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FEDERAL AND STATE ENFORCEMENT 

OF FINANCIAL CONSUMER AND 

INVESTOR PROTECTION LAWS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 20, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–18 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

March 20, 2009 ................................................................................................. 1 

Appendix: 

March 20, 2009 ................................................................................................. 59 

WITNESSES 

FRIDAY, MARCH 20, 2009 

Dugan, Hon. John C., Comptroller, Office of the Comptroller of the Currency . 8 

Duke, Hon. Elizabeth A., Governor, Board of Governors of the Federal Reserve System ......................................................................................................... 6 

Galvin, Hon. William Francis, Secretary of the Commonwealth of Massachusetts ....................................................................................................................... 37

Glavin, Rita M., Acting Assistant Attorney General, Criminal Division, U.S. 

Department of Justice ......................................................................................... 16 

Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit Insurance Corporation ................................................................................................................. 12 

Madigan, Hon. Lisa, Attorney General, State of Illinois ...................................... 39 

Pistole, John, Deputy Director, Federal Bureau of Investigation ........................ 17 

Polakoff, Scott M., Acting Director, Office of Thrift Supervision ......................... 14 

Raskin, Sarah Bloom, Commissioner, Maryland Office of Financial Regulation ........................................................................................................................ 41

Ropp, James B., Commissioner, Delaware Division of Securities ....................... 43 

Sharick, Merle D., Jr., Mortgage Asset Research Institute (MARI) .................... 46 

Walter, Hon. Elisse B., Commissioner, U.S. Securities and Exchange Commission ........................................................................................................................ 10

APPENDIX 

Prepared statements: 

Cummings, Hon. Elijah E. ............................................................................... 60 

Dugan, Hon. John C. ........................................................................................ 62 

Duke, Hon. Elizabeth A. .................................................................................. 81 

Galvin, Hon. William Francis .......................................................................... 94 

Glavin, Rita ....................................................................................................... 102 

Gruenberg, Hon. Martin J. .............................................................................. 114 

Madigan, Hon. Lisa .......................................................................................... 133 

Pistole, John ...................................................................................................... 144 

Polakoff, Scott M. ............................................................................................. 152 

Raskin, Sarah Bloom ........................................................................................ 172 

Ropp, James B. ................................................................................................. 203 

Sharick, Merle D., Jr. ....................................................................................... 218 

Walter, Hon. Elisse B. ...................................................................................... 223 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Dugan, Hon. John C.: 

Written responses to questions submitted by Representative Posey ........... 255 

Duke, Hon. Elizabeth A.: 

Written response to question posed during the hearing by Representative 

Foster ............................................................................................................. 261 

Written response to question posed during the hearing by Representative 

Gohmert ......................................................................................................... 262 

Written responses to questions submitted by Representative Grayson ....... 263 

Page

IV 

Duke, Hon. Elizabeth A.—Continued 

Written responses to questions submitted by Representative Posey ........... 265 

Glavin, Rita M.: 

Written responses to questions submitted by Representative Grayson ....... 269 

Written responses to questions submitted by Representative Posey ........... 271 

Gruenberg, Hon. Martin J.: 

Written responses to questions submitted by Representative Foster .......... 275 

Written responses to questions submitted by Representative Gohmert ...... 277 

Written responses to questions submitted by Representative Posey ........... 278 

Pistole, John: 

Written responses to questions submitted by Representative Grayson ....... 282 

Written responses to questions submitted by Representative Posey ........... 285 

Polakoff, Scott M.: 

Written responses to questions submitted by Representative Grayson ....... 290 

Written responses to questions submitted by Representative Posey ........... 293 

Ropp, James B.: 

Written response to question posed during the hearing by Representative 

Gohmert ......................................................................................................... 299 

Written response to question posed during the hearing by Representative 

Scott ............................................................................................................... 300 

Walter, Hon. Elisse B.: 

Written responses to questions submitted by Representative Foster .......... 301 

Written responses to questions submitted by Representative Gohmert ...... 303 

Written responses to questions submitted by Representative Grayson ....... 305 

Written responses to questions submitted by Representative Posey ........... 310 

Written response to question posed during the hearing by Representative 

Scott ............................................................................................................... 314 

(1) 

FEDERAL AND STATE ENFORCEMENT 

OF FINANCIAL CONSUMER AND 

INVESTOR PROTECTION LAWS 

Friday, March 20, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Moore of Kansas, Green, Foster, Carson, Driehaus, Maffei; Campbell, Posey, and 

Lee. 

Also present: Representatives Cummings, Scott of Virginia, and 

Gohmert. 

The CHAIRMAN. The hearing will come to order. I apologize for 

the delay. This has been a somewhat busier week than usual. And 

let me begin by saying when I asked that this hearing be on Friday—I didn’t ask, I decided—I was told there would be votes. And 

I understand, obviously, there are members who left town. I will 

confess that coming and seeing a manageable number of members 

rather than 72, which is our quota, does give me some encouragement, because I think we may be able to not be here all day. 

But I do want to explain that it is an important hearing. I am 

not trying to slight it, obviously, by having it on a day when there 

were no votes. We were told there were going to be votes. And we 

do have a very busy schedule, which we are trying to accommodate. 

I also want to express my appreciation to my colleagues on the 

Judiciary Committee, because we have before us officials who are 

under the jurisdiction of the Judiciary Committee. One of the 

things I have worked very hard on with my colleagues is to avoid 

jurisdictional disputes. We have tried to be cooperative. I have spoken to Mr. Conyers. I know he has spoken to his Republican counterpart. And we have with us the gentleman from Virginia, Mr. 

Scott, and the gentleman from Texas, Mr. Gohmert, the chairman 

and ranking member of the subcommittee of the Judiciary Committee. So to that extent, this is a joint hearing. 

We are joined by our colleague, Mr. Cummings of Maryland— 

who also has had a great interest in this—from the Oversight and 

Reform Committee. So it is a joint effort to that extent. And it is 

important, because one of the questions we are going to be asking 

of the assembled panel is whether going forward, there is any legislative authority that you would like enhanced. We, if that was the 

2 

case, in the Financial Services Committee would have jurisdiction 

over some of that, but the Judiciary Committee would have jurisdiction over other parts of it. Anything that is criminal, of course, 

goes to the Judiciary Committee, plus staffing or other requirements for recommendations from the people in the Justice Department. And given the rules about personnel and salaries that have 

come up, the Government Reform Committee has jurisdiction. Because one of the things we have been asked in the past is, in some 

cases, frankly, to make some special rules so some of these agencies could acquire the degree of expertise they would need in dealing with this. So that explains it all procedurally. 

I am very grateful to the witnesses. It is a panel that is fully representative of the capacity of the Federal Government to enforce 

the various laws, both civil and criminal, that try to keep our financial system honest in the literal sense. 

You can start my 5 minutes now. I started it. I used up 10 seconds. 

There are two reasons for this hearing, candidly. One is the substance of the subject. We do want to know what, if anything, we, 

the Congress, the relevant committees taking the lead, can do to 

enhance your ability to protect the public, which is what you do. 

And there are agencies that have dual functions. You have general 

functions for keeping the market going, but every one of you has 

some law enforcement activity as well, both civil and criminal. And 

so it is important for us to know what, going forward, we can do 

to help you. 

And I want to make this very clear now. I know there is OMB 

and all those other people. I am asking you on behalf of the Financial Services Committee, and I believe the Judiciary Committee, we 

are directing you to volunteer to us—not to volunteer, but to respond if you need more resources. This is not a case of you being 

accused of coming here behind OMB’s back. We insist on knowing 

what your honest assessment is of your resource needs, because we 

cannot have a situation where the public is being told that we don’t 

have enough people to do this. 

We have had efforts before on a bipartisan basis out of this committee; we have talked to Judiciary to try to get more resources, 

for instance, to the Justice Department to deal with mortgage 

fraud. And mortgage fraud is obviously one of the issues that we 

are talking about. 

The second part of that, and mortgage fraud gets me into it, is 

there is in America today a justifiable level of anger at the fact 

that the great majority of Americans are suffering economically because of the mistakes of a relatively small number of people and 

of a system that was inadequate to the task. Some of those problems, as I say, resulted from an inadequate system. We cannot 

prosecute people for breaking rules when the rules didn’t exist. And 

part of what we have to do is to think about what rules we need 

to have going forward. And you should feel free to tell us about 

those as well. 

But it is also likely that there are people who violated the rules, 

and if we are to sustain the capacity to govern effectively, if we are 

to provide the resources that are needed to deal with the current 

situation, we have to satisfy the American public that everything 

3 

is being done that can be done legitimately to hold accountable the 

people who caused this problem. And so it is important for people 

to know that to the extent there were crimes committed, and there 

certainly were crimes committed as we hear, that there will be 

prosecutions if these are possible to achieve. And we will have a 

second panel of State attorneys general whom we understand have 

a large part of the criminal jurisdiction. There are also civil recoveries that can be made. There are debarments that can be issued. 

A great deal collectively can be done to protect the public, and 

it is important to do that, because if we don’t convince the American public that this is being done effectively, their response will 

be, I believe, one that will shut down some of these efforts. That 

might be paradoxical, but it will be there. 

And then, of course, we do want to make sure that going forward, we are better able to protect our financial system from the 

kind of action and inaction that brought us where we are today. 

So this hearing is very important. Just to summarize, we want 

you to tell us—no agency represented here today should go out of 

this room and be able to say, the problem is they didn’t give us 

enough resources, or we need this change in the law, unless you 

have told us that and given us a chance to respond. 

I will give you one example. We had a hearing with the FHA in 

January, still under the previous Administration, about their role 

in reducing and issuing mortgages of the sort that wouldn’t lead to 

the subprime crisis. What evolved in that hearing is they did not 

have sufficient power to debar past bad actors. We elicited that in 

testimony—my colleagues from California Ms. Waters and Ms. 

Speier. We elicited that testimony. In the bill that the House 

passed a couple of weeks ago, we gave the FHA that authority. 

That is an example of the kinds of things we are looking to do. 

And let me say the last thing is we are not asking for names. 

We are not the prosecutors. This is not an appropriate forum in 

which individuals should be attacked. We are interested in your 

plans for going forward and what you intend to do going backward. 

That is, what do you intend to do to prosecute and recover funds 

where we can? What do you need to make sure you do the best possible job going forward? This is not a hearing in which, as I said, 

we want you to name names. That would not be an appropriate legislative function. 

And with that, let me call on the gentleman from Texas, Mr. 

Gohmert, for an opening statement. 

Mr. GOHMERT. Thank you, Mr. Chairman. I appreciate being included in this hearing. In several former lives ago, I was hired as 

outside counsel to clean up some banking messes and illnesses, and 

so I have a real interest in this. Those who would seek to commit 

mortgage fraud often prey on the elderly and other members of society who are most vulnerable. And obviously, they shouldn’t be allowed to defraud the American public. Honest Americans must 

have the confidence to know they can enter into a financial deal 

and the person on the other side won’t be able to cheat them without consequences. 

Unfortunately, reporting of mortgage fraud on the Suspicious Activity Reports filed with the Treasury’s Financial Crimes EnforceVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
4 

ment Network shot up by 36 percent from 2007 to 2008, with 

63,173 reported last year. 

The problem of mortgage fraud is getting worse. Federal and 

State entities that police these activities obviously must have the 

resources and tools to deal with them. 

One of the things that may surprise some folks here that has 

brought together the ACLU, the Heritage Foundation, and, maybe 

more surprisingly, Mr. Bobby Scott and me all on the same side is 

that we have often been overcriminalizing way too many activities, 

and so one of the things some of us have wanted to start taking 

a look at is if there are ways to stop or slow a bad activity by other 

means. If there is not criminal intent, if there is not mens rea, then 

would a civil fine or some kind of dollar penalty address the issue? 

You look at mortgage companies who intended to put people in 

mortgages so it didn’t matter if they put people in homes they 

couldn’t afford, it didn’t matter if people put down fraudulent information in order to get a mortgage because they intended to turn 

around and immediately sell those, package them into a neat little 

security package and sell them without recourse. Maybe if there 

was recourse civilly, you would address this issue and you wouldn’t 

see fraud skyrocketing, because the people would have a real incentive, like Countrywide would have a real incentive, to make sure 

that people did not put down fraudulent information, they didn’t 

get in homes they couldn’t afford because they didn’t want people 

coming back to them for the costs of this thing. 

But I am glad to hear the FBI has increased the number of special agents specifically devoted to mortgage fraud nationally by half 

over the last year from 120 to 186. And I am looking forward to 

hearing from the witnesses and learning about how this all affects 

them and their suggestions. But my time as a lawyer, as a prosecutor, judge, chief justice, and Congressman has taught me that 

crises such as the scourge of mortgage fraud can lead to overreaction in the form of new criminal laws that potentially cover 

people who had no guilty intent. For example, in this area, they 

were greedy, but they didn’t intend to commit a crime. 

But one of our problems is this overreaction; let us criminalize 

some conduct, let us put people in prison. We have heard some terrible anecdotal evidence of some Federal agencies who couldn’t wait 

to get their own SWAT team with the red lights and the ability to 

slam people to the ground and handcuff them in public, because 

there apparently is a pent-up desire to do that among some people. 

And wow, you can do it and get paid for it at the same time. So 

we have to be careful about spreading that ability to do that among 

people who should not have that. 

But perhaps we could hear thoughts on whether to outlaw combining mortgages into securities. I know I have friends who think 

I shouldn’t talk like that, but when you lump mortgages into a security, and you don’t examine the value of each mortgage and 

whether the payments have been made on time or the property underlying the mortgage is keeping its value, then you are going to 

end up needing to buy some insurance, or we will call it a credit 

swap, and that way we don’t have to hold money in reserve in the 

event the insurable event ever occurs. 

5 

So there are a number of things we need to look at. If greed is 

the problem, but there is no criminal intent, let us address it with 

a proportional monetary cost to the wrongdoer and pop them right 

where they hurt the worst, in the pocketbook. And if there is criminal intent, then let us go after them. I may be one of the few people 

in this room who has watched his hand sign an order to have somebody taken and the death penalty administered. I am serious about 

crime, but I do want to make sure there is criminal intent; otherwise, if it is just greed, let us hit them in the pocketbook where 

they really hurt. 

Thank you, Mr. Chairman. 

The CHAIRMAN. At this, if I could take a second to express agreement with him. That is why I did stress both civil and criminal. 

And that is why we have people here from both the civil and criminal jurisdictions. And it is why we are working with Judiciary, because we don’t want this to be narrowly done. The gentleman is absolutely right, and I think he speaks for a great majority of both 

committees. 

Mr. GOHMERT. And that is why I do appreciate this hearing and 

being included. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Virginia, who is chairman 

of the subcommittee on the Judiciary Committee. 

Mr. SCOTT OF VIRGINIA. Thank you, Mr. Chairman, for inviting 

the Judiciary Committee to participate in this hearing on Federal 

and State enforcement of financial, consumer, and investor protection laws. As a member of the House Judiciary Committee and the 

Chair of the subcommittee overseeing crime issues, we are exploring ways to hold accountable unscrupulous mortgage brokers and 

Wall Street executives who are an integral part of the problem. 

With the Department of Justice and FBI witnesses, I hope this 

hearing will give more insight into what is being done and what 

needs to be done, particularly what is needed in the way of resources to investigate those suspected of serious criminal activity 

which contributed to the crisis, and what needs to be done to make 

sure they are prosecuted to the full extent of the law. 

The Financial Services Committee has been relentless in investigating and uncovering the causes of the financial and mortgage 

crisis. As banks and private mortgage companies relaxed their 

standards for loans, approving riskier mortgages with less scrutiny, 

they created an environment that invited fraud. In the last 3 years 

alone, the number of criminal mortgage fraud investigations 

opened by the FBI has more than doubled. The FBI has testified 

before the Senate that it currently has 1,800 mortgage fraud investigations that are open, but only 240 agents specifically assigned to 

those cases. 

It is my view that to fully protect law-abiding taxpayers from 

criminal conduct, it is essential that appropriate resources be dedicated to meet the challenges of investigating mortgage and financial fraud. I am not persuaded that more laws are needed, but 

what is needed is more resources to enforce existing laws. 

Many in this industry knew that they were dealing with worthless paper. They had even names for the paper. They had mortgages like ninja loans, no income, no job. When these are passed 

off as triple A assets, someone has committed common law fraud. 

6 

I believe that Federal mail and wire fraud criminal statutes 

should be sufficient to address the problem. Those penalties for 

those violations are substantial. Mail and wire fraud violations 

carry a maximum penalty of 20 years, and any mail or wire fraud 

that affects a financial institution increases that maximum sentence to 30 years. 

It is just not mail and wire fraud that is at the disposal of Federal prosecutors. The FBI itself has identified nine applicable Federal criminal statutes for which this fraud—for which those committing the fraud may be charged. In addition to the Federal criminal law, these crimes can also be aggressively prosecuted by State 

and local law enforcement officials under aggressive and very punitive State criminal law provisions as well. So it seems that we may 

have enough in the way of criminal code provisions, but what we 

need is to make sure that we have adequate resources to State and 

Federal authorities to battle fraud. And we need to ensure that the 

Federal authorities are also coordinating their activities with local 

and State officials. 

So, Mr. Chairman, what we need to do is find out what resources 

law enforcement officials need to prosecute the fraud, whether it is 

consumer I.D. theft, contracting fraud in Iraq, or even mortgage 

fraud before us today. I was happy to see that the 2009 Omnibus 

Appropriations Act provided $10 million to the FBI to dedicate additional agents to the mortgage fraud investigations. I am also supportive of other bills that provide more resources in this area. 

In conclusion, Mr. Chairman, I support more resources for the 

Department of Justice to assist the FBI and the States in enforcing 

fraud laws to recover the billions of dollars that have been lost. We 

also need to make sure that we have in place the prosecution and 

investigations to prevent these same schemes from happening in 

the future. Today’s hearing is an opportunity to fully discuss these 

issues, and I look forward to hearing from the witnesses. And I 

thank you again, Mr. Chairman, for your relentless action to make 

sure that the public is actually protected. 

Thank you, and I yield back. 

The CHAIRMAN. I thank the gentleman. 

The gentleman from California, Mr. Campbell, will be giving an 

opening statement from the Financial Services Committee. He had 

a conflict, which is an unavoidable fate of all of us. He is on his 

way. I would assume it will be all right with the members if we 

proceed with the testimony, and if Mr. Campbell has a statement 

when he arrives, he will give it. And given the large number of witnesses, I cannot tell you how nice it is to have the witnesses outnumber the members, because we will get some real conversation 

going. 

We will now begin with our first witness, the Honorable Elizabeth Duke, who is a Governor of the Board of Governors of the Federal Reserve system, and then go down the list. Governor Duke? 

STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Ms. DUKE. Thank you, Mr. Chairman. 

7 

Chairman Frank, and members of the committee, I want to 

thank you for the opportunity to discuss the Federal Reserve 

Board’s ongoing efforts to address and prevent mortgage-related 

fraud and abusive lending practices in the institutions we supervise. 

While the expansion of the subprime mortgage market over the 

past decade increased consumers’ access to credit, too many homeowners and communities are suffering today because of lax underwriting standards and other unfair and deceptive practices that resulted in unsustainable loans. The Federal Reserve is committed to 

improving consumer protections and ensuring responsible lending 

practices through each of the roles we play, as supervisor for safety 

and soundness, as supervisor for consumer compliance, and as rule 

writer. 

Let me first address the steps that the Federal Reserve is taking 

to combat mortgage fraud. In recent years, there has been a significant increase in suspected mortgage fraud and other mortgage-related criminal activity. Federal Reserve staff regularly review Suspicious Activity Reports filed by the financial institutions we supervise. In appropriate circumstances, and particularly when bank insiders may be involved, we initiate investigations, make criminal 

referrals, coordinate with law enforcement and other regulatory 

agencies, and pursue enforcement actions against individuals, including seeking prohibition orders and, in appropriate cases, civil 

money penalties and restitution. We are currently pursuing numerous investigations involving insiders related to possible mortgagerelated fraud, both commercial and residential. 

More generally, the Federal Reserve’s enforcement efforts begin 

with the examination of its supervised institutions. In the Federal 

Reserve’s regular safety and soundness examinations of State 

member banks and bank holding companies, we evaluate their risk 

management systems, financial condition, and compliance with 

laws and regulations. 

In assessing a bank’s risk management systems, examiners 

evaluate the adequacy of the bank’s practices to identify, manage, 

and control the credit risk arising from the bank’s mortgage lending activity. Examiners look at the bank’s underwriting standards, 

credit administration practices, quality control processes over both 

its own originations and third-party originations, and appraisal 

and collateral valuation practices. Institutions with weaknesses are 

expected to take corrective actions that include improving their underwriting practices in the future. In those instances where the 

bank is not willing to address the problem, we have and use a full 

range of powerful enforcement tools to compel corrective action. 

The Federal Reserve conducts regular examinations of State 

member banks to evaluate compliance with consumer protection 

laws. Each examination includes an evaluation of the bank’s fair 

lending compliance program. Our objective is to identify compliance 

risk at banks before they harm consumers, and to ensure that 

banks have appropriate controls in place to manage those risks. 

When examiners identify banks with weak and ineffective compliance programs, they document the weaknesses in the examination report and take appropriate supervisory action. In addition, 

when examiners identify patterns or practices of lending discrimiVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
8 

nation, the Federal Reserve makes referrals to the Department of 

Justice as required by the Equal Credit Opportunity Act. Furthermore, Federal Reserve consumer compliance examiners routinely 

participate in the review and assessment of the adequacy of large 

bank holding company compliance risk management programs. 

In addition to our supervisory activities, in 2008 the Federal Reserve Board finalized sweeping new rules for home mortgage loans 

to better protect consumers and facilitate responsible residential 

mortgage lending. The rules, which amended Regulation Z, prohibit 

unfair, abusive, or deceptive home mortgage lending practices. 

Importantly, the rules apply to all mortgage lenders, not just to 

the depository institutions supervised by the Federal banking and 

thrift regulators. The rules apply to a newly defined category of 

higher-priced mortgage loans secured by a consumer’s principal 

dwelling. The higher-priced thresholds would cover all, or virtually 

all, of the subprime market. For these loans, the rules will prohibit 

a lender from making a loan without regard to the borrower’s ability to repay the loan from income and assets other than the home’s 

value. In addition, lenders are prohibited from making stated income loans, and are required in each case to verify the income and 

assets that they rely upon to determine the borrower’s repayment 

ability. 

Again, I want to thank you for the opportunity to discuss what 

the Federal Reserve does to address and prevent mortgage-related 

fraud and abusive lending practices in the institutions we supervise. I would be happy to answer any questions. Thank you, Mr. 

Chairman. 

[The prepared statement of Governor Duke can be found on page 

81 of the appendix.] 

The CHAIRMAN. Next, the Comptroller of the Currency, John 

Dugan. 

STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. DUGAN. Thank you, Mr. Chairman, and members of the committee. I welcome this opportunity to appear before you today to 

discuss the OCC’s enforcement authority and how we have exercised that authority. 

Recent unprecedented losses at financial firms, the mortgage crisis, and shocking examples of both fraud and excess have prompted 

your questions about the adequacy and use of enforcement powers 

by Federal and State authorities. The OCC vigorously applies laws 

and regulations to national banks through both supervisory activities and enforcement actions to protect the safety and soundness of 

national banks and their customers. 

The OCC and the other Federal banking agencies have a broad 

range of supervisory and enforcement tools that are used to supervise banks and protect consumers, investigate and halt fraudulent 

activities, and remove and prohibit those responsible from ever 

working in the banking industry again. Unlike the Department of 

Justice and the FBI, however, the Federal banking agencies are not 

criminal law enforcement agencies, and we do not have the authority to investigate and prosecute crimes of fraud. Rather, the FedVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
9 

eral banking agencies refer suspected criminal fraudulent acts to 

the Department of Justice for prosecution. 

My written statement today covers the OCC’s activities and perspectives on enforcement in four areas. The first is our approach 

to enforcement. National banks are subject to comprehensive, ongoing supervision that, when it works best, enables examiners to 

identify problems early and obtain early corrective action before enforcement action is necessary. Once problems or weaknesses are 

identified, we expect bank management and the board of directors 

to correct them promptly. And because of the tremendous leverage 

that bank supervisors have over banks, management normally 

takes great pains to do so. 

That is not always true, however, and in other cases, the seriousness of the problem requires an enforcement response. In those circumstances, we have a range of enforcement tools at our disposal, 

from informal enforcement actions such as a commitment letter or 

memorandum of understanding, to formal enforcement actions such 

as a formal agreement, cease and desist order, or removal and prohibition order. 

We use all of these tools, depending on the circumstances, to vigorously implement our safety and soundness and consumer protection mandates, as the chart in my written statement summarizes. 

These include actions taken to address a wide range of issues, including capital adequacy, unfair and deceptive practices, managerial competence, mortgage fraud, and many others. 

The second part of my testimony describes how we have employed enforcement actions in problem bank situations to protect 

consumers and eliminate fraud. Problem banks warrant special supervisory attention, and our actions here are designed to remedy 

various unsafe and unsound practice and compliance violations. 

The various corrective measures incorporated into our enforcement 

actions have included requiring the bank to raise capital, restrict 

borrowings, eliminate certain activities and even entire business 

lines, adopt appropriate underwriting standards and policies to 

govern lending activities, limit the transfer of assets, and eliminate 

payments of bonuses or dividends. 

The third part of my statement describes how we coordinate with 

State and Federal regulatory agencies and law enforcement agencies. As an example, when the OCC issues a remedial enforcement 

action against a national bank, the Federal Reserve Board will 

often take a complementary action with respect to the bank’s holding company. 

We also coordinate extensively with other regulatory agencies 

and with law enforcement authorities. The OCC has entered into 

similar information-sharing agreements with most State banking 

agencies and all 50 State insurance departments, and recently with 

the Federal Trade Commission, and we regularly share information 

with the SEC. When we suspect criminal conduct, we make referrals to the Department of Justice. 

Finally, my statement concludes with a description of the measures we have taken to address mortgage lending practices. Abusive 

lending practices by mortgage lenders and brokers and the current 

foreclosure crisis understandably have raised questions about the 

role and effectiveness of bank regulators in anticipating and preVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
10 

venting mortgage lending abuses. This area represents a good example of how we apply our approach to supervision and enforcement. It is important to be clear about who did what. 

The OCC extensively regulates the mortgage business of national 

banks and their subsidiaries, and as a result of the standards applied by the OCC, national banks originated less than 15 percent 

of all subprime loan mortgages. In contrast, the vast bulk of such 

loans were originated by nondepository institution mortgage lenders and brokers that were not subject to our regulation. It is these 

lenders and brokers that have been widely recognized as the overwhelming source of abusive subprime mortgages resulting in waves 

of foreclosures. 

The OCC has been aggressive in combating abusive lending practices and in preventing national banks from engaging in such activities. We were the first Federal banking agency to issue 

antipredatory lending regulations, and in recent years we have 

issued, with the other agencies, a number of supervisory issuances 

covering payday loans, title loans, unfair and deceptive practices, 

risks associated with subprime mortgage practices, and other related issues. Although many of these statements were issued as 

guidance, compliance is not optional for national banks. We require 

it. 

We describe a number of enforcement actions that we have taken 

in our testimony, including several that I won’t go into the details 

of here because the details were reported there. 

And thank you very much. I will be happy to answer questions. 

[The prepared statement of Comptroller Dugan can be found on 

page 62 of the appendix.] 

The CHAIRMAN. Next, we have Commissioner Elisse Walter, a 

relatively new Commissioner, of the Securities and Exchange Commission. Commissioner Walter? 

STATEMENT OF THE HONORABLE ELISSE B. WALTER, COMMISSIONER, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. WALTER. Thank you, Mr. Chairman, and good morning to 

you, the members of the committee, and the members of the Judiciary Committee. I am one of the five Commissioners of the Securities and Exchange Commission, and I am testifying here today on 

behalf of the Commission as a whole. I very much appreciate the 

opportunity to discuss our enforcement program and, more specifically, our efforts to address violations of the law arising out of the 

current financial crisis. We are fully committed to pursuing wrongdoers and returning as much money as possible to injured investors. 

The Commission’s enforcement program is in a critical transition 

period. Since joining the Commission in January, our new Chairman, Mary Schapiro, has been taking important steps to bolster 

our enforcement efforts and restore investor confidence to our markets. Among other things, she has hired a new Director of Enforcement, Robert Khuzami, an accomplished former Federal prosecutor 

who is scheduled to join the agency at the end of this month. And 

she has begun streamlining our enforcement processes. 

Today, as detailed in my written statement, I would like to talk 

about the SEC’s law enforcement authority and the steps we are 

11 

taking to address the current crisis. As you know, the SEC is a 

capital markets regulator and a law enforcement agency. We are 

charged with civil enforcement of the Federal securities laws, and 

our Enforcement Division is authorized to investigate any potential 

violation of these laws. We have the authority to take action 

against any form of fraud in connection with the purchase or sale 

of securities. 

Our Enforcement Division, which numbers about 1,100, initiates 

investigations based on information from many sources, including 

referrals from within the Commission itself and from other regulators, investor complaints, and tips. In Fiscal Year 2008, the Division received more than 700,000 complaints, tips, and referrals. 

The enforcement staff coordinates its work with other law enforcement bodies across the country and around the globe in order 

to leverage enforcement resources effectively. In our actions, we 

seek a variety of remedies, including disgorgement of ill-gotten 

gains, permanent injunctive relief against violations of the law, remedial undertakings, civil penalties, revocation of registration, and 

bars to prevent a wrongdoer from serving as an officer or director 

of a public company or from associating with any broker-dealer or 

investment adviser. 

Whenever possible, the Commission seeks to return monies to 

harmed investors under the Fair Funds provisions of the SarbanesOxley Act. Under the authority granted to us by Congress in that 

legislation in 2002, we have authorized approximately 220 Fair 

Funds, with an estimated total value of more than $9.3 billion that 

has been or will be distributed to investors. 

To halt an ongoing fraud or to prevent misuse of investor funds, 

we have the ability to seek emergency relief in court, including 

temporary restraining orders, preliminary injunctions, asset 

freezes, and the appointment of a receiver to conduct operations 

during the case or to marshal any remaining assets for the benefit 

of injured investors. During this fiscal year thus far, we have already obtained 20 temporary restraining orders to halt ongoing 

frauds. 

I would like to take a minute to give you a few examples of our 

recent work to address the current crisis. Our Enforcement Division has already filed nine cases involving subprime issues, and 

has many more under active investigation. And through the collective efforts of SEC enforcement, State regulators, and FINRA, the 

self-regulatory organization for broker-dealers, over the past year, 

tens of thousands of auction-rate securities investors have received 

or will soon receive over $67 billion of liquidity. These cases involve 

the largest monetary settlements in the history of our agency. 

Also, we are investigating the possible manipulation of the securities of six large financial issuers involved in the recent market 

turbulence, with particular focus on claims that credit default 

swaps were being used to manipulate equity prices. 

We have also brought many cases involving hedge funds. As you 

know, hedge funds and their advisers are not required to register 

with us, but we still have authority to pursue fraud cases against 

them. The SEC has dozens of active investigations involving individuals associated with hedge funds. 

12 

Over the past 2 years, the Commission has filed enforcement 

cases against the perpetrators of more than 75 Ponzi schemes, including 12 such cases since December 2008. For example, we recently filed an emergency action against Robert Allen Stanford and 

others, alleging a massive Ponzi scheme. At our request, the court 

issued a temporary restraining order, appointed a receiver, and ordered an asset freeze. 

Also this week, we filed a complaint alleging fraud by the accountant who purportedly audited the firm run by Bernard Madoff. 

A criminal fraud case was brought at the same time. 

The SEC is committed to finding ways to improve, to act more 

quickly and efficiently. Within days after her appointment as SEC 

Chairman, Mary Schapiro repealed the pilot project under which 

enforcement staff were required to seek preauthorization from the 

five-member Commission before negotiating civil money penalties 

against public issuers. In addition, she streamlined the process for 

obtaining formal orders, and now they can be authorized by a single Commissioner. We are also working with the Center for Enterprise Modernization, a federally funded research and development 

center, to establish a centralized process that will more effectively 

identify leads for potential enforcement as well as areas of high 

risk for compliance. 

But these steps are just the start. We are carefully examining 

our processes from top to bottom. However, while our job has 

grown substantially, our resources have not kept pace. Our staffing 

levels have actually declined in the recent past, and our technology 

must be improved. 

As the sole agency charged with protecting investors, the SEC is 

committed to restoring the confidence needed for our marketplace 

to thrive. Thank you again for the opportunity to testify, and I look 

forward to answering any questions you have. 

[The prepared statement of Commissioner Walter can be found 

on page 223 of the appendix.] 

The CHAIRMAN. Next, Martin Gruenberg, who is the Vice Chair 

of the Federal Deposit Insurance Corporation. 

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, 

VICE CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Mr. Chairman, and members of the 

committee. I appreciate the opportunity to testify on behalf of the 

FDIC regarding enforcement of consumer and investor protection 

laws. 

Earlier this month, in a speech before the National Association 

of Attorneys General, FDIC Chairman Bair stated that many of the 

current problems in the economy were caused by a widespread failure to protect consumers. She noted that it is essential that those 

whose actions contributed to the current crisis and who are engaging in practices harmful to consumers be held accountable, and 

that we take steps to prohibit these practices from occurring again. 

The FDIC has a strong commitment to the vigorous and effective 

enforcement of consumer protection laws and other statutes under 

its jurisdiction. The FDIC brings a unique perspective to this issue 

because of the variety of functions it performs, including deposit inVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
13 

surer, bank supervisor, and receiver for failed insured depository 

institutions. 

Immediately following the closing of every failed institution, 

FDIC investigators and attorneys begin an investigation. The purpose is to determine whether the failed institution’s directors, officers, and professionals such as accountants, appraisers, and brokers were responsible for its losses, and if so, to hold them accountable. 

Recent failures of insured institutions, 3 in 2007, 25 in 2008, and 

17 thus far this year, have resulted in a substantial increase in our 

investigations and professional liability workload. Since the beginning of 2007 through today, investigations of mortgage fraud 

claims have increased from 0 to 4,375. Investigations of professional liability claims other than mortgage fraud have increased 

from 34 to 427. And mortgage fraud lawsuits have increased from 

0 to 113. 

As receiver of a failed institution, the FDIC has the authority to 

terminate contracts upon an insured institutions’s failure. The 

FDIC routinely terminates compensation and other contracts with 

senior management whose services are no longer required. 

In addition to the development and support of civil claims 

brought by the FDIC with regard to failed institutions, our investigators also identify signs of possible criminal activity in a failed 

institution. These findings support the Department of Justice’s subsequent prosecution of the wrongdoers. The FDIC also coordinates 

with other Federal, State, and international agencies to detect and 

deter bank fraud. 

The FDIC, in addition, pursues enforcement actions against open 

insured depository institutions, their directors and officers, employees, and other institution affiliate parties where warranted, including third parties and independent contractors such as accountants, 

attorneys, and appraisers, under its Federal Deposit Insurance Act 

authority. 

When FDIC examiners find other violations of law, breaches of 

fiduciary duty, unsafe and unsound practices or mismanagement in 

banks’ consumer protection responsibilities, the FDIC requires corrective action. During 2007 and 2008, the FDIC issued 142 cease 

and desist orders and 102 removal and/or prohibition orders banning individuals from banking. These enforcement actions were 

based on a variety of harm or risks caused to an insured institution, and included theft and embezzlement by employees of the 

bank, poor lending policies or procedures, and fraudulent actions 

on the part of a lending officer. 

Removing from office and prohibiting from banking those who 

commit financial crimes is a primary goal of FDIC enforcement actions. The employees found to have committed financial crimes are 

removed from positions of trust, and are often required to make 

restitution and pay a financial penalty to remedy these transgressions. 

The FDIC’s Office of Inspector General brings another level of 

enforcement. The OIG conducts investigations of fraud and other 

criminal activity in or affecting FDIC-regulated open financial institutions, all closed institutions in receiverships, and other FDICrelated programs and operations. Currently, the OIG has about 170 

14 

active investigations involving open and closed institutions. The 

work focuses on various types of fraud, including mortgage securities and crimes such as embezzlement and money laundering. 

Investigations of financial institution fraud currently constitute 

about 88 percent of the OIG’s investigative caseload. Over the last 

2 years, it has closed about 100 investigations, with the crimes occurring almost exclusively in open institutions. These investigations have resulted in over 230 indictments, 170 convictions, and 

over $530 million in fines, restitution, and monetary recoveries. 

The FDIC expects the enforcement challenges in both the closed 

bank and open bank context to increase for the foreseeable future. 

In order to handle the substantially increased workload in the 

closed bank area, we are increasing our enforcement staff as well 

as retaining outside counsel. We have also added to both our civil 

and criminal investigations staff. In the open bank area, the FDIC 

has added 87 full-time compliance examiners in 2007 and 2008, 

and has authorized the hiring of 79 more. Since 2007, we have increased our legal staff responsible for open bank enforcement by 29 

attorneys. 

The FDIC’s core mission is to maintain public confidence in the 

banking system. Critical to the achievement of that mission is to 

hold accountable those who do not comply with applicable laws and 

regulations. The FDIC looks forward to continuing to work closely 

with the committee to achieve that goal. 

Thank you, Mr. Chairman. 

[The prepared statement of Vice Chairman Gruenberg can be 

found on page 114 of the appendix.] 

The CHAIRMAN. Next, the Acting Director of the Office of Thrift 

Supervision, Mr. Scott Polakoff, to whom this committee gave, I 

think, 2 days off this week. So welcome back, Mr. Polakoff. 

STATEMENT OF SCOTT M. POLAKOFF, ACTING DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. POLAKOFF. Thank you, sir. 

Good morning, Chairman Frank, and members of the committee. 

Thank you for the opportunity to testify on the enforcement authority that the OTS exercises over regulated institutions and their affiliates, and in particular OTS enforcement of consumer protection 

laws. 

The OTS has broad powers to protect customers of federally regulated thrifts, their affiliates, and thrift holding companies. These 

powers include specific authority regarding truth in lending and 

unfair or deceptive practices. As you know, the OTS used that authority over unfair practices to initiate a process resulting in a 

final interagency rule in January of 2009 banning unfair credit 

card practices. 

We exercise our enforcement authority when our examiners find 

problems during their examinations of thrifts as well as when we 

receive consumer complaints and referrals from other agencies. 

Throughout 2008 and into 2009, we have seen a steady increase 

in OTS enforcement actions. Formal actions, such as cease and desist orders and monetary penalties, increased by 45 percent from 

2007 to 2008, and the pace is accelerating further this year. 

15 

I would like to highlight two particularly notable cases. The first 

one occurred in June of 2007 and involved a Federal savings bank 

and two affiliates that were charging excessive fees to mortgage 

customers and failing to adequately evaluate their creditworthiness. We required these institutions to immediately stop these 

practices, establish a fund of $128 million to reimburse consumers, 

and commit an additional $15 million to support financial literacy 

and credit counseling. 

The second case, in June of 2008, involved a Federal savings 

bank and its subsidiaries that were charging inappropriate and, in 

some cases, very large broker and lender fees to mortgage customers. The enforcement action required the bank to reform its 

practices and establish a $5 million fund to reimburse consumers. 

Since 2007, I believe that OTS is the only Federal banking agency 

to require institutions to make restitution to bank customers for 

abusive lending practices, enabling the customers to stay in their 

homes. 

On criminal matters, the OTS makes referrals to the Department 

of Justice and U.S. Attorneys’ offices. The number of these referrals 

is increasing, particularly in the fair lending area. Five recent 

cases involve steering customers to more expensive mortgages 

based upon their race or national origin. 

I would also like to point out that the OTS has been increasing 

its enforcement resources for several years. Since 2006, the agency 

has increased the number of attorneys in its Enforcement Division 

by 67 percent. The agency has also been expanding the size of its 

staff devoted to fair lending issues. 

As we discuss actions that will better protect consumers, I think 

it is important to point out that gaps in laws and regulations over 

mortgage lending leave some sectors of the financial market underregulated, and therefore may leave consumers unprotected. These 

sectors include mortgage brokers and mortgage companies. 

We urge Congress to establish a level playing field in mortgage 

lending, with the same rules and oversights for all players. Consumers do not understand, nor should they need to understand, 

distinction between types of lenders offering to provide them with 

a mortgage. They deserve the same service, care, and protection 

from any lender. 

Finally, I would like to offer two suggestions for legislative 

changes that would improve consumer protection. Number one, expand and enhance the temporary cease and desist authority to 

make it easier to apply in consumer protection cases. Number two, 

improve the jurisdiction of Federal banking regulators over third 

parties such as mortgage brokers, appraisers, and consultants to 

whom depository institutions outsource key parts of their business. 

Thank you again, Mr. Chairman. 

[The prepared statement of Acting Director Polakoff can be found 

on page 152 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Polakoff. Those last two points 

are very much what we were hoping to hear. 

And next, with the cooperation of the Judiciary Committee, 

which has the primary jurisdiction over the Department of Justice, 

Ms. Rita Glavin, who is the Acting Assistant Attorney General of 

the Criminal Division. 

16 

STATEMENT OF RITA M. GLAVIN, ACTING ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF 

JUSTICE 

Ms. GLAVIN. Good morning, Mr. Chairman, and members of the 

committee, and members of the House Judiciary Committee. Thank 

you for your invitation to speak today. 

The Nation’s current economic crisis has had devastating effects 

on the mortgage markets, credit markets, the banking system, and 

all of our Nation’s citizens. And although not all of our current economic ills are the result of criminal activity, the financial crisis has 

laid bare criminal activity such as Ponzi schemes that may have 

otherwise gone undetected for years. 

The Department of Justice is committed to redoubling our efforts 

to uncover abuses involving financial fraud schemes, mortgage 

lending and securitization frauds, foreclosure rescue scams, government program fraud, bankruptcy schemes, and securities and commodities fraud. And we are committed to adopting a proactive approach for better detecting and deterring such fraud in the future. 

Put simply, where there is evidence of criminal wrongdoing, including criminal activity that may have contributed to the current economic crisis or any attempt to criminally profit from this crisis, the 

Department will prosecute those wrongdoers. We will work tirelessly to recover assets and criminally derived proceeds and strive 

to make whole victims of such schemes. 

Historically the Department has had tremendous success in identifying, investigating, and prosecuting massive financial fraud 

schemes. Last year, for example, the Department secured the convictions of five former executives, including the owner and president of National Century Financial Enterprises, one of the largest 

health care finance companies in the United States until its bankruptcy in 2002, on charges stemming from an investment fraud 

scheme resulting in $2.3 billion in investor losses. Similarly, last 

year the Department obtained the conviction of a former AIG executive and several Gen Re executives who engaged in corporate 

fraud by executing two false reinsurance transactions to conceal a 

$59 million decrease in the loss reserves of AIG. 

From the Department’s prosecution of executives of Enron to 

WorldCom to Adelphia to Revco, the prosecution of mortgage 

fraudsters and architects of Ponzi schemes across the country, the 

Department has considerable institutional experience which it can 

and will draw upon in fighting crimes that relate to the current crisis. Indeed, in recent weeks the Department has made clear that 

its commitment to prosecuting financial crimes will not abate. 

The Department secured a guilty plea from Bernard Madoff for 

securities fraud and mail fraud violations. The Department filed a 

criminal complaint against the chief investment officer of Stanford 

Financial, alleging that she obstructed a Securities and Exchange 

Commission investigation into the activities of Stanford Financial. 

And these are just two examples of the Department’s ongoing vigorous enforcement efforts. 

The Department has approached the current financial problem 

with three primary goals. The first is coordination. The Department has sought to aid in coordination among law enforcement 

agencies. The sharing of information and ideas is essential to idenVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
17 

tifying and prosecuting financial fraud in the mortgage fraud problem. Accordingly, the Department has encouraged and led by example a comprehensive information-sharing effort within the Department and amongst our partner agencies. 

Second, investigation and prosecution. The Department has focused on the investigation and prosecution of financial fraud and 

mortgage fraud for many years. When criminals go to jail, we deter 

similar conduct by others. The Department over the last several 

years aggressively prosecuted mortgage fraud cases, and we have 

yielded nationwide sweeps, resulting in hundreds of convictions, 

and sending criminals to jail when appropriate. 

Third, in addition to deterring, detecting, and prosecuting crimes, 

the Department is committed in its responsibilities to help the victims of financial fraud and mortgage fraud schemes, and, to the extent possible, attempt to make them whole. To this end, prosecutors and law enforcement partners work to locate and recover assets from the criminals and provide restitution to the victims. 

Unquestionably, the crisis now demands an aggressive and comprehensive approach, and we are going to do that, doing it the way 

we have always been doing it, through vigorous investigations and 

prosecutions of those people who defraud their customers, the 

American taxpayer, and may otherwise have unlawfully placed billions of dollars of private and public money at risk. We are committed to the effort. We are going to look at allegations of fraud 

closely, follow the facts where they may lead, and bring our resources to bear to prosecute those who have committed crimes. 

Thank you for the opportunity to address the committee, and I 

would be happy to answer any questions. 

[The prepared statement of Acting Assistant Attorney General 

Glavin can be found on page 102 of the appendix.] 

The CHAIRMAN. Thank you. 

Our next speaker is John Pistole, who is the Deputy Director of 

the FBI. 

STATEMENT OF JOHN PISTOLE, DEPUTY DIRECTOR, FEDERAL 

BUREAU OF INVESTIGATION 

Mr. PISTOLE. Thank you, Chairman Frank and, from the Judiciary Committee, Chairman Scott, and other members of the committee. 

Today, I would like to give just a very brief overview of what we 

in the FBI are doing in facing the challenges that we have, and I 

will describe some of the current efforts to combat the fraud that 

has been described previously. 

To state the obvious, we have experienced a significant increase 

in mortgage-fraud-related cases since 2005, when we had approximately 720 investigations. Today, the FBI has more than 2,000 active mortgage fraud investigations and an additional 566 corporate 

fraud investigations, a trend which we expect to continue. Our 

work in mortgage-fraud-related crimes generally appears in two 

distinct areas: fraud for profit; and fraud for housing. 

Our primary focus is in the fraud-for-profit area, which refers to 

those individuals who falsely inflate the value of property or issue 

loans related to fictitious properties. These schemes rely on industry insiders, those appraisers, accountants, mortgage brokers, and 

18 

other professionals—who override lender controls designed to prevent this crime from happening. 

The second area, fraud for housing, occurs when an individual 

borrower, often with the assistance of a real estate professional, acquires a house in which to live under false pretenses. 

The current financial crisis has also produced an additional consequence—the exposure of pervasive fraud schemes that have been 

thriving in the global financial system. These schemes are not new 

but are coming to light, as has been described, as a result of market deterioration. For example, numerous Ponzi schemes, such as 

Madoff and other investment frauds, have been uncovered which 

we are actively pursuing in the following ways: 

We have shifted resources and now have over 250 agents and approximately 50 financial analysts and other intelligence analysts 

assigned to mortgage fraud and related investigations. We also 

have another 100-plus agents working corporate fraud matters. We 

also augment our efforts with approximately 250 State and local 

law enforcement officers assigned to 18 mortgage fraud task forces 

and 47 working groups. We also established at our FBI headquarters a national mortgage fraud team to coordinate and to 

prioritize the FBI efforts across the country and to provide tools to 

identify the most egregious fraud perpetrators and to work even 

more effectively with our counterparts in law enforcement, and regulatory and industry leaders. 

Even before the creation of this national initiative, we were seeing results from our increased focus in this area. For example, last 

June, we completed the initial phases of what we called ‘‘Operation 

Malicious Mortgage,’’ involving the arrest of more than 400 offenders nationwide believed to be responsible for more than $1 billion 

in estimated losses. This initiative has focused on three types of 

mortgage fraud: lending, of course; mortgage rescue schemes; and 

mortgage-related bankruptcy schemes. Our work on that initiative 

and others continues. 

In closing, it is clear to us in the FBI and to our law enforcement 

partners that more must be done to protect our country and our 

economy from those who try to enrich themselves through illegal 

financial transactions. We are committed to doing so, and we appreciate the committee’s support. Thank you. 

[The prepared statement of Deputy Director Pistole can be found 

on page 144 of the appendix.] 

The CHAIRMAN. Let me begin with Mr. Polakoff. 

On page 17, Roman numeral V, as to closing the regulatory gaps, 

you talk about establishing a level playing field. You talk about unregulated or underregulated people in the mortgage market. 

The Federal Reserve has proposed some rules, as you know. Actually, under the better-late-than-never category, the Federal Reserve is invoking authority that this Congress gave it in 1994. It 

was not used. Mr. Bernanke, to his credit, decided to use it. 

Is that the kind of thing you are talking about? What specific 

language would you be looking for? 

Mr. POLAKOFF. Mr. Chairman, what I am talking about is bootson-the-ground examiners. 

The difference is, you take your respective State; Steve 

Antonakes does a great job with examining mortgage brokers and 

19 

mortgage companies in your State. Not all States have such a robust program. Sometimes it is because they do not have a sufficient 

budget, and there are other reasons, so the rules need to be consistent across-the-board, but the boots on the ground actually examine— 

The CHAIRMAN. Do you think we need uniform Federal mortgage 

regulations for the nonbanks? I assume we are talking about 

nonbanks. 

Mr. POLAKOFF. Yes, sir, but it is the two parts. It is the uniform 

regulation, and then it is the prudential supervision of such. 

The CHAIRMAN. In those cases where you think the States may 

not have enough, would you authorize Federal regulators to step 

in? How would we deal with that? 

Mr. POLAKOFF. Yes, sir. We are suggesting that the State charter 

remain as it currently is for these mortgage brokers or mortgage 

companies, and there would be a joint examination program with 

a Federal partner and a State partner. 

The CHAIRMAN. That is an interesting approach. 

Triggered by the State’s request or would you have the right to 

go in with or without a request? 

Mr. POLAKOFF. Just like State-chartered banks now, we would 

suggest it would be an alternating program. 

The CHAIRMAN. I am not sure I know what that means. 

Mr. POLAKOFF. I am sorry. So right now, for a State-chartered 

bank, typically the State examiners go in one year to conduct the 

examination. Then, the FDIC or the Federal Reserve goes in the 

other year to conduct the examination. 

The CHAIRMAN. And you would do the same with the OTS? 

Mr. POLAKOFF. Our recommendation is there should be a Federal 

agency. We would love to take that responsibility. It would be up 

to you, sir, and Congress. 

The CHAIRMAN. All right. Then I also appreciate your very specific request about cease and desist power and the third parties, 

and we will be taking those seriously. 

Mr. Pistole, if that is not the correct pronunciation, I apologize. 

Mr. PISTOLE. It is correct, Mr. Chairman. 

The CHAIRMAN. On the other hand, I do not pronounce anything 

that well. 

Mr. PISTOLE. ‘‘Pistole’’ is correct. 

The CHAIRMAN. Obviously, the complaint, accusation, explanation 

has been that, since September 11, 2001, understandably, you have 

become the first line of defense for American safety in ways that 

we had not anticipated. We are all grateful for that. 

The argument has been made that it has led to a diminution of 

activity elsewhere. For instance, mortgage fraud lacks the sense of 

physical threat. So I have a two-part question: Has enforcement in 

that area suffered because of other priorities? If so, do we need to 

do something to overcome it? I guess that is the general sense and 

not a criticism of the FBI, because I think people would say, if we 

had to choose between being blown up and being defrauded, defrauded would win. Can we avoid that choice in some ways, and 

is that a legitimate explanation of what has happened in the past? 

Mr. PISTOLE. Thank you, Mr. Chairman. 

20 

After 9/11, obviously, we moved a number of our traditional 

criminal investigative resources to national security, particularly 

counterterrorism. Most of those resources were in our drug enforcement areas, recognizing the Department, obviously, the DEA, had 

that primary responsibility and that the FBI did not, frankly, need 

to be in the drug enforcement business. 

There were some lower level, white-collar crimes such as bank 

teller fraud and things like that, and we did get out of that business, so we did have that, but we did continue in the significant 

corporate fraud investigations and other financial frauds, as appropriate, depending on the U.S. Attorney’s Office’s prosecutive guidelines and all that. 

So, as I mentioned, we have more than doubled our resources toward the mortgage fraud/corporate fraud investigations in the last 

2 years, trying to address those allegations that have been coming 

in and also trying to be proactive. I would note that we have several ongoing undercover operations, for example, in the corporate 

fraud and financial fraud areas where we are being proactive about 

seeking out perpetrators of frauds on a wide-scale basis, not just 

sitting back, waiting for referrals to come in. 

The CHAIRMAN. Thank you. 

The gentleman from California, who has graciously waived his 

opening statement, will have his 5 minutes. 

Mr. CAMPBELL. I do not know how gracious I was by being tardy, 

but I will accept that. 

The CHAIRMAN. I would just say to the gentleman, as chairman 

of the committee, I never mind members’ absences. 

Mr. CAMPBELL. Should I take that personally, Mr. Chairman? 

Anyway, thank you all for being here. 

My question is going to be very broad and is to all of you. I could 

go specifically and all that, but in front of us today, we have representatives of the Federal Reserve, the Comptroller of the Currency, the SEC, the FDIC, the Office of Thrift Supervision, the Department of Justice, and the FBI. So we have seven separate agencies all testifying in reasonable detail about the investigative 

things you are doing relative to the financial services area and 

issue. 

My first overall question is: Do any of you believe that there are 

duplicative areas where two out of the seven of you or three out 

of the seven of you have an overlapping jurisdiction or responsibility that results in and that has a lack of coordination? Or, alternatively, are there areas where there is a gap in the current jurisdiction, and so none of the seven of you believe that it is actually 

your primary responsibility to investigate? Do not all speak at 

once. 

Mr. POLAKOFF. Congressman, I would offer only one example, 

and it is not a gap. It is possibly an overlap, but I do not think 

it is bad. 

The example I would offer, sir, is if, in a financial institution, 

there is an individual who may have his or her activities warrant 

an investigation on our part to possibly remove that individual 

from a bank, quite possibly, the FBI or Justice will be looking at 

that same individual and will ask us to stand down while it completes its investigation. That is not bad. That is an overlap, and we 

21 

will work together through that. That is the only example I can 

think of off the top of my head, sir. 

Mr. CAMPBELL. Yes. Commissioner Walter? 

Ms. WALTER. Thank you. 

In the securities arena, there are gaps in the SEC’s authority 

with respect to certain types of instruments or entities. 

For example, a few years ago, we attempted to regulate hedge 

funds and those rules were struck down by the courts so that, 

today, we do not regulate hedge funds. As I noted in my oral statement, we do have antifraud authority, but what we do not have is 

the access to information about who all of them are unless they voluntarily register, what the principals are, the nature of their activities. Similarly, we specifically have no authority with respect to the 

credit default swap market. 

So there are a number of areas in which there are regulatory 

gaps that should be filled so that the appropriate regulatory agencies—in this case, we think the SEC—have full information about 

what is going on and can proceed vigorously. 

Mr. CAMPBELL. Thank you. 

Ms. Glavin? 

Ms. GLAVIN. What I was going to mention from the Department’s 

perspective is that we work with each of these agencies. One of the 

best, most recent examples is we are working now with the SEC 

on the Stanford financial investigation. They work at it from the 

civil side. We work at it from the criminal side. 

One of the ways that we try to check on overlap and on coordinating our efforts is that we have within the Criminal Division a 

Bank Fraud Enforcement Working Group where we meet on almost 

a monthly basis, with a number of the agencies that are represented here, to talk about what they are doing regulatory-wise, 

and we do some information sharing and coordination. There are 

a number around the country, and it is not limited to just the agencies here, but there are task forces and working groups around the 

country that are specifically formed with the aim to try and coordinate our efforts, do deconfliction where it is appropriate, and do coordination where it is appropriate as well so that the taxpayer gets 

the most bang for his law enforcement regulatory buck. 

Mr. CAMPBELL. Okay. Do any of the rest of you wish to comment? 

Yes, Comptroller? 

Mr. DUGAN. I would just highlight and amplify what Director 

Polakoff said earlier about having a common mortgage standard 

that goes across all providers so there are no gaps in what the 

rules are and, secondly, to have comparable kinds of supervision 

and enforcement to make sure those rules are enforced comparably. 

I think that was a big issue that led to where we are now with respect to the mortgage crisis, and I think the kind of legislation the 

committee passed last year with some amendment, I think, is quite 

appropriate. 

Mr. CAMPBELL. Thank you. 

Governor Duke, did I see you? 

Ms. DUKE. I would really echo what Comptroller Dugan said, and 

would point out that this was the focus of the HOEPA regulations 

that the Federal Reserve issued last year, which was to cover all 

lenders. 

22 

Also, we had a pilot program to go in with both Federal and 

State examiners into the subsidiaries of holding companies that we 

supervise and look at the mortgage operations for consumer compliance as well as consumer protection. I think using the authorities 

that we already have in new ways is also going to be important in 

addition to any new authorities we might get. 

Mr. CAMPBELL. Thank you very much. 

My time has expired. 

Ms. WATERS. [presiding] Thank you very much. I will recognize 

myself for 5 minutes. 

In my work on the foreclosure crisis, I have noticed an explosion 

of fake Web sites that try to confuse homeowners into believing 

that they are official government sites. 

On Wednesday, I contacted the Federal Trade Commission and 

the Federal Communications Commission to alert them about such 

a fraudulent Web site that was purporting to offer loan modifications through the Making Home Affordable Program. Of course, 

within hours of my letter, the Web site was taken down. 

However, I am really concerned about those Web sites and the 

national ads. For example, there is one called the Federal Loan 

Modification Company that is getting more and more aggressive. 

There is no oversight for a business that springs up, purporting to 

do loan modifications with names that sound like government 

names. 

What can be done? Who is doing something about that or who 

is at least looking at it? 

Mr. PISTOLE. We in the FBI, ma’am, look at any fraud that 

would be perpetrated by one of those businesses, primarily through 

our Internet Fraud Complaint Center, which receives thousands of 

complaints from people around the country, such as you have seen 

on the Web sites, so we look at it from the fraud perspective and 

whatever type of fraud it is, but we are not in the prevention business, if you will, of preventing those sites from going up. Obviously, 

we do not do that, but we have a number of those types of investigations ongoing right now. 

Ms. WATERS. Let me just ask you: The Federal Loan Modification Company is advertising that, for $3,500, when you talk to them, 

and I have called them, they will take care of modifying your loan. 

They almost guarantee it. They assure you that they can do that, 

and they collect $3,500 from you, but they say, ‘‘We tried, and the 

loan servicer just would not cooperate.’’ 

What is that? Is that fraud? 

Mr. PISTOLE. I do not know the specifics about that one, but typically, that is an advanced fee scheme where somebody is required 

to pay a fee for a service that is not rendered, and it is oftentimes 

used by people around the world. The Nigerian fraud schemes are 

prevalent. In fact, my name and Director Mueller’s name have been 

used in saying the FBI has endorsed this, so it is okay to provide 

that information. So I will get calls from friends and family saying, 

‘‘Is this accurate?’’ It is, obviously, not. 

Ms. WATERS. Do we need to regulate this whole servicer industry? It has become very important. We have servicers who are independent and some who are working for our own government agencies. Everybody has to have them, whether it is Fannie or Freddie, 

23 

etc. They all have servicers that they are contracting with, but I 

do not know who the servicers are. I do not know where they get 

their training. There is no licensing required, and anybody can be 

a servicer. Do we need some new public policy to deal with 

servicers? 

Mr. PISTOLE. I would suggest that we would work with the Department and the committee to explore that further. 

Ms. WATERS. All right. I have another little question I want to 

ask, but it may not seem so big or important. 

Yesterday, I heard information about overdrafts that really bothered me. I understand that there are debit cards that students may 

use, that parents get for them. They buy a cup of coffee or something at Starbucks, and they can use that card even if they do not 

have enough money on it, and then they follow up with a $35 

charge on a $4 item. 

What is that considered? Let the marketplace work as it may? 

Should there be any consumer protection in that at all? 

Mr. PISTOLE. I would defer to my colleagues on that one. 

Ms. DUKE. Yes, ma’am. 

The Federal Reserve has regulations out for comment right now 

that would govern overdrafts and particularly those that are with 

electronic means, debit card overdrafts, and those regulations are 

out for comment. I am not sure exactly how far we are through the 

comment period, but it would address exactly that. 

Ms. WATERS. But it is something you are taking a look at? 

Ms. DUKE. Yes, ma’am. 

Ms. WATERS. Finally, let me just say to all of you: 

Obviously, Countrywide emerged as the poster nonbank for what 

was wrong with predatory lending and the subprime market. How 

did they stay in business so long and get so far as a nonbank with 

the kind of exotic products that they were putting on the market 

with untrained brokers on the street? Who was looking at that? 

What could have been done with what Countrywide was doing? 

Anybody? Somebody? 

Mr. POLAKOFF. Congresswoman, from an OTS perspective, I can 

only speak from early 2007 when Countrywide converted to a 

thrift. As you very astutely point out, a good portion of the predatory lending business or subprime business was conducted outside 

of the insured financial institution, so we would have looked at 

that. Looking back and looking at all of those activities, it would 

have been under the responsibility of the State banking or the 

State entity to look at that particular mortgage company. 

Ms. WATERS. Yes. 

Mr. DUGAN. Before it became a thrift, Countrywide had a national bank, and it also had a holding company that engaged in its 

mortgage activities. A relatively small proportion was conducted in 

the bank. We did not allow the subprime to be put in the bank, 

and so the mortgages that were actually booked in the bank were 

not the issue, but it eventually left our charter and became a Federal thrift. 

Ms. WATERS. I have to go to our next member now, but— 

Mr. GOHMERT. Madam Chairwoman, if there are others who 

want to respond, I would love to hear from them. 

24 

Ms. WATERS. Oh, I am sorry. Are there any others who would 

like to respond? Yes, just one second. Okay. We do not have anyone 

else who would like to respond. 

Lastly, the so-called ‘‘exotic products’’ that keep springing up and 

all of the products that were on the market, whether they were Alt 

A or adjustable rates options, etc., am I to understand that any 

product that can be thought of by somebody—a mathematician or 

somebody assisting banks in ways to make more money—can go on 

the market without your stopping them? Does anybody have the 

ability to stop an exotic product that, obviously, is going to defraud 

our consumers? 

Mr. POLAKOFF. I will take the first stab at it. 

What all of the banking regulators have the ability to stop is a 

predatory product, an unsafe and unsound product. So the important test for us, Congresswoman, is whether the borrower has the 

capacity to repay, whether that is properly assessed. Equally as important is whether the borrowers have the ability to understand 

the product that they are committing to. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GOHMERT. Thank you, Mr. Chairman. I am pleased you came 

back just to hear me. Thank you. 

I am curious. We have had the credit default swaps brought up 

a number of times. What do you think would have been the most 

effective way to regulate or to control these things that really 

threaten to bring down our financial system? Obviously, it is a 

threat. Should they have been regulated by some type of insurance 

standards or do one of you all have the ability and the wherewithal 

to actually regulate them effectively? What do we need to do? I am 

throwing that open to anybody. 

Ms. WALTER. Let me start. 

I believe that, like many other innovative financial products, it 

is very important that there not be a lack of transparency. That is 

the first critical step. 

Mr. GOHMERT. Do you think there might have been some? 

Ms. WALTER. Oh, only a little, perhaps, but when you have a 

product like this spring up and grow by leaps and bounds and become huge and become systemically important before anyone has 

any information about it, I think that is the first place to start. We 

can all attack the issues to a certain extent from the institutions 

we regulate. For example, we regulate broker-dealers and investment advisers, but unless there is transparency within the marketplace itself— 

Mr. GOHMERT. I agree with the transparency, but I am asking 

specifically: Who really should have the ultimate authority now 

that we know how untransparent they were? Who should have the 

ultimate authority to regulate them? Who would have the wherewithal to do it most effectively? 

Ms. WALTER. I think it would be a combination of different regulators. We, on the one hand— 

Mr. GOHMERT. That is pretty specific. Could you be just a little 

more specific? 

Ms. WALTER. Of course. I will go on from there. 

I think that the SEC has a role to play in terms of looking at 

the market forces that go on in terms of how these instruments are 

25 

traded. You are right. They are, essentially, an insurance product, 

so there may be a role for insurance regulators to play. 

There, obviously, is a role for my colleagues up here at the table 

to play because a lot of these instruments are held by institutions 

they regulate. I do think, in the first place, you need a market regulator who can look at the forces that are operating and at the 

trading that is going on in the market as a whole. 

Mr. GOHMERT. And you are talking specifically about which market regulator? 

Ms. WALTER. I am talking about the market actually in trading 

and the transactions that are going on in the credit default swap 

market. 

Mr. GOHMERT. No. What entity? When you say it requires a market— 

Ms. WALTER. I believe that the SEC is the right regulator to do 

that. 

Mr. GOHMERT. All right. That is what I was trying to get to. All 

right. 

Anybody else? 

Governor Duke? 

Ms. DUKE. The Federal Reserve has believed for some time that 

these should be traded on a central exchange, and we have just approved a central exchange for counterparties for that. The Federal 

Reserve Bank in New York has been working on this for a number 

of years, and there is now one up and running. I think that will 

also improve the trading of the credit default swaps. 

Mr. GOHMERT. Do you think that these things that you have both 

mentioned would be enough to control what has become, basically, 

criminal because of the effect on our economy? Civilly, would that 

be sufficient to regulate this group without imposing new criminal 

laws? 

Ms. WALTER. I believe that the criminal laws that are out there 

are sufficient to cover it. 

One of the things that will happen with the centralized counterparties—and there are two others that are going to be up and running soon, we think, and have been approved—is that you will get 

more regularized pricing information, which will provide the public 

with some indicators that are better than the ones that are out 

there. But if you put them in a system, for example, where you call 

them ‘‘securities,’’ securities fraud will apply. The mail fraud, as 

well, will apply. So I believe that the criminal statutes are sufficient, but I would defer to the criminal authorities to my left. 

Mr. GOHMERT. Let me ask a quick question regarding the FBI. 

My time is running out. 

Mr. Pistole, I appreciate your being here. 

From my experience and from what I have seen, white-collar 

crime requires more experience, more expertise, more training. I 

know that since Director Mueller has been in charge, he has this 

5-year up-or-out policy that has forced out thousands and thousands of years of experience. 

Are you still forcing out all of our best experienced agents in 

charge out in the field or have you backed off of that policy a little 

bit? 

Mr. PISTOLE. We have modified that policy. 

26 

Mr. GOHMERT. Because I have not heard that from the field yet. 

Mr. PISTOLE. We have modified that for our field supervisors 

from 5 years to 7 years, and have even given them an option to go 

up over 8 years if they do some time back at headquarters. Yes, 

we have modified that. 

Mr. GOHMERT. Okay. I see my time has expired. 

Thank you. 

The CHAIRMAN. Let me now turn to the Chair of the Judiciary 

subcommittee, who is our partner, Mr. Scott—or Mr. Moore first. 

Let us go to Mr. Scott first to recognize the joint jurisdiction. 

Mr. SCOTT OF VIRGINIA. Thank you, Mr. Chairman. 

I want to follow up on the last question a little bit, to Ms. Glavin 

and Mr. Pistole. 

If everybody knew that they had these so-called ninja loans—no 

income, no jobs, no assets—and they were passed off as AAA assets 

secured by real estate when, in fact, no one had done any due diligence to ascertain the reasonable value of the collateral or whether 

or not the borrower had any capacity to pay for the loan after the 

readjustment from a teaser rate; if everybody knew all of that was 

going on and an investor bought the package based on a AAA rating, is there any problem with the criminal law, fraud, wire fraud, 

and other things to go after that kind of activity? Do we need any 

new criminal laws? 

Ms. GLAVIN. There is a bill that just came out of the Senate Judiciary Committee which the Justice Department supports. It is the 

Fraud Enforcement and Recovery Act of 2009, sponsored by Senators Leahy and Grassley. 

A couple of the key provisions of that Act, which would add tools 

to a prosecutor’s arsenal beyond traditional mail fraud and wire 

fraud, are that it would amend the definition of ‘‘financial institution’’ in title 18 to include private mortgage lending businesses. So 

if you make a false statement to a private mortgage lending business, which did a lot of these subprime loans, we can prosecute you 

under some different statutes, not just the mail and wire fraud 

statutes. That would be helpful, and it would expand the menu of 

options that prosecutors can use. Also, I think it could help us 

make cleaner presentations to grand juries and to juries. 

Mr. SCOTT OF VIRGINIA. Is that a jurisdictional issue that you do 

not have to prove mail and that you can just prove a financial institution? 

Ms. GLAVIN. With mail and wire fraud, you do have to find the 

mails and the wires. On the amendments to that particular statute, 

I think there has to be some type of a Federal nexus, which, I 

think, you would probably be able to find in a lot of the private 

mortgage lending companies. If there is an interstate— 

The CHAIRMAN. If the gentleman would yield, only very few of 

them operate intrastate. 

Ms. GLAVIN. Yes. 

The CHAIRMAN. I do not know of any company that does its business only intrastate. 

Ms. GLAVIN. So I do not think there would be difficulty in a lot 

of cases if prosecutors wanted to use statutes beyond 1341 and 

1343 to prosecute fraud on the mortgage lending businesses. 

27 

In addition, one of the things that particular proposed statute 

does is, the major fraud statute, which I believe is 1031, would also 

explicitly cover fraud in connection with TARP funds and fraud in 

connection with the stimulus package. That is not to say that we 

do not have other tools with which we can prosecute such fraud, 

but it gives us a broader menu of options, which the Department 

supports. 

Mr. SCOTT OF VIRGINIA. In your comments, you mentioned restitution involving the Iraq contracting. At a previous hearing in the 

last Congress, we heard that the Department was hesitant to get 

involved in False Claims Act cases involving Iraqi fraud. In fact, 

it had many of the cases sealed, which put whistleblowers out on 

a limb, where they could not get evidence to prove what they were 

saying. 

Is that policy of being reluctant to go after false claims cases in 

Iraq and sealing those cases going to change? 

Ms. GLAVIN. Congressman Scott, I come from the criminal side 

of the Department. I think you are referring to the False Claims 

Act, which is enforced by the civil side of the Department. I am not 

aware—and I am happy to get back to you on this—of a slowdown, 

and I think you are talking about the sealing of cases, the qui tam 

cases, and I think there are time limits for when it can be sealed. 

Mr. SCOTT OF VIRGINIA. If you could get back to me on the details. 

Ms. GLAVIN. Yes, I would be happy to do that. 

Mr. SCOTT OF VIRGINIA. Finally, I guess, for you and Mr. Pistole, 

how many accountants would you need to effectively go after these 

cases without transferring people from Homeland Security’s terrorist cases? 

Mr. PISTOLE. Look, Congressman, to give you some context, we 

have a little over 250 agents currently working on these types of 

investigations along with about 50 financial analysts, forensic accountants, and intelligence analysts. To go back to the S&L crisis, 

we had about 1,000 agents. Obviously, the scope of what we are 

dealing with now just hugely dwarfs the S&L crisis, so we are— 

Mr. SCOTT OF VIRGINIA. Has the Department submitted a potential budget so we know, if we wanted to deal with it, we could deal 

with it? 

Mr. PISTOLE. In the 2009 budget, we received an additional 58 

positions, which we are getting on board, and are applying to that. 

Also, we are going through the 10 process right now. 

Mr. SCOTT OF VIRGINIA. Mr. Chairman, I think he said 59. The 

order of magnitude he was suggesting was that 1,000 would not be 

enough. So, obviously, we have a lot of work to do. 

The CHAIRMAN. Thank you. It does sound like that is a piece of 

legislation where our two committees would be able to cooperate, 

but it does sound to me like something we would want to move on. 

The gentleman from Florida. 

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

I have a lot more questions than we have time to have answered 

here today. I wish I could have about an hour with each of you individually. 

The CHAIRMAN. Of course, we do have the option of getting the 

follow-up answers in writing. 

28 

Mr. POSEY. Thank you, Mr. Chairman. I was going to ask for 

your permission to do that. Thank you, Mr. Chairman. 

The first thing I would appreciate from all of you, if you can see 

your way clear, would be a one-page summary, not a book but a 

one-page summary and without corroborating your theories with 

each other, of what you think the root cause of this financial crisis 

is, not just the word ‘‘greed.’’ 

If your life depended on solving this puzzle, how would you do 

it, and what do all indicators point to? If you think that Congress 

is somehow culpable, I would expect you to say that in all honesty 

and forthrightness for which you all have a reputation. Stealing is 

still stealing even if the government is doing the caper, unfortunately. 

Also, since time will not allow an answer to these, I just will request that you respond to us in writing. 

First, to Governor Duke, the number of employees that you have 

and the number of prosecutions and convictions to date that you 

have had. 

To Mr. Dugan, if and when you find criminal conduct, you said 

you would refer it to an agency. I want to know how often you have 

ever found criminal conduct and who you have referred it to. 

Commissioner Walter, I notice in your testimony, you have 1,100 

attorneys in your organization. It looks like an attorney handles a 

case every other year. It does not say anything about convictions. 

I am interested in knowing how many convictions they have ever 

had, if any. 

I want to know, after the Madoff fiasco and when Mr. 

Markopolos took that thick dossier to your organization almost a 

decade ago and tried to get them to investigate Bernard Madoff 

and you refused to do it—your agency, not you—I wonder what discipline was taken for the employees who disregarded the best interests of the citizens of this country and allowed that to be perpetrated and allowed $75 billion to disappear from the face of the 

Earth? There are quite a few people in my constituency who think 

crime would not pay if the SEC were in charge of it. 

Just to put it in a local perspective, if you have a local police 

force and your street cops write one ticket every other year, you 

probably have more than you need or they are not doing enough. 

Mr. Gruenberg, yours does not say how many employees you 

have or how many prosecutions or convictions you have had, just 

that you have had 4,375 mortgage fraud claims filed, and they are 

expected to result in 900 additional civil mortgage fraud lawsuits 

over the next 3 years. I would like your estimate, your prognosis 

on what you think the success rate will be, what justice you think 

will come to the American public, what amount of money you think 

we will be able to recover from the bad people involved in that. 

Mr. Polakoff, there is a list attached of the total numbers of OTS 

formal enforcement actions. It is a very, very modest number. It 

looks like it is probably under 200. I wonder how many employees 

it takes to get this many enforcement actions, but more importantly, I would like to know how many of them were criminally 

prosecuted successfully, and how many you expect to see successfully prosecuted. Thank you. 

29 

Ms. Glavin, your agency has 62,000 suspicious activity reports. 

I would be interested in knowing or of having a breakdown of how 

those were handled and how they were referred. That was between 

just the years of 2007 and 2008. I wonder if your agency needs an 

invitation to invite the companies who received TARP money to be 

investigated under the RICO, the racketeering statutes, and if you 

would need Congress to ask you to do that or if somebody from the 

Treasury or someone else could ask for that. I think the public 

would just like a good cleansing of the possibility that there is 

racketeering involved. 

Ken Lay went to prison for fleecing investors. We have people in 

some of these companies who have fleeced every member of the 

American public and future generations as well, and I think the 

public deserves to know there was no racketeering involved if, in 

fact, there was not any. 

I would pose that same question, basically, to the FBI. I would 

like a short summary of the prognosis you have for the team you 

established in 2008. Unfortunately, I think we were a day late and 

a dollar short in getting in front of this crime wave. We got behind 

it, and we have a lot of cleanup to do, but I would like your 

thoughts as to a prognosis of what you forecast statistically, if necessary, to be the consequences and the results of the new fraud 

team that you have put in place there. 

Again, I would wonder if you have done any investigations on 

any of the companies that received TARP money or bailout money 

and, if you have not, what it would take to have you take a perfunctory view to see if there is evidence of racketeering there. I 

think much of the public suspects that it is there, and for better 

or for worse, I think we probably deserve to know. Thank you. 

Thank you very much for your indulgence. 

The CHAIRMAN. Yes, we would like those answers, obviously, in 

writing. They will be made a part of the record and will be shared 

with all members of the committee. 

The gentleman from Kansas, the chairman of the Oversight Subcommittee. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Mr. Pistole, in your written testimony, you discuss the rise in 

mortgage fraud investigations the FBI is conducting. 

You say, ‘‘The number of FBI mortgage fraud investigations has 

risen from 881 in fiscal year 2006 to more than 2,000 in fiscal year 

2009. In addition, the FBI has more than 566 open corporate fraud 

investigations, including 43 corporate fraud and financial institution matters directly related to the current financial crisis... The increasing mortgage, corporate fraud and financial institution failure 

case inventory is straining,’’ and I repeat straining, ‘‘the FBI’s limited white collar crime resources.’’ 

Mr. Pistole, if you would, please, give us your best estimate of 

how many more agents you need, that the FBI needs now, to keep 

up with the growing number of fraud investigations. 

Mr. PISTOLE. Thank you, Congressman. 

We are obviously doing a scrub of all of our investigative resources internally, initially, to assess whether we can move additional resources first from within our criminal investigative division, from violations that are not as high-priority as this, and that 

30 

is where we have gleaned those additional bodies, doubling from 2 

years ago to where we are now. We also look at the enhancement 

through the task forces, which I also mentioned. I would have to 

get back with you in terms of a precise number, but we obviously— 

Mr. MOORE OF KANSAS. I would appreciate that, sir. 

Mr. PISTOLE. We will do that. We are also working with the Department and with OMB to assess what we may be able to get in 

the out-years, 2010 and beyond. In the meantime, we are moving 

those resources as we can do that. 

Mr. MOORE OF KANSAS. That would be very helpful because I 

think every member of this committee would want to make sure 

that your Department, your agency, has sufficient personnel resources to conduct the investigations necessary to stop what is 

going on. 

Mr. PISTOLE. Thank you, Congressman. I greatly appreciate that. 

Mr. MOORE OF KANSAS. Thank you. 

Ms. Glavin, I was a district attorney for 12 years in my home 

district, and I certainly understand how important personnel resources are, especially prosecutors, in trying to stop some of what 

is going on here. 

My question to you is basically the same as I just asked the FBI 

agent: Do you have, do you think, adequate personnel resources in 

terms of prosecutors right now, the Department of Justice, to do 

what needs to be done to get this thing under control? 

Ms. GLAVIN. It just so happens the Attorney General made some 

public comments about this a couple of days ago, and had indicated 

that he had asked the President and OMB to take a look at our 

budget numbers from 2010 to give additional resources for what 

the Attorney General calls the ‘‘traditional side of the Department,’’ 

which would be the non-national-security side, so that we have the 

ability to hire new agents, look at financial fraud matters, as well 

as hire additional prosecutors to look into those matters. 

Mr. MOORE OF KANSAS. Thank you, Ms. Glavin. 

I truly, truly believe that every member of this committee, Republicans and Democrats, believes that we want to provide sufficient resources to the agencies here to stop what is going on when 

there are abuses and violations of criminal law, and I thank you 

for that. If you can provide any more written information about 

what you need, we would appreciate that as well. 

Thank you, Mr. Chairman. I yield back my time. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the witnesses for appearing today, and I also thank my 

colleagues for the questions that I have heard. The questions, 

themselves, have been beneficial to me. 

Ms. Walter, ma’am, you indicated that the credit default swaps 

were, and I am using my terminology now, under the radar such 

that they had become quite pervasive before we had an opportunity 

to discover the impact. Is this a fair rendition of what you are saying, or would you prefer to say it another way? 

Ms. WALTER. Yes, Congressman, I think that is part of what happened because, unlike with respect to instruments that trade on an 

organized and regulated market, the information was not available. 

Everyone knew they were growing and growing fast, but we knew 

31 

very little about the underlying aspects of them, and because they 

were not standardized, the terms varied. 

Mr. GREEN. I have a follow-up question quickly. My time is limited. I am sorry. 

Ms. WALTER. That is okay. 

Mr. GREEN. If this is true, is there some agency that these products are required to be registered with? Is there some clearinghouse, or is there some methodology by which we can ascertain 

that such a product exists so that we can make some determination 

as to the worth of it? 

Ms. WALTER. There has not been an agency with which these 

types of instruments have to be registered. We do obtain piecemeal 

information about them, various of us up here, through institutions 

that we regulate. 

As Governor Duke mentioned earlier, there is now one central 

clearinghouse that is up and running, and that will cause some further information to come forth. There are likely to be at least two 

more, and that will cause some standardization of the instruments 

as well, but we think participation in a central clearinghouse 

should be mandatory, and there should be an information flow to 

the regulators across-the-board. 

Mr. GREEN. Just for my edification, does everyone agree with the 

commentary accorded, just presented? If you disagree, would you 

kindly extend a hand into the air? 

If such a clearinghouse is needed and if it should be mandatory, 

should the penalty for failure to comply be civil or criminal? Can 

you give me some indication as to how we would enforce such a 

penalty, please? 

Ms. WALTER. If there were a requirement placed by statute, depending on the statute in which it was placed, there would be civil 

law enforcement authority. I, once again, will defer to the criminal 

law enforcement authorities about how best to address criminal 

sanctions for failure to follow the law. 

Mr. GREEN. Are you of the opinion that they should be criminal 

as well as civil, the penalties and sanctions? 

Ms. WALTER. Yes, I would certainly support that, of course, with 

the appropriate state-of-mind requirements and the like that are 

true in general with respect to criminal prosecution. 

Mr. GREEN. Mr. Pistole? 

Mr. PISTOLE. Yes, Congressman, I think we would have to look 

at the details. If it is tantamount to a false statement, then, obviously, there would be those criminal sanctions, but absent that, in 

terms of a central clearinghouse, I think the thing we would not 

want to happen is to slow down anything in terms of the sense of 

urgency, and would want to focus on where we are going. We have 

fairly robust reporting requirements now to the individual components here, so my only concern would be in going to a central clearinghouse that somehow slows something down. If it acts as a 

deconfliction mechanism, that has always been beneficial. 

Mr. GREEN. My concern is that these products embrace so many 

people and so many lives. Do we slow down at the end and prosecute over some long period of time, or do we take the time to 

make sure that they are products that will not harm us, is the 

question? 

32 

Listen, do not answer that. I want to go to a closing statement. 

I do not favor invidious persecution. I do favor vigorous prosecution. I think the public is not privy to prosecutions that are taking 

place. I believe you when you say they are, but my suspicion is 

most members of the public would say not enough is being done. 

If it is as you say it is, we have to find a way to get this message 

to the masses so that not only will they know that the prosecutions 

are taking place but also such that there will be a proper deterrent. 

My time has expired. I yield back. 

Ms. WATERS. [presiding] Thank you very much. 

Mr. Foster? 

Mr. FOSTER. Governor Duke, my first question, do you think that 

the detection of fraudulent mortgage originators would have been 

quicker without teaser rates and so on that temporarily hid a borrower’s inability to repay? 

Ms. DUKE. I am not sure that I can understand the characterization of the fraud as the inability to pay, because, at the time, the 

ability to pay was not necessarily required by regulation or by statute. It was only in the HOEPA regulations that the requirement 

of identification and verification of the income that would be used 

to pay became a requirement for making a mortgage loan, if that 

is responsive to your question. 

Mr. FOSTER. I was just wondering,if the only kind of mortgage 

that was allowed to be originated was one that had a constant level 

of payment, just this sort of fraudulent— 

Ms. DUKE. The regulations, actually, address not only fixed-rate 

mortgages but also variable-rate mortgages, and require that they 

be underwritten to the fully indexed rate so that they be underwritten to the rate that they would automatically go to after the 

teaser time expired. 

Mr. FOSTER. Okay. Is there anyone else who would like to make 

a comment on that? 

Mr. GRUENBERG. Congressman, I would just say that the teaser 

rate was one of the means by which those who engaged in predatory practices drew in borrowers who did not fully understand the 

terms of the mortgage, such as when it would adjust upwards. So, 

in a sense, it was part and parcel of the problem. The guidance and 

the rules issued by the Fed under HOEPA tried to address that by 

requiring lending based on the borrower’s ability to pay, which 

hopefully would address that kind of a mortgage product. 

Mr. FOSTER. Okay. Comptroller Dugan, I guess, this question is 

for, how comprehensive is the list of banned individuals? Is the list 

public? Is it nationwide? Does it span all financial services industries? 

Mr. DUGAN. I am sorry, Congressman. Could you repeat that? 

Mr. FOSTER. Oh, yes. 

I was just wondering how comprehensive the list of banned individuals is. Is it public? Is it nationwide? Does it span all financial 

services industries? 

Mr. DUGAN. Yes, it is public. We publish it whenever we issue 

such an order, and it is put on our Web site, and it is distributed 

to all the law enforcement agencies as well, while understood in 

the community. 

33 

Mr. FOSTER. Okay. Is it easy for consumers to sort of get at it 

and be aware that— 

Mr. DUGAN. Yes. There is a central Web site. There are links 

from all the agencies about who is banned and who is not. 

Mr. FOSTER. Okay. Then the last question I have, I guess it is 

to everyone, and it will probably require a written response. I am 

trying to get my arms around what is the optimum level of effort 

and money to put into enforcement. So what I would like and if you 

could answer first is, what is your budget associated with enforcement activities? What is a best estimate of the losses in the area 

under your purview? 

So, for example, for the SEC, that would be security fraud and 

related activities. What would be the effect of an increased avoidance of losses for a 10 percent and a factor of 2 increase in your 

budget? Do you understand my question? 

I am trying to sort of prod the shape of the curve. From a purely 

economic point of view, there is some best amount to spend on enforcement activities. If we are underspending, then giving you an 

additional dollar will result in more than one dollar of losses avoided. If we are past that point, giving you an additional dollar will 

result in less than a dollar of avoided losses. I am just trying to 

get some feeling for where we are on that curve for each of your 

activities. 

Okay. I yield back. 

Ms. WATERS. Thank you very much. 

Mr. Carson? 

Mr. CARSON. Thank you, Madam Chairwoman. 

I appreciate, first of all, all of the witnesses joining us today to 

discuss these very important issues. 

My colleagues briefly touched on the recent growth of mortgage 

foreclosure rescue schemes. I represent Indiana’s Seventh Congressional District, a district that has seen dramatic rates of foreclosures in the past 2 years. I am extremely invested in making 

sure my constituents are armed with an effective knowledge base 

about these scams. 

My first question goes to Mr. Pistole, a fellow Hoosier. You said 

earlier, sir, that the FBI has open cases, and you mentioned the 

problems with foreclosure rescue fraud in your testimony. Will you 

please elaborate on the most common forms of scams your agency 

and its regulatory partners have seen lately and what specific 

kinds of actions the Bureau has taken so far against these operations? 

Mr. PISTOLE. Thank you, Congressman. 

Yes. What I can talk about is from the Operation Malicious Mortgage, which I mentioned, that is ongoing, but it is where we have 

had over 400 people arrested. Part of that was focused on the, obviously, upfront lending, all the false statements and the fraud involved in those mortgage applications. We have also seen areas of 

bankruptcy fraud associated with that, so you are further downstream in terms of the fraud where people who are caught up simply cannot pay, and then there may be even unwitting people involved there, but then there is a bankruptcy fraud committed. 

Another aspect is, even in the reverse mortgage area, where people, senior citizens, are able to get reverse mortgages, there has 

34 

been fraud that has been uncovered in that area. We are looking 

at all of those to try to assess the systemic nature of it and the 

numbers that would represent, again under prosecutive guidelines 

for each U.S. Attorney’s Office, what makes sense in terms of trying to prioritize our limited resources in a way that can have the 

maximum impact, for example, on Indianapolis. So those are some 

of the areas that we have focused on. 

As one of the other members mentioned earlier, virtually any 

scheme that could be conceived or devised has been, and we believe 

we have uncovered, virtually, all of them. It is simply a matter of 

applying those resources to the problems in the various districts, 

and that is where we are right now. 

Mr. CARSON. Thank you, sir. 

Secondly, Mr. Gruenberg and Mr. Dugan, would you please comment on whether or not banks have been stepping up their outreach to troubled borrowers, at least warning them of these scams 

that are taking place? 

Mr. DUGAN. Speaking for the OCC, we have put information up 

on our Web site about the scams. 

And I also wanted to mention that the NeighborWorks organization, which a number of us sit on the board of and it is funded by 

Congress in part, also has an initiative that is specifically related 

to this particular issue, which we support. 

Mr. GRUENBERG. Congressman, I should mention that pursuant 

to a directive from the Congress, the FDIC recently conducted a 

large nationwide survey of banks’ outreach efforts, particularly 

with respect to consumers who lack access to mainstream banking 

institutions. I think it is fair to say that our survey indicated that, 

in terms of outreach efforts to inform people in the community 

about the services that mainstream financial institutions offer, 

there has been an increasing effort by insured depository institutions to do that. 

Mr. CARSON. Thank you, Madam Chairwoman. I yield back the 

balance of my time. 

Ms. WATERS. Thank you very much. Mr. Gohmert had a request. 

Mr. GOHMERT. Yes. Thank you, Madam Chairwoman. 

I have two questions that I would like to ask for written answers 

to, if I could, to be submitted within the next 2 weeks. 

Ms. WATERS. Yes. 

Mr. GOHMERT. If that would be appropriate. 

One, this is to everybody. We have a pretty amazing panel here, 

when you look at everybody’s title; and it is this question: What 

would you recommend we do legislatively to keep at least some financial risk with those who put people in mortgages and with 

those who package and sell them as securities? 

If your answer is, do away with mortgage-backed securities, fine. 

But I am not looking for a treatise on what all is involved or who 

could—the question is very specifically: What do you personally 

recommend? Because if you don’t have suggestions on something 

that has nearly brought down the financial system, then we are in 

bigger trouble than I thought. 

The other question is to the FBI; and that is, what is the status 

of providing the States access to criminal history information 

through the Nationwide Mortgage Licensing System and Registry 

35 

as required by the SAFE Act. Specifically, since States are going 

to need that information this summer, has that or when will that 

access be granted? Two, what is the status of setting up the distribution mechanism between the Department of Justice and the 

appropriate State agency? And, three, who within the FBI is responsible for granting this access? And, last, can the FBI provide 

this committee and the Judiciary Committee with periodic progress 

reports on the status of this issue? 

That will take care of it. 

Ms. WATERS. Thank you. 

Mr. Posey, I think you had an additional question you wanted to 

ask. 

Mr. POSEY. Thank you very much, Madam Chairwoman. 

This would be for Ms. Glavin and Mr. Pistole, written responses, 

too, just in the interest of time. I appreciate your patience, Madam 

Chairwoman. 

To what extent are the RICO laws useful to convict those committing white collar crimes? I understand that the DOJ prosecutor 

did not use the RICO approach very often. How often is it used and 

why is it not used more often? Are the RICO statutes sufficiently 

broad to capture the kinds of activities white collar criminals engage in? What are the limitations of a RICO approach in deterring 

and prosecuting financial white collar crimes? How do prosecutors 

determine criminal intent apart from recklessness or general incompetence? And then, finally, how best could Members of Congress strengthen criminal statutes to discourage some executives 

from running off with big bonuses while running their companies 

into the ground? 

That is the bottom line that we are looking for. I thank you all 

for your attention and your courtesy and for appearing here today. 

The CHAIRMAN. Did the gentleman from Virginia want to ask 

some questions? 

Mr. SCOTT OF VIRGINIA. Yes, if I could, Mr. Chairman. If I could 

very briefly pose a couple of questions to be answered for the 

record. 

Ms. Walter indicated some of the exotic instruments that are 

being used. One of the problems we have had is the deviation from 

insurance standards, what are essentially insurance products. If 

you could comment on the need for assets to back what are essentially insurance products and the deviation from the need for an insurable interest before you can buy what is essentially an insurance product. 

And for Ms. Glavin, whether or not there are any changes that 

we need and restitution laws to make sure that we can get our assets recovered and whether conspiracy laws are sufficient to—and, 

also, Mr. Pistole, if you could answer this—whether conspiracy 

laws are sufficient to get those who may also be involved, like the 

accountants and others that may be involved. 

And then, finally, to Mr. Polakoff, you indicated cease and desist 

orders. Could you give us an idea of what you are using these cease 

and desist orders for? Because my initial reaction is that some of 

these could possibly be referrals for criminal activity, rather than 

to stop breaking the law. If you could give us an idea of what you 

are using those for? 

36 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the panel. It has been useful. And I must 

say I thought the questions asked by my colleague, Mr. Posey from 

Florida, were useful ones. We will look forward to those answers. 

Mr. Polakoff, you gave us some specific legislative suggestions; 

Ms. Glavin did as well. All of those will go to the Judiciary Committee. I promise you we will take all of them very seriously, because we clearly, collectively have to do a much better job than we 

have done as we go forward. 

The next panel is now before us. 

The panel will be seated. You can all be polite to each other outside, please. I will ask the staff to close the doors, and we will 

begin. 

One of the points noted was the multiplicity of jurisdictions, and 

we wanted to make clear that a very important set of jurisdictions 

exist here at the State level. 

Let me make a preliminary statement here. One action that happened under the Bush Administration, although it was done by a 

Clinton Administration holdover appointee, the Comptroller of the 

Currency, was what I believe to be an excessive preemption by the 

Comptroller of the Currency of the ability of States to enforce laws 

against nationally chartered banks; and I believe that left us with 

a vacuum because the Federal authorities did not have the power 

to promulgate a code to fill the vacuum. 

That was a resistance of the Federal Reserve. We have improved 

that some. But there is clearly a role for the States. 

And I will say it is not entirely irrelevant that on the panel before us today at least two are elected. Mr. Ropp, are you elected 

or appointed? 

Mr. ROPP. My boss is elected. 

The CHAIRMAN. We do have two directly elected officials. Your 

boss, the Governor or the— 

Mr. ROPP. The Attorney General of the State of Delaware. 

The CHAIRMAN. The Attorney General. 

I will say this: Consumer protection, particularly when you have 

individual cases, for a variety of reasons does not have the same 

aura that making grand policy does; and I have found that, in the 

absence of a direct electoral spur, consumer protection sometimes 

lags. Those of us who are in an elected office here in the Congress 

are often asked by individuals in our districts to do this, and we 

pursue it. 

At the State level, unlike the Federal level, much of the administration of consumer protection law is in the hands of directly elected officials: the Secretary of the Commonwealth of Massachusetts, 

the Attorney General of Illinois, the Attorney General of Delaware; 

and I think there is a great deal to be gained there. 

So there are reasons for involving the State in consumer protection both in terms of federalism, but, also, I believe that having 

elected officials be charged with some of the responsibility for consumer protection helps us overcome the institutional lag that exist. 

And your people say, these consumer things, they can be annoying. When people vote for you, they become a lot less annoying. So 

that is, I think, a mechanism that we want to take a shot of. 

37 

With that, I will begin with my former colleague in the Massachusetts Legislature, who has done a very good job of administering securities law. In Massachusetts, the Secretary of the Commonwealth is the Securities Administrator, William Galvin. 

STATEMENT OF THE HONORABLE WILLIAM FRANCIS GALVIN, 

SECRETARY OF THE COMMONWEALTH OF MASSACHUSETTS 

Mr. GALVIN. Thank you, Mr. Chairman. 

Chairman Frank and members of the committee, I am pleased to 

have this opportunity to testify on the crucial role of State securities regulators in financial regulation and investor protection. 

As Secretary of the Commonwealth, I am the Chief Securities 

Regulator for Massachusetts. The Securities Division regulates to 

protect investors and promote confidence in securities markets. In 

the United States, securities regulations are regulated by the Securities and Exchange Commission and by States’ securities agencies 

and by a system of complementary regulation. State regulators 

serve an important backstop to other regulators if they are not acting to protect investors. 

Massachusetts, along with other States, has been at the forefront 

to bring enforcement actions to protect investors. These include actions against brokerages using bogus stock analyst reports to entice 

customers to buy low-value stocks and debt securities, cases 

against mutual fund companies that illegally facilitated market 

timing trades, actions against the abusive sales of variable annuities, actions against the use of spurious senior credentials to sell 

inappropriate investments to older investors, actions against unsuitable sales and fraudulent practice in the sales of auction rate 

securities to retail and municipal investors, and investigations and 

actions against pyramid schemes including the Madoff scheme and 

their feeder funds and several hedge fund cases. 

The Massachusetts Securities Division has acted promptly and 

decisively to protect the interest of investors, particularly retail investors. Massachusetts and other States have negotiated substantial refunds for investors and imposed significant fines against violators. Massachusetts was the lead State in 3 auction rate securities cases that ended with settlements that returned $33.9 billion 

to investors. The States’ combined efforts in these cases will bring 

back $61.3 billion to date to investors across the country. 

The State enforcement powers, however, go beyond monetary 

sanctions. The Securities Division has revoked the licenses of serious violators in order to drive them out of the securities business. 

Massachusetts has often required financial firms to admit wrongdoing. 

The current crisis in financial services has once again exposed a 

failure of aggressive enforcement, particularly at the Federal level. 

For too long, a culture of compromise and accommodation has overwhelmed enforcement efforts. Too often, the guilty neither admit 

nor deny any wrongdoing and routinely promise not to cheat again 

until they come up with a more clever way to do again what they 

just said they would not do again. I ask this committee and the 

Congress to give the States the tools we need to maintain and enhance our ability to regulate effectively and protect investors. 

38 

The National Securities Markets Improvement Act of 1996, 

NSMIA, removes State regulatory authority over mutual funds, 

most private offerings of securities and over large investment advisors. Since the adoption of NSMIA, jurisdiction over investment advisors has been split between the Federal Government and States. 

I ask that Congress restore the States’ powers to act against federally registered investment advisors, particularly for dishonest and 

unethical business practices. 

The States Securities Act permits the States to impose a range 

of remedial sanctions against violators, including that violators 

make rescission to investors—that is repayment to investors—for 

violation of laws. These sanctions give the States the ability to recover money for defrauded investors. The rescission remedy is particularly important because it helps make the investors whole. 

Unfortunately, several recent court decisions have held the Federal Arbitration Act preempts the States’ ability to order rescissions for security violations. These cases hold the rescission remedies preempted because arbitration is the sole mechanism for investors to recover their losses. We strongly dispute these decisions 

which ignore the remedial and deterrent purposes of State-ordered 

rescission. We urge Congress to amend the Federal Arbitration Act 

to clarify that it does not preempt the States from ordering securities law violators to make rescission to their victims. 

Another area—under current law, broker-dealer firms deal with 

their customers without fiduciary obligations. In contrast to brokers, investment advisors work solely for their customers and acknowledge a fiduciary duty of them. 

Brokerages like to have the issue both ways. Among other practices, they frequently give their salespeople the title ‘‘financial advisor.’’ This term blurs the nature of the firm’s relationship with its 

customer by making the broker appear to be an investment advisor. However, when a dispute arises between the customer and the 

broker, the broker will strongly assert that it does not work for the 

customer but instead has only an arm’s-length relationship with 

the customer. 

The Securities Division has seen examples of brokers dealing unfairly and improperly with customers, and we have witnessed customers who have recovered little or nothing for their losses through 

the pro-industry arbitration system and due to the fact that brokers are not considered fiduciaries. 

This system should be changed. I urge the committee and the 

Congress to require that brokerages be in a fiduciary relationship 

with their customers, at least with respect to individual retail customers. 

There are, finally, several problems on the horizon that I would 

like to bring your attention. Many hedge funds are liquidating because their investment strategies did not work and because the advisors anticipate they will not receive an incentive share of funds 

profit for the years to come—the investors, that is, will not receive 

profit for years to come. 

We can expect many of the people who ran and advised the last 

generation of hedge funds to set up new funds and start again. Unless regulation of hedge funds is significantly improved, we can expect to see a replay of past problems which can and have caused 

39 

great damage to our economy, including wild speculations and essential commodities. I ask the committee and the Congress to take 

steps to make hedge funds more transparent and their activities 

more visible. 

Lastly, American households now rely on mutual funds to help 

fund retirement costs. Because so many retail investors have their 

savings in mutual funds, I urge the committee and the Congress 

to give mutual funds appropriate scrutiny. 

No topic or type of investment should be off the table as Congress enacts regulatory reform and improvements to investor protection. Congress has an urgent need to restore confidence in the 

financial markets. Effective regulation or enforcement are desperately needed. 

Thank you for this opportunity to testify on these important 

issues, and I will welcome your questions. 

[The prepared statement of Mr. Galvin can be found on page 94 

of the appendix.] 

The CHAIRMAN. Next, Attorney General Lisa Madigan, State of 

Illinois. 

STATEMENT OF THE HONORABLE LISA MADIGAN, ATTORNEY 

GENERAL, STATE OF ILLINOIS 

Ms. MADIGAN. Mr. Chairman and members of the committee, 

thank you for inviting me to testify today. 

My testimony is divided into two parts: first, I am going to summarize the major enforcement actions that have been brought by 

my office and other State Attorneys General against lenders and 

other participants involved in the collapse of the mortgage market; 

and second, I will identify some of the key impediments to effective 

enforcement of consumer protection laws at the State level. 

Because State Attorneys General are on the front line of consumer fraud, we hear about problems as they are happening. And 

let’s debunk the myth that the predatory practices in the mortgage 

lending industry just started a year or two ago. In fact, we have 

been pursuing predatory mortgage lending practices for over 10 

years. In that time, State Attorneys General have often targeted 

very large mortgage lenders for investigation, because our aim is 

to bring cases that will have an impact on the lending practices of 

the industry as a whole. 

In 1998, Illinois, Massachusetts, and Minnesota brought civil 

consumer fraud suits against First Alliance Mortgage Company, a 

California-based lender. FAMCO’s business and lending practices 

will, unfortunately, sound very familiar to you. FAMCO sold highcost home loans to subprime and prime borrowers. Most of its loans 

were re-fi’s, with borrowers typically placed into a 2/28 ARM, one 

of the same products that is causing so much trouble in the current 

market. 

Another foreshadowing of today’s crisis, FAMCO bundled and 

sold its loans on Wall Street to Lehman Brothers. As a result of 

being sold unnecessarily high-cost home loans, FAMCO borrowers 

paid the price in the form of higher monthly payments and lost equity. In a settlement of the lawsuit in 2002, the States recovered 

well in excess of $50 million in restitution for consumers’ losses; 

40 

and FAMCO was ultimately forced out of business and into bankruptcy. 

In the years since FAMCO, the States have brought a succession 

of enforcement actions against some of the biggest names in mortgage lending. These actions include a multistate investigation of 

the subprime mortgage giant Household Financial, which culminated in a $484 million settlement in 2002. 

Following the Household settlement, the States launched a probe 

of Ameriquest, the largest subprime lender in the Nation at the 

time. The Ameriquest investigation was resolved in 2006 when the 

lender entered into a $325 million settlement agreement with the 

States. 

All of these enforcement actions targeted the kinds of fraudulent, 

unfair, and deceptive practices that eventually led to the collapse 

of the mortgage market. 

By the fall of 2007, as the subprime mortgage market was starting to crumble, my office opened an investigation into the lending 

practices of Countrywide Home Loans. At the time, Countrywide 

was the largest prime and subprime mortgage lender in the Nation. 

My investigation, which was conducted in conjunction with the 

California Attorney General’s Office, revealed that Countrywide 

had engaged in a wide range of deceptive lending and marketing 

practices in relentless pursuit of greater market share and profits. 

As a result of our investigation, I filed a lawsuit against Countrywide in June of last year; and in October, I and several other State 

Attorneys General announced a settlement with Countrywide’s new 

owner, Bank of America. That settlement established a mandatory 

loan modification program that covers approximately 400,000 borrowers nationwide. The program is estimated to provide $8.7 billion worth of loan modifications to borrowers and give them a fighting chance to stay in their homes. A mandatory loan modification 

program which requires the lender to reviewer its most toxic products and modify its loans is at the heart of the Countrywide settlement. 

In my view, saving homes and stabilizing communities must be 

the primary goal of any enforcement action against predatory mortgage lenders. Unlike previous settlements with major lenders, the 

Countrywide agreement could not prevent the company from engaging in deceptive lending practices in the future. This is because 

once we subpoenaed Countrywide, the company moved all its lending business to its federally-chartered subsidiary which State Attorneys General are arguably prevented from investigating due to 

OCC regulations. In other words, the lenders, supported by the 

OCC, argue that the States are preempted. 

We devote a tremendous amount of resources to investigating 

and prosecuting the many other State-licensed participants involved in the mortgage meltdown, including brokers, title companies, and appraisers. 

Congresswoman Waters, to address your concern about mortgage 

rescue fraud, I want you to know that the State of Illinois has 

brought 22 lawsuits against mortgage rescue fraud companies; and 

we have outlawed up-front fees being paid for these services. Our 

prosecutions of these wrongdoers are both civil and criminal and 

remain a vital part of our enforcement efforts. 

41 

While the States have been aggressively pursuing enforcement 

actions against major lenders and other industry participants, for 

years our efforts have been impeded by a number of obstacles. 

State enforcement actions have been hamstrung by the dual forces 

of preemption of State authority and lack of oversight on the Federal level. 

In the run-up to the crisis, many federally-chartered lenders 

were engaging in the same predatory practices as State-licensed 

lenders. The States, however, could not pursue these Federal lenders, even though we would have liked to. When a report showed 

that several lenders in the Chicago area had possibly violated fair 

lending laws, I could send subpoenas only to the State-licensed 

lenders implicated in the study. Two of those State lenders have 

since moved to Federal charters to avoid our investigation. 

Preemption is a clear impediment to our investigations of fair 

lending and consumer protection violations by Federal banks. To 

give you an appreciation of the preemption battle, there is currently a case before the United States Supreme Court where a coalition of national banks is challenging the authority of State Attorneys General to investigate violations of State fair lending laws; 

and we all know the reason that national banks have fought so 

hard to block States from enforcing State laws against them. 

Over the years, efforts to preempt State consumer protection 

powers have left a large gap in regulatory authority. So far, the 

Federal agencies have been unwilling to fill this gap, and the national banks are counting on their regulators to remain similarly 

resistant in the future. 

As home loans grew increasingly complex and risky, Federal regulators could have and should have taken steps to ensure that 

lenders evaluated borrowers’ ability to repay their mortgage loans. 

Unfortunately, Federal regulators chose not to exercise their authority to enact uniform marketwide underwriting standards until 

the mortgage market showed the first signs of the meltdown. By 

then, it was too little and too late. 

To conclude, I would say that the best thing you can do to prevent further preemption is to give us the authority that we need 

to go after federally-chartered banks as well. 

Thank you for this opportunity to testify, and I would be happy 

to answer any questions you may have. 

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

133 of the appendix.] 

The CHAIRMAN. Next, Commissioner Sarah Bloom Raskin of the 

Maryland Office of Financial Regulation—you should know that 

Congressman Cummings is a great supporter of yours. He was here 

earlier and was called away but is clearly very pleased that you are 

here. 

STATEMENT OF SARAH BLOOM RASKIN, COMMISSIONER, 

MARYLAND OFFICE OF FINANCIAL REGULATION 

Ms. BLOOM RASKIN. Thank you for that. 

Chairman Frank and distinguished members of the committee, 

my name is Sarah Bloom Raskin, and I am the Commissioner of 

Maryland’s Office of Financial Regulation. Thank you for inviting 

42 

me to talk about my efforts and those of my counterparts in other 

States to address the crisis of mortgage fraud. 

The downturn in our economy has ripped the veneer off of a lot 

of predatory transactions that the good times kept hidden from 

view. And what we are seeing today in the States is ugly indeed. 

Let there be no doubt: We have a mortgage industry in America; 

and we have a mortgage fraud industry in America. In my office, 

people come in every day with heartbreaking stories of bank accounts depleted, life savings wiped out, homes lost, families bankrupted, and American dreams turned to living nightmares with 

eviction notices and foreclosure sales. 

In our Federal system, State officials play the leading part in 

regulating mortgage activity which brings together a buyer, a mortgage company, a house, and a neighborhood. State Commissioners 

license and regulate over 77,000 mortgage companies, another 

50,000 branches, and over 400,000 loan officers. This makes sense, 

because we are in proximity to the transactions and to our citizens. 

Like neighborhood cops who know their beats, we can detect both 

positive and negative trends right as they emerge, and we have the 

flexibility at ground level to respond. 

But, as you know, the financial underpinnings of the mortgage 

industry are national, if not international, in scope and scale. Capitalization, securitization, wholesale funding, servicing, and other 

integral functions are consolidated and national in character. As 

State regulators, our reach into these functions is minimal. Oversight in these fields is either federalized or, as we have too frequently seen, nonexistent. 

As State bank supervisors, we can meaningfully address only the 

end point of the problem, the final rip-off of the mortgage purchaser; and that is usually after the fact. But we are without power 

to regulate the essential structural incentives in the national banking industry or the basic content of industry practices and transactions. 

Now, don’t get me wrong. State authorities have been effectively 

pursuing unfair and deceptive mortgage practices. Through several 

landmark settlements, State regulators have recently returned 

nearly $1 billion to consumers who had been ripped off by their 

mortgage companies. 

In 2002, a settlement forced Household Financial to pay consumers $484 million in restitution. A settlement with Ameriquest 

Mortgage Company 4 years later produced $295 million in restitution, and home buyers got back $60 million in a settlement with 

First Alliance Mortgage Company. 

My office responds to some 2,500 consumer complaints per year. 

We conduct over 1,000 mortgage exams. Nationwide, States took 

almost 6,000 enforcement actions against mortgage lenders and 

brokers. 

Furthermore, we have worked with our State legislatures to enhance consumer protections to address rank abuses ungoverned by 

Federal law. In Maryland, we have expanded legal protections for 

homeowners in delinquency and foreclosure to thwart the financial 

scam artists who inevitably descend on financial victims like vultures on highway roadkill. 

43 

But one key point I want to make is that Congress should eliminate the preemption of consumer protections enacted by the States. 

I urge Congress to promptly implement a recommendation made by 

the Congressional Oversight Panel in its special report on regulatory reform to eliminate Federal preemption of the application of 

State consumer protection laws to national banks. 

The magic of federalism is that if one level of government falls 

asleep at the wheel or has too much to drink at the party, another 

can drive everybody home safely. But when you preempt our best 

laws, you take away the keys to the car and our license to drive. 

Today, we all share the same goals of stabilizing homeownership, 

stopping foreclosures, ending the mortgage crime wave, and getting 

our communities moving again. Such ability to expand upon a basic 

Federal standard is essential to the development of effective responses to new mortgage abuses as they emerge. 

Today, as you have heard, we have seen another mortgage storm 

brewing in the area of loss mitigation consulting. Historically, we 

confronted fraudulent transactions where title was conveyed as 

part of a scheme to strip homeowners of their equity. Today, there 

is no equity left to strip, so the rip-offs have become fee-based with 

so-called consultants charging high up-front fees to vulnerable consumers to help them get a loan modification. 

Up-front fees are restricted in Maryland, and our office has re- covered more than $80,000 for consumers to date. We have worked 

through the State Foreclosure Prevention Working Group to raise 

the issue with the Administration and to warn those overseeing the 

President’s housing program of the potential for these practices to 

cause further financial instability. 

On behalf of the 50 State banking supervisors, I want to thank 

you for the opportunity to testify and restate our commitment to 

working with you to reform and revitalize our mortgage industry. 

We view close collaboration as the best way to come out of this crisis and Federal preemption of our laws as an impediment to swift 

recovery. And I look forward to answering any questions you may 

have. 

[The prepared statement of Ms. Raskin can be found on page 172 

of the appendix.] 

The CHAIRMAN. Thank you. 

And next, Mr. Ropp. 

STATEMENT OF JAMES B. ROPP, COMMISSIONER, DELAWARE 

DIVISION OF SECURITIES 

Mr. ROPP. Chairman Frank and members of the committee, I am 

Jim Ropp, Delaware Securities Commissioner and Chair of the Enforcement Section of the North American Securities Administrators 

Association. 

The CHAIRMAN. Could you pull the microphone a little closer to 

you, please? 

Mr. ROPP. I am sorry. I didn’t turn it on, sir. 

The CHAIRMAN. That is the alternative. 

Mr. ROPP. I appreciate this opportunity to focus on the role of 

State securities regulators in the current economic crisis. 

Since the Securities Division is part of the Delaware AG’s office, 

we have statutory jurisdiction over administrative, civil, and crimiVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
44 

nal actions to address securities fraud. And we do not have to refer 

our cases to an independent prosecutorial agency. This allows us 

more freedom to pursue offenders criminally, and we do not shy 

away from bringing criminal cases. 

Delaware was recently the first to indict a Ponzi scheme operator 

who was offering investments in fraudulent real estate deals. In 

another case, Delaware indicted a broker who had defrauded a senior citizen out of more than $200,000. The broker diverted funds 

from the client’s account into a fictitious account. Shortly thereafter, the broker withdrew the money and left the country. Warrants are still outstanding and we are attempting to secure his extradition to the United States. 

In short, criminal prosecutions are an important tool for effective 

enforcement of Federal and State securities laws. 

Delaware obtains cases in a number of ways. The primary source 

of securities cases comes from investor complaints about fraud and 

misconduct. We obtain cases from branch office examinations, referral from local law enforcement agencies, referral from other 

States, NASAA, the SEC, and FINRA. 

Mr. Chairman, as you noted during last year’s ARS hearings, in 

a number of States it has been the State securities officials and law 

enforcement officials who have taken the lead. High-profile national cases receive great public attention, but they should not obscure the more routine and much larger caseload representing the 

bulk of the State’s enforcement work. Those are the cases which affect everyday citizens and their local communities across the country. 

During the past 3 months, the States have been very active. Washington, working with the FBI and the IRS, broke up a $50 

million oil and gas investment Ponzi scheme. Hawaii, with the assistance of the SEC and the CFTC, shuttered a suspected Ponzi 

scheme targeting a deaf community in Hawaii, parts of the mainland, and in Japan. 

An investigation by Texas resulted in a 6-year prison sentence 

for a Ponzi scheme operator who stole at least $2.6 million from investors. Arizona stopped a religious community fraud and ordered 

more than $11 million returned to investors. 

Since January, the Alabama Securities Commission has announced the conviction of nine individuals convicted of securities 

fraud. These convictions encompass cases of fraud and abuse ranging from classic Ponzi schemes to violations of Reg D Rule 506. All 

convictions and charges were felonies. Currently, Alabama has 27 

defendants awaiting trial for securities fraud in 19 separate cases. 

During our most recent 3-year reporting period, State securities 

regulators have conducted more than 8,300 enforcement actions, 

which resulted in $178 million in monetary fines and penalties and 

more than $1.8 billion ordered returned to investors. 

We are responsible for the sending of fraudsters away for a total 

of more than 2,700 years in prison over the last 3 years, and yet, 

over a number of years, there has been a concerted industry effort 

against State regulation which calls for the preemption of both 

State regulation and enforcement. 

For example, NSMIA did preempt much of the State’s regulatory 

authority for securities trade on national markets, and although it 

45 

left State antifraud enforcement largely intact, it limited States’ 

abilities to address fraud in its earliest stages before massive losses 

had been inflicted on investors. 

A prime example in this area is the private offerings under Rule 

506 of Regulation D. These offerings enjoy an exemption from registration under Federal securities laws, so they receive virtually no 

regulatory scrutiny. As a result, since the passing of NSMIA, we 

have observed a steady and significant rise in the number of offerings made pursuant to Rule 506 that are later discovered to be 

fraudulent. 

Although Congress has referred the State’s authority to take enforcement actions for fraud in the offer and sale of all covered securities, including Rule 506 offerings, the power is no substitute for 

the State’s ability to scrutinize offerings for signs of potential abuse 

and to ensure that the disclosure is adequate before harm is done 

to investors. 

The time has come for Congress to reinstate State regulatory 

oversight over all Rule 506 D offerings. There are a number of legislative proposals pending now to significantly increase funding for 

Federal law enforcement agencies. NASAA supports these efforts, 

but urges Congress to consider establishing Federal grant programs to assist State agencies, including securities divisions, involved in the prevention, investigation and prosecution of certain 

financial crimes. 

State securities regulators have learned how to do more with 

less. However, there is little doubt that additional resources during 

this economic downturn would help prosecute these cases, which 

have resulted in vulnerable investors looking to recover their 

losses. State securities regulators welcome the opportunity to work 

with our regulatory partners at the SEC and the SROs to collectively use our resources to protect investors. 

To facilitate communication and coordination, on all financial 

service issues, NASAA believes the President’s working group 

should be expanded to include representatives from the State agencies that regulate banking insurance and securities. Another improvement would be more consistent cooperation between States 

and their regional counterparts at the SEC. 

In conclusion, State securities regulators are dedicated to pursuing those firms and individuals who have violated securities law. 

We want to ensure that we not only maintain but enhance our authority to regulate at the local level and bring enforcement actions 

with appropriate remedies against those firms that violate securities laws in their jurisdictions. With additional resources and support from Congress, State securities regulators will continue to provide an indispensable layer of protection to Main Street investors. 

Thank you. 

The CHAIRMAN. Thank you, Mr. Ropp. 

[The prepared statement of Mr. Ropp can be found on page 203 

of the appendix.] 

The CHAIRMAN. And finally, Mr. Merle Sharick from the Mortgage Asset Research Institute. 

Mr. Sharick? 

46 

STATEMENT OF MERLE D. SHARICK, Jr., MORTGAGE ASSET 

RESEARCH INSTITUTE (MARI) 

Mr. SHARICK. Good afternoon, Chairman Frank, and distinguished members of the committee. My name is Merle Sharick, and 

I am with MARI, the Mortgage Asset Research Institute, a 

LexisNexis service. I commend the chairman and the members of 

the committee for holding this hearing and for your dedication to 

protecting consumers and promoting the principles of responsible 

lending. 

For over 18 years, MARI has managed and maintained the only 

cooperative contributory database existing today in the mortgage 

industry specifically established to keep track of mortgage professionals and companies. This database, known as MIDEX, the Mortgage Industry Data Exchange, includes public financial sanction information from over 200 government regulators and nonpublic incident reports provided by subscribers when fraud or misrepresentation is confirmed in a loan transaction. 

MARI became a key part of LexisNexis in 2008. Our current 

focus is driving and supporting the installation of a loan fraud prevention database for loan origination pipelines for all lenders to 

share and compare loans and process to prevent fraud early in the 

mortgage process. 

This month, MARI released its 11th periodic mortgage fraud case 

report to the Mortgage Bankers Association, of which all committee 

members have a copy. This report found that reported cases of 

mortgage fraud in the United States are at an all-time high and 

increased by 26 percent from 2007 to 2008. Additionally, the report 

found that for the first time, Rhode Island ranked first in the country for mortgage fraud with more than 3 times the expected 

amount of reported mortgage fraud for its origination volume. Florida ranked first in 2000 and 2007 and 2006, but dropped to second 

place for 2008 instances and is followed by Illinois, Georgia, Maryland, New York, Michigan, California, Missouri, and Colorado. 

The top fraud incident type in 2008, representing 61 percent of 

all reported frauds, was application fraud. For the 5th year in a 

row, it topped the list. Second were frauds related to tax returns 

and financial statements, which jumped 60 percent from 17 percent 

of reported frauds in 2007 to 28 percent of reported frauds in 2008. 

Additional documented fraud types included in order of their volume frauds related to appraisals of valuations, verifications of deposit, verifications of employment, escrow or closing costs and credit reports. 

In 2008, Rhode Island made its first official appearance on 

MARI’s top 10 list. But since last year’s case report, reports of material misrepresentation have bolstered the State’s ranking to number 5 in our current snapshot of loans originated in 2007. 

The significant drops in reported incidences in Nevada, Utah, 

California, and Michigan are most likely the result of the lack of 

investors for subprime and alternative lending products and tightened underwriting guidelines on conforming products and that the 

flurry of delinquent and foreclosed loans does not allow servicers 

significant time to investigate default causes. Future reports that 

we will issue will indicate whether this is just a 2008 phenomenon 

or not. 

47 

Some observations about fraud types: Many of the percentage figures shown in our report are similar to those MARI has reported 

for several years. Notable differences in the 2008 data include the 

percentage of reports of tax return and financial statement misrepresentation nationwide is higher in 2008 than in previous years. 

The same is true for verification of employment misrepresentation. 

Credit report fraud has decreased and incidences reported for both 

2007 and 2008. 

Appraisal fraud is higher at the time of this report in past years. 

Typically, appraisal fraud numbers grow as more issues are uncovered. 

There are many mortgage schemes out there, and I won’t elaborate on all of them, but I do want to comment on some emerging 

fraud trends that have been reported by our subscribers. These 

emerging fraud trends are further draining lender, law enforcement, and consumer resources in the industry’s most challenging 

times ever. 

Our subscribers reported an increase in traditional mortgage 

misrepresentation of income inflation and bank statement fraud. 

Our subscribers reported an increase in foreclosure prevention 

schemes. Our subscribers also reported an increase in elderly and 

immigrant identity fraud and a significant increase in builder bailout fraud. 

We must use technology more wisely, and we must pay attention 

to details to return confidence and integrity to the mortgage loan 

to attract the capital from a variety of sources that the industry 

will need in a recovery. Combating mortgage fraud is critically important to restoring integrity in the mortgage loan transaction and 

attracting the necessary capital to meet the needs of prospective 

homeowners in the industry. It is also critical to rebuilding consumer trust in the industry’s professionals when the real estate 

market segment begins to improve. We believe that the mid- to 

longer-term systemic return of the real estate market segment 

must be anchored by improved fraud prevention and lending practices already being pursued by lenders. 

Mr. Chairman, we look forward to working with the mortgage industry, this committee, the States, the Federal financial regulatory 

agencies, and other stakeholders to combat mortgage fraud, protect 

consumers and promote the principles of responsible lending. 

I very much appreciate the time. 

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

218 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Sharick. 

Should that show any difference in terms of their originations between the banks and the mortgage companies, to the extent to 

which they are regulated at the Federal or State level? Has that 

been in any way—is there any distinction? 

Mr. SHARICK. I think we will see that in future reports particularly. But the change that has happened in the mortgage industry 

over the last couple of years, the banks and government-regulated 

financial institutions are the main survivors. 

The CHAIRMAN. And they have done a less bad job? 

Mr. SHARICK. They have, I think, more controls in place. 

The CHAIRMAN. So that they have been less contributory. 

48 

The other question is, for those outside of that—and you say they 

are survivors, but would you recommend—you said, tighten the underwriting guidelines. 

We still have some entities which operate outside of these kinds 

of regulations. Would you recommend some kind of statutory or 

other establishment of better guidelines? 

Mr. SHARICK. I am not sure. What I would recommend is more 

due diligence, tightening underwriting guidelines. 

The CHAIRMAN. Due diligence by whom? 

Mr. SHARICK. By everybody who is involved as far as the lender 

and the lending transaction. 

The CHAIRMAN. You would recommend that to the lender. But if 

we have lenders that aren’t doing it, would you mandate it? 

Mr. SHARICK. I think that is something that could be looked at. 

We would be happy to talk with you about that some more. 

The CHAIRMAN. Thank you. 

Let me turn back to the question of preemption, which is an important one. Attorney General Madigan, I think you were referring 

to the case of Andrew Cuomo as the lead against the central clearinghouse. I am pleased to reference here the amicus brief signed 

by myself, the chairman of the Judiciary Committee, Mr. Conyers, 

and several other senior members of this committee on the side of 

the attorneys general. 

Ms. MADIGAN. We appreciate it. 

The CHAIRMAN. There is no question. But I often learn from my 

former colleague, Mr. Galvin. In the area of bank preemption, we 

don’t need to change the statute. What happened was, the Comptroller of the Currency, a Clinton appointee who stayed over until 

the Bush Administration, Mr. Hawke, issued, I think, an excessive 

degree of preemption. It was challenged in court; and what the Supreme Court said basically was, this is a matter that is very much 

within the discretion of the administrator. 

It was an extreme case of matters of discretion. What it means 

was that—and it was a very extreme preemption. What it says is 

that virtually no State laws can apply to banks—no State law specifically related to a lot of banks; and even where a State law or 

general application applies to banks, they have to get the national 

bank people to administer it. Fair lending, for example, would not 

hear the case the attorney general and I were referring to. It is not 

an effort to regulate sort of core banking decisions; it is a fair lending issue. 

The Comptroller of the Currency can undo what the Comptroller 

of the Currency did. I was asked, I will say, by members of this 

Administration, what my view was on the reappointment of the 

current Comptroller. I have found him to be responsible in a number of ways, for instance, in his refutation and the argument that 

the Community Reinvestment Act has been the cause of serious 

problems. And he was not the one who did the preemption and he 

has been somewhat flexible in his approach to it. 

But I have asked—and I am in the process of asking all three 

of the agencies, organizations represented here—the State attorneys general, the State bank supervisors and the State securities 

administrators—to create a working group; and we will meet under 

our guidance with the Comptroller of the Currency to un-preempt 

49 

in the banking area. But my colleague tells me that, apparently, 

in the securities area that has to be statutory. 

So we will do that as well, and we will have a—actually, it will 

be the attorneys general and the State bank supervisors in kind of 

a working group to dial back the preemption there. But we will be 

asking the securities administrator, Mr. Ropp, and Mr. Galvin to 

give us the statutory changes. 

I think there is no question that this could work well. And it 

would be my hope to have some hearings essentially on this, maybe 

one in each of the two relevant subcommittees and a full committee 

hearing. It is a very important subject, and I would hope by the 

end of this year or early next year we could have gotten an agreement to undo some of the excessive preemption by the Comptroller 

and get back into—and change some of the statutory matters that 

have to be done. 

So I appreciate this, and I do not think—certainly in the mortgage area, we didn’t suffer from overenforcement. And I think we 

are able to do this in a way—and it is a legitimate complaint by 

a potential enforcement target, one of them being hit in a contradictory way. I think we could work out among ourselves ways 

to avoid that, so you could have a primary guide or you could have 

some degree of coordination. But that is very high on our list. 

The gentleman from Texas. 

Mr. GOHMERT. Thank you, Mr. Chairman, and thank y’all for 

being here today. I am sorry; I try to avoid saying y’all when I am 

up here, and I let one out. I know Jeff Foxworthy is right; when 

people hear a southern accent, they deduct 50 IQ points from how 

smart they think you are. 

But thank you. We appreciate you being here. 

Mr. Ropp, you indicated the SEC has been criticized for inaction 

toward securities fraud. Do you think that is a result of a lack of 

commitment on the SEC’s part, a lack of resources or a need, heaven help us, for larger Federal regulatory situation or a restructuring? 

Mr. ROPP. I think it is a combination of things. I think you have 

hit on most of them. 

I think part of it probably is resources. I understand their budget 

has not been raised for a number of years until recently. I think 

that they focus on big cases and cases that will bring them a lot 

of publicity. And unlike the States, where we try to handle as much 

as comes along from the Main Street investors, they rarely look at 

this one-person case, two-person case, or the ones where there is 

a $25,000 loss or $30,000 loss, which are real cases and real losses 

to these people. 

I think, because of the size and their resources, they do look at 

the larger cases and don’t necessarily look at some of the smaller 

cases. 

Mr. GOHMERT. Thank you. 

And I am a big proponent of States’ rights. I hate to see more 

and more States’ rights usurped when I think the 10th amendment 

means what it says, those powers are not specifically enumerated, 

but are reserved for the States and the people. 

But in that regard, you have been here. You have heard the testimony of the other panel as they have talked about the credit deVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
50 

fault swaps flying under the radar for way too long, getting too big 

too fast. We are finding the inadequacies of the Federal system in 

not picking that up sooner, before it got us in some significant trouble. 

What was it, do you think, that kept the States from picking up 

on this, this growing, burgeoning fiasco? What kept you guys from 

being able to pick up on it? 

We know the Fed had problems. How about yourselves? 

Mr. GALVIN. If I may, I think part of this relates to the preemptions that have been put into the law over the last couple of decades. 

Mr. GOHMERT. As I understand it, some of the problem with the 

credit default swaps was, we didn’t have control over it. We didn’t 

jump in and take over, and that is why— 

Mr. GALVIN. It is a definitional issue. Part of the problem here 

is, you had entities creating new instruments that were unheard 

of before, new types of risks. 

I don’t think—I don’t presume to speak for anybody else on this 

panel, but I personally do not—I am not arguing for the absence 

of a Federal regulator. There has to be a national market regulator 

and that has to be Federal. 

I think the issue really is, how do the two sides—this isn’t a competition between the States and the Federal regulators; this is 

about making sure the States have the ability to protect their citizens. 

I do think there needs to be a national regulator. I know you are 

going to revisit the whole issue of the structure, and I think some 

of the gaps we have seen are now exposed. The reality is, I think— 

the biggest lesson I think we can all take from what has happened 

most recently is, these industries, they aren’t just some other business. This is a business that affects every other business and all 

of us—indeed, you might say even beyond the confines of the country. 

So when we are talking about some sort of a regulatory process, 

there has to be a national market regulator. There has to be an entity that can step in and deal with the definitional issues that you 

were touching upon in your question. But at the same time, there 

has been this conscious effort to peel back the rights of the States 

to protect their citizens. And in most instances, those State laws 

are more aggressive than the Federal laws. 

Mr. GOHMERT. Okay. I was trying to be specific on the credit 

swap because if we can figure out exactly how we let this get—or 

fall between the cracks so nobody picks it up, then maybe we can 

avoid it. Because, let’s face it, people on Wall Street, people who 

came up with these ideas—Countrywide pushed sometimes—they 

are smart people and they look for these loopholes. And with credit 

swaps, heck, it basically sounds like insurance. But if you don’t call 

it insurance, you don’t have to put money in reserve to reserve 

against the insurable event. And then we have a big problem. 

So I am just looking for suggestions you might have on how we 

keep it from falling between the cracks of the States and the Federal Government. 

Attorney General Madigan, I know you want the Federal Government to run it all, but maybe you could elaborate. 

51 

Ms. MADIGAN. Obviously, one of the problems—and I don’t think 

we have specifically addressed it with this group—is, it comes down 

to resources. I went through this Countrywide investigation and 

lawsuit—six lawyers, and I have one of the largest consumer protection bureaus in the country in an attorney general’s office. 

So, obviously, resources was an issue. Last year alone, we got 

over 33,000 consumer fraud complaints; we got 8,000 calls from 

people who are struggling to pay their mortgages, who are already 

in foreclosure. So we are attempting at the local level to keep people in their homes and to do all we can to hold the people involved 

in the mortgages. 

Mr. GOHMERT. My time is running out. I really appreciate what 

you are doing. I am just looking for a way to figure out how we 

keep another credit default swap from overwhelming. 

I know my time is running out, Mr. Chairman. 

If I could ask to submit in writing any suggestions you might 

have as to how we can do it more effectively—I don’t need a term 

paper, just your own personal opinion of what we can do to avoid 

this in the future. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I am going to ask unanimous consent to just 

take—the gentleman asked a very important question. I think 

there is this distinction, because the problem with credit default 

swaps was not that individuals were being swindled as much as 

the cumulative impact was great. And that is not something a 

State can do. The problem was that you had accumulation of these 

that went beyond the capacity of the system to handle them. 

So I think there is a very important role for the States in protecting investors from being mistreated. But when we are talking 

about a systemic impact, that is inherently, I think, a Federal 

thing. And that isn’t always the case, but I think that was the 

problem. 

The problem with all insurance risk securities was that people 

were not getting paid back. They weren’t a systemic risk. The problem with credit default swaps is that they became a risk beyond 

any individual or any company nationally. 

Mr. GOHMERT. If I could just explain my question, though. People 

at the State level often pick up on these quicker, and even though 

it is a national problem, we should be the ones to do something 

about it. There ought to be a way that they can alert the Feds more 

quickly. 

The CHAIRMAN. I appreciate the gentleman. If the gentleman 

would yield, again, part of the problem though is—the problems 

that went beyond any one State or the transactions in any one 

State. One of the things we need to say, to be able to accumulate 

these things, to keep track of all of them. 

But there certainly needs to be—it is a cooperative relationship 

and the States can, and have in some cases. I believe the problem 

with auction rate securities, for example, first came from the States 

alerting us. 

The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman, and I am 

very appreciative for this hearing. 

52 

I am very appreciative for this panel. I was about to regret that 

I had taken my Friday to come because the first panel was obviously brain dead or something, except for maybe the FDIC and the 

AG’s office, I was beginning to feel a little bit hopeless that we 

could get any real help in dealing with these problems. 

I think, Mr. Chairman, one of our real challenges is, how do we 

have a clearinghouse on products without interfering in ‘‘let the 

marketplace work?’’ It seems to me as you gather in the kind of 

interaction that you have described, that is one thing that perhaps 

you can take a look at. 

I know there are people who would think that, oh, you can’t have 

a clearinghouse where mere human beings would perhaps interfere 

with products that were thought up by mathematicians and others 

in the back room. But I think it is very important that we find a 

way to look at these products before they hit the market, so that 

we can at least do some kind of assessment about what harm they 

may be causing to the citizens of this country. 

I want to especially thank this panel and, of course, Attorney 

General Lisa Madigan and also Commissioner Bloom Raskin. You 

have, I think, really inspired me and given me a lot of hope that 

we certainly can do more. 

Just the information that you gave us today about up-front fees, 

I think can be executed also at the Federal level—and in just talking with my chairman, as we whisper back and forth, he seems to 

have liked that idea also. 

And, of course, the preemption issue that he is talking about, engaging the States and the Feds, I think is something that can lead 

us to avoiding the kind of problems that we have experienced in 

this meltdown and in this crisis. 

I want to thank you for the work that you did on Ameriquest and 

Household Finance. Household Finance had been around for years, 

ripping off minority communities. I can remember as a young 

woman with a family having been interactive with Household Finance. So I want to thank you for all of that. 

And I am just hopeful that you won’t be in the position of continuing to chase these bad actors all the way up to the Fed door 

and then have the Fed door slammed in your face. And I hope you 

come up with some real help to us in how you can take your knowledge and your experience and all that information and somehow 

work with the Feds to continue the chase until you get them. 

And that is it. Thank you very much. 

The CHAIRMAN. The gentleman from Virginia. 

Mr. SCOTT OF VIRGINIA. Thank you, Mr. Chairman. I wanted to 

follow up on what you and the gentleman from Texas were talking 

about on credit default swaps, because they are essentially insurance products without the insurance regulation. 

There are a couple of—and in terms of the marketplace working, 

if you don’t have to back these insurance products with assets, you 

get to collect the assets, the premiums every year, and when the 

house burns down, you don’t have any money. That is a very profitable business when—when the house burns down, you either declare bankruptcy or get bailed out. 

Ms. WATERS. Yes. 

53 

Mr. SCOTT OF VIRGINIA. But in the meantime, it is a very profitable business. 

One of the things that the insurance requires is, one, it has to 

be backed by assets. And it can’t get out of control because you 

have a finite amount of assets to back up your insurance assets 

guarantee. 

The other thing is, you have to have, if it is insurance, an insurable interest. Because if you don’t have an insurable interest, then 

you are just betting on outcomes and everybody gets to play, and 

nobody is really—so if something bad happens or good happens, 

people are just kind of betting on the side. 

Can the panelists say something about the need for anything 

that looks like insurance to actually have assets backing it up and 

whether or not the principle of having an insurable interest is still 

a good thing? 

Mr. GALVIN. I don’t have insurance jurisdiction. But I served in 

the legislature for a long time, and I was on the Insurance Committee in a leadership role. 

I think one of the things we have seen is—and this does touch 

upon the earlier discussion we were having about preemption— 

there is an ongoing discussion about where insurance should be 

regulated, where appropriately it should be regulated. Wholly, the 

market has become national and international, but some of the 

principles have been lost. Those two principles you are talking— 

speaking about, assets and a particular insurable interest, are fundamental to anyone who has studied insurance or knows anything 

about the concept that there has to be some interest in why you 

are getting this insurance policy. 

I think what has happened in the migration from insurance to 

credit default swaps is those principles have been lost. I certainly 

think that the problem—and I tried to touch upon this in my remarks—is the problem with trying to regulate credit default swaps, 

as we now know them, it is almost like a bacteria. It is going to 

change into something else; by the time we have a vaccine to deal 

with the current outbreak, we will have something new. 

So I think that it does argue—and I know there has been some 

discussion of this—of having some sort of a national regulator deal 

with some of these more exotic products. I think you may well have 

to look at that, and you may have to look at the concept that the 

lady from California mentioned about some sort of a clearinghouse 

of products or an identification of products, a definition of terms. 

Frankly, the credit default swaps issue touches quite close to 

home to me, coming from Massachusetts. One of the major problems we are having in our finances right now is one of our larger 

public entities, the Massachusetts Turnpike Authority, got into 

some very bad credit default swaps at this point, and they are having difficulty living up to the terms of them to the extent they had 

to vote the State’s credit behind it. 

It is a real problem. But I don’t think simply trying to identify 

what happened before is going to solve the problem going forward. 

I am not arguing for an insurance—national insurance regulator 

exemption of the States or preemption of the States. I am saying, 

I think you have to start identifying these products where they 

54 

really exist, in anticipation there will be new products that will 

take their place. 

Mr. SCOTT OF VIRGINIA. You can kind of call them different 

things and tweak them here or there. But if you are ultimately liable, if something occurs and there is insurance, you have to have 

assets around it. And that will cure any getting out of control because you only have limited assets. And then the insurable interest 

will limit the number of people who can get into the thing. 

Let me ask all of the witnesses to talk about the cooperation with 

the Feds. We talked about eliminating the preemption, but in law 

enforcement, there has to be some cooperation so you can effectively use all of your resources. 

How has the Federal Government helped or hindered your ability 

to go after the bad actors? 

Ms. MADIGAN. I can address that. And I know some others have 

as well. 

Most, if not all of us, are involved in essentially mortgage fraud 

task forces. I think there are 18 of them, regional ones, and I know 

there are about 47 that are smaller in nature. And so we work 

mainly on criminal matters cooperatively with the Feds. 

But in terms of the Countrywides, the Ameriquests, rarely were 

we working with the Feds. We were working with the other States, 

we were working with the other State bank regulators as well. 

Ms. BLOOM RASKIN. I would only add, in Maryland, for example, 

we have teamed up with our U.S. attorney and with a variety of 

State regulatory agencies in the area of mortgage fraud to create 

a Maryland mortgage task force; and we find these mechanisms to 

have great potential because they provide for a sharing of information, a real two-way street in terms of what we are all seeing. 

And we all bring different things to the table in terms of the levels of enforcement, the number of feet we have on the ground, and 

these turned out to be critical mechanisms for spotting trends very 

early. 

Mr. ROPP. From my standpoint, I work with the Federal Legislation Subcommittee with NASAA, and almost every Federal act that 

we look at has some preemption language in it, preempting State 

action in certain areas; and I am not sure it is always thought 

through what the impact of this is going to be. 

Secretary Galvin and I both spoke about the situation with Reg 

D 506 offerings, private placements where States have effectively 

been taken off the case except for where we know there is fraud. 

So we can’t look at them to see if there are dishonest, unethical 

practices or bad actors or people who have prior records, which we 

used to be able to do. And frankly, now we get notice filings which 

we just sort of look at quickly and file away because we really have 

no authority anymore because of preemption under NSMIA to look 

at these things. These are some of the concepts; and Secretary 

Galvin has also mentioned them in his remarks, where the Federal 

Government has preempted the States from being able to do what 

we think is our job of protecting investors. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. SCOTT OF VIRGINIA. Mr. Chairman? If we could, if the witnesses, in writing, could respond, we have had ways where we 

could hinder. If you could make recommendations how we can actuVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
55 

ally effectively help these investigations, we would appreciate 

those. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. FOSTER. Secretary Galvin, you had mentioned market timing 

trade frauds. What fraction of market timing trade frauds do you 

think are actually detected? And do you view this as basically a 

State or a national problem? 

Mr. GALVIN. The market timing issue—which Massachusetts 

brought, I think, the first case in the Putnam Investment case— 

was clearly a national trend in the mutual fund industry. 

One of the amazing things about that case was that as we got 

deeper into it, we had company after company saying, oh, well, we 

did it too. And when we tried to go back at them and say, well, 

why? Well, everyone was doing it. So it kind of argued against the 

policing, the self-policing of the industry. 

I mentioned in my oral testimony the necessity of looking at mutual funds. I think mutual funds again are an area of financial 

services that morphed over time. Initially, they started out as fairly 

small, pooled assets—people thoughtfully investing your money, 

safety in numbers—and they got into something very different. 

I think the common thread that runs through both the market 

timing scandal and many of the other issues that we have dealt 

with is the idea that you have two different types of investors. Special people are taken care of. Market timing was all about you took 

care of the special customers, you let them trade at a higher rate, 

you let them get out and make a quick profit, while the average 

person that was relying on mutual funds for their financial security, they were stuck. 

So I think that these issues, as they emerge, while they are different in the particular, are similar in the fact that they really get 

back to the idea that there are two sets of customers—special treatment for special customers. And what we at the State level, I 

think, are more likely to find is, when that is occurring, we are 

able to move more nimbly sometimes. 

That is not to argue with the Federal people. We work with the 

SEC, we worked with them on auction rate securities. We have to 

work together. This is not a case where, as I said, we are competing. 

Mr. FOSTER. Thank you. I have to move on to a few other issues, 

but I think this is a ball we have to keep our eye on. 

Attorney General Madigan, you mentioned that several institutions had changed to a Federal charter to basically avoid subpoenas. Is that effect instantaneous, or can you look back to the 

years when they were—in fact, were State-chartered? 

Ms. MADIGAN. We have to decide whether or not we are going to 

essentially fight a preemption battle with these entities when 

things of that nature occur. So when we look at potential targets 

and we know there are bad actors out there, the first thing we 

have to do is determine, are we going to fight that battle or are 

we going to go after the other bad actors? And there are plenty of 

them. 

And so, on a going-forward basis, I think what I mentioned in 

terms of Countrywide, part of that settlement and previous settleVerDate Nov 24 2008 17:42 Dec 02, 2010 Jkt 048871 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\48871.TXT TERRIE
56 

ments with Ameriquest and others, we put in injunctive measures—so no prepayment penalties; certain notifications have to be 

made if you are going to change the terms. 

We couldn’t do that in Countrywide because on a going-forward 

basis we wouldn’t be able to. Arguably, once they have moved, we 

will have to engage in a preemption battle even for past conduct. 

Mr. FOSTER. Okay. And did the large settlements against 

FAMCO and Countrywide and others that you mentioned, did 

those result in anyone being added to the black list of banned individuals that are not allowed to participate in financial— 

Ms. MADIGAN. I don’t know the answer to that question. We can 

find out. 

Mr. FOSTER. Okay. That is a very interesting one. 

And does anyone on the panel have any reservations about Attorney General Madigan’s assessment of the value of freezing and rolling back the Federal preemption? Is there any downside to that 

you can see? 

Ms. MADIGAN. Not on this panel. 

Mr. FOSTER. Okay. 

Mr. Sharick, how does tax return fraud typically work? And are 

there technological fixes that might make this harder to accomplish? 

Mr. SHARICK. Tax return fraud is accomplished by altering documents in some way, altering the information. There are a number 

of solutions now that allow certain vendors to go directly to the IRS 

and to the Social Security Administration to verify information. 

But the great percentage of fraud that you see in the mortgage industry has to somewhere center itself around altered documentation. 

Mr. FOSTER. Okay. 

And I guess my last question is the same one I posed to the previous panel as to the cost-effective amount of resources to put into 

enforcement. 

And so, if you could, each of you, I guess the first four members 

of the panel, provide an estimate of your total budget for enforcement activities, the total value of losses averted—just an estimate, 

do the math—and how many additional losses might be avoided by 

a 10 percent increase and a factor-of-two increase in your enforcement efforts? 

Mr. GALVIN. I am not sure I am good at math questions, but I 

will tell you that my division, the Securities Division, is relatively 

small. 

My total operating budget for all my divisions is about $40 million. The Securities Division probably is about $3 million of that. 

We do recoup some fines for our use. Most of it goes to our general 

fund. 

In terms of what we have saved, I did cite in my testimony literally millions of dollars. Just in the last year, we returned over 

$10 million to Massachusetts investors. But in some of the larger 

cases where we cooperated with our colleagues in other States, the 

States led the effort, for instance, on auction rate securities; and 

as I noted in my testimony, over $61 billion has been freed up by 

that. 

57 

So I think in terms of bang for your buck, you are getting a very 

good bang for your buck at the State level. 

Mr. FOSTER. I would just like to see that quantified across the 

range of enforcement activities so we can think sensibly about 

where to put the increase in enforcement activities. 

Ms. MADIGAN. As I mentioned, our legal team who dealt with 

Countrywide—six lawyers. I don’t have financial investigators in 

the office, so we end up hiring experts. Total, statewide, I probably 

have 28 lawyers who do consumer fraud work. 

There is an endless number of bad actors in the mortgage meltdown that we could go after—literally hundreds, if not thousands 

of brokers. In terms of just the volume of consumer fraud complaints around mortgage fraud that we received last year, 2,400. 

And so we could always use more resources. With more resources, we would have the ability to prevent, as well as recoup, 

potentially, some of those losses and keep people in their homes, 

which is what our priority is right now out of the attorney general’s 

office in Illinois. 

Mr. FOSTER. So, for example, doubling your budget would double 

the amount—you are still in a situation where doubling your budget would double the amount of bad actors and losses you would 

avoid? 

Ms. MADIGAN. Potentially. And we would love it if you could help 

us do that. 

Mr. FOSTER. I yield back. 

The CHAIRMAN. I do want to add—yes, Mr. Ropp, go quickly. 

Mr. ROPP. I just wanted to say, our budget, I would love to have 

Secretary Galvin’s $3 million budget. I have $800,000 in Delaware. 

And we had two investors in the auction rate securities who had 

$1,250,000 returned to them just in those two complaints based 

upon the leadership work done by the States and Secretary 

Galvin’s office and Texas and Missouri and other States. So there 

can be a huge bang for the buck. 

And in another case, we had one fraud actor who ripped off 11 

Delawarians for $400,000, which would have been half of my budget. 

Now, we didn’t get all the money back, but certainly the cases 

we do on a very inexpensive basis do a lot of good for the citizens 

of the States. 

The CHAIRMAN. I am just going to—Mr. Ropp, you did say that 

you could use some help with the funding. I would say this. 

I do believe that the States should be given more power, but I 

don’t think I could support sending the money with it. I don’t think 

you are going to see the Federal Government subsidizing the State 

enforcement. And I think you can point out the amount you could 

recover; and at some point, we are all going to have to explain to 

the American people who in the absence of a sufficient level of taxation, they cannot expect the government activity that they need 

to protect themselves. So I do think, at some point we yield to that. 

The only other thing I just want to underline, and Commissioner 

Bloom Raskin talked about—I think it was Commissioner Bloom 

Raskin—the $25,000 fraud, the case of an individual who would 

look to some of the Federal people, like a fairly small case. 

58 

And the answer is, I think that is precisely why elected officials 

need to be in the mix, because the anger of individual constituents 

and the fear that one of them will go to the newspaper and look 

terribly sympathetic and unaided is a powerful goad to an elected 

official intervening. 

As you percolate up to the appointed officials here in Washington, that gets attenuated. So as I said, there is a good political 

science reason why you want to connect State officials, because you 

don’t want the electoral process so—I don’t want the consumer 

complaint process as insulated from electoral politics as it is here. 

The hearing is concluded. We appreciate this, and we will be pursuing many of these issues. 

[Whereupon, at 1:10 p.m., the committee was adjourned.] 

(59) 

A P P E N D I X 

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