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IMPROVING FEDERAL CONSUMER

PROTECTION IN FINANCIAL SERVICES

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 13, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–40

(

(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 

JULIA CARSON, Indiana 

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, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

June 13, 2007 .................................................................................................... 1

Appendix: 

June 13, 2007 .................................................................................................... 63

WITNESSES 

WEDNESDAY, JUNE 13, 2007

Antonakes, Steven L., Commissioner of Banks, Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors .......................... 22

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 16

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

of the Currency ..................................................................................................... 14

Kroszner, Hon. Randall S., Governor, Board of Governors of the Federal 

Reserve System .................................................................................................... 12

Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission ............... 17

Miller, Hon. Thomas J., Attorney General, State of Iowa .................................... 21

Polakoff, Scott M., Deputy Director and Chief Operating Officer, Office of 

Thrift Supervision ................................................................................................ 19

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn .................................................................................... 64

Moore, Hon. Dennis .......................................................................................... 65

Waters, Hon. Maxine ........................................................................................ 66

Antonakes, Steven L. ....................................................................................... 67

Bair, Hon. Sheila C. ......................................................................................... 91

Dugan, Hon. John C. ........................................................................................ 120

Kroszner, Hon. Randall S. ............................................................................... 159

Majoras, Hon. Deborah Platt ........................................................................... 180

Miller, Hon. Thomas J. .................................................................................... 205

Polakoff, Scott M. ............................................................................................. 219

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Follow-up letter from Hon. John Dugan, Comptroller of the Currency, 

dated August 3, 2007, in response to Chairman Frank’s request ............. 236

Letter from the National Association of Insurance Commissioners, dated 

June 12, 2007 ................................................................................................ 237

Bachmann, Hon. Michele: 

Additional information requested during the hearing from Hon. John 

Dugan, Comptroller of the Currency ........................................................... 239

Waters, Hon. Maxine: 

Responses to questions submitted to Hon. Sheila Bair, Chairman of the 

FDIC .............................................................................................................. 241

Responses to questions submitted to Governor Randall S. Kroszner, 

Board of Governors of the Federal Reserve System ................................... 246

Responses to questions submitted to Scott Polakoff, Office of Thrift Supervision ........................................................................................................ 251

(1)

IMPROVING FEDERAL CONSUMER 

PROTECTION IN FINANCIAL SERVICES 

Wednesday, June 13, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Maloney, Watt, Ackerman, 

Sherman, Moore of Kansas, Clay, Miller of North Carolina, Scott, 

Green, Cleaver, Davis of Tennessee, Ellison, Klein, Wilson, 

Perlmutter; Bachus, Baker, Castle, Gillmor, Biggert, Barrett, 

McHenry, Campbell, and Bachmann. 

The CHAIRMAN. The committee will come to order. There are vacant seats, so if there are citizens who would like to sit in the 

seats, please fill them. There are people waiting. We shouldn’t have 

empty seats. 

This is a very important hearing, in my mind, and it is one 

which I hope we will produce a lot of information. Contrary to the 

prevailing notion, sometimes Members of Congress have hearings 

because we want to learn things. I understand that is not the norm 

for hearings, but in this case, there is a need for information, and 

it is information to fill, in my judgment, a very clear-cut void. 

The preemptions by the Comptroller of the Currency and the Office of Thrift Supervision were controversial. Many of us in Congress on both sides did not like them. A former colleague, the gentlewoman from New York, Ms. Kelly, for example, was a very 

strong critic of them on the Republican side. But reality sets in; 

those preemptions are not going to be undone in any substantial 

way. We have a President in power who would veto any effort to 

do that, and by the time we might get a different President, I do 

not think we could unscramble that particular set of eggs. 

So I regret the scope of the preemptions. I acknowledge the extreme unlikelihood of our being able substantially to cut them 

back. There was some uncertainty until the Wachovia case was decided. Those of us who felt it was not an absolutely clear-cut decision take some solace in the fact it was 5–3; it would have been 

5–4, I believe, if Justice Thomas had not recused, given his past 

voting pattern. 

But the preemptions are in place, and that leaves us with the 

problem, in my judgment, that we, the Federal Government, have 

at this point bitten off much more than we are currently able to 

chew. Essentially to change metaphors a little bit, we have bitten 

2

off 50 heads, but we don’t have the brainpower ourselves to replace 

them. What we have done is to eliminate the major source of consumer protection in the financial area, because in the American 

system, for a variety of reasons, consumer protection has come primarily at the State level. 

And let me, as an elected official, explain to people why there is 

an institutional reason for that, and why I am particularly concerned about the need to take serious action here. I want to say 

what may be imprudent, but making international macroeconomic 

supermonetary policy is more fun than arbitrating disputes between a cranky customer and a bank clerk. And it is much better 

to debate the Basel accords, or how going forward to do assignee 

liability in subprime, or any of a number of other issues that we 

have, the effect of monetary policy on employment, those are more 

stimulating intellectually, more rewarding than a, ‘‘He said, she 

said;’’ ‘‘I did not, yes, you did, no, I didn’t,’’ dispute. 

There is a reason why consumer protection has been more often 

done at the State level; State regulators are more likely to be elected officials than Federal regulators—State attorneys general, State 

insurance commissioners, and other State officials. This is one case 

where being the closest to the electorate is a serious fact. And I 

will tell you, in my own office, and among Members of Congress, 

we do a certain amount of consumer protection because we run for 

office. And I will tell you this: If you ask me, where is the greater 

intellectual stimulation, where do I think any individual energy is 

that I express, where will I get greater results, it is probably in 

making broad national policy. 

But cumulatively dealing with these individual consumer complaints is very, very important for two reasons: first, for the injustice done to individuals; and second, if there is no consumer protection mechanism in the society, things will go off track, and there 

could become this bias against consumers. 

Now it is not that I believe that the banks and other institutions 

that are regulated are rapacious or greedy beyond the norm that 

we are supposed to have in a capitalist system. It is just that we 

all make mistakes, and even more of a problem, we don’t like to 

admit our mistakes; we like to cover them up, we like to deny that 

we made them, and we like to blame other people for them. Those 

are human traits. I do not impute them to the banks; I impute 

them to human beings. 

Consumer protection exists to be something of a corrective force, 

and here’s the problem: I do not think that the Federal agencies 

as currently and historically constituted, given their mission, are at 

present adequately staffed or oriented or legally structured to provide consumer protection. 

I had a conversation with one bank regulator who told me that 

the existence of safety and soundness powers—and, by the way, we 

will take 20 minutes on each side. We have only one panel. This 

is a serious issue, and so we are going to go to the fullest extent. 

However, I want to lay it out so that people have a sense of where 

we are on this. We are going to be within our 20 and 20. I was told 

by one of the regulators, well, we can do regulation of consumer 

protections under our power to enforce safety and soundness on the 

banks, the argument being that a bank that does not treat conVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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sumers well can be called to account because it is jeopardizing its 

safety and soundness. I wish. 

In fact, done cleverly enough, being unfair to consumers can contribute to the safety and soundness of a bank. I believe, for example, that the overdraft fees that people get hit with, where people 

go to an ATM and are told by the ATM that they have so much 

money, or they read on the ATM—I don’t think we have talking 

ATMs yet. I guess we do for people who are vision impaired. But 

when people learn from the ATM that they have so much money—

and that includes, without them having asked for it, an overdraft 

amount—and they write a check for that, they get whacked with 

a fee. I wish that jeopardized the safety and soundness of the 

banks who did it, but I see no evidence of that. 

The fact is that banks are not stupid, and they do not do these 

things to put themselves at risk; they do them because they make 

money off of them. And they are there to make money and provide 

that money in our capitalist system to people who are invested in 

the intermediary function, but there are abuses. 

So here are a couple of problems I want to examine. One, legally, 

do the various Federal bank regulators have the authority to step 

in and replace the regulations that were done at the State level? 

Two, do they have the proper resources for enforcement? There is 

no reason why these couldn’t be changed. The fact is that even 

where State laws have applied, the visitation rights do not apply; 

States may not even enforce those laws where they can apply the 

law. Why? Are we the world’s best—we, the Federal Government, 

are we such super-duper law enforcers that we don’t need any help 

from anybody, and we can replace everybody else? 

I think the opposite is the case. I think that cooperation in this 

area of law enforcement is a good idea. My colleagues want cooperation in other areas of law enforcement on immigration and 

elsewhere. I don’t understand why we can say that all of these 

State regulators, with all of their experience, are totally incompetent to help us, the Federal Government, the all-wise, all-knowing, omnipotent Federal Government. 

So we have the legal authority. We have the statutory powers. 

We also have the question of the culture, and I hope that is changing. And then we have this problem, and that is why I have asked 

all of you to be here together. And I am going to ask you all to keep 

your hands on the table so that nobody goes like this when we are 

asking why something isn’t being done. You know, Harry Truman 

wanted a one-armed economist. I want regulators without fingers, 

because I don’t want them being pointed at other people. 

Here is the problem: We have been told by some of the regulators 

that they are not fully able to do regulation to the extent that we 

want because the Federal Reserve Board of Governors has not used 

their authority under the Federal Trade Commission Act to list 

things. That is why we appreciate Commissioner Majoras being 

here, with, by the way, I will say to you, the full acquiescence of 

Chairman Dingell, who has the primary congressional jurisdiction 

over the FTC. We have a combination. We are told, well, it is the 

FTC Act, and the Federal Reserve has their responsibilities under 

the FTC Act, and only they can give responsibilities to the other 

bank regulators. 

4

Well, you are all here, and at the very least, when we leave 

today, we are going to know who does what, and who is responsible 

for what, and whether, in fact, the failure, as some have said, of 

the Fed to spell this out does interfere or not. 

So that is where we are. I do believe that we have a common interest. I do believe that the people here before us from the Federal 

side do want to do consumer protection, but it is not primarily 

what you were instructed. 

I have to say, and I am grateful that the Governor is here, but—

let me give you this example. Former Governor Gramlich expressed 

a difference of opinion with former Chairman Greenspan about consumers, and Chairman Greenspan’s response was very revealing. 

He said, ‘‘Oh, how can people say I wasn’t interested in consumer 

affairs? I always followed the staff recommendation on that.’’ Can 

anyone imagine Alan Greenspan saying, you know, when it came 

to interest rates, I always followed the staff recommendation? 

When it came to deciding whether there were problems in the stock 

market, I always followed the staff’s recommendation? The fact 

that Alan Greenspan always followed the staff recommendation in 

consumer affairs is confirmation that this was not highest on his 

agenda. Alan Greenspan is not a man who is known for being staffled. He was not known for his intellectual passivity. Yes, he goes 

to the staff, because he didn’t become Chairman of the Federal Reserve, the supereconomic chiefdom of the world, to worry about a 

couple of people having an argument about a bank deposit in Chicago. And if we don’t do that better than I think we would otherwise do it, then we are going to have a problem. So that is why 

we are here. 

I now recognize the gentleman from Alabama. He has asked for 

5 minutes. It is divided up. So I will just say to the clerks that he 

will have his time. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Let me start by saying that I am a strong supporter of the dual 

banking system, and I think it has served our country well. Since 

the 19th century, where the OCC regulates our national banks the 

OCC, and then our Federal banks by the Federal Reserve and the 

FDIC, and our State agencies, the Supreme Court has basically 

preempted some State regulation on our national banks and established one national standard, which obviously provides a great deal 

of efficiency and ease of operation. 

I think a national standard—OCC preemption—reduces the costs 

of the banks. It enhances, I think, their ability or at least their opportunity, to serve their customers, particularly in a global marketplace. However, critics have expressed concerns about—and it is a 

concern that I share—the adequacy of the OCC’s regime for enforcing consumer protection. I wouldn’t have said that 5 years ago; 5 

years ago, I would have said that I am confident that regulation 

of our national banks and our State charter banks is sufficient. But 

recent practices have really called into question my judgment that 

customers are being well served, really, by both State and Federal 

regulators. 

When we passed Check 21, we were assured by the regulators 

that this was a way to modernize our system, take cost out, which 

was an excellent opportunity to modernize and bring our banking 

5

system forward. But we were told that it would not prejudice customers. Within 6 months, we began to get complaints that while 

checks were being debited to the account realtime, deposits were 

not. Deposits were being held until the next day. 

I like to cite real examples. And again, a lot of the people who 

come to us with these complaints, it is the principle of the matter. 

I said that about credit cards. I had a gentleman who was getting 

work done at his house, he had a guy working there, and he paid 

the contractor an $8,000 check. Before he paid him, he actually 

said, ‘‘I have to go to the bank and make a deposit.’’ He went to 

the bank, made a deposit, came back, and paid the contractor. 

Well, it was about 2:30. The contractor went to a bank around 

5:00 and deposited his check. It was the same bank where the gentleman had made his deposit. The deposit wasn’t credited, but the 

check was, because the bank explained to the gentleman that after 

2:00, it was the next business day for deposits, but not for checks. 

It was only the deposit which was the next business day. Now what 

really enraged this constituent of mine, and actually I probably had 

heard this on many occasions, was that his wife had written two 

small checks, one for $6 or $8, and one for about $18. Well, the 

bank could have paid those checks, but instead of paying those 

checks, they put the larger one in first so it would overdraw the 

account. He was actually told by his banker, and I confirmed this, 

that the bank had a computer program which took the larger check 

first to maximize overdraft charges. And, in fact, that has become 

a common practice to take the larger check when there are two or 

three checks presented at the same time. It maximizes the profit 

of the bank, but it obviously operates to the detriment of the client. 

Now, a lot of the people who come to complain to me, they have 

time, they have money, they have resources, and it is not a lifeor-death situation to them. But I am in a district that has counties 

where the median income is $18,000. After taxes, it is $12,000, and 

when someone writes three or four checks, and one overdraws their 

account, and the bank chooses to charge them for each of those 

three checks, that is $100. That can represent half of their disposable income for a week, and I see that as sharp practice. I see that 

as unconscionable. 

You heard last week, many of you, in the last week or two, you 

had appeared before this committee on credit cards. Many of the 

practices—I have heard no one defend them as saying they are fair. 

I have had no one stand up and say this. I have had bankers and 

institutions that do it say, we realize there is a problem there, but 

no one is addressing the problem. And all of these practices are recent practices. 

I talk to bankers in Birmingham. I talked to one of the gentlemen who established one of the large banks in Alabama. He said 

that as long as he was there—and he is in his 80’s—the bank never 

would have done what is being done now. He said they wouldn’t 

have even thought to have done such a thing. 

I mentioned Check 21, clearing the checks, some of the credit 

card things. My fear with preemption, I think it can be a very good 

thing. It can only be a very good thing if Federal regulators both 

work with the State and coordinate their efforts to protect consumers, and they also get serious about some of these abusive 

6

sharp practices which are not just fact. Yes, it increases the profits 

of the bank, but that shouldn’t be—you know, that is not a justification for unfair practice. The customer has to have a seat at 

the table. And I would hope that Federal regulators would promote 

uniformity in Federal oversight, but also in strong consumer protection in both regulation and enforcement. I think that those are 

steps which will ultimately improve the bank’s ability to serve their 

customers. 

In this regard, the memorandum of understanding between the 

OCC and the Conference of State Banking Supervisors to facilitate 

proper referral of consumer complaints to Federal and State agencies with the regulatory authority is a step in the right direction, 

and I hope we will protect customers. But let me tell you what it 

won’t protect, the two things that we keep saying that we have, 

and they are important, but they don’t do the job alone. One is financial literacy. It is very important, but it is not an end-all, doall, and disclosure is not an end-all, do-all. The idea that it is in 

the agreement, the customer was given notice of this practice, the 

chairman and I discussed yesterday. We are both law school graduates, we are very proud of our academic record in law school, and 

yet we get these disclosures, and we don’t understand them. 

The practice of the banks, to us, appears as something is simple, 

what we call sharp practice or unconscionable. And I do believe, 

and many of my Republican colleagues might disagree, but I do believe the Federal regulators: one, don’t carry forward on the promises that they made to us when we passed Check 21; and two, if 

they do not start addressing some of these egregious practices, I do 

believe that the confidence of this committee and this Congress—

if the Federal regulators in concert with State regulators don’t protect the customers, I believe this committee will lose confidence and 

take action. 

There are some on this committee who will never do that, they 

will never intervene. They will basically let the market sort it out 

between institutions and banks with a lot of financial resources 

and customers with almost no resources and very little ability to 

protect themselves. It is not a level playing field. And part of leveling that playing field is strong consumer protection. It has been 

a tradition of the Republican Party. It is a tradition I would like 

to see honored both on my side and on the other side. And I know 

these regulators; I know the people on the first panel. I know that 

they want to do what is right for the customer. Thank you. 

The CHAIRMAN. How much time has been consumed by both 

sides? All right. We have 14 minutes left on this side. The gentleman has 9 minutes left. 

I am going to recognize for 2 minutes the gentleman from Ohio, 

Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman. 

Let me start by saying, first of all, thank you for holding this 

hearing today, and I am pleased to be able to give an opening 

statement. Let me welcome our witnesses. 

I am Charlie Wilson. I am from the Ohio Sixth Congressional 

District, and it is ironic we should be doing this today because just 

a year ago, I was in the Ohio Senate working on predatory lending. 

Ohio, ladies and gentlemen, has been a victim of predatory lending, 

7

and unfortunately we lead the Nation, the entire Nation, in foreclosures. That is not something we are very proud of, and we are 

a proud State with 11.4 million people, and we do a lot of things 

right. So we sincerely want to get started on this at the Federal 

level. 

As I said, last year we did Senate bill 185. We ran into some 

lame duck problems at the end of the session, and lost some of the 

teeth that were in Senate bill 185; however, we feel that we have 

made some strides toward helping. We realize it is a combination 

of problems that brings about the losses that we have. 

Let me say that it is an honor to have representation of the Federal Reserve Board, the OCC, the FDIC, the Federal Trade Commission and all of you who are here today. Thank you for taking 

your time, and we hope to be able to get some direction and learn 

from you as to what we need to do. I say this not only as a State 

legislator, but as a former bank chairman, and a guy who spent the 

majority of his life on a bank board and saw it grow in great increments and did lots of things right. 

I might say that when we did a lot of our investigation on the 

predatory lending that is going on in my home State of Ohio, it 

didn’t seem to be the banks, it was more the subprime and the 

mortgage companies, and we found different things that were really being abused that we needed to address. So I really welcome the 

opportunity to hear from you today as to what protections we can 

put in, what we can do to be able to move the ball and be able to 

clear up this cancer that is in our society. 

So I appreciate the opportunity to speak, Mr. Chairman, and 

thank you to the witnesses for being here today. I look forward to 

hearing from you. 

The CHAIRMAN. I thank the gentleman. 

Next, the gentleman from Louisiana is recognized for 5 minutes. 

Mr. BAKER. Thank you, Mr. Chairman. 

I wish to establish that I have been a preemption advocate for 

some time, so my position here is not necessarily inconsistent with 

past practices. I have challenged Attorney General Spitzer in his 

role as assuming the role of promisee in the securities marketplace. 

I was in the majority then, but I was in the minority, though, supporting that position. I have now cemented my position in the minority and continue to be in such a minority. 

However, I think to attempt to balance the record just a bit, the 

issue of preemption begins in 1819 with McCulloch v. Maryland, 

when a State attempted to tax the Bank of the United States. This 

is not a revelation that has developed since the ATM machine. This 

is something that has been a customary practice for one principal 

reason: to provide stability in our capital markets and solvency 

among our financial institutions who engage in risk-taking by extending credit to those who qualify for the credit they seek. 

Let us make clear that this is not about the OCC. The OTS has 

a long-standing authority for actions in preemption. In fact, during 

the early 1980’s, a painful time in the real estate industry under 

President Carter, interest rates, prime, approached 21 percent, and 

States began to take action to prohibit individuals from transferring the terms of their mortgage to the new borrower in order to 

instill an artificially low interest rate environment while the prime 

8

rate to the lending institutions themselves were 2, 3, 4, or 5 times 

the availability of the funds from the existing mortgage terms. 

That was litigated all the way to the Supreme Court, and in the 

mid-1980’s, it was held as a right of the OTS for the safety and 

soundness of the institutions involved and, I would point out, lost 

in this debate is the taxpayers of the United States who stand in 

good faith and ready to back up the losses of those institutions 

should they become insolvent. And need I remind everyone that in 

the late 1980’s, we ultimately created the RTC, and many members 

of this committee spent many long hours derailing and bemoaning 

the actions of those thrifts in Louisiana and Texas which took extreme action to extend the losses to the American taxpayer. This 

is not incidental stuff. It has real-life consequences. Preservation 

and market stability is important. It is not necessarily just for 

those who are here at the table this morning. 

The Credit Union Association, the NCUA, is not represented here 

this morning. They have the preemptive right to regulate not only 

nationally chartered, but State-chartered, federally insured credit 

unions. The National Federal Credit Union Act requires the regulation of federally insured, State-chartered credit unions to comply 

with certain provisions of NCUA’s rules and regulations, not merely a regulator’s action, but by action of this Congress. Therefore, to 

unwind the preemptive role of the NCUA from the function of regulating credit unions in this country, the Congress would have to 

act. We simply cannot beat up a handful of regulators and claim 

it is all at fault. 

Beyond the question of the credit union, which I suggest would 

not likely be a helpful contribution to the overall debate this morning, an Executive Order issued during President Reagan’s term, the 

great defender of free markets, said Federal action limiting the policymaking discretion of the State should be taken only when constitutional authority for the action is clear and certain that the national activity is necessitated by the presence of a problem of national scope. There is a way to define the need for preemption to 

preserve the integrity of our national capital markets while not at 

the same time obviating the States’ ability to intercede on consumer protection advocacy. Both can be done, not mutually exclusive. 

When we look back to the authorities of the OCC currently in 

question, there are areas where they are not now able to preempt 

contract law, criminal law, torts, actionable torts, in some cases the 

OTS, even in zoning matters. In other cases, the OTS doesn’t 

match up exactly, but is similar in context. 

So there is an obligation of the regulator for the sake of the 

United States taxpayer, whether a bank, whether a savings and 

loan, or whether a credit union, to act in a manner which is reasonable and prudent to ensure the continued solvency of that financial 

system. It does not, however, require that a regulator turn their 

back on actions which do not serve public policy well, and joining 

with State regulators can take action against those who engage in 

activities not for the common economic good or to the prejudice of 

the individual consumer. 

If we can back this down a notch and focus our attention on 

where the real problem is, whether a State regulator can govern 

9

the actions of a subsidiary of a national bank really should not be 

an issue. Whether you are in the main office in Chicago, or you are 

standing next to the potted plant in west Texas, it is the same institution governed by the same set of rules, and should they violate 

those rules, they will be held accountable by the national regulator; 

and should they engage in activities which are found to be 

cannibalizing the assets of normal, everyday, hard-working consumers, I will join with every other member of this committee in 

seeking out those problems and providing a Federal remedy, if necessary, if the States are unable to act. 

But if the States are able to act, we should not get in their way. 

And I would assume—and questions of those on the panel this 

morning—we can determine whether they choose or will choose to 

intervene in consumer protection policies and intercede on the behalf of banks, or will you balance your judgment between the consumer and stability of our financial markets. 

I yield back. 

The CHAIRMAN. The gentlewoman from New York, the chairwoman of the Financial Institutions Subcommittee, is now recognized for 5 minutes. 

Mrs. MALONEY. I thank the chairman for yielding and for organizing this incredibly important issue on the overarching issues of 

Federal and State consumer regulation. And I compliment you on 

the all-star cast of witnesses who are assembled today. And as you 

mentioned, the subcommittee which I chair is charged with consumer protections, so this is tremendously important to me, and I 

would say to all consumers and all Members of Congress. 

Whether it is in the context of credit card regulation or subprime 

mortgage lending, the fact of growing OCC preemption requires us 

to ask who is best able to make new rules and who can enforce 

them. 

I do want to mention that I have been involved and concerned 

about some of the abuses that Chairman Frank and Ranking Member Bachus highlighted. Chairman Frank mentioned the overdraft 

fees as an abuse, and I want to mention that I have legislation concerning this before Congress which would call for notice at ATMs 

on these overdraft fees. 

And in the area that Ranking Member Bachus mentioned on deposit holds, I had a bill in last year to speed up deposit holds, and 

in this Congress I did not introduce it. I was awaiting the response 

from the Fed and their report on the bank adoption of Check 21 

enforcement. But it is now clear that the Fed will not be regulating, or so they have said in their report, so I will be reintroducing my bill. I do want to note that Chairman Frank and I wrote 

a letter last week, literally, to the Fed urging them to regulate in 

this area. 

On the issue that is before us today, it may be correct, as the 

OCC says, that the Watters decision changed the law very little, 

if at all, but in legal history books, I believe it will be seen as 

marking the end of one era and the beginning of the next. I hesitate to announce the impending death of the dual-banking system, 

but I wonder what meaningful role is left for State regulators. As 

an elected official, I believe very strongly in the statements earlier 

by Chairman Frank that elected officials are the most responsive 

10

to the needs of the public, to the needs of their constituents and 

to the needs of consumers. And as a New Yorker, I know that an 

active State AG is a very effective consumer protector. On the other 

hand, in today’s global market we may no longer be able to afford 

the luxury of having the most banking regulators in the world. 

Uniformity may be an advantage we can no longer afford to do 

without. 

So I would like to see the Federal regulators prove that they can 

take up this responsibility and build a record on consumer protection to match the record they have built on safety and soundness. 

For instance, I would like to see the Fed use its authority in unfair 

and deceptive practices to regulate in both the subprime mortgage 

area and in the credit card area to ban abuses. As I suggested at 

last week’s hearing, maybe we should extend the power to the 

other agencies as well so that there would be more regulatory vigilance. Joint rulemaking would give a seat at the table to the various sectors and provide more input and different views. 

I would like to see the OCC and the FDIC ramp up their staffing 

and resources to make it possible for consumers to call and complain and get a helpful response. Structurally, I am concerned that 

the consumer protection sections of the agencies, that they should 

have direct access to the top decisionmakers and have a seat at the 

head table. 

I also think we should support and encourage efforts by Federal 

regulators to work with States. For example, the OCC and the Conference of State Banking Supervisors have agreed on a model 

framework for sharing consumer complaints that has been put into 

place in my home State of New York with an MOU between the 

OCC and the New York State Banking Department. I understand 

that 17 other States have followed New York’s lead and have gone 

forward with such agreements. 

I hope we can explore these and other issues, and I very much 

look forward to the testimony on this critically important issue. 

And I yield back the balance of my time. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentlewoman. 

I will await the Ranking Member for the disposition of his last 

minutes, and I will recognize the gentleman from Kansas for 4 

minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, for having 

this hearing, and again I want to also thank the witnesses who are 

here to testify and to help answer some of our questions about 

what we can do to address this issue. 

Before I came to Congress, I was for 12 years the elected district 

attorney in Johnson County, Kansas, which is a suburb of Kansas 

City, and our office early in my tenure investigated and successfully prosecuted a national oil company charged with breaking gas 

pumps to cheat consumers. Things seemed to happen again and 

again. 

We had problems then. We are having problems now. Consumers 

who file complaints with the consumer protection division of my office, which was really a very straightforward process, especially 

compared, I think, to the prospect of filing a complaint faced by 

banking customers today when they have a problem with their fiVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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nancial institution—I don’t think the average person has any idea 

where to file a complaint when something has gone wrong with 

their bank. In the past, a consumer who had a problem with a 

bank would often call the banking regulator or the attorney general’s office, but the role has been significantly reduced in today’s 

atmosphere. 

When it comes to Federal regulators, I don’t think most consumers have even heard the name of the several of them—Federal 

Reserve, OCC, NCUA, FTC, and OTS—and they all, I suppose, 

have seen the sign on the bank doors, FDIC, but they don’t even 

know what these other institutions do. Even if the consumer knows 

the right Federal regulators, it is often then hard to find consumer 

complaint resources on the regulatory Web sites. Some of them require a great deal of searching to find a telephone number or complaint form. And when the consumer submits the complaint to the 

regulator, the process, I think, can be confusing and intimidating. 

Our committee needs to feel confident that if consumers have 

fewer opportunities to go to State regulators for satisfaction, the 

Federal regulators are doing all they can to make this process as 

consumer friendly as possible and using what they learned from 

consumers to push financial institutions for better performance. 

Generally consumers are seeking assistance from regulatory agencies because they have experienced some level of frustration with 

their bank or their financial institution. We owe it to them to ensure that the process they encounter, the resolution they receive is 

not a source of greater frustration than the original complaint. 

Again, thank you all for being here, and I hope we can work together and address some of these issues. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Colorado is now recognized 

for 2 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. Thanks for the opportunity to make a statement this morning. 

Recent actions such as Watters v. Wachovia give me some concerns because it weakens the role that States play in consumer 

transactions. The Supreme Court ruling, I believe, will make it 

more difficult for State banking consumer protections, which are 

considerably, in many instances, tougher than Federal measures, 

and I would ask those of you who are working with the various 

State regulators to continue to do that and allow for the States to 

continue to play a significant role in connection with consumer protection. In Colorado, we have really some good consumer protection 

laws, and some outstanding regulators, and the States must continue to play a role. 

The other day Chairman Maloney convened a hearing on consumer protection and credit card practices, and I didn’t get to 

speak until the very end, the third panel, and I missed many of 

you. But I went into sort of a tirade, and I will apologize for that 

now. But I did it because I come from a background representing 

banks and credit unions and financial institutions. 

But I can tell you that in Colorado, there is a populist uprising. 

And Mr. Bachus, I think, hit it on the head, the chairman hit it 

on the head. Just looking at the regulation Z—and people were 

calling it the periodic statement. For me it is more confusing than 

12

the periodic table because people are getting charged so many fees 

and such high rates. That is where we are coming from, whether 

it is the ATM charge—in Mr. Bachus’ State, it is $39. Thank goodness in Colorado it is only $34. If you have a $2 overdraft, you get 

a $34 overcharge. If you have—you believed you paid off your card 

that month, but you didn’t realize there was a double billing cycle, 

and you still have 50 cents. You don’t pay the 50 cents, so you get 

a $25 late charge. That is what people are upset about. 

The disclosures are fine and dandy if you can understand them 

because they are complicated. I mean, if you look at all the different fees just on the credit card regulation Z table, which we 

have simplified, it is still very difficult for anybody to understand, 

you know, not just the ordinary guy trying to make some kind of 

transaction. 

So Mr. Baker is right about the preemption and the role of solvency versus the consumer. But what I think all of us are concerned about is that the consumer, the charges—somebody called 

it the other day risk-based lending. I call it profit-based lending. 

These fees make a lot of money for the financial institutions at the 

cost of the consumers, and they have gotten out of hand. 

Thank you, Mr. Chairman. I will yield back. 

The CHAIRMAN. All time has expired on this side. I believe we 

are through on both sides. 

I sincerely apologize for the length of the statements, but I think 

it was important for all of you to know how—and I think on a bipartisan basis we express this—we feel this concern. 

And we are now going to begin. No inferences should be drawn 

by the order. I never know exactly what the order was. Maybe people knew that our two chairs here would be color-coordinated, and 

they should be together. But for whatever reason, we will begin 

with Mr. Kroszner. 

STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. KROSZNER. Thank you very much. Chairman Frank, Ranking 

Member Bachus, and members of the committee, I really appreciate the opportunity to discuss the Federal Reserve Board’s role in 

protecting consumers in financial services transactions with you 

today. 

An important part of the Federal Reserve’s mandate is promoting 

the availability of credit throughout the banking system. Equally 

important, the Federal Reserve has responsibility for implementing 

the laws designed to protect consumers in financial services transactions. 

In carrying out its responsibilities related to consumer protection, the Federal Reserve has four complementary roles: First, we 

write rules to implement the consumer financial services and fair 

lending laws; second, we examine the financial institutions we supervise for compliance and as necessary take action to enforce the 

laws and resolve consumer complaints; third, the Federal Reserve 

actively promotes consumer education through its publications in a 

variety of partnerships with other organizations; and fourth, 

13

through the community affairs program, we promote community 

development and fair and impartial access to credit. 

In my oral remarks today I would like to focus on our role as rule 

writer. Many of the laws we implement are based on ensuring that 

consumers receive adequate disclosures about the features and 

risks of a particular product. When consumers are well-informed, 

they are in a better position to make decisions that are in their 

best interest. Effective disclosure also enhances competition and 

has the capacity to help weed out some abuses. 

Advances in technology have fostered the development of products that are increasingly diverse, but also increasingly complex. 

While this has expanded consumer choices, it also presents a challenge to ensure effective disclosures about these complex products. 

The Board is committed to developing more effective disclosures, 

and we have recently undertaken an innovative approach, namely 

using consumer surveys and testing in detail to understand consumers’ needs in order to develop our regulatory response. Consumer testing can help us improve the effectiveness of disclosures 

by providing insight into consumers’ understanding of financial 

products and their decision-making processes. 

Given the complexity of some products, we must also be aware 

of the potential for information overload and design disclosures 

that not only are accurate, but clear and simple enough so that 

they are meaningful and useful to the consumers. 

The Board is keenly aware that disclosures and financial education may not always be sufficient to combat abusive practices. 

The consumer laws implemented by the Board contain a number 

of restrictions, and the Board has the responsibility to prohibit 

other practices by issuing rules, for example, if the Board finds 

they meet the legal standard for unfair and deceptive practices. 

Crafting effective rules under the unfair or deceptive standard, 

however, presents a significant challenge. Whether the practice is 

unfair or deceptive depends heavily on the facts and circumstances 

of the individual case. 

To be effective, rules must be broad enough to encompass a wide 

variety of circumstances so they are not easily circumvented. At 

the same time, broad prohibitions can limit consumers’ options in 

legitimate cases that do not meet the required legal standard. This 

has led the Federal Reserve to focus primarily on addressing potentially unfair and deceptive practices through case-by-case determinations rather than through rulemaking. The Federal Trade 

Commission, which has authority to prohibit practices from financial services firms that are not depository institutions, I believe has 

taken a similar approach. Because prohibition on unfair or deceptive practices applies to all the depository institutions as a matter 

of law, the banking and thrift agencies can and do enforce prohibition using their supervised reinforcement powers. 

The Board also addresses concerns about some practices under 

other statutes, such as the Truth in Lending Act and the Truth in 

Savings Act. For example, the Board adopted a rule to address socalled flipping of high-cost mortgages and revised the Truth in Savings Act rules to address concerns about overdraft protection programs. 

14

In conclusion, the Federal Reserve takes its consumer protections 

responsibilities very seriously and is committed to addressing abusive practices. We will consider how we might use our authority to 

prohibit specific practices consistent with the legal standards in appropriate cases such as when there are widespread abuses that 

cannot be effectively addressed on a case-by-case basis. For example, tomorrow I will be chairing a hearing to examine how the 

Board might use its rulemaking authority to address practices in 

the subprime mortgage market. We must be careful, however, not 

to curtail responsible subprime lending. Any rules should be drawn 

sharply to avoid creating legal and regulatory uncertainty which 

could have the unintended consequence of substantially reducing 

consumers’ access to legitimate credit options. 

Again, I want to thank the committee very much for holding this 

hearing today, and I look forward to the questions that you have. 

Thank you. 

[The prepared statement of Governor Kroszner can be found on 

page 159 of the appendix.] 

The CHAIRMAN. Next we will hear from the Comptroller of the 

Currency, Mr. Dugan. 

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

Mr. DUGAN. Chairman Frank, Ranking Member Bachus, and 

members of the committee, I welcome this opportunity to discuss 

consumer protection. As the Federal Reserve just said, the OCC 

also takes this responsibility very seriously, especially since retail 

banking has become a much larger part of the activities of national 

banks. 

Frankly, our comprehensive approach to consumer protection, integrating guidance, supervision, enforcement, and complaint resolution is just not well understood. The fact is consumer protection is 

a fundamental part of the OCC’s mission, and we are not simply 

a safety and soundness regulator as some have suggested. OCC supervision plays a unique and critical role in ensuring compliance 

with Federal consumer protection standards. Our extensive and 

continual presence in national banks, from large teams of resident 

examiners at our largest banks, to our frequent on-site examinations of our community banks, allows us to identify and fix consumer compliance issues early before they become major problems. 

As a result, our compliance regime is not enforcement only. Instead, it is better described as supervision first, enforcement if necessary. 

With supervision addressing so many problems early, that formal 

enforcement often is not necessary. For this reason, the number of 

formal enforcement actions taken by any bank supervisory agency 

is a misleading measure of the effectiveness of its consumer compliance regulation. Yet when we have needed to take strong enforcement action, the OCC has not hesitated to do so, often providing 

new standards to protect bank customers. 

The OCC also has developed a robust process for addressing consumer complaints. Our Customer Assistance Group integrates 

skilled professionals and up-to-date technology to redress indiVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
15

vidual problems, answer questions, educate consumers, and support our consumer compliance supervision. 

While we believe this comprehensive approach is effective, it does 

have three significant limits: statutory limits set by Congress, rulewriting limits in that the OCC has no authority to write most consumer protection regulations; and jurisdictional limits in that our 

authority obviously only extends to national banks. 

Let me also briefly share our view of the Supreme Court’s recent 

preemption decision. The Watters case does not mark a shift in 

prevailing law, but it does clarify responsibility and accountability. 

In particular, it makes clear that Federal and State regulators both 

have important jobs to do, but they are different. Ours is to regulate and supervise national banks for which we should be held accountable. Theirs is to regulate State-chartered entities for which 

they should be held accountable. 

And to those who argue that there should be both Federal and 

State supervision of national banks, that there can never be too 

many cops on the beat, I must respectfully disagree. We believe it 

is counterproductive for States to focus their finite enforcement resources on national banks that are already heavily regulated, especially when there are lightly regulated State entities, like many 

subprime lenders and mortgage brokers, that clearly have been the 

source of real problems. You can indeed have too many cops on the 

same beat if it means leaving other, more dangerous parts of the 

neighborhood unprotected. 

We believe consumers benefit most when the OCC and the States 

focus on our respective areas of responsibility and find productive 

ways to cooperate. The OCC is doing just that. For example, since 

last November we have reached agreements with 18 States, as was 

mentioned earlier, to refer and share complaint information. Similarly, the OCC and the other Federal banking agencies have cooperated with the States to extend the coverage of the nontraditional mortgage guidance and the proposed subprime lending guidance. 

I am also very pleased to announce another cooperative initiative 

today on mortgage brokers: parallel examinations of national banks 

regulated by the OCC and the mortgage brokers that they use regulated by the States. This intersection of our regulatory jurisdictions provides a real and useful opportunity to coordinate our efforts, especially given the recent criticism of mortgage broker practices. Though still in the early stages, and limited in scope, both 

we and the Conference of State Bank Supervisors believe this new 

initiative shows real promise. 

Finally, my testimony provides the following suggested improvements to Federal consumer protection regulation: First, joint agency authority, including for the OCC, to write regulations defining 

unfair and deceptive practices applicable to banking organizations; 

second, a requirement that an agency charged with writing consumer protection regulations consult before issuing such regulations with the regulators charged with implementing them; third, 

a requirement that consumer protection regulations be revised and 

updated more regularly than they are now in order for the regulations to keep pace with change; and fourth, the development of a 

centralized Web site for complaints by consumers of any banking 

16

institution regardless of charter to help eliminate much of today’s 

confusion. 

Thank you very much. I look forward to answering questions. 

[The prepared statement of Comptroller Dugan can be found on 

page 120 of the appendix.] 

Thank you, Comptroller. 

And next, the Chairman of the Federal Deposit Insurance Corporation, Chairman Bair. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to testify on 

Federal consumer protection in financial services. 

The U.S. financial system has undergone a significant change in 

recent years. Consumers overall have benefited from the huge 

number of new and innovative products and services they can now 

choose from. But along with all this consumer choice has come 

more complexity in product terms and cost structures. This complexity has created financial pitfalls for the unsophisticated and 

unwary. We also see many new players in the market, many of 

them beyond the reach of Federal regulatory agencies. 

The greatest weakness in today’s financial marketplace is the absence of clear consumer protection standards applied uniformly to 

all participants in the market. As you know, consumer protection 

is a key part of our job at the FDIC. We closely examine our banks 

for compliance with consumer protection laws and regulations and 

take enforcement actions where warranted. We also devote significant resources to investigating and resolving consumer complaints. 

And we carefully monitor and analyze consumer complaints to signal problems in particular services or financial institutions. 

We have several recommendations for improving Federal consumer safeguards that would provide stronger, more uniform protections and help level the playing field. First, as I have previously 

testified, the FDIC supports national standards for subprime mortgage lending by all lenders through HOEPA rulemaking or by statute. Ideally, national standards would include a number of elements which I detail in my written testimony, such as requiring 

underwriting at the fully indexed rate, restrictions on prepayment 

penalties, and restrictions against misleading marketing. 

Second, Congress should consider expanding rulemaking authority to all Federal banking regulators to address unfair and deceptive practices under the FTC Act, not just to three of the five regulators, as is the case under current law. This change in law would 

include the prospective input at the FDIC and OCC in rulemaking 

to protect consumers; together, we account for about 7,000 banks. 

Third, to enhance enforcement of Federal consumer protection 

laws, Congress could consider expanding the Truth in Lending Act 

as well as the FTC Act to allow State authorities to enforce those 

laws against nonbank financial service providers. Nonbank providers are a significant portion of today’s market. Allowing more 

regulators to enforce these laws would beef up compliance. 

Finally, I am a big believer in financial literacy. Educated consumers are better able to make sound choices and protect themVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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selves against scams. Integrating financial education into existing 

public school curriculum, such as in math classes, would help kids 

from all income levels and expose them to basic financial principles 

year after year. There are a number of Teach the Teacher programs offered at many universities to assist school systems in integrating financial education into core curriculum, but such programs 

could greatly benefit from Federal financial support. 

In conclusion, I would say that market competition is the best 

way to set prices and allocate resources. However, markets need 

rules. Abusive or misleading financial practices not only hurt consumers, they hurt the reputation of the entire industry. The FDIC 

stands willing to assist you and our fellow regulators in finding 

ways to serve the needs of consumers and the markets. Thank you, 

and I would be happy to answer your questions. 

[The prepared statement of Chairman Bair can be found on page 

91 of the appendix.] 

The CHAIRMAN. Next, the Chair of the Federal Trade Commission. And Chairwoman Majoras, we know we are not your usual 

venue, so we very much serious appreciate you doing this. But it 

did seem to us that having all the regulators together is really the 

prerequisite, and we hope that this won’t be the last time you all 

will be together talking about this issue. Madam Chairwoman, 

please proceed. 

STATEMENT OF THE HONORABLE DEBORAH PLATT MAJORAS, 

CHAIRMAN, FEDERAL TRADE COMMISSION 

Ms. MAJORAS. Chairman Frank, Ranking Member Bachus, and 

members of the committee, I am pleased to be here with you and 

with my colleagues today. 

Because financial issues affect all consumers, whether they are 

buying a home, trying to improve their credit rating, or dealing 

with rising debt, protecting consumers of financial services is a key 

part of the mission at the FTC. 

Now, of course, the FTC is primarily a law enforcement agency. 

We don’t have the same sort of supervisory authority over particular entities that some of my colleagues here have. And, of 

course, we don’t have jurisdiction over banks. But under the FTC 

Act and several other consumer protection and financial statutes, 

the Commission has broad jurisdiction over nonbank financial companies, including nonbank mortgage companies, mortgage brokers, 

finance companies, and some units of bank holding companies. 

The FTC uses three main tools to protect consumers: law enforcement; consumer education; and policy research and development. 

We focus our investigations and prosecutions on combating and 

preventing unlawful acts and practices that are most likely to 

cause consumer harm. Recently in this area, we focused on the following: mortgage lending and servicing; nonmortgage lending and 

leasing; gift card sales; advance fee loan scams; debt collection 

practices; credit and debt counseling services; and credit reporting. 

The Commission has targeted deceptive or unfair practices in all 

stages of mortgage lending, for example, from advertising and marketing through to loan servicing. In the past decade, the FTC has 

brought 21 such actions, focusing particularly on the subprime 

market. 

18

As a result of these actions, courts have ordered the return of 

more than $320 million to consumers. And because law enforcement is highly effective, indeed, it is most effective when government agencies cooperate, we have done so whenever possible and 

appropriate. For example, we brought an action against Fairbanks 

Capital Corp., one of the country’s largest third-party subprime 

loan services a few years ago with HUD. We charged that Fairbanks failed to charge consumers’ payments upon receipt, charged 

unauthorized fees, and reported consumer payment information 

that it knew to be inaccurate to the credit bureaus. And Fairbanks 

and its former CEO paid over $40 million in consumer redress. 

Attacking debt collection abuses is another critical part of our 

agenda. Today, I am announcing the Commission’s 20th debt collection case since 1998. This week, the FTC filed an action to stop 

debt collectors who targeted Spanish-speaking consumers and engaged in repeated egregious violations of the Fair Debt Collection 

Practices Act. The case has been filed under seal, and we are waiting for the judge to rule in our request for a temporary restraining 

order. 

Another recent area of enforcement has been gift cards, and we 

recently brought two cases against sellers of gift cards that carried 

concealed fees. Both Kmart Corporation and Darden Restaurants 

agreed to settle claims that they engaged in deceptive practices and 

advertising in selling gift cards and are now implementing programs to either refund consumers or restore fees that were deducted from the consumers’ gift cards. 

Now, while law enforcement is essential, consumers are best 

served if they can avoid the injury in the first place. To empower 

them to avoid the harm, we have developed extensive consumer 

education programs addressing financial services focusing on expanding the reach of these materials to get them out there. 

In the last fiscal year, we distributed over 4 million printed copies of financial education brochures, and had over 6 million hits on 

the same publications on our Web site. In addition, we have educated young people who have limited experience with credit by conducting outreach on college campuses, at local district college fairs, 

and in high schools, including local high schools here in the District. 

Of course, financial services markets are dynamic and continue 

to evolve, and recognizing that, we and other policymakers must 

continually assess how we adapt our policies and practices, and 

how we engage in research and policy development concerning financial services and consumers. 

And today the Commission’s Bureau of Economics released a 

study that confirms the need to improve mortgage disclosures. The 

key findings of that study, which we have with us here today, are: 

first, that the current federally required disclosures fail to convey 

key mortgage costs to consumers; second, that better disclosures—

there was a prototype that our economists used—can significantly 

improve consumer recognition of the various costs; third, that both 

prime and subprime borrowers fail to understand key loan terms, 

and they benefited from improved disclosures; and fourth, not surprisingly, that improved disclosures provide the greatest benefit for 

19

more complex loans, whether they were prime or subprime. We 

look forward to working with our colleagues on the next steps. 

Looking ahead to October, the FTC, in response to a growing 

number of complaints about the practices of debt collectors, is holding a public workshop to examine changes in debt collection and 

the impact on consumers and competition, and we hope whatever 

we learn there we can use to assist policymakers in developing further laws, policies, and procedures. 

Mr. Chairman, and members of the committee, I appreciate the 

opportunity to provide the FTC’s input today, and I assure you that 

you have our commitment to work tirelessly for the consumers of 

this Nation. Thank you. 

[The prepared statement of Chairman Majoras can be found on 

page 180 of the appendix.] 

The CHAIRMAN. Next we have Scott Polakoff, the Deputy Director 

and Chief Operating Officer of the Office of Thrift Supervision. 

STATEMENT OF SCOTT M. POLAKOFF, DEPUTY DIRECTOR AND 

CHIEF OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION 

Mr. POLAKOFF. Good morning, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to present the views of OTS on the adequacy of consumer 

protections in financial services. 

Consumer protection, maintaining the safety and soundness of 

the thrift industry, and ensuring the continued availability of affordable housing credit are three critical responsibilities of the 

OTS. 

On the subject of today’s hearing, consumer protection, there are 

four important components detailed in my written statement. Briefly, effective consumer protection by regulators requires: Number 

one, an emphasis on consumer protection in both the examination 

process and the application process; number two, an effective supervision program including the use of formal and informal enforcement actions to address threats to consumer protection; number three, a robust consumer complaint mechanism to address 

issues as they arise and to use the information in the supervisory 

process; and number four, effective training and continuing education of examiners regarding consumer protection issues. 

OTS has a consolidated examination structure that is unique 

among the Federal banking agencies. The program combines our 

safety and soundness and compliance examinations to better address institutions’ risk during the exam process. Part of the rationale for this approach is that compliance and safety and soundness 

go hand-in-hand. We believe this provides a more comprehensive 

assessment of an institution’s risk profile, more accurately exposes 

weaknesses and deficiencies in an institution’s overall program, 

and provides us with an accurate assessment of an institution’s 

overall business strategy. 

Our examiners are subject to an intensive cross-training program 

to acquire the knowledge and skills needed to lead a melded examination. We also maintain a cadre of compliance experts to assist 

examination teams in handling complex compliance matters. 

20

Because Federal thrifts may conduct their lending and deposittaking programs subject only to the requirements of Federal law, 

the OTS is required to ensure that Federal thrifts conduct their activities and programs in compliance with applicable consumer protection laws and subject to rigorous scrutiny of all aspects of an institution’s program. 

We regularly examine risks for compliance with Federal protection statutes including the Truth in Lending Act, HOEPA, RESPA, 

the Truth in Savings Act, ECOA, the Fair Housing Act, and the 

Credit Reporting Act, among others. 

We also continually track, investigate, and respond to consumer 

complaints involving thrift institutions. We follow up with the institution on all consumer complaints filed with the Agency, and we 

typically process and conclude consumer complaints investigations 

within our 60-day timeframe. 

In addition, this data plays a significant role in identifying areas 

to focus on during on-site examinations in assessing the adequacy 

of an institution’s overall compliance management program and in 

pursuing corrective action that may be appropriate to address programmatic weaknesses or deficiencies. 

I should also mention that we have finalized the model memorandum of understanding with the Conference of State Bank Supervisors to share consumer complaint data between the OTS and 

State banking supervisors. 

When an institution’s lending programs are found to be potentially predatory or lacking adequate controls to support responsible 

lending, there are numerous options that OTS can take to stop 

these practices and correct the situation. These include formal enforcement actions and informal agreements. While we find informal 

actions to be an effective mechanism to address these types of supervisory concerns, we do not hesitate to use our formal enforcement authority when appropriate. 

Fundamental to our continuing oversight of the industry we regulate is ensuring that institutions conduct their activities in a manner consistent with sound consumer protection. In my written 

statement we describe various programs, publications, and initiatives that the OTS has worked on its own and cooperatively with 

various other agencies and organizations to promote consumer education and responsibility. We also have various initiatives to improve financial literacy, and we work closely with our institutions 

to encourage them to do the same. 

Regarding the adequacy of our existing authority to address consumer protection issues and potential abuses that may arise going 

forward with the programs of OTS-regulated thrifts and their affiliates, I believe our authority is complete and adequate. I do not believe that an additional statutory authority is necessary at this 

time for OTS to continue to effectively supervise, regulate, and enforce Federal consumer protection laws. 

I look forward to answering your questions and thank you for the 

opportunity to comment. 

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

219 of the appendix.] 

The CHAIRMAN. Next to represent those involved here, the attorney general of the State of Iowa, who has been active with the 

21

other State attorneys general, and I believe speaks for many of 

them today, Mr. Tom Miller. 

STATEMENT OF THE HONORABLE THOMAS J. MILLER, 

ATTORNEY GENERAL, STATE OF IOWA 

Mr. MILLER. Thank you, Mr. Chairman. Mr. Chairman, Ranking 

Member Bachus, and members of the committee, thank you for inviting me, and thank you for listening to the views of myself and 

State attorneys general. 

The Watters case, I suppose we could debate whether it changed 

the law or reaffirmed the law, but that debate is over. What has 

happened, though, over the last 5 to 8 years is that the practice 

has been changed, the practice of the role of State AGs and State 

banking superintendents, in dealing with consumer complaints in 

the banking area and related areas. For decades, we dealt with 

those complaints, we dealt with those issues. Now we are prohibited from doing so in many instances. So the practice has changed 

considerably under the direction and institution of the OCC. 

So we—like the chairman, like CSBS—think the law should be 

changed. We think the States should have the role that they played 

for decades, really, starting from the 1960’s on, with consumer protection, but we recognize that the law probably won’t be changed. 

I think the chairman stated the political realities very, very well. 

So what happens next? 

I think the huge challenge for the Federal people is the volume 

of complaints. This is the potentially intractable problem—probably 

millions of complaints each year, some of them not heard, but out 

there and maybe will be heard by the Federal regulators. How do 

they deal with those complaints? Now many of those complaints at 

a national level don’t have a lot of significance, but for that individual person, it has a huge amount of significance. That is their 

challenge. 

Now, what do we, State attorneys general, think might be done? 

Well, first of all, they have considerable rulemaking power that 

generally in the past has not been used, in part because I think 

they thought the States were doing these kinds of activities, and 

we were. So they have rulemaking authority. And they have enormous power because of their regulatory authority over the various 

banks and institutions. So that is an enormous opportunity, but 

they can’t be reticent, for whatever reason, to use their authority. 

Recently, as a result of a New York Times story, the demand 

draft issue has come forward where people can send through demand drafts, checks that are unsigned, if they get the bank account 

number, and clean out a person’s account. Well, that is something 

the Federal regulators can take care of. In that story, it indicated 

that the bank involved, 59 percent of the checks were returned. 

Well, consumer protection people would tell you if it is 2 or 3 or 

4 percent, that is fraud in the biggest, strongest possible letters as 

a warning signal. So the Federal regulators need to figure out 

where the banks—when they get a certain percentage of checks returned for those reasons, they have to investigate, and invariably 

they will find fraud. And frankly, if they do that, they can do in 

this area more than the State attorneys general and do it more effectively. 

22

Another area is what I call soft-core fraud dealing with membership clubs and getting people in membership clubs and banks giving the names and sharing the profits. Banks shouldn’t be doing 

that. They shouldn’t be using their names. The regulators can stop 

that, and, again, more effectively than the States. 

The Federal regulators have to get the expertise in consumer 

protection. They have some, but they need a lot more, because as 

a practical matter, they have a lot more responsibility. They can 

draw perhaps on former State officials that dealt with this area, 

and many others, to build up their expertise in the consumer area. 

And it is also a matter of focus. The chairman was, as always, brilliant on that, that the focus has been safety and soundness. The 

focus of consumer protection with this increased role has to increase at the agencies. 

And finally, in terms of complaints, I go back to that, that is 

something that in an informal way we might help on. But in any 

area where there is problems and challenges, there is opportunities, and I think there is one amazing opportunity that is present 

today, and that is for all of us to work together in the subprime 

area and on predatory lending. That is an area where we still have 

some considerable authority. And if we work together, what has 

happened is that some of the bad actors are out of business; some 

of the better actors are continuing in business and have 

reputational issues. There have been problems that have been 

raised for the country. There has been pain for both consumers and 

investors. This industry, which is a chronic one, could be cleaned 

up if we all worked together—meaningful, not just lip service, but 

we got together, shared our expertise and shared our power, figured out on an ongoing basis at a staff level—I have a a guy, Patrick Madigan, who works this all the time. He understands it completely. There are other people in the State offices and in the Federal offices. If they worked on it on an ongoing basis, and the principals, the elected officials, the appointed officials, came in at the 

appropriate time, we could clean up the subprime industry if we 

worked together, and if we had the will to use the powers that we 

all have on a complementary, comprehensive basis. 

Thank you, members of the committee. 

[The prepared statement of Mr. Miller can be found on page 205 

of the appendix.] 

The CHAIRMAN. And now my own State bank commissioner, 

Commissioner Steven Antonakes, from Massachusetts. 

STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF 

BANKS, COMMONWEALTH OF MASSACHUSETTS, ON BEHALF 

OF THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. ANTONAKES. Good morning, Chairman Frank, Ranking Member Bachus, and distinguished members of the committee. My 

name is Steven Antonakes, and I serve as the commissioner of 

banks of the Commonwealth of Massachusetts. I am also the chairman the FFIEC State Liaison Committee. It is my pleasure to testify today on behalf of the Conference of State Bank Supervisors. 

I commend you, Mr. Chairman, for calling this hearing to discuss 

consumer protection and financial services. The States have long 

been recognized as leaders in providing consumer protection. CSBS 

23

is committed to working with Congress and our Federal counterparts to further the development of a fair and efficient system of 

consumer protection that serves the interest of financial services 

customers. 

As you may know, nearly every consumer protection that exists 

at the Federal level or that Congress is currently contemplating, 

has its roots in State law. However, as the result of OCC and OTS 

interpretations supported by the courts, it is unclear if the States 

will continue to have the ability to serve as the laboratory for innovation for banking consumer law. 

Maintaining a local role in consumer protection and a strong 

State banking system is more important than ever as our Nation’s 

financial system consolidates. As the Nation’s largest banks become 

less connected with the communities they serve, they are also finding ways to become less accountable to those communities through 

preemption of State law and law enforcement. CSBS believes that 

the effective supervision of the financial marketplace requires a coordinated effort among the Federal agencies and the States. 

Ultimately the goal for Congress and the regulators should be to 

create an efficient supervisory structure that allows institutions to 

compete effectively and to make their products and services available to a broad demographic while offering effective consumer protection and recourse against fraudulent and abusive practices. 

Recently the States, through CSBS, agreed to a framework for 

the sharing of consumer complaints and resolutions between State 

agencies and the OCC and the OTS. CSBS and the OCC are also 

working with the other agencies to develop a model consumer complaint form. In addition, I look forward to working with Comptroller Dugan to coordinate examinations of national banks and 

State license brokers and originators. 

These are all positive steps to improve service to consumers, 

however, these efforts do not address our fundamental concern 

about the impact of OCC and OTS preemption on how consumer 

protections are developed and how they are enforced. 

Recognizing that only Congress can address our concerns, we 

would suggest the following: 

Congress should require that the FFIEC write regulations and 

guidance for consumer protection. This will allow the States to 

have more input in the process and result in more consistent 

standards for consumers. 

Congress should give the FFIEC rule-writing authority for unfair 

and deceptive acts and practices. 

Congress should consider creating a centralized system for the 

collection and distribution of consumer complaints to the appropriate regulators. 

Additionally, banks and their subsidiaries should disclose who 

their primary regulator is and how to address consumer complaints 

to that specific regulator. 

We ask that Congress direct the Federal banking agencies to list 

applicable and preempted State laws. The Riegle-Neal Interstate 

Branching Act stated that the OCC shall enforce applicable State 

consumer protection laws. It is important that banks, the States, 

and consumers know which State laws are being enforced and 

which have been preempted. 

24

Congress should clarify State enforcement authority and the limits of applicable State law for federally chartered institutions. State 

legislators and attorneys general need a clear statement of their 

roles in protecting the citizens of their States. The current state of 

confusion is not acceptable. 

And Congress should encourage Federal and State coordination 

to develop consistent interpretation and enforcement of applicable 

State laws. 

I urge Congress to continue its examination of the adequacy of 

OCC and OTS consumer protections and enforcement. The States, 

through CSBS and our involvement on the FFIEC, want to be part 

of the solution. We want to ensure that consumers are protected regardless of the chartering agent of their financial institution. We 

want to preserve the viability of both the Federal and State charter 

options to maintain a meaningful choice in charters and the success of the dual-banking system. 

Thank you for inviting me to testify. I look forward to your questions. 

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

67 of the appendix.] 

The CHAIRMAN. Thank you. 

I am going to swap places with the gentleman from Kansas, Mr. 

Moore. He will ask in my place, and I will wait until he would have 

been reached. I recognize the gentleman from Kansas. 

Before that, I want to introduce into the record a letter from the 

National Association of Insurance Commissioners, by unanimous 

consent, in which they say, ‘‘We would like to share with you some 

of the examples of the negative effects of Federal preemption on 

State regulation of health insurers.’’ They acknowledge that we 

don’t have health, but they are expressing their concerns about the 

negative effects of preemption in that area. That will be part of the 

record. 

The gentleman from Kansas. 

Mr. MOORE. Thank you, Mr. Chairman, for swapping time with 

me here. 

I want to ask a question of Mr. Dugan. Pages 21 and 22 of your 

testimony indicate that data derived from your customer assistance 

group are used in identifying problems at banks. OCC claims that 

it fields 70,000 inquiries and complaints each year compared to the 

OTS, which received 5,200 complaints in 2006, and the Fed, which 

received 1,900 in each of the last 2 years. 

And I want to refer to a GAO report in February of 2006 which 

says, in reporting its performance, OCC includes data on its response to consumers’ inquiries which typically take less time, 

thereby overstating its performance on timeliness to responses or 

complaints. 

Could you break down that number, that 70,000 number, for me 

in terms of inquiries versus complaints? Can you give examples of 

enforcement actions, formal or informal, that originates from consumer complaints? Can you break down the number first, sir? 

Mr. DUGAN. I can get the number on breaking it down for complaints versus inquiries in just a moment, but we don’t trace which 

inquiry leads to a formal or informal enforcement action. More 

often than not, these lead to situations where we assist the conVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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sumer by resolving a dispute and providing financial relief. We 

have tracked and provided over $30 million of financial relief to 

consumers in the last 5 years that was facilitated through that 

process. 

Mr. MOORE. You are familiar with this GAO report in February 

of last year, correct? 

Mr. DUGAN. Yes, I am familiar with it. I am not sure these are 

the same ones that you are talking about, but it is the 41,000 inquiries and 29,000 complaints. I am not sure that is the bar that 

you were looking at. 

Mr. MOORE. That is really what I was looking for. 

Mr. DUGAN. And we are very familiar with that recommendation. 

We do break that down directly like that now as a result of the report. We are quite conscious of that. 

Mr. MOORE. Thank you. 

According to this GAO report, OCC agreed with the conclusions 

and recommendations. 

Mr. DUGAN. Yes, sir. 

Mr. MOORE. You are going to follow that? 

Mr. DUGAN. Absolutely. 

Mr. MOORE. I appreciate that. 

I am pleased that some of you mentioned in your testimony, and 

the attorney general mentioned in his testimony, that you are 

working toward the goal of a uniform consumer complaint. I think 

OCC talked about that and OTS and FDIC in your reports. While 

you are developing this uniform complaint, which I think is great, 

wouldn’t it be helpful to create a single toll-free number—any comments by any of the panelists on that—so people who had a problem with their financial institution would know where to go? 

I looked at some of the Web sites, and it is very, very confusing 

and takes several clicks sometimes to get to a complaint form or 

a toll-free number. Any comments about a single toll-free number 

that maybe all financial institutions could use? 

Mr. DUGAN. Speaking for the OCC, I think this is an idea definitely worth exploring. We have had some preliminary discussions 

in a forum. I think the FTC actually has a number that they use 

in these sorts of circumstances. It is more complicated than it first 

sounds, but we can do more as a group to have a centralized, easyto-understand, easy-to-find function. And as my testimony indicates, I really do think we should pursue that. 

Ms. BAIR. Could I add, since we are the deposit insurer, the 

FDIC logo is displayed in all banks and thrifts. Because we recently needed to change our logo due to the merger of two of our 

funds, our Web site and all the information that is sent out about 

the FDIC is displayed at banks and will have our Web site address 

on it. 

Anticipating your question, it only took us two clicks to get to the 

complaint form on our Web site. But if we could improve that and 

put the complaint form on the FDIC home page, I am happy to do 

that. But I do think that de facto we serve as a clearinghouse now 

because a lot of people come to us because they know our name. 

We would be happy to expand upon that role. 

Mr. MOORE. Any other comments by panelists up here? Mr. 

Kroszner? 

26

Mr. KROSZNER. We also have been moving towards having a single 800 number for all the Federal Reserve banks, because we have 

a system of 12 regional Federal Reserve banks. Rather than have 

the customer try to find the regional Federal Reserve bank that is 

appropriate to them, by 2008 we will have a centralized clearinghouse with one number for everyone to call. I am very much supportive of that idea. 

We also now have a beta version of the Web site up that if you 

have your institution’s name, you can type that institution’s name 

in, and it will tell you whether it is a Federal Reserve supervisor, 

an FDIC supervisor, or an FCC supervisor, etc. Also, if you call 

that 800 number, there will be a person who can tell you if it is 

a Fed institution, or it is an OCC or other institution, and then direct the person directly to that. But I think it is extremely valuable 

that we do this, and we are working towards that end. 

Mr. MOORE. A real person you are talking about that consumers 

can talk to? 

Mr. KROSZNER. A real person, not a series of, ‘‘Press 5 if you 

would like to wait for 5 minutes.’’ 

The CHAIRMAN. In what country will this real person be working? 

Mr. KROSZNER. I believe—this will be up in 2008, but I believe 

that real person will be working in the United States. 

The CHAIRMAN. That is reassuring. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Comptroller Dugan, you mentioned the importance of working 

with State officials. Could you give us some greater detail on areas 

where you have worked with them or you are open to working with 

them in the future? 

Mr. DUGAN. Absolutely. As I mentioned, we have been trying for 

some time to figure out a way to share consumer complaint information, and, last November, after a series of meetings and good cooperation of the Conference of State Bank Supervisors, we adopted 

a model memorandum of understanding where we can share information about complaints, get referrals, and report back on the disposition of information. And, as a result of that, we entered into 

an agreement first with the State of New York, and since then with 

17 other States, and we are pursuing that with a number of other 

States. 

We have entered into similar agreements with 14 State insurance commissioners. When we did our nontraditional mortgage 

guidance, it became apparent that a huge part of the mortgage 

business is being conducted at the State level, not just by non-national bank people, but by nonbank-affiliated lenders. Over half of 

the subprime mortgages were issued there, for example, and it became very important for us to have some kind of agreement by 

States to adopt similar rules for that. 

Lastly, as we just announced today, we have spoken with Commissioner Antonakes and the State of New York’s commissioner, 

Superintendent Neiman, to try to develop a way to look more closely at State-regulated brokers that originate mortgages that are 

used by national banks, and have parallel examinations where we 

can share information. I believe this will be particularly important 

going forward to make sure this new guidance is being impleVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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mented not just by employees of the banks that we supervise, but 

by the brokers that they use and with whom the banks don’t necessarily have the same kind of contact as they do with their own 

employees. 

Those are several types of things. We are open to other kinds of 

suggestions. We welcome them. 

Mr. BACHUS. Complaints that OCC has not taken any enforcement actions, does that indicate you are not doing your job? 

Mr. DUGAN. No. It is something I did try to spend some time discussing in our testimony. First of all, we do take enforcement actions. We are not an enforcement-only regime as is the case in 

many places that don’t have regulated institutions. 

We, because of our extensive presence in the banks that we supervise, which is also true of the other bank regulators, are able 

to effect change much more quickly in a way that never reaches an 

enforcement action. We have a series of graduated steps that we 

take to effect corrective action beginning with something called a 

‘‘matter requiring attention.’’ And, if you look at our record over the 

last 5 years, which we did in anticipating this hearing, we totaled 

up the number of formal enforcement actions that we took in consumer-related issues. It is about 200. Similarly we took about 200 

informal enforcement actions on consumer issues. But if you look 

at the ‘‘matters requiring attention’’ that start this process, there 

were 1,500 of them. And that is what you want to see. You want 

to see identification early of what those problems are, telling management to fix this, and they don’t result in enforcement actions 

but instead result in correction. 

The problem for us is that as a public relations matter, people 

don’t see that. And that is the point really I am trying to get 

across, which is you can’t measure how well we do what we do in 

this area by only looking at formal enforcement actions. 

Mr. BACHUS. All right. Let me ask the total panel, anybody, if 

you would like to comment. Neither the OCC or the FDIC has rulewriting authority to define unfair and deceptive practices under the 

FTC Act. Is that going to limit your ability to protect consumers? 

Ms. BAIR. Well, we enforce UDAP, but we don’t have the ability 

to write rules. And so because there are no rules, we are finding 

out we have to use case-by-case determinations and consult a great 

deal with the Fed and the FTC about what is unfair or deceptive 

because we don’t have the ability to define these terms. 

Rule-writing authority would be extremely helpful, especially in 

the subprime area. If you have a rule, you can have a preventive 

effect. You can let the industry know as a whole that certain types 

of practices are going to be viewed as unfair and deceptive, as opposed to having to go in bank-by-bank in the supervisory process. 

Also, if you take informal action, it is not public, so there is not 

any precedential impact. 

It will certainly be used in consultation and coordination with 

the other regulators, and I do think it would be helpful. 

Mr. DUGAN. And I would just add that I agree with that. For 

many years it was not clear that banking agencies could even take 

enforcement action under unfair and deceptive. The OCC was the 

first agency to go down that path. We have taken a number of enVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
28

forcement actions on a case-by-case basis, but we do think it would 

be helpful to have rule-writing authority. 

Frankly, I think it would be most helpful to have it on a joint 

basis. Our concern is that if one agency adopts a rule, people could 

use other charters to do the same activity, although I agree with 

my colleague that as a practical matter we would probably work together in any event. But I do think that is important. 

Mr. BACHUS. Could I ask one other question? Have any of the 

regulators or the FDIC found any credit card practices to be unfair 

or deceptive? Let me highlight three or four. One is that they apply 

your payment to your lowest interest rate. Another one is universal 

default where they increase your interest rate simply because your 

credit score goes up, or you approach your credit limit, or you take 

out a loan to buy an automobile, or a double-billing cycle, or a short 

billing cycle. 

Even I now face a situation where you are up here all week, and 

sometimes you get home, and you have about 8 days or 6 days to 

get that check in the mail. And the cycle continues to shorten, it 

appears. And they also—as the chairman documented, many times 

they will—even though the payment arrives on a certain day, it is 

posted, but it is not credited until the next day. 

Mr. DUGAN. We regulate a number of the credit card banks in 

the country. We have taken a number of enforcement actions 

against credit card banks for unfair and deceptive practices, primarily subprime credit card practices, and as a result there are 

very few subprime credit card providers left in the national banking system. 

Having said that, the types of practices you described, doublecycle billing, universal default, those are not things that we have 

taken or regarded as unfair and deceptive so long as they are adequately disclosed. The regime that we have always operated under 

as a statutory matter is that fees and charges are not things that 

we generally regulate unless they rise to the level of being something that is unfair and deceptive the way that is defined in the 

Federal Trade Commission Act. And if those fees are adequately 

disclosed, they have not been treated as unfair or deceptive, and 

I don’t know of any regulator that has treated them that way. 

Ms. BAIR. I think those practices are highly troubling, but even 

assuming we thought they were unfair or deceptive, we would not 

have the ability to write a rulemaking that determination, whereas, we can write rules on safety and soundness. 

I think previously you mentioned that universal default, in effect, 

is piling onto a person who has problems already. Perhaps you 

could make a safety and soundness argument to issue a rule to address the problem of universal default. 

However, since we only have 15 percent of the credit card market, even if we could find authority under safety and soundness to 

write a rule, we would be imposing a rule only on FDIC-supervised 

credit card issuers that would not apply to banks not supervised 

by the FDIC. 

The CHAIRMAN. And you would pretty soon have 1.5 percent of 

the market and not 15 percent if you had rules and he did not. 

The gentlewoman from New York. 

Mr. BACHUS. The Chairman of the FTC was trying to— 

29

The CHAIRMAN. I am sorry. Please, Madam Chairwoman. 

Ms. MAJORAS. I was going to add one thing. At the FTC, we don’t 

have jurisdiction over very many credit card issuers because so 

many of them are banks, but where they haven’t been, we have 

brought cases under deception and unfairness authority. And we do 

have a rule that prohibits advance-fee credit card and loan 

schemes. A lot of these are out-and-out scams, which is where we 

specialize. But I would point out that is one of the places where 

we do have a rule, but most of the time we use our deception and 

unfairness authority without any rules. We just use it in our enforcements. 

The CHAIRMAN. I was glad you mentioned gift cards. That is an 

issue where in Massachusetts we went after where you gave a gift, 

and pretty soon it was you gave a gift that kept on shrinking, and 

you did not know that. By the time the person cashed the gift card, 

you looked like Uncle Cheapskate because it was half of what it 

was supposed to be. 

I congratulate the Comptroller—I think it was the Comptroller’s 

predecessor. There was an effort by the issuing banks who were 

shilling for the merchants there to invoke the preemption, and the 

OCC did not go along with that. So we were able to preserve, I believe, State authority there. But I appreciate you bringing it out. 

That is the prime example of the kind of protection we want to 

give. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. I was impressed with 

the list of reforms Chairwoman Bair proposed for Congress. And I 

would like to ask the other panelists about some of them, particularly the Honorable Kroszner and Honorable Dugan. What do you 

think of giving the States a greater enforcement role under truth 

and lending and the FTC Act against nonbank financial providers? 

And also the FTC? 

Mr. DUGAN. I think it is a good idea myself. You might say it is 

easier for me to say because you are not saying it is providing it 

against national banks. But I do think that what recent history has 

shown is that the less regulated institution—and here I am not 

talking about State banks, I am talking about State-chartered institutions that are not regulated, like mortgage brokers or mortgage lenders—have been a significant source of the problem, and 

I think finding a way to devote more resources to addressing that 

issue is a good thing. 

Mrs. MALONEY. Mr. Kroszner. 

Mr. KROSZNER. I certainly agree it is very important to devote resources to protect consumers, and there are many things that are 

outside the scope of what the Federal Reserve can do in terms of 

enforcement, and so we very much rely on and coordinate with the 

States both for the institution—certainly for the institutions that 

we regulate, the State member banks. We coordinate very much 

with the States on those institutions. But there are many institutions, as Comptroller Dugan mentioned, that are outside of our 

purview for enforcement, and so providing appropriate resources to 

make sure that the laws are enforced to protect consumers is very 

important. 

Mrs. MALONEY. And Chairman Majoras? 

30

Ms. MAJORAS. There is no question in my mind or anyone at the 

FTC about the States’ importance in enforcing consumer protection 

laws in this country. We work with them all the time, and we are 

a relatively small agency, and if we did not have them working side 

by side with us, we would do a lot less. So I will start by saying 

that. 

The FTC has always taken the position that the States don’t 

need authority under the FTC Act because—Tom could probably 

say it better—if not all of them, almost all of them have what we 

call little FTC Acts; in other words, they have passed their own 

statute that essentially mocks the FTC Act. And so we have previously said we don’t think it is necessary. 

We file cases as co-plaintiffs or in big law enforcement sweeps 

where we announce cases on the same day all the time, and it has 

not inhibited us. The thing to remember is that if you have too 

many regulators all enforcing the same statute, you can end up 

with some inconsistency. And what the States have typically done 

is look to Federal case law under the FTC Act, and that has kept 

us all, I think, marching in the same direction. 

Mrs. MALONEY. I am also concerned about this, and it has been 

touched upon. I am concerned about banks entering into agreements with unregulated third parties who want to issue subprime 

credit cards. And I know the FDIC has investigated some of these 

activities, and I would just like to know, or to get a sense of, how 

big is the rent-a-charter problem? And is there a role for the States 

in this area? And how can Congress help? Maybe start with the 

FDIC and the OCC and the Fed. 

Mr. DUGAN. Well, as I said earlier, we had a number of significant problems both on the safety and soundness and the consumer 

protection side with subprime credit card practices. We took a 

number of quite strong enforcement actions, and as a result of that 

whole series of actions that we took over a period of years, there 

just are not many subprime credit card lenders in the national 

banking system anymore. 

Ms. BAIR. We carefully scrutinize these arrangements because 

they are prone to abuse. We are conducting a joint investigation 

with the FTC right now concerning the so-called rent-a-bin arrangements. We have identified about 10. We, again, closely scrutinize them. I don’t know if I can categorically say they are all problematic, but they are certainly prone to abuse, and we are carefully 

reviewing them. 

Mr. KROSZNER. Fortunately, we do not have any banks that are 

engaged in this practice, so we haven’t undertaken any actions because there are no banks doing this. 

Mrs. MALONEY. Any other comments? And then my time has expired. 

Mr. MILLER. This is our great nightmare, of course, the rent-acharter situation, where there could be enormous bad actors using 

the shield of Federal preemption. I think by and large, so far, Federal agencies have been fairly vigilant about that issue, and they 

really need to be. That is probably the biggest nightmare that we 

are dealing with in the sort of set of circumstances we have been 

put in with the Watters case and related cases. 

31

Mr. POLAKOFF. Congressman, I would offer from the OTS perspective that rent-a-charters are simply not acceptable, and if we 

find it, we stop it. And whether it is credit card, subprime credit 

card, payday lending, it makes no difference. It is not an acceptable 

practice. 

The CHAIRMAN. The gentleman from Louisiana. 

Mr. BAKER. Thank you, Mr. Chairman. 

I am appreciative of the fact that there has not been insurmountable attention given to the preemption issue, but rather where do 

we go now, in light of the definitive decision in the Watters case? 

Mr. Dugan, in your testimony you recite the observation that the 

FTC Act vests with the Federal Reserve the ability to regulate unfair or deceptive practices at banks—comparable authority is invested with the OTS for thrifts, and the NCUA for credit unions. 

And so you establish that Congress has acted with regard to each 

specific financial sector to provide consumer advocacy responsibilities, but you go on to suggest that a unified working group of sorts 

that could provide for joint rulemaking opportunity would do great 

service towards the absence of venue shopping and having as best 

we can an equitable enforcement practice. 

I would like to suggest and seek your counsel. Would it not be 

advisable, in light of the comments made by those representing 

State interests here today, that a representative of the CSBS at 

least in an advisory capacity, because it may not be proper for 

them to be voting on national bank regulation, but perhaps they 

would have perspectives of value, as well as, of course, the FTC, 

to provide some sort of working group format? We have presidential working groups of regulators that come out with reports 

which are generally ignored, but we could have a consumer working group, as an example, solely focused on consumer advocacy, 

identifying practices inconsistent with sound fiscal policy, and leave 

it then to each specific regulator to act consistent with others. 

If we were to suggest something of that sort, that would not necessarily in itself require congressional action if agencies chose to 

work in such a cooperative manner, quarterly, semiannually, annually, even if it were just to report to Congress and say here is what 

we should do and let us evaluate that policy, if that is what you 

deem to be most appropriate. 

From what I am hearing from everything is can’t we share information? Can’t we work together? No one has the resources to do 

this all on their own. Everybody can see problems. You might see 

a problem across the fence that is not in your jurisdiction, and if 

we got everybody together and had a more uniform system of consumer advocacy rules, the market wins and the consumers win. Is 

that an inappropriate observation? 

Mr. DUGAN. Not at all. I think it is actually a quite good observation. I think recently in the last Congress, the State representative 

was added to the Federal Financial Institution Examination Council, FFIEC as we call it, and that would be a place to share that 

kind of information. 

I think if you go beyond that to rule writing, which is one of the 

things you talked about, I think you did hit on one of the issues 

that would be involved as a constitutional matter and appointVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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ments matter. It is quite murky if you have a State official voting 

on something— 

Mr. BAKER. Let me be clear. I meant only in an advisory capacity. They would certainly not want you voting on their rules. But 

I think the pressure would be if there was an identified problem 

by this group, and generally action were taken, that those aberrant 

players who did not subsequently act to protect their consumers 

would have immense political responsibility for their failure to act 

in light of the public discussion. 

Let me also suggest that, given restricted resources, multiple 1–

800s and multiple Web pages—I note on page 23 of your testimony 

that you will have up this summer your own Web page, which is 

helpmewithmybank.gov. So, you can log on and find out what you 

need to know and then move to the appropriate regulator. 

It might also be appropriate for this group to think about consolidating those informational resources, because with everybody having its own Web page and 1–800, that gets to be confusing, and if 

there would be a way to consolidate that where you ultimately end 

up with a real person who lives in the United States and can speak 

in the language with which you are calling—I know that yours will 

be bilingual, I think that is appropriate—you would end up with 

something of value instead of having disparate standards which 

confuse consumers, and they don’t understand exactly with whom 

they should make their complaints. This would be something that 

you guys could perform, I think, a significant service and perhaps 

break through this idea that you don’t care about consumers. 

Mr. DUGAN. Mr. Baker, I totally agree. It is one of the things 

that I talk about a little bit in my testimony. As you heard today, 

we are all doing different things, and you wonder if there is a way 

that we can coordinate and— 

Mr. BAKER. What gets this started? Do we have to do it, or can 

you do it? 

Mr. DUGAN. No, I think we can do this. I think we can do this 

at the FFIEC, and we can also invite our colleague at the FTC to 

participate as well. But that is one of the things that I haven’t discussed yet with my colleagues, but I think it is something that we 

could do if people were amenable to it, and I certainly am. 

Mr. BAKER. Mr. Chairman, I hope you will encourage their participation in seeking out a negotiated settlement on this. I take 

‘‘yes’’ for an answer and yield back. 

The CHAIRMAN. The gentleman from New York. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Last week one of our subcommittees held a hearing that focused 

on some of the more disingenuous practices within the credit card 

industry, and some of our witnesses and Members made the comment that the Congress has not given the Federal Reserve enough 

regulatory authority to sufficiently restrict some of the egregious 

practices. Some of them we have talked about were universal default and double-cycle billing and pay-to-pay fees. 

The question that I would like to ask first is, does the Federal 

Reserve feel, Governor Kroszner, that these are practices that require some type of restriction? In general, would the American people be better served if the Federal Reserve were given increased 

authorities to regulate the credit card industry? 

33

Mr. KROSZNER. Thank you very much. 

Certainly we take our responsibilities with respect to credit cards 

quite seriously. As you know, in the hearing last week we discussed 

a number of the new proposals that we put out to deal with these 

issues because we think they are very, very important issues. 

The approach that we have so far taken is primarily through our 

regulation Z, TILA, Truth in Lending Act, authorities through trying to improve disclosure. I think it is true, as one of the other 

Members had said earlier, that the current disclosures are not adequate for consumers to understand what is going on, and that is 

why we have really focused on consumer testing to ask real people 

real questions about what do they understand, what can they get 

out of the forms that they are seeing? And we went back and forth 

quite a few times to improve the information that is out there, not 

only the accuracy of the information, but the understandability, the 

usefulness to individuals. 

I believe that we have—we believe that we have sufficient authority to deal with these issues as of today; however, we are continuing to take actions to look further into what needs to be done 

in this area and a number of other areas, and certainly we will not 

hesitate to come back to Congress to ask for further authority if we 

need to. 

Mr. ACKERMAN. Thank you. I appreciate that. 

I have a second concern. I get these letters in the mail all the 

time, besides the credit card ones, again with mortgages, and I get 

a lot of them. Sometimes they are very official-looking, and I am 

sure that is not by accident. And they are designed to make it look 

like it is from the Federal Government or sometimes the State government or sometimes some unknown great official authority. And 

it is very, very misleading. 

This one does not identify who it is from on the cover. This one 

is a similar design. It happened to come from the same source, I 

believe. And it says right on the front, Re: Your current loan with 

Citibank North America—which is one of the mortgages that I 

have a property—Request for immediate action. I think this is from 

my bank when I get it. Most people would think that because it 

is up there in the return address area. But it is not. 

And there are all sorts of warnings on here that are postal regulations that everybody knows about. You don’t have to put it on the 

envelope, but you do if you want to make it look official: Warning, 

a $2,000 fine and 5 years imprisonment for anyone interfering with 

or obstructing the delivery of this letter. This is an important letter. There are all sorts of codes, and then it says, your mortgage 

recorded in the county of, and there is all sorts of stuff that actually I once had. I guess they did not know that I paid that one off 

and already switched it to somebody. 

And it goes on looking real official-like. And then there is a big 

notice on this part of the page: Notice, the Queens County property 

code in Jamaica, New York, notification date. Recent changes in 

our mortgage policy. There are programs now available to Queens 

County residents. 

Now, I would think this is some kind of government program if 

I was an average person or somebody who is not reading this carefully because they don’t have the time, but gets an impression and 

34

all sorts of things. And they give you—I can get this deal for a rate 

of 1.25 percent. Now, if I am a senior citizen on a fixed income, and 

I think I had an interest rate that I am paying now of 6 or 7 or 

8 percent or something, and I am going to be able to pay 1 percent, 

I don’t realize that they could eventually take my house, or I am 

going to owe more on the mortgage than the house is worth, but 

they don’t care because that is not going to be 1.25 percent for too 

long. 

I get this one that does not have any return address on the front, 

nothing on the back, and it says, ‘‘Certificate enclosed.’’ That is all 

it says besides my address. And it comes looking like this. That 

certificate of finance, preferred, bearer’s certificate, made out to 

me. This looks so official with big ‘‘equal employment’’ thing on 

there and FHA things and certificate numbers and guys, you know, 

half dressed, carrying shields and swords, and things looking like 

they came from dollar bills printed in the color of ink. You have 

to read it 10 times to find out that it is not from my bank, but 

somebody that wants to snipe my mortgage. 

Is this fair? Should the industry not be policing itself, or should 

some greater authority be supervising what is going on here? 

Mr. MILLER. Congressman, that is deceptive, deceptive in so 

many ways, and it is a violation of Federal laws and a violation of 

State law, depending on preemption, of course, and that is the kind 

of thing that we all should be after. 

Mr. ACKERMAN. Are we after it, though? What is being done? 

Mr. ANTONAKES. I would add in Massachusetts last year we 

passed a law prohibiting those very types of deceptive advertisements featuring the third-party use of a bank name. And we have 

taken enforcement actions against entities that we license and referred others that use these types of advertisement. I would also 

just add quickly that we will enforce that law whether the complaint is against a State-chartered bank or a national bank. 

Mr. ACKERMAN. I always liked Massachusetts. I hope the chairman makes a note of that. 

Shouldn’t there be a Federal role in this? 

Mr. POLAKOFF. I would like to offer that I suspect that did not 

come from an insured financial institution. I suspect it came from 

a mortgage bank or a mortgage broker, and I think that is where 

the emphasis should be focused. 

Mr. ANTONAKES. I would not disagree. They generally come from 

third parties. We would enforce the law whether the complaint was 

from a State bank or a national bank for the illegal third-party use 

of their name, and it has also come from insurance companies, as 

well. 

Ms. MAJORAS. Briefly, Congressman, the FTC has enforced 

against a number of nonbank mortgage lenders that have made deceptive representations to consumers, whether it is about interest 

rates or fees and the like. We have done that. 

Now, just, you know, what it says on the envelope, that by itself, 

to be honest is not the only story, because we can also bring cases 

when consumers are truly harmed by it. But if you go inside, and 

it is telling you that you can get a mortgage at a particular percentage and can’t and so forth, that we have taken very seriously. 

35

The CHAIRMAN. Let me ask, we get letters like this all the time. 

How can they send that to me? If I got a letter that like that, and 

I wanted to refer my constituent to a place where he or she might 

be able to get enforcement action, which of your agencies should we 

refer that to? In Massachusetts, it would be you. 

Mr. ANTONAKES. Absolutely. 

Mr. MILLER. Our office too, or State attorney general’s office. But 

there is maybe a larger point here. 

The CHAIRMAN. Let me ask first, would any of the Federal agencies—I think that is what the gentleman was getting at. I wouldn’t 

want his dramatic reading to not get its full impact here. Would 

any of the— 

Mr. ACKERMAN. I appreciate the rescue. 

The CHAIRMAN. Would any of the Federal agencies be responsive 

if we were to say, look, what is going on? What can you do about 

it? 

Ms. MAJORAS. We do get these things all the time at the FTC, 

and we look at them. And incidentally, since we have been talking 

about complaint filing, too, we get probably 15,000 complaints a 

year that would involve actual banks or other depository institutions. 

The CHAIRMAN. I would assume, for the three bank regulators, 

if it did not come from a regulated financial institution, you have 

no jurisdiction. It would be the FDIC. 

Ms. BAIR. This is right. I am sure this letter did not come from 

an insured institution. I see this all the time. I get these at home. 

I get the spam faxes. That is one of the reasons we are urging that 

State authorities, the attorneys general, and the Federal supervisors at the State level, be given the authority to supplement what 

the FTC already does to go after the entities that are conducting 

this type of marketing. 

Also we very much work with the Federal agencies with the hope 

of rulemaking to expressly say, we think that this is unfair and deceptive. I don’t have the power to write the rule, but the Fed does, 

to say specifically that this type of advertising is unfair and deceptive. 

The CHAIRMAN. Would the Fed have the right to write that rule 

covering both depository institutions and others? 

Ms. BAIR. Yes, for the extension of mortgage credit they would. 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. I have a question for the Comptroller, Mr. 

Dugan. 

Mr. Dugan, I understand that the OCC has entered into some 

agreements with the States related to the identification and enforcement of State laws, and I was just wondering if you could describe for me some of those agreements? 

Mr. DUGAN. I think the agreements I was talking about earlier 

are the agreements for information sharing about complaints. So if 

we get a complaint filed that really belongs with the States, much 

like we were just talking about, we would have a way to get that 

to the State efficiently, and vice versa, and if the State got a complaint that related to a national bank that we needed to take care 

of, there would be an efficient process not only for us to get it, but 

36

for us to share information about what we did with it with respect 

to a consumer in that State. 

And so we entered into a model type of agreement with the Conference of State Bank Supervisors, and then individually have been 

contacting States to try to get them to enter into agreements so we 

could do it as a practical matter, and since December, we have 18 

States that have agreed to do that. 

Mrs. BACHMANN. Thank you. Do the State anti-discrimination 

laws apply to the national banks? 

Mr. DUGAN. State anti-discrimination laws do apply to national 

banks by long-standing legal precedent. 

Mrs. BACHMANN. How about the State unfair and deceptive practices laws, do they apply to the national banks? 

Mr. DUGAN. They do if the way they are applied or the way they 

are ordered don’t actually put in specific requirements that regulate, or attempt to regulate, the particular banking activities of a 

bank. So if it is a general unfair and deceptive act, what we were 

talking about earlier, the little FTC acts, those on its face are not 

preempted, we would say. 

Mrs. BACHMANN. What consumer protection laws do not apply to 

national banks? 

Mr. DUGAN. Well, this is an issue of course that has come up and 

people have been talking about it recently, and it is something that 

the GAO looked at as well. We have pledged to talk with the States 

about how we look at which laws we believe are not preempted, 

and which ones are. Frankly, a lot of that got put on hold because 

of the Watters case and the outcome of it. Now that it is over, we 

do recognize that we need to get more clarity on that. We already 

have addressed this in significant ways in our regulations and 

what we have put out, but we need to provide more. 

I think, as GAO recognized, it is not a situation where it is practical to go to each State and go through the code and identify every 

single one that is or is not preempted. So there will be principles 

that we will be articulating in outreach meetings as we committed 

to do. 

Mrs. BACHMANN. Mr. Dugan, could you tell the committee, how 

does the OCC’s regulation compare with the rules that were adopted by OTS and NCUA? 

Mr. DUGAN. To have such a specific comparison, I would love to 

be able to get back to you for the record on that. I know what ours 

does, but I can’t give you chapter and verse on exactly what theirs 

do. But I would be happy to respond for the record if that would 

be appropriate. 

Mrs. BACHMANN. That would be fine. We have an example of one 

of the State attorneys general investigating student lending, and 

that suggests that State attorneys general are playing a very important role in consumer protection. I wonder if you could tell the 

committee what would be the impact on the national banking system if State attorneys general which bring enforcement actions 

against national banks. 

Mr. DUGAN. Well, I think this is the same question, whether it 

is student lending or other issues that the Supreme Court had to 

address, which is what is the legislative scheme that Congress has 

adopted with national banks. And it has always been our view that 

37

historically the idea has been to have a uniform set of Federal laws 

that apply to the national banks wherever they operate, or whatever part of the country that they are in. And that is what the 

Watters case upheld, that if national banks are exercising their 

banking powers, whether at the bank level or at a subsidiary level, 

it is a set of uniform rules that applies. And so in those circumstances, State laws would be preempted. 

We believe we have robust ways, as I have tried to outline in our 

statement, to address the consumer protection issues that we have 

been charged with addressing, and that regime is established by 

Congress, by you, and can be expanded or contracted. And we will 

faithfully implement those laws, but do so in a uniform way 

throughout the country. 

Mr. MILLER. If I could jump in, I think your question was what 

effect would happen if the State AGs enforced the laws, not what 

the law is. The effect, I think, would be great. It would be consistent with our Federal system. The State AGs have stepped forward and done some innovative things in the securities area, insurance with Eliot Spitzer, now in the predatory lending area, as well 

as in student loans, and the country is better off for that. Those 

laws in various forms weren’t being enforced. The AG stepped forward and protected the public and pursued the public interest, and 

we are all better off for it. And it is consistent with our Constitution, consistent with the great wisdom of our Founding Fathers 

concerning checks and balances and federalism. It is an incredible 

system that at least in my view is now frustrated by the recent 

practices of the OCC and the Supreme Court decision. 

Mrs. BACHMANN. Attorney General, thank you for your comments. I wonder, could you also tell me what resources you have 

to examine national banks and Federal thrifts for compliance with 

State law? 

Mr. MILLER. We don’t, and shouldn’t have, resources to examine 

them for safety and soundness. We never suppose that we should 

do that nor should our colleagues, the banking superintendents, 

and they don’t. But we have enormous resources in the consumer 

protection area. That is one of the bread and butter of many of our 

offices. And we bring those and used to bring those resources to the 

national banks in an effective creative way. I think there was one 

estimate in terms of consumer protection, the States bring 17 times 

the resources of the Federal agencies that are here today in terms 

of consumer protection. 

Mrs. BACHMANN. I have a question. 

The CHAIRMAN. We are over time. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentlewoman for those questions. 

Mr. Kroszner, I am going to ask you a question, but as we proceed I am going to make a statement with regard to your rulemaking authority: use it or lose it. I was struck by the agreement. 

The Comptroller and the Chair of the FDIC didn’t agree on everything. It does seem that both are in a position of being criticized 

because you did not roll out the rules which they can use. I don’t 

think case-by-case does it. I don’t think case-by-case in complex situations like we live in is a good idea. And I think I speak here 

probably for the majority of this committee. If the Fed doesn’t start 

38

to use that authority to roll out the rules, then we will give it to 

somebody who will use it. You reinforce my sense that the Fed is 

not the best place to do consumer protection. And all of our legal 

traditions about people knowing what they are doing, etc., having 

some due process, that is important. 

It is also the case, it seems to me, that we don’t want to stop people doing bad things after the fact: we want to deter people from 

doing bad things. If you are in a case-by-case situation you are 

greatly constrained against penalizing people. It is one thing to penalize people who have violated rules. It is another to tell people 

to stop doing something case-by-case where they can legitimately 

say, well, I didn’t know that. And without rules that would be the 

case. 

So I think the rulemaking authority is important. Now, there is 

a—again, I would rather see the OCC and the FDIC, and I assume 

the OTS would agree on this, but the rulemaking decision should 

be joint. And obviously, it is better to have one set of rules. If the 

Fed is willing to work with them to do it, that is fine. But I will 

tell you if we need to begin to see the process of rulemaking going 

into effect for this area. And the answer is that it is especially true 

now with the preemption. Their workload, what they have to do 

with regard to consumer protection, has clearly increased as a result of the most recent decision about preemption, so I think this 

just has to happen. 

Now, the next two questions. We have—yes, Mr. Kroszner. 

Mr. KROSZNER. If I might just very briefly respond. We really do 

take the consumer protection area very, very seriously. We have an 

entire division—this gets back to an earlier point that you made 

about monetary policy versus consumer protection. We have a division of monetary affairs but we also have a division of consumer 

community affairs at the Federal Reserve board, and we have similar divisions at all the regional Federal Reserve banks, and so we 

do have it at the highest level. 

The CHAIRMAN. I don’t think it is what motivates people mostly. 

Certainly that wasn’t the experience, it seemed to me, of Governor 

Gramlich. But there is also a philosophical distinction. You say specifically in your testimony that the Fed doesn’t think it should use 

the rulemaking authority. I believe overwhelmingly this Congress 

will think that it should. And I want to put you on notice that it 

is not a personal thing, but there is a real difference. And I believe, 

particularly now that the role of the Federal regulators has increased, there has to be a change in the rulemaking authority. It 

can be done jointly, but it I think has to be done. And I think the 

absence of rules is a serious problem that needs to be dealt with. 

For example, the Comptroller said with regard to the practices 

like these that credit card companies engage in that make a lot of 

people angry, justifiably, essentially as long as they are explicit 

about what they plan to do, they can do almost anything. Maybe 

that is the current state of the law. I will tell you that I think there 

are some things that are so counterintuitive to individuals that if 

you nailed it to their foreheads, they still wouldn’t fully understand 

it. There are some things that consumers think, well, that can’t be. 

And I will say for the credit card issuers, no, we don’t want fixed 

rates. But there is an intermediate position between rate setting 

39

and simply telling people—let me put it this way in effect—maybe 

I will have to clear up the record later. We are your credit card 

company. By the way, here on page 7, it says that we may screw 

you from time to time and by signing this application you have 

waived any objection to that? That is notification, but it is not 

going to be enough. 

But two other questions specifically. One, we have unregulated 

entities, it has been noted in response to Mr. Ackerman’s question. 

We need at a Federal level, I believe, to pass some laws to cover 

currently unregulated entities. I think that is right. If only the entities that the banks regulated issued subprime loans, we would 

not now be in a crisis. The banks are entitled to have us acknowledge that. There are entities that make these loans that do other 

things that are not now regulated. I think there needs to be a national law. Exactly how it fits with State law, to what extent it is 

preemptive, we will work that out. But it does seem to me that 

there needs to be a national law if only to keep institutions from 

leaving a State that has strong laws to go to places that don’t. 

What I would want from you, and it doesn’t have to be today, is 

a sense of who should be that regulator? It is one thing to create 

the rules. We are going to have to create some new rules, I believe, 

about subprime. And we are talking about unregulated institutions, 

nondepository institutions. Do one of you want to take that over? 

I am serious. Or does it go to the FTC or does it go to HUD? We 

are not going to adequately be able to regulate that unless we create a regulator. I would ask your advice in writing about that. 

The other issue is on the States. I will say that I agree with 

much of what you said, but when you talked about your concern 

for the overstressed State resources, to be honest, that did not 

strike me as your primary motivation. When you say, oh, you don’t 

want the States involved in this thing because you have such sympathy with these poor overstressed State regulators, well, we will 

worry about them. I appreciate your compassion in this case, but 

it does not seem to me that was your primary motive. I think the 

States have the resources. 

Let me ask you about one specific issue. One entity that has been 

very much active in State regulation is the attorney general in 

each State; that is why Mr. Miller is here. You don’t have any comparable Federal authority, for example, Ms. Bair doesn’t have any 

comparable authority. You have the Justice Department, but it is 

not the same. The ability to bring injunctive lawsuits, the ability 

maybe even to get punitive damages in abusive cases, but you have 

to have rules before you can do that. Are you not somewhat handicapped vis-a-vis the States? And I would say this to the Federal 

regulators. Mr. Antonakes can go to the attorney general of Massachusetts. In the absence of that kind of legal enforcement, to the 

extent that we transfer from the State regime where the supervisors and the attorneys general work closely together to a national 

regime with an attorney general, how is that not a diminution to 

some extent of the force with which we can apply these protections? 

Mr. DUGAN. Actually, Mr. Chairman, I think we have more authority with respect to the banks that we regulate. We don’t have 

to go to a separate agency to get a bank to stop immediately doing 

something that we find that violates the law. We have extraorVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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dinary powers under the Federal Deposit Insurance Act to take formal enforcement action. Long before you get there, we have the 

power to get— 

The CHAIRMAN. You never want to go to court, or you do? 

Mr. DUGAN. It is actually quite rare that we go to court because 

institutions almost always settle because of the great power that 

we have as a formal enforcement matter. That is a reality. 

The CHAIRMAN. The other point I want to make is, you talked 

about matters requiring attention and how many of you deal with 

them. You say that many of them are consumer related. I will close 

with this: I guess we are talking about things being unfair and deceptive. I want to get disjunctive. I think we need to make sure we 

get things that are unfair or deceptive. A regime in which deception has to be there does not protect consumers. There are unfair 

practices that are not technically deceptive. And I guess that is the 

sense. You got it from my colleague, the ranking member, and others. We do not think you now are adequately dealing with practices 

which are unfair, probably because you don’t have the authority. 

You may need the statutory authority. You may need the rulemaking. This is not a personal failing on the part of any of you. 

But I guess that is what I would leave you with. In today’s world, 

with the banks so creatively making money off fees, off overdraft 

fees—I mean, I think that there are people who watch their congressional calendar, and they see when I get a vote on Friday, so 

they mail my credit card bill because then I will be a day late getting back to it. There are so many of these other practices that are 

not deceptive, but I believe they are unfair. 

So I will close with this. Somebody is going to have to do some 

rulemaking and you are going to have to go beyond deceptive into 

unfairness. We are not talking about rate setting, we are not trying 

to put anybody out of business, but I think you have a broad consensus to do that. 

Mr. DUGAN. I will defer to my colleague after this from the FTC 

because they actually have the authority. I think we need to be 

careful here, if unfair or deceptive, but the unfair standard legally 

under the Federal Trade Commission Act is not a judgment about 

unfairness. 

The CHAIRMAN. I understand that, but you are not here arguing 

as a lawyer before the Federal Trade Commission. We will rewrite 

the Federal Trade Commission Act with Mr. Dingell’s cooperation. 

So understand, we are not now into statutory interpretation, we 

are into statute writing. And what I can tell you is, and it may be 

that you don’t have enough statutory authority, but we have to give 

you a broader reach to go after things that are in the perception 

of the people in this country unfair. And if the problem is lack of 

statutory authority, then it is our job to care about that. 

Ms. BAIR. I would just say that there can be a restrictive legal 

standard. If you are looking at the statutory language in this area, 

you might consider adding the term ‘‘abusive.’’ ‘‘Abusive’’ is a 

standard that is contained in HOEPA that the Fed is looking at 

using in the context of mortgage lending. But ‘‘abusive’’ is a more 

flexible standard to address some of the practices that make us all 

uncomfortable. 

41

Ms. MAJORAS. I just wanted to clarify that, in fact, the FTC Act 

allows us to attack practices that are unfair or deceptive, and we 

do. And we have brought plenty of cases that attack unfair practices. But it was Congress that went back to the FTC at one point 

and said you need to define what unfairness means, because of 

course Congress didn’t want it to mean just whatever, whoever 

happens to be sitting in my seat thinks it means. So there is a 

standard. 

The CHAIRMAN. I appreciate that. When was that? 

Ms. MAJORAS. I think it was in the 1980’s. 

The CHAIRMAN. In the interim, a lot of my good friends work for 

financial institutions and they play an essential role in this country 

and I am grateful to them and I work with them, but they have 

succeeded in angering a significantly large part of the American 

people by nickel-and-diming them on credit card late fees and overdraft fees. And I think you are going to find a Congress today that 

is less inclined to restrain you and more inclined to encourage you 

to reach out and give consumer protection. 

Mr. CAMPBELL. Thank you, Mr. Chairman. I just have a few 

questions for Mr. Dugan here. The first concerns subprime. My understanding is that over 90 percent of the subprime loans are not 

originated in banking institutions that are supervised. 

Mr. DUGAN. In national banks last year, that is right. 

Mr. CAMPBELL. In national banks, okay, last year, great. Given 

that statistic, is this an area where a national rule makes more 

sense than a State-by-State if over 90 percent of the loans are not? 

Mr. DUGAN. It is certainly true that because we have such a 

small part of that market, and because we haven’t frankly had the 

same kinds of problems with the banks that we regulate that engage in these activities, you do need broader coverage. But that is 

exactly why the bank regulators have gotten together and proposed 

guidance that applies to all, not only insured institutions, but companies affiliated with them, which we are about to finalize, and, 

getting to your point, we have enlisted the Conference of State 

Bank Supervisors to get their agreement to try to get that same 

guidance out to the State lenders that none of the Federal regulators touch. 

So do I think that there needs to be some kind of national standard? The answer is yes, because so much of this market comes 

through the States. It can be done by each of the Federal regulators and each of the State regulators, which is one approach. Another that has been talked about is the Federal Reserve addressing 

some of these issues through their rule writing authority. And failing that, the last line would be actual legislation. But it is absolutely imperative that we have some kind of nationwide approach 

to this problem. 

Mr. CAMPBELL. Just to understand that answer better, that order 

you gave is the order that you believe is preferable? 

Mr. DUGAN. I guess I would say, one, we can do now and are in 

the process of doing and working down that path. I think the second is an area where the Federal Reserve, and Governor Kroszner, 

of course, can speak for themselves. But they are holding a hearing 

tomorrow to talk about it. And I just think as a matter of time, 

42

precedent and so forth, getting to Congress is a third practical reality. 

Mr. CAMPBELL. Another question along the same lines, but not 

just subprime—a lender in one State can make loans to people in 

any State. So does that make, if you are looking at consumer protection, does that make some kind of uniform consumer protection 

a better approach? 

Mr. DUGAN. I think there are certain practices that have become 

national products, commodities if you like, and they raise the same 

issues over and over again. And those are the ones that I believe 

cry or call out more for national kinds of standards. Because as you 

say, things can happen in different States. 

Mr. CAMPBELL. And the third question, I think you kind of 

touched on in discussing things with the chairman a little, but just 

maybe you can elaborate on preemption by you guys. We have 

talked a lot about resources relative to State license mortgage lenders, resources at the State level versus preemption by you guys. It 

sounds like you believe that looking for more resources or more involvement at the State level is something preferable to preemption 

by you guys. 

Mr. DUGAN. I guess what I would say is that I think we do have 

adequate resources to put in place a standard. Let me give you an 

example. One of the things that I have spoken about recently is the 

use of stated income or totally undocumented income in order to 

make loans. It is something that we will address, I think forcefully, 

in the guidance we are about to issue to make that no longer the 

general rule when you do a subprime loan. If we adopt that guidance, we would be able to implement that guidance in national 

banks around the country wherever they are situated to have that 

as a standard. There is no similar mechanism to make sure it gets 

done in the same way in the more than half of the market that 

Federal regulators don’t touch. The States individually are going to 

do that. But if they are not actually in those institutions supervising them, it will take a longer time to do it. That is really what 

I am getting at. If you have a finite amount of resources, rather 

than devote them all to the really heavily regulated insured institutions, doesn’t it make more sense to devote them to the States? 

We do the national banks, hold us accountable, but that it is a better division of labor in order to achieve the maximum benefit for 

the consumer. 

Mr. CAMPBELL. Okay. I yield back. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. Thank you for this hearing. I certainly will attempt to observe the 5-minute rule. I have 

a set of questions for the entire panel. Recently I was reading an 

article entitled, ‘‘Unsafe At Any Rate,’’ written by Elizabeth Warren, and I want to use that analogy that she used. It is impossible 

to buy a toaster that has a one in five chance of bursting into 

flames and burning down your house. But it is possible to refinance 

an existing home with a mortgage that has the same one in five 

chance of putting the family out on the street and the mortgage 

won’t even carry a disclosure of that fact to the homeowner. Similarly, it is impossible to change the price on a toaster once it has 

been purchased. But long after the papers have been signed, it is 

43

possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit 

terms in full and on time. 

The question is this. And Ms. Warren suggested that perhaps we 

create a financial services product safety commission. Should there 

be more Federal regulation? Why are consumers safe when they 

purchase tangible consumer products with cash, but when they 

sign up for a routine financial practice like mortgages and credit 

cards, they are left at the mercy of their creditors? The answer 

given by the author is regulation. 

I ask, where are we dropping the ball? What is your answer to 

this problem, and where do we go from here? If we could start with 

Mr. Kroszner, please. 

Mr. KROSZNER. Thank you very much. It is certainly extremely 

important in all areas to protect consumers, whether it is health 

and safety regulation, or their financial well-being. So these are 

both very important issues. I do think there is a bit of a distinction 

between something like a toaster and some financial products. I 

think it is very easy to objectively define whether a toaster is likely 

to burst into flames. With respect to financial products, some 

things that could be helpful and useful to certain types of customers may not be helpful and useful to other types of customers. 

I think with respect to a toaster bursting into flames, it is very 

clear that one bursting into flames with a one in five chance, that 

is harmful no matter who you are, and no matter where you are. 

With respect to financial products it becomes a little trickier, because certain types of products which may not be appropriate to 

some people may be appropriate for other people. So it is much 

more difficult, I think, to set up those types of bright line distinctions. 

That said, it is very important to make sure that if there are certain types of practices that are inappropriate, that we address 

those, and that is one of the reasons why with respect to mortgages 

we are holding the hearing tomorrow on HOEPA to look to see 

whether there are sort of certain systematic patterns and practices 

that we need to address. 

Mr. MILLER. Congressman, I said earlier that if the seven of us 

at this table really meant it, and worked together, and used all of 

our power in the subprime market, and we all have power, including the States have significant power there, going forward, we 

could reform the industry. And I say that because of what has happened. Some of the bad companies are out of business, some of the 

better companies are still there. They have reputations to deal 

with. There has been pain for the people who have been foreclosed 

on, there has been pain for the investors. The time is right. If the 

seven of us and the people who work for us really work together 

cooperatively and spot the various problems and use our expertise, 

we could really clean up the industry. 

There is one other thing that needs to be done, and that is that 

the current situation with all those foreclosures—there what has to 

happen is, with us and with everybody in the industry, they have 

to have what we call Iowa common sense. And that is to renegotiate some of the terms so that the consumer, the borrower, can 

make the payments and the creditor, the investor, is better off beVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
44

cause they make more money that way than on foreclosing. We 

went through that in the farm crisis. I think more and more people 

are understanding that. The whole industry has to understand 

that, act on it, and that can ameliorate the current crisis considerably. 

So we know what to do. The question is, will the seven of us do 

it. 

Mr. CLAY. Mr. Miller, have the consumers been unexpectedly 

caught off guard as far as knowledge of these balloon payments? 

Mr. MILLER. They have, they have. It is a scandal in the sense 

that the mortgages, particularly the subprime mortgages, are enormously complex. The people are very much at need. They are the 

working, the lower working class Americans, who don’t have any 

margin for error. They have an economic situation, they need the 

loan, it is very complex. And in the past, there has been so much 

willingness on the part of certain players to abuse them, they have 

been taken advantage of, and it is a national scandal. And we can 

wring our hands about that, and we brought some lawsuits and 

that is good. But the big thing is, what do we do now? Do we solve 

the current problem and do we work together using our powers and 

using them aggressively where necessary, always reasonably, or do 

we all sort of splinter up, the seven of us up here? 

Mr. CLAY. Thank you for your response. May I? 

The CHAIRMAN. Yes, you can continue another couple of minutes. 

Mr. CLAY. Ms. Bair. 

Ms. BAIR. I have a lot of respect for Professor Warren. She serves 

on our Advisory Committee on Economic Inclusion. Although I 

haven’t read the complete report yet, I am familiar with some of 

her thoughts on this. I agree with your analysis, but I am not sure 

that we need a new financial regulator. There are seven of us here 

on this panel. I think there are some ways that we can improve existing authorities and use them perhaps more proactively. In a coordinated fashion, I think we can take care of this problem without 

a new regulator. 

Mr. CLAY. Thank you, ma’am. 

Ms. MAJORAS. I would start with this, closure. There have been 

comments here about well, closure is not the whole answer. I understand that. But we released a study today that our economists 

have been working on for some time which shows that even consumers who are fairly educated, and think they understand the 

current mortgage disclosure forms, don’t. Because when our people 

sat down and worked through it with them, they realized that 

there were costs and charges and they didn’t have any idea what 

they are, so people don’t know what this is costing them. We hope 

we can use this, and we developed some prototypes on what would 

work, what consumers would better understand. Because I do think 

it has to start with that. Ray is right in the sense that you have 

to be careful here because there are some bad things that happen, 

but there are people who did get credit and did get homes that are 

still paying for those homes who got them in the subprime market 

who wouldn’t have gotten them in any other market. We have to 

remember that, too, because those people deserve to have a home 

as well. 

45

Mr. CLAY. What is your opinion about the creation of a financial 

services product safety commission. 

Ms. MAJORAS. I think I agree with my colleague Ms. Bair that 

I think we ought to try to work this out with what we have. There 

is no question that we all have different jurisdiction and so forth, 

but we all, in some piece, have the consumer protection aspect 

here. And we know where consumers are being harmed and so we 

ought to be able to attack it with what we have. And if we don’t 

come through on that, then I wouldn’t blame you for considering 

something else, but I think we should start with that. 

Mr. CLAY. Yes, sir. 

Mr. POLAKOFF. Congressman, there was a recently publicized supervisory action taken by OTS against the Federal Savings Bank 

for—we could characterize it as unfair or deceptive or aggressive 

underwriting to take advantage of borrowers. And when we pursued the action, we briefed the other Federal banking agency sitting at the table. And I am convinced if they would have seen a 

similar situation they would have taken equally aggressive supervisory action. So I believe when we find predatory practices, which 

is entirely different than lending to the subprime community, when 

we find it we take appropriate action and we communicate amongst 

ourselves to ensure that there is some sort of level or horizontal 

analysis. 

Mr. CLAY. No matter who the perpetrator is? 

Mr. POLAKOFF. If it is within our institutional jurisdiction, we 

will take action regardless of the perpetrator. 

Mr. CLAY. Yes, sir. 

Mr. ANTONAKES. Congressman, we license mortgage lenders and 

mortgage brokers in Massachusetts, and they are not unregulated. 

We conducted over 400 exams last year that resulted in over 100 

enforcement actions, 3,700 enforcement actions by all the States 

combined against lenders and brokers collectively. We continue to 

do work here, we need to do more work here as well, and we need 

to work with our Federal counterparts. The idea brought up by 

Comptroller Dugan, to coordinate our examinations of lenders and 

brokers, is something I broached 3 months ago, because you can’t 

look at broker network solely. Certainly sales and marketing practices of brokers are a concern that needs to be dealt with. But you 

also have to look at the internal controls and underwriting processes that took place at nonbank as well as bank subprime lenders. 

And then you also have to look at the funding structure and also 

what is going on in the secondary market as well. I think disclosure needs to be improved. We support the Federal Reserve using 

their broad rulemaking authority whereas we have attempted to 

deal with the issue with individual State predatory lending laws, 

including my own in Massachusetts, which has only been somewhat successful because not everyone complies with them. And 

then also in Massachusetts an attempt to deal— 

The CHAIRMAN. You can finish the sentence. 

Mr. ANTONAKES. I would just say trying to deal with the issue 

now, as well as in the future, we have set up a hotline where anyone who is having foreclosure problems can contact us. We feel that 

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46

seling agencies and also work directly with their lenders and also 

mediations as well. 

Mr. CLAY. I thank the chairman and the panel for the indulgence. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MCHENRY. Thank you, Mr. Chairman. I am from North 

Carolina, and the North Carolina anti-predatory lending law that 

has been vaunted here in the halls of Congress is a wonderful 

thing that needs to be expanded to the national level, that somehow it had this fabulous effect in North Carolina. In the Sunday 

Charlotte Observer, they have a large expose that they are continuing, a long series about the fallouts and the foreclosure rate in 

North Carolina and that this vaunted anti-predatory lending law 

has actually had an adverse effect in the market. And it sort of 

brings to mind something, Mr. Dugan. There is this discussion here 

in Washington by consumer advocates that our Federal law isn’t 

sufficient, that we are not doing enough to protect the public. Yet 

when we get into the details about bad lending practices, predatory 

lending practices, it seems that—well, it is apparent that this is 

not primarily an issue by federally regulated institutions. We have 

seen the main abuses occur through State regulated institutions. Is 

that a fair assessment? 

Mr. DUGAN. I think it is a fair assessment, and I am not just saying that because I am a Federal regulator. I think, in a brief filed 

by the attorneys general, 46 out of the 50 attorneys general agreed 

that the real predatory lending practices were not taking place in 

regulated insured depository institutions or their subsidiaries. 

Those tend to be State chartered companies, some of which have 

some ties to Federal regulators, but many of which do not. And just 

last year, over 50 percent of subprime originations were in completely nonfederally regulated markets. Not all of those are bad 

loans, but some of the problems we have seen, and the more egregious ones I think, it is fair to say have been at those institutions. 

Mr. MILLER. If I can just jump in here. 

Mr. MCHENRY. If I may finish here. I only have a set amount of 

time. 

Mr. MILLER. But you raise some issues directed towards us. 

Mr. MCHENRY. I appreciate that, and thank you so much, but I 

will get to you in a second. I have a follow-up to him, and this is 

actually my time, respectfully, sir. But to continue that thought, 

would that indicate that we need to create another Federal law? Do 

we need to go further with our Federal law or is it kind of adequate? Should the focus be changing the State-by-State regulations 

of those State regulated institutions? Would that be a reasonable 

conclusion? 

Mr. DUGAN. I think there are some things that occur in both 

markets in the subprime area, and that is why the Federal regulators got together, as we can do pretty quickly, to issue proposed 

guidance in that area. The question is, how do you get those same 

kinds of standards to apply to the exclusively State regulated entities. And that takes action by the States and CSBS has committed 

to go down a path of going State by State to do that. If that works, 

that may address the problem. If it does not, that is when people 

are considering other measures to get a national standard, whether 

47

it is a regulation by the Federal Reserve, which has its own set of 

issues, or a congressional law. 

But the first place that we are looking is guidance by the Federal 

regulators jointly to be with companion guidance to follow by the 

States. Of course the question is, you have to have uniform application in the States. It is not enough just to say you are going to do 

it, you have to do it. But that is the first place that we are looking. 

Mr. MCHENRY. What is the Federal Reserve’s perspective on 

this? I know they have taken some action. 

Mr. KROSZNER. Well, it is certainly very important for us to coordinate with the States, and it is important for the States to have 

sufficient resources to be able to deal with the issues that they 

need to deal with with respect to institutions outside of the Federal 

regulatory purview. And so we try as much as possible to cooperate 

with them. 

Exactly as Comptroller Dugan had said, in working up, for example, the nontraditional mortgage guidance that we issued last year, 

we have worked very closely with the States. We have even sent 

Federal Reserve staff members to testify before various State legislatures to try to convince the States that they should adopt the 

same types of guidance, same types of regulation. Some States are 

able to do that without legislation. And we have had, I think, a lot 

of cooperative success on nontraditional mortgage guidance, and we 

will be working exactly the same with the subprime mortgage guidance that should be coming out. 

Mr. MCHENRY. My time has expired. And if I may just, Mr. 

Chairman, to Mr. Antonakes. There is this disparity between the 

amount of bank examiners and oversight that we have. And we 

have about 1,800 bank examiners for about 1,850 federally regulated financial institutions. There is a great disparity about the 

number of State regulated, State bank examiners versus the number of State banks. Do you think we have enough in the way there? 

And when he finishes up, Mr. Miller, if you want to chime in. You 

seem anxious to do that. 

Mr. MILLER. I am waiting patiently, as long as I get my turn. 

Mr. MCHENRY. Welcome to Congress. Mr. Antonakes. 

Mr. ANTONAKES. I can speak for my State that we have adequate 

resources to fulfill our responsibilities, and I think it is up to the 

individual States to make sure in their own discussions with their 

administration and their legislatures that they have what they 

need to do the job. I would only add that we have been supportive 

of the process for the nontraditional guidance. I would suggest if 

that takes place within the confines of the FDIC where we can participate, it is a far better process. We don’t have to wait for the 

Federal action to be done. We can do it in companion, in part of 

that actual process, and not be locked out of the actual rulemaking 

process. 

Mr. MILLER. The chairman sort of gave the recommendation 

early not to have finger pointings on what happened, and it was 

a good recommendation that I followed so far. But there have been 

repeated statements that most of the loans came from State regulated places in the subprime area a number of times. And with 

some uniformity in questions from the minority side, although not 

Mr. Bachus, it has come up a number of times. So let me just say 

48

this, that there is responsibility at the State and Federal level for 

the subprime crisis. National banks certainly had some involvement throughout the whole process, including in the securitization 

and in the purchasing of the loans. There is responsibility to go all 

the way around. The only thing I would point out is that Steve’s 

agencies and the attorneys general were working very hard in this 

area and accomplished a significant amount of good despite what 

happened. We were much more active than our Federal counterparts, is what I would leave you with. 

In terms of North Carolina, I would be interested in what the 

paper is saying on your statute. There have been other studies that 

show that your predatory lending statute has worked very well, 

that it hasn’t dried up credit. And indeed the Ameriquest case, 

Ameriquest left North Carolina for an extended period of time as 

a result of that statute. And the abuse that they directed throughout the country was much less in North Carolina because of your 

statute. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you. To get the view from that side, and you 

get the view from this side of North Carolina, my assessment is 

much, much more similar to the one that Mr. Miller has outlined. 

And I don’t think it does us any good to engage in this kind of activity, pointing at each other and casting blame here. My experience is that there is enough blame to go around for the subprime 

debacles at every level. And despite the fact that North Carolina 

has a fairly aggressive predatory lending statute, even that doesn’t 

stop unsavory lenders who are engaging in the business and trying 

to make a quick buck. And then there are the subprime lenders 

that I still, even after a series of hearings, haven’t been able to figure out who regulates. The ones that are subsidiaries of national 

banks at some level, but somehow have some kind of shield between them and the regulators, I haven’t quite figured that out yet. 

So I am not even going to try to engage in this debate with my 

colleague from North Carolina. I won’t even read the story that he 

read quite like he read it, but that is a subject for another day. 

What I would like to know is from my friend from the Fed, I was 

pretty abusive to the Fed the other day at the credit card hearing, 

but there is one suggestion here that OCC has made, Ms. Bair has 

made on behalf of the FDIC, that there needs to be joint rulemaking authority. OCC, FDIC is not currently authorized to do 

some things that the Fed and maybe the FTC are authorized to do. 

And they I think, for the first time, I have heard them affirmatively say Congress ought to expand that authority. 

What is your view and what is the Fed’s view on that, if you 

would? 

Mr. KROSZNER. Thank you. That is a very important question. 

One thing I think that is very important to realize is that the enforcement authority is there regardless of whether there is a particular rule. 

Mr. WATT. We are talking about joint rulemaking. You can only 

enforce rules that the Fed will make, and I can tell you that there 

were a lot of unhappy people in the room when we were talking 

about credit cards, when we were talking about the rules that you 

all have made or the lack of rules that you all have made. And 

49

there is some dissatisfaction with the lack of rules that you all 

have made. So I am going to get to the enforcement question if my 

time doesn’t run out, but I want to know, does the Fed have a position on what is being advocated on giving the OCC and the FDIC 

joint rulemaking authority within this area? 

Mr. KROSZNER. The Federal Reserve Board has not formally discussed this issue, so we have no formal position. 

Mr. WATT. Are you all planning to take up that issue? Would you 

encourage them to take it up at your next meeting and let us have 

your formal position on it? I think we finally got the formal position of the other regulators that are sitting beside you. They have 

kind of told us that off-the-record, but I think from my perspective, 

this is the first time I have heard it in a public hearing venue 

where they aggressively said, give us this joint rulemaking authority. So it would be nice to hear from you. 

Now, second, on the enforcement issue, I am wondering, Mr. Miller, if the Feds got the regulatory authority under Watters now to 

basically have absolute authority to make the rules, what implications does that have for enforcement of those rules that are made 

at the State level by attorneys general even though the rules that 

are being enforced are articulated at the Federal level? Do you 

have that authority and could I have the opposite view or the other 

view on that, maybe it is not the opposite view, on whether maybe 

something needs to be more aggressively done to make it clear that 

even when you all make the rules for Federal regulated institutions 

the States still have the authority to enforce those rules? 

Mr. MILLER. In some limited areas, but important areas like telemarketing rules, when the FTC does telemarketing rules the 

States have the authority to enforce that. And in a subprime area 

to give us the authority to enforce the Federal rules, I think, would 

make a lot of sense for all the reasons that we have mentioned, including the resources. I would offer one sort of caution about joint 

rules. I think that it is important to give the OCC rulemaking and 

the FDIC in deceptive and unfair practices, but if you give all the 

agencies jointly the rules, then— 

Mr. WATT. I probably misstated that. I am actually advocating 

for exactly what you are saying, but then having them get together 

and hopefully do it jointly, but giving them each one independent 

authority to do it. 

Mr. MILLER. That would be the way to do it, and have them consult, of course, and try to work together. But otherwise you could 

get into stalemate and lowest common denominator, and I don’t 

think you want to go there. 

Mr. WATT. Just to get the other side on the enforcement issue 

from Mr. Dugan and Ms. Bair. 

Mr. DUGAN. I think there is a statutory prohibition on unfair and 

deceptive practices that we are talking about, and we can take enforcement actions just under that without a Federal Reserve rule 

with respect to that. That is something that we kind of pioneered 

among all the agencies. 

Mr. WATT. I am only talking about State. 

Mr. DUGAN. On that count, when the Federal Reserve issues a 

rule under this that applies to lenders, it applies to all lenders, not 

just bank lenders. To the extent it applies to nonbank lenders you 

50

do need an enforcement mechanism. I believe that, I think this is 

right, that the State attorneys general already have that authority 

to enforce that rule if a rule is written. I believe that is correct. 

I am sorry, that is only with respect to HOEPA, which is the 

high cost loan thing. To the extent that is not provided here, I 

think it would be a useful thing to do. 

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

The CHAIRMAN. Would that have to be statutory? 

Mr. DUGAN. I think it would have to be statutory. 

The CHAIRMAN. To the extent that we have touched on things 

where you think we would need a statutory change to fix things up, 

follow up with us and let us know. 

The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. Much has been said. This 

has been a very, very informative and a very, very good hearing. 

But we have a serious problem of lack of faith and confidence of 

the financial consumer being protected. We have soaring foreclosure rates, we have subprime lending, predatory lending, and 

deceptive credit card practices. And nowhere is that more impacted 

than those at the lower end of the economic scheme, which makes 

it all the more serious. And so while some will argue that the State 

is in control, or it is the Federal, these poor people are out there 

just looking for help, they are looking for protection. So I think that 

we need to establish certain facts. I think one is, without question, 

State regulators are in need of clear and concise explanations of 

what their role in regulating should be and will be in the near future, and how State and Federal authorities can work together to 

ensure above all else that there is protection of the financial consumer. 

And with that as a premise, I think we need to ask some questions about the infrastructure at work here between the Federal 

and the State level. I would like to ask a series of questions and 

maybe get some quick answers because my time is short. The first 

thing is, in your opinion, and any one of you can answer these, or 

if two can chime in with quick answers, I would appreciate it greatly. First of all, should Federal banking law bar States from regulating the activities of State chartered subsidiaries of national 

banks? 

Mr. DUGAN. The answer from the OCC is yes, and the Supreme 

Court just agreed with that position. 

Mr. POLAKOFF. And the answer from the OTS is yes. 

Mr. SCOTT. What do you believe should be the appropriate scope 

of the National Banking Act? 

Mr. DUGAN. I think the scope should be to the activity, all activities in national banks, both from the safety and soundness and the 

consumer protection side of what they do. 

Mr. SCOTT. Do you believe that State regulation of national 

banks helps or hurts the consumer? 

Mr. DUGAN. I guess what I would say is that it is duplicative, 

and it would be a better use of resources to have States focus on 

the place where they can bring the most attention to things that 

aren’t otherwise done, and that we should be held accountable to 

do what we need to do at national banks. 

51

Mr. MILLER. I dissent of course. I think that the States and the 

Feds both doing it in this important area is the best of both worlds 

and is the kind of federalism and checks and balances that our 

Founding Fathers intended for this kind of situation. 

Mr. SCOTT. You know, I agree with you, Mr. Miller. I love history, and perhaps one of the most fascinating chapters of American 

history is the layout of our financial systems and the checks and 

balances that basically the architect of which was Alexander Hamilton, who made it very clear to us and has yet in my opinion to 

receive the proper credit that he rightfully deserves. But with that, 

if Hamilton were here, I think he would ask this question: How 

much deference should be given to a Federal agency’s determination that their regulations preempt State law? 

Mr. MILLER. I think that obviously there should be some deference, some considerable deference. I think the exception, though, 

would be with the OCC and the OTS who are competing with the 

States for bank charters, that when that competition continues, 

and certainly the temptation or the implication is that we are going 

to go easier on you than they will, so come with us, and then put 

a different hat on and say, okay, we preempt the States. That is 

not a good situation. So I think because of the existence of that situation, the deference to those two agencies should be diminished 

or indeed eliminated. 

Mr. POLAKOFF. If I could offer two thoughts for your consideration. The first is that preemptions are a rather fascinating discussion, and recently there have been three States that have actually 

preempted their city or county ordinances. So preemption exists at 

each level, sir. 

The second is that, at OTS, when we are asked for a local opinion on a preemption issue, we do share that legal opinion with 

CSBS and with the affected States. I am not suggesting that we 

are asking for an equal contribution, but I do want to share with 

you that we do share that before finalizing our opinion. 

Mr. SCOTT. Thank you very much. I have one other point here. 

I have heard from my consumer groups in the State of Georgia. 

The State of Georgia has been a leader in the Nation of foreclosure 

preemption. You name the abuse, you name a need for protection 

for financial consumers, and my State of Georgia, unfortunately, is 

the poster child for that. And many of the folks back home argue 

that Federal regulators cannot adequately police consumer protections that they have worked to promote. Is that a fair statement? 

Mr. DUGAN. I don’t think it is a fair statement with respect to 

national banks. But of course we cannot promote consumer protections with the places where predatory lending is most in evidence. 

And it is not in the national banking system, it is not in insured 

depositories, it is outside of them. And we don’t have any jurisdiction over that. That is absolutely true. 

Mr. SCOTT. And then I have constituents on the other side, national banks for example. They complain that they shouldn’t have 

to spend the money or time complying with both Federal regulations and the rules of the various States in which they conduct 

their business. 

Mr. DUGAN. Well, I think that is the essence of the dual banking 

system and that is the essence of the national banking system hisVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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torically, going back to the very strong advocate of a national bank 

charter, which was Alexander Hamilton, which is that a set of uniform rules that apply to nationally chartered banks is the system 

that Congress set up to be and the reason why it has gotten the 

kind of deference it has gotten in the courts over the years. That 

is the principle. 

Mr. SCOTT. Finally, Mr. Chairman, if I may, just to conclude, do 

you believe supervision over national banks and their subsidiaries 

is adequate to ensuring financial customers are being treated fairly? This is especially as a crisis in the subprime lending market, 

and foreclosure numbers across the country are not foreseen as letting up any time soon given the crisis. 

Mr. DUGAN. I do believe we have the resources. We are not perfect. The banks we supervise are not perfect. But I believe our 

record on those subprime loans that you are talking about is a 

strong one. 

Mr. SCOTT. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. And as usual, Mr. Chairman, you have provided great oracularity in helping us to better 

understand these issues. I believe that the perception exists in the 

minds of many consumers, a great number I might add, that they 

are being, to use a highly technical term, ‘‘ripped off’’ by some of 

these fees, fees that are noninterest income. They believe they are 

being ripped off. And Chairwoman Bair, on page 3 of your statement, starting in the second paragraph, a few lines down, you indicate that fee based overdraft protection programs typically charge 

customers at least $20 to $35 for each overdraft. Depending on the 

size of the overdraft and length of time for repayment, the effective 

annual percentage rate can exceed 1,000 percent. And then you go 

on to indicate in the next paragraph that last year insured institutions obtained 42.2 percent of their net operating revenue from 

noninterest income. At some point someone might conclude that 

this is rapacious and that it is invidious and that something more 

than a notice is appropriate. 

The truth is that a disclosure of an invidious practice, while it 

would disclose it, it won’t eliminate it, and it won’t obviate it. You 

just tell the person that if you do a certain thing you will have this 

practice to contend with. And it seems to me that at some point 

we have to try to end some of these rapacious and invidious practices. 

Let me just cite one or two maybe. The ranking member talked 

about the overdraft problem. You cash the check and you make a 

deposit at the same time you are cashing a check or writing and 

having the check honored. The deposit does not have the same rate 

of speed with reference to becoming a part of the system that the 

check that you have written seems to matriculate through the system. Credit cards, and perhaps I should ask this question before 

I make a statement of fact, so let me ask. If I charge something 

on a charge card and right immediately after charging decide that 

I don’t want it, and I return it and get a credit to my account, is 

it true or not true that the credit may take longer to reach my account than the charge? 

53

Mr. POLAKOFF. Congressman, I could offer from a personal perspective that while it may take longer, there is not an obligation 

to pay the amount of the expected credit. 

Mr. GREEN. I understand. But consumers are of the opinion that 

these things ought to move at about the same rate of speed. If you 

take my money on day one, perhaps I ought to get credit on day 

one, especially if I hand it back to you right after I have made the 

charge. I charge, I give it right back, the charge hits my account, 

but the credit shows up some days later. These kinds of practices 

are, I think, what is causing the consumer to think that some of 

us are not fulfilling our obligations to protect them. Universal defaults, double cycle billing, these things are repugnant to the consumer. And while I hope that we can cure them with notices, I am 

not sure that notices alone are sufficient. 

One more comment. Mr. Miller, I really admire your optimism. 

You talk about folks getting together and working it out. There are 

two great powers, many great powers, but there are two that I will 

speak of in the universe. One is ‘‘way power,’’ the ability to find a 

way. The other is willpower. Many times we can see the way, but 

we can’t find the will, and I am hopeful that the will will manifest 

itself, because if we do have the will, and I am convinced that this 

august body can find a way. 

So my question is this: Having said all of this, do you find any—

is there any practice that is rapacious, repugnant, and invidious to 

the extent that there ought to be some rule that would alter it? 

And I have cited a few. So why don’t we start with the Fed. 

Mr. KROSZNER. Certainly it is very important to protect consumers and to make them feel that they are being dealt with fairly 

and to make sure that they are dealt with fairly. I certainly agree 

with that. And one of the rules— 

Mr. GREEN. May I just intercede? And I would beg that you accept my interceding for just a moment. Could you kindly start out 

with yes or no? That way I will know what you really said, because 

sometimes when folks finish, I don’t know whether they have said 

yes or no. So could you start with yes or no and then give me all 

the explanation you would like within about a 10-second period of 

time? 

Mr. KROSZNER. Yes. Under HOEPA, we have undertaken a rule 

against loan flipping, which we thought was unfair and deceptive 

and inappropriate, and so we prohibited that practice. Tomorrow I 

will be holding a hearing where we are going to be discussing other 

potential practices that we would consider for a prohibition. 

Mr. GREEN. Mr. Dugan? 

Mr. DUGAN. Yes, there are. We have had to take action against 

some of these. You know, we don’t have the rulemaking authority. 

But just to give you one example, in the area of secured credit 

cards, we saw a practice where people were charging the amount 

of the security to the card, and as a result, there was nothing left 

for the consumer to borrow. And that would be the kind of practice 

that we certainly would think rises to the level of something that 

just shouldn’t happen. 

Ms. BAIR. Yes, exploding ARMs. These payment-shock mortgages 

that people have no realistic chance of repaying, are what the 

Subprime Mortgage Guidance is all about, getting rid of those. 

54

Also, I think regarding fee-based bounce protection, we are undergoing a careful review of that practice. That product is used 

chronically. It is extremely high-priced, and we want to do more 

fact-finding about how customers are using it. 

Ms. MAJORAS. Sure. The FTC, we have lots of cases alleging that 

facts were deceptive or that they were unfair in the financial services area. We had one recently in which the mortgage lenders were 

providing all sorts of terms to Spanish-speaking consumers in 

Spanish, but then changing the terms and giving them documents 

in English that they couldn’t read that had wholly different terms 

for the mortgages. So, yes, of course there are practices, and we attack them regularly. 

Mr. POLAKOFF. Congressman, absolutely. Our 2005 guidance on 

overdraft protection is a perfect example where it is unacceptable 

for a consumer to go to an ATM and ask for the available balance 

and have included in that the overdraft protection amount without 

any notice of the charge associated with accessing that. 

Mr. GREEN. My final question is, to what extent were these corrections published? 

Mr. DUGAN. Ours was published. 

Mr. KROSZNER. We issued a formal rule. 

Ms. BAIR. Yes. For subprime mortgages, again, we have imposed 

very public formal enforcement actions, and also the Subprime 

Mortgage Guidance obviously is public. 

Ms. MAJORAS. We filed a case in court and issued a press release 

and the like. 

Mr. GREEN. Thank you, Mr. Chairman. I yield back the balance 

of my time. 

Mr. CLEAVER. [presiding] The Chair now recognizes the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you. 

Comptroller, if the OCC determined, either by rule or interpretation, that realistic brokerage is a permissible activity for national 

banks, would you then view State real estate licensing laws as either obstructing, conditioning, impairing, or interfering with national banks’ ability to engage in such activity, and then go on to 

preempt those State licensing laws? 

Mr. DUGAN. Mr. Sherman, we have no such rule in our book to 

permit real estate brokerage and I have no intention of doing so 

as long as I am Comptroller. 

Mr. SHERMAN. That pretty much puts that question to rest. 

We need consumer protection. We need more of it than we have 

now. If we have the States do it, then a lot of people who live in 

States where they get inadequate consumer protection, a few will 

live in States where consumer protection is so intense that it interferes with business and raises costs, and the whole country will 

suffer, because we benefit from an efficient national economy. In 

fact, this union was formed perhaps more than for any other purpose to give us the benefits of living in the world’s first common 

market where companies could do business across State lines and 

now across the continent. 

We could act through the Federal agencies. I think you have 

some prodding here today, but there is more for you to do. Or finally, we could pass laws through this committee. They are subject 

55

to possible veto, and they are also subject to a congressional schedule that is now being drawn out on the Floor. I don’t know how 

good we would be at writing good consumer protection if we do it 

on 3 hours’ sleep, which appears like it is going to be the norm for 

a while here in Congress. 

My hope, therefore, is that the agencies represented here move 

forward with consumer protection, and there are two kinds of consumer protection. One is disclosure, where it provides good information, is always helpful. And the other is when you prohibit an 

activity, and the problem there is—I will give you an example. Let 

us say you have a group of subprime borrowers, and they can’t 

qualify for anything but the really tough subprime loan. If those 

loans tend to have a one-fifth default rate, you would say, my God, 

what kind of lender is making those loans? We have to stop that. 

But if you stop it, then you have stopped—for every foreclosure you 

have stopped, you have stopped four people from ever owning a 

home. 

So I don’t know what the default rate is. If you aim to tell those 

financial institutions that you regulate to aim for a 1 percent default rate, a lot of people aren’t going to be able to own homes. If 

you allow them to make such loans on such extreme circumstances 

that they have a 50 percent default rate, first they are going to go 

bankrupt, but second, we don’t want to see those kinds of loans 

made. 

As a disclosure, we have these credit cards out there, and the 

statement tells me what my annual percentage rate is, and it tells 

me what my minimum payment is. Should we by law or regulation 

require that it say, Mr. Sherman, if you choose to make the minimum payment, even if you don’t use this credit card for any future 

purchases, it will take you ‘‘X’’ years to pay us off, and in addition 

to paying us the ‘‘X’’ dollars that you owe, that we were going to 

add ‘‘Y’’ dollars of interest? 

Now, I realize people continue to use their credit cards, but 

would it be helpful to American consumers if we knew if I have 

this balance at the current interest rate, eliminating the effect of 

any teaser rates, this genuine effective rate, and I choose just to 

make those minimum payments, what am I in for both in terms 

of how long am I going to be making those payments, and the total 

amount of interest I am going to pay? I will let anybody respond 

to that. 

Mr. KROSZNER. Certainly our proposal that was discussed in the 

subcommittee of this committee a week ago tries to address exactly 

that issue. One of the things that we did is we talked to real consumers and asked them, what do you need to know? What do you 

want to know? What is going to be helpful to you? And then when 

we have those answers, tried to put that together in a way that 

was useful to them, and then asked them, well, is this helpful? Can 

you understand that? 

And so our proposal is getting at exactly these kinds of issues, 

and as part of our proposal, we have discussed disclosing precisely 

that type of information. We are now in a comment period, so we 

are very open to comments from consumers, and from other parties 

who might tell us how useful that is and how to improve that. 

56

Mr. SHERMAN. And I hope in the limited time that one of the 

things you put forward to consumers was a little table: If you make 

the minimum payments, this is how long it is going to take, this 

is the total amount you are going to pay, and this amount is going 

to be your interest, and this is your principal. 

I do have a quick question on home lending, and that is, we have 

seen home mortgages make the people who would never qualify to 

be able to pay the fully indexed adjusted amount. So it is somebody 

that says, oh, yes, you can qualify for a $500,000 mortgage because 

you can afford to make $2,000-a-month payments, and that is all 

you are going to have to make for the first 6 months or a year, at 

which point it goes to double that payment. Are the financial institutions that each of you regulate allowed to regard a borrower as 

qualified based upon the teaser rate and not based upon whether 

they qualify to make the fully indexed payments that will come 

about in—and I realize they only come about if the index doesn’t 

drop, but assuming the index stays the same. 

Mr. KROSZNER. This is precisely the issue that we have put out 

in our notice of proposed rulemaking on subprime mortgages. And 

we have gotten comments in, and the agencies are working together to finalize that rule. I think when we looked at the comments—or we are looking at the comments, and we certainly can’t 

prejudge where we are going to be, I believe there is a lot of support for— 

Mr. SHERMAN. Isn’t this a basic issue of bank solvency? If they 

go around loaning $500,000 to somebody who can only afford to 

make $2,000-a-month payments, and they say, well, that is a goodperforming loan because we got the $2,000 last month, do you 

guys—my time—do you guys call that a performing, qualified, good 

asset loan? 

Mr. KROSZNER. We have always taken safety and soundness very 

seriously and looked at the underwriting standards that are regulating institutions’ views. I think the key is making sure that all 

institutions use similar types of of high-quality underwriting standards. 

And just to address the previous question, it is precisely the 

table that you described that is in our proposal on credit cards. So 

I think we have tried to address both of the concerns. 

Mr. SHERMAN. Thank you for the credit card answer. Hopefully, 

for the record, you can provide a somewhat better answer on the 

home mortgage issue, and I will yield back. 

Mr. CLEAVER. Thank you. 

The Chair now recognizes the gentleman from Minnesota. 

Mr. ELLISON. Mr. Dugan, in the Watters case, basically, the Supreme Court construed the National Banking Act, and essentially, 

you know, the Act vested nationally chartered banks with certain 

powers and, ‘‘all such incidental powers as are necessary to carry 

out the business of banking.’’ But within the statute, doesn’t it also 

say that there are certain exceptions that are carved out under the 

Act, and if the Congress wants to regulate in those exceptions, that 

they certainly can, right? 

Mr. DUGAN. Congress can—we are a creature of Congress. You 

can change the National Bank Act in any way that you see fit. 

57

Mr. ELLISON. Yes. So I guess my question is this: In the area of—

I mean, I know what the decision says and all, but in the area of 

consumer protection, don’t you think having more eyes on the problem to protect consumers would augment the Fed’s work in terms 

of looking out for the consumer? 

Mr. DUGAN. As I said earlier in my testimony, I believe that if 

we had an unlimited number of resources, and an unlimited number of staff to have 2 sets of eyes, 3 sets of eyes, 10 sets of eyes, 

would obviously put more compliance on an institution, but we 

don’t. 

Mr. ELLISON. I know that, but let me just say this. If the States 

were allowed to help protect consumers as it relates to Federal 

banks or State-Chartered subsidiaries of Federal banks, that would 

mean you would have more eyes to protect consumers, isn’t that— 

Mr. DUGAN. To me what makes the most sense is these are very 

heavily regulated institutions that we regulate, and we believe we 

should be held accountable for that. That is what we spend our resources on. 

Mr. ELLISON. Right. 

Mr. DUGAN. To duplicate that effort to me doesn’t make any 

sense. 

Mr. ELLISON. Sure. Let me ask you the question this way then. 

You know, there are banking practices by national banks and State 

charters that are owned by Federal banks that have been called 

into question to date; isn’t that right? 

Mr. DUGAN. Certainly. 

Mr. ELLISON. Yes. And as a matter of fact, I think you said 

that—and maybe I got this wrong, but I thought you said that the 

Fed maybe was—I am not sure of the time period. I think it was 

last year—had like 200 formal actions and 200 informal actions. 

Did I get that right? 

Mr. DUGAN. I said the OCC. 

Mr. ELLISON. The OCC. 

Mr. DUGAN. 200 over a 5-year period. 

Mr. ELLISON. My mistake. I misidentified the Agency. But we are 

on the same page. That doesn’t seem like a lot to me, given so 

many of the things that I have been hearing about from my constituents. 

Mr. DUGAN. Well, all of what I said was—this is a very good example. There are many actions that we take that never arise to 

even an informal action, particularly in something that we call 

‘‘matters requiring attention,’’ and that is where we first alert bank 

management of a problem because we are supervising them and we 

are in there. We see it. We have a problem. You need to fix it. And 

there were, over the same period, about 1,500 matters requiring attention. 

Mr. ELLISON. This is over a 5-year period? 

Mr. DUGAN. A 5-year period on consumer-related issues only. 

Mr. ELLISON. Fifty States? 

Mr. DUGAN. It is the national banking system, yes. 

Mr. ELLISON. Plus the territories? 

Mr. DUGAN. Yes. 

Mr. ELLISON. I can even see how that is not that many. 

58

Anyway, let me ask Attorney General Miller about this. Do you 

feel that there is room for the States to regulate in the areas that 

were precluded by the Watters decision? I mean, do you feel like 

you could help the citizens of your State notwithstanding Watters? 

Mr. MILLER. We could help our citizens a lot. The States, the attorneys general, the banking superintendents, have a lot of expertise, have a lot of resources to contribute here. You know, it is particularly difficult when there is a State-chartered institution that 

is sheltered from our authority or a State law that we are prohibited from enforcing. It just doesn’t make any sense at all. 

Mr. ELLISON. For example, if a national bank or a State-chartered bank that is a national subsidiary had a credit card section, 

and they were doing things like, I don’t know, double-cycle billing, 

universal default, pay to pay, all the stuff we have been talking 

about, you can’t touch them; is that right? 

Mr. MILLER. That appears to be the case. And, you know, the 

credit card complaint is the poster complaint for this whole issue, 

and the whole—why this context that we have gotten into doesn’t 

make sense. And we will handle that individual complaint at the 

local level makes just so much sense. 

Mr. ELLISON. We live in a country that has negative savings; 

people are relying on credit cards to make it. They are at a competitive disadvantage with the banks, and yet their own State that 

they live in is without the power to do anything for them. 

Mr. MILLER. That is the dilemma, and that is why it doesn’t 

make sense. 

Mr. ELLISON. Let me ask you this question, Mr. Miller. The argument goes something like this: We don’t want the States to have 

their own—to be able to regulate in this area or to enforce in this 

area because it would drive up the cost of doing business because 

it would cost the national banks money, and, I guess, lawyers, to 

comply with these various States. So if this is essentially a costsaving measure, why don’t we see the costs of lending practices 

going down? You would think they would be lower. You would 

think we would have really cheap money in America. 

Do you have any thoughts on this subject? Could I at least get 

an answer, Mr. Chairman? I mean, you know, one could argue that 

the cost of money is pretty high because there is only—you know, 

when you look at some of the practices we have been talking about 

today. 

Mr. MILLER. I think you can draw that conclusion. 

The other thing is that, you know, we are a large, complex, efficient country. And, you know, today banks and institutions know 

how to, in a cost-effective way, efficiently comply with the whole set 

of rules and regulations. That is not really what we are talking 

about. We are really talking about the authority question, between 

States and Federal. We are not talking about cost here. 

Mr. ELLISON. Mr. Chairman, unanimous consent for 30 seconds? 

Mr. CLEAVER. Yes, please. 

Mr. ELLISON. Now let me ask you, if the national banks and the 

State subsidiaries that are owned by those national banks, if we 

really should—I mean, do you think we should be seeing cost savings as a result of the national scheme? And in your view, are we 

seeing the benefits of what should be a cheaper, more cost-effective 

59

system, or have we simply given certain banks sort of a free hand 

and fewer people to hold them accountable, and, therefore, they are 

in more of a monopoly position and can charge consumers higher 

prices because there is fewer people watching them; is that possible? 

Mr. MILLER. I suppose that is possible. I guess what I am saying 

is that obviously we are not seeing lower charges, and that is either because there really isn’t a cost saving by going to the national system, or if the advocates are right, there is additional profit. But I think it is really a question of power and authority and 

how we treat consumers. I have said, though, that, you know, I respect the Supreme Court decision. I have to live with it. The chairman said earlier, I think, correctly— 

Mr. ELLISON. I don’t. 

Mr. MILLER. Yes. I mean, you can change it. But the chairman 

said earlier, the prospects of changing aren’t so great. So, you 

know, what do we do now? 

And, you know, one of the things I talked about is that seven of 

us really work together, use our powers in the subprimary. We all 

have power; we have retained power there. And, you know, we just 

have this enormous opportunity to change that system, particularly 

with bad actors out, relatively good actors remaining, those with 

national—with reputational interests remaining, and having that 

incentive—some pain being felt including by the investors and the 

public knowing this is a problem. 

Going forward, if the seven of us really work together sincerely 

and practically, as the two of us at the end of the table have 

worked together for the last 5 years, we could have a much, much 

better subprime market. 

Mr. CLEAVER. Thank you. 

The Chair recognizes the gentleman from Ohio, who has worked 

on this issue in the Ohio Legislature, Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman. 

Ladies and gentlemen, I am fully aware this has been a long, 

long time, so I will be brief. However, I have made some observations, and I appreciate the seven of you being here, and so I will 

just ask my question in this way. 

One of the things that came out today to me is that there are 

some—we need to work on connecting the dots, be that State or 

Federal, how we can ask the FTC to step up, the Feds, Federal Reserve, and what we can do with the OCC? I think a lot of questions, Mr. Dugan, were directed to you for some obvious reasons. 

So without saying anything negative, I really thought that Attorney General Miller had some really good observations in his testimony and saying what things we need to do. 

My question would be—and I would like to go through the seven, 

and just give me a brief response—is what can we do on the congressional level to help you connect the dots to put this together 

so that we can make a better situation for the people in America 

and certainly for those in Ohio? If I could. 

Mr. CLEAVER. We are going to ask all of you to answer the question and give the Reader’s Digest version. 

Mr. KROSZNER. The Reader’s Digest version is you actually already have taken a very important first step in including the ConVerDate 0ct 09 2002 14:21 Oct 25, 2007 Jkt 037556 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\37556.TXT HFIN PsN: TERRIE
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ference of State Banks Supervisors in the FFIEC, the FFIEC Act. 

So they are participating, and it is making it easier for us to coordinate. 

Mr. WILSON. Thank you. 

Mr. DUGAN. We made four suggestions. And for Congress one 

would be to give joint rulemaking authority for unfair and deceptive practices. We also think that when regulators write rules that 

other regulators have to enforce or implement, that they should be 

consulted as part of that process. I think that gets very much to 

your connect the dots kind of thought. And then I think that Congress should require that these consumer protection regulations be 

updated on a regular basis, that they sometimes can go too long 

without being reviewed, and that causes problems for consumers 

over time. And then lastly—and this isn’t a congressional thing, 

but it was something that was raised earlier. I think we all need 

to get together to adopt a centralized way of handling consumer 

complaints so they don’t get confused about who is a national bank, 

who is a savings association, etc. 

Mr. WILSON. Thank you. 

Ms. BAIR. Yes. I think you have hit the nail on the head. As I 

said in my testimony, we need uniform, consistent, across-theboard protections. I have called again for national standards to address abuses in subprime mortgage lending at both bank and 

nonbank lenders. 

We would like the ability to write rules regarding unfair and deceptive practices. We need to expand the ability and the authority 

of State bank supervisors, as well as State attorneys general and 

others who are involved in regulating nonbank providers, to enforce 

the existing Federal protections. 

And finally, although financial education is not a panacea, I do 

think there is an opportunity for Congress to fund more financial 

education in public schools in their core curricula. In the longer 

term, I think that would help. 

Ms. MAJORAS. I think the crux of the matter is to decide what 

we want to do with the nonbank lenders who are the major participants in the subprime market. They are currently not regulated at 

the Federal level. So I think that is one decision that needs to be 

made. 

Second, we think that mortgage disclosures based on a study we 

have just released are inadequate, and we think we should look at 

that. 

And finally, if you are going to revise the FTC Act, it is one thing 

to give others more authority, and I don’t have an opinion on it. 

That is up to them what they need. But if you change our standard 

and our enabling statute, remember that the FTC enforces in broad 

swaths of the economy, not just this, and that would change it for 

everything. 

So I do hope we can work together with those who are making 

such proposals because, of course, we use that statute every day all 

day, and we know what it can do and what it can’t do. Thank you. 

Mr. WILSON. Thank you. 

Mr. POLAKOFF. Congressman, the Reader’s Digest version, three 

issues. The FFIEC, which is a very effective tool for all of us. There 

is a consumer forum, I think the Comptroller mentioned it earlier, 

61

headed by Treasury, and I believe virtually all of us at the table, 

including CSBS, and the FTC, and the banking regulators, sit at 

that forum and have very robust discussions, and I think that 

would—they are the two most critical aspects. 

The last is I would commend CSBS and ask them to remain vigilant. Right now only 70 percent of the banks have adopted the nontraditional mortgage guidance. CSBS is very active in getting other 

departments to enact that guidance, and I think that is critical. 

Mr. WILSON. Thank you. 

Mr. MILLER. One of the great roles of Congress is oversight. I 

think the most important thing you could do is hold the seven of 

us, our feet to the fire, make sure we fully and fairly and effectively use our powers, and make sure we work together to protect 

consumers. 

Mr. WILSON. Thank you. 

Mr. ANTONAKES. Well, presuming overturning the decision isn’t 

an option, we would speak for the FFIEC on an expanding role and 

have joint rulemaking through the FFIEC. We think we are just 

one of six parties, but we think we bring extensive consumer experience. 

Mr. WILSON. Thank you. And if I may, Mr. Chairman, in my 

opening statement, I said what I really felt our issues were, and 

the fact that it is not all bank-related, certainly that most is not. 

But this has been very helpful to me, and having sat through this 

just last year in Ohio, we have a lot of work to do, and we truly 

want to be able to bring all seven of you together in looking at how 

we can improve on the States and the Federal level. So I look forward to working with you in the future. 

Thank you, Mr. Chairman. 

Mr. CLEAVER. Let me express appreciation to all of you. Ms. Bair, 

you have spent quite a bit of time with us over the last few weeks, 

and we appreciate you coming and being responsive, as you always 

have been. 

The Congress was in session until about 2 a.m., so you have seen 

the hearty Members today, and we feel very strongly about this. I 

think the chairman expressed at the opening of the hearing that 

this was designed for us to learn, and so I think that, in fact, has 

happened. Some Members may want to ask additional questions, 

and if they do, they will do it in writing. And without objection, the 

hearing record will remain open for 30 days for members to submit 

any additional questions to the witnesses, and to place their responses in the record. 

If there are no requests to speak, this hearing is adjourned. 

[Whereupon, at 1:30 p.m., the hearing was adjourned.] 

(63)

A P P E N D I X

June 13, 2007

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