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EXAMINATION OF THE FEDERAL 

FINANCIAL REGULATORY SYSTEM 

AND OPPORTUNITIES FOR REFORM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

APRIL 6, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–16 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

BLAINE LUETKEMEYER, Missouri, Chairman 

KEITH J. ROTHFUS, Pennsylvania, Vice 

Chairman 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

MIA LOVE, Utah 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

MICHAEL E. CAPUANO, Massachusetts 

DENNY HECK, Washington 

GWEN MOORE, Wisconsin 

CHARLIE CRIST, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 6, 2017 ..................................................................................................... 1 

Appendix: 

April 6, 2017 ..................................................................................................... 43 

WITNESSES 

THURSDAY, APRIL 6, 2017 

Baer, Greg, President, the Clearing House Association ....................................... 4 

Gerety, Amias Moore, former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury ............................................................. 8 

Himpler, Bill, Executive Vice President, American Financial Services Association ........................................................................................................................ 9 

Michel, Norbert J., Senior Research Fellow, Financial Regulations, the Heritage Foundation ..................................................................................................... 6 

APPENDIX 

Prepared statements: 

Baer, Greg ......................................................................................................... 44 

Gerety, Amias Moore ........................................................................................ 66 

Himpler, Bill ..................................................................................................... 76 

Michel, Norbert J. ............................................................................................. 91 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement of the Conference of State Bank Supervisors ................ 104 

Written statement of the Consumer Mortgage Coalition .............................. 106 

Written statement of the Credit Union National Association ...................... 118 

Written statement of the National Association of Federally-Insured Credit 

Unions ............................................................................................................ 124 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 126 

(1) 

EXAMINATION OF THE FEDERAL 

FINANCIAL REGULATORY SYSTEM 

AND OPPORTUNITIES FOR REFORM 

Thursday, April 6, 2017 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:15 a.m., in room 

2128, Rayburn House Office Building, Hon. Blaine Luetkemeyer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Luetkemeyer, Rothfus, Royce, 

Lucas, Posey, Pittenger, Barr, Tipton, Williams, Trott, Loudermilk, 

Kustoff, Tenney; Clay, Maloney, Scott, and Green. 

Chairman LUETKEMEYER. The Subcommittee on Financial Institutions and Consumer Credit will come to order. Without objection, 

the Chair is authorized to declare a recess of the subcommittee at 

any time. 

Today’s hearing is entitled, ‘‘Examination of the Federal Financial Regulatory System and Opportunities for Reform.’’ 

Before we begin, I would like to thank the witnesses for appearing today. We appreciate your participation and look forward to a 

robust conversation. 

We do apologize that we have votes scheduled this morning 

sometime between 10 and 10:30, so we will recess for a period of 

time. If the witnesses want to step out and get some refreshments, 

grab breakfast, whatever, we will be back probably shortly thereafter, but we will have to stop for a little while and go vote. 

With that, I recognize myself for 5 minutes for an opening statement. 

Financial companies are standing on regulatory quicksand, having to constantly shift in an effort to stay afloat. There are 

unending attempts to decipher a regulator’s wants and needs, allowing little to no foundation on which to run a business. Ultimately, this world of ambiguous guidance, contradictory rules, and 

aggressive enforcement has led to confusion for financial companies 

seeking to comply with the Dodd-Frank Act and other Obama-era 

rules. But the greatest impact is on the customers of those financial companies, who in many cases have been left clamoring for access to financial services and paying more for the ones they are 

able to retain. 

2 

Take a look at the boxes sitting on the dais over here. These 

boxes represent the 20,000 to 30,000 pieces of paper that the average bank submits to the Federal Reserve for the annual CCAR review process. And, in fact, I was talking to one of the larger banks 

last night and I found out that tt can go up to 100,000 pages. That 

is 20,000 to 30,000 pages per bank per year just for CCAR. 

Despite the amount of information contained in these boxes, feedback from the Federal Reserve is limited, leaving some institutions 

to wonder who, if anyone, actually reads the material before 

issuing what has been described as an arbitrary qualitative decision. 

To have a picture of what overregulation looks like, allow me to 

provide you with a real-life example. The Mid America Bank & 

Trust was originally founded in 1920 and serves communities in 

my area of the world in central Missouri. For nearly 5 years, the 

Federal Reserve has blocked acquisition of the bank. Despite years 

of document production, there has been little communication between the Board of Governors and bank leadership, and there is no 

indication of when a decision might be made as to whether or not 

an acquisition will be approved. 

Mid America Bank & Trust has already lost several interested 

buyers, not because of questions surrounding the business, but, instead, because of the delays from the Fed. So for 5 years, the Federal Reserve has left this bank, its customers, and the communities 

it serves sitting in purgatory. This is all in spite of the fact that, 

as I understand it, the FDIC has given the institution and its products a clean bill of health. 

The Consumer Financial Protection Bureau (CFPB) hasn’t exactly been a poster child for reasonable rulemaking and enforcement either. Just yesterday, members of this committee heard from 

Director Cordray directly. The Director continues to state that the 

Bureau has never and would never regulate through enforcement. 

But, as I pointed out to the Director several years ago, failure to 

issue guidance while simultaneously subjecting institutions to enforcement actions is, in fact, regulation through enforcement. Now, 

because of the Bureau, people need a crystal ball to run their businesses. 

The CFPB rules and policies are a perfect example of, ‘‘Washington knows best.’’ The Federal Government knows what types of 

financial products should be offered and to whom. Rules and enforcement actions leave little to no room for innovation, despite the 

fact that American consumers and small businesses continue to 

struggle to get the financial services they need to pursue growth 

and economic freedom. Once again, the consumer suffers. Eventually, one must wonder what the Federal financial agencies really 

want: a stable economy; or just more control. 

Today’s hearing will serve to examine the state of the Federal financial regulatory system and to determine what can be done to 

increase transparency and build a strong, steady, financial system 

and U.S. economy. It is long past time to take the power out of 

Washington and return it to the American people. It is past time 

to demand a reasonable regulatory structure that fosters innovation and economic opportunity while simultaneously allowing for 

robust consumer protection. 

3 

We have a distinguished panel with us today. We look forward 

to your testimony and your ideas for reform. 

The Chair now recognizes the distinguished gentleman from 

Georgia, Mr. Scott, who is sitting in today for Ranking Member 

Clay. Mr. Scott is recognized for 5 minutes for an opening statement. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I really appreciate this. 

First, I want to thank Chairman Luetkemeyer for convening this 

very, very important hearing. Nothing could be more important 

right now than making sure we have a healthy financial system, 

and not just to have the financial system, but the most healthy financial system in the world. And I look forward to our distinguished witnesses and their testimony. 

But I don’t think it would be difficult to say that any member 

on our committee, Democrat or Republican, would disagree that 

our striking the right balance between consumer protection and 

regulatory burden is an important priority for this committee. We 

should certainly and constantly reexamine whether we are achieving this goal, and hopefully we can come to some conclusions today 

on that in hearing from our distinguished panel. 

But without any reexamination, we must always start looking at 

the lay of the land before us, the data we have in front of us. So 

why don’t we take a moment to do just that. 

First, we are, indeed, experiencing record month-over-month job 

growth. For the past 77 consecutive months, we have seen positive 

gains in employment, but I hasten to add, not enough gain, and in 

some ways we are backtracking when it comes to many of our 

urban centers. This is something we need to devote more attention 

to. 

Second, small business lending is trending upward. And since the 

financial crisis, we have seen nearly a 75 percent jump in business 

lending. 

And lastly, we are seeing our housing debt, an enormous part of 

our financial crisis, finally dipping back below the previous peak 

we saw in 2008. So things seem great, but we can make them better. But even with all these positive signs, we also are seeing some 

areas in the financial services world that still need improvement. 

For example, I previously expressed concerns that some regulations 

might hamstring the unbanked and the underbanked famililes’ 

ability to gain access to important financial services. 

Many of your committee, you have followed our progress with indirect auto lending. That is a prime example where some regulations certainly hamstring the unbanked family. We have 70 million 

unbanked and underbanked Americans in our financial system. 

But I really want to challenge both sides of the aisle, Democrats 

and Republicans, and our panelists, to begin this conversation by 

reexamining the whole regulatory system, not just Dodd-Frank. 

Dodd-Frank is an important part, but we have to look at and examine all sides of our regulatory system. 

I would welcome a constructive bipartisan conversation about 

Dodd-Frank, but let’s not forget all the ways that Dodd-Frank has 

improved the banking system and health of our economy, and how 

4 

it helped us to come out of the worst financial depression we have 

had since the 1930s. 

So throwing it out completely, as our distinguished Financial 

Services Committee Chairman, Mr. Hensarling, is proposing in his 

CHOICE Act, ignores these positive developments and is, therefore, 

a nonstarter for Democrats. But we Democrats equally look forward to working with our Republican colleagues to both strengthen 

our financial regulatory system while simultaneously also looking 

and making sure our regulations do not hamper our financial system. 

So, again, I want to thank Chairman Luetkemeyer for calling 

this hearing, and I am looking forward to hearing what the witnesses have to say. Thank you, Mr. Chairman. 

Chairman LUETKEMEYER. Thank you, Mr. Scott. 

Today, we welcome the testimony of Mr. Greg Baer, president, 

The Clearing House Association; Mr. Norbert J. Michel, senior research fellow for financial regulations at The Heritage Foundation; 

Mr. Amias Moore Gerety, former Acting Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury; and 

Mr. Bill Himpler, executive vice president of the American Financial Services Association. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. 

And without objection, each of your written statements will be 

made a part of the record. 

Just a quick tutorial on the lighting system: green means go; yellow means you have 1 minute to wrap up; and red means it is time 

to pass on the baton. 

So with that, Mr. Baer, you are recognized for 5 minutes. 

STATEMENT OF GREG BAER, PRESIDENT, THE CLEARING 

HOUSE ASSOCIATION 

Mr. BAER. Thank you, Chairman Luetkemeyer, Ranking Member 

Scott, and members of the subcommittee. 

I am pleased to appear before the subcommittee today to discuss 

regulatory process. Public input and a transparent process tend to 

produce better regulation, but the current trend is clearly away 

from both. My testimony will highlight areas where the administrative process has broken down, harming the quality of regulation 

and the ability of banks to serve their customers. 

The first area is the Federal Reserve CCAR stress test. To be 

clear, The Clearing House believes that stress testing is the smartest way to evaluate the resiliency of a bank, but the CCAR process 

contains significant procedural and substantive deficiencies. 

Under CCAR, banks use models to forecast losses and revenues 

under a severely adverse stress. These models are reviewed and approved by the Federal Reserve and are regularly back-tested to ensure accuracy. Nonetheless, in determining the bank’s stress law 

and, therefore, its effective capital requirement, the Federal Reserve discards these results and, instead, runs a variety of its own 

models. Neither the formulas for those models nor their combined 

results have ever been subject to notice and public comment or any 

type of peer review. This matters, because banks tend to shift lendVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
5 

ing away from sectors with higher implicit capital requirements 

under CCAR. 

For example, our research shows that the Federal Reserve’s 

model has imposed dramatically higher capital requirements on 

small business loans and residential mortgages. Given the stakes 

involved, it is remarkable how little we know not only about the 

contents of these models, but also about their performance. This too 

is a black box. 

We urge that the Federal Reserve continue to engage in modeling as part of CCAR, but only as a check on the bank’s own projections. If a given bank’s models are deemed insufficient, the Federal Reserve’s models can be offered as evidence in issuing a capital directive or an order to improve them. 

Although highly unlikely, if the Federal Reserve’s models ever 

prove more accurate over time for a given bank, they could be 

adopted instead. Notably, this approach would alleviate any concerns that making the Federal Reserve’s models public would cause 

banks to cluster into assets that those models favor, causing an 

unhealthy concentration of risk. Once generally nonbinding, the 

Federal Reserve’s models could benefit from peer review by the 

academic community in a way that bank models, which are necessarily proprietary, cannot. 

A secondary is the CAMELS rating system, which was adopted 

in 1979 when there was no capital regulation, no liquidity regulation, and no stress testing. In other words, at a time when bank 

regulation was necessarily subjective. Remarkably, it has not been 

materially updated since. Over that time, CAMELS ratings have 

become progressively more arbitrary and compliance-focused, likely 

because capital and liquidity regulation have supplanted them as 

the best indicators of financial condition. 

All of this is significant, because a low CAMELS rating, as I believe as the chairman alluded to, is now generally treated by regulators as a bar on bank growth. A wholesale review of the CAMELS 

system is required. In the interim, its ratings should be made more 

objective and modernized. For example, the bank that is well-capitalized under the 35-plus capital standards currently applicable to 

large banks should be presumed to be rated a one for capital. 

Next, living wills. Title I of Dodd-Frank requires large banks to 

construct a prepackaged bankruptcy plan and requires regulators 

to review the credibility of that plan. This requirement is important and altogether appropriate. The required review, however, has 

been translated into a shadow regulatory regime with real economic consequences. For example, the most recent living will process has effectively ring-fenced some major bank holding company 

subsidiaries through capital and liquidity prepositioning. The costs 

of doing so are significant, but have never been debated. 

Another area where process appears to have broken down is supervision of bank corporate governance. Examiner oversight is increasingly subjective and arbitrary, more akin to conservatorship 

than traditional examination, and in almost all cases without basis 

in law or regulation. In some cases, examiners attend Board of Directors or Board committee meetings, which both chills candid discussion and inevitably shifts the agenda away from corporate strategy and real economic risk and towards regulatory topics. 

6 

Even when examiners do not attend meetings, they insist on detailed minutes so as to judge the participants’ performance. Examiners are dictating reporting lines within management and to the 

Boards of Directors as well as the proper jurisdiction of committees 

and their agendas. 

Consequently, we now frequently hear from bank management 

that more than half of Board of Directors’ time is devoted to regulation and compliance as opposed to innovation, strategy risk, and 

other crucial topics. We actually did a catalog for our members of 

all the requirements by regulation or guidance that are imposed on 

bank Boards of Directors. It runs to 144 pages. 

In all these areas, more transparency and the ability of the public to evaluate the wisdom of these policies would, we believe, 

produce better outcomes. And I hope today’s hearing marks the beginning of a change in that direction. 

Thank you again for this opportunity to testify. 

[The prepared statement of Mr. Baer can be found on page 44 of 

the appendix.] 

Chairman LUETKEMEYER. We thank Mr. Baer for his testimony. 

Mr. Michel, you are recognized for 5 minutes. 

STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW, FINANCIAL REGULATIONS, THE HERITAGE FOUNDATION 

Mr. MICHEL. Chairman Luetkemeyer, Congressman Scott, and 

members of the subcommittee, thank you for the opportunity to testify today. The views that I express in this testimony are my own 

and they should not be construed as any official position of The 

Heritage Foundation. 

My testimony argues that there are countless opportunities to reform the Federal financial regulatory system. It is full of counterproductive overlapping authorities and duplicative efforts. There 

are three main issues that I would like to address in my oral testimony. 

First, the U.S. has too many financial regulators. Banks, just for 

instance, could be forced to comply with regulations from any combination of the following: the FDIC; the OCC; the Federal Reserve; 

the CFPB; the SEC; the CFTC; the FHA; and the FHFA; all on top 

of State regulators, just to name a few. 

While there is good reason to limit consolidation so that the U.S. 

does not have a single super financial regulator, the system is so 

cumbersome that some consolidation clearly makes sense, and the 

trick would be to consolidate while guarding against efforts to 

apply bank-like regulation outside of the banking industry. A reasonable approach would be to reorganize so that the U.S. has only 

one banking regulator and one capital markets regulator; and the 

obvious place to start would be merging the CFTC and the SEC. 

These agencies regulate markets that have increasingly blurred 

into one another over the years and that are closely tied through 

common participants and common purposes. 

Indeed, the U.S. is unusual for having separate regulators for 

these markets. On the banking side, Congress could shift the Federal Reserve’s regulatory and supervisory powers to either the OCC 

or the FDIC, and then merge those two agencies. The most imporVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
7 

tant part of that type of reorganization, I think, is to get the Fed 

out of the regulation business. The Fed should be conducting monetary policy, nothing else. 

Regrettably, Dodd-Frank took us in the opposite direction and 

expanded the Fed’s regulatory role, even though this move is 

counter to the trend found in most developed nations. More than 

a dozen developed countries, among them the U.K. and Sweden, 

have already removed regulatory functions from their own central 

banks. 

My second point would be that the U.S. did not need and does 

not need the Consumer Financial Protection Bureau. The CFPB is 

unaccountable to the public in any meaningful way and raises serious due process and separation-of-powers concerns. But most importantly, there was no shortage of consumer protection from 

fraudulent companies prior to the Dodd-Frank Act. 

Title X of Dodd-Frank created the CFPB, in part, by transferring 

enforcement authority for 22 specific consumer financial protection 

statutes to the new agency. These Federal statutes were administered by seven different Federal agencies and layered on top of 

State laws and local ordinances. So it is reasonable to say that 

some consolidation may have been warranted. 

Regardless, for decades this framework outlawed deceptive and 

unfair practices in financial products and services. And, in fact, if 

Congress eliminated the CFPB right now, Americans would be just 

as protected against unfair and deceptive fraudulent practices as 

they are with the CFPB. Financial firms do not need another Federal supervisor, and Americans do not need protection from themselves through the ill-defined protection regime against abusive 

practices. 

My final point is that given the political difficulty in making 

these types of changes, Congress should take a careful look at 

using the reorganization authority under 5 U.S. Code Section 901. 

Granting the President this authority, which has been used by 

Presidents in the past of both parties, is a flexible way to enable 

the Executive Branch to propose viable Government reorganization 

plans. 

These plans could be narrowly targeted to improve the efficiency 

and effectiveness of specific areas of financial market regulation, 

and they can be enacted by Congress more easily than if the Legislative Branch had to develop these plans from scratch. This route 

seems like a particularly good idea now, because the Trump Administration has started its formal review of financial regulation, 

and specifically expressed a desire to improve its effectiveness and 

efficiency. 

Thank you for your consideration, and I am happy to answer any 

questions that you may have. 

[The prepared statement of Mr. Michel can be found on page 91 

of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Michel, for your testimony. 

Mr. Gerety, you are now recognized for 5 minutes. 

8 

STATEMENT OF AMIAS MOORE GERETY, FORMER ACTING ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS, U.S. 

DEPARTMENT OF THE TREASURY 

Mr. GERETY. Thank you, Chairman Luetkemeyer, Ranking Member Scott, and members of the subcommittee, for the opportunity 

to be here today and to offer my perspective on the ongoing need 

for effective regulation and supervision of the financial system. 

It is important to start in the fall of 2008. A financial crisis of 

tremendous scale and severity left millions of Americans unemployed and resulted in trillions of dollars in lost wealth. Our financial system had evolved dramatically over decades and the regulatory approach had moved in the wrong direction. For instance, 

derivatives were statutorily protected from oversight, and subprime 

lending and securitizations grew with little to no oversight. 

When the crisis exposed these massive inadequacies, we were 

faced with the unpalatable choice of either intervening to prevent 

certain institutions from failing, or letting them fail, at the risk of 

imperiling the entire financial system and plunging the country 

into a second Great Depression. Americans nonetheless paid a high 

price and lost wealth, jobs, homes, delayed retirements, and college 

educations. 

We all learned that in the end, our financial system only works, 

and our market is only free, when there are clear rules and basic 

safeguards that prevent abuse, check excesses, and ensure that it 

is more profitable to play by the rules than to game the system. 

Dodd-Frank enacted a number of provisions that curb excessive 

risk-taking and hold financial firms accountable. However, the policymakers that drafted Dodd-Frank recognized that our financial 

system is dynamic and risks cannot be adequately addressed by a 

one-size-fits-all approach. 

Today, I would like to share with the committee two key points. 

First, the post-crisis Wall Street reforms have strengthened our financial system and supported our economic recovery. As financial 

reform was being implemented, the private sector added 15 million 

net new jobs, and household wealth grew by $30 trillion. At the 

same time, real GDP growth continued steadily since Dodd-Frank 

passed and remained positive, even as Europe weathered a sovereign debt crisis and the U.K. suffered a double-dip recession. 

Within the banking sector, recovery has been strong and widespread. The banking system is currently delivering on its promise 

to provide credit to the economy. In the past 2 years, community 

bank lending and earnings growth has outpaced the industry as a 

whole, with more than 10 percent income growth in 2016 and lending up nearly 9 percent year over year, both vaster than the industry. 

Second, Dodd-Frank provides a clear and coherent framework to 

deliver regulation that is appropriate to the risk of individual institutions and the system as a whole. Dodd-Frank uses clear exemptions, statutory requirements for tailoring, and market-based rules 

to help ensure that regulators are focused on a tiered and tailored 

approach. Regulators have responded to the statutory direction and 

used their discretion to consistently respond to legitimate concerns 

about regulatory burden and to create a tiered and tailored regime. 

9 

Let us start with a simple but central point. A $200 billion bank is not the same as a $2 trillion bank, nor is it the same as a $20 

billion bank, a $2 billion bank, or a $200 million bank. The U.S. 

banking system is far less concentrated than our peer developed 

nations, and this diversity is a strength. 

In order to deliver a regulatory system that is appropriate to the 

risk, we must be clear-eyed about the risks we face. This means acknowledging that tough standards must apply to the largest, most 

complex institutions, and that we must have the tools to handle 

their failure. It is only by having a clear plan and clear legal authority that we can avoid the awful choices that we faced in the 

fall of 2008 between the panic-inducing failure of Lehman Brothers 

and the bailout of AIG. Removing the authority to liquidate large, 

complex financial institutions the way we have done for banks of 

all sizes would be a return to the policy of too-big-to-fail. 

In closing, it is important to note that the goal of bank regulators 

must not be to satisfy the banking industry, but, rather, to satisfy 

the public interest. For that reason, the best test of how regulators 

are progressing through their work is whether financial markets 

are stable, loans are extended on clear and fair terms, and agencies 

demonstrate consistent openness to new approaches and an ability 

to flexibly apply their rules over time. 

Thank you, members of the subcommittee, and I look forward to 

observing my perspective in today’s hearing. 

[The prepared statement of Mr. Gerety can be found on page 66 

of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Gerety, for your testimony. 

Mr. Himpler, you have a very high bar to—every one of the previous folks who have testified have come in under 5 minutes. So 

we will test you here. 

Mr. HIMPLER. Mr. Chairman, I noted that as well, and I fully expect to use all 5 minutes. 

Chairman LUETKEMEYER. You are recognized for your time plus 

theirs, I guess, huh? 

STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, 

AMERICAN FINANCIAL SERVICES ASSOCIATION 

Mr. HIMPLER. I like the sound of that. 

Good morning, Mr. Chairman, Ranking Member Scott, and members of the subcommittee. I am the executive vice president of the 

American Financial Services Association (AFSA). 

AFSA was founded in 1916 as the only national trade association 

solely focused on consumer credit issues. As such, let me state at 

the outset that we stand shoulder to shoulder with members of this 

subcommittee on both sides of the aisle as well as with the CFPB 

in wanting to see bad actors eliminated from the marketplace. 

However, it is equally important to ensure access to affordable 

credit for all Americans. 

As the Federal Reserve notes, consumer credit balances, exclusive of mortgage, stand at roughly $2.5 trillion. Banks account for 

about 60 percent of this credit, but finance companies account for 

almost one-third. Yet, banks and finance companies represent very 

different business models. 

10 

Federal regulators have a long history of effectively supervising 

banks. Finance companies, though, are creatures of State law and 

have been supervised and examined at the State level for close to 

100 years. Trying to supervise banks and finance companies as if 

they are the same could be disastrous for consumers and the economy as a whole. 

To that point, then-Representative Barney Frank, one of the authors of the Dodd-Frank Act, wrote to the CFPB in 2011, stating 

that: ‘‘I urge staff to pay close attention to the differences in products offered by nonbank institutions and to be mindful of 

Congress’s intent in financial reform that State consumer protection laws be preserved to the extent possible.’’ 

He went on: ‘‘For example, there are key differences in product 

characteristics between payday, car title, and other high-cost secured loans and more traditional closed-end unsecured lending and 

related products, and the products are often regulated differently 

in various States.’’ 

He concluded: ‘‘To the extent that State regulation has worked 

to protect consumers with regard to financial products offered by 

nonbank institutions, I encourage the Bureau to coordinate and 

work with States to preserve these protections.’’ 

AFSA believes in the CFPB’s mission to help consumer finance 

markets work effectively by putting in place clear rules that are 

consistently enforced. But all too often, it feels as if the CFPB is 

following a ‘‘gotcha’’ mentality that is more interested in grabbing 

flashy headlines and punishing the industry. Furthermore, despite 

the CFPB’s vast authority, it often manages to exceed the limits 

placed on it by Congress. 

Here are a few examples of what I mean. The CFPB issued a 

short bulletin that attempts to hold indirect lenders liable for discrimination resulting from dealer compensation policies. This is 

contrary to Dodd-Frank, which prohibits the CFPB from regulating 

dealers. It is also an example of guidance designed to function as 

rulemaking without due process of law. 

In this instance, the CFPB has pursued disparate impact cases 

against financial services companies without a valid legal basis, 

employing a proxy methodology it knows to be flawed, refused to 

consider nondiscriminatory factors that could explain alleged pricing disparities, and employed a remuneration process that was designed to achieve a political end. As a solution, Congress should 

work quickly to preclude the CFPB explicitly from using disparate 

impact theory under ECOA. 

The second example of the CFPB’s overreach can be found in its 

attempt to impose interest rate caps, which Dodd-Frank, again, 

prohibits the CFPB from doing. But that is exactly what the Bureau is attempting to do with its small dollar loan rule. The proposed small dollar rule imposes substantial and burdensome underwriting requirements on loans with a total cost of credit that exceeds 36 percent. Because these additional requirements are so 

costly, many lenders will choose not to make such loans to needy 

consumers. Keep in mind, these are institutions that had played no 

part in the financial crisis in 2008. 

This proposed rule imposes a de facto usury limit by making it 

uneconomical for many lenders to comply with these new requireVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
11 

ments. In fact, in a hearing last year before this committee, the 

members of the committee pressed Acting Deputy Director David 

Silberman to specify what deficiencies in State law the CFPB was 

trying to address; and the acting Deputy Director could not answer 

the Members of this body. We ask Congress to encourage the CFPB 

to go back to the drawing Board on this rule. 

My third example is the CFPB’s use of regulation by enforcement. Despite the CFPB’s authority to write rules, the CFPB 

chooses to govern industry by enforcement orders. But these orders 

are not consistent. For example, in the area of dealer compensation 

that I mentioned earlier, does the CFPB expect vehicle finance 

companies to comply with the enforcement order against American 

Honda Finance Company or the enforcement order against Ally? 

These are two very different orders, and it is unclear. 

The CFPB also tries to utilize the unfair prong in UDAAP regulation. For example, debt collection practices employed by EZCORP 

were consistent with both Federal and State law, and the CFPB 

did not like them so they labeled them as unfair. The CFPB’s 

UDAAP authority should be removed and returned to the Federal 

Trade Commission. 

I see I have exceeded my time. I look forward to the questions 

of the members of this subcommittee. 

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

76 of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Himpler, for your testimony. 

With that, the Chair recognizes himself for 5 minutes for questions. 

And, Mr. Baer, I want to begin with you. We brought a visual 

this morning with regards to the CCAR process that represents 

20,000 to 30,000 pages. That is the norm for midsize regional 

banks to comply with stress tests. I was discussing last night with 

one of the larger banks, it can go up to 100,000 pages for some of 

those folks. And they get back a three- or four-page letter saying 

that you don’t comply and you didn’t hit the model that we had intended for you to do, without any guidance as to how to hit that 

model. 

Would you like to elaborate a little bit on this? I know you talked 

a little bit about it in your testimony, about how—and quite frankly, it would appear to me, from having an examiner background, 

that examiners are in these banks on a full-time basis, the larger 

banks, and they see this information every day, and yet for the 

banks to have to compile this in these voluminous reports seems 

superfluous to me. Would you like to comment? 

Mr. BAER. Sure. Mr. Chairman, yes, if you think about CCAR, 

there are actually really two components: one is the quantitative 

assessment that I referenced in my oral remarks; and the other is 

the qualitative, which has uniquely, of all the types of regulations 

supervised by the regulators, become an annual binary public, lifeor-death decision that you pass or you fail and has not had a lot 

of standards around it such that banks can know whether they are 

going to pass or fail. 

To the Federal Reserve’s credit, I think they have eliminated 

that or proposed to eliminate that for almost all banks. We obviVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
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ously urge them to go ahead do that for all of them. There is no 

reason that capital planning cannot be evaluated through the traditional examination process that you are aware of, just as any other 

credit underwriting or cybersecurity. So we think that should be 

subject to the same process. 

With respect to the quantitative test, yes, clearly, there is an extraordinary amount of data that is submitted. The number of people at the banks working on this ranges from the dozens to the 

hundreds, full-time year round. I think there are clearly ways that 

process could be streamlined and the burdens of that reduced. 

That said, I do think that one of the great frustrations of the 

banks is that they go to all this trouble. They do all this work. 

They produce projections of losses and revenue under the stress, 

but then those results are discarded and the Federal Reserve runs 

its own models, which they do not see, and actually, I think, they 

don’t have confidence that those models are better than their own 

with respect to a particular bank. 

So I think the burdens of this process would be more tolerable 

and more sensible to the extent the results actually mattered and 

weren’t discarded. 

Chairman LUETKEMEYER. Thank you. 

During your testimony, you also made the comment that a lot of 

examiners attend regular meetings, and sitting there has a chilling 

effect. And I assume they don’t participate in the meeting unless 

called upon, but it would seem to me that would be an example of 

them trying to micromanage the bank, which they are not supposed 

to be in the middle of this as a regulator. They are supposed to be 

on the outside trying to enforce the law. 

If the bank wants to make decisions based on a business model, 

they should be allowed to do that and not have an examiner sitting 

there to try and have a chilling effect on their ability to actually 

perform what they need to do in order to be able to fulfill their mission. 

Mr. Himpler, given the number of comments here with regard to 

the CFPB, the rulemaking process, some of it they do without due 

process when they enforce things and regulation by enforcement, 

would you like to elaborate on the regulation by enforcement a little bit? I know, to me, this is really problematic from the standpoint that this is an agency that promulgates a rule, and then they 

go out and enforce the rule through fines and what have you, and 

basically, there is no—to me, that is a law. And there is only one 

group around here that can make law and that is us, and yet that 

is what they are doing. 

Would you like to elaborate on that? 

Mr. HIMPLER. I would. First, I would like to see things return to 

regular order, where Congress is making law, as opposed to 

unelected folks in agencies such as the CFPB. I think it does go 

back to the founding author of the CFPB, Senator Warren, who expressed at the outset in creating this that rules are like fence posts 

on the prairie; they are useless. Lawyers try and get around them. 

So there is a new sheriff in town, and we have to crack a few 

heads. 

That mentality has continued to reverberate through the Bureau. 

We have had civil investigative demands (CIDs) that have been 

13 

hanging out over companies for years without any feedback from 

the Bureau as to whether or not somebody has been cleared. 

We have had different orders with respect to the vehicle finance 

industry, in terms of which order a company should follow. And I 

guess most importantly, the Bureau put out a blog last year saying 

that they had backed off from pursuing this type of activity, but 

that activity still continues in examinations. 

Companies come forward with plans to actually try and work 

with the CFPB and get very little credit for it. Discover was one 

of the first enforcement actions that the CFPB took. They self-reported and got no credit for it. You would have thought the CFPB 

had identified that and rooted out a bad actor. 

Chairman LUETKEMEYER. Thank you. My time has expired. 

With that, we recognize the ranking member, Mr. Scott, for 5 

minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Let me continue that line of questioning, if I may, with you, Mr. 

Himpler. I listened very intently to your comments about the 

CFPB, but here’s the rub: We need to protect our consumers from 

the bad actors out there. 

And I think that my situation is somewhat similar to yours, because, as you recall, during the auto indirect lending fight, I more 

or less tried to lead the way in examining. In my own estimation, 

there were errors made, but they were errors made basically in the 

methodology that was applied to determine who was being discriminated against, not the function of the CFPB going after and 

trying to do its major function of protecting the consumer. 

And, as I mentioned in my testimony yesterday, ours is a very 

complex, complicated financial system. Again, we have 70 million 

unbanked/underbanked citizens out there, the most vulnerable 

being many who are low-income African Americans and others. 

So the question I want to ask you is—I am not sure you agree— 

don’t we need to make sure that all of our consumers, especially 

the most vulnerable, deserve financial protection? 

Mr. HIMPLER. Thank you, Mr. Scott. I couldn’t agree with you 

more. Everyone needs to be protected. But in the area of vehicle 

finance in particular, it is a very fragmented market. You have 

thousands of players who are competing for market share. But the 

lion’s share of the folks who are being regulated are finance companies, that are creatures of State law, that are putting their own 

capital at risk. It is a different business model than banks, that are 

putting deposits on the line for lending activity. 

I think that what we are looking for, and Mr. Gerety got to it 

a little bit in terms of the bank sizes that he mentioned, but where 

he stopped was a $200 million bank. What I am talking about is 

institutions that are below $200 million, in terms of activity. They 

are providing a meaningful service and just want clear rules for the 

road. It is kind of like a sheriff pulling over somebody where there 

is no speed limit posted. 

Mr. SCOTT. All right. Mr. Himpler, thank you very much for that. 

I want to go to you, Mr. Michel, because you outline somewhat 

thorough your recommendations, which were basically mergers, 

and you recommend merging, for example, the CFTC and the SEC. 

Do you not feel that kind of merger with two distinct entities would 

14 

bring more confusion and less order to our financial system, given 

the fact of their jurisdictions? The CFTC strictly deals with this 

area, the commodities futures trading, and more or less handles 

this growing derivatives market, swaps, all of that business, crossborder, and dealing with a very growing and complex $800 trillion 

piece of the world’s economy. So I don’t see how that fits together. 

Mr. MICHEL. I don’t think there would be any more confusion 

than there is confusion between what is a swap and a securitiesbased swap. I think that an artificial distinction was made in 

Dodd-Frank Title VII. And those markets are—although commodities are not the same as securities or derivatives necessarily, they 

are essentially all financial instruments that are I would call cousins. And the distinction that we have been making legally over 

time has grown to the point where it is almost pointless. 

Whether you are trading futures, whether you are trading derivatives, whether you are trading indexes, whether you are trading stocks, you are trading some sort of financial asset in the market and these things are very similar. 

Mr. SCOTT. The other point you mentioned, which I have some 

experience with, was the overlap and the confusion that takes place 

with our Federal regulators and our State regulators. And I spent 

28 years in the Georgia Legislature, 14 now in Congress, and I can 

speak to that. 

One case in mind was we had to deal with Fleet Finance and 

their predatory lending. They were allowed to come into the State 

and use our usury laws for paying down second mortgages. But the 

point is that it was because we were able to get a better working 

relationship between what the Feds were doing and what the State 

was doing, and this was a new frontier we had to create. 

But I see my time is up. Thank you, sir. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the vice chairman of the subcommittee, the 

gentleman from Pennsylvania, Mr. Rothfus, who is recognized for 

5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Mr. Baer, I would like to ask you a couple of questions. I have 

concerns about whether the current regulatory framework properly 

recognizes the various business models and risk profiles of banking 

organizations. Custody banks, for example, are very different from 

investment banks. The one-size-fits-all regulations are pushing 

banks to a one-size-fits-all business model and balance sheet. This 

homogeneity cannot be good for the financial system or financial 

stability. 

Do you have any opinion as to whether more tailoring is needed 

to preserve this diversity in business models? 

Mr. BAER. Thank you, Congressman. I think custody banks are 

a terrific example of that, in the sense that, clearly, their primary 

purpose is to safe-keep assets, but that also involves holding very 

large amounts of deposits. If you think about how the regulations 

affect a custody bank, the liquidity rules assume that those deposits, counterfactually, will all run in a crisis. 

Now, certainly, deposits are at risk of a run in a crisis, but I 

think we saw in the last crisis that custody banks did not see large 

runs. But even if you assume that that is a fair assumption and 

15 

that lots of those deposits will run and, therefore, that you need to 

hold a Treasury security against that deposit to be able to fund 

that run, you then for a custody bank also have the leverage ratio, 

which requires you to hold the same amount of capital against that 

Treasury security as you would against a junk bond or an illiquid 

loan. 

So they are put in a very difficult position, even though they are 

in an extremely low-risk business, of having to hold very large 

amounts of liquidity and capital on the liquidity. The same liquidity that is being held for a safety and soundness purpose, they are 

holding 6 percent capital against that, and that really doesn’t make 

a lot of sense. 

Mr. ROTHFUS. I plan on introducing legislation shortly that 

would exclude custody bank funds held at a central bank from supplementary leverage ratio calculations. How would this measure 

impact the viability of custody banks? 

Mr. BAER. I think it would assist not only custody banks, but to 

potentially applying that to dealers, it would assist them in meeting liquidity requirements. It is interesting—actually, I just came 

back from Europe—that the Bank of England recently took just 

that step and deducted deposits on reserve at the central bank 

from the leverage ratio in the United Kingdom. So clearly, it is 

something they have thought about and makes a lot of sense. 

One of the ideas behind the leverage ratio is that in a crisis you 

don’t really know what any asset is going to be worth, and you go 

to that sort of ratio because you may have the risk weights wrong. 

But in no crisis has anybody ever gotten the value of cash wrong, 

or specifically cash on reserve at the Federal Reserve. 

Mr. ROTHFUS. Dr. Michel, in your testimony, you wrote, ‘‘Leading 

up to 2008, financial firms funded too much unsustainable activity, 

largely because of the rules and regulations they faced, including 

the widespread expectation that Federal rules had guaranteed safety and soundness and that the Federal Government would provide 

assistance to mitigate losses.’’ I find this interesting, because one 

of the main narratives that we hear from the left is that the financial crisis was caused by banks that got out of control because of 

deregulation. 

Can you elaborate a bit more on which rules and regulations had 

the greatest impact in the lead-up to the crisis? 

Mr. MICHEL. Sure. And first of all, I will reiterate that I think 

it is absolutely insane for people to say that there was deregulation 

and that there was no oversight of this activity. All of this activity 

took place under the direct supervision of the Federal Reserve, the 

FDIC, and the OCC, at the very least. 

I think if I were to sort of prioritize the rules that were screwed 

up and that contributed to this, I would start with capital requirements and then bankruptcy preferences. On the capital requirement side, you had a risk weight system that incentivized banks 

to load up on mortgage-backed securities, to not hold mortgages, 

and to lower their capital charge for just doing the mortgagebacked securities, which were guaranteed, everybody knew, by the 

Federal Government, for the most part. 

On the other side of that, with the bankruptcy laws, a lot of the 

funding for these vehicles, through swaps and repos, were given exVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
16 

emptions from the bankruptcy safe harbors. So all the counterparties in those markets had very little reason to care how much of 

it they were writing and who they were writing it with, because 

they knew that they would be in the front of the line and be the 

first ones out the door with their money. 

Those would be my two main categories of those rules. 

Mr. ROTHFUS. Are there similar rules, regulations, and practices 

today that are setting the stage for financial instability down the 

road? 

Mr. MICHEL. Well, we have changed the risk-weighting a little 

bit, but we haven’t really fixed it, in the sense that we are still depending on this crazy idea that the Federal regulators or any group 

of any particular persons can get together and know exactly what 

those risks are going to be, what those financial assets are going 

to be worth going forward. 

And that is just not true. We have proven that already. And we 

have not fixed that part. And we are going through all the CCAR 

exercises as if we know exactly how a bank is going to operate in 

a crisis and exactly what is going to happen in a crisis and exactly 

how much money is going to be there to protect it. History shows 

that that is not a good idea. That is what we have been doing, 

though. 

Mr. ROTHFUS. Thank you. I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

I now recognize the ranking member of the subcommittee, Mr. 

Clay from Missouri, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

And I would like to ask unanimous consent to place in the record 

a letter I have here from Public Citizen on the importance of DoddFrank and financial regulation. 

Chairman LUETKEMEYER. Without objection, it is so ordered. 

Mr. CLAY. Thank you. 

Thank you, Mr. Chairman. 

Earlier this year, the President issued an executive order directing the Treasury to consult with all members of the Financial Stability Oversight Council and produce a report on whether the current financial regulatory system meets several high-level noncontroversial principles. If the Administration produces a report 

that resembles Chairman Hensarling’s radical rollback of DoddFrank, known as the wrong CHOICE Act, it would be very controversial and poorly received. 

Mr. Gerety, as a former Treasury official, what would your advice to the Treasury be as it conducts its review? Should they be 

focused on trying to dismantle the CFPB, repeal the Orderly Liquidation Authority of the Dodd-Frank rollbacks? 

Mr. GERETY. Thank you, Ranking Member Clay. 

I am glad to offer my perspective. I will note, just as a factual 

matter, the consistent review and regular engagement with agencies on how rules are working is a standard practice of the Treasury Department. We conducted such an engagement in the spring 

of 2009, and we regularly engaged, at the behest of the President 

and the Treasury Secretary, over the years in lots of discussions. 

So I think that the fact of doing a review, as the Chair of this 

subcommittee said earlier, is a natural part of the responsibility of 

17 

any Federal regulator or policymaker in Congress or in the administrative branch. 

In terms of the recommendations, I think the central question is 

how we articulate the regulations, the statutes, and the guidance 

in ways that are appropriate to the risk, and how do we build on 

the progress we have made, to make our financial system stronger, 

to make our financial system more fair, and also make it more effective. 

In particular, I would highlight areas like small business lending, where we have spent a lot of effort to try and promote small 

business lending among community banks. We did investments in 

community banks to help them support small business lending. 

And I think also along the theme of simplification, especially for 

the smallest banks in our system. 

Mr. CLAY. Thank you for that response. 

Mr. Gerety, it seems that despite evidence to the contrary, Republicans and industry lobbyists think that the financial protection 

for consumers and community banks in Dodd-Frank are harming 

them and the broader economy. However, I know that Democrats 

work with representatives of trade associations, such as the Independent Community Bankers of America, to craft wholesale exemptions for small financial institutions. 

For example, community banks and credit unions under $10 billion are not supervised nor subject to enforcement actions brought 

by the CFPB. And while they are subject to consumer protection 

rules, they were subject to these rules even before Dodd-Frank was 

passed. 

Indeed, all of CFPB’s $12 billion worth of enforcement actions, 

providing relief for 29 million consumers, have been against large 

banks and nonbanks, direct competition to the community banks 

and credit unions. 

Mr. Gerety, would you please comment on how the Dodd-Frank 

Act promoted community banking and shifted the regulatory focus 

to more risky large banks and nonbanks that can compete with 

small banks and credit unions? 

Mr. GERETY. Thank you. I think this is a really important point 

about the structure of Dodd-Frank. It is not just that there are affirmative exemptions, such as the one that you mentioned with the 

CFPB supervision; but also, there is an affirmative targeting of 

making sure that the toughest rules apply to the largest and most 

complex institutions. 

This happens in specific directions. For instance, under Title I of 

Dodd-Frank, there are specific enhanced prudential standards that 

only apply to the largest banks in the system. And those standards 

are further tailored by statutory mandate. So that the so-called GSIBs, the globally systemic, the money center banks with trillions 

of dollars on their balance sheet, are subject to different rules. It 

is also true that with issues like derivatives or securitization, 

which community banks and smaller regional banks simply do not 

participate in, the weight of those rules do not fall there. 

So, in terms of both its affirmative exemptions and its direction 

in terms of creating tough standards, Dodd-Frank explicitly and 

implicitly carves out community banks. I think there is still work 

to do to make sure that the rules—already, the banking agencies 

18 

have talked about simplifying the Basel III rules, making sure that 

those issues are easier for community banks to comply with. And 

I think that is a very fruitful direction and should be taken further. 

Mr. CLAY. Thank you for your response. 

My time is up. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Florida, Mr. Posey, is recognized for 5 minutes. 

Just a minute, Mr. Posey—votes have been called, so we are 

going to try and get in hopefully two more people, two more questioners here. 

So go ahead, Mr. Posey. Thank you. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Himpler, yesterday, Director Cordray appeared before the 

committee. And, as you know, the Consumer Financial Protection 

Bureau has a mission, and let me just state it precisely here: ‘‘To 

make consumer financial markets work for consumers, arm people 

with information, steps, and tools they need to make smart financial decisions.’’ 

I am interested to hear your opinion about whether or not you 

believe the CFPB is, in fact, adhering to their mission? 

Mr. HIMPLER. Thank you, Mr. Posey. 

And I guess my first response would be to kind of follow on the 

discussion that Mr. Gerety and Mr. Clay had just a second ago 

about independent community banks. 

That exemption is afforded to the community banks because of 

the high burden of having a Federal regulator adding to the regulations that you are already facing at the State level. Representing 

finance companies that are providing both small dollar credit as 

well as vehicle finance, we would love to work with Mr. Clay and 

the members of this subcommittee and of the full Financial Services Committee to get that exemption so that there is a level playing field for all financial institutions. 

We are willing to play by the same rules as everybody else, but 

what we are talking about is a difference between profitability, sustainability, and the ability to provide affordable credit or being out 

of business and having to shutter your doors. 

One example of where I think the CFPB has missed its mission 

is in the area of its consumer complaint database. I don’t think it 

really provides any information to consumers. Information that is 

gathered in that database, namely through a narrative field that 

customers are able to utilize, is not verified; and, most importantly, 

consumer information is not safeguarded. 

So, from my perspective, that is something that really needs to 

be addressed, in terms of meeting its mission, in terms of providing 

helpful information and protecting the consumer. 

Mr. POSEY. Again, offhand, can you think of any other steps you 

think should be taken to get back on course with the mission? 

Mr. HIMPLER. I would say also, in the area of enforcement, our 

concern is that the Bureau is regulating by enforcement. It is not 

providing clear guidelines in the vehicle finance space, in terms of 

utilizing not so much its abusive authority under unfair, deceptive, 

and abusive practices, but the unfair prong. That has really never 

19 

been used by regulators before. The reason it hasn’t been used is 

it is very hard to create any sort of objective standard. 

Like I said at the outset in answering your question, our members are willing to play by the same rules as everybody else, and 

we do. What we don’t think is in the best interests of the consumer 

is creating a ‘‘gotcha’’ environment where you don’t know what the 

rules of the road are. 

Mr. POSEY. Yes. I think that the CFPB indicated at one time 

they might be required or requested to issue something like 50,000 

opinions on interpretations of their rules. And they kind of committed to doing at least one to three a year, and to date they 

haven’t done any. Do you see that as problematic? 

Mr. HIMPLER. Again, in the vehicle finance space, they issued a 

four-page bulletin to provide guidance to lenders in the vehicle finance space. They have at least three public enforcements. They 

have other private enforcements. None of them look like each 

other. And the Director has said it is regulatory malpractice for financial services players not to follow these orders. Which one do 

we follow? 

Mr. POSEY. We get statistics that we are now losing something 

like a community bank a day or something. It is just unbelievable. 

Do you think this is a root cause of that? 

Mr. HIMPLER. I do think that is a root cause. We don’t represent 

the community banks, but they are great players. Everybody has 

a part to play in this. But another proposed rule by the CFPB is 

its arbitration rule. The Director’s own economics team said that 

arbitration is better than litigation for the consumer, in terms of 

time, convenience, and monetary awards. And yet, his own statement when he rolled out this rule totally contradicted that. 

I will stand here and tell you today that a significant number of 

financial players that are small and community-based, if that rule 

goes into effect, those businesses will go out of business, because 

they can’t afford the risk associated with a class action lawsuit. 

Mr. POSEY. Thank you, sir. 

Thank you, Mr. Chairman. 

Mr. HIMPLER. Thank you. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

We are going to get one more questioner in here before we recess. 

The gentleman from North Carolina, Mr. Pittenger, is recognized 

for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Mr. Himpler, I would like to ask you, do you think that there has 

been an uptick in the enforcement actions by the Bureau since the 

November elections? Is that your sense? 

Mr. HIMPLER. I do think that it has been sustained. But a lot of 

the enforcements are now through the supervisory process. And so 

what we have happening, as opposed to the more public orders that 

we have seen, is a lot of the enforcement orders are in the supervisory process, and they are not a matter of public disclosure. So 

it is very hard for our members to actually articulate what is happening to them. 

But I will tell you that, again, in the vehicle finance space, the 

CFPB said last December that they were moving on from this. I 

20 

can tell you clearly they have not moved on from this and they 

have, in fact, probably doubled down on this. 

Mr. PITTENGER. Do you feel like, in a sense, the CFPB has moved 

the goalpost? 

Mr. HIMPLER. I’m sorry, I missed your— 

Mr. PITTENGER. Do you feel that, in a sense, the CFPB has 

moved the goalpost? Do you have any examples of that? 

Mr. HIMPLER. I do think that it is interesting with respect to the 

bulletin that they put out. They put out a clear standard that was 

not achievable by industry. The vehicle finance industry is very 

fragmented, and nobody was willing to step forward. It said that 

all compensation to dealers had to be flat. Nobody was willing to 

go there. 

The first public settlement that they came out with dealt with 

monitoring. Two subsequent ones dealt with capping the compensation. And I can tell you another one actually came forward and offered to cap compensation and were still penalized for doing so. 

Mr. PITTENGER. Thank you. 

Mr. Michel, how was consumer protection handled before the creation of the CFPB? 

Mr. MICHEL. It was fragmented. It was spread around several 

different agencies. If you go through Title X, I believe subtitle (h), 

of Dodd-Frank, you can see part of what was done, which is it literally shifted enforcement authority for 22 Federal statutes into 

the Bureau. So, unfair and deceptive practices, primarily enforced 

by the Federal Trade Commission (FTC), are all under all of those 

authorities. And banking regulators also had the authority, although not the explicit statute requirement, the authority to enforce laws under those rules as well on top of State regulatory 

agencies, all policing fraud. So the fact that there is deceptive and 

unfair practices, fraud—you cannot, as a business, lie about what 

you have sold me; you cannot mislead me; you cannot trick me— 

all of this was done prior to Dodd-Frank. 

As Congressman Clay alluded to a moment ago himself, smaller 

banks were subject to consumer protection laws prior to DoddFrank. That is the body of that framework that you see there in 

Dodd-Frank. 

Mr. PITTENGER. Do you think that process provided more protection to consumers or do you think the CFPB provides more protection? 

Mr. MICHEL. The CFPB, the only argument you can possibly 

make is that we have consolidated that authority in one agency, 

and that is fine. But it didn’t have to be the CFPB. It could have 

been the FTC. In fact, I think it made a lot more sense to be the 

FTC. They have a Bureau of Consumer Protection. That is their 

mission. 

Mr. PITTENGER. Was there any benefit in consolidation? 

Mr. MICHEL. I would say, yes, there would be benefit in consolidating, and it was quite fragmented. So, yes, but not with the 

CFPB because the CFPB goes much further than that, and it is not 

really designed primarily to enforce those statutes. It is not an enforcement agency per se, like the FTC. And what you have—the 

agency is primarily designed to go much further than that, particuVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
21 

larly with abuse of authority, which is ill-defined and will not be 

defined under the Bureau and is not defined under the statutes. 

And it is really designed, if you look at the intellectual architects 

Gill and Warren, the idea is that you have to protect consumers 

against themselves or from themselves. That is a very different 

concept than what was in consumer protection law prior to DoddFrank. 

Mr. PITTENGER. Many members of the Financial Services Committee have spoken to Fed Chair Yellen about the need to tailor 

regulations to specific institutions. Do you think the prudential regulators do enough to tailor these regulations to an institution or to 

smaller groups of institutions? 

Mr. Baer? 

Mr. BAER. Sure. I would agree, Congressman. Certainly, more 

can be done. I think we already talked about the custody bank example. There are certainly other examples, for example, the living 

will process, which is a large resource drain on firms that are actually quite easy to resolve and don’t need that level of planning. 

I will also just say—and there has been a lot of talk about the 

CFPB in terms of tailoring. I think, as Mr. Michel notes, at least 

in theory, the statute transferred consumer enforcement authority 

away from the banking agencies and to the CFPB. I think what 

has happened, though, in reality is that the banking agencies have 

re-christened every consumer compliance violation as a safety-andsoundness issue using the amorphous concept of reputational risk, 

meaning, ‘‘If you do something I don’t like, somebody else might 

not like it; that will hurt your reputation, and, therefore, you have 

a safety-and-soundness problem.’’ 

So that is another example. Maybe it is a different kind of tailoring, but that jurisdiction wasn’t really transferred. It was more 

duplicated. 

Mr. PITTENGER. Thank you. 

My time has expired. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

And, with that, we apologize to the witnesses. We do have to go 

vote. Votes have been called. We will take a recess here and probably reconvene around 10:45 roughly. 

[recess] 

Mr. LUETKEMEYER. Let’s reconvene the hearing. I again apologize 

for the interruption, but we do have to go do our job from time to 

time. 

So, with that, we want to again thank the witnesses for their indulgence, and we will continue the questioning. 

Mr. Williams, the gentleman from Texas, is recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

Mr. Himpler, as you know, yesterday our committee had the opportunity to hear testimony from CFPB Director Cordray. From his 

testimony, you would have thought that community financial institutions, which facilitate a significant amount of lending in my district in Texas, are doing great. But perhaps the Director hasn’t 

been to rural Texas, where many credit unions and community 

banks have simply closed. 

22 

So, last year, 329 Members of Congress and many of the members of this subcommittee sent a letter to Director Cordray calling 

on him to invoke his authority to exempt community financial institutions from CFPB regulations. Yet, instead, he went ahead and 

released a 1,300-page rule on small-dollar lending, which applies to 

community banks and credit unions. I am not quite sure he got the 

message, but in your opinion, why does a small bank or a credit 

union need a 1,300-page rule to tell them how to make a $500 loan 

to their local customer or member? 

Mr. HIMPLER. Thank you, Mr. Williams. It is good to see you this 

morning. 

I don’t know why any community financial institution needs a 

1,300-page regulation. Most of the small-dollar products are fairly 

clear on their face. We do not represent payday, but it is a very 

clear disclosure. Most small-dollar extensions of credit are only a 

couple of pages in length, if that. There are clear disclosures of 

APRs. And the rule that the Bureau has come forward with will 

cripple access to credit, particularly in the communities that you 

are talking about. 

The whole rule, I must admit, I find personally offensive. No one 

would dare ask members who have premium or gold credit cards 

to have a cooling-off period after they paid off their monthly statement for March or April, but that is exactly what we are doing to 

working- class and lower-income folks. And to me, that is unfair. 

Mr. WILLIAMS. And staying with that line of questioning, Mr. 

Himpler, I want to talk about an issue that, unfortunately, I did 

not have time to discuss at yesterday’s hearing. In March 2013, the 

CFPB issued a bulletin that allegedly provided guidance for indirect auto finance companies. We now know this was the Bureau’s 

way to get around Section 1029 of the Dodd-Frank Act, which explicitly excluded them from the CFPB oversight and rightfully left 

the duty to the FTC. 

As the story goes, the CFPB used a now debunked study citing 

disparate impact to hold the indirect auto finance companies liable 

for discrimination resulting from dealer compensation or markup. 

So why is the Bureau continuing to utilize this methodology in enforcement actions against banks and indirect auto finance companies? 

Mr. HIMPLER. That is probably a question best suited to the Bureau. I can tell you that, having worked with the CFPB and represented indirect auto for 13 years now, the staff has this kind of 

stuck in their craw that dealers are exempt under Dodd-Frank, and 

the only way to address that shortcoming that they see is to do it 

through vehicle finance companies, like the ones that I represent. 

And despite the fact that they have issued a bulletin—or actually 

a blog—last December calling a truce, that may be the case for 

public enforcement orders, but it is not the case in supervision and 

enforcement that stems from that. That continues to go forward. 

And even in instances where finance companies are trying to do 

the right thing and meet the Bureau halfway, I am afraid that all 

too often the Bureau is still looking for the flashy headline. 

Mr. WILLIAMS. I agree with you. In their semiannual report, the 

Bureau has dropped ECOA auto lending enforcement from its fair 

lending priorities just this past year. The Director himself has said 

23 

that the CFPB has abandoned work in this space. You have 

touched on that. Yet, in my opinion, the damage has already been 

done. So, by my count, the CFPB has already extorted hundreds of 

millions of dollars from these auto lending companies. In your opinion, why do you think the Bureau has abandoned work in this 

space? 

Mr. HIMPLER. I think the curtain has been pulled back on their 

flawed methodology, the fact that they were unwilling to account 

for nondiscriminatory factors that we presented to them to explain 

any disparities that they found, and the fact that you had bipartisan pressure trying to get the Bureau to come forward with some 

sort of regular order. Even in just trying to figure out how they did 

the methodology, in terms of trying to duplicate their efforts, it 

took industry a year-and-a-half for them to even turn over the computer code. That is just silly, Congressman, and uncalled for. 

Mr. WILLIAMS. Thank you for your testimony. 

I yield back. 

Mr. LUETKEMEYER. The gentleman yields back his time. 

The gentleman from Georgia, Mr. Loudermilk, is recognized for 

5 minutes. 

Mr. LOUDERMILK. Thank you, Mr. Chairman. 

And, Mr. Himpler, welcome, and thank you for being here today. 

Mr. HIMPLER. Thank you for having me. 

Mr. LOUDERMILK. Yes, well, maybe we will have a little more 

productive meeting today than what may have happened yesterday 

when it comes to actually getting some questions answered. 

To follow on kind of the direction that Mr. Williams was heading 

in, some of the questions I asked yesterday were not adequately 

answered. There were a lot of things said but I don’t think Director 

Cordray actually addressed the question at hand. A lot of it has to 

do with the CFPB and their database. 

And let me kind of just pose a question I did to Mr. Cordray yesterday and see if you can help me get to some of the answers, at 

least what you believe the truth would be there. 

In their annual report, which came out Monday, their numbers 

showed that in 2016, the CFPB handled 291,000 consumer complaints, and about 17,000 of them were resolved with monetary relief for the customer. Now that equates to only 6 percent of the 

complaints being resolved with monetary relief, and 94 percent had 

no monetary relief. 

So my question was, does this low number show that the vast 

majority of their claims really have no merit? Or is it just incompetence in the agency? Or is it a priority issue in your opinion? 

From your knowledge, could you help me with that? 

Mr. HIMPLER. I would actually like to give the Bureau a little bit 

of credit here. I think the fact that you have such a low numerical 

value associated with monetary rewards means that the lion’s 

share of complaints that come into the Bureau may not warrant a 

monetary award. We have had complaints come in regarding one 

of the captive auto finance companies under a particular brand, 

and they didn’t actually finance the car; it was financed by one of 

their competitors. And it took them a while to sort it out and make 

sure the complaint got to the right consumer, and it was resolved. 

24 

That is just one instance. But I do have other problems with the 

database. 

This is reputational risk at its finest. No one in our industry can 

afford to take on their Federal regulators, let alone a Federal regulator that has ‘‘consumer protection’’ in the title. What is the upside to that? Okay? Then you have numerous mistakes. They have 

now put in place a narrative field that allows consumers to put 

something online that is totally unverified. Well, how do you correct that? Once the damage is done to a company, it is hard to get 

your reputation back. 

Mr. LOUDERMILK. I agree. 

Mr. HIMPLER. And probably most importantly is the fact that 

they don’t protect the consumer’s private information on this database. If the whole goal of the CFPB is to protect the consumer, protecting their private information should be at the forefront. 

Mr. LOUDERMILK. I appreciate you going in that direction because that is really where I was going. Without the 96 percent, 

there has to be a large number that are—let me use the term ‘‘frivolous.’’ In his testimony yesterday, Director Cordray said that, once 

the company has an opportunity to respond—this is when a customer posts something on their website, a complaint—that they 

confirm that there was a commercial relationship with the customer. That is the extent of any confirmation. Why will they not 

go and at least try to validate the complaint? Because, as you say, 

once that reputation has been damaged by a consumer protection 

agency, it is irreparable; it is very difficult. 

Mr. HIMPLER. That is correct. I think, at the end of the day, although it is listed as a consumer complaint database, there is no 

real interest in terms of looking at both sides of the equation. As 

I said at the outset of my statement, we share the CFPB’s mission 

to protect consumers, but that has to be balanced with ensuring 

the availability of credit. And all too often, I am concerned that the 

Bureau does not have that balance in mind. 

Mr. LOUDERMILK. So is the purpose of the database just to name 

and shame companies, or should they have a disclaimer on there 

that says it is a fact-free zone, or ‘‘This is fake news?’’ It is really 

what I see is happening. 

Mr. HIMPLER. As entertaining as that is, yes, something needs to 

be done, particularly in this space in terms of protecting 

reputational risk because that comes at a cost. It will drive companies out of business. 

Mr. LOUDERMILK. Thank you. 

I yield back. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Tennessee, Mr. Kustoff, is recognized for 5 

minutes. 

Mr. KUSTOFF. Thank you, Mr. Chairman. 

Mr. Baer, good morning to you. I recently had the privilege of 

talking with a good community banker in my district in Fayette 

County in west Tennessee who talked about the Community Reinvestment Act. He said, while the intent of the CRA was to create 

fair lending practices, current test criteria are often so stringent, 

so tough, that it makes it impossible for smaller institutions to proVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
25 

vide credit to those who want to reinvest in the communities that 

they live in. 

We know that the CRA was designed to ensure that financial institutions were providing capital and meeting the financial needs 

of the communities in which they operate. Regulators have ensured 

that these institutions meet the requirements of the Act through 

tests that look at the bank’s lending, investments, and services. 

Until recently, these tests provided a clear benchmark for a bank 

to meet its CRA responsibilities. However, lately, regulators have 

been increasingly including in their CRA examination criteria, unrelated to the CRA, including compliance with other financial laws 

or consumer regulations that have their own standards and penalties for violations. I bring all this up because, in your testimony, 

of course, you mentioned that one institution was graded by the 

OCC as ‘‘outstanding’’ but yet then was later downgraded to—I 

think you said—‘‘needs to improve’’—because of issues related to 

the bank’s account management. Does that seem like a reasonable 

process to you? 

Mr. BAER. No, Congressman. I think the important point is that 

that process or that kind of behavior actually undercuts the value 

of the Community Reinvestment Act. As you note, the legislative 

history and clear statutory purpose of the Community Reinvestment Act was to ensure that banks were meeting the credit needs 

of all the people in the communities they operate in. And the grade 

is outstanding; it is outstanding for meeting credit needs. That is 

the focus of the statute. And it is a good example of how the examination regime around this has actually worked pretty well in the 

sense that the standards, the three tests you mentioned, are applied rather objectively. Banks know what they need to do to get 

a satisfactory rating, what they need to do to get an outstanding 

rating, and they can benchmark that and know where they are. 

That is all somewhat ancient history now but certainly not true 

now. 

What has happened is that any consumer compliance violation 

now can result and likely does result in a downgrade of the CRA 

rating. There are plenty of other consumer laws to punish that 

kind of behavior, whether it is informal supervisory or formal enforcement action or State action or Justice Department action. So 

it is not like this sort of behavior would go unpunished but for the 

CRA. But the unfortunate consequence of adding the CRA to the 

list of punishments for that kind of behavior is it diminishes the 

transparency of how it is applied to banks, and it really gives them 

less of incentive to stretch to make the extra loans to become either 

satisfactory or outstanding. 

Firms used to actually like, even aside from the compliance aspect, sort of the marketing of being an outstanding CRA institution. But if you tell them going into the exam, ‘‘Well, you have an 

unrelated consumer compliance violation; you are going to have a 

‘needs to improve’ no matter what you do,’’ that really undercuts 

for everybody—the banks and then also the communities who want 

the lending—the value of the CRA. 

Mr. KUSTOFF. Thank you very much, Mr. Baer. 

26 

Mr. Michel, if I could, your testimony about the CFPB, I heard 

that; I think we all heard that in your testimony and your opening 

statements. 

Yesterday, when Director Cordray appeared, I had a line of questioning involving the unfair, deceptive, or abusive acts or practices, 

the UDAAP authority that was granted to the CFPB. As we look 

at the statute as written, it appears that there is little guidance 

as to what actually constitutes an abusive act or practice. Without 

clear and consistent guidance to make sure what that determination is, the Bureau now apparently has the discretion to make unilateral decisions that ultimately result in the elimination of a useful practice and service for the consumer. 

If I could ask you, in your opinion, has the CFPB adequately defined what constitutes an ‘‘abusive practice?’’ And is more clear, 

concise guidance needed for the CFPB to demonstrate further 

transparency in the process? 

Mr. MICHEL. They haven’t clearly defined it, and Mr. Cordray 

has said that they don’t want to define it and shouldn’t define it. 

And that is not the rule of law. That is, ‘‘We are going to figure 

out what you did wrong after you did it, and we will tell you.’’ It 

is absolutely 100 percent counter to the rule of law and the type 

of governmental system that we have in the United States. 

And then the next part of your question, as to whether they 

should clarify that, the only thing that we know is that it is not 

unfair or deceptive. So it has to be something else. Well, the question should be, what is wrong with unfair and deceptive? In other 

words, if unfair and deceptive is not okay, is not enough protection, 

then let’s talk about something else. But that debate was never 

really had. So I don’t think that we should waste any time trying 

to force them to come up with a better guidance for abusive. I think 

that should be thrown out. It is, in my opinion, superfluous. 

Mr. KUSTOFF. My time has expired. I yield back. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

The gentlelady from New York, Mrs. Maloney, is recognized for 

5 minutes. 

Mrs. MALONEY. Thank you so much, Mr. Chairman, for calling 

this hearing. And it is very good to see Mr. Baer and some other 

constituents here and all the panelists for being here today. 

We have a busy day on the Floor. We have one important Financial Services bill that came out of this committee that we were debating and it just passed unanimously. That doesn’t happen often 

in this Congress—unanimous support. 

So, Mr. Gerety, I would like to ask you a question about the orderly liquidation authority. One of the main changes, as you know, 

that we made in Dodd-Frank was to give the regulators the authority to wind down large nonbank financial institutions when they 

fail. The FDIC has long had the authority to wind down commercial banks, but they did not have the authority to wind down large 

noncommercial banks like Lehman Brothers and AIG. 

And I distinctly remember one weekend, the beginning of the 

weekend with 11 investment banks in my district; at the end of it, 

every single one of them had failed. Yet, I give strong support to 

the FDIC. They very, very expertly worked with the private sector 

to save the commercial banks, to wind them down, to merge them, 

27 

to keep them moving. So we were really forced with two decisions: 

we could either bail it out, like we did with AIG; or we could let 

it fail, which we did with Lehman. Neither was a good option, as 

we all know, and, if anything, contributed to more confusion and 

pain in the financial crisis. 

Dodd-Frank gave the regulators a third option: an orderly wind 

down that prevents a government bailout but does not harm the 

broader markets so that they would have another tool, God forbid, 

that we have another financial crisis, but that we could better 

manage it. 

So, Mr. Gerety, I would like to ask you to talk about the structural change and why it is important and what would happen if— 

some of my Republican colleagues are very intent on repealing the 

orderly liquidation authority, although it says expressly in the statute that no taxpayer money should ever be used or can be used. 

So it is really prevention of using taxpayer money and gives them 

another tool to really react to the crisis as the FDIC was able to 

do with the powers that were given to them. 

So your thoughts on that, and any other panelist who would like 

to add or comment on it, we would like to hear what you have to 

say. 

Mr. Gerety? 

Mr. GERETY. Thank you, Congresswoman Maloney. I think this 

is such an important issue, and you have laid out the facts, as we 

saw them in 2008, so eloquently. 

I think there are a couple of principles at stake that are really 

important to highlight any debate about how we handle the failure 

of a large complex financial institution. The first principle, which 

you have outlined, is the fact that this authority did not exist in 

2008. The choices were limited and the fact that those choices were 

limited was a massive problem for the American people. 

The second is that market discipline works when firms have the 

ability to fail. Market discipline does not work if firms are—if the 

market does not believe that the firms have the ability to suffer 

from their own mistakes. And so I think we have seen already— 

in the implementation, the development of the capital rules to go 

along with orderly liquidation, the strategies of the single point of 

entry that give that credibility—we have seen the markets react 

positively. And when I say ‘‘positively,’’ what that means is they 

have taken away the assumption that the government will step in. 

The ratings agencies have noticed this as well. So I think moving 

in the opposite direction would be a move away from market discipline and move toward too-big-to-fail. 

I think the second thing is that there is often a discussion about 

bankruptcy versus orderly liquidation. I think it is important to not 

see those as substitutes. Certainly, this House has worked on a 

bankruptcy bill focused on Financial Services. That should be seen 

as a compliment. It cannot be a substitute for the approaches that 

we know have worked and the approaches that we know need to 

be differentiated for financial services companies because of their 

extreme size and their different structure than regular corporations 

in America. 

Mrs. MALONEY. I would like to ask Mr. Greg Baer if he would 

like to comment. 

28 

Mr. BAER. Sure, thank you, Congresswoman. 

I think it is important to note, as I think Amias did, that under 

the statute, and quite sensibly, the first option is bankruptcy. That 

is why banks are submitting living wills and either all now have 

or probably soon will have credible living wills under the Bankruptcy Code. So, at that point, it is really a cost-benefit analysis: 

What is the cost of retaining Title II? What is the benefit? 

Given—you can argue the benefit is low in the sense that banks 

are now extremely resilient at extremely high capital liquidity levels. There is a credible bankruptcy process using the single-pointof-entry strategy that Amias mentioned. And there is even liquidity 

available because their prepositioning liquidity or the trigger for 

bankruptcy is now sufficiently high that there will be liquidity 

available through the living wills. 

On the other hand, there doesn’t really seem to be much of a cost 

at this point of retaining Title II as a backup plan in the sense 

that, as noted, markets are pricing the debt as if there will be no 

government support. So there is not a moral hazard being created 

or an unfair subsidy. That has been validated by the GAO, by two 

other recent studies, and by the rating agencies now as well as. 

So it is a backup plan. I think it is an unlikely-to-be-used backup 

plan, but it appears to be a backup plan for which there aren’t a 

lot of costs to retaining. 

Mrs. MALONEY. And it would have been a backup plan that 

would have been helpful in the 2008 crisis, and we don’t know 

what the next financial crisis is going to be. As you said, banks are 

very well-capitalized now. So it won’t be like the last one; it will 

be something different. So having tools to respond might be helpful. 

Thank you all for your testimony. 

Thank you, Mr. Chairman. 

Mr. LUETKEMEYER. The gentlelady’s time has expired. 

With that, the gentleman from Michigan, Mr. Trott, is recognized 

for 5 minutes. 

Mr. TROTT. I thank you, Mr. Chairman, for calling this hearing. 

And I want to thank the panel for spending time with us this 

morning. And as has been mentioned, we spent about 5 hours yesterday with Mr. Cordray. And I am not sure how productive of a 

discussion it was. But I want to share with you a couple of the 

statements he made and get your thoughts. 

Mr. Michel, at one point, Mr. Cordray said, ‘‘Certainly no one can 

claim that their voices are not heard at the CFPB.’’ And when I 

had occasion to ask him a few questions, I told him I was astonished at that statement because I go home every weekend, and I 

talk to REALTORS® and title agencies, and mortgage brokers, and 

debt collectors, and attorneys, and small-business owners, and they 

are all terrified of the CFPB. In fact, one constituent recently said 

that the CFPB is like the Mafia. They show up, and they say: ‘‘This 

is a nice business you have here; I hope nothing happens to it.’’ 

So I want to get your thoughts on whether you feel there is an 

adequate framework for people to bring questions, honest business 

people to bring questions to the CFPB; if not, maybe give me a few 

examples of their failure in that regard; and then, finally, what the 

consequences for our economy are of an operation that runs itself 

providing guidance through enforcement. 

29 

Mr. MICHEL. I have heard firsthand—and Bill probably has a 

thousand times more firsthand accounts than I do—of people who 

say that this is not true, that the CFPB does not listen to them, 

in the mortgage industry and outside of the mortgage industry. So 

I don’t think—no, I don’t believe that that is accurate. I don’t believe they do listen. That is not why they are there. 

We had Dennis Shaul, who is an ex-Barney Frank staffer, talk 

to us about how different the Bureau became versus what it was 

pitched as it was going to be. So, no, I don’t agree with him at all. 

Mr. TROTT. Great. 

Mr. Himpler, let’s go to another statement he made. I questioned 

him on his press releases, particularly a press release that was 

issued August 26, 2016, regarding First National Bank of Omaha. 

The press release made it sound like the First National Bank of 

Omaha had basically admitted guilty to egregious transgressions 

and where they were just a terrible organization. But then, when 

you look at the settlement agreement, section 2, there is no admission of guilt of any kind. 

So you mentioned a few minutes ago they are prone to flashy 

headlines, and I am just wondering if you think some of the press 

releases issued by the CFPB in connection with their settlements 

of enforcement actions are accurate and largely whether you believe there is really a due process issue when you consider the fact 

that fighting the government really is a tough row to hoe for many 

companies given the reputational risk and, again, what the consequences of that method of operation is. 

Mr. HIMPLER. Thank you, Mr. Trott. 

And if you will indulge me, I would like to comment on your 

question that you asked Mr. Norbert just to start off. 

Don’t take our word for it. The Small Business Administration, 

under the previous Administration, actually opined on this because 

a lot of the rules that the CFPB have put forward have to go 

through a small business review panel to anticipate the impact on 

small businesses if they were to go forward. The SBA said that the 

CFPB was not listening to folks. That is—and Norbert is correct: 

I do have plenty of other examples. I would love to talk to you 

about them offline. 

A lot of the discussion, even Mrs. Maloney’s previously, was 

about big institutions, too-big-to-fail. We are talking about institutions that are too-small-to-succeed. If you guys don’t get it right, 

with all due respect, you can have serious consequences and take 

a lot of folks that have institutions and access to credit in rural 

areas right out of the equation. 

With respect to the press releases, more often than not we see 

press releases that don’t reflect the orders that the Bureau puts 

forward. More importantly, sometimes the parties that are subject 

to those orders don’t even see the order until it has actually been 

issued by the Bureau. That is being convicted before you even see 

the indictment, sir, and there is nothing more unfair than that. 

Mr. TROTT. When I asked the Director about his press releases, 

his response was, ‘‘I know the facts.’’ And it sounded—and I don’t 

know that he particularly appreciated this analogy—like the line 

from, ‘‘A Few Good Men,’’ when Jack Nicholson was on the stand 

and he said, ‘‘You can’t handle the truth,’’ and he is acting as judge 

30 

and jury. So how would he feel if I drafted a press release saying, 

‘‘Director Cordray admitted responsibility for sex and racial discrimination at the CFPB and retaliatory actions against his employees, apologized, said it would never happen again, but no one 

there is going to be fired as a result of their bad behavior.’’ I know 

the facts. I read the National Review articles. How can you dispute 

that? 

Mr. HIMPLER. Sir, as far as I know, all of the public orders in 

the vehicle finance space, none of the companies admitted to guilt. 

That was part of an agreed-to consent order, and the press releases 

all, from top to bottom, say that they are guilty and then, in the 

fine print, say, ‘‘Nothing in here accurately reflects the order.’’ 

Mr. TROTT. Thank you for your time. 

I yield back. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Kentucky, Mr. Barr, is recognized for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

And I appreciate the testimony from our witnesses. 

Dr. Michel, I was particularly interested in your proposal to remove the supervisory responsibilities from the Fed and transfer 

them to other regulators, and proposals to consolidate regulatory 

activities. As chairman of the Monetary Policy Subcommittee, I 

have raised that proposal with Fed Governors and regional bank 

presidents. And as you might imagine, I got a little push back on 

that idea. 

What they have said to me is that their supervision informs their 

monetary policy. Can you speak to that argument? 

Mr. MICHEL. I am not surprised. And I think that is scary. That 

is not the way this is supposed to work. Monetary policy in a fiat 

money system—the central bank is supposed to provide liquidity to 

the system. It is not supposed to be making bank determinations 

or bank safety-and-soundness determinations and picking and 

choosing who to lend to. That is the problem, literally. 

So the way to stop that is to let the Federal regulators do the 

regulating on the safety and soundness and let the central bank 

provide liquidity to the system. It can do that in a very open and 

transparent process without emergency lending authority, without 

regulatory authority. It is all it has to do. 

Mr. BARR. To the extent that the CHOICE Act, or other reform 

efforts here in Congress, maintains this concept of a stability oversight council, even if Congress were to remove its designation authorities, should the Fed participate in an FSOC? 

Mr. MICHEL. In the unfortunate event that you retain the FSOC, 

no. 

Mr. BARR. To your point about overlap, duplication, and inconsistency in the excessive number of these regulators, could you address the argument that multiple regulators can in fact lead to 

greater accountability and talk about that in the context of this argument of the race to the bottom? 

Mr. MICHEL. The research on this is pretty muddled. There are 

arguments for regulatory competition and that you get better outcomes that way. There is very little support for the race-to-the-bottom hypothesis, and there is also some support for the idea that 

31 

regulatory competition turns out to largely end up being a myth. 

If you look at bank failure rates—and this just one example, admittedly muddled research—but one example is that bank failure rates 

across the different Federal regulators were pretty much the same. 

So it is pretty hard to say that there was sort of like a charter 

shopping thing going on and that some regulators were being 

tougher or easier on others. That is— 

Mr. BARR. One final quick question, if I could, and then I want 

to move on to Mr. Baer. Talk about your proposal of regulatory consolidation in the context of the dual banking system, and specifically, what do you propose with respect to State-chartered Fed 

members? Who would be regulating them besides the State financial institutions regulator? 

Mr. MICHEL. I think you would just have to go to the FDIC. That 

would be my preference. 

Mr. BARR. Mr. Baer, I was interested in your testimony, particularly about the CCAR qualitative assessments over bank capital 

planning processes. Talk about the arbitrariness of that and why 

you think we should get rid of that qualitative assessment. 

Mr. BAER. I think the place to start is the regulators and the examiners, including the Federal Reserve, routinely assess the quality of bank’s processes and their compliance with law across a 

whole wide range of activities, whether it is credit underwriting, 

cybersecurity, trading, anything. 

In none of those cases do they feel the need to announce publicly 

at the end of the year, pass or fail. They work diligently with the 

institution throughout the course of the year. Their findings are reflected in an examination rating, and that system works. 

Especially in an area like capital planning, you already have the 

quantitative assessment, which is—and I think will continue to 

be—public. But the real question is, what is the value added by 

having that final assessment be public and binary? There has also 

been, I think, a real sense—and I think some public reports— 

around this function has been transferred largely from the exam 

teams to Washington. I think the standards are not particularly 

clear. There isn’t a lot of very good feedback such that we routinely 

hear that firms simply do not know going into that week whether 

they are going to pass or fail, which is not the way the exam system— 

Mr. BARR. Sorry to cut you off. 

But in my remaining time, Mr. Himpler, can you address the 

unique challenges associated with the regulation of finance companies as opposed to banks, credit unions, and other lenders? 

Mr. HIMPLER. Sure. This is not a problem with the CFPB. It is 

a problem in D.C. Washington, D.C., is a bank-regulated town. Finance companies and a lot of community banks are creatures of 

State law. They have been effectively regulated at the State level 

for close to 100 years. And trying to put community institutions 

through the same pace as some of the bigger institutions and the 

tens to hundreds of billions just doesn’t work. 

Mr. BARR. Thank you. 

I yield back. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

32 

With that, we recognize the gentlelady from New York, Ms. 

Tenney. 

Ms. TENNEY. Thank you, Mr. Chairman. 

Thank you to the panel for being here. 

I like what I am hearing from Mr. Himpler, as a Member from 

rural suburban central New York, where we have a number of 

small businesses and some of the largest out-migration of people, 

businesses in the Nation and—I just found out today—in my district some of the highest property tax rates based on per 1,000. 

I want to focus a little bit on Operation Choke Point and just the 

nature of Operation Choke Point and how it focuses on small-dollar 

lenders, payment processors, and companies that are believed to be 

reputational or moral risks. And I am concerned about what could 

happen in my district, particularly because we do have a number 

of small businesses that would probably fit that definition, one 

being Remington Arms, the oldest continuously running manufacturing firm, which happens to be large. But there are other smaller 

offshoots, such Oriskany Arms, that could be targeted by an Operation Choke Point—a small startup that is making firearms right 

now for hunting and personal protection. But Remington also provides for our military. But other smaller businesses, whether it is 

payday lenders, check cashers, coin dealers, some people who provide some kind of services for people who are largely unbanked because of the massive regulation of so many of the big banks. 

As we regulate the big banks, we end up hurting the small banks 

even more. And as a small-business owner, it is sort of a parallel; 

we know we have a hard time complying with New York’s regulatory burden as a small business, but we can’t afford to hire compliance agents just like in a smaller bank. 

And I was just struck by your comment about too-small-to-succeed. I would like to say they are too small to be cared about by 

a lot of politicians and bureaucrats. Small businesses, small lenders, and people who are in these persona non grata categories. 

I am just concerned that some of these tactics that the DOJ and 

the FDIC are using are almost like threats to increase the scrutiny 

on these types of lenders. I know we have written a number of letters, and I know I am getting—we have written a number of letters 

to the FDIC and the OCC about Operation Choke Point and how 

it is affecting our industry. 

I just want to know—and I guess I would single out Mr. Himpler, 

since you have the great quote of the day with ‘‘too small to succeed’’—can you wager a guess—and I think you could probably give 

me a more educated answer—as to why the government agencies 

believe that these licensed legal businesses that I have described 

should not have access to the banking system and why we put 

them into the underground? And maybe you could answer why 

they are so targeted, it appears, from the regulators. 

Mr. HIMPLER. Thank you, Ms. Tenney. In full disclosure, I wish 

I had come up with that quote, but I heard it from someone else. 

I think your point is dead on. And whether we are talking about 

Choke Point or whether we are talking about using the unfair 

prong of UDAAP, you have folks in the regulatory community, be 

it at the CFPB, the FDIC, or others, who feel a need to stand in 

judgment of hardworking Americans and how they utilize the credVerDate Nov 24 2008 19:44 Mar 15, 2018 Jkt 027372 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\27372.TXT TERI
33 

it system. And whether we like it or not, the FDIC can say that 

they are no longer deploying Choke Point. That message has not 

gotten down to the rank and file. Our members are still being subjected to the questions that call into question whether or not they 

are a moral provider of credit. 

Our association is 100 years old. We were formed with consumer 

groups in order to provide access to credit for hardworking Americans at the turn of the last century, folks in steel mills, folks in 

factories and the like, that banks couldn’t provide credit to. And we 

take great pride in the fact that we are able to work directly with 

the consumers that we serve, but the CFPB and the FDIC and others have made it increasingly difficult by not following a rule of 

law, not providing clear guidelines and coming up with squishy 

standards, such as unfair because somebody doesn’t think it is appropriate. All we are looking for is to be treated fairly. 

Ms. TENNEY. Do you think that some of these are targeted or calculated attempts to eliminate an industry that might not be or 

someone that is involved in a banking institution or financial institution of this nature that is just not desirable in their world? 

Mr. HIMPLER. I do think that is the case, and I don’t want to cast 

aspersions, but I think what we are dealing with, especially at the 

Bureau, is a lot of very young examiners right out of college, very 

idealistic, who think that they know better than the folks that they 

serve. 

Ms. TENNEY. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. LUETKEMEYER. The gentleman from California, Mr. Royce, 

the chairman of the House Foreign Affairs Committee, is recognized for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. Baer, I appreciate your expertise on the issue of combatting 

money laundering and the financing of terrorism. We had a hearing last week, and I shared my concern at that time that we are 

misaligning our resources and hindering legitimate consumers and 

businesses from accessing capital. And I specifically referenced the 

Clearing House’s research on the subject, which concluded that the 

billions in bank resources spent on AML/CFT compliance have limited law enforcement or national security benefit. Now that was the 

conclusion. 

Now, to be clear on this, I know you agree that banks should be 

spending ample resources on AML/CFT compliance, as do I. But we 

have missed the mark on creating a framework that emphasizes 

identifying and catching the bad actors. So examiners seem, at this 

point, to be more concerned with quantitative metrics. So the 

metrics are, you know, how many compliance officers have been 

hired or suspicious activity reports have been filed? But I am looking here for your direction in terms of what legislative steps would 

you have this committee take to better align our regulations with 

the goal of protecting the financial system from illicit financing, 

which was the original intent. 

Mr. BAER. Thank you, Congressman. And thank you very much 

for your leadership on this issue, which has been continuing and 

important. 

34 

I think what we see—and it wasn’t just the Clearing House. We 

worked on this report with experts in law enforcement, national security, global development, diplomacy, and everyone really came to 

pretty much the same conclusions, both about the problems with 

the system and the ways to fix them. The fundamental problem is 

not a resource problem; it is a management and leadership problem. 

The analogy I use is you have one person teaching the course 

and another person drafting the exam and grading the test. And 

law enforcement and national security and development folks and 

others are not engaged in the enterprise of telling banks how to 

spend that money. They don’t give them direction, goals, priorities. 

Instead, as you note, they are graded by bank examiners who do 

what bank examiners do, which is look for policies and procedures 

and rigid adherence to those policies. So what law enforcement and 

national security want are financial intelligence units that think 

very cleverly about how to find a human trafficker or terrorist financier. And what the examiners have to in practice do—because 

they are actually excluded from that process. They really don’t 

know what happens after these CCARs are filed. Law enforcement 

doesn’t talk to them. National security doesn’t talk to them. They 

check boxes. And that is not a really very smart system. 

A lot of this could actually be reformed by Treasury, TFI, and 

FinCEN working with the regulators. Congress can certainly help 

in certain areas, I think, expanding information-sharing under 

314(b) of the PATRIOT Act. And then, really importantly, and I 

know this Congress, this committee has in front of it legislation 

from Representative King and Representative Maloney on so-called 

beneficial ownership or eliminating the use of anonymous companies to cloak who owns— 

Mr. ROYCE. Right, right. That probably would be a huge step if 

we could do that. 

I have to turn to Mr. Michel. We have already seen the failure 

of a model that separates consumer protection regulation from safety-and-soundness regulation with respect to the GSEs. As the 

former Fed Chair Alan Greenspan noted after the financial crisis, 

‘‘Fannie and Freddie paid whatever price was necessary to reach 

the affordable housing goals put in place by Congress in 1992.’’ 

Now the result of that was that the GSEs purchased more than $1 

trillion in junk loans. When we rang the alarm bell, when we tried 

to pass legislation—I had a measure on the House Floor to rein in 

the GSEs—our efforts were blocked as a tax on affordable housing. 

We had two agencies tasked with entirely different, often conflicting, objectives at the time. 

So my question is, are you concerned that we have gone down 

this road with the CFPB? For example, I look at the plan to overhaul overdraft rules. If the CFPB gives borrowers 21 days to repay 

an overdraft rather than requiring it to come out of the next deposit, does it not morph into a line of credit that the bank will need 

to hold capital against? In other words, where do safety-and-soundness concerns come into play here? Where does the prudential regulator have that responsibility to take a look at that issue, if you 

can respond? Do you have that same concern? 

Mr. HIMPLER. I’m sorry. I didn’t hear the last part. 

35 

Mr. ROYCE. Do you have that same concern? 

Mr. MICHEL. Oh, well, yes. And I don’t think adding another regulator on top of the process does anything to fix this. And I think 

the whole premise is wrong in that the idea that finance companies, community banks, or big banks don’t want to succeed and 

want to lend to people that cannot pay them back—the whole thing 

is twisted. So you have to start by uprooting that. That is my opinion. 

Mr. ROYCE. Thank you very much. 

Mr. Chairman, thanks. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

I would like to go to a second round. I have a couple of followup questions myself, and Mr. Barr has a couple. 

So, with that, we will recognize the gentleman from Kentucky, 

Mr. Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman, for giving us a second 

round here. 

And as you all know, Mr. Michel and Mr. Himpler, Director 

Cordray was in front of our committee yesterday, and I raised a 

concern with him about the Bureau’s regulation on international 

remittances, and I shared with him a concern that was raised with 

me from a constituent about the Fort Knox Federal Credit Union. 

And as you can imagine, the Fort Knox Federal Credit Union 

serves many servicemembers who are deployed overseas, and they 

simply want to be able to send some of their paycheck back home 

to their spouses while they are deployed. 

And because of the Bureau’s overly burdensome regulations and 

the implementation of those rules, the credit union had to basically 

get out of the business, and that obviously was a huge inconvenience for those servicemembers and their families. 

Director Cordray’s excuse was that Congress made him do it and 

that it was our fault that this was happening. And, while, Mr. 

Himpler, you don’t represent credit unions per se, but you all are 

observers of the Bureau. I just took a look at the statute, the DoddFrank law, Section 1022, which actually requires the Bureau to 

look at cost-benefit analysis and to mitigate costs such as this. 

Does the Bureau have the discretion? Does Director Cordray 

have the discretion to ease the regulatory burden on regulated parties so that these kinds of consequences do not occur? And by the 

way, I asked him—the credit union in question called him thinking 

that this was an unintended consequence, and they reported to me 

that Director Cordray himself told them, no, this was an intended 

consequence. Can you comment on that? 

Mr. MICHEL. Sure. He absolutely has the discretion to go the 

other way. It is one of the bizarre things, from my point of view. 

I understand what was going on in that environment when they 

passed Dodd-Frank. But from my perspective, you don’t want—either side of the aisle—you don’t want to create an agency like this 

because you might find yourself in a situation where you are on the 

opposite end of what you just created. Even if the Trump Administration doesn’t fire Director Cordray, there will be a new Director. 

If that is somebody like, just say, I don’t know, Todd Zywicki from 

George Mason, he will have the discretion to reverse a lot of this 

36 

stuff, just outright authority to do it, and then not do anything else 

that he doesn’t want to do. 

Mr. BARR. Mr. Himpler, can you comment on Director Cordray’s 

pointing the finger at Congress instead of looking at what the Bureau can do itself to ease the burden on regulated entities like this 

Fort Knox Credit Union that no longer can serve its deployed 

servicemembers? 

Mr. HIMPLER. Thank you, Congressman. Yes, I can. 

I think one of the basic problems here when it comes to, not only 

remittance, but also other consumer products is that very few people—especially at the CFPB, but I would say just as equally at 

some of the other Federal regulators—have no experience in extending credit to consumers, have no experience in some of these 

products, be they remittance products, be they an installment loan, 

be they a subprime vehicle finance loan because you are trying to 

extend credit to a college grad that needs to finance his car to get 

to his first job. 

Mr. BARR. I would just note that the Bureau seems to be able 

to have the discretion to ban financial services and products. I 

don’t know why it doesn’t have the discretion to help 

servicemembers deployed overseas send some of their paycheck 

back to their spouses back home. I think that is absurd. 

Mr. Baer, one final question. This idea of gold plating of U.S. 

standards, we believe, as the financial CHOICE Act reflects, we believe that large systemically important institutions should be required to maintain or at least be incentivized to maintain healthy 

levels of capital. But can you speak to the apparent need for the 

government to impose requirements that go well beyond anything 

that we impose on banks around the world and the effect that this 

gold-plating idea may have on the competitiveness of American 

banks as they compete in a global economy? 

Mr. BAER. Sure. Yes, gold plating is generally referred to as 

where U.S. regulators go off to the Basel Committee or the FSB 

and negotiate an international standard and then come back and 

dramatically increase the stringency of that requirement for U.S. 

banks and U.S. banks alone. 

The competitiveness aspect is difficult to tease out, certainly at 

a time when European banks particularly are in difficulties and 

U.S. banks are doing well. We may see that over time. I can’t tell 

you I have seen research to demonstrate that right now. 

I think the bigger concern is simply the effect on economic 

growth and, in particular, certain types of lending as a result of 

higher standards than at least an international body thought was 

necessary. And that is true not only with respect to the ones that 

have been officially gold-plated, like the leverage ratio or the LCR, 

but if you think about the Federal Reserve CCAR stress test, there 

is a European stress test which bears no relation to it. So that is 

actually a whole construct that has no international parallel in any 

meaningful way except perhaps in the United Kingdom. 

So there are certainly benefits to U.S. banks that have accrued 

from being the best capitalized and the most rapidly recapitalized 

postcrisis, and I don’t think anyone would dispute that. And it has 

helped them competitively in a lot of ways. 

37 

But there are certainly areas where you see overlaps between 

these gold-plated rules. We talked about one earlier with respect to 

custody banks. And you also see with the way that they have imposed ring-fencing on foreign banks operating in the United States. 

They are having, if not competitive effects, real effects on the 

ability of those firms to serve U.S. customers, whether they be corporate or individual. 

Mr. BARR. Thank you. 

I yield back. 

Chairman LUETKEMEYER. The gentleman yields back. 

I have just a few follow-ups to kind of clarify a few points very 

quickly here. 

Mr. Baer, you talked at length about the Community Reinvestment Act. And one of the things that I have seen—you did a good 

job of explaining the Act and some of the concerns, probably some 

reforms that need to be done. 

One of the things that I have seen is that the examiners now use 

this as sort of a punitive way to sort of—a carrot-and-stick approach where we will hold the exam open until you do something, 

or we will keep you from being able to merge a bank until you put 

a facility over here. 

Is this something that you see yourself other places, how they 

are misusing some of these laws and leveraging against for other 

activities, trying to micromanage the bank? 

Mr. BAER. Absolutely, Mr. Chairman. It is not just the Community Reinvestment Act. It is why I focused so much of my testimony 

around the CAMELS requirements and those standards, and a 

whole host of unwritten rules now that say, for example, if you 

have a consent order pending for any reason, even something unrelated to the kind of expansion you want to do, that effectively puts 

you in what the regulators now call the penalty box. 

And if you look at why there hasn’t been more growth, be it 

branching, mergers, acquisition, among, for example, midsize banks 

that everyone expected would be growing, it is because many of 

them have been in the penalty box for years. Because there is another unwritten rule that if you get a consent order, you can’t get 

out of it for generally at least 2 years and often more; and during 

that whole time, you are in the penalty box, whether you are making good progress or not. 

So, again, Congress never enacted any of these obstacles to expansion. In fact, if you look at the Bank Merger Act, or the National Bank Act or the Bank Holding Company Act, there are explicit standards for when you should be allowed to expand. And 

yet, there are new invented rules that have come along over the 

past few years that have really stopped this in their tracks. 

Chairman LUETKEMEYER. And the arbitrariness of their actions 

really is breathtaking sometimes. The bank that I referenced in my 

opening testimony is someone from my area, and they have a very 

unique product at the bank. It is not illegal, they had it approved 

by the banking regulators, but it is a unique product. And as a result of that uniqueness, now that they want to sell the bank, the 

regulators are trying to get them to divest themselves of this product. Well, that is one of the reasons that the other banks want to 

38 

purchase them is because it is a money-generating activity that can 

help pay for the purchase of the bank. 

And yet, they have been holding this open now for 5 years to try 

and keep them from doing this. This is the kind of nonsense that 

is going on, and that is why this hearing is here today, to see how 

these rules are being used and abused. So thank you for your comment. 

With regards to the CAMELS rating, I would like for you to just 

explain a little bit more what your concerns are with that and your 

suggestions for reworking it, because I think this is very important. 

Mr. BAER. Sure. The CAMELS rating, again, this was started in 

1979 by the FFIEC, which is sort of the umbrella group for the regulators when they examine, and it rates you according to capital 

asset, asset quality management, earnings, liquidity, and then the 

S for sensitivity to interest rate, particularly market risk, was 

added probably a decade or so later. 

The oddity is that when they adopted it, they had a series of subjective standards that examiners should look at in deciding whether you have good capital. Now, almost 40 years later, we have dozens of capital requirements that banks have to meet, and including 

the stress test for the larger institutions. And to the extent that 

you meet all of those, there really doesn’t seem to be a very good 

argument that your rating should be anything other than one. 

The same with liquidity, if you comply with the liquidity coverage ratio, which the regulators have explicitly designed to be a 

comprehensive look at the quality of your liquidity position. And, 

in fact, examiners—and they frequently do not give you a one or 

even a two for those things—they don’t engage in a robust discussion or analysis of why, notwithstanding the fact that you have met 

all the requirements that their agencies themselves have created, 

you can’t get a good rating. 

And there is also another unofficial unwritten rule that if you 

have a three for management, you can’t have better than a 3 for 

composite. And, of course, there are legal consequences in terms of 

your ability to expand if you have a three for either. 

We look at what has happened over time as the CAMELS rating 

has sort of been divorced from financial condition, because that is 

being taken care of by capital and liquidity requirements. It has 

really become a compliance rating system. And that is what drives 

your management rating, that is what drives your overall composite rating, and that is what really, if you think about what has 

made the examination process so much more draconian, subjective, 

and really in a lot of areas arbitrary, it has been that move away 

from CAMELS as a wholesale look at your financial condition to 

really a focus on your willingness to engage in compliance activities 

that the examiners want you to engage in. 

Chairman LUETKEMEYER. Thank you, Mr. Baer. 

Mr. Michel, you talked a lot about the reorganization of these financial regulators. And one of the things in my discussions with 

a couple of the Fed presidents has been that they would like to see 

all of the Fed presidents be on the Fed Board instead of a rotating 

situation. 

For instance, if a Fed president is not on the Board, that area 

of the country is not represented, per se, as other areas are on and 

39 

off, when the New York Fed has their permanent position there. 

To me, there is a fairness issue there. Would you like to comment 

on that? 

Mr. MICHEL. Sure. And the way that it is set up is definitely a 

relic of the founding of the Fed in early 1900s, and there are a lot 

of issues like that. But this is one where it really doesn’t make any 

sense anymore not to have everybody rotate on and to give the 

New York Fed a special sort of place there for various reasons. 

I think you could even make the argument that the West Coast 

district is overly large now, based on obviously the way the population was when we started it. 

The Federal Open Market Committee conducts open market operations through a system that was created for the technology at 

that time, and we have outstripped that. So these are all issues 

that could easily be addressed. I think the New York Fed one 

seems to be, although the New York Fed won’t like it, a slam dunk, 

in that it really doesn’t make any sense anymore not to have everybody rotate on. 

Chairman LUETKEMEYER. Thank you. 

With that, we want to conclude the hearing here. 

The title of the hearing today was, ‘‘Examination of the Federal 

Financial Regulatory System and Opportunities for Reform.’’ I have 

a whole list of the different bills or laws and actions that you all 

have discussed today, and we are going to use this hearing as a 

predicate to go out and have some more hearings and do some bills 

and some things, and we certainly appreciate your testimony along 

that line. 

As a followup here, we didn’t get a lot of testimony from the 

other side over here today and some of our members had to leave 

early. 

So I would like to allow a minute or so—no 5-minute testimony 

now. I have a plane to catch, too. But if each of you would like to 

take just a minute to either summarize something that you 

thought was important that you didn’t get a chance to discuss or 

respond to somebody else or present a new idea that we didn’t have 

here, I would certainly entertain that opportunity. I will give you 

that opportunity. 

So, Mr. Baer, if you would like to start first, why, we would certainly— 

Mr. BAER. Mr. Chairman, I think the hearing has actually been 

quite good in doing a good survey of the procedural issues that we 

are now facing in banking. I think your anecdotes and some others 

were quite powerful in demonstrating how a breakdown in process 

actually makes a real difference to the way that banks are able to 

serve the community. 

And I also think it is an area that is really ripe for Congressional 

oversight, because, again, we are talking about unwritten rules 

that have no basis in law and have no basis in regulation. Sometimes, they have basis in guidance, but often they don’t even have 

basis in guidance. 

And so I think it is—I guess maybe that is the one thing that 

we haven’t focused a lot on, though—and I think someone alluded 

to it—is that we really now have regulation by guidance, regulation 

by enforcement. 

40 

And I think all of that is why Congress needs to keep an eye on 

this and make sure that the regulators actually are running a 

transparent process, not just because it is fun to run a transparent 

process and it is fair, but because that actually makes for better 

regulation. 

Chairman LUETKEMEYER. Very good. Thank you. 

Mr. Michel? 

Mr. MICHEL. I would just sort of dovetail on that. I think we 

focus a lot on the CFPB and their discretion to do these things, and 

in some sense you see that in other banking regulators. Not just 

in some sense, but you often see that. Everybody knows that the 

bank examiners come in and say something about too many loans 

in one area or another, and you have to stop doing it. And so this 

is a discretionary sort of process that has evolved that I think you 

have a really good case to make for simplifying and fixing that 

problem by doing something like what you had in the CHOICE Act. 

It is an election. You can choose to go into a simpler regime. I 

think there is a lot of room to expand that. I know we didn’t get 

to talk about that here, but I like where that is going. 

Chairman LUETKEMEYER. Very good. Thank you, Mr. Michel. 

Mr. Gerety? 

Mr. GERETY. Thank you, Mr. Chairman, and thank you again for 

the opportunity to be here today. 

I think the most important theme that I would pick up in the 

testimony today is just the great diversity of our banking system. 

We talked earlier today about rural banks. I was looking at data 

yesterday. The average rural bank with $50 million to $100 million 

in deposits earns about $1 million a year. At $10 billion, the average bank earns more like $100 million, $120 million a year. So 

even within the community bank space, there is just tremendous 

diversity. 

And I think one of the major themes that needs to be focused on 

in any conversation about how to improve our financial regulatory 

system is about how do you simplify the burdens for the smallest 

banks in the system and not use those as a reason to roll back really important reforms for the largest and most complex institutions. 

Chairman LUETKEMEYER. Great observation. Thank you, Mr. 

Gerety. 

Mr. Himpler? 

Mr. HIMPLER. Thank you, Mr. Chairman. I also want to thank 

you for holding this important hearing today. 

I think I would reiterate what some of my colleagues have already said, in terms of the rural bank at $50 billion in deposits 

making a million dollars. We have small finance companies that 

are struggling with the same compliance burden as JPMorgan 

Chase. We are talking about the difference between keeping the 

doors open and affordable access to credit and closing those doors, 

because you just can’t live under the burden as a small business. 

For example, in its supervisory process in the auto space, the 

CFPB issued a larger participant rule. They captured in their net 

90 percent of the overall market. That goes well beyond the largest 

of the large, even the large. Anybody that qualifies as large, they 

captured those folks. And what it means is that some of the small 

41 

finance companies are not going to be able to extend access to credit to that single mom who needs a car to get to work. 

Chairman LUETKEMEYER. Thank you, Mr. Himpler. 

And, again, thank all of you for being here today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And, with that, this hearing is adjourned. 

[Whereupon, at 11:43 a.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

April 6, 2017 

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