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FEDERAL REGULATOR PERSPECTIVES ON 

FINANCIAL REGULATORY REFORM PROPOSALS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 23, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–77 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 23, 2009 .......................................................................................... 1 

Appendix: 

September 23, 2009 .......................................................................................... 47 

WITNESSES 

WEDNESDAY, SEPTEMBER 23, 2009 

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 6 

Bowman, John E., Acting Director, Office of Thrift Supervision ......................... 8 

Dugan, Hon. John C., Comptroller, Office of the Comptroller of the Currency . 7 

Smith, Joseph A., Jr., North Carolina Commissioner of Banks, on behalf 

of the Conference of State Bank Supervisors .................................................... 10 

APPENDIX 

Prepared statements: 

Marchant, Hon. Kenny ..................................................................................... 48 

Bair, Hon. Sheila C. ......................................................................................... 49 

Bowman, John E. .............................................................................................. 65 

Dugan, Hon. John C. ........................................................................................ 98 

Smith, Joseph A., Jr. ........................................................................................ 132 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Written statement of the National Association of State Credit Union Supervisors (NASCUS) .................................................................................................. 157 

Foster, Hon. Bill: 

Written statement of the Illinois Bankers Association (IBA) ....................... 163 

Price, Hon. Tom: 

Written statement of the Georgia Bankers Association (GBA) .................... 165 

Letter from the Retail Industry Leaders Association (RILA) to Hon. Timothy F. Geithner, Secretary of the Treasury, dated September 22, 2009 169 

Bowman, John E.: 

Written responses to questions submitted by Representative Bean ............ 173 

Written responses to questions submitted by Representative Manzullo ..... 177 

Dugan, Hon. John C.: 

Written responses to questions submitted by Representatives Bean, Foster, and Manzullo .......................................................................................... 182 

(1) 

FEDERAL REGULATOR PERSPECTIVES 

ON FINANCIAL REGULATORY 

REFORM PROPOSALS 

Wednesday, September 23, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 2:21 p.m., in room 

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

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Moore of Kansas, McCarthy of New York, Lynch, 

Miller of North Carolina, Scott, Green, Cleaver, Klein, Perlmutter, 

Foster, Minnick, Adler, Kosmas, Himes, Peters, Maffei; Bachus, 

Castle, Royce, Manzullo, Biggert, Capito, Hensarling, Garrett, 

Neugebauer, Price, McHenry, Marchant, McCarthy of California, 

Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. At the request 

of the Minority, we will have opening statements. And the gentleman from Delaware is recognized for 21⁄2 minutes. 

Mr. CASTLE. Thank you very much, Mr. Chairman. I will probably be briefer than that. 

I would like to thank the regulators who are here. Mr. Geithner 

this morning referenced the fact that while he recognizes there is 

some disagreement, he believes that it is protecting your territory, 

if you will. And I guess to some degree that is part of it. But I 

opine that I think it goes a little beyond that. I think we are very 

interested in what you have to say. 

I don’t think there is any disagreement amongst any of us here 

that we do need to tighten the regulation of our financial services 

in this country. But how we do it and the creation of a new authority to look at products or whatever is a matter that is very important. Perhaps it needs to be done, but at least it is very important 

in terms of what we are doing. So I look forward to your testimony. 

I look forward to your reform recommendations, and I hope that we 

can continue to work together to make a difference. 

There was also yesterday a memorandum I think circulated 

among the Democratic Members about the CFPA bill, and we are 

very interested in that, in exactly where that is going. That is the 

bill in general. I am not sure what is in the memo per se. But that 

is something else we have to pay attention to. 

2 

But we appreciate you being here and look forward to your testimony, and hopefully together we can do whatever is in the best interest of the country. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Georgia is recognized for 

21⁄2 minutes. 

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

this hearing. 

I want to start by thanking you, Ms. Bair, for your quick response and coming to the phone and talking with us about the particular situation in my home State of Georgia, where, as you know, 

unfortunately we almost got a double tragedy, of course, with the 

flooding that is going on there now, but, of course, with our flood 

of bank foreclosures. And I appreciate your comments on that and 

doing everything we can to stem the tide of losing banks. That is 

an unfortunate thing that my State, unfortunately, leads the Nation in this regard. 

I guess my major concern that I want to certainly put before this 

panel today, and I will get to some of it in my questions, simply 

that the fact that there needs to be a heightened awareness and 

interest and emphasis placed upon what we are doing and must do 

to reclaim the confidence of the American people in our economic 

system. We have, I think, played a much heavier hand and placed 

a greater interest on dealing with our banks, Wall Street, who are 

apparently getting well now, under the belief that as we move forward with unfreezing the credit markets and making sure that we 

help bail out Wall Street, we have forgotten to place the necessary 

emphasis on doing something to help Main Street, to help people. 

So now here we are with unemployment hovering at 10 and 11 percent, and in some communities they are at Depression levels. 

I think there ought to be something for us to discuss today on 

what we are going to do as we move forward to make sure we are 

getting jobs created in this country, because that, in all reasoning, 

is the key to getting our economy back moving. It is jobs. Unemployment continues to go up. And as we spoke, Ms. Bair—and unfortunately home foreclosure rates are continuing to go up. 

So the fundamental question becomes to me is there seems to be 

a freezing of the arteries within the banking system. We need to 

get to the fundamental reason why banks are not lending, why are 

they not lending, especially to small businesses which create the 

jobs? 

And with that I will yield back the balance of my time. 

The CHAIRMAN. The gentleman from New Jersey is recognized for 

21⁄2 minutes. 

Mr. GARRETT. I thank the chairman, and I will just be brief. 

Just a couple of points. One is to follow up on the point that Mr. 

Castle was raising a moment ago. We find ourselves on this side 

of the table in somewhat of a quandary as to where we should go 

for the expertise in the reform that we are looking to do for this 

country. And I preface that by saying that contrary to what some 

people would like to say, some people have said earlier this morning, that there are some out there who see no need whatsoever for 

reform in this marketplace, there is no one, there is no one on either side of the aisle who believes that no reform is necessary. EvVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
3 

eryone agrees that mistakes were made in the past, and we need 

to sit down and hopefully in a bipartisan manner try to fix the situation. But doing so, those of us somewhat laymen in these topical 

areas look to those who sit on that side of the table for the expertise in order to bring us this. 

Earlier, as Mr. Castle said and as I said during the earlier hearing, as I am sure was pointed out to you, the Treasury Secretary 

makes the point that when we hear from the regulators, that they 

have their own particular areas of—their own particular areas of 

interests and concerns, their own turf battles that they are working 

on. The question that I couldn’t put back to him was that if that 

is the case, then why in the world would the Administration be 

suggesting that we should actually expand that authority and expand that power to those very same bureaucrats, if you will, or regulators, if all they are interested in is looking at their narrow area 

of responsibility? I wasn’t able to give that question to the Secretary, but I will allow you to touch upon that if that is an area. 

And the other question, I guess, I would like to hear from you 

is we now have several different proposals. We have the Administration’s proposal coming out. And I understand the chairman has 

said with regard to CFP, trying to narrow that in. And I think the 

chairman has gone at least in the right direction of that as to who 

they would apply to. 

Mr. Hensarling from Texas was trying to hear from the Secretary 

whether we really are going to narrow that into, as to which financial institutions should be covered and what have you. I would be 

curious from the panel as well as to where the panel comes in on 

those issues as well, whether the chairman is going closer in the 

direction to where we were originally, that this should really be 

looking at banking institutions and the areas where the problems 

were in the first place and not in the rest of the financial market; 

or is the Administration correct and just say this is much broader 

than that, and we should be applying a program of reform to an 

area that really the problems didn’t originate from and start trying 

to impose bank regulations on an area where we know that those 

bank regulations didn’t work in the past. I appreciate your testimony. 

The CHAIRMAN. I will recognize myself now for 4 minutes. That 

will use up our time, and then the gentleman from Texas will use 

up time from the other side in total. 

I will be dealing with some of the consumer issues. And let me 

say to my friends, the regulators, I welcome a chance to have a serious conversation with you about consumer affairs. I must tell you 

that I don’t remember too many of those in the past. It does appear 

to be of minute interest in consumer affairs from some of you, consumer protections. 

But I want to talk about the continuing problem we have dealt 

with before. The gentleman from Georgia alluded to it. I appreciate 

the fact that those of you who are regulators here have been urging 

the people who work for you, the examiners, to encourage responsible lending. But I am afraid from all the information I get that 

we are not there yet. 

Now, I understand that there is the problem of a culture in 

which you work. I think it is probably the case that no examiner 

4 

in history has been in serious trouble for a loan that didn’t get 

made. There have been examiners who have found themselves in 

difficulty because they were accused of allowing loans to be made 

that shouldn’t have been made. I have sympathy for the people 

who do these jobs, and they are sometimes caught in the shifting 

winds. But I just emphasize again—and I appreciate that, Chairman Bair, you attended a meeting in Nevada recently, very much 

appreciated by Congresswoman Berkeley and the others from Nevada. And we have this constant—many of us across the aisle, we 

are told by the community bankers that they find the examiners 

difficult in terms of the lending. And you say, and I believe you 

completely, that you were trying to ease that. 

I just would emphasize that it takes constant work. We are trying to change culture and change incentives. We need to keep doing 

this, because the sense that the regulators on the ground, your representatives on the ground, are not in sync with what you are saying in Washington continues. I am sure it is not entirely fair, but 

when you go into our line of work, you waive your right to not deal 

with things that are unfair. And perception is part of reality. So 

this is really very, very important for us, for you to do. 

Secondly, obviously the Chair has a serious responsibility with 

regard to the fund, and I do believe that there have been unduly 

alarmist views about the insurance fund. And I welcome the 

chance, Chairman Bair, for you to address that and reassure people. 

We have been at this for a very long time. The deposit insurance 

has been one of the great successes in regulation and economic activity, and we will continue that. I will say—and this is a choice 

for you to make—I understand that there is a need for increased 

funding. It does seem to me that it would be procyclical in the 

wrong way to raise the assessment now. There have been people 

who say if you don’t raise the assessments on the banks, you are 

subsidizing the banks. No, let us be very clear. No one is talking 

about anything other than a loan to the fund. 

Now, where the money comes from will still be discussed. But it 

seems to me the case is overwhelming for there to be loans to the 

fund to be paid back by the banks in their assessments, but in the 

future; that is, to make it countercyclical rather than procyclical. 

This is not the time to raise the assessments on the banks. We will 

have money lent, I hope, to the fund, which will be paid back out 

of assessments. And if we are successful with our regulation, and 

things work well, and the economy works well, we may well get another period where—I don’t know how long it was we didn’t have 

any bank failures, 10 years or more. If we get back into such a period, as we all hope we do, the assessments, the loans can then be 

paid back under existing assessments without any increase. 

So I do want to refute the notion that by forgoing an assessment 

increase today and instead borrowing the money, we are somehow 

letting the banks off the hook. We are simply saying that, yes, we 

understand that the banks will have to pay for this, but it will be 

far better from everybody’s standpoint to defer that repayment 

until the better time that we hope is coming. 

My time has expired. 

The gentleman from Texas. 

5 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I yield to the ranking member. 

Mr. BACHUS. I just wanted to acknowledge that there are two 

funds at the FDIC, and one is the contingent loss fund of $30 billion that you do never hear about. And I don’t—obviously there are 

challenges, but I appreciate the chairman mentioning that. 

Mr. NEUGEBAUER. I thank the ranking member, and I thank the 

chairman for holding this hearing today. Obviously, there is a lot 

of discussion out there about regulatory reform. And I think everyone agrees there were some flaws in the current system, and we 

need to look at ways to make the system better. 

I think while we have—different ideas have been put forward on 

how best to accomplish that, and quite honestly, as we had Treasury Secretary Geithner in here, he has a different perspective particularly when it comes to consumer protection. In fact, to be blunt, 

he wants to fire our witnesses from the consumer protection. And 

I don’t know how you feel about being fired, but that is his proposal. 

And so the question I had for him today, and Chairman Frank 

indicated earlier that you have a lackluster performance in the consumer protection area, and the question is, if you think that you 

need to continue to hold that role, why do you think that you 

should do that? And evidently your testimony previously has been 

that you think that bifurcating that is not a good process. I tend 

to agree with that. But I think one of the questions that you all 

are going to have to answer is what—why should you get to keep 

that if, in fact, you missed the boat in this previous round? 

One of the things that we are moving down a road that I think 

many of us are concerned about is that we seem to be moving to 

consumer protection, but many of us think that we are taking away 

consumer choices. I think we have to be very careful with that, because the consumers are—quite honestly, when given the right information, are very smart, and I think disclosure helps them make 

the choices in their best interests. I don’t think they particularly 

want the Federal Government to do that. 

I think one of the things that—the analogy that I would use here 

is that we seem to be moving in a direction where little Johnnie 

gets hurt on the playground, and so we go and remove the playground so that Johnnie doesn’t get hurt again. The truth is Johnnie 

likes the playground. Consumers like the choices they have. They 

like a lot of the financial products that they have, and they are 

very concerned that the Federal Government is about to take the 

playground away, and I don’t think that they support that. I don’t 

support that. 

But what we do need to do is make sure that we have a regulatory structure that protects the investments of the people who 

are involved in those transactions, but also provides a robust financial market for consumers to be able to have good choices for their 

products. 

The CHAIRMAN. The time for opening statements has been consumed. And we will now begin with the Chair of the Federal Deposit Insurance Corporation, Chairwoman Bair. 

6 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

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

return this afternoon to continue testifying on reforming the Nation’s financial regulatory system. 

Differences in the regulation of capital, leverage, and consumer 

protection and the almost complete lack of regulation of over-thecounter derivatives created an environment in which regulatory arbitrage became rampant. Reforms are urgently needed to close 

those gaps. At the same time, we must recognize that much of the 

risk in the system involved firms that are already subject to extensive financial regulation. 

One of the lessons of the past few years is that regulation alone 

is not enough to control imprudent risk taking with our dynamic 

and complex financial system. So at the top of the must-do list is 

a need to stop future bailouts and reinstill market discipline. The 

government needs a way to say no. We need a statutory mechanism to resolve large financial institutions in an orderly fashion 

that is similar to what we have for depository institutions. While 

this process can be painful for shareholders and creditors, it is necessary, and it works. 

Unfortunately, measures taken during the year, while necessary 

to stabilize credit markets, have only reinforced the doctrine that 

some financial firms are simply ‘‘too-big-to-fail.’’ In fact, the markets are more concentrated than before. 

We also need disincentives for excessive growth in risk-taking. 

We need a better way of supervising systemically important institutions and a framework that proactively identifies risks before 

they threaten the financial system. We have called for a strong 

oversight council with rulemaking authority. It would closely monitor the system for problems such as excessive leverage, inadequate 

capital and overreliance on short-term funding, and have a clear 

statutory mandate to act to prevent systemwide risks. 

Finally, the FDIC strongly supports creation of a Consumer Financial Protection Agency as a stand-alone Federal regulator. As 

embodied in H.R. 3126, the agency would eliminate regulatory gaps 

between bank and nonbank financial products and services by setting robust national standards for consumer protection. However, 

it is essential to focus examination and enforcement on the 

nonbank sector to protect consumers from some of the most abusive 

products and practices. We believe this bill would be even stronger 

if amended to include a well-defined mechanism that provides oversight of nonbanks in partnership with State regulators. 

To be sure, there is much to be done if we are to prevent another 

financial crisis, but at a minimum we need to scrap the ‘‘too-bigto-fail’’ doctrine, set up a strong oversight council to prevent systemic risk, and create a strong consumer watchdog that offers real 

protection from abusive financial products and services. 

Thank you. 

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

49 of the appendix.] 

The CHAIRMAN. Comptroller Dugan. 

7 

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

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

members of the committee, I appreciate this opportunity to continue where we left off last time in discussing the Treasury Department’s proposal for regulatory reform. 

As I testified in July, the OCC supports many elements of the 

proposal, including the establishment of a council of financial regulators to identify and monitor systemic risk and enhanced authority 

to resolve systemically significant financial firms. 

We also believe it would be appropriate to extend consolidated 

supervision to all systemically significant financial firms. The Federal Reserve already plays this role for the largest bank holding 

companies, but during the financial crisis, the absence of a comparable supervisor for large securities and insurance firms proved 

to be an enormous problem. The proposal would fill this gap by extending the Federal Reserve’s holding company regulation to such 

firms which we believe would be appropriate. 

However, one aspect of the proposal goes much too far, which is 

to grant broad new authority to the Federal Reserve to override the 

primary banking supervisor on standards, examination, and enforcement applicable to the bank. Such override power would alter 

our present working relationship with the Federal Reserve that 

works very well and fundamentally undermine the authority and 

accountability of the banking supervisor. 

We also support the imposition of more stringent capital and liquidity standards on systemically significant financial firms. This 

would help address their heightened risk to the system and mitigate the competitive advantage they could realize from being designated as systemically significant. 

Similarly, the OCC supports the proposals calling for more forward-looking loan loss provisioning, which is an issue that I have 

spent a great deal of time on as co-Chairman of the Financial Stability Board’s Working Group on Provisioning. Unfortunately, our 

current system unacceptably discourages banks from building reserves during good times when they can most afford it, and requires them to take larger provisions for loan losses during 

downturns when it weakens vulnerable banks and inhibits needed 

lending. 

And we support the proposal to effectively merge the OTS into 

the OCC. 

Finally, we support enhanced consumer financial protection 

standards and believe that a dedicated consumer protection agency, 

the CFPA, could help achieve that goal. However, we have significant concerns with the parts of the proposed CFPA that would consolidate all financial consumer protection rulewriting, examination, 

and enforcement in one agency, which would completely divorce 

these functions from safety and soundness regulation. 

It makes sense to consolidate all consumer protection rulewriting 

in a single agency with the rules applying to all financial providers 

of a product, both bank and nonbank, but we believe the rules 

must be uniform, and that banking supervisors must have meanVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
8 

ingful input into formulating them, and unfortunately, the proposed CFPA falls short on two counts. 

First, the rules would not be uniform because the proposal would 

expressly authorize States to adopt different rules for all financial 

firms, including national banks, by repealing the Federal preemption that has always allowed national banks to operate under uniform Federal standards. This repeal of the uniform Federal standards option is a radical change that will make it far more difficult 

and costly for national banks to provide financial services to consumers in different States having different rules, and these costs 

will ultimately be borne by the consumer. The change will also undermine the national banking charter and the dual banking system 

that has served us well for nearly 150 years. 

Second, the rules do not afford meaningful input from banking 

supervisors, even on real safety and soundness issues, because in 

the event of any dispute, the proposed CFPA would always win. 

The new agency needs to have a strong mechanism for ensuring 

meaningful bank supervisor input into the CFPA rulemaking. 

Finally, the banking agencies should continue to be responsible 

for examination and enforcement, not the CFPA. I believe there are 

real benefits to an integrated approach to consumer compliance 

and safety and soundness exams, a process that I think has worked 

well over time. Moreover, moving bank examination and enforcement functions to the CFPA would only distract it from its most 

important and most daunting implementation challenge, which is 

establishing an effective enforcement regime for the shadow banking system of the tens of thousands of nonbank providers that are 

currently unregulated or lightly regulated, like nonbank mortgage 

brokers and originators. We believe the CFPA’s resources should be 

focused on this fundamental regulatory gap rather than on already 

regulated depository institutions. 

Thank you. 

[The prepared statement of Comptroller Dugan can be found on 

page 98 of the appendix.] 

The CHAIRMAN. Mr. Bowman. 

STATEMENT OF JOHN E. BOWMAN, ACTING DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. BOWMAN. Good afternoon, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to testify today. 

When I testified here 2 months ago, my remarks concentrated on 

addressing real problems underlying the financial crisis. In my 

written testimony today, I debunk the myth of regulatory arbitrage 

by the industry. 

In my brief remarks here this afternoon, I would also like to emphasize that we will not solve the potential problems of tomorrow 

by merging regulatory agencies. There are five reasons why consolidation would neither solve those problems, nor promote efficiency, 

especially if the thrift charter is preserved. 

First, as you know, the OTS conducts consolidated supervision of 

thrifts and their holding companies. Although I do not believe the 

OTS is the proper regulator for systemically important conglomerates, I think it makes perfect sense for the agency to continue to 

9 

supervise thrift holding companies, particularly for the many local 

consumer and community lenders across America who should not 

be asked to bear the cost and the inefficiency of a separate holding 

company regulatory scheme. 

Although larger thrifts tend to get the headlines, the overwhelming majority of thrifts are small, conservative lenders that 

offer home mortgages, car loans, and other day-to-day financial 

services to people in towns and cities, suburban and rural, across 

the country. Quite a few are community-based mutual institutions—much like the Bailey Building and Loan in the movie, ‘‘It’s 

a Wonderful Life’’—that had been integral parts of their communities for decades. They did not contribute to the financial crisis, 

and they should not have to pay for it. 

The health of the financial services industry is improving, but it 

is by no means robust. The transition cost of thrifts converting to 

a different supervisor and a separate holding company regulator 

would be an unnecessary burden at a difficult time. 

My second point also relates to the fact there is no efficiency to 

be gained by merging regulatory agencies that do not fit together. 

Currently, thrifts report their financial status to the OTS through 

quarterly thrift financial reports, while banks file call reports 

under consolidation proposals. Either thrifts would need to spend 

money to overhaul their financial reporting systems, or the consolidated agency would need to operate and maintain two different reporting systems. Either approach would undercut efficiency. 

The third point is that trillion-dollar megabanks have almost 

nothing in common with small community thrifts. If these different 

types of businesses were supervised by a single regulator, the 

needs of the community-oriented majority could be too often overlooked by a bureaucracy forced to focus on the institutions that 

pose the greatest risks to the financial system. 

A fourth point is that multiple viewpoints among regulators foster better decisionmaking. OTS’s leadership of banning unfair credit card practices is just one example. Remember that countries with 

a single monolithic bank regulator fared no better than the United 

States during this financial crisis we are currently undergoing. 

My fifth and final point dovetails with the first two. Consolidating agencies would take years, cost the industry millions of dollars, and generate upheaval in the day-to-day supervision of the financial institutions. All of this would be done to achieve a forced 

fit of fundamentally different agencies that regulate the fundamentally different charters and institutions; in effect, trying to pound 

a square peg into a round hole with no efficiencies or other benefits 

for taxpayers, consumers or the industry. 

To reiterate my remarks to this committee 2 months ago, the 

proposed consolidation could not address the problems that caused 

the financial crisis or could cause the next one. 

Thank you again, Mr. Chairman. I am happy to respond to your 

questions. 

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

65 of the appendix.] 

The CHAIRMAN. Next—and I am very proud that we have maintained the rule here of including our State colleagues in banking, 

insurance and in regulation and securities. There are people who 

10 

consider you State regulators a nuisance, but we think you are an 

important part of the system. So we have Mr. Joseph Smith, who 

is the North Carolina Commissioner of Banks, and he is here on 

behalf of the Conference of State Bank Supervisors. 

STATEMENT OF JOSEPH A. SMITH, JR., NORTH CAROLINA 

COMMISSIONER OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. SMITH. Chief nuisance, right. Good afternoon, Chairman 

Frank, Ranking Member Bachus, and distinguished members of 

the committee. I appreciate the opportunity to continue our discussion of financial services regulatory reform. 

First and foremost, the decisions that you make will determine 

the industry’s structure and its impact on communities, small businesses, and consumers across the country. My colleagues and I are 

very concerned that we could end up with a highly concentrated 

and consolidated industry that holds too much sway over the Federal Government and is unmoved by the needs of consumers and 

communities. 

The States have made the industry—that is, the financial services industry—more diverse and accountable. You see this in the 

fact that the States have chartered over two-thirds of the Nation’s 

8,000 banks, and you see this in the fact that the States serve as 

incubators and models for consumer protection. 

We hope that we can agree that the outcome of reform cannot be 

less diversity and less accountability, and yet we are hearing proposals that will undermine both diversity and accountability, proposals that will drive us towards greater centralization and consolidation. In our view, a consolidated banking system and industry 

would be in conflict with the health of our State and local economies and would further erode public confidence. 

I would like to make a few brief points on some specific issues 

and proposals. First, it is important to preserve the role of State 

law and the role of the States to set and enforce tougher consumer 

protection standards. Nationally chartered banks must not be able 

to hide behind preemptive regulatory declarations, declarations 

that are directly contrary to long-standing congressional intent. We 

oppose any effort to undermine the provisions in H.R. 3126, preserving the ability of the States to set and enforce tougher consumer protection standards. 

Second, creating a single monolithic regulator as a means of improving financial regulation relies on the faulty assumption that 

regulator consolidation leads to a safer and stronger banking system. Such a structure would diminish regulatory accountability 

and discipline. It would lead to further industry consolidation and 

facilitate regulatory capture by the Nation’s largest financial institutions. A single Federal regulator, a regulator that both charters 

and examines national banks and examines State-chartered institutions, would irreparably harm the dual banking system and the 

diversity that is the hallmark of that system. 

Finally, regulatory reform must directly address and end ‘‘toobig-to-fail.’’ This means regulatory safeguards to prevent growth 

driven by excessive risk-taking and leverage, a clear path for resolving large interconnected institutions, and no discretionary safeVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
11 

ty net. Only in this manner will we be able to preserve the financial system’s stability and protect taxpayers from potential unlimited liability from failed firms. 

As always, sir, it is an honor to appear before you. Thank you 

very much. I look forward to answering your questions. 

[The prepared statement of Mr. Smith can be found on page 132 

of the appendix.] 

The CHAIRMAN. Thank you. 

I will begin the questioning. And I know that there are questions 

that some of the regulators have about their authority and whether 

it is turf or not. So, Mr. Bowman, you spoke out against the abolition of the OCC and the OTS and their becoming one national entity. You thought that was a mistake. 

Mr. Dugan, what do you think about the proposal to replace the 

current OCC and OTS with one national bank supervisor? 

Mr. DUGAN. Mr. Chairman, as I put it in my written remarks 

from last time— 

The CHAIRMAN. I apologize for not reading them, Mr. Dugan. I 

do not always do my homework. Pull the microphone a little closer, 

please. 

Mr. DUGAN. Sorry. 

I support the proposal in that kind of consolidation. 

The CHAIRMAN. Mr. Bowman, you don’t agree with the argument 

that this is consolidation, it doesn’t make sense? I am wondering 

whether—let me say there does seem to be some analogy here with 

the consumer protection. That is, people seem to be in favor of 

other people losing their jurisdiction much more than they are of 

their own. That is not surprising. 

But to Mr. Bowman, the arguments against the consumer agency 

are the same as against a consolidation, which most people think 

is more the OTS moving into the OCC. You do not. I am not surprised. I just want to say I do think institutional position does have 

some impact on people’s views on this. 

Let me ask you further on the question of the importance of leaving the consumer function with the safety and soundness regulator. 

Now, I have agreed with that to some extent; not the consumer 

function, that is why one of the differences that I have with the Administration had to do with the Community Reinvestment Act. 

That does seem to me to be very much, when we talk about volumes of loans, etc., safety and soundness. But I am a little troubled 

by the implication that a good enforcement of the credit card law 

or rules about truth in lending or others, that those somehow 

would implicate safety and soundness. Is that the argument, that 

we are afraid that if people enforce consumer protection laws too 

vigorously, this will call into question safety and soundness? 

Mr. Dugan? 

Mr. DUGAN. No. That is not exactly what I meant. What I meant 

was as we do our supervision for safety and soundness, we often 

find consumer protection issues and vice versa. And I attached a 

bunch of real-world examples. 

The CHAIRMAN. That is fine. 

Will there be anything preventing you from telling the agency— 

it did seem to me the way this is presented—and I will tell you this 

gets into the discussion—that there is somehow something risky 

12 

about separating consumer protection for safety and soundness, because obviously safety and soundness is of prime importance. So 

you are not suggesting that this is going to be riskier. When you 

say you don’t want safety and soundness separated from consumer 

protection, you are not suggesting that this would in any way undercut safety and soundness? 

Mr. DUGAN. There are some places it could undermine safety and 

soundness in the Administration’s proposal because— 

The CHAIRMAN. Which parts? 

Mr. DUGAN. To the extent that there is a dispute about whether 

there is a safety and soundness issue, the way it is currently drafted, the CFPA would always win. 

The CHAIRMAN. Okay. So our proposal, which is going to have a 

way in which that is decided between the agencies—and I want to 

deal with this. But you do believe that safety and soundness—I 

guess the implicit point there is that too vigorous a protection of 

consumer rights might somehow implicate safety and soundness; 

otherwise you would have a dispute. And your problem is it is onesided. 

Our proposal will—and by the way, people have described us as 

moving away. I haven’t moved away from anything. I didn’t have 

anything to start with. I never liked ‘‘plain vanilla.’’ As I have said, 

I remember the days when the bars had to serve food if they were 

going to serve liquor, and they served some of the most God-awful 

food known to human beings. And I think trying to force someone 

to do good is a very, very qualitatively different and, I think, often 

futile effort rather than preventing them from doing bad. I have 

never been much of a compulsory do-gooder. But if we were to have 

a mechanism which allowed for a fair resolution and even maybe 

weighted more towards the bank regulators of a dispute, would 

there still be a safety and soundness issue? 

Mr. DUGAN. I think that would help, but that is not the only 

issue. 

The CHAIRMAN. I understand that. And I understand that— 

Chairwoman Bair, again, do you see—is it a safety and soundness 

issue if we separate out consumer protection from you? 

Ms. BAIR. I think it is an examination quality issue. 

The CHAIRMAN. Okay. But is it a safety and soundness issue? 

Ms. BAIR. Well, I think there could be conflicts. 

The CHAIRMAN. But if we resolve the conflicts. It might be if 

there was a conflict between the two? 

Ms. BAIR. As an insurer for all banks, you do need to have some 

emphasis on safety and soundness, too. The government is ultimately at risk for the viability of the institutions. 

The CHAIRMAN. I understand that, but I do think it is important 

for the safety and soundness regulators to be able to say, wait a 

minute, you have gone too far. Although do you think in general 

that vigorous consumer law enforcement undercuts safety and 

soundness? 

Ms. BAIR. No. Just the opposite. I think a good quality consumer 

compliance examination function complements and supports safety 

and soundness. 

The CHAIRMAN. My time has expired. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

13 

I want to go back to some of the comments I made in my opening 

statement. Chairman Bair, we will start with you. What was the 

FDIC doing in relationship to consumer protection, say, over the 

last 5 or 10 years? In other words—because quite honestly, as I 

said, some folks don’t think you all were doing anything. 

Ms. BAIR. The first thing I would like to say is we don’t have the 

authority to write consumer rules. We have never had that. That 

has always been vested in the Federal Reserve Board. Two years 

ago, I came to this committee and asked for the ability to do that. 

Mr. Dugan did the same thing. 

I will be happy to give you our comment letters to the Federal 

Reserve Board on subprime lending, on yield spread premiums, on 

credit cards, and on overdraft protection. We have vigorously 

pressed for a number of years for stronger consumer protections in 

key areas. My examiners are only as good as the rules they have 

to enforce. So that is that. 

Number two, in enforcing the rules we do have, we have done a 

reasonable job. Could we do better? Yes. That has been one of the 

things that I have tried to do as Chairman of the FDIC. We have 

increased the number of our compliance examiners, we have increased and streamlined our General Counsel section that brings 

these enforcement cases, and overall, we do have a pretty good 

record. I am happy to give you the numbers concerning our enforcement cases if you would like. 

We care about consumer protection. We care about protecting 

bank customers. No, we don’t want to lose that. And if you want 

to call that turf, that is fine, but that is who we are. 

Mr. NEUGEBAUER. Thank you. 

So your response, let me be clear, is that in response to the consumer protection, you weren’t doing anything, what you are saying 

is in that area, for example, FDIC, you do not feel like you had any 

jurisdictional authority to address consumer issues? 

Ms. BAIR. We feel we did not have strong enough rules against 

abuses like overdraft protection and credit card and subprime lending. Our subprime lending cases were brought as safety and soundness cases because those weren’t prudent loans either. But we 

didn’t have rules in place to tackle it from a consumer protection 

standpoint. 

Mr. NEUGEBAUER. Mr. Dugan, is that your position as well? 

Mr. DUGAN. It is similar. We also did not have any rulewriting 

authority in this area. But we did have considerable examination 

and enforcement responsibilities with respect to the rules that were 

on the books, and we think we did a decent job with that. 

I would make one other very fundamental point, though. A number of the problems that caused the crisis, while consumer protection contributed to it, a big chunk of that was pure and simple underwriting problems. A big chunk of that was outside of the banking system. And we did not have any authority over that in terms 

of examining and supervising it, and even the rules that were 

adopted didn’t apply to them. And so you had this uneven world 

where you had two different systems applying to the regulated and 

the unregulated, and that was a fundamental problem. 

Mr. NEUGEBAUER. Thank you, Mr. Dugan. 

Mr. Bowman? 

14 

Mr. BOWMAN. Yes. Two examples. First, we do have some 

rulewriting authority in terms of consumer complaints, and we 

took the lead in coming up with an unfair and deceptive acts and 

practices rule that related to credit card practices and other activities. Second, we have additional authority as it relates to deceptive 

advertising and issues like that, which we have used to enforce 

consumer rules and regulations against those institutions we regulate and their holding companies. 

Fair lending referrals to the Department of Justice have been 

fairly constant throughout. In the last couple of years, formal enforcement actions brought against our institutions are up somewhat dramatically as a result of increased consumer complaints 

that we are receiving. 

But I would share Comptroller Dugan’s concern about the number of consumer complaints and abuses that existed outside of the 

regulated depository institution area where we don’t have the authority to regulate or oversee. One of the advantages, in my opinion, of something like the Consumer Financial Products Agency, 

would be a uniform set of regulations that would be applicable to 

all providers of consumer products and services. 

Mr. NEUGEBAUER. My time is limited. So what I hear you all saying is, if you had the rules, if you had a uniform set of rules, that 

individually your agencies are capable of enforcing that and making that a part of your standard regulatory process. But what you 

are saying, in defense of what others have said about taking that 

just totally away from you, is that you haven’t really been given 

the opportunity to execute that with the proper rulemaking authority. Is that what I am hearing you say? 

Ms. BAIR. I think the examination and enforcement apparatus 

with regard to banks is already in place. Give us stronger rules, 

and you can immediately leverage those resources. I would absolutely echo what Comptroller Dugan said, especially that many 

consumer abuses in mortgages occurred outside regulated depository institutions. If we have strong rules, we have the examination 

forces and capabilities to enforce them. With the existing rules, we 

have had 639 total formal and informal consumer actions since 

2006. We also have had another 91 referrals to the Department of 

Justice for fair lending. We have a good record of enforcing the 

rules that we have in place now. 

The CHAIRMAN. The gentleman’s time has expired. I am going to 

recognize the gentlewoman from New York, and I will ask her to 

just give me 30 seconds of her time. 

If I could just say that I am a great admirer of Chairman Bair 

and of Mr. Dugan. In fact, I actively urged your continuation in 

your reappointment. But I have to be honest with you, in all the 

conversations we have had, I do not remember either of you ever 

coming to me and saying, here is this consumer problem. You have 

come to me, as you should, with problems in the regulatory area, 

in the financing area, etc., but I do not recall either of you ever 

coming to me and saying that you didn’t have strong enough rules. 

I do not recall either of you ever coming to me and saying, here 

is a defect in consumer protection, as you often did in your general 

area. 

15 

Ms. BAIR. Mr. Chairman, I will provide my previous testimony. 

We have absolutely testified about the need for additional consumer protection authority. 

The CHAIRMAN. I will apologize if that is the case, because my 

recollection is that you have been much more energetic with us on 

those other areas and not on consumer protection. But— 

Mr. DUGAN. I would be happy to respond to that as well. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I appreciate the hearings from this morning and this afternoon, and I 

appreciate the testimony that we have been hearing. 

This is a learning curve for a lot of people. Hopefully, a lot of 

people are watching this on TV so they can actually hear what 

went down over the past year. And to be very honest with you, it 

is a learning session for many Members. We sit here on the committee, but there are many Members who are sitting outside that 

really have no idea what we are talking about. These are difficult 

subjects. And if you are not in the financial world, it is extremely 

difficult for the average person to even pick this up. 

Now, I guess the questions that I want to go to, again, go to the 

Consumer Financial Protection Agency and what the rules and regulations are going to be. There are many who feel we definitely 

need something like this, and I am one of them. But we also want 

to make sure as we do this, we are not going to strangle those corporations that we are trying to help, so they are healthy. It is a 

fine line when you start to think about it. 

But I guess one of the things that I would like to have an answer—and I apologize if it was in the full context of your words— 

but how would a conflict between the agency and a regulatory be 

solved? And who is going to be on the top of that to make those 

decisions when you bring all these together? 

Ms. BAIR. I think subprime is an example. Early on, when 

subprime expanded, it was viewed positively. Lenders that were 

making these loans were getting some plaudits in the media and 

elsewhere because they were broadening homeownership. As we 

saw later, these loans didn’t perform, and they weren’t serving anyone’s interest because long-term, they weren’t affordable. 

There can be differences in perspective on this, and you need 

synergies between the two. You need both perspectives to be able 

to evaluate a practice. This is one example of where a tool originally introduced in the nonbank sector spilled into banks. This tool, 

a type of mortgage product that was originally touted by those offering it as a way to expand homeownership, really ended up hurting a lot of people. But early on, nobody caught it on the safety and 

soundness side or the consumer protection side. This type of thing 

can happen in benign environments if a product appears to look 

good. With a low teaser rate, you can buy a house for a couple of 

years and figure it out later. Or you can have have a very low 

downpayment. Ultimately, we saw that did not work. 

In more benign times, you can get into a situation where a product that looks on the surface like it is going to be proconsumer is 

actually not. If you look deeper in terms of underwriting quality, 

it is not in the consumer’s long-term interest and certainly not in 

the lender’s long-term interest. 

16 

Mr. DUGAN. I would just echo those remarks. If you only have 

one set of views, I think you can have problems in emphasizing 

that aspect of it if you don’t have them both blended together and 

balanced, one against the other, when you have an issue like that. 

Nontraditional mortgages, the payment option mortgages, were 

something we identified very early on as having both safety and 

soundness problems and underwriting problems. We began to try 

to take action in the national banking system, as my fellow banking regulators did. We couldn’t get at the place that was really 

cranking them out because we didn’t have rules that applied in 

that area. So I think you would need a mixture of the two, and the 

notion that you can completely separate them gives us pause. 

Mrs. MCCARTHY OF NEW YORK. One of the other things I just 

want to bring up, and, Chairman Bair, we had talked about this. 

If you watch TV, and it doesn’t matter whether it is early in the 

morning or late at night or the middle of the day, we are still seeing a tremendous amount, in my opinion, of predatory lenders on 

TV. I know it is not particularly in this committee that we can deal 

with it, but this is a perfect example where I see the two entities 

of different parts of the government aren’t working together. 

We are here talking about—talking about giving consumers protection, and it is blasted all over the TV, it is on every telephone 

pole in my area: We will get you insurance, we will get you your 

loan for your house, no downpayment. How far have we actually 

come on protecting our consumers? 

Ms. BAIR. Congresswoman, that is right. Banks are not doing 

this. If they were banks, we could stop it. We have both rules now. 

The Fed finally moved forward with rules under the Home Owner’s 

Equity Protection Act and we have an enforcement mechanism for 

banks. The nonbank sector is lightly regulated or virtually unregulated in many, if not most, of these areas, and it is a daunting task 

to try to identify those people, get them registered, get them licensed, and have some type of examination and enforcement mechanism. That is really where the void is, and that is where the focus 

of this new agency should be. That, in and of itself, is a daunting 

task. 

So we think the best leverage in examination and enforcement 

resources is for this new agency to write rules for everybody, but 

on the enforcement side focus on nonbank financial service providers that, you are absolutely right, are still out there. 

Mrs. MCCARTHY OF NEW YORK. I thank you all for your testimony. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Bair, you have opined in the past at some time or another that the creation of the CFPA may not solve the fundamental 

causes of the mortgage crisis, and that concerns me. You had a lot 

of entities that weren’t even banking entities issuing mortgages. 

Obviously earnings statements by the people obtaining the mortgages weren’t always obtained. There are a lot of fundamental 

problems with that, and my concern is that if we are to create this 

particular new agency, and it doesn’t have the authority to deal 

with those problems or the mechanical ability to deal with those 

problems, that would be an issue. 

17 

But I am also concerned what happens if we don’t create the 

agencies in terms of how do we catch these problems that apparently we didn’t catch before. I would be interested in your comments on that. 

Ms. BAIR. You need the CFPA because you need strong rules 

across-the-board for banks and nonbanks. There has been a lot of 

arbitrage between the more heavily regulated banking sector and 

the nonbanking sector. Unless you have a new agency that not only 

writes rules for both banks and nonbanks, but also has some viable 

examination and enforcement mechanism for the nonbank sector, 

you are not going to address the problem. We can keep regulating 

banks and deploy more examiners. But if somebody else can offer 

a loan that is completely outside that framework, you are not going 

to solve the problem. Banks will lose more market share or this 

will put competitive pressure on them to lower their standards, 

which is exactly what happened with subprime mortgages. 

There really needs to be a laserlike focus on the nonbank sector. 

You don’t fix that problem unless you make sure you have both 

rules and enforcement mechanisms that apply across-the-board. 

Mr. CASTLE. In short, it is the nonbank sector that is the disturbing part of it as far as you are concerned? 

Ms. BAIR. Yes. You have to deal with that, or you are not going 

to solve the problem. 

Mr. CASTLE. Thank you. 

Mr. Dugan, how important is uniformity in setting the standards 

for national banks? And what do you see as some of the problems 

raised by the Administration’s proposal to establish a Consumer Financial Protection Agency which at the same time allows the 50 

States to set their own standards for national banks operating 

within their borders? It seems to me you are getting into a double 

structure there, and I would be interested in your comments on 

that. 

Mr. DUGAN. You put your finger on a very important point. As 

we were just talking about, there has been a rulewriting gap in not 

having uniform standards. The notion of having a new agency that 

could set some uniform rules at the national level is a very powerful and good thing. 

But in the same breath, I think you undermine this principle by 

then inviting the States to add additional rules on each of these 

areas. And in a world in which the delivery of financial products 

and services, particularly national banks that operate across State 

borders, it is a technology that doesn’t respect boundaries. If you 

have ATM cards or credit cards or debit cards or instant credit 

checks, you have a world in which you touch many States, and the 

efficient delivery of it requires a single set of rules. 

That is what has allowed a lot of these products to flourish, and 

I think the danger you would have is twofold by having many different standards apply. First, you would have a lot more cost in figuring out how to comply with 50 different rules on how to disclose 

things, an account opening, interest rates, or rules on compensation. 

Second, you create tremendous legal uncertainty and exposure in 

different areas by having different rules and not knowing which 

States’ rules would apply. And the problem is that those costs will 

18 

get passed on to consumers either in the form of higher prices or 

less availability of the products and services. 

Mr. SMITH. Excuse me, Representative Castle, may I respond to 

that as well? 

Mr. CASTLE. Let me ask another question, Commissioner. You 

can respond to that one and the one I am going to ask next, if you 

will. This is to Mr. Dugan as well. 

Do you think that the creation of CFPA will result in less competition and higher costs, which you just indicated it would, but 

would force the multi-State banks to operate in, say, one bank, just 

California and New York or whatever—one State, excuse me, California, New York or whatever it may be. Are you going to see more 

of that if this were to— 

Mr. DUGAN. I don’t know if that would happen, but I think you 

can have circumstances where rather than incur the compliance 

costs of a bunch of different rules, they would take a particular 

large State, and, if it had a different rule, try to conform their systems to that one State, even if it is different from the rules adopted 

at the national level pursuant to notice and comment pursuant to 

all the deliberative process that the new CFPA would have. It 

would undermine that thought. I think you could have a real issue 

there. 

Mr. CASTLE. Commissioner Smith, you have a little more time. 

The CHAIRMAN. Well, I would ask unanimous consent to—he is 

a State bank supervisor representative, and it is a very relevant 

question. I would ask unanimous consent that he get an additional 

minute to respond to the question. 

Mr. SMITH. I will try. 

First of all, sir, if I might say so, we have just had a financial 

meltdown under subprime. The States were all over subprime for 

years. No one has ever said, to my knowledge, that the State regulation caused the subprime crisis. In fact, if anything, the State 

regulation was on top of the subprime crisis before anybody else. 

It is astonishing to me to hear the regulators of enterprises that 

have lost billions of dollars somehow related to subprime say they 

weren’t involved then. This is an astonishing proposition. 

It seems to me in cases where there are appropriate Federal 

standards or where Federal standards are enforced, the States 

have other things to do right now than fry these fish. We will work 

with the Federal Government. We have worked with the Federal 

Government on the SAFE Act. We thank you for adopting that. 

Forty-nine States have adopted similar legislation to license mortgage originators so that we can get our arms around this issue, and 

we have been doing this stuff for years. So I think it is really quite 

unfair to say that allowing States to have higher standards to protect consumers somehow damages the financial system. 

The CHAIRMAN. Well, it is an appropriate segue to the gentleman 

from North Carolina, who has been a leading activist here in the 

subprime crisis, and I am about to recognize him. 

I would just say to my friend, no one ever said this was the answer to the subprime crisis. The answer to the subprime crisis was 

the subprime bill that we passed. That is what we thought was the 

answer to that. This was never meant to be the answer to that. 

19 

The gentleman may have forgotten that we did pass the subprime 

bill. 

The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

There is a division in the existing law between safety and soundness regulation and consumer protection regulation. Chairwoman 

Bair said that you had testified or that you had commented as part 

of the public comment period when the Fed adopted rules that applied to institutions for which you all have principal safety and 

soundness responsibility—and actually, Comptroller Dugan, you 

did as well—you commented not for stronger rules, but for weaker 

rules. You opposed in the public comments many parts of the credit 

card regulation. 

Mr. Dugan, I understand that you don’t have rulemaking authority. You didn’t have rulemaking authority. You do have the authority to bring enforcement actions. The great, great bulk of credit 

card business was with national banks. It is now like the top 3 

banks have 75 percent of the business. It was a little bit less sometime back, but it has always been dominated by national banks. 

And there were no enforcement actions. Now—yes, sir? Am I missing something? 

Mr. DUGAN. Yes. First, you are missing something. We brought 

a number of enforcement actions against credit card banks, particularly the subprime credit card lenders, where we brought so many 

enforcement actions against them that they stopped doing business 

as national banks. 

Second, we enforced the rules that applied to credit card companies. The rules that you are talking about, the suggestions and the 

practices that caused Congress to pass a statute that applies to 

them, we will enforce those, too. But we can’t make up rules. In 

fact, we are prohibited from adopting anything that looks like a 

rule if it is given to another agency by statute. 

Mr. MILLER OF NORTH CAROLINA. Well, the statute now is that 

you can enforce the Federal Trade Commission’s unfair and deceptive trade practices—acts and practices rule, and you can do that 

by enforcement action. 

Mr. DUGAN. But we can’t write a rule under that. Only the Federal Reserve can. We have requested that authority. 

Mr. MILLER OF NORTH CAROLINA. You can bring enforcement actions with respect to specific practices as a violation of the— 

Mr. DUGAN. We do. And we have brought 11 of them in the last 

9 years against significant companies, and we have issued guidances related to it, but we can’t define them as a matter— 

The CHAIRMAN. Just to clarify, that was 11 in 9 years? 

Mr. DUGAN. Those kind of specific enforcement actions. 

Mr. MILLER OF NORTH CAROLINA. That is more than I thought 

you had brought. But did you bring any enforcement actions with 

respect to charging the double-cycle billing, for charging interest on 

a balance that had already been paid off? 

Mr. DUGAN. Double-cycle billing was expressly permitted by regulation, by the Federal Reserve. There is no way we could have 

brought an action against them as an unfair and deceptive practice 

that the regulation permitted. 

20 

Mr. MILLER OF NORTH CAROLINA. Okay. Raising the interest 

rates on an existing balance. That was expressly allowed? 

Mr. DUGAN. If it is adequately disclosed to consumers that can 

happen to their balances when they do something, it is not an unfair and deceptive practice to raise it. It is now unlawful to do that 

because Congress acted. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. DUGAN. But that rule was not in place. 

Mr. MILLER OF NORTH CAROLINA. Okay. You have said on several 

occasions that there were a great many practices that you simply 

stopped banks from doing by dissuading them from doing it as part 

of your supervision. 

Mr. DUGAN. Right. 

Mr. MILLER OF NORTH CAROLINA. Given what has gone on in the 

economy in this decade, can you give us some idea of the kinds of 

things you have talked them out of doing? Given what happened 

and what was allowed, what did you talk them out of? Was it 

human trafficking? Conflict minerals? What did you talk them out 

of? 

Mr. DUGAN. Okay. I will give you a couple of examples, and then 

I will also say that a bunch of the practices, the very worst 

subprime mortgage lending, was not occurring inside national 

banks or State banks for that matter. It was in unregulated State 

entities where the States were in charge of them. And the numbers 

show that. 

In terms of the things that we have leaned on people, payday 

lending was something where the payday lenders tried to get ahold 

of national banking franchises to run payday lending operations in 

them, and we stopped it. We stopped them from so-called renting 

the national bank charter to do that. I mentioned subprime lending 

and credit cards, where we saw a number of abuses that caused 

real problems. Both on the consumer protection side and the safety 

and soundness side, we came down very hard on it, and we essentially ended that practice for the monoline stand-alone subprime 

lenders in the credit card business. I can provide you other examples and specific cases and would be happy to do that for the 

record. 

Mr. MILLER OF NORTH CAROLINA. My time is nearly up. 

The CHAIRMAN. I will take the last 20 seconds to say, I would 

note, Mr. Dugan, you mentioned the failure to do the subprime regulation in the nonbanks. The authority to do that was lodged in 

one those safety and soundness regulators whose autonomy you are 

protecting, the Federal Reserve. Your proposal would keep that in 

the Federal Reserve, your position. Because the Federal Reserve 

has made your consumer protections, and you have said leave them 

with the safety and soundness regulator. The fact is, as Mr. Miller 

also pointed out, you said, well, we couldn’t do that; the Federal 

Reserve gave them the permission to do it. So the consequence of 

what you are saying, don’t give any enforcement powers to this, the 

Federal Reserve refused to use the enforcement powers, and you 

are for the status quo with the Federal Reserve. 

Mr. DUGAN. That is not what I am saying. What I was saying 

was— 

21 

The CHAIRMAN. Excuse me, Mr. Dugan, it is when you say that 

we should not create a consumer agency— 

Mr. DUGAN. I didn’t say that. 

The CHAIRMAN. —and give it enforcement powers. You did say 

that. You said we shouldn’t give the consumer agency the enforcement and examination powers. They should be left with the safety 

and soundness regulator. That includes the Federal Reserve, whose 

inaction you have frequently cited. 

Mr. DUGAN. I am sorry if I created a misunderstanding. What I 

was trying to say was we should give the new CFPA rule-writing 

power— 

The CHAIRMAN. And not examination and enforcement. 

Mr. DUGAN. —and examination enforcement with respect to 

nonbanks. 

The CHAIRMAN. Right. But not with respect to banks, which is 

where the credit card issue came in. You cited an example of the 

credit card situation where you were in fact debarred from taking 

action, when Mr. Miller asked you, because the Federal Reserve, a 

safety and soundness bank regulator, explicitly allowed the banks 

to do it. And according to your position, that status quo would continue. 

Mr. DUGAN. No, because I think the new CFPA would write the 

rules, would have that issue— 

The CHAIRMAN. But there were rules that were written that the 

Fed wouldn’t use. Do you think the Federal Reserve has done a 

good job in consumer protection? 

Mr. DUGAN. No, what I am saying is that 75 percent of those 

credit card companies are regulated by national banks, 25 percent— 

The CHAIRMAN. And the regulations allow them to do all those 

things. 

The hearing will now recess. We will return after the votes. 

[recess] 

Mr. KANJORSKI. [presiding] The committee will be in order. 

Mr. Scott of Georgia is recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Let me ask, it is a great pleasure to have the three of you here, 

who are our primary regulators in our system. But I would like to 

take the gist of my questions on the state of the economy now. Because in the final analysis, a major reason why we are putting 

these financial reforms in place is to, quite honestly, save our economy and our financial system. 

But if I am the American people out watching us and trying to 

glean something from what is a very complex, complicated issue, 

our report card for the American people would get an ‘‘F’’ right 

now. 

And I want to ask you, Ms. Bair, Comptroller Dugan, Mr. Bowman, and also you, Mr. Smith, why are we at the state that we are 

after spending $700 billion in TARP money, $700 billion in bailout 

money, $700 billion in economic recovery? We are looking at almost 

$2 trillion that we directly put out within the last 7 or 8 months, 

and yet, as you and I have discussed, Ms. Bair, and I would like 

for you to lead off, because the indicators are not very good for us. 

Home foreclosures are still ratcheting through the roof. Bank closVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
22 

ings are at a record rate, especially in my home State of Georgia. 

Unemployment is at 10 percent, and in some areas at Depression 

levels. Banks that we are supervising and you are regulators of are 

not lending, particularly to small businesses, therefore bringing out 

bankruptcies there. 

So to me, the American people are probably saying, what good 

does it do for us to be sitting up dealing with these regulatory reforms when, in fact, where is the report on what we have been 

doing? Why is it that we can’t see the jobless numbers go down? 

Why is it that banks are not moving to mitigate loans? Why is it 

that banks are not restructuring? And at the same time that this 

is happening, many of them are going back to their same old ways 

of bonuses and salaries. 

The American people have a right to be very angry. So could you 

please respond to why we are in the state we are in? And what are 

we doing to get these banks to unleash this money and make loans 

and mitigate loans so that people can—we can really stimulate the 

economy and keep people in their homes? I think if we do that, 

that is the way in which we are going to stop all of these bank foreclosures and small businesses going into bankruptcy. 

And Ms. Bair, I would particularly like for you, because we 

moved to give the FDIC the authority and funding to move within 

the foreclosure area particularly to deal with this area, could you 

really tell us how we are progressing there, and why we are not 

doing more? 

Ms. BAIR. Well, a couple of things. Regarding loan modifications, 

that is something certainly we advocated. And some of the work we 

did with the IndyMac loan modification program was used by 

Treasury and HUD to launch their own HAMP program. This is 

not something we are doing, though we support it and have tried 

to provide technical assistance. 

They estimate they can get about 500,000 loans modified in the 

near future. It is making a dent, but it was never meant to be the 

complete cure. It is not, but it can help a significant number of 

folks stay in their homes. 

To get banks to lend, we have taken a number of steps. We are 

asking our examiners to do a lot. There was some bad lending 

going on. There was some lending based on rising collateral values 

that shouldn’t have happened. So, because there was too much 

credit out there, there needed to be some type of pull back. But the 

challenge is to make sure it doesn’t pull back so far that the creditworthy loans, the prudent loans, are not being made. 

We have tried to strike this balance with our examiners. We 

want our banks to lend. We want prudent lending. But, we don’t 

want them to overreact. There are a lot of cross-currents. There are 

a lot of people saying that regulation wasn’t tough enough; we need 

to be tougher. And there are other people saying, you are being too 

tough. It is a hard balance to strike. 

We have tried to provide clarity in a number of key areas. We 

have said very specifically that we want commercial loans restructured also. We want small business loans restructured, too. Loss 

mitigation is a good business practice, whether it is for residential 

mortgages or commercial mortgages. That needs to be disclosed 

and done properly. We want the appropriate loans restructured. 

23 

We don’t want good loans written down just because the collateral 

value has fallen. We don’t want that to happen. We have made that 

very clear. 

Mr. SCOTT. I know my time is running out. It is about to run out, 

too. But I did want to get to, why are so many banks closing, especially in the State of Georgia? What is there? Is there something 

we can point to that is going on in Georgia to explain why so many 

of these banks are closing? 

Ms. BAIR. There are a lot of banks in Georgia. It was a boom 

area. Now, many of the boom areas are bust areas. There is residential mortgage distress and a lot of commercial real estate distress as well. In Georgia, like other parts of the country, it is 

broader economic problems that are feeding losses on bank balance 

sheets, which is driving closures as well. 

One of the best things you can do for the banking system, especially community banks, is to get the economy going again quickly, 

keep the unemployment rate down, get those retailers back in business, and get those hotels full again. Those are the kinds of things 

that will help banks as well. In Georgia, bank closures were a 

symptom of a lot of banks existing in the State, plus it was a great 

boom area. And as in other areas, like Florida, southern California, 

and Nevada, Georgia is having a severe bust now. 

Mr. SCOTT. I would just like to ask unanimous consent just for 

30 more seconds. Is that possible? 

Mr. KANJORSKI. The price is you are going to assume the Chair 

right after your next question. 

Mr. SCOTT. Okay. I will be willing to pay that price. Thank you. 

Mr. Dugan, I wanted to go to one specific thing. You and I have 

discussed this, I believe, in my office. And I wanted to know, have 

we made any progress? Because I think there is so much more our 

banks can do that they are not doing in terms of lending. But there 

is a practice that is going on within the banking system that I 

think that we do need to address. I spoke to you about that, and 

I wanted to know if we have moved on that. And that is this, that 

we have been receiving some complaints from some of our constituency that when they have multiple services at these banks where 

one will have their savings account, their checking account, and 

then they will go borrow maybe a home equity loan, and then—or 

another loan, but without any acquiescence to the customer, the 

bank has the right, apparently, which I think is wrong, to without 

any—with total disregard to the customer, to go into one of the 

other accounts, get money out of that account to pay for something 

in the other account. It puts that customer and that consumer at 

a very disadvantage without having a notification, without knowing. He may think he has so much money there, but the bank has 

already gone in and got it to pay something else, maybe the home 

equity loan. And I was wondering, I know you were concerned 

about that, and I wanted to find out if you moved on that and what 

we need to do to stop that. 

Mr. DUGAN. I am not sure that we have seen that as a rampant 

problem in the system. There are some rights related to set off 

when you have some issues, but I don’t believe that banks can routinely use one account to pay the debts of another bank. But I will 

24 

get back to you on that, on where we are on that, if I could, for 

the record. 

Let me just also say that earlier this week, I did spend some 

time with Georgia community national bankers in Atlanta, and 

would just echo all of the comments that my colleague just said 

about the situation in Georgia and some of the issues that they 

have. 

Mr. SCOTT. All right. I just want to say, we need your help in 

Georgia. And we want to stop this trend of banks foreclosing and 

a lot of the other things that are going. So I appreciate your attention on these two matters. Thank you. 

Mr. BACHUS. Mr. Chairman, one thing, I hope you will allow 

some of the people on the other side some liberal time, by which 

I mean I am not protesting the additional time, but I would allow 

that courtesy to be extended on— 

Mr. KANJORSKI. If it is Mrs. Biggert, we are going to allow her 

18 minutes. 

Mr. BACHUS. Thank you. 

Mr. KANJORSKI. The gentlelady from Illinois, Mrs. Biggert, is recognized. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I am not one of many words. That is why you said that. 

Chairman Bair, I have had some of my community bankers come 

in to see me, and they have some real concerns, particularly with 

where they have been required to reserve 3 percent of all of their 

fully performing construction loans and land development loans. 

And so that has significantly impaired their CPA capital ratio so 

that they have been rated barely adequately capitalized. And then, 

in turn, they were told, well, now you can’t get any TARP money 

or to withdraw their application because of the just barely adequately capitalized. And they are concerned that if they had gotten 

TARP funds, they would be well capitalized and not in danger of 

becoming undercapitalized. 

And the other issue that they worry about is there might be 

these special assessments that they would have from the FDIC. 

What should I tell them to do? 

Ms. BAIR. We understand the additional stress that another special assessment would create. So we are actively considering other 

options. The FDIC Board will be meeting next week and will be 

voting on some options for public comment. We very much understand the stress that another special assessment could place on 

smaller institutions. We are looking at this issue very carefully and 

evaluating other options as well. 

On the TARP, obviously the TARP is not an FDIC program. 

There is an interagency process where the primary regulator will 

make an initial set of recommendations to an interagency group, 

and then make recommendations to the Treasury Department. The 

standard remains viability without the funding. This is a difficult 

determination to make. If that test is not passed—if there is a 

question about that—then it is a very difficult judgment to make. 

We have suggested a matching program so that banks can show a 

strength in their ability to raise nongovernment money on at least 

a dollar-for-dollar basis. That might be another way to build some 

flexibilities into the program. 

25 

I can’t respond to the 3 percent reserving requirement. I am unaware that we have a carte blanche rule like that. I can check that 

and get back to you. The general rule is, if it is a performing loan 

and if the borrower has the documented capacity to continue making the loan—has the income, the balance sheet to support continued payments—then generally it should not be classified. I can talk 

with our staff, and if there is a specific instance you would like to 

bring to our attention, I can have our supervisory staff address 

that. 

Mrs. BIGGERT. Have you explored the idea of a shared equity loss 

program and where the FDIC would match private equity and increase capital? In other words, instead of having them go under 

and then bring in somebody with the 90 percent, would that be a 

way of— 

Ms. BAIR. Well, we have a statutory prohibition against providing open bank assistance unless there is a systemic risk determination, which is hard to do with the smaller institutions. We 

have made a systemic risk determination with the Treasury and 

the Federal Reserve Board to undertake a troubled asset relief program—the PPIF or legacy loan program. We just did a test sale of 

a legacy loan mechanism with our receivership assets. And we are 

now looking at how we might use that for open institutions. 

I think it is a matter of evaluating what the criteria should be 

for institutions that are viable and have franchise value or would 

be viable with this additional help and can raise private capital. I 

think there is a good case to use such a mechanism if they can 

meet that criteria. However, we do have strong statutory restrictions against providing open bank assistance. And we do not have 

authority to make a direct capital investment in an open bank. 

Mrs. BIGGERT. Then just a quick question for several people, but 

beyond the authority to write and enforce Unfair and Deceptive 

Practices Act rules and enforce mortgages and credit card rules, did 

any of you actually write consumer protection rules? And who 

wrote them? And who currently writes them, the consumer protection rules and regulations? 

Ms. BAIR. As both Comptroller Dugan and I have said, the OCC 

and the FDIC do not have authority to write UDAP rules. We 

don’t. We have asked. We really have. We can provide our testimony and show you we have asked for that authority. 

Mrs. BIGGERT. Did you have any say? I guess the answer is the 

Fed, but— 

Ms. BAIR. The Federal Reserve Board had that rulemaking authority. We filed comment letters with the Federal Reserve Board 

encouraging them to promulgate rules. We have never had the authority to do that ourselves, to write rules. 

Mrs. BIGGERT. All right. Thank you. I yield back. 

Mr. SCOTT. [presiding] The gentleman from Texas, Mr. Hensarling, is recognized. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Last month, The Wall Street Journal had a rather disturbing article, which I assume you are familiar with. I will quote from it: 

‘‘Treasury Secretary Timothy Geithner blasted top U.S. financial 

regulators in an expletive-laced critique last Friday, as frustration 

grows over the Obama administration’s faltering plan to overhaul 

26 

U.S. financial regulation, according to people familiar with the 

meeting. 

‘‘Mr. Geithner told the regulators Friday that ‘enough is enough,’ 

said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it 

was time to stop, this person said. Friday’s roughly hour-long meeting was described as unusual not only because of Mr. Geithner’s repeated use of obscenities but because of the aggressive posture he 

took with officials from Federal agencies generally considered independent of the White House.’’ 

The article asserts that at least three of the four of you were in 

attendance at that meeting. Assuming that to be true for our first 

three panelists, is The Wall Street Journal story accurate? 

I will start with you, Chairman Bair. 

Ms. BAIR. Congressman, I don’t like to comment, I am sorry, on 

private meetings. I will tell you, though, that any input we provided to Congress has been independent. I used to work for Congress. I understand being an independent agency. When you ask 

for my views, I am going to give them to you. And I also am giving 

you my views based upon what I think are the best mechanisms 

to put in place from a regulatory reform standpoint and a consumer protection standpoint. 

Mr. HENSARLING. Thank you. 

Comptroller Dugan? 

Mr. DUGAN. I would agree with that. I would say there was a 

candid exchange of views, and it hasn’t in any way affected my job 

and my duty as Comptroller to call these issues as I see them and 

be fully independent, as Congress has expressly provided with respect to my agency and the other agencies up here. 

Mr. HENSARLING. Mr. Bowman? 

Mr. BOWMAN. I would agree with both of those statements. And 

I really think that our opinions of our respective independence 

from the White House and/or the Treasury, can be found in our respective testimonies both here and in the Senate. And I think that 

really does speak for our position on where we go and how independent we are. 

Mr. HENSARLING. I thank you. 

Clearly, I didn’t hear it was inaccurate, but I respect that you 

wish to keep it confidential. I understand that. 

But I do think it is important that this committee hear your commitment to independence. Your opinion, and I have disagreed with 

your opinions on many occasions, and I assume that on future occasions, I will disagree again. But it is a terribly important opinion. 

It is a terribly relevant opinion. And this committee needs to know 

it is an independent opinion. 

And I am not quite sure how one proves a negative, but with articles like this, you can understand a number of us on the committee remain concerned. 

Perhaps this will be a bit simpler question to answer. The CFPA, 

as presently constituted in the Administration’s White Paper and 

in Chairman Frank’s bill—and I know we have this memo floating 

around ostensibly from Chairman Frank to members of his committee. I haven’t heard the chairman either verify or deny the accuVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
27 

racy of that memo. So, theoretically, the bill may change. But 

again, I don’t know the accuracy of this memo. 

My question is this: The CFPA as presently constituted, in your 

professional opinion, could it or would it lead to less credit and 

more costly credit for families and small businesses in our economy? 

Again, I suppose going left to right to make it easy, Chairman 

Bair? Apparently, it wasn’t that easy of a question. 

Ms. BAIR. With so many of these issues, it depends on who is the 

head of the agency and how it is structured, and I think that the 

structure is in flux: Chairman Frank’s observation about placing 

the focus prohibiting bad practices as opposed to identifying and 

enforcing good practices may help address that concern. 

Mr. HENSARLING. So is it fair to say, potentially yes, but you 

don’t know? 

Ms. BAIR. Yes. 

Mr. HENSARLING. Comptroller Dugan, do you have an opinion on 

the matter? 

Mr. DUGAN. I think part and parcel of it is this repeal of uniform 

standards for national banks and for Federal thrifts. And as I testified or mentioned earlier, I do think that could lead to the kind of 

increased costs that could in turn increase potential litigation exposure, that could in turn result in increased costs to consumers of 

financial products, but also restricted availability of products and 

services. 

Mr. HENSARLING. So, as presently written, your answer would be 

yes. Is that a fair assessment? 

Mr. DUGAN. Yes, with the preemption piece in it, yes. 

Mr. HENSARLING. Mr. Bowman? 

Mr. BOWMAN. I agree with both of the responses. It could result 

in additional costs and a reduction in credit. But we will see what 

it looks like at the end of the process. 

Mr. HENSARLING. Just so you don’t get lonely, Commissioner 

Smith, we will let you answer the question as well. 

Mr. SMITH. I will give you the best answer, which is that, when 

we adopted State legislation to address predatory lending, we were 

called reverse redliners. It was said we were reducing credit availability at the time we did it. And I wish we had reduced it sooner, 

because what happened was the result of the loans that were made 

during the period I am talking about, which was 2005 to 2007, let’s 

say, was that millions of families went out of their homes. So the 

answer to the question may well be, yes, there would be less credit. 

The question really is whether that is a bad thing or not. 

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

I recognize the gentleman from Missouri, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I have a couple of questions. My primary concern in this regulatory reform is the whole issue really of not so much ‘‘too-big-tofail,’’ but ‘‘too-interconnected-to-fail.’’ I am not sure that they are 

not synonymous. And I am not sure how that is being dealt with. 

But that is another issue for another committee hearing, I think. 

It may be important for me to focus on the issue of whether we 

need a regulator, which is why I think you are here. Do any of you 

28 

know who Dennis Blair is? He is the Director of National Intelligence. And the reason that he is there is because, after 9/11, we 

discovered, to our dismay and to our great pain and embarrassment, that we had agencies not communicating with one another. 

We had the FBI and the CIA, both having intelligence on the 9/ 

11 terrorists, and they were not sharing. And so, in an attempt to 

correct a problem, we now have a Director of National Intelligence 

who is the cop, so we don’t have those problems again. 

Any time we have a crisis and we can identify a problem, don’t 

all of you agree, do all of you agree that then we need to make 

some adjustments? Who believes that we should not make an adjustment? 

Ms. BAIR. We all support reform very vigorously. Absolutely. 

Mr. DUGAN. We agree with that. And even though I would say 

that, in a crisis, it brings regulators more together to have to share 

than— 

Mr. CLEAVER. Yes, but the question, Mr. Dugan, is what brings 

them together, the crisis and the declaration that we should come 

together? 

Mr. DUGAN. I would say, first of all, we have to work together 

on a bunch of things because we have to put out common rules on 

things. And John Bowman and I are both on the FDIC Board. We 

vote on things like the assessment that we were talking about earlier. So we inevitably have a lot of interaction with each other, unlike some other regulatory agencies. 

And I think the caldron and the crucible of a crisis brings you 

even more together. But I think it is also true that this crisis has 

identified issues that need to be addressed through changes in the 

regulatory framework and structure, which I think we all support. 

Mr. CLEAVER. Okay. So how do you think the average U.S. citizen will respond if the chairman of the committee hits the gavel 

and says, okay, everybody has learned how to function better, we 

are not going to have any reform in spite of the fact that the world 

economy almost ran off a cliff? How many of you think that the 

American citizens are going to say, oh, that is good? 

Ms. BAIR. No one, sir. 

Mr. DUGAN. No one, sir. 

Mr. CLEAVER. So we need to do something, you would agree. Who 

would independently move? We have 3 banks controlling 75 percent 

of the credit card debt in this country. There is something wrong 

with that. Do you agree? More than 75 percent of the credit card 

debt held by 3 companies? 

Mr. DUGAN. It is more than 3, because the banks that we supervise, national banks, have about 75 percent depending upon how 

you count it, and it is more than 3 banks. 

Mr. CLEAVER. So Wells, Bank of America, and J.P. Morgan. Who 

else? 

Mr. DUGAN. Actually, Citi is bigger into credit cards than Wells 

is. And then U.S. Bank is, and then you have American Express 

and Discover. It is dominated by a smaller group of providers than 

other financial services. That is definitely the case. But it is a business of scale. And because it demands such an investment in systems and products, it naturally leads to larger providers. 

29 

I think you have to watch that in terms of any time you have 

a smaller number of people providing the same product, you get 

into questions over time of whether it raises competition questions. 

But there are certain products that lend themselves to having more 

or fewer providers in it. 

Mr. CLEAVER. One final question: Was it 9 cases in 11 years or 

11 cases in 9 years? 

Mr. DUGAN. The latter. Under UDAP. That is right. 

Mr. CLEAVER. Is that good or bad? 

Mr. DUGAN. I would say two things. Number one, first of all, we 

are supervisors. We see these institutions every day. And we get 

a lot of things done before you ever get to the question of a formal 

enforcement action. We do it through our normal supervision. We 

do it through matters requiring attention. We do it through informal actions. And that is the advantage of having supervisors in 

there. They can get corrective action taken right away when they 

see things before they turn into enforcement kinds of problems, 

number one. 

Number two, as we talked about earlier, some of the practices 

that people complained about were not illegal. And we couldn’t 

make them illegal because we didn’t have the power to write rules 

with respect to them. 

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

Now we will recognize the gentleman from Georgia, Mr. Price. 

Mr. PRICE. Thank you, Mr. Scott. I appreciate that. 

I want to thank you all for your patience. My friend from Missouri says we have to do something. We have to do something. Is 

it possible do the wrong thing? Is that possible? Everybody agrees. 

Mr. DUGAN. Yes. 

Mr. PRICE. We can do the wrong thing. 

Mr. DUGAN. Right. 

Mr. PRICE. So the goal of this committee obviously ought to be 

to do the right thing, and not just do anything at all or something. 

And I think we need to remember that as we try to devise a system 

that is more responsive and works better for people as opposed to 

the one we currently have and also the one we might be reinforcing 

with some current rules. 

Mr. Dugan and Mr. Bowman, I want to talk a little bit about, 

please, the new recent guidance that the OCC and the OTS have 

put forward, the ban on no-interest/no-payment activity promotions 

that are done oftentimes by retailers. Some retailers say that their 

no-interest/no-payment for a period of time comprises a significant 

portion of their business, sometimes up to 20 percent. The repayment on those is in many instances very, very high. It works well. 

It works well for people, and it works well for the retailers. Why 

would you do that? 

Mr. DUGAN. We have something called our account management 

guidance that applies to all credit card providers. We were seeing 

some real problems in our portfolio about people not making consumers even pay a very small amount due. This was masking 

losses over time that they were continuing to report as income. It 

was a truly unsafe and unsound practice, and it was also resulting 

in consumers getting deeper and deeper into debt. 

30 

Mr. PRICE. So the information that I have from retailers that 

they have a payment rate of over 90 percent, or approaching 90 

percent on no-interest/no-payment credit for a period of time, is 

that not accurate? 

Mr. DUGAN. Well, I have seen the letter that they provided, and 

we will respond to the particulars of the letter. And I would be 

happy to do that. I think the particular point we would make is we 

are treating them exactly the same way we treat other credit card 

providers. 

Mr. PRICE. That is my concern. 

Mr. DUGAN. We are trying to get indications that the customer 

can repay the loans. We are not saying that they can’t do no-interest. But they have to make some regular payments, repayments to 

demonstrate the capacity and ability to repay to address safety and 

soundness. 

Mr. PRICE. This one-size-fits-all notion tends to result in decreased flexibility and decreased responsiveness to the consumer. 

And Washington can run the whole show, there is no doubt about 

it. But it may result in a system that is not as helpful for the 

American people. 

Mr. Bowman? 

Mr. BOWMAN. I wouldn’t add anything more to what Mr. Dugan 

has said. The attempt is to ensure, first of all, that the consumer 

appreciates the obligation to repay. Ninety percent of them do, according to the letter that we received. The goal is to keep the examiners mindful of the particular product, the consumer and the institution mindful of what it is they have and the ability to ensure 

that repayments are provided for. 

Mr. PRICE. So you both are telling me then that it is possible 

that this ban isn’t an absolute ban? 

Mr. DUGAN. What I would like to do is respond in detail to each 

of the items in the letter. And I think that can give some color to 

it. 

Mr. PRICE. Great. I look forward to that. 

Chairman Bair, as my friend from Georgia said, we are having 

awful, awful problems down there. And I am not convinced that the 

FDIC isn’t contributing to the awful problems that we are having. 

In many instances, the banks that I have talked to that the FDIC 

has come in and taken over, the consequences of that are real. 

There are real-life consequences to the people in those communities. Some of these small community banks where they have performing assets, performing loans, they have been asked by the— 

they have been demanded by the FDIC to increase their capitalization. 

And they do so. And still they dot every ‘‘i’’ and they cross every 

‘‘t,’’ and then the knock comes on the door on Friday afternoon. The 

consequences to these decisions that the FDIC takes are massive, 

and they are not necessarily favorable to the community and to the 

individuals in those communities. We have had this conversation 

before. And we have been assured of flexibility and responsibleness 

and reasonableness by the FDIC personnel. I understand it is a 

tough job. But we are killing communities. We are killing communities with action that, from many individuals’ perspectives, doesn’t 

need to be taken. 

31 

Ms. BAIR. The process close a bank is made by the chartering authority. So, for a State bank, it is made by the State bank supervisor. For a federally-chartered institution, it is the OTS or the 

OCC. There is a dialogue, obviously, with the FDIC, in alerting us 

to the possibility that a bank could fail, in preparing for the closure 

and monitoring the resolution process. But, the resolution process 

is governed by a strict statutory regimen of Prompt Corrective Action. This was an outgrowth of the savings and loan crisis where 

Congress rightfully felt that there had been too much forbearance. 

And it is true that once an institution becomes nonviable, the 

longer you wait for it to be closed and resolved, the higher the costs 

will be, because it will continue to lose money. Such institutions 

are not doing much healthy lending anymore, and will continue to 

lose franchise value. We take this very seriously. 

I am painfully aware of the concerns and the drama surrounding 

the closure of an institution. But in these instances, this needed to 

be done. 

We make every effort to market and sell the bank in advance of 

the resolution. And usually for a community bank, we have been 

successful in selling it to another community bank, another bank 

servicing that area which is healthier and is in a better position 

to provide credit services and deposit services to the community. 

We can’t always do that. In most cases, we have been successful. 

Mr. PRICE. The problem with that is oftentimes those individuals 

who come in know nothing about the community. There are no relationships. And in the process of doing that—and again people 

who have dotted every ‘‘i’’ and crossed every ‘‘t,’’ jumped through 

all the hoops and thought they were moving in the right direction 

based upon the FDIC, then they are removed, and folks who come 

in are from somewhere else, and the local community is without a 

local lender. 

Ms. BAIR. We try to avoid that. We absolutely try to avoid that. 

If there are specific resolutions which you would like to talk about 

later, I would be happy to do that. But if an institution has insufficient capital and it cannot raise new capital, there is not much we 

can do about it. 

Mr. PRICE. That is not the case. 

I appreciate that, Mr. Chairman. 

Mr. SCOTT. Chairman Bair, and just before I get to Mr. Green, 

as we both pointed out, we both represent Georgia. There is a particular problem with Georgia. And some of us feel very strongly, as 

the gentleman from Georgia, Mr. Price, has said that there is more 

that the FDIC can do to help us in Georgia. And there are things 

that they might not be doing that are helping to cause the problem 

in Georgia. 

There are just too many banks closing in the State of Georgia, 

and we want to put a stop to that. I would appreciate it, and I am 

sure the people of Georgia would appreciate it very much if the 

FDIC could review how they are dealing with the banks in Georgia 

to work with a plan to see if we can’t stop this very terrible pattern. Because it is just not fair nor right. Thank you. Thank you 

for that. I wanted to get that out. 

I now recognize the gentleman from Texas, Mr. Green, for 5 minutes. 

32 

Mr. GREEN. Thank you. 

Mr. Price, did you get your concern addressed? Because I see 

that the two of you are very much concerned about this. Would you 

need an additional 30 seconds? You are good? Okay. Thank you. 

Let me thank all of you for appearing today. And I would like 

to first mention to you that ‘‘too-big-to-fail’’ in my world is the right 

size to regulate. Not only is it the right size to regulate, but as you 

approach becoming ‘‘too-big-to-fail,’’ I think you are the right size 

to regulate. I absolutely think that we must find a way to avoid 

another AIG. I cannot imagine doing nothing and allowing circumstances to manifest themselves again such that we will have 

another AIG. It would be unconscionable for us to do nothing. And 

it would be unconscionable for us to, under the guise of doing something, do nothing. It would be unconscionable for us to allow the 

paralysis of analysis to prevent us from doing anything. We do 

have to act. 

And I think that when Mr. Cleaver, in his defense, talked about 

doing something, I would hope that it would be presumed that he 

was talking about doing the right thing, as it has been said. I rarely find him suggesting that we do the wrong thing, in his defense. 

So having said this, let me just ask a few questions to see if we 

can agree on some things that are floating around that are not necessarily entirely true. CRA: Did the CRA cause the economic crisis 

that we are having to contend with? 

Chairwoman—by the way, I would have had Chairwoman, not 

Chairman, but if you— 

Ms. BAIR. Just not ‘‘Chair Bair.’’ I don’t like that. 

Mr. GREEN. Did it cause the crisis? 

Ms. BAIR. No, it did not. No. 

Mr. GREEN. Comptroller? 

Mr. DUGAN. No, it did not. 

Mr. GREEN. Acting director? 

Mr. BOWMAN. No, it did not. 

Mr. GREEN. Commissioner? 

Mr. SMITH. Absolutely did not. 

Mr. GREEN. Did not. The CRA did not cause the current crisis. 

And I would hope that would echo through the halls of Congress 

such that at least we can put that to rest. 

Did overregulation of the market create the problem that we are 

trying to contend with, an overregulated market? In words that 

may not be suitable, but did a lack—did laissez-faire, the lack of 

laissez-faire create the problem? 

Chairwoman Bair? 

Ms. BAIR. No, a lack of laissez-faire did not cause the problem, 

no. 

Mr. DUGAN. I agree. 

Mr. BOWMAN. I agree. 

Mr. SMITH. I have already testified that I don’t think that is the 

case. 

Mr. GREEN. Okay. I just want to build this record, because we 

continually hear that it was an overregulated market that created 

the circumstance. We continually hear that it was the CRA that 

created the circumstance. And at some point, people who are inVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
33 

volved, engaged, and who study these things, their opinions ought 

to count for something. 

Notwithstanding your opinions, by the way, my belief is that we 

have entered an era of time where there is no indisputable truth. 

We will find some person in some distant corner of the world who 

differs with you, and we will find a way to give this person credibility such that this person will carry as much weight as all of you 

who study these things quite regularly. And I consider you experts 

to some degree. 

Moving along, with reference to a Consumer Financial Protection 

Agency, whether we bifurcate or consolidate, leaving that aside, bifurcation, the question of bifurcation, should we have a consumer 

protection agency? Because, and I ask this because, quite frankly, 

there are some who contend that there is no need for a consumer 

protection agency, that things will work themselves out if we just 

allow time to pass, as opposed to do something with the passage 

of time. 

Chairwoman Bair, do we need a consumer protection agency? 

Ms. BAIR. Yes, I think we do. 

Mr. GREEN. Comptroller? 

Mr. DUGAN. To go back and touch on your earlier question, there 

was a rule-writing gap, and there was an implementation gap so 

that different firms were treated differently with respect to consumer protection. And I think a CFPA is a way to get at that. 

Mr. GREEN. I take it from this you would say yes, but I understand that there may be—we all have different opinions about how 

it should come into being. But are we at a point where we can say 

we need to do this? 

Acting Director, please, sir? 

Mr. BOWMAN. The answer is yes. 

Mr. GREEN. And Mr. Commissioner? 

Mr. SMITH. Yes. But I think, in fairness to myself and my colleagues at the table here, that each of us has reservations about 

the current proposal. 

Mr. GREEN. I understand. That is why I took bifurcation and consolidation off of the board. My time is up, but as I leave you, I just 

want to say this: We are charged with the responsibility of, in some 

sense, being the watchdog for the public. We have a duty to act 

positively, to try to avoid unintended consequences. But if we don’t 

act, our inaction will become our action. And that inaction is going 

to create another circumstance that we will have to cope with in 

the future. 

Thank you, Mr. Chairman. 

Ms. WATERS. [presiding] Thank you very much. 

Mr. Royce. 

Mr. ROYCE. Thank you. 

Let me ask a quick question. This has to do with something that 

I remember the Federal Reserve bringing to us in, I think it was 

about 2004, where they laid out a concern they had with the Government-Sponsored Enterprises. And their worry was that, unless 

they could regulate for systemic risk and have the ability to reduce 

the portfolios some, they were worried that with a $1.5 trillion 

portfolio, and a mandate that we had built up over the years that 

half of it had to be subprime and Alt-A loans and so forth, that it 

34 

was leveraged 100 to 1, and so they were saying, we could have a 

systemic risk problem if we don’t have sufficient regulation to allow 

us to address this. Do you think that could have been a contributor 

to the problem in terms of what happened in the GSEs? If I could 

ask the panel? 

Ms. BAIR. Yes, I think the GSEs did contribute to the problem. 

Mr. DUGAN. I would agree that was a contributing factor. 

Mr. BOWMAN. Agreed. 

Mr. SMITH. Agreed. 

Mr. ROYCE. And I guess that comes around to one of the problems with the CRA, because under the CRA, there was leverage in 

order to get to that goal. Those who were pushing the CRA saw a 

certain advantage in terms of having that subprime portfolio held 

by Fannie Mae and Freddie Mac. 

But in any event, let me go down a line of questions, because 

with distance comes some perspective on some of these issues. And 

I wanted to quote from something Ms. Bair said. She said we need 

to develop a resolution regime that provides for the orderly wind 

down of large, systemically-important financial firms without imposing large costs to the taxpayers. 

In contrast to the current situation, this new regime would not 

focus on propping up the current firm and its management. Now, 

if we take Treasury Secretary Geithner’s reform proposal, it reads, 

and it comes from a different direction it seems to me, it says the 

regime also should provide for the ability to stabilize a failing institution by providing loans to the firm, purchasing assets from the 

firm, guaranteeing the liabilities of the firm, or making equity investments in the firm. 

And this sounds like you and the Secretary have different ideas 

on the options that should be available to regulators when it comes 

to resolving a failed institution. So I would ask if you believe what 

the Treasury Secretary is suggesting amounts to granting permanent bailout authority, or is there a distinction that I am missing? 

Because as I read it, it suggests, or he suggests that we grant authority to prop up failed institutions, as we have in recent months, 

without necessarily moving them through an unwinding process. 

And here is why I think it is important. I think if there is any 

ambiguity as to what would happen should an institution run into 

trouble, then the market is going to view that institution as government-backed, as was the case with Fannie and Freddie. And if 

that is the perception by the market, then you are going to have 

a moral hazard problem. And that is why I feel that is something 

we should avoid going forward. 

And I was going to ask you, Ms. Bair, about my concern about 

that. 

Ms. BAIR. I agree with you. It needs to be quite clear that shareholders and creditors will take losses if these big firms become nonviable and have to be closed. It should be a wind down, not a conservatorship or Government-run enterprise. It needs to be quite 

clear what will happen. You will not get market discipline back 

until this is clear. Recent measures have exacerbated the problem. 

Some people joke now we have more GSEs because of these. We 

are part of these programs, and we support these programs, but we 

didn’t really have an option. But going forward we should have a 

35 

resolution mechanism in place that works for large, interconnected 

financial institutions that allows them to be closed. It is very important to be able to tell the public: no more AIGs. It just shouldn’t 

happen. 

Mr. ROYCE. I appreciate that. Now, my last question I would like 

to ask the panel about the costs associated with the Consumer Financial Protection Agency if we do not do that under the existing 

safety and soundness regulators, if we go out and set up a separate 

agency, a bifurcated agency. Who ultimately will bear the costs of 

creating and funding this agency? I don’t think it is hard to imagine that the costs would be passed on by the institutions in a competitive market that those costs would end up going onto the customers. So you increase operating and compliance costs and you increase the eventual costs to the consumer. So it seems to me more 

logical that you would handle that within the—under the safety 

and soundness regulator, because you would also have the sharing 

of expertise that regulator has. And so I was going to ask that 

question. 

Mr. DUGAN. As you said, we do have a regime already in place. 

We already examine people, we already have a system for doing it, 

and we do combine our supervision for consumer protection and 

safety and soundness. It is more efficient and will be less costly to 

get the same level of coverage than it would be to have a whole 

separate agency. Now, in terms of who gets assessed for it, it was 

not entirely clear how that would work in the Administration’s proposal. And there are other proposals to have the Federal Reserve 

pay for some of it. So I don’t know how that is all going to shake 

out. But in terms of the costs to consumers, I think they would be 

higher. 

Mr. ROYCE. Thank you, very much. 

Thank you, Mr. Chairman. 

Mr. GREEN. [presiding] Mr. Klein is recognized for 5 minutes. 

Mr. KLEIN. Thank you, Mr. Chairman. 

And thank you all for your service. Tough responsibilities right 

now, but we appreciate you taking this on and sticking with it. I 

would like to just approach this in a before, you know, before all 

this occurred and what brought us up to this point, and then currently, what are we doing, and then going forward? Just the before, 

very simply, back home where I am from, and I think around the 

country, people are upset. They are anxious. They are frustrated. 

They know a lot of money went out, and they don’t see it translating into bank loans to them, or frustrated in dealing with lending capacity. And I think that—I want to spend a minute on that. 

The current, of course, relates to, what do we do right now? What 

can we do to get the economy going? And we all understand it is 

about liquidity. If we think about the RTC a number of years ago, 

ultimately we got through that because there was access to capital. 

And whether a building was worth $1 million and sold for 

$500,000, there was a market, at some free enterprise point buyer 

and seller, and they came through that. On a going forward basis, 

a lot of discussion today, and we do appreciate your recommendations on what is being proposed. Chairman Frank has a number of 

suggestions which I think are worth considering, but we will have 

those continuing discussions over the next few weeks. 

36 

But what I want to focus on for a few minutes is just an echo 

of what you have heard all day today. And that is—I am from Florida. 

Ms. Bair, you have heard my comments before on this, and I appreciate the opportunity to state it again. 

That is the access to capital, the strictness and the rigidity, if 

you will, the inflexibility of banks dealing with existing loans, and 

defaults based on covenants. 

I had somebody come in my office today, he even said I could use 

his name, Wayne Cotton from Design Flooring Distributors in Fort 

Lauderdale. He had a little over $1 million line of credit, steady as 

you go, for all these years. He is a leader in the community on a 

lot of levels. He has buildings to back up and everything else. And 

because his receivables are down and he is in the building business, if you will, he does interior work, the bank said, we are calling the loan. He got a letter. It said, pay up. Here is the date you 

have to pay up, and that is it. It is one of our major banks, a bank 

that took TARP money. And he is as frustrated as all get out, as 

you can only imagine. And to me, the question is this. Why is it 

that some of these concepts of borrower capacity, the individual 

borrower, personal guarantee, whatever it may be, the idea of substitute collateral, being able to put other collateral in place so 

maybe his receivables and that commitment is down, but maybe 

the loan can stay in place if there is some type of substitute collateral that can be applied? Why not the principle, and it is not tangible, but the principle of ‘‘time heals?’’ Over time, particularly in 

real estate, some of this will return to some point. 

We are not getting the banks to consider many of these principles at all. A little bit of sitting down with common sense across 

the table and saying, all right, you have a problem here, your collateral base is down a little bit, but maybe if you put near piece 

of real estate in here that has this amount of equity in it, we can 

still make this work instead of us calling the loan. And there is no 

ability to refinance, no ability to find another loan. So can you just 

share with me those two or three principles why is it that can’t be 

integrated or introduced and the examiners consider that or encourage that kind of behavior with the banks? Start out with Ms. 

Bair, if you don’t mind. 

Ms. BAIR. We especially encourage our banks to work with their 

individual borrowers and provide flexibilities. These are individual 

credit determinations. I don’t know the specific circumstances, obviously, but we do encourage banks to work with their borrowers. 

This is a very difficult judgment, though, for both banks and examiners to be making because we can’t let the banks indefinitely defer 

loss. If the loan has gone bad, a bank should recognize it now, not 

later. There are those countervailing pressures, and there are critics on the other side as well. It is a very difficult balance. 

But, we have a very clear policy. We have said this numerous 

times to our examiners and to our banks. We want them to work 

with their borrowers—their commercial borrowers, as well as their 

residential borrowers. Even if they have some credit distress, banks 

should try to restructure the loan or provide some relief, rather 

than just foreclosing or cutting off the loan. Where that makes 

sense from a loss mitigation standpoint, it needs to be approVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
37 

priately disclosed and reported. But we absolutely encourage them 

to work with those borrowers and show flexibility. 

Mr. KLEIN. And I cannot tell you enough how that is not in any 

meaningful sense translating into the local Florida market—where 

I am from. I can just speak to my local market in south Florida. 

It is just not happening enough. And I am seeing a little bit of 

movement, but we have 90 percent of the way to go. And it is just 

holding back everything in the economy from small businesses. 

SBA loans, we waived the fees. Ninety percent—if I was in a bank, 

I would say, wow, that is a good quality loan. Why aren’t banks 

taking up SBA loans? 

Ms. BAIR. That I don’t know. I have been hearing this. I heard 

this during my trip to Las Vegas. 

I am actually going to be in Florida in a couple of months, and 

I am going to be meeting with some bankers. I am hearing that 

small business lending is absolutely key. It is an area where community banks in particular are the lifeblood for small businesses. 

This has been raised with me. I am concerned about it. I am going 

to be looking into it more. I can only tell you what we have done 

now. We have tried to convey to our banks the need for flexibility 

and our support for prudent lending. If there is more we can do, 

we want to. 

Mr. KLEIN. Mr. Dugan? 

Mr. DUGAN. I would agree with everything Chairman Bair said. 

I just spent some time with a group of Florida bankers in a meeting earlier this week and heard some of the same issues. We do not 

tell bankers not to make particular loans. A banker makes a judgment, and I am pretty sure it wouldn’t shock you to know that 

sometimes the regulators get blamed for loans not being made 

when— 

Mr. KLEIN. More from the borrower’s side— 

Mr. DUGAN. We are in a deep recession. Florida is a place where 

there has been a lot of trouble with commercial real estate. I think 

there has been a risk-preferring posture that has gone to riskavoiding, and that is partly due to the economy and to where people are as much as it is due to examination policies. 

But I quite agree that if the borrower can show ways that they 

can repay the loan, then that is something we encourage our people 

to work with. But I do have to caution you that time does not always make things better; sometimes time makes things worse. And 

we get, as Chairman Bair said, quite criticized, and our resolution 

costs go up. Our Inspectors General fault us for not acting swiftly 

enough. You mentioned the RTC; that was all after-the-fact, 

postclosure stuff, where all that stuff ran through it. So it is a complicated balance. We strive hard to do it. We hear you. We will 

keep at it. 

Ms. WATERS. [presiding] Mr. Bachus. 

Mr. BACHUS. Thank you. 

One thing that we have not—I don’t think has come up is the 

effect of the unregulated subprime affiliates of depository institutions, and I know, Comptroller Dugan, you—at one time, the OCC 

issued a list of how many of the subprime lenders that failed actually were not regulated by either Federal or State regulators. 

Would you like to comment on that and the effect that has? 

38 

Mr. DUGAN. I don’t think there is any serious question that the 

overwhelming proportion of subprime loans that have caused the 

worst problems, the highest foreclosure rates were in nonbanks; 

that is, entities that were not regulated by banking regulators. And 

we have data, and we— 

Mr. BACHUS. It was very impressive. 

Mr. DUGAN. We will be providing some additional statistics. If 

you look at the worst foreclosure rates in the worst cities, it was 

not from the regulated institutions. It is the flip side of people who 

think that the CRA has caused the problems, which is only done 

in banks, CRA lending, and the data just does not show it. And it 

is why we believe having a rulewriter that can write rules that 

apply the same to banks as well as nonbanks, and why the importance of having new Federal attention being paid to nonbanks to 

bring their compliance level up to the level of banks is so important. That is the powerful part of the idea behind a CFPA. 

Mr. BACHUS. And I am not sure it has to be done through that 

agency. It could simply be that the existing agencies could take responsibility. But someone ought to be regulating that market. And 

we have passed registration for mortgage originators. But does 

anyone else want to comment on that? 

Mr. SMITH. I do think the money for those loans had to come 

from somewhere. Most of the originators weren’t banks themselves, 

they weren’t mortgage lenders themselves, they were funded by 

somebody, so I am interested in those statistics. 

I do think the power of the CFPA is exactly what the Comptroller says, which is it will apply to everybody across-the-board in 

the same way the SAFE Act promises to apply regulation, license 

your kind of regulation across-the-board as well. 

Mr. BACHUS. But if you had underwriting standards, and you 

said, we are going to regulate underwriting standards, you could— 

Mr. SMITH. Whoever was providing the money—someone provided financing to these alleged unregulated subprime originators. 

Mr. BACHUS. I understand that, but I think even banks—and one 

of the problems was not only were they unregulated subprime lenders, but they were also—the depository institutions purchased 

them. And it was actually Wachovia who did that, Bank of America, Merrill Lynch. You could go on and on. 

Mr. SMITH. Somehow the regulated institutions filled with Ph.D.s 

and so forth were fooled by the people I did deal with, because I 

do regulate the mortgage market, many of whom hadn’t completed 

high school. 

Mr. BACHUS. Right. Also regional banks. We had regional banks 

that did not do the subprime business because they couldn’t originate them, and they didn’t buy affiliates who did. And because of 

that, they were shut out of the mortgage business, and they went 

into a concentration of real estate. And now they are commercial 

real estate, and now that is their problem. But it was a problem 

over here that actually created that problem. 

Mr. Bowman, the House Republicans have proposed the most 

sweeping consolidation of regulators under one regulator with different charters, which is a different approach. I do want to say 

this, and I want to acknowledge your testimony. I think you do 

make—your argument has merit that you are really not addressing 

39 

the arbitrage when you just go from 54 to 53, although I guess you 

could make the argument that you—but it certainly is—I think you 

do make—your argument has merit. 

One thing you say here that I think has—I have not heard before, but I think it is something that should be pointed out, the 

OTS did not regulate the largest banks that failed. The OTS regulated the largest banks that were allowed to fail, and that is one 

distinction. There were other, much larger institutions that were 

not allowed to fail. And I do think that there are—your argument 

at least—I think it deserves consideration. 

Mr. BOWMAN. Congressman, thank you. 

I would like to add that in terms of the concept of arbitrage in 

general, we also do not believe that financial institutions, depository institutions and their holding companies go out and select a 

regulator, be it a State regulator or one of the Federal regulators, 

based upon what they hope to be a series of less than vigorous enforcement supervision. We just don’t think that happens. We think 

it is an argument that doesn’t hold a lot of water at the end of the 

day. 

Mr. BACHUS. All right. And you do get facts and figures—you had 

people moving from the OTS to the OCC. You had them moving. 

And they can also move from State to State, which you pointed out. 

Mr. BOWMAN. That is exactly right. 

Mr. BACHUS. So I do think that you make a good point, and I 

think it is something that as we move forward, we—and as we try 

to decide that. The OTS has been to a certain extent, I think, 

maybe the sacrificial lamb in all that, I think. 

Mr. BOWMAN. Thank you. 

Mr. BACHUS. And then there are other arguments that you made 

that I am not sure that most Members, including me, have considered, and that is many of the members were concentrating not only 

in real estate, which obviously was a major problem, but were also 

concentrating in California, those institutions that failed. And that 

was just as Atlanta—the other earlier conversations—Atlanta was 

a boom area, and your institutions happened to be in those areas 

that went up very fast and came down very fast. 

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

I will recognize myself for 5 minutes. Let me thank our panelists 

for being here today. Thank you for your patience. 

I would like very much to talk about the Consumer Finance Protection Agency, and I would also like to talk about the plight of 

small banks and regional banks, but I don’t have enough time to 

do so. So I have decided that I am going to spend some time talking about the plight of minority banks, and before I do that, let the 

record show that my husband is an investor in a minority institution, and also let me disclose for the record that our broker, Merrill 

Lynch, has been taken over by a systemically important bank, the 

Bank of America. So I guess I better disclose that also. 

Now, having said that, the OTS and the FDIC are required to 

provide assistance to minority-owned banks under section 308 of 

FIRREA. The law requires banking regulators to preserve the 

present number of minority banks; preserve the minority character—or preserve the minority character of these banks in cases 

involving mergers or acquisitions of minority banks; provide techVerDate Nov 24 2008 16:40 Apr 08, 2010 Jkt 054868 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\54868.TXT TERRIE
40 

nical assistance to prevent the insolvency of institutions that are 

not currently insolvent; promote and encourage the creation of new 

minority banks; and provide the training, technical assistance and 

education programs. 

The Federal Reserve and the OCC are not statutorily required to 

assist minority-owned banks, but you do have policies and programs to assist minority-owned banks. This appears to me to be opportunities that may be missed. Given what I have just read, what 

I have just indicated, I don’t understand what you do to assist minority-owned banks in the ways that are described by law. And I 

would like to ask each of you if you could tell me if this is an area 

that perhaps you would just like to improve, if you haven’t done 

a lot, or that you have done a lot, and I just don’t know about it. 

I will start with Ms. Sheila Bair. 

Ms. BAIR. We have an annual conference for minority depository 

institutions. We bring together technical experts and sources of 

capital investment, regulators speak, and we provide technical assistance. We have a program at Historically Black Colleges to help 

train bank management and to support careers with minority depository institutions. 

In terms of a resolution function, again, the resolution process is 

governed by Prompt Corrective Action, which is triggered by capital 

levels at banks, and is a very strict process. There is not a lot of 

flexibility there. 

Ms. WATERS. What do you do to promote and encourage the creation of new minority banks? 

Ms. BAIR. We don’t charter banks, but as part of the deposit insurance application process, we would weigh heavily in the balance 

of serving unmet needs in particular communities. We have had a 

few minority depository institution (MDI) failures and have actively recruited other MDIs to bid. We let them know about these 

situations. Acting Director Bowman and I personally intervened 

with Dwelling House in Pittsburgh to try to stabilize the situation 

and made some calls, and unfortunately we couldn’t find an MDI 

acquirer. But it is something I have a personal interest in and a 

commitment to. And certainly if there are other ways we should be 

addressing this, I would be open to suggestions. 

Ms. WATERS. I would like to know—while I am talking with you, 

let me talk a little bit about the opportunities that are being created as you dissolve and take over banks. You have some way by 

which you are selling off or asking the management of assets of 

those banks. You have other things that you are doing. Is there 

anything included in your efforts to include minority-owned banks 

in any way? 

Ms. BAIR. Well, if there is a minority depository institution that 

will be closed, our resolution staff will get on the phone and actively recruit other minority depository institutions and ask them 

to review the institution to bid. I think there were two situations 

where we had an MDI failure and were able to sell it to another 

MDI. 

Ms. WATERS. What about nonminority-owned banks that are 

being taken over? How do you outreach to banks or organizations 

that would like to take over failed banks? 

41 

Ms. BAIR. Well, I personally have had several meetings with 

those who have a particular interest in investing in MDIs. As part 

of our preresolution marketing process, we actively reach out to 

other MDIs to bid on MDIs that are going to fail. 

Somewhat related, we also have a good contractor outreach program. We have a very good record on minority contractors. 

Through a variety of outreach tools, we do have a strong commitment in this area. And again, if there are other things we can do, 

I would be open to suggestions. 

Ms. WATERS. I think I have heard you talk about this before. 

This week we have the annual legislative conference of the Black 

Caucus in town, and we have money managers and minorities and 

financial services, various financial service organizations, and this 

is the number one topic because of the bailout, because of the $700- 

and-what billion that the citizens have made available to save the 

financially—the systemically important institutions. Minorities are 

complaining about a lack of involvement and opportunities acrossthe-board, from the Treasury to the FDIC to—you name it, and I 

just wish we had something to tell them this weekend. 

Ms. BAIR. Congresswoman, we do have a good record. I have gotten a lot of positive feedback on our programs. If there are individuals who are complaining that they don’t think there is appropriate 

access or education, I would like to know that, because I have gotten a lot of good feedback about our programs, and I think we have 

a very good story to tell on our minority contracts. We are happy 

to give those numbers to you. Again, if there are other things we 

can be doing, we are open to suggestions, but I have gotten a lot 

of positive feedback on our outreach efforts. 

Mr. BOWMAN. Congresswoman, if I could also add that we at the 

OTS in April of this year put together the Minority Depository Institution Advisory Committee, which is made up of 12 members, 

not all of whom are parts of existing minority depository institutions, but are other members of the community, including those 

that may or may not be a source of financing going forward. We 

have now met 4 times. We have discussed many different issues, 

including the very issues that you are asking about in terms of assistance: how to bring minority investors into the system; and how 

to bring additional capital that they would bring with them. We 

have going at the present time probably three different fairly active 

discussions with three groups of minority investors who are interested in looking at all institutions, not just minority institutions 

that are on the verge of failure or possible failure, but other institutions as well. 

Ms. WATERS. If I may, there is a constant complaint about the 

inability to raise capital with these small and minority-owned 

banks. And they say, why can’t we go to the Fed, why can’t we be 

considered just as the systemically important banks are being considered for capital, for loans? What do you tell them when you meet 

with them about access to capital other than going out and finding 

private investors? Of course they are looking for that, and they are 

simply not looking for it from minority investors, they are looking 

for capital, period. What do you tell them, and how do you assist 

them in accessing capital? 

42 

Mr. BOWMAN. I think Chairman Bair referred to an instance at 

one of our institutions in Pennsylvania where she and others 

worked very hard to assist the minority institution in locating 

available capital. Ultimately, for a variety of reasons, it just was 

not there. 

The availability of capital today for all of our institutions, except 

some of the larger ones, is very, very difficult to come by regardless 

of who the investor might be or who the interested parties might 

be. The ability of any institution to raise capital continues to be a 

problem. 

Ms. WATERS. Well, I guess, again, if I may, what the small and 

minority banks are saying is just as the bailout assisted the big 

banks, that are ‘‘too-big-to-fail,’’ why can’t government come up 

with a program to assist small and minority-owned banks? And 

they remind us that they are not the ones that had the subprime 

meltdown, they weren’t doing that kind of lending, yet they stand 

on the sidelines and they watch as the very people who caused the 

problem are assisted because they are ‘‘too-big-to-fail.’’ 

What can you think about, what possibly could happen for getting capital for these small and minority-owned banks? What kind 

of—would you, for example, be an advocate for assisting minorityowned banks with bailout money in different ways than is being 

done now? 

Mr. BOWMAN. Certainly. 

Ms. WATERS. Well, why don’t you? 

Mr. BOWMAN. We can have some of those conversations with the 

people who have the money, which includes Secretary Geithner and 

Chairman Bernanke. We can also have conversations with the Congress who can appropriate money. 

Ms. WATERS. Well, here is what you can do. You can tell them 

that there is a law, FIRREA, that you are charged with preserving 

the present number of minority banks, preserving the minority 

character of these banks, providing technical assistance to prevent 

the insolvency, promote and encourage the creation of new minority 

banks, and provide the training, technical assistance and education; and you can tell them that this is all smoke and mirrors unless you have access to capital, and you think that something different ought to be done. Can we talk about that at some point, how 

we can assist these banks? 

Ms. BAIR. As regulators, we cannot be a source of capital. The 

FDIC is specifically prohibited by statute from making investments 

in open banks. So I think the TARP program is probably the most 

immediately available source if you are looking for government 

sources for capital. And certainly we can continue to do what we 

can appropriately. We have something called bank match where 

private investors who are interested in investing in smaller banks 

can go to our Web site. 

Ms. WATERS. Let me ask you this, Ms. Bair: Is it possible that 

when you take over a bank and you have these assets to be managed, is it possible that some of these small and minority-owned 

banks could be a part of managing the assets of the failed banks? 

You have to contract it out to somebody, right? 

Ms. BAIR. Well, we sell the assets. Most of these assets are sold 

when the bank fails. 

43 

Ms. WATERS. You sell them rather than manage them; is that 

right? 

Ms. BAIR. Yes, that is right. So the acquirer will be the manager. 

We do have some assets that are harder to manage, and I believe 

we do have minority contractors helping with that. I can get those 

numbers for you. And we certainly are open to others who have an 

interest. I have met with a variety of groups who have interest. 

Mickey Collins, who is going to be talking to your caucus on Friday, has an extensive minority contractor outreach program. We 

want to make sure they understand the door is open, how the process works, the process of applying, and what opportunities exist. 

Ms. WATERS. So you are selling the nonperforming assets or the 

performing assets of the banks that you take over, and the minorities who have been applying to purchase assets, I suppose there 

have been some, have been able to access those opportunities at 

this time? 

Ms. BAIR. It is a competitive bidding process, so whomever has 

the best price wins the bid. But, yes, I can think of at least two 

situations where a minority depository institution has been the 

successful bidder. 

Ms. WATERS. Thank you. 

Are there any other ideas that you would like to share that— 

about how you can carry out FIRREA for the OTS and the FDIC? 

Any other ideas that you may have? And for the Federal Reserve 

and the OCC that are not statutorily required to assist, you are attempting to do something, I am told? 

Mr. DUGAN. Absolutely. And two points. We have a very active 

minority outreach technical assistance program that we take very 

seriously, and we participate actively in the conference that the 

FDIC sponsors each summer. We work with our minority institutions in a variety of ways, including, where appropriate, to try to 

match them up with other investors. For example, in the postKatrina situation, we worked to match minority institutions up 

with potential investors at that time. And it is true we are not 

technically covered by that provision, but we try to act as if we are. 

We certainly would have no objection to being included in the same 

language. So I will be happy to provide more details on exactly the 

types of things that we have been doing, which, as I said, have 

been quite active. 

Mr. BOWMAN. Congresswoman, your question is exactly the kind 

of questions we are posing to our Minority Depository Institution 

Advisory Committee, asking them for some additional insight and 

ideas that might help other minority depository institutions going 

forward. And we would be happy to share the results of some of 

those discussions with you if you would like. 

Ms. WATERS. Okay. I was just—my staff who works on this just 

passed me a note about the Temporary Liquidity Program. That is 

under what, FDIC? 

Ms. BAIR. Yes, that is a debt guarantee program and a transaction account guarantee program. 

Ms. WATERS. Would you explain to me how you use this program 

to guarantee debt? As I understand it, the banks sell debt and 

raise capital. How does the program work? 

44 

Ms. BAIR. We are winding it down actually. It is scheduled to expire October 31st. This is an emergency program we put in place 

early last October after the Lehman situation when the market 

was seizing up. It allowed most bank holding companies and thrift 

holding companies, for a temporary time period to issue debt, unsecured debt, that was guaranteed by the FDIC for a fee. We have 

collected over $9 billion so far from charging our guarantee fee. We 

have had no losses on the debt program. 

Also, as part of that, we added a transaction account guarantee. 

This was particularly helpful for the smaller banks. This enables 

participating banks to cover noninterest-bearing transaction accounts with unlimited deposit insurance—insurance without caps. 

That program will go to June 30th. 

Ms. WATERS. Should it be extended? 

Ms. BAIR. We have extended it until June 30th of next year. It 

is Congress’ call if it should go beyond that. Congress sets our deposit insurance limits. This is something we did under a very extraordinary systemic risk procedure, which I am advised that we 

don’t have the authority to make permanent. But we have extended 

it to June 30th of next year, and hopefully we will be stabilized by 

then. 

Ms. WATERS. Is this something we should explore for assistance 

to the small and minority-owned banks between now and June 

30th? 

Ms. BAIR. They have until June 30th of next year. It would be 

an open question whether they would feel there was a need after 

that. It does cost; obviously we charge a premium for it, because 

there are losses associated with that particular program. But, 

again, our deposit insurance limits typically are defined by Congress. We did this in an extraordinary process. 

So it really would be Congress’ call whether the program should 

be extended beyond June 30th. A lot of banks are feeling that they 

will be able to exit it and will not need it after that. 

Ms. WATERS. Let me just close by saying I know that you have 

had a number of seminars around the country. I understand there 

was one in Irvine, California, and that you have a database of minority-owned banks that invited small banks—that was invited to 

that conference? 

Ms. BAIR. Yes. 

Ms. WATERS. We were not aware of it, and some of our small 

banks were not aware of it. 

I would like to—at some point in time, would each of you perhaps meet to talk about how we can perhaps share some information? And I would like to know more about how your programs 

work under FIRREA in particular, who the people are, how the 

programs are executed. And perhaps I can visit your institutions 

and you can have me talk with your people. They can talk with me 

about how they do this, and how it all works, and perhaps we can 

see how we can use some of our experiences to advise you about 

some possibilities for being more effective with FIRREA and other 

programs that are not necessarily under FIRREA. 

With that, thank you very much. 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 

45 

record will remain open for 30 days for members to submit written 

questions to these witnesses and to place their responses in the 

record. 

With that, this hearing is adjourned. Thank you very much. 

[Whereupon, at 5:31 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

September 23, 2009 

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