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REGULATORY RESTRUCTURING: SAFEGUARDING 

CONSUMER PROTECTION AND THE ROLE OF 

THE FEDERAL RESERVE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 16, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–60 

( 

(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) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

MELVIN L. WATT, North Carolina, Chairman 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

JOHN ADLER, New Jersey 

SUZANNE KOSMAS, Florida 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

BILL POSEY, Florida 

LEONARD LANCE, New Jersey 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 16, 2009 ..................................................................................................... 1 

Appendix: 

July 16, 2009 ..................................................................................................... 43 

WITNESSES 

THURSDAY, JULY 16, 2009 

Carr, James H., Chief Operating Officer, National Community Reinvestment 

Coalition (NCRC) ................................................................................................. 31 

Duke, Hon. Elizabeth A., Governor, Board of Governors of the Federal Reserve System ......................................................................................................... 7 

McCoy, Patricia A., Director, Insurance Law Center, and George J. and Helen 

M. England Professor of Law, University of Connecticut School of Law ........ 28 

Saunders, Lauren K., Managing Attorney, National Consumer Law Center, 

on behalf of Americans for Financial Reform .................................................... 29 

APPENDIX 

Prepared statements: 

Watt, Hon. Melvin ............................................................................................ 44 

Carr, James H. ................................................................................................. 48 

Duke, Hon. Elizabeth A. .................................................................................. 72 

McCoy, Patricia A. ............................................................................................ 161 

Saunders, Lauren K. ........................................................................................ 183 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Watt, Hon. Melvin: 

Responses to questions submitted to Hon. Elizabeth Duke .......................... 228 

Responses to questions submitted to Lauren Saunders ................................ 239 

USA Today article entitled, ‘‘Banks raise penalty fees for customers’ 

overdrafts’’ ..................................................................................................... 247 

(1) 

REGULATORY RESTRUCTURING: 

SAFEGUARDING CONSUMER 

PROTECTION AND THE ROLE 

OF THE FEDERAL RESERVE 

Thursday, July 16, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:03 p.m., in room 

2128, Rayburn House Office Building, Hon. Melvin L. Watt [chairman of the subcommittee] presiding. 

Members present: Representatives Watt, Meeks, Sherman, 

Green, Cleaver, Ellison, Adler, Kosmas; Paul and Posey. 

Ex officio present: Representative Bachus. 

Chairman WATT. This hearing of the Subcommittee on Domestic 

Monetary Policy and Technology will come to order. We will proceed with opening statements up to 10 minutes per side, and I will 

recognize myself for a brief opening statement. 

This hearing is entitled, ‘‘Regulatory Restructuring: Safeguarding 

Consumer Protection and the Role of the Federal Reserve.’’ This is 

the second in a series of hearings about financial regulatory reform 

and the role of the Federal Reserve, the second in this subcommittee, that is. The first hearing, held on July 9th, examined 

how to balance the Federal Reserve’s existing role as the independent authority on monetary policy with its proposed role as systemic risk regulator under the Administration’s financial regulatory reform proposal. 

Today’s hearing examines a different aspect of the Administration’s regulatory reform proposal, the proposed Consumer Financial 

Protection Agency (CFPA). While the full Financial Services Committee has held a hearing—or a series of hearings, for that matter—on the CFPA, this hearing will drill down further and examine 

some of the public policy and operational considerations related to 

the proposed CFPA, including whether the Federal Reserve should 

maintain a role in consumer protection, given its current responsibilities for writing rules, supervising institutions, and enforcing 

the Nation’s consumer protection laws, and if so, what that role 

should be and how it might be coordinated with, supportive of, or 

at least not in conflict with the new CFPA. 

Although no witnesses from other Federal banking agencies are 

testifying today, this hearing may also touch upon how the same 

2 

set of questions should be answered with respect to their consumer 

protection roles and their interactions with the CFPA. 

Today there is no single agency focused solely on protecting consumers from products and services that could be detrimental to 

their financial health. Since the idea of having a single Consumer 

Financial Protection Agency was advanced by Harvard Law School 

Professor Elizabeth Warren, other academics, commentators, Members of Congress, and regular citizens have embraced the idea. 

They have witnessed the way that our fragmented regulatory system produced serious gaps in regulation and oversight and failed 

to have anyone whose highest priority was protecting consumers, 

that is, someone who goes to work every day with that as their single most important objective. 

Others, of course, criticize the idea of a single consumer protection agency as adding another layer of regulation. 

There can be no doubt that regulatory gaps helped create an environment for toxic financial products such as predatory mortgages 

and other abuses that helped cause the current financial crisis. To 

remedy this, the Administration has proposed placing focused authority in the proposed CFPA to administer the Nation’s consumer 

protection laws. As Congress and President Obama work to enact 

financial regulatory reform, it is critical for us to examine the public policy rationale for vesting virtually all authority for consumer 

protection of financial products in a single agency. Also, as a matter of public policy, we will examine whether and how the Federal 

Reserve can effectively balance its responsibilities to execute monetary policy, take on a new role in systemic regulation, and if it continued to have this role, protect consumers effectively. 

For far too long, consumer protection has been an afterthought. 

I hope that the record developed at today’s hearing will offer further support for the elevation of consumer protection to be on equal 

footing with prudential and safety and soundness regulation. 

We also hope that today’s hearing testimony will begin to address some of the questions surrounding the operational details of 

the proposed consumer protection agency, including coordination 

between and among Federal regulators and State regulators so 

that there is effective and efficient regulation of the Nation’s consumer protection laws in the financial services area, as many believe we have in the food and product safety area. 

With that, I will recognize the gentleman from Texas, the ranking member of the subcommittee, Mr. Ron Paul, for, I guess, up to 

10 minutes or as much time as—I guess, 6 minutes; 6 minutes is 

what I have been told. 

Dr. PAUL. Thank you, Mr. Chairman. I want to thank you for 

holding these hearings because I think they are very important. 

The subject of consumer protection and the role of the Federal Reserve is, to me, a very important issue. 

I look at this somewhat differently than others because they talk 

about consumer protection, and they are thinking about financial 

products and services, credit cards and gift cards and that if there 

is any harm done to the consumer, that just additional regulation 

will handle this. But I think there is a much bigger issue related 

to the consumer and the Federal Reserve, something I think is neglected in a serious manner. 

3 

For instance, the Federal Reserve has something to do with the 

value of our money, and the Federal Reserve has been around since 

1913 and now we are working on a 4-cent dollar. So the systematic 

destruction of the value of our money has not helped our consumers; our consumers are destroyed by the loss of their purchasing power. 

The fact that the Federal Reserve regulates interest rates and 

gets them down to 1 or 2 percent, so if you happen to be a saver 

and you are in retirement and you put money away, you get punished. Maybe the market would say that the interest rates ought 

to be 5 percent or 6 percent or 7 percent, if you are a saver. But 

we punish them, and this has to do with the regulations and manipulations going on with the Federal Reserve. 

So the Federal Reserve is hardly a protector of the consumer 

when it distorts the interest rate that is paid to the savers, and 

they are the consumers. 

Think about how the consumer was protected with the collapse 

of the financial bubble. The financial bubble—it is well-known the 

financial bubbles come from inflating the money supply, lower interest rates, malinvestment, too much debt. The source of all this 

mischief comes from the Federal Reserve, and who suffers? The 

consumer. 

Who benefits? The people who had been making bundles on Wall 

Street and the bankers, for years when the bubble is being built, 

and then all of the sudden the bubble bursts, and who gets punished? The little guy gets punished. He loses trillions and trillions 

of dollars in value. 

Who gets bailed out? Goldman Sachs. 

And we pretend that the Federal Reserve is going to protect the 

consumer when the consumer is being destroyed under these conditions. 

Think about the consequence of the collapse of the bubble that 

has been artificially created. Who suffers? It is the consumer, the 

people who lose their jobs, the poor people, the middle class. 

This type of system that we have today, historically it is wellknown if we pursue it, and we are pursuing it, because the middle 

class gets wiped out. Look at all of the inflations throughout history, all of the paper moneys of history. The middle class eventually gets wiped out because the value goes down. And the people 

who suffer the most aren’t the people on Wall Street; the people 

who suffer the most are the middle class. They lose their jobs. They 

lose their houses. 

And I just think that as well intended as this is, to have more 

regulations to protect the consumer with their financial products 

and their other services—maybe it will help a little, but if you don’t 

address the subject of how the consumer is destroyed, it won’t help. 

Mexico has gone through this quite a few times with the destruction of currency. Who gets wiped out? The middle class. They are 

all holding pesos. The peso goes to the dogs. The middle class gets 

wiped out. 

Now, and I have had correspondence and meetings with members of congress from Mexico, and now they have a savings account 

in Mexico where if you are frightened about the destruction of curVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
4 

rency, you can actually go in and have a savings account in silver. 

That is—they are trying to help protect the consumer. 

But here in this country, if you happen to want to use silver and 

gold as legal tender, you go to jail, even though the Constitution 

tells us exactly what to say. 

So, ultimately, these—this process will work its way through the 

progress and there will be another consumer protection agency, but 

it is not going to do a whole lot until we address the subject of how 

do you protect the little guy, the middle class, by having honest 

money and not allowing the monetary system to inflate at will behind closed doors and to benefit special interests. This is what has 

been happening for a long time. 

Some day, we are going to have a revelation and find out that 

when we open up the books and find out every agreement that was 

ever made between the Federal Reserve and Goldman Sachs and 

have it on the record, maybe then we will find out how we can protect the consumer and not have a system that protects all the 

wealthy on Wall Street as well as those individuals who happen to 

work for Goldman Sachs. 

I yield back the balance of my time. 

Chairman WATT. The gentleman yields back the balance of his 

time. 

The gentleman from California, Mr. Sherman, a member of the 

subcommittee, is recognized for 3 minutes. 

Mr. SHERMAN. The Federal Reserve is a very powerful government agency exercising government power. The proposal now is to 

give them a lot more power. 

In a constitutional democracy we have one person, one vote. The 

executive branch is headed by the President and all important executive branch appointees are appointed by the President or appointed by the President’s appointees. 

There is one incredible and offensive exception. That is the Federal Reserve where, at the regional bank, a majority are selected 

and, ultimately, on the Federal Open Market Committee, perhaps 

the most important government agency we have, a majority of the 

power is in the hands of one bank, one vote. Or should I say, ‘‘one 

big bank, one big vote;’’ ‘‘one small bank, one small vote?’’ 

This is an affront to the Constitution which will be exacerbated 

if we transfer more power to the Federal Reserve without mandating that all its Governors be appointees of those who are elected 

by the voters. It is a testament to the power of the banks that such 

incredible governmental power is invested in agencies where the 

voters don’t decide who are the Governors. I realize the Federal Reserve Board of Governors is appointed, but those regional slots and 

the Open Market Committee are very important centers of government power. 

Second, the ranking member on this committee has a bill which 

I have cosponsored to audit the Federal Reserve. It is absurd to 

have a government agency with this kind of power be the agency 

immune from such audits. 

And finally, there is the idea of, where do we put consumer protection? Right now, we have a Federal Reserve where the banks 

choose the majority of those on the regional boards and on the Federal Open Market Committee, and then we are told that is the 

5 

agency that will protect consumers from the banks. No other industry has that much power to select its regulators. 

Finally, if the Fed is going to be the systemic risk regulator, we 

have to recognize that ripping off consumers is one way to ameliorate systemic risk because if you can double-cycle bill, you can get 

the banks a little bit more healthy, and maybe they will survive 

their stress tests. We can’t put those responsible for the stress test 

on the one hand with the responsibility for protecting consumers 

on the other. And I don’t care how healthy you can make the banks 

with credit card rip-offs, we ought to prevent those credit card ripoffs, we ought to prevent those credit card rip-offs because ripping 

off the consumer is not the best way to make the banks healthy. 

I yield back. 

Chairman WATT. The gentleman yields back the balance of his 

time. 

The ranking member of the full committee, Mr. Bachus from Alabama, is recognized for 4 minutes. 

Mr. BACHUS. I thank the chairman. I thank you for convening 

this hearing on consumer protection and the role of the Federal Reserve. And I would like to personally welcome Governor Elizabeth 

Duke. 

I guess ‘‘welcome’’ is a good word. You are welcome. Obviously, 

you have a difficult task any time you face a subcommittee. And 

I am not sure who selected you as the one to come up here, but 

I think it was a very capable decision. 

At one point in her distinguished career, she was the head of the 

community banking for one of our long-based Birmingham banks. 

And I thank you for being here. 

As we heard in this morning’s hearing, and it is likely to come 

out in this hearing, proponents of the Administration’s proposal to 

create a Consumer Financial Protection Agency are contending 

that there was a massive failure in consumer protection on the part 

of the Federal Reserve, and that failure led to the collapse of the 

global economy. I think that is an oversimplification and unduly 

unjust criticism. And there is lots to criticize about the Fed’s response to the growth and the collapse of the subprime mortgage 

market, as well as the agency’s handling of the credit crisis and the 

turmoil in the financial markets. 

In addition, we all agree that comprehensive reform of our financial regulatory system is needed. But I think it is, or should be, 

clear to all of us that last September, the challenges that the central bank faced were without precedent and that Chairman 

Bernanke and the Federal Reserve, in combination with the other 

regulators, the Administration, and the Congress acted with good 

intentions, and I believe averted a much more catastrophic economic collapse. 

I am not sure this Congress and the people we represent fully 

realize that they did some very good work. 

Both the Democrats’ regulatory reform proposal and a plan we 

have put forth strips the Federal Reserve of its consumer protection mandate. And it does that although—with both the subprime 

lending regulations in 2007, and the credit card regulations of the 

Fed advanced in 2008 were very good. In fact, in a bipartisan way, 

both the chairman of the full committee and I as ranking member 

6 

and most of the members complimented you on that work and, I 

think, had—I think they were very good. 

The difference in the Republican plan is that it streamlines and 

consolidates the functions of the four bank regulators, including 

consumer protection, into a single umbrella agency; and this creates clear lines of accountability and prevents regulatory authorities from passing the buck. 

In contrast, the Democrats’ plan adds a massive new layer of bureaucracy with broad undefined and arbitrary powers to a brandnew agency with absolutely no experience. It is a plan that continues the kind of turf battles that undermine rather than promote 

effective consumer protection. 

In closing, let me say that I understand that Governor Duke will 

be suggesting some other approaches and I think other approaches 

probably will carry the day, given the Fed’s extensive regulatory 

expertise and their recent successes in this regard, we have a responsibility to carefully consider them and judge them on the merits. 

Thank you, Mr. Chairman. 

Chairman WATT. I thank the gentleman for his statement. 

The gentleman from Texas, Mr. Green, is recognized for 2 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And I do want to associate myself with some of the comments made by the ranking member of the full committee. 

I appreciate what you said about averting the catastrophe that 

the country was facing and that we did some good here in Congress 

by working with the Fed and helping. I think that was important. 

And I think that Mr. Bernanke has done a good job, an outstanding job, and I salute him for what he has done. He has been 

very much amiable and amicable in terms of working with the Congress, to the extent that he can without surrendering his autonomy, and I don’t expect him to do this. 

I think the Fed has an awesome task. Right now we are talking 

about systemic risk regulation. You currently deal with setting and 

executing monetary policy, and now we are looking at the possibility of adding consumer protection. 

With reference to your consumer protection function currently, 

you deal with supervision and enforcement, complaint investigation, rule-making, consumer education, as well as community development. 

You did promulgate some rules that were, I think, of benefit with 

reference to dealing with credit card practices; the rule that relates 

to the 45-day notice, I thought was of benefit; prohibiting doublecycle billing was beneficial; and I think that the way that you have 

put in place the allocation of payments with reference to interest 

rates, when the interest rates can vary, I think that is a benefit 

too. 

But my concern is, candidly speaking, that these things are done 

in a reactive way. Congress was about to do something, and I think 

the Fed judiciously and prudently gave us a very good reaction to 

what was about to become congressional action. And I am concerned that we don’t—we won’t have a proactive entity if we have 

this in the hands of the Fed. 

7 

So I welcome your comments later to help me to understand better how this will become a proactive initiative, if you have it, as 

opposed to reactive. 

I thank you, Mr. Chairman, and I yield back. 

Chairman WATT. I thank the gentleman for his opening statement. 

Without objection, all members’ opening statements will be made 

a part of the record. 

And now, I will proceed with the introduction of our witnesses. 

Our first witness, the only witness on this panel, is the Honorable 

Elizabeth A. Duke, Governor, Board of Governors of the Federal 

Reserve System. 

Without objection, of course, Ms. Duke, your written statement 

will be made a part of the record, and you will be recognized for 

a 5-minute summary of your testimony. There is a lighting system 

that you are very familiar with; you have been here before. When 

it goes to yellow, you will have 1 more minute; and then we will— 

I am pretty generous in trying to hear our witnesses, because I 

think that is more important than hearing ourselves sometimes. So 

we will give you a little slack if you run over. 

So you are recognized for 5 minutes, and you may proceed with 

your testimony. 

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

SYSTEM 

Ms. DUKE. Thank you, Mr. Chairman. And I will try to be mindful of my time. 

Chairman Watt, Ranking Member Paul, and members of the subcommittee, I appreciate the opportunity to appear today to discuss 

regulatory restructuring and the role of the Federal Reserve Board 

in consumer protection. 

The members of the Federal Reserve Board are in strong agreement with the Administration that a fundamental lesson of the financial crisis is that we need to do a better job for consumers of 

financial products. 

While arguments for consolidating consumer protection functions 

may be compelling, it is important to also consider the substantial 

opportunities presented by existing arrangements. In our view, the 

Federal Reserve has the resources and the experience to execute an 

ongoing, comprehensive program for effective consumer protection 

in financial services. Our team of seasoned professionals and specialists focus exclusively on the panoply of activities that, taken together, can most effectively protect consumers; however, their work 

is augmented by supplemental expertise in market research and 

supervision from within the Board and the 12 regional Reserve 

Banks. 

We believe that replicating in another agency the full array of 

functions that support our consumer protection program would be 

enormously challenging. A report outlining our extensive program 

and recent actions is provided to my written testimony. 

We also view consumer protection as complementary to, rather 

than in conflict with, the other functions of the Federal Reserve, 

such as prudential supervision and financial stability. These misVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
8 

sions enforce one another. For example, sound underwriting benefits consumers as well as institutions, and strong consumer protections can add certainty to the markets and reduce risk to the financial system. 

We have demonstrated, particularly in the recent years with 

which I am most familiar, our commitment and capacity to effectively execute our congressionally assigned consumer protection responsibilities. The Board is also concerned that removing consumer 

protection responsibilities from the Federal Reserve would weaken 

the consumer perspective that currently exists in our monetary and 

supervisory policy discussions. 

It is appropriate and beneficial that the central bank has a mission that includes an analytical and nuanced understanding of developments in the consumer marketplace. 

For these reasons, we stand ready to work with this subcommittee and others in Congress to help identify ways to further 

strengthen our consumer protection program institutionally. 

As Congress considers regulatory reform, one option that might 

be considered would be to retain the Federal Reserve’s consumer 

protection responsibilities and consider additional policies to 

strengthen and further reinforce our commitment going forward. 

Along these lines, I would like to offer some suggestions for how 

this could be accomplished. 

First, we believe that enhanced accountability could be achieved 

by codifying or otherwise institutionalizing consumer protection as 

a core mission or responsibility for the Federal Reserve, just like 

monetary policy in bank supervisions. This would provide a clear 

and ongoing understanding that consumer protection matters are 

an integral part of the Federal Reserve’s overall mission. 

Second, Congress could require the Chairman of the Federal Reserve Board to annually report regarding the state of consumer 

protection, similar to the semiannual monetary policy reports to 

the Congress. Such reporting could include a comprehensive review 

of the Federal Reserve’s actions taken to strengthen consumer protection, planned future actions to address potentially unfair and deceptive acts and practices, a review of enforcement actions, studies 

of consumer finances, availability of financial services, especially in 

underserved areas or other matters as requested by the Congress. 

Third, we plan to conduct periodic sufficiency reviews of consumer regulations and policies. These reviews will consider emerging trends in consumer financial services, whether existing regulations are adequate for protecting consumers, and identify those 

areas in which new consumer protection measures are needed. We 

will develop a process that includes regular public hearings in 

Washington and regional locations around the country similar to 

the process required by the Credit Card Act of 2009. These findings 

and recommendations could then be reported to Congress as part 

of the annual testimony and report discussed previously. 

Strong, timely and thoughtful consumer protection is critical for 

the economic health and vitality for our country. We at the Federal 

Reserve Board remain strongly committed to effectively protecting 

consumers, and we look forward to continuing to work with Congress on these critical issues. 

Thank you, Mr. Chairman. 

9 

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

72 of the appendix.] 

Chairman WATT. I thank you for your testimony. 

And I now recognize the members for questioning and I recognize 

myself for 5 minutes. 

Ms. Duke, I learn something new in this job every day; and reading your testimony, I learned something new. Both on page 2 and 

page 17 of your testimony, you indicate that consumer protection 

was never at the core mission statutorily of your agency. You say, 

correcting that would help you do consumer protection more. I 

mean, I am reading it here. 

I thought you said we should codify consumer protection as a 

core mission along with our other responsibilities. On page 17, you 

say, ‘‘codify consumer protection as a core mission or responsibility’’—‘‘similar to monetary policy in banking supervision and regulation.’’ 

I didn’t realize that consumer protection was dealt with differently than—certainly not banking supervision and regulation; 

maybe monetary policy, I recognize, is pretty carefully statutorily 

outlined. 

Are you saying to me that the Fed has viewed this as a secondary role? 

Ms. DUKE. The monetary policy targets that we have are in the 

statute. I think the reason that I would suggest that be put into 

statute, that this be codified, is that there is a perception, whether 

true or untrue, that consumer protection has taken a lower priority 

than some of the other functions of the Federal Reserve. 

At times in our history— 

Chairman WATT. I can certainly understand the perception, but 

according to this, it is a reality. 

Is there something more explicit about banking supervision and 

regulation and the responsibilities the Fed has for that than there 

is about consumer protection? 

Ms. DUKE. Mr. Chairman, since I have been with the Federal Reserve, it has been my observation that the three are all important 

in the Federal Reserve. However, over time, the codification of that 

would simply make it—we would ensure that it remains. 

Chairman WATT. Would you argue with the notion that somebody in our government ought to show up every day with the prime 

responsibility for protecting or dealing with the issues of consumers 

in their financial matters? 

Ms. DUKE. I wouldn’t argue with that at all. In fact, I would hope 

there is more than one somebody. 

Chairman WATT. Okay. All right. 

Now, some of the people in the industry have said that if we 

leave part of this responsibility in the Fed and create this new consumer protection agency, that will lead to conflicts. And I think I 

started to understand that yesterday, so I am prepared maybe to 

move it all out of the Fed. That is one possibility of resolving conflicts. Or leave it all in the Fed. 

But this is all over the place now: It is in the Fed; it is in OTC; 

it is in a number of different regulatory agencies. And while you 

have been pretty aggressive about saying that you think that the 

Fed can do it, I am wondering if you have the same level of conVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
10 

fidence in the other regulators who are doing it. Or should we— 

are you saying that we should continue to leave consumer protection in the Fed, in the OTC, in the other regulators as an alternative for the new agency? 

Ms. DUKE. I am assuming that your question refers to the examination responsibilities, the supervision responsibilities. 

Chairman WATT. I am talking about protecting consumers, not 

the examination responsibilities. Do you have to examine an institution to protect consumers? 

Ms. DUKE. There are actually two parts to the consumer protection. One part is the rule-writing and the other part is the inspection within the institutions to ensure that all of the rules are being 

followed. 

So within the banks, within the banking industry, there are onsite examinations similar to prudential supervision examination, 

but focused entirely on consumer issues. So to the extent that there 

would be any conflict between the prudential supervision, the safety and soundness side and the consumer compliance side, as a matter of practice right now within the agencies, because of the dayto-day contact, those are usually resolved in the ordinary course of 

business. 

Chairman WATT. I think that is another question that I have, 

but my time has run out and I don’t want to abuse it. 

I actually think this may be a panel that we do a second round 

of questions, so as not to put the other members at a disadvantage. 

Let me proceed with recognizing the ranking member for 5 minutes for his questions. 

Dr. PAUL. Thank you, Mr. Chairman. 

And welcome, Governor Duke, to our hearing. 

I find it rather fascinating that we are talking about where the 

regulations will go, whether it is going to be in the Fed or a new 

agency. From my viewpoint, I am not sure it makes a whole lot of 

difference. I think it is the principle of regulation, whether it will 

work or not. 

But it is rather ironic that a lot of people are talking about putting them in the Fed with the amount of failure of the Federal Reserve and the amount of noncompliance or at least, an observation 

by the Congress, its inability to audit makes it sort of ironic that 

we might give the Federal Reserve even more power. 

I am concerned about the history of regulation. We don’t have a 

real good record that regulations prevent problems. We have had 

the SEC around for a long time, and the SEC didn’t prevent Enron 

and so many other bankruptcies and big problems. Then, of course, 

when we had that failure, we had Sarbanes-Oxley and that hasn’t 

prevented much either. We had a lot of housing regulations. It 

didn’t prevent the housing bubble. It goes on and on. 

A lot of people think, if you are not a strong endorser of all these 

regulations, therefore, you think it runs free and there is no regulation. But the regulations come differently; it comes through the 

marketplace. If you do badly, and you don’t serve the consumer, 

you go bankrupt. 

But when you prop-up policies that are bad, ultimately the consumer is hurt by these regulations because the market doesn’t hold 

them in check, and I see that as a bigger problem. 

11 

The question is, though, do you think that with additional regulations, more rules and—it might not hurt the consumer in the 

sense that it is going to be difficult to come up with a new package 

for the consumer. People might just say, ‘‘To heck with gift cards 

and other things; I am not going to mess with this.’’ 

And then there is a cost; there is a cost always, and it is always 

borne by the consumer. Any time you have a regulation, you say, 

I am going to regulate the businessman, that is a fallacy. All regulations are a tax, and they are a tax that is passed on to consumers. 

Could you address that, on how you can regulate without putting 

a tax on the consumer? 

Ms. DUKE. I think all consumer regulation—and I frankly do 

think there needs to be some, that it needs to be informed by a 

deep understanding—an understanding of the market, an understanding of financial institutions, an understanding of the way financial markets operate and the way transactions operate—in 

order to avoid adding excessive costs; and that such regulations 

have to be done with an eye toward the availability of financial 

services. 

So it is a balance between the quality and the quantity of financial services. 

Dr. PAUL. Right now, there is a big grass-roots effort by consumers, who are saying that the Congress has not fulfilled its responsibility in knowing exactly what the Federal Reserve does— 

what kind of agreements they make with international banks, 

other governments, international financial organizations, what 

kinds of conversations they have had with companies like Goldman 

Sachs. 

And because of this consumer concern, they have asked for more 

oversight of the Federal Reserve, and there are now 277 Members 

of Congress who think that should be the case. 

Why do you think it would hurt consumers for us to know more 

about what the Federal Reserve is doing, which may well be hurting the consumer if we knew more about it? How can this information be harmful? 

Ms. DUKE. Congressman, we are making quite a bit of information available now. 

We have a weekly report of our balance sheet. We have a monthly report which is submitted to Congress. We have a great deal of 

information on our Web site. And we also are subject to quite a bit 

of GAO oversight. 

The one place, the one exception to that oversight, is in monetary 

policy; and what research has shown with monetary policy is that 

the independence of monetary policy is important for expectations 

of— 

Dr. PAUL. May I interrupt, because this bill would have nothing 

to do with monetary policy. They might find out what has been 

done, but it wouldn’t interfere at all with monetary policy. 

And I would beg to disagree. There is more than one issue. It is 

not monetary policy. If you look at the code, it exempts about five 

categories; one is, all relationships and transactions with foreign 

governments, foreign central banks, international financial instituVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
12 

tions, private corporations. So those are exempt, too, and I think 

those are pretty important. 

In a way, if the Federal Reserve can have an agreement with another government, that is like a treaty. And surely it isn’t exactly 

what the founders intended when they wrote the Constitution. 

I see my time has expired. 

Chairman WATT. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witness, 

Ms. Duke, for appearing today. 

It is an honor to have you with us, Ms. Duke. My concern has 

to do with what I called to your attention earlier about being 

proactive as opposed to reactive. And while I appreciate much of 

what was done in December of last year, it appeared to be reactive, 

and I am interested in how do you move from that level of engagement, such that you start to look for ways to protect the consumer, 

which is what I think most people assume that a consumer protection agency would do. 

Let me just give you an example. My suspicion is that a consumer protection agency would have, or a consumer protector 

would have, looked at the yield spread premium, an undisclosed 

yield spread premium, and probably have concluded that there is 

something wrong this as it relates to the consumer, the one who 

actually received it. 

And I said ‘‘undisclosed,’’ wherein you qualify the buyer for 5 percent, and you don’t tell the buyer that you qualified for 5 percent; 

and you give them a loan for 8 or 10 percent, and he or she never 

knows that he or she qualified for prime and was pushed into the 

subprime market. 

How would you do this? How would you become proactive on an 

issue like this? 

Ms. DUKE. I appreciate that question. 

We have actually talked about this quite a bit and have recognized the need to be proactive, and I think, at least in recent years, 

have become quite proactive. The regulations that I appreciate you 

mentioning, the regulations governing both mortgages and credit 

cards that we recently passed are one example of that. 

A second example that you may not be as much aware of is the 

review of disclosures that we have done, the review of disclosures 

under truth in lending, and we have finalized new disclosure rules 

for credit cards. 

We will this week be unveiling new disclosures for mortgage 

loans, as well as home equity, which will address exactly the yield 

spread premium that you are talking about. As part of doing that, 

we have instituted consumer testing, and we have spent quite a bit 

of time testing disclosures with consumers to make sure we understand how they make decisions and what information is meaningful 

to them. And what we are finding is that, in some cases, there are 

some practices that you just plain can’t explain with a disclosure, 

no matter how hard you try, and those are the practices we elect 

to prohibit. 

Mr. GREEN. It seems to me—and I appreciate what you are 

doing. It seems to me that if we have this located in the Fed, the 

13 

consumer protection agency, that you have a balance that you have 

to achieve and that is safety and soundness. You obviously always 

want to have that in mind and then you want to protect the consumer. I don’t think that either agency should lean one way or the 

other, assuming that this consumer protection agency is separate 

and apart from the Fed. 

I think it should be concerned about safety and soundness as 

well. But your perch tends to dictate what your view is. You can 

go to Mount Rushmore, and if you are standing on the wrong side, 

you won’t see all of these pictures, these carvings of Presidents. 

And if you are a consumer protection agent, it just seems to me 

that you would be more focused on the recipient and how the consumer will benefit than you will—than a person who is in banking 

and is concerned about the product. I think that concern about the 

product is what actually caused us to have problems with protecting the consumer. 

So how do you reconcile this, if you have it? 

Ms. DUKE. I understand what you are saying. And, frankly, a lot 

of these discussions talk about prudential supervision and the good 

of the institutions versus the consumers, if they are two different 

things. And that might have been a reasonable perception a couple 

of years ago. 

Given what we have come through recently, I don’t think anybody can argue that what is important, as far as consumers understanding the products they are buying, is absolutely important also 

for the workings of our economy in addition to the financial institutions; and that what is good for one is good for the others, and that 

each of those perspectives gives you another window into ferreting 

potential problems. 

Mr. GREEN. My concern is that the enlightenment came after a 

certain degree of friction, if you will. And I think that a consumer 

protector being proactive would have picked up on some of these 

things a little bit sooner because that is the job of the consumer 

protector. 

And my time is up, so I will have to yield back and wait for a 

second round. 

Thank you, Mr. Chairman. 

Chairman WATT. The gentleman from Alabama is recognized for 

5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Governor Duke, you noted in your written testimony, ‘‘We believe 

that replicating in another agency the deep expertise and full array 

of functions embedded within the Federal Reserve and used to support our consumer protection program would be enormously challenging.’’ 

Can you elaborate on that? What challenges do you think we 

would face in setting up a brand-new agency? 

Ms. DUKE. Our Consumer Affairs Division draws frequently and 

deeply on the researcher, the economic researchers that we have. 

We do regular studies of 3-year—every 3 years a study of consumer 

finances. We have numerous studies going—on markets for consumer credit, on debt markets. We are closely entwined with the 

securitization markets and, in addition, all of the supervision people that we have. 

14 

So having all of that, those resources which are core competencies of the Federal Reserve, for the consumer protection group 

to draw on is something that I think informs their policymaking in 

a very positive way. 

Mr. BACHUS. And that new agency wouldn’t have that expertise 

or that resource? 

Ms. DUKE. I believe that the proposal calls for the new agency 

to have research capability. But whether it would replicate the entire research capability of the Federal Reserve, I wouldn’t think so. 

Mr. BACHUS. All right. 

You testified—and I think the chairman actually mentioned 

this—that the Federal Reserve views consumer protection as ‘‘complementary to, rather than in conflict with, other responsibilities at 

the Federal Reserve, such as prudential supervision and fostering 

financial stability.’’ And, of course, those are both very important 

to consumers also. 

And you say these missions reinforce each other, which—I think 

that is absolutely true. 

What are the dangers of setting up another agency that may 

view consumer protection as a conflicting mandate with prudential 

supervision or safety and soundness, rather than a complementary 

one as the Fed does? 

Ms. DUKE. I think probably those risks would have to do with inadvertently adding costs to consumer products through less familiarity, say, with the payment systems and the way those work, or 

the way the markets work, the way financial institutions are structured, and so mandating protections that are simply more expensive to comply with, or in some cases, that might cause financial 

institution providers not to offer the product and reduce availability. 

Mr. BACHUS. Thank you. 

Let me say this: I think you suggested two, I think, beneficial 

changes. I think this Congress, particularly if we leave consumer 

protection at the Fed and that codifies consumer protection as a 

core mission, I think that would be important. 

And another thing you say is, ‘‘establish periodic reporting requirements for consumer protection similar to the Federal Reserve’s semiannual monetary policy report.’’ Of course, you do it 

twice a year, your Chairman comes before the Congress to talk 

about monetary policy. That is very helpful. And I think it would 

be invaluable in us overseeing—and you actually, the Federal Reserve, discharging its duties in consumer protection—to have a 

similar hearing once a year, or semiannually, to have a progress 

report on consumer protection and answer questions from the 

members because markets change, as you said in your statement 

or in the statement on the Fed’s role in consumer protection. Markets change and products evolve. I think that would be an important reform that the Congress could make. 

Thank you. 

Chairman WATT. The gentleman yields back. 

The gentleman from Missouri, Mr. Cleaver, is recognized for 5 

minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

15 

Governor Duke, thank you for being here. I represent the Fifth 

District of Missouri, primarily Kansas City, Missouri, and of 

course, we have a regional Federal Reserve office. 

It is a cute building, too, incidentally. It is a brand-new building. 

Have you seen it yet? 

Ms. DUKE. Yes, I have. 

Mr. CLEAVER. Don’t you think it is cute? 

Thank you for— 

Ms. DUKE. I have never discussed that subject, if a building is 

cute, but— 

Mr. CLEAVER. It is. 

The thing that strikes me about the regional office in Kansas 

City is that it is the center for all of the national complaints. The 

complaints that would occur in New Jersey end up being routed to 

the call center in our Federal Reserve office; and they report that 

there is about one complaint per bank per year, one complaint per 

bank per year, which would suggest, I think, that—that is a pretty 

good average. 

I mean, that is unbelievable. Churches get more complaints than 

that on a Sunday. So I think that is pretty good. 

And while I do agree that Sarbanes-Oxley didn’t live up to what 

it was intended or certainly by those who promoted it, that the 

truth of the matter is, I think one of our problems is that we don’t 

have an opportunity for people to understand what is going on. 

I don’t know—have you ever seen ‘‘Jaywalking?’’ 

Ms. DUKE. Yes. 

Mr. CLEAVER. Isn’t it amazing, people can’t tell you who the Vice 

President of the United States is? So how would they know, the 

people on the street, even know what the Federal Reserve is? 

You start asking questions—I bet if they asked questions on the 

street, most people wouldn’t have any idea what the Federal Reserve is. So most people I would think, and maybe you would agree, 

if they had a complaint against a bank, they wouldn’t know where 

to take it. Would you agree? 

Ms. DUKE. Yes. 

Mr. CLEAVER. Now, stay with me. 

Ms. DUKE. I am with you. 

Mr. CLEAVER. Burger King—I used to be on the board; our goal 

was to always have free-standing Burger Kings as opposed to having them in buildings because our research showed that we did infinitely more business if we had free-standing Burger King stores. 

Are you still with me? 

Ms. DUKE. I am still with you. 

Mr. CLEAVER. Do you agree then that if we had a free-standing 

agency to handle consumer complaints that we might get more 

than one a year? 

Ms. DUKE. Yes. I think if you consolidate the complaints and do 

a good job of publishing and publicizing the place to go with those 

complaints, you will get more complaints. 

Mr. CLEAVER. Thank you. 

Chairman WATT. The gentleman—I am going to give him a law 

license, I think, after the end of this hearing. 

The gentleman from California is recognized for 5 minutes. 

16 

Mr. SHERMAN. I have a law license. I made sure they shredded 

it. I disclaim it. 

Whenever I have a member of the Board of Governors here, and 

I don’t think I have had a chance to examine you yet, I ask about 

just your personal legal interpretation of section 133. You will remember this is the code section that says that that in times of 

emergency and after proper consultation, the Fed can basically extend credit so long as it is secured. 

And your Chairman has taken the position, what does that security mean? To him, it means the equivalent of AAA. 

Do you agree with that? 

Ms. DUKE. Yes, sir, and you have asked me that question before. 

Mr. SHERMAN. As the chairman of the full committee says, duplication is often a very good thing. 

I am concerned about form shopping, not just on prudential regulation, but consumer regulation. If we bring together all of the consumer regulation, then it doesn’t matter whether you are subject 

to Fed regulation or not. You are going to have the same consumer 

regulation. 

Do you think it makes sense to have the Fed provide borrower 

protection to those who borrow from, say, banks but then have a 

different consumer regulator define what it takes to protect consumers if they are borrowing from a nonbank? 

Ms. DUKE. I think there are two pieces to that. One is the rules 

which should, and in most cases do, cover all lenders who are offering the same product. 

The other piece, and the really important piece here, is the supervision—the level of supervision and enforcement, which has 

been uneven, and I think that is one of— 

Mr. SHERMAN. Are you saying that the Fed has the power to turn 

to some guy in my District who offers a friend a mortgage, that you 

have regulatory power over the terms of that mortgage? 

Ms. DUKE. We have power over the terms of the mortgage. We 

don’t have the authority or the mandate to go in and examine 

whether or not the guy actually complied with the regulations. 

Mr. SHERMAN. So Fed regulations apply even to the most private 

loans. If I loan money to my brother-in-law, I had better check Federal regulations? 

Ms. DUKE. I am not a lawyer, and I cannot tell you that. 

But they do apply to lenders generally—commercial lenders, 

bank and nonbank. 

Mr. SHERMAN. Bank and nonbank. 

Now there are those who say there would be a conflict if you had 

the safety and soundness regulator and the consumer protection 

regulator separated. And yet lenders today have to deal with IRS 

rules and they have to deal with environmental rules, they have 

to deal with State consumer regulation, they have to deal with prudential regulation, they have to deal with the FDIC. Somehow we 

work it all out. 

Do you see it as somehow impossible for the prudential regulators to work—to avoid conflicts with the consumer regulator? 

Ms. DUKE. I do not. And as a matter of fact, we do work it out 

with other regulators all the time. 

17 

Mr. SHERMAN. I would like to return to the governance issues I 

brought up in my opening statement. 

How much power do the members of the regional Board of Governors have in dealing with consumer protection in prudential regulation? 

Ms. DUKE. Very little. The regional boards are focused primarily 

on economic matters and the operation of the Reserve Banks themselves and not on supervision or consumer protection. 

Mr. SHERMAN. Can you identify any harm there would be if we 

had, as Presidential appointees, all the members of the Board of 

Governors of all of the regional banks? 

Ms. DUKE. I think that the system that we have with the separate Reserve Banks who are—who have separate boards of directors are important for our independence and monetary policy, that 

they perform a critical role in monetary policy. 

Mr. SHERMAN. So you think it is critical that monetary policy be 

determined in large part by those voted on by bankers, rather than 

reflect the outcome of elections? 

Ms. DUKE. It is not exactly that directly. And the number of 

votes on the Open Market Committee—there are seven for the governors and five voting members from the Reserve Banks. 

Mr. SHERMAN. That is still an important number, 5 out of 12. 

And it is not like the meatball industry gets representation; it is 

not like the lawyers, the accountants or the shoemakers get representation. They are all affected by the Federal Open Market 

Committee as well. 

And why bankers would have such tremendous power over government, over the most famous of all Federal Government decisions. There is nothing the Federal Government does that is 

watched more intently than the Federal Open Market Committee. 

Ms. DUKE. Actually, two-thirds of the boards of each of the Reserve Banks are made up of members of industry, not from— 

Mr. SHERMAN. So if you had—the industry dominates the regional; the regional has five-twelfths of the Open Market Committee, and that is not democracy. 

Ms. DUKE. Not the banking industry, but from manufacturing, 

commerce, retail, labor, consumer. 

Chairman WATT. The gentleman’s time has expired. I announced 

earlier that we may go a second round if the gentleman is prepared 

to stay for that. 

Mr. Ellison is recognized for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman. And I also thank you, 

Governor Duke. It is good it see you again. I appreciate the time 

you have taken to help us understand the issues today and yesterday. It is a pleasure to see you here. 

In your view, is consumer protection from the view of the Fed an 

equal partner to potential regulation? 

Ms. DUKE. It is today. 

Mr. ELLISON. How do you feel that we got to the point we are 

at now over the course of the last 8 years? Do you think it has been 

historically? 

Ms. DUKE. I think when you look back, we absolutely could have 

and should have taken action earlier than we did. It is hard for me 

to determine why not. But what I can tell you is that in the time 

18 

that I have been there, and actually when I arrived there, there is 

quite a bit of focus on both supervision and consumer protection. 

Mr. ELLISON. Do other central banks around the world have consumer protection within their portfolio? 

Ms. DUKE. It is not a typical central bank function. Although I 

would point out that after 40 years, we have quite a bit of institutional experience and knowledge and memory and that, as an overall matter, our consumer structure and availability in the United 

States is the envy of the world. 

Mr. ELLISON. Yes. Thanks for talking about the Consumer Advisory Council in your testimony. I know they play an important role 

in advising the Board on consumer regulatory matters. But as I 

was looking at the membership of the committee, it sort of looked 

to me like there are a lot of people from the banking industry on 

the Consumer Advisory Council. Has that ever come to your attention? 

Ms. DUKE. That is actually required by statute. 

Mr. ELLISON. I see. 

Now is there a similar board that advises the Fed on banking 

issues? 

Ms. DUKE. There is also within the statute the Federal Advisory 

Commission which is made up entirely of the banks. 

Mr. ELLISON. Are consumer advocates on that board? 

Ms. DUKE. They are not. 

Mr. ELLISON. The bankers have their own board and part of another one. That is a good deal. 

Ms. DUKE. Again, it is statutory. 

Mr. ELLISON. And I think it is important to point out that Congress had its own role to play in all of this. I think that is what 

it means when it is statutory. 

Ms. DUKE. Excuse me. If I could, though, we do meet quite regularly with numerous consumer groups as well as industry groups 

in our boardroom with the entire Board. 

Mr. ELLISON. Right. As I went through here, I looked for people 

who were bankers. There are some nonprofits. But if you look on— 

just from my look at what was printed on the Board’s Web site the 

Consumer Advisory Council, it is at last half representation by the 

banking industry or credit score agency or real estate. 

That is not a critique of you, Governor, it is just an observation. 

And I think it is something we need to look at when we talk about 

issues of governances. Issues around this have already been raised. 

Let me kind of paint a scenario for you. Let’s just say that banks 

are reaping a lot of their profits from, say, overdraft fees, and we 

have a safety and soundness regulator who says, great, you are 

making money, you have an income stream. And then you have a 

consumer regulator who says, that is a problem, this person had 

a 35-cent overdraft and has a $35 fee. 

Now under the present system, that problem will be resolved. 

Somebody will, someone will make a decision and say the prudential matters are of greater importance than the consumer. Or it 

could happen the other way, although I doubt it. Isn’t that true? 

Somebody right now is resolving these conflicts that could arise between the prudential regulation and consumer regulation. That is 

happening now; isn’t that right? 

19 

Ms. DUKE. Well, if I could come back to, in particular, overdrafts. 

What we have found, again, particularly in the most recent crisis, 

the important thing—we talk a lot about the conflict, but there is 

also the benefit of having the consumer regulation inform safety 

and soundness and say this may be a short-term source of profitability, but it may not be a reliable long-term source of profitability, and to sound a warning on the prudential side that products that are not well understood and not used well by consumers 

can actually, as we have seen, come back and endanger the very 

institution itself. 

Mr. ELLISON. And we could have joint examination even if the 

function were separated. 

Ms. DUKE. Conceivably. 

Mr. ELLISON. I guess my main point is that there has been some 

dialogue around the conflict, not raised by you but by members of 

our committee, and they seem to say there is a conflict and the bill 

doesn’t clearly spell out what to do in the case of a conflict. But 

my point is, there already is a potential for a conflict and probably 

already have had those kind of conflicts resolved. But now there is 

just collapse within one entity, and the public really never knows 

how these things are resolved; is that right? 

Ms. DUKE. There are possible conflicts. Although I think the 

complementarities are stronger even than the conflicts. 

Mr. ELLISON. And would you agree that you could have 

complementarity even from agencies that are not under the same 

roof? 

Ms. DUKE. Yes, I would. 

Mr. ELLISON. I think that means I am done. 

Chairman WATT. The gentleman’s time has expired. We are at 

this juncture. I don’t want to be unfair to the second panel, but I 

think there is some benefit to be gained by going at least some 

more with this witness. 

I have a few more questions. So I am thinking that maybe if we 

did a second round of 3 minutes each, and if somebody really needed more than that, we can do it by unanimous consent. Would that 

be satisfactory to everybody? 

In that case, I recognize myself for 3 minutes. And I start by acknowledging the testimony that you gave about the expertise that 

is on your staff at the Fed and let you know that Ms. Braunstein, 

who is sitting behind you, is one of my favorite people. So I recognize that there is substantial expertise at the Fed in the consumer 

and consumer outreach area, and I respect that. 

The question I have is, though, I presume that expertise, whether it is Ms. Braunstein or members of her staff or others, could be 

transferred to a separate agency if they were not doing consumer 

protection inside the Fed; and perhaps do that with reference to all 

of the consumer regulation in this area as opposed to just for the 

Fed. Am I missing something here? 

Ms. DUKE. I am not sure—first of all, I thank you for recognizing 

Ms. Braunstein and her staff, because they are outstanding. 

Chairman WATT. I wouldn’t think of doing otherwise. 

Ms. DUKE. They are outstanding public servants and they bring 

not only knowledge and experience to the job, but a passion for consumer protection. 

20 

Chairman WATT. You have a reasonably good legislative affairs 

guy there too. I didn’t want him to feel like he was being left out. 

Ms. DUKE. I will use your time to praise all of our staff. But I 

think that one of the things to consider would be that in the rulewriting area in particular, that as good as they are, they might find 

it more difficult to write their rules without the support of the research staff, the market staff and the supervision staff. 

Chairman WATT. All right. 

Let me go to the real question, because I noticed the real complaint from the panel we had here from the industry yesterday was 

that there was this big conflict or potential for conflict if we created 

this agency. And I dealt with the part of the conflicts between consumer and consumer. I recognize that possibility exists. 

I notice you didn’t say anything in your testimony about the potential conflict that they kept talking to me about, that nobody was 

able to identify for me, the conflict that they have said exists between your prudential regulation and the consumer part. There is 

nothing in your testimony that I could identify. 

Is there such a conflict between the consumer side of your operation and the regulatory or monetary policy side of your operation? 

Ms. DUKE. There is probably— 

Chairman WATT. Maybe just give me one example. I asked a witness this morning, on the panel that we had this morning, to give 

me one example of a potential conflict between consumer protection 

and regulation, and he wasn’t able to do it. 

I am just having trouble figuring out what that conflict is. 

Ms. DUKE. There are probably conflicts in a number of different 

senses. I am trying to sort through them pretty quickly in my 

mind. There is a potential for conflict between agencies. Any time 

you have agencies— 

Chairman WATT. I understand that. I am talking about policy 

conflicts. I am talking about policy conflicts between a consumer 

representative, whether it is in your agency or outside your agency, 

and the responsibilities you have as regulator of banks and/or monitor policy. 

Ms. DUKE. There are a couple of different pieces. There is probably a perceived conflict between, for instance— 

Chairman WATT. I am talking about real conflict. 

Ms. DUKE. Well, a conflict in perception between a consumer protection proposal that might have the potential to increase cost or 

reduce availability. So you might have that weighing of those two 

considerations. 

Chairman WATT. All right, okay. Let me go one step further. 

Suppose we just assumed that there is that conflict, and the consumer side of your operation says, this is a real problem for consumers; and the regulatory side of your operation says, this is a 

real problem for regulators. How does that get resolved? Who has 

the final word on that now? Is it the consumer’s interest that is 

being driven or is it the bank’s interest that is being driven? 

Ms. DUKE. From the standpoint of within an agency or even between agencies, it is a policy balance and ultimately that is what 

a policymaker has to do, has to make the call balancing those two 

interests. 

21 

From an industry standpoint, if I could reach back into my industry days, I think what that might mean is if you have one set 

of regulators telling you one thing and another set of regulators 

telling you something else, the question of which one do you pay 

the most attention to, which possibly gives rise in a difference in 

intensity from one or the other. 

Chairman WATT. All right, my time has run out, unfortunately, 

and I am well over the 3 minutes that I said I was going to try 

to hold people to. 

The gentleman from Texas is recognized for 3 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. I want to follow up on my 

question about whether or not current Federal Reserve policy is 

fair to the consumer. I argue there is a real challenge to the consumer in two points. One, the consumer is always losing purchasing power, and only the Federal Reserve can undo the purchasing power of a dollar. And also the low interest rates which are 

artificial, because the Fed is involved in interest rates and it really 

hurts the innocent consumer. 

As a matter of fact, the people who are more frugal, the people 

who borrow against mortgages, they don’t care that much. But the 

frugal people who are doing what a lot of people think they should 

do, they get penalized. And I know the answer so often that comes 

back is—I always get the quotes back of what the CPI is doing, and 

there is really no inflation so don’t worry about it. Inflation is a 

monetary issue and we just doubled the money supply in a short 

period of time. And I would also argue that prices are going up significantly in certain areas. 

One thing characteristic about inflation, all prices don’t go up 

uniformly. If they did and wages went up uniformly, inflation 

would be no problem. But we have educational costs, they go up 

disproportionately. Just think about how military equipment goes 

up and how the military industrial complex gets served with this 

system. And then also the people who participate in the financial 

bubbles, and if they are able to get out they benefit tremendously. 

But also today in medicine, today we are facing this medicine crisis. Not that the care isn’t there. We can get good care, but it costs 

too much. That is an inflationary problem as much as anything 

else, because those places where government gets involved, like 

these three things I mentioned, that is where the money goes and 

that is where the prices get pushed up. You don’t get better service, 

because you don’t get better education or medical care, you get 

higher prices. 

So what is your defense of this position that the Fed isn’t a very 

good protector of the consumer because it undermines the value of 

a dollar? We have lost 96 percent of the value of our dollar since 

the Fed has been in existence, and also this low interest rate issue 

that I bring up. 

Ms. DUKE. We are conducting monetary policy to achieve our 

dual mandate, which is low inflation and steady prices and economic growth. And the inflation rate right now, the core consumer 

inflation is about 1.8 percent. 

Dr. PAUL. According to government statistics, but not according 

to the consumers. Private sources say that the consumer price 

index is much higher than what the government reports. So it is 

22 

in the interest of the government and the Federal Reserve to say 

that there is no erosion. But whether or not it is today or next 

year, we know the history. 

But what justification is it? Doesn’t this seem to be unfair? If you 

had a CD in the bank, or your parents had a CD in the bank and 

they were making 1 percent instead of 5 percent, is that fair or unfair? 

Ms. DUKE. The interest rates are set and are managed, again, to 

meet our mandate. And right now rates are particularly low in 

order to support economic activity, particularly funds’ availability 

to borrowers. 

Dr. PAUL. I think the consumer loses on that deal. Thank you. 

Chairman WATT. The gentleman’s time has expired. 

The gentleman from New York is recognized for 3 minutes. I am 

recognizing him for 3 minutes because we are on the second round 

of questions with an understanding that if people need more than 

3 minutes, they can get it by unanimous consent. The gentleman 

from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. And thank you, Ms. 

Duke. 

Let me ask you, we had a panel here earlier before the full committee, and what I was trying to figure out and what a number of 

individuals are talking about is the fact that some are questioning 

whether the systemic risk regulator should be the Fed. The Fed 

has been—they have talked about giving the Fed a lot more jurisdiction, a lot more responsibility. And some are concerned about— 

and I think that based upon the White Paper that the President 

has put out, that there is going to be tremendous responsibility 

that is going to cause a lot more work. 

Now we want to make sure, because we are looking forward to 

put some legislation that we think is going to take place and survive for 70, 80, 100 years. What is wrong with letting the Fed focus 

as a systemic risk regulator and doing what it has to do in maintaining this whole spectrum of responsibilities, and then having another agency whose primary focus is on consumer protection? It 

seems to me to make sense so that we are not overburdening the 

Fed. What is wrong with that? 

Ms. DUKE. If the question is the overburdening of the Fed, the 

first thing I would say about the systemic risk responsibility that 

is in the proposal from the Administration is actually not an incrementally large increase in the activities we have today. The systemically important institutions, the vast majority of them were 

not necessarily bank holding companies last Fall, but through the 

crisis became bank holding companies. And I am not aware of very 

many institutions that would be considered systemically important 

that we don’t supervise today. 

I think the difference would be probably in the focus of that supervision which would look not just to the individual institutions 

themselves, but also to the impact of their activities across the financial system. 

Mr. MEEKS. But the problem is that it seems no one picked up. 

We are in this crisis now. There is enough blame to go around. I 

am not blaming just the Fed. And no one seemed to pick up the 

problems that we were having, and the Fed is the one that is supVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
23 

posed to be the independent authority on monetary policy; now we 

get the systemic risk on top of that. 

Then what concerns many individuals is the fact that the Fed 

had authority, for example, to issue rules implementing the Home 

Ownership and Equity Protection Act beginning in 1994, yet it 

chose not to do anything or issue any rules until 2008, which would 

be important to the consumer. Why is that? Can you explain that? 

Ms. DUKE. Again, in hindsight, we could have and should have 

acted faster on that. Since that time, however, the Fed has been 

very proactive in the areas of regulations governing mortgages and 

credit cards, in consumer testing and issuing new consumer disclosures which would be much more helpful to consumers, and also 

in community outreach for foreclosure prevention and neighborhood 

stabilization. 

I would say since learning that lesson, the Fed has been extremely proactive. 

Mr. MEEKS. I see my time has expired. 

Chairman WATT. Thank you. And I am squeezing people a little 

bit, because we do have to be out of the room by 4:30 and we have 

another panel. So be cognizant of that. 

The gentleman from Alabama is recognized for 3 minutes. 

Mr. BACHUS. Thank you. 

Governor Duke, as I think someone else said, the Fed has had 

the right to regulate unfair and deceptive loans since, I guess, 

1994. Is that correct? 

Ms. DUKE. I think so. 

Mr. BACHUS. Now it really took until 2007 or 2008 for them to 

do that; is that correct? 

Ms. DUKE. 2008. 

Mr. BACHUS. 2008? I think maybe if we had had something 

where you came up every year and explained your progress. On occasions members did write and say, what are you doing? 

Let me ask you this. Even on the lending underwriting standards, I think at the same time or around that same period of time, 

you were given the jurisdiction on all loan underwriting standards; 

is that correct? 

Ms. DUKE. I believe, and I am not certain on this, so if I get too 

deep into it, I may have to respond in writing. But I believe that 

we issued guidance to those institutions that we supervised on underwriting, but then afterwards when we came out with regulations, those regulations would have governed both bank and 

nonbank lenders. 

Mr. BACHUS. You know, there was no going into the banks and 

examining anything. But I know the State charter banks were examined for underwriting standards. One thing I ran into when I 

was advocating for subprime lending legislation in 2005, I would 

talk to some of the banks, the big banks, bank holding companies, 

and they would say, we don’t do these subprime loans. And I found 

out later that was somewhat half true in that they all had nonbank 

affiliates who were making those loans hand over fist. But I don’t 

think that the Fed did any audits or supervision of those nonbank 

affiliates, did they? 

Ms. DUKE. I think the authority to do that kind of examination 

was a little unclear under Gramm-Leach-Bliley. However, we did 

24 

conduct a pilot program within the last year where we went into 

nonbank subsidiaries jointly with the FTC, with the OTS, with 

State regulators, and did full compliance exams on those. And as 

a result of what we learned there, we are going to continue those 

examinations. 

Mr. BACHUS. Will you enforce the hope of regulations as well? 

Ms. DUKE. We will enforce all consumer regulations. 

Mr. BACHUS. Will that be just on subprime loans or— 

Ms. DUKE. It will be on every kind of loan. 

Mr. BACHUS. Thank you. 

Chairman WATT. The gentleman’s time has expired. The gentleman from California is recognized for 3 minutes. 

Mr. SHERMAN. I want to return to the issue of governance at the 

regional board level. Who has the power to select those members 

at the regional level, not selected by the President? When I say 

this, I mean even if bankers are doing the selecting, but have to 

select a former union leader, that person is a bank selectee. You 

can always find a former union leader that will reflect the interest 

of those appointing. How are these slots filled? Who has the power 

to fill them? 

Ms. DUKE. I assume you are talking about the Reserve Bank 

presidents? 

Mr. SHERMAN. And their boards, yes. 

Ms. DUKE. Let me back up. The boards of directors of the Reserve banks, there are nine members of the board of directors, A, 

B, and C directors. The A directors generally are officers or directors of banks and they are elected by the member banks. 

Mr. SHERMAN. Okay. 

Ms. DUKE. The B directors generally come from and there is a 

list of 6, and I am not sure I can name them all. It is commerce, 

manufacturing, labor, retail, agriculture—and I am missing one. 

Mr. SHERMAN. All right. 

Ms. DUKE. And those are elected by the banks. But that is where 

they come from, and they are not permitted to be affiliated with 

a bank. 

Mr. SHERMAN. But you are free to find the retailer who is most 

bank-friendly and appoint that person, elect that person? 

Ms. DUKE. In theory. But in practice, that is not the case. And 

I can actually send a breakdown of what they are. And the C directors are appointed by the Board of Governors, and again from that 

same group. 

Mr. SHERMAN. You have two-thirds selected by the banks. They 

can’t select bankers, but there are literally millions of people that 

they can turn to, and they just have to find a business person or 

whatever who meets their interest. 

Trust me, if only bald people got to vote, but we had to vote for 

people with hair, there would be no taxes on bald people. We would 

find some—some would go get the Bosley thing and sneak in. But 

that is a little off point. 

Now, our friend Mr. Paul has a bill to audit the Federal Reserve. 

Obviously I don’t think there is anything in that bill that says that 

an audit means you have a stenographer at the Open Markets 

Committee, and that is immediately published. What is the probVerDate Nov 24 2008 17:05 Dec 17, 2009 Jkt 053240 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\53240.TXT TERRIE
25 

lem with auditing such a powerful government agency the way 

other government agencies are audited? 

Ms. DUKE. As I understand it, GAO does audit many parts of the 

Federal Reserve, and that there are 20-some audits underway right 

now. They have been specifically asked to audit the 13(3) facilities 

and to audit the specific loans to individual institutions. The concern with having them audit the open market, the FLMC operations, has to do with—as I understand the way those audits go, 

it is a review of policy decisions, and it would be some perception 

of a reduction in the independence with respect to policy. 

Mr. SHERMAN. Why would you lose— 

Chairman WATT. The gentleman’s time has expired. 

The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, I was so 

impressed with the questioning of the gentleman next to me, I 

would like to ask the Chair for some guidance. Do I refer to him 

henceforth as Reverend, or Doctor, or Attorney, or Reverend Doctor 

Attorney? 

Chairman WATT. I think the latter would be appropriate. 

Mr. GREEN. Attorney Doctor. But I do appreciate his questions 

and I would like to do a quick follow-up. I thought it was a fantastic point that you make. 

Quick follow-up, with reference to the complaints that you receive, how many complaints have actually gone from complaint to 

a case that was referred to the Justice Department with reference 

to your mission to deal with patterns on practices of discrimination? 

Ms. DUKE. In terms of numbers of complaints received or otherwise, I would have to get back to you in writing on that. I do know 

that we investigate every complaint that we receive on our member 

banks that we actually supervise. And with respect to referrals to 

the Justice Department, they primarily come from reviews of fair 

lending in the institutions. And to the extent that we find discrimination, we do refer those to the Department of Justice. 

Mr. GREEN. Have you had occasion to have any bank, as a result 

of the Justice Department’s action, respond and take corrective action? 

Ms. DUKE. I believe so. But if I could follow up in writing with 

specifics. 

Mr. GREEN. Okay. 

The reason I am asking is because every survey indicates that 

African Americans, minorities who apply for loans, are less likely 

to get the same treatment as equally qualified persons who are not 

minorities. And I am concerned that, given the history of this, and 

the lack of what I see as affirmative action to correct it, what will 

happen if we leave it there? It seems to me that a consumer protection agency would probably look at these things a little bit closer 

and see it as a greater mission than it has been accorded where 

it is currently. 

Ms. DUKE. I would just say that our examiners take this very seriously. And there really are two parts to the examination process. 

Sometimes they may find a practice that is not in itself discrimination but looks suspect or looks dangerous, and they will talk with 

the bank and maybe take informal action to get that practice 

26 

stopped. In those cases, the practice does stop. In cases where either that is not an option or the practice does not stop, those cases 

are referred to Justice. 

Mr. GREEN. Thank you, Mr. Chairman. I will yield the balance 

of my time to the attorney from Missouri. 

Chairman WATT. The gentleman from Missouri. 

Mr. CLEAVER. No questions, Mr. Chairman. 

Chairman WATT. The gentleman from Minnesota, then, is recognized for 3 minutes. 

Mr. ELLISON. Thank you again for your patience, Governor. You 

have been great this afternoon. 

You know, I read an article which says that banks and credit 

unions collect about $17.5 billion, with a ‘‘B’’ in overdraft fees per 

year. How does this overdraft issue play in terms of the safety and 

soundness of banks? Is it, I guess, a good thing from their perspective, because it is a stream of income; or does it indicate something 

we should be concerned about? 

Ms. DUKE. It is a stream of income. However, there are also some 

issues with overdraft protection or with overdraft fees. We have actually already published, for comment, rules governing overdrafts. 

Those rules have both an opt-in and an opt-out alternative, and we 

are now testing disclosures of those alternatives. And we will issue 

some final rules this year. And so to the extent that banks are 

overly reliant on overdraft income, that would in the short term. 

That would be a risk in the long term. 

Mr. ELLISON. I am speaking only from a prudential regulator 

standpoint. What sort of things might a regulator who might go to 

a particular individual bank, who sees that a significant portion of 

their profitability based on these overdraft fees—what does that 

conversation kind of go like, if you understand what I am saying? 

Is it like you are relying on us too much or you need to develop 

other products? Because I would imagine a safety and soundness 

conversation going like this: You have to have more capital, you 

have to develop more ways to have income streams. 

And so I was curious to know, how does the regulator approach 

the bank if they are excessively relying on overdraft fees? 

Ms. DUKE. I am not quite sure with respect to the overdraft fees. 

But if I could, let me go to a different example. And that would be: 

Suppose you had an institution that was generating very strong 

fees from the origination and sale of subprime mortgages. Then 

certainly the fact it has the income stream is one possibility. But 

one risk is that if something should go wrong in that marketplace, 

that that revenue source will dry up. So I think from the prudential side, you would look for— 

Mr. ELLISON. In your example, the prudential issues are clear because it represents the possibility of default, right? But not with 

overdraft fees. This is a just a stream of income. They are not going 

to default by having too many overdraft fees. But it is just them 

getting money from a consumer, that I think most people, if you 

bring specific examples forward, would say the consumer is getting 

taken advantage of here. And yet the only person whom I think is 

really going to raise a stink is someone who has a view of the consumer in mind. 

27 

So I am just curious to know—I guess we have been beating this 

horse pretty thoroughly—but I am still curious to know. I think 

that these two points of view are somewhat in conflict. I think that 

is a good thing. 

Ms. DUKE. To your point, though, it was the Consumer Affairs 

Division that actually has initiated and completed the rulemaking 

proposal on overdrafts this year. 

Mr. ELLISON. Thirty seconds? I just want to say for anyone who 

is interested in getting comments to the Fed about this overdraft 

issue, they have to get their comments there by July 18th. So, if 

anybody is interested. 

Chairman WATT. The gentleman’s time has expired. The 

gentlelady from Florida, Ms. Kosmas. 

Ms. KOSMAS. I don’t have any questions. 

Chairman WATT. In that case, the Chair notes that some members may have additional questions for this witness that they may 

wish to submit in writing. It seems like there are a number of 

questions still outstanding here. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to this witness and 

to place her responses in the record. 

We thank you so much, Governor Duke, for being with us this 

afternoon. And we thank your trusted people, whom we have 

praised behind you, for being with us. And you are excused, and 

the second panel is officially requested to come forward. 

While the witnesses are coming forward I ask unanimous consent 

that an article from USA Today entitled, ‘‘Banks raise penalty fees 

for customers’ overdrafts’’ be submitted for the record. That is the 

article that Mr. Ellison has requested be submitted. Without objection, it is so ordered. 

Now I will introduce briefly the witnesses on the second panel. 

The first witness is Ms. Patricia McCoy. She is the director of the 

Insurance Law Center, and the George J. and Helen M. England 

Professor of Law at University of Connecticut School of Law. 

Our second witness on this panel is Ms. Lauren Saunders, managing attorney at the National Consumer Law Center. 

And our third witness on this panel is Mr. Jim Carr, the chief 

operating officer at the National Community Reinvestment Coalition. 

We had a fourth witness, but he turned out to be on the earlier 

panel, at a hearing earlier today, and I think he had heard enough 

from me for one day, so he decided he wouldn’t come for this one. 

Each of you will be recognized for 5 minutes. Your full written 

statements and any supporting materials, of course, will be made 

a part of the record. And we would ask you to summarize your testimony in approximately 5 minutes. There is a lighting system in 

front of you there. The green light stays on for 4 minutes, the yellow light comes on for 1 minute, and the red light means you have 

hit 5 minutes. We are not religious about that in my subcommittee, 

but we do ask you to stay reasonably close to that 

Ms. McCoy, Professor McCoy, you are recognized for your testimony. 

28 

STATEMENT OF PATRICIA A. McCOY, DIRECTOR, INSURANCE 

LAW CENTER, AND GEORGE J. AND HELEN M. ENGLAND 

PROFESSOR OF LAW, UNIVERSITY OF CONNECTICUT 

SCHOOL OF LAW 

Ms. MCCOY. Chairman Watt, Ranking Member Paul— 

Chairman WATT. Press that button and pull it close to you. 

Ms. MCCOY. Chairman Watt, Ranking Member Paul, and members of the subcommittee, thank you for inviting me here today to 

discuss restructuring financial regulation. Today I will testify in 

support of the Consumer Financial Protection Agency Act of 2009. 

This bill would transfer consumer protection and financial services from Federal banking regulators to one agency dedicated to 

consumer protection. We need this to fix two problems: first, during 

the housing bubble, fragmented regulation encouraged lenders to 

shop for the easiest regulators and laws; and second, banking regulators often dismiss consumer protection in favor of the short-term 

profitability of banks. 

Under our fragmented system of credit regulation, lenders could 

and did shop for the easiest laws and regulators. One set of laws 

applies to federally chartered banks and thrifts and their operating 

subsidiaries. Another set of laws applies to independent nonbank 

lenders and mortgage brokers. 

Because lenders could threaten to change charters, they were 

able to play regulators off one another. This put pressure on regulators, both State and Federal, to relax their standards and enforcement. 

Countrywide, for example, turned in its charters in early 2007 in 

order to drop the OCC and Federal Reserve regulators and to 

switch to the OTS. The result was a regulatory race to the bottom 

that only the Fed had the power to stop. 

During the housing bubble, three of the four Federal banking 

regulators—the Federal Reserve, the OCC, and the OTS—succumbed to pressure to loosen loan underwriting standards and 

safeguards for consumers. 

Today I will focus on the Fed. Under Chairman Alan Greenspan, 

the Federal Reserve Board failed to stop the mortgage crisis in thee 

crucial ways: 

First, the Federal Reserve was the only agency that could have 

stopped the race to the bottom. That was because it had the ability 

to prohibit unfair and deceptive lending for all lenders nationwide 

under the Home Ownership Equity Protection Act. But Chairman 

Greenspan refused to exercise that authority. The Fed did not 

change its mind until last summer when it finally issued such a 

rule. At that point, the horse was out of the barn. 

Second, the Fed as a matter of policy did not do regular examinations of the nonbank subprime lenders under its jurisdiction. These 

included the biggest subprime lender in 2006, HSBC Finance, and 

Countrywide ranked number three. 

Finally, the last time the Fed did a major overhaul of its Truth 

in Lending Act mortgage disclosures was 28 years ago, in 1981. 

With the rise in subprime loans and nontraditional ARMs, those 

disclosures became solely obsolete. Nevertheless, the Fed did not 

even open a full review of its mortgage disclosure rules until 2007, 

and it still has not completed that review. 

29 

So why did the Federal Reserve drop the ball? One reason was 

its overriding belief in deregulation. Another, however, was an attitude that a good way to improve bank safety and soundness was 

to bolster fee income at banks. We still see that today with respect 

to rate hikes with credit cards still going on. 

This focus on short-term profits not only hurt consumers, it undermined our Nation’s financial system. The Act would fix these 

problems in three ways: first, it would stop shopping by providing 

one set of consumer protection rules for all providers nationwide; 

second, the Act puts the authority for administering those standards in one Federal agency whose sole mission is consumer protection. We are asking the Fed to do too much when we ask it to excel 

at four things: monetary policy; systemic risk regulation; bank safety and soundness; and consumer protection. 

Housing consumer protection in a separate agency in fact will 

provide a healthy check on the tendency of Federal banking regulators to underestimate risk at the top of the business cycle. 

Finally, to avoid any risk of future inaction by the new agency, 

the Act gives backup enforcement authority to the Fed and other 

Federal banking regulators in the States. 

My time is up. Thank you and I will welcome any questions. 

[The prepared statement of Professor McCoy can be found on 

page 161 of the appendix.] 

Chairman WATT. Thank you so much. 

Ms. Saunders, you are recognized for 5 minutes. 

STATEMENT OF LAUREN K. SAUNDERS, MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER, ON BEHALF OF 

AMERICANS FOR FINANCIAL REFORM 

Ms. SAUNDERS. Thank you, Chairman Watt, Ranking Member 

Paul, and members of the subcommittee. Thank you for the opportunity to testify today on behalf of Americans for Financial Reform 

and many of its individual organizational members. We believe 

that better consumer protection demands more than modest 

changes to the existing structure. The structure itself is the problem. 

I am Lauren Saunders with the National Consumer Law Center. 

We at the National Consumer Law Center have a long and deep 

history of working with the banking agencies. We publish an 18- 

volume set of consumer law treatises, write hundreds of pages of 

comments every year on proposed regulations, and have participated on the Fed’s Consumer Advisory Council and have otherwise 

interacted regularly with the banking agencies for decades. 

We have found the Fed staff and the Governors to be intelligent, 

knowledgeable, and respectful of our views. One of the strengths of 

the proposal to create the new agency is that it will consolidate entire divisions and will retain their experience and knowledge. 

There have been successes over the years, but as Congressman 

Green pointed out, they have tended more to be reactive than 

proactive measures. At the end of the day, in example after example described in my written testimony, at the Fed and the other 

agencies, consumers have usually come up short, trumped by an 

excessive faith in the free market, an overreliance on more disclosures, and an antipathy to taking measures opposed by industry. 

30 

This is ironic because listening seriously to consumer concerns 

can help bolster safety and soundness. It was consumer advocates 

who pointed out that credit card debt was wreaking havoc on family finances and was unsustainable. It was the consumer advocates, 

not the banking agencies, who complained repeatedly about mortgages that people could not afford to pay, again and again, year in 

and year out, and nobody was listening. It is just one of many similar warnings. In 2003, a New York attorney, Ruhi Maker, vented 

her frustration at the Fed’s Consumer Advisory Council: ‘‘Consumer advocates are from Mars and bankers are from Venus. I 

sometimes feel that way. There are parts of the country where I 

really feel it is going to be a nightmare.’’ This was in 2003. 

‘‘I think the horse is out the barn door and, you know, I hope I 

am wrong, I really hope I am wrong, but I think it’s in the interest 

of the financial institutions to figure out how to fix this problem 

which some unregulated institutions created, but which then the financial institutions went and purchased.’’ But those concerns and 

many like them year in, year out went unheeded. 

Mars and Venus, men and women, consumers and bankers. We 

think about things differently. We focus on different problems. 

As former Federal Governor Mishkin testified last week in saying 

he believed the Fed should give up its role as the consumer protection regulator, ‘‘The skills and mind-set required to operate as a 

consumer protection regulator are fundamentally different from 

those required by a systemic regulator.’’ I would say the same is 

also true of the mind-set of a prudential regulator. Precisely because consumer protection is complementary to safety and soundness, we need a new agency that will focus on the individual, asking questions from their perspective, about whether products are 

fair and contribute to or harm family financial stability. It will spot 

problems early, before they present safety and soundness concerns 

for an entire portfolio or an entire institution. 

The balanced proposal for a consumer financial protection agency 

ensures that the agency will consider real safety and soundness 

concerns. 

First, and most importantly, one of the five commissioners will 

be a prudential regulator. That commissioner, present at the creation, will ensure that prudential concerns are integrated into the 

fabric of the agency’s work. 

Second, the agency has a statutory mandate to coordinate with 

the banking agencies. Not every disagreement is a serious conflict, 

but the agency will have every reason to listen to legitimate prudential concerns like fraud, money laundering, or operational 

issues. 

Third, the proposal requires the Consumer Financial Protection 

Agency and banking agencies to share confidential examination 

materials so that each can see the concerns that have been raised 

from the other’s perspective. 

Finally, Congress will be exercising oversight. With the history 

of the Federal Trade Commission in mind, and a prudential regulator on the board, the agency will do everything in its power to 

minimize conflicts. 

Change is always difficult. There are always reasons for tinkering and not making important structural changes. Our coalition 

31 

firmly believes that we will all be better off with a system that 

takes consumer protection seriously, that listens fully to both Mars 

and Venus. 

Thank you for this opportunity to testify and I welcome your 

questions. 

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

183 of the appendix.] 

Chairman WATT. Thank you for your testimony, Ms. Saunders. 

Mr. Carr, you are recognized for 5 minutes. 

STATEMENT OF JAMES H. CARR, CHIEF OPERATING OFFICER, 

NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC) 

Mr. CARR. Good afternoon, Chairman Watt, Ranking Member 

Paul, and other distinguished members of the subcommittee. My 

name is James H. Carr, National Community Reinvestment Coalition. On behalf of the Coalition, I am honored to speak with you 

today. 

NCRC is an organization of more than 600 community-based associations that promote access to basic financial services across the 

country for working families. NCRC is also pleased to be a member 

of the new coalition, Americans for Financial Reform, that is working to cultivate integrity and accountability within the financial 

system. 

Members of the committee, the collapse of the U.S. financial system represents a massive failure of financial regulation that suffered from a host of problems, including regulatory system design 

flaws, gaps in oversight, conflicts of interest, weaknesses in enforcement, failed philosophical perspectives on the self-regulatory 

functioning of the markets, and inadequate resolution authority to 

deal with problems after they have occurred. 

At the request of the committee, I will devote my time today to 

one issue, and that is consumer protection. Safety and soundness 

and consumer protection are often discussed as separate issues, yet 

the safety and soundness of the financial system begins with and 

relies on the safety and soundness of the products that are extended to the public. 

If the extension of credit by a financial firm promotes the economic wellbeing and financial security of the consumer, the system 

is at reduced risk of failure. If the financial products exploit consumers, even if they are highly profitable to financial institutions, 

the system is in jeopardy of failure. 

Unfortunately, for more than a decade, financial institutions 

have increasingly engaged in practices intended to mislead, confuse, or otherwise limit a consumer’s ability to judge the appropriateness of financial products offered in the market and make informed decisions. In fact, the proliferation of unfair and deceptive 

mortgage products led directly to the current foreclosue crisis and 

massive destruction of U.S. household wealth, which currently 

stands at about $13 trillion. 

The tricks and traps, as it has been described by Elizabeth Warren, used to trap consumers into high-cost abusive financial products, greatly complicated if not impaired the ability of a consumer 

to make an informed financial decision about the most appropriate 

product for their financial circumstances. 

32 

Nowhere was this irresponsible and reckless behavior by financial institutions more prevalent than in communities of color. For 

more than a decade, Federal agencies, independent research institutes, and nonprofit organizations have described and discussed the 

multiple ways in which people of color have been exploited financially within the mortgage market. 

The result today, the foreclosure crisis is having its most damaging impact on communities of color in two ways: first, people of 

color are experiencing a disproportionate level of foreclosures; and 

second, they are most negatively harmed by rising unemployment. 

The Obama Administration recently proposed a sweeping reform 

of the financial system. A core element of the President’s plan is 

the establishment of the Consumer Financial Protection Agency. 

House Financial Services Chairman Frank has proposed a similar 

agency in his legislation, H.R. 3126. A consumer protection agency 

is long overdue. 

Currently, the financial regulatory agencies compete with one another for fees paid by institutions that they are entrusted to regulate. The winning bid is the regulator that promises the least 

amount of consumer protection. 

Although competition is an essential element in a free market, 

oversight and enforcement of the law is not, nor should it be, available for purchase in a free market. In fact, regulation is one of the 

few instances in which a monopoly market will result in the most 

efficient and desired result. A consumer financial agency, as outlined by both the President and the Chairman, would achieve a 

commonsense goal, and that is to provide standard products to 

eliminate unnecessary confusion for consumers on routine transactions. 

The concept of a standard product seems to be an anathema to 

some observers, but it is worth remembering that a 30-year fixed 

rate mortgage has been for more than half a century, and remains 

today, the gold standard loan product. It was created to help the 

Nation recover from the collapse of the previous major fall of the 

housing and credit markets during the Great Depression. In short, 

sometimes a good standard is the best innovation. 

In order to be most effective, the new consumer financial protection agency must examine lending at a community level as well. 

Highly segregated communities of color are the primary targets for 

unfair, deceptive, and predatory lending. As a result, the agency 

must have the knowledge, experience, and resources to address this 

critical reality. 

Moreover, prohibiting reckless and irresponsible products is only 

half the challenge in making sure there is equal access to reliable 

financial services. Many financial firms simply deny access to financial services completely. America has a long, unfortunate history of redlining. 

The Act that most significantly can address that issue at a community level is the Community Reinvestment Act. That law was included in the consumer protection agency proposed by the President, and we recommend that it be included in the bill that is 

being considered by this House. 

In conclusion, there has and will continue to be considerable 

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33 

cy, primarily from financial institutions. Their argument is that 

such an agency will stifle innovation, limit access to credit, and discourage lending to families most in need. 

These arguments should be considered as having the same merit 

as the declaration that the markets are self-regulating. We have 

seen the folly of self-regulated markets, and the American people 

are paying an extraordinary price for failed consumer protection. 

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

[The prepared statement of Mr. Carr can be found on page 48 of 

the appendix.] 

Chairman WATT. Thank you so much for all of your testimony. 

And we will now go to questioning by the members. It is my policy to go last on the last panel, since I have to be here anyway. 

So with that in mind—before I do that, though, I did want to commend to the members’ attention the historical analysis that Professor McCoy has done. You would do well to read her entire testimony, not just the 5 minutes that she abbreviated here. It is about 

the best analysis of how we got here that I have seen floating 

around. 

So the gentleman from New York, Mr. Meeks, is recognized for 

5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman, and thank you for your 

testimony here today. 

You know, my district in New York is the number one in foreclosures in the City of New York. I am noticing a certain trend, and 

I am wondering if you can tell me your opinion on this and whether 

a consumer agency would be able to intersect. 

Here is what I am finding: number one, that individuals who 

have taken out mortgages—and some of the financial institutions 

had skin in the game, they didn’t just take it and securitize it 

away—that those individuals’ incomes and the credit they received 

seemed to match more or less the mortgages that they were receiving. Those who went to mortgage brokers or some others and their 

incomes did not match, those were simply sold away, because they 

weren’t going to keep them, so it didn’t matter. 

And so there are two things that are happening. Either individuals are now in upside-down mortgages, and the banks are not refinancing them; or they just simply—if they had adjustable rates, 

and they adjusted, they can’t afford them and they are thrown out 

of their homes. 

So what I am concerned with in your vision when we move forward with a consumer financial protection agency, that this would 

be an area of which they could specialize and look in to see if, in 

fact—or tracking, if you will—to see if in fact there is a pattern. 

I mean, for years we have been talking here about predatory 

lending. And there has been no one that I know of that we could 

go to, to focus on, to stop predatory lending. I can recall on this 

committee we could go—we would be talking time after time after 

time to a person, at the person, but yet no result. 

So in your mind’s eye, would a consumer financial protection 

agency also be an adequate agency to look at issues such as predatory lending and put an end to it? 

That would be my first question. 

Ms. MCCOY. It would be a very important piece of the puzzle. 

34 

What we need to stop is this two-tier system where the sensible 

loans are the ones held in portfolio and the reckless, dangerous 

loans are the ones sold through securitization. Having one uniform 

standard for all loans, whether they are securitized or not, would 

definitely help that problem. But here the bank regulators would 

continue to have a role even if the agency is created, because the 

bank regulators can make sure that banks are not rewarded with 

lower capital requirements for securitizing bad loans. So they can 

partially buttress safety through capital treatment, and they 

should. 

Mr. CARR. I would agree with that. 

I would add, however, that the first step in enforcement is actually knowing there is a problem. And one of the great opportunities 

of this new agency is to have a staff steeped in the ability and understanding of consumer issues such that they can examine the 

trends and practices, and patterns and practices, to bring forth 

really powerful studies with a Federal imprimatur. 

Mr. MEEKS. Before I run out of time, refute this argument for 

me. Some have said that with the agency, we would need to look 

at a vanilla product, we would have to put 20 to 25 percent down; 

and as a result, I know, therefore the availability of credit, and 

particularly in minority communities, to own a home—which I still 

believe is the way we create wealth—would become smaller and 

thereby the gap between the haves and have-nots would become 

greater. 

How would you answer that? 

Mr. CARR. It is a frivolous argument, the idea that somehow 

every single consumer is different from one another. 

There is a difference to offering one product to every single consumer in the market as opposed to having standard products that 

are based on individuals’ income, their wealth, and certain other 

types of financial circumstances to create classes of standard products. 

And one can be very nimble, very innovative, with standard 

products. In fact, there are a lot of them that actually exist. The 

problem was they could not compete with the reckless subprime 

loans that were actually priced at a much higher premium by the 

investment banks. 

So the idea that somehow you lose innovation because you introduce standards is a frivolous argument. 

Chairman WATT. The gentleman’s time has expired. The gentleman from Texas is recognized for 5 minutes. 

Dr. PAUL. I thank you, Mr. Chairman. I have a question for Mr. 

Carr on how optimistic he might be about what we are trying to 

do. 

I tend toward pessimism at times; and I think the problem is almost bigger than what we are dealing with here, and we are just 

dealing on the edge of the basic problem. So the system that we 

have had has been around a long time. We have had a system— 

some people refer to it as capitalism that was unregulated. 

I happen to think that it doesn’t have much to do with capitalism; it has to do with corporatism, where corporations seem to 

get the benefits of some of the programs that are designed to help 

the poor. We have multiple programs that have been going on for 

35 

a long time designed to help the poor, and yet sometimes I think 

that is so superficial. The poor seem to become more numerous and 

the poor—especially since the crisis has hit; but it is always on a 

pretense to help the poor, and yet the corporations stand to make 

the money. 

So they make the money and they have the power and they have 

the insight with some of our financial institutions, including the 

Federal Reserve; and when the bubble forms, they benefit, and nobody complains too much if it seems to satisfy a lot of people. 

But when the bust comes, then we have a bailout. Who does the 

bailout serve? Do we immediately go out and bail out the people 

that we tried to get houses for? No. We immediately go out and bail 

out the system. So—the system is so deeply flawed, so they make 

the money when the bubble is being formed and they get bailed out 

when the bubble bursts. 

We come along with a new system that we hope will work. But 

for housing programs, for instance, you know, we want houses for 

the poor people, but developers make a lot of money, builders make 

a lot of money, mortgage companies make a lot of money, the banks 

make a lot of money. And all of a sudden the system doesn’t work 

very well and the poor get wiped out and they lose their houses. 

So if we don’t address that major problem, the structure of the 

system, this corporatism which has invaded us, how can this idea 

that, well, we will regulate a little bit in order to protect the consumer—I guess I am rather cynical, and I want you to tell me 

whether you share any of that concern, whether my cynicism sometimes is justified or not. 

Mr. CARR. Congressman, I appreciate the question because I 

agree with much of what you have just said. 

One of the problems that we have in this country is that we have 

the financial system operating on one side of the ledger and we 

have special programs for the poor on the other. The way the poor 

became solid middle class in this country was by having a financial 

system that built their wealth and public policies working with 

that financial system, coming largely out of the Great Depression, 

that built the vast majority of our middle class. 

We do not have that now. Instead, we have a banking system 

that looks at consumers and says, how can we exploit them? And 

that is problematic, and until we change that system such that 

when a bank and our financial institution is reaching to a consumer specifically to promote the economic mobility of that consumer and build their wealth—if that is not their goal, if that is 

not what is going to be accomplished by their product, the poor will 

remain poor and all the Federal subsidies in the world won’t help 

them. 

That is why it is so critical to put into place an agency that actually combines the knowledge, the collective wisdom of people who 

actually understand the banking system, the financial system, and 

understand it is their mission to promote the economic mobility of 

this country. Because once they are working together, there will be 

no conflicts of promoting wealth and stability within working families, with safety and soundness of the financial system. 

And then, Congressman, the other programs that you have 

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36 

grams will now have a foundation by which they can actually enhance what is happening. But if the markets don’t work for the 

general public, poverty will never be resolved. 

Dr. PAUL. One other quick question. Would you have any objection, personally, to us knowing what is going on at the Federal Reserve and have an audit of the Federal Reserve? 

Mr. CARR. I am not familiar with the Federal Reserve’s audit. 

Dr. PAUL. I am finished. I yield back. 

Chairman WATT. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Green, is recognized. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing. 

I have a question with reference to the Fed continuing to perform 

the function of consumer protection. And I would like for each of 

you to give me a reason why the Fed should not—this consumer 

protection agency should not be in the Fed. And I would like for 

you to discount—it is exceedingly important that you do this—discount past performance. Do not let that be your reason, discounting 

past performance. 

Why would we not want the Fed to have custody, care, and control of this agency? Ms. McCoy, we will start with you. 

Ms. MCCOY. Thank you, Congressman Green. 

The reason why the Fed would not do as good a job as the agency 

is that it approaches safety and soundness issues, which is one of 

its core concerns, through the vantage point of banks. It is concerned about their solvency. The banks, in turn, report quarterly 

profits, and that tends to produce a short-term vantage that the 

Federal Reserve often shares. 

And that is true not only for the Federal Reserve. It is true for 

the Comptroller of the Currency and the Office of Thrift Supervision. And this is a structural and cultural mind-set that will not 

change. 

Mr. GREEN. Thank you. 

Ms. Saunders? 

Ms. SAUNDERS. I was basically going to say the same thing. I 

think the questioning here today has pointed out how many people 

coming from consumer organizations sit on the Board of Governors, 

have ever sat on the Board of Governors, even have had a significant role on the Consumer Advisory Council. 

I actually drafted a section of my testimony focused on the CAC 

and how it promotes industry views more than consumers’. It just 

pervades the agency. Whether we add the words ‘‘consumer protection’’ to the line in the statute or not, it is always going to be a 

small part of the overall function of the Federal Reserve, and it is 

so dominated by bankers and focused on banking and those concerns that it is going to look at things from that perspective and 

miss important questions if you look at it—focus solely on the consumer. 

Mr. GREEN. Mr. Carr? 

Mr. CARR. I would just reinforce the past two comments, that it 

is just a structure that does not and will not work. In fact, you 

said, without looking in hindsight or retrospectively, it is really 

hard to do that. 

37 

You just asked a question right in the depths of the greatest recession we have had in a half century. We know that much of the 

damage was brought to Black and Latino communities. How many 

civil rights actions are currently active by the Fed? And the answer 

was, we are not sure. 

I can’t look backward, but can I look back just an hour? 

I think we need an agency that understands that economic opportunity and economic mobility is imperative for this country; and 

that if you can’t respond to that in the depth of this crisis, how can 

you be given the mantle to make sure that those rights are ensured? 

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

Chairman WATT. I thank the gentleman. 

The gentleman from Missouri is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. It won’t take the entire 

5 minutes. 

This is for the three of you, or either of the three of you. My assumption—well, I don’t want to assume. 

Do you believe that we absolutely must include the Community 

Reinvestment Act in this legislation, assuming of course that we 

can somehow prevent illegal immigrants who work for ACORN 

from benefiting, do you think that this has to be an inseparable 

part of this new consumer protection agency? 

Ms. MCCOY. Congressman, by the way, Kansas City was my ‘‘big 

city’’ when I grew up. 

Mr. CLEAVER. Where are you from? 

Ms. MCCOY. Lawrence. 

Mr. CLEAVER. Lord help us. 

Ms. MCCOY. Exactly. 

I think it makes sense for the Community Reinvestment Act to 

be part of the new agency because the agency is so concerned with 

access to credit and credit quality. And those two things are at the 

core of CRA. 

Ms. SAUNDERS. My organization does not really work on CRA 

issues. But I can tell you that as I was writing my testimony and 

the particular history on Rent-a-Bank, payday lending where the 

banks are lending their preemption rights to the payday lenders, 

I was struck—I had help on the testimony from Jean Ann Fox at 

the Consumer Federation. I was struck by the important role that 

CRA played in eventually bringing—eventually, it was one of the 

rare successes, all four of the banking agencies, to realize that this 

was not appropriate and shutting it down. 

Mr. CLEAVER. Mr. Carr. 

Mr. CARR. Yes. 

First of all, I am on the executive committee of Americans for Financial Reform. It is the official position of the organization that 

CRA should and must be included in the new consumer protection 

agency. 

Second of all, I will go back to something I said in my opening 

comments. The goal of that agency is to ensure access to safe and 

sound products, and it can’t do so to minority communities if it is 

only looking at individuals, because the financial system doesn’t 

treat individuals the same in minority communities. They treat 

them as markets. 

38 

And so getting at systemic issues of failing to lend—failing to 

lend, as opposed to using exploitive products—the Community Reinvestment Act is the only real act that really promotes and holds 

banks and other financial institutions—well, banks now, hopefully 

other financial institutions—accountable for proactively lending in 

communities and not ignoring the legitimate credit needs. 

So if it is not in that agency, we have left a major piece of support for minority communities out. 

The second thing is that we should understand that that agency 

will have that accumulated knowledge and expertise of researchers, 

data—how will it in any way enhance their jobs to have the people 

who look at things at a geographic and at a market’s level—systemic market level not part of those daily conversations, sharing of 

information and, ultimately, the creation of products and the enforcement of the law? 

It must be in order for that agency to work as it is designed. It 

must be able to look at broad-based community lending. 

Mr. CLEAVER. You don’t all have to answer. Just give me some 

signal. 

Based on your answer, then, you would support a civil rights division of the financial consumer protection agency? 

Ms. MCCOY. I would. 

Ms. SAUNDERS. That is also part of, I think, an official position 

of Americans for Financial Reform, which we— 

Mr. CLEAVER. Yes. I know yours. Thank you very much. 

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

Chairman WATT. The gentleman from Minnesota is recognized. 

Mr. ELLISON. Thank you, Mr. Chairman. 

And also I want to thank all the panelists. You all have done a 

remarkably excellent job, and I appreciate the time you have taken. 

Let me get right to my point. One of the things I have been trying to focus on yesterday and today is to ask some of the people 

who represent the Fed—and even yesterday, the bankers—about 

this issue of what takes precedence—what will take precedence, 

what has taken precedence—prudential regulation or consumer interests? 

Based on the long amount of time that has transpired between 

the Fed having the authority to make rules regarding good mortgages and the time they actually came up with something—credit 

cards, overdrafts, all of this stuff—does the length of time that has 

transpired give us any indication as to how the Fed has grappled 

with these two conflicting portfolios and which one has prevailed? 

Do you understand my question? 

Ms. MCCOY. I do, Congressman. 

I want to relate a personal experience that—I was on the Consumer Advisory Council of the Fed from 2002 to 2004, and this was 

exactly the period when we—consumer advocates were urging the 

Fed to adopt the unfair and deceptive rules that it delayed until 

2008. 

We pressed for 3 years with no success to have that rule adopted. 

We were told endlessly why the Fed could not do it, would not do 

it; and I have to say, I was so frustrated because we were not listened to. 

39 

Subsequently, a Fed staffer said, ‘‘You were right, we were 

wrong, but we didn’t listen to you because you only told stories of 

individual consumers.’’ 

Mr. CARR. Congressman, if I could just— 

Mr. ELLISON. Mr. Carr, please. 

Mr. CARR. I think we should recognize that it took until the middle of 2008 to actually release final regs on HOEPA to deal with 

this issue. And even at that time, some of the most egregious predatory practices still weren’t purged. 

For example, yield spread premiums, which are basically kickbacks, were still allowable, as well as weaknesses on issues such 

as assignee liability, prepayment penalties. And this is knee deep 

into the crisis. Those issues have now only recently been taken on 

again. 

Mr. ELLISON. Ms. Saunders? 

Ms. SAUNDERS. If I could just add, in addition to the length of 

time which, of course, says something about priorities, what triggered the action? It wasn’t just how long it took, it is that nothing 

happened until Chairman Frank and others said, ‘‘Use it or lose it.’’ 

And they were under threat of losing that authority and Congress 

was considering credit card bills and predatory lending bills and it 

was clear that they were under the gun and they had to do it. And 

in the end, you know, that is what it took, a threat, an ultimatum 

to get action. 

Mr. ELLISON. Thank you for elaborating on that. 

Do you see any reason why there couldn’t be joint exams with 

prudential and consumer regulators? Because some people seem to 

be really concerned about a potential conflict between the two. 

I mean, I don’t see it as a huge problem. I see it—first of all, I 

see conflicts as having happened already; they just were resolved 

in the way you all just described in favor of the prudential regulator, in favor of the industry. So now there might be a fair chance 

for the consumer, and that might somehow manifest into a conflict 

that we can see. 

But I guess my question is, if there is a potential conflict, can 

you envision a few ways in which these things might be worked 

out? 

Ms. MCCOY. I can. 

First of all, I think joint examinations are entirely feasible. There 

are other parts of financial services regulation where it happens 

very well, such as an insurance regulation. 

But let me suggest this. We know on very rare occasions that 

agencies do have irreconcilable conflicts. For example, under 

Gramm-Leach-Bliley, the SEC and the Federal banking regulators 

couldn’t agree on the push-out provisions. And a way to resolve 

that is to allow them, the agency, to refer the matter to GAO. It 

does a report to Congress, and Congress is advised of the issue and 

if GAO’s recommendation is to the resolution. I think that is a 

great tiebreaker. 

Mr. CARR. Congressman, if I could just say for 5 seconds, I think 

the absence of conflict would be a failure of mission, which is exactly what we have right now. 

40 

One would expect that given the types of deceptive and exploited 

practices happening, you would be having lots of conflicts for the 

last decade. The absence is a problem. 

Mr. ELLISON. Thirty seconds, Mr. Chairman, or no? 

Chairman WATT. Yes. 

Mr. ELLISON. Just to sort of wrap up, have you all thought about 

how we might fund the agency? 

Ms. MCCOY. I was saying before the hearing that funding is a 

really hard issue to figure out, and I don’t have a good solution except to say that the agency needs adequate funding, which the SEC 

has not had. And the funding system needs to make certain that 

the agency does not become captive to large financial services providers. Those, to me, are the two overriding goals. 

Mr. ELLISON. And if we cannot get this independent regulatory 

board, which I believe we need and I support fully, can we at least 

change the situation so that the bankers don’t have their advisory 

board at the Fed and then have half an advisory board on the consumers? 

Chairman WATT. I take it that is a rhetorical question of this 

panel? 

Ms. MCCOY. Even if the consumers have their own board and 

there are no bankers on it, that will not solve the problem. It is 

just not enough. 

Mr. ELLISON. Thank you. 

Chairman WATT. The gentleman’s time has expired. 

I will recognize myself for 5 minutes to conclude this. 

Ms. Saunders, I think you may have addressed some of the concerns that I was beginning to feel about the potential for conflict 

between a new consumer regulatory agency and leaving some consumer responsibilities, consumer protection responsibilities. You 

pointed out some things in the legislation that—I am a cosponsor 

of that—I was not aware of. It would be helpful, I think, if you— 

all three of you—looked closer at that because what we do not need 

is conflict between consumer regulation in one place and consumer 

regulation in the other place. 

And I think we may have addressed it appropriately in the statute. Ms. Saunders seems to suggest that in her testimony. I take 

it you stand by that? 

Ms. SAUNDERS. I do. 

I would also like to point out, though, that the proposal is basically to remove pretty much all of it into the new agency. The Fed 

would retain backup enforcement authority. 

Chairman WATT. But then I am thinking that maybe if there is 

a potential for conflict, we may need to be removing even more of 

it. That was the conflict that I—now, the second question that the 

industry has raised over and over again, this potential for conflict 

between consumer and prudential. I keep having trouble identifying even what that is all about. 

The regulator, Ms. Duke, didn’t suggest that that potential existed today, but the industry keeps telling me that there is a conflict between consumer regulation and prudential regulation. 

And is anybody able to tell me one instance where that would 

raise its head? 

41 

Ms. SAUNDERS. I was actually looking for those examples in industry testimony yesterday as I was preparing, and the ones that 

I came up with from their examples—interesting that Mr. Ireland 

did not repeat them this morning when you challenged him—one 

was check hold times. 

Now, the Expedited Funds Act actually is not one of the ones 

being proposed and given to the new agency. It would stay with the 

Fed. But let’s assume that it was going. 

The idea is that the banks say, ‘‘We have operational issues on 

how we clear checks and we have fraud issues and we just can’t 

speed it up.’’ And of course the consumer is saying, ‘‘We want our 

money now.’’ 

Why couldn’t this agency take that into consideration? Nobody 

wants fraudulent checks cleared. Like any other agency, it is going 

to balance the issues. 

Chairman WATT. If you really got to a fork in the road where you 

had a real conflict, which nobody has really been able to identify 

to me—it is even hard for me to imagine who would—I guess then 

the question becomes, who takes precedence, the consumer or the 

bank? 

How would you resolve that? 

Ms. SAUNDERS. In the end, somebody has to decide; and the 

structure of this agency is that the agency decides. But it has a 

regulator on the board and Congress looking over its shoulder, and 

I am confident that it is not going to ignore serious safety and 

soundness issues. 

Chairman WATT. Final point and final question, because I do 

confess to a level of ambivalence on this CRA issue that Representative Cleaver raised. I am still somewhat ambivalent. 

I understand your position that an integral part of CRA should 

be in this consumer agency, but I would hate to think of a scenario 

in which CRA responsibility and duties don’t continue to reside 

over on the regulatory side also, because I would hate for them to 

say, you know—that is not our thing anymore to oversee that. 

So let me get you all to just think about that a little bit. Not that 

I am—the legislation that we introduced kept it where it is in the 

existing regulators. There may be some way to accomplish what 

you all have suggested would be the legitimate consumer regulatory part of it through some language to make sure that they are 

monitoring it, and still give the primary responsibility to the regulators who are out there pushing the banks and financial institutions regularly through their examination process. But that is—I 

am—my jury is still out on that; and I would love to hear more. 

But we have run out of time, unfortunately, and my time has expired. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing or 

which maybe have been raised today; and we would welcome your 

written responses to—such as the last one that I raised. Without 

objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place 

their responses in the record. 

We thank you all so much. All of you were just outstanding witnesses, and your written testimony was outstanding also. I have 

42 

commended it—put Ms. McCoy’s testimony, in fact, in the hearing 

record of the full committee this morning; and we will make sure 

that the other two written testimonies get circulated widely also. 

We thank you for your participation, and with that—with nothing further for the good of the cause, as they say in my church— 

the hearing is adjourned. 

[Whereupon, at 4:27 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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