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BANKING INDUSTRY PERSPECTIVES ON 

THE OBAMA ADMINISTRATION’S FINANCIAL 

REGULATORY REFORM PROPOSALS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 15, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–58 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 15, 2009 ..................................................................................................... 1 

Appendix: 

July 15, 2009 ..................................................................................................... 55 

WITNESSES 

WEDNESDAY, JULY 15, 2009 

Bartlett, Hon. Steve, President and Chief Executive Officer, The Financial 

Services Roundtable ............................................................................................. 11 

Courson, John A., President and Chief Executive Officer, Mortgage Bankers 

Association ............................................................................................................ 14 

Leonard, Denise M., Vice President, Government Affairs, National Association 

of Mortgage Brokers ............................................................................................. 20 

Menzies, R. Michael S., Sr., President and Chief Executive Officer, Easton 

Bank and Trust Company, on behalf of the Independent Community Bankers of America (ICBA) .......................................................................................... 24 

Stinebert, Chris, President and Chief Executive Officer, The American Financial Services Association ...................................................................................... 15 

Yingling, Edward L., President and Chief Executive Officer, American Bankers Association ...................................................................................................... 22 

Zeisel, Steven I., Vice President and Senior Counsel, The Consumer Bankers 

Association ............................................................................................................ 17 

Zywicki, Professor Todd J., George Mason University Foundation Professor 

of Law and Mercatus Center Senior Scholar, George Mason University 

School of Law ........................................................................................................ 18 

APPENDIX 

Prepared statements: 

Bartlett, Hon. Steve ......................................................................................... 56 

Courson, John A. .............................................................................................. 111 

Leonard, Denise M. .......................................................................................... 145 

Menzies, R. Michael S., Sr. .............................................................................. 158 

Stinebert, Chris ................................................................................................ 176 

Yingling, Edward L. ......................................................................................... 187 

Zeisel, Steven I. ................................................................................................ 206 

Zywicki, Professor Todd J. ............................................................................... 211 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachmann, Hon. Michele: 

Editorial from The Wall Street Journal entitled, ‘‘A Tale of Two Bailouts’’ 246 

(1) 

BANKING INDUSTRY PERSPECTIVES 

ON THE OBAMA ADMINISTRATION’S 

FINANCIAL REGULATORY 

REFORM PROPOSALS 

Wednesday, July 15, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

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

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Sherman, Meeks, Moore of Kansas, Hinojosa, 

McCarthy of New York, Baca, Lynch, Miller of North Carolina, 

Scott, Green, Cleaver, Bean, Moore of Wisconsin, Ellison, Klein, 

Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, 

Adler, Driehaus, Himes; Bachus, Royce, Lucas, Manzullo, Jones, 

Biggert, Miller of California, Hensarling, Garrett, Barrett, Neugebauer, McHenry, Putnam, Bachmann, Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. 

As people know, we are in a very, very serious examination of 

the financial regulations of the country. It is the intention of myself 

as Chair to—that is pretty pompous—it is my intention to begin 

marking up a couple of aspects of this. 

Most of the complex, systemic ones will be coming in September. 

But we do have a very heavy schedule of hearings, and I want to 

invite anyone listening in the audience today or through any other 

means, please feel free to submit information. We have a serious 

set of issues here. They are interconnected. We really do welcome 

information. 

The hearing today is to receive the views of people in the financial services industry on various regulatory proposals. And I invite 

people to talk about the full range. Obviously, there is a certain 

amount of concern about the proposal for a financial customer protection agency, but we also are going to be dealing with the questions of systemic risk for those institutions which are not banks, 

the question of the resolving authority and how we can extend 

that. 

We did have a separate hearing on compensation, but that will 

be one of the topics. 

2 

We obviously will also be dealing with questions of derivatives 

and how much we are going to tighten regulation on that, and the 

answer is a significant amount. 

And I do want to note that on this coming Monday, after the 

Chairman of the Federal Reserve testifies, we are going to have a 

hearing specifically on the question of ‘‘too-big-to-fail.’’ That has become a very important issue that people are concerned about. 

My own view is that the Administration’s approach deals with 

that in a reasonable way, but it is important that we both be doing 

it right and be seen to be doing it right. And so on Monday, we 

are going to be having a hearing specifically to address how we can 

avoid the danger of a too-big-to-fail regime. How do we have a situation—obviously, the hope is you want to keep them from getting 

too big and, particularly, you hope to keep them from failing. But 

how do you deal with that if it happens? 

So I do recommend to anyone—and I almost want to have an 

essay contest, except we are not allowed to give anybody anything 

except through an appropriations bill, and that has gotten tougher 

than it used to be. But anyone who has any proposal for what we 

should be doing to substantially diminish the likelihood of any institutions being treated as too-big-to-fail—I am serious—please feel 

free to let us have them, in writing in particular, because I think 

there is a general consensus that one of the things we want to 

come out of this with is a substantial diminution, at the very least, 

of that problem. 

Now let me begin my statement. 

Today’s hearing is about the whole set of issues. Obviously, the 

financial consumer protection issue has attracted a lot of attention, 

and that is the one that I believe we will be able to mark-up before 

we go. 

I just want to read a memo I got from my staff. It is a memo 

summarizing the large number of complaints we have received both 

directly from consumers and from Members on both sides of the 

aisle who have heard from their constituents objecting to practices 

that the credit card companies are engaging in now that we have 

passed the bill. 

Essentially, the argument is that in anticipation of the legislation, a number of things are happening. Senator Dodd, in fact, sent 

a letter to the Chairman of the Federal Reserve talking about this. 

As you know, in a compromise with people in the banking industry, we agreed to hold off the effective date. But we were concerned 

that the effective date being held off might lead people to kind of 

flood the zone before we could get there. We have had complaints 

about significant increases in the monthly minimum payment, for 

example, from 2 percent to 5 percent on existing balances. 

Again, I want to make clear, in my own mind, there is a distinction between what you do with existing balances and what you do 

going forward. And I don’t think an increase in the minimum 

monthly payment is a bad thing in every case; and maybe it discourages people from getting too deeply in over their heads. But to 

raise the monthly minimum on an existing balance is changing the 

rules after people have started playing. And people could rightly 

say, ‘‘Well, if I had known that, I would have altered my behavior 

at the outset.’’ 

3 

One of my colleagues told me that he had people complain that 

JPMorgan Chase had told him that it was Federal law requiring 

such increases. That is, of course, not true; and I have no reason 

to disbelieve people saying that is what they were told by various 

bank employees. 

We have other changes being made, some of which are within the 

law, some of which I think would be prevented by the law. But 

that, I must tell you, is what strengthens the case for this Agency. 

We cannot and should not try to pass a law every time there is a 

set of complaints. What we need is for there to be rules. And it is 

not our experience that the existing regulators have used statutory 

authority given to them very vigorously. 

But this, this flood of complaints—and I must tell you the complaints about the credit card issuance, the credit card-issuing 

banks—has become a very significant one. 

There are a couple other points I will make with regard to financial customer protection. I know there will be people who won’t 

want it in any case. I certainly agree that it should not be a situation in which any bank could ever be given contradictory orders. 

We can guarantee that this law will be written, if it becomes law, 

to prevent that. 

I previously expressed my view that the Administration made a 

mistake in including the Community Reinvestment Act here. I 

think that is a different order of activity. 

One other concern that came because, as the Administration sent 

it, they, of necessity, talked about their plans to abolish—well, to 

merge the OTS and the OCC and to—I know there are people who 

think merging the OCC and the OTS is kind of like merging Latvia 

with the Soviet Union, but we do really see this as a merger because we think there is a very important thrift function that has 

to be preserved. 

And in that conjunction, I do not think this committee is going 

to abolish the thrift charter. I think it is important that we preserve the thrift charter. The problem with the thrift charter is that 

it is both a charter to engage in thrift activity and, to some extent, 

a hunting license to go and do other things with less regulation. 

I believe we are capable of rewriting that so that it is a thrift charter and a thrift charter only and will not get into that. 

And while I am on thrifts, I just want to have one—we are often 

criticized, and good things happen and people don’t notice, I was 

pleased to read in the report of the Federal Home Loan Banks, not 

that they had lost money; they lost money, as we expect for people 

in the housing business, but they made a point of noting that their 

losses were significantly less than they would have been had it not 

been for the alterations that had been made in the mark-to-market 

rules; that their ability to distinguish between instruments held for 

trading and instruments that they plan to hold until maturity, 

which are fully paying, minimize their losses. 

When you minimize the losses of the Federal Home Loan Banks, 

you increase their ability to make home loans at a time when we 

need them. So I do want to take credit, because this committee had 

a major role in an advocacy capacity on both sides in urging that 

change in mark-to-market. And we have just had some evidence 

that it was the right thing to do. 

4 

The gentleman from Alabama is recognized for how much time? 

Mr. BACHUS. Actually, Mr. Chairman, I don’t have an opening 

statement. 

I do want to respond to something in your pre-opening statement. 

The CHAIRMAN. Sure. 

Mr. BACHUS. The chairman invited you to submit essays. And I 

would simply say that they need to be plain vanilla essays. And if 

they are not, you need to get Elizabeth Warren’s okay before you 

submit them. 

The CHAIRMAN. That sounded like an opening statement to me, 

but all right. 

The gentleman from Texas, Mr. Neugebauer, is recognized for 2 

minutes. And then I will go right to the gentleman from California 

for 2 minutes. We split that up. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

As we continue to assess the Administration’s and the chairman’s 

proposal for regulatory restructuring, we need to take more time to 

understand the impacts. And I think we just heard the chairman 

say, there are consequences when we pass legislation. And we 

heard some of that today. 

How will these proposals affect the cost of credit for those whom 

we represent? What are the impacts on the community lender and 

the constituents and small businesses in our hometowns who count 

on that credit? 

At a time when our economy has slowed, and lenders are hesitant to lend, a new regulator would further limit the available 

credit. New fees to fund this agency mean added costs for consumers at a time when they can least afford it. 

What do consumers get for this new tax? They get a massive 

Federal agency to substitute the government’s judgment for theirs 

about what financial products and services best fit their needs. 

Taxpayers I represent are getting tired of the Federal Government 

dictating what kind of energy they are going to use, who is going 

to provide their health care, what kind of credit card they can 

have, what kind of a mortgage is appropriate for them, even what 

kind of car they can buy. 

Our Republican plan is better for consumers. We keep safety and 

soundness regulation and consumer protection regulation under the 

same roof, because this structure holds regulators accountable. Our 

plan requires better disclosure and antifraud enforcement. When 

the American people receive good information about their financial 

products and services available and know that the fraudulent behavior will be stopped and punished, we think they are smart 

enough to make decisions about what products are best for them 

to use. 

The problem I have had with this whole process is that we had 

a lot of legislation on the books. We had regulators in place who 

were supposed to be doing their job. The problem is that regulators, 

in many cases, didn’t do their job. And so now our answer, rather 

than going back and holding those people accountable for their action, is to throw a whole new blanket of regulation over the markets to somehow give some indication that is going to fix the problem. 

5 

What we don’t need is more regulation. We need better regulation, we need smarter regulation, and we need regulators doing 

their job. And I hope to hear from our witnesses today on some 

commonsense approaches to this so that we can continue to provide 

credit and not limit the choices of the American people. I don’t 

think the American people are going to be overly excited about 

their choices being limited. 

So I thank you, Mr. Chairman, for holding this hearing. 

The CHAIRMAN. The gentleman from California for 2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. A major component of the 

Administration’s regulatory reform proposal is the creation of a 

Consumer Financial Protection Agency, which would separate safety and soundness regulation from consumer protections. 

This idea of separating the two has been around for some time. 

In fact, we saw that very structure over the GSEs. A weak safety 

and soundness regulator, OFHEO, was competing with HUD, who 

subjected Fannie Mae and Freddie Mac to ever-increasing affordable housing goals. And we know how that ended. The affordable 

housing goals of Fannie and Freddie, enforced by HUD, were the 

main reason behind the GSEs loading up on junk bonds, which 

ended up accounting for roughly 85 percent of their losses. Clearly, 

the goals were at odds with the long-term viability of these firms, 

and ultimately led to their demise. 

We are now looking at applying that regulatory framework to the 

entire financial services sector. As the GSEs have shown, there is 

an inherent conflict in separating these two responsibilities. And 

there is also a reason why regulators like James Lockhart, who 

heads up the FHFA, and Sheila Bair, head of the FDIC, have expressed concern over such a proposal. 

I think, long term, this Agency will do more harm than good, and 

based on the GSE history and political interference at the expense 

of safety and soundness, it should be avoided at all costs. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Kansas is recognized for 2 

minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, and I thank 

you for your work to introduce H.R. 3126 to create the Consumer 

Financial Protection Agency. 

I look forward to working with you and members of this committee to ensure that we have oversight of any new agency and the 

regulatory structures. I will be working to add an independent Office of Inspector General to the CFPA, as well as increasing the coordination between all financial IGs to ensure regulatory gaps are 

identified and addressed. 

The financial meltdown last year made it very clear that our financial regulatory structure has problems that need to be fixed. We 

need to make sure that we have a system that protects consumers, 

investors, and taxpayers. 

I thank the witnesses for their views on the Administration’s proposal. We need to act thoughtfully and carefully, but quickly, to repair the gaps identified in our regulatory system. We also need to 

make sure that community banks that did not create this crisis are 

fairly treated under the new system. 

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

6 

The CHAIRMAN. The gentlewoman from Illinois, Mrs. Biggert, for 

2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

It is no secret that one of the reasons our country got into this 

financial mess in the first place is because there simply were too 

many regulators who weren’t doing their job and not talking to one 

another. Thus, I am very skeptical that for consumers the answer 

is making government bigger by creating a new Federal agency 

that is paid for by taxpayers, that tells consumers what financial 

products they can and cannot have, and tells financial institutions 

what products they can and cannot offer. 

There is no question that our financial services regulatory structure is broken; and for both consumers and the health of our financial services industry and the economy, we need to clean it up. 

However, I fear that we are moving in the wrong direction when 

we strip from the banking regulators their mission to protect consumers. Instead, we place that responsibility with a new government bureaucracy, an agency that I think should really be called 

the Credit Rationing and Pricing Agency. 

Why do I say this? Well, because this new agency, charged with 

deciding what is an affordable and appropriate product for each 

consumer, can only result in one or more of three things: 

First, many consumers who enjoy access to credit today will be 

denied credit in the future; 

Second, riskier consumers will have access to affordable products, 

but who will pay for that risk? It is the less risky consumer whose 

cost of credit will increase; and 

Third, financial institutions will be told to offer certain products 

at a low cost to risky consumers, which will jeopardize the safety 

and soundness of that financial institution. 

Secretary Geithner last week couldn’t really answer the question, 

would the safety and soundness banking regulator trump a new 

consumer regulator if the consumer regulator’s policy would put 

the bank in unsafe territory? 

We must first do no harm. We must find a balanced approach to 

financial regulation. I think our Republican plan that puts all the 

banking regulators and consumer protection functions under one 

roof is a better answer for the consumer and really gets to the 

heart of preventing another financial meltdown. 

I look forward to today’s hearing and I yield back. 

The CHAIRMAN. The gentleman from Texas, Mr. Green, for 2 

minutes. 

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

introduction of H.R. 3126. 

I am eager to hear commentary on H.R. 3126. I believe that we 

can have consumer protection as well as safety and soundness; I 

don’t think these things are mutually exclusive of each other. I 

don’t think that legislation is perfect, but I do think that we can 

do things to perfect it. And I am interested in being a part of the 

perfection process to make sure we have safety and soundness as 

well as consumer protection. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from California, Mr. Miller, for 2 

minutes. 

7 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I want 

to thank you for holding this hearing today. 

And I believe that everyone in this room would agree that our 

current regulatory system failed to adequately protect not only the 

markets, but investors, and it does need to be restructured. However, I believe we need to proceed with caution to ensure that legislation does not overregulate our markets, stifle innovation or take 

choices away from consumers. 

I want to thank the chairman for bringing up the issue of markto-market. I believe it was in February of last year that I introduced an amendment on a bill, the housing bill, that required the 

Federal Reserve and the SEC to look at mark-to-market, perhaps 

take part of it and revisit it and restructure it, and perhaps even 

avoid implementing portions of it at that point in time. 

It is sad to say, I think I did that 3 or 4 times, and the Senate 

removed it from every bill we sent over there. I think, had we 

moved more aggressively in that direction, perhaps some of the 

problems we face today might have been avoided. 

There has been much debate about Freddie and Fannie. I know 

in 2002–2003, we also passed legislation providing a strong regulator and providing oversight for Freddie and Fannie that perhaps 

might have avoided some of the circumstances they are facing 

today. But the concept of not having a Freddie or Fannie there 

today, when they are providing about 73 percent of all the loans 

out there and the guarantees in the marketplace, is bothersome to 

me. And if you include FHA in that, between Freddie, Fannie, and 

FHA, over 90 percent of the loans made today are taken by those 

or guaranteed by those companies. 

The fact is that with liquidity as it is, the banks just don’t have 

the liquidity on hand to make fixed-rate 30-year loans and hold 

those loans in many cases. 

I think one thing we didn’t do was open Freddie and Fannie up 

to the high-cost areas. We did that much later, in fact in this last 

year, but I think had we done that early on there would have been 

more liquidity in the overall marketplace, and I believe that certain 

portions of this country wouldn’t have been discriminated against 

because they weren’t having the option to participate in the program. 

I really hope that the comments by this group of distinguished 

individuals today will be honest, above board, and really tell us 

your concerns. I am concerned that we overregulate you. We need 

to allow the market to take its course. We need to allow innovation 

within the marketplace, and especially within your industry, we 

need to allow for innovation. 

I think sometimes we are not timely in implementing programs 

like mark-to-market. And I think sometimes we react overaggressively after the fact when things have occurred, and I am hoping 

we don’t do that in many cases. 

I hope we are thoughtful in what we are doing here, we discuss 

the pros and cons as it applies to your industry, and we come up 

with something that is reasonable. 

Mr. Chairman, I thank you and I yield back the balance of my 

time. 

8 

The CHAIRMAN. The gentleman from Georgia, Mr. Scott, for 2 

minutes. 

Mr. SCOTT. Thank you, Mr. Chairman, and thank you for this 

hearing. This is an important hearing. As I have often said, the 

banking industry is the heart of our financial system, and through 

it, everything flows. 

We have so much on our plate as we deal with the President’s 

regulatory reforms: the new financial oversight agency, the Consumer Financial Protection Agency; the Federal Reserve and its 

role as systemic regulator; the creation of a council of regulators; 

the FDIC’s role; the merger of the Office of Thrift Supervision into 

the OCC; title rules on banks that package and sell securities 

backed by mortgages and other debt; proposals that companies 

issuing their mortgages retain at least 5 percent on their books; 

and the requirement that hedge funds and private equity funds 

register with the SEC and open their books to regulation. We have 

a lot on our plate to deal with in this regulatory reform. 

And on top of that, how do we make this work with our State, 

our Federal, and international regulators, all in our efforts to ensure the stability of the financial services sector and protection of 

the financial consumer? What a challenge we have. It is the banking community that is at the heart of it, and this is why this hearing is so vital and so important. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, for 

2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Under the national energy tax, House Democrats want to help 

decide what cars we can drive. Yesterday, House Democrats announced a plan to help decide what doctors we can see and when 

we can see them. And now under CFPA, House Democrats want to 

decide whether or not we qualify for credit cards, mortgages, or 

practically any other consumer financial product. 

Yes, there is a troubling trend. The CFPA represents one of the 

greatest assaults on economic liberty in my lifetime. It says to the 

American people, you are simply too ignorant or too dumb to be 

trusted with economic freedom. Therefore, five unelected bureaucrats, none of whom know anything about you or your family, will 

make these decisions for you. But never fear, surely several of 

them will have Ph.D. by their names, and they will engage in vigorous discussions about consumer credit issues at very exclusive 

cocktail parties in Georgetown. 

This is the commission that will now have sweeping powers to 

decide under the subjective phrase ‘‘unfair,’’ what mortgages, credit 

cards, and checking accounts you may qualify for. Sleep soundly at 

night. 

To take from consumers their freedom of choice, to restrict their 

credit opportunities in the midst of a financial recession, all in the 

name of consumer protection is positively Orwellian. 

Let’s protect consumers from force and fraud. Let’s empower 

them with effective and factual disclosure. Let’s give them opportunities to enjoy the benefits of product innovations like ATM machines and online banking. And let’s not constrict their credit opportunities. 

9 

A consumer product Politburo does not equate into consumer protection. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Green, for 2 

minutes. 

I am sorry, the gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I am pleased we have an opportunity this morning to interact 

with the banking industry. I am particularly pleased that many of 

our witnesses have indicated they support more regulation for the 

shadow banking industry, a collection of unregulated lenders who 

operate outside of State and Federal oversight due to their 

nonbank status. 

It was, yes, many of these lenders who preyed on customers with 

products such as no-doc loans, and helped erode the lending markets which compromised the foundation of our economy. 

However, I am still concerned with the consumer-related activities of regulated banks. Large banks, in particular, have substantial interactions with the public, be it as a mortgage servicer, as 

a place for consumers and small businesses to access necessary 

credit. 

I would agree with you that additional regulation would be unnecessary were our financial system functioning properly. However, 

data from the Federal Reserve on the availability of credit shows 

this is not the case. 

Likewise, neither do the calls I receive from my constituents, the 

ones who are facing foreclosure, yet cannot reach their servicer to 

modify their loan. After all that we have gone through in trying to 

make loan modifications available to deserving people, we still have 

people who cannot reach their servicers. And even when they do, 

the servicers are not working out credible loan modification arrangements. 

Clearly, the mechanisms we have to protect consumers and ensure their access to credit are inadequate. I believe that a Consumer Financial Protection Agency is vital to the proper functioning of our economy. 

Our current crisis began when collateralized debt obligations and 

mortgage-backed securities began to be packed with exotic products 

such as no-doc and liar loans. It was exacerbated as consumers 

were continually squeezed with excessive penalties and fees from 

bank products, reducing purchasing power and leading families everywhere to make tough decisions. A strong regulator, one which 

focuses solely on consumer safety and champions simpler disclosure 

and products would have prevented all of this. 

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

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett, 

for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. Let me just make two 

points. The first one—I don’t want to single out any single member 

of this committee, because what I want to say is a reflection on the 

process and not just the individual, because he is certainly not 

alone. 

But this last Monday, in the American Banker magazine, this 

member of the committee was asked this question: ‘‘How will a disVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
10 

pute be settled between the safety and soundness regulators and 

the newly formed CFPA?’’ And he responded, ‘‘Unfortunately, I 

can’t give you an answer to that.’’ He went on to say, ‘‘Your question is a good one, because you have to think about what you 

haven’t thought about, and I haven’t even thought about how a dispute between the agencies would be resolved, so I had better figure 

that out.’’ 

Now this comment, mind you, comes from one of the bill’s sponsors, who just a couple of days ago had not thought about a process 

that is basically fundamental to the issue that is in this bill. 

As I stated before, I am not singling out a single member, because I think other people have the same questions. They haven’t 

had the time to think this all through, nor has the Administration 

thought about the unintended consequences of their proposal—this, 

despite the fact we rush long into the April break—I mean the August break—with the goal of getting this rammed through Congress 

without having thought it through. 

Secondly, you know, there was an op-ed by Peter Wallison recently which points out that traditionally in this country for consumer protection we talk about disclosure, adequate disclosure. 

And it is always assumed if you have adequate disclosure, that regardless of the level of sophistication of the consumer, the consumer would make a rational decision as to what he was doing. 

If the Administration’s proposal is put through, however, the consumer will be told that regardless of the level of his sophistication, 

his education, or perhaps his intelligence, he is not going to be able 

to understand what is being offered to him. You know, this Administration has made a fairly dramatic move to make more and more 

decisions in place of the decisions that have been traditionally been 

made in the place of the consumer, whether it is in the area health 

care that you talked about, the bankruptcy process or the like. 

Quite honestly, I don’t think Americans want government bureaucrats deciding if they are smart enough or sophisticated 

enough to take out a line of credit at the local retailer, or policing 

whether the credit card that they choose offers reward points or 

not. When you come down to it, having choices is part of being an 

American. 

With that, I yield back. 

The CHAIRMAN. The gentlewoman from Kansas for 2 minutes. 

Ms. JENKINS. Thank you, Mr. Chairman. 

For months now, this body has been attempting to relieve the 

pain felt by our constituents because of today’s economic turmoil. 

However, politicians should not use the current financial crisis as 

a convenient excuse for a massive overreach of government intervention into our free markets. 

Smart and lean regulation can be effective, allow free markets to 

innovate, and balance consumer protection. Innovation is the base 

of American economic strength. Killing innovation, whether 

through overregulating or by allowing only plain vanilla products, 

could hinder access by individuals and businesses to sound, yet creative, financial products. 

Plus, many of the proposals before us may not address the real 

faults in the system. The regulatory compliance costs alone may seVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
11 

verely impact smaller financial institutions at a time when many 

of these institutions in Kansas are already struggling. 

I am eager to hear this week about how we can best reform our 

system, protect consumers, and allow for vibrant growth. 

Regulatory restructuring is not to be taken lightly. I urge my colleagues to proceed with caution, taking into account unintended 

consequences these reforms may have on the financial industry and 

the consumer. 

Thank you, Mr. Chairman. I yield back the remainder of my 

time. 

The CHAIRMAN. We will now hear from Mr. Watt, then we will 

be able to hear one of the statements, and then we will break. 

Mr. Watt is recognized for 1 minute. 

Mr. WATT. Thank you, Mr. Chairman. I really had planned not 

to give an opening statement, but Mr. Garrett and his comments 

provoked me; and I did want to be clear that in answering the 

question that the gentleman asked, I don’t think an appropriate response or answer is—just as if you have a safety and soundness 

regulator, you wouldn’t have the consumer regulator overrule the 

final decision on safety and soundness, I don’t think the appropriate response is to have a safety and soundness regulator overrule and be the final word on consumer issues. 

The CHAIRMAN. Would the gentleman yield me his last— 

Mr. WATT. I am happy to. 

The CHAIRMAN. First of all, if we have the answers before the 

hearing, people are upset. And if we have the hearing before the 

answers, people are upset. If people want to be upset, there is nothing I can do to stop it. 

I will say this: I can guarantee that any legislation that comes 

out of here will make it clear that no bank will be faced with any 

conflicting demands and that there will be, very clearly, a final resolution matter, and no one will be subjected to that double standard. 

And now we are going to take one witness. And the members 

may know that in seniority, two people elected at the same time, 

if there is a member who had prior service that was interrupted, 

that member gets seniority. So following that principle, the former 

member of this committee, the gentleman from Texas, as he then 

was, Mr. Bartlett, will be our lead witness representing the Financial Services Roundtable. 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINANCIAL 

SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you Mr. Chairman, Ranking Member 

Bachus, and members of the committee. 

The focus of this hearing is on the future, as it should be, but 

I want to begin with an apology about the past—I said this at other 

times, in other forums, and in other places for perhaps a year; John 

Dalton, representing the Roundtable and Housing Policy Council, 

said this the last time he was before the committee—and that is, 

our sincere—my personal, sincere apologies and those of our organizations for the role that we played and I played in failing to see 

the crisis in time to help to avert it. 

12 

So I accept my responsibilities. And we are here to set out some 

responsibilities to seek reform to avert the next crisis. 

It is the Roundtable’s view and my view that this reform should 

be comprehensive, should be systemic, and should be quite large in 

terms of its scope of averting the next crisis. The fact is, there is 

a lot of blame to go around, a lot of sources of the problem; but the 

number one problem, it seems to me, that brought us here was the 

regulatory system that is in chaos in terms of its structure. The 

current system is characterized much more by silos of regulation 

than coherent regulation, and that introduces hundreds of different 

agencies who regulate the same companies with the same activities 

in totally different ways based on different statutes, different 

standards, different systems, different goals, with a total lack, or 

virtually total lack, of common principles and common goals. 

So I am here today to start with this committee to urge comprehensive reform. The Roundtable supports bold reform, comprehensive reform that will strengthen the ability of our financial 

systems to serve the needs of consumers and to ensure the stability 

and integrity and safety and soundness of the financial system. 

To be clear, the status quo is unacceptable. 

I am going to comment orally on several components of the legislation or the proposal that has been proposed by the Administration. I have about 15 in total in my written testimony. I will offer 

four or five. 

The CHAIRMAN. And without objection, all submissions by any of 

the witnesses on any material will be accepted into the record. 

Mr. BARTLETT. I will comment on four or five of those in my oral 

testimony. 

One is the Consumer Financial Protection Agency, no doubt the 

subject of the largest amount of heat and attention by this committee, as it should be. The Roundtable believes that strengthened 

consumer protection is an essential component of broader regulatory reform. To that end, we endorse the spirit to ensure sound 

protections and better disclosures for consumers, but we strongly, 

strongly oppose the creation of a separate, free-standing Consumer 

Financial Protection Agency. 

Rather than create a new agency and bifurcate consumer protection from safety and soundness, we recommend that the Congress 

enact strong national consumer protection standards for all consumers. 

We are not here to advocate the status quo; we are here to advocate stronger regulation. In short, we support consumers, we support financial regulatory reform, we support protection, and we oppose the agency. 

Second, systemic risk regulator and the so-called Tier 1 financial 

holding companies: An essential part of regulatory reform legislation is the creation of a systemic risk regulator. Today, no single 

agency has the specific mandate or surveillance purview or the accountability to detect and mitigate the risks of financial stress in 

future financial crises. 

We strongly support the designation of the Federal Reserve 

Board as a systemic risk oversight authority. However, the Board 

should not be added as an additional super-regulator. Rather, it 

13 

should work with and through the powers of prudential supervisors 

in nonemergency situations to achieve their goals. 

We support a national resolution authority. The recent financial 

crisis demonstrated the urgent need for that authority. 

The Roundtable supports and has advocated for the establishment of a resolution regime for insolvent nonbank financial institutions. We recommend that the Treasury Department have the authority to appoint the appropriate prudential regulator for an institution upon determination that authority is necessary. However, 

we strongly believe that the FDIC and other agencies that are set 

up for those sectors should be segregated and held off just for the 

sectors that those funds have been designated for. 

Insurance: The Administration’s proposal recognizes ‘‘our current 

insurance regulatory system remains highly fragmented, inconsistent and inefficient,’’ and ‘‘has led to a lack of uniformity and reduced competition across State and international boundaries, resulting in inefficiency.’’ Well, you get the picture. That is from the 

Administration’s statement. 

So at the Roundtable, we think a logical extension of that should 

strongly support the adoption of a Federal insurance charter as 

part of this regulatory reform for national insurers, reinsurers, and 

producers under the supervision of a single national regulator. 

We urge the committee to consider H.R. 1880, the National Insurance Consumer Protection Act offered by Congresswoman Bean 

and Congressman Royce as part of this regulatory structure. 

Mr. Chairman, the Roundtable supports comprehensive reform 

now. We recommend a number of practical and important improvements to this legislation to achieve that reform. 

I yield back. 

[The prepared statement of Mr. Bartlett can be found on page 56 

of the appendix.] 

The CHAIRMAN. We will now recess. We will vote. 

It looks like there is one adjournment vote. So we will be able 

to come back fairly quickly, and we will get to the rest of the witnesses. 

The committee is in recess. 

[recess] 

The CHAIRMAN. The hearing will reconvene. I have been told by 

the staff that the timer is broken, so I will be looking at the clock 

and going by the clock. That doesn’t mean you won’t get much 

time. 

I will try to give people—I will try. That is not hard, except I 

may forget. That will mean you have a minute to go, so people will 

have a chance to wind up what they are saying or, to use the terminology of the industry, they will have a chance to resolve their 

statements; which means put you out of business, as we know. 

That is a nice way to say that. 

So we will now go to John Courson, who is president and chief 

executive officer of the Mortgage Bankers Association, and my very 

able colleague here has a timer of 5 minutes, very good. 

So we have a 5-minute timer from Mr. Neugebauer. Thank you. 

Mr. Courson, please go ahead. 

14 

STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION 

Mr. COURSON. Thank you, Mr. Chairman. Let me say from the 

outset that MBA supports regulatory modernization and strengthening our consumer protections. Our country’s economic crisis gives 

us a once-in-a-generation opportunity to really improve the regulation of our mortgage markets. These improvements to the financial 

regulatory structure will have a profound effect on the availability 

and affordability of mortgage financing. 

We believe they must be judiciously considered so reform is done 

right. Today’s financial regulatory system is a patchwork of State 

and Federal laws. While MBA strongly supports the Congress’ and 

the Administration’s efforts to improve this system, having reviewed these proposals through the prism of our regulatory modernization principles, we do have some concerns. 

MBA’s principles include that all parts of financial services regulation must be addressed comprehensively and regulatory changes 

should focus on substance, not form. Uniformity and oversight and 

interpretation of standards should also be promoted whenever possible. Collaboration among regulators and transparency should be 

required. Appropriate borrower protections must be balanced with 

the opportunities for the industry to compete and to innovate. 

Finally, attention must be given to ensure the continued availability and affordability of sustainable mortgage options. 

With these points to guide our analysis, MBA has the following 

concerns about the creation of a consumer financial protection 

agency. Establishing a new consumer protection regulator, while 

also maintaining the authority at existing regulators, may actually 

weaken consumer protections by disbursing regulatory power and 

removing consumer protection from the mainstream of the regulators’ focus. 

In addition, CFPA may result in a worse patchwork of Federal 

and State laws as well as uneven protection and increased costs for 

consumers. To truly protect consumers, we need greater uniformity. 

Additionally, while the proposal suggests that HUD and the Federal Reserve work together to achieve a single combined RESPA/ 

TILA of disclosure or have it become the responsibility of CFPA, 

the bill does not require such collaboration as this committee directed in the mortgage reform bill, which passed this House in 

May. And borrower protections offered in H.R. 3126 could stem 

competition and innovation. 

If saddled with responsibilities across the spectrum of financial 

products, CFPA could fail to give proper attention to the biggest 

asset most families purchase: a home. Because the new regulator 

would not be solely focused on mortgage regulation, there is a danger that mortgage products may not receive sufficient priority. 

To respond to these issues, MBA believes there are better alternatives for improving consumer protections. With our expertise in 

the mortgage markets, MBA has developed a groundbreaking proposal to protect consumers and improve the system that regulates 

mortgage finance. We call it the Mortgage Improvement and Regulation Act. 

It would provide uniform standards, consistent regulation for all 

mortgage lending. MIRA would improve the regulatory process to 

15 

include more rigorous standards for lenders and investors and 

equally clear protections for consumers. Instead of adding duplicative regulation at the Federal level, it would fill gaps in regulation 

of nondepository lenders and mortgage brokers, providing them 

with a Federal regulator, streamline regulation, and would enhance enforcement. 

MIRA could easily be part of a more comprehensive regulatory 

modernization effort. More importantly, it would ensure that consumers are provided mortgage financing and protection from abuse. 

We hope the committee will consider our MIRA proposal as part 

of its regulatory modernization efforts. 

Mr. Chairman, MBA looks forward to working with the committee on new consumer protection and regulatory modernization 

legislation as these proposals develop. These are extremely complex 

and important issues, and we hope the committee will take all of 

the time it needs to do the right thing. 

Thank you for this opportunity to testify. 

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

111 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Courson. 

Next, we will hear from Chris Stinebert, president and chief executive officer of the American Financial Services Association. 

STATEMENT OF CHRIS STINEBERT, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE AMERICAN FINANCIAL SERVICES 

ASSOCIATION 

Mr. STINEBERT. Thank you, Mr. Chairman, and thank you for 

your assurances about no contradictory orders out there. That is 

very helpful. And, also, I heard from everyone in their opening 

statements about the desire of everyone to move cautiously and 

carefully as we move forward, and that is appreciated as well. 

Today I am going to focus most of my remarks on the new formation of the Consumer Financial Protection Agency. Let me say from 

the outset that AFSA fully supports strong consumer protection. 

What is troubling, however, is the notion that improved consumer protection depends entirely on the creation of a new Federal 

agency empowered to make product choices for consumers. 

We believe the country does not need a vast new bureaucracy, 

and that the goals of the Administration and Congress can be 

achieved through other means that are quicker, more efficient, and 

certainly less costly. 

If signed into law today, the CFPA’s earliest action could be 

taken perhaps 2 to 3 years from now. Why then would Congress 

rush to launch a new agency before taking the time to carefully 

evaluate the potential consequences on the availability of credit 

and certainly the overall economy? We believe that a thorough assessment is needed to determine if the benefits will outweigh the 

risk and certainly the costs. 

In essence, the proposal would impose a new tax on consumers 

at a time when they are least able to afford it. Congress should 

think carefully about setting up a new government agency that 

would cost taxpayers more money at a time when they are already 

struggling to stay afloat financially. 

16 

Given the vast scope of the new agency, it is certainly acceptable 

that these costs could be staggering. Any assessment or fees 

charged to lenders undoubtedly will be passed on to consumers. 

The result will be an increase in costs and hurt the availability of 

credit. 

AFSA believes consumers will be better served by a regulatory 

structure where the prudential and consumer production oversight 

is housed within a single regulator. Congress tried to separate 

these two functions with the GSEs. Director James Lockhart recently cited this separation of functions was one of the primary reasons for failure at Fannie Mae and Freddie Mac. 

We urge Congress to support a regulatory structure that continues to have that balance, that necessary balance between safety 

and soundness and the viability of the companies that offer them. 

We also believe that the proposed agency has the potential to roll 

back the clock 30 years, back to when consumers only had a choice 

of standard and plain vanilla products. 

In the last 30 years, in adjusted inflation dollars, consumer cred- it has increased from $882 billion to $2.6 trillion; household mortgages, from $2 trillion to $10.4 trillion. 

For the last 30 years, financial innovation has been the fuel of 

this economy. We are not here today to claim that financial innovation did not play some role in the subprime mortgage crisis, but regressing to a bygone era is not progress. Financial services reform 

should take us forward, not back to plain vanilla. 

Most AFSA members are regulated primarily at the State level 

subject to a patchwork of inconsistent requirements. Under this 

new proposal, you could wind up with 50 different State requirements as far as trying to meet those regulations in different forms 

and different disclosures, and certainly that is not a formula for 

simplification. 

We have six different suggestions: 

Allow time to evaluate the effects of other government initiatives, 

such as the Cardholders’ Bill of Rights recently signed into law and 

the new changes to HOEPA. 

Make current and future consumer protection rules apply to all 

financial service providers. 

Pursue a regulatory structure that does not separate financial 

services and products from the viability of the companies that offer 

them. 

Leave enforcement of rules of existing regulators, but give 

backup authority to the Fed for these areas, and step up enforcement. Step up enforcement, make stronger enforcement of existing 

consumer protection laws, and make sure that the necessary resources are provided. 

Last but not least, I would like to mention, preserve the industrial bank charter. The Administration’s proposal calls for eliminating the industrial bank charter. Industrial banks provide a safe, 

sound, and appropriate means for delivering financial services to 

many in the public. These institutions have not been part of the 

problem. As a matter of fact, there have been no instances of any 

problem within the ILC structure, and we think they should be 

part of the solution moving forward. 

I am happy to answer any questions that you might have. 

17 

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

176 of the appendix.] 

The CHAIRMAN. Next, we have Mr. Steven Zeisel who is vice 

president and senior counsel of the Consumer Bankers Association. 

STATEMENT OF STEVEN I. ZEISEL, VICE PRESIDENT AND 

SENIOR COUNSEL, THE CONSUMER BANKERS ASSOCIATION 

Mr. ZEISEL. Good morning, Mr. Chairman, members of the committee. My name is Steve Zeisel, and I am senior counsel at the 

Consumers Bankers Association. I am very pleased to be given this 

opportunity to present the views of CBA to the committee. 

CBA is a trade association focusing on retail banking issues, and 

we are therefore limiting our testimony today to the proposed Consumer Financial Protection Agency. CBA supports strengthening 

consumer protections as part of the regulatory reform initiative, 

and we support several of the goals outlined in the CFPA proposal, 

including improving transparency, simplicity, fairness, accountability, and access for consumers. 

Our concern is with the approach being proposed. We believe 

these objectives can best be achieved within the existing regulatory 

framework rather than dismantling the current system and creating a separate new regulatory agency. Safety and soundness and 

consumer protection are intimately related, and cannot be separated without doing harm to both. 

Furthermore, putting consumer protection in a separate agency 

will create a host of problems, including how the agencies will coordinate their activities—as the chairman mentioned—who will resolve inevitable disputes, and many more, none of which are necessary to achieve improved consumer protection. We also believe 

there needs to be stronger supervision of nonbank lenders so they 

receive a consistent and comparable level of oversight and enforcement as experienced by banks. 

Although we have many other issues, many other concerns, there 

are two issues I particularly want to highlight today. 

First, we are concerned that the proposal would subject retail 

banks to the consumer laws of 50 States. I ask you to consider the 

practical impact of such a policy. It could result in dozens, perhaps 

scores of differing requirements pertaining to minimum payments, 

fee limits, underwriting prescriptions and the like, making nationwide lending into a complex and costly undertaking. 

Not only will this limit the range of products available, but some 

banks may have to make the unwelcome decision not to do business in States they otherwise would, due to the complexity and cost 

associated with the compliance burdens. That could mean fewer 

and more expensive choices for consumers as a result of the decreasing competition. 

Further, due to the elimination of uniform consumer laws for federally chartered institutions, even a simple uniform disclosure, 

which is one of the goals of this initiative, would have to be supplemented by State disclosure requirements in every State in which 

the bank does business. 

The best intentions of the bank or the CFPA to provide simple 

disclosures would be frustrated, as a uniform loan agreement 

would become a voluminous document cluttered with State-specific 

18 

information. We believe the better approach is to maintain a uniform national standard as it relates to retail banking. 

Second, under the proposal, the CFPA will require retail banks 

and other financial service providers to offer products that are designed entirely by the Federal Government. This so-called plain vanilla requirement will remove product development from banks and 

transfer it to the new agency. Banks will offer vanilla products, but 

it is less clear whether they will be able to offer the variety of products they offer today or may develop tomorrow. 

This is because the proposal strongly discourages the offering of 

other products consumers may find useful by creating regulatory 

uncertainty regarding how these nonvanilla products must be described, how they can be advertised, and the disclosures that must 

accompany them. 

It is also unclear whether an institution would be required to 

make available the same plain vanilla products and features to everyone, regardless of whether they quality. It is unclear what hurdles a consumer would have to jump to obtain any other products, 

and it is unclear what risks the institution would be taking when 

it allows a consumer to have any other products. 

The list of questions is long. In the final analysis, we believe retail banks are in a better position than the government to know 

which products serve their clients’ needs. 

In conclusion, we believe the proposed changes, though well intentioned, may stifle innovation, raise costs to consumers, reduce 

access to credit, and result in more confusion rather than less. 

Thank you for the opportunity. I will be happy to answer any 

questions you may have. 

[The prepared statement of Mr. Zeisel can be found on page 206 

of the appendix.] 

The CHAIRMAN. Next is Professor Todd Zywicki, from George 

Mason University. 

STATEMENT OF PROFESSOR TODD J. ZYWICKI, GEORGE 

MASON UNIVERSITY FOUNDATION PROFESSOR OF LAW AND 

MERCATUS CENTER SENIOR SCHOLAR, GEORGE MASON 

UNIVERSITY SCHOOL OF LAW 

Mr. ZYWICKI. Thank you, and let me make clear that even 

though this hearing estopped banking industry perspectives, I appear only as myself. My affiliation with the banking industry is as 

a consumer. 

I am going to address the Consumer Financial Protection Agency 

today, and I think there are three fatal problems with the CFPA 

that I think are irremediable and really can’t be overcome or approved. 

The first is that it is based on misguided paternalism. The second is that because it misdiagnoses the underlying problems, it will 

create unintended consequences that will probably exacerbate rather than improve the situation we have seen in the past few years. 

And, third, it creates a new apparatus of bureaucratic planning 

that is simply unfeasible and, at a minimum, unworkable. 

First, it is based on an idea of misguided paternalism. The 

causes of the foreclosure crisis, if we focus on that particular issue, 

really have very little to do with consumer protection. What the 

19 

causes of foreclosure crises erode from were a set of misaligned incentives that consumers rationally responded to. When consumers 

rationally respond to incentives, that is not a consumer protection 

problem. 

Take an example. Say there is a fellow in California who got a 

no-doc nothing-down loan. California has an antideficiency law that 

means that if you walk away from your house, the bank is limited 

in taking back the house and they can’t sue you for any deficiency. 

Say the guy was going to buy the house, live in it for a couple 

of years, and then flip it for a profit. Instead, the house goes down 

in value. He crunches the numbers and says well, it is worth it for 

me to walk away from the house and give it back to the bank. The 

bank can’t sue me for any deficiency. There is no consumer protection issue in that hypothetical. There is a very, very, very serious 

safety and soundness issue. That was a very foolish loan by the 

bank, and it really created a lot of problems for safety and soundness. But that is not a consumer protection issue. And if we consider it a consumer protection issue, rather than consumers rationally responding to incentives, we are going to have problems. 

Similarly, the other factor that caused a lot of foreclosures was 

adjustable rate mortgages. Adjustable rate mortgages are not inherently dangerous. There have been many times in the past, over 

the past 30 years, where adjustable rate mortgages have been 50 

or 60 or 70 percent of the new mortgages that were written. Adjustable rate mortgages are a problem when the Federal Reserve 

engages in the kind of crazy monetary policy it engaged in from 

2001 to 2004. When the Federal Reserve engages in crazy monetary policy, that is not a consumer protection issue. And I don’t 

think there is anything in the CFPA that will make the Federal 

Reserve engage in better monetary policy in the future. So that 

basing it on the misguided idea that the crisis was spawned by 

hapless consumers being victimized by ruthless lenders is not going 

to be a basis for good policy. 

Second, that leads to a second problem which is a problem of unintended consequences. Consider two issues identified in the 

Obama Administration’s White Paper, prepayment penalties and 

mortgage brokers and yield spread premiums. Prepayment penalties are an especially good example. They talk about how they 

are going to get rid of prepayment penalties in subprime mortgages. 

Well, what we know about prepayment penalties from all the empirical evidence is that there is no empirical evidence that prepayment penalties increase foreclosures. Why is that? Because consumers pay a premium in order to have the right to prepay their 

mortgage, because that shifts the risk of interest rate fluctuations 

to the bank. 

Consumers pay about 20 to 50 basis points more for a mortgage 

that has a right to prepay, and that is even higher for subprime 

borrowers for reasons we can talk about. The effect is that by allowing borrowers to pay less for a mortgage, they are less likely to 

get into financial trouble and less likely to end up in foreclosure. 

So getting rid of prepayment penalties would increase the price of 

mortgages and have no discernible impact on foreclosures. 

20 

In fact, it could end up having the unintended consequence of 

worsening things. Why? Because the United States is virtually 

unique in the Western world in having the right generally to prepay your mortgage, which is basically to refinance when your interest rates go down. 

What a lot of Americans did was when equity ramped up in their 

house, they exercised that right to prepay and refinance their mortgage and sucked out all the equity in their house. As a result, 

when their house went down in value, they decided to walk away 

from the house. 

In Europe, they have had very big property value decreases as 

well, but Europe has not had a foreclosure crisis. And one reason 

is because in Europe nobody can prepay their mortgage. You have 

a 10- or 15-year mortgage with a balloon payment and an adjustable rate mortgage and no right to prepay. No right to prepay 

means you can’t suck out the mortgage when your house goes up 

in value. When you can’t suck out the mortgage, then you have a 

better equity if the house goes down in value. So that banning prepayment penalties would likely have the impact of increasing foreclosures by giving more people an opportunity to suck out equity 

in their homes going forward. 

With respect to mortgage brokers, the evidence is clear that competition is what matters. If we reduce the number of mortgage brokers, people are going to pay more for mortgages. 

Finally, let me say the third point, which is the problem of bureaucrat central planning. The CFPA essentially requires an impossibility. It requires identifying certain terms and mortgages as 

being unsafe. 

What we know is there are no individual terms and mortgages 

that are unsafe. Terms in combination may be unsafe. Terms designed with State antideficiency laws may be unsafe. But the idea 

you can identify certain terms as unsafe is just folly and will stifle 

innovation and create other problems. 

Thank you. 

[The prepared statement of Professor Zywicki can be found on 

page 211 of the appendix.] 

The CHAIRMAN. Next is Denise Leonard who is vice president for 

government affairs at the National Association of Mortgage Bankers. 

STATEMENT OF DENISE M. LEONARD, VICE PRESIDENT, GOVERNMENT AFFAIRS, NATIONAL ASSOCIATION OF MORTGAGE 

BROKERS 

Ms. LEONARD. Good morning, Chairman Frank, distinguished 

members of the committee. I am Denise Leonard, vice president of 

government affairs for the National Association of Mortgage Brokers. 

In addition to being vice president, I am also a mortgage broker 

in Massachusetts and have been for the past 19-plus years. I would 

like to thank you for the opportunity to testify before you here 

today. 

We applaud this committee’s response to the current problems in 

our financial markets and we share a resolute commitment to a 

simpler, clearer, more uniform and valid approach relative to finanVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
21 

cial products, most specifically with regard to obtaining mortgages 

and to protecting consumers throughout the process. 

As such, NAMB is generally supportive of the tenet behind the 

plan and conceptually agrees with the establishment of an independent agency that focuses on consumer financial products protection, but believes some changes are necessary. 

Before I address some specific areas of concern, I must first extinguish the false allegations targeted at mortgage brokers for 

years. We do not put consumers into loan products. We provide 

mortgage options to consumers and work with them throughout the 

process. We don’t create loan products. We don’t assess the risk on 

those products or approve the borrower. We don’t fund the loan, 

and we are regulated. 

Our testimony will focus on the Consumer Financial Protection 

Agency and how it affects us, as well as H.R. 3126. 

In order for the CFPA to be effective, the structure must adequately protect consumers and account for the complexity of the 

modern mortgage market, and it must be in disparate treatment of 

any market participants. Any agency, whether new or existing, 

must act prudently when promulgating and enforcing rules to ensure real protections are afforded to consumers, and not provide 

merely the illusion of protection that comes from incomplete or unequal regulation of similar products, services, or providers. 

To the extent that the CFPA will enhance uniformity in the application of those rules, regulations, disclosures, and laws that provide for consumer protection, NAMB supports such an objective, although we do believe that there should be added limitations on the 

CFPA’s powers. Whereas the purpose of the agency is to promote 

transparency, simplicity, fairness, accountability, and access in the 

market for consumer financial products and to ensure the markets 

operate fairly and efficiently, it is imperative that the creation of 

new disclosures or the revision of antiquated disclosures be 

achieved through an effective and even-handed approach and consumer testing. 

It is not the ‘‘who’’ but the ‘‘what’’ that must be addressed in 

order to ensure true consumer protection and success with this 

type of initiative. To ensure that all consumers are protected under 

the CFPA, there should be no exemption from its regulatory purview or limited exemptions that pick winners and losers in the industry. 

We are very supportive of H.R. 3126’s requirement that the 

CFPA propose a single integrated model disclosure for mortgage 

transactions that combine those currently under TILA and RESPA. 

Consumers would greatly benefit from a uniform disclosure that 

clearly and simply explains critical loan terms and costs. 

Therefore, NAMB strongly encourages this committee to consider 

imposing a moratorium on the implementation of any new regulations or disclosures issued by HUD and the Federal Reserve Board 

for at least a year after the designated transfer date. This would 

help to avoid consumer confusion and minimize the increased costs 

and unnecessary burden borne by industry participants to manage 

and administer multiple significant changes to mandatory disclosures over a very short period of time. 

22 

We strongly support empowering the CFPA to take a comprehensive review of new and existing regulations, including the new 

Home Valuation Code of Conduct. Too often, in the wake of our 

current financial crisis, we have seen new rules promulgated 

through the use of existing regulations that run afoul of the purpose and objectives of the Administration that do not reflect measured, balanced, and effective solutions to the problems facing our 

markets and consumers. 

The HVCC provides the most notable recent example of that 

flawed method and, as such, should be revealed during the CFPA’s 

review of existing rules. We also believe that the SAFE Act should 

be amended to ensure that the CFPA possesses complete and exclusive authority to implement it in its entirety. 

In addition, we support a Federal standard of care based on good 

faith and fair dealing for all originators as defined under the SAFE 

Act. We believe such a standard would greatly enhance consumer 

protections. 

Finally, with regard to the board makeup as it is proposed, the 

committee would be anything but independent, and we recommend 

that its makeup be expanded and consistent with other agencies 

such as the FTC with regard to political affiliation. There should 

be no more than three members of the same party as the President 

who appoints them. 

We appreciate this opportunity to appear before you, and we look 

forward to continuing to work with you, and I am available for any 

questions. 

[The prepared statement of Ms. Leonard can be found on page 

145 of the appendix.] 

The CHAIRMAN. Next, Mr. Edward Yingling, president and chief 

executive officer of the American Bankers Association. 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION 

Mr. YINGLING. Thank you, Mr. Chairman. 

ABA believes there are three areas that should be the primary 

focus of reform: the creation of a systemic regulator; the creation 

of a mechanism for resolving institutions; and filling the gaps in 

regulation of the shadow-banking industry. 

The reforms need to be grounded in a real understanding of what 

caused the crisis. For that reason, my written testimony discusses 

continuing misunderstandings of the place of traditional banking in 

this mess. ABA appreciates the fact that the bipartisan leadership 

of this committee has often commented that the crisis in large part 

developed outside the traditional banking industry. The Treasury’s 

plan noted that 94 percent of high-cost mortgages were made outside traditional banking. 

The ABA strongly supports the creation of an agency to oversee 

systemic risk. The role of the systemic risk oversight regulator 

should be one of identifying potential systemic problems and then 

putting forth solutions. This process is not about regulating specific 

institutions, which should be left primarily to the prudential regulators. 

It is about looking at information on trends in the economy and 

different sectors within the economy. Such problematic trends from 

23 

the recent past would have included the rapid appreciation of home 

prices, proliferation of mortgages that ignored the long-term ability 

to repay, excess leverage in some Wall Street firms, the rapid 

growth and complexity of mortgage-backed securities and how they 

were rated, and the rapid growth of the credit default swap market. 

This agency should be focused and nimble. In fact, involving it 

in a day-to-day regulation would be a distraction. While much of 

the early focus was on giving this authority directly to the Fed, 

now most of the focus is on creating a separate council of some 

type. 

This would make sense, but it should not be a committee. The 

council should have its own dedicated staff, but it should not be a 

large bureaucracy. 

The council should primarily use information gathered from institutions through their primary regulators. However, the systemic 

agency should have some carefully calibrated backup authority 

when systemic issues are not being addressed. There is currently 

a debate about the governance of such council. A board consisting 

of the primary regulators, plus Treasury, would seem logical. 

As to the Chair of the agency, there would seem to be three 

choices: Treasury; the Fed; or an independent person appointed by 

the President. 

A systemic regulator could not possibly do its job if it cannot 

have oversight authority over accounting rulemaking. A recent 

hearing before your Capital Markets Subcommittee clearly demonstrated the disastrous procyclical impact of recent accounting 

policies, and I appreciate the chairman’s reference to that at the 

beginning of this hearing. 

Thus a new system for oversight of accounting rules needs to be 

created in recognition of the critical importance of accounting rules 

to systemic risk. H.R. 1349, introduced by Representatives Perlmutter and Lucas, would be in a position to accomplish this. ABA 

has strongly supported this legislation in previous testimony. 

As the systemic oversight agency is developed, Congress could 

consider making that agency the appropriate body to which the 

FASB reports under the approach of H.R. 1349. 

Let me turn to the resolution issue. We have a successful mechanism for resolving banks. Of course, there is no mechanism for resolution of systemically important nonbank firms. Our regulatory 

bodies should never again be in the position of making up a solution on the fly to a Bear Stearns or an AIG or not being able to 

resolve a Lehman Brothers. 

A critical issue in this regard is ‘‘too-big-to-fail,’’ and again I appreciate the chairman’s reference to a separate hearing on that 

critical issue. Whatever is done on the resolution system will set 

the parameters for too-big-to-fail. 

We are concerned that the too-big-to-fail concept is not adequately addressed in the Administration’s proposal. The goal 

should be to eliminate, as much as possible, moral hazard and unfairness. 

When an institution goes into the resolution process, its top management, board, and major stakeholders should be subject to clearVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
24 

ly set out rules of accountability, change, and financial loss. No one 

should want to be considered too-big-to-fail. 

Finally, the ABA strongly supports maintaining the Federal 

thrift charter. 

Mr. Chairman, ABA appreciates your public statements in support of maintaining the thrift charter. There are 800-plus thrift institutions and another 125 mutual holding companies. Forcing 

these institutions to change their charter and business plan would 

be disruptive, costly, and wholly unnecessary. 

Thank you, Mr. Chairman. 

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

187 of the appendix.] 

The CHAIRMAN. Finally, Michael Menzies, who is the president 

and chief executive officer of the Easton Bank and Trust Company, 

and he is here on behalf of the Independent Community Bankers 

of America. 

STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, EASTON BANK AND TRUST 

COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA (ICBA) 

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

committee. As you mentioned, I am president and CEO of Easton 

Bank and Trust, just 42 miles east of here. We are a $150 million 

community bank, and I am honored to be the volunteer chairman 

of the Independent Community Bankers of America, who represent 

5,000 community-bank-only members at this important hearing. 

Less than a year ago, due to the failure of our Nation’s largest 

institutions to adequately manage their highly risky activities, key 

elements of the Nation’s financial system nearly collapsed. Even 

though our system of locally owned and controlled community 

banks were not in similar danger, the resulting recession and credit crunch has now impacted the cornerstone of our local economies: 

community banks. 

This was, as you know, a crisis driven by a few unmanageable 

financial entities that nearly destroyed our equity markets, our 

real estate markets, our consumer loan markets and the global finance markets, and cost American consumers over $7 trillion in net 

worth. ICBA commends you and President Obama for taking the 

next step to reduce the chances that taking risky and irresponsible 

behavior by large or unregulated institutions will ever again lead 

us into economic calamity. 

ICBA supports identifying specific institutions that may pose systemic risk and systemic danger and subjecting them to stronger supervision, capital, and liquidity requirements. Our economy needs 

more than just an early warning system. It needs a real cop on the 

beat. 

The President’s plan could be enhanced by assessing fees on systemically dangerous holding companies for their supervisory costs 

and to fund, in advance, not after the fact, a new systemic risk 

fund. 

ICBA also strongly supports H.R. 2897, introduced by Representative Gutierrez. This bill would impose an additional fee on banks 

affiliated with systemically dangerous holding companies and betVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
25 

ter account for the risk these banks pose, while strengthening the 

deposit insurance fund. 

These strong measures are not meant to punish those institutions for being large, but to guard against the risk they do create. 

These large institutions would be held accountable and discouraged 

from becoming too-big-to-fail. 

But to truly prevent the kind of financial meltdown we faced last 

fall and to truly protect consumers, the plan must go further. It 

should direct systemic-risk authorities to develop procedures to 

downsize the too-big-to-fail institutions in an orderly way. This will 

enhance the diversity and flexibility of our Nation’s financial system, which has proven extremely valuable in the current crisis. 

In that regard, ICBA is pleased the Administration plan maintains the State bank system and believes that any bill should retain the thrift charter. Both charters enable community banks to 

follow business plans that are best adapted to their local markets 

and pose no systemic risk. 

Unregulated individuals and companies perpetrated serious 

abuses on millions of American consumers. Community banks already do their utmost to serve consumers and comply with consumer protections. Consumers should be protected. Any new legislation must ensure that unregulated or unsupervised people in institutions are subject to examinations just like community banks. 

My written testimony outlines serious challenges with the proposed Consumer Protection Agency, which we oppose in its current 

form. For example, we strongly believe that rural writing and supervision for community banks should remain with agencies that 

also must take safety and soundness into account. Clearly a financial institution that does not adhere to consumer protection rules 

also has safety and soundness problems. And we, too, are grateful, 

Mr. Chairman, with your statement that you are committed to preventing conflict between safety and soundness and consumer protection. 

If we truly want to protect consumers, Congress must enact legislation that effectively ends the too-big-to-fail system, because 

these institutions are too-big-to-manage and too-big-to-supervise. 

And we are grateful for your hearings on Monday, Mr. Chairman. 

ICBA urges Congress to add an Assistant Secretary for Community Financial Institutions at the Treasury Department to provide 

an internal voice for Main Street concerns. H.R. 2676, introduced 

by Representative Dennis Cardoza, will provide that important balance between Wall Street and Main Street within the Treasury. 

Mr. Chairman, community banks are the very fabric of our Nation. We fund growth, we drive new business. Over half of all the 

small business loans under $100,000 in America are made by community banks. We help families buy homes and finance educations. 

We, too, are victims of the current financial situation, but we are 

committed to help the people and businesses of our communities, 

and we will be a significant force in the economic recovery. 

Thank you, sir. 

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

158 of the appendix.] 

The CHAIRMAN. We have another hearing at 2 o’clock, so we will 

go as long as we can stay, until about 1:45. 

26 

I have to correct myself. That hearing on ‘‘too-big-to-fail’’ will be 

Tuesday. We will have the Chairman of the Federal Reserve in the 

morning, and we will have the too-big-to-fail hearing in the afternoon. It is a serious pace, but we need to deal with this. 

My question has to do with a question many of you raised, and 

that is your objection to the extent where we would recognize State 

authority in this area. Now, I understand that the Comptroller of 

the Currency a few years ago did preempt, very substantially, 

State banking laws. 

There was a good deal of concern about that. It was actually 

right at about the time a Republican Member of the House, our colleague Sue Kelly from New York, who was Chair of the Oversight 

Committee, she was particularly troubled by that, and I want to 

focus on that. 

I gather it is a position of many of you here that we should continue to preempt any State consumer laws regarding national financial institutions. Tell me that, Mr. Bartlett. 

Mr. BARTLETT. We support uniform national standards. As an essential ingredient to get to that, you have to preempt State laws. 

The goal is strong, high uniform national standards. 

The CHAIRMAN. Well, I understand that. But the goal is also a 

Federal system, which people in various parties at various times 

seem to find convenient depending on the issue at hand. 

Are there any others who would agree that all consumer State 

protection laws should be preempted here? Let me go down the list. 

Mr. Courson? 

Mr. COURSON. Mr. Chairman, I can—obviously the Mortgage 

Bankers Association can only speak about mortgages, but we have 

certainly been consistent in asking for a uniform national standard. 

But I would also say that in working with the State regulators, we 

think they still play a very important role. We are not going to 

get— 

The CHAIRMAN. All right. But I need to have you tell me, would 

you have us—should the law at the end of this process preempt all 

State laws on mortgages? 

Mr. COURSON. Yes, that would be our position. 

The CHAIRMAN. Okay. Next, Mr. Stinebert. 

Mr. STINEBERT. Mr. Chairman, what we believe is that the way 

the proposal is currently structured right now in the area of consumer protection, you would have basically a meet-or-exceed standard that would be created by the new agency. But you would give 

the authorities to the States to— 

The CHAIRMAN. All right. Well, what would you propose? 

Mr. STINEBERT. So I think if you had a national Federal standard 

that was developed for—or standards that were developed for consumer protection, that should apply to all 50 States equally. 

The CHAIRMAN. So you would preempt. I mean, I know sometimes people don’t like to say it, but sometimes you would have to. 

Mr. STINEBERT. Yes, we would preempt. 

The CHAIRMAN. You are preempting for all State consumer protection areas in the areas that— 

Mr. STINEBERT. Yes, promote consistency across the CFPA. 

The CHAIRMAN. All right. Let me ask Mr. Zeisel. 

27 

Mr. ZIESEL. Yes. The CBA’s position is that uniformity is important, that it is a consumer protection and that strong uniform Federal laws ought to be a ceiling, not a floor. 

The CHAIRMAN. But you think the consumers are better off if we 

preempt all State consumer laws? 

Mr. ZIESEL. If they are all strong, good, clear Federal laws, yes. 

The CHAIRMAN. Well, we will get to that in a minute. Professor 

Zywicki. 

Mr. ZYWICKI. Yes, you should preempt them for the same reasons 

that you can anticipate the possible conflict between a consumer 

protection regulator and a safety and soundness regulator, and you 

can anticipate consumer protection State law conflicting with safety and soundness regulators and Federal State ways preempt— 

The CHAIRMAN. Wait, we do have the supremacy clause of the 

Federal Constitution. It does not arbitrate between the FDIC and 

this, but it does arbitrate between States and Federal. So there is 

no competition. Federal Government wins. Supremacy clause. 

Ms. Leonard. 

Ms. LEONARD. No, because we are currently regulated under 

those State laws. 

The CHAIRMAN. So you are not for preempting them. 

Ms. LEONARD. No. 

The CHAIRMAN. You find this impossible. Are you torn in 50 different directions? Are you besieged by conflicting and inconsistent 

standards? 

Ms. LEONARD. No. 

The CHAIRMAN. Good. Mr. Yingling? 

Mr. YINGLING. We would generally be in favor of preemption. 

However, we would urge that the kind of conversations that you 

had been urging for the last couple years between the Comptroller 

and the States continue and that there be some mechanism for coordination. 

The CHAIRMAN. But you would preempt the laws. It would be at 

the grace of the Comptroller? 

Mr. YINGLING. Well, I don’t know that it has to be at the grace 

of the Comptroller. I think you could work in some mechanism that 

encourages this kind of coordination. 

The CHAIRMAN. But as we all know, you can encourage; but having the law say it is qualitative in its difference. 

Mr. YINGLING. Maybe you could do a little more than encourage. 

The CHAIRMAN. Mr. Menzies. 

Mr. MENZIES. Well, basically a States’ rights organization, if preemption means that we neuter CSBS, then we probably would be 

opposed to it. But we do like the notion of uniformity, and we think 

CSBS has done a great job and isn’t the reason we have the financial problems for that. 

The CHAIRMAN. You are talking about the Conference of State 

Banking Supervisors? 

Mr. MENZIES. Yes, sir. The State regulators. 

The CHAIRMAN. The question is whether nationally chartered institutions would be exempt from any State law and covered only by 

Federal law. That is the issue. 

Mr. MENZIES. Well, if you put national chartered institutions in 

a position where they are exempt and State institutions are not, as 

28 

we are subject to our State regulations, then you create exactly 

what you don’t want to create. 

The CHAIRMAN. An unfair or uneven competition. 

Mr. MENZIES. Yes, sir. 

The CHAIRMAN. All right. I am appreciative of that mix. I have 

to say that the description of chaos that comes if you have the 

State laws does not seem to be an accurate portrayal of what the 

situation was before the Comptroller did all that preemption. But 

my time has expired. 

The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. One of the things 

that I heard, a common theme was coordination, innovation, and 

the fact that with two different regulators there could be conflicts. 

And one of the things that I think about from my lending days 

is many times when people came in to borrow money, sometimes 

we had to tailor financial products to meet the consumer’s need. 

And I think this hearing today is about the consumers to a great 

degree. And everybody here, I believe, believes that they ought to 

be treated fairly and appropriately and with integrity. 

But what I am concerned about under the proposal that the Administration and the chairman have laid out is that this is really 

not a consumer protection bill but a products regulation bill. 

And there is a difference between product regulation and consumer protection. 

And I think I would just kind of like to go down the line there 

and get your perspective of—you know, one is about a behavior, 

and when people try to defraud or misrepresent something to someone, that is a behavioral issue and not a product issue—but get 

your reflections on the implications of the Federal Government 

being very prescriptive about the products that you would be providing and how that might impact the people that we are talking 

about here, and that is the consumer. 

Mr. Bartlett? 

Mr. BARTLETT. Congressman, you have hit the nail on the head. 

These agencies should regulate for safety and soundness and for 

consumer protection, but not to determine products. The products 

themselves, leave them in the competitive marketplace, but then 

protect the consumers by disclosure by anti-fraud protection, by unfair and deceptive acts, by coordinating the decentralized complaint 

systems and, otherwise, by sales practices, but don’t set the products. As for the products, consumers are far better off with choice 

and with innovation. 

Mr. COURSON. I certainly agree. And I think the key is—and 

there been those also who say that this might not even be prescriptive. You have a plain vanilla, and you can still then, once you 

have your plain vanilla, offer other products. But I think if you 

have a regulator out there that has the ability to call a product 

down the line out of bounds, that you clearly are going to move— 

lenders are going to move very reluctantly and with great trepidation of innovating products that may later be deemed to be ‘‘out 

of bounds.’’ 

And the other piece of that is, if the secondary market authority 

exists, consumers are going to pay more because the market is 

going to demand a premium for a product that they may buy, put 

29 

on their balance sheet or secure, as it may not exist going down 

in the future. 

Mr. NEUGEBAUER. Mr. Stinebert. 

Mr. STINEBERT. I think the flexibility moving forward is very important. As long as you look at specific products, I think it was 

mentioned on the panel earlier about adjustable rate mortgages, or 

ARM products—for many, many years and in other parts of the 

world are considered very good products. We talked about some 

types of balloon payments. 

Everything should be customized to fitting what the consumer 

needs in that specific circumstance, that best meets what they 

need. 

If you try a plain vanilla, if everything is just standard, you 

eliminate all innovation and you are really making choices of those 

people who don’t necessarily need money, can get options, can have 

products that are available to them. Others that might have a more 

blemished credit record, might be lower income, would have less 

options, less choice. 

And I think that it is best left to the industry and the lenders 

to make those decisions of what products are available to them— 

to their customers. 

Mr. NEUGEBAUER. Mr. Zeisel. 

Mr. ZEISEL. Yes, I think that the financial institutions deal every 

day with their customers, and they know what their customers’ 

needs are and they understand those needs in a way that a Federal 

Government agency is not going to. And as a government agency 

defines what is an acceptable product, they are also defining what 

is not an acceptable product. And when they take a product off the 

shelf, it is one less option available for the consumer. 

The product may or may not be acceptable for some consumers 

and not others. That is the determination that has to be made; not 

whether the product itself is always acceptable or always not acceptable, for the most part. 

Mr. NEUGEBAUER. Mr. Zywicki. 

Mr. ZYWICKI. A plain vanilla loan would be perfect for a plain vanilla consumer. I have never met that person, unfortunately. Every 

consumer seems to be completely different to me. And every consumer seems to have different needs and wants and different sorts 

of things. To think about plain vanilla products is being like credit 

cards 30 years ago. They were very simple. 

They were plain vanilla, and they were really lousy products. They had a $40 annual fee, a high fixed-interest rate, no benefits, 

nothing else that came along with it. 

Competition has intervened and credit cards have certainly gotten much more complex, but they have gotten much, much better 

for consumers. And if you think about the way in which consumers 

use credit cards to cash advances, to travel, to small businesses, all 

those sorts of things, there is no plain vanilla consumer. There is 

a plain vanilla loan. 

The CHAIRMAN. Time has expired. I don’t mean to imply that— 

Mr. Zywicki was certainly not the one who began this. I would say 

for this committee in particular, we would like the basic option to 

be either plain vanilla or basic black. We are not an entirely plain 

vanilla committee even in our legislative approach. 

30 

The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. I am not sure, in my 

decision to come to this hearing, I am not more confused leaving 

the hearing after hearing all of your statements than before I got 

here. 

If you could help me think this through, were any of the eight 

witnesses here consistent in their beliefs as to what we should do? 

Mr. STINEBERT. I think everybody certainly recommended a cautious, careful approach to addressing this issue. 

Mr. KANJORSKI. And I understand that. You know, I really want 

to get to a more fundamental problem of why I worry about where 

we are going and how we are going to get there. 

Did anybody who is on the panel, the eight witnesses, did you 

see this coming, and what actions did you take in terms to warn 

us of this eventuality? I remember very distinctly Alan Greenspan 

testifying here, a direct question as early as 2005, I think. I asked 

him a question: ‘‘Is there any foreseeable problem in the real estate 

bubble?’’ And he clearly said, ‘‘No, we have it all under control. 

There is nothing to worry about.’’ 

Now, you all do not handle all real estate, although the mortgage 

people sort of cover the unbanked portion of it. Who did see it and 

did not take action—or of you who did not see it? And is that not 

what we want to get to, what is the next calamity and how is it 

going to be handled? And God knows, there is going to be another 

calamity. 

All we are arguing is whether we are going to get a rather comprehensive regulatory reform that will last 75 years, as the last set 

of regulations lasted, or whether we are going to get a financial crisis every 25 years as the history of the Republic reflected for its 

first 200 years or first 150 years of existence. 

But if you could give me that fundamental question, because I 

am hearing from that side of the aisle that this all occurred from 

CRAs. How many of you believe that? Was that a major contributor 

to our problem? 

How many of you believe that, except for Fannie Mae or Freddie 

Mac, this disaster would not have occurred? 

Well, there go your two propositions, Randy. 

Ms. LEONARD. One of the things that we saw was the fact that 

there was a need for licensing, there was a need for increased professional standards, and we advocated for that and with the SAFE 

Act that has now come into play. That is one of the things that we 

believe will help long term with some of the problems that did 

exist. 

Mr. COURSON. Congressman, may I? I would respond differently. 

We didn’t see it coming. 

But I think it points up, and someone had asked me, what could 

have prevented this? And I think if we would have had a strong, 

uniform national standard and a consistent strong regulation, particularly in our industry, we have—we are examples of being subject to 50 different State regulators, very uneven regulation. Some 

States, granted, are very good, some States are not. That is why 

we are asking ourselves for a strong Federal regulator for nondepository mortgage brokers and lenders. 

31 

Mr. BARTLETT. Mr. Chairman, as I said in my opening statement, 

we saw it coming, beginning—and I did and my officers, in about 

the summer of 2006 as it began to—and as we began to unravel 

the pieces and try to figure it out, we spent 6 months trying to 

avoid it, setting up new standards, advocating some new regulations, advocating some new legislation. By January of 2007, we 

were pretty much—we were full on board by that—by that time the 

horses were out of the barn and running around in the pastures 

about 10 miles away. 

It is one of the regrets of my professional life that I didn’t see 

it earlier. But I don’t think anyone did, and we saw it beginning 

in the summer of 2006. 

Mr. YINGLING. Congressman, I would just say that I think what 

your question points out is the need for some kind of systemic oversight body. Did anybody see it coming? Some did. Should we have 

seen? Absolutely. It is a terrible failure of ours. It is a terrible failure of our regulatory system. 

We had a previous discussion in a previous hearing. I had a previous discussion with the Chairman, that the Fed had the numbers; and we really should have done something about it, and that 

is true. But the weakness in our regulatory structure is there is 

really nobody at this point who is charged with looking for these 

kinds of disasters coming down the pike, ringing the alarm bell, 

and making sure something is done about it. And I think it points 

out the need for some type of oversight regulator that doesn’t regulate, but says there is a disaster coming. 

The CHAIRMAN. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Well, yes, as a matter of fact we did have the Fed 

telling us there was a disaster coming. They said it was a systemic 

risk to the entire financial system unless there was deleveraging, 

some kind of regulation for safety and soundness over Fannie and 

Freddie. Not to get off the point, but I remember those lectures ad 

nauseam out of the Fed. And as a matter of fact, the Treasury 

chimed in as well. 

But on the issue of bifurcating consumer protection and prudential regulation, Sheila Bair, the head of the FDIC, had this to say, 

and I am going to ask Mr. Courson to respond to this, if you would. 

She said, ‘‘I have always felt that consumer protection and safe and 

sound lending are two sides of the same coin. And if you have an 

abusive product that doesn’t serve your customers’ long-term interest it will come back to bite you.’’ 

Now as I mentioned in my opening statement, this idea of separating the two has been around for some time. In fact, we saw that 

very structure over the GSEs, a weak prudential regulator, in this 

case OFHEA, was competing with HUD, and HUD strong-armed 

OFHEA and Fannie and Freddie into ratcheting up the affordable 

housing goals. We know how this ended. 

As Ms. Bair alluded to, the affordable housing goals of Fannie 

and Freddie enforced by HUD were at odds with the long-term viability of the regulated entities, in this case Fannie and Freddie, 

and ultimately led to their demise. 

And I was going to ask you, do you see the potential for future 

conflicts between a Consumer Financial Products Agency and their 

prudential regulator in this case? 

32 

Mr. COURSON. Well, clearly—I mean obviously there is opportunity for the conflict. Not to be simplistic, but for 12 years we 

have been trying to get the Fed and HUD to work together on one 

simple upfront disclosure, and we can’t get this done. In addition, 

to the fact that what we have said, and, in our case with a Federal 

regulator, we want a combined prudential, safety and soundness 

and mission consumer protection, all under one umbrella for mortgage banking. 

Mr. ROYCE. Well, certainly the housing goals were created and 

enforced with an altruistic belief. It was misguided, but it was an 

altruistic belief that the highest possible stretch for homeownership 

was to the benefit of consumers. And I think it would be very difficult to create a separate regulatory entity, charge it with consumer protection oversight, and then not expect it to come up, you 

know, with a similar politically driven mandate further down the 

road. 

It seems to me logical that would be the course of action here. 

In large part, these politically driven mandates caused the financial collapse, and allowing for a similar structure will likely encourage similar mandates down the road. 

So I would like you to comment on the likelihood that a CFPA 

will be used for politically driven mandates in the future. 

Mr. COURSON. Well, Congressman, obviously that is a concern in 

any regulatory venue, particularly when you are creating a new 

one. 

The issue is in this respect, there is trepidation that we are trying something, sort of a laboratory experiment, to try something 

with the consumers; and, frankly, safety and soundness being at 

risk. So I think there are those concerns. 

Mr. ROYCE. Yes. I just don’t see how it is not something that we 

have already tried with pretty clear results. 

But I will ask Mr. Zywicki for any observations he has on this 

front. 

Mr. ZYWICKI. Sure. I think you point out more generally the fundamental problem here is that there are all kinds of tradeoffs. 

There are tradeoffs between the particular terms and the price of 

loans, between—as I talked about—prepayment penalties. Consumers pay an extra 100 to 150 basis points to get a fixed-rate 

mortgage. All these sorts of tradeoffs to think about price versus 

terms, accessibility versus risk, all the different sorts of things you 

are talking about are invariably and inevitably going to turn into 

political questions where there is no obvious answer. 

And it is precisely these sorts of tradeoffs between risk and price, 

for instance, why we have eschewed government central planning 

and dictating of credit terms in the past, because there is no right 

answer to these questions and they run the risk of being politicized. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from California, Ms. Waters. 

And we will break after this. 

I must say, it is not entirely clear if we will be able to reconvene 

this panel. We have five votes, I am informed, leading with a 15- 

minute vote. I am told that Members are advised that additional 

33 

Republican procedural votes are possible during this next series of 

votes. 

So if we have not been able to conclude by about 1:30—if we are 

not back by 1:30, goodbye. 

Ms. WATERS. Mr. Chairman and members, I almost hesitate to 

ask you any questions. I am just dumbfounded that we have before 

us representatives of the overall industry here today who do not 

appear to understand we have a crisis. 

We have rising foreclosures. There is no end. And the tale keeps 

going on and on and on. And you come here today and say, don’t 

try to stop us from having any kind of product we can come up 

with that we can put on the market, no matter what you say about 

some kind of standard product. We have products for any and everybody, whatever you can think of. 

Someone just said to me, maybe I should design my own product 

for you. 

Well, let me just say that, in addition to no support, no real support for a consumer finance agency to protect consumers from these 

exotic products that worry us so much, we are confronted with our 

constituents who are trying to get loan modifications. You can’t 

even do that right. You can’t set up systems where you can train 

enough people, that you can have telephone responses, that you 

can work out modifications and we can do something about keeping 

people in their homes. 

You don’t come here with any real instructions, advice, or plans 

that you can share with us to deal with the crisis that we are having. All you can do is come here and talk about preemption, knowing full well that you will work your magic with your influence in 

the Congress of the United States to keep any real strong legislation from coming out of here; and you want to prevent the States 

from coming up with anything that would cause you any kind of 

concerns at all. 

What do I have to ask you? I don’t know what I have to ask you. 

Would somebody answer me whether or not you think there is a 

crisis? Anybody? Is there a crisis? 

Mr. BARTLETT. Congresswoman, there is a crisis, the crisis of delinquencies. There are some 3 million mortgage delinquencies 

today. We—as an industry, we are providing modifications for 

about 250,000 a month. That is woefully inadequate. We are doing 

everything we can to increase that number by as much as double, 

and we are seeking to do that. I believe we will do that. There are 

real barriers to keep us from it, but that is no excuse. We are going 

to increase those modifications because it has to be done for the 

economy to recover. There is a crisis. 

Ms. WATERS. You are right. You have done a terrible job of modifications. 

How many of you own or are connected with service agencies in 

addition to your banking interests? Financial Services Roundtable? 

Mr. BARTLETT. You mean lenders? 

Ms. WATERS. Yes, servicers. You own servicing, also. You do servicing, also. Is that right? 

Mr. BARTLETT. Our members do. And we are one of the sponsors— 

Ms. WATERS. That is what I mean. Your members, yes. 

34 

Mr. BARTLETT. Yes. 

Ms. WATERS. Why can’t you get it right? Why can’t we get the 

modifications right? 

Mr. BARTLETT. Congresswoman, we are doing 250,000 a month. 

That is not enough. 

Let me stay that when we started this in July of 2007, we didn’t 

measure the number, but we think that, historically, that mortgage 

modifications were in the range of 1,000 to 2,500 a month, and now 

we have moved it up to 250,000. 

Is that enough? No, it is not enough. But we increase it every 

month, and we increase it every day. The new Obama mods, as 

they are called, are beginning to take hold and are beginning to get 

some real numbers. They are not there yet, but it is a big improvement. 

I met with the Secretary yesterday—Under Secretary yesterday 

to seek—and we have a checklist of 10 additional steps that we can 

take to improve those numbers. We are painfully aware we have 

to improve the number of modifications, and we set about to do it 

every day. 

Ms. WATERS. Mr. Bartlett, you have publicly said that the new 

agency would end up increasing the cost of financial products. Do 

you really mean that? 

Mr. BARTLETT. I believe it will increase the cost of financial products. But, worse than that, it will increase the cost of credit, deny 

credit to consumers, and it will decrease safety and soundness, and 

it will deny consumers with financial products that they want and 

need and deserve. 

Ms. WATERS. As I understand, the President’s plan is to transfer 

existing staff and use a portion of those existing fees that you pay 

for enforcement of existing laws. Why would your members have to 

increase the cost of financial products? The President’s plan proposes no additional costs to your members, yet you are here claiming that consumers will have to pay more. Why do you say that? 

Mr. BARTLETT. Consumers will have to pay more under the plan 

as is before us with a separate agency than there would be separate regulation of products. 

Product regulation is not the answer. The answer is— 

The CHAIRMAN. We will have to get the rest in writing. 

And, before closing, the gentleman from Oklahoma, Mr. Lucas, 

whom I should note is also the ranking Republican on the Agriculture Committee, with which we are working closely in our approach to the regulation of derivatives. The gentleman from Oklahoma. 

Mr. LUCAS. That is very true, Mr. Chairman. I recently met with 

a group of bankers from small community banks and financial institutions in my district, and they have serious concerns, as do I, 

about the impact of the proposed Consumer Financial Protection 

Agency and what it will do to them. 

Our community banks are small financial institutions that have 

had little to do with the cause of the current financial crisis and 

continue to serve their communities as safe and reliable sources of 

credit. Their very success depends on the success of their communities. However, under this new regulatory agency, they could, I 

35 

fear, be disproportionately burdened with additional regulations 

and fees. 

In addition, there has been a lot of discussion here today in regard to the threat that too-big-to-fail institutions pose to the stability of our financial institutions as a whole, and how best to address this threat. 

When considering how best to approach reform, we must not sacrifice the health of our small institutions that did not cause this 

situation. 

Now, I address my question in particular to Mr. Yingling and 

Mr. Menzies. I do not represent a capital-intensive district. I do not 

have any money market facilities, institutions in my district. I have 

consumers of products, and I have small businesses. 

Your two organizations represent the backbone of the financial 

institutions in my district. Expand for a moment what the effect of 

this piece of legislation, as now drafted, will be on those institutions. Because, after all, we all know rules have many effects. And 

they can limit opportunities and they can kill, too. That is the nature of the Federal process. Explain to me what this bill will do to 

your folks in my district. 

Mr. YINGLING. Congressman, first, I want to thank you for your 

leadership on the accounting issue. And I do think that since you 

introduced your bill the report of the G–20 and the Group of 30 

and others have shown that your approach was correct. 

The concept that is in the Administration proposal that we are 

particularly concerned about is that products should be designed. 

And, as was pointed out earlier, particularly in community banks, 

loans to your constituents are not cookie-cutter. They are individually designed. 

And lest people think we are being paranoid here, I would like 

to read from the paper that the Administration handed out in the 

White House when they announced this; and it says, the CFPA 

should be authorized to define standards for products and require 

firms to offer them. 

So let’s suppose it is a loan, a cookie-cutter loan that is a standard loan; and it says to your banks, you must offer these. Then 

they deviate from it. So they want to deviate one off like they do 

all the time and say, all right, I will let your father guarantee it. 

Or I will change this one provision. Or I will change the repayment 

terms so you can qualify for this loan. 

Here is what the President’s proposal says: ‘‘The CFPA could impose a strong warning label on all alternative products, require 

providers to have applicants fill out an experience questionnaire, 

require providers to obtain the applicant’s written opt in to such 

products.’’ ‘‘Originators of alternative products’’—that is your 

bank—‘‘should be subject to significantly higher penalties for violations.’’ 

You are not going to make that loan. You are not going to make 

those one-off deals. And I am reading from the Administration because I have to take what they say seriously. 

Mr. LUCAS. Mr. Menzies. 

Mr. MENZIES. Congressman, the $7 trillion of loss to this Nation 

was not the product of community banks. It was the product of 

mega banks and Wall Street creating shadow corporations and 

36 

SIVs that stuffed toxic assets based on products that they created 

into those entities, and community banks are truly the victim of 

the product regulation that is contemplated today because of that 

activity. 

Don’t take away my right to take care of a widow whom I loaned 

a year ago, who had 25 percent borrowed against her house, interest only for a year, at a market rate, no payments required, while 

she could care for her husband, who was dying, understanding that 

after he died she could go back and get a job and then we could 

amortize that loan. 

That is a nonconforming product in every possible manner, but 

it provides me with the flexibility to be creative and take care of 

the needs of our customers. That is essential to retain the role that 

community banks do for this Nation. 

Mr. LUCAS. Thank you for those real-world insights. 

Thank you, Mr. Chairman, for your tolerance on the time. 

The CHAIRMAN. The hearing is recessed. And, as I said, we may 

not be back in time. If we can be back here by 1:30, we will have 

a couple more rounds of questions, but it may not be possible. I 

apologize, but that is the way it is. 

[recess] 

The CHAIRMAN. The hearing will reconvene. 

The gentleman from North Carolina is recognized for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. 

I was hoping Mr. Bartlett would be here, but I can deal with the 

ones who are here. 

I perhaps have deluded myself into thinking that I am one of the 

members who deals with members of this panel on a regular basis 

and tries to understand and listen to what they really have to say 

about these issues. I guess I am a little bit perplexed about some 

of the things I am hearing today. 

I think Mr. Garrett raised a valid question in his opening comments today. If you put part of the authority for consumer protection with the regulators and part of it with a new regulatory agency, there is the conflict potential because people are working on the 

same turf and you are going to have that conflict. 

I am not sure that I see quite the conflict between consumer protection, which is one responsibility, and safety and soundness, 

which is another responsibility. I acknowledge that there are occasionally circumstances where the two overlap. 

So I did hear Mr. Courson say that to the extent you leave part 

of the responsibilities one place and put part of them in the new 

agency that there is that potential. I am actually of a mind to agree 

with that and think that more of the responsibilities, most of the 

responsibilities for consumer protection, if not all of the responsibilities for consumer protection, ought be given to the new agency, 

taking the people, some of the people who are doing it in the existing agencies and putting them over there into the new agency, 

using the experience that they already have and building a new entity. 

So I am troubled by this notion that somehow keeping consumer 

protection and safety and soundness in the same entity is an imperative, and if you don’t do that there is going to be some kind 

of conflict. There are multiple agencies doing safety and soundness 

37 

now. And when—I guess the systemic regulator will be the ultimate authority on that, ultimately, but I don’t hear anybody suggesting that there are irreconcilable conflicts now between the various agencies that are doing safety and soundness. 

So my question is, is this real or is it—I understand that there 

is a resistance to change, but this didn’t work in the old framework. And it seems to me to be more of an excuse for saying we 

want consumer protection subordinate to the other objective, rather 

than we think that there is the potential for conflict. 

So that is one question that I hope you all will address for me, 

and I won’t ask you to do it in this context. 

The other thing I have trouble with, Mr. Bartlett in particular, 

is your position that we should set up a brand new Federal agency 

to deal with insurance. The cost I suppose would be fairly high, yet 

we should not spend the money to set up an agency that deals with 

consumer protection so that the people who come to work every day 

have as their primary, sole responsibility looking at consumer protection. I am having trouble reconciling those two positions. So if 

you can reconcile them for me, I would love to have you maybe address that little piece of— 

The CHAIRMAN. In light of the unusual circumstances, we will do 

an extra couple of minutes—I don’t think there would be objection—so that we can get a response to that. 

Mr. BARTLETT. Mr. Chairman, I can understand how you could 

reach that conclusion. 

Let me say it forcefully. We are not advocating the status quo. 

Consumer protections are not adequately provided in current Federal law for the safety and soundness regulators. That is the primary reason why they didn’t get the job done. The unfair, deceptive 

trade practices does not apply to the OCC, just as one example. 

TILA and RESPA are with two different agencies that are mandated to cooperate, but they are not cooperating, and they have not 

done their job. So in issue after issue, these consumer protection 

practices are not in the hands of the safety and soundness regulators, and they should be. 

I think you heard unanimously that it would be an unmitigated 

disaster to separate safety and soundness from consumer protection because— 

Mr. WATT. I heard it. I just don’t understand it. I really do not 

understand that, and I will talk to you separately on that. 

Mr. BARTLETT. We will submit for the record if you like, also. 

Mr. WATT. I really don’t care to hear from Mr. Zywicki on this. 

I don’t even know how you got on this panel, to be honest. 

Excuse me. I yield back. 

The CHAIRMAN. He was, as is the practice, as the gentleman 

knows, the witness suggested by the Republicans, which is I think 

an important part of our trying to get through this all. 

Next is Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I wanted to follow up a little on Mr. Kanjorski’s question. We 

have 50 States, 50 State regulators, plus the territories, and then 

we have the OCC, the OTS, the NCUA, the FDIC, and the Fed, 

and now we have a new bill that creates the credit rationing and 

pricing agency, to add another layer. And I understand that the 

38 

Administration says it is interested in consistent regulation of similar products. Yet its proposal would gut the doctrine of preemption 

under which the national banks and thrifts have long operated. 

How would the Federal standard work which allows the States 

to pile on on top? How would the Federal standard then promote 

consistent regulation of similar products? 

I will start with whomever wants to answer. 

Mr. COURSON. Congresswoman, being president of an association 

that is subject to 50-State regulation, we can tell you; and I would 

say that we think that is one of the things that, had we had a uniform national standard, we could have avoided. Some of this could 

have been avoided. It is really a disservice to consumers in the different States. 

I will tell you we deal in all of the States; and some States, as 

I have said before, have very good regulations, very solid laws on 

the books. And, frankly, there are others that don’t. And we have 

a map that we put in the back of our testimony that shows this 

patchwork. 

We have to have a uniform national standard. State regulation, 

particularly if this is—if the national standard is a floor, just merely adds more complexity, additional disclosures, which we are trying to go the other way with our HUD and Fed initiative, and really doesn’t well serve, assuming that the uniform national standard 

has to be strong and at the proper ceiling. 

Mrs. BIGGERT. Do you think that the new agency weakens the 

regulations or the standard even further? 

Mr. COURSON. Well, it just puts a floor in to continue on with 

this patchwork of State laws we have. And, in some respects, I 

must say that every time we see a Federal law it is almost a stimulant for the States to go in and do something else. 

Mr. STINEBERT. We also have a good example of where that has 

happened with the implementation of the SAFE Act. You have basically a mandate on the States that they have a certain period of 

time in order to implement conforming laws, and we are finding in 

all 50 States we have basically no uniformity. We are going to have 

50 different laws. 

Mrs. BIGGERT. Okay. Thank you. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

I think that part of what—some of what we are looking at is 

credibility issues, etc. I would have liked to have heard—and what 

I think a lot of the members have heard, at least on this side, is 

that if people are diametrically opposed to a CFPA, I would have 

liked to have heard and would like to hear in the future how we 

can make it work, what we can do to make sure that it works. Because, obviously, consumers do need protection. 

Someone—I don’t know whether it was the professor or not, but 

somebody talked about how there are no foreclosures in Europe. 

And I don’t think you really want to go where they are. Because 

if you look at Europe in particular, there are generally huge consumer protection programs, and banks primarily offer only vanilla 

products. And, you know, I am not so sure that I want to go all 

39 

the way there, because I think that there is some good utilization 

of some diversity in products. 

But there has to be a buy in, some kind of way that we need to 

talk. And I, for one, want to again sit down, as I have with many 

of you, to talk and to try to figure out so that we can get this thing 

right. Because I am hoping that we will put a piece of legislation 

in place that is going to survive the test of time and try to minimize any unintended consequences but make sure that individuals 

who are in my district, for example, number one in New York City, 

which is small compared to some of my colleagues in other States, 

in home foreclosures, and how we can figure out how to make 

them. Because that is what—people are coming to me. They are 

saying, how do we fix this thing? 

I am going to change the area that I am going to, because the 

question that I really wanted to ask to get your opinion has to deal 

with the subcommittee of which I am the Chair, and that is dealing 

with international monetary policy. And I know that many industry organizations and individual financial firms, and from what I 

am hearing here, agree that we must have some kind of a change 

and a resolution authority so that there would be a systemic risk 

manager. 

The FDIC has typically put forward a successful example of how 

we can bring this kind of stability to the industry. But several of 

the key bank failures that brought the global financial system to 

the brink of collapse were international bank holding companies, 

with operations in multiple sovereign jurisdictions; and I was wondering if you had any thoughts on whether and how an FDIC-type 

model could work to manage these type of global banks so that, you 

know, people get out here, go to another jurisdiction and cause a 

systemic risk in Europe or other places where we don’t have the 

direct jurisdiction. I was wondering if there were any thoughts on 

how we could manage that. 

Mr. BARTLETT. Mr. Chairman, yes, we have some. And we have 

prepared some work—we actually would be preparing some suggestions for the record for the committee on global harmonization. We 

think that the President’s draft said the right words as the goal for 

global harmonization. We would put our emphasis on the G–20, by 

the way; and we are going to offer some suggestions for how to beef 

that up to actually create an institutional framework for global 

harmonization through the G–20. We think that is essential to happen. 

The markets are porous across international borders, and to just 

leave it to the sense of goodwill on an informal basis that the nations will try we think is expecting too much. So we will offer your 

subcommittee as well as this full committee some suggestions on 

how to structure global harmonization. 

I don’t see it in the context of the FDIC, by the way, but we will 

take your request and suggestion and think that through for you. 

Mr. MEEKS. Thank you. 

One other question I want to ask really quickly. I was wondering, you know, because I am concerned about like the failure of 

Lehman Brothers. Many individuals in the United States have 

some—they thought they were investing in Lehman United States. 

They now found out they were investing in Lehman U.K. Their 

40 

money is caught up in a bankruptcy proceeding in the U.K. They 

can’t get it out, foundations, universities, etc. 

I was wondering if any of your banks or institutions fell into that 

problem, where you are stuck with the U.K. And how you think we 

need to deal with bankruptcy proceedings in a foreign land or how 

do you think we can resolve those issues to protect those United 

States investors, citizen investors who invested here thinking they 

were investing safely in the United States, but actually the money 

was in the U.K. proceedings. 

Mr. BARTLETT. We think that the new systemic regulator will 

look at that. So far, we haven’t seen the adverse effects, but we 

may well. We think it is still an open question. 

That is a real problem. Obviously—and you are not implying 

this—you don’t want to solve that problem by denying Americans 

the right to invest across markets. So we think it is a problem, but 

as of this point it hasn’t led to a crisis. It hasn’t added to the crisis. 

But we think it ought to be something that ought to be looked at, 

and we will get you some thoughts on that on the record. 

Mr. MEEKS. Thank you. I look forward to working with you. 

The CHAIRMAN. The gentleman from California. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

I want to thank all of you for your testimony today. I appreciate 

you being candid. And, Professor Zywicki, I enjoyed your presentation. 

I am trying to look at this not as a Republican or a Democrat. 

I am trying to look at the economy which I think is in far worse 

condition than I think some of us will acknowledge, and I think we 

need to look how do we get it back where it should be. And even 

with some of my good friends on the Republican side, we disagree 

on some things. 

I heard some comments that some believe that the GSEs, 

Freddie and Fannie, should be phased out. I don’t agree with that 

concept. I think they need a very strong regulator, and I think in 

recent years they were encouraged to forego basic underwriting 

standards that they should have implemented. And I think they 

should be strongly regulated, but I think there is a very sound 

place for them in the economy and especially in the housing industry. 

So even on my side we can disagree, but we can disagree with 

a smile. But I think we have very tough times ahead of us; and 

I think you all need to be very honest, regardless who on this committee, my side or the other side, gets offended, because we are 

dealing with the future. 

And I saw some grain of similarity throughout this testimony. 

You are concerned about winners and losers. More government 

could be more confusion, perhaps. You want uniformity. You are 

concerned about the board makeup. You want it to be more independent. Systemic risk and oversight was a big concern. But the 

national standard was talked about a lot. 

But standard enforcement seemed to be something that I heard 

ring throughout your testimony. You are concerned with that, and 

I think that is something that didn’t occur in recent years, and that 

things weren’t enforced. 

41 

But there are many Federal banking statutes out there that already exist. And if the bank regulators had enforced those, do they 

have the authority basically with everything on the books now to 

pretty much do what we are talking about doing today, in your 

opinion? 

Mr. ZEISEL. Congressman, there are a lot of tools out there that 

are available, Federal and State certainly, to address a lot of these 

problems. In addition, there are now regulations, such as HOEPA, 

that deal with a lot of the mortgage products that may have been 

behind a lot of the problems we have experienced. 

Mr. MILLER OF CALIFORNIA. And regulators could enforce that? 

Mr. ZEISEL. Regulators can enforce that, and the FTC can enforce that, and the States can enforce that as well. 

Mr. MILLER OF CALIFORNIA. The trouble I have with the SEC testimony—and I asked specifically a question—is she is modifying 

mark-to-market, the Board is, to some degree. And yet I said, are 

you really working closely with regulators on enforcement? Because 

you are going to have quite a change from the history. They have 

always mandated on banks and regulators and what mark-to-market modifications might be. And the response was, we have talked 

to a few regulators. 

But I think there is going to be more than talking to a few. You 

are going to have to get two organizations together to understand 

things have to be modified, and we have to also deal with each 

other on that modification. 

The adoption of CFPA would result, some said, in serious reductions in credit to consumers; and, Professor Zywicki, you had talked 

about that. Could you kind of expand on your opinion on that? 

Mr. ZYWICKI. Sure. There is a variety of different ways in which 

that would happen. Obviously, the idea of an exalted plain vanilla 

product that might fit some consumers but wouldn’t fit a huge 

number won’t add much. But it will make it much more difficult 

to tailor-make products for other consumers, because they will have 

to get permission in order to do this and all those sorts of things. 

It will—they are contemplating outright bans on certain useful 

terms like prepayment penalties. They are contemplating a crackdown on mortgage brokers, which the empirical evidence is pretty 

clear that mortgage brokers—if there is competition, that mortgage 

brokers generate lower prices for consumers. 

And so the final point is that, you know, I worked at the Federal 

Trade Commission. I know about the antitrust policy and that sort 

of thing. And the plain vanilla notion here is a very dangerous notion from a competition perspective, which is that we know, for instance, by studying usury ceilings on consumer credit is they tend 

over time to turn into collusive focal points and tend to dampen 

competition. 

So the idea that everybody would be offering the same product 

has a lot of antitrust and anti sort of competition concerns embedded in it, because it makes it easier for parties to collude, more difficult for them to compete on different sorts of terms. That, too, 

would certainly not lead to lower prices and could lead to higher 

prices. 

Mr. MILLER OF CALIFORNIA. We talked about something similar 

with GSEs. We talked about the programs that a GSE might adopt 

42 

and within that program various products they would come up with 

daily that modified what was the demand in the marketplace. And 

my concern was we overly restricted them in some fashion, or we 

could have, to not allow them to do the function based upon market 

needs and market demands and market trends. 

And I thank you all for your testimony. I appreciate it. 

The CHAIRMAN. The gentleman from Colorado—the gentleman 

from Kansas. I am sorry. 

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

How should this committee consider and balance the costs of creating the Consumer Financial Protection Agency? I think we need 

tougher consumer protection enforcement to prevent another costly 

financial meltdown in the future. So some additional resources may 

be needed up front so we don’t have to spend more money later in 

rescuing the financial system or the economy in the event of another meltdown. But, Mr. Bartlett or anybody else on the panel, do 

you have any thoughts about what this committee should consider 

as we think about new costs? 

Mr. BARTLETT. Mr. Chairman, I think there will be some additional costs with additional consumer protections, whether it is by 

the safety and soundness or a new agency. But the cost of a new 

agency itself would be a factor of tenfold of what it would cost to 

embed it into existing agencies. 

I do think the existing agencies have the advantage of being able 

to see the whole of the organization, of the bank or the company 

that they are regulating and tie it all together and then relate it 

back to consumer protections. 

In response to that as well as an earlier question, I will say that 

the laws granting consumer protection to the existing agencies are 

woefully inadequate. I think this committee and this Congress and 

we didn’t realize how inadequate they were. But they are spotty. 

Some have UDAP, some have HOEPA, some have other things, but 

they are spotty and inconsistent across agencies. And the agencies, 

as a result, without a statutory mandate, had not acted very much 

at all on consumer protections. 

We think it is the job of this Congress and this committee to provide those additional mandates and those additional consumer protections, but do it with an agency that can do something about it 

by coordinating with safety and soundness. That is not only less 

costly; it is also far more effective for consumer protection. 

Mr. MOORE OF KANSAS. Thank you, Mr. Bartlett. 

Yes, sir. 

Mr. STINEBERT. One of the areas that I think there was agreement among all the panel here was the additional resources that 

are needed among the current agencies so they can step up their 

consumer protections. 

Mr. MOORE OF KANSAS. Very good. 

Any other comments? 

Mr. COURSON. I would just—I am sorry, go ahead. 

Mr. YINGLING. I would comment about the budget of this new 

agency. Nobody has any idea what it is. And I think the conundrum is if it is not large enough to do what it says it is going to 

do, it is going to end up having regulations, examining banks, but 

it is not as it says it is going to do—examine and enforce these 

43 

rules on the thousands of nonbanks. And that is where the great 

majority of the problem has been. But, to do that, it is going to 

take a significant budget. And so, in a weird way, we kind of want 

the budget to be bigger. It sounds unusual. But then the question 

is, how are you going to pay for it? And if it is done on the cheap, 

it cannot do what it says it is going to do, because it will end up 

discriminating in enforcement against banks. 

Mr. MOORE OF KANSAS. Did somebody else have a comment? 

Mr. COURSON. Congressman, in following up on that, as I have 

said, the mortgage bankers, we are one, ironically, that are here 

asking for Federal regulation, safety and soundness, prudential 

regulations, which we have not had from a Federal level. And in 

our proposal, this MIRA proposal that we have talked about, we 

envision that, as in the other agencies, those that are regulated 

would have to share in the cost of that regulation. We know there 

is going to be another cost, whether it is tucked inside an existing 

regulator or someplace else; and we are prepared, our members are 

prepared to pay their share of that cost. 

Mr. MOORE OF KANSAS. Thank you. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I have a number of concerns about this legislation and particularly the aspect of it that would regulate products, since I view it 

as abrogating consumer rights. I am concerned about the safety 

and soundness issues. 

I am sorry that the gentleman from North Carolina is no longer 

here. When I think about the separation of essentially product supervision and safety and soundness, Fannie and Freddie come to 

mind. That was a model that we had up until roughly a year ago, 

and so I see parallels here. 

I don’t know if anybody else on the panel does, and would care 

to comment. I see a few heads nodding in the vertical. Mr. Bartlett? 

Mr. BARTLETT. Congressman, I think that is one of several examples from the past of the bad things that happen when you separate consumer protection with safety and soundness. HUD had the 

approval over activities. So far as I know, so far as I know, HUD 

never disapproved an activity so far as I know. And that is a—zero 

is a very small number. 

At the same time, OFHEO had their safety and soundness regulations disapproved, rejected, turned down, put on hold for decades 

and in part because it was separated and in part because they were 

not an independent authority. So we think that is an example that 

proves that that is not the right model. 

Mr. HENSARLING. Let me change subjects here, if I could. And 

this is a fairly long bill, I say, by congressional standards, weighing 

in at 200-some odd pages. Maybe it isn’t all that long. I am not 

sure I found the language where it expressly says there will be 

product pre-approval. But as I read various sections of the underlying Act that was introduced by the chairman, subtitle C, section 

131, it talks about the rulemaking authority of this new agency: 

‘‘The agency may prescribe regulations identifying as unlawful 

unfair acts, abusive acts or practices in connection with any transVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
44 

action with a consumer financial product. Regulations prescribed 

under this section may include requirements for the purpose of preventing such acts and practices.’’ 

So if we give the agency the ability to declare unlawful unfair 

practices—I assume each of your associations or organizations has 

legal counsel who has probably, hopefully, had a chance to review 

this. Have your organizations concluded whether a prepayment 

penalty in a 30-year fixed mortgage is fair under this statute? Mr. 

Yingling? 

Mr. YINGLING. Congressman, one, if you are looking for where 

they are authorized to have standard products, it is section 1036, 

right in plain language. 

Mr. HENSARLING. Thank you. I hadn’t quite memorized it all. 

Mr. YINGLING. You are raising an important issue, and that is 

this legislation changes everything. There is no law on the books 

that this Congress has authorized in the consumer area, no regulation that isn’t trumped by this. 

You read a very broad statute where they have changed the definition under UDAP. So we don’t know what it means. 

But let me just very briefly read you another section which 

trumps everything: 

‘‘The agency shall prescribe rules imposing duties on a covered 

person’’—that is anybody engaged in consumer financial services— 

‘‘as the agency deems appropriate or necessary to ensure fair dealing with consumers.’’ 

I am a banking lawyer of 35 years. I have no idea what that 

means, other than they can do anything they want. It is the broadest standard I think any of us could imagine, which means—and 

it gets back to the preemption argument—we are not going to know 

what the rules are for years. 

Mr. HENSARLING. Is it your interpretation then that functionally 

Congress will cede to this five-person unelected body essentially the 

right of pre-approval of all consumer financial service products? 

Has anybody come to a different conclusion? 

Mr. YINGLING. They could do that. 

Mr. HENSARLING. With the exception, I believe, I don’t believe 

they can impose usury limits. 

Mr. YINGLING. They can’t do that. They also can limit compensation in any way they want, except they can’t limit total compensation. So they can regulate compensation, but not in total. 

Mr. HENSARLING. I see my time is running out. I am going to try 

to slip this in quickly. 

I know the statute appears to be aimed at consumer products, 

but, according to the Federal Reserve, 77 percent of all small businesses use credit cards. I am led to believe a number of those are 

under an individual name. Might this have a deleterious impact on 

small businesses and job creation? 

Mr. STINEBERT. Absolutely. 

Mr. ZEISEL. Yes, Congressman, small businesses often use consumer products and services, mom and pop shops and other small 

operations, and certainly would be affected by this. 

Mr. HENSARLING. Thank you. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

45 

And, Professor, I would just say that ordinarily I don’t agree very 

often with George Mason because my economic philosophy is a little different than yours. But I do agree with you I think with respect to the subprime piece and whether it was really a consumer 

protection issue or whether it was just a deregulation or refusal to 

do appropriate underwriting that affected financial institutions and 

people who invested in financial institutions and people who 

bought big portfolios. That I agree with. 

I think you are off base on the credit card piece. That really is 

a consumer issue. And all the bells and whistles that come along 

with credit cards are probably one of the top five things discussed 

if you were to go door-to-door, walk in a precinct or having a town 

hall. People didn’t expect ‘‘X,’’ ‘‘Y,’’ or ‘‘Z’’ with respect to their credit cards. 

So—which brings me to sort of the general question of who is 

best, who best can assist consumers with a credit card that has, 

you know, this fee and that fee and, you know, this surcharge and 

that penalty charge? Is it a new agency? Is it the FTC? Is it the 

FDIC? The OCC? The Federal Reserve? 

And so my question, if we don’t go with what has been proposed 

and create a new agency, how do we—do we set up ombudsmen or 

new departments in every one of the regulators? If anybody has an 

answer to that, I would like to hear it. Or do we just beef up the 

FTC? 

Mr. ZEISEL. Congressman, every one of the bank regulatory agencies has consumer departments. They do the examination of the 

consumer issues. Some of them have merged them with the safety 

and soundness teams. Some of them have separate ones. Each one 

probably has advantages. But if the consumer portion of their oversight doesn’t get the amount of attention it deserves at the agency, 

that can probably be addressed through that agency and the agency charter and the agency structure more easily than stripping it 

out of each of the agencies and creating a new agency to do the 

same basic function. 

Mr. ZYWICKI. I would just add I think the FTC could probably do 

a lot of this. A lot of it is simply unworkable for anybody, I think. 

But the FTC could do a lot of it. 

And I think it is also worth exploring the proposal that I think 

the Republicans have suggested of creating a new agency that sort 

of takes the safety and soundness functions away from the Fed and 

combine—you sort of have a stand-alone safety and soundness/consumer protection agency separate from the Fed. 

But I think keeping those two together really is an important 

issue, and I think the Federal Trade Commission does have this 

sort of expertise and experience and understanding of consumer decision-making and that sort of thing—that it could also be more authority at the FTC would probably be—could be a useful thing as 

well. 

Mr. PERLMUTTER. Okay. Thank you. And just for me and listening to the bankers, Mr. Yingling and the gentleman from Easton 

Bank—I am sorry. I forgot your name. 

Mr. MENZIES. That is all right. 

Mr. PERLMUTTER. You know, for me, having been on this committee and what we went through in September and all of last 

46 

year, you know, it really is a too-big-to-fail. I mean, for me that is 

the big issue here, and I have sort of become radicalized on the 

whole issue. That and derivatives, you know, regulating derivatives, the hedge funds and credit rating agencies. I mean, those are 

where I think I would like to see—and I know a lot of our attention 

is focused on that. I do think that some consumer practices caused 

some issues. But really the focus I would like the reform to be really on, the too-big-to-fail. And anybody can comment on that if they 

like. 

Mr. MENZIES. Congressman, I am itching to make a point. And 

this hearing, this legislation needs to focus on those who created 

the train wreck, not those who didn’t, not those who played by the 

rules and did not abuse the consumer. And the small finance, small 

banking players in this arena had skin in the game, and they 

played by the rules. And it is as simple as that. 

It is so important to make certain that it is recognized that community banks are really not in the product business. We are in the 

solutions business. And we create solutions with an array of products, some of which are on the shelf and some of which we need 

to create. And if our right to create solutions for individuals and 

small businesses are packaged into a bunch of pre-approved products, it will destroy our capacity to participate in this recovery. 

Mr. PERLMUTTER. Thank you, and I yield back. 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. Mr. Chairman, thank you very much, and I 

would like to ask unanimous consent to insert into the record— 

The CHAIRMAN. We have general leave for anybody to insert anything into the record. We got that already today. 

Mrs. BACHMANN. Okay. I would like to insert into the record 

today the editorial from the Wall Street Journal, ‘‘A Tale of Two 

Bailouts.’’ 

I had read this editorial this morning as I was preparing for this 

hearing today, and the question that I would ask of the panel is, 

is the discipline of the marketplace now a thing of the past? I am 

really wondering, as I look at what has transpired just since last 

fall and the actions that Congress is taking. 

You take a look at risk, and risk in the American system has 

been a really good thing. We saw risk hurt a lot of people, but the 

question is, did risk hurt people because the Federal Government 

provided the backstop through a GSE like Freddie and Fannie? 

Was that the problem? 

It was no longer really risky, because what happened is we 

spread—losses occurred. The only thing is the shareholders didn’t 

have to bear the brunt of the losses. The net was spread wider so 

that now all of the American taxpayers are on the hook for those 

losses. 

So it isn’t that the losses went away. It is who is responsible for 

the losses. There were private contracts made between individuals 

who contracted for money and those who were lending money. But 

those people who were part of a private contract aren’t the ones 

that are on the hook for risk. 

Now people who had no part of that contract, the American taxpayer, they are all made involuntarily a part of that contract. They 

47 

have to subsume a risk they never wanted, they never asked for, 

and now it is their problem. 

And so that is what I am asking you, a very simple question: Is 

the discipline of the marketplace now a thing of the past? 

Professor Zywicki, and then I think Mr. Yingling, also would like 

to respond. 

Mr. ZYWICKI. I agree with you completely. 

Mrs. BACHMANN. Thank you. That doesn’t happen very often. 

Really. 

Mr. ZYWICKI. Like I said, I am on this panel, but I don’t speak 

for the banking industry, and so I am not sure I would get uniform 

agreement with this, but I think that is a very, very serious problem. I think that, you know, risk and the risk of failure, if you get 

to keep the profits and socialize the losses, you are going to have 

a train wreck. If we continue to do that going forward, it is going 

to be an even bigger train wreck. 

And I think that coming up with some way of making sure that 

those who fail feel the pain of their failure and they actually fail 

is an important part of capitalism and risk. And it applies even to 

consumers as well that, you know, that consumers have to have the 

opportunity to be able to take chances, and we can’t put a safety 

net under every consumer as well for every decision that they 

make. 

Mrs. BACHMANN. And I wonder as well about growth in our economy. How will we have continued growth in our economy without 

risk? We need to have a certain element of risk taking, risking capital on the gamble that somehow you are going to profit down the 

road. If we have just plain vanilla products, it seems to me we are 

going to be limiting consumer choices, especially for those at the 

bottom echelon of the economic lifestyle. 

And just like we saw in the article this morning in the Wall 

Street Journal, they termed it, is Goldman Sachs GoldiMac? Because now they are too-big-to-fail. The American taxpayer is always 

going to be bailing out Goldman. I have nothing against Goldman. 

It is a great American company. But if you take a look at CIT and 

look at the fact that we did give them bailout money, now it looks 

like we might be predisposed to giving them bailout money again, 

is this really systemic risk? You know, supposedly this panic has 

passed now. It is like the article says, we vitiated the definition of 

systemic risk. 

Mr. Yingling. 

Mr. YINGLING. Well, you are raising excellent points, and it really comes down to too-big-to-fail. And I think Mr. Perlmutter was 

raising the same question. You left out accounting from your list, 

Congressman Perlmutter. 

Mr. PERLMUTTER. I know. Yes, and accounting. 

Mr. YINGLING. And that is why this issue of the systemic risk 

resolution is so important. Because that is the mechanism through 

which you all will determine too-big-to-fail in the future. 

And I think the Administration’s proposal was, frankly, too weak 

and too vague in this area. The systemic risk process will look— 

the marketplace will look to that and it will say, what will happen 

to an institution when it goes through systemic risk? And when it 

goes through that process, say a future Lehman Brothers or a fuVerDate Nov 24 2008 13:47 Feb 02, 2010 Jkt 053238 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\53238.TXT TERRIE
48 

ture AIG, it should pay very, very heavy penalties so that you don’t 

want to be there, so that the stakeholders you are talking about, 

the people who take risks through it, are basically wiped out. And 

that is why that part of this proposal is so critical and should be 

getting I think more attention than the Administration gave to it. 

The CHAIRMAN. The gentleman from Connecticut. 

Mr. HIMES. Thank you, Mr. Chairman. 

I would like to direct a couple of questions to Professor Zywicki. 

Professor Zywicki, I appreciate your testimony and some of the 

facts here, but I would like you to defend some of the things that 

I have read and heard in your testimony. Stories have power. And 

you tell a story that you call not unrealistic here about a California 

borrower in northern California who can pay his mortgage but 

chooses not to and consults with his lawyers, your conclusion is 

that this does not present a consumer protection issue. 

I have never been to this part of northern California. I represent 

Connecticut, which includes Bridgeport, which is the densest concentration of foreclosures in Connecticut. We have seen over a 

thousand. And while you call this not unrealistic, what I see when 

I go to Bridgeport is often minority families out of their house, on 

the curb, with crying children, surrounded by their belongings. 

They didn’t consult their lawyer, because they don’t have a lawyer. 

They didn’t have a choice. 

And I don’t ordinarily deviate from the sort of rationale here, but 

your story just sort of strikes me as a cartoon of where the American people find themselves today, and the conclusion is what really concerns me. Foreclosure is certainly, in my district, a terrible 

consumer protection issue. It is a community protection issue. Because, as you know, as an economist, when you have a neighborhood with foreclosures, you see a decline in property values with 

all that that implies. 

So I guess I would like to know whether you really believe—and 

this is a question being asked by somebody who worked for 12 

years in the financial services industry who sometimes has trouble 

understanding his own mortgage and credit card contracts. Do you 

really believe that the foreclosure situation was really more about 

incentives and that in fact all of our individual actors here were 

rational economic actors who had that fundamental quality that 

capitalism requires, which is information and knowledge of what 

they got into? 

Mr. ZYWICKI. Thanks. That is an excellent question. So let me 

clarify my thoughts, which is, first, yes, there are serious problems 

in a lot of inner cities where people got in bad mortgages and 

ended up in foreclosures. I don’t doubt that. That is definitely a 

problem. Those are—things should be done about that. What I am 

focusing on— 

Mr. HIMES. My question is really very narrow, which is do you 

believe that we have done an adequate job as regulators, as government, as private industry to creating that fundamental unit of capitalism, which is a fully informed, smart consumer? 

Mr. ZYWICKI. Right. With respect to the story that I told, I get 

one or two e-mails a week from borrowers in California and Arizona who say, ‘‘Professor Zywicki, I bought a house 2 years ago. I 

49 

am $100,000 underwater. I saw an article that said I can walk 

away from my mortgage. Should I do it?’’ 

Right. People are out there. So it is not a cartoon. People are 

making that decision. 

Do people understand their mortgages? No, nobody does. I mean, 

that is one of the problems with this, is it sets up this aspirational 

standard where every person can understand every mortgage. And 

according to a study done by the Federal Trade Commission 2 

years ago, what they found was that nobody understands their 

mortgages, whether they are prime or subprime borrowers. It is not 

a subprime versus prime sort of issue. 

What they also recommended, which I think—to go to what else 

we should do—is they went through and they gave very clear instructions on how we could construct better disclosures so that people could shop in a better sort of way. That would solve a lot of 

the problems if we solved the disclosure problem. The disclosures 

are not good. 

Mr. HIMES. The reason I am going down this path is, look, this 

is a complicated topic, and we have to get it right. There is merit 

on both sides and many different sides, and we have to get it right. 

But to me it is a no-brainer, and as people with some economic 

training here, it is a no-brainer that you need a fully informed consumer. 

And you repeat here there is no evidence that the financial crisis 

was spawned by a systematic lack of understanding. No evidence 

that consumer ignorance was a substantial cause. 

Nobody is saying that it was spawned by consumer ignorance. 

Was not a substantial contributing factor to this crisis the lack of 

education, the lack of knowledge, the lack of information that consumers had? 

Mr. ZYWICKI. No. 

Mr. HIMES. It was not a contributing factor? 

Mr. ZYWICKI. Not a substantial contributing factor. I have not 

seen that it is a minor contributing factor, but— 

Mr. HIMES. But you did just say that we agree that there was 

substantial misunderstanding and misinformation out there. So 

you are saying that exists, despite no evidence that it was causal, 

you are saying that it didn’t cause it. 

Mr. ZYWICKI. Sure. That has been around for 10, 20, 30—that 

has been around forever, those sorts of problems. But the problems 

that were caused here were caused, as you read my testimony, as 

you see, I think caused by incentives. It was interest rates, Federal 

Reserve monetary policy, and incentives when house prices fell. 

That is what caused the problem. There were other things that exacerbated it that were around the margins. 

Mr. HIMES. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Florida, I think, was next. 

Mr. PUTNAM. Thank you, Mr. Chairman. 

I apologize for being late. So if we are going over previously 

plowed ground, my apologies. 

The CHAIRMAN. Well, given the next job the gentleman looks for, 

that is probably a good practice. 

Mr. PUTNAM. I appreciate the chairman’s faith and optimism. 

50 

If you accept that the credit, liquidity, economic contraction crisis 

is substantially behind us, is it far enough behind us for us to 

make the type of sweeping regulatory reforms that are being contemplated with the immediate aftermath being such recent history? 

Do we understand enough about the events of last summer and fall 

to accomplish the type of sweeping reforms that are being discussed here today? 

It is a simple question, so let’s start at one end and work down 

to the other. Mr. Menzies? 

Mr. MENZIES. I guess your question presumes that we have some 

knowledge on whether this is all behind us or not; and that depends upon whether you are from Florida, California, Arizona, Nevada, Ohio, Michigan, or Atlanta, or when you are from the Eastern Shore of Maryland. You can bet I don’t know the answer to 

that question. 

It also presumes that there is a need to create some regulation 

to deal with the problem, to deal with the collapse, if you will. And 

again I would repeat that it is so important to focus on what 

caused the problem. What caused the $7 trillion of economic loss 

to the American consumer? 

We can have all the product legislation in the world and do everything possible to protect the consumer, but the greatest damage 

to the consumer was the failure of a system because of concentrations and excesses across the board, of a Wall Street vehicle that 

gathered together substandard, subprime, weird mortgages that 

community banks didn’t make, created a warehouse to slice and 

dice those entities, make huge profits selling off those items, and 

have very little skin in the game, very little capital at risk, and to 

be leveraged, leveraged in some cases, according to the Harvard 

Business Review this week, 70 to 1. That deserves attention. The 

too-big-to-fail, systemic-risk, too-big-to-manage, too-big-to-regulate 

issue must be dealt with. And from the perspective of the community banks, that is the crisis of the day. That is what has destroyed 

the free market system. 

Mr. PUTNAM. Mr. Yingling, do we know enough? 

Mr. YINGLING. I think we need to be extremely careful, because 

what the Congress does with this legislation will not just determine 

the regulatory structure, it will determine the financial structure 

for decades to come. It will change all the incentives. So I think we 

need to be very careful. 

And I would just add another point that I touched on earlier. 

There is great uncertainty already in the markets, and it is affecting the markets. It is affecting the cost of credit. And I do worry, 

particularly in terms of this consumer agency, as I mentioned earlier, that all the rules will be changed, and we won’t know what 

the rules are for years to come. 

So I think an additional point to the one you are raising and related is, is there going to be so much uncertainty in the market 

that people will not know what the rules of the road are? And that 

can affect economic recovery. 

Ms. LEONARD. I think we, too, need to be extremely cautious, because the market has changed. The market has adjusted based on 

going so far in the opposite direction in terms of being risk tolerant 

that there could be extreme unintended consequences for future 

51 

credit if we don’t really take the time to know where the problems 

took place all the way down the line and how to stop them from 

happening again. 

Mr. ZYWICKI. This proposal made credit more costly and less 

available to consumers. That would be bad in itself. 

Secondly, it will probably push consumers to even less attractive 

forms of credit such as pawn shops, payday lenders, a lot of these 

sorts of organizations, because it will make regular credit less 

available. That is a bad idea anytime. It seems like an especially 

bad idea at this time. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

The gentlelady from Minnesota mentioned Goldman. The one 

issue that I need to bring up is we own warrants in Goldman. They 

are worth between a quarter and a half billion dollars. And there 

are negotiations now in process that I fear will lead to us cashing 

in those warrants for far less than they are worth. 

We took a huge risk. Goldman is doing well. We are going to 

have to profit on this deal, because I know we are going to lose 

money on a bunch of the other deals. 

As to consumer ignorance being the cause of all this, I would say 

to my way of thinking it is investor ignorance. They treated AltA as triple A. They loaned $500,000 to people to buy a three-bedroom bungalow in my district, and then we counted that as increase in our worth. It increased property values, didn’t exactly increase the value of that home. 

And I don’t think the borrowers were all that dumb, even if they 

signed a loan that they ultimately couldn’t pay. Because if they 

sold in 2006, they made more money on their home than they ever 

made working, or at least for many years of working. 

The people who took ridiculous risks were the investors, the 

lenders. They thought they were creating wealth. All they were 

doing is creating a bubble. 

The three issues that I think are going to be most contentious 

on regulatory reform are: first, the enhanced powers of the Fed. We 

are going to have to deal with Fed governance. It is absolutely absurd to put huge governmental powers in an entity that is selected, 

whose leadership is selected—not always one man, one vote—they 

will have to appoint Fed board members. But in some cases, the 

regional side and various other entities, the governance of the Fed 

is one bank, one vote; one big bank, one big vote. And last I 

checked the Constitution, governmental powers should be in the 

hands of those who are elected one man, one vote; one woman, one 

vote. 

Also a big discussion on whether the Fed should be audited like 

every other government agency. The more governmental power you 

give it, the more reason there is to audit. 

And, finally, the chairman has discussed Section 13.3 of the Federal Reserve Act. 

Mr. Bernanke was here and I facetiously questioned him about 

whether he would accept a $12 trillion limit on the power of the 

Fed to go lend money to whomever he thought ought to get it. He 

thought a $12 trillion limit on that power would be acceptable. The 

52 

power of the purse is supposed to be in Article 1 of the Constitution, not Article 2. 

And the proposal of the Administration is to say, well, you need 

two entities in Article 2 of the Constitution, both the Fed and the 

Treasury Department, to go out and take—and to risk trillions of 

dollars. I would think that we would want a dollar limit imposed 

by Congress. 

Derivatives are often a casino. We are told that they are used as 

hedges, and that is the justification for them. But for every $10 billion that an airline hedges on the future fuel of costs, there seems 

to be $10 trillion in casino gambling. Which would be more or less 

fine, except, unlike Las Vegas, we have the Secretary of the Treasury, when he came before us a couple of days ago, making it plain 

that he reserves the right to use whatever governmental powers he 

might have to bail out the counterparties on derivatives being written today. 

So we do have an interest in minimizing the over-the-counter derivatives and minimizing what could be a risk that ultimately falls 

on the taxpayer. 

I would think at a minimum, we would limit over-the-counter derivatives to those cases where somebody has a genuine insurable 

risk and is unable to hedge it in the exchange-traded derivatives. 

For us to say we are going to have a taxpayer-insured casino involving trillions of dollars a day, just so that one or two airlines 

could hedge fuel costs, fails to recognize the size of this, of the casino part of the over-the-counter market. 

Finally, Professor, I will be introducing a bill that would deprive 

the issuer of a debt security from selecting the credit-rating agency. 

To me, that is like having the umpire selected by the home team. 

Which is fine if it is a beer league; not so fine if you are in the 

major leagues. 

And instead, we would select at random from a panel of SECqualified credit-rating agencies. Another way to go would be to 

make the credit-rating agencies liable for negligence. I don’t know 

if I am allowed a response. 

The CHAIRMAN. No, you can’t get— 

Mr. SHERMAN. I will ask you to respond for the record. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Illinois. 

Mr. MANZULLO. Mr. Chairman, you know it is amazing, if I had 

asked each of you guys—that of course includes the gentlelady— 

what caused everything, the answer is pretty simple: too easy credit. The Federal Reserve had the authority to stop the 2/28 and the 

3/27 mortgages, and the Federal Reserve also had the authority to 

require, goodness gracious, written proof of a person’s income before that person was eligible to get the mortgage. 

You know something? No one starts with the problem. The problem is not in the derivatives, the problem is in the stinky piece of 

financial garbage that was generated because of the bad subprime 

loans. 

So if we already have a government agency that had the powers 

to stop this, and didn’t do so for any number of reasons, why create 

another agency given the authority to come in and mess up? 

53 

I mean, I don’t know if you guys have taken a look at this Consumer Financial Protection Agency Act of 2009, the proposal on it. 

You know what that does? That says that this new organization 

gets to work with HUD, and perhaps FHSA, on a Truth-in-Lending 

and RESPA financial disclosure form. And how long did we fight 

those people at HUD on RESPA? 

When I chaired the Small Business Committee, that went on for 

6 years. They finally came up with something they thought would 

work. 

And now FHA says well, we are going to take care of the appraisers. It allows banks to own an appraisal management company so that the appraisal management company can be wholly 

owned by the bank. But if you separate the men’s bathroom from 

the women’s bathroom, they can go out there and do an independent appraisal. 

And if a person gets an appraisal that he doesn’t like—you know, 

we were told by the head of the FHFA what his resolution is: to 

contact them or the CC. You know, the more power and the more 

agencies we set up, it just screws everything up. 

I mean, Mr. Menzies, you know, you are a community banker. In 

your opinion—I like to pick on you—this is the third time since you 

have been here. 

In your opinion, if we did not have those exotic mortgages, if they 

were not allowed, and people had to show proof of their income, 

don’t you agree that this crisis probably never would have occurred? 

Mr. MENZIES. You do pick on me all the time. 

Mr. MANZULLO. Yes, that is because I like your answers. 

Mr. MENZIES. Thank you, sir. You know, as a community banker, 

knowing that my personal capital is at risk, knowing that I have 

personal skin in the game, introduces a great deal of morality in 

the business decision-making; because we own, individually and 

personally, the consequences of our own loan decisions, whether we 

put it in the secondary market through Fannie and Freddie, whether we keep it, we own the consequences of those decisions personally. 

So my perspective would be that the lack of capital, the lack of 

ownership, the extraordinary leverage, the lack of skin in the 

game, created an environment that allowed those who were feeding 

off of the system to create products that they would not have created if their personal skin were in the game, if their personal capital were at risk, if they were truly at risk of owning their own decisions. 

Mr. MANZULLO. Now, Ms. Leonard, do you agree with my assessment that had the Fed had some reasonable—I mean, the Fed finally has put these into effect, will take effect in October of this 

year— wouldn’t that have stopped a lot of the subprime? 

Ms. LEONARD. Yes. If the lenders were not allowed to create 

those products, those, you know, riskier guidelines, yes. 

Mr. MANZULLO. Well, then isn’t that the answer? You know, I 

just can’t see setting up a whole new—I mean, this consumer financial protection— 

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

give myself 10 seconds. 

54 

Mr. Menzies, I take what you have said, if I am correct, as a 

strong argument in favor of some requirement of risk retention 

throughout the system. 

Mr. MENZIES. Yes, sir. We believe that risk retention is an important part of the whole system. And at the same time, we hope 

those transactions that are clearly underwriting, like a conforming 

mortgage loan, don’t get buried or weighted down in that process. 

But we think risk retention is an important part of the whole system. 

The CHAIRMAN. Right. And it seems to me it takes the place of 

some other restrictions that may come. 

I thank the panel very much, and it is dismissed. 

[Whereupon, at 2:07 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

July 15, 2009 

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