CHRG-110hhrg34673--60 Mr. Bernanke," I think good progress has been made in trying to understand how to distinguish predatory lending from legitimate subprime lending. That is always the challenge. How do you define the rules in a way to address predatory lending without driving out legitimate subprime lending? And what we have seen lately is that a number of States, and your own State, North Carolina, has been one of the pioneers there, have introduced legislation which have moved the ball forward in terms of achieving that objective. And I was very pleased to see that because I think the States are good laboratories. They can really try out different things, and we can see what works and what doesn't work. At some point when we understand well enough how to distinguish between predatory and legitimate lending, probably a Federal standard would be a good idea because it would eliminate the many differences across States and make it more costly for lenders to lend on a national basis. I don't really have a good judgment as to whether the States have reached a point where we feel, you know, we are ready to do that, but at some point we should really consider-- " CHRG-111hhrg54872--297 Mr. Menzies," Coordination is important on anything that can be done to produce greater coordination between the regulatory agencies and the CFPA will produce a positive benefit. But, Congressman, community banks and our customers were equally injured by predatory lending. And in our State, we have been aggressive about that, because predatory lending benefits no one. " FinancialCrisisInquiry--832 BORN: Thank you. Listening to your testimony, it strikes me to ask where were the regulators. Mr. Rosen, you said that the Federal Reserve Board had a lot of data about the predatory lending that was going on. They had been given the authority and responsibility by statute to oversee and prevent predatory lending. Do you know why the Fed failed to act in this respect? CHRG-110shrg46629--101 Chairman Bernanke," That is correct. Senator Bennett. And not all subprime lending is predatory. " CHRG-110hhrg34673--59 Mr. Watt," Can I just interrupt you long enough to ask you to comment on whether you think we need a Federal predatory lending statute? " CHRG-110shrg38109--72 Chairman Bernanke," I think, first of all, that this distress in the subprime area is a significant concern. I am obviously following it very carefully, both in terms of the impact it has on the borrowers and lenders as well. I do not think that it has at this point implications for the aggregate economy in terms of the ongoing expansion, but as I said, it is an important issue for those sectors. I could certainly list a wide variety of things that we do to try to address predatory lending, which I do think is an important issue, and I think the subprime market, which is distinct from predatory lending, it is a legitimate market. Senator Martinez. Right. That is a good distinction to make. " CHRG-110hhrg34673--57 Mr. Watt," Okay. The increase in foreclosures is a serious problem, and one of the concerns we have is that the Fed has never adopted a final rule under its authority under the truth and lending act to prohibit practices or acts that it found to be unfair or deceptive or designed to evade the purposes of HOPA over the entire class of mortgage loans. There has never been a real rule on these things, and I think that is one of the things that is putting pressure on us to be more aggressive in having a Federal predatory lending standard, or at least a Federal predatory lending floor. I am wondering whether you view that as a problem, and maybe I could just get you to discuss with me why the Fed has never used that more aggressive, unfair, deceptive trade practices language to be more aggressive in this area in light--and especially in light of the increasing number of foreclosure that we are experiencing. " CHRG-111hhrg54872--91 Mr. Watt," Now, the third issue I want to deal with is this whole preemption issue. You and I worked through this or tried to work through it on the predatory lending front, trying to find the appropriate balance about what got preempted and what did not get preempted. One approach that I want to sound out on you publicly today, and I haven't thought it all the way through, is similar to the approach that we used in the predatory lending area of actually going through and specifying some things that are not preempted, unfair and deceptive, State unfair and deceptive trade practices laws, State fraud laws. There was a list of them that we came up with. I don't have the list in front of me right now, civil rights laws, things that we know if a State legislates in, we ought not be preempting their standards because quite often a lot of those standards are set at the local level; is that correct? " CHRG-111hhrg52261--59 Mr. Anderson," Well, we have got RESPA; that is number one, under HUD. We have the Truth in Lending Act. I mean that has to do with your disclosures, your good faith and truth in lending. All of this, mortgage brokers, banks savings and loans, we all operate under that umbrella. Also in our States, individual States, we have to adhere to the same policies; and some of our States have predatory lending laws. In Louisiana, we just passed a law that there are no prepayment penalties, which is a good thing. So we are all under the same umbrella, and we have to comply with our own State lending laws. And we have got the Safe Licensing Act, which is for everybody. " fcic_final_report_full--454 Securitization and structured products . Securitization—often pejoratively described as the “originate to distribute process”—has also been blamed for the financial crisis. But securitization is only a means of financing. If securitization was a cause of the financial crisis, so was lending. Are we then to condemn lending? For decades, without serious incident, securitization has been used to finance car loans, credit card loans and jumbo mortgages that were not eligible for acquisition by Fannie Mae and Freddie Mac. The problem was not securitization itself, it was the weak and high risk loans that securitization financed. Under the category of securitization, it is necessary to mention the role of collateralized debt obligations, known as CDOs. These instruments were “toxic assets” because they were ultimately backed by the subprime mortgages that began to default in huge numbers when the bubble deflated, and it was diffi cult to determine where those losses would ultimately settle. CDOs, accordingly, for all their dramatic content, were just another example of the way in which subprime and other high risk loans were distributed throughout the world’s financial system. The question still remains why so many weak loans were created, not why a system that securitized good assets could also securitize bad ones. Credit default swaps and other derivatives . Despite a diligent search, the FCIC never uncovered evidence that unregulated derivatives, and particularly credit default swaps (CDS), was a significant contributor to the financial crisis through “interconnections”. The only company known to have failed because of its CDS obligations was AIG, and that firm appears to have been an outlier. Blaming CDS for the financial crisis because one company did not manage its risks properly is like blaming lending generally when a bank fails. Like everything else, derivatives can be misused, but there is no evidence that the “interconnections” among financial institutions alleged to have caused the crisis were significantly enhanced by CDS or derivatives generally. For example, Lehman Brothers was a major player in the derivatives market, but the Commission found no indication that Lehman’s failure to meet its CDS and other derivatives obligations caused significant losses to any other firm, including those that had written CDS on Lehman itself. Predatory lending . The Commission’s report also blames predatory lending for the large build-up of subprime and other high risk mortgages in the financial system. This might be a plausible explanation if there were evidence that predatory lending was so widespread as to have produced the volume of high risk loans that were actually originated. In predatory lending, unscrupulous lenders take advantage of unwitting borrowers. This undoubtedly occurred, but it also appears that many people who received high risk loans were predatory borrowers, or engaged in mortgage fraud, because they took advantage of low mortgage underwriting standards to benefit from mortgages they knew they could not pay unless rising housing prices enabled them to sell or refinance. The Commission was never able to shed any light on the extent to which predatory lending occurred. Substantial portions of the Commission majority’s report describe abusive activities by some lenders and mortgage brokers, but without giving any indication of how many such loans were originated. Further, the majority’s report fails to acknowledge that most of the buyers for subprime loans were government agencies or private companies complying with government affordable housing requirements. CHRG-110hhrg34673--208 Mr. Bernanke," Well, I indicated that it is very difficult. And I am not just trying to hedge here, because we want to eliminate predatory and abusive lending, but we don't want to shut down the legitimate subprime market. And that is sometimes a difficult task, and that is why I was praising some of the State efforts that represent good experiments along those lines. So approaching that I think involves disclosure, it may involve barring certain practices as well. The Federal Reserve, I should say, is very much involved in trying to control predatory lending. We are responsible for the Home Mortgage Disclosure Act. We recently added information requirements there on pricing so we can find out whether pricing is varying across, for example, minorities and nonminorities. We are responsible for the Home Ownership Equity Protection Act and other things, Regulation Z. So we are very much involved in that from the Federal level. But again, I think there is still a lot of creativity we can see at the State level to try to understand better how to address this problem. " CHRG-111shrg52619--151 Mr. Tarullo," This should be something which is an oversight mechanism on top of it in the general course of things. But as I think you have pointed out, you will sometimes have practices--and subprime mortgage lending that was either predatory or not well backed by good underwriting is a principal example--that became pervasive and should have been regulated earlier. " CHRG-111hhrg53248--142 Mr. Garrett," That certainly should trouble you because we have heard a lot of discussion on this panel with regard to something called predatory lending, and so many times they said that there should be other products that individuals should be entitled to but they are just not offered those, and all they are offered are these much higher rate products or just really ones that put them in a bad situation. " CHRG-110shrg46629--100 Chairman Bernanke," Certainly Senator. Just one word on your initial comment. I agree with you that legitimate subprime lending is beneficial. It gives people access to homeownership and access to credit. So the real trick for us is to write rules, to write regulations that will screen out the abusive practices and the improper practices while preserving this market. I think that is a very challenging task. Senator Bennett. If I just might, a witness in a previous hearing said not all predatory lending is subprime. " fcic_final_report_full--115 COMMISSION CONCLUSIONS ON CHAPTER 6 The Commission concludes that there was untrammeled growth in risky mort- gages. Unsustainable, toxic loans polluted the financial system and fueled the housing bubble. Subprime lending was supported in significant ways by major financial insti- tutions. Some firms, such as Citigroup, Lehman Brothers, and Morgan Stanley, acquired subprime lenders. In addition, major financial institutions facilitated the growth in subprime mortgage–lending companies with lines of credit, securitiza- tion, purchase guarantees and other mechanisms. Regulators failed to rein in risky home mortgage lending. In particular, the Federal Reserve failed to meet its statutory obligation to establish and maintain prudent mortgage lending standards and to protect against predatory lending. FinancialCrisisInquiry--242 Right. Well, then the question is, does it include, for example, private-purpose tax- exempt debt for a multi-family couple with 4 percent tax credits, at 9 percent tax credits. There’s a number of CRA eligible activities. So what I’m going to suggest—which I think is important, and I want to say this to the commissioners—is I think one of the things we have to do here is get to actual numbers. And so I’m going to ask our staff to make sure that sooner than later we put together the best numbers from the most credible sources about what, in fact, does exist, for example, with the Fannie and Freddie portfolio. What’s the nature of it? And if there’s divergence, let’s get the facts on the table. I think we ought to get the best facts we can about the contour of loans made by CRA and non-CRA regulated institutions. And I just want to say, you know, I want to say let’s get the numbers and the facts on the table and make sure we’re dealing with apples to apples. I think that’s important. That was on my time. Ms. Born? BORN: Thank you. Listening to your testimony, it strikes me to ask where were the regulators. Mr. Rosen, you said that the Federal Reserve Board had a lot of data about the predatory lending that was going on. They had been given the authority and responsibility by statute to oversee and prevent predatory lending. Do you know why the Fed failed to act in this respect? ROSEN: It’s very puzzling because they wrote the right paper. A key Federal Reserve Board member was pushing it very hard. It was—and I don’t know why it didn’t happen. The chairman was a pretty strong guy, and I suspect that was it. But maybe read Ned Gramlich’s book because he’s written a whole book on this topic before he passed away. I think it would be worth it to find out why they didn’t do it. A lot of them did believe, though, there was—it wasn’t really happening; it was demographics. It wasn’t predatory; it was just market innovation at work. CHRG-111hhrg53240--111 Mr. Meeks," Thank you, Mr. Chairman, and thank you for your testimony here today. You know, my district in New York is the number one in foreclosures in the City of New York. I am noticing a certain trend, and I am wondering if you can tell me your opinion on this and whether a consumer agency would be able to intersect. Here is what I am finding: number one, that individuals who have taken out mortgages--and some of the financial institutions had skin in the game, they didn't just take it and securitize it away--that those individuals' incomes and the credit they received seemed to match more or less the mortgages that they were receiving. Those who went to mortgage brokers or some others and their incomes did not match, those were simply sold away, because they weren't going to keep them, so it didn't matter. And so there are two things that are happening. Either individuals are now in upside-down mortgages, and the banks are not refinancing them; or they just simply--if they had adjustable rates, and they adjusted, they can't afford them and they are thrown out of their homes. So what I am concerned with in your vision when we move forward with a consumer financial protection agency, that this would be an area of which they could specialize and look in to see if, in fact--or tracking, if you will--to see if in fact there is a pattern. I mean, for years we have been talking here about predatory lending. And there has been no one that I know of that we could go to, to focus on, to stop predatory lending. I can recall on this committee we could go--we would be talking time after time after time to a person, at the person, but yet no result. So in your mind's eye, would a consumer financial protection agency also be an adequate agency to look at issues such as predatory lending and put an end to it? That would be my first question. Ms. McCoy. It would be a very important piece of the puzzle. What we need to stop is this two-tier system where the sensible loans are the ones held in portfolio and the reckless, dangerous loans are the ones sold through securitization. Having one uniform standard for all loans, whether they are securitized or not, would definitely help that problem. But here the bank regulators would continue to have a role even if the agency is created, because the bank regulators can make sure that banks are not rewarded with lower capital requirements for securitizing bad loans. So they can partially buttress safety through capital treatment, and they should. " CHRG-111hhrg54868--114 Mr. Smith," I will give you the best answer, which is that, when we adopted State legislation to address predatory lending, we were called reverse redliners. It was said we were reducing credit availability at the time we did it. And I wish we had reduced it sooner, because what happened was the result of the loans that were made during the period I am talking about, which was 2005 to 2007, let's say, was that millions of families went out of their homes. So the answer to the question may well be, yes, there would be less credit. The question really is whether that is a bad thing or not. " CHRG-111hhrg53241--125 Mr. Meeks," Thank you, Madam Chairwoman. First of all, I want to agree with Ms. Zirkin, who stated in her statement that I am not against subprime loans that are responsible. Those kinds of loans can help individuals own a home, which I still believe is the greatest opportunity for wealth creation that we have and will lower the gap between those who own and don't have, particularly in regards to African Americans, Latinos, etc. The problem comes in is where the responsibility leaves, and we get into areas of predatory loans. And I think for a long period of time many individuals, on this side of the aisle, at any rate, were yelling and screaming that we should ban predatory lending because predatory lending put many of the individuals in the situations that they are currently in. Now, if it is someone who is flipping homes, that is a whole different person. We are talking about individuals who bought these homes, trying to participate in the great American dream of homeownership so they can raise their kids for a long period of time. And, to me, what we are simply trying to do here is to say, yes, we have to have safety and soundness regulations, but we also have to have someplace to go where there may be some predatory lending going on. This consumer regulatory agency can overlook and can oversee what is going on so we can make sure that the product is not having a negative impact overall. For example, there is a debate that is going on as to whether or not--you know, yield spread premiums. From my idea, we should ban yield spread premiums, because I don't see what the utilization of them are except for costing individuals more money. Now, it would seem to me that we could debate that. Because on one side, if you just leave it to the bankers and the financial institutions who--they are--part of their role is to try to make as much money as they can. But we need someone else whose role is to try to make sure that we are not doing it at the backs or at the expense of other individuals. And I think what the President's plan is simply trying to do is say, let us lay it out. And what I would think that--I had hoped yesterday and what I may comment to those who testified yesterday is, as opposed to people lining up dead set against something, I think it helps them. It would help their image if they came with some recommendations on how we could make sure consumers are also protected. Because one of the biggest problems in America right now is it is us against them, and we need to find a way to bridge that gap. And, to me, it makes sense that this is an avenue to bridge that gap so Main Street doesn't think that Wall Street is against them. But if anytime you talk about something of that nature without saying, well, here is my recommendations, how we can work it again, then it looks like Wall Street is against Main Street. And we have to figure out how we bridge that. I thought that Ms. Zirkin's testimony was right on the money in that regard. I think that is the direction we need to go in. I think that the conversation that we also need to have is--because I heard some say it needs to be an independent agency. And it gets to the question of how do we pay for it. Should it be a situation where there is a direct appropriation from Congress? Should it be by fee? Who--I hadn't heard that. Let me just throw that out. Anyone have any recommendation of how we should pay for it? " CHRG-111hhrg53240--137 Mr. Ellison," Ms. Saunders? Ms. Saunders. If I could just add, in addition to the length of time which, of course, says something about priorities, what triggered the action? It wasn't just how long it took, it is that nothing happened until Chairman Frank and others said, ``Use it or lose it.'' And they were under threat of losing that authority and Congress was considering credit card bills and predatory lending bills and it was clear that they were under the gun and they had to do it. And in the end, you know, that is what it took, a threat, an ultimatum to get action. " fcic_final_report_full--27 There were government reports, too. The Department of Housing and Urban De- velopment and the Treasury Department issued a joint report on predatory lending in June  that made a number of recommendations for reducing the risks to bor- rowers.  In December , the Federal Reserve Board used the HOEPA law to amend some regulations; among the changes were new rules aimed at limiting high- interest lending and preventing multiple refinancings over a short period of time, if they were not in the borrower’s best interest.  As it would turn out, those rules cov- ered only  of subprime loans. FDIC Chairman Sheila C. Bair, then an assistant treasury secretary in the administration of President George W. Bush, characterized the action to the FCIC as addressing only a “narrow range of predatory lending is- sues.”  In , Gramlich noted again the “increasing reports of abusive, unethical and in some cases, illegal, lending practices.”  Bair told the Commission that this was when “really poorly underwritten loans, the payment shock loans” were beginning to proliferate, placing “pressure” on tradi- tional banks to follow suit.  She said that she and Gramlich considered seeking rules to rein in the growth of these kinds of loans, but Gramlich told her that he thought the Fed, despite its broad powers in this area, would not support the effort. Instead, they sought voluntary rules for lenders, but that effort fell by the wayside as well.  In an environment of minimal government restrictions, the number of nontradi- tional loans surged and lending standards declined. The companies issuing these loans made profits that attracted envious eyes. New lenders entered the field. In- vestors clamored for mortgage-related securities and borrowers wanted mortgages. The volume of subprime and nontraditional lending rose sharply. In , the top  nonprime lenders originated  billion in loans. Their volume rose to  billion in , and then  billion in .  California, with its high housing costs, was a particular hotbed for this kind of lending. In , nearly  billion, or  of all nontraditional loans nationwide, were made in that state; California’s share rose to  by , with these kinds of loans growing to  billion or by  in California in just two years.  In those years, “subprime and option ARM loans saturated California communities,” Kevin Stein, the associate director of the California Reinvestment Coalition, testified to the Commission. “We estimated at that time that the average subprime borrower in Cali- fornia was paying over  more per month on their mortgage payment as a result of having received the subprime loan.”  Gail Burks, president and CEO of Nevada Fair Housing, Inc., a Las Vegas–based housing clinic, told the Commission she and other groups took their concerns di- rectly to Greenspan at this time, describing to him in person what she called the “metamorphosis” in the lending industry. She told him that besides predatory lend- ing practices such as flipping loans or misinforming seniors about reverse mortgages, she also witnessed examples of growing sloppiness in paperwork: not crediting pay- ments appropriately or miscalculating accounts.  Lisa Madigan, the attorney general in Illinois, also spotted the emergence of a troubling trend. She joined state attorneys general from Minnesota, California, Washington, Arizona, Florida, New York, and Massachusetts in pursuing allegations about First Alliance Mortgage Company, a California-based mortgage lender. Con- sumers complained that they had been deceived into taking out loans with hefty fees. The company was then packaging the loans and selling them as securities to Lehman Brothers, Madigan said. The case was settled in , and borrowers received  million. First Alliance went out of business. But other firms stepped into the void.  State officials from around the country joined together again in  to investi- gate another fast-growing lender, California-based Ameriquest. It became the na- tion’s largest subprime lender, originating  billion in subprime loans in —mostly refinances that let borrowers take cash out of their homes, but with hefty fees that ate away at their equity.  Madigan testified to the FCIC, “Our multi- state investigation of Ameriquest revealed that the company engaged in the kinds of fraudulent practices that other predatory lenders subsequently emulated on a wide scale: inflating home appraisals; increasing the interest rates on borrowers’ loans or switching their loans from fixed to adjustable interest rates at closing; and promising borrowers that they could refinance their costly loans into loans with better terms in just a few months or a year, even when borrowers had no equity to absorb another refinance.”  CHRG-111hhrg54872--294 Mr. Driehaus," Thank you very much, Mr. Chairman. And thank you, gentlemen, for testifying today for the umpteenth time for some of you. I spent the better part of the last 8 years in the State legislature in Ohio. And I fully agree with you that the community banks and the small independent financial institutions were not part of the problem. But I think you would concede that you have not been part of the solution either. For years, we tried to pass predatory lending legislation in the State of Ohio, and were stopped. We were stopped in large part because so many financial institutions said, look, we are already the most regulated industry in the country, the last thing we need is more regulations. And the legislature too often bought into that. It wasn't until Governor Strickland was elected in 2006 that we finally created a foreclosure task force in the State of Ohio, and finally started actually doing something. And even then, I served on the task force, the bankers were very reluctant to work on legislation that would have gotten at some of the predatory lending issues. Now, I grant you that the vast majority of the legislation should have been Federal in nature because the State-chartered institutions were few, and they weren't causing the problem. But I just have a problem with this revision as history. I agree, and I have been fighting for the community banks and this legislation. I was on the phone with the FDIC yesterday, talking about assessments and trying to protect community banks. But my problem is that in the last 8 years, we saw this thing run away; we saw predatory lending legislation introduced in this body in 2001 and every year since, and we did nothing about it. We saw the problem, but people were making money off the system when real estate was increasing. And until the bubble burst, that is when everybody said, okay, we need to do something about it. Well, we were paying the price in foreclosures in Cincinnati back in 2001 and in 2002 and 2003. I now live in a neighborhood that has hundreds of homes that have been foreclosed on because we failed to act back then, and the banks were part of that inertia. What I am trying to get at is I want to come up with a solution that works. I believe very strongly in consumer protection. I also believe you don't need another regulatory burden. Is there a way that we structure this that we are achieving the consumer protection--and maybe it is not by giving the CFPA examination authority, maybe it is by allowing them to create rules and regulations, and they then have enforcement authority but they don't have examination authority, because you don't need another examiner. I want to make this thing work because the consumers are demanding it, and the consumers deserve it. We in our neighborhoods are paying the price for it. It is not those folks who were foreclosed on, it is not the big banks that have the mortgage-backed securities, it is the neighborhoods who are paying the price. And we continue to pay the price. So I want you to help me make this work. And I think many of us are willing to work with you in trying to reduce the regulatory burden, but help us understand how we make that happen. Mr. Yingling? " CHRG-111hhrg56776--136 Mr. Watt," The gentleman's time has expired. The gentlelady from New York--I'm sorry, the gentlelady from California, Ms. Waters, is recognized for 5 minutes. Ms. Waters. Thank you very much, Mr. Chairman. I would like to thank both Mr. Volcker and Chairman Bernanke for being here today. And while we are not going to get into the Volcker Rule today, I understand that we are going to hold a hearing to talk about it more. I understand the President is very interested in what he calls the Volcker Rule. And I want to learn a lot more about it, too. But we are very pleased that you are here. We have respected your work for so many years. And I am looking forward to having you back with us again, so we can talk about the Volcker Rule. Having said that, I want to go to Chairman Bernanke. It was not until 2008, well after the predatory mortgage loan products had done their damage, that the Fed finalized its rule-making for the Home Ownership and Equity Protection Act, which Congress passed in 1994, mandating that the Federal Reserve prohibit unfair, deceptive, or abusive acts or practices in mortgage lending. I know the work that you have done, and you mentioned the intensive self-examination that the Federal Reserve has taken of its regulatory and supervisory performance, and I really do appreciate that. I am not going to get deeply into the consumer financial protection agency that has been talked about so much, and what's happening with the Dodd bill. But here is what I really wanted to try and focus on. I have this notion that there are some products that are so bad, that are so predatory, that they should never have been on the market, should not be on the market. It seems to me that flies in the face of what those of you in the industry think about, the ways that you think about it. You feel that in a free market society, businesses are able to come up with all kinds of ideas about how they want to provide products or services or what have you, and it's up to you to regulate them, not to prohibit them and say, ``You can't do that.'' I don't understand why a regulator can't take a look at a product and say, ``This is so bad, this is so predatory, that it shouldn't be on the market, and we're not going to allow it to be on the market,'' or, ``We're going to discourage it from being on the market.'' And that's one of the reasons I am so interested in the Consumer Financial Protection Agency, because I think they can start to see these things in different ways than they have been seen in the past. Do you feel that, as a regulator, you should have the ability to say, ``No, you can't put that product on the market. It is just too bad. It is too predatory.'' " CHRG-110hhrg41184--122 Mr. Bernanke," And we are looking forward this year, trying to estimate what is going to happen this year, and a lot of it depends on what happens to the price of oil. If oil flattens out, we will do better, but if it continues to rise at that rate in 2007, it will be hard to maintain low inflation, I agree. Mr. Moore of Kansas. Thank you, Mr. Chairman. We face significant challenges in the housing market that have led in part to serious problems in the credit markets and our larger economy. Some of these problems begin as a result of predatory lending practices, which reached epidemic proportions in recent years, and took millions of dollars from American households of the equity in their homes and undermining the economic vitality of our neighborhoods. Approximately 1.8 million subprime borrowers will be facing resetting adjustable rate mortgages over the next couple of years, unless the government or the lending industry helps them modify the terms of their loan in some other form. I don't support a government bailout for all these homeowners, particularly for wealthy investors and speculators who borrowed against the equity in their homes, betting on profits from a soaring housing market. But I do believe we need to make a strong effort to help lower-income homeowners, who were the victims of predatory lenders, refinance in order to stay in their homes. If foreclosures, Mr. Chairman, continue to rise, what impact do you believe this will have or could have on the economy in the next couple of years? " CHRG-111hhrg53241--71 Mr. Taylor," No. They have other functions to serve. Obviously, the bank regulators, monetary policy, safety and soundness and other very important roles to play. But, clearly, this has been the stepchild of legislation. That is why we had all this predatory and abusive lending, and that is what this is aimed to stop. And I just want to, for Mr. Hensarling as well, none of us are opposed to competition. I think competition will remain robust. But we should have a free market that has a rule of law in it that ensures fairness and doesn't allow for a free market that is free to abuse and free to fraud and free to do things that hurt consumers, and I think that is what this agency gets at. " FinancialCrisisInquiry--721 THOMPSON: Yes, OK. Ms. Gordon, you talked about predatory practices, and you specifically said it seemed as though some of that might have been targeted at minorities, African- Americans and Hispanics. Do you have evidence to support that statement? And are there lawsuits or activities underway that would suggest that this is not just predatory, but perhaps illegal? CHRG-111hhrg53241--78 Mr. Ireland," I think the State of Georgia's predatory landing law-- " CHRG-110hhrg34673--125 Mr. Hensarling," No. I think I will quit while I am ahead, Mr. Chairman. I think I will quit while I am ahead. To the extent that I have any time left, subprime lending--you mentioned that there is a great challenge in figuring out the difference between predatory and subprime. I believe the world works off of incentives. Are subprime lenders incented to actually take back the collateral, to take back the house, to repossess it, particularly since, I think you testified, we are now in a softening real estate market, and if that is not the incentive structure might the competitive marketplace help ameliorate what we are seeing as far as some of the high foreclosure rates? " CHRG-111hhrg54872--240 Mr. Calhoun," I will start with that. The bill currently pushes preemption back close to what it was in 2004. So the one issue is, do you roll back some of what many of us believe was excessive preemption that led to the problems that we have now, not just the mortgages, but in credit card overdraft. There is a second question that there are proposals to actually increase the amount of preemption that we have in the bill and, specifically, to make any rule of the CFPA preemptive, even though most of its authority comes from statutes such as truth in lending which today are not preempted. States are allowed to build on those protections. And I think, importantly, truth in lending is a good example. There has been virtually no State activity, although it is permitted, because you have comprehensive regulation. States like North Carolina moved in and Georgia attempted to move in, in predatory mortgage lending, due to the failure of the Federal regulators to take action. When Federal regulators have taken action, typically States adhere to those standards because they are beneficial to the community in that State. But I think that is the line that it crosses. If it becomes fully preemptive, it undercuts current protections in a wide array, consumer car purchases, furniture purchases across-the-board, payday lending, all of that could be swept aside by a single administrator. Ms. Speier. Let me move on to payday lending, because in the bill, it prohibits the CFPA from establishing a usury limit. Now, I feel pretty passionately about that issue, I realize. But nonetheless, why would we want to tie the hands of a consumer protection agency from actually putting in place a usury limit of let us say 36 percent? " fcic_final_report_full--107 FEDERAL RULES: “INTENDED TO CURB UNFAIR OR ABUSIVE LENDING ” As Citigroup was buying Associates First in , the Federal Reserve revisited the rules protecting borrowers from predatory conduct. It conducted its second round of hearings on the Home Ownership and Equity Protection Act (HOEPA), and subse- quently the staff offered two reform proposals. The first would have effectively barred lenders from granting any mortgage—not just the limited set of high-cost loans defined by HOEPA—solely on the value of the collateral and without regard to the borrower’s ability to repay. For high-cost loans, the lender would have to verify and document the borrower’s income and debt; for other loans, the documentation standard was weaker, as the lender could rely on the borrower’s payment history and the like. The staff memo explained this would mainly “affect lenders who make no-documentation loans.” The second proposal addressed practices such as deceptive advertisements, misrepresenting loan terms, and having consumers sign blank documents—acts that involve fraud, de- ception, or misrepresentations.  Despite evidence of predatory tactics from their own hearings and from the re- cently released HUD-Treasury report, Fed officials remained divided on how aggres- sively to strengthen borrower protections. They grappled with the same trade-off that the HUD-Treasury report had recently noted. “We want to encourage the growth in the subprime lending market,” Fed Governor Edward Gramlich remarked at the Fi- nancial Services Roundtable in early . “But we also don’t want to encourage the abuses; indeed, we want to do what we can to stop these abuses.”  Fed General Coun- sel Scott Alvarez told the FCIC, “There was concern that if you put out a broad rule, you would stop things that were not unfair and deceptive because you were trying to get at the bad practices and you just couldn’t think of all of the details you would need. And if you did think of all of the details, you’d end up writing a rule that people could get around very easily.”  Greenspan, too, later said that to prohibit certain products might be harmful. “These and other kinds of loan products, when made to borrowers meeting appro- priate underwriting standards, should not necessarily be regarded as improper,” he said, “and on the contrary facilitated the national policy of making homeownership more broadly available.”  Instead, at least for certain violations of consumer protec- tion laws, he suggested another approach: “If there is egregious fraud, if there is egre- gious practice, one doesn’t need supervision and regulation, what one needs is law enforcement.”  But the Federal Reserve would not use the legal system to rein in predatory lenders. From  to the end of Greenspan’s tenure in , the Fed re- ferred to the Justice Department only three institutions for fair lending violations re- lated to mortgages: First American Bank, in Carpentersville, Illinois; Desert Community Bank, in Victorville, California; and the New York branch of Société Générale, a large French bank. CHRG-111hhrg67816--79 Mr. Rush," The chair thanks the chairman. The chair recognizes himself for 5 minutes for the purposes of questioning our witness. Chairman Leibowitz, during the housing boom the FTC had clear jurisdiction over many of the worse predatory lenders with the most objectionable practices, but the Commission arguably didn't do much to address any of these activities. As a matter of fact, it was the states that successfully brought actions against lenders such as Countrywide and AmeriQuest when there are abusive lending practices in the sub-prime mortgage market. In the second panel Attorney Jim Tierney will talk about these and other issues a little more. But to begin with, I want to ask a simple question to you. What happened at the FTC? Why did the FTC not take aggressive action against mortgage lenders in the earlier part of this decade? " CHRG-110shrg38109--39 Chairman Dodd," I thank you for that. I am going to turn to my colleague from Alabama, but I will probably send this as a written question, unless one of my colleagues raises it with you here. Back in December, Senator Sarbanes, Senator Allard, Senator Reed, Senator Bunning, Senator Schumer, and myself sent you and other regulators a letter regarding these exotic mortgages. We had a hearing here the other day, and I have talked about this. I am a strong advocate of subprime lending. It has made a huge difference in accessibility to homeownership. I am also simultaneously very concerned about the predatory lending practices that go on. That concern about providing those subprime borrowers with the same kind of protections we do to the prime borrowers is a matter of concern to many of us here on this Committee. The letter we got back, frankly, Mr. Chairman, was a little inadequate. The notion, ``We are thinking about it,'' was nice to know, but I think many of us would like to know they are taking some additional steps. And, again, I will make this a written question to you, but I am very concerned about this issue, and some of the data we are receiving were as many as 2 million of our fellow citizens may be foreclosed out of their homes because of predatory practices. Again, I will not ask you here. I want to turn to Senator Shelby, but I want to raise that issue with you and ask you to be thinking about it because it is an important concern for many of us. Senator Shelby. Senator Shelby. Thank you, Chairman Dodd. Chairman Bernanke, the Federal Open Market Committee has held the Federal funds rate target at 5.25 percent since June 2006. In the FOMC statement following your most recent meeting in January, the FOMC noted, ``the high level of resource utilization has the potential to sustain inflation pressures. The Committee judges that some inflation risks remain.'' Mr. Chairman, what data related to resource utilization will you be paying the closest attention to between now and the next FOMC meeting in March? " CHRG-111shrg54675--41 Mr. Skillern," I would concur with the bankers that, in general, the small banks are well regulated by both their State and primary regulators. I would also disagree, though, that the Federal regulators have done their job well currently. Countrywide, Washington Mutual are both regulated by the OTS. Their subprime predatory lending harmed consumers and collapsed their banks. Wachovia, a national bank regulated by the OCC, crashed itself on exotic mortgage lending. The Federal Reserve has failed to enforce its rules. I am currently in a fight with the OCC to enforce the rules on Santa Barbara Bank and Trust around their refund anticipation loan loss. It is just not happening. So the Federal regulators have lost credibility on their willingness and ability to enforce the existing consumer laws. I do believe that a separate agency with that focus brings standardization of how those rules are applied, can expand it to those agencies that are not covered, and hopefully try to reduce the seemingly conflict of interest that the existing Federal regulators have of enforcing consumer laws. Senator Crapo. Thank you. My time is up. Thank you, Mr. Chairman. " CHRG-111shrg51290--46 Chairman Dodd," Thank you, Senator. Those are good questions and ones we have spent a lot of time on over the last 2 years on going through the predatory lending practices. The yield spread premium issue is one that consumed a lot of attention of this Committee, as did teaser rates and prepayment penalties, so I am very appreciative of you raising it again here in today's discussion as we look down the road our work on predatory lending as well as credit cards. I wanted to make note, as well, that on Thursday, we will have a hearing on AIG before this Committee and a very interesting group of panelists to come, particularly in light of the decisions in the last 24 hours or so--36 hours--and so there will be a lot of interest, I presume, in hearing where that stands and where we are going with all of it. Let me underscore the point that Senator Shelby has made and I attempted to make at the outset. This is a large task we have in front of us and our common determination here is to get this right. I am very grateful to have a partner in this in Senator Shelby, who has sat in the chair that I am sitting in as Chair of this Committee and has a good understanding of these issues, as you have witnessed by his questions here today and his interest in the subject matter. And so it is our common determination to try and, as the Chair and Vice Chair or Co-Chair or Ranking Member of this Committee here, to work closely together with people like yourselves who are very, very informative and have a lot to offer in this discussion. This is a formal hearing today, but our intention is to have informal conversations and discussions with people as well, so we can have the kind of give and take as we move forward and start to build that architecture. So I am very grateful to all three of you for your participation today. Richard, do you have something else? Senator Shelby. Yes. I just want to follow up on the number of banks. You were talking about 8,000, more or less, smaller banks. And then we have the top 19 banks they are going to apply the stress test to if they can find the pulse and so forth. Steve, if you put the 19 banks that they are going to do a stress test on together, roughly how much of the deposits in the United States is that, roughly? " CHRG-111shrg51290--65 Many of these risky mortgage instruments were made in areas where housing was least affordable, such as California, Florida and Arizona, leading to concentrated areas of unsustainable housing values. (See Figures 3 and 4). This concentration of risky loans put the entire local markets at risk, due to the sudden and extreme withdrawal of credit in the aftermath of a bubble.\10\ \10\ See Susan M. Wachter, Andrey D. Pavlov & Zoltan Pozsar, Subprime Lending and Real Estate Markets, in Mortgage and Real Estate Finance__(Stefania Perrucci, ed., Risk Books 2008).--------------------------------------------------------------------------- Figure 3. Geographic Distribution of Interest-Only Loans, 2006.\11\--------------------------------------------------------------------------- \11\ Anthony Pennington-Cross, Mortgage Product Substitution and State Predatory Lending Laws, Presentation at the 2008 Mid-Year Meeting of the American Real Estate and Urban Economics Association, Washington, D.C., May 27, 2008. Figure 4. Geographic Distribution of Low-Documentation Loans, 2006\12\--------------------------------------------------------------------------- \12\ Id. CHRG-110hhrg44900--159 Mr. Bernanke," Well, to some extent that is happening, in the following sense that first, as Secretary Paulson mentioned, the Federal Reserve is releasing on Monday a new set of rules which will limit the parameters, essentially, of how the mortgage can be constructed, and will eliminate certain kinds of confusing and other practices from the possible contracts. Second, we are continuing--as we have recently done in credit cards--a very sensitive set of disclosure reviews so that the lender will be required to explain and provide essential information to the borrower. I think we are going to go a long way towards reducing both the predatory aspects of the lending that you were referring to and also what I would just call the bad lending which ended up being losses for the lenders themselves because they had insufficient oversight and care when they made the loans. In terms of creating a standardized project in advance, I think it is an interesting idea. It would simplify things in some ways, but on the other hand, there are some benefits to having flexibility and innovation in the mortgage market to have different types of mortgages available like shared appreciation mortgages or variable maturity mortgages and so on, so I wouldn't want to take government action to eliminate the possibility of innovation in that market. " fcic_final_report_full--110 Looking back, Fed General Counsel Alvarez said his institution succumbed to the climate of the times. He told the FCIC, “The mind-set was that there should be no regulation; the market should take care of policing, unless there already is an identi- fied problem. . . . We were in the reactive mode because that’s what the mind-set was of the ‘s and the early s.” The strong housing market also reassured people. Al- varez noted the long history of low mortgage default rates and the desire to help people who traditionally had few dealings with banks become homeowners.  STATES: “LONG STANDING POSITION ” As the Fed balked, many states proceeded on their own, enacting “mini-HOEPA” laws and undertaking vigorous enforcement. They would face opposition from two federal regulators, the OCC and the OTS. In , North Carolina led the way, establishing a fee trigger of : that is, for the most part any mortgage with points and fees at origination of more than  of the loan qualified as “high-cost mortgage” subject to state regulations. This was con- siderably lower than the  set by the Fed’s  HOEPA regulations. Other provi- sions addressed an even broader class of loans, banning prepayment penalties for mortgage loans under , and prohibiting repeated refinancing, known as loan “flipping.”  These rules did not apply to federally chartered thrifts. In , the Office of Thrift Supervision reasserted its “long-standing position” that its regulations “occupy the entire field of lending regulation for federal savings associations, leaving no room for state regulation.” Exempting states from “a hodgepodge of conflicting and over- lapping state lending requirements,” the OTS said, would let thrifts deliver “low-cost credit to the public free from undue regulatory duplication and burden.” Meanwhile, “the elaborate network of federal borrower-protection statutes” would protect consumers.  Nevertheless, other states copied North Carolina’s tactic. State attorneys general launched thousands of enforcement actions, including more than , in  alone.  By ,  states and the District of Columbia would pass some form of anti-predatory lending legislation. In some cases, two or more states teamed up to produce large settlements: in , for example, a suit by Illinois, Massachusetts, and Minnesota recovered more than  million from First Alliance Mortgage Company, even though the firm had filed for bankruptcy. Also that year, Household Finance— later acquired by HSBC—was ordered to pay  million in penalties and restitu- tion to consumers. In , a coalition of  states and the District of Columbia settled with Ameriquest for  million and required the company to follow restric- tions on its lending practices. As we will see, however, these efforts would be severely hindered with respect to national banks when the OCC in  officially joined the OTS in constraining states from taking such actions. “The federal regulators’ refusal to reform [predatory] prac- tices and products served as an implicit endorsement of their legality,” Illinois Attor- ney General Lisa Madigan testified to the Commission.  CHRG-110hhrg34673--218 Mr. Bernanke," Well, the Federal Reserve has multiple responsibilities. The one that is best known is our responsibility for monetary policy, which we use to pursue the Congressional mandate of price stability and maximum sustainable employment. It is important that the Federal Reserve be independent and be able to make independent decisions about interest rates in order to preserve the credibility of the central bank. However, it is also important that Congress exert oversight over the Federal Reserve to make sure that we are following our stated mission, and that we are pursuing coherent and rational plans. The other areas include banking supervision, where we are involved in developing the new capital accord, providing various guidances and regulations together with the other banking agencies, and there we are more like the other agencies in terms of the kinds of responsibilities we have. We have considerable responsibility in the consumer protection area--that has come up a lot today--for various regulations that provide disclosures to consumers on credit cards, on mortgages, and that provide some tools to address predatory lending, or high-cost lending. And there, like other agencies, we are given instruction by the Congress, by the law, in terms of what the Congress wants us to achieve and with what instruments. And then it is our job to implement the regulations that will most effectively accomplish Congress's goals. So we have a range of activities, all of which fall into the underside of Congress obviously. " CHRG-111hhrg53241--39 The Chairman," Our final witness is Nancy Zirkin, on behalf of the Leadership Conference on Civil Rights.STATEMENT OF NANCY ZIRKIN, EXECUTIVE VICE PRESIDENT, LEADERSHIP CONFERENCE ON CIVIL RIGHTS (LCCR) Ms. Zirkin. Thank you, Mr. Chairman, and members of the committee. I am Nancy Zirkin, executive vice president of the Leadership Conference on Civil Rights (LCCR), the oldest and largest human and civil rights organization in this country comprised of 200 national organizations. We are also a part of the Americans for Financial Reform. LCCR supports a Consumer Financial Protection Agency because it is the key to protecting the civil rights of the communities that LCCR represents. Our interest ties into what has always been one of the key goals of the civil rights movement, homeownership, which is how most people build wealth and improve communities. LCCR and our member organizations have always worked to expand fair housing and also the credit that most people need to buy housing. Despite the progress since the Fair Housing Act, predatory lending has been the latest obstacle standing in the way, and, of course, it is very much the root of the crisis that we find ourselves in today. For years, LCCR and our allies argued that the modern lending system was working against us. Just to be clear, responsible subprime lending is a good thing. The problem is that the industry basically threw the responsible out of the window by giving countless numbers of people loans that weren't realistic or responsible. Even worse, many lenders were steering racial and ethnic minorities into these loans, even when they could have qualified for conventional loans. So, for years, civil rights and consumer advocates have tried to get help from Federal banking regulators, but they ignored us and maintained the status quo. Seemingly, they were more persuaded by the industry's platitudes about access to credit than the growing evidence of what the credit was actually doing. Since 1994, for example, the Fed has been able to ban predatory loans but waited until a year ago to actually start doing so, after most predatory lenders had already skipped down and left taxpayers holding the bag. The OTS and OCC were no better, even when it came to enforcing civil rights laws like the Equal Credit Opportunity Act. During the housing bubble years, neither regulator referred cases to the Department of Justice. In one instance, DOJ had to go after an OTS thrift on its own, Mid-America Bank. I have attached a new brief by the Center for Responsible Lending to my written statement which will be added to the record. The brief contains a lot of compelling horror stories about the lack of financial enforcement. And we all know about the Treasury Inspector General's report on IndyMac, which certainly shows what OTS did--or didn't do, I should say. The problem with relying on Federal bank regulators to protect our communities is simple. Its structure is inherently designed to fail consumers. When regulators are financially dependent on the institutions that they police, consumer interest will always be squeezed out. CFPA will break this pattern. In the same way that our Founders realized that sometimes you have to deliberately pick interests against each other in order to create a stable government, the interest of consumers and civil rights on the one hand and bank profitability on the other need to be pitted against each other. It is obvious that the current system didn't serve either interest. That is why LCCR thinks your legislation, Mr. Chairman, is so important. Speaking of details, my written testimony includes recommendations to the bill that we think are essential, and also LCCR's Fair Housing Task Force has a series of recommendations that we will be sharing. Again, thank you for inviting LCCR here today; and I will be happy to answer any questions you might have. Thank you. [The prepared statement of Ms. Zirkin can be found on page 170 of the appendix.] " CHRG-111hhrg54872--164 Mr. John," Absolutely. Mr. Miller of North Carolina. Mr. Calhoun, I ask you because I know you have been here for the 6\1/2\ years that I have been here, you have been sitting at this table when I have been sitting at this table. So has Mr. Shelton, for that matter. The industry is now saying that they support consumer protection, but not a consumer protection agency. Steve Bartlett was quoted recently saying they support the ``CFP,'' but not the ``A.'' That is not entirely consistent with my recollection. My recollection is that they opposed every consumer protection bill, the predatory mortgage lending legislation that I introduced, the credit card legislation that Ms. Maloney introduced, the overdraft bill that Ms. Maloney introduced. They commented publicly opposing rules that protected consumers further. Is that your recollection? Do you recall industry pushing for stronger consumer protections? " FinancialCrisisInquiry--618 CHAIRMAN ANGELIDES: OK. Mr. Rosen, you were talking about the development of bad products, bad underwriting and fraud in the marketplace. And obviously it was—went all the way up the chain. And in terms of those products then moving throughout the system. I guess my question is, to what extent were those products available historically as predatory loan products? In a sense, to what extent did what used to be considered predatory loans, focused perhaps on certain neighborhoods, essentially get transported to the larger economy? Because there were lenders who offered some of these products on a narrow basis, correct? CHRG-110hhrg34673--62 Mr. Bernanke," I have no objection at all to your discussing those issues. I think the question is making sure that you are making a clear distinction between predatory-- " CHRG-110hhrg44901--8 The Chairman," The Federal Reserve doesn't get to object. Dr. Paul. I think everybody recognizes today that our financial markets are in a big mess, and I have complained for many years about the Federal Reserve System. But I would have to say that Chairman Bernanke himself is not responsible for this mess. Not that I think he has the answers in this deeply flawed monetary system, but obviously the seeds of this mess have been planted over a long period of time. It is more a reflection of the system rather than that of one individual. It is amazing how panicky people have been getting, and how everybody is wringing their hands, and yet our government tells us, well, there is no recession, so things must be all right. A lot of people are very angry. Yet we know there is something seriously wrong, with all the mess that we have in the financial markets. And now we see this morning that inflation is roaring back, yet it is still way below what the private economists are saying about what inflation is really doing. But the consumer knows all about it. It seems like around here, whether it is from Treasury or the Federal Reserve or even in the Congress, all we need now is to have a world-class regulator that is going to solve all our problems, and I think that is so simplistic. From my viewpoint, what we need is a world-class dollar, a dollar that is sound, not a dollar that continues to depreciate, and not a system where we perpetually just resort to inflation and deficit financing to bail out everybody. This is what we have been doing. It hasn't been just with this crisis, but an ongoing crisis. We have been able to pull ourselves out of these nosedives quite frequently. One of the worst with the dollar was in 1979. We patched it together. I think the handwriting on the wall is there is a limit to how many times we can bail the dollar out, because conditions are so much worse today than they have ever been. We talk a lot about predatory lending, but I see the predatory lending coming from the Federal Reserve. Interest at 1 percent, overnight rates, loaning to banks, encouraging the banks and investors to do the wrong things causes all the malinvestment. These conditions were predictable. They were predicted by the Austrian free market economists. It should surprise nobody, yet nobody resorts to looking to those individuals who are absolutely right about what was coming and what we should have done. Even as early as 7 years ago, I introduced legislation that would have removed the line of credit to the Treasury, which was encouraging the moral hazard and the malinvestment. Here, it looks like now we are going to need $300 billion of new appropriations. So we need to look at the monetary system and its basic fundamental flaws that exist there, and then we might get to the bottom of these problems we are facing today. " CHRG-110hhrg38392--187 Mr. Bernanke," The best guess is that food and energy prices, or at least energy prices, will stay high. The question, though, is whether they will keep rising at the pace that they have been rising. As best we can tell, as best as futures markets suggest, while they may remain high, they will not continue to rise at the same pace. Now, that is a very uncertain judgment. I discussed in my testimony that this is one of the risks that we are examining. One of the things that could happen to make inflation more of a problem would be if energy prices in fact did continue to rise at the pace they have in recent years. Mr. Miller of North Carolina. I have more questions, but I want to move on to subprime lending. Many people have asked about subprime lending. When I have asked in the past about subprime lending, it has been a pretty lonely effort. The concerns about subprime lending are not new for many of us. I introduced a predatory mortgage lending bill 4 years ago, 4\1/2\ years ago, when I first came to Congress, and I dearly wish that Congress had enacted that legislation because we would not have seen the spike, the disastrous spike in foreclosure rates and the default rates that we have. There has been more discussion in the press about the spike in foreclosures in the subprime market has affected the stability, what it has done to hedge funds that hold portfolios than there has to how it affects the families who have lost their homes. You have talked some about the importance of homeownership, equity in homes, to the wealth of no class families. The information I have: there were about 900,000 residential foreclosures in 2005; 1.2 million foreclosures last year; and there will be 1.5 million foreclosures this year. As you have said, based upon the change in underwriting last year, it is going to explode the year after that and the year after that. What is that doing to the wealth, to the life savings of families who are now facing foreclosure? " FinancialCrisisInquiry--691 ROSEN: Right. And that came through what I would say this—and it was unregulated. Almost every one of the institutions that made these loans, aggressive loans, have now been put out of business, bankrupt. I hope a number of people are going to go where they should, to jail that did the predatory lending. They’re mostly gone. But that came from that source. It wasn’t Fannie and Freddie who did it, primarily. It wasn’t the tax system being changed. I think it was these—I won’t say deceptive, but loans that looked too good to be true, and they were. Underwriting standards were—just disappeared. Low down payment loans became such a high portion of the market, low down payment meaning 100 percent, you know, loan, and so you’re asking for trouble when you do that. HOLTZ-EAKIN: Right. But—but my point is, is simply that, for years, our policymakers have been trying to get the homeownership rate to move. Suddenly it moves exactly the way they want. It’s hard to imagine them being upset with what they saw on the surface. fcic_final_report_full--93 This guidance applied only to regulated banks and thrifts, and even for them it would not be binding but merely laid out the criteria underlying regulators’ bank examina- tions. It explained that “recent turmoil in the equity and asset-backed securities mar- ket has caused some non-bank subprime specialists to exit the market, thus creating increased opportunities for financial institutions to enter, or expand their participa- tion in, the subprime lending business.”  The agencies then identified key features of subprime lending programs and the need for increased capital, risk management, and board and senior management oversight. They further noted concerns about various accounting issues, notably the valuation of any residual tranches held by the securitizing firm. The guidance went on to warn, “Institutions that originate or purchase subprime loans must take special care to avoid violating fair lending and consumer protection laws and regulations. Higher fees and interest rates combined with compensation incentives can foster predatory pricing. . . . An adequate compliance management program must identify, monitor and control the consumer protection hazards associated with subprime lending.”  In spring , in response to growing complaints about lending practices, and at the urging of members of Congress, HUD Secretary Andrew Cuomo and Treasury Secretary Lawrence Summers convened the joint National Predatory Lending Task Force. It included members of consumer advocacy groups; industry trade associa- tions representing mortgage lenders, brokers, and appraisers; local and state officials; and academics. As the Fed had done three years earlier, this new entity took to the field, conducting hearings in Atlanta, Los Angeles, New York, Baltimore, and Chicago. The task force found “patterns” of abusive practices, reporting “substantial evidence of too-frequent abuses in the subprime lending market.” Questionable prac- tices included loan flipping (repeated refinancing of borrowers’ loans in a short time), high fees and prepayment penalties that resulted in borrowers’ losing the eq- uity in their homes, and outright fraud and abuse involving deceptive or high-pres- sure sales tactics. The report cited testimony regarding incidents of forged signatures, falsification of incomes and appraisals, illegitimate fees, and bait-and-switch tactics. The investigation confirmed that subprime lenders often preyed on the elderly, mi- norities, and borrowers with lower incomes and less education, frequently targeting individuals who had “limited access to the mainstream financial sector”—meaning the banks, thrifts, and credit unions, which it viewed as subject to more extensive government oversight.  Consumer protection groups took the same message to public officials. In inter- views with and testimony to the FCIC, representatives of the National Consumer Law Center (NCLC), Nevada Fair Housing Center, Inc., and California Reinvestment Coalition each said they had contacted Congress and the four bank regulatory agen- cies multiple times about their concerns over unfair and deceptive lending prac- tices.  “It was apparent on the ground as early as ’ or ’ . . . that the market for low-income consumers was being flooded with inappropriate products,” Diane Thompson of the NCLC told the Commission.  The HUD-Treasury task force recommended a set of reforms aimed at protecting borrowers from the most egregious practices in the mortgage market, including bet- ter disclosure, improved financial literacy, strengthened enforcement, and new leg- islative protections. However, the report also recognized the downside of restricting the lending practices that offered many borrowers with less-than-prime credit a chance at homeownership. It was a dilemma. Gary Gensler, who worked on the re- port as a senior Treasury official and is currently the chairman of the Commodity Fu- tures Trading Commission, told the FCIC that the report’s recommendations “lasted on Capitol Hill a very short time. . . . There wasn’t much appetite or mood to take these recommendations.”  CHRG-111shrg51290--54 Chairman Dodd," Let me just--one point I wanted to make before the conclusion, we are allowing the words ``subprime'' and ``predatory lending'' to become interchangeable and that is dangerous, in my view. If you have good underwriting standards, subprime lending can work, provided you don't have a lot of bells and whistles on it. This has been one of the great wealth creators for people who are moving up economically to be able to acquire a home and to watch equity build up. It becomes a great stabilizer, not to mention it does a lot for families and neighborhoods. Equity interest in homes is, I think, one of the great benefits. I think we are one of the few countries in the world that ever had a 30-year fixed-rate mortgage for people. Now, that is not always the best vehicle, I understand that, as well. But I wonder if you would agree with me or disagree with me. I just worry about this idea that we are going to exclude the possibility of poorer people becoming home owners. They have to meet standards, obviously. I think you pointed out where Community Investment Act requirements are in place, I think only 6 percent of those institutions ended up in some kind of problems. There has been an assumption that the Community Reinvestment Act gave mortgages to a lot of poor people who couldn't afford them. But, in fact, the evidence I have seen is quite the contrary. Where institutions followed CRA guidelines here and insisted upon those underwriting standards, there were very few problems, in fact. I wonder if you might comment on those two points. Ms. McCoy. If I may, Senator Dodd, the performance of CRA loans has, in fact, been much better. That turned out to be a viable model for doing subprime lending, and there are two other viable models. One are FHA guaranteed loans. That works pretty well. And then the activities, the lending activities of CDFIs such as ShoreBank are an excellent model to look at, as well. Ms. Seidman. Let me just add, first of all, you are certainly right that subprime used to mean a borrower with less than stellar credit. " fcic_final_report_full--572 Economics 64 (2008): 223. 31. Michael Calhoun and Julia Gordon, interview by FCIC, September 16, 2010. 32. Annamaria Lusardi, “Americans’ Financial Capability,” report prepared for the FCIC, February 26, 2010, p. 3. 33. FCIC staff estimates based on analysis of Blackbox, S&P, and IP Recovery, provided by Antje Berndt, Burton Hollifield, and Patrik Sandas, in their paper, “The Role of Mortgage Brokers in the Sub- prime Crisis,” April 2010. 34. William C. Apgar and Allen J. Fishbein, “The Changing Industrial Organization of Housing Fi- nance and the Changing Role of Community-Based Organizations,” working paper (Joint Center for Housing Studies, Harvard University, May 2004), p. 9. 35. Herb Sandler, interview by FCIC, September 22, 2010. 36. Wholesale Access, “Mortgage Brokers 2006” (August 2007), pp. 35, 37. 37. Jamie Dimon, testimony before the FCIC, First Public Hearing of the FCIC, panel 1: Financial In- stitution Representatives, January 13, 2010, transcript, p. 13. 38. October Research Corporation, executive summary of the 2007 National Appraisal Survey, p. 4. 39. Dennis J. Black, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Miami, session 2: Uncovering Mortgage Fraud in Miami, September 21, 2010, p. 8. 40. Karen J. Mann, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Sacramento, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, September 23, 2010, p. 2. 41. Gary Crabtree, testimony before the FCIC, Hearing on the Impact of the Financial Crisis— Greater Bakersfield, session 4: Local Housing Market, September 7, 2010, transcript, p. 172. 42. Complaint, People of the State of New York v. First American Corporation and First American eAppraiseIT (N.Y. Sup. Ct. November 1, 2007), pp. 3, 7, 8. 43. Martin Eakes, quoted in Richard A. Oppel Jr. and Patrick McGeehan, “Along with a Lender, Is Citigroup Buying Trouble?” New York Times , October 22, 2000. 44. Pam Flaherty, quoted in Erick Bergquist, “Judging Citi, a Year Later: Subprime Reform ‘on Track’; Critics Unsatisfied ,” American Banker, September 10, 2001. 45. “Citigroup Settles FTC Charges against the Associates Record-Setting $215 Million for Subprime Lending Victims,” Federal Trade Commission press release, September 19, 2002. 46. Mark Olson, interview by FCIC, October 4, 2010. 47. Timothy O’Brien, “Fed Assess Citigroup Unit $70 Million in Loan Abuse,” The New York Times , May 28, 2004. 48. Federal Reserve Board internal staff document, “The Problem of Predatory Lending,” December 5, 2000, pp. 10–13. 49. Federal Reserve Board, Morning Session of Public Hearing on Home Equity Lending, July 27, 2000, opening remarks by Governor Gramlich, p. 9. 50. Scott Alvarez, interview by FCIC, March 23, 2010. 51. Alan Greenspan, written testimony for the FCIC, Hearing on Subprime Lending and Securitiza- tion and Government-Sponsored Enterprises (GSEs), day one, session 1: The Federal Reserve, April 7, 2010, p. 13. 52. Alan Greenspan, quoted in David Faber, And Then the Roof Caved In: How Wall Street’s Greed and Stupidity Brought Capitalism to Its Knees (Hoboken, N.J.: Wiley, 2009), pp. 53–54. 53. “Truth in Lending,” Federal Register 66, no. 245 (December 20, 2001): 65612 (quotation), 65608. 569 54. Robert B. Avery, Glenn B. Canner, and Robert E. Cook, “New Information Reported under HMDA and Its Application in Fair Lending Enforcement,” Federal Reserve Bulletin 91 (Summer 2005): 372. 55. Alan Greenspan, interview by FCIC, March 31, 2010 56. Sheila Bair, testimony before the FCIC, Hearing on Too Big to Fail: Expectations and Impact of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis, day 2, ses- sion 2: Federal Deposit Insurance Corporation, September 2, 2010, transcript, p. 191. 57. Dolores Smith and Glenn Loney, memorandum to Governor Edward Gramlich, “Compliance In- spections of Nonbank Subsidiaries of Bank Holding Companies,” August 31, 2000. 58. GAO, “Consumer Protection: Federal and State Agencies Face Challenges in Combating Preda- tory Lending,” GAO 04–280 (Report to the Chairman and Ranking Minority Member, Special Commit- tee on Aging, U.S. Senate), January 2004, pp. 52–53. 59. Sandra Braunstein, interview by FCIC, April 1, 2010. Transcript pp. 32–33. 60. Greenspan, interview. 61. Ibid. 62. Edward M. Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” Federal Reserve Bank of Kansas City Economic Review (2007): 109. 63. Edward Gramlich, quoted in Greg Ip, “Did Greenspan Add to Subprime Woes? Gramlich Says Ex- Colleague Blocked Crackdown On Predatory Lenders Despite Growing Concerns,” Wall Street Journal, June 9, 2007. See also Edmund L. Andrews, “Fed Shrugged as Subprime Crisis Spread,” New York Times, December 18, 2007. 64. Patricia McCoy and Margot Saunders, quoted in Binyamin Appelbaum, “Fed Held Back as Evi- dence Mounted on Subprime Loan Abuses,” Washington Post, September 27, 2009. 65. GAO, “Large Bank Mergers: Fair Lending Review Could be Enhanced with Better Coordination,” GAO/GDD-00-16 (Report to the Honorable Maxine Waters and Honorable  Bernard Sanders, House of Representatives), November 1999; GAO, “Consumer Protection:  Federal and State Agencies Face Chal- lenges in Combating Predatory Lending.” 66. “Federal and State Agencies Announce Pilot Project to Improve Supervision of Subprime Mort- gage Lenders,” Joint press release (Fed Reserve Board, OTC, FTC, Conference of State Bank Supervisors, American Association of Residential Mortgage Regulators), July 17, 2007. 67. “Truth in Lending,” pp. 44522–23. “Higher-priced mortgage loans” are defined in the 2008 regula- tions to include mortgage loans whose annual percentage rate exceeds the “average prime offer rates for a comparable transaction” (as published by the Fed) by at least 1.5% for first-lien loans or 3.5% for subordi- nate-lien loans. 68. Alvarez, interview. 69. Raphael W. Bostic, Kathleen C. Engel, Patricia A. McCoy, Anthony Pennington-Cross, and Susan M. Wachter, “State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mecha- nisms,” Journal of Economics and Business 60 (2008): 47–66. 70. “Lending and Investment,” Federal Register 61, no. 190 (September 30, 1996): 50965. 71. Joseph A. Smith, “Mortgage Market Turmoil: Causes and Consequences,” testimony before the Senate Committee on Banking, Housing, and Urban Affairs, 110th Cong., 1st sess., March 22, 2007, p. 33 (Exhibit B), using data from the Mortgage Asset Research Institute. 72. Lisa Madigan, written testimony for the FCIC, First Public Hearing of the FCIC, day 2, panel 2: Current Investigations into the Financial Crisis—State and Local Officials, January 14, 2010, p.12. 73. Commitments compiled at National Community Reinvestment Coalition, “CRA Commitments” (2007). 74. Josh Silver, NCRC, interview by FCIC, June 16, 2010. 75. Data references based on Reginald Brown, counsel for Bank of America, letter to FCIC, June 16, 2010, p. 2; Jessica Carey, counsel for JPMorgan Chase, letter to FCIC, December 16, 2010; Brad Karp, counsel for Citigroup, letter to FCIC, March 18, 2010, in response to FCIC request; Wells Fargo public commitments 1990–2010, data provided by Wells Fargo to the FCIC. 76. Karp, letter to FCIC, March 18, 2010, in response to FCIC request. 77. Carey, letter to FCIC, December 16, 2010, p. 9; Brad Karp, counsel for JP Morgan, letter to FCIC, fcic_final_report_full--559 Report on Recommendations to Curb Predatory Home Mortgage Lending” (June 1, 2000). 40. Federal Reserve Board press release, December 12, 2001. 41. Sheila C. Bair, written testimony for the FCIF, First Public Hearing of the FCIC, day 2, panel 1: Current Investigations into the Financial Crisis—Federal Officials, January 14, 2010, p. 11. 42. Fed Governor Edward M. Gramlich, “Predatory Lending,” remarks at the Housing Bureau for Seniors Conference, , January 18, 2002. 43. Sheila C. Bair, testimony before the FCIC, First Public Hearing of the FCIC, day 2, panel 1: Cur- rent Investigations into the Financial Crisis—Federal Officials, January 14, 2010, transcript, p. 97. 44. Sheila C. Bair, interview by FCIC, March 29, 2010. 45. 2009 Mortgage Market Statistical Annual, 1:220, “Top B&C Lenders in 2000”; 1.223, “Top B&C Lenders in 2003.” 46. Ibid., 1:237, “Subprime Origination by State in 2001”; and 1:235, “Subprime Originations by State in 2003.” 47. Stein, testimony before the FCIC, September 23, 2010, transcript, p. 72. 48. Gail Burks, interview by FCIC, August 30, 2010. 49. Lisa Madigan, written testimony for the FCIC, First Public Hearing of the FCIC, day 1, panel 2: Current Investigations into the Financial Crisis—State and Local Officials, January 14, 2010, p. 4–5; “Home Mortgage Lender settled ‘Predatory Lending’ Charges,” Federal Trade Commission press release, March 21, 2002. 50. 2009 Mortgage Market Statistical Annual, 1:220, “Top 25 B&C Lenders in 2003.” 51. Madigan, written testimony for the FCIC, January 14, 2010, pp. 4–5. 52. Ed Parker, interview by FCIC, May 26, 2010. 53. Prentiss Cox, interview by FCIC, October 15, 2010. 54. Ibid. 55. 2009 Mortgage Market Statistical Annual, 1:45, 47, 49, 51. 56. Alphonso Jackson, interview by FCIC, October 6, 2010. 57. Cox, interview; Madigan, written testimony for the FCIC, January 14, 2010, p. 11. 58. Cox, interview. Madigan, testimony before the FCIC, January 14, 2010, transcript, pp. 121–122. 59. John D. Hawke Jr. and John C. Dugan, written statements for the FCIC, Hearing on Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs), day 2, session 2: Office of the Comptroller of the Currency, April 8, 2010, pp. 4–5 and pp. 4–8, respectively. 60. Madigan, written testimony for the FCIC, January 14, 2010, pp. 9, 10. 61. Cox, interview. 62. 2009 Mortgage Market Statistical Annual, 1:4, “Mortgage Originations by Product.” Nonprime = Alt-A and subprime combined. 63. Marc S. Savitt, interview by FCIC, November 17, 2010. 64. Rob Barry, Matthew Haggman, and Jack Dolan, “Ex-convicts active in mortgage fraud,” Miami Herald , January 29, 2009. 65. J. Thomas Cardwell, written testimony for the FCIC, Hearing on the Impact of the Financial Cri- sis—Miami, session 3: The Regulation, Oversight, and Prosecution of Mortgage Fraud in Miami, Sep- tember 21, 2010, p. 8. 66. Savitt, interview. 67. Gary Crabtree, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Greater Bakersfield, session 4: Local Housing Market, September 7, 2010, p. 6. 68. Ibid. 69. Gary Crabtree, interview by FCIC, August 18, 2010. Crabtree, written testimony for the FCIC, fcic_final_report_full--109 In the same FCIC interview, Greenspan recalled that he sat in countless meetings on consumer protection, but that he couldn’t pretend to have the kind of expertise on this subject that the staff had.  Gramlich, who chaired the Fed’s consumer subcommittee, favored tighter super- vision of all subprime lenders—including units of banks, thrifts, bank holding com- panies, and state-chartered mortgage companies. He acknowledged that because such oversight would extend Fed authority to firms (such as independent mortgage companies) whose lending practices were not subject to routine supervision, the change would require congressional legislation “and might antagonize the states.” But without such oversight, the mortgage business was “like a city with a murder law, but no cops on the beat.”  In an interview in , Gramlich told the Wall Street Journal that he privately urged Greenspan to clamp down on predatory lending. Greenspan demurred and, lacking support on the board, Gramlich backed away. Gramlich told the Journal, “He was opposed to it, so I did not really pursue it.”  (Gramlich died in  of leukemia, at age .) The Fed’s failure to stop predatory practices infuriated consumer advocates and some members of Congress. Critics charged that accounts of abuses were brushed off as anecdotal. Patricia McCoy, a law professor at the University of Connecticut who served on the Fed’s Consumer Advisory Council between  and , was famil- iar with the Fed’s reaction to stories of individual consumers. “That is classic Fed mindset,” said McCoy. “If you cannot prove that it is a broad-based problem that threatens systemic consequences, then you will be dismissed.” It frustrated Margot Saunders of the National Consumer Law Center: “I stood up at a Fed meeting in  and said, ‘How many anecdotes makes it real? . . . How many tens [of] thousands of anecdotes will it take to convince you that this is a trend?’”  The Fed’s reluctance to take action trumped the  HUD-Treasury report and reports issued by the General Accounting Office in  and .  The Fed did not begin routinely examining subprime subsidiaries until a pilot program in July , under new chairman Ben Bernanke.  The Fed did not issue new rules under HOEPA until July , a year after the subprime market had shut down. These rules banned deceptive practices in a much broader category of “higher-priced mortgage loans”; moreover, they prohibited making those loans without regard to the borrower’s ability to pay, and required companies to verify income and assets.  The rules would not take effect until October , , which was too little, too late. FinancialCrisisInquiry--245 And, Congressman Baker, if you remember, used to love to hold hearings on Fannie and Freddie. That was—he did a lot of that. And he talked about systemic risk. And—and the groups on the panel that day, in the—it was a large consumer group in the audience, complaining about Citigroup merging with another finance company, and that—their predatory lending practices they had. And, of course, you know, Congress said we’re going to get the Fed to look into it. Well, it never really came that way. It ended up being that the attorney general of New York, filed charges against them for their practices of credit life insurance, which they finally pled nolo contendere to and just moved on. So, you know, you’re absolutely right. There’s been a very lackadaisical treatment of that situation that continues to go on. As I said, a very interesting question for this commission. With all the problems you’ve heard about the large banks -- ask how many MOUs or cease-and-desists they’re under. I think the answer will be not many. CHAIRMAN ANGELIDES: Would you like some more time, Ms. Born? BORN: No, that’s fine. CHAIRMAN ANGELIDES: Because we’ve got two, three minutes on the clock. BORN: I am—I’m done. CHAIRMAN ANGELIDES: You’re sated? All right. FinancialCrisisInquiry--841 CLOUTIER: And I would—I would add, I’ve testified many times—I think, most probably, 13 times, here— but I remember one that sticks in my mind. Congressman Richard Baker was having a hearing. This was about 2001. January 13, 2010 And, Congressman Baker, if you remember, used to love to hold hearings on Fannie and Freddie. That was—he did a lot of that. And he talked about systemic risk. And—and the groups on the panel that day, in the—it was a large consumer group in the audience, complaining about Citigroup merging with another finance company, and that—their predatory lending practices they had. And, of course, you know, Congress said we’re going to get the Fed to look into it. Well, it never really came that way. It ended up being that the attorney general of New York, filed charges against them for their practices of credit life insurance, which they finally pled nolo contendere to and just moved on. So, you know, you’re absolutely right. There’s been a very lackadaisical treatment of that situation that continues to go on. As I said, a very interesting question for this commission. With all the problems you’ve heard about the large banks -- ask how many MOUs or cease-and-desists they’re under. I think the answer will be not many. CHRG-111hhrg72887--116 Mr. Rush," The Chair now recognizes the gentlelady from California, the wonderful coast of California, Ms. Matsui for 5 minutes. Ms. Matsui. Thank you, Mr. Chairman. As you know, a government effort has been initiated by the Treasury Department, HUD, Justice Department, and the FTC to combat mortgage foreclosure rescue scams and loan modification fraud. As I mentioned in my opening statement, during debate on mortgage reform on the Anti-Predatory Lending Act, I offered an amendment that was included in the final bill to direct the GAO to evaluate ongoing government actions to combat foreclosure rescue fraud and to educate consumers about the risk of these scams. In addition, I want to thank Chairman Rush for joining me in sending a letter today to the GAO Comptroller General to urge him to begin reviewing the administration's efforts to combat foreclosure rescue scams. Mr. Chairman, I ask unanimous consent to enter this letter into the record. " CHRG-111hhrg52406--218 Mr. Manzullo," Thank you. I do not believe we should start a whole new consumer agency to protect the consumer on financial products. However, the analysis done by Mr. Plunkett and Ed, I would commend that everybody on the panel read the reasons why they want to set up a new organization because of the complete failure of the existing organizations to stop the subprime massacre that took place in the country. So I can understand where they are coming from, but it is irrelevant to you guys on the insurance side. I would like to ask this question of Mr. Plunkett. On page 3, the last paragraph, you state that the failure of Federal banking agencies to stem subprime mortgage lending abuses is fairly well-known. They did not use a regulatory authority granted to them to stop unfair and deceptive lending practices until it was too late. You are advocating the setting up of another agency. I can understand the reason for that because what is there did not step into the breach. I mean the Fed had the authority, and Mr. Greenspan could have stopped it. Most of this occurred before Mr. Bernanke came on board, because there were no rules that said that you had to have proof of payment or proof of your income before you could buy a house or could do away with these predatory practices of 3/27 and 2/28 mortgages. My concern is, even though the appointees to this new body would be ``consumer-oriented,'' I would think that, ultimately, the bottom line is everything should be consumer-oriented because it is the consumer who has the greatest stake in the banks and in the other financial institutions being sound and safe. It protects them. So there is actually an identity of interest that is involved. Mr. Plunkett, what would make this new agency political proof or able to do the job or to recognize what the other agencies did not? " CHRG-111hhrg54867--262 Mr. Hinojosa," Absolutely. And we will be glad to work with you to make sure that it is in a way that is going to help our consumers. Because I represent an area in deep south Texas that, had they had that financial literacy education, I think they would have refrained from signing so many predatory contracts and loans. " CHRG-109hhrg23738--90 Mr. Greenspan," Thank you very much. Ms. Carson. Grants for downpayments, where we give money to people to buy homes, I noticed in your statement, on Page 10, you talk about the increase in the prevalence of interest-only loans and the introduction of more exotic forms of adjustable-rate mortgages. Would you consider the giving of a grant for a downpayment for a low-income family to be an exotic form of support? And then also I am concerned about the housing market, because I am the queen of predatory lending. And also I think Indiana still ranks highest among foreclosures. So that sort of relates to the question that I asked. But, anyway, I know you have taken steps to control inflation, but there is still a dearth of housing available to people with modest incomes, but I am afraid that the availability is pricing the moderate-income people out of the housing market. Thirdly, if you have time, can you comment on whether or not the oil prices that our consumers face are related to a war. It is not a political question. It is whether or not you believe that the fires in the oil fields and the drawing up of the oils has in fact got a direct correlation to the insurmountable inflation prices of oil. Thank you very much, Mr. Chairman. " CHRG-111hhrg54872--251 Mr. Himpler," I just thought it was a really interesting coincidence. Ms. Waters. No. Please--that is a mistake. But that is not the point. The point is, this is a predatory loan that I am confronted with time and time again, and you come here to tell us about why a consumer protection finance agency is not wise thinking. What should we do? " CHRG-111hhrg48867--242 Mr. Ellison," Well, let me ask you this question then. Mortgage originators, who were largely unregulated--as you know, most of the mortgages, the what we call subprime, predatory mortgages were not originated by banks but by unregulated mortgage originators. Do you agree that they contributed significantly to the problem and were unregulated? Do you agree with that? " CHRG-110hhrg41184--110 Mr. Watt," Thank you, Mr. Chairman. Welcome, Chairman Bernanke. In the 108th Congress, Congressman Brad Miller and I introduced the first predatory lending bill as H.R. 3974. In the 109th Congress, we introduced it in 2005 as H.R. 1182. The regulators weren't paying much attention to this, say minimizing the significance of it, and it took a crisis to finally get a bill passed. My concern is that looking finally at the last page of your testimony, you finally reached the credit card part of the equation, one paragraph, and my concern is that a lot of people who are seeing their credit dry up on the mortgage side are getting more and more credit on the credit card side, and that could portend potentially a similar kind of effect in the credit card market as we have seen in the mortgage market. Now I have not yet signed on to Ms. Maloney's bill, because we are still looking at it, but I have been meeting with industry participants, and one of the things that they have said is that we should give them more time for the regulator to do more. That is the same argument that we were hearing back in 2004 and 2005 and 2006: Give the regulators more time. And I asked them, does the regulator have enough authority to really do anything if they were inclined to do something? And it appears to me from page 9 of your testimony, the one paragraph we have, the only authority you appear to have is the Federal Trade Commission Act, or the Truth in Lending Act, which is a disclosure act. Actually the Truth in Lending Act is the one that is under your authority, which is a disclosure statute. I'm not even going to get into the issue that Ms. Maloney raised, do you think we need to do something, but tell me what authority the regulators would need, what authority would you need to be more aggressive in this area, as we were trying to get the Fed to be in 2004 and 2005 in the mortgage area? Even if you were inclined to be more aggressive, if you didn't have the authority, you really couldn't do it, and one of the concerns I'm seeing is that disclosure won't do everything. Unfair and Deceptive Trade Practices won't do anything if both of those things are required. Some things are unfair that are not necessarily deceptive. What kind of additional authority should we be considering giving to the Fed or to somebody, some regulator if it's not the Fed, and to whom in this area? " CHRG-111hhrg52261--33 Mr. Hirschmann," We have not yet seen the details, but we do think that consumer protection should be an important part of the overall regulatory reform; and so we welcome alternatives, particularly alternatives that build on the current structure that requires better coordination among existing regulators, that provide for better disclosure to consumers and tougher enforcement against predatory practices. " FinancialCrisisInquiry--215 HOLTZ-EAKIN: But—but in the recent years, we haven’t seen dramatic changes in that aspect of policy, but we did see a big jump in the homeownership rate. ROSEN: Right. HOLTZ-EAKIN: I mean, those facts are right? ROSEN: Right. And that came through what I would say this—and it was unregulated. Almost every one of the institutions that made these loans, aggressive loans, have now been put out of business, bankrupt. I hope a number of people are going to go where they should, to jail that did the predatory lending. They’re mostly gone. But that came from that source. It wasn’t Fannie and Freddie who did it, primarily. It wasn’t the tax system being changed. I think it was these—I won’t say deceptive, but loans that looked too good to be true, and they were. Underwriting standards were—just disappeared. Low down payment loans became such a high portion of the market, low down payment meaning 100 percent, you know, loan, and so you’re asking for trouble when you do that. HOLTZ-EAKIN: Right. But—but my point is, is simply that, for years, our policymakers have been trying to get the homeownership rate to move. Suddenly it moves exactly the way they want. It’s hard to imagine them being upset with what they saw on the surface. ROSEN: CHRG-111hhrg52406--125 Mr. Gutierrez," Sure. Mr. Miller of California. I want to make myself clear so you don't misunderstand me. I think that the problem we faced in recent years was we failed to define predatory versus subprime. And lenders went out and acted, and some individuals acted as if there were no underwriting standards necessary that should apply to a loan. " fcic_final_report_full--111 COMMUNITYLENDING PLEDGES: “WHAT WE DO IS REAFFIRM OUR INTENTION ” While consumer groups unsuccessfully lobbied the Fed for more protection against predatory lenders, they also lobbied the banks to invest in and loan to low- and mod- erate-income communities. The resulting promises were sometimes called “CRA commitments” or “community development” commitments. These pledges were not required under law, including the Community Reinvestment Act of ; in fact, they were often outside the scope of the CRA. For example, they frequently involved lending to individuals whose incomes exceeded those covered by the CRA, lending in geographic areas not covered by the CRA, or lending to minorities, on which the CRA is silent. The banks would either sign agreements with community groups or else unilaterally pledge to lend to and invest in specific communities or populations. Banks often made these commitments when courting public opinion during the merger mania at the turn of the st century. One of the most notable promises was made by Citigroup soon after its merger with Travelers in : a  billion lending and investment commitment, some of which would include mortgages. Later, Citi- group made a  billion commitment when it acquired California Federal Bank in . When merging with FleetBoston Financial Corporation in , Bank of Amer- ica announced its largest commitment to date:  billion over  years. Chase an- nounced commitments of . billion and  billion, respectively, in its mergers with Chemical Bank and Bank One. The National Community Reinvestment Coali- tion, an advocacy group, eventually tallied more than . trillion in commitments from  to ; mortgage lending made up a significant portion of them.  Although banks touted these commitments in press releases, the NCRC says it and other community groups could not verify this lending happened.  The FCIC sent a series of requests to Bank of America, JP Morgan, Citigroup, and Wells Fargo, the nation’s four largest banks, regarding their “CRA and community lending com- mitments.” In response, the banks indicated they had fulfilled most promises. Ac- cording to the documents provided, the value of commitments to community groups was much smaller than the larger unilateral pledges by the banks. Further, the pledges generally covered broader categories than did the CRA, including mortgages to minority borrowers and to borrowers with up-to-median income. For example, only  of the mortgages made under JP Morgan’s  billion “community devel- opment initiative” would have fallen under the CRA.  Bank of America, which would count all low- and moderate-income and minority lending as satisfying its pledges, stated that just over half were likely to meet CRA requirements. Many of these loans were not very risky. This is not surprising, because such broad definitions necessarily included loans to borrowers with strong credit histories—low income and weak or subprime credit are not the same. In fact, Citigroup’s  pledge of  billion in mortgage lending “consisted of entirely prime loans” to low- and moderate-income households, low- and moderate-income neighborhoods, and mi- nority borrowers. These loans performed well.  JP Morgan’s largest commitment to a community group was to the Chicago CRA Coalition:  billion in loans over  years. Of loans issued between  and , fewer than  have been -or-more- days delinquent, even as of late .  Wachovia made  billion in mortgage loans between  and  under its  billion in unilateral pledges: only about . were ever more than  days delinquent over the life of the loan, compared with an estimated national average of .  The better performance was partly the result of Wachovia’s lending concentration in the relatively stable Southeast, and partly a re- flection of the credit profile of many of these borrowers. CHRG-111hhrg67816--35 CONGRESS FROM THE STATE OF OHIO Ms. Sutton. Thank you so much, Mr. Chairman. Thank you for holding this hearing. It is extremely important to the people that I represent in Ohio. You know, time and time again we have learned that sometimes the people who are hurt the most by what is going on out there are the ones who need our help the most. Today there are a wide range of financial products advertised to assist consumers in paying off debt and emerging from debt from pay-day lending to car title loans, short-term loans with incredibly high interest rates all but ensure that individuals remain in debt, and these individuals, many of them, are my constituents. The American people expect their government to rein in unscrupulous and unfair lending. Last November, voters in Ohio overwhelmingly improved a referendum on pay-day lenders to end predatory loans. Our referendum capped interest rates provided borrowers with more time to pay back loans and prohibited new loans to pay off old ones which will help to break that cycle of debt. However, we are now learning that these lenders are exploring new loopholes and operating under different licenses and adding new fees such as inflated check cashing fees for checks they have just printed and even as our Attorney General, Richard Cordray, and our state legislature and our governor are working to address this situation, the Federal Trade Commission must aggressively act as the American people expect. While I used Ohio as an example, this is a problem that severely impacts people in need throughout our country and if the Federal Trade Commission does not have the tools or the authority to aggressively protect Americans, then it is our responsibility to strengthen the Commission and restore Americans' confidence, and I look forward to being a part of making that happen. " CHRG-111shrg56376--225 Mr. Carnell," Actually, I would like to say, if I could, some words in favor of a consumer financial protection agency. I support creating a new independent agency. As I would propose, it would have full responsibility for writing rules implementing consumer protection legislation, financial consumer legislation. And I would also agree with the Administration that it should have primary enforcement authority over nonbank lenders. Now, I differ with the Administration on a couple of points. I think it should have only back-up enforcement authority over FDIC-insured banks and their affiliates. I think that is enough. I think that will do the job. And I also do not support slashing the preemptive effect of the National Bank Act. The State regulators had primary responsibility for dealing with nonbank lenders that were the epicenter of predatory lending. They did a poor job, and yet what they talk about is national bank preemption, which was not the practical problem there. On top of that, I point out that the Supreme Court issued a major decision earlier this year, Cuomo v. Clearing House, that cut back on some of the preemptive claims made for the National Bank Act. So I do not think there is a need for action in the preemption area, certainly not what the Administration has proposed. But the agency is a good idea. Senator Reed. Thank you, gentlemen, very much for this excellent testimony, and thank you very much. " CHRG-111hhrg54867--7 Mr. Gutierrez," Mr. Secretary, first of all, thank you for appearing. Exactly 1 year ago, we experienced the most agonizing week of the current financial crisis. And this committee began to address the root causes of the social and economic trauma that crippled our economy and caused millions of Americans--and we should remember this--to lose trillions of dollars of their hard-earned wealth. Let me repeat that: Trillions of dollars of hard-earned wealth were lost by the American people. Not so much the guys on Wall Street, they lost, but the people on Main Street lost. Predatory mortgage lending, combined with risky investment practices and poor underwriting standards, financed by some of the largest financial institutions in this country, created the financial and economic debacle that we must now address. Over a decade ago, the Federal Reserve was given the power by this committee--I was here; I got elected in 1993--to stop predatory mortgage practices through the Homeowners' Equity Protection Act. It took the Federal Reserve 12 years to implement the rules and regulations that could have prevented many, if not all, of the worst abuses by predatory lenders and originators, abuses that were a direct and immediate cause of our current crisis. Why did it take so long? While there were many theories to explain this, I believe it took the Fed this ridiculously long time, including the FDIC, which did absolutely nothing either, because it was distracted by their other regulatory obligations and by a sense in Washington, D.C., of do less, do nothing, leave it alone, it is okay. The default of these toxic mortgages and the securitized products based on them caused trillions of dollars in losses and caused the 2008 freeze in credit markets, which nearly destroyed not only our financial system but the entire international financial system. The message to those of us who want to restore the stability to the financial system could be no clearer or louder. If we do not include a strong, effective Consumer Financial Protection Agency within our regulatory reform legislation, Congress will have failed to address the current and any future economic challenges facing our country. We must also address the economic threat inherent in institutions known as ``too-big-to-fail.'' I believe we must work to a comprehensive, risk-based pricing regime which eliminates the incentives for these financial firms to grow to the point of becoming ``too-big-to-fail.'' One of the ways we can prevent an institution from becoming ``too-big-to-fail'' is through a pricing regime which discourages banks from growing so large and interconnected. We must not only increase capital requirements, but we should also require decreased leverage ratios and increased contributions to the Deposit Insurance Fund. Let me ask that this be submitted for the record, my complete statement, because it is clear to me, Mr. Chairman, we are going to have, you know, our classical debate. Our colleagues on the other side have already thrown health care into this, big government. I hear ``socialism'' coming any second. They are going to say, ``No, no, no. Global warming doesn't exist, no. We don't need to do anything about global warming. We really don't need to do anything about this.'' We do need to do something, and Mr. Geithner knows it probably better than anybody else. We can never allow a Lehman Brothers again to have a 30:1 ratio. We can't allow that kind of leverage. And government is the only one that is going to stop it from happening again. Thank you very much, Mr. Chairman. " CHRG-111hhrg55811--284 Mr. Stulz," My expectation is that with proper regulation of the clearinghouses, they should be able to handle the capacity. The worry is that it will be an operational challenge for them, and that the regulatory authorities will have to be monitoring their ability to do so very carefully. I am not sure that the current draft gives them enough power to do so, and I think it will be helpful for them to have those powers. Ms. Bean. Thank you. I also have a question for Mr. Kaswell. A company stock price can be responsive to changes in CDS spreads for their company. There have been allegations that some market participants bought CDS credit protection, and at the same time took large short positions of the same referenced company stock with the intent of increasing the cost of credit to and credit risk of the company, ultimately causing the stock to fall significantly. Congress is exploring how to root out that type of manipulative and predatory behavior. Is it workable to ban short sales of a company stock when one is simultaneously purchasing CDS on the same referenced entity, or do you have some better ideas about deterring predatory or manipulative practices? " CHRG-111hhrg52406--187 FOR RESPONSIBLE LENDING Ms. Keest. Thank you to the chairman and to Ranking Member Bachus, although, I guess he is not here anymore. Thank you very much for inviting us to testify. The Center for Responsible Lending brings a unique perspective to the question of how to structure a regulatory system that best serves the public, the institutions, and the financial needs of American households. Ours is a research-based policy organization, but it is affiliated with a financial institution that is directly affected by regulations and the regulatory system. I, myself, am a former credit code administrator and assistant attorney general in Iowa, so we bring three perspectives to this proposal. From all of these perspectives, we wholeheartedly welcome the proposal of a separate, independent regulator that is focused on the bottom lines of both the providers and of the households who are their customers. Today's crisis has many origins, but a big one is a fatally flawed regulatory system that has led to where we are today. There were flawed regulators in not seeing what they were doing, but the structure, itself, has made it unlikely that any of the current lessons that today's regulators may have learned will have any staying power. The OTS is a good example of that. They were created after the savings and loan industry self-destructed 20 years ago. Yet, today, when OTS' full-time, on-site safety and soundness examiners were at WaMu, they failed to notice that half of the real estate loans that WaMu was making from 2004 to 2006 were inherently risky, badly underwritten loans. It is a little bit difficult to understand why we are talking about vesting these agencies with the consumer protection fair lending compliance, calling them ``prudential regulators'' when they have been no more prudent than the customers of those agencies, which is what they call their supervised institutions. Financial autopsies by inspectors general have pointed to regulatory failures in both the OCC and the OTS for not doing their jobs, and the attitude of those regulators who consider their supervisees their customers is at the heart of the problem. For the market to work as intended, we need to have a level playing field. We need rules of the game and we need referees. We need referees, not cheerleaders, but the charter competition and the legal systems for sales structure that we have now inevitably led to the so-called ``prudential regulators'' being cheerleaders. That is why we believe that this needs to be an independent regulator. That regulator needs to have all three tools that a regulator's toolbox should have. It needs to have the authority to set standards, the ability to monitor them in real-time, and the ability to enforce those standards. As a former regulator, I can tell you that, if you are not able to be onsite and monitoring things in real-time and are left to dealing with them when they become big enough to become a law enforcement problem, then the damage has already been done, and at the velocity that today's market moves, that does not take very long. The second question that I would like to address is that about insurance. One of the things that we think is key is that insurance products that are inextricably linked with the financial products have to be there. We have proposed a ``but for'' test, which is to say, if this insurance product would not exist except for the underlying transaction and if it is intrinsically intertwined with it, then it should be there. We think that it is important to remember that credit insurance was one of the key tools used by predatory mortgage lenders 10, 15 years ago, and it was used to strip billions of dollars of equity out of people's homes when they still had some equity to steal. Fifteen years ago, Congress had a chance to nip it in the bud then by making it a HOEPA trigger fee, but you did not. You did give the Fed the authority to do so later, but it was about 5 years later after billions of dollars of equity had been lost and after State legislatures, law enforcement and the FRB all clamped down on it. So we would simply like to remind you that we think it is important to have learned both from the lessons of the S&L crisis 20 years ago and from the predatory lending problem 15 years ago and to say, let's learn from those mistakes and not do the same thing over again. Thank you for the opportunity to testify, and I will look forward to your questions. [The prepared statement of Ms. Keest can be found on page 94 of the appendix.] " CHRG-110hhrg34673--207 Mr. Ellison," Thank you. I want to ask you a little about loans. What is your best prescription or recommendation to fix what I would generally describe as predatory loans? And I am not only referring to the mortgage market, but what could also--some phenomena in the credit card area? It sounds like what you are saying what we need is more disclosure to the consumer. Did I understand your views accurately on that? " CHRG-111shrg51290--67 The combination of easing credit standards and a growing economy resulted in a sharp increase in homeownership rates through 2004. As the credit quality of loans steadily grew worse over 2005 through 2007,\13\ however, the volume of unsustainable loans grew and homeownership rates dropped.\14\ (See Table 1).--------------------------------------------------------------------------- \13\ Subprime mortgage originated in 2005, 2006 and 2007 had successively worse default experiences than vintages in prior years. See Freddie Mac, Freddie Mac Update 19 (December 2008), available at www.freddiemac.com/investors/pdffiles/investor-presentation.pdf. \14\ See Jesse M. Abraham, Andrey Pavlov & Susan Wachter, Explaining the United States' Uniquely Bad Housing Market, XII Wharton Real Estate Rev. 24 (2008).--------------------------------------------------------------------------- Table 1. U.S. Homeownership Rates, by Year (U.S. Census Bureau) The explosion of nontraditional mortgage lending was timed to maintain securitization deal flows after traditional refinancings weakened in 2003. The major take-off in these products occurred in 2002, which coincided with the winding down of the huge increase in demand for mortgage securities through the refinance process. Coming out of the recession of 2001, interest rates fell and there was a massive securitization boom through refinancing that was fueled by low interest rates. The private-label securitization industry had grown in capacity and profits. But in 2003, rising interest rates ended the potential for refinancing at ever lower interest rates, leading to an increased need for another source of mortgages to maintain and grow the rate of securitization and the fees it generated. The ``solution'' was the expansion of the market through nontraditional mortgages, especially interest-only loans and option payment ARMs offering negative amortization. (See Figure 1 supra). This expansion of credit swept a larger portion of the population into the potential homeowner pool, driving up housing demand and prices, and consumer indebtedness. Indeed, consumer indebtedness grew so rapidly that between 1975 and 2007, total household debt soared from around 43 percent to nearly 100 percent of gross domestic product.\15\--------------------------------------------------------------------------- \15\ U.S. Federal Reserve Board, Bureau of Economic Analysis.--------------------------------------------------------------------------- The growth in nonprime mortgages was accomplished through market expansion of nontraditional mortgages and by qualifying more borrowing through easing of traditional lending terms. For example, while subprime mortgages were initially made as ``hard money'' loans with low loan-to-value ratios, by the height of their growth, combined loan-to-value ratios exceeded that of the far less risky prime market. (See Figure 3 supra). While the demand for riskier mortgages grew fueled by the need for product to securitize, the potential risk due to deteriorating lending standards also grew.B. Consumer Confusion If borrowers had been able to distinguish safe loans from highly risky loans, risky loans would not have crowded out the market. But numerous borrowers were not able to do so, for three distinct reasons. First, hybrid subprime ARMs, interest-only mortgages, and option payment ARMs were baffling in their complexity. Second, it was impossible to obtain binding price quotes early enough to permit meaningful comparison shopping in the nonprime market. Finally, borrowers usually did not know that mortgage brokers got higher compensation for steering them into risky loans. Hidden Risks--The arcane nature of hybrid ARMs, interest-only loans, and option payment ARMs often made informed consumer choice impossible. These products were highly complex instruments that presented an assortment of hidden risks to borrowers. Chief among those risks was payment shock--in other words, the risk that monthly payments would rise dramatically upon rate reset. These products presented greater potential payment shock than conventional ARMs, which had lower reset rates and manageable lifetime caps. Indeed, with these exotic ARMs, the only way interest rates could go was up. Many late vintage subprime hybrid ARMs had initial rate resets of 3 percentage points, resulting in increased monthly payments of 50 percent to 100 percent or more.\16\--------------------------------------------------------------------------- \16\ Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation, on Strengthening the Economy: Foreclosure Prevention and Neighborhood Preservation, before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 538 Dirksen Senate Office Building, January 31, 2008, www.fdic.gov/news/news/speeches/chairman/spjan3108.html. --------------------------------------------------------------------------- For a borrower to grasp the potential payment shock on a hybrid, interest-only, or option payment ARM, he or she would need to understand all the moving parts of the mortgage, including the index, rate spread, initial rate cap, and lifetime rate cap. On top of that, the borrower would need to predict future interest rate movements and translate expected rate changes into changes in monthly payments. Interest-only ARMs and option payment ARMs had the added complication of potential deferred or negative amortization, which could cause the principal payments to grow. Finally, these loans were more likely to carry large prepayment penalties. To understand the effect of such a prepayment penalty, the borrower would have to use a formula to compute the penalty's size and then assess the likelihood of moving or refinancing during the penalty period.\17\ Truth-in-Lending Act disclosures did not require easy-to-understand disclosures about any of these risks.\18\--------------------------------------------------------------------------- \17\ Federal Reserve System, Truth in Lending, Part III: Final rule, official staff commentary, 73 Fed. Reg. 44522, 44524-25 (July 30, 2008); Federal Reserve System, Truth in Lending, Part II: Proposed rule; request for public comment, 73 Fed. Reg. 1672, 1674 (January 9, 2008). \18\ Patricia A. McCoy, Rethinking Disclosure in a World of Risk-Based Pricing, 44 Harv. J. Legis. 123 (2007), available at http://www.law.harvard.edu/students/orgs/jol/vol44_1/mccoy.pdf. --------------------------------------------------------------------------- Inability to Do Meaningful Comparison Shopping--The lack of binding rate quotes also hindered informed comparison-shopping in the nonprime market. Nonprime loans had many rates, not one, which varied according to the borrower's risk, the originator's compensation, the documentation level of the loan, and the naivety of the borrower. Between their complicated price structure and the wide variety of products, subprime loans were not standardized. Furthermore, it was impossible to obtain a binding price quote in the subprime market before submitting a loan application and paying a non-refundable fee. Rate locks were also a rarity in the subprime market. In too many cases, subprime lenders waited until the closing to unveil the true product and price for the loan, a practice that the Truth in Lending Act rules countenanced. These rules, promulgated by the Federal Reserve Board, helped foster rampant ``bait-and-switch'' schemes in the subprime market.\19\--------------------------------------------------------------------------- \19\ Id.; Federal Reserve System, Truth in Lending--Proposed rule; request for public comment, 73 Fed. Reg. 1672, 1675 (Jan. 9, 2008).--------------------------------------------------------------------------- As a result, deceptive advertising became a stock-in-trade of the nonprime market. Nonprime lenders and brokers did not advertise their prices to permit meaningful comparison-shopping. To the contrary, lenders treated their rate sheets--which listed their price points and pricing criteria--as proprietary secrets that were not to be disclosed to the mass consumer market. Subprime advertisements generally focused on fast approval and low initial monthly payments or interest rates, not on accurate prices. While the Federal Reserve exhorted people to comparison-shop for nonprime loans,\20\ in reality, comparison-shopping was futile. Nonprime lenders did not post prices, did not provide consumers with firm price quotes, and did not offer lock-in commitments as a general rule. Anyone who attempted to comparison-shop had to pay multiple application fees for the privilege and, even then, might not learn the actual price until the closing if the lender engaged in a bait-and-switch.--------------------------------------------------------------------------- \20\ See, e.g., Federal Reserve Board, Looking for the Best Mortgage, www.federalreserve.gov/pubs/mortgage/mortb_11.htm.--------------------------------------------------------------------------- As early as 1998, the Federal Reserve Board and the Department of Housing and Urban Development were aware that Truth in Lending Act disclosures did not come early enough in the nonprime market to allow meaningful comparison shopping. That year, the two agencies issued a report diagnosing the problem. In the report, HUD recommended changes to the Truth in Lending Act to require mortgage originators to provide binding price quotes before taking loan applications. The Federal Reserve Board dissented from the proposal, however, and it was never adopted.\21\ To this day, the Board has still not revamped Truth in Lending disclosures for closed-end mortgages.--------------------------------------------------------------------------- \21\ See Bd. of Governors of the Fed. Reserve Sys. & Dep't of Hous. & Urban Dev., Joint Report to the Congress, Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act, at 28-29, 39-42 (1998), available at www.federalreserve.gov/boarddocs/rptcongress/tila.pdf.--------------------------------------------------------------------------- Perverse Fee Incentives--Finally, many consumers were not aware that the compensation structure rewarded mortgage brokers for riskier loan products and higher interest rates. Mortgage brokers only got paid if they closed a loan. Furthermore, they were paid solely through upfront fees at closing, meaning that if a loan went bad, the losses would fall on the lender or investors, not the broker. In the most pernicious practice, lenders paid brokers thousands of dollars per loan in fees known as yield spread premiums (or YSPs) in exchange for loans saddling borrowers with steep prepayment penalties and higher interest rates than the borrowers qualified for, based on their incomes and credit scores. In sum, these three features--the ability to hide risk, thwart meaningful comparison-shopping, and reward steering--allowed lenders to entice unsuspecting borrowers into needlessly hazardous loans.C. The Crowd-Out Effect The ability to bury risky product features in fine print allowed irresponsible lenders to out-compete safe lenders. Low initial monthly payments were the most visible feature of hybrid ARMs, interest-only loans, and option payment ARMs. During the housing boom, lenders commonly touted these products based on low initial monthly payments while obscuring the back-end risks of those loans.\22\--------------------------------------------------------------------------- \22\ See, e.g., Julie Haviv & Emily Kaiser, Web lenders woo subprime borrowers despite crisis, Reuters (Apr. 22, 2007); E. Scott Reckard, Refinance pitches in sub-prime tone, Los Angeles Times, October 29, 2007.--------------------------------------------------------------------------- The ability to hide risks made it easy to out-compete lenders offered fixed-rate, fully amortizing loans. Other things being equal, the initial monthly payments on exotic ARMs were lower than on fixed-rate, amortizing loans. Furthermore, some nonprime lenders qualified borrowers solely at the low initial rate alone until the Federal Reserve Board finally banned that practice in July 2008.\23\--------------------------------------------------------------------------- \23\ In fall 2006, Federal regulators issued an interagency guidance advising option ARM lenders to qualify borrowers solely at the fully indexed rate. Nevertheless, Washington Mutual (WaMu) apparently continued to qualify applicants for option ARMs at the low, introductory rate alone until mid-2007. It was not until July 30, 2007 that WaMu finally updated its ``Bulk Seller Guide'' to require its correspondents to underwrite option ARMs and other ARMs at the fully indexed rate.--------------------------------------------------------------------------- Of course, many sophisticated customers recognized the dangers of these loans. That did not deter lenders from offering hazardous nontraditional ARMs, however. Instead, the ``one-sizefits-one'' nature of nonprime loans permitted lenders to discriminate by selling safer products to discerning customers and more lucrative, dangerous products to naive customers. Sadly, the consumers who were least well equipped in terms of experience and education to grasp arcane loan terms \24\ ended up with the most dangerous loans.--------------------------------------------------------------------------- \24\ Howard Lax, Michael Manti, Paul Raca & Peter Zorn, Subprime Lending: An Investigation of Economic Efficiency, 15 Housing Pol'y Debate 533, 552-554 (2004), http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_1503_Lax.pdf. --------------------------------------------------------------------------- In the meantime, lenders who offered safe products--such as fixed-rate prime loans--lost market share to lenders who peddled exotic ARMs with low starting payments. As conventional lenders came to realize that it didn't pay to compete on good products, those lenders expanded into the nonprime market as well.II. The Regulatory Story: Race to the Bottom Federal banking regulators added fuel to the crisis by allowing reckless loans to flourish. It is a basic tenet of banking law that banks should not extend credit without proof of ability to repay. Federal banking regulators \25\ had ample authority to enforce this tenet through safety and soundness supervision and through Federal consumer protection laws. Nevertheless, they refused to exercise their substantial powers of rulemaking, formal enforcement, and sanctions to crack down on the proliferation of poorly underwritten loans until it was too late. Their abdication allowed irresponsible loans to multiply. Furthermore, their green light to banks to invest in investment-grade subprime mortgage-backed securities and CDOs left the nation's largest banks struggling with toxic assets. These problems were a direct result of the country's fragmented system of financial regulation, which caused regulators to compete for turf.--------------------------------------------------------------------------- \25\ The four Federal banking regulators include the Federal Reserve System, which serves as the central bank and supervises State member banks; the Office of the Comptroller of the Currency, which oversees national banks; the Federal Deposit Insurance Corporation, which operates the Deposit Insurance Fund and regulates State nonmember banks; and the Office of Thrift Supervision, which supervises savings associations.---------------------------------------------------------------------------A. The Fragmented U.S. System of Mortgage Regulation In the United States, the home mortgage lending industry operates under a fragmented regulatory structure which varies according to entity.\26\ Banks and thrift institutions are regulated under Federal banking laws and a subset of those institutions--namely, national banks, Federal savings associations, and their subsidiaries--are exempt from State anti-predatory lending and credit laws by virtue of Federal preemption. In contrast, mortgage brokers and independent non-depository mortgage lenders escape Federal banking regulation but have to comply with all State laws in effect. Only State-chartered banks and thrifts in some states (a dwindling group) are subject to both sets of laws.--------------------------------------------------------------------------- \26\ This discussion is drawn from Patricia A. McCoy & Elizabeth Renuart, The Legal Infrastructure of Subprime and Nontraditional Mortgage Lending, in Borrowing to Live: Consumer and Mortgage Credit Revisited 110 (Nicolas P. Retsinas & Eric S. Belsky eds., Joint Center for Housing Studies of Harvard University & Brookings Institution Press, 2008).--------------------------------------------------------------------------- Under this dual system of regulation, depository institutions are subject to a variety of Federal examinations, including fair lending, Community Reinvestment Act, and safety and soundness examinations, but independent nondepository lenders are not. Similarly, banks and thrifts must comply with other provisions of the Community Reinvestment Act, including reporting requirements and merger review. Federally insured depository institutions must also meet minimum risk-based capital requirements and reserve requirements, unlike their independent non-depository counterparts. Some Federal laws applied to all mortgage originators. Otherwise, lenders could change their charter and form to shop for the friendliest regulatory scheme.B. Applicable Law Despite these differences in regulatory regimes, the Federal Reserve Board did have the power to prohibit reckless mortgages across the entire mortgage industry. The Board had this power by virtue of its authority to administer a Federal anti-predatory lending law known as ``HOEPA.''1. Federal Law Following deregulation of home mortgages in the early 1980's, disclosure became the most important type of Federal mortgage regulation. The Federal Truth in Lending Act (TILA),\27\ passed in 1968, mandates uniform disclosures regarding cost for home loans. Its companion law, the Federal Real Estate Settlement Procedures Act of 1974 (RESPA),\28\ requires similar standardized disclosures for settlement costs. Congress charged the Federal Reserve with administering TILA and the Department of Housing and Urban Development with administering RESPA.--------------------------------------------------------------------------- \27\ 15 U.S.C. 1601-1693r (2000). \28\ 12 U.S.C. 2601-2617 (2000).--------------------------------------------------------------------------- In 1994, Congress augmented TILA and RESPA by enacting the Home Ownership and Equity Protection Act (HOEPA).\29\ HOEPA was an early Federal anti-predatory lending law and prohibits specific abuses in the subprime mortgage market. HOEPA applies to all residential mortgage lenders and mortgage brokers, regardless of the type of entity.--------------------------------------------------------------------------- \29\ 15 U.S.C. 1601, 1602(aa), 1639(a)-(b).--------------------------------------------------------------------------- HOEPA has two important provisions. The first consists of HOEPA's high-cost loan provision,\30\ which regulates the high-cost refinance market. This provision seeks to eliminate abuses consisting of ``equity stripping.'' It is hobbled, however, by its extremely limited reach--covering only the most exorbitant subprime mortgages--and its inapplicability to home purchase loans, reverse mortgages, and open-end home equity lines of credit.\31\ Lenders learned to evade the high-cost loan provisions rather easily by slightly lowering the interest rates and fees on subprime loans below HOEPA's thresholds and by expanding into subprime purchase loans.--------------------------------------------------------------------------- \30\ 15 U.S.C. Sec. 1602(aa)(1)-(4); 12 C.F.R. 226.32(a)(1), (b)(1). \31\ 15 U.S.C. Sec. 1602(i), (w), (bb); 12 C.F.R. 226.32(a)(2) (1997); Edward M. Gramlich, Subprime Mortgages: America's Latest Boom and Bust 28 (Urban Institute Press, 2007).--------------------------------------------------------------------------- HOEPA also has a second major provision, which gives the Federal Reserve Board the authority to prohibit unfair or deceptive lending practices and refinance loans involving practices that are abusive or against the interest of the borrower.\32\ This provision is potentially broader than the high-cost loan provision, because it allows regulation of both the purchase and refinance markets, without regard to interest rates or fees. However, it was not self-activating. Instead, it depended on action by the Federal Reserve Board to implement the provision, which the Board did not take until July 2008.--------------------------------------------------------------------------- \32\ 15 U.S.C. 1639(l)(2).---------------------------------------------------------------------------2. State Law Before 2008, only the high-cost loan provision of HOEPA was in effect as a practical matter. This provision had a serious Achilles heel, consisting of its narrow coverage. Even though the Federal Reserve Board lowered the high-cost triggers of HOEPA effective in 2002, that provision still only applied to 1 percent of all subprime home loans.\33\--------------------------------------------------------------------------- \33\ Gramlich, supra note 31 (2007, p. 28).--------------------------------------------------------------------------- After 1994, it increasingly became evident that HOEPA was incapable of halting equity stripping and other sorts of subprime abuses. By the late 1990s, some cities and states were contending with rising foreclosures and some jurisdictions were contemplating regulating subprime loans on their own. Many states already had older statutes on the books regulating prepayment penalties and occasionally balloon clauses. These laws were relatively narrow, however, and did not address other types of new abuses that were surfacing in subprime loans. Consequently, in 1999, North Carolina became the first State to enact a comprehensive anti-predatory lending law.\34\ Soon, other states followed suit and passed anti-predatory lending laws of their own. These newer State laws implemented HOEPA's design but frequently expanded coverage or imposed stricter regulation on subprime loans. By year-end 2005, 29 States and the District of Columbia had enacted one of these ``mini-HOEPA'' laws. Some States also passed stricter disclosure laws or laws regulating mortgage brokers. By the end of 2005, only six States--Arizona, Delaware, Montana, North Dakota, Oregon, and South Dakota--lacked laws regulating prepayment penalties, balloon clauses, or mandatory arbitration clauses, all of which were associated with exploitative subprime loans.\35\--------------------------------------------------------------------------- \34\ N.C. Gen Stat. 24-1.1E (2000). \35\ See Raphael Bostic, Kathleen C. Engel, Patricia A. McCoy, Anthony Pennington-Cross & Susan Wachter, State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms, 60 J. Econ. & Bus. 47-66 (2008), full working paper version available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1005423. --------------------------------------------------------------------------- Critics, including some Federal banking regulators, have blamed the states for igniting the credit crisis through lax regulation. Certainly, there were states that were largely unregulated and there were states where mortgage regulation was weak. Mortgage brokers were loosely regulated in too many states. Similarly, the states never agreed on an effective, uniform system of mortgage regulation. Nevertheless, this criticism of the states disregards the hard-fought efforts by a growing number of states--which eventually grew to include the majority of states--to regulate abusive subprime loans within their borders. State attorneys general and State banking commissioners spearheaded some of the most important enforcement actions against deceptive mortgage lenders.\36\--------------------------------------------------------------------------- \36\ For instance, in 2002, State authorities in 44 states struck a settlement with Household Finance Corp. for $484 million in consumer restitution and changes in its lending practices following enforcement actions to redress alleged abusive subprime loans. Iowa Attorney General, States Settle With Household Finance: Up to $484 Million for Consumers (Oct. 11, 2002), available at www.iowa.gov/government/ag/latest_news/releases/oct_2002/Household_Chicago.html. In 2006, forty-nine states and the District of Columbia reached a $325 million settlement with Ameriquest Mortgage Company over alleged predatory lending practices. See, e.g., Press Release, Iowa Dep't of Justice, Miller: Ameriquest Will Pay $325 Million and Reform its Lending Practices (Jan. 23, 2006), available at http://www.state.ia.us/government/ag/latest_news/releases/jan_2006/Ameriquest_Iowa.html. ---------------------------------------------------------------------------C. The Ability to Shop For Hospitable Laws and Regulators State-chartered banks and thrifts and their subsidiaries had to comply with the State anti-predatory lending laws. So did independent nonbank lenders and mortgage brokers. For the better part of the housing boom, however, national banks, Federal savings associations, and their mortgage lending subsidiaries did not have to comply with the State anti-predatory lending laws due to Federal preemption rulings by their Federal regulators. This became a problem because Federal regulators did not replace the preempted State laws with strong Federal underwriting rules.1. Federal Preemption The states that enacted anti-predatory lending laws did not legislate in a vacuum. In 1996, the Federal regulator for thrift institutions--the Office of Thrift Supervision or OTS--promulgated a sweeping preemption rule declaring that henceforth Federal savings associations did not have to observe State lending laws.\37\ Initially, this rule had little practical effect because any State anti-predatory lending provisions on the books then were fairly narrow.\38\--------------------------------------------------------------------------- \37\ 12 C.F.R. 559.3(h), 560.2. \38\ Bostic et al., supra note 35; Office of Thrift Supervision, Responsible Alternative Mortgage Lending: Advance notice of proposed rulemaking, 65 Fed. Reg. 17811, 17814-16 (2000).--------------------------------------------------------------------------- Following adoption of the OTS preemption rule, Federal thrift institutions and their subsidiaries were relieved from having to comply with State consumer protection laws. That was not true, however, for national banks, State banks, State thrifts, and independent nonbank mortgage lenders and brokers. The stakes rose considerably starting in 1999, when North Carolina passed the first comprehensive State anti-predatory lending law. As State mini-HOEPA laws proliferated, national banks lobbied their regulator--a Federal agency known as the Office of the Comptroller of the Currency or OCC--to clothe them with the same Federal preemption as Federal savings associations. They succeeded and, in 2004, the OCC issued its own preemption rule banning the states from enforcing their laws impinging on real estate lending by national banks and their subsidiaries.\39\ In a companion rule, the OCC denied permission to the states to enforce their own laws that were not federally preempted--state lending discrimination laws are one example--against national banks and their subsidiaries. After a protracted court battle, the controversy ended up in the U.S. Supreme Court, which upheld the OCC preemption rule.\40\--------------------------------------------------------------------------- \39\ Office of the Comptroller of the Currency, Bank Activities and Operations; Final rule, 69 Fed. Reg. 1895 (2004) (codified at 12 C.F.R. 7.4000); Office of the Comptroller of the Currency, Bank Activities and Operations; Real Estate Lending and Appraisals; Final rule, 69 Fed. Reg. 1904 (2004) (codified at 12 C.F.R. 7.4007-7.4009, 34.4). National City Corporation, the parent of National City Bank, N.A., and a major subprime lender, spearheaded the campaign for OCC preemption. Predatory lending laws neutered, Atlanta Journal Constitution, Aug. 6, 2003. \40\ Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007); Arthur E. Wilmarth, Jr., The OCC's Preemption Rules Exceed the Agency's Authority and Present a Serious Threat to the Dual Banking System, 23 Ann. Rev. Banking & Finance Law 225 (2004). The Supreme Court recently granted certiorari to review the legality of the OCC visitorial powers rule. Cuomo v. Clearing House Ass'n, L.L.C.,__U.S.__, 129 S. Ct. 987 (2009). The OCC and the OTS left some areas of State law untouched, namely, State criminal law and State law regulating contracts, torts, homestead rights, debt collection, property, taxation, and zoning. Both agencies, though, reserved the right to declare that any State laws in those areas are preempted in the future. For fuller discussion, see. McCoy & Renuart, supra note 26.--------------------------------------------------------------------------- OTS and the OCC had institutional motives to grant Federal preemption to the institutions that they regulated. Both agencies depend almost exclusively on fees from their regulated entities for their operating budgets. Both were also eager to persuade State-chartered depository institutions to convert to a Federal charter. In addition, the OCC was aware that if national banks wanted Federal preemption badly enough, they might defect to the thrift charter to get it. Thus, the OCC had reason to placate national banks to keep them in its fold. Similarly, the OTS was concerned about the steady decline in thrift institutions. Federal preemption provided an inducement to thrift institutions to retain the Federal savings association charter.2. The Ability to Shop for the Most Permissive Laws As a result of Federal preemption, State anti-predatory lending laws applied to State-chartered depository institutions and independent nonbank lenders, but not to national banks, Federal savings associations, or their mortgage lending subsidiaries. The only anti-predatory lending provisions that national banks and federally chartered thrifts had to obey were HOEPA and agency pronouncements on subprime and nontraditional mortgage loans.\41\ Of these, HOEPA had extremely narrow scope. Meanwhile, agency guidances lacked the binding effect of rules and their content was not as strict as the stronger State laws.--------------------------------------------------------------------------- \41\ Board of Governors of the Federal Reserve System et al., Interagency Guidance on Subprime Lending (March 1, 1999); OCC, Abusive Lending Practices, Advisory Letter 2000-7 (July 25, 2000); OCC et al., Expanded Guidance for Subprime Lending Programs (Jan. 31, 2001); OCC, Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans, Advisory Letter 2003-3 (Feb. 21, 2003); OCC, Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices, Advisory Letter 2003-2 (Feb. 21, 2003); OCC, OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices, 70 Fed. Reg. 6329 (2005); Department of the Treasury et al., Interagency Guidance on Nontraditional Mortgage Product Risks; Final guidance, 71 Fed. Reg. 58609 (2006); Department of the Treasury et al., Statement on Subprime Mortgage Lending; Final guidance, 72 Fed. Reg. 37569 (2007). Of course, these lenders, like all lenders, are subject to prosecution in cases of fraud. Lenders are also subject to the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices (UDAPs). However, Federal banking regulators were slow to propose rules to define and punish UDAP violations by banking companies in the mortgage lending area.--------------------------------------------------------------------------- This dual regulatory system allowed mortgage lender to play regulators off one another by threatening to change charters. Mortgage lenders are free to operate with or without depository institution charters. Similarly, depository institutions can choose between a State and Federal charter and between a thrift charter and a commercial bank charter. Each of these choices allows a lender to change regulators. A lender could escape a strict State law by switching to a Federal bank or thrift charter or by shifting its operations to a less regulated State. Similarly, a lender could escape a strict regulator by converting its charter to one with a more accommodating regulator. Countrywide, the nation's largest mortgage lender and a major subprime presence, took advantage of this system to change its regulator. One of its subsidiaries, Countrywide Home Loans, was supervised by the Federal Reserve. This subsidiary switched and became an OTS-regulated entity as of March 2007. That same month, Countrywide Bank, N.A., converted its charter from a national bank charter under OCC supervision to a Federal thrift charter under OTS supervision. Reportedly, OTS promised Countrywide's executives to be a ``less antagonistic'' regulator if Countrywide switched charters to OTS. Six months later, the regional deputy director of the OTS West Region, where Countrywide was headquartered, was promoted to division director. Some observers considered it a reward.\42\--------------------------------------------------------------------------- \42\ Richard B. Schmitt, Regulator takes heat over IndyMac, Los Angeles Times, Oct. 6, 2008; see also Binyamin Appelbaum & Ellen Nakashima, Regulator Played Advocate Over Enforcer, Washington Post, November 23, 2008.--------------------------------------------------------------------------- The result was a system in which lenders could shop for the loosest laws and enforcement. This shopping process, in turn, put pressure on regulators at all levels--state and local--to lower their standards or relax enforcement. What ensued was a regulatory race to the bottom.III. Regulatory Failure Federal preemption would not have been such a problem if Federal banking regulators had replaced State laws with tough rules and enforcement of their own. Those regulators had ample power to stop the deterioration in mortgage underwriting standards that mushroomed into a full-blown crisis. However, they refused to intervene in disastrous lending practices until it was too late. As a result, federally regulated lenders--as well as all lenders operating in states with weak regulation--were given carte blanche to loosen their lending standards free from meaningful regulatory intervention.A. The Federal Reserve Board The Federal Reserve Board had the statutory power, starting in 1994, to curb lax lending not only for depository institutions, but for all lenders across-the-board. It declined to exercise that power in any meaningful respect, however, until after the nonprime mortgage market collapsed. In the mortgage lending area, the Fed's supervisory process has three major parts and breakdowns were apparent in two out of the three. The only part that appeared to work well was the Fed's role as the primary Federal regulator for State-chartered banks that are members of the Federal Reserve System.\43\--------------------------------------------------------------------------- \43\ In general, these are community banks on the small side. In 2007 and 2008, only one failed bank--the tiny First Georgia Community Bank in Jackson, Georgia, with only $237.5 million in assets--was regulated by the Federal Reserve System. It is not clear whether the Fed's performance is explained by the strength of its examination process, the limited role of member banks in risky lending, the fact that State banks had to comply with State anti-predatory lending laws, or all three. In the following discussion on regulatory failure by the Federal Reserve Board, the OTS, and the OCC, the data regarding failed and near-failed banks and thrifts come from Federal bank regulatory and S.E.C. statistics, disclosures, press releases, and orders; rating agency reports; press releases and other web materials by the companies mentioned; statistics compiled by the American Banker; and financial press reports.--------------------------------------------------------------------------- As the second part of its supervisory duties, the Fed regulates nonbank mortgage lenders owned by bank holding companies but not owned directly or indirectly by banks or thrifts. During the housing boom, some of the largest subprime and Alt-A lenders were regulated by the Fed, including the top- and third-ranked subprime lenders in 2006, HSBC Finance and Countrywide Financial Corporation, and Wells Fargo Financial, Inc.\44\ The Fed's supervisory record with regard to these lenders was mixed. On one notable occasion, in 2004, the Fed levied a $70 million civil money penalty against CitiFinancial Credit Company and its parent holding company, Citigroup Inc., for subprime lending abuses.\45\ Apart from that, the Fed did not take public enforcement action against the nonbank lenders that it regulated. That may be because the Federal Reserve did not routinely examine the nonbank mortgage lending subsidiaries under its supervision, which the late Federal Reserve Board Governor Edward Gramlich revealed in 2007. Only then did the Fed kick off a ``pilot project'' to examine the nonbank lenders under its jurisdiction on a routine basis for loose underwriting and compliance with Federal consumer protection laws.\46\--------------------------------------------------------------------------- \44\ Data provided by American Banker, available at www.americanbanker.com. \45\ Federal Reserve, Citigroup Inc. New York, New York and Citifinancial Credit Company Baltimore, Maryland: Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent, May 27, 2004. \46\ Edward M. Gramlich, Boom and Busts, The Case of Subprime Mortgages, Speech given August 31, 2007, Jackson Hole, Wyo., at symposium titled ``Housing, Housing Finance & Monetary Policy,'' sponsored by the Federal Reserve Bank of Kansas City, pp. 8-9, available at www.kansascityfed.org/publicat/sympos/2007/pdf/2007.09.04.gramlich.pdf; Speech by Governor Randall S. Kroszner At the National Bankers Association 80th Annual convention, Durham, North Carolina, October 11, 2007.--------------------------------------------------------------------------- Finally, the Board is responsible for administering most Federal consumer credit protection laws, including HOEPA. When former Governor Edward Gramlich served on the Fed, he urged then-Chairman Alan Greenspan to exercise the Fed's power to address unfair and deceptive loans under HOEPA. Greenspan refused, preferring instead to rely on non-binding statements and guidances.\47\ This reliance on statements and guidances had two disadvantages: one, major lenders routinely dismissed the guidances as mere ``suggestions'' and, two, guidances did not apply to independent nonbank mortgage lenders.--------------------------------------------------------------------------- \47\ House of Representatives, Committee on Oversight and Government Reform, ``The Financial Crisis and the Role of Federal Regulators, Preliminary Transcript'' 35, 37-38 (Oct. 23, 2008), available at http://oversight.house.gov/documents/20081024163819.pdf. Greenspan told the House Oversight Committee in 2008: Well, let's take the issue of unfair and deceptive practices, which is a fundamental concept to the whole predatory lending issue. The staff of the Federal Reserve . . . say[ ] how do they determine as a regulatory group what is unfair and deceptive? And the problem that they were concluding . . . was the issue of maybe 10 percent or so are self-evidently unfair and deceptive, but the vast majority would require a jury trial or other means to deal with it . . . Id. at 89.--------------------------------------------------------------------------- The Federal Reserve did not relent until July 2008, when under Chairman Ben Bernanke's leadership, it finally promulgated binding HOEPA regulations banning specific types of lax and abusive loans. Even then, the regulations were mostly limited to higher-priced mortgages, which the Board confined to first-lien loans of 1.5 percentage points or more above the average prime offer rate for a comparable transaction, and 3.5 percentage points for second-lien loans. Although shoddy nontraditional mortgages below those triggers had also contributed to the credit crisis, the rule left those loans--plus prime loans--mostly untouched.\48\--------------------------------------------------------------------------- \48\ Federal Reserve System, Truth in Lending: Final rule; official staff commentary, 73 Fed. Reg. 44522, 44536 (July 30, 2008). The Board set those triggers with the intention of covering the subprime market, but not the prime market. See id. at 44536-37.--------------------------------------------------------------------------- The rules, while badly needed, were too little and too late. On October 23, 2008, in testimony before the U.S. House of Representatives Oversight Committee, Greenspan admitted that ``those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief.'' House Oversight Committee Chairman Henry Waxman asked Greenspan whether ``your ideology pushed you to make decisions that you wish you had not made?'' Greenspan replied:\49\--------------------------------------------------------------------------- \49\ House of Representatives, Committee on Oversight and Government Reform, ``The Financial Crisis and the Role of Federal Regulators, Preliminary Transcript'' 36-37 (Oct. 23, 2008), available at http://oversight.house.gov/documents/20081024163819.pdf. Mr. GREENSPAN. . . . [Y]es, I found a flaw, I don't know how significant or permanent it is, but I have been very distressed by that fact . . . Chairman WAXMAN. You found a flaw? Mr. GREENSPAN. I found a flaw in the model that defines how the world works, so to speak. Chairman WAXMAN. In other words, you found that your view of the world, your ideology, was not right, it was not working. Mr. GREENSPAN. Precisely. That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.\50\ \50\ Testimony of Dr. Alan Greenspan before the House of Representatives Committee of Government Oversight and Reform, October 23, 2008, available at http://oversight.house.gov/documents/20081023100438.pdf.---------------------------------------------------------------------------B. Regulatory Lapses by the OCC and OTS Federal preemption might not have devolved into a banking crisis of systemic proportions had OTS and the OCC replaced State regulation for their regulated entities with a comprehensive set of binding rules prohibiting lax underwriting of home mortgages. Generally, in lieu of binding rules, Federal banking regulators, including the OCC and OTS, issued a series of ``soft law'' advisory letters and guidelines against predatory or unfair mortgage lending practices by insured depository institutions.\51\ Federal regulators disavowed binding rules during the run-up to the subprime crisis on grounds that the guidelines were more flexible and that the agencies enforced those guidelines through bank examinations and informal enforcement actions.\52\ Informal enforcement actions were usually limited to negotiated, voluntary agreements between regulators and the entities that they supervised, which made it easy for management to drag out negotiations to soften any restrictions and to bid for more time. Furthermore, examinations and informal enforcement are highly confidential, making it easy for a lax regulator to hide its tracks.--------------------------------------------------------------------------- \51\ See note 41 supra. \52\ Office of the Comptroller of the Currency, Bank Activities and Operations; Real Estate Lending and Appraisals; Final rule, 69 Fed. Reg. 1904 (2004).---------------------------------------------------------------------------1. The Office of Thrift Supervision Although OTS was the first agency to adopt Federal preemption, it managed to fly under the radar during the subprime boom, overshadowed by its larger sister agency, the OCC. After 2003, while commentators were busy berating the OCC preemption rule, OTS allowed the largest Federal savings associations to embark on an aggressive campaign of expansion through option payment ARMs, subprime loans, and low-documentation and no-documentation loans. Autopsies of failed depository institutions in 2007 and 2008 show that five of the seven biggest failures were OTS-regulated thrifts. Two other enormous thrifts during that period--Wachovia Mortgage, FSB and Countrywide Bank, FSB--were forced to arrange hasty takeovers by large bank holding companies to avoid failing. By December 31, 2008, thrifts totaling $355 billion in assets had failed in the previous sixteen months on OTS' watch. The reasons for the collapse of these thrifts evidence fundamental regulatory lapses by OTS. Almost all of the thrifts that failed in 2007 and 2008--and all of the larger ones--succumbed to massive levels of imprudent home loans. IndyMac Bank, FSB, which became the first major thrift institution to fail during the current crisis in July 2008, manufactured its demise by becoming the nation's top originator of low-documentation and no-documentation loans. These loans, which became known as ``liar's loans,'' infected both the subprime market and credit to borrowers with higher credit scores. By 2006 and 2007, over half of IndyMac's home purchase loans were subprime loans and IndyMac Bank approved up to half of those loans based on low or no documentation. Washington Mutual Bank, popularly known as ``WaMu,'' was the nation's largest thrift institution in 2008, with over $300 billion in assets. WaMu became the biggest U.S. depository institution in history to fail on September 25, 2008, in the wake of the Lehman Brothers bankruptcy. WaMu was so large that OTS examiners were stationed there permanently onsite. Nevertheless, from 2004 through 2006, despite the daily presence of the resident OTS inspectors, risky option ARMs, second mortgages, and subprime loans constituted over half of WaMu's real estate loans each year. By June 30, 2008, over one fourth of the subprime loans that WaMu originated in 2006 and 2007 were at least thirty days past due. Eventually, it came to light that WaMu's management had pressured its loan underwriters relentlessly to approve more and more exceptions to WaMu's underwriting standards in order to increase its fee revenue from loans.\53\--------------------------------------------------------------------------- \53\ Peter S. Goodman & Gretchen Morgenson, Saying Yes, WaMu Built Empire on Shaky Loans, N.Y. Times, Dec. 28, 2008.--------------------------------------------------------------------------- Downey Savings & Loan became the third largest depository institution to fail in 2008. Like WaMu, Downey had loaded up on option ARMs and subprime loans. When OTS finally had to put it into receivership, over half of Downey's total assets consisted of option ARMs and nonperforming loans accounted for over 15 percent of the thrift's total assets. In short, the three largest depository institution failures in 2007 and 2008 resulted from high concentrations of poorly underwritten loans, including low- and no-documentation ARMs (in the case of IndyMac) and option ARMs (in the case of WaMu and Downey) that were often only underwritten to the introductory rate instead of the fully indexed rate. During the housing bubble, OTS issued no binding rules to halt the proliferation by its largest regulated thrifts of option ARMs, subprime loans, and low- and no-documentation mortgages. Instead, OTS relied on oversight through guidances. IndyMac, WaMu, and Downey apparently treated the guidances as solely advisory, however, as evidenced by the fact that all three made substantial numbers of hazardous loans in late 2006 and in 2007 in direct disregard of an interagency guidance on nontraditional mortgages issued in the fall of 2006 and subscribed to by OTS that prescribed underwriting ARMs to the fully indexed rate.\54\--------------------------------------------------------------------------- \54\ Department of the Treasury et al., Interagency Guidance on Nontraditional Mortgage Product Risks; Final guidance, 71 Fed. Reg. 58609 (2006).--------------------------------------------------------------------------- The fact that all three institutions continued to make loans in violation of the guidance suggests that OTS examinations failed to result in enforcement of the guidance. Similarly, OTS fact sheets on the failures of all three institutions show that the agency consistently declined to institute timely formal enforcement proceedings against those thrifts prohibiting the lending practices that resulted in their demise. In sum, OTS supervision of residential mortgage risks was confined to ``light touch'' regulation in the form of examinations, nonbinding guidances, and occasional informal agreements that ultimately did not work.2. The Office of the Comptroller of the Currency The OCC has asserted that national banks made only 10 percent of subprime loans in 2006. But this assertion fails to mention that national banks moved aggressively into Alt-A low-documentation and no-documentation loans during the housing boom.\55\ This mattered a lot, because the biggest national banks are considered ``too big to fail'' and pose systemic risk on a scale unmatched by independent nonbank lenders. We might not be debating the nationalization of Citibank and Bank of America today had the OCC stopped them from expanding into toxic mortgages, bonds, and SIVs.--------------------------------------------------------------------------- \55\ Testimony by John C. Dugan, Comptroller, before the Senate Committee on Banking, Housing, and Urban Affairs, March 4, 2008.--------------------------------------------------------------------------- Like OTS, ``light touch'' regulation was apparent at the OCC. Unlike OTS, the OCC did promulgate one rule, in 2004, prohibiting mortgages to borrower who could not afford to repay. However, the rule was vague in design and execution, allowing lax lending to proliferate at national banks and their mortgage lending subsidiaries through 2007. Despite the 2004 rule, through 2007, large national banks continued to make large quantities of poorly underwritten subprime loans and low- and no-documentation loans. In 2006, for example, fully 62.6 percent of the first-lien home purchase mortgages made by National City Bank, N.A., and its subsidiary, First Franklin Mortgage, were higher-priced subprime loans. Starting in the third quarter of 2007, National City Corporation reported five straight quarters of net losses, largely due to those subprime loans. Just as with WaMu, the Lehman Brothers bankruptcy ignited a silent run by depositors and pushed National City Bank to the brink of collapse. Only a shotgun marriage with PNC Financial Services Group in October 2008 saved the bank from FDIC receivership. The five largest U.S. banks in 2005 were all national banks and too big to fail. They too made heavy inroads into low- and no-documentation loans. The top-ranked Bank of America, N.A., had a thriving stated-income and no-documentation loan program which it only halted in August 2007, when the market for private-label mortgage-backed securities dried up. Bank of America securitized most of those loans, which may be why the OCC tolerated such lax underwriting practices. Similarly, in 2006, the OCC overrode public protests about a ``substantial volume'' of no-documentation loans by JPMorgan Chase Bank, N.A., the second largest bank in 2005, on grounds that the bank had adequate ``checks and balances'' in place to manage those loans. Citibank, N.A., was the third largest U.S. bank in 2005. In September 2007, the OCC approved Citibank's purchase of the disreputable subprime lender Argent Mortgage, even though subprime securitizations had slowed to a trickle. Citibank thereupon announced to the press that its new subsidiary--christened ``Citi Residential Lending''--would specialize in nonprime loans, including reduced documentation loans. But not long after, by early May 2008 after Bear Stearns narrowly escaped failure, Citibank was forced to admit defeat and dismantle Citi Residential's lending operations. The fourth largest U.S. bank in 2005, Wachovia Bank, N.A., originated low- and no-documentation loans through its two mortgage subsidiaries. Wachovia Bank originated such large quantities of these loans--termed Alt-A loans--that by the first half of 2007, Wachovia Bank was the twelfth largest Alt-A lender in the country. These loans performed so poorly that between December 31, 2006 and September 30, 2008, the bank's ratio of net write-offs on its closed-end home loans to its total outstanding loans jumped 2400 percent. Concomitantly, the bank's parent company, Wachovia Corporation, was reported its first quarterly loss in years due to rising defaults on option ARMs made by Wachovia Mortgage, FSB, and its Golden West predecessor. Public concern over Wachovia's loan losses triggered a silent run on Wachovia Bank in late September 2008, following Lehman Brothers' failure. To avoid receivership, the FDIC brokered a hasty sale of Wachovia to Wells Fargo after Wells Fargo outbid Citigroup for the privilege. Wells Fargo Bank, N.A., was in better financial shape than Wachovia, but it too made large quantities of subprime and reduced documentation loans. In 2006, over 23 percent of the bank's first-lien refinance mortgages were high-cost subprime loans. Wells Fargo Bank also securitized substantial numbers of low- and no-documentation mortgages in its Alt-A pools. In 2007, a Wells Fargo prospectus for one of those pools stated that Wells Fargo had relaxed its underwriting standards in mid-2005 and did not verify whether the mortgage brokers who had originated the weakest loans in that loan pool complied with its underwriting standards before closing. Not long after, as of July 25, 2008, 22.77 percent of the loans in that loan pool were past due or in default. As the Wells Fargo story suggests, the OCC depended on voluntary risk management by national banks, not regulation of loan terms and practices, to contain the risk of improvident loans. A speech by the then-Acting Comptroller, Julie Williams, confirmed as much. In 2005, Comptroller Williams, in a speech to risk managers at banks, coached them on how to ``manage'' the risks of no-doc loans through debt collection, higher reserves, and prompt loss recognition. Securitization was another risk management device favored by the OCC. Three years later, in 2008, the Treasury Department's Inspector General issued a report that was critical of the OCC's supervision of risky loans.\56\ Among other things, the Inspector General criticized the OCC for not instituting formal enforcement actions while lending problems were still manageable in size. In his written response to the Inspector General, the Comptroller, John Dugan, conceded that ``there were shortcomings in our execution of our supervisory process'' and ordered OCC examiners to start initiating formal enforcement actions on a timely basis.\57\--------------------------------------------------------------------------- \56\ Office of Inspector General, Department of the Treasury, ``Safety and Soundness: Material Loss Review of ANB Financial, National Association'' (OIG-09-013, Nov. 25, 2008). \57\ Id.--------------------------------------------------------------------------- The OCC's record of supervision and enforcement during the subprime boom reveals many of the same problems that culminated in regulatory failure by OTS. Like OTS, the OCC usually shunned formal enforcement actions in favor of examinations and informal enforcement. Neither of these supervisory tools obtained compliance with the OCC's 2004 rule prohibiting loans to borrowers who could not repay. Although the OCC supplemented that rule later on with more detailed guidances, some of the largest national banks and their subsidiaries apparently decided that they could ignore the guidances, judging from their lax lending in late 2006 and in 2007. The OCC's emphasis on managing credit risk through securitization, reserves, and loss recognition, instead of through product regulation, likely encouraged that laissez faire attitude by national banks.C. Judging by the Results: Loan Performance By Charter OCC and OTS regulators have argued that their agencies offer ``comprehensive'' supervision resulting in lower default rates on residential mortgages. The evidence shows otherwise. Data from the Federal Deposit Insurance Corporation show that among depository institutions, Federal thrift institutions had the worst default rate for one-to-four family residential mortgages from 2006 through 2008. (See Figure 5). Figure 5. Total Performance of Residential Mortgages by Depository Institution Lenders fcic_final_report_full--127 Even as the Fed was doing little to protect consumers and our financial system from the effects of predatory lending, the OCC and OTS were actively engaged in a campaign to thwart state efforts to avert the com- ing crisis. . . . In the wake of the federal regulators’ push to curtail state authority, many of the largest mortgage-lenders shed their state licenses and sought shelter behind the shield of a national charter. And I think that it is no coincidence that the era of expanded federal preemption gave rise to the worst lending abuses in our nation’s history.  Comptroller Hawke offered the FCIC a different interpretation: “While some crit- ics have suggested that the OCC’s actions on preemption have been a grab for power, the fact is that the agency has simply responded to increasingly aggressive initiatives at the state level to control the banking activities of federally chartered institutions.”  MORTGAGE SECURITIES PLAYERS: “WALL STREET WAS VERY HUNGRY FOR OUR PRODUCT ” Subprime and Alt-A mortgage–backed securities depended on a complex supply chain, largely funded through short-term lending in the commercial paper and repo market—which would become critical as the financial crisis began to unfold in . These loans were increasingly collateralized not by Treasuries and GSE securities but by highly rated mortgage securities backed by increasingly risky loans. Independent mortgage originators such as Ameriquest and New Century—without access to de- posits—typically relied on financing to originate mortgages from warehouse lines of credit extended by banks, from their own commercial paper programs, or from money borrowed in the repo market. For commercial banks such as Citigroup, warehouse lending was a multibillion- dollar business. From  to , Citigroup made available at any one time as much as  billion in warehouse lines of credit to mortgage originators, including  mil- lion to New Century and more than . billion to Ameriquest.  Citigroup CEO Chuck Prince told the FCIC he would not have approved, had he known. “I found out at the end of my tenure, I did not know it before, that we had some warehouse lines out to some originators. And I think getting that close to the origination function— being that involved in the origination of some of these products—is something that I wasn’t comfortable with and that I did not view as consistent with the prescription I had laid down for the company not to be involved in originating these products.”  As early as , Moody’s called the new asset-backed commercial paper (ABCP) programs “a whole new ball game.”  As asset-backed commercial paper became a popular method to fund the mortgage business, it grew from about one-quarter to about one-half of commercial paper sold between  and . CHRG-111hhrg52406--8 The Chairman," Next, the prime sponsor of the bill here on the committee, the gentleman from North Carolina, Mr. Miller, for 2 minutes. Mr. Miller of North Carolina. Thank you, Mr. Chairman. One of the issues arising from the financial crisis that this committee must address is how compensation in the financial industry created incentives for taking immediate profits while ignoring only slightly less immediate risk. We will consider how to adjust compensation to ally the long-term interests of companies with the interest of those who work for them. The issue before us today is more difficult and more important, how to ally the interests of the financial industry with those of society. The financial industry has defended every consumer credit practice, regardless of how predatory the practice appeared to those unsophisticated in finance, like me, as an innovation that made it possible to extend needed credit to those who were excluded from traditional lending. And the industry's innovations resulted in inflating the housing bubble, evading existing consumer protections, trapping the middle class in unsustainable debt, and creating risk for financial companies that were dimly understood by regulators, by investors, and even by the investors and CEOs of the companies that created them. And it plunged the country and the world into the worst recession since the Great Depression. The regulatory system we are considering is less restrictive than the regulation of many industries that have done much less damage. At bottom, the question is this: Are consumer lending practices that the industry celebrates as innovation actually useful to society, or are they just a way to make more and more money by betraying the trust of the American people? Other regulators don't just take the regulated industry's word for it that their products are beneficial, and neither should the regulation of the financial industry. I yield back my time. " CHRG-111hhrg67816--41 Mr. Green," Mr. Chairman, thank you for your friendship over the last 17 years. I thank you for holding this hearing on the consumer credit and debt protection and to look at the role that the FTC should play. I would like to welcome our new FTC chairman, Jon Leibowitz, and congratulate him on the new position as the chair of the Commission. I look forward to working with you. The FTC is important all the time but in this day and time it is even more so. As the primary federal agency that enforces consumer credit laws at entities other than banks, the thrifts and federal credit unions, the FTC has broad responsibility regarding consumer financial issues in the mortgage market including those involving mortgage lenders, brokers, and services. The FTC enforces a number of federal laws governing mortgage lending, Truth in Lending Act, the Home Ownership and Equity Protection Act, and the Equal Credit Opportunity Act. The Commission also enforces Section 5 of the Federal Trade Commission Act which more generally prohibits unfair and deceptive acts or practices in the marketplace. That is probably one of the most important that we can deal with. In addition, the Commission enforces a number of other consumer protection statutes that govern financial services including Consumer Leasing Act, Fair Debt Collection Practice Act, the Fair Credit Reporting Act, the Credit Repair Organization Act, and the privacy provisions of the Gramm-Leach-Bliley Act. I also have a particular concern about non-traditional loans such as pay-day loans and car title loans, which can carry enormous interest rates and fees. In 2006, Congress enacted to cap the pay-day loans made to military personnel to a 36 percent annual percentage rate after pay-day loans grew 34 percent to reach a total of 500 million the previous 2 years. That figures has doubled since 2002. In an economic climate such as the one we are in today where credit availability is shrinking consumers may be more inclined to turn to these options which are much less regulated and therefore the potential for predatory practice is much greater. In recent months, the FTC has taken significant steps to protect consumers and crack down on scam artists by going after Internet pay-day lenders, alleged mortgage foreclosure rescue companies, and companies claiming they remove negative information from the consumers' credit reports. I look forward to hearing what other actions the FTC is making to protect consumers, what tools it may need from Congress, and what the rest of our witnesses believe could be done better to protect consumers in today's volatile economic environment. All told, this gives the FTC broad authority to go after those predatory practices. The Congress may need to act particularly to give FTC authority to issue rules under the Administrative Procedures Act. Again, Mr. Chairman, thank you for calling the hearing, and I appreciate the opportunity. " CHRG-111hhrg67816--80 Mr. Leibowitz," Well, Mr. Chairman, I would say sometimes the simple questions are the most difficult ones to answer, but let me try to respond. First of all, I think, as you know, we are a tiny agency by Washington standards. We have 270 attorneys doing consumer protection. And, as Mr. Radanovich and others mentioned, we cover the entire waterfront of the economy with a few exceptions like common carriers. So we have to--and we spent a lot of time doing things like stopping fraud, going after spyware, you know, because we talked about that together. Having said that, I think we did a pretty good job. You know, we brought 75 cases in the last 5 years. We have gotten in the last 10 years $465 million in consumer redress, and that is just in this area of financial services alone. Could we have done more? Yes, I think we could have done more. Will we do more in the future? Yes. And do we need to work with the state attorneys general? Yes, and we do it all the time. We are part of several regional task forces. The director of or Atlanta office or southeastern regional office has actually set up a task force with state AGs, and they are going after predatory lending. But, yes, we can do more. I have been exchanging phone calls with Attorney General Holder about resurrecting something called the Executive Working Group, which involved the Federal Trade Commission, the state AGs, and the Justice Department. And it was something that was used in the 1990s and the 1980s to sort of coordinate efforts. I think we are going to resurrect that, and I think that would be--you can ask Attorney General Tierney, but I believe that that will be something that is welcome by all the state AGs, and it will allow us to help coordinate even more. " CHRG-111hhrg74090--46 CONGRESS FROM THE STATE OF FLORIDA Ms. Castor. Thank you, Chairman Rush, for calling this critically important hearing on the Obama Administration's proposal for a Consumer Financial Protection Agency. Last Congress, in the wake of widespread concerns about toxic lead in paint on children's toys and other toxic consumer products, this subcommittee originated legislation to reorganize and strength the Consumer Product Safety Commission, and last year as the economy plunged, there were some analogous terms being used to describe some of the mortgage and investment products. We heard about toxic assets, poisoning banks balance sheets and toxic mortgage products, leaving millions of our neighbors facing foreclosure. Predatory lenders wreaked havoc on my community and the subsequent significant decline in property values has affected millions of folks in my home State, and unfortunately consumers could not count on State oversight of these mortgage brokers. In my home State, they just turned a blind eye and I recommend the Miami Herald expose that documented how many convicted felons entered into the subprime mortgage loan marketing business. So this financial crisis has taught us that in order to maintain a healthy economy, effective regulation must focus on protecting consumers from abusive, deceptive and unfair lending practices. The FTC has the enforcement authority to go after only non-depository lending institutions that deal unfairly with their borrowers but the abuses that led to the financial crisis spread deep into the banking system. So in light of the need for more-effective regulation of all lending institutions, depository and non-depository, the Obama Administration has rightly proposed a reorganization, and I think all of us can agree that regulation of financial institutions must be improved to better protect consumers. However, we must be aware not only of the impact of granting authority to a new Consumer Financial Protection Agency but also the consequences to consumers of the changes that have been proposed to the FTC. The Administration's proposal would reshape the FTC by shifting authority over consumer credit but also by streamlining its rulemaking process and allowing it to assess civil penalties on bad actors. So I look forward to your testimony on what this new FTC might look like and how its ability to achieve its mandate of consumer protection will be affected. I yield back. " fcic_final_report_full--92 In June , two years after HOEPA took effect, the Fed held the first set of pub- lic hearings required under the act. The venues were Los Angeles, Atlanta, and Wash- ington, D.C. Consumer advocates reported abuses by home equity lenders. A report summarizing the hearings, jointly issued with the Department of Housing and Urban Development and released in July , said that mortgage lenders acknowledged that some abuses existed, blamed some of these on mortgage brokers, and suggested that the increasing securitization of subprime mortgages was likely to limit the op- portunity for widespread abuses. The report stated, “Creditors that package and se- curitize their home equity loans must comply with a series of representations and warranties. These include creditors’ representations that they have complied with strict underwriting guidelines concerning the borrower’s ability to repay the loan.”  But in the years to come, these representations and warranties would prove to be inaccurate. Still, the Fed continued not to press its prerogatives. In January , it formalized its long-standing policy of “not routinely conducting consumer compliance examina- tions of nonbank subsidiaries of bank holding companies,”  a decision that would be criticized by a November  General Accounting Office report for creating a “lack of regulatory oversight.”  The July  report also made recommendations on mortgage reform.  While preparing draft recommendations for the report, Fed staff wrote to the Fed’s Committee on Consumer and Community Affairs that “given the Board’s traditional reluctance to support substantive limitations on market behavior, the draft report discusses various options but does not advocate any particular ap- proach to addressing these problems.”  In the end, although the two agencies did not agree on the full set of recommen- dations addressing predatory lending, both the Fed and HUD supported legislative bans on balloon payments and advance collection of lump-sum insurance premiums, stronger enforcement of current laws, and nonregulatory strategies such as commu- nity outreach efforts and consumer education and counseling. But Congress did not act on these recommendations. The Fed-Lite provisions under the Gramm-Leach-Bliley Act affirmed the Fed’s hands-off approach to the regulation of mortgage lending. Even so, the shakeup in the subprime industry in the late s had drawn regulators’ attention to at least some of the risks associated with this lending. For that reason, the Federal Reserve, FDIC, OCC, and OTS jointly issued subprime lending guidance on March , . CHRG-111shrg54533--67 Secretary Geithner," Well, again, I think you have put in place an enormously powerful set of oversight mechanisms, and I think those have done a very good job of helping provide not just a second pair of eyes, but three additional sets of eyes looking over everything we do. Of course, we would be happy to look at ways to sort of strengthen accountability and transparency because it is important to our credibility, too. But I do not believe you need new legislation in this area. Senator Hutchison. Thank you, Mr. Chairman. Senator Johnson. We have time for one more question apiece. Senator Merkley. Senator Merkley. Thank you very much, Senator Johnson. Am I limited to just a single question? Senator Johnson. Yes. Senator Merkley. Thank you, Mr. Chair. I would like to praise the plan that you put forward, and three things that I had been advocating for were in the plan: the Consumer Financial Protection Agency, having a housing expert involved in the systemic risk council, and power to reform predatory retail mortgage practices. So I certainly appreciate those aspects having been addressed. In regard to the Consumer Financial Protection Agency, would they have the power without additional input--or not input so much but authority from some other sector to do things such as shut down new tricks and traps introduced into credit cards or shut down new tricks and traps introduced into mortgage lending practices? " fcic_final_report_full--6 From  to , the amount of debt held by the financial sector soared from  trillion to  trillion, more than doubling as a share of gross domestic product. The very nature of many Wall Street firms changed—from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks. By , the  largest U.S. commercial banks held  of the industry’s assets, more than double the level held in . On the eve of the crisis in , financial sector profits constituted  of all corporate profits in the United States, up from  in . Understanding this transformation has been critical to the Commis- sion’s analysis. Now to our major findings and conclusions, which are based on the facts con- tained in this report: they are offered with the hope that lessons may be learned to help avoid future catastrophe. • We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essen- tial to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us. Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread re- ports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregu- lated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner. The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: financial institu- tions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mort- gage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines? FOMC20061025meeting--87 85,MS. BIES.," Thank you, Mr. Chairman. Well, again, as some of you have said, in five weeks we don’t have a whole lot of new information. But I’m coming back and starting with housing again. As you know, that continues to be something I watch. Let me just make a few comments and give you recent feedback from some exams and dialogues with brokers that I’d like to share with you. Looking at both starts and permits, we all know that housing is continuing to soften in terms of construction, and we have also identified the increasing number of contract cancellations for new housing. Someone mentioned earlier the noise that we may be having around housing data, and I get this through some of the anecdotal conversations that I’ve had with folks. One topic was the inventory of existing housing for sale. I’m hearing from a couple of real estate brokers that people who may have wanted to sell their homes or may have put them up for sale are withdrawing them from the market. They don’t need to move, and it isn’t worthwhile for them to move if they don’t get the price they want. I think the supply was possibly bigger than what we’re really measuring, and so we’re seeing some understating of what desired house sales would be in terms of inventory. That’s continuing; it is just beginning at this stage, at least in a couple of regions, according to folks with whom I’ve talked. One of the challenges that we’re faced with here is that—again, I try to look for the good news—in the housing purchase process, people file applications for mortgages very often before they qualify to buy the house. When you look at the Mortgage Bankers Association data on purchase mortgage applications, as I mentioned before, they dropped 20 percent from their peak of last summer, but in the past few months they have been leveling off. So if applications are a leading indicator, we may begin to see some moderation in housing purchases. However, the 20 percent drop in purchase mortgage applications means that mortgage brokers are earning a lot less income. If they don’t close a transaction, most of them get no paycheck because three out of four mortgages are originated not in financial institutions but by independent brokers. We’re beginning to see increasing evidence of this in terms of the quality of mortgages that are out there. We continue to track the mortgages that have vintages—in other words, that were originated—in 2005, and we are continuing to see that, as these mortgages age, the early delinquencies for these are greater than early delinquencies for similar-aged mortgages of earlier vintages, which implies a loosening of underwriting standards and more stress on the borrowers. We are also seeing in a small way increased predatory activity with loans. Certain practices have been described to me lately with new products, such as the 2-28 mortgage, which is fixed for two years and then escalates and becomes an ARM tied to LIBOR in the third year. But don’t worry—you can refinance it with the broker and bring your payment down and do it all over again. We’re seeing those kinds of things—mortgages for which people are being qualified by brokers with no escrow account; all of a sudden taxes are due, and borrowers don’t have the money for them. So predatory lending is rearing its head at the lower end of the scale, and it’s something we have to continue to watch for. However, before I leave housing, let me just say that the bottom line is that overall mortgage credit quality is still very, very strong. We’re seeing predatory lending only in pockets of the market. I continue to believe that the rest of the economy—except for autos, I should add—is still very strong. Consumer spending is good, and business fixed investment is very sound. The moderation in energy prices and the growth in consumer income will continue to add support to the economy going forward. Jobless claims have been low and moving in a very narrow range the past few months. As several of you have mentioned, I’m hearing more concern by corporate executives about the inability to hire the talent they need to meet their business plans, and so I’m seeing more indication of tightness in labor markets. Turning to inflation, as many of you have said, core inflation has moderated from the pace in the third quarter. But going forward in the Greenbook forecast, it is still showing significant persistence even though we think we will be growing, at least for a period, below potential. That concerns me because that level is higher than I’m comfortable with in the long run. We might have had some spillover effects from rising commodity and energy prices earlier on, but I was hoping at this point that, with the reversing, we would see more-positive spillover effects that would mitigate inflation. So I am very worried about inflation. At the same time, I know that negative spillover effects on growth due to the rapid decline in housing construction and the moderating house-price appreciation are risks, which we cannot dismiss, to growth; but on net I am still much more concerned about the persistence of inflation. Thank you, Mr. Chairman." CHRG-111hhrg53240--136 Mr. Carr," I think we should recognize that it took until the middle of 2008 to actually release final regs on HOEPA to deal with this issue. And even at that time, some of the most egregious predatory practices still weren't purged. For example, yield spread premiums, which are basically kickbacks, were still allowable, as well as weaknesses on issues such as assignee liability, prepayment penalties. And this is knee deep into the crisis. Those issues have now only recently been taken on again. " CHRG-110shrg50415--24 Mr. Morial," Thank you very much. It is almost afternoon, but good morning. Let me, first of all, say that I am proud to be here on behalf of the National Urban League, its 100 affiliates who exist in all of the States and cities represented by Members of the Committee. I am also here representing the Black Leadership Forum, an umbrella organization of some 30-plus African American-focused organizations from coast to coast. I serve this year as its Chair. I come today to set the record straight about what I call the ``financial weapon of mass deception,'' the ugly, insidious, and concerted effort to blame minority borrowers for the Nation's current economic straits. This financial weapon of mass deception, as false and outrageous as it is, has taken hold, thanks to constant and organized repetition and dissemination through the media, political circles, newspapers, and the Internet. It is not a harmless lie. It is a stretching of the truth for fleeting political advantage. It is an enormously damaging and far-reaching smear designed to shift the blame for this crisis from Wall Street and Washington, where it belongs, onto middle-class families on Main Streets throughout this Nation. For years, the National Urban League and others have raised the flag and urged Congress and the administration to address the predatory lending practices that were plaguing our communities. For example, in March of 2007, I issued the Homebuyers Bill of Rights in which I called upon the Government to clamp down on predatory lending and other practices that were undermining the minority homebuyer and homebuyers of all races. Unfortunately, not only did our call go unheeded, but also we spent time right here in this Congress fighting back efforts to preempt the ability of States to regulate predatory practices. Now disaster has struck. Many of those who caused it are trying now to blame communities of color and urban communities and those measures that helped clear the way for qualified people to purchase homes--most notably the Community Reinvestment Act. In fact, it was the failure of regulatory policy and oversight that led to this debacle that has been completely expressed by every one of the three witnesses that have gone before me. But I want for the record to share with you some plain and simple facts, stubborn facts, Senator Dodd. It was Wall Street investors--not Fannie Mae and Freddie Mac--who were the major purchasers/investors of subprime loans between 2004 and 2007, and we have a chart that demonstrates this very clearly that we will make a part of the record. No. 2, while minorities and low-income borrowers received a disproportionate share of subprime loans, the vast majority of subprime loans--the vast majority--went to white middle- and upper-income borrowers. The true racial dimensions of the housing crisis have been reported in places like the New York Times, and that is expressed by another chart. Third, African Americans and Latinos were given subprime loans disproportionately compared to whites, according to ComplianceTech, a leading expert in lending to financial services companies, researcher to financial services companies. Also, African American borrowers were more than twice as likely to be scared into a subprime loan as white borrowers. In each year from 2004 to 2007, non-Hispanic whites had more subprime rate loans than all minorities combined. In 2007, 37 percent of African American borrowers were given subprime loans, versus 14.21 percent of whites, according to ComplianceTech. More than 53 percent of African American borrowers were given subprime loans compared versus 14 percent of whites, according to ComplianceTech. The vast majority of subprime rate loans were originated in largely white census tracts. The volume of subprime rate loans made to non-Hispanic whites dwarfs the volume of subprime rate loans made to minorities. In each year, the white proportion of subprime rate loans was lower than all minorities, except Asians. I want to point out that while the majority of subprime loans did go to white Americans, African Americans and Hispanics were disproportionately steered into subprime loans. At the end of the day, this is a problem that affects Americans of all races, and I urge this Committee to strongly and publicly not only affirm that but to challenge the false assumptions being peddled by the agents of mass deception. Upper-income borrowers--upper-income borrowers--had the highest share of subprime rate loans during each year except 2004, where middle-income borrowers had the highest share. The misconception is that lending to low- and moderate-income Latinos and African Americans caused this problem. The stubborn facts, not hidden but in the Mortgage Disclosure Act, clearly affirm this point. It is clear that a large number of people who ended up with subprime loans could have qualified for a prime loan, and the incentive system set up for brokers and originators which incentivized steering people into higher-rate loans was one of the causes of this. Non-CRA, as the Treasurer mentioned, financial services companies--non-CRA financial services companies were the major originators of subprime loans between 2004 and 2007. These facts are unequivocal. They are clear. And they are indisputable. There have been commentators, some who hold a great deal of respect, who write and broadcast, some members of the other side of this Congress, who for some reason have peddled this story of mass deception as though they were reading off a set of political talking points. As we have seen in numerous Internet blogs, highly trafficked sites, this baseless blame game has turned into vicious attacks on the Internet directed at African Americans, Latinos, Jews, gays, and lesbians. In the last few weeks, I have undertaken an aggressive campaign directed at the Nation's financial leaders to dispel this myth. I have written to Treasury Secretary Paulson and Federal Reserve Chairman Bernanke and asked that they publicly refute claims by these pundits and politicians that most of the defaulted subprime loans at the root cause of the crisis were made to African Americans, Hispanics, and other so-called ``unproductive borrowers.'' On the basis of hearsay, on the basis of rumors, on the basis of statements made by respected commentators, the seeds of division around this financial crisis are being sown in this Nation. History tells us too many times that the consequences of singling out only certain segments of the population as culprits for the Nation's woes for us not to do all within our power to stop these attacks, to end this smear campaign in its tracks, requires--and I would ask and urge that this Committee join us in the strongest possible terms available to stand up to this lie, to stand up to these agents of mass deception, to stop the waste of discussion and time being spent on blaming victims and force, as this Committee seeks to do, a healthy debate on what must be done to curb too much Wall Street greed and too little Washington oversight. This hearing is an important start toward that. So I urge you to stay focused and take strong and positive steps to strengthen our communities and this Nation's financial foundation through regulatory reform. Finally, with respect to regulation, I want to encourage the Congress not to leave it to the rulemaking authority of the Federal Reserve to regulate anti-predatory lending. I urge this Congress, I urge this Committee to take the lead, as you suggested, Senator Dodd, to codify the boundaries going forward for the type of loan products that financial services companies are going to be able to offer to the American people. No. 2, an area of failed oversight and regulation not mentioned thus far has been the failure to enforce fair lending laws. Both the Department of Justice and the Department of Housing and Urban Development ought to be called to account, ought to be called to be transparent, on where they were as this crisis has fomented, because they, too, have a very important responsibility in enforcing laws on the books. No. 3, the Community Reinvestment Act is a very important vehicle that has yielded great benefits for this Nation. The idea that it has been assigned responsibility and blame for this crisis is so far-fetched, so imaginary as to almost not merit a response. But we know that there are those who for years have held it close on their legislative agenda to try to water down, to try to eliminate, to try to undercut the Community Reinvestment Act. I would suggest that at a time when the taxpayers of this Nation have been asked to take an unprecedented move--that is, to authorize the Treasury to invest taxpayer dollars in the preferred stock of financial services corporations--then the direction that the Congress should take in exchange and in return is not a weakening of the Community Reinvestment Act, but a strengthening of the Community Reinvestment Act and its enforcement mechanisms. So, Senator Dodd, I thank you for your leadership. I urge the Committee to take a very strong stand, and I thank you for your time today. " fcic_final_report_full--569 Chapter 5 1. Gail Burks, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis—State of Nevada, session 3: The Impact of the Financial Crisis on Nevada Real Estate, September 8, 2010, p. 3. 2. Tom C. Putnam, president, Putnam Housing Finance Consulting, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis—Sacramento, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, September 23, 2010, pp. 3–4. 3. Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1: Flow of Funds Accounts of the United States, release date, December 9, 2010, Table L.1: Credit Market Debt Out- standing, and Table L.126: Issuers of Asset-Backed Securities (ABS) 4. Jim Callahan, interview by FCIC, October 18, 2010. 5. Lewis Ranieri, former vice chairman of Salomon Brothers, interview by FCIC, July 30, 2010. 6. Federal Deposit Insurance Corporation, “Managing the Crisis: The FDIC and RTC Experience” (August 1998), pp. 29, 6–7, 407–8, 38. 7. Ibid., 417. 8. Ibid., pp. 9, 32, 36, 48 9. The figures throughout this discussion of CMLTI 2006-NC2 are FCIC staff calculations, based on analysis of loan-level data from Blackbox Inc. and Standard & Poor’s; Moody’s PDS database; Moody’s CDO EMS database; and Citigroup, Fannie Mae Term Sheet, CMLTI 2006-NC2, September 7, 2006, pp. 1, 3. See also Brad S. Karp, counsel for Citigroup, letter to FCIC, November 4, 2010, p. 1, pp. 2–3. All rat- ings of its tranches are as given by Standard & Poor’s. 10. Technically, this deal had two unrated tranches below the equity tranche, also held by Citigroup and the hedge fund. 11. Fed Chairman Ben S. Bernanke, “The Community Reinvestment Act: Its Evolution and New Challenges,” speech at the Community Affairs Research Conference, Washington, D.C., March 30, 2007. 12. Ibid. 13. See Glenn Canner and Wayne Passmore, “The Community Reinvestment Act and the Profitability of Mortgage-Oriented Banks,” Working Paper, Federal Reserve Board, March 3, 1997. Under the Com- munity Reinvestment Act, low- and moderate-income borrowers have income that is at most 80% of area median income. 14. Fed Chairman Alan Greenspan, “Economic Development in Low- and Moderate-Income Com- munities,” speech at Community Forum on Community Reinvestment and Access to Credit: California’s Challenge, in Los Angeles, January 12, 1998. 15. John Dugan, interview by FCIC, March 12, 2010. 16. Lawrence B. Lindsey, interview by FCIC, September 20, 2010. 17. Souphala Chomsisengphet and Anthony Pennington-Cross, “The Evolution of the Subprime Mortgage Market,” Federal Reserve Bank of St. Louis Review 88, no. 1 (January/February 2006): 40 18. Southern Pacific Funding Corp, Form 8-K, September 14, 1998 19. The top 10 list is as of 1996, according to FCIC staff calculations using data from the following sources: Inside Mortgage Finance, The 2009 Mortgage Market Statistical Annual, vol. 1, The Primary Mar- ket (Bethesda, Md.: Inside Mortgage Finance Publications, 2009), p. 214, “Top 25 B&C Lenders in 1996”; Thomas E. Foley, “Alternative Financial Ratios for the Effects of Securitization: Tools for Analysis,” Moody’s Investor Services, September 19, 1997, p. 5; and Moody’s Investor Service, “Subprime Home Eq- uity Industry Outlook—The Party’s Over,” Moody’s Global Credit Research, October 1998. 20. “FDIC Announces Receivership of First National Bank of Keystone, Keystone, West Virginia,” Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency joint press release, September 1, 1999. 21. FCIC staff calculations using data from Inside MBS & ABS . 22. See Marc Savitt, interview by FCIC, November 17, 2010. 23. Henry Cisneros, interview by FCIC, October 13, 2010. 24. Glenn Loney, interview by FCIC, April 1, 2010. 25. Senate Committee on Banking, Housing, and Urban Affairs, The Community Development, Credit Enhancement, and Regulatory Improvement Act of 1993, 103rd Cong., 1st sess., October 28, 1993, S. Rep. 103–169, p. 18. 26. Ibid., p. 19. 27. 15 U.S.C. § 1639(h) 2006. 28. Loans were subject to HOEPA only if they hit the interest rate trigger or fee trigger: i.e., if the an- nual percentage rate for the loan was more than 10 percentage points above the yield on Treasury securi- ties having a comparable maturity or if the total charges paid by the borrower at or before closing exceeded $400 or 8% of the loan amount, whichever was greater. See Senate Committee on Banking, Housing, and Urban Affairs, S. Rep. 103–169, p. 54. 29. Ibid., p. 24. 30. Board of Governors of the Federal Reserve System and Department of Housing and Urban Devel- opment, “Joint Report Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act” (July 1998), p. 56. 31. Griffith L. Garwood, director, Division of Consumer and Community Affairs, Board of Gover- nors of the Federal Reserve System, “To the Officers and Managers in Charge of Consumer Affairs Ex- amination and Consumer Complaint Programs,” Consumer Affairs Letter CA 98–1, January 20, 1998 32. GAO, “Large Bank Mergers: Fair Lending Review Could Be Enhanced with Better Coordination,” GAO/GGD-00–16 (Report to the Honorable Maxine Waters and the Honorable Bernard Sanders, House of Representatives), November 1999, p. 20. 33. Fed and HUD, “Joint Report,” pp. I–XXVII. 34. Griffith L. Garwood, director, Division of Consumer and Community Affairs, Board of Gover- nors of the Federal Reserve System, memorandum to the Committee on Consumer and Community Af- fairs, “Memorandum concerning the Board’s Report to the Congress on the Truth in Lending and Real Estate Settlement Procedures Acts,” April 8, 1998, p. 42. 35. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, “Interagency Guidance on Sub- prime Lending” (March 1, 1999), p. 1 36. Ibid., pp. 1–7; quotation, p. 5. 37. U.S. Department of the Treasury and U.S. Department of Housing and Urban Development, “Curbing Predatory Home Lending” (June 1, 2000), pp. 13–14, 1–2, 81 (quotations, 2, 1–2). 38. Gail Burks, president and chief executive officer, Nevada Fair Housing Center, Inc., testimony be- fore the FCIC, Hearing on the Impact of the Financial Crisis—State of Nevada, session 3: The Impact of the Financial Crisis on Nevada Real Estate, September 8, 2010, transcript, p. 242–43.See also Kevin Stein, associate director, California Reinvestment Coalition, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis—Sacramento, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, September 23, 2010, pp. 8–9. See also his testimony at the same hearing, transcript, pp. 73–74. See Diane E. Thompson, of counsel, National Consumer Law Cen- ter, Inc., and Margot F. Saunders, of counsel, National Consumer Law Center, Inc., interview by FCIC, September 10, 2010. 39. Diane E. Thompson and Margot F. Saunders, both of counsel, National Consumer Law Center, in- terview by FCIC, September 10, 2010. 40. Gary Gensler, interview by FCIC, May 14, 2010. 41. Sheila Bair, testimony before the FCIC, First Public Hearing of the FCIC, day 2, panel 1: Current Investigations into the Financial Crisis—Federal Officials, January 14, 2010, transcript, p. 97. 42. Sheila Bair, interview by FCIC, March 29, 2010. 43. Sandra F. Braunstein, interview by FCIC, April 1, 2010, pp. 31–34. 44. Bair, interview. 45. Treasury and HUD, “Curbing Predatory Home Lending,” p. 31. CHRG-110shrg38109--151 Chairman Dodd," The basic research point is an excellent one. I do not have the numbers on the top of my head here, but the decline of the U.S. Government's commitment to basic research has dropped precipitously. I think over the last number of years, it is not something that has occurred in the last couple of years. I am pleased to hear you say that. That is something we do not pay enough attention to, and how much we have benefitted over the years for applied research to live off the basic research commitments we have made in the past, so it is worthwhile. If I can, Mr. Chairman, just a couple of points I wanted to raise with you, and I thank my colleague from Delaware for his comments. Just a couple of cleanup things. I mentioned earlier, the issue we had in the hearings on the predatory lending issue. We did not bring up GSE's today. My colleague from Delaware has a strong interest, as I do. And we are going to move fairly quickly here on a Senate bill. It is an important issue. Although I think things are in pretty good control. It is not as if there is some immediate threat out there. There are a number of things we need to be doing and we intend to move in that direction. One of the things I wanted to raise with you, because with Fannie Mae and Freddie Mac, is the purchasing of some of these ARM's that are pretty abusive. Understand in these things, the broker and the bank is out of it pretty quickly, 10 to 12 weeks. These things are bundled and then go off and are securitized. And the fact that Fannie and Freddie are purchasing these at a pretty high standard, AA or AAA, whatever the standard is they are applying to them, concerns me in a sense. One good way to begin to try and reverse some of these practices, in addition to what regulators may be able to do, is to have some different requirements here in terms of the securitization of these products. I wonder if you have any comment on that at all you care to share. " CHRG-111hhrg72887--39 CONGRESS FROM THE STATE OF CALIFORNIA Ms. Matsui. I want to thank you very much for calling today's hearing. I would also like to thank our panelists for sharing their expertise with us. In today's economic recession, many families in my home district of Sacramento are struggling to make ends meet. I have heard countless stories of people struggling to keep their homes, their jobs, and their way of life. Many of my constituents were victims of predatory lending and were steered into high-cost, bad loans. Now, many of these homeowners are seeking assistance in modifying their loans to more affordable terms, yet many of these individuals are now being tricked by scam artists posing as so-called ``foreclosure consultants'' to save their homes. These scams are costing thousands of dollars and represent false promises to struggling homeowners. During last week's debate on the mortgage reform bill, I offered an amendment that was included in the final bill that directs the GAO to conduct a study of the government's current efforts to combat foreclosure rescue scams. It is clear that consumers are not being properly protected from these shameful practices. It is also clear that we can do more to protect the American people from harmful exposure to mercury. Mercury is a known toxin, and we should do all in our power to ensure that it stays out of our newborns' bodies. I look forward to hearing from today's witnesses, particularly from Dr. Lynn Goldman, who is the principal investigator of the National Children's Study, and who is an expert on mercury exposure. I thank you, Mr. Chairman, for holding this important hearing today. I yield back the balance of my time. " fcic_final_report_full--517 Activities,” 121 the authors noted in slide 10 that AH goal costs had risen from $2,632,500 in 2000 to $13,447,500 in 2003. Slide 17 is entitled: “Meeting Future HUD Goals Appear Quite Daunting and Potentially Costly” and reports, “Based on 2003 experience where goal acquisition costs (relative to Fannie Mae model fees) cost between $65 per goals unit in the first quarter to $370 per unit in the fourth quarter, meeting the shortfall could cost the company $6.5-$36.5 million to purchase suffi cient units.” The presentation concludes (slide 20): “Cost of mission activities— explicit and implicit—over the 2000-2004 period likely averaged approximately $200 million per year.” Earlier, I noted the efforts of Fannie and Freddie to window-dress their records for HUD by temporarily acquiring loans that would comply with the AH goals, while giving the seller the option to reacquire the loans at a later time. In 2005, we begin to see efforts by Fannie’s staff to accomplish the same window-dressing in another way--delaying acquisitions of non-goal-eligible loans so Fannie can meet the AH goals in that year; we also see the first efforts to calculate systematically the effect of goal-compliance on Fannie’s profitability. In a presentation dated September 30, 2005, Barry Zigas, the key Fannie offi cial on affordable housing, outlined a “business deferral option.” Under that initiative, Fannie would ask seven major lenders to defer until 2006 sending non-goal loans to Fannie for acquisition. This would reduce the denominator of the AH goal computation and thus bring Fannie nearer to goal compliance in the 4th quarter of 2005. The cost of the deferral alone was estimated at $30-$38 million. 122 In a presentation to HUD on October 31, 2005, entitled “Update on Fannie Mae’s Housing Goals Performance,” 123 Fannie noted several “Undesirable Tradeoffs Necessary to Meet Goals.” These included significant additional credit risk, and negative returns (“Deal economics are well below target returns; some deals are producing negative returns” and “G-fees may not cover expected losses”). One of the most noteworthy points was the following: “Liquidity to Questionable Products: Buying exotic product encourages continuation of risky lending; many products present with significant risk-layering; consumers are at risk of payment shock and loss of equity; potential need to waive our responsible lending policies to get goals business.” Much of the narrative about the financial crisis posits that unscrupulous and unregulated mortgage originators tricked borrowers into taking on bad mortgages. The idea that predatory lending was a major source of the NTMs in the financial system in 2008 is a significant element of the Commission majority’s report, although the Commission was never able to provide any data to support this point. This Fannie slide suggests that loans later dubbed “predatory” might actually have been made to comply with the AH goals. This possibility is suggested, too, in a message sent in 2004 to Freddie’s CEO, Richard Syron, by Freddie’s chief risk manager, David Andrukonis, when Syron was considering whether to authorize a “Ninja” (no income/no jobs/no assets) product that he ultimately approved. Andrukonis argued against authorizing Freddie’s purchase: “The potential for the perception and reality 121 122 123 Fannie Mae, “Costs and Benefits of Mission Activities, Project Phineas,” June 14, 2005. Barry Zigas, “Housing Goals and Minority Lending,” September 30, 2005. Fannie Mae, “Update on Fannie Mae’s Housing Goals Performance,” Presentation to the U.S. Department of Housing and Development, October 31, 2005. 513 of predatory lending, with this product is great.” 124 But the product was approved by Freddie, probably for the reason stated by another Freddie employee: “The Alt-A [(low doc/no doc)] business makes a contribution to our HUD goals.” 125 On May 5, 2006, a Fannie staff memo to the Single Family Business Credit Committee revealed the serious credit and financial problems Fannie was facing when acquiring subprime mortgages to meet the AH goals. The memo describes the competitive landscape, in which “product enhancements from Freddie Mac, FHA, Alt-A and subprime lenders have all contributed to increased competition for goals rich loans…On the issue of seller contributions [in which the seller of the home pays cash expenses for the buyer] even FHA has expanded their guidelines by allowing 6% contributions for LTVs up to 97% that can be used toward closing, prepaid expenses, discount points and other financing concessions.” 126 The memorandum is eye-opening for what it says about the credit risks Fannie had to take in order to get the goals-rich loans it needed to meet HUD’s AH requirements for 2006. Table 11 below shows the costs of NTMs in terms of the guarantee fee (G-fee) “gap.” (In order to determine whether a loan contributed to a return on equity, Fannie used a G-fee pricing model that took into account credit risk as well as a number of other factors; a G-fee “gap” was the difference between the G-fees required by the pricing model for a particular loan to contribute to a return on equity and a loan that did not.) The table in this memo shows the results for three subprime products under consideration, a 30 year fixed rate mortgage (FRM), a 5 year ARM, and 35 and 40 year fixed rate mortgages. For simplicity, this analysis will discuss only the 30 year fixed rate product. The table shows that the base product, the 30 year FRM, with a zero downpayment should be priced according to the model at a G-fee of 106 basis points. However, the memo reports that Fannie is actually buying loans like that at a price consistent with an annual fee of 37.50 basis points, producing a gap (or loss from the model) of 68.50 basis points. The reason the gap is so large is shown in the table: the anticipated default rate on that zero- down mortgage was 34 percent . The table then goes on to look at other possible loan alternatives, with the following results: 124 CHRG-111hhrg53241--7 The Chairman," The gentlewoman from California, Ms. Waters, for 2\1/2\ minutes. Ms. Waters. Thank you very much, Mr. Chairman, and members. I am still shaken from yesterday when we had the financial services community representatives, bankers, etc., come before us and take on the consumer financial agency with great opposition, giving us 101 reasons why we didn't need it, how it was going to cost the taxpayer more money, how it would interfere with safety and soundness, and on and on and on. But I am even more shaken with what is happening in the underground with the huge amount of money that the bankers and financial services community representatives are going to spend to lobby Members of Congress. I understand they almost have hired a lobbyist for each one of us. I never expected, given the subprime meltdown and the number of foreclosures we have, that we would get that kind of opposition. How soon we forget. And I am more concerned that there are Members of Congress who are beginning to take on the arguments of the financial services industry about why a consumer financial agency is not necessary. Many of the people who are before us today have been fighting as nonprofits against predatory lending, opposition to bank mergers, forcing mortgage disclosure. I remember being in the fight with some on redlining, fighting to create CRA, helping to create the Cooling Off Period, Truth in Lending. And they are forever chasing the very-well-heeled financial services community, trying to protect the consumers. And now we have an opportunity to really show that we want to protect the consumers with an agency that will have the word ``consumer'' in it, and we have people who are backing off. I am even more shocked that, as this chairman has provided opportunities for us to interact with the financial services industry, it has basically been dishonored. Even yesterday, when we were engaged with consumer advocates, one member got up and left and went to a fundraiser with the banking community in the middle of all of that. Well, all I have to say is I am hopeful that our advocates will be stronger than ever and that we will fight against this opposition. We will respect our consumers. We will not forget the still-growing number of foreclosures that are out there created by greedy loan initiators, and we will do a job for the consumers despite the lobbyists and the money and the opposition to this. I yield back the balance of my time. " CHRG-110shrg38109--71 Chairman Bernanke," Senator, as I indicated in my opening testimony, we think we see some tentative signs of stabilization in demand in the housing market, that nevertheless takes some time yet to work its way out because of the inventories of unsold homes that still exist on the market. I would emphasize that the signs of stabilization are tentative, and we do not want to jump to conclusions. It will be helpful to see what happens when the spring selling season begins and strong demand is at that time. But it is interesting that so far the economy has done a good job of withstanding the slowdown in construction, which, although substantial relative to the last couple of years, is still similar to the late 1990's, for example. It is not that we have had a complete collapse in construction by any means. So the decline in construction, while it has slowed the economy, has obviously not thrown us into a much slower growth situation. And we have not seen substantial spillovers from the housing slowdown to consumer spending or to other parts of the economy. So it is early to say that this problem is over. I think we are going to have to continue to watch it very carefully, and as I indicated, I think it is a downside risk to the economy going forward. But so far, the economy has reasonably adapted to this adjustment in the housing market. Senator Martinez. You mentioned in your remarks also that household finance appears solid and that delinquency rates on most consumer loans, including residential mortgages, were low, but you did note the subprime mortgages with variable interest rates where delinquency rates have increases appreciably. And it is an issue that is of great concern to several of us on this Committee, the issue of predatory lending, the abuse of some of our most vulnerable consumers. Any comments on that or any issues that you see there which could impact the overall economy? " CHRG-111shrg51290--5 STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman. I want you to know that I appreciate your conducting this hearing and also appreciate your advocacy on behalf of consumers, Mr. Chairman and Ranking Member, Senator Shelby. I also want to welcome our witnesses this morning to this hearing. Well before the current economic crisis, our financial regulatory system was failing to adequately protect working families, home buyers, individuals from predatory practices and exploitations. Prospective home buyers were steered into mortgage products with risks and costs that they could not afford. Working families were being exploited by high-cost fringe financial service providers, such as payday lenders and check cashers. Low-income taxpayers had their Earned Income Tax Credit benefits unnecessarily diminished by refund anticipation loans. Individuals trying to cope with their debt burdens were pushed into inappropriate debt management plans by disreputable credit counselors. We must increase consumer education so that individuals are able to make better informed decisions. However, although it is essential, education is not enough. We must also restrict predatory policies, ensure that consumers' interests are better represented in the regulatory process, and increase effective oversight of financial services. Mr. Chairman, you mentioned this in your opening statement and I will certainly work with you on these measures. I appreciate the witnesses today and I look forward with all of you to educate, protect, and empower consumers. Thank you very much, Mr. Chairman. " FinancialCrisisInquiry--223 ROSEN: Yes, I would. I think that’s—the data seems to show that. THOMPSON: Yes, OK. Ms. Gordon, you talked about predatory practices, and you specifically said it seemed as though some of that might have been targeted at minorities, African- Americans and Hispanics. Do you have evidence to support that statement? And are there lawsuits or activities underway that would suggest that this is not just predatory, but perhaps illegal? GORDON: Well it’s well documented that African American and Latino families disproportionately received the expensive and dangerous subprime loans that we’ve been talking about. You—you know, there—there are Federal Reserve papers on this. The HUMDA data will show that to you, because it collects the demographic data that you need to get this. I think—in one—one data point I have in my testimony is that in 2006 among consumers who received conventional mortgages for single family homes, about half of African Americans and Hispanic borrowers received a higher rate mortgage compared to about one fifth of White borrowers. You know, our—our research has shown that African Americans and Latinos were much more likely to receive higher rate subprime loans. Another study has shown that minority communities were more likely to get loans with prepayment penalties even after controlling for other factors. You know, and like I said while it’s hard right now to get really good demographic data on foreclosures, you know, given that we know which loans have the highest rates of default, it’s not that hard to connect the dots. THOMPSON: Dr. Rosen, in your written testimony you gave a number of very thoughtful things that people should do as they thought about originating mortgages. And these seem to be quite simple. Better underwriting standards, better mechanisms that discourage speculation, so on and so forth. And since these seem so simple yet so necessary, in your opinion, why weren’t they done? fcic_final_report_full--94 But problems persisted, and others would take up the cause. Through the early years of the new decade,  “the really poorly underwritten loans, the payment shock loans” continued to proliferate outside the traditional banking sector, said FDIC Chairman Sheila Bair, who served at Treasury as the assistant secretary for financial institutions from  to . In testimony to the Commission, she observed that these poor-quality loans pulled market share from traditional banks and “created negative competitive pressure for the banks and thrifts to start following suit.” She added, [Subprime lending] was started and the lion’s share of it occurred in the nonbank sector, but it clearly created competitive pressures on banks. . . . I think nipping this in the bud in  and  with some strong consumer rules applying across the board that just simply said you’ve got to document a customer’s income to make sure they can re- pay the loan, you’ve got to make sure the income is sufficient to pay the loans when the interest rate resets, just simple rules like that . . . could have done a lot to stop this.  After Bair was nominated to her position at Treasury, and when she was making the rounds on Capitol Hill, Senator Paul Sarbanes, chairman of the Committee on Banking, Housing, and Urban Affairs, told her about lending problems in Baltimore, where foreclosures were on the rise. He asked Bair to read the HUD-Treasury report on predatory lending, and she became interested in the issue. Sarbanes introduced legislation to remedy the problem, but it faced significant resistance from the mort- gage industry and within Congress, Bair told the Commission. Bair decided to try to get the industry to adopt a set of “best practices” that would include a voluntary ban on mortgages that strip borrowers of their equity, and would offer borrowers the op- portunity to avoid prepayment penalties by agreeing instead to pay a higher interest rate. She reached out to Edward Gramlich, a governor at the Fed who shared her con- cerns, to enlist his help in getting companies to abide by these rules. Bair said that Gramlich didn’t talk out of school but made it clear to her that the Fed avenue wasn’t going to happen.  Similarly, Sandra Braunstein, the director of the Division of Con- sumer and Community Affairs at the Fed, said that Gramlich told the staff that Greenspan was not interested in increased regulation.  When Bair and Gramlich approached a number of lenders about the voluntary program, Bair said some originators appeared willing to participate. But the Wall Street firms that securitized the loans resisted, saying that they were concerned about possible liability if they did not adhere to the proposed best practices, she recalled. The effort died.  fcic_final_report_full--12 Second, we clearly believe the crisis was a result of human mistakes, misjudg- ments, and misdeeds that resulted in systemic failures for which our nation has paid dearly. As you read this report, you will see that specific firms and individuals acted irresponsibly. Yet a crisis of this magnitude cannot be the work of a few bad actors, and such was not the case here. At the same time, the breadth of this crisis does not mean that “everyone is at fault”; many firms and individuals did not participate in the excesses that spawned disaster. We do place special responsibility with the public leaders charged with protecting our financial system, those entrusted to run our regulatory agencies, and the chief ex- ecutives of companies whose failures drove us to crisis. These individuals sought and accepted positions of significant responsibility and obligation. Tone at the top does matter and, in this instance, we were let down. No one said “no.” But as a nation, we must also accept responsibility for what we permitted to occur . Collectively, but certainly not unanimously, we acquiesced to or embraced a system, a set of policies and actions, that gave rise to our present predicament. * * * T HIS REPORT DESCRIBES THE EVENTS and the system that propelled our nation to- ward crisis. The complex machinery of our financial markets has many essential gears—some of which played a critical role as the crisis developed and deepened. Here we render our conclusions about specific components of the system that we be- lieve contributed significantly to the financial meltdown. • We conclude collapsing mortgage-lending standards and the mortgage securi- tization pipeline lit and spread the flame of contagion and crisis. When housing prices fell and mortgage borrowers defaulted, the lights began to dim on Wall Street. This report catalogues the corrosion of mortgage-lending standards and the securiti- zation pipeline that transported toxic mortgages from neighborhoods across Amer- ica to investors around the globe. Many mortgage lenders set the bar so low that lenders simply took eager borrow- ers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay. Nearly one-quarter of all mortgages made in the first half of  were interest- only loans. During the same year,  of “option ARM” loans originated by Coun- trywide and Washington Mutual had low- or no-documentation requirements. These trends were not secret. As irresponsible lending, including predatory and fraudulent practices, became more prevalent, the Federal Reserve and other regula- tors and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission “to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” It failed to build the retaining wall before it was too late. And the Office of the Comptroller of the Cur- rency and the Office of Thrift Supervision, caught up in turf wars, preempted state regulators from reining in abuses. CHRG-111shrg52619--207 RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JOSEPH A. SMITH, JR.Q.1. It is clear that our current regulatory structure is in need of reform. At my subcommittee hearing on risk management, March 18, 2009, GAO pointed out that regulators often did not move swiftly enough to address problems they had identified in the risk management systems of large, complex financial institutions. Chairman Bair's written testimony for today's hearing put it very well: `` . . . the success of any effort at reform will ultimately rely on the willingness of regulators to use their authorities more effectively and aggressively.'' My questions may be difficult, but please answer the following: If this lack of action is a persistent problem among the regulators, to what extent will changing the structure of our regulatory system really get at the issue? Along with changing the regulatory structure, how can Congress best ensure that regulators have clear responsibilities and authorities, and that they are accountable for exercising them ``effectively and aggressively''?A.1. First of all, CSBS agrees completely with Chairman Bair. In fact, in a letter to the Government Accountability Office (GAO) in December 2008, CSBS Executive Vice President John Ryan wrote, ``While there are clearly gaps in our regulatory system and the system is undeniably complex, CSBS has observed that the greater failing of the system has been one of insufficient political and regulatory will, primarily at the federal level.'' Perhaps the resilience of our financial system during previous crises gave policymakers and regulators a false sense of security and a greater willingness to defer to powerful interests in the financial industry who assured them that all was well. From the state perspective, it is clear that the nation's largest and most influential financial institutions have themselves been major contributors to our regulatory system's failure to prevent the current economic collapse. All too often, it appeared as though legislation and regulation facilitated the business models and viability of our largest institutions, instead of promoting the strength of consumers or encouraging a diverse financial industry. CSBS believes consolidating supervisory authority will only exacerbate this problem. Regulatory capture by a variety of interests would become more likely with a consolidated supervisory structure. The states attempted to check the unhealthy evolution of the mortgage market and it was the states and the FDIC that were a check on the flawed assumptions of the Basel II capital accord. These checks should be enhanced by regulatory restructuring, not eliminated. To best ensure that regulators exercise their authorities ``effectively and aggressively,'' I encourage Congress to preserve and enhance the system of checks and balances amongst regulators and to forge a new era of cooperative federalism. It serves the best interest of our economy, our financial services industry, and our consumers that the states continue to have a role in financial regulation. States provide an important system of checks and balances to financial oversight, are able to identify emerging trends and practices before our federal counterparts, and have often exhibited a willingness to act on these trends when our federal colleagues did not. Therefore, CSBS urges Congress to implement a recommendation made by the Congressional Oversight Panel in their ``Special Report on Regulatory Reform'' to eliminate federal preemption of the application of state consumer protection laws. To preserve a responsive system, states must be able to continue to produce innovative solutions and regulations to provide consumer protection. Further, the federal government would best serve our economy and our consumers by advancing a new era of cooperative federalism. The SAFE Act enacted by Congress requiring licensure and registration of mortgage loan originators through NMLS provides a mode for achieving systemic goals of high regulatory standards and a nationwide regulatory roadmap and network, while preserving state authority for innovation and enforcement. The SAFE Act sets expectations for greater state-to-state and state-to-federal regulatory coordination. Congress should complete this process by enacting a federal predatory lending standard as outlined in H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act. However, a static legislative solution would not keep pace of market innovation. Therefore, any federal standard must be a floor for all lenders that does not stifle a state's authority to protect its citizens through state legislation that builds upon the federal standard. States should also be allowed to enforce-in cooperation with federal regulators-both state and federal predatory lending laws for institutions that act within their state. Finally, rule writing authority by the federal banking agencies should be coordinated through the FFIEC. Better state/federal coordination and effective lending standards is needed if we are to establish rules that are appropriately written and applied to financial services providers. While the biggest institutions are federally chartered, the vast majority of institutions are state chartered and regulated. Also, the states have a breadth of experience in regulating the entire financial services industry, not just banks. Unlike our federal counterparts, my state supervisory colleagues and I oversee all financial service providers, including banks, thrifts, credit unions, mortgage banks, and mortgage brokers.Q.2. How do we overcome the problem that in the boom times no one wants to be the one stepping in to tell firms they have to limit their concentrations of risk or not trade certain risky products? What thought has been put into overcoming this problem for regulators overseeing the firms? Is this an issue that can be addressed through regulatory restructure efforts?A.2. Our legislative and regulatory efforts must be counter-cyclical. A successful financial system is one that survives market booms and busts without collapsing. The key to ensuring our system can survive these normal market cycles is to maintain and strengthen the diversity of our industry and our system of supervision. Diversity provides strength, stability, and necessary checks-and-balances to regulatory power. Consolidation of the industry or financial supervision could ultimately product a financial system of only mega-banks, or the behemoth institutions that are now being propped up and sustained by taxpayer bailouts. An industry of only these types of institutions would not be resilient. Therefore, Congress must ensure this consolidation does not take place by strengthening our current system and preventing supervisory consolidation.Q.3. As Mr. Tarullo and Mrs. Bair noted in their testimony, some financial institution failures emanated from institutions that were under federal regulation. While I agree that we need additional oversight over and information on unregulated financial institutions, I think we need to understand why so many regulated firms failed. Why is it the case that so many regulated entities failed, and many still remain struggling, if our regulators in fact stand as a safety net to rein in dangerous amounts of risk-taking? While we know that certain hedge funds, for example, have failed, have any of them contributed to systemic risk? Given that some of the federal banking regulators have examiners on-site at banks, how did they not identify some of these problems we are facing today?A.3. To begin, the seeming correlation between federal supervision and success now appears to be unwarranted and should be better understood. The failures we have seen are divided between institutions that are suffering because of an extreme business cycle, and others that had more fundamental flaws that precipitated the downturn. In a healthy and functional economy, financial oversight must allow for some failures. In a competitive marketplace, some institutions will cease to be feasible. Our supervisory structure must be able to resolve failures. Ultimately, more damage is done to the financial system if toxic institutions are allowed to remain in business, instead of allowed to fail. Propping up these institutions can create lax discipline and risky practices as management relies upon the government to support them if their business models become untenable. ------ FinancialCrisisInquiry--833 ROSEN: It’s very puzzling because they wrote the right paper. A key Federal Reserve Board member was pushing it very hard. It was—and I don’t know why it didn’t happen. The chairman was a pretty strong guy, and I suspect that was it. But maybe read Ned Gramlich’s book because he’s written a whole book on this topic before he passed away. I think it would be worth it to find out why they didn’t do it. A lot of them did believe, though, there was—it wasn’t really happening; it was demographics. It wasn’t predatory; it was just market innovation at work. January 13, 2010 Chairman Greenspan said—encouraged people to take these loans. Remember one of those statements he made, and I couldn’t believe he said that. And he did. He apologized after the fact for it. But he did say it. fcic_final_report_full--538 This dissenting statement argues that the U.S. government’s housing policies were the major contributor to the financial crisis of 2008. These policies fostered the development of a massive housing bubble between 1997 and 2007 and the creation of 27 million subprime and Alt-A loans, many of which were ready to default as soon as the housing bubble began to deflate. The losses associated with these weak and high risk loans caused either the real or apparent weakness of the major financial institutions around the world that held these mortgages—or PMBS backed by these mortgages—as investments or as sources of liquidity. Deregulation, lack of regulation, predatory lending or the other factors that were cited in the report of the FCIC’s majority were not determinative factors. The policy implications of this conclusion are significant. If the crisis could have been prevented simply by eliminating or changing the government policies and programs that were primarily responsible for the financial crisis, then there was no need for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, adopted by Congress in July 2010 and often cited as one of the important achievements of the Obama administration and the 111 th Congress. The stringent regulation that the Dodd-Frank Act imposes on the U.S. economy will almost certainly have a major adverse effect on economic growth and job creation in the United States during the balance of this decade. If this was the price that had to be paid for preventing another financial crisis then perhaps it’s one that will have to be borne. But if it was not necessary to prevent another crisis—and it would not have been necessary if the crisis was caused by actions of the government itself—then the Dodd-Frank Act seriously overreached. Finally, if the principal cause of the financial crisis was ultimately the government’s involvement in the housing finance system, housing finance policy in the future should be adjusted accordingly. 533 -----------------------------------------------------Page 562-----------------------------------------------------  FinancialCrisisInquiry--198 ZANDI: No, now, the CDOing that was going on—CDO would be like the best example of the wildest euphoria, meaning we were bundling up securities and putting them—putting them into one big security, that CDOing was going on with every single security out there at the height of the—at the height of the hubris. CHAIRMAN ANGELIDES: OK. Mr. Rosen, you were talking about the development of bad products, bad underwriting and fraud in the marketplace. And obviously it was—went all the way up the chain. And in terms of those products then moving throughout the system. I guess my question is, to what extent were those products available historically as predatory loan products? In a sense, to what extent did what used to be considered predatory loans, focused perhaps on certain neighborhoods, essentially get transported to the larger economy? Because there were lenders who offered some of these products on a narrow basis, correct? ROSEN: They were, and many of these practices have been around for a long time, very successfully done, not the risk element—we heard that earlier—but narrowly based. It’s when they became—layered the risk. So if you underwrote a subprime mortgage but underwrote the person’s income, gave them counseling, did all the right things, you didn’t have this issue. Defaults were always higher, but not dramatically higher. Same thing with option ARMs. What happened is we layered the risk. We decided to give a person a subprime mortgage, not verify their income, give them no down payment. And I have charts in the paper which I sent to you guys that—it was hard to believe they were doing it; it’s layering all the risks. And it is because the owner of these mortgages was distant from the origination process. I think that’s why it happened. So the proliferation of products that were sound for certain categories of people with the right underwriting, became—underwriting just disappeared, and it proliferated throughout the system, so we ended up writing, instead of 5 percent subprime mortgages, all of a sudden, it was 20 percent. CHRG-111hhrg52261--18 Mr. Anderson," Thank you. I have a little opening statement: Small businesses in the financial service arena are under tremendous risk and we need your help. Good afternoon, Chairwoman Velazquez and Ranking Member Graves and members of the committee. I am Mike Anderson. I am a Certified Residential Mortgage Specialist and Vice Chairman of the Government Affairs Committee of the National Association of Mortgage Brokers. I am also a practicing mortgage broker in the State of Louisiana, with over 30 years of experience. I would like to thank you for the opportunity to testify today. We applaud this committee's response to the current problems in our financial markets. We share a resolute commitment to a simpler, clearer, more uniform and valid approach relative to financial products, most specifically with regard to obtaining mortgages and to protecting consumers throughout the process. NAMB has several areas of concern with the CFPA. It is impossible to have one large agency develop and maintain comprehensive consumer protections. Consumer protection needs to exist at the State level, closer to the consumers. As proposed, the CFPA will favor big business. It will choose winners and losers, and the losers will be the small businesses and consumers. Before I address our overall concerns, I must first extinguish the false allegations targeted at mortgage brokers for many years. First of all, brokers do not create loan products. We do not underwrite the loan or approve the borrower for the loan. We do not fund the loan. We provide consumers with an array of choices and permit them to choose the loan payments that fit their particular needs and to provide an on-time closing. We are regulated. State-regulated mortgage brokers and lenders comply with State and Federal consumer protection laws, including State predatory lending laws. Federally chartered banks are preempted from these predatory lending laws. And lastly, we did not receive any TARP funds. The typical mortgage broker of today exists as an origination channel for consumers who wish to purchase or refinance their home. Mortgage brokers typically employ anywhere from 2 to 50 people, and they serve communities big and small, urban and rural in all 50 States, truly classifying them as a valuable small business entity. In order for the CFPA to be effective, it must act prudently when promulgating and enforcing rules to ensure that real protections are afforded to consumers and not merely provide the illusion of protection that comes from incomplete or unequal regulation of similar products services or providers, whereas financial reform is to provide transparency, clarity, simplicity, 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 the 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 to ensure true consumer protection and success with this initiative. There should be no exemptions from consumer protections whether the CFPA is created or not. The Federal Government should not--and I repeat, should not--pick winners and losers, which is where we believe the Federal reform is heading. We are very supportive of the concepts of the proposed single, integrated model disclosure for mortgage transactions that combine those currently under TILA and RESPA. Consumers will 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 until financial modernization has become law. This will help to avoid consumer confusion and minimize the increased cost and the unnecessary burden borne by industry participants to manage and administer multiple significant changes to the mandatory disclosures over a short period of time. NAMB strongly supports the concept of mandating a comprehensive review of the new and existing regulations, including the Home Value Code of Conduct, the HVCC. Too often in the wake of our current official crisis we have seen new rules promulgated that do not effect measured balance and effective solutions to the problems facing our markets and consumers-- " fcic_final_report_full--180 Clayton Holdings, a Connecticut-based firm, was a major provider of third-party due diligence services.  As Clayton Vice President Vicki Beal explained to the FCIC, firms like hers were “not retained by [their] clients to provide an opinion as to whether a loan is a good loan or a bad loan.” Rather, they were hired to identify, among other things, whether the loans met the originator’s stated underwriting guidelines and, in some measure, to enable clients to negotiate better prices on pools of loans.  The review fell into three general areas: credit, compliance, and valuation. Did the loans meet the underwriting guidelines (generally the originator’s standards, some- times with overlays or additional guidelines provided by the financial institutions purchasing the loans)? Did the loans comply with federal and state laws, notably predatory-lending laws and truth-in-lending requirements? Were the reported prop- erty values accurate?  And, critically: to the degree that a loan was deficient, did it have any “compensating factors” that offset these deficiencies? For example, if a loan had a higher loan-to-value ratio than guidelines called for, did another characteristic such as the borrower’s higher income mitigate that weakness? The due diligence firm would then grade the loan sample and forward the data to its client. Report in hand, the securitizer would negotiate a price for the pool and could “kick out” loans that did not meet the stated guidelines. Because of the volume of loans examined by Clayton during the housing boom, the firm had a unique inside view of the underwriting standards that originators were actually applying—and that securitizers were willing to accept. Loans were classified into three groups: loans that met guidelines (a Grade  Event), those that failed to meet guidelines but were approved because of compensating factors (a Grade  Event), and those that failed to meet guidelines and were not approved (a Grade  Event). Overall, for the  months that ended June , , Clayton rated  of the , loans it analyzed as Grade , and another  as Grade —for a total of  that met the guidelines outright or with compensating factors. The remaining  of the loans were Grade .  In theory, the banks could have refused to buy a loan pool, or, indeed, they could have used the findings of the due diligence firm to probe the loans’ quality more deeply. Over the -month period,  of the loans that Clayton found to be deficient—Grade —were “waived in” by the banks. Thus  of the loans sampled by Clayton were accepted even though the company had found a basis for rejecting them (see figure .). Referring to the data, Keith Johnson, the president of Clayton from May  to May , told the Commission, “That  to me says there [was] a quality control issue in the factory” for mortgage-backed securities.  Johnson concluded that his clients often waived in loans to preserve their business relationship with the loan originator—a high number of rejections might lead the originator to sell the loans to a competitor. Simply put, it was a sellers’ market. “Probably the seller had more power than the Wall Street issuer,” Johnson told the FCIC.  The high rate of waivers following rejections may not itself be evidence of some- thing wrong in the process, Beal testified. She said that as originators’ lending guide- lines were declining, she saw the securitizing firms introduce additional credit CHRG-111hhrg67816--122 Mr. Leibowitz," If it is deceptive, if it is, you now, a sub-prime loan or a non sub-prime loan with hidden fees that they don't know about, it is hurting them. So we have a sort of balkanization of authority here. There are three or four different banking entities or banking agencies that have some jurisdiction over the 60 percent of the mortgages that are issued by banks. We have jurisdiction over the others. And I think that is why Elizabeth Warren and the professor at Harvard and a variety of folks on the hill are thinking, you know, that it may be time to have one single entity that protects consumers from predatory financial instruments. And certainly I know people on this committee are thinking about that, and I want to make sure that you know from our perspective we are a consumer protection agency. Ms. Schakowsky. So you could do banks as well is what you are saying? " CHRG-111hhrg74090--131 Mr. Leibowitz," Well, as you know, I am very fond of the Federal Trade Commission as you are. I would say this. You know, as you know, I testified here a few months ago that we thought we could do the consumer protection mission involving predatory financial instruments. The proposal that has been developed, though, is one that is broader than that. It has bank examiner components. It has compliance components. So those are not things in our core competency. You know, again, we are a creature of Congress. We are an independent agency, and so we will do whatever you tell us we are going to do, and then beyond that, I just want to come back to my initial point, which is, based on what we have seen in this marketplace and the restrictions that we have operated under, I do think that if these issues are worked through, and I believe they will be, I do think that having this new agency and the FTC both going after unfairness, deception, fraud is considerably preferable to the status automobile accident. " CHRG-111hhrg67816--15 CONGRESS FROM THE STATE OF CALIFORNIA Ms. Matsui. Thank you, Mr. Chairman. Thank you very much for calling today's hearing. I applaud your leadership on this issue. I would also like to thank Chairman Leibowitz for being here today with us and congratulate him also. In today's economic recession, many families in my home district of Sacramento are really struggling to make ends meet. I have heard countless stories about people struggling to keep their homes, their jobs, and their way of life. As we all know, the housing crisis has had an unprecedented effect on our economy. The rising unemployment will cause even more Americans to face foreclosure. California, and in particular my home district of Sacramento, has been greatly impacted by the foreclosure crisis. Many of my constituents were victims of predatory lending and were steered into high cost, bad loans. Now many of these homeowners are seeking assistance in modifying their loans to more affordable loan terms. However, that has been a serious issue for many. In some cases, their original loan company is not a business or in some cases their lenders or services are not being responsive leaving struggling homeowners feeling desperate to save their homes. As a result, many have been tricked into contacting scam artists posing as so-called foreclosure consultants or the so-called agencies to save their homes. These scams are costing thousands of dollars and false promises to struggling homeowners. I am a member of the Sacramento District Attorney's Foreclosure Task Force, which is charged with cracking down on mortgage fraud. Many of these unfortunate scams have been well documented in my district. It is clear that consumers are not being properly protected from these shameful, unacceptable practices. We are here today to determine what more the government can and should do to stop these abuses from occurring today and in the future. I think you once again, Mr. Chairman, for holding this important hearing today, and I yield back the balance of my time. [The prepared statement of Ms. Matsui follows:] [GRAPHIC] [TIFF OMITTED] T7816A.003 CHRG-110shrg50415--2 Chairman Dodd," The Committee will come to order. Let me welcome everyone to the hearing this morning. I want to welcome my colleagues who are here. Senator Crapo, I welcome you and thank you very much for being here this morning. Senator Akaka, Senator, how are you this morning? Good to see you as well. And, Sherrod, thanks for being here this morning. Let me thank our witnesses as well. What I am going to do, if we can here this morning, is to make an opening statement, turn to my colleagues for any opening comments they would like to have this morning, and then we will get to our witnesses. Any and all statements or supporting documents that you would like to have included in the record, we will certainly make it a part of the record. Just so people can be aware, my intention over the coming weeks is to have a series of hearings and meetings--some of them more informal, some of them more formal--to do what we are doing today, obviously, to go back and examine how we arrived at the situation we are in today; but just as importantly--in fact, I would argue even more importantly--what do we need to do from here forward so as to minimize these problems from ever occurring again. Second, we want to watch and we are going to monitor very carefully, of course, the rescue plan that was adopted several weeks ago. As I think all of you are aware, there are provisions in that bill that literally require almost hourly reporting, every 48 hours or so on various transactions that occur, and we want to watch very carefully following the auditing process that we wrote into the legislation with the GAO and the Inspector General as well. And so the Committee will be working at that almost on a daily basis. Then, third, the issue of financial regulatory reform. Secretary Paulson a number of weeks ago now, months ago, submitted a proposal on regulatory financial reform, and we never got to having the hearings we wanted to have on that, frankly, over the summer because of events with the foreclosure crisis and more recently with the broader economic crisis. But I would like over these coming weeks between now and the first of the year to have this Committee, both formally and informally, meet with knowledgeable people--and there are some at this very panel who could be of help in this regard--as to what the architecture and structures of our financial services system ought to look like in light of the changes that have obviously occurred, updating a system that in many instances actually dates back more than 80 years. The world has obviously changed dramatically, as we are all painfully aware, and having an architecture and a structure that reflects the world we're in today is going to be a critical challenge. This is not an easy task. It will require a lot of thought, and careful thought, about how you do this. But I thought it would be worthwhile to begin that process, and then with a new administration arriving on January 20th, to already have sort of an up-and-running effort that we could then work with the new administration, be it a McCain administration or an Obama administration, to move that process along rather than just wait until after January 20th to begin a process that I think will take some time, quite candidly, given the complexity involved, going back to the 1933 act and other provisions. And as I said, several of you on this panel here have a wealth of knowledge about those laws and how they work or do not work. So I may very well be calling on some of you to participate, either informally or more formally, in that conversation and discussion. Today's hearing is entitled ``Turmoil in the U.S. Credit Markets: The Genesis of the Current Economic Crisis,'' and I want to share some opening comments if I can on this and, again, turn to Senator Crapo and then to others to share some thoughts as well, if they care to, before we turn to our witnesses. This morning the Committee examines the genesis, as I said a moment ago, of the crisis in our credit markets. Such an examination is in keeping with this Committee's extensive work over the past 21 months to understand the implosion of the mortgage markets and how that implosion has infected the wider economy. All told, this Committee has held 73 hearings and meetings since January of 2007 when I first became the Chairman of this Committee. No less than 31 of those hearings have addressed in one form or another the origins and nature of the current market turmoil. Today's meeting is essential to understand not only how we got here, but just as importantly--and I would argue even more importantly--where we as a nation need to go. Only if we undertake a thorough and complete postmortem examination of the corpus of this damaged economy will we have any chance to create a world where the mistakes of the past are less likely to be repeated and where all Americans will have a fair chance at achieving security and prosperity. It is by now beyond dispute that the current conflagration threatening our economy started several years ago in what was then a relatively discreet corner of the credit markets known as subprime mortgage lending. The Chairman of the Federal Reserve, Ben Bernanke, and Treasury Secretary Hank Paulson and many other respected individuals have all agreed on that fact. Mortgage market participants, from brokers to lenders to investment banks to credit rating agencies formed an unholy alliance conceived in greed and dedicated to exploiting millions of unsuspecting, hard-working American families seeking to own or refinance their homes. Relying on two faulty assumptions that housing prices would continue to rise maybe forever and that new financial instruments would allow them to shift the risk to others, these market participants flouted the fundamentals of prudent lending. Certainly some borrowers themselves sought unjust enrichment in the process. They deserve neither our sympathy nor our assistance. But the millions of American homebuyers who today face foreclosure and financial ruination, the vast majority were victims, not perpetrators, of what will be remembered as the financial crime of the century. Indeed, the misdeeds of a few have robbed nearly every American. Whether they suffer from the loss of a home, retirement security, a job, or access to credit, Americans are reeling from the credit crisis. Sadly, in my view, this crisis was entirely preventable. It is clear to me that greed and avarice overcame sound judgment in the marketplace, causing some very smart people to act in very stupid ways. But what makes this scandal different from others is the abject failure of regulators to adequately police the markets. Regulators exist to check the tendency to excess of the regulated. They are supposed to step in to maintain transparency, competition, and fairness in our economy. In this case, though, our Nation's financial regulators willfully ignored abuses taking place on their beat, choosing to embrace the same faulty assumptions that fueled the excessive risk taking in the marketplace. Instead of checking the tendency to excess, they permitted and in some ways even encouraged it. They abandoned sensible and appropriate regulation and supervision. No one can say that the Nation's financial regulators were not aware of the threats posed by reckless subprime lending to homeowners, communities, and, indeed, the entire country. That threat had already been recognized by Congress. In fact, the Congress had already taken strong steps to neutralize it. In 1994, 14 years ago, then President Clinton signed into law the Home Owners and Equity Protection Act. This law required--let me repeat, required, mandated--the Federal Reserve Board as the Nation's chief financial regulator, and I quote, ``to prohibit unfair, deceptive, and excessive acts and practices in the mortgage lending market.'' Despite this direct requirement and mandate, the Federal Reserve Board under its previous leadership decided to simply ignore the law--not for days, not for weeks, not for months, but for years. Indeed, instead of enforcing the law by simply imposing the common-sense requirements that a mortgage loan be based on a borrower's ability to repay it, the Fed leadership actually encouraged riskier mortgage products to be introduced into the marketplace. And the public information on this point is massive. The Fed's defiance of the law and encouragement of risky lending occurred even as the Fed's own officials warned that poor underwriting in the subprime mortgage market threatened homeownership and wealth accumulation. And it was incompatible with safe and sound lending practices. The Fed's defiance of the law and encouragement of risky lending occurred despite warnings issued by Members of Congress, I would add, including some of us who served on this Committee, that occurred despite warnings from respected economists and others that the Fed and its sister agencies were playing with fire. It was only this year, 14 years after the enactment of the 1994 law, that the Fed finally published regulations to enforce the bill's provisions, the needed protections. By that time, of course, the proverbial horse was out of the barn. Trillions of dollars in subprime mortgages had already been brokered, lent, securitized, and blessed with unrealistic credit ratings. Millions of American homeowners faced foreclosure, nearly 10,000 a day in our country. I spoke to a housing group from my State yesterday. There are 1,000 legal foreclosure proceedings every week in the State of Connecticut, and we have a foreclosure rate that is lower than the national average. A thousand cases a week in the courts in Connecticut in foreclosures. Tens of millions more are watching as their most valuable asset--their homes--decline in value. And the entire global financial marketplace has been polluted by toxic financial instruments backed by these subprime mortgages, which has caused a financial meltdown of unprecedented proportions and laid low our economy. The evidence is overwhelming. This crisis is a direct consequence of years of regulatory failures by government officials. They ignored the law. They ignored the risks to homeowners. And they ignored the harm done to our economy. Despite this clear and unimpeachable evidence, there are still some who point fingers of blame to the discretion of Fannie Mae, Freddie Mac, and the Community Reinvestment Act. These critics are loud and they are shrill. They are also very wrong. It is no coincidence that they are some of the very same sources who were the greatest cheerleaders for the very deregulatory policies that created the financial crisis. Let's look at the facts, or as Pat Moynihan used to say, ``Everyone's entitled to their own opinions, but not their own facts.'' On Fannie Mae and Freddie Mac, the wrong-headed critics say Fannie and Freddie lit the match of the subprime crisis. In fact, Fannie and Freddie lagged in the subprime market. They did not lead it. Between 2004 and 2006, the height of the subprime lending boom, Fannie and Freddie's share of subprime securitizations plummeted from 48 percent to 24 percent. The dominant players were not Fannie and Freddie, but the Wall Street firms and their other private sector partners: the mortgage brokers and the unregulated lenders. In fact, in 2006, the height of the subprime boom, more than 84 percent of subprime mortgages were issued by private lenders. Private lenders. One of the reasons Fannie and Freddie lagged is because they were subject to tougher underwriting standards than those rogue private unregulated lenders. So it was the private sector not the Government or Government-sponsored enterprises that was behind the soaring subprime lending at the core of this crisis. At the risk of stating the obvious, it is worth noting that at the height of the housing boom, the President and his supporters in and out of Government did nothing to criticize or stop predatory lending. They did nothing to support, much less advance, the legislation that some of us were working on to move in the Congress that would have cracked down on predatory lending. Regarding the Community Reinvestment Act, the critics are also speaking in ignorance of the facts. The overwhelming majority of predatory subprime loans were made by lenders and brokers who were not, I repeat were not, subject to CRA. In 2006, for example, 24 of the top 25 subprime lenders were exempt--exempt--from the CRA. In fact, CRA lending is in no way responsible for the subprime crisis. CRA has been the law of the land for three decades. If it were responsible for creating a crisis, this crisis would have occurred decades ago. The late Ned Gramlich, the former Fed Governor, put it well when he said that two-thirds of CRA loans did not have interest rates high enough to be considered subprime. Rather than being risky, lenders have found CRA loans to have low default rates. According to former Governor Gramlich, ``Banks that have participated in CRA lending have found that this new lending is good business.'' So people are entitled to their own opinions, as Pat Moynihan would say, but they are not entitled to their own facts. And Ronald Reagan once said, ``Facts are stubborn things.'' Indeed, they are, as they should be in this regard. Let me also say that I have learned over the years from this debacle that the American consumers, when all is said and done, remain the backbone of the American economy and deserve far better than they have been getting from too many people. The lessons, obviously, of this crisis are already becoming clear to us. One of the central lessons is that never again should we permit the kind of systematic regulatory failures that allowed reckless lending practices to mushroom in the global credit crisis. Anther is that never again should we allow Federal financial regulators to treat consumer protection as a nuisance or of secondary importance to safety and soundness regulation. If we have learned one thing from all of this, it is, as I said a moment ago, the American consumer, when all is said and done, remains the backbone of the American economy, that consumer protection and safe and sound operation of financial institutions are inextricably linked. I look forward to hearing from our distinguished panel of witnesses and from my colleagues this morning as we go back and look at what occurred here and the ideas that can be put forward as to how do we minimize these problems from ever occurring again. Again, I thank the witnesses very much and my colleagues for interrupting their time back in their respective States and districts to be here this morning to participate in the hearing. With that, Senator Crapo. CHRG-111shrg54789--178 FINANCIAL PROTECTION AGENCY Although a Consumer Financial Protection Agency (CFPA) would not be a panacea for all current regulatory ills, it would correct many of the most significant structural flaws that exist, realigning the regulatory architecture to reflect the unfortunate lessons that have been learned in the current financial crisis and sharply increasing the chances that regulators will succeed in protecting consumers in the future. A CFPA would be designed to achieve the regulatory goals of elevating the importance of consumer protection, prompting action to prevent harm, ending regulatory arbitrage, and guaranteeing regulatory independence.A. Put consumer protection at the center of financial regulation. Right now, four Federal regulatory agencies are required both to ensure the solvency of the financial institutions they regulate and to protect consumers from lending abuses. \32\ Jurisdiction over consumer protection statutes is scattered over several more agencies, with rules like RESPA and TILA, which both regulate mortgage disclosures, in different agencies.--------------------------------------------------------------------------- \32\ The Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTC) charter and supervise national banks, and thrifts, respectively. State chartered banks can choose whether to join and be examined and supervised by either the Federal Reserve System or the Federal Deposit Insurance Corporation (FDIC). The FTC is charged with regulating some financial practices (but not safely and soundness) in the nonbank sector, such as credit cards offered by department stores and other retailer.--------------------------------------------------------------------------- Within agencies in which these functions are combined, regulators have often treated consumer protection as less important than their safety and soundness mission or even in conflict with that mission. \33\ For example, after more than 6 years of effort by consumer organizations, Federal regulators are just now contemplating incomplete rules to protect consumers from high-cost ``overdraft'' loans that financial institutions often extend without the knowledge of or permission from consumers. Given the longstanding inaction on this issue, it is reasonable to assume that regulators were either uninterested in consumer protection or viewed restrictions on overdraft loans as an unnecessary financial burden on banks that extend this form of credit, even if it is deceptively offered and financially harmful to consumers. In other words, because regulators apparently decided that their overriding mission was to ensure that the short-term balance sheets of the institutions they regulated were strong, they were less likely to perceive that questionable products or practices (like overdraft loans or mortgage prepayment penalties) were harmful to consumers.--------------------------------------------------------------------------- \33\ Occasionally, safety and soundness concerns have led regulators to propose consumer protections, as in the eventually successful efforts by Federal banking agencies to prohibit ``rent-a-charter'' payday lending, in which payday loan companies partnered with national or out-of-State banks in an effort to skirt restrictive State laws. However, from a consumer protection point-of-view, this multiyear process took far too long. Moreover, the outcome would have been different if the agencies had concluded that payday lending would be profitable for banks and thus contribute to their soundness.--------------------------------------------------------------------------- As mentioned above, recent history has demonstrated that this shortsighted view of consumer protection and bank solvency as competing objectives is fatally flawed. If regulatory agencies had acted to prevent loan terms or practices that harmed consumers, they would also have vastly improved the financial solidity of the institutions they regulated. Nonetheless, the disparity in agencies' focus on consumer protection versus ``safety and soundness'' has been obvious, both in the relative resources that agencies devoted to the two goals and in the priorities they articulated. These priorities frequently minimized consumer protection and included reducing regulatory restrictions on the institutions they oversaw. \34\--------------------------------------------------------------------------- \34\ For example, in 2007 the OTS cited consumer protection as part of its ``mission statement'' and ``strategic goals and vision.'' However, in identifying its eight ``strategic priorities'' for how it would spend its budget in Fiscal Year 2007, only part of one of these priorities appears to be directly related to consumer protection (``data breaches''). On the other hand, OTS identified both ``Regulatory Burden Reduction'' and ``Promotion of the Thrift Charter'' as major strategic budget priorities. Office of Thrift Supervision, ``OMB FY2007 Budget and Performance Plan,'' January 2007.--------------------------------------------------------------------------- Though the link between consumer protection and safety and soundness is now obvious, the two functions are not the same, and do conflict at times. In some circumstances, such as with overdraft loans, a financial product might well be profitable, even though it is deceptively offered and has a financially devastating effect on a significant number of consumers. \35\--------------------------------------------------------------------------- \35\ Testimony of Travis Plunkett, Legislative Director, Consumer Federation of America and Edmund Mierzwinski, Consumer Program Director, U.S. PIRG, Before the Subcommittee on Financial Institutions and Consumer Credit of the U.S. House of Representatives, Committee of Financial Services, March 19, 2009.--------------------------------------------------------------------------- Until recently, regulatory agencies have also focused almost exclusively on bank examination and supervision to protect consumers, which lacks transparency. This process gives bank regulators a high degree of discretion to decide what types of lending are harmful to consumers, a process that involves negotiating behind-the-scenes with bank officials. \36\ Given that multiple regulators oversee similar institutions, the process has also resulted in different standards for products like credit cards offered by different types of financial institutions. In fact, widespread abusive lending in the credit markets has discredited claims by bank regulators like the Comptroller of the Currency that a regulatory process consisting primarily of supervision and examination results in a superior level of consumer protection compared to taking public enforcement action against institutions that violate laws or rules. \37\ Financial regulatory enforcement actions are a matter of public record which has a positive impact on other providers who might be engaged in the same practices and provides information to consumers on financial practices sanctioned by regulators.--------------------------------------------------------------------------- \36\ ``Findings made during compliance examinations are strictly confidential and are not made available to the public except at the OCC's discretion. Similarly, the OCC is not required to publish the results of its safety-and-soundness orders . . . . Thus, the OCC's procedures for compliance examinations and safety-and-soundness orders do not appear to provide any public notice or other recourse to consumers who have been injured by violations identified by the OCC.'' Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, before the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee, April 26, 2007. \37\ `` . . . ours is not an `enforcement-only' compliance regime--far better to describe our approach as `supervision first, enforcement if necessary,' with supervision addressing so many early problems that enforcement is not necessary,'' Testimony of John C. Dugan, Comptroller of the Currency, before the Committee on Financial Services of the U.S. House of Representatives, June 13, 2007.--------------------------------------------------------------------------- Additionally, the debate about the financial and foreclosure crisis often overlooks the fact that predatory lending practices and the ensuing crisis have had a particularly harsh impact on communities of color. African Americans and Latinos suffered the brunt of the predatory and abusive practices found in the subprime market. While predatory and abusive lending practices were not exclusive to the subprime market, because of lax regulation in that sector, most abuses were concentrated there. Several studies have documented pervasive racial discrimination in the distribution of subprime loans. One such study found that borrowers of color were more than 30 percent more likely to receive a higher-rate loan than White borrowers even after accounting for differences in creditworthiness. \38\ Another study found that high-income African Americans in predominantly Black neighborhoods were three times more likely to receive a subprime purchase loan than low-income White borrowers. \39\--------------------------------------------------------------------------- \38\ See Bocian, D.G., K.S. Ernst, and W. Li, ``Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages,'' Center for Responsible Lending, May 2006. \39\ ``Unequal Burden: Income and Racial Disparities in Subprime Lending in America'' (Washington, DC: HUD, 2000).--------------------------------------------------------------------------- African Americans and Latinos receive a disproportionate level of high cost loans, even when they quality for a lower rate and/or prime mortgage. Fannie Mae and Freddie Mac estimated that up to 50 percent of those who ended up with a sub prime loan would have qualified for a mainstream, ``prime-rate'' conventional loan in the first place. \40\ According to a study conducted by the Wall Street Journal, as much as 61 percent of those receiving subprime loans would ``qualify for conventional loans with far better terms.'' \41\ Moreover, racial segregation is linked with the proportion of subprime loans originated at the metropolitan level, even after controlling for percent minority, low credit scores, poverty, and median home value. \42\ The resulting flood of high cost and abusive loans in communities of color has artificially elevated the costs of homeownership, caused unprecedented high rates of foreclosures, and contributed to the blight and deterioration of these neighborhoods. It is estimated that communities of color will realize the greatest loss of wealth as a result of this crisis, since Reconstruction.--------------------------------------------------------------------------- \40\ See the Center for Responsible Lending's ``Fact Sheet on Predatory Mortgage Lending'', at http://www.responsiblelending.org/pdfs/2b003-mortgage2005.pdf, and ``The Impending Rate Shock: A Study of Home Mortgages in 130 American Cities'', ACORN, August 15, 2006, available at www.acorn.org. \41\ See ``Subprime Debacle Traps Even Very Creditworthy'', Wall Street Journal, December 3, 2007. \42\ Squires, Gregory D., Derek S. Hyra, and Robert N. Renner, ``Segregation and the Subprime Lending Crisis'', Paper presented at the 2009 Federal Reserve System Community Affairs Research Conference, Washington, DC (April 16, 2009).--------------------------------------------------------------------------- A CFPA, by contrast, would have as its sole mission the development and effective implementation of standards that ensure that all credit products offered to borrowers are safe and not discriminatory. The agency would then enforce these standards for the same types of products in a transparent, uniform manner. Ensuring the safety and fairness of credit products would mean that the CFPA would not allow loans with terms that are discriminatory, deceptive or fraudulent. The agency should also be designed to ensure that credit products are offered in a fair and sustainable manner. In fact, a core mission of the CFPA would be to ensure the suitability of classes of borrowers for various credit products, based on borrowers' ability to repay the loans they are offered--especially if the cost of loans suddenly or sharply increase, and that the terms of loans do not impose financial penalties on borrowers who try to pay them off. As we've learned in the current crisis, focusing exclusively on consumer and civil rights protection would often be positive for lenders' stability and soundness over the long term. However, the agency would be compelled to act in the best interest of consumers even if measures to restrict certain types of loans would have a negative short-term financial impact on financial institutions.B. Prevent regulatory arbitrage. Act quickly to prevent unsafe forms of credit. The present regulatory system is institution centered, rather than consumer centered. It is structured according to increasingly irrelevant distinctions between the type of financial services company that is lending money, rather than the type of product being offered to consumers. Right now, financial institutions are allowed (and have frequently exercised their right) to choose the regulatory body that oversees them and to switch freely between regulatory charters at the Federal level and between State and Federal charters. Many financial institutions have switched charters in recent years seeking regulation that is less stringent. Two of the most notorious examples are Washington Mutual and Countrywide, \43\ which became infamous for promoting dangerous sub-prime mortgage loans on a massive scale. \44\ Both switched their charters to become thrifts regulated by the Office of Thrift Supervision (OTS). At the Federal level, where major agencies are funded by the institutions they oversee, this ability to ``charter shop,'' has undeniably led regulators like the OTS to compete to attract financial institutions by keeping regulatory standards weak. It has also encouraged the OTS and OCC to expand their preemptive authority and stymie efforts by the States to curb predatory and high-cost lending. The OCC in particular appears to have used its broad preemptive authority over State consumer protections and its aggressive legal defense of that authority as a marketing tool to attract depository institutions to its charter. \45\--------------------------------------------------------------------------- \43\ Of course, following their stunning collapses, Countrywide was acquired by Bank of America and Washington Mutual by Chase, both in regulator-ordered winding-downs. \44\ In fact, several other large national banks have chosen in recent years to convert their State charter to a national charter. Charter switches by JPMorgan Chase, HSBC, and Bank of Montreal (Harris Trust) alone in 2004-05 moved over $1 trillion of banking assets from the State to the national banking system, increasing the share of assets held by national banks to 67 percent from 56 percent, and decreasing the State share to 33 percent from 44 percent. Arthur E. Wilmarth, Jr., ``The OCC's Preemption Rules Threaten to Undermine the Dual Banking System, Consumer Protection and the Federal Reserve Board's role in Bank Supervision'', Proceedings of the 42nd Annual Conference on Bank Structure and Competition (Fed. Res. Bank of Chicago, 2006) at 102, 105-106. \45\ For a detailed analysis, see brief amicus curiae of Center for Responsible Lending et al. in the case currently before the Supreme Court, Cuomo v. Clearinghouse and OCC (08-453) available at http://www.abanet.org/publiced/preview/briefs/pdfs/07-08/08-453_PetitionerAmCu10ConsumerProtectionOrgs.pdf (last visited 21 June 2009) at pp. 20-39.--------------------------------------------------------------------------- When agencies do collaborate to apply consumer protections consistently to the institutions they regulate, the process has been staggeringly slow. As cited in several places in this testimony, Federal regulators dithered for years in implementing regulations to stop unfair and deceptive mortgage and credit card lending practices. One of the reasons for these delays has often been that regulators disagree among themselves regarding what regulatory measures must be taken. The course of least resistance in such cases is to do nothing, or to drag out the process. Although the credit card rule adopted late last year by Federal regulators was finalized over protests from the OCC, these objections were likely one of the reasons that Federal regulators delayed even beginning the process of curbing abusive credit card lending practices until mid-2008. The ``charter shopping'' problem would be directly addressed through the creation of a single CFPA with regulatory authority over all forms of credit. Federal agencies would no longer compete to attract institutions based on weak consumer protection standards or anemic enforcement of consumer rules. The CFPA would be required to focus on the safety of credit products, features and practices, no matter what kind of lender offered them. As for regulatory competition with States, it would only exist to improve the quality of consumer protection. Therefore, the CFPA should be allowed to set minimum national credit standards, which States could then enforce (as well as victimized consumers). States would be allowed to exceed these standards if local conditions require them to do so. If the CFPA sets ``minimum'' standards that are sufficiently strong, a high degree of regulatory uniformity is likely to result. With strong national minimum standards in place, States are most likely to act only when new problems develop first in one region or submarket. States would then serve as an early warning system, identifying problems as they develop and testing policy solutions, which could then be adopted nationwide by the CFPA if merited. Moreover, the agency would have a clear incentive to stay abreast of market developments and to act in a timely fashion to rein in abusive lending because it will be held responsible for developments in the credit market that harm consumers.C. Create an independent regulatory process. The ability of regulated institutions to ``charter shop'' combined with aggressive efforts by Federal regulators to preempt State oversight of these institutions has clearly undermined the independence of the OTS and OCC. This situation is made worse by the fact that large financial institutions like Countrywide were able to increase their leverage over regulators by taking a significant chunk of the agency's budget away when it changed charters and regulators. The OTS and OCC are almost entirely funded through assessments on the institutions they regulate (see Appendix 4). The ability to charter shop combined with industry funding has created a significant conflict-of-interest that has contributed to the agencies' disinclination to consider upfront regulation of the mortgage and consumer credit markets. Given that it supervises the largest financial institutions in the country, the OCC's funding situation is the most troublesome. More than 95 percent of the OCC's budget is financed by assessments paid by national banks, and the twenty biggest national banks account for nearly three-fifths of those assessments. Large, multistate banks were among the most outspoken supporters of the OCC's preemption regulations and were widely viewed as the primary beneficiaries of those rules. In addition to its preemption regulations, the OCC has frequently filed amicus briefs in Federal court cases to support the efforts of national banks to obtain court decisions preempting State laws. The OCC's effort to attract large, multistate banks to the national system have already paid handsome dividends to the agency . . . . Thus, the OCC has a powerful financial interest in pleasing its largest regulated constituents, and the OCC therefore faces a clear conflict of interest whenever it considers the possibility of taking an enforcement action against a major national bank. \46\--------------------------------------------------------------------------- \46\ Testimony of Arthur E. Wilmarth. Jr., Professor of Law, George Washington University Law School, before the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee, April 26, 2007. The leadership sofa CFPA would be held to account based on its ability to inform consumers and help protect them from unsafe products. In order to function effectively, the leadership would need to show expertise in and commitment to consumer protection. Crucial to the success of the agency would be to ensure that its funding is adequate, consistent and does not compromise this mission. Congress could also ensure that the method of agency funding that is used does not compromise the CFPA's mission by building accountability mechanisms into the authorizing statute and exercising effective oversight of the agency's operations. (See Section 4 below.) Recent history has demonstrated that even an agency with an undiluted mission to protect consumers can be undermined by hostile or negligent leadership or by Congressional meddling on behalf of special interests. However, unless the structure of financial services regulation is realigned to change not just the focus of regulation but its underlying philosophy, it is very unlikely that consumers will be adequately protected from unwise or unfair credit products in the future. The creation of a CFPA is necessary because it ensures that the paramount priority of Federal regulation is to protect consumers, that the agency decision making is truly independent, and that agencies do not have financial or regulatory incentives to keep standards weaker than necessary.SECTION 3: ERRORS OF OMISSION AND COMMISSION BY THE FEDERAL BANK CHRG-110hhrg44901--137 The Chairman," I will say in the 10 seconds I will borrow from the gentlelady, my jurisdiction proposal is we leave with the Agriculture Committee jurisdiction over all those futures and things you can eat, and we get the rest. The gentleman from California. Mr. Miller of California. Thank you, Mr. Chairman. I kind of enjoyed the comments that the Federal Reserve is getting blamed for not dealing with the predatory issue as it applies to subprime. But I recall 5 years ago, I repeatedly tried to introduce language to effectively define what predatory was versus subprime and included the issues you have dealt with finally. So I feel guilty blaming you for something 5 years ago we should have done and didn't. The purpose and intent of the GSEs was to inject liquidity into the marketplace, which we have done. If you look at the amount of loans that are out there, I think it has proven to be very beneficial to the housing market. Having been a developer for over 35 years, I have been through the 1970's recession, 1980's, 1990's. Any time you see a housing boom, you know eventually there is a going to be a housing recession occurs. It has happened repeatedly. This one is a little different, but every one I have been through has been somewhat different. In the stimulus package we passed recently, I think the most important part on the economy was increasing conforming loan limits for FHA and GSEs. Sending people a check, yes, there is a benefit to that. But the main reason I think for the situation the economy is in today is because of the housing recession we have gone through. I think raising conforming loan limits in high-cost areas has gone a long way to mitigating an impact that could have been worse than it was. Especially in California and other areas there are many lenders that will not make a loan today if it is not conforming because they don't have the assets basically to tie their capital up if they can't make the loan and sell the loan off. Now, there has been discussion about after December 31st, we are going to be dropping those limits down to much lower levels. I believe that is going to have a major detrimental impact on the housing market because it sends--even the discussion and debate about doing that sends a message that we are not going to be committed in the future to trying to create liquidity in these high-cost areas. I would like to have your opinion on that issue. " CHRG-111hhrg67816--88 Mr. Leibowitz," Well, I mean I guess I would say this. We found a fair amount of fraud in the entire life cycle of the mortgage instrument, and when you have an economic downturn as severe as the one that we are in now, I think there is more of an incentive to see more of this, so we are--in the mortgage area we now have that rulemaking authority that was given to us in the Omnibus. We think that is going to be helpful. We think we are going to be able to find malefactors and write good rules, but I think--and we have deployed more resources. We have really doubled our resources in the last 2 years to go after predatory financial practices. Having said that, there is just no shortage of bad acts that we could look at in this area. Most companies, of course, do the right thing but there are a lot of people who have just been ripping off consumers and the cases that we brought today sort of attest to that. " CHRG-111hhrg52261--117 STATEMENT OF DAWN DONOVAN Ms. Donovan. Good afternoon, Chairwoman Velazquez, Ranking Member Graves, and members of committee. My name is Dawn Donovan, and I am testifying today on behalf of the National Association of Federal Credit Unions, NAFCU. I serve as the President and CEO of Price Chopper Employees Federal Credit Union in Schenectady, New York. Our credit union has seven employees, approximately 4,500 members in six States and just over $19 million in assets. NAFCU and the entire credit union community appreciate the opportunity to participate in this discussion regarding financial regulatory restructuring and its impact on America's credit unions. It is widely recognized that credit unions did not cause the current economic downturn; however, we believe we can be a important part of the solution. Credit unions have fared well in the current economic environment and as a result many have capital available. Surveys of NAFCU member credit unions have shown that many are seeing increased demand for mortgage and auto loans as other lenders leave the market. Additionally, a number of small businesses who have lost important lines of credit from other lenders are turning to credit unions for the capital that they need. Our Nation's credit unions stand ready to help in this time of crisis and unlike other institutions have the assets to do so. Unfortunately, an antiquated and arbitrary member business cap prevents credit unions from doing more for America's small business community. It is with this in mind that NAFCU strongly supports H.R. 3380, the Promoting Lending to America's Small Businesses Act of 2009. This important piece of legislation would raise the member-business lending cap to 25 percent of assets, while also allowing credit unions to supply much-needed capital to underserved areas which have been among the hardest hit during the current economic downturn. NAFCU also strongly supports the reintroduction of the Credit Union Small Business Lending Act, which was first introduced by Chairwoman Velazquez in the 110th Congress. As the current Congress and administration mull regulatory reform, NAFCU believes that the current regulatory structure for credit unions has served the 92 million American credit union members well. As not-for-profit member-owned cooperatives, credit unions are unique institutions in the financial services arena and make up only a small piece of the financial services pie. We believe that NCUA should remain the independent regulator of credit unions and are pleased to see the administration's proposal would maintain this independence as well as the Federal credit union charter. NAFCU also believes that the proposal is well intentioned in its effort to protect consumers from the predatory practices that led to the current crisis. We feel there have been many unregulated bad actors pushing predatory products onto consumers, and we applaud efforts to address this abuse. It is with this in mind that we can support the creation of the Consumer Financial Protection Agency, CFPA, which would have authority over nonregulated institutions that operate in the financial services marketplace. However, NAFCU does not believe such an agency should be given authority over regulated federally insured depository institutions, and opposes extending this authority to credit unions. As the only not-for-profit institutions that would be subject to the CFPA, credit unions would stand to get lost in the enormity of the proposed agency. Giving the CFPA the authority to regulate, examine, and supervise credit unions, already regulated by the NCUA, would add an additional regulatory burden and cost to credit unions. Additionally, it could lead to situations where institutions regulated by one agency for safety and soundness find their guidance in conflict with the regulator for consumer issues. Such a conflict will result in diminished services to credit union members. Credit unions already fund the budget for NCUA. As not-for-profits, credit unions cannot raise moneys from stock sales or capital markets. This money comes from their members' deposits, meaning credit union members would disproportionately feel the cost burden of a new agency. However, NAFCU also recognizes that more should be done to help consumers and look out for their interests. We would propose that rather than extending the CFPA to federally insured depository institutions, each functional regulator create a new strengthened office on consumer protection. We were pleased to see the NCUA recently announce its intention to create such an office. Consumer protection offices at the functional regulators will ensure those regulating consumer issues have knowledge of the institutions they are examining and guidance on consumer protection. This is particularly important to credit unions as they are regulated and structured differently from others. We believe such an approach would strengthen consumer protection while not adding unnecessary regulatory burden. Part of avoiding that burden will be to maintain a level of Federal preemption so small institutions like mine, with members in several States, are not overburdened by a wide variety of State laws. In conclusion, while there are positive aspects to consumer protection and regulatory reform, we believe Federal credit unions continue to warrant an independent regulator handling safety and soundness and consumer protection matters. I thank you for the opportunity to appear before you on behalf of NAFCU and would welcome any questions that you may have. " CHRG-111hhrg48875--160 Secretary Geithner," This will make our system more stable in the future, with better protection for consumers and for investors. So it's much less--we want to make it much less likely in the future that a working family, in your district or anywhere else, could be taken advantage of by a mortgage broker, could be sold a mortgage loan or some other type of financial product which they did not understand, and could not afford to meet in a sense, leaving them vulnerable to losing their house, that we have to prevent. We have a deep moral obligation to prevent that more effectively in the future. We won't be able to save all people from making bad judgments about their financial health, but we can try to do a better job of making sure they're not taken advantage of by predatory behavior at the basic level of the mortgage consumer lending market. That is necessary, but it's not sufficient. Because even if we did that well, but we still had large institutions taking on such risk that when we go into a recession, they suck the oxygen out of the overall economy, and pushing smaller businesses to the brink of failure, then we'll still leave the system as a whole more vulnerable in the future. So we have to prevent that, too, and that's going to require smarter, tougher, better designed constraints on risk taking at the core of the financial system as well. You need both of those two things. And just finally, because we won't be able to prevent all financial crises, nothing we do here today over the next 6 months will offer the prospect of preventing all future financial crises, we can make sure that when they happen in the future, we can act more quickly, more effectively to contain the damage, to put a firebreak around the most weaker parts of the system, to not allow the fire to jump that firebreak and spread to parts of the economy that were more prudent and careful in their decisions. That's the core objectives that have to guide what we do. Ms. Kilroy. One of the issues that arose in the wake of our financial distress in terms of getting the toxic assets off of banks' books was the issue of pricing them. And the proposal that you made earlier this week has had some criticism that we could be overpricing some of the toxic assets and that it would be a windfall for some of the hedge funds. Would you address that issue for us, please? " CHRG-111shrg54533--20 Chairman Dodd," Thank you, Senator, very much. Senator Akaka. Senator Akaka. Thank you very much, Mr. Chairman. Mr. Secretary, our current regulatory structure, I feel has failed to adequately protect working families from predatory practices. Working families are exploited by high-cost fringe financial service providers, such as payday lenders and check cashers. Individuals trying to cope with their debt burdens are pushed into inappropriate debt management plans by disreputable credit counselors or harmed by even debt settlement agencies. Mr. Secretary, agencies already have had the responsibilities in these areas, but what will be done to ensure that the Consumer Financial Protection Agency will be able to effectively protect working families? " CHRG-111hhrg67816--125 Mr. Leibowitz," Well, you know, do I personally see this as a missed opportunity? I certainly think Congress needs to look at the notion of a single entity whether it is housed in the FTC or whether it is a new one to protect consumers from predatory financial instruments, deceptive and unfair ones. I see this as actually an opportunity for us because the language in the Omnibus Appropriations Act gives us rulemaking throughout the entire life cycle of a mortgage only of course for non-bank issued mortgages. But that is a real opportunity to do rulemaking, and after we do rulemaking to actually be able to have standards, get those from rules, and to find malefactors who fall below those standards. So I see your point, and we are very supportive of Congress having a discussion about creating an entity to protect consumers here, but I also think we have been struggling for this legislation for quite some time. It is going to be helpful to us. " FinancialCrisisReport--81 In addition to the early payment default problem, a September 2005 WaMu audit observed that at Long Beach, policies designed to mitigate the risk of predatory lending practices were not always followed. The audit report stated: “In 24 of 27 (88%) of the refinance transactions reviewed, policies established to preclude origination of loans providing no net tangible benefit to the borrower were not followed.” 226 In addition, in 8 out of 10 of the newly issued refinance loans that WaMu reviewed, Long Beach had not followed procedures designed to detect “loan flipping,” an industry term used to describe the practice of unscrupulous brokers or lenders quickly or repeatedly refinancing a borrower’s loan to reap fees and profits but provide no benefit to the borrower. 227 2006 Purchase of Long Beach. In response to all the problems at Long Beach, at the end of 2005, WaMu fired Long Beach’s senior management and moved the company under the direct supervision of the President of WaMu’s Home Loans Division, David Schneider. 228 Washington Mutual promised its regulator, OTS, that Long Beach would improve. 229 The bank also filed a formal application, requiring OTS approval, to purchase Long Beach from its parent company, so that it would become a wholly owned subsidiary of the bank. 230 WaMu told OTS that making Long Beach a subsidiary would give the bank greater control over Long Beach’s result of the EPD provision for the year ended December 31, 2005 was $837.3 million. The net loss from these repurchases was approximately $107 million.”). 223 Id. 224 Id. 225 Washington Mutual Inc. 2005 10-K filing with the SEC. 226 9/21/2005 WaMu audit of Long Beach, JPM_WM04656627. 227 Id. 228 Subcommittee interview of David Schneider (2/17/2010). 229 See, e.g., 12/21/2005 OTS memorandum, “Long Beach Mortgage Corporation (LBMC),” OTSWMS06-007 0001009, Hearing Exhibit 4/16-31. 230 Id. at OTSWMS06-007 0001009 (stating WaMu filed a 12/12/2005 application to acquire Long Beach). operations and allow it to strengthen Long Beach’s lending practices and risk management, as well as reduce funding costs and administrative expenses. 231 In addition, WaMu proposed that it replace its current “Specialty Mortgage Finance” program, which involved purchasing subprime loans for its portfolio primarily from Ameriquest, with a similar loan portfolio provided by Long CHRG-110shrg50415--30 Chairman Dodd," Well, thank you very, very much, and just on your last point, my intention is if we have a lame-duck session, which we are apt to have after the elections, and if there is a package that may move forward, a stimulus package, my intention is to take the predatory lending bill which we craft in this Committee, along with the credit card legislation, along with a moratorium on foreclosures--and there is one other item--the bankruptcy provisions that would deal with that single home that people have, in a package then and ask our colleagues to support those measures. We have done a lot here for the financial sector of our economy. We have not done anything yet, in my view, very significantly, for the consumer side. And so in November my hope is we can package that together, make it part of that stimulus package that may be forthcoming, and give our colleagues a chance to do something before the Christmas holidays. It might provide some relief for people. Ten thousand a day. Every day that goes by--every day that goes by, imagine. And as you point out so accurately, when you get into the court proceeding, as people told me in my own State yesterday, once you are in that court proceeding, too often the lender says, ``I would like to help you, but I am instructed I cannot do anything now. We have to complete the legal process.'' And I am getting a thousand a week of those in Connecticut, and I know other States are going through many more as well. Well, let me raise some questions here, and I will put up a brief clock because you have been very patient, all of you. We have talked a lot about CRA, and I think that is important. But also, the second theory--and, again, I thank my colleagues here and I thank Barney Frank and his colleagues in the House--that after many years of debating and discussing what to do about the GSEs, we actually did it this year. And as pointed out, I think by Sherrod Brown, or others, in 2005--Mike Oxley deserves a lot of credit. He and Barney Frank put together a bill, and it had 331 supporters in the House, 90 opponents. Then came in Senator Sarbanes, offered that proposal, slightly modified, to appeal to people over here, and it went down on a party-line vote. That was the bipartisan bill that would have done something in 2005. But what this Committee finally did this year is make those modifications and corrections. But there is this story going around, this was all about a Fannie and Freddie problem, and I wonder, Mr. Stein, if you might address that issue. To what extent is there accuracy in that? Is there a legitimacy in that argument? Or is it overstated, in your view? And I will ask anyone else on the Committee who wants to comment on this your own thoughts. What is the true answer to that question? " CHRG-111shrg55117--56 Mr. Bernanke," Thank you, sir. Senator Johnson. Senator Schumer. Senator Schumer. Thank you, Mr. Chairman. I thank you, Chairman Bernanke, for these 2 long days of hearings. This job is a very tough one, and, of course, you are subject to criticism, and that is part of it. And some of it is valid, and some of it I agree with, but I just would remind people where we were 6 months ago--worried that we might enter a Great Depression. And I think the actions that you and others have taken have avoided that. We still have a long way to go, but it is easy to take all the shots, and certainly I have my criticisms. But also we should remember where we were 6 months ago and where we are today and give you some good credit for that. So I thank you for that. Now I would like to talk about credit cards, something I care a lot about. I know Chairman Dodd has mentioned them briefly. And the JEC hearing back in May, we had an exchange about the Federal Reserve's new credit card rules, and I was troubled by the 18-month delay. Senator Dodd and I asked you to use your emergency authority to put the new rules into effect immediately. And we talked about how consumers were suffering from an increase in predatory credit card practices, arbitrary rate increases, and you had said you would look into it. So the first part of my question is: Have you looked into it? It looks to me as if nothing has changed; things are getting worse. Credit card issuers right now are changing fixed rates to floating rates so that they can say when the law takes effect, as the rates go up, well, we are not raising the rates. That is outrageous. That is against the whole intent of the law. They are also increasing fees for balance transfers. They are cutting credit card limits, hiking up interest rates. So I would like to ask you: How do these new advance notification rules help consumers hit hard by this kind of behavior? Isn't it true that consumers slammed with fee or rate hikes have no recourse other than to pay the increase and cancel the card? Canceling a credit card adds insult to injury by lowering a consumer's credit score. So I have a question for you. I do not think we can afford to wait until our legislation goes into effect. Can the Fed take some actions now, which you have the power to do, to deal with these practices, some of which are clearly predatory? " CHRG-111hhrg67816--240 Mr. Benson," Good morning, Chairman Rush, Ranking Member Radanovich, and members of the subcommittee. My name is Nathan Benson, and I am the CEO of Tidewater Finance Company, which was established in 1992 to purchase and service retail installment contracts. The company is based in Virginia Beach, Virginia, and has two lines of business, Tidewater Credit Services for consumer goods and Tidewater Motor Credit for auto services. I am here today in my capacity as a board director of American Financial Services Association, AFSA, whose 350 members include consumer and commercial finance companies, auto finance companies, card issuers, mortgage lenders, industrial banks and other firms that lend to consumers and small businesses. AFSA appreciates the opportunity to provide testimony to the members of the subcommittee. Today, I will focus my testimony on the role that the Federal Trade Commission has played, and continues to play, in helping to restore confidence in the financial services industry. I will also address the installment loan industry's importance in providing access to credit to millions of Americans. The FTC is the effective regulator. The FTC has been very successful in enhancing consumer protection under its current authority. It has addressed the economic crisis in two ways, first, by using its enforcement authority under Section 5 of the FTC Act to pursue bad actors in the sub-prime mortgage industry, and, second, by setting federal policy through guidance and public comment. I will start by providing some examples that fall into the first category. The FTC successfully negotiated a $40 million settlement with Select Portfolio Services in November 2003 for engaging in unfair and deceptive practices in servicing sub-prime mortgage loans. The settlement was modified in August 2007 to provide additional protections to borrowers, including mandatory monthly mortgage statements, a 5-year prohibition on marketing optional products such as home warranties and refunds for foreclosure attorney fees for services that were not actually performed. The FTC has entered into a $65 million settlement with First Alliance Mortgage Company for making deceptive sub-prime mortgage loans. The FTC distributed the $65 million to nearly 20,000 affected borrowers. The FTC has successfully pursued other sub-prime mortgage lenders engaged in what the Commission deemed to be inappropriate conduct, including Capital City Mortgage Corporation and Quicken Loans. I want to just move on to the installment lending and its role in providing credit to consumers. At the outset, let me say that AFSA shares Congress' concern about predatory lending. We support the goal of protecting consumers from unfair, abusive, or deceptive lending and servicing practices while preserving access to responsible lenders. The installment lending industry was born in 1916 out of a need to provide credit to working men and women. The Russell Sage Foundation worked with lenders to develop a set of principles by which they would abide in their lending activities. Lenders agreed to make the cost of their loans transparent so that borrowers understood the true cost of the loan. Loans would be structured over a period of time allowing a repayment schedule that was long enough to match the earning power of the borrower. Finally, the lender would price the loan based on the character of the borrower, which was defined as a combination of the borrower's employment stability and previous history of handling credit. Today's installment lenders are a key element in improving the socio-economic status of poorer citizens and supporting our company's economic health. They do this by adhering to basic principle of economics, that people should borrow so they can consume based on their permanent income, and that such consumption is the fuel of our economy. Typically, the middle and upper class borrow through traditional banking and financial services relationships. However, average wage earners with few financial assets often cannot borrow in this way. Traditional banks simply are not equipped to offer products and services to these consumers in a manner that is profitable for the enterprise. As a result, these consumers need access to safe forms of small-sum credit. These are the very products the installment loan industry, an industry fully and completely regulated and examined at the state level, have been providing successfully for decades. Certainly, people turn to installment lenders for multiple reasons. Key among these, however, is the need to access small sums to deal with unforeseen circumstances. I could go on but if there are any questions. [The prepared statement of Mr. Benson follows:] [GRAPHIC] [TIFF OMITTED] T7816A.071 FinancialCrisisInquiry--199 Also, we had, I think, some of the predatory things that we heard from another witness that I think we did have people focusing and steering people. You’ve seen—I don’t have evidence of that, but we’ve seen lots of anecdotal evidence of that, and that certainly was a problem. CHAIRMAN ANGELIDES: All right. You said you talked to the Fed—directly, unequivocally? ROSEN: Speeches at the Fed... CHAIRMAN ANGELIDES: Speeches at the Fed. ROSEN: ... and talked to, specifically, people involved with the real estate side. One of the board members, Ned Gramlich, tried very hard to convince them that this was an important issue, wrote a book on it before he passed away. And so there was—and there was an internal Fed paper which was great, 80 pages long, about the risk layering, which I got the change to read and review. And they knew everything that was going on. CHAIRMAN ANGELIDES: Was that an internal document to the Fed? ROSEN: It was an internal document, but somehow I got it, so they must have let... CHAIRMAN ANGELIDES: CHRG-111hhrg74090--38 Mrs. Matsui," Thank you, Mr. Chairman, and thank you for calling today's hearing. I applaud your leadership in addressing this important issue. I would also like to thank the witnesses for joining us today. In today's economic recession, many families in home district of Sacramento are struggling to make ends meet. I have heard countless stories of people struggling to keep their homes, their jobs and their way of life. California and in particular my constituents in Sacramento have been greatly impacted by the economic crisis. Many of my constituents were and continue to be victims of predatory home loan lending, unfair credit card practices, payday loans and other forms of unscrupulous business practices. Just recently, the President signed into law credit card reform legislation to regulate unfair credit card practices. The ink is hardly dry. The companies are already trying to find ways to arbitrarily raise credit card interest rates and fees on consumers. Struggling homeowners are also seeking assistance to keep their homes but continue to be tricked into contacting scam artists who just so happen to be the same crowd that initially steered homeowners into subprime loans. This is also occurring as job losses mount, foreclosures continue to rise and Americans are increasingly turning to other forms of credit to make ends meet. It is clear that consumers are not being properly protected from unfair and deceptive financial practices. When is enough enough? The President's proposal to create a new financial consumer protection agency could be the answer that American consumers are seeking but it must be done in a thoughtful way to ensure consumers are protected from fraudulent activity. We must make sure any new agency has real authority and just as much bite as it has bark. Consumers need to feel protected and have confidence in our financial system. Right now it is clear that they do not. I thank you, Mr. Chairman, for holding this important hearing today and I look forward to working with you and the committee on this issue moving forward. I yield back the balance of my time. " CHRG-111shrg52619--78 Mr. Smith," On behalf of the States, I will say that with regard to the mortgage issue, for example, the State response to the mortgage issue may have been imperfect, and it may not have been complete. In North Carolina, we started addressing predatory lending in 1999. I would say that I think that the actions of State AGs and State regulators should have been and ought to be in the future, market information in assessing systemic risk ought to be taken into account. And I think this has not been done in the past. Again, I do not claim that we are perfect. I do claim that we are closer to the market as a rule than our colleagues in the Federal Government. And I think we have something to add if we are allowed to add it. So I hope as we go forward, sir, the State role in consumer protection will be acknowledged and it will be given a chance to do more. Senator Merkley. OK. Well, let me just close with this comment since my time is up. The comment that this issue has had robust attention--I believe, Mr. Polakoff, you made that--WAMU was a thrift. Countrywide was a thrift. On the ground, it does not look like anything close to robust regulation of consumer issues. I will say I really want to applaud the Fed for the actions they took over subprime lending, their action regarding escrow for taxes and insurance, their addressing of abusive prepayment penalties, the ending of liar loans in subprime. But I also want to say that from the perspective of many folks on the ground, one of the key elements was booted down the road, and that was the yield spread premiums. Just to capture this, when Americans go to a real estate agent, they have all kinds of protection about conflict of interest. But when they go to a broker, it is a lamb to the slaughter. That broker is being paid, unbeknownst to the customer is being paid proportionally to how bad a loan that consumer gets. And that conflict of interest, that failure to address it, the fact that essentially kickbacks are involved, results in a large number of our citizens, on the most important financial transaction of their life, ending up with a subprime loan rather than a prime loan. That is an outrage. And I really want to encourage you, sir, in your new capacity to carry this conversation. The Fed has powers that it has not fully utilized. I do applaud the steps it has taken. And I just want to leave with this comment: that the foundation of so many families financially is their homes, and that we need to provide superb protections designed to strengthen our families, not deregulation or loose regulations designed for short-term profits. Thank you. Senator Reed. Senator Johanns. Senator Johanns. Thank you very much. I am not even exactly certain who I direct this to, so I am hoping that you all have just enough courage to jump in and offer some thoughts about what I want to talk about today. As I was sitting here and listening to the great questioning from my colleague, the response to one of the questions was that we do make a risk assessment when there is a merger. We make an assessment as to the risk that is being taken on by this merger. And I sit here, I have to tell you, and I think to myself, well, if it is working that well, how did we end up where we are at today? So that leads me to these questions. The first one is, who has the authority, or does the authority exist for somebody to say that the sheer size of what we end up with poses a risk to our overall national, if not international economy, because you have got so many eggs in one basket that if your judgment is wrong about the risk assessment, you are not only wrong a little bit, you are wrong in a very magnificent sort of way. So who has that authority? Does that authority exist, and if it doesn't, should it exist? " CHRG-111hhrg54872--118 Mr. John," I think existing law and practice, had it been properly enforced and properly expanded, would have worked, too. Mr. Moore of Kansas. Thank you, sir. The provision I like about the current CFPA draft, the provisions I like are the consolidated rulemaking for consumer protection laws, expanding financial literacy efforts and, most importantly, from my perspective, strong oversight of nonbank firms, many in the mortgage market that issued too many loans families couldn't afford. As a former district attorney for 12 years, I had to prioritize resources to ensure the most urgent threats were focused on, and I believe the same lessons apply to CFPA. Starting with Mr. Shelton and quickly going down the line, if you had to choose the larger threat to financial stability, the lack of supervision of nonbank firms, especially those that made predatory subprime loans or consumer protection or protection enforcement of banks, which would it be? " CHRG-111hhrg54872--181 Mr. Calhoun," Congressman Scott, I would like to express concerns about creating these exemptions because of the difficulties that has created in the past. One of the biggest examples was, just a few years ago, in fact even when we were looking at the predatory mortgage bill hear this committee, there were efforts to exclude FHA with the argument that FHA loans are a very small part of the market. They were about 2 percent a few years ago, and they were the generally safer loans. However, in the last year, we have seen the very subprime lenders invade FHA. You can go on the Web sites and see ads for, here is how you transfer your business. And there are subprime lenders who have literally converted into FHA lenders. One of the beauties of and I think real core strengths of this bill is it looks at products, not the label that is put on the product or the label that is put on the financial services provider, because that has created a lot of problems. In this specific limited exception, it may be okay. But these exceptions have created a lot of dangers in the past. " fcic_final_report_full--106 In , the four bank regulators issued new guidance to strengthen appraisals. They recommended that an originator’s loan production staff not select appraisers. That led Washington Mutual to use an “appraisal management company,” First American Corporation, to choose appraisers. Nevertheless, in  the New York State attorney general sued First American: relying on internal company documents, the complaint alleged the corporation improperly let Washington Mutual’s loan pro- duction staff “hand-pick appraisers who bring in appraisal values high enough to permit WaMu’s loans to close, and improperly permit[ted] WaMu to pressure . . . appraisers to change appraisal values that are too low to permit loans to close.”  CITIGROUP:  “INVITED REGULATORY SCRUTINY ” As subprime originations grew, Citigroup decided to expand, with troubling conse- quences. Barely a year after the Gramm-Leach-Bliley Act validated its  merger with Travelers, Citigroup made its next big move. In September , it paid  bil- lion for Associates First, then the second-largest subprime lender in the country (af- ter Household Finance.). Such a merger would usually have required approval from the Federal Reserve and the other bank regulators, because Associates First owned three small banks (in Utah, Delaware, and South Dakota). But because these banks were specialized, a provision tucked away in Gramm-Leach-Bliley kept the Fed out of the mix. The OCC, FDIC, and New York State banking regulators reviewed the deal. Consumer groups fought it, citing a long record of alleged lending abuses by Associ- ates First, including high prepayment penalties, excessive fees, and other opaque charges in loan documents—all targeting unsophisticated borrowers who typically could not evaluate the forms. “It’s simply unacceptable to have the largest bank in America take over the icon of predatory lending,” said Martin Eakes, founder of a nonprofit community lender in North Carolina.  Advocates for the merger argued that a large bank under a rigorous regulator could reform the company, and Citigroup promised to take strong actions. Regula- tors approved the merger in November , and by the next summer Citigroup had started suspending mortgage purchases from close to two-thirds of the brokers and half the banks that had sold loans to Associates First. “We were aware that brokers were at the heart of that public discussion and were at the heart of a lot of the [con- troversial] cases,” said Pam Flaherty, a Citigroup senior vice president for community relations and outreach.  The merger exposed Citigroup to enhanced regulatory scrutiny. In , the Fed- eral Trade Commission, which regulates independent mortgage companies’ compli- ance with consumer protection laws, launched an investigation into Associates First’s premerger business and found that the company had pressured borrowers to refi- nance into expensive mortgages and to buy expensive mortgage insurance. In , Citigroup reached a record  million civil settlement with the FTC over Associ- ates’ “systematic and widespread deceptive and abusive lending practices.”  In , the New York Fed used the occasion of Citigroup’s next proposed acqui- sition—European American Bank on Long Island, New York—to launch its own in- vestigation of CitiFinancial, which now contained Associates First. “The manner in which [Citigroup] approached that transaction invited regulatory scrutiny,” former Fed Governor Mark Olson told the FCIC. “They bought a passel of problems for themselves and it was at least a two-year [issue].”  The Fed eventually accused Citi- Financial of converting unsecured personal loans (usually for borrowers in financial trouble) into home equity loans without properly assessing the borrower’s ability to repay. Reviewing lending practices from  and , the Fed also accused the unit of selling credit insurance to borrowers without checking if they would qualify for a mortgage without it. For these violations and for impeding its investigation, the Fed in  assessed  million in penalties. The company said it expected to pay an- other  million in restitution to borrowers.  CHRG-111hhrg56241--184 Mr. Bachus," And I do think one answer is to look at whether they are lending, and if they are not lending, the government, if they are going to make money available it ought to be to those institutions that are lending and lending on Main Street, and put some competition out there . " fcic_final_report_full--91 Despite this diffusion of authority, one entity was unquestionably authorized by Congress to write strong and consistent rules regulating mortgages for all types of lenders: the Federal Reserve, through the Truth in Lending Act of . In , the Fed adopted Regulation Z for the purpose of implementing the act. But while Regu- lation Z applied to all lenders, its enforcement was divided among America’s many fi- nancial regulators. One sticking point was the supervision of nonbank subsidiaries such as subprime lenders. The Fed had the legal mandate to supervise bank holding companies, in- cluding the authority to supervise their nonbank subsidiaries. The Federal Trade Commission was given explicit authority by Congress to enforce the consumer pro- tections embodied in the Truth in Lending Act with respect to these nonbank lenders. Although the FTC brought some enforcement actions against mortgage companies, Henry Cisneros, a former secretary of the Department of Housing and Urban Development (HUD), worried that its budget and staff were not commensu- rate with its mandate to supervise these lenders. “We could have had the FTC oversee mortgage contracts,” Cisneros told the Commission. “But the FTC is up to their neck in work today with what they’ve got. They don’t have the staff to go out and search out mortgage problems.”  Glenn Loney, deputy director of the Fed’s Consumer and Community Affairs Division from  to , told the FCIC that ever since he joined the agency in , Fed officials had been debating whether they—in addition to the FTC—should enforce rules for nonbank lenders. But they worried about whether the Fed would be stepping on congressional prerogatives by assuming enforcement responsibilities that legislation had delegated to the FTC. “A number of governors came in and said, ‘You mean to say we don’t look at these?’” Loney said. “And then we tried to explain it to them, and they’d say, ‘Oh, I see.’”  The Federal Reserve would not exert its authority in this area, nor others that came under its purview in , with any real force until after the housing bubble burst. The  legislation that gave the Fed new responsibilities was the Home Owner- ship and Equity Protection Act (HOEPA), passed by Congress and signed by Presi- dent Clinton to address growing concerns about abusive and predatory mortgage lending practices that especially affected low-income borrowers. HOEPA specifically noted that certain communities were “being victimized . . . by second mortgage lenders, home improvement contractors, and finance companies who peddle high- rate, high-fee home equity loans to cash-poor homeowners.”  For example, a Senate report highlighted the case of a -year-old homeowner, who testified at a hearing that she paid more than , in upfront finance charges on a , second mortgage. In addition, the monthly payments on the mortgage exceeded her income.  HOEPA prohibited abusive practices relating to certain high-cost refinance mort- gage loans, including prepayment penalties, negative amortization, and balloon pay- ments with a term of less than five years. The legislation also prohibited lenders from making high-cost refinance loans based on the collateral value of the property alone and “without regard to the consumers’ repayment ability, including the consumers’ current and expected income, current obligations, and employment.”  However, only a small percentage of mortgages were initially subject to the HOEPA restrictions, be- cause the interest rate and fee levels for triggering HOEPA’s coverage were set too high to catch most subprime loans.  Even so, HOEPA specifically directed the Fed to act more broadly to “prohibit acts or practices in connection with [mortgage loans] that [the Board] finds to be unfair, deceptive or designed to evade the provisions of this [act].”  CHRG-111shrg54789--177 FINANCIAL PROTECTION AGENCY It has become clear that a major cause of the most calamitous worldwide recession since the Great Depression was the simple failure of Federal regulators to stop abusive lending, particularly unsustainable home mortgage lending. Such action would not only have protected many families from serious financial harm but would likely have stopped or slowed the chain of events that has led to the current economic crisis. The idea of a Federal consumer protection agency focused on credit and payment products has gained broad and high-profile support because it targets the most significant underlying causes of the massive regulatory failures that occurred. First, Federal agencies did not make protecting consumers their top priority and, in fact, seemed to compete against each other to keep standards low, ignoring many festering problems that grew worse over time. If agencies did act to protect consumers (and they often did not), the process was cumbersome and time-consuming. As a result, agencies did not act to stop some abusive lending practices until it was too late. Finally, regulators were not truly independent of the influence of the financial institutions they regulated. Meanwhile, despite an unprecedented Government intervention in the financial sector, the passage of mortgage reform legislation in the House of Representatives and the enactment of a landmark law to prevent abusive credit card lending, problems with the sustainability of home mortgage and consumer loans keep getting worse. With an estimated 2 million households having already lost their homes to foreclosure because of the inability to repay unsound loans, Credit Suisse now predicts that foreclosures will exceed 8 million through 2012. \27\ The amount of revolving debt, most of which is credit card debt, is approaching $1 trillion. \28\ Based on the losses that credit card issuers are now reporting, delinquencies and defaults are expected to peak at their highest levels ever within the next year. \29\ One in two consumers who get payday loans default within the first year, and consumers who receive these loans are twice as likely to enter bankruptcy within 2 years as those who seek and are denied them. \30\ Overall, personal bankruptcies have increased sharply, up by one-third in the last year. \31\--------------------------------------------------------------------------- \27\ ``Foreclosures Could Top 8 million: Credit Suisse,'' 9 December 2008, MarketWatch, available at http://www.marketwatch.com/story/more-than-8-million-homes-face-foreclosure-in-next-4-years (last visited 21 June 2009). \28\ See the Federal Reserve statistical release G19, Consumer Credit, available at http://www.federalreserve.gov/releases/g19/ \29\ ``Fitch Inc. said it continues to see signs that the credit crunch will escalate into next year, and it said card chargeoffs may approach 10 percent by this time next year.'' ``Fitch Sees Chargeoffs Nearing 10 percent,'' Dow Jones, May 5, 2009. \30\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans, Uncertainty, and Discounting: Explaining Patterns of Borrowing, Repayment, and Default,'' August 21, 2008. http://www.law.vanderbilt.edu/faculty/faculty-personal-sites/paige-skiba/publication/download.aspx?id=1636 and Paige Marta Skiba and Jeremy Tobacman, ``Do Payday Loans Cause Bankruptcy?'' October 10, 2008 http://www.law.vanderbilt.edu/faculty/faculty-personal-sites/paige-skiba/publication/download.aspx?id=2221 (last visited 21 June 2009). \31\ ``Bankruptcy Filings Continue to Rise'' Administrative Office of the U.S. Courts, news release, 8 June 2009, available at http://www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsMar2009.cfm (last visited 21 June 2009).--------------------------------------------------------------------------- The failure of Federal banking agencies to stem subprime mortgage lending abuses is fairly well known. They did not use the regulatory authority granted to them to stop unfair and deceptive lending practices before the mortgage foreclosure crisis spun out of control. In fact, it wasn't until July of 2008 that these rules were finalized, close to a decade after analysts and experts started warning that predatory subprime mortgage lending would lead to a foreclosure epidemic. Less well known are Federal regulatory failures that have contributed to the extension of unsustainable consumer loans, such as credit card, overdraft and payday loans, which are now imposing a crushing financial burden on many families. As with problems in the mortgage lending market, failures to rein in abusive types of consumer loans were in areas where Federal regulators had existing authority to act, and either chose not to do so or acted too late to stem serious problems in the credit markets. Combining safety and soundness supervision--with its focus on bank profitability--in the same institution as consumer protection magnified an ideological predisposition or antiregulatory bias by Federal officials that led to unwillingness to rein in abusive lending before it triggered the housing and economic crises. Though we now know that consumer protection leads to effective safety and soundness, structural flaws in the Federal regulatory system compromised the independence of banking regulators, encouraged them to overlook, ignore, and minimize their mission to protect consumers. This created a dynamic in which regulatory agencies competed against each other to weaken standards and ultimately led to an oversight process that was cumbersome and ineffectual. These structural weaknesses threatened to undermine even the most diligent policies and intentions. They complicated enforcement and vitiated regulatory responsibility to the ultimate detriment of consumers. These structural flaws include: a narrow focus on ``safety and soundness'' regulation to the exclusion of consumer protection; the huge conflict-of-interest that some agencies have because they rely heavily on financial assessments on regulated institutions that can choose to pay another agency to regulate them; the balkanization of regulatory authority between agencies that often results in either very weak or extraordinarily sluggish regulation (or both); and a regulatory process that lacks transparency and accountability. Taken together, these flaws severely compromised the regulatory process and made it far less likely that agency leaders would either act to protect consumers or succeed in doing so.SECTION 2. CORRECTING REGULATORY SHORTCOMINGS BY CREATING A CONSUMER CHRG-110shrg46629--64 Chairman Dodd," Thank you, Senator. Senator Menendez. Senator Menendez. Thank you, Mr. Chairman. Chairman Bernanke, I appreciate the testimony you have given on the subprime issue and the actions. But I am wondering if the actions reflect the crisis at hand. I find it hard to believe that months of hearings and reviews, a pilot project that will not commence until the end of the year, and guidance after guidance that seems to take only small steps, is a swift enough response for a crisis that has led to over one million foreclosures last year and ruined the American Dream of owning a home for too many people in this country. With all due respect, when, as part of that challenge, we are talking about predatory lending, I am not convinced that the proposals the Fed has put forward will be enough to stop predatory lenders dead in their tracks. I also hope that we have at least prospectively a better monitoring system because it is my personal opinion that, in many respects, the Fed was somewhat asleep at the switch, that we could have been more proactive in this process. It seems to me we are coming to the table with a plan after a tornado has already ripped through a community. So, I hope that the one message I think many of our colleagues have for you and the Reserve is that you will be as swift and use the powers that were given to you under the Home Ownership and Equity Protection Act as vigorously as we would like to see you use them. I hope that that is both your intent, your mission, and in terms of timing within the context of being judicious but not be judicious to the point that we err on the side of being able to protect more people in this country. I would like to hear your response to that in a moment. Let me get my second line of question and give you the balance of the time to answer. In my mind, I always ask who is this economy working for? Is inflation tame or is it still a significant problem? I guess that depends upon where you sit. Consumer prices rose at a moderate rate in June with a key factor keeping things under control is collapsing clothing costs. They have dropped for the past 4 months. But after energy, clothing is probably about the next most volatile component in the Consumer Price Index. So, I would not be surprised if sometime soon we see a major increase in prices in that regard. In addition, we already know that the pullback in gasoline prices in June has been unwound so energy will be adding greatly to consumer woes in July. And then there is food. As you mentioned yourself, prices jumped again and since June 2006 food and beverage costs have risen by 4 percent. With that, with the ethanol issues that are spiraling through food costs, I do not know that we can be looking for relief anytime soon, at least if you are looking at it from the context of the consumer. It seems to me that pain for the consumer is still there. When I look at household debt in America that has risen to record levels over the past 5 years. In the first quarter of 2007, household debt relative to disposable income stood at 130.7 percent. That is the third highest ratio on record. That means the average family in America is in debt for over $130 for every $100 it has to spend. Compounding this, the average household savings rate has actually been negative for the past seven quarters, averaging a negative 1 percent for 2006. One last measurement, one measure of this economic insecurity that I hear New Jerseyans talk to me about, that I hear other Americans talk about, is the percentage of middle-class families who have at least 3 months of their salary in savings. That percentage of middle-class families who had three or more months salary in savings rose over 72 percent from 16.7 percent in 1992 to 28 percent in 2001. But unfortunately, in the span of less than 4 years that percentage has dropped to 18.3 percent in 2004. So, I am looking at this and I am saying to myself so you have rising food costs, you have rising energy costs, rising health costs. You have stagnant median income for the last 5 years for families in this country. You have more debt, the third-highest ratio on record, and you have less families in quite some time that have 3 months and savings or more. Who is this economy working for? And is inflation tame or is it still a significant problem? " CHRG-111hhrg56766--89 Mrs. Capito," Thank you. On page three of your testimony, you talk about contrasting larger lending institutions with smaller lending institutions, and you say bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit and uncertain economic prospects. My question is that I have heard from our community bankers that they have the capital to lend but they are getting conflicting messages from regulators. How can we ensure prudent lending and capital levels while working with these institutions but to expand on the question, too, they have the capital to lend, but creditworthy customers are not the ones coming in the door looking for expansion of their business because they lack confidence in where the economy is now, where we will be a year from now. That is my first question. Thank you. " CHRG-111hhrg48867--71 Mr. Bartlett," Congressman, I don't see it that way. I think lending is up. I think that the lending from all sizes of banks, both largest and smallest, is actually up. Regions in Birmingham and Compass Bank in Birmingham have, in fact, increased their lending. Whitney has increased their lending. So it is not size that either causes more commercial lending or less. It is the capital underneath at the bank. So I don't see it as a size issue. " fcic_final_report_full--558 Bakersfield, session 2: Local Banking, September 7, 2010, transcript pp. 25, 61. 9. William Martin, testimony before the FCIC, Hearing on the Impact of the Financial Crisis—State of Nevada, session 2: The Impact of the Financial Crisis on Businesses of Nevada, September 8, 2010, transcript, p. 76. 10. Inside Mortgage Finance, The 2009 Mortgage Market Statistical Annual, vol. 1, The Primary Mar- ket (: Inside Mortgage Finance, 2009), p. 4, “Mortgage Product by Origination.” 11. Data provided to the FCIC by National Association of Realtors: national home price data from sales of existing homes, comparing second-quarter 1998 ($135,800) and second-quarter 2006 ($227,100), the national peak in prices. 12. Core-based statistical area house prices for Sacramento–Arden–Arcade–Roseville CA Metropoli- tan Statistical Area, CoreLogic data. 13. Data provided by CoreLogic, Home Price Index for Urban Areas. FCIC staff calculated house price growth from January 2001 to peak of each market. Prices increased at least 50% in 401 cities, at least 75% in 217 cities, at least 100% in 112 cities, at least 125% in 63 cities, and more than 150% in 16 cities. 14. Updated data provided by James Kennedy and Alan Greenspan, whose data originally appeared in “Sources and Uses of Equity Extracted from Homes,” Finance and Economics Discussion Series, Federal Reserve Board, 2007-20 (March 2007). 15. “Mortgage Originations Rise in First Half of 2005; Demand for Interest Only, Option ARM and Alt-A Products Increases,” Mortgage Bankers Association press release, October 25, 2005. 16. In 2007, the weekly wage of New York investment banker was $16,849; of the average privately employed worker, $841. 17. Federal Reserve Survey of Consumer Finances, tabulated by FCIC. 18. Angelo Mozilo, interview by FCIC, September 24, 2010. 19. Michael Mayo, testimony before the First Public Hearing of the FCIC, day 1, panel 2: Financial Market Participants, January 13, 2010, transcript, p. 114. 20. “Mortgage Originations Rise in First Half of 2005,” MBA press release, October 27, 2005. 21. Yuliya Demyanyk and Yadav K. Gopalan, “Subprime ARMs: Popular Loans, Poor Performance,” Federal Reserve Bank of St. Louis, Bridges (Spring 2007). 22. Ann Fulmer, vice president of Business Relations, Interthinx (session 1: Overview of Mortgage Fraud), and Ellen Wilcox, special agent, Florida Department of Law Enforcement (session 2: Uncovering Mortgage Fraud in Miami), testimony before the FCIC, Hearing on the Impact of the Financial Crisis— Miami, September 21, 2010. 23. Julia Gordon and Michael Calhoun, Center for Responsible Lending, interview by FCIC, Septem- ber 16, 2010. 24. Faith Schwartz, at Consumer Advisory Council meeting, Thursday, March 30, 2006. 25. Federal Reserve Board, “Mean Value of Mortgages or Home-Equity Loans for Families with Hold- ings,” in SCF Chartbook, June 15, 2009, tables updated to February 18, 2010. 26. Christopher Cruise, interview by FCIC, August 24, 2010. 27. Ibid. 28. Robert Kuttner, interview by FCIC, August 5, 2010. 29. Timothy Geithner, testimony before the FCIC, Hearing on the Shadow Banking System, day 2, session 2: Perspective on the Shadow Banking System, May 6, 2010, transcript, p. 146. 30. James Ryan, chief marketing officer at CitiFinancial and John Schachtel, executive vice president of CitiFinancial, interview by FCIC, February 3, 2010. 31. These points were made to the FCIC by consumer advocates: e.g., Kevin Stein, associate director, California Reinvestment Coalition, at the Hearing on the Impact of the Financial Crisis—Sacramento, ses- sion 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, Septem- ber 23, 2010; Gail Burks, president and CEO, Nevada Fair Housing Center, at the Hearing on the Impact of the Financial Crisis—State of Nevada, session 3: The Impact of the Financial Crisis on Nevada Real Estate, September 8, 2010. See also Federal Reserve Consumer Advisory Council transcripts, March 25, 2004; June 24, 2004; October 28, 2004; March 17, 2005; October 27, 2005; June 22, 2006; October 26, 2006. 555 32. Bob Gnaizda, interview by FCIC, March 25, 2010. 33. James Rokakis, interview by FCIC, November 8, 2010. 34. Ibid. 35. Fed Governor Edward M. Gramlich, “Tackling Predatory Lending: Regulation and Education,” remarks at Cleveland State University, Cleveland, Ohio, March 23, 2001. 36. Rokakis, interview. 37. John Taylor, chairman and chief executive officer, National Community Reinvestment Coalition, letter to Office of Thrift Supervision, July 3, 2000, provided to the FCIC. 38. Stein, testimony before the FCIC, transcript, pp. 73–74, 71. 39. U.S. Department of the Treasury and U.S Department of Housing and Urban Development, “Joint fcic_final_report_full--171 All along the assembly line, from the origination of the mortgages to the creation and marketing of the mortgage-backed securities and collateralized debt obligations (CDOs), many understood and the regulators at least suspected that every cog was reliant on the mortgages themselves, which would not perform as advertised. THE BUBBLE: “A CREDITINDUCED BOOM ” Irvine, California–based New Century—once the nation’s second-largest subprime lender—ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June  presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, legal and state viola- tions, and credit issues, in  of the loans they audited in November and December . In , Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in , the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in , it gave the company’s loan production depart- ment “unsatisfactory” ratings seven times. Patrick Flanagan, president of New Cen- tury’s mortgage-originating subsidiary, cut the department’s budget, saying in a memo that the “group was out of control and tries to dictate business practices in- stead of audit.”  This happened as the company struggled with increasing requests that it buy back soured loans from investors. By December , almost  of its loans were going into default within the first three months after origination. “New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy,” New Century’s bankruptcy examiner reported.  In September —seven months before the housing market peaked—thou- sands of originators, securitizers, and investors met at the ABS East  conference in Boca Raton, Florida, to play golf, do deals, and talk about the market. The asset- backed security business was still good, but even the most optimistic could read the signs. Panelists had three concerns: Were housing prices overheated, or just driven by “fundamentals” such as increased demand? Would rising interest rates halt the market? And was the CDO, because of its ratings-driven investors, distorting the mortgage market?  CHRG-111hhrg54872--24 Mr. Ellison," Thank you, Mr. Chairman. One of the most important causes of the financial crisis was the complete and utter failure of our system of consumer financial protection. The most abusive and predatory lenders were not federally regulated, while regulation was overly lax for banks and other institutions that were covered. To address this problem, we need a new agency dedicated to consumer financial protection, a Consumer Financial Protection Agency. Of course there are some who would like to keep the same regulators on the job and thereby duct-tape together the shards of a broken system. Anyone who wants to take this bankrupt approach should read the Washington Post article from this last Sunday, which I will submit for the record, that discussed the Fed's failures to act on consumer protection. Those failures were so great that even former Fed Chairman Alan Greenspan has backtracked and said the Administration's proposal is probably the ``right decision'' regarding a Consumer Financial Protection Agency. Of course, that initial proposal was not perfect, but we will continue to work on it over the weeks ahead. I yield back. Thank you. " CHRG-111hhrg48674--58 Mrs. Maloney," Lend. Lend and guarantee. " CHRG-111shrg52619--199 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL FROM DANIEL K. TARULLOQ.1. Two approaches to systemic risk seem to be identified: (1) monitoring institutions and taking steps to reduce the size/activities of institutions that approach a ``too large to fail'' or ``too systemically important to fail'' or (2) impose an additional regulator and additional rules and market discipline on institutions that are considered systemically important. Which approach do you endorse? If you support approach one how you would limit institution size and how would you identify new areas creating systemic importance? If you support approach two how would you identify systemically important institutions and what new regulations and market discipline would you recommend?A.1. As we have seen in the current financial crisis, large, complex, interconnected financial firms pose significant challenges to supervisors. In the current environment, market participants recognize that policymakers have strong incentives to prevent the failure of such firms because of the risks such a failure would pose to the financial system and the broader economy. A number of undesirable consequences can ensue: a reduction in market discipline, the encouragement of excessive risk-taking by the firm, an artificial incentive for firms to grow in size and complexity in order to be perceived as too big to fail, and an unlevel playing field with smaller firms that are not regarded as having implicit government support. Moreover, of course, government rescues of such firms can be very costly to taxpayers. The nature and scope of this problem suggests that multiple policy instruments may be necessary to contain it. Firms whose failure would pose a systemic risk should be subject to especially close supervisory oversight of their risk-taking, risk management, and financial condition, and should be held to high capital and liquidity standards. As I emphasized in my testimony, the government must ensure a robust framework--both in law and practice--for consolidated supervision of all systemically important financial firms. In addition, it is important to provide a mechanism for resolving systemically important nonbank financial firm in an orderly manner. A systemic risk authority that would be charged with assessing and, if necessary, curtailing systemic risks across the entire U.S. financial system could complement firm-specific consolidated supervision. Such an authority would focus particularly on the systemic connections and potential risks of systemically important financial institutions. Whatever the nature of reforms that are eventually adopted, it may well be necessary at some point to identify those firms and other market participants whose failure would be likely to impose systemic effects. Identifying such firms is a very complex task that would inevitably depend on the specific circumstances of a given situation and requires substantial judgment by policymakers. That being said, several key principles should guide policymaking in this area. No firm should be considered too big to fail in the sense that existing stockholders cannot lose their entire investment, existing senior management and boards of directors cannot be replaced, and over time the organization cannot be wound down or sold in an orderly way either in whole or in part, which is why we have recommended that Congress create an orderly resolution procedure for systemically important financial firms. The core concern of policymakers should be whether the failure of the firm would be likely to have contagion, or knock-on, effects on other key financial institutions and markets and ultimately on the real economy. Of course, contagion effects are typically more likely in the case of a very large institution than with a smaller institution. However, size is not the only criterion for determining whether a firm is potentially systemic. A firm may have systemic importance if it is critical to the functioning of key markets or critical payment and settlement systems.Q.2. Please identify all regulatory or legal barriers to the comprehensive sharing of information among regulators including insurance regulators, banking regulators, and investment banking regulators. Please share the steps that you are taking to improve the flow of communication among regulators within the current legislative environment.A.2. In general, there are few formal regulatory or legal barriers to sharing bank supervisory information among regulators, and such sharing is done routinely. Like other federal banking regulators, the Board's regulations generally prohibit the disclosure of confidential supervisory information (such as examination reports and ratings, and other supervisory correspondence) and other confidential information relating to supervised financial institutions without the Board's consent. See 12 C.F.R. 261, Subpart C. These regulations, however, expressly permit designated Board and Reserve Bank staff to make this information available to other Federal banking supervisors on request. 12 C.F.R. 261.20(c).. As a practical matter, federal banking regulators have access to a database that contains examination reports for regulated institutions, including commercial banks, bank holding companies, branches of foreign banks, and other entities, and can view examination material relevant to their supervisory responsibility. State banking supervisors also have access to this database for entities they regulate. State banking supervisors may also obtain other information on request if they have direct supervisory authority over the institution or if they have entered into an information sharing agreement with their regional Federal Reserve Bank and the information concerns an institution that has acquired or applied to acquire a financial institution subject to the state regulator's jurisdiction. Id. at 261.20(d). The Board has entered into specific sharing agreements with a number of state and federal regulators, including most state insurance regulators, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of Foreign Asset Control (OFAC), and the Financial Crimes Enforcement Network (FinCEN), authorizing sharing of information of common regulatory and supervisory interest. We frequently review these agreements to see whether it would be appropriate to broaden the scope of these agreements to permit the release of additional information without compromising the examination process. Other supervisory or regulatory bodies may request access to the Board's confidential information about a financial institution by directing a request to the Board's general counsel. Financial supervisors also may use this process to request access to information that is not covered by one of the regulatory provisions or agreements discussed above. Normally such requests are granted subject to agreement on the part of the regulatory body to maintain the confidentiality of the information, so long as the requester bas identified a legitimate basis for its interest in the information. Because the Federal Reserve is responsible for the supervision of all bank holding companies and financial holding companies on a consolidated basis, it is critical that the Federal Reserve also have timely access to the confidential supervisory information of other bank supervisors or functional regulators relating to the bank, securities, or insurance subsidiaries of such holding companies. Indeed, the Gramm-Leach-Bliley Act (GLBA) provides that the Federal Reserve must rely to the fullest extent possible on the reports of examinations prepared by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the SEC, and the state insurance authorities for the national bank, state nonmember bank, broker-dealer, and insurance company subsidiaries of a bank holding company. The GLBA also places certain limits on the Federal Reserve's ability to examine or obtain reports from functionally regulated subsidiaries of a bank holding company. Consistent with these provisions, the Federal Reserve has worked with other regulators to ensure the proper flow of information to the Federal Reserve through information sharing arrangements and other mechanisms similar to those described above. However, the restrictions in current law still can present challenges to timely and effective consolidated supervision in light of, among other things, differences in supervisory models--for example, between those favored by bank supervisors and those used by regulators of insurance and securities subsidiaries--and differences in supervisory timetables, resources, and priorities. In its review of the U.S. financial architecture, we hope that the Congress will consider revising the provisions of Gramm-Leach-Bliley Act to help ensure that consolidated supervisors have the necessary tools and authorities to monitor and address safety and soundness concerns in all parts of an organization.Q.3. What delayed the issuance of regulations under the Home Ownership Equity Protection Act for more than 10 years? Was the Federal Reserve receiving outside pressure not to write these rules? Is it necessary for Congress to implement target timelines for agencies to draft and implement rules and regulations as they pertain to consumer protections?A.3. In responding, I will briefly report the history of the Federal Reserve's rulemakings under the Home Ownership and Equity Protection Act (HOEPA). Although I did not join the Board until January 2009, I support the action taken by Chairman Bernanke and the Board in 2007 to propose stronger HOEPA rules to address practices in the subprime mortgage market. I should note, however, that in my private academic capacity I believed that the Board should have acted well before it did. HOEPA, which defines a class of high-cost mortgage loans that are subject to restrictions and special disclosures, was enacted in 1994 as an amendment to the Truth in Lending Act. In March 1995, the Federal Reserve published rules to implement HOEPA, which are contained in the Board's Regulation Z. HOEPA also gives the Board responsibility for prohibiting acts or practices in connection with mortgage loans that the Board finds to be unfair or deceptive. The statute further requires the Board to conduct public hearings periodically, to examine the home equity lending market and the adequacy of existing laws and regulations in protecting consumers, and low-income consumers in particular. Under this mandate, during the summer of 1997 the Board held a series of public hearings. In connection with the hearings, consumer representatives testified about abusive lending practices, while others testified that it was too soon after the statute's October 1995 implementation date to determine the effectiveness of the new law. The Board made no changes to the HOEPA rules resulting from the 1997 hearings. Over the next several years, the volume of home-equity lending increased significantly in the subprime mortgage market. With the increase in the number of subprime loans, there was increasing concern about a corresponding increase in the number of predatory loans. In response, during the summer of 2000 the Board held a series of public hearings focused on abusive lending practices and the need for additional rules. Those hearings were the basis for rulemaking under HOEPA that the Board initiated in December 2000 to expand HOEPA's protections. The Board issued final revisions to the HOEPA rules in December 2001. These amendments lowered HOEPA's rate trigger for first-lien mortgage loans to extend HOEPA's protections to a larger number of high-cost loans. The 2001 final rules also strengthened HOEPA's prohibition on unaffordable lending by requiring that creditors generally document and verify consumers' ability to repay a high-cost HOEPA loan. In addition, the amendments addressed concerns that high-cost HOEPA loans were ``packed'' with credit life insurance or other similar products that increased the loan's cost without commensurate benefit to consumers. The Board also used the rulemaking authority in HOEPA that authorizes the Board to prohibit practices that are unfair, deceptive, or associated with abusive lending. Specifically, to address concerns about ``loan flipping'' the Board prohibited a HOEPA lender from refinancing one of its own loans with another HOEPA loan within the first year unless the new loan is in the borrower's interest. The December 2001 final rule addressed other issues as well. As the subprime market continued to grow, concerns about ``predatory lending'' grew. During the summer of 2006, the Board conducted four public hearings throughout the country to gather information about the effectiveness of its HOEPA rules and the impact of the state predatory lending laws. By the end of 2006, it was apparent that the nation was experiencing an increase in delinquencies and defaults, particularly for subprime mortgages, in part as a result of lenders' relaxed underwriting practices, including qualifying borrowers based on discounted initial rates and the expanded use of ``stated income'' or ``no doc'' loans. In response, in March 2007, the Board and other federal financial regulatory agencies published proposed interagency guidance addressing certain risks and emerging issues relating to subprime mortgage lending practices, particularly adjustable-rate mortgages. The agencies finalized this guidance in June 2007. Also in June 2007, the Board held a fifth hearing to consider ways in which the Board might use its HOEPA rulemaking authority to further curb abuses in the home mortgage market, including the subprime sector. This became the basis for the new HOEPA rules that the Board proposed in December 2007 and finalized in July 2008. Among other things, the Board's 2008 final rules adopt the same standard for subprime mortgage loans that the statute previously required for high cost HOEPA loans--a prohibition on making loans without regard to borrowers' ability to repay the loan from income and assets other than the home's value. The July 2008 final rule also requires creditors to verify the income and assets they rely upon to determine borrowers' repayment ability for subprime loans. In addition, the final rules restrict creditors' use of prepayment penalties and require creditors to establish escrow accounts for property taxes and insurance. The rules also address deceptive mortgage advertisements, and unfair practices related to real estate appraisals and mortgage servicing. We can certainly understand the desire of Congress to provide timelines for regulation development and implementation. This could be especially important to address a crisis situation. However, in the case of statutory provisions that require consumer disclosure for implementation, we hope that any statutory timelines would account for robust consumer testing in order to make the disclosures useful and effective. Consumer testing is an iterative process, so it can take some additional time, but we have found that it results in much clearer disclosures. Additionally, interagency rulemakings are also more time consuming. While they have the potential benefit of bringing different perspectives to bear on an issue, arriving at consensus is always more time consuming than when regulations are assigned to a single rule writer. Moreover, assigning rulewriting responsibility, to multiple agencies can result in diffused accountability, with no one agency clearly responsible for outcomes. ------ CHRG-109hhrg23738--111 Mr. Greenspan," They are good friends. Ms. Lee. And thank you very much for everything that you have done to help move this agenda forward, in terms of the fairness in our economic system. I wanted to ask you a couple of things. And we have been in touch with each other over the years with regard to CRA, and I want to thank you--the Community Reinvestment Act, and why and how banks can receive an A rating when in fact they are lending to African-Americans and Latinos, in terms of home lending, between 2 and 3 percent. As it relates to the Hispanic community in California, I think it is about 18 percent, when 35 percent of the population is Latino. And your response, of course, was that CRA cannot, you know, deal with the ethnic composition of any lending transaction because they are not required to, but the enforcement of fair lending laws is what would allow for the insurance of nondiscrimination actions. But yet I have to ask you: The fair lending laws appear not to have been enforced, given the very dismal mortgage lending rates of these institutions. And so in going back and forth, over the years, I have been reading your responses, and I want to ask you today if it makes sense, then, that we ask you to look at how to conduct--or maybe the Federal Reserve could conduct--a disparity study, to really begin to look at what is taking place, because, for the life of me, I cannot understand why in fact the home lending rate is so low when in fact these institutions are getting such high ratings. And so I would like to ask for some specific solutions to this so that we can move forward to ensure more fairness in mortgage lending. " CHRG-111hhrg54872--100 Mr. Shelton," I have an opinion. My opinion is very well that payday lending is absolutely necessary which is why the demand is so high. However, payday lending is extremely unfair in that the APR if you factor throughout most States ends up being astronomical. " CHRG-110shrg50410--99 Chairman Dodd," Thank you, Mr. Chairman. Thank you very much, Senator. Senator Casey. Senator Casey. Mr. Chairman, thank you very much. I think I might be the last questioner. I know those that have been waiting a long time will be happy to hear that. I want to thank all three of you for your testimony today as witnesses. But my questions will be directed at Secretary Paulson. I had a chance earlier to ask some questions of Chairman Bernanke. And Chairman Cox, I hope I can get to you on another day, if not today. I wanted to pick up on something the Chairman said earlier, that all of this began with predatory lending. I think all of us would agree on some of the origins of our problems here. In the State that I represent, Pennsylvania, when you are just looking at it from the perspective of the subprime market in terms of our housing challenges, it is really remarkable. A report done in the early part of 2008, when you look at the rate of subprime mortgages, just the existence of those mortgages at a very high rate, it was not just a big city like Philadelphia. The other 8 counties cited in the top 9, really, were all rural or relatively rural counties. I mentioned this, I think, to Secretary Paulson before. In light of that, though, I just wanted to let the Secretary know, I have sent a letter today to HUD Chairman Preston and I have copied you on this letter. You can react to it or not, because you have not seen the letter. But I want to highlight what the letter is about. It is an attempt to provide some answer, some one solution to part of our subprime crisis. In Philadelphia, a new program called the Philadelphia Residential Mortgage Foreclosure Diversion Pilot Program--a long name for a program which does two or three things basically. No. 1, it requires face-to-face meetings between borrowers and lenders and no owner-occupied home can be sold at a sheriff's sale without the owner first getting an opportunity to take part in a ``conciliation session'' with lenders. That is part one. Part two is the homeowner must participate in a free counseling session to develop a proposed payment schedule to present to their mortgage company. And finally, the third point, the Philadelphia Inquirer reported that approximately 200 Philadelphia lawyers--you do not hear too much about lawyers in this context--200 Philadelphia lawyers have donated their time to the program. And out of 600 homeowners who are in danger of losing their homes, approximately 325 were able to avoid foreclosure and eviction. I say that really to all three of you, but in particular to Secretary Paulson because I know you have worked a lot of months now on this problem and you have been determined and dogged and creative and resolute about it. And I would ask you to take a look at that letter and see if there is anything Treasury could do to--if you can endorse it and highlight it. Basically, what we are asking is to take a share of the counseling money and use it for a program like that. I do not know if you have any reaction to that. " CHRG-111shrg51290--32 STATEMENT OF SENATOR SCHUMER Senator Schumer. Thank you, Mr. Chairman. Thank you for holding this hearing, and unfortunately I got here a little late, so I am going to take a little bit of my time and read my opening statement, if you don't mind. And I want to thank you and Senator Shelby for holding this hearing. I think this hearing is really important. We have a great economic crisis in our country and it extends from one end to the other. We have had an explosion of consumer debt. Now we have 12 million households that owe more on their mortgages than their house is worth. The average American family has over $8,000 in credit card debt. Mortgages and credit cards are ordinary features of middle-class life and now they are at the heart of our financial crisis. Something went awry, seriously awry. During the 1980s, I worked to pass legislation that would require disclosure on credit card terms, the ``Schumer box,'' and it had a real effect. But it doesn't do enough now, because disclosure isn't enough, and when you hear of banking institutions just raising the rates, boom, for some small almost induced mistake, you say, well, we need more, and I know that Senator Dodd, Senator Menendez, and I have been working on credit card legislation. But the deceptive practices, the predatory practices, we have seen them in the mortgage industry. The Federal Reserve was in charge of all this and did nothing. Home buyers were enticed and misled, sometimes by banks, sometimes by independent mortgage brokers, more often by the latter, but there is a serious problem. And so I would say complexity ultimately stacks the deck in favor of the financial experts who peddle the products at the expense of the consumer. So again, I am not trying to point fingers of blame here. I am trying to correct the situation. In the early 1900s, Congress created the Food and Drug Administration to protect consumers from peddlers of medicinal concoctions whose miracle elixirs did more harm than good. In today's world, we need a comparable response to peddlers of unfair and deceptive financial practices and services. And I would just say to Mr. Bartlett that all too often, they don't come only from major banking institutions or financial institutions. They come from everywhere. So this week Senator Durbin and I plan to introduce legislation to create a new regulator to provide consumers with stronger protection from excessively costly and predatory financial products and practices. The idea for a Financial Product Safety Commission was first proposed by Elizabeth Warren, professor at Harvard, in 2007. She recognized that substantial changes in the credit markets have made debt far riskier for consumers today than a generation ago and that ordinary credit transactions have become complex undertakings. Consumers are at the mercy of those who write the contracts, and simple disclosure--it is never simple anymore because the terms are so complicated--it doesn't do the job. So consumers deserve to have someone on their side, a regulator that will watch out for the average American, who will review financial products and services to ensure they work without any hidden dangers or unreasonable tricks. So the time is right for a financial services regulator with consumer focus. Professor Warren and consumer groups--CFA, Consumers Union, Public Citizen, Center for Responsible Lending--have been instrumental in helping develop the objectives and responsibilities of such a regulator and I appreciate their efforts. I also think we have got to think beyond regulatory reform of the financial system. We need to think about a new way to live, because what has happened basically over the last decade and a half is we became a country that consumed more than we produced, borrowed more than we saved, and imported more than we exported. Something has to give. And I would say the greatest challenge President Obama has after he gets us out of this financial mess is to figure out how we get back to those traditional values. We have seen it up and down the line. There are the CEOs and their salaries. We all know about that, excessive, huge, based on the short-term. We have seen it here in government with all the deficits. And we have seen it with individuals who get into debt far beyond their means. So it has been a whole societal problem that we have to do something about. The proposal that Senator Durbin and I are making is one part of that, but there are lots of other parts, and I thank you all for listening. I particularly want to thank both Ellen Seidman and Professor McCoy for arguing for this kind of thing. Do I have time for one question, Mr. Chairman? Is that OK? " CHRG-110hhrg44901--21 Mr. Capuano," Chairman Bernanke, I have been listening to the GSE issue, and some people think this is nothing more than a crisis of confidence; maybe we should not do anything and let it wait. It amazes to me to hear this when I have an oil crisis, a food crisis, a Consumer Price Index going up through the roof, job losses all over the place, a trade deficit, a budget deficit going through the roof, corporate losses all across-the-board, and the stock market shaky every single day. I would argue very clearly that this is a little more than a crisis of confidence; I think we have a crisis of leadership. When I say that, I want to except you from that position. I say that because of the actions you have taken. They have been dramatic, bold, and courageous. That doesn't mean I agree with every little detail; I don't want to pretend that. But as far as I am concerned, you have been the leader in this Congress in proving that taking bold action, sometimes action that is a little bit on the edge, helps the economy. It is something that is necessary. I think you are following in the footsteps of some people who really saved this country from disaster in the 1930's. People tend to forget this. In the 1930's, there was no one action, no one silver bullet that pulled us out of the Depression. It was a series of actions, over a decade. Many of those actions were to correct prior actions that maybe they made a mistake on, maybe they acted too quickly and had to adjust it. I don't see that there is anything we can do, unless anyone has a single action that this Congress and this country should take. I think we need more action, and that includes Congress as well. I think we are going to try to do something in the next week or so. We need it from the regulators. I personally think we need more action from the SEC. I think we need faster action by everybody. I think we need more dramatic action by everybody. And I think we need more coordinated action by everybody. Right now, I think we have too many people running around on their own. All that being said, again, I want to thank you for what you have done thus far and to thank you for your bold and courageous moves, as I see it, most recently in the predatory lending area. I would just like to hear your opinion in general, not about the specific proposals we have. I guess I can't escape them right now when the GSE proposal is floating around in all its different iterations. In general, in the crisis that we are in, do you believe that government--that includes Congress, regulators, and everybody across-the-board--but that government should be acting relatively quickly, or do you think that we should simply sit back and say it is a confidence problem and people just need to get over it? Because, honestly, especially in the last day or so, I have been shocked at the number of people who have pretty much said that. I understand people differ as to what we should do. That is fair. That is what this is all about. But to imply or to state that no action is necessary, to me, is completely wrong, and I would just like to hear your opinion on that issue. " CHRG-110shrg50409--9 Chairman Dodd," Well, thank you very much, Mr. Chairman. And let me just briefly say I appreciate the efforts of the Fed regarding both credit cards and the things dealing with predatory lending practices. We welcome those rules, and we welcome the suggestions in the credit card areas, and a future point here, we will maybe have more discussion about that. But I wanted to at least reflect my appreciation of what the Fed has done regarding those matters, and we appreciate it very much. I am going to put this clock on at 5 minutes so we can give everyone a chance to raise any questions they have on the monetary policy issues. Some of the questions may overlap, and at the conclusion of that, Secretary Paulson and Chairman Cox will be here to have a broader discussion about the proposals being made by Treasury over the weekend. Let me, if I can, jump to the economic projections for 2009, the concerns about economic growth that you have raised in your statement here this morning. Given the fact that we have, as you point out, acknowledged the risk to your forecast for economic growth are skewed to the downside, to use your words, and given the fact that the stimulus package is about to--the effects of it are going to run out by the end of the year. The housing crisis continues, obviously, as we all know painfully. Gasoline prices, as you point out, are at record levels, costing consumers tremendously. The issues involving the weakness in the labor market are significant, 94,000 jobs lost every month for the last 6 months on a consistent basis. Inflation, as you point out, while it may abate in the coming years, it certainly is going to be with us for some time. What suggestions do you have for us in all of this? And I realize you may want to reserve some final judgment on the effects of the stimulus package and will not know the full effects of that until maybe toward the end of the year. But as we look down the road as policy setters here in the Congress looking at ideas, including a possibly a second stimulus package, one of the suggestions we made to increase productivity is to invest more heavily in infrastructure, the infrastructure needs of the country. I wonder if you might just share with us your views as to what ideas, as a menu of ideas, without necessarily embracing one or the other, but what you would be planning to do rather than just sort of waiting out the year and a new administration coming in, we will be leaving here, adjourning in late September, early October, maybe coming back, maybe not until after inauguration of the President late in January, it seems to me this would be an opportune time for us to be considering very seriously policy considerations that would provide for greater economic growth and opportunity than what we are presently looking at. " CHRG-110shrg50409--2 Chairman Dodd," Well, good morning. Let me welcome my colleagues and others to this very important hearing this morning. I want to thank the Chairman of the Federal Reserve. Today we are meeting in the most unusual and extraordinary moments in many ways in the recent history of our country. Let me tell you how we are going to proceed this morning. This is, of course, a scheduled hearing with the Chairman of the Federal Reserve on Humphrey-Hawkins and dealing with monetary policy, and over the next hour or so, we are going to focus on that and give the Chairman an opportunity to give us his statement this morning on that statutorily mandated requirement to appear before the Committee and share his thoughts on this issue. And then, as I understand it, we are due to have a vote around 11 o'clock, and my hope would be that we would recess for a few minutes for that vote, and when we come back, the Secretary of the Treasury, Hank Paulson, and Christopher Cox, the Chairman of the Securities and Exchange Commission, will be with us to engage in a discussion of the financial services issues that are before us. I want to thank Senator Shelby and my colleagues here for waiving the normal requirements of having several days of notice before we actually have a hearing like this. But I think all of us recognize the significance of the issues that are going on in our country at this moment and the importance of having the Secretary of the Treasury and the Chairman of the SEC as well as the Chairman of the Federal Reserve to be with us this morning. So I am very grateful to you and to the Secretary of the Treasury and Chris Cox. So the first hearing will be to receive the Semiannual Monetary Policy Report from the Federal Reserve as previously scheduled, and after the conclusion of that hearing, we will convene a second hearing on Recent Developments in U.S. Financial Markets and Regulatory Responses to Them. The second hearing was noticed yesterday with the consent of Senator Shelby--and, again, I am grateful to him--due to the special and exigent circumstances in our Nation's financial markets. I want to thank Chairman Bernanke for testifying at both hearings. I also thank Secretary Paulson and Chairman Cox for agreeing to appear on very short notice at the second hearing. In deference to them and the importance of the matters at hand, I will provide a brief opening statement. I will ask Senator Shelby to do likewise. And then I would ask my fellow Members here if they would reserve their question period to make their opening statements. All statements will be included in the record as if read so that we can get to the statement by the Chairman of the Federal Reserve and then get to the questions as quickly as we can. In considering the state of our economy and, in particular, the turmoil in recent days, it is important to distinguish between fear and facts. In our markets today, far too many actions are being driven by fear and ignoring crucial facts. One such fact is that Fannie Mae and Freddie Mac have core strengths that are helping them weather the stormy seas of today's financial markets. They are adequately capitalized. They are able to access the debt markets. They have solid portfolios with relatively few risky subprime mortgages. They are well regulated, and they have played a vital role in maintaining the flow of affordable mortgage credit even during these volatile times. Another fact is that the subprime lending fiasco was preventable. In this Committee, 18 months of exhaustive hearings have documented what I have called a ``pattern of regulatory neglect.'' The previous leadership, along with other financial agency leaders appointed by this administration, in my view ignored the clear and present danger posed by predatory lending to homeowners, to financial institutions, and to the economy as a whole. The result of this neglect is that the American people are experiencing unprecedented hardships and uncertainties. Foreclosure rates continue at record levels. Each and every day in America, more than 8,000 families enter foreclosure. For those lucky enough to keep their homes, the value of their homes has dropped by the greatest amount in some cases since the Great Depression. Millions more are paying record-high prices for gasoline, for health care, for education, and even for the food that they put on their tables. They are watching the value of their pension funds and 401(k)s plummet. And they want to know when will things start to turn around, when will America get back on track. Chairman Bernanke, you are to be commended, in my view, for your efforts to bring greater stability to our financial system during an unprecedented period of volatility. You also deserve credit for your willingness to address some of the unsafe, unsound, and predatory practices that proliferated over the last several years in the subprime mortgage market, as well as in the credit card lending. And we look forward to hearing from you today about the outlook for the Nation's economy and what can be done to improve it. Certainly, this Committee has worked diligently in that regard. On Friday evening, the Senate passed, with an overwhelming bipartisan majority, a bill that we believe will assist homeowners at risk of foreclosure, establish a new, permanent affordable housing fund, modernize the FHA, strengthen the regulation of the GSEs, and help restore confidence to the mortgage markets as a whole. It is certainly my view that this legislation deserves to be enacted as soon as possible, and I hope that will occur. In addition, we are all by now aware that the Treasury and the SEC as well as the Fed made important policy announcements this past weekend, which we intend to examine carefully in the hearing later this morning with you, Mr. Chairman, Secretary Paulson, and Chairman Cox. I think I can speak for everyone, I hope, on this Committee in saying that we all share a common desire to promote the common good of our country, and I think we all certainly appreciate the spirit in which the Fed, the SEC, and the Treasury Department have acted. But we do them and the American people a disservice if we do not examine very carefully the proposals that are being put forward. That is particularly true of the Treasury proposals. It is in many respects unprecedented. Although limited in duration, these proposals would give the Treasury unlimited new authority to purchase GSE debt and equity, it would exempt those purchases from pay-as-you-go budget rules, and it would grant to the Federal Reserve considerable new powers in relation to the regulation of the GSEs. These new powers could have the effect of crippling the efforts of virtually every Member of this Committee to create a true world-class regulator for the GSEs. These proposals raise serious questions--questions about the nature of the economic crisis facing our Nation, about the ability of these proposals to address this crisis effectively, and about the burden to the American taxpayer potentially being asked to carry. These questions deserve serious answers. Above all, this is a time to act on the basis of fact and not fear, as I said at the outset of these remarks. For too many years, leaders have shirked their duty, in my view, to protect the American taxpayer and to promote the American economy. At this critical moment, we must not flinch from our duty to do the same. With that, let me turn to Senator Shelby. FinancialCrisisInquiry--619 ROSEN: They were, and many of these practices have been around for a long time, very successfully done, not the risk element—we heard that earlier—but narrowly based. It’s when they became—layered the risk. So if you underwrote a subprime mortgage but underwrote the person’s income, gave them counseling, did all the right things, you didn’t have this issue. Defaults were always higher, but not dramatically higher. Same thing with option ARMs. What happened is we layered the risk. We decided to give a person a subprime mortgage, not verify their income, give them no down payment. And I have charts in the paper which I sent to you guys that—it was hard to believe they were doing it; it’s layering all the risks. And it is because the owner of these mortgages was distant from the origination process. I think that’s why it happened. So the proliferation of products that were sound for certain categories of people with the right underwriting, became—underwriting just disappeared, and it proliferated throughout the system, so we ended up writing, instead of January 13, 2010 5 percent subprime mortgages, all of a sudden, it was 20 percent. Also, we had, I think, some of the predatory things that we heard from another witness that I think we did have people focusing and steering people. You’ve seen—I don’t have evidence of that, but we’ve seen lots of anecdotal evidence of that, and that certainly was a problem. CHRG-111hhrg52406--210 Mr. Bachus," I said I associate you all with subprime lending just because of the last few years, but you are actually concerned with all sorts of lending practices. Ms. Keest. Certainly. We work on credit cards. We work on payday loans, and we are affiliated with the financial institution that does mortgage lending, small business lending and that has retail credit union operations. " CHRG-111hhrg56766--121 Mr. Castle," Thank you, Mr. Chairman. Chairman Bernanke, like many others here, probably all of us, I'm very concerned about the job situation in the United States and we can argue politically whether the Stimulus Program has worked well or not. Mr. Zandi, an economist, yesterday indicated that the jobs that were created were probably to some degree temporary in that we funded governments so they could keep on employees for a period of time and various capital projects that will expire at some point or another. So we still have a continuing problem, and I have had a couple of job fairs in my State and I have been surprised both at the number of people who have come out for that and the backgrounds of some of these people. It's not the usual unemployed, it's people with college degrees, even graduate degrees, who are unemployed at this point. I see that the lending by banking institutions has fallen by some 7.5 percent in 2009, and my question to you is, is there anything that you as the head of the Fed or the Fed itself or us as Members of Congress could be doing to help with the employment circumstance? My further question is what is happening in this whole bank lending? I mean, we have put a lot of--we, being both the TARP Program and the Federal Reserve, have put a lot of money into banking institutions, primarily larger banking institutions, and the theory was that they're the ones who are going to lend to the other commercial banks who would then lend to the business people on main streets throughout America and that somehow seems to have not connected. The lending is down for a lot of the reasons you're talking about, the commercial real estate issues and various aspects like that which I understand, but what is it that we could do to make sure that the lending does pick up so that jobs can be created and, perhaps as an economist beyond even the Federal Reserve, what else should we be doing differently or considering doing in terms of helping with employment, by we meaning Congress and the Federal Reserve? " FinancialCrisisReport--177 During the five-year period reviewed by the Subcommittee, from 2004 through 2008, OTS examiners identified over 500 serious deficiencies in Washington Mutual’s lending, risk management, and appraisal practices. 647 OTS examiners also criticized the poor quality loans and mortgage backed securities issued by Long Beach, and received FDIC warnings regarding the bank’s high risk activities. When WaMu failed in 2008, it was not a case of hidden problems coming to light; the bank’s examiners were well aware of and had documented the bank’s high risk, poor quality loans and deficient lending practices. (a) Deficiencies in Lending Standards From 2004 to 2008, OTS Findings Memoranda and annual Reports of Examination (ROE) repeatedly identified deficiencies in WaMu’s lending standards and practices. Lending standards, also called “underwriting” standards, determine the types of loans that a loan officer may offer or purchase from a third party mortgage broker. These standards determine, for example, whether the loan officer may issue a “stated income” loan without verifying the borrower’s professed income, issue a loan to a borrower with a low FICO score, or issue a loan providing 90% or even 100% of the appraised value of the property being purchased. When regulators criticize a bank’s lending or “underwriting” standards as weak or unsatisfactory, they are expressing concern that the bank is setting its standards too low, issuing risky loans that may not be repaid, and opening up the bank to later losses that could endanger its safety and soundness. When they criticize a bank for excessively high lending or underwriting “errors,” regulators are expressing concern that the bank’s loan officers are failing to comply with the bank’s standards, such as by issuing a loan that finances 90% of a property’s appraised value when the bank’s lending standards prohibit issuing loans that finance more than 80% of the appraised value. In addition to errors, regulators may express concern about the extent to which a bank allows its loan officers to make “exceptions” to its lending standards and issue a loan that does not comply with some aspects of its lending standards. Exceptions that are routinely approved can undermine the effectiveness of a bank’s formal lending standards. Another common problem is inadequate loan documentation indicating whether or not a particular loan complies with the bank’s lending standards, such as loan files that do not include a property’s appraised value, the source of the borrower’s income, or key analytics such as the loan-to-value or debt-to- income ratios. In the case of Washington Mutual, from 2004 to 2008, OTS examiners routinely found all four sets of problems: weak standards, high error and exception rates, and poor loan documentation. 2004 Lending Deficiencies. In 2004, OTS examiners identified a variety of problems with WaMu’s lending standards. In May of that year, an OTS Findings Memorandum stated: 647 See IG Report at 28. “Several of our recent examinations concluded that the Bank’s single family loan underwriting was less than satisfactory due to excessive errors in the underwriting process, loan document preparation, and in associated activities.” 648 CHRG-111hhrg53241--36 Mr. Taylor," Good morning, Chairman Frank, Representative Waters, and other distinguished members of the Committee on Financial Services. I am John Taylor, president and CEO of the National Community Reinvestment Coalition (NCRC). I am here representing 600 organizations from across the country, and my remarks reflect their views. The current crisis demonstrates the need for comprehensive regulatory reform and the establishment of a Federal agency focused on consumer protection. If we had adequate protection against predatory lending, then we would have not have had the current foreclosure crisis. The Administration asserts that consumer protection needs an independent seat at the table in our financial regulatory system and that the Consumer Financial Protection Agency, the CFPA, would be that independent seat. We couldn't agree more. NCRC strongly supports empowering the CFPA to administer and enforce all of the consumer protection and fair lending laws. In particular, we agree with the Administration that the CFPA must have jurisdiction over the Community Reinvestment Act. We urge the House Financial Services Committee to reinsert CRA under the CFPA in H.R. 1326. Currently, the bank regulatory agencies charged with enforcing the CRA have shown a feeble interest in enforcing this important legislation. Weakened enforcement and less frequent and thorough exams have been the norm. CRA grade inflation. Just so you understand, in 1990 to 1994, 8 percent of the financial institutions in this country failed the CRA exams, failed to accurately provide services and products to people of low- and moderate-income needs. That was between 1990 and 1994. From 2002 to 2007, a period of which we had the absolute worst lending where we really needed these lenders in these communities offering safe and sound and quality products, the CRA grades given by these regulators went down from 8 percent to 1 percent. Near absence of public hearings on mergers. We have had over the last 18 years all of 13 public hearings on mergers of CRA institutions. The opportunity for the public, for Members of Congress, for the press, and others to have a conversation about what this merger means for underserved communities, what the depositors and others who do business with the institutions need to see happen in the event these banks are merged, that process has been all but eliminated. The bank regulatory agencies have sat idly as they have seen a systematic bank withdrawal from low-income and communities of color. I mean, why is it that the basic banking of choice in minority and low-income communities is payday lenders, check cashers, and pawn shops? Because all these regulators sat by and allowed all those banking institutions to close those branches one after one after one after the next. By the way, in case you don't know this, we have gone from 15,000 financial institutions down to less than 10,000. In that same period of time, the number of branches has actually gone up but not in low-income and minority communities. And they were charged with enforcing that. Twenty-five percent of the CRA grade is supposed to be the servicing. What is the history of opening and closing branches? Where have the bank regulators been? Asleep at the helm. Even the Fed's Consumer Advisory Council--this Congress passed a law that required them to have a Consumer Advisory Counsel to advise the Fed board Governors. I had the honor of serving on that Council, but it astounded me to watch all these bankers appointed to the Consumer Advisory Council and then would be in these debates inside the Federal Reserve with bankers to give what is supposed to be a consumer perspective. Hello. And then, by the way, in case you don't know it, the Fed actually has a Bankers Council, made up of all bankers. Maybe one they will stop to invite consumers so that the banks will have to argue on them. When better attempts are made to enforce CRA by one agency, such as under the OCC when Eugene Ludwig was the Comptroller of the Currency, he actually really began to really take seriously CRA and the fair lending laws and to really enforce them, what happened? One hundred and twenty national banks changed their charter and went over to the Federal Reserve. So there is sort of this regulatory arbitrage. You don't like how they are enforcing law over here; go over here. OTS? Oh, gee, we will make a less frequent exam and we will go up to a billion dollars in assets, and we will say you don't really have to have the three exams. We will do a streamlined exam. There is enough history here. We don't have to doubt it. CRA is a stepchild regulation in these regulatory agencies. We couldn't need more now an agency that really for the first time takes a look at consumer interest, the taxpayer's interest, and assures that their rights are protected and that the Community Reinvestment Act is enforced. Let me--how am I doing for time? I still have some. Let me jump ahead and say a couple of things. We are very pleased that they have some enhanced data that I think will be very helpful to you, to us, and to others in looking at what banks do in underserved communities. " CHRG-111shrg55117--88 Mr. Bernanke," It would depend whether the agency was involved in promulgating--actively promulgating proactively actions that the banks should take in terms of the kind of lending they should do and so on. If it is promoting certain kinds of lending, then it does raise the risk that that lending might not be safe and sound. If it is mostly involved in putting limits on the types of products that can be offered and so on, that could also have implications for bank profitability, but it doesn't have the same implications of what you are talking about, which is lending which is not safe and sound. Senator Vitter. Although bank profitability goes to safety and soundness, too. " CHRG-111hhrg52261--132 Chairwoman Velazquez," Ms. Donovan? Ms. Donovan. Madam Chair, most credit unions today have sufficient capital. We have good capital on hand. Unfortunately, the artificial cap that is on member lending is what is refraining us from lending that out. I am a very small credit union, as I noted. We have hardly any member-business lending, very little. However, we do have the capital to lend to the small businesses in our community. And most credit unions do have that at this point. " CHRG-110hhrg46593--232 Mr. Manzullo," Do you like that question? Ms. Blankenship. I will take that question. Of the 8,000 community banks, the banks that are on Main Street and in the agricultural and rural communities that represent 22,000 communities across the Nation, by and large they are well capitalized and they do have money to lend. Our own bank actually has increased in lending--our net lending since this time last year. The market confidence was a huge factor. When there were comments that thousands of banks would fail, you know, we had--that is where you saw your customers pulling in. It wasn't the fact that the banks didn't have money to lend. The consumer confidence just went to the tank. And so we had to restore that. And coupled with that was the deposit insurance question and, you know, does your bank save? And the confusion over money market guarantees where the mutual funds got unlimited and our banks had $100,000 still. So it is hard to compete. And yet those customers know us. They know us by name, as you said. And the confidence--we were able to rebuild that confidence. But it was a campaign. We do have money to lend, and we would be glad to lend it. " CHRG-111hhrg54868--72 Mr. Dugan," Okay. I will give you a couple of examples, and then I will also say that a bunch of the practices, the very worst subprime mortgage lending, was not occurring inside national banks or State banks for that matter. It was in unregulated State entities where the States were in charge of them. And the numbers show that. In terms of the things that we have leaned on people, payday lending was something where the payday lenders tried to get ahold of national banking franchises to run payday lending operations in them, and we stopped it. We stopped them from so-called renting the national bank charter to do that. I mentioned subprime lending and credit cards, where we saw a number of abuses that caused real problems. Both on the consumer protection side and the safety and soundness side, we came down very hard on it, and we essentially ended that practice for the monoline stand-alone subprime lenders in the credit card business. I can provide you other examples and specific cases and would be happy to do that for the record. Mr. Miller of North Carolina. My time is nearly up. " CHRG-110hhrg44901--223 Mr. Bernanke," Well, my understanding is that Congress has addressed that to some extent by allowing direct lending or backup lending. " CHRG-111hhrg54872--28 Mr. Shelton," Thank you, and good morning. Thank you, Mr. Chairman, Ranking Member Bachus, and members of the Committee on Financial Services for inviting us here today. I appreciate the opportunity to share with you the views of the NAACP on the creation of a Consumer Financial Protection Agency, or CFPA. I would also like to begin by thanking you, Chairman Frank, for all you have done, and continue to do, to help all Americans obtain access to capital and financial security. In fact, NAACP members from across the Nation who were fortunate enough to hear your presentation at our Centennial Convention in New York this summer are still talking about the need for this new agency and its promise to our communities. The NAACP is very supportive of the creation of a strong and effective CFPA with the protection of civil rights and a directive that it seek to eliminate discrimination as a core part of its mandate. For too long, racial and ethnic minorities, the elderly, and others have been targeted by unscrupulous lenders and underserved by traditional financial institutions. The result of this lack of standard rule and the strict enforcement of the rules that we do have has been the financial stagnation, and, in too many cases, the economic ruin of people's lives, families, and entire communities. When they have been engaged, too many regulators have spent too much time in recent years asking what is the effect on the financial industry, without asking what is the effect on the consumer? One result of these misplaced priorities, as we have seen, has been an almost complete collapse of not only our Nation's economy, but the near ruination of the global financial system as well. Examples of financial abuses, targeting racial and ethnic minorities abound, especially in the mortgage arena, where predatory lenders consistently target certain groups and communities, and by abusive credit card companies and exploitive payday lenders. In my written testimony, I provided the committee with numerous examples of studies that conclusively show not only a targeting of certain groups by financial services, but also the disparate impact this unscrupulous, wealth-stripping behavior has had on individuals, families, and, indeed, whole communities. In the interest of time, I will not go into detail here. Suffice it to say that the evidence that racial and ethnic minorities have been targeted by abusive financial services is strong and conclusive, and their eradication is a top civil rights issue of our day. As envisioned, the CFPA would provide the government with the tools necessary to help all consumers investigate and be treated fairly by what is often a confusing and potentially ruinous environment. It would support, if not require, regulators to become more protective of consumers, and it would make civil rights protections more a key element in the regulation and oversight of financial services. It is also because of the systemic discriminatory and abusive lending practices that we were pleased to see a strong support of our provisions in the latest draft of CPA's legislation that creates an Office of Fair Lending and Equal Opportunity and makes the fight against discrimination part of the mandate of the new agency. These provisions will go a long way towards putting some teeth into the laws that are already on the books and to protecting consumers, all consumers, as they attempt to navigate our Nation's financial services. One area where the NAACP would like to see the current CFPA proposal strengthened is that we would like to see regulation of the Community Reinvestment Act, the CRA, fall under the CFPA's jurisdiction. We need to renew, reinvigorate, modernize, and expand CRA, and I appreciate the comments of the chairman last week when he said that he too is serious about updating this important law. I would suggest that perhaps in the course of reauthorizing CRA, this committee consider putting authority of this important law under the newly created and robust CFPA. In order to fully address the needs of local communities, many of which are represented by the NAACP, the CFPA should be able to review and enforce lending laws at that level. Mr. Chairman, it is our belief that a strong CFPA will go a long way towards addressing the very real needs of enforcement and regulation in the financial services arena. However, let me make it clear that we have no illusions that this new agency will fully address all of the needs and shortcomings that continue to plague our communities and, indeed, our Nation. We still need strong laws to address many of the problems that allow unscrupulous lenders to continue to operate. Specifically, the NAACP will continue to fight for aggressive antipredatory lending laws, as well as curbs on abusive payday loans, and real assistance for homeowners facing foreclosure. In that vein, I look forward to continuing to work with you, Mr. Chairman, as well as all the other members of this committee, to enact strong legislation to help all Americans gain the American dream of economic security. Thank you very much. And I look forward to your questions. [The prepared statement of Mr. Shelton can be found on page 147 of the appendix.] " CHRG-111shrg52619--175 PREPARED STATEMENT OF JOSEPH A. SMITH, JR. North Carolina Commissioner of Banks, and Chair-Elect of the Conference of State Bank Supervisors March 19, 2009Introduction Good morning Chairman Dodd, Ranking Member Shelby, and Members of the Committee. My name is Joe Smith, and I am the North Carolina Commissioner of Banks. I also serve as incoming Chairman of the Conference of State Bank Supervisors (CSBS) and a member of the CSBS Task Force on Regulatory Restructuring. I am pleased to be here today to offer a state perspective on our nation's financial regulatory structure--its strengths and its deficiencies, and suggestions for reform. As we work through a federal response to this financial crisis, we need to carry forward a renewed understanding that the concentration of financial power and a lack of transparency are not in the long-term interests of our financial system, our economic system or our democracy. This lesson is one our country has had to learn in almost every generation, and I hope that the current lesson will benefit future generations. While our largest and most complex institutions are no doubt central to a resolution of the current crisis, my colleagues and I urge you to remember that the health and effectiveness of our nation's financial system also depends on a diverse and competitive marketplace that includes community and regional institutions. While changing our regulatory system will be far from simple, some fairly simple concepts should guide these reforms. In evaluating any governmental reform, we must ask if our financial regulatory system: Ushers in a new era of cooperative federalism, recognizing the rights of states to protect consumers and reaffirming the state role in chartering and supervising financial institutions; Fosters supervision tailored to the size, scope and complexity of an institution and the risk it poses to the financial system; Assures the promulgation and enforcement of consumer protection standards that are applicable to both state and federally chartered institutions and are enforceable by state officials; Encourages a diverse universe of financial institutions as a method of reducing risk to the system, encouraging competition, furthering innovation, insuring access to financial markets, and promoting efficient allocation of credit; Supports community and regional banks, which provide relationship lending and fuel local economic development; and Requires financial institutions that are recipients of governmental assistance or pose systemic risk to be subject to safety and soundness and consumer protection oversight. We have often heard the consolidation of financial regulation at the federal level is the ``modern'' answer to the challenges our financial system. We need to challenge this assumption. For reasons more fully discussed below, my colleagues and I would suggest to you that an appropriately coordinated system of state and federal supervision and regulation will promote a more effective system of financial regulation and a more diverse, stable and responsive financial system.The Role of the States in Financial Services Supervision and Regulation The states charter and supervise more than 70 percent of all U.S. banks (Exhibit A), in coordination with the FDIC and Federal Reserve. The rapid consolidation of the industry over the past decade, however, has created a system in which a handful of large national banks control the vast majority of assets in the system. The more than 6,000 banks supervised and regulated by the states now represent less than 30 percent of the assets of the banking system (Exhibit B). While these banks are smaller than the global institutions now making headlines, they are important to all of the markets they serve and are critical in the nonmetropolitan markets where they are often the major sources of credit for local households, small businesses and farms. Since the enactment of nationwide banking in 1994, the states, working through CSBS, have developed a highly coordinated system of state-to-state and state-to-federal bank supervision. This is a model that has served this nation well, embodying our uniquely American dynamic of checks and balances--a dynamic that has been missing from certain areas of federal financial regulation, with devastating consequences. The dynamic of state and federal coordinated supervision for state-chartered banks allows for new businesses to enter the market and grow to meet the needs of the markets they serve, while maintaining consistent nationwide standards. Community and regional banks are a vital part of America's economic fabric because of the state system. As we continue to work through the current crisis, we need to do more to support community and regional banks. The severe economic recession and market distortions caused by bailing out the largest institutions have caused significant stress on these institutions. While some community and regional banks have had access to the TARP's capital purchase program, the processing and funding has grown cumbersome and slow. We need a more nimble and effective program for these institutions. This program must be administered by an entity with an understanding of community and regional banking. This capital will enhance stability and provide support for consumer and small business lending. In addition to supervising banks, I and many of my colleagues regulate the residential mortgage industry. All 50 states and the District of Columbia now provide some regulatory oversight of the residential mortgage industry. The states currently manage over 88,000 mortgage company licenses, over 68,000 branch licenses, and approximately 357,000 loan officer licenses. In 2003, the states, acting through the CSBS and the American Association of Residential Mortgage Regulators, first proposed a nationwide mortgage licensing system and database to coordinate our efforts in regulating the residential mortgage market. The system launched on January 2, 2008, on time and on budget. The Nationwide Mortgage Licensing System (NMLS) was incorporated in the federal S.A.F.E. Act and, as a result, has established a new and important partnership with the United States Department of Housing and Urban Development, the federal banking agencies and the Farm Credit Administration. We are confident that this partnership will result in an efficient and effective combination of state and federal resources and a nimble, responsive and comprehensive system of regulation. This is an example of what we mean by ``a new era of cooperative federalism.''Where Federalism Has Fallen Short For the past decade it has been clear to the states that our system of mortgage finance and mortgage regulation was flawed and that a destructive and widening chasm had formed between the interests of borrowers and of lenders. Over that decade, through participation in GAO reports and through congressional testimony, one can observe an ever-increasing level of state concern over this growing chasm and its reflection in the state and federal regulatory relationship. Currently, 35 states plus the District of Columbia have enacted predatory lending laws. \1\ First adopted by North Carolina in 1999, these state laws supplement the federal protections of the Home Ownership and Equity Protection Act of 1994 (HOEPA). The innovative actions taken by state legislatures have prompted significant changes in industry practices, as the largest multi-state lenders have adjusted their practices to comply with the strongest state laws. All too often, however, we are frustrated in our efforts to protect consumers by the preemption of state consumer protection laws by federal regulations. Preemption must be narrowly targeted and balance the interest of commerce and consumers.--------------------------------------------------------------------------- \1\ Source: National Conference of State Legislatures.--------------------------------------------------------------------------- In addition to the extensive regulatory and legislative efforts, state attorneys general and state regulators have cooperatively pursued unfair and deceptive practices in the mortgage market. Through several settlements, state regulators have returned nearly one billion dollars to consumers. A settlement with Household resulted in $484 million paid in restitution, a settlement with Ameriquest resulted in $295 million paid in restitution, and a settlement with First Alliance Mortgage resulted in $60 million paid in restitution. These landmark settlements further contributed to changes in industry lending practices. But successes are sometimes better measured by actions that never receive media attention. States regularly exercise their authority to investigate or examine mortgage companies for compliance not only with state law, but with federal law as well. These examinations are an integral part of a balanced regulatory system. Unheralded in their everyday routine, enforcement efforts and examinations identify weaknesses that, if undetected, might be devastating to the company and its customers. State examinations act as a check on financial problems, evasion of consumer protections and sales practices gone astray. Examinations can also serve as an early warning system of a financial institution conducting misleading, predatory or fraudulent practices. Attached as Exhibit C is a chart of enforcement actions taken by state regulatory agencies against mortgage providers. In 2007, states took nearly 6,000 enforcement actions against mortgage lenders and brokers. These actions could have resulted in a dialog between state and federal authorities about the extent of the problems in the mortgage market and the best way to address the problem. That did not happen. The committee should consider how the world would look today if the ratings agencies and the OCC had not intervened and the assignee liability and predatory lending provisions of the Georgia Fair Lending Act had been applicable to all financial institutions. I would suggest we would have far fewer foreclosures and may have avoided the need to bailout our largest financial institutions. It is worth noting that the institutions whose names were attached to the OCC's mortgage preemption initiative--National City, First Franklin, and Wachovia--were all brought down by the mortgage crisis. That fact alone should indicate how out of balance the system has become. From the state perspective, it has not been clear for many years exactly who was setting the risk boundaries for the market. What is clear is that the nation's largest and most influential financial institutions have been major contributing factors in our regulatory system's failure to respond to this crisis. At the state level, we sometimes perceived an environment at the federal level that is skewed toward facilitating the business models and viability of our largest financial institutions rather than promoting the strength of the consumer or our diverse economy. It was the states that attempted to check the unhealthy evolution of the mortgage market and apply needed consumer protections to subprime lending. Regulatory reform must foster a system that incorporates the early warning signs that state laws and regulations provide, rather than thwarting or banning them. Certainly, significant weaknesses exist in our current regulatory structure. As GAO has noted, incentives need to be better aligned to promote accountability, a fair and competitive market, and consumer protection.Needed Regulatory Reforms: Mortgage Origination I would like to thank this committee for including the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E.) in the Housing and Economic Recovery Act of 2008 (HERA). It has given us important tools that continue our efforts to reform mortgage regulation. CSBS and the states are working to enhance the regulatory regime for the residential mortgage industry to ensure legitimate lending practices, provide adequate consumer protection, and to once again instill both consumer and investor confidence in the housing market and the economy as a whole. The various state initiatives are detailed in Exhibit D.Needed Regulatory Reforms: Financial Services Industry Many of the problems we are experiencing are both the result of ``bad actors'' and bad assumptions by the architects of our modern mortgage finance system. Enhanced supervision and improved industry practices can successfully weed out the bad actors and address the bad assumptions. If regulators and the industry do not address both causes of our current crisis, we will have only the veneer of reform and will eventually repeat our mistakes. Some lessons learned from this crisis must be to prevent the following: the over-leveraging that was allowed to occur in the nation's largest institutions; outsourcing of loan origination with no controls in place; and industry consolidation to allow institutions to become so large and complex that they become systemically vital and too big to effectively supervise or fail. While much is being done to enhance supervision of the mortgage market, more progress must be made towards the development of a coordinated and cooperative system of state-federal supervision.Preserve and Enhance Checks and Balances/Forge a New Era of Federalism The state system of chartering and regulating has always been a key check on the concentration of financial power, as well as a mechanism to ensure that our banking system remains responsive to local economies' needs and accountable to the public. The state system has fostered a diversity of institutions that has been a source of stability and strength for our country, particularly locally owned and controlled community banks. To promote a strong and diverse system of banking-one that can survive the inevitable economic cycles and absorb failures-preservation of state-chartered banking should be a high priority for Congress. The United States boasts one of the most powerful and dynamic economies in the world because of those checks and balances, not despite them. Consolidation of the industry and supervision and preemption of applicable state law does not address the cause of this crisis, and has in fact exacerbated the problem. The flurry of state predatory lending laws and new state regulatory structures for lenders and mortgage brokers were indicators that conditions and practices were deteriorating in our mortgage lending industry. It would be incongruous to eliminate the early warning signs that the states provide. Just as checks and balances are a vital part of our democratic government, they serve an equally important role in our financial regulatory structure. Put simply, states have a lower threshold for crisis and will most likely act sooner. This is an essential systemic protection. Most importantly, it serves the consumer interest that the states continue to have a role in financial regulation. While CSBS recognizes the financial services market is a nationwide industry that has international implications, local economies and individual consumers are most drastically affected by mortgage market fluctuations. State regulators must remain active participants in mortgage supervision because of our knowledge of local economies and our ability to react quickly and decisively to protect consumers. Therefore, CSBS urges Congress to implement a recommendation made by the Congressional Oversight Panel in their ``Special Report on Regulatory Reform'' to eliminate federal preemption of the application of state consumer protection laws to national banks. In its report, the Panel recommends Congress ``amend the National Banking Act to provide clearly that state consumer protection laws can apply to national banks and to reverse the holding that the usury laws of a national bank's state of incorporation govern that bank's operation through the nation.'' \2\ We believe the same policy should apply to the Office of Thrift Supervision. To preserve a responsive system, states must be able to continue to produce innovative solutions and regulations to provide consumer protection.--------------------------------------------------------------------------- \2\ The Congressional Oversight Panel's ``Special Report on Regulatory Reform'' can be viewed at http://cop.senate.gov/documents/cop-012909-report-regulatoryreform.pdf--------------------------------------------------------------------------- The federal government would better serve our economy and our consumers by advancing a new era of cooperative federalism. The S.A.F.E. Act enacted by Congress requiring licensure and registration of mortgage loan originators through the Nationwide Mortgage Licensing System provides a model for achieving systemic goals of high regulatory standards and a nationwide regulatory roadmap and network, while preserving state authority for innovation and enforcement. The Act sets expectations for greater state-to-state and state-to-federal regulatory coordination. Congress should complete this process by enacting a federal predatory lending standard. A federal standard should allow for further state refinements in lending standards and be enforceable by state and federal regulators. Additionally, a federal lending standard should clarify expectations of the obligations of securitizers.Consumer Protection/Enforcement Consolidated regulation minimizes resources dedicated to supervision and enforcement. As FDIC Chairman Sheila Bair recently told the states' Attorneys General, ``if ever there were a time for the states and the feds to work together, that time is right here, right now. The last thing we need is to preempt each other.'' Congress should establish a mechanism among the financial regulators for identifying and responding to emerging consumer issues. This mechanism, perhaps through the Federal Financial Institutions Examination Council (FFIEC), should include active state regulator and law enforcement participation and develop coordinated responses. The coordinating federal entity should report to Congress regularly. The states must retain the right to pursue independent enforcement actions against all financial institutions as an appropriate check on the system.Systemic Supervision/Capital Requirements As Congress evaluates our regulatory structure, I urge you to examine the linkages between the capital markets, the traditional banking sector, and other financial services providers. Our top priority for reform must be a better understanding of systemic risks. The federal government must facilitate the transparency of financial markets to create a financial system in which stakeholders can understand and manage their risks. Congress should establish clear expectations about which regulatory authority or authorities are responsible for assessing risk. The regulator must have the necessary tools to identify and mitigate risk, and resolve failures. Congress, the administration, and federal regulators must also consider how the federal government itself may inadvertently contribute to systemic risk--either by promoting greater industry consolidation or through policies that increase risk to the system. Perhaps we should contemplate that there are some institutions whose size and complexity make their risks too large to effectively manage or regulate. Congress should aggressively address the sources of systemic risk to our financial system. While this crisis has demanded a dramatic response from the federal government, the short-term result of many of these programs, including the Troubled Asset Relief Program (TARP), has been to create even larger and more complex institutions and greater systemic risk. These responses have created extreme disparity in the treatment of financial institutions, with the government protecting those deemed to be too big or too complex to fail, perhaps at the expense of smaller institutions and the diversity of our financial system. At the federal level, our state-chartered banks may be too-small-to-care but in our cities and communities, they are too important to ignore. It is exactly the same dynamic that told us that the plight of the individual homeowner trapped in a predatory loan was less important than the needs of an equity market hungry for new mortgage-backed securities. There is an unchallenged assumption that federal regulatory reforms can address the systemic risk posed by our largest and most complex institutions. If these institutions are too large or complex to fail, the government must give preferential treatment to prevent these failures, and that preferential treatment distorts and harms the marketplace, with potentially disastrous consequences. Our experience with Fannie Mae and Freddie Mac exemplifies this problem. Large systemic institutions such as Fannie and Freddie inevitably garner advantages and political favor, and the lines between government and industry blur in ways that do not reflect American values of fair competition and merit-based success. My fellow state supervisors and I have long believed capital and leverage ratios are essential tools for managing risk. For example, during the debate surrounding the advanced approach under Basel II, CSBS supported FDIC Chairman Sheila Bair in her call to institute a leverage ratio for participating institutions. Federal regulation needs to prevent capital arbitrage among institutions that pose systemic risks, and should require systemic risk institutions to hold more capital to offset the grave risks their collapse would pose to our financial system. Perhaps most importantly, Congress must strive to prevent unintended consequences from doing irreparable harm to the community and regional banking system in the United States. Federal policy to prevent the collapse of those institutions considered too big to fail should ultimately strengthen our system, not exacerbate the weaknesses of the system. Throughout the current recession, community and regional banks have largely remained healthy and continued to provide much needed credit in the communities where they operate. The largest banks have received amazing sums of capital to remain solvent, while the community and regional banks have continued to lend in this difficult environment with the added challenge of having to compete with federally subsidized entities. Congress should consider creating a bifurcated system of supervision that is tailored to the size, scope, and complexity of financial institutions. The largest, most systemically significant institutions should be subject to much more stringent oversight that is comprehensive enough to account for the complexity of the institution. Community and regional banks should be subject to regulations that are tailored to the size and sophistication of the institutions. In financial supervision, one size should no longer fit all.Roadmap for Unwinding Federal Liquidity Assistance and Systemic Responses The Treasury Department and the Federal Reserve should be required to provide a plan for how to unwind the various programs established to provide liquidity and prevent systemic failure. Unfortunately, the attempts to avert crisis through liquidity programs have focused predominantly upon the needs of the nation's largest institutions, without consideration for the unintended consequences for our diverse financial industry as a whole, particularly community and regional banks. Put simply, the government is now in the business of picking winners and losers. In the extreme, these decisions determine survival, but they also affect the overall competitive landscape and relative health and profitability of institutions. The federal government should develop a plan that promotes fair and equal competition, rather than sacrificing the diversity of our financial industry to save those deemed too big to fail.Conclusion Chairman Dodd, Ranking Member Shelby, and Members of the Committee, the task before us is a daunting one. The current crisis is the result of well over a decade's worth of policies that promoted consolidation, uniformity, preemption and the needs of the global marketplace over those of the individual consumer. If we have learned nothing else from this experience, we have learned that big organizations have big problems. As you consider your responses to this crisis, I ask that you consider reforms that promote diversity and create new incentives for the smaller, less troubled elements of our financial system, rather than rewarding the largest and most reckless. At the state level, we are constantly pursuing methods of supervision and regulation that promote safety and soundness while making the broadest possible range of financial services available to all members of our communities. We appreciate your work toward this common goal, and thank you for inviting us to share our views today. APPENDIX ITEMSExhibit D: State Initiatives To Enhance Supervision of the Mortgage IndustryCSBS-AARMR Nationwide Mortgage Licensing System The states first recognized the need for a tool to license mortgage originators several years ago. Since then, states have dedicated tremendous monetary and staff resources to develop and enact the Nationwide Mortgage Licensing System (NMLS). First proposed among state regulators in late 2003, NMLS launched on time and on budget on January 2, 2008. The Nationwide Mortgage Licensing System is more than a database. It serves as the foundation of modern mortgage supervision by providing dramatically improved transparency for regulators, the industry, investors, and consumers. Seven inaugural participating states began using the system on January 2, 2008. Only 15 months later, 23 states are using NMLS and by January 2010--just 2 years after its launch--CSBS expects 40 states to be using NMLS. NMLS currently maintains a single record for every state-licensed mortgage company, branch, and individual that is shared by all participating states. This single record allows companies and individuals to be definitively tracked across state lines and over time as entities migrate among companies, industries, and federal and state jurisdictions. Additionally, this year consumers and industry will be able to check on the license status and history of the companies and individuals with which they wish to do business. NMLS provides profound benefits to consumers, state supervisory agencies, and the mortgage industry. Each state regulatory agency retains its authority to license and supervise, but NMLS shares information across state lines in real-time, eliminates any duplication and inconsistencies, and provides more robust information to state regulatory agencies. Consumers will have access to a central repository of licensing and publicly adjudicated enforcement actions. Honest mortgage lenders and brokers will benefit from the removal of fraudulent and incompetent operators, and from having one central point of contact for submitting and updating license applications. The hard work and dedication of the states was ultimately recognized by Congress as they enacted the Housing and Economic Recovery Act of 2008 (HERA). The bill acknowledged and built upon the work that had been done in the states to protect consumers and restore the public trust in our mortgage finance and lending industries. Title V of HERA, titled the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act), is designed to increase uniformity, reduce regulatory burden, enhance consumer protection, and reduce fraud by requiring all mortgage loan originators to be licensed or registered through NMLS. In addition to loan originator licensing and mandatory use of NMLS, the S.A.F.E. Act requires the states to do the following: 1. Eliminate exemptions from mortgage loan originator licensing that currently exist in state law; 2. Screen and deny mortgage loan originator licenses for felonies of any kind within 7 years and certain financially related felonies permanently; 3. Screen and deny licenses to individuals who have ever had a loan originator license revoked; 4. Require loan originators to submit personal history information and authorize background checks to determine the applicant's financial responsibility, character, and general fitness; 5. Require mortgage loan originators to take 20 hours of pre- licensure education in order to enter the state system of licensure; 6. Require mortgage loan originators to pass a national mortgage loan originator test developed by NMLS; 7. Establish either a bonding or net worth requirement for companies employing mortgage loan originators or a recovery fund paid into by mortgage loan originators or their employing company in order to protect consumers; 8. Require companies licensed or registered through NMLS to submit a Mortgage Call Report on at least an annual basis; 9. Adopt specific confidentiality and information sharing provisions; and 10. Establish effective authority to investigate, examine, and conduct enforcement of licensees. Taken together, these background checks, testing, and education requirements will promote a higher level of professionalism and encourage best practices and responsible behavior among all mortgage loan originators. Under the legislative guidance provided by Congress, the states drafted the Model State Law for uniform implementation of the S.A.F.E. Act. The Model State Law not only achieves the minimum licensing requirements under the federal law, but also accomplishes Congress' ten objectives addressing uniformity and consumer protection. The Model State Law, as implementing legislation at the state level, assures Congress that a framework of localized regulatory controls are in place at least as stringent as those pre-dating the S.A.F.E. Act, while setting new uniform standards aimed at responsible behavior, compliance verification and protecting consumers. The Model State Law enhances the S.A.F.E. Act by providing significant examination and enforcement authorities and establishing prohibitions on specific types of harmful behavior and practices. The Model State Law has been formally approved by the Secretary of the U.S. Department of Housing and Urban Development and endorsed by the National Conference of State Legislatures and the National Conference of Insurance Legislators. The Model State Law is well on its way to approval in almost all state legislatures, despite some unfortunate efforts by industry associations to frustrate, weaken or delay the passage of this important Congressional mandate.Nationwide Cooperative Protocol and Agreement for Mortgage Supervision In December 2007, CSBS and AARMR launched the Nationwide Cooperative Protocol and Agreement for Mortgage Supervision to assist state mortgage regulators by outlining a basic framework for the coordination and supervision of Multi-State Mortgage Entities (those institutions conducing business in two or more states). The goals of this initiative are to protect consumers; ensure the safety and soundness of institutions; identify and prevent mortgage fraud; supervise in a seamless, flexible, and risk-focused manner; minimize regulatory burden and expense; and foster consistency, coordination, and communication among state regulators. Currently, 48 states plus the District of Columbia and Puerto Rico have signed the Protocol and Agreement. The states have established risk profiling procedures to determine which institutions are in the greatest need of a multi-state presence and we are scheduled to begin the first multi-state examinations next month. Perhaps the most exciting feature of this initiative is the planned use of robust software programs to screen the institutions portfolios for risk, compliance, and consumer protection issues. With this software, the examination team will be able to review 100 percent of the institution's loan portfolio, thereby replacing the ``random sample'' approach that left questions about just what may have been missed during traditional examinations.CSBS-AARMR Reverse Mortgage Initiatives In early 2007, the states identified reverse mortgage lending as one of the emerging threats facing consumers, financial institutions, and supervisory oversight. In response, the states, through CSBS and AARMR, formed the Reverse Mortgage Regulatory Council and began work on several initiatives: Reverse Mortgage Examination Guidelines (RMEGs). In December 2008, CSBS and AARMR released the RMEGs to establish uniform standards for regulators in the examination of institutions originating and funding reverse mortgage loans. The states also encourage industry participants to adopt these standards as part of an institution's ongoing internal review process. Education materials. The Reverse Mortgage Regulatory Council is also developing outreach and education materials to assist consumers in understanding these complex products before the loan is made.CSBS-AARMR Guidance on Nontraditional Mortgage Product Risks In October 2006, the federal financial agencies issued the Interagency Guidance on Nontraditional Mortgage Product Risks which applies to insured depository institutions. Recognizing that the interagency guidance does not apply to those mortgage providers not affiliated with a bank holding company or an insured financial institution, CSBS and AARMR developed parallel guidance in November 2006 to apply to state-supervised residential mortgage brokers and lenders, thereby ensuring all residential mortgage originators were subject to the guidance.CSBS-AARMR-NACCA Statement on Subprime Mortgage Lending The federal financial agencies also issued the Interagency Statement on Subprime Mortgage Lending. Like the Interagency Guidance on Nontraditional Mortgage Product Risks, the Subprime Statement applies only to mortgage providers associated with an insured depository institution. Therefore, CSBS, AARMR, and the National Association of Consumer Credit Administrators (NACCA) again developed a parallel statement that is applicable to all mortgage providers. The Nontraditional Mortgage Guidance and the Subprime Statement strike a fair balance between encouraging growth and free market innovation and draconian restrictions that will protect consumers and foster fair transactions.AARMR-CSBS Model Examination Guidelines Further, to promote consistency, CSBS and AARMR developed state Model Examination Guidelines (MEGs) for field implementation of the Guidance on Nontraditional Mortgage Product Risks and the Statement on Subprime Mortgage Lending. Released on July 31, 2007, the MEGs enhance consumer protection by providing state regulators with a uniform set of examination tools for conducting examinations of subprime lenders and mortgage brokers. Also, the MEGs were designed to provide consistent and uniform guidelines for use by lender and broker compliance and audit departments to enable market participants to conduct their own review of their subprime lending practices. These enhanced regulatory guidelines represent a new and evolving approach to mortgage supervision.Mortgage Examinations With Federal Regulatory Agencies Late in 2007, CSBS, the Federal Reserve System (Fed), the Federal Trade Commission (FTC), and the Office of Thrift Supervision (OTS) engaged in a pilot program to examine the mortgage industry. Under this program, state examiners worked with examiners from the Fed and OTS to examine mortgage businesses over which both state and federal agencies had regulatory jurisdiction. The FTC also participated in its capacity as a law enforcement agency. In addition, the states separately examined a mortgage business over which only the states had jurisdiction. This pilot is truly the model for coordinated state-federal supervision. ______ CHRG-111shrg53085--138 Mr. Mica," We could put $10 billion on Main Street, $10 billion into Main Street small loans almost immediately if they lifted that cap. Senator Schumer. Mr. Attridge, let me just ask you, why at this time--we can debate whether this should be done permanently--but why at this time when so many banks, big and small, are not lending for a variety of reasons, and I hear about it regularly--I have several instances in my State where a small business is going to go under because they can't get bank lending. The existing bank has pulled the line of credit. They don't think the value of the inventory is as great as it used to be. Credit unions want to lend and they can't because they are at the cap. Give me a reason why we shouldn't, at the very least, temporarily lift the cap, given the state of our economy. " CHRG-111shrg57320--323 Mr. Corston," It suggests the inability to repay the loan out of their payment capacity, which moves the reliance to the underlying collateral. And I think we have seen the results. Senator Levin. Now, several OTS officials told our Subcommittee that single-family residential lending, compared to other types of lending, was historically very safe, so that is how they judged WaMu's lending. Is that a fair comparison, given that WaMu's lending practices departed radically from historically safe products and practices? Either one of you. Mr. Doerr, why don't you start? " CHRG-110hhrg44900--149 Mr. Bernanke," There is not monetization. This is a sterilized operation; there is no effect on the money supply. And in addition, I would add that our lending, not only to Bear Stearns but more generally to the banks and so on, is not only collateralized with good hair cuts, it is also a recourse to the banks themselves. We have not lost a penny on any of this lending, and it is just lending, we are not purchasing any of it, it goes back to the bank when the term of the loan is over. " CHRG-111shrg56262--91 Outside of the mortgage sector, auto loan, credit card, and student loan securitizations have fallen by over half since 2007. All three sectors became paralyzed in mid-2008, prompting the Federal Reserve to revive these markets with the Term Asset-Backed Securities Lending Facility (TALF). Spreads soared in 2008 and have since fallen, although have not completely recovered. This suggests that investor concerns about the general integrity of the securitization process spilled over to other sectors.[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Although TALF has helped to revive these markets, particularly in the auto and credit card areas, delinquencies and charge-offs continue to climb.V. Needed Reforms Private-label mortgage securitization will undoubtedly return in one form or another. And just as certainly, investors will eventually forget the lessons from this crisis. To avoid repeating the mistakes of the past, it is essential to put private-label mortgage securitization on sound footing going forward.A. Proposals To Realign Incentives Discussions about reforming private-label securitization often revolve around proposals to realign the incentives of originators and investment banks. The idea is to give them sufficient ``skin in the game'' to care about soundly underwritten loans. Thus, the Obama Administration has proposed \9\ requiring securitizers to retain at least 5 percent of the credit risk on each asset in the asset-backed securities that they issue. \10\ Securitizers would also be barred from resecuritizing or hedging that retained risk. Section 213 of the Mortgage Reform and Anti-Predatory Lending Act, H.R. 1728, passed by the House of Representatives on May 7, 2009, contains a similar proposal.--------------------------------------------------------------------------- \9\ Financial Regulatory Reform Proposal, Title IX, 951, www.treas.gov/initiatives/regulatoryreform/. \10\ The implementing agencies would also have to adopt provisions allocating the risk retention obligation between the securitizer and the originator.--------------------------------------------------------------------------- There are other incentive-based proposals to improve loan underwriting. One involves increased capital: in other words, requiring commercial and investment banks --especially too-big-to-fail banks--to hold more capital, both against the tranches they retain and against other aspects of securitization that could come back to haunt them, such as recourse clauses and structured investment vehicles. Another proposal is to realign originators' compensation with loan performance. Accounting standards could be changed to eliminate immediate recognition of gain on sale by originators at the time of securitization. And there are two promising proposals to curb reckless originations by independent mortgage brokers. One would prohibit pay incentives such as yield spread premiums for steering customers to costlier or riskier loans. H.R. 1728, 103. Another proposal would make full payout of compensation to mortgage brokers contingent on good performance of the loan. A final idea along these lines is to require lenders and securitizers to make stronger representations and warranties to investors, accompanied by stiffer recourse provisions for loans that violate those reps and warranties. The American Securitization Forum has advanced this reform. All of these proposals are good ideas. However, they are not enough, together or alone, to ensure sound underwriting. Take the risk retention requirement, for example. It is doubtful whether the ban on hedging is even enforceable, since ``sometimes firms pool their risk and set hedges against several positions at once.'' \11\ More importantly, requiring risk retention does not solve the fact that banks, once they got loans off of their books through securitization, assumed that risk again by investing in toxic subprime RMBS and CDOs.--------------------------------------------------------------------------- \11\ Fender and Mitchell, supra note 4, at 41.--------------------------------------------------------------------------- As for capital requirements, more capital is essential for depository institutions and investment banks. But capital is no panacea. Banks have proven adept at evading minimum capital requirements. Furthermore, the credit crisis raised serious concerns about the newly adopted Basel II capital standards, which were designed to lower capital and allow large internationally active banks--i.e., too-big-to-fail banks--to set their own minimum capital. Stronger reps and warranties, backed by stiffer recourse, are likewise advisable. But the crisis has shown that recourse provisions are only as good as a lender's solvency. Since the credit crisis began, most nonbank subprime lenders have gone out of business. In addition, 126 banks and thrifts have failed since 2007. Some institutions failed precisely due to their inability to meet investor demands for recourse. \12\--------------------------------------------------------------------------- \12\ See, e.g., Office of Inspector General, Department of the Treasury, ``Safety and Soundness: Material Loss Review of NetBank, FSB'' (OIG-08-032, April 23, 2008), www.ustreas.gov/inspector-general/audit-reports/2008/OIG08032.pdf.--------------------------------------------------------------------------- Even when recourse can be had, negotiations can be long and drawn-out. Moreover, if a recourse provision is not ironclad, a solvent lender may be able to escape it. For example, any provisions that would condition recourse on the lender's knowledge that the reps and warranties were violated--creating a Sergeant Schultz ``I know nothing'' defense--usually would be meaningless if the misconduct in question was committed by an independent mortgage broker. That would include situations where the lender failed to adequately supervise the broker, which often was the case. For all of these reasons, having ``skin in the game'' is not enough to ensure sound loan underwriting. As discussed below, more is needed in the form of minimum underwriting standards.B. Improved Due Diligence by Investors Meanwhile, investors need the ability to do better due diligence. Three major reforms are needed to provide investors with the information that they need to make sound investment decisions about private-label mortgage-related bonds. First is improved transparency, second is product simplification and standardization, and third is rating agency reform. Transparency--The SEC should require securitizers to provide investors with all of the loan-level data they need to assess the risks involved. See Obama Administration Proposal, Title IX, 952. In addition, the SEC should require securitizers and servicers to provide loan-level information on a monthly basis on the performance of each loan and the incidence of loan modifications and recourse. These disclosures should be made in public offerings and private placements alike. In addition, TBA offerings should be prohibited because it is impossible for investors to do due diligence on those loan pools. Product Simplification and Standardization--The Government should encourage simpler, standardized securitization products, whether through the REMIC tax rules or rules governing permissible investments by insured banks and thrifts. Similarly, the Government should explore ways to build a liquid secondary trading market in private-label RMBS and other bonds. Rating Agency Reform--The most critical rating agency reform is banning the ``issuer pays'' system, in which issuers pay for ratings. That would help ensure that rating agencies serve the interests of investors, not issuers. In addition, it is necessary to require the rating agencies to create a new, different ratings scale for mortgage structured finance to distinguish it from the ratings for corporate bonds. Finally, NRSRO designations need to be abolished. The Obama Administration's proposal takes a different approach. The proposal would subject NRSROs to enhanced SEC oversight, including expanded public disclosures. In addition, the Administration would require rating agencies to have systems to ``manage, and disclose'' their conflicts of interest. Title IX, subtitle C. While better investor due diligence is necessary to improve private-label mortgage securitization, it is not enough. At the height of every business cycle, memories grow dim and euphoria takes hold. During bubbles, when default rates are low, investors are apt to cast aside basic due diligence precautions to grab the chance of a high-yield investment. This temptation is particularly great for institutional money managers, who have cash they need to put to work and face pressure to report the same high returns as their competitors. For all of these reasons, minimum Federal underwriting standards are a needed supplement to investor due diligence.C. Protecting Borrowers and the Financial System We cannot assume that investors will monitor adequately or that standardization will be achieved. Furthermore, none of the measures outlined above addresses the obstacles to loan modifications. Two additional measures are needed to protect borrowers and the larger economic system from reckless loans and unnecessary foreclosures. 1. Uniform Minimum Underwriting Standards Enforceable by Borrowers--The downward spiral in underwriting standards drove home the need for uniform consumer protection standards that apply to all financial services providers. In fact, a new study by the Center for Community Capital at the University of North Carolina (Chapel Hill) finds that States that mandated strong loan underwriting standards had lower foreclosure rates than States without those laws. \13\--------------------------------------------------------------------------- \13\ Center for Community Capital, State Anti-Predatory Lending Laws (October 5, 2009), http://www.ccc.unc.edu/news/AG_study_release_5[2].10.2009.pdf.--------------------------------------------------------------------------- The Federal Reserve's 2008 rule for higher-cost loans accomplished part of this goal, \14\ but all loans need protection, not just subprime loans. The Obama Administration proposal, H.R. 1728, and H.R. 3126 would solve this problem by creating one set of uniform Federal laws that apply to all financial services providers across the country, regardless of entity, charter, or geographic location. To prevent a race to the bottom in which regulators compete to relax lending standards, the Administration proposal and H.R. 3126 would consolidate the authority to administer those laws in a new Consumer Financial Protection Agency. Under both, the standards would constitute a floor, in which weaker State laws are federally preempted. States would remain free to enact stricter consumer protections so long as those protections were consistent with Federal law.--------------------------------------------------------------------------- \14\ Federal Reserve System, Truth in Lending: Final rule; official staff commentary, 73 FED. REG. 44522, 44536 (July 30, 2008). The Board intended to cover the subprime market, but not the prime market. See, id. at 44536-37.--------------------------------------------------------------------------- These Federal standards do three things. First, the standards would ensure proper loan underwriting based on the consumer's ability to repay. Second, the standards would prohibit unfair or deceptive practices in consumer credit products and transactions. Finally, the standards would promote transparency through improved consumer disclosures. Bottom-line, the proposed standards would help make it possible for consumers to engage in meaningful comparison shopping, with no hidden surprises. In the event these standards are violated, injured borrowers need an affirmative claim for relief as well as a defense to foreclosure. Both the claim and the defense should be available against loan originators. Limiting relief to loan originators does not help borrowers with securitized loans, however, if their loans later go into foreclosure or their originators become judgment-proof. When a securitized loan is foreclosed on, for example, the lender is not the plaintiff; rather, foreclosure is instituted by the servicer, the owner of the loan, or its designee (generally the Mortgage Electronic Registration Systems or MERS). Consequently, fairness requires allowing injured borrowers to raise violations as a defense to foreclosure against those entities. Similarly, giving borrowers an affirmative claim against assignees for violations of Federal lending standards by originators will spur investors and investment banks to insist on proper underwriting of loans and afford injured borrowers relief when their originators are judgment-proof or a securitized trust sues for foreclosure. The Administration's proposal and H.R. 1728, 204, both contain assignee liability provisions designed to accomplish these objectives. Some fear that a borrower right of action against securitized trusts and investment banks would reduce access to credit. A 2008 study by Dr. Raphael Bostic et al. examined that question by looking at the effect of assignee liability provisions in nine State antipredatory lending laws on the availability of subprime credit. The study found ``no definitive effect of assignee liability on the likelihood of subprime originations, even when the [assignee] liability provisions are in their strongest form.'' Subprime originations rose in six of the nine States studied that had assignee liability, relative to the control State. Results were mixed in the other three States, depending on how subprime lending was defined. No State reported a consistent drop in subprime originations. \15\--------------------------------------------------------------------------- \15\ Raphael Bostic, Kathleen C. Engel, Patricia A. McCoy, Anthony Pennington-Cross, and Susan Wachter, ``The Impact of Predatory Lending Laws: Policy Implications and Insights'', In Borrowing To Live: Consumer and Mortgage Credit Revisited 138 (Nicolas P. Retsinas and Eric S. Belsky eds., Joint Center for Housing Studies of Harvard University and Brookings Institution Press, 2008), working paper version at http://www.jchs.harvard.edu/publications/finance/understanding_consumer_credit/papers/ucc08-9_bostic_et_al.pdf.--------------------------------------------------------------------------- In short, assignee liability is not likely to impede access to credit. To the contrary, borrower relief will provide needed incentives for originators, Wall Street, and investors to only securitize loans that borrowers can repay. Providing that relief would go a long way toward avoiding the biggest threat to access to credit, which is a repeat collapse of private-label securitization. 2. Remove Artificial Barriers to Cost-Effective Loan Modifications--Right now, too many distressed loans are needlessly going to foreclosure despite the availability of cost-effective loan modifications. Not only do these foreclosures oust homeowners from their homes, they needlessly depress home values for everyone else. It is time to cut this Gordian knot. Most securitized loan pools are created as ``Real Estate Mortgage Investment Conduits,'' or REMICs, under the Federal tax code. Any securitization vehicle that qualifies for REMIC treatment is exempt from Federal income taxes. Congress or the Internal Revenue Service should amend the REMIC rules to disqualify future mortgage pools from favored REMIC tax treatment unless pooling and servicing agreements and related deal documents are drafted to give servicers ironclad incentives to participate in large-scale loan modifications when specific triggers are hit. \16\--------------------------------------------------------------------------- \16\ See, Michael S. Barr and James A. Feldman, Issue Brief: Overcoming Legal Barriers to the Bulk Sale of At-Risk Mortgages (Center for American Progress April 2008).--------------------------------------------------------------------------- ______ CHRG-110hhrg45625--218 Mr. Meeks," I wish I had more time. But let me just get my last fear because I really wanted to get under that piece because I think the diversity needs to be done. But my last fear is this: What if the Treasury buys the loans off the banks' books and the banks hold on to the reserve requirements and work towards replacing lost shareholder value rather than lend it out again? You know, then, right now most of the banks have frozen all of their lending and those that are lending have these stringent requirements. So therefore my big fear is if that is the case, then again we will be back in a few months with the same lack of consumer confidence and lending confidence and there would be no movement in the credit market, and therefore we would be back to the same place again and would be having to put more money into this thing. We don't have any guarantees that the banks won't do that. " CHRG-110shrg50417--18 RESPONSIBLE LENDING " CHRG-110shrg50415--28 RESPONSIBLE LENDING " CHRG-111hhrg56241--183 The Chairman," If the gentleman would yield, if they can make enough money doing everything but lending that may be a contributing factor to not lending. We will have an all-day hearing on Friday, February 5th, with borrowers and regulators and lenders, and we want to get into this question about why more loans aren't being made. It is a bipartisan concern. And I do think it is legitimate to inquire to the extent to which other opportunities to make a lot of money displace lending, either directly or indirectly. Let me just now-- " CHRG-110hhrg44901--5 Mr. Gutierrez," Thank you, Mr. Chairman. Welcome back, Chairman Bernanke. There is a lot of debate about whether or not we are in the midst of a recession, but to most people out there, it is really a moot question as they look at their bank accounts. And we all know IndyMac went under, and everybody else is really worried. There are a lot of calls at the office, should I check my savings account, my bank account, is it insured, do they have enough money? Then there is word that there might be another 90 banks. Some people say they are small. We don't know. Nobody is ever going to really tell us. So, recession? When gasoline pops up to $4.50 in Chicago, and your real earnings haven't increased, it seems like a recession to them. Most folks say, well, I wasn't in the stock market. Most folks, because we have done so much good work at purchasing homes, have lost a lot of their net value. Their house isn't worth what it was worth last year. It seems like a recession to them. GM is on the verge of bankruptcy. Let's hope it doesn't go under. I don't want to be a pessimist, but things are not good. Tens of thousands of retirees heard from GM yesterday that it is so bad that their health care insurance is being canceled after 35 or 40 years of working at GM. It is bad. I don't know if we are in a recession, but if you came out to my district and saw the foreclosure signs, literally the foreclosure signs everywhere. They say it is really worse on the east or the west coast. I think it is worse in those neighborhoods where people were finally getting a leg under and finally moving forward. So I hope today, as we look at gas prices and food prices and what they really mean, and I know a lot of this is very familiar to you, I would like to know your thoughts on inflation in the current environment. With stagnant wages, we are not entering into a wage spiral, and inflation is running high when measured by personal consumption expenditures, and with gasoline and consumer energies even higher, inflation seems to be a real threat in the near term. I understand the markets need to grow, and that means lower interest rates, but at the same time, specifically with the sharp increases in commodity prices, inflation has had to play a larger role in Federal Reserve decisionmaking. So, Mr. Bernanke, in the past you have discussed inflation targets, and I would like to know if you think such targets might be appropriate in this environment. I am also concerned about the weak dollar. We went to the Middle East on a congressional delegation to look into sovereign wealth funds, and it was suggested by some of these sovereign wealth managers, and I guess they would know since they have so much oil and the petrodollars, they say about 25 percent of it is due to the weakening of the dollar. So I look forward--and I do want to close by saying thank you for allowing the GSEs access to the discount window. I was really happy to read and hear about the decisions you made in terms of stopping predatory lending. I specifically ask you for that as we move forward. Thank you so much, Chairman Bernanke. " CHRG-111shrg50815--121 PLUNKETT Q.1. Without access to traditional credit, where do you believe that individuals would turn to finance their consumer needs? A.1. As I mentioned in my testimony before the Committee, it is important to note that the lack of regulation can also lead to detrimental market conditions that ultimately limit access to credit for those with less-than-perfect credit histories. Credit card issuers have recently reduced the amount of credit they offer to both existing and new cardholders, for reasons that have virtually nothing to do with pending regulation of the market. Issuers losses have been increasing sharply, in part because of unsustainable lending practices. (Please see my written testimony for more information.) Had Congress stepped in earlier to require issuers to exercise more responsible lending, they might not be cutting back on available credit as sharply right now. Regarding access to affordable credit for individuals with an impaired or limited credit history, CFA has urged mainstream financial institutions to offer responsible small loan products to their depositors. We applaud FDIC Chairman Sheila Bair's leadership in proposing guidelines for responsible small loans and her call for military banks to develop products that meet the test of the Military Lending Act predatory lending protections. Banks and credit unions should extend their line of credit overdraft protection to more account holders. The FDIC has a pilot project with 31 participating banks making loans under the FDIC guidelines for responsible small-dollar lending. Offering affordable credit products is not the only strategy needed to help households more effectively deal with a financial shortfall. Borrower surveys reveal that many households are not using high-cost credit because of a single financial emergency, but instead have expenses that regularly exceed their income. For these households who may not be able to financially handle additional debt burdens at any interest rate, non-credit strategies may be more appropriate. These may include budget and financial counseling; getting help from friends, family, or an employer; negotiating with a creditor; setting up different bill payment dates that better align with the person's pay cycle; and putting off a purchase for a few days. Toward this end, it is very important that banks and credit unions encourage make emergency savings easy and attractive for their low- and moderate-income customers. Emergency savings are essential to keep low-income consumers out of the clutches of high-cost lenders. CFA's analysis based on Federal Reserve Board and other survey data found that families earning $25,000 per year with no emergency savings were eight times as likely to use payday loans as families in the same income bracket who had more than $500 in emergency savings. We urge banks and credit unions to make emergency savings easy and attractive for their customers. Q.2. Do you agree that prudential regulation and consumer protection should both be rigorously pursued together by regulators? A.2. Absolutely. Credit card issuers must do a better job of ensuring that borrowers truly have the ability to repay the loans they are offered. As I mention in my testimony, card issuers and card holders would not be in as much financial trouble right now if issuers had done a better job of assessing ability to repay. This is why CFA has supported legislation that would require issuers to more carefully assess the repayment capacity of young borrowers and potential cardholders of all ages. Q.3. Do any of the witnesses have concerns that moving away from risk-based pricing could result in the subsidization of credit to wealthy yet riskier borrowers, by poorer but lower-risk borrowers? A.3. Under the Federal Reserve rules, card issuers will certainly have to be more careful about who they extend credit to and how much credit they offer. Given the current levels of indebtedness of many card holders--and the financial problems this indebtedness has caused these borrowers and card issuers--it is hard to argue that this is a bad thing. However, the Federal Reserve rules still preserve the ability of card issuers to price for risk in many circumstances, if they wish. They can set the initial rate a cardholder is offered based on perceived financial risk, reprice on a cardholder's existing balance if the borrower is late in paying a bill by more than 30 days, and change the borrower's prospective interest rate for virtually any reason, including a minor drop in the borrower's credit score or a problem the borrower has in paying off another debt. In addition, issuers can manage credit risk in more responsible ways by reducing borrowers' credit lines and limiting new offers of credit. Q.4. Do you believe that borrowers' rates and fees should be determined based on their own actions and not on those of others? A.4. It is certainly reasonable to base offers of credit on legitimate assessments of borrowers' credit worthiness. As I mention in my testimony, however, many of the pricing methods that card issuers have used to arbitrarily increase borrowers' interest rates and fees do not appear to be based on true credit risk, but rather on the judgment of issuers that they can get away with charging what the market will bear. Q.5. Do you think that credit card offerings from the past, which had high APR's and annual fees for all customers were more consumer friendly than recent offerings that use other tools to determine fees and interest rates. A.5. As I mention in my response above, the Federal Reserve rules leave plenty of room for card issuers to price according to borrower's risk, so I do not think it is likely that we will see a return to the uniform, undifferentiated pricing policies of the past." CHRG-111hhrg49968--78 Mr. Campbell," Last quick question. TARP money was originally intended to stabilize the markets, but also to give banks capital from which to do more lending. As they want to give it back in order to avoid the restrictions being placed on them, isn't that, in effect, going to reverse part of the original intent, which was to provide them more capital from which to lend, and therefore reduce potential lending in the marketplace? Thank you. " CHRG-111hhrg55809--201 Mr. Bernanke," Well, it is first certainly true that we are better off than we were with the system in crisis. It is also true that the banks have not returned to normal lending by any means. I think the low interest rates do have positive effects on the economy, for example, operating through other markets, like the mortgage market or the corporate bond market. But getting the banking system back into a lending mode is very important. We continue to work with the banks to encourage them to raise equity so they have sufficient capital to support their lending. We have provided them with an enormous amount of liquidity so they are able to have the funds to lend. We are encouraging them to lend, in that going back to November, the bank regulators had a joint statement encouraging banks to lend to creditworthy borrowers as being in the interest both of the banks and of the economy. And we continue to try to follow up on all those things. In addition, as you may know, we have some programs, including the Term Asset-Backed Securities Loan Facility, which is trying to open up sources of funding from the capital markets, for example, for consumer loans and small business loans. I would add, I guess, that there are also some efforts taking place from the Treasury to support small-business lending. It is a difficult problem, but we are trying it attack it in a number of fronts. Just to conclude, I would say that it is true that as long as the banks are as reluctant to lend as they are, to some extent, it weakens the effect of our stimulative policies. Mr. Miller of California. You recall last September, we were having a very lengthy debate, and you and I had some conversations requiring the $700 billion to going to buy mortgage-backed securities, which we approved the first $350 billion. But it seems like we went through a tremendous amount of debate to make that decision; yet the Federal Reserve last week decided to buy a trillion and quarter dollars of mortgage-backed securities. And your previous comments, we have talked about the Fed's role in injecting liquidity in the marketplace and being able to fight inflation as needed, but you can't do that with assets you are buying. They are not liquid. Unless you are going to have a barn sale and just get rid of them for liquidity, how can you justify those two? They seem to be-- " CHRG-111hhrg53248--151 Mr. Scott," We continue to get complaints from some in the banking industry with certain practices. We have the Consumer Protection Agency which we are pushing, which unfortunately some are fighting very hard. And yet they are not doing the basic things that need to be done. They are not lending. What can you do to increase pressure on our banks to lend? " CHRG-111shrg53085--142 Mr. Attridge," Well, Senator, I guess from the community banks' point of view, at least the community banks in Connecticut and I know there are some in other parts of the country that are more stressed out because of the real estate issues in the area they are in, but we are well capitalized. We have the money to lend. We are lending and we are looking for loans and there is competition out there for good loans. The problem is on the other side. The small businesses are not looking for---- Senator Schumer. Let me tell you a story I heard, and this is a Connecticut story. It is about a gentleman who applied for a job with me, OK. His father owns a small home heating oil delivery business. It has, I don't know, about 50 employees, ten trucks, I don't know how many. It had a $4 million line of credit with one of the larger banks, not a community bank, probably one of--I am certain it is one of Mr. Patterson's members. They pulled the line of credit. He has gone everywhere under the sun to try to find a substitute line of credit. This business is profitable. People are still buying home heating oil in Southwestern Connecticut. He can't find it. So you tell me your people are lending. Mr. Patterson tells me his people are lending. Every one of us at the table has had businesses calling us and saying they can't find the lending. " CHRG-111hhrg67816--180 Mr. Rush," I have less than 1 minute, and I just want to ask another question on pay-day lending. I believe that pay-day lenders have a role in our economy but there are far too many abuses. Does the FTC have authority to crack down on pay-day lending practices such as rollover fees and the specific statutory language leading to direct the Commission to adequately deal with certain abusive pay-day lending features? " CHRG-110hhrg46596--76 Mr. Bachus," I understand. Is there leverage under the law, or under the lending regulations, to require them to lend it, as opposed to, say, they pay the amount of dividend or to make acquisitions? I will ask Mr. Kashkari or either one of you gentlemen. " CHRG-111hhrg74090--8 Mr. Waxman," Thank you very much. I want to thank you, Mr. Chairman, for holding this important hearing. Last year, as chairman of the House Oversight Committee, I held several hearings examining the causes of the financial crisis. Those hearings revealed a government regulatory structure that was unwilling and unable to meet the complexities of the modern economy. We found regulatory agencies that had fully abdicated their authority over banks and had done little or nothing to curb abusive practices like predatory lending. The prevailing attitude was that the market always knew best. Federal regulators became enablers rather than enforcers. The Obama Administration has developed an ambitious plan to address these failures and to strengthen accountability and oversight in the financial sector. Today's hearing will take a close look at one piece of that plan, the proposal to create a single agency responsible for protecting consumers of financial products. A new approach is clearly warranted. The banking agencies have shown themselves to be unwilling to put the interests of consumers ahead of the profit interests of the banks they regulate and the structure and division of responsibilities among these agencies has led to a regulatory race to the bottom. The Federal Trade Commission has taken steps to protect consumers but its jurisdiction is limited and it has been hampered by a slow and burdensome rulemaking process. I am pleased that this subcommittee is holding today's hearing and examining the Administration's proposal carefully. There are two areas of which attention and focus from this committee are particularly needed. First, the new agency must be structured to avoid the failures of the past. It only makes sense to create a new agency if that new agency will become a strong, authoritative voice for consumers. And second, we must ensure that the Federal Trade Commission is strengthened, not weakened, by any changes. Unlike the banking agencies, FTC has consumer protection as its core mission. In recent months, FTC has taken great strides to protect consumers of financial products, bringing enforcement actions against fraudulent debt settlement companies and writing new rules governing mortgages. The Administration's proposal would give most of the FTC's authority over financial practices and some of FTC's authority over privacy to the new agency. At the same time, the Administration proposes improving FTC's rulemaking authority and enforcement capabilities. It is not clear what impact these proposals would have on FTC or its ability to perform its consumer protection mission. As we build a new structure for protecting consumers of financial products, it is our responsibility to ensure that we do not weaken the agency currently responsible for consumer protections in this and many other areas. Once again, I thank Chairman Rush for holding this hearing. I welcome our witnesses to the committee and look forward to their testimony. " CHRG-111shrg50814--95 Mr. Bernanke," Senator, the direct impact of the TARP dollars is to expand the capital bases of these companies which allows them to do all the activities they do, including lending---- Senator Tester. But the lending hasn't freed up, from everybody I have talked to. " CHRG-111hhrg48874--106 Mr. Green," I don't want to talk about everyone. We are trying to ascertain whether or not we have a significant number such that it is becoming a part of the problem that we are trying to extricate ourselves from. Let me go on. If we conclude, as some have, that creditworthy borrowers, many are not getting loans--what I would like to do is get to the root of the problem. Is it because of capital requirements or is it because of money that is not available within the bank to lend? The capital requirements, the TARP money that the banks received, generally speaking, was to capitalize the banks. That was not money to lend, generally speaking. Is this a true statement? If you agree that it is a true statement, raise your hand. Alright, everybody has agreed. Now if that was not money to lend, the money that the bank would lend will come from either money that it gets from overnight circumstances or from various discount windows, true? If so, raise your hand. You are going to have to participate, everyone. Okay, good, everyone agrees. Or it can come from monies that the banks will have in their loan portfolios, which comes from deposits, true? So the question is this. Is the problem one of being undercapitalized such that they can't lend money from deposits or from the discount windows, or is one of being capitalized properly, fully capitalized, and not having the money available from deposits? Do you follow my question? If you do not, raise your hand and I will give it to you again. So if you would, Mr. Polakoff, give your commentary, please. " CHRG-111hhrg53248--43 Secretary Geithner," Remember, a dollar of capital is equivalent to between $8 and $12 of lending capacity. So if you are short a dollar of capital, you are going to have to reduce lending by $8 to $12. So on the scale of our financial system, just think of this, so without that initial $250 billion of capital the previous Administration put into the financial system, you would have seen overall lending capacity decline by well over $1 trillion, $1 trillion to $2 trillion. So you did see the benefits of that. " CHRG-110hhrg46593--234 Mr. Yingling," Just a few numbers that I think would surprise most people. Consumer and industrial loans for banks are up 15 percent this year. Home equity loans, admittedly from a low base, are up 21 percent. Asset-backed securities lending--not mortgage but other asset backs--down 79 percent. We have a chart on page 10 of our testimony that shows consumer and industrial business lending, and consumer lending is actually up for banks. " CHRG-111hhrg52406--209 Mr. Bachus," I am talking about the subprime mortgages, where it is just restricted to that. I sort of associate you all with subprime lending, but you are actually on all sorts of credit--with the Center for Responsible Lending. Ms. Keest. I am sorry. " CHRG-111hhrg53248--38 Mr. Bachus," That is on the lending program. " CHRG-111hhrg54872--30 OFFICER, CENTER FOR RESPONSIBLE LENDING " CHRG-111shrg57319--39 Mr. Melby," That is correct. Senator Levin. Now, specialty lending is what Washington Mutual called its subprime operations after it abolished Long Beach as a separate entity and took over the subprime lending function itself, right? " CHRG-110hhrg45625--221 Mr. Meeks," Okay. But again, why wouldn't they want to then not replace the loss of shareholder value first before lending out money? Since they lost it, why wouldn't they want to replace their shareholder value first as opposed to lending out money once they-- " FOMC20080130meeting--34 32,MR. LACKER.," Well, on the last point, that's a matter of the ECB's willingness to lend to those institutions. You're saying that they would be willing to lend themselves to those institutions only if we did this. It's not about the economics of their borrowing from their central bank versus borrowing from us--nothing about the market functioning. " FOMC20080310confcall--87 85,MR. ALVAREZ.," You'll be asked to vote on three resolutions today--one that deals with the term securities lending facility and two that deal with the swaps. The Board is also voting separately to authorize part of the term securities lending facility. One matter I would note, because the rate on the TSLF must be set in the same way that other discount rates are set, we do need a recommendation on how to set the rates. However, because this facility involves just securities lending from the SOMA portfolio, it will be sufficient to receive a rate recommendation from just the New York Reserve Bank, and so the resolutions would not be needed from the boards of directors of the other Reserve Banks at this point. With that, I'll read the resolution for the term securities lending facility, and I will ask for a vote on that. ""In addition to the current authorization granted to the Federal Reserve Bank of New York to engage in overnight securities lending transactions, and in order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend up to $200 billion of U.S. government securities held in the System Open Market Account to primary dealers for a term that does not exceed thirty-five days at rates that shall be determined by competitive bidding. These lending transactions may be against pledges of U.S. government securities, other assets that the Reserve Bank is specifically authorized to buy and sell under section 14 of the Federal Reserve Act (including federal agency residential-mortgage-backed securities), and nonagency AAA-rated residential-mortgage-backed securities. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. This authority shall expire at such time as determined by the Federal Open Market Committee or the Board of Governors."" " CHRG-111hhrg53244--118 Mr. Donnelly," In regards to the TALF program, which is an area that we had hoped for some help on and that we had discussed before, at the present time none of it has gone to floor plan lending, as we discussed. What other areas do you think can help open up floor plan lending? We know the SBA has helped a little bit. What other avenues, if any, are being explored or do you think are available out there? " CHRG-111shrg50814--132 Chairman Dodd," Maybe what we ought to do with the Committee sometime is maybe have just an informal dinner one night with interested Members and have a discussion about those days. I think it would be an interesting conversation. Senator Akaka. Senator Akaka. Thank you very much, Mr. Chairman. Welcome, Chairman Bernanke. It is good to see you. I can recall back on September 23, 2008, when we had a Banking meeting with four of you: Treasury Secretary Paulson, Cox, and you, and also with Jim Lockhart. At that time we were trying to learn what the crisis was all about and what we were going to do about it. And as I recall, we came out--really, what came out of it was the $700 billion was to bring confidence to Wall Street. But since then, many things have happened, and well before the current economic crisis, the financial regulatory system was failing to adequately protect working families from predatory practices and exploitation. Families were being pushed into mortgage products with associated risks and costs that they could not afford. Instead of utilizing affordable, low-cost financial services found at regulated banks and credit unions, too many working families have been exploited by high-cost, fringe financial service providers such as payday lenders and check cashers. Additionally, too many Americans lack the financial literacy, knowledge, and skills to make informed financial decisions, and I have two questions for you. What I am asking is what must be done. What must be done as we work toward reforming the regulatory structure for financial services to better protect and educate consumers? " CHRG-111hhrg48867--70 Mr. Bachus," I would agree with that and advance a resolution, but I think we ought to put a provision in there that they don't use taxpayer dollars. Another thing that I think--what do you think about advancing local lending more? In the past several years with the consolidation, we are getting further away from sort of Main Street lending. Is that a problem? " CHRG-111shrg57709--124 Mr. Volcker," Let me try that one. Commercial banking, as I said, is a risky business. Now the question is whether you want to, in effect, provide a subsidy or provide protection when they are lending to small business, when they are lending to medium-size business, when they are lending to homeowners, when they are transferring money around the Country. Those are important continuing functions of a commercial bank, in my view, and I do think it is deserving of some public support. I do not think speculative activity falls in that range. They are not lending to your constituents. They are out making money for themselves and making money with big bonuses. And why do we want to protect that activity? I want to encourage them to go into commercial lending activity. Senator Johanns. But, see, you are assuming something about what I am doing. I do not like the bailouts. I voted against TARP, the second tranche of TARP. Quite honestly, I do not think we should put the taxpayer in that position. But I also likewise think that if your goal is to try to wrestle risk out of the system, you get to a point where quite honestly you do not have a workable system anymore, and that is what worries me about where you are going here--is because you are using this opportunity to put into place something that has some pretty profound consequences, and I am not sure these circumstances justify that step. That is why I ask these questions. " CHRG-111hhrg48674--311 Mr. Green," Thank you. Now, a quick comment and a response from you. All banks are not bad banks; and somehow all banks are getting the rap of being bad banks because of what is happening, but they are not. Some desire to lend, but they are not fully capitalized to the extent that they would like to be, or if they are, they are having problems with making loans because of, one, not getting good applicants, two, because they don't have the money to lend. While they received money to capitalize, to be capitalized--the money that we, for example, placed in banks; that money was to take an equity position, and they used that money for capitalization--they don't use that money for lending. So since they have that money--and the public believes by the way, Mr. Bernanke, and I am sure you are aware of this, that they could have taken that money and immediately started to lend it, which is a mistake; and somehow we have to communicate that message that there are rules that require that they be fully capitalized or capitalized to the extent that they can make loans at a certain ratio. So here is my concern: If we don't get this message out--and I think this is what one of the chairpersons has talked about earlier in another way. But if we don't get this message out, the public continues to believe that the banks are getting money, and they are just holding on to it because they just like holding money, which is highly unusual for banks. They kind of like to lend at a high rate and borrow at a cheap rate, if they have to borrow, and prefer not to borrow if they can help it. So now would you kindly comment on how we can deal with this perception that the public has about banks? " CHRG-110shrg50415--21 Mr. Rokakis," Thank you, Mr. Chairman and Members of the committee, for the opportunity to speak to you today. I am the Treasurer of Cuyahoga County, Ohio, the State's largest county, representing Cleveland and 59 cities, villages, and townships. While the events of the past several months have focused the attention of the entire financial world on the practices of the subprime lending industry, we have suffered the consequences of reckless and irresponsible lending for many years. Since the late 1990's, Ohio and Cuyahoga County have consistently led the Nation in this sad statistic of foreclosure filings. Consider these numbers. In 1995, 3,300 private mortgage foreclosures were filed in Cuyahoga County and about 16,000 in the State of Ohio. By 2000, the number in Cuyahoga County had more than doubled to over 7,500 private mortgage foreclosures and over 35,000 in Ohio--better than double the number for 5 years earlier. In 2006, there were 13,000 foreclosures--13,600, actually, filed in Cuyahoga County; 15,000 filed in Cuyahoga County in 2007. And, sadly, we are on pace to foreclose on an additional 15,000 properties in Cuyahoga County in 2008. I am accompanied here today by Professor Howard Katz, a professor of law from Elon University, who was our Director of Strategic Planning in Cuyahoga County back in 2000. Professor Katz and I approached the Federal Reserve Bank of Cleveland in the fall of 2000 to ask for their help in controlling the reckless lending practices that were doing real harm to Cleveland neighborhoods, harm I describe in detail in an article I wrote for the Post entitled ``Shadow of Debt.'' We knew the Fed had the authority to act under HOEPA, the Home Ownership Equity Protection Act, and under the truth-in-lending laws. Our hope was that the Fed would step up once they knew the extent of the problem. That was our hope. The Fed cosponsored a 1-day conference in March of 2001 entitled ``Predatory Lending in Ohio'' where we discussed potential solutions, Federal, State, and local. Our keynote speaker, Mr. Chairman, was Ed Gramlich, the late Fed Governor who passed away in 2007. We had contacts from the Fed that said that late Governor Gramlich understood the nature of the problem. As we all know now, he had warned Fed Chairman Greenspan about the need to regulate these practices. Nothing of substance came from this conference. In frustration, local ordinances were passed later that year in Cleveland, Dayton, and Toledo to try to slow down the practices of the mortgage bankers and brokers. Within 90 days of these ordinances passing, the Ohio Legislature passed a law pre-empting the right of Ohio cities to regulate in this area. In early 2005, I approached the U.S. Attorney of the Northeast District of Ohio, U.S. Attorney Greg White, and requested a meeting of Federal and local officials to deal with these practices from the enforcement side. We knew we were the victims of fraud on an industrial scale. This meeting included U.S. Attorney White, other Assistant U.S. Attorneys, FBI agents, and postal inspectors where we begged that Federal authorities make this enforcement issue a high priority. I still remember one Assistant U.S. Attorney making the point that they had received not a single complaint from any of the mortgage banks involved in these loans. He asked me, and I remember, ``If they aren't complaining, who are the victims?'' Well, Mr. Chairman, the victim was the homeowner who lived on a stable street and woke up 1 day and found that there was a vacant house next to him, and a month later one across the street, and a year later three more on that street. That entire neighborhood was victimized by this, and as we have come to learn now, Mr. Chairman, the victim is the entire world. For the record, a very limited number of prosecutions came as a result of these meetings. The only significant prosecutions in our community have been by the county prosecutor's office. We tried, Mr. Chairman and Members of the Committee, we did try. We were ignored. There were others who tried to warn the Federal Government about this problem, the Fed, but we were no match for Wall Street. Mr. Chairman, I would like to take my remaining time to discuss the attempts, as you have and others here, to pin this entire crisis on the Community Reinvestment Act of 1977. You all know what the CRA is, what it does. I do not need to get into the details. But if you really want to understand how silly this allegation is, all you need to do is look at the lending data for the city of Cleveland. The peak year for home purchase mortgage origination in Cleveland was 2005. A local nonprofit research organization, the Housing Research and Advocacy Center, has analyzed the HMDA data for that year. They found that of the top ten mortgage originators in the city that year, only four were affiliated in any way with local depository banks, and those four accounted for less than 15 percent of the total mortgages originated. Of the 7,100 Cleveland mortgages reported in HMDA data that year, 1,258--almost 18 percent--were originated by the now defunct subprime lender Argent Mortgage. Argent was never covered by the CRA. The second largest Cleveland lender that year was New Century Mortgage, also now defunct, with about 5 percent of the total. The third largest lender, also accounting for about 5 percent, was Third Federal Savings, which I have to say, Mr. Chairman, there are some heroes in this crisis. Third Federal Savings and Loan has been one of the few really good guys in this industry, at least in our community. They have done an outstanding job. They did not make these kinds of loans. Numbers 4, 5, and 6 and others on that list, again, were companies like Aegis, Long Beach Mortgage, and others, which were not covered by CRA. Finally, way down that list, we get to banks like Charter One, National City, and Fifth Third, but they each only had about 3 percent of the market, adding up to about 648 loans. Did they make these loans to help their parent institutions' CRA ratings look better? Possibly. Did these 648 loans play a major role in the city's default and foreclosure crisis? Hardly. I realize I am out of time, but I would like to just point to one bit of statistic. As dangerous as mortgages, Mr. Chairman and Members of the Committee, were the home refis. If you look at the home refi data, you will find that they, first of all, equaled the number of home purchase mortgages. Refis have been very destructive in our community, have resulted in many foreclosures. And if you look at the refi data, Mr. Chairman, only 7 percent of those loans were made by CRA-affiliated institutions. The foreclosure crisis in Cleveland for the last 6 years has not been driven by CRA-covered depository banks, even though some of them--notably National City--were minor players. The problem has been driven by Argent, New Century, Aegis, Countrywide, Long Beach, and others, dozens of other subprime and high-cost loan peddlers with no local depository services and no CRA obligations in our community. Thanks for the chance to be on this distinguished panel. " CHRG-111shrg56376--74 Mr. Dugan," Yes, but the bank itself was subject to the uniform Federal standards of the National Bank Act, and was not subject to California law. They did not do their subprime lending that caused a number of problems in the bank. Senator Reed. Just to be clear, the subprime lending was in an entity that was subject to California law. " fcic_final_report_full--126 Back in  the OTS had issued rules saying federal law preempted state preda- tory lending laws for federally regulated thrifts.  In , the OTS referred to these rules in issuing four opinion letters declaring that laws in Georgia, New York, New Jersey, and New Mexico did not apply to national thrifts. In the New Mexico opinion, the regulator pronounced invalid New Mexico’s bans on balloon payments, negative amortization, prepayment penalties, loan flipping, and lending without regard to the borrower’s ability to repay. The Comptroller of the Currency took the same line on the national banks that it regulated, offering preemption as an inducement to use a national bank charter. In a  speech, before the final OCC rules were passed, Comptroller John D. Hawke Jr. pointed to “national banks’ immunity from many state laws” as “a significant benefit of the national charter—a benefit that the OCC has fought hard over the years to pre- serve.”  In an interview that year, Hawke explained that the potential loss of regula- tory market share for the OCC “was a matter of concern.”  In August  the OCC issued its first preemptive order, aimed at Georgia’s mini-HOEPA statute, and in January  the OCC adopted a sweeping preemption rule applying to all state laws that interfered with or placed conditions on national banks’ ability to lend. Shortly afterward, three large banks with combined assets of more than  trillion said they would convert from state charters to national charters, which increased OCC’s annual budget .  State-chartered operating subsidiaries were another point of contention in the preemption battle. In  the OCC had adopted a regulation preempting state law regarding state-chartered operating subsidiaries of national banks. In response, sev- eral large national banks moved their mortgage-lending operations into subsidiaries and asserted that the subsidiaries were exempt from state mortgage lending laws. Four states challenged the regulation, but the Supreme Court ruled against them in .  Once OCC and OTS preemption was in place, the two federal agencies were the only regulators with the power to prohibit abusive lending practices by national banks and thrifts and their direct subsidiaries. Comptroller John Dugan, who suc- ceeded Hawke, defended preemption, noting that “ of all nonprime mortgages were made by lenders that were subject to state law. Well over half were made by mortgage lenders that were exclusively subject to state law.”  Lisa Madigan, the attor- ney general of Illinois, flipped the argument around, noting that national banks and thrifts, and their subsidiaries, were heavily involved in subprime lending. Using dif- ferent data, she contended: “National banks and federal thrifts and . . . their sub- sidiaries . . . were responsible for almost  percent of subprime mortgage loans, . percent of the Alt-A loans, and  percent of the pay-option and interest-only ARMs that were sold.” Madigan told the FCIC: CHRG-111shrg51303--53 Mr. Dinallo," No, I don't actually disagree with that. I agree with it. The only difference is causation. As I said, the 25 other domestic life insurance companies that we have examined have not had a problem with their securities lending. The causation of AIG's problem with its securities lending business was essentially the run on the entire company caused by its exposure from Financial Products division. Senator Shelby. Could you briefly walk us through the balance sheets for the life insurance companies under your jurisdiction? What was their capital at the start of 2008 and what were their losses in securities lending in that year? If you would take just a second. I know my time is up, but I think that is important. " CHRG-110hhrg44900--156 Mr. Miller," Thank you. I have served on this committee for almost 6 years, and I remember the testimony pretty well on mortgage lending, but I have recently gone back and reviewed some of it to see what the lending industry was saying at the time about the kind of mortgage practices that have led to the problem. And what they have always said was that the provisions of the mortgages that may seem to be a problem, they seem unfavorable to consumers, actually were risk based, they were responding to a greater risk by certain borrowers, and that without those provisions they would not be able to lend to those borrowers, and those borrowers would be denied credit, would be unable to buy a home, and be unable to borrow against their homes to provide for life's rainy days. Looking back on the practices that actually led to the problem, the subprime mortgages made in 2005 and 2006, it is pretty clear that those provisions had nothing to do with risk and nothing to do with benefiting consumers or making credit available to them that would otherwise not have been available. It was a fundamental change in consumer lending from making an honest living off the spread to trying to trap consumers, homeowners into a cycle of having to borrow repeatedly and paying penalties and fees when they did, and that the loans were intended to become unpayable for the borrowers, so the borrower would have to borrow again. Insurance regulation at the State level generally requires that policy forms provisions and policies and premiums be approved in advance by the State regulator, and that the insurer has to justify those provisions. So the kinds of arguments that we heard in this committee that we were not really in a position to judge on a provision by provision basis, a reasonably competent regulator could judge and determine whether that really was related to the risk, whether it really was to the advantage of the consumer, and whether it also presented a solvency issue for an insurer. Secretary Paulson, the proposed regulator to protect consumers, will that regulator have the authority, should it have the authority, to review consumer lending products in advance to see if the practices can be justified both for what it might do to the solvency of the institution and also what it does to the consumer? " CHRG-111shrg52619--96 Mr. Dugan," Senator, as I said before, we certainly did have some institutions that were engaged in subprime lending, and what I said also is that it is a relatively smaller share of overall subprime lending in the home market and what you see. It was roughly ten to 15 percent of all subprime loans in 2005 and 2006, even though we have a much larger share of the mortgage market. I think you will find that of the providers of those loans, the foreclosure rates were lower and were somewhat better underwritten, even though there were problem loans, and I don't deny that at all, and I would say that, historically, the commercial banks, both State and national, were much more heavily intensively regulating and supervising loans, including subprime loans. We had had a very bad experience 10 years ago or so with subprime credit cards, and as a result, we were not viewed as a particularly hospitable place to conduct subprime lending business. So even with organizations that were complex bank holding companies, they tended to do their subprime lending in holding company affiliates rather than in the bank or in the subsidiary of the bank where we regulated them. We did have some, but it turned out it was a much smaller percentage of the overall system than the subprime loans that were actually done. Senator Menendez. Well, subprimes is one thing. The Alternate As is another. Let me ask you this. How many examiners, on-site examiners, did you recently have at Bank of America, at Citi, at Wachovia, at Wells? " CHRG-110shrg50410--58 Chairman Dodd," Thank you. This will be a subject of longer discussion, but let's remind ourselves, this began with predatory lenders out there marketing products that borrowers could not afford. GSEs, Fannie and Freddie, were never bottom feeders. They had some Alt-A, they had some subprime, but nothing to the extent these other institutions had. That is where the problem lay, the failure to actually oversee, to regulate, to monitor that effectively, is where the problems began. We had legislation adopted 14 years ago for which a regulation was never promulgated to protect against deceptive and fraudulent practices. Had that been done, had cops been on the beat, going after these people who are marketing these products as they were as aggressively, we would not be here today. This was not a natural disaster. This was malfeasance and misfeasance, in my view, that created this mess that we are in today. Senator Reed. Senator Reed. Thank you, Mr. Chairman. Mr. Secretary, recently the Federal Reserve and the Securities and Exchange Commission entered into a memorandum to coordinate their supervision of the consolidated supervised entities. I do not believe there was a specific legislative requirement that they do that, they consult, or anything else. So why is it necessary to have a legislative requirement that this new super regulator consult with the Federal Reserve? I would think it would happen or could happen in the course of the common interest of both regulators. And the downside I think has been expressed by some of my colleagues, is if we have the super regulator, if he is looking over his shoulder every moment, even for--as your language requires--even for guidelines or directives concerning prudential management operations, that would involve the Federal Reserve I think in the routine decisions on a daily basis. " FinancialCrisisInquiry--193 Today bank regulators are far more sensitive to lending risk and force banks to be much more conservative in underwriting on all types of loans. While this is to be expected after a deep recession, the regulatory pendulum has swung too far in the direction of overkill and choking off credit at the community bank level. Indeed, the mixed signals that appear to be coming out of Washington have dampened the lending environment in many communities. On one hand, the administration and lawmakers are saying lend, lend, lend, and on the other, that message seems to be lost on the examiners, particularly in the parts of the nation most severely affected by the recession. Bankers continue to comment that they are being treated like they have portfolio full of subprime mortgages and even though they had no subprime on their books. Under the climate community bankers may avoid making good loans for the fear of an examination criticism, write-down and resulting loss of income and capital. Community banks are willing to lend. That’s how banks generate a return and survive. However, quality loan demand is down. It is a fact that demand for credit overall is down as business suffered lower sales, reducing their inventory, cut capital spending, shed workers and cut debt. In a recent National Federation of Independent Business survey, respondents identified weak sales as the biggest problem they face, with only 5 percent of the respondents saying that access to credit is a hurdle. I can tell you from my own bank’s experience customers are scared about the economic climate and are not borrowing. They are basically panicked. Credit is available, but businesses are not demanding it. The good news is that my bank did make $233 million in new loans this past year. MidSouth is extremely well capitalized and would do even more if quality loans were available. CHRG-111hhrg48674--70 Mr. Bernanke," Well, in many cases, they don't have--so the reserves at the Fed are very, very safe and have a very low weight against capital. In many cases, they either don't have enough capital, or they are simply worried about the creditworthiness of the borrowers or the demand for lending. That inhibits their willingness to take those reserves and lend them out. If they were to lend them out and the money supply began to grow, I am sure Congressman Paul would be very concerned about that, then the Fed would pull back and let them take the lead. But for the moment, their capital, their worries about creditworthiness, and their lack of loan demand and uncertainty about the economy is causing them to be very reticent. " CHRG-110hhrg46596--49 Mr. Scott," Thank you, Mr. Chairman. What we have here, quite honestly, is one big mess. That is exactly what we have. The people sitting at that table looking at us ought to be Secretary Paulson and the Treasury Department and the banks. We have been lied to; the American people have been lied to. We have been bamboozled; they came to us to ask for money for one thing, then used it for another. They said we would have oversight, and no oversight is in place. We have given these banks $290 billion for the sole purpose of so-called buying these toxics. They change it, and all of a sudden now they are not lending it but using it for acquisitions, using it for salaries. These are lies. We have been bamboozled. The Secretary of the Treasury owes us an explanation about this, owes the American people an explanation about this. We have the auto companies coming to us. In a few days, we are going to give them a $15 billion loan. When they were here, we asked them, why can't you go to the banks? The banks won't lend it. Here we have sent them $290 billion, but they won't lend it. Why won't the banks lend the money to small businesses and the American people? That is the question. " CHRG-111shrg53085--144 Mr. Attridge," We haven't changed our underwriting criteria. What has changed is the economic environment we are lending in. Senator Schumer. So if a credit union would want to lend to this small business and the local community banker for whatever reason wouldn't, why not let them? Mr. Whalen. " CHRG-111shrg51303--16 Mr. Dinallo," Thank you, Chairman Dodd, Ranking Member Shelby, and other Senators. I think that to some extent, AIG is a microcosm of our regulatory regime, love it or hate it, and I want to try to explain what I think were the roles of at least the State insurance regulators here and try to clear up any confusion about responsibility that I know existed a couple of days ago, although it sounds like a lot of that has been clarified. I think the State regulators did a very good job on what their main assignment is, which is solvency and policy holder protection. I think that the operating companies of AIG, particularly the property companies, are in excellent condition. The life insurance companies are experiencing a lot of the same stresses that other life insurance companies are experiencing across the country and the world. I think that it is important to put some of these numbers in context, because I disagree with the concept that the securities lending program had much of anything to do with the problems at AIG. We calculate that without the Federal intervention, the life insurance companies are approximately $10 billion solvent, so they were solvent prior to the intervention. The amount that was written, on Senator Shelby's numbers, the amount that was written and put into the securities lending pool wasn't a leveraging, it was a direct undertaking, would be, say, I think $40 billion was invested in RMBS. That would be against $400 billion of assets in the life insurance company. So there was 10 percent invested in AAA-rated RMBS. The loss, as you say, we will adopt the number of $17 billion. So that is less than 5 percent of the losses of the assets at the life insurance companies could be laid at the door of securities lending investing in RMBS, which I submit $17 billion is a big number, but as a percentage basis, I think it is not an overwhelming number. I would say that the securities lending business was used to expose itself to RMBS businesses. But if you look at the entirety of the assets as invested by life insurance companies, it was a modest percentage. I think the Financial Products division had a huge causation on this. I think that Chairman Bernanke was correct a couple days ago when he described that causation. And the amounts of money are staggering. The securities lending business, as I said, you would put somewhere in the $75 billion range. The Financial Products division had notional exposure through CDSs and derivatives of $2.7 trillion. That is larger than the gross national debt of Germany, Great Britain, or Italy. I do agree with both of your statements that what they essentially did was they wrote a form of insurance without anywhere near the capitalization that you would have for such an activity if you were in a regulated insurance company. They are the ones that created the systemic risk, and that systemic risk rolled through the operating companies, including causing the run that you described, Senator, on the securities lending business. The securities lending business, which is something that I am happy to discuss with you, although New York only had about 8 percent exposure to it, is not the purpose or the reason for the Federal bailout. If there had been no Financial Products division involvement, I don't think there would have been any bailout of AIG's operating companies, certainly not the securities lending business. I think it was caused by, A, the run on the bank, and also, of course, the Federal Government had to detangle it in order to sell the operating companies. So they essentially removed the remaining securities from the operating companies in the securities lending business in order to sell the assets. Those assets are the ones that are going to go to pay off the loan. So it is the solvency in the operating companies that are going to go to pay off the Federal loan that is necessary because of what Chairman Bernanke described as essentially a bolted-on hedge fund of Financial Products division. When we came into the department, we did begin to take seriously some of the issues around securities lending, and I can detail that during question and answer. But we began to work it down starting in the beginning of 2007 by 25 percent. We got the holding company to guarantee $5 billion of the losses. And in July, we sent a circular letter to all of our companies saying this is something that you need to start to examine. It does have exposure to the mortgage underwritings and securitization. And indeed, I will just tell you that we have subsequently sent out 25 letters to our regulated entities to look into securities lending businesses. Frankly, they have actually performed pretty well across the board. AIG is the lone securities lending business that has had this kind of problem of the 25 that we looked at, and I would hypothesize that it is because of the run on it and the run on it came directly because of the need for massive collateral and the run on Financial Products division. I think that there are some lessons that we can discuss. I certainly think that one of them is a revisitation of Gramm-Leach-Bliley. We did not completely abrogate Glass-Steagall, thank God, or you would have the operating dollars of policy holders being used for the hedge fund activities. But we have, I think, seen for the first time that the creation of financial supermarkets can have a, what I would almost call a knock-on effect on the operating companies to which they are related. The portions of the company that involves itself in leverage, which securities lending did not do any leverage, has the potential to commit itself so heavily that when there is a financial downturn and there is a need for liquidity which they simply didn't have, the operating companies are looked to as an opportunity for that liquidity, but because they are regulated, fortunately, against that, they can't put up the liquidity and you have a downgrade. You have people asking for collateral which doesn't exist at the holding company level, which the State regulators do not regulate. And you have the systemic effects of basically some of these companies' future being questioned, whereas actually the underlying solvency of them and the quality of them as operating companies, as Chairman Bernanke said 2 days ago, I think are actually--should be unquestioned. Thank you. " fcic_final_report_full--555 Wally Murray, President and Chief Executive Officer, Greater Nevada Credit Union Philip G. Satre, Chairman, International Gaming Technology (IGT); Chairman, NV Energy, Inc. Session : The Impact of the Financial Crisis on Nevada Real Estate Daniel G. Bogden, United States Attorney, State of Nevada Gail Burks, President and Chief Executive Officer, Nevada Fair Housing Center Brian Gordon, Principal, Applied Analysis Jay Jeffries, Former Southwest Regional Sales Manager, Fremont Investment & Loan Session : The Impact of the Financial Crisis on Nevada Public and Community Services Andrew Clinger, Director of the Department of Administration, Chief of the Budget Division, State of Nevada Jeffrey Fontaine, Executive Director, Nevada Association of Counties David Fraser, Executive Director, Nevada League of Cities Dr. Heath Morrison, Superintendent, Washoe County School District Session : Forum for Public Comment Public Hearing on the Impact of the Financial Crisis—Miami, Florida, Florida Inter- national University, Modesto A. Madique Campus, Miami, FL, September ,  Session : Overview of Mortgage Fraud William K. Black, Associate Professor of Economics and Law, University of Missouri–Kansas City Ann Fulmer, Vice President of Business Relations, Interthinx; Co-founder, Georgia Real Estate Fraud Prevention and Awareness Coalition Henry N. Pontell, Professor of Criminology, Law & Society and Sociology, University of Cali- fornia, Irvine Session : Uncovering Mortgage Fraud in Miami Dennis J. Black, President, D. J. Black & Company Edward Gallagher, Executive Officer, Economic Crimes Bureau, Mortgage Fraud Task Force, Miami-Dade Police Department Jack Rubin, Senior Vice President, JPMorgan Chase Bank Ellen Wilcox, Special Agent, Florida Department of Law Enforcement Session : The Regulation, Oversight, and Prosecution of Mortgage Fraud in Miami J. Thomas Cardwell, Commissioner, Office of Financial Regulation, State of Florida Wilfredo A. Ferrer, United States Attorney, Southern District of Florida R. Scott Palmer, Special Counsel and Chief of the Mortgage Fraud Task Force, Office of the At- torney General, State of Florida Public Hearing on the Impact of the Financial Crisis—Sacramento, California De- partment of Education, Sacramento, CA, September ,  Session : Overview of the Sacramento Housing and Mortgage Markets and the Impact of the Financial Crisis on the Region Mark Fleming, Chief Economist, CoreLogic Session : Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacra- mento Region Karen J. Mann, President and Chief Appraiser, Mann and Associates Real Estate Appraisers & Consultants Thomas C. Putnam, President, Putnam Housing Finance Consulting CHRG-111hhrg56776--29 Mr. Bachus," They should not be lending money to failing institutions? " CHRG-111hhrg56776--31 Mr. Bachus," Through the discount lending window. " CHRG-111shrg51303--152 Mr. Kohn," We lend on a secured basis. " FOMC20080625meeting--261 259,MR. LACKER.," Thank you, Mr. Chairman. The issues around the liquidity facility and what supervisory apparatus we have wrapped around primary dealers have to do with our having extended our lending reach. I think there's now a substantial gap between our implied lending commitment and the scope of our supervisory authority. Vice Chairman Geithner spoke very eloquently about that earlier this month. I think it's paramount that we close that gap in order to keep borrowers from exploiting the obvious lending commitment and choosing to leave themselves vulnerable to runs and run-like behavior. But this leaves open the question of the extent of our lending reach and how we close that gap, and I think that that's the most critical challenge for us in the year ahead, particularly as we approach negotiations with the Congress. I'd like to share a couple of thoughts on that broader question because the questions posed to us sort of get at those. It's important to start this from a peacetime perspective, sort of a timeless perspective, and ask the question as if you were choosing afresh a lending and regulatory policy that was going to last a long time. If you imagine for the moment that whatever we announce and adopt would be perfectly credible and immediately viewed as credible, I think you'd obviously choose to not have this gap. You'd obviously choose to have lending and regulatory policies that are mutually incentive compatible. So you'd want an adequate supervisory regime in place for any institution that market participants believe we'll lend to. Conversely, it means that you would want market participants to believe that we will constrain our lending to those institutions for which we have an adequate supervisory regime in place. So then the question comes up: How do you choose the boundaries of our lending commitment? I take it as self-evident that our lending commitment shouldn't be open-ended and unlimited. We don't want to supervise every financial intermediary in the world or in the United States, much less all individuals, partnerships, and corporations. But even limiting ourselves to what's called systemically important financial institutions is going to be problematic as well. I take that phrase to mean any institution whose failure could be costly or disruptive to many other market participants. Any institution that chooses to engage in maturity transformation to some extent faces the potential for run-like behavior by the creditors. Unless we impose draconian regulations, market participants will always have a virtually unlimited capacity for creating financial arrangements that run the risk of disruptive failures. So extending our lending reach to whatever institution that makes itself systemically important just leads us down a path of ever more financial regulation of an ever larger portion of the financial system. I think we're going to have to set some boundaries. I'd like to see them tighter rather than looser, and making them credible is going to be the hard problem for us going forward. In doing that, we're going to face a classic time-consistency problem. I take that as given. I'm not sure everyone else shares that view, but I take it as obvious. Inevitably the exigencies of crisis management are excruciating, but I think there are times when they conflict with our long-run interest in the type of financial system that we would design from a peacetime, timeless perspective, just the way short-run concerns about growth sometimes conflict with our long-run interest in price stability. But just as sustaining monetary policy credibility sometimes requires resisting the temptation to ease policy to stimulate growth, sustaining credible lending limits is going to sometimes require not preventing a disruptive failure of an institution and not ameliorating the cost of financial distress. To put it another way, I think it would be a mistake to adapt our supervisory reach to a purely discretionary lending policy. We're going to have to choose a policy and commit to it and then take hard actions to make that credible. From this point of view, I have a deep question about the questions posed by the staff. They focus entirely on primary dealers, and it doesn't strike me that the fact that Bear Stearns was a primary dealer was what made us lend. It was the fact that it was more disruptive. I think it's likely that any other institution that presents the same threat of a disorderly resolution is going to be perceived as benefiting from our implicit lending support, whether or not they're a primary dealer, unless we say something otherwise, unless we draw a boundary, and unless we make that credible. So, for example, other large broker-dealers, hedge funds, private equity firms, or insurance companies could easily fail in a disruptive way. We need to think through whether we're going to let that happen or whether we're going to be forced to step in. At some point we're going to have to choose to let something disruptive happen. I think that ambiguity about our lending limits would be a bad choice. Market participants are going to form their own views about the likelihood of us lending. Any lack of clarity about the boundaries is just going to lead some firms to test the boundaries, and it's not going to help us resist the temptation to lend beyond the boundaries we want to establish. Besides, Mr. Chairman, you've emphasized the value of de-personalizing and institutionalizing the conduct of monetary policy. It's important that we strive for lending policy that isn't critically dependent on particular officeholders. As I said, I'd favor fairly tight limits on our lending commitments, and you are probably not surprised about that. I think we really ought to maintain this section 13(3) hurdle at a fairly high level, but the exit strategy makes me nervous. Crafting this MOU, a permanent shift in our visibility into and in our ability to protect the system from primary dealers, is just going to sustain the expectations that have arisen since Bear--which have been described and referenced a couple of times and which you see in the fall in CDS spreads for those institutions--and it is just really hard to see how to put that genie back in the bottle and limit the extent to which we're viewed as backstopping them. But I think we ought to strive to make that somehow be viewed as unusual as possible. More broadly, my reading of the history of economics and financial intermediation is just my reading. But I'm motivated broadly by the sense that we'd be better served in the long run with as small an extent of central bank lending commitment as possible. Central bank credit is fiscal policy. It entangles us in politics. It risks compromising the independence of our monetary policy. You've heard me say this before. Expanding our lending forces us to extend our regulatory reach, and that can't be good for the financial system even though I trust our staff to do a very good job of being as efficient and effective as they can be. I've argued this before. It's not obvious on the evidence that our financial system is terribly fragile apart from the volatility induced by uncertainties about government and central bank policies. Besides, I think that we should take seriously the notion that some amount of financial instability is undoubtedly optimal, as work by economists such as Allen and Gale has demonstrated. Those are the kinds of considerations that I think ought to guide our policy. Finally, Mr. Chairman, a word about process. At our last meeting we discussed interest on reserves, a historic and consequential decision for us. We had a briefing package of 100-plus pages reflecting substantial staff work. The Committee very much benefited from that. At an upcoming meeting we're going to talk about inflation dynamics, another consequential topic. We've received somewhat less material, even going back several months, about financial markets, their character, and the welfare economics of our interventions. I'd urge you to consider a special topic at some future meeting at which we explore the economics of financial stability, since it is becoming such a consequential part of what we do. Related to that, I was happy to learn from Art that an after-action review by the SEC was under way. Because our role is different from the SEC's, I'd like to suggest that maybe building on that or maybe in parallel to that we conduct our own after-action review of the factors that went into how that event played out. Thank you very much, Mr. Chairman. " CHRG-111hhrg56766--248 Mr. Paulsen," Okay. Thank you, Mr. Chairman. " Mr. Minnick," [presiding] The Chair recognizes the gentleman from North Carolina for 5 minutes. Mr. Miller of North Carolina. Thank you, Mr. Chairman. My questions are also about how to encourage lending. I am sure as a scholar of the Great Depression, you know the Reconstruction Finance Corporation did not start out with a direct lending program. They only resorted to that when they could not persuade banks to lend, when they tried to lend to banks for the banks to lend in turn, that did not work. They tried to buy preferred stock in banks so banks could have additional capital. That did not work. It was only then that the Reconstruction Finance Corporation began direct lending, and 20 years later, when the program was ratcheted down, it had turned a slight profit. It does appear it is possible to lend even in a bad economy with proper underwriting. I am sure I am in a distinct minority in this committee in thinking that it was probably a mistake to--we were probably better off having mark-to-market rules for accounting, that it is better to know what is on a bank's books, to have an accurate idea of the assets and of the liabilities. I was also skeptical a year ago about the stress test, that would be seen as a rigorous test, a real measure of the sovereignty of banks. I have been surprised at the amount of capital that has gone into those 19 banks. A couple of questions. To what extent was that the result of investors getting confidence to cause the stress test, because they did feel reassured their books were accurate, and to what extent was that because investors became convinced that the government was not going to allow any of those 19 institutions to fail, that they were too-big-to-fail? Second, with respect to community and regional banks, it does not appear that capital is flowing into community and regional banks in the same way they flowed into those 19 bigger banks. Do you agree it is important they have additional capital? Are they trying to acquire it? Is that because of the skepticism about what is really on their books? Do they have accurate books or are their books being cooked somewhat? To what extent because they are too small to fail and investors know they may in fact lose their entire investment in a way they cannot possibly lose their entire investment at the bigger banks? " CHRG-110hhrg44901--43 Mr. Manzullo," And then with regard to regular loans, you have proof, do you not, that homeowners are making payments to lending institutions and the lending institutions are holding on to the checks while the interest grows on the loan and waiting days before applying that money to the principal balance of the mortgage, isn't that correct? " CHRG-111shrg50815--2 Chairman Dodd," The Committee will come to order. My apologies to our witnesses and my colleagues. Today is the 200th anniversary of Abraham Lincoln's birthday and I took my daughter up to Lincoln's cottage this morning up at the Old Soldier's Home where there was a ceremony this morning to unveil a wonderful statue of Abraham Lincoln and his horse Old Boy that he used to ride every morning for about a quarter of his Presidency from the White House to the Old Soldiers Home where he lived for a quarter of that Presidency and he wrote the Emancipation Proclamation. So I thought I would take my daughter out of school this morning for a bit of history and I am sorry to be a few minutes late getting back here this morning, so apologies to everybody for being a few minutes late for enjoying a moment of history with a 7-year-old. Well, let me begin with some opening comments, if I can. I will turn to Senator Shelby. We are honored to have such a distinguished panel of witnesses with us this morning on an issue that many of my colleagues know has been a source of interest of mine for literally two decades, the issue of reform of the credit card industry. And so this hearing this morning will give us a chance to reengage in that debate and discussion, and I want my colleagues to know at some point, and I say this to my good friend, the former Chairman of the Committee, at some point, I would like to be able to mark up a bill in this area. I know he knows that, but I wanted to say so publicly. So good morning to everyone, and today the Committee meets to look into an issue of vital importance to American consumers, their families, and to the stability of our financial system, and that is the need to reform the practices of our nation's credit card companies and to provide some tough new protections for consumers. In my travels around my State, as I am sure it is true of my colleagues, as well, we frequently hear from constituents about the burden of abusive credit card practices. In fact, the average amount of household credit card debt in my State is over $7,100. Actually, the number is higher, I think, nationally. Non-business bankruptcy filings in the State are increasing. In the second quarter of last year, credit card delinquencies increased in seven of eight counties in my State. Across the country, cardholders are paying $12 billion in penalty fees annually, every year. It is a major problem throughout our nation. At a time when our economy is in crisis and consumers are struggling financially, credit card companies in too many cases are gouging, hiking interest rates on consumers who pay on time and consistently meet the terms of their credit card agreements. They impose penalty interest rates, some as high as 32 percent, and many contain clauses allowing them to change the terms of the agreement, including the interest rate, at any time, for any reason. These practices can leave mountains of debt for families and financial ruin in far too many cases. When I introduced Secretary Geithner earlier this week as he unveiled the framework of the President's plan to stabilize our financial system, I noted then for too long, our leading regulators had failed fully to realize that financial health and security of the consumers is inextricably linked to the success of the American economy. In fact, for too many years, I think people assumed that consumer protection and economic growth were antithetical to each other. Quite the opposite is true. I noted that unless we apply the same urgent focus to helping consumers that we apply to supporting our banks' efforts to restart lending, we will not be able to break the negative cycle of rising foreclosures and declining credit that is damaging our economy. In this hearing, the Committee examines abusive credit card practices that harm consumers and explores some very specific legislative ideas to end them. These kinds of consumer protections must be at the forefront of our efforts to modernize our financial regulatory system. Why is this both important and urgent? Well, today, far too many American families are forced to rely on short-term, high-interest credit card debt to finance their most basic necessities. And as layoffs continue, home values plunge, and home equity lines of credit are cut or canceled, they are increasingly falling behind. This December, the number of credit card payments that were late by 60 days or more went up 16.2 percent from last year. Banks increasingly worried about taking more debt, bad debt, into their balance sheets are monitoring their credit card portfolios very closely, slashing credit lines and increasing fees and interest rates even more for consumers who have held up their end of the bargain. That puts consumers, including many of my constituents and others around the country, in the worst possible position at the worst possible time. For too long, the use of confusing, misleading, and predatory practices have been standard operating procedures for many in the credit card industry. The list of troubling practices that credit card companies are engaged in is lengthy and it is disturbing: Predatory rates, fees, and charges; anytime, any reason interest rate increases and account charges; retroactive interest rate increases; deceptive marketing to young people; shortening the period consumers have to pay their bills with no warning. Even the Federal financial regulators, of whom I have been openly critical for a lack of appropriate oversight throughout this subprime mortgage market crisis, recognize the harm these sinister practices pose not only to credit card customers, but also to our economy. Last May, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration proposed rules aimed at curbing some of these practices. These rules were a good step and I applaud them, but they are long overdue. But they fell far short of what is actually needed, in my view, to protect American families. Just as we have seen in this housing crisis, when companies lure people into financial arrangements that are deceptive, abusive, and predatory, it only means mountains of debt for families, bankruptcy, and financial ruin for far too many. It also proved catastrophic, of course, for our economy. Today as the Committee examines how best to modernize and reform our outdated and ineffective financial regulatory system, we have a clear message to send to the industry. Your days of bilking American families at the expense of our economy are over. Today, we will discuss proposals to reform abusive credit card practices that drag so many American families deeper and deeper and deeper into debt, including the Credit Card Accountability, Responsibility, and Disclosure Act, which I recently reintroduced. We must protect the rights of financially responsible credit card users so that if a credit card company delayed crediting your payment, you aren't charged for this mistake. We must prevent issuers from changing the terms of a credit card contract before the term is up. And perhaps most importantly, we must protect our young people who are faced with an onslaught of credit card offers, often years before they turn 18, or as soon as they set foot onto a college campus. These practices are wrong and they are unfair. And mark my words, in the coming months, they are going to end. Of course, we must do all we can to encourage consumers to also act responsibly when it comes to using credit cards. But we should demand such responsible behavior when it comes to the companies that issue these cards, as well. The need to reform credit card practice has never been more important. It is not only the right thing to do for families and our consumers, it is the right thing to do for our economy, as well. I have been working on reforms in this area for many, many years and I am determined to move forward on these reforms. With that, let me turn to our former Chairman and Ranking Member, Richard Shelby. CHRG-111shrg54675--97 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL FROM ED TEMPLETONQ.1. I have heard from many small businesses struggling to find lines of credit and keep their doors open. How has the member business lending cap affected the ability of credit unions to make small business loans to their members? Does your organization have any data showing that more small businesses would be served if the member business lending cap was increased by loan size and volume? In the current credit crisis, do you believe that credit unions are able to provide more loans to small businesses and should the cap be raised?A.1. When Congress passed the Credit Union Membership Access Act (CUMAA) (P.L. 105-219) in 1998, they put in place restrictions on the ability of credit unions to offer member business loans. Congress codified the definition of a member business loan and limited a credit union's member business lending to the lesser of either 1.75 times the net worth or 12.25 percent of total assets. Also pursuant to section 203 of CUMAA Congress mandated that the Treasury Department study the issue of credit unions and member business lending. In January 2001, the Treasury Department released the study, ``Credit Union Member Business Lending'' that found, among other things: Overall, credit unions are not a threat to the viability and profitability of other insured depository institutions. In certain instances, however, credit unions that engage in member business lending may be an important source of competition for small banks and thrifts operation in the same geographic areas. Congress has not revisited this issue since the study came out. The arbitrary member business lending cap placed on credit unions is a detriment to credit unions ability to serve their members and America's small businesses. A number of credit unions are at or near the MBL cap, and a significant number shy away from business lending programs altogether because of the arbitrary cap and the restrictions it places on the ability to operate a business loan program. Additionally, the definition of a member business loan has not been updated for inflation in over a decade, meaning the $50,000 minimum level set in 1998 needs to be updated. Credit union economists have estimated that removing the member business lending cap could help credit unions provide $10 billion in new small business loans in the first year alone. Removing the credit union member business lending cap would help provide economic stimulus without costing the taxpayer a dime. Senator Schumer has indicated his interest in introducing legislation to remove this cap and we would urge the Committee to support him in these efforts. ------ CHRG-111hhrg52397--188 Mr. Foster," And if I go to the next smaller slice is credit default swaps at 7 percent. And a general question, would have forcing all of the OTC derivatives on to clearing or an exchange have prevented AIG financial products, at least the part that was not related to the mortgage lending or their securities lending business? " CHRG-111hhrg48674--317 Mr. Castle," Thank you. What criteria are you looking at to determine the effectiveness of the various programs, not only your regular lending to the banks, but to the other institutions, the AIGs and Bear Stearnses? I mean, do you look at just the capitalization and liquidity, or are you looking at what they are doing with it and how they are conforming to their normal lending practices or whatever? What criteria do you look at? " CHRG-111shrg54675--92 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL FROM FRANK MICHAELQ.1. I have heard from many small businesses struggling to find lines of credit and keep their doors open. How has the member business lending cap affected the ability of credit unions to make small business loans to their members? Does your organization have any data showing that more small businesses would be served if the member business lending cap was increased by loan size and volume? In the current credit crisis, do you believe that credit unions are able to provide more loans to small businesses and should the cap be raised?A.1. The member business lending cap has affected the ability of credit unions to make small business loans to their members in two ways. First, many of the roughly one quarter of credit unions that offer business loans are getting sufficiently close to the cap for it to affect their behavior. Long before a credit union actually reaches the arbitrary 12.25 percent cap it must begin to moderate its business lending in order to stay below the cap. Considering the vast majority of credit unions that were not originally grandfathered from the cap, fully 38 percent of credit union business loans outstanding are in credit unions with more than 10 percent of assets in business loans. That means that almost 40 percent of the market is essentially frozen. Another 21 percent of the business loans outstanding in credit unions that are not grandfathered is in credit unions with business loans between 7.5 percent and 10 percent of assets. These credit unions are approaching the territory at which they will need to moderate business lending growth. A total of almost 60 percent of nongrandfathered credit union business loans is in credit unions at or near the cap. Second, the cap not only restricts the credit unions that are engaging in business lending and approaching their limit, but also discourages credit unions who would like to enter the business lending market. The cap effectively limits entry into the business lending arena on the part of small- and medium-sized credit unions--the vast majority of all credit unions--because the startup costs and requirements, including the need to hire and retain staff with business lending experience, exceed the ability of many credit unions with small portfolios to cover these costs. Today, only one in four credit unions have MBL programs and aggregate credit union member business loans represent only a fraction of the commercial loan market. Eliminating or expanding the limit on credit union member business lending would allow more credit unions to generate the level of income needed to support compliance with NCUA's regulatory requirements and would expand business lending access to many credit union members, thus helping local communities and the economy. CUNA has produced an estimate of how much additional business lending could be provided by credit unions if the cap were raised to 25 percent of assets. We assume that all current business lending credit unions will hold business loans in the same proportion to the new cap that they currently do to the existing cap, and that they will use one half of the new authority in the first year. Further, we assume that on average credit unions that currently make no business loans will as a group add business loans equal to 1 percent of their assets. Applying these assumptions to second quarter NCUA Call Report data indicates an additional $12.5 billion in business loans for America's small businesses. Based on this analysis, we conservatively project that credit unions could provide up to an additional $10 billion of business loans in the first year after the raising of the cap. ------ CHRG-111hhrg53244--324 Mr. Bernanke," Those are swaps that were done with foreign central banks. Many foreign banks are short dollars. And so they come into our markets looking for dollars and drive up interest rates and create volatility in our markets. What we have done with a number of major central banks like the European Central Bank, for example, is swap our currency, dollars, for their currency, euros. They take the dollars, lend it out to the banks in their jurisdiction. That helps bring down interest rates in the global market for dollars. And, meanwhile, we are not lending to those banks; we are lending to the central bank. The central bank is responsible for repaying us. " CHRG-110shrg50416--41 Mr. Kashkari," We are, Senator. Again, we completely agree with the spirit of that, and we want our banks to lend. But we also did not want to be in a position of micromanaging our banks. We wanted to create a program where thousands of institutions across our country would volunteer to participate, and if we came in with very specific guidance on ``you must do this, you must do that,'' we were afraid that we would discourage firms, discourage healthy institutions from participating. And it is the healthy institutions that we want to take the capital because they are going to be in the best position to lend. Senator Shelby. One of the big rationales from Treasury in injecting this money into these nine large banks was to make them perhaps more solvent and have more capital to lend. Is that central to the whole scheme here? " CHRG-111shrg51303--169 PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY Thank you, Mr. Chairman. The collapse of the American International Group is the greatest corporate failure in American history. Once a premiere global insurance and financial services company with more than one trillion dollars in assets, AIG lost nearly $100 billion last year. Over the past 5 months it has been the recipient of four bailouts. To date, the Federal Government has committed to provide approximately $170 billion in loans and equity to AIG. Given the taxpayer dollars at stake and impact on our financial system, this Committee has an obligation to throughly examine the reasons for AIG's collapse and how Federal regulators have responded. I also hope that today's hearing will shed new light on the origins of our financial crisis, as well as inform our upcoming discussions on financial regulatory reform. In reviewing our witnesses' testimony and AIG's public filings, it appears that the origins of AIG's demise were two-fold. First, as has been widely reported, AIG suffered huge losses on credit default swaps written by its Financial Products subsidiary on collateralized debt obligations. AIG's problems, however, were not isolated to its credit default swap business. Significant losses at AIG's State-regulated life insurance companies also contributed to the company's collapse. Approximately a dozen of AIG's life insurance subsidiaries operated a securities lending program, whereby they loaned out securities in exchange for cash collateral. Typically, an insurance company or bank will lend securities and reinvest the cash collateral in very safe, short-term instruments. AIG's insurance companies, however, invested their collateral in riskier long-term mortgage-backed securities. Although they were highly rated securities, approximately half of them were backed by subprime and alt-a mortgage loans. When the prices for mortgage-backed securities declined sharply last year, the value of AIG's collateral plummeted. The company was rapidly becoming unable to meet the demands of borrowers returning securities to AIG. By September, it became clear that AIG's life insurance companies would not be able to repay collateral to their borrowers. Market participants quickly discovered these problems and rushed to return borrowed securities and get back their collateral. Because AIG was unable to cover its obligations to both its securities lending and derivatives operations, it ultimately had to seek Federal assistance. In total, AIG's life insurance companies suffered approximately $21 billion in losses related to securities lending in 2008. More than $20 billion dollars in Federal assistance has been used to recapitalize the State-regulated insurance companies to ensure that they are able to pay their policyholders' claims. In addition, the Federal Reserve had to establish a special facility to help unwind AIG's securities lending program. I am submitting for the record a document from AIG that shows the losses from securities lending suffered by each AIG subsidiary that participated in AIG's securities lending program and the impact those losses had on its statutory capital. (See Exhibit A, below.) The causes of AIG's collapse raise profound questions about the adequacy of our existing State and Federal financial regulatory regimes. With respect to AIG's derivatives operations, the Office of Thrift Supervision was AIG's holding company regulator. It appears, however, that the OTS was not adequately aware of the risks presented by the company's credit default swap positions. Since AIG's Financial Products subsidiary had operations in London and Hong Kong, as well as in the U.S., it is unclear whether the OTS even had the authority to oversee all of AIG's operations. It is also unclear whether OTS had the expertise necessary to properly supervise what was primarily an insurance company. According to the National Association of Insurance Commissioners, a life insurance company may participate in securities lending only after it obtains the approval of its State insurance regulator. If so, why did State insurance regulators allow AIG to invest such a high percentage of the collateral from its securities lending program in longer-term mortgage-backed securities? Also, how did insurance regulators coordinate their oversight of AIG's securities lending since it involved life insurers regulated by at least five different States? While I hope we can get answers to these and many other questions today, I believe we are just beginning to scratch the surface of what is an incredibly complex and, on many levels, a very disturbing story of malfeasance, incompetence, and greed. Thank you, Mr. Chairman. CHRG-111shrg51303--48 Mr. Polakoff," Yes, Senator. When you look through the weeds, it is clear that the various insurance subsidiaries that participate in the security lending business, the insurance commissioners had responsibility for understanding and approving any agreements between the insurance companies and the entity that was formed for the security lending business and any of the losses that were recorded were recorded on the insurance company's books. The Insurance Commissioner's staff would have known that when they looked at the books and records. Senator Shelby. Were these securities lending losses greater than the statutory cap? For example, in 2008, it is my understanding that American International Life's statutory cap was 662 and the losses were 771. " CHRG-111shrg57319--101 Mr. Vanasek," I don't think CRA led or forced WaMu into doing a great deal more low-income moderate housing, moderate-income lending. It had a small influence. But the real influence was the pure profitability of subprime lending. Senator Coburn. Right, the up-front profitability. " FinancialCrisisInquiry--610 ZANDI: I think the hubris in the financial system was widespread. I think it was clearest and most evident in the residential mortgage market, thus the focus on that. But I think it extends well beyond that, and, as we can see to this day, into commercial real estate lending, which many small banks are now struggling with, to corporate lending, all various kinds of—of corporate lending. It was evident more broadly in financial markets, in the derivatives market, stock prices, obviously in commodity markets at certain points in time. So I think the hubris among investors, global investors, was extraordinarily widespread and cut across lots of different markets, a whole range of markets. In fact, it would be more difficult to identify the markets that weren’t affected at the height of this by that hubris. CHRG-111shrg51303--58 Mr. Dinallo," It is completely severed now. So the concept of continued systemic risk from securities lending, to the extent anyone thought there was--and I would not agree that there was--it is a completely severed situation, because in order to sell the operating companies to various buyers to pay off the loan that you authorized them to give, you had to untangle the operating companies from the securities lending pool, and that required the Fed to buy $20 billion at face value of the securities. Those may actually perform well. They may not. But they were bought at the market price so we could unwind securities lending pool so we could sell the operating companies that have huge value. Senator Shelby. Thank you. " CHRG-110shrg50416--40 Chairman Dodd," I agree. They said that. I am not ruling out acquisitions. The hoarding notion is the one that really is distracting. Senator Shelby. Senator Shelby. Thank you. Secretary Kashkari, why did Treasury not attach a requirement to increase lending as a price for receiving the Government money? In other words, we are talking about lending to keep our economy going, are we not? " CHRG-111shrg52619--122 Chairman Dodd," We are going back around. Chairman Bair, let me ask you to comment on this as well. Ms. Bair. Well, I think John is right. These practices became far too pervasive. For the most part, the smaller State-chartered banks we regulate did not do this type of lending they do more traditional lending, and then obviously they do commercial real estate lending, which had a separate set of issues. We had one specialty lender who we ordered out of the business in February of 2007. There have been a few others. We have had some other actions, and I would have to go back to the examination staff to get the details for you. But I was also concerned that even after the guidance on the nontraditional mortgages, which quite specifically said you are not going to do low-doc and no-doc anymore, that we still had very weak underwriting in 2007. So I think that is a problem that all of us should look back on and try to figure out, because clearly by 2007 we knew this was epidemic in proportion, and the underwriting standards did not improve as well as you would have thought they should have, and the performance of those loans had been very poor as well. I do think we need to do a lot more---- " CHRG-111hhrg56778--56 Mr. Royce," Thank you, Mr. Chairman. Mr. Chairman, despite Mr. Garrett's opening comments, I have never argued that AIG's securities lending losses are a reason for Federal regulation. What I have said, and what I'll say again, is that the State insurance commissioners had the ability to prevent those losses and they did not. There is a lot of blame to go around in the case of AIG, but to say the various State insurance commissioners are not to be included in that group is a failure to look at the facts. AIG's Securities Lending Division used capital directly from the insurance subsidiaries. To date, the losses derived from the Securities Lending Division amount to over $40 billion. Mr. Garrett mentioned that AIG would have been okay, despite these losses. I think $40 billion would cripple any institution. Further, there are at least seven State-regulated insurance subsidiaries that were participating in AIG's Securities Lending Division that would have been insolvent but for the American taxpayers. I would like to ask the insurance commissioners, I understand that every State has an insurance company, holding company law, and that those laws give the insurance regulator the authority to examine the activities of the holding company or other affiliates to ensure the ongoing health of the insurer itself. With regard to AIG, how were those holding company laws and the authority they granted to insurance commissioners used prior to the time the AIG crisis came t a head? Ms. Frohman. Although I did not have an AIG company domesticated in my State, I can speak to the terms of what the holding company framework requires; and in terms of agreements involving U.S.-based AIG companies that are insurance operating entities, we have a number of requirements we're dealing with affiliated agreements and material transactions that would have touched the insurance company or involved the insurance company's operations. We would have required prior review of those agreements to the extent that they had a material threshold. " FinancialCrisisInquiry--718 GORDON: We don’t see CRA as a contributor to the—the crisis that occurred. CRA had been working for several decades to get some more lending to people who were qualified for the loans that they were getting. CRA was not intended to put unqualified people into home loans. It was intended to get lending to otherwise qualified people who weren’t being serviced by the financial institutions. CHRG-110hhrg46593--35 Mr. Bernanke," Yes. We only lend to good quality banks. We lend on a recourse basis, that is post, post, post collateral, and if the collateral were to be insufficient, then the bank itself is still responsible. We have never lost a penny doing this. I think it is a totally standard practice for central banks around the world, and it is very constructive to provide liquidity to the financial system. " CHRG-111hhrg48674--10 Mr. Bernanke," I thank you, Mr. Chairman. I would like to maintain throughout this hearing a very clear distinction between the 95 percent of our balance sheet which is devoted to regular lending programs, such as lending to sound financial institutions or supporting the credit commercial paper facility, versus the other 5 percent of our balance sheet which has been involved in-- " CHRG-110hhrg38392--104 Mr. Sires," I know the lending rate seems to have stabilized. Do you see any changes downward for the future? " CHRG-111hhrg48674--69 Mrs. Biggert," Thank you, Mr. Chairman. Mr. Chairman, my constituents have the same problem and are questioning, when are we going to return to normalcy so consumers and small businesses and everybody would be able to get loans? But can you describe in more detail why banks are parking their excess reserves at the Fed instead of using those excess reserves to facilitate interbank lending as well as private and consumer and small business lending? " CHRG-111hhrg53244--344 Mr. Bernanke," We are lending to all U.S. financial institutions in exactly the same way. " CHRG-111hhrg49968--66 Mr. Scott," Because that would convert directly into reduced lending capacity? " FOMC20081029meeting--30 28,MR. LACKER.," Or we could lend to them, collateralized by the Treasuries rather than by their own currency. " CHRG-110hhrg41184--71 Mr. Bernanke," Of course it is possible. As I said in a recent speech, whenever we do regulation, we need to think about the cost and benefit of that regulation, and make sure there is an appropriate balance between them. And as we have done regulations on mortgage lending, I believe, for example, that subprime mortgage lending, if done responsibly, is a very positive thing and can allow some to get homeownership who might otherwise not be able to do so. There is plenty of evidence that people can do subprime lending in a responsible way. So in doing our regulations, we wanted to be sure that we didn't put a heavy hand on the market that would just shut it down and make it uneconomic. We want to help consumers understand the product, but we don't want to censure the market. Mr. Price of Georgia. Sure. Would you agree with the statement that excessive deregulation is the single greatest cause of the challenge that we currently find ourselves in? " CHRG-111shrg53085--141 Mr. Attridge," Of removing what cap now, Senator. Senator Schumer. Removing the 12.5 percent limit on credit unions lending to small businesses. I mean, I understand it gives your membership more competition, but I am talking about now where we are desperately short of credit in the economy and lending to small businesses. " CHRG-111hhrg56778--57 Mr. Royce," Any other commentary there? Ms. Frohman. I guess in terms of where we have been with securities lending, we have in the lessons learned imposed a risk capital charge. We have also enhanced our disclosures, and prior to the credit crisis, we were well aware of the issue and the insurance regulators had required a reduction I think by 50 percent in the securities lending activity. " CHRG-110hhrg46593--28 Mr. Bachus," Thank you, Mr. Chairman. You have just been told, if you don't give assistance or lend to folks, you will be waxed. It is sort of a continuation of what we have been hearing since the 1970's by Federal policy and the GSEs, is, lend and meet the needs of folks and assist them. I think, as a result of that, the financial system and the economy has been waxed by lending to people who weren't creditworthy. And I hope--and I appreciate that your intergovernment statement stressed creditworthy borrowers. Secretary Paulson, I very much appreciate something that you did in your opening statement. I think you distinguished between the economy and the financial system, because people did question some of the actions by saying, well, the economy is strong. But the financial system, chaos or distress there will affect the economy. It has that effect. I think we have heard good news here. There is stability returning to the financial system. And I think the good news is, just like the instability in the financial system affected the economy, going forward, and it may take a while to do, but the stability that has returned to the system will in the long term strengthen the economy. I think that is good news for all of us. The TARP program, the capital purchase program, all of them had as a design two things. One was restoring the stability to the financial markets. And I think that we are well on our way to achieving that. And as you said, you don't get credit for something that you avoid, and that would be a collapse of the financial system. The second objective was to strengthen the economy by restoring lending to companies and borrowers. And on that score, it hasn't worked as well. Would you comment on, do you think we are on the right track in restoring lending? " fcic_final_report_full--87 While investors in the lower-rated tranches received higher interest rates because they knew there was a risk of loss, investors in the triple-A tranches did not expect payments from the mortgages to stop. This expectation of safety was important, so the firms structuring securities focused on achieving high ratings. In the structure of this Citigroup deal, which was typical,  million, or , was rated triple-A. GREATER ACCESS TO LENDING: “A BUSINESS WHERE WE CAN MAKE SOME MONEY ” As private-label securitization began to take hold, new computer and modeling tech- nologies were reshaping the mortgage market. In the mid-s, standardized data with loan-level information on mortgage performance became more widely avail- able. Lenders underwrote mortgages using credit scores, such as the FICO score, de- veloped by Fair Isaac Corporation. In , Freddie Mac rolled out Loan Prospector, an automated system for mortgage underwriting for use by lenders, and Fannie Mae released its own system, Desktop Underwriter, two months later. The days of labori- ous, slow, and manual underwriting of individual mortgage applicants were over, lowering cost and broadening access to mortgages. This new process was based on quantitative expectations: Given the borrower, the home, and the mortgage characteristics, what was the probability payments would be on time? What was the probability that borrowers would prepay their loans, either because they sold their homes or refinanced at lower interest rates? In the s, technology also affected implementation of the Community Rein- vestment Act (CRA). Congress enacted the CRA in  to ensure that banks and thrifts served their communities, in response to concerns that banks and thrifts were refusing to lend in certain neighborhoods without regard to the creditworthiness of individuals and businesses in those neighborhoods (a practice known as redlining).  The CRA called on banks and thrifts to invest, lend, and service areas where they took in deposits, so long as these activities didn’t impair their own financial safety and soundness. It directed regulators to consider CRA performance whenever a bank or thrift applied for regulatory approval for mergers, to open new branches, or to en- gage in new businesses.  The CRA encouraged banks to lend to borrowers to whom they may have previ- ously denied credit. While these borrowers often had lower-than-average income, a  study indicated that loans made under the CRA performed consistently with the rest of the banks’ portfolios, suggesting CRA lending was not riskier than the banks’ other lending.  “There is little or no evidence that banks’ safety and sound- ness have been compromised by such lending, and bankers often report sound busi- ness opportunities,” Federal Reserve Chairman Alan Greenspan said of CRA lending in .  FOMC20070810confcall--26 24,VICE CHAIRMAN GEITHNER.," Richard, we’ve been talking to these people several times a day, and we’ll do so again today. But I guess I don’t feel that at this point we can do anything appropriate that is more powerful than this statement, and I’m not sure that it makes any sense for us to try to persuade these people to lend to a bunch of institutions that they’re not comfortable lending to now. I don’t really feel as though there’s an effective way for us to condition this. You know, we have no indication that people are going to come to the window on any significant scale. If we think that there’s a liquidity problem that could be effectively relaxed by encouraging people to come to the window and that would make them more likely to help meet that constraint, then we can get to that point. But at this stage I don’t think it’s helpful or necessary for us to try to induce these people to on-lend what they may come to us later in the day for at the window. We may get to that point, but I don’t think that makes sense now." CHRG-111hhrg50289--34 Mr. Graves," Ms. Blankenship. Ms. Blankenship. Yes. Actually our loans increased just over ten percent from 2007 to 2008 as well, but interestingly, our SBA loan percentages have been running about two to two and a half percent per year of our total portfolio. This year it is running 6.38. So we have really gotten behind a push to use the SBA program because what banks are facing right now is kind of a double-edged sworn. You hear Congress saying, ``Lend, lend, lend,'' but then the examiners are overreacting and they are coming in and we are getting stories of, you know, all commercial real estate being classified. So, you know, in my opinion, this is an opportune time to use the SBA program because you can mitigate some of that because you have that guaranty. Because the overwhelming majority of SBA loans will include typically, at least in our portfolio, some type of real estate as collateral. So we really need to mitigate the overreaction from the examining force. Again, I think it has been stated today there is an opportune time. The only other thing that I think would make the program more accessible in these times is perhaps raising the limits that we currently have on the size of 7(a) loans, and I think also on the 504s. So I think that would help a lot. " CHRG-110shrg50417--35 LEADERSHIP CONFERENCE ON CIVIL RIGHTS Ms. Zirkin. Thank you, Senator Dodd and other Members of the Committee. Again, I am Nancy Zirkin, Executive Vice President of the Leadership Conference on Civil Rights, our Nation's oldest and largest civil and human rights coalition. Let me begin by saying why the foreclosure crisis is so important to LCCR. Homeownership has always been one of the most important goals of the civil rights movement. It is the way most Americans build wealth and improve their lives, and it is essential to stable communities. For decades, LCCR has worked to break down barriers to fair housing, as well as the barriers from redlining and predatory lending, to the credit that most people need to own a house. For these reasons, we have argued for a number of years that the modern mortgage system was terribly flawed, that countless irresponsible and abusive loans were being made, often in a discriminatory way, and that without better regulations things would not end well. Now, after years of denial, I think it is quite obvious that the mortgage crisis is definitely not contained. But to date--and despite the best efforts of you, Mr. Chairman, and others--the whole collective response, based on voluntary efforts, has not done much to actually turn the tide. At the same time, there are helpful ideas out there now such as the FDIC proposal and the efforts of Bank of America and others. However, LCCR remains convinced that the best way to quickly reduce foreclosures is to let desperate homeowners modify their loans in Chapter 13. It would give borrowers leverage to actually negotiate with servicers and give them a last resort when the negotiations do not work. It does not use public funds, and more importantly, it would quickly help other homeowners and our economy by keeping the value of the surrounding homes from being eroded, stopping a vicious cycle that can only lead to more foreclosures. We recognize that the bankruptcy relief has faced intensive opposition from industry, which is ironic to us given the number of lenders that have obtained bankruptcy relief themselves. Opponents say that allowing bankruptcy would make investors hesitant, limiting ``access to credit'' for underserved populations. Well, the fact is right now, because of the years of irresponsible lending, there is no access to credit for most of the people, anyway. We are glad that since your last hearing several banks and the GSEs have planned to drastically increase their loan modification programs, following what the FDIC is doing with IndyMac. We are all for voluntary efforts. Every home that is saved is a step in the right direction. However, industry efforts have not provided enough affordable, lasting solutions for the borrowers. This obviously has a lot to do with securitization and second mortgages. Until these obstacles can be overcome, industry efforts cannot be a substitute for actually helping homeowners directly. The stakes are simply too high because the credit drought will not be mitigated until foreclosures are controlled. While LCCR is disappointed that the bankruptcy relief that was blocked earlier this year, we are encouraged by some of the recent discussions with FDIC about a new mortgage guarantee program. As we understand it, the plan would give new incentives for loan servicers to reduce payments to 30 percent debt-to-income ratio in return for Government guarantees. If the plan can be implemented quickly, and just as importantly, if it is quickly used by the servicers, we believe it will be a great improvement over existing efforts, including Hope for Homeowners Act, moratorium, or even the existing IndyMac plan. It also aims directly at the cause of the economic crisis--foreclosures. So it is a wise investment, especially with the latest controversies over how Wall Street has been using our tax dollars. For all of these reasons, while we have a few reservations, we strongly believe that the FDIC plan is well worth a try, and it should be adopted as quickly as possible. Before I conclude, I would be remiss, especially because this is the 40th anniversary of the Fair Housing Act, if I did not note that any measure to implement the financial rescue law must be done in a way that is fully consistent with all applicable civil rights laws--something I discuss in greater detail in my written testimony. Again, Mr. Chairman, thank you for the opportunity of testifying, and I look forward to answering questions. " CHRG-111hhrg51591--75 Mr. Harrington," I would like to see a really detailed analysis of the securities lending issue and exactly what happened, why it happened, what the nature of the breakdown was, to what extent New York's Insurance Department and various other State regulators may have been asleep at the switch. Securities lending had gone on for so long and had been a major part of so many operations, I think it was regarded as routine business with no mischief involved. Clearly, it now appears there might have been some real mischief. So there could seriously have been some State regulatory failure there. I would want to really look into the specifics of the securities lending. But I have to go back and say everybody failed here. The OTS failed. Foreign bank regulators failed. They were letting foreign banks load up on AIG paper, CDS paper. Presumably, if they were doing their job, they would have said, how can we have so much of our banking system dependent on the promise of a single United States institution? Bank regulators failed. I don't know about the Comptroller, but the Fed in many respects must have failed to allow so many banks to contract with AIG given that it was running amok, so to speak, on these dimensions. So the Fed was partially to blame. The FDIC seems to have been to blame. The SEC, you can lay a lot of blame at their feet. And then also the Federal Reserve in general. I mean, I won't go--we don't want to go to low interest rates and what that did to the incentives in the entire system. But my point would just be you may well be correct that there is blame to go around. " CHRG-111hhrg54869--134 Mr. Volcker," It meant that, the falling-off-the-cliff analogy applied to the rapid decline in the economic activity for 6 months or so, which found its expression, cause, the rapidity of it, in that the supply of credit dried up. Banks were not lending. Banks could not lend. The open market was constipated. So there was no availability of credit, and that led to, obviously, difficulties in carrying on economic activity. " CHRG-111hhrg48874--76 Mr. Long," And I can tell you that at the OCC, our examiners are not telling our bankers to not lend to manufacturers. " CHRG-111hhrg48674--57 Mr. Bernanke," First of all, I want to insist that the Fed does not spend. We lend. " CHRG-111hhrg51591--105 Mr. Webel," You know, we can't insure the future. But in looking--I have specifically in the past looked at the securities lending aspect of AIG, and into the sort of other insurance companies and what their securities lendings look like. And from what I have found, there wasn't anybody else who was approaching it nearly to the level that AIG did. And this was definitely a big way that they failed. So it doesn't look like this explosive failure is coming from that direction. Ms. Guinn. I would agree with Mr. Webel that in terms of participation in the credit default swap market and securities lending, coupled with the scope of AIG's operations, the complexity of it, the number of coverages it wrote, the number of legal entities, it is pretty unique in the industry. That is if there are other large companies and each company bears its own risks. So if there were--you know, the big quake came to California tomorrow, could other insurance companies, perhaps large ones, be impacted-- " FOMC20080724confcall--75 73,MR. LACKER.," Yes. I want to, first, just express appreciation to President Yellen for the full account of their experience. I think it is useful for us to share notes on experiences like that. We had an experience with the OTS, and we found that their rating plus 1 was the rating we usually came to. We had the luxury of having someone on our staff who had experience with Countrywide, and we essentially treated them like an institution that we supervised and insisted on the full panoply of information, such as reports and financial reporting, to be able to make our own independent assessment. Our guys did a great job. I have to commend them--they did a lot of work. But it was a strain on our staff. I do think, if lending is going to play such a large role for us going forward, that we should build up the capability of developing our own independent assessment of institutions whose primary regulator is not us. In this instance, I think it is outrageous that the OTS downgraded them and didn't inform the San Francisco Fed. I hope, Mr. Chairman, that the unacceptability of that sort of behavior is communicated at the highest levels to the OTS. This instance demonstrates the principle that lending on which we incur no loss doesn't necessarily equal lending that is appropriate. I think it is a good thing, President Yellen, that you folks insisted on comfort from the FDIC that they were pursuing a least-cost strategy. But it will not necessarily be the case that lending to allow the chartering institution to delay closure will be the least-cost resolution. I am curious, President Yellen, whether there were uninsured claimants that were able to withdraw funds in the interim during your lending. " CHRG-110hhrg41184--196 Mr. Garrett," And just to close, the two gentlemen raised the issue about the dollar and the falling value there, the old axiom in there is, you know, inflation comes when too many dollars are chasing too few goods. So far, what we've done on the fiscal side of this is basically throw more dollars into it with a stimulus package, and my two questions to you are: One, does that do anything to actually change the mind set of creditors as far as their lending practice as a short-term lending like that? Does that really change their actual lending practices. And two, with the overall dollar value, there was an article in the Wall Street Journal today by David Ranson, I believe it is, which looks to say as far as the CPI and the way that we're evaluating the value of these things, that they're really backwards-looking and not forwards-looking, and that maybe we need to change the structure as to how we looked and measured the CPI and some of these valuations as well, in addition. " CHRG-111hhrg50289--33 Mr. Heacock," Thank you. We have not backed off at all. As I said before, we wrote more SBA loans than any other lender in South Dakota last year, and it is continuing this year. As far as non-SBA loans, we had a record year last year and it is continuing very, very strong. Credit unions nationwide, for the most part, have plenty of capital to lend, and we have had, I know, locally some financial institutions that are not willing to lend to some small businesses. Also, they are changing some terms and conditions. They are coming to us. Oftentimes we can help them. Sometimes we cannot, but we are there and available and have the funding. " CHRG-110shrg50414--80 Secretary Paulson," I would say, regrettably, there is not every homeowner that is going to save their home. As you well know, even in normal times, in good times, there are many foreclosures. There are some people that cannot afford to stay in their home. But there is a huge effort being made so that everyone that can afford to stay in the home and want to stay in the home stays in the home. But what this plan will do is make financing available. And I do not think there is anything more important. Lenders have got to keep lending. If they are not lending and there is not capital available, homeowners are not going to be able to stay in the home. " CHRG-111hhrg48875--251 Secretary Geithner," Well, I think it is a very good question. I think that, you know, people will always innovate around what the government prohibits. And you will always be chasing the next thing which is designed to get around just that new piece of legislation designed to ban some particular product. So probably the more effective way to regulate, in some sense, is again to make sure the institutions are strong enough to survive a very bad storm, and that people are protected from predatory behavior, because the predation can come in all sorts of forms. People will be endlessly innovative in how to take advantage of people if they think there is some gain at stake. So I think that you need to have, you know, clearer standards regulated and enforced much more effectively across our country, and not allow people to come and get around those standards and offer people products that don't meet with those broad regulatory standards. But if you just do it by banning specific things, you will always be chasing the next innovation. Ms. Waters. Well, I am not so sure that we shouldn't look at opportunities to give more scrutiny to products before they come on the market, and really disclose to consumers that this is particular maybe as it relates to your economic health. So let me go to the next one on asset management. I started out the other day talking about the five firms that are indicated in the plan. I am concerned about women-owned and minority-owned businesses. You know, we are dumping a lot of money out into the economy, and we want everybody who has something to offer that is legitimate and competent to participate in all of this money that we are putting into the economy to create jobs and opportunities. Why can't we look at this a little bit closer and figure out how we can get more women and small firms and minority firms involved in this asset management, rather than having to go and knock on the doors and beg the five? " fcic_final_report_full--25 Cioffi’s investors and others like them wanted high-yielding mortgage securities. That, in turn, required high-yielding mortgages. An advertising barrage bombarded potential borrowers, urging them to buy or refinance homes. Direct-mail solicita- tions flooded people’s mailboxes.  Dancing figures, depicting happy homeowners, boogied on computer monitors. Telephones began ringing off the hook with calls from loan officers offering the latest loan products: One percent loan! (But only for the first year.) No money down! (Leaving no equity if home prices fell.) No income documentation needed! (Mortgages soon dubbed “liar loans” by the industry itself.) Borrowers answered the call, many believing that with ever-rising prices, housing was the investment that couldn’t lose. In Washington, four intermingled issues came into play that made it difficult to ac- knowledge the looming threats. First, efforts to boost homeownership had broad po- litical support—from Presidents Bill Clinton and George W. Bush and successive Congresses—even though in reality the homeownership rate had peaked in the spring of . Second, the real estate boom was generating a lot of cash on Wall Street and creating a lot of jobs in the housing industry at a time when performance in other sec- tors of the economy was dreary. Third, many top officials and regulators were reluc- tant to challenge the profitable and powerful financial industry. And finally, policy makers believed that even if the housing market tanked, the broader financial system and economy would hold up. As the mortgage market began its transformation in the late s, consumer ad- vocates and front-line local government officials were among the first to spot the changes: homeowners began streaming into their offices to seek help in dealing with mortgages they could not afford to pay. They began raising the issue with the Federal Reserve and other banking regulators.  Bob Gnaizda, the general counsel and policy director of the Greenlining Institute, a California-based nonprofit housing group, told the Commission that he began meeting with Greenspan at least once a year starting in , each time highlighting to him the growth of predatory lending prac- tices and discussing with him the social and economic problems they were creating.  One of the first places to see the bad lending practices envelop an entire market was Cleveland, Ohio. From  to , home prices in Cleveland rose , climb- ing from a median of , to ,, while home prices nationally rose about  in those same years; at the same time, the city’s unemployment rate, ranging from . in  to . in , more or less tracked the broader U.S. pattern. James Rokakis, the longtime county treasurer of Cuyahoga County, where Cleveland is located, told the Commission that the region’s housing market was juiced by “flip- ping on mega-steroids,” with rings of real estate agents, appraisers, and loan origina- tors earning fees on each transaction and feeding the securitized loans to Wall Street. City officials began to hear reports that these activities were being propelled by new kinds of nontraditional loans that enabled investors to buy properties with little or no money down and gave homeowners the ability to refinance their houses, regardless of whether they could afford to repay the loans. Foreclosures shot up in Cuyahoga County from , a year in  to , a year in .  Rokakis and other public officials watched as families who had lived for years in modest residences lost their homes. After they were gone, many homes were ultimately abandoned, vandalized, and then stripped bare, as scavengers ripped away their copper pipes and aluminum siding to sell for scrap. “Securitization was one of the most brilliant financial innovations of the th cen- tury,” Rokakis told the Commission. “It freed up a lot of capital. If it had been done responsibly, it would have been a wondrous thing because nothing is more stable, there’s nothing safer, than the American mortgage market. . . . It worked for years. But then people realized they could scam it.”  CHRG-111hhrg56776--28 Mr. Volcker," I think this is an example of why we need some pretty thorough reform, so that an institution of that size would have some official oversight. I would also hope that if we have the kind of reform that is being talked about, the issue of the Federal Reserve lending to those institutions, non-bank institutions, would not be relevant because if push came to shove and they were failing, it would come under the so-called ``resolution authority'' that would have the power and resources to provide a suitable liquidation or merger of that institution. The Federal Reserve would not have to get directly involved as a lending organization. " FOMC20080724confcall--71 69,MS. YELLEN.," Well, I guess we would have had that. Had they taken the loan out earlier, when they were still rated 2 or 3, I think it would have substituted for borrowings that they could have had at that time from the Federal Home Loan Bank. They might have had a motive to take out a long-term loan from us rather than to tap their Federal Home Loan Bank access. They would have pledged a huge amount of collateral to the Federal Home Loan Bank, which was not accessible to us, had we wanted to lend more because the Federal Home Loan Bank has blanket authority over a large class of collateral. So if we had, in fact, extended that loan, we could have called it in; but that would have precipitated a failure. And we wouldn't have had the ability to augment the collateral. So our hands would have been tied when the FDIC came to us and said, ""Please assist us in lending. This institution is experiencing deposit outruns. We want to get it through to a close that we think will be least-cost, and it is going to take us another week and a half."" There would have been no more collateral to be had. We would have been, then, up against the limit of what we could lend. " CHRG-110hhrg46593--46 Mr. Bernanke," Well, our balance sheet is about $2 trillion, of which--I am guessing now--$600 billion is Treasury's and agencies'. The rest is some kind of credit extension of some type. The overwhelming amount, however, is of two classes. It is either collateralized lending to financial institutions. I described earlier, those are loans made with recourse and on haircut collateral. They are short-term loans, and they are quite safe. We have never lost a penny on one of those. The other type of lending we have been doing is we have been doing currency swaps with some major central banks in order to try to address dollar funding problems in other jurisdictions. There the credit risk is of the Foreign Central Bank, like the European Central Bank, and we consider that to be zero risk, essentially. So the overwhelming majority of our lending is at very low credit risk. " CHRG-110shrg50416--62 Mr. Kashkari," Well, Senator, as you and I have discussed, we share the spirit of your question completely and want these institutions to lend and provide credit to our communities. In fact, it is not published yet, but when the final purchase agreement is put out there between the Treasury and the individual institutions, there is specific language in the purchase agreement about lending and about taking aggressive steps on foreclosure mitigation. It is not a legally binding contract. Senator Schumer. Right. " CHRG-111shrg54789--188 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM EDWARD L. YINGLINGQ.1. In assessing the need for and scope of a new Consumer Financial Protection Agency (CFPA), the Committee must conduct an objective evaluation regarding the responsibility of various types of financial services providers for the lending problems that have occurred in recent years. In your written testimony, you identify nonbank lenders as the source for the vast majority of abusive mortgage lending in recent years. Specifically you write that `` . . . the Treasury's plan noted that 94 percent of high cost mortgages were made outside the traditional banking system.'' Your testimony also says that `` . . . it is likely that an even higher percent of the most abusive loans were made outside our sector.'' On the other hand, the Committee heard testimony from Professor McCoy of the University of Connecticut on March 3, 2009, that such an assertion, ``fails to mention that national banks moved aggressively into Alt-A low-documentation and no-documentation loans during the housing boom.'' Professor McCoy cites data indicating that national banks and thrifts issued mortgage loans from 2006-2008 with higher default rates than State-chartered thrifts and banks. Moreover, Assistant Secretary Barr testified on the panel prior to you that ``about one-half of the subprime originations in 2005 and 2006--the shoddy that set off the wave of foreclosures--were by banks and thrifts and their affiliates.'' Is it your view that national banks and thrifts did not play a significant role, either directly or through their subsidiaries, in offering abusive or unsustainable mortgage loans?A.1. Thank you for your question, Mr. Chairman. Certainly, some banks--both national and State chartered--were involved in subprime lending, but the fundamental fact remains that the vast majority of banks in the country never made a toxic subprime loan. These regulated banks did not cause the problem; rather, they are the solution to the economic problem we face. The comment by Professor McCoy you cite in your question is not directed at the Treasury's statistic we referenced, i.e., that a very high percentage of high cost loans were made outside the banking industry. In fact, Professor McCoy refers to a study by the OCC which finds that national banks only accounted for 10 percent of subprime lending in 2006--thus confirming the evidence that the heart of the problem is with nonbanks. Even though attempts have been made to increase Federal regulation of the nonbank sector, the fact remains that in the key areas of examination and enforcement, nonbanks still are not regulated as strictly or robustly as banks. In fact, the GAO recently released a study on Fair Lending (July 2009) which found that the independent mortgage lenders represented ``higher fair lending risks than depository institutions'' yet ``Federal reviews of their activities are limited.'' Furthermore, GAO found that ``[d]epository institution regulators also have established varying policies to help ensure that many lenders not identified through HMDA screening routinely undergo compliance examinations, which may include fair lending components.'' This increased focus on insured depository institutions occurs because the banking agencies ``have large examination staffs and other personnel to carry out fair lending oversight.'' Traditional banks are the survivors of this financial crisis, not the cause. The fly-by-night nonbank mortgage lenders have disappeared as fast as they appeared. As I mentioned in detail in my written statement, the focus of policymaking should be on the core cause of the problem--the unregulated nonbank financial sector--and not end up punishing the very institutions that are most likely to restart our economy. ------ CHRG-111hhrg55814--438 Mr. Bachus," What about subprime lending? Do you think it was regulated, or-- " Mr. Watt," [presiding] I-- " CHRG-110hhrg46593--153 Mr. Bernanke," Only that our programs are mostly short-term lending and well collateralized. " fcic_final_report_full--450 INTRODUCTION Why a Dissent? The question I have been most frequently asked about the Financial Crisis Inquiry Commission (the “FCIC” or the “Commission”) is why Congress bothered to authorize it at all. Without waiting for the Commission’s insights into the causes of the financial crisis, Congress passed and the President signed the Dodd-Frank Act (DFA), far reaching and highly consequential regulatory legislation. Congress and the President acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President’s chief of staff—“Never let a good crisis go to waste.” Although the FCIC’s work was not the full investigation to which the American people were entitled, it has served a useful purpose by focusing attention again on the financial crisis and whether—with some distance from it—we can draw a more accurate assessment than the media did with what is often called the “first draft of history.” To avoid the next financial crisis, we must understand what caused the one from which we are now slowly emerging, and take action to avoid the same mistakes in the future. If there is doubt that these lessons are important, consider the ongoing efforts to amend the Community Reinvestment Act of 1977 (CRA). Late in the last session of the 111 th Congress, a group of Democratic congressmembers introduced HR 6334. This bill, which was lauded by House Financial Services Committee Chairman Barney Frank as his “top priority” in the lame duck session of that Congress, would have extended the CRA to all “U.S. nonbank financial companies,” and thus would apply, to even more of the national economy, the same government social policy mandates responsible for the mortgage meltdown and the financial crisis. Fortunately, the bill was not acted upon. Because of the recent election, it is unlikely that supporters of H.R. 6334 will have the power to adopt similar legislation in the next Congress, but in the future other lawmakers with views similar to Barney Frank’s may seek to mandate similar requirements. At that time, the only real bulwark against the government’s use of private entities for social policy purposes will be a full understanding of how these policies were connected to the financial crisis of 2008. Like Congress and the Administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and a financial system addicted to excessive risk-taking. The Commission did not seriously investigate any other cause, and did not effectively connect the factors 443 it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally failed to show how practices that had gone on for many years suddenly caused a world-wide financial crisis. In the end, the majority’s report turned out to be a just so story about the financial crisis, rather than a report on what caused the financial crisis. CHRG-111shrg54789--168 PREPARED STATEMENT OF SENATOR TIM JOHNSON Thank you Mr. Chairman for holding today's hearing. This hearing could be one of the most important held this month as the Committee takes up legislation to modernize our financial regulatory system. The current economic crisis has exposed regulatory gaps that allowed institutions to offer products with minimal regulation and oversight. Many of these products were not just ill-suited for consumers, but were disastrous for American homeowners. There is a clear need to address the failures of our current system when it comes to protecting consumers. We need to find the correct balance between consumer protection, innovation, and sustainable economic growth. There is no doubt that the status quo is not acceptable. However, as Congress considers proposals to improve the protection of consumers from unfair, deceptive, and predatory practices, we must ask many important questions. We need to know if it is the right thing to do to separate consumer protection from functional regulation. We need to know if a separate, independent consumer protection agency is better than a consumer protection division within an existing regulatory agency. We need to know who should be writing rules for consumer products and who should be enforcing those rules. We need to know if national standards or 51 set of rules made by each State are better for consumers. Last, while the goal of any consumer protection agency is clearly better protection of consumers, we need to know if it will also preserve appropriate access to credit for the consumers it is designed to protect. The creation of a new agency is a daunting task under any circumstances; even more so in this case, considering the role a consumer protection agency would play in our Nation's economic recovery. It is important we get this right. I look forward to hearing from today's witnesses. ______ CHRG-111hhrg51591--63 Chairman Kanjorski," I like that pun. We now have Ms. Bean for 5 minutes. Ms. Bean. Thank you, Mr. Chairman. My first couple of questions are for Mr. Webel. And I am going to give you a couple of them and let you answer them together in the interest of time. The subcommittee has talked a lot about the $200 billion in Federal tax dollars that have gone to AIG, and how it was essentially focused on the financial products unit. But almost $70 billion in taxpayer money did go to bailing out AIG insurance subsidiaries and their securities lending program. In the current State-based system, who is responsible for overseeing the insurance subsidiaries' securities lending program? " CHRG-111hhrg53021Oth--52 Mr. Posey," You know better than me how cyclical they are--anyway, the next question is, we know, even in our districts, banks have money to lend, but they are not lending it. People have money to buy a new car, but they are not buying them. People have money to take a vacation, but they are not taking them. Consumer confidence isn't what we would like it to be, and the money is not getting spent. And, personally, I think it is because they don't know what is coming. The banks are afraid to loan it. They don't know what the next issue is going to be, and we are looking, really, kind of, for a plan. " CHRG-111hhrg53021--52 Mr. Posey," You know better than me how cyclical they are--anyway, the next question is, we know, even in our districts, banks have money to lend, but they are not lending it. People have money to buy a new car, but they are not buying them. People have money to take a vacation, but they are not taking them. Consumer confidence isn't what we would like it to be, and the money is not getting spent. And, personally, I think it is because they don't know what is coming. The banks are afraid to loan it. They don't know what the next issue is going to be, and we are looking, really, kind of, for a plan. " CHRG-111hhrg56766--45 Mr. Bernanke," I think one set of tools that we have that we continue to work on as regulators is to try to get credit flowing again. We know that small business lending is closely tied to job creation. We know there are problems with bank lending to small businesses. I do not know if you want me to take your time to go through some of these things, but we are collecting more information. We are doing more consulting. We are trying to train our examiners. We are trying to do everything we can to make sure that creditworthy small businesses can get credit and banks would be willing to take a second look at small businesses to make sure they have access to credit. " CHRG-111shrg52966--38 Mr. Sirri," What a firm does is it takes the security it has, it gives it someone who lends it out---- Senator Bunning. I am familiar. " Mr. Sirri,"----it comes back. Because that is a secured lending market, the lenders were thought to be not sensitive to the health of the firm, but sensitive to the quality of the collateral they got. So our thought was always that if you as a firm gave someone a Treasury bill or gave them an agency security, they would take that and fund you, even if you as a firm were in trouble. That was an assumption we made, and that is, I think, many in the financial community made. And we were wrong. When firms got in trouble, other funding counterparties--money market funds, people with cash to lend--would not take Treasury's to fund, and that was something we had never seen before. Senator Bunning. Mr. Long, what changes in law do you suggest to protect against future failures like we are in right now? " FinancialCrisisInquiry--14 Even so, we remained relatively strong throughout the crisis so much so that we were called upon to take actions to help stabilize the system. Over the weekend of March 15, 2008, the federal government asked us to assist in preventing Bear Stearns from going bankrupt before the opening of the Asian markets on Monday morning. On September 25 th , we acquired the deposits, assets and certain liabilities of Washington Mutual from the FDIC. Later we learned that we were the only bank that was prepared to act immediately following the largest bank failure in U.S. history. In addition we continued to lend and support our clients’ financing and liquidity needs throughout the crisis. Over the course of the last year, we’ve provided more than $800 billion in direct lending and capital raising for investor and corporate clients. For example, we helped provide state and local government financing to cover cash flow shortfalls. We are the only institution that agreed to lend California $1.5 billion in its time of need. And even though small business loan demand has been down, we have maintained our lending levels to small business. In November of last year, we announced plans to increase lending to small businesses by $4 billion, to a total of $10 billion this year. For the millions of Americans feeling with the effects of this crisis, we are doing everything we can to help them meet their mortgage obligations. In 2009 we offered approximately 600,000 new trial loan modifications to struggling homeowners through our own program as well as through participation in government programs like the U.S. Making Home Affordable initiative. Our capabilities, size and diversity of business have been essential to our withstanding the crisis and emerging as a stronger firm. It is these trains that have put us in a position to acquire Bear Stearns and Washington Mutual. Some have suggested that size alone or the combination of investment banking and commercial banking caused the crisis. We disagree. If you consider the institutions that failed during the crisis, some of the largest and most consequential failures were stand-alone investment banks, mortgage companies, thrifts and insurance companies. CHRG-111hhrg56766--264 Mr. Lance," I thank you. A statement, not a question, Mr. Chairman. I think consumer confidence is at the heart of restoring the economy, getting more people working in America since it is such a large percentage of the overall economy, and I am deeply concerned about any bank tax as suggested by the President's proposal because I think it would lead to less lending by banks and what we need in this country is more lending, not less. Thank you. I yield back the balance of my time. " CHRG-110hhrg38392--50 Mr. Bernanke," Well, I think there is a balance. I have discussed this in a number of speeches. I do believe the legitimate subprime lending in particular helps expand homeownership. It helps expand access to credit. At the same time, it is very important that we protect those who are possibly subject to abusive or to fraudulent lending, so we have to draw a fine line. We have to make sure we find ways to prevent the bad actors, the abusive lending, while preserving this market, which is an important market, both for the sake of those people who would like to borrow and to become homeowners, and also for the broad sake of our economy in maintaining the demand for housing. So it is really a case-by-case issue, but it is very important to try to walk that fine line between protecting consumers adequately by making sure that we do not shut down what is, I think, essentially, a valuable market. " FOMC20080724confcall--46 44,MR. PLOSSER.," I want to go back to the collateral issue for a minute. I share some of the concerns about the options on the TSLF that President Lacker and President Hoenig were discussing. I assume we will come back and talk more about some of those things, but I do have a question about the collateral. My understanding in the discussion about the larger collateral on term lending is that it would also apply to the primary credit lending, which means that if somebody came into the primary credit facility and asked for primary credit of two or three days, they would have to have this 125 percent or this extra collateral. Is that the way we are interpreting this thing, and is that really what we want to be doing by raising the collateral on term loans at the primary credit facility? I am just confused about that and whether--particularly on things less than 30 days, the primary credit facility--we want to be applying the same standard to that lending as we are on the longer TAF stuff. Just a question. " fcic_final_report_full--243 COMMISSION CONCLUSIONS ON CHAPTER 11 The Commission concludes that the collapse of the housing bubble began the chain of events that led to the financial crisis. High leverage, inadequate capital, and short-term funding made many finan- cial institutions extraordinarily vulnerable to the downturn in the market in . The investment banks had leverage ratios, by one measure, of up to  to . This means that for every  of assets, they held only  of capital. Fannie Mae and Freddie Mac (the GSEs) had even greater leverage—with a combined  to  ratio. Leverage or capital inadequacy at many institutions was even greater than re- ported when one takes into account “window dressing,” off-balance-sheet expo- sures such as those of Citigroup, and derivatives positions such as those of AIG. The GSEs contributed to, but were not a primary cause of, the financial crisis. Their  trillion mortgage exposure and market position were significant, and they were without question dramatic failures. They participated in the expansion of risky mortgage lending and declining mortgage standards, adding significant demand for less-than-prime loans. However, they followed, rather than led, the Wall Street firms. The delinquency rates on the loans that they purchased or guar- anteed were significantly lower than those purchased and securitized by other fi- nancial institutions. The Community Reinvestment Act (CRA)—which requires regulated banks and thrifts to lend, invest, and provide services consistent with safety and sound- ness to the areas where they take deposits—was not a significant factor in sub- prime lending. However, community lending commitments not required by the CRA were clearly used by lending institutions for public relations purposes. CHRG-110shrg50415--6 STATEMENT OF SENATOR DANIEL AKAKA Senator Akaka. Thank you very much, Mr. Chairman. Thank you for conducting this hearing today. I am hopeful that this hearing will help clear up some misconceptions and help promote a greater understanding of the cause of this financial crisis as we work to reform the financial services regulatory structure. And I thank you for this opportunity, Mr. Chairman. I want to express some of my thoughts thus far on what has been happening. The uninformed have blamed much of the current financial crisis on the Community Reinvestment Act. That is simply not true. The CRA has helped empower individuals in low-income communities by promoting access to mainstream financial services and investment. Instead of finding excuses to stop Federal efforts to expand across to mainstream financial services, we must do more. Low- and moderate-income working families are much better off utilizing mainstream financial service providers rather than unregulated or fringe financial service providers. Working families would have been better off obtaining mortgages from their local financial institutions instead of obtaining mortgages through independent peddlers such as Countrywide. The majority of subprime mortgage lending was done by independent mortgage companies that are not subject to CRA requirements and lacked effective consumer protections. I have greatly appreciated the extraordinary leadership and judgment shown by the Chairman of the Federal Deposit Insurance Corporation, Sheila Bair, during her tenure. I also have highly valued Chairman Bair's efforts to promote financial literacy and address issues so important to working families. Under Chairman Bair's leadership, the FDIC is encouraging the development of affordable, small-dollar loans using CRA initiatives. Working families are exploited by predatory lenders who often charge triple-digit interest rates. As access to legitimate credit tightens, more working families will be susceptible to unscrupulous lenders. We must encourage consumers to utilize the credit unions and banks for affordable small loans. Banks and credit unions have the ability to improve lives of working families by helping them save, invest, and borrow at affordable rates. Repealing or weakening the CRA would be a mistake. Low- and moderate-income families must have greater access to regulated mainstream financial institutions, not less. Critics of the CRA seem to forget that it does not apply to investment banks. Investment banks bought securitized and sold subprime mortgages. The CRA does not apply to credit rating agencies. The CRA does not apply to the sale of derivatives or credit default swaps. These products have contributed significantly to the financial situation that we are in now. The causes of this crisis are complex and cannot simply be blamed on the CRA. Instead of repealing the CRA, we must overhaul and strengthen the regulation of financial services to better protect consumers, protect markets ability, and empower the regulators to be more forward-looking. Instead of just reacting to a crisis, regulators must quickly adapt to the financial service innovations. I thank the witnesses for appearing here today, and I look forward to their testimony, and thank you very much, Mr. Chairman. " CHRG-110hhrg38392--49 Mr. McHenry," I thank the chairman. Chairman Bernanke, I am certainly glad to have you here. It seems your presentation today is largely about residential real estate. You mentioned that declines in residential construction will continue to weigh on economic growth over the coming quarters. Do you have any words for Congress--at a time when lending standards have been tightened--on whether or not we should further tighten lending with additional rules and regulations on the mortgage marketplace? " CHRG-110shrg50416--37 Mr. Kashkari," Chairman, we share your view. It is a very important point. We want our financial institutions lending in our communities. It is essential. And so if you look at some of the details--terms around the preferred stock purchase agreement, there are specific contractual provisions on how they can and cannot use the capital. As an example, we are preventing increases in dividends because we do not think it is appropriate to take Government capital, the taxpayers' money, and then increase dividends. That does not increase capital in the financial system, so that is prohibited. Second, share repurchases are also prohibited. We do not want to put Government capital in and then boost the stock price by buying back a bunch of shares. That is contractually prohibited. In addition, we have got other language in there focusing on commitments around increasing lending, working hard to help homeowners. Some of them are contractual provisions. Others are more guidance in nature. But we share your view 100 percent. We want these institutions in our communities lending. " CHRG-111hhrg48873--65 Mr. Bachus," Okay. And these were credit default swaps, securities lending, things of that nature, which you can lose money on. " CHRG-111shrg51303--5 STATEMENT OF SENATOR RICHARD C. SHELBY Senator Shelby. Thank you, Mr. Chairman. The collapse of the American International Group is the largest corporate failure in American history. Once a premier global insurance and financial services company, with more than $1 trillion in assets, AIG lost nearly $100 billion last year. Over the past 5 months, it has been the recipient of four bailouts. To date, the Federal Government has committed to provide approximately $170 billion in loans and equity. Given the taxpayers' dollars at stake and the impact on our financial system, this Committee has an obligation to thoroughly examine the reasons for AIG's collapse and how Federal regulators have responded. I also hope that today's hearing will shed new light on the origins of our financial crisis as well as inform our upcoming discussions on financial regulatory reform. In reviewing our witnesses' testimony here today and AIG's public filings, it appears that the origins of AIG's demise were twofold: First, as has been widely reported, AIG suffered huge losses on credit default swaps written by its Financial Products subsidiary on collateralized debt obligations. AIG's problems, however, were not isolated to its credit default swap business. Significant losses in AIG's State-regulated life insurance companies also contributed to the company's collapse. Approximately a dozen of AIG's life insurance subsidiaries operated a securities lending program whereby they loaned out securities for short periods in exchange for cash collateral. Typically, an insurance company or bank will lend securities and reinvest the cash collateral in very safe short-term instruments. AIG's insurance companies, however, invested their collateral in riskier long-term mortgage-backed securities. And although they were highly rated at the time, approximately half of them were backed by subprime and Alternate-A mortgage loans. When the prices for mortgage-backed securities declined sharply last year, the value of AIG's collateral plummeted. The company was rapidly becoming unable to meet the demands of borrowers returning securities to AIG. By September, it became clear that AIG's life insurance companies would not be able to repay collateral to their borrowers. Market participants quickly discovered these problems and rushed to return borrowed securities and get back their collateral. Because AIG was unable to cover its obligations to both its securities lending and derivatives operations, it ultimately had to seek Federal assistance. In total, AIG's life insurance companies suffered approximately $21 billion in losses related to securities lending in 2008. More than $17 billion in Federal assistance has been used to recapitalize the State-regulated insurance companies to ensure that they are able to pay their policy holders' claims. In addition, the Federal Reserve had to establish a special facility to help unwind AIG's securities lending program. The causes of AIG's collapse raise profound questions about the adequacy of our existing State and Federal financial regulatory regimes. With respect to AIG's derivatives operations, the Office of Thrift Supervision was AIG's holding company regulator. It appears, however, that the OTS was not adequately aware of the risks presented by the companies credit default swap positions. Since AIG's Financial Products subsidiary had operations in London and Hong Kong, as well as in the U.S., it is unclear whether the OTS even had the authority to oversee all of AIG's operations. It is also unclear whether OTS had the expertise necessary to properly supervise what was primarily an insurance company. Additionally, did AIG life insurance companies obtain the approval of their State regulators before they participated in securities lending? If so, why did the State insurance regulators allow AIG to invest such a high percentage of the collateral from its securities lending program in longer-term mortgage-backed securities? Also, did the insurance regulators coordinate their oversight of AIG's securities lending since it involved life insurance regulated by at least five different States? While I hope we can get some answers to these and many other questions today, I believe we are just beginning to scratch the surface of what is an incredibly complex and, on many levels, a very disturbing story of malfeasance, incompetence, and greed. Thank you, Mr. Chairman. " CHRG-111hhrg48674--121 Mr. Bernanke," For example, the so-called TALF, the assets-backed securities program, was slated for $200 billion to support new lending in credit cards, student loans, auto loans and small business lending. As part of the plan announced this morning by Secretary Geithner, the Treasury and the Federal Reserve would collaborate to bring that amount up to $1 trillion, which would be another $800 billion of credit made available to broad categories of consumers and businesses. " CHRG-110hhrg46596--501 Mrs. Maloney," First of all, I want to thank you for your testimony and your hard work, and for assuming this critically important oversight position. As you could tell, and I noticed you were here for the entire hearing-- Ms. Warren. Yes, ma'am. " Mrs. Maloney," --many of my colleagues, including myself, were very concerned about getting credit out into the community. We appear to have stabilized our financial markets. I would like your comments on whether or not you agree that we have accomplished that goal. And could you comment on programs or ways we can get credit out into Main Street? We have helped Wall Street. What are we doing to help people buy cars, and purchase homes? I like the proposal from Treasury that they are studying of a 4.5 percent interest rate over 30 years to start moving our housing program. I would like to hear your comments on that and any other ideas about getting credit into Main Street. They testified, and we need to work on really an accounting system so that we can understand where the money is going. We have put out $7.8 trillion, and still people say that interest rates for cars are at 14 percent, which is unaffordable for most Americans, and many people cannot get mortgages for their homes with a 30-year mortgage. Could you comment on steps we need to take now? Ms. Warren. It would be premature for me to make specific recommendations, but I would turn to page 19 of our report. We actually had a little bit to say about this. The reminder that our friends in Great Britain faced a similar problem, and they were quite explicit up front. The money was given to financial institutions in return for the financial institutions to lend to small- and medium-sized enterprises. It was an explicit quid pro quo from the beginning. There have been measurements of what was your lending a year ago at this point and what is your lending now. Recapitalized banks, as part of their obligation in receiving funds, have to turn around and put those funds back into the economy. I mention this by way of saying that is not an entirely novel idea. It is one that has been tested somewhere else and seems to be working at least with some success. So there are ways to measure this. It is not impossible to measure what is happening to lending volume and to put metrics in to compare lending volume now with lending volume by the same bank or per dollar capitalized in the past. And this may be something that it will be appropriate to at least continue to question Treasury vigorously about. " FOMC20080805meeting--25 23,MR. LACKER.," So if I could just follow up--in these graphs, what would you point to as the effects of our actions or our lending? " CHRG-111shrg57319--83 Mr. Vanasek," That is true. Senator Coburn. And did that violate any banking or mortgage lending rules? " FOMC20080916meeting--94 92,MR. FISHER., Could you interpret for us the Bank of China's cut in the bank lending rate? CHRG-111hhrg52407--38 Mr. Hensarling," But it doesn't trouble you that this particular commission could have that power without any review. So you would be trusting that simply wouldn't happen. How about with respect to payday lending, which is controversial within a number of areas and communities? It seems among some disadvantaged and low-income communities, some believe they serve a valuable purpose; other people, frankly, would like to see them banned. I don't know what the position of La Raza is. But would it trouble you if this particular panel decided to ban all payday lending as inherently ``unfair'' or ``anti-consumer?'' " CHRG-111hhrg53248--40 Mr. Bachus," And let me ask another question, but I think you have Fannie and the car companies are our biggest loss, looking to me, maybe AIG. You know, you are talking about the Capital Purchase Plan. The idea there was we put the money in the banks. They will lend it. You get a multiplier effect, and then it will pass through the economy, and I think a velocity is the economic term there. Of course they are holding on to it, but that is because of the capital requirements. They are restocking their capital. Some of them are lending it. But tell me why we didn't really see that multiplier effect? " fcic_final_report_full--475 Indeed, the Commission’s entire investigation seemed to be directed at minimizing the role of NTMs and the role of government housing policy. In this telling, the NTMs were a “trigger” for the financial crisis, but once the collapse of the bubble had occurred the “weaknesses and vulnerabilities” of the financial system— which had been there all along—caused the crisis. These alleged deficiencies included a lack of adequate regulation of the so-called “shadow banking system” and over-the-counter derivatives, the overly generous compensation arrangements on Wall Street, and securitization (characterized as “the originate to distribute model”). Coincidentally, all these purported weaknesses and vulnerabilities then required more government regulation, although their baleful presence hadn’t been noted until the unprecedented number of subprime and Alt-A loans, created largely to comply with government housing policies, defaulted. 6. Conclusion What is surprising about the many views of the causes of the financial crisis that have been published since the Lehman bankruptcy, including the Commission’s own inquiry, is the juxtaposition of two facts: (i) a general agreement that the bubble and the mortgage meltdown that followed its deflation were the precipitating causes—sometimes characterized as the “trigger”—of the financial crisis, and (ii) a seemingly studious effort to avoid examining how it came to be that mortgage underwriting standards declined to the point that the bubble contained so many NTMs that were ready to fail as soon as the bubble began to deflate. Instead of thinking through what would almost certainly happen when these assets virtually disappeared from balance sheets, many observers—including the Commission majority in their report—pivoted immediately to blame the “weaknesses and vulnerabilities” of the free market or the financial or regulatory system, without considering whether any system could have survived such a blow. One of the most striking examples of this approach was presented by Larry Summers, the head of the White House economic council and one of the President’s key advisers. In a private interview with a few of the members of the Commission (I was not informed of the interview), Summers was asked whether the mortgage meltdown was the cause of the financial crisis. His response was that the financial crisis was like a forest fire and the mortgage meltdown like a “cigarette butt” thrown into a very dry forest. Was the cigarette butt, he asked, the cause of the forest fire, or was it the tinder dry condition of the forest? 44 The Commission majority adopted the idea that it was the tinder-dry forest. Their central argument is that the mortgage meltdown as the bubble deflated triggered the financial crisis because of the “vulnerabilities” inherent in the U.S. financial system at the time—the absence 44 FCIC, Summers interview, p.77. of regulation, lax regulation, predatory lending, greed on Wall Street and among participants in the securitization system, ineffective risk management, and excessive leverage, among other factors. One of the majority’s singular notions is that “30 years of deregulation” had “stripped away key safeguards” against a crisis; this ignores completely that in 1991, in the wake of the S&L crisis, Congress adopted the FDIC Improvement Act, which was by far the toughest bank regulatory law since the advent of deposit insurance and was celebrated at the time of its enactment as finally giving the regulators the power to put an end to bank crises. CHRG-111shrg51303--178 PREPARED STATEMENT OF ERIC DINALLO Superintendent, New York State Insurance Department March 5, 2009 I would like to thank Chairman Christopher Dodd, Ranking Member Richard Shelby, and the Members of the Senate Committee on Banking, Housing, and Urban Affairs for inviting me to testify today at this hearing on ``American International Group: Examining What Went Wrong, Government Intervention, and Implications for Future Regulation.'' My name is Eric Dinallo and I am Insurance Superintendent for New York State. I very much appreciate the Committee holding this hearing so that we can discuss what has happened at AIG and how to improve financial services regulation in the future. I would like to start by taking this opportunity to clear up some confusion. I have read a number of times statements that the New York State Insurance Department is the primary regulator of AIG. The New York Insurance Department is not and never has been the primary regulator for AIG. AIG is a huge, global financial services holding company that does business in 130 countries. Besides its 71 U.S.-based insurance companies, AIG has 176 other financial services companies, including non-U.S. insurers. State insurance departments have the power and authority to act as the primary regulator for those insurance companies domiciled in their State. So the New York Department is primary regulator for only those AIG insurance companies domiciled in New York. Specifically, the New York Insurance Department is the primary regulator for 10 of AIG's 71 U.S. insurance companies: American Home Assurance Company, American International Insurance Company, AIU Insurance Company, AIG National Insurance Company, Commerce and Industry Insurance Company, Transatlantic Reinsurance Company, American International Life Assurance Company of New York, First SunAmerica Life Insurance Company, United States Life Insurance Company in the City of New York, and Putnam Reinsurance Company. AIG's New York life insurance companies are relatively small. The property insurance companies are much larger. Other States act as primary regulator for the other U.S. insurance companies. State insurance regulators are not perfect. But one thing we do very well is focus on solvency, on the financial strength of our insurance companies. We require them to hold conservative reserves to ensure that they can pay policyholders. That is why insurance companies have performed relatively well in this storm. One clear lesson of the current crisis is the importance of having plenty of capital and not having too much leverage. The crisis for AIG did not come from its State regulated insurance companies. The primary source of the problem was AIG Financial Products, which had written credit default swaps, derivatives and futures with a notional amount of about $2.7 trillion, including about $440 billion of credit default swaps. For context, that is equal to the gross national product of France. Losses on certain credit default swaps and collateral calls by global banks, broker dealers and hedge funds that are counterparties to these credit default swaps are the main source of AIG's problems. Faced with ratings downgrades, AIG Financial Products and AIG holding company faced tens of billions of dollars of demands for cash collateral on the credit default swaps written by Financial Products and guaranteed by the holding company. Federal Reserve Chairman Bernanke recently said, ``AIG had a financial products division which was very lightly regulated and was a source of a great deal of systemic trouble.'' This week, Chairman Bernanke accurately called the Financial Products unit ``a hedge fund basically that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses.'' The main reason why the Federal Government decided to rescue AIG was not because of its insurance companies. Rather, it was because of the systemic risk created by Financial Products. There was systemic risk because of Financial Products relationships and transactions with virtually every major commercial and investment bank, not only in the U.S., but around the world. I would like to note that insurance companies were not the purchasers of AIG's toxic credit default swaps. To quote Chairman Bernanke again, Financial Products ``took all these large bets where they were effectively, quote, `insuring' the credit positions of many, many banks and other financial institutions.'' By purchasing a savings and loan in 1999, AIG was able to select as its primary regulator the Federal Office of Thrift Supervision, the Federal agency that is charged with overseeing savings and loan banks and thrift associations. The Office of Thrift Supervision is AIG's consolidated supervisor for purposes of Gramm-Leach-Bliley. AIG Financial Products is not a licensed insurance company. It was not regulated by New York State or any other State. We all agree that AIG Financial Products should have been subject to more and better regulation. A major driver of its problems stemmed from its unregulated use of credit default swaps, which were exempted from regulation by Federal legislation in the late nineties. Some have tried to use AIG's problems as an argument for an optional Federal charter for insurance companies. I am open to a Federal role in regulating insurance and the non-insurance operations of large financial services groups such as AIG. I have said as much in prior testimony to other Congressional committees. But an optional Federal charter is the wrong lesson to learn from AIG for two very clear reasons. One, when you permit companies to pick their regulator, you create the opportunity for regulatory arbitrage. The whole purpose of financial services regulation is to appropriately control risk. But when you allow regulatory arbitrage, you increase risk. Because you create the opportunity for a financial institution to select its regulator based on who might be more lenient, who might have less strict rules, who might demand less capital. This is not a theoretical contention. I refer the Committee to a January 22, 2009, article in the Washington Post titled ``By Switching Their Charters, Banks Skirt Supervision.'' The article reports that since 2000 at least 30 banks switched from Federal to State supervision to escape regulatory action. The actual number is likely higher because the newspaper was only able to count public regulatory actions. They could not discover banks that acted to pre-empt action when they saw it coming. In total, 240 banks converted from Federal to State charters, while 90 converted from State to Federal charters. The newspaper was unable to discover if any of those formerly State banks were avoiding State action. Two, what happened at AIG demonstrates the strength and effectiveness of State insurance regulation, not the opposite. The only reason that the Federal rescue of AIG is possible is because there are strong operating insurance companies that provide the possibility that the Federal Government and taxpayers will be paid back. And the reason why those insurance companies are strong is because State regulation walled them off from non-related activities in the holding company and at Financial Products. In most industries, the parent company can reach down and use the assets of its subsidiaries. With insurance, that is greatly restricted. State regulation requires that insurance companies maintain healthy reserves backed by investments that cannot be used for any other purpose. I've said that the insurance companies are the bars of gold in the mess that AIG has become. There are activities that the States need to improve, such as licensing and bringing new products to market. But where we are strong has been in maintaining solvency. I would note that at a time when financial services firms are in trouble because they do not have adequate capital and are too highly leveraged, at a time when commercial banks and investment banks have very serious problems, insurance companies remain relatively strong. There is justified concern about AIG's securities lending program, which affects only AIG's life insurance operations. I would like to review for you some facts about that program and the actions the New York Department has taken in regards to that program. It is important to understand that securities lending did not cause the crisis at AIG. AIG Financial Products did. If there had been no Financial Products unit and only the securities lending program as it was, we would not be here today. There would have been no Federal rescue of AIG. Financial Products' trillions of dollars of transactions created systemic risk. Securities lending did not. If not for the crisis caused by Financial Products, AIG would be just like other insurance companies, dealing with the stresses caused by the current financial crisis, but because of its size and strength, most likely weathering them well. Securities lending is an activity that has been going on for decades without serious problems. Many, if not most, large financial institutions, including commercial banks, investment banks and pension funds, participate in securities lending. Securities lending involves financial institution A lending a stock or bond it owns to financial institution B. In return, B gives A cash worth generally about 102 percent of the value of the security it is borrowing. A then invests the cash. A still owns the security and will benefit from any growth in its value. And A invests the cash to gain a small additional amount. Problems can occur if B decides it wants to return the security it borrowed from A. A is then required to sell its investment to obtain the cash it owes B. Generally, in a big securities lending program, A will have some assets it can easily sell. But if there is a run, if many of the borrowers return the securities and demand cash, A may not be able to quickly sell enough assets to obtain the cash it needs or may have to sell assets at a loss before they mature. AIG securities lending was consolidated by the holding company at a special unit it set up and controlled. This special unit was not a licensed insurance company. As with some other holding company activities, it was pursued aggressively rather than prudently. AIG maintained two securities lending pools, one for U.S. companies and one for non-U.S. companies. At its height, the U.S. pool had about $76 billion. The U.S. security lending program consisted of 12 life insurers, three of which were from New York. Those three New York companies contributed about 8 percent of the total assets in the securities lending pool. The program was invested almost exclusively in the highest-rated securities. Even the few securities that were not top rated, not triple A, were either double A or single A. Today, with the perfect clarity of hindsight, we all know that those ratings were not aligned with the market value of many mortgage-backed securities, which made up 60 percent of the invested collateral pool. The New York Department was aware of the potential stresses at the AIG securities lending program and was actively monitoring it and working with the company to deal with those issues. Those efforts were working, but were thwarted by the Financial Products crisis in September 2008. As early as July 2006, we were engaged in discussions about the securities lending program with AIG. In 2007, we began working with the company to start winding down the program. Unfortunately, the securities lending program could not be ended quickly because beginning in 2007 some of the residential mortgage securities could not be sold for their full value. At that time there were still few if any defaults, the securities were still paying off. But selling them would have involved taking a loss. Still, we insisted that the program be wound down and that the holding company provide a guarantee to the life companies to make up for any losses that were incurred as that happened. In fact, the holding company provided a guarantee of first $500 million, then $1 billion and finally $5 billion. In 2008, New York and other States began quarterly meetings with AIG to review the securities lending program. Meanwhile, the program was being wound down in an orderly manner to reduce losses. From its peak of about $76 billion it had declined by $18 billion, or about 24 percent, to about $58 billion by September 12, 2008. At that point, the crisis caused by Financial Products caused the equivalent of a run on AIG securities lending. Borrowers that had reliably rolled over their positions from period to period for months began returning the borrowed securities and demanding their cash collateral. From September 12 to September 30, borrowers demanded the return of about $24 billion in cash. The holding company unit that managed the program had invested the borrowers' cash collateral in mortgage-backed securities that had become hard to sell. To avoid massive losses from sudden forced sales, the Federal Government, as part of its rescue, provided liquidity the securities lending program. In the early weeks of the rescue, holding company rescue funds were used to meet the collateral needs of the program. Eventually the Federal Reserve Bank of New York created Maiden Lane II, a fund that purchased the life insurance companies' collateral at market value for cash. There are two essential points about this. First, without the crisis caused by Financial Products, there is no reason to believe there would have been a run on the securities lending program. We would have continued to work with AIG to unwind its program and any losses would have been manageable. In fact, the New York Department has worked and continues to work with other insurance companies to unwind their securities lending programs with no serious problems. Second, even if there had been a run on the securities lending program with no Federal rescue, our detailed analysis indicates that the AIG life insurance companies would not have been insolvent. Certainly, there would have been losses, with some companies hurt more than others. But we believe that there would have been sufficient assets in the companies and in the parent to maintain the solvency of all the companies. Indeed, before September 12, 2008, the parent company contributed slightly more than $5 billion to the reduction of the securities lending program. But that is an academic analysis. Whatever the problems at securities lending, they would not have caused the crisis that brought down AIG. And without Financial Products and the systemic risk its transactions created, there would have been no reason for the Federal Government to get involved. State regulators would have worked with the company to deal with the problem and protect policyholders. I would like to also review briefly what the New York Department has done generally about securities lending in the insurance industry. Based on what we were seeing at AIG, but before the Financial Products crisis in September, we warned all licensed New York companies that we expect them to prudently manage the risks in securities lending programs. On July 21, 2008, New York issued Circular Letter 16 to all companies doing business in New York which indicates Department concerns about security lending programs. We cautioned them about the risks, reminded them of the requirements for additional disclosure and told them we would be carefully examining their programs. On September 22, 2008, the Department sent what is known as a Section 308 letter to all life insurance companies licensed in New York requiring them to submit information relating to security lending programs, financing arrangements, security impairment issues and other liquidity issues. My staff then conducted a thorough investigation of the securities' lending programs at New York life insurance companies. The results were reassuring. Almost all of the companies had modest sized programs with highly conservative investments, even by today's standards. Companies with larger programs had ample liquidity to meet redemptions under stress. What became clear was that AIG, because of the Financial Products problems, was in a uniquely troubling situation. In the succeeding months we have continued to analyze the securities lending programs at New York companies. We are currently drafting regulatory guidelines that will govern the size and scope of securities lending programs and will include best practices. We will also continue to enforce our legal authority to shut-down any programs that we believe endanger policyholders. Also, as chair of the National Association of Insurance Commissioners Statutory Accounting Practices Working Group, we have successfully worked to have the NAIC adopt increased disclosure rules for securities lending programs. Our primary principle throughout the effort to assist AIG has been to continue to protect insurance company policyholders and stabilize the insurance marketplace. And it is appropriate to recognize that all our partners in this effort, including officials from the Federal Reserve Bank of New York, the Federal Reserve Board, the U.S. Treasury, AIG executives and their financial advisors, investment and commercial bankers, private equity investors, other State regulators at all times understand and agree that nothing should or would be done to compromise the protection of insurance company policyholders. The dependable moat of State regulation that protects policyholders remains solid. We will continue to evaluate any transactions involving AIG insurance companies on that basis. Thank you and I would be happy to answer your questions. RESPONSE TO WRITTEN QUESTIONS OF THE SENATE BANKING COMMITTEE FROM ERIC DINALLOQ.1.a. State Rescue Plan: Superintendent Dinallo, it has been reported that last year you and the Pennsylvania Insurance Commissioner sought to save AIG by allowing AIG's property and casualty insurers to transfer $20 billion in liquid government securities to AIG's holding company in exchange for stock in AIG's domestic life insurers. On September 15, 2008, New York Governor David Paterson issued a press release stating that he had instructed you to permit AIG's parent company to access the $20 billion from its subsidiary property-casualty insurance companies. Please provide the Committee with a complete description of this plan, including the documents you presented to Governor Paterson to obtain his approval for the plan.A.1.a. The basic terms of the initial proposed plan provided for three distinct elements: (1) the parent company American International Group, Inc. (AIG) raising equity capital from commercial sources, (2) AIG quickly selling a significant business unit or units, and (3) AIG property casualty companies exchanging liquid assets for equally valuable, but less liquid, assets owned by the parent and the parent in turn converting those liquid assets to cash. The plan was discussed at length over the weekend of September 12-14, 2008, and into Monday, September 15, 2008, as described below, but was supplanted by other actions and not implemented. This was not a formally developed ``Plan'' with lengthy development or long written analyses. The plan was a constantly evolving, working response developed during a rapidly changing crisis. We were aware of and engaged in discussions concerning all three parts of this plan. It was always our expectation and understanding that all three elements were required and that we would not implement the third element unless there was a comprehensive solution for the crisis. In addition, the third element was itself never finalized. One of the conditions for our final approval was the company providing assets that would be, in our estimation, of sufficient value to protect the property casualty companies and their policyholders. Governor Paterson's direction was to ensure that policyholders inside and outside New York were protected. The Governor's press release on Monday, September 15, reflected an agreement in principle. It was clearly not a final approval. As the weekend of September 12 to 14 progressed, AIG's projected cash needs grew substantially. By early Tuesday, it was clear that, even if possible to complete, this plan would not suffice and all parties focused on other actions. For the first element of the plan, AIG discussed raising equity capital from a variety of commercial sources. If a capital raise resulted in another entity acquiring control, as defined in Article 15 of the New York Insurance Law (the ``Insurance Law''), of New York licensed insurance companies, New York State Insurance Department (the ``Department'') approval would have been required. While we were not negotiating the terms of any prospective capital raises, we were periodically updated on the progress of those discussions. For the second element of the plan, AIG was discussing possible imminent business unit sales. As noted above, another entity acquiring control, as defined in Article 15 of the Insurance Law, of New York licensed insurance companies would have required Department approval. As with AIG's capital raising efforts, while we were not negotiating the terms of any prospective sales, we were periodically updated on the progress of these discussions. For the third element of the plan, AIG sought to have certain of its property casualty companies exchange municipal bonds they owned for stock in AIG Life Holdings (U.S.), Inc. and AIG Retirement Services, Inc. (the ``Life Company Stock''), intermediate holding company subsidiaries of AIG which own substantial operating insurance companies, and for other assets including certain real estate interests and other investments. AIG would then seek to post these municipal bonds with the Federal Reserve Bank of New York in exchange for cash. That would allow AIG to use the cash to post cash collateral for its AIG Financial Products collateral calls. Among the property casualty companies considered for this exchange (as providers of municipal bonds and receivers of life insurance company stock) were American Home Assurance Company (AHAC) and Commerce and Industry Insurance Company (C&I), each a New York domiciled property casualty company. Additionally, three Pennsylvania domiciled property casualty companies were also considered, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, and The Insurance Company of the State of Pennsylvania. The stated goal of AIG for the proposed transactions in this third element of the plan was to provide $20 billion of liquidity to AIG. An aggregate purchase price for the Life Company Stock of approximately $15 billion dollars was proposed by AIG. The additional asset sales sought by AIG had a proposed aggregate purchase price of approximately $5 billion dollars. By Monday, September 15, as the plan evolved, the Department was considering only that the New York domiciled property casualty companies might purchase a portion of the Life Company Stock, and not any other assets. The plan contemplated that if the exchange were completed, the Life Company Stock would then be sold to third party purchasers over a longer sale period, with the sale proceeds retained by the property casualty companies. The discussions contemplated that the groups of New York and of Pennsylvania property casualty companies would each purchase approximately 50 percent of the Life Company Stock. Throughout Saturday and Sunday, September 13 and 14, my staff and I had many discussions with AIG and its advisors. We reviewed and discussed their various proposals and ideas for implementing the exchange. We did not at any time give final approval for the proposed exchange. Indeed, we were at all times clear that the proposal had to be part of a holistic solution and had to over-protect policyholders, or it would not be approved. As my statement in Governor Paterson's press release, issued on the morning of September 15, noted, as of Monday morning we continued ``working closely with AIG'' on its proposal. As the Governor stated in that release on the morning of September 15, I was, at the Governor's direction, working with the Federal Reserve Bank of New York (FRBNY) in response to the rapidly changing crisis. As my discussions with the FRBNY, the U.S. Treasury Department and numerous other parties continued through Monday afternoon and well into Monday night, other plans developed. The primary alternative considered was a commercial line of credit provided by commercial lenders. Through roughly midnight Monday or 1 a.m. on Tuesday, when I left AIG's offices, that appeared to be the most likely option. By the time of a meeting commencing at 7:30 a.m. Tuesday morning, that alternative appeared to have failed. Discussion then turned to possible Federal Reserve and Federal Government actions and consideration of the credit facility announced that night. The three part plan that is the subject of your question was not further pursued.Q.1.b. Which other State and Federal regulatory agencies, private sector firms and banks were involved in preparing this plan?A.1.b. Concerning our own advisors, in addition to Department resources, we retained the law firm of Fried, Frank, Harris, Shriver, and Jacobson as outside counsel. We later retained Centerview Partners as outside financial advisors, although such retention was not in effect during the period that your question covers. We dealt with many parties between September 12 and September 16. To say that they were each ``involved in preparing this plan'' is an overstatement and a more formal characterization than would be accurate. Each of them, however, played a role in those 5 days and our own response and actions incorporated, at least indirectly, our dealings with a broad range of other firms and agencies. Concerning commercial parties, these included AIG, JPMorgan Chase and Blackstone as advisors to AIG, Sullivan & Cromwell as counsel to AIG, Simpson Thacher & Bartlett as counsel to the AIG board of directors, J.C. Flowers & Co., Texas Pacific Group, Kohlberg Kravis & Roberts, and Berkshire Hathaway as prospective investors and/or purchasers. On September 15 and 16, these also included Goldman Sachs. I do not recall any other firms or banks as being involved, but only AIG and the other parties can say definitively whether they retained or engaged any other firms or banks. Concerning other government agencies, we dealt with the Federal Reserve Bank of New York, the FRBNY's financial advisors Morgan Stanley, the FRBNY's legal counsel Davis Polk & Wardwell, the United States Treasury Department, the Pennsylvania Department of Insurance, the National Association of Insurance Commissioners (including the then-NAIC president Sandy Praeger, who is the Kansas Insurance Commissioner and the NAIC president-elect, and now president, Roger Sevigny, who is the New Hampshire Insurance Commissioner), and a number of other State insurance departments. I have subsequently learned that a staff member of the United States Office of Thrift Supervision contacted one of my staff late on Sunday, September 14. I was unaware of that contact at the time and I had no contact with the Office of Thrift Supervision during the period covered by your question.Q.1.c. Did any State insurance regulators object to or express any concerns about this plan?A.1.c. Accurately answering your question requires separating it into two parts, the first being whether any insurance regulators ``object[ed] to'' such plan and the second being whether any insurance regulators ``express[ed] any concerns.'' On the first part, I do not recall any State insurance regulator saying that they objected to the plan. On the second part, all State insurance regulators I spoke with expressed concerns. Indeed, I had great concerns and worked virtually around the clock beginning Friday evening in response to those concerns. Our shared concerns were policyholder protection and the solvency of the licensed insurance companies. As Governor Paterson stated in his press release on the morning of September 15, protection of policyholders was a pre-condition for any approval and we focused intently on such protection. We worked to evaluate the possible asset exchange in detail, including whether the assets to be received by the property and casualty companies were of sufficient value, and continued doing so through late Monday, September 15.Q.2.a. Securities Lending: Superintendent Dinallo, according to AIG corporate records, AIG's securities lending program invested more than 60 percent of its collateral in long-term mortgage-backed securities. More than 50 percent of its mortgage-backed securities were comprised of subprime and alt-a mortgages. Since AIG loaned out securities for typically less than 180 days, there was a significant asset-liability mis-match in AIG's securities lending program. Why was AIG allowed to invest such a large percent of the collateral from its securities lending program in long-term assets? When did you first become aware that AIG had invested such a high percentage of the collateral from its securities lending program in mortgage-backed securities? Did it raise any concerns at the time? If so, what specific steps did your Department take to address those concerns?A.2.a. Based on what we were seeing at AIG, but before AIG Financial Products caused a crisis in September 2008, we warned all licensed New York companies that we expect them to prudently manage the risks in securities lending programs. On July 21, 2008, the New York Department issued Circular Letter 16 to all insurance companies doing business in New York, indicating Department concerns about securities lending programs. We cautioned them about the risks, reminded them of the requirements for additional disclosure and told them we would be carefully examining their programs. The Department does not issue many circular letters and they are understood by the industry to be important communications. Immediately after the AIG crisis began, on September 22, 2008, the Department sent what is known as a Section 308 letter to all life insurance companies licensed in New York, requiring them to submit information relating to securities lending programs, financing arrangements, security impairment issues and other liquidity issues. My staff then conducted a thorough investigation of the securities lending programs at New York life insurance companies. Besides gathering information from all companies, the Department met with 25 New York life insurance companies which have a securities lending program. The results were reassuring. Almost all of the companies had modest sized programs with highly conservative investments, even by today's standards. Companies with larger programs had ample liquidity to meet redemptions under stress. None of them had the same issues as the AIG program. In the succeeding months we have continued to analyze the securities lending programs at New York companies. We are currently drafting regulatory guidelines that will govern the size and scope of securities lending programs and will include updated best practices. We will use our legal authority to shut down any programs that we believe endanger policyholders. AIG's securities lending program was operated by a special unit created by the holding company, rather than by each individual AIG life insurance company. No other New York insurance company operates its securities lending at the holding company. The New York Insurance Department began discussing securities lending with AIG in 2006 in the context of applying risk-based capital. Risk-based capital looks at the risk of a particular investment and requires the company to hold capital against that investment based on an analysis of the risk. For securities lending, the Department took the position that insurers with securities lending programs had counterparty risk and should take a risk-based capital charge on that basis. AIG in particular, and the industry in general, disagreed with our position. Taking a charge would have protected the company and its policyholders, but would also have reduced the amount earned from securities lending. In early 2007, AIG gave the Department a presentation about its securities lending program. The intent of the presentation was to explain why there should be no risk-based capital charge. The company explained that they had reinvested the cash collateral largely in asset-backed and mortgage-backed securities. They explained to us that they maintained sufficient liquidity to meet ``normal'' collateral calls and that the reinvested assets were in AAA-rated, highly-liquid assets. At the time of the presentation, these assertions seemed valid and in fact the market value of the securities was sufficient to cover the liability, that is, the return of the cash collateral. The issue of a risk-based capital charge for securities lending was settled to our satisfaction in 2007. The Department, as chair of the NAIC Capital Adequacy Task Force, spearheaded a subgroup to review the risk-based capital formula to ensure that the appropriate charge was taken by all companies for their securities lending programs. The subgroup completed its work in 2007, and recommended changes that were adopted and effective for the 12/31/08 annual statement filing. The bad news about the residential mortgage-backed securities market began to become serious in the summer of 2007. Because of that, we conducted further discussions with AIG in September 2007. In those discussions, we focused on the percentage of the investments in mortgage-backed securities and their terms and maturity. At that time, the AIG U.S. securities lending program reached its peak of $76 billion. AIG stated that the program was structured to ensure that sufficient liquidity was maintained to meet the cash calls of the program under ``normal circumstances.'' At that time, AIG's securities lending program held 16 percent cash and cash equivalents, 33 percent securities with 2 years or less maturity, 34 percent securities with 3 to 5 years maturity, 15 percent securities with 5 to 10 years to maturity and only 2 percent securities with more than 10 years maturity. It was then clear that the program should be reduced. The holding company promised at that time to pay the securities lending program for any losses on sales of securities up to $1 billion, which later was increased to $5 billion, to protect the life insurance companies. We began to work with the company on reducing the size of the program. \1\--------------------------------------------------------------------------- \1\ According to an unofficial transcript, in my oral statement to the Committee on March 5, which I did not read, but presented from brief notes, I stated that we began working with the company to reduce the securities lending program ``starting in the beginning of 2007.'' Later in my testimony, I stated more precisely that ``starting in 2007, we did begin to wind down'' the program. While we were working with AIG on issues related to the securities lending program in early 2007, in fact, as noted, we began working with the company specifically on reducing the size of the program towards the end of 2007.--------------------------------------------------------------------------- In March 2008, New York and other States began quarterly meetings with AIG to review the securities lending program. Meanwhile, the program was being wound down in an orderly manner to reduce losses. Because of the size of the program and the bad market conditions, the company had to proceed slowly with sales of assets in order to reduce losses on those sales. Despite those problems, the company was able to make substantial progress. From its peak of about $76 billion in September 2007, the securities lending program had declined by $18 billion, or about 24 percent, to about $58 billion by September 12, 2008. At that point, the crisis caused by Financial Products caused the equivalent of a run on the AIG securities lending program. Securities borrowers that had reliably rolled over their positions from period to period for months began returning the borrowed securities and demanding their cash collateral. From September 15 to September 30, borrowers demanded the return of about $24 billion in cash. The holding company unit managing the program had invested the securities borrowers' cash collateral in mortgage-backed securities that had become hard to sell. To avoid massive losses from sudden forced sales, the Federal Government, as part of its rescue, provided liquidity to the securities lending program. In the early weeks of the rescue, holding company rescue funds were used to meet the collateral needs of the program. Eventually the FRBNY created Maiden Lane II, a special purpose vehicle which, according to AIG, purchased the life insurance companies' securities lending collateral at an average price of about 50 percent of par. If not for the Financial Products crisis, we believe that AIG could have continued to manage the reduction of its securities lending program. It would have incurred some losses, but they would have been manageable. There is no doubt in my mind that the Federal Government would not have stepped in to rescue AIG if the company only had its securities lending problems. It is also important to note that despite the fact that New York life insurance companies are relatively small and made up only 8 percent of the AIG securities lending program, the New York Insurance Department was active from the start in dealing with the issues related to the program.Q.2.b. How does the reinvestment strategy of AIG's securities lending program compare with those of other insurance companies? Are you aware of any other companies having a similarly risky reinvestment strategy?A.2.b. In September and October 2008, the Department met with 25 New York life insurance companies which have a securities lending program. In addition, the Department sent out 134 letters (Section 308 requests) to New York insurance companies to obtain information on securities lending programs, as well as other liquidity issues. The review indicated that none of the New York companies had a similar reinvestment strategy.Q.3. Holding Company Supervision: Superintendent Dinallo, what authority does New York insurance law give your office to examine the activities of insurance holding companies and their affiliates? Did your office ever exercise this authority with respect to AIG?A.3. Beginning nearly two generations ago, most if not all States in the Nation, New York included, enacted a ``holding company act'' to ensure that any authorized (i.e., licensed) insurance company that is part of a holding company system is subject to scrutiny by insurance regulators. The purpose of these holding company acts is to ensure, first and foremost, that insurance companies can meet their obligations to policyholders, and are not exploited in ways that inure to policyholder detriment. Thus, under holding company acts, insurance regulators must review, among other things, the financial condition and trustworthiness of any person or entity that seeks to acquire control of an authorized insurer, as well as significant transactions within a holding company system. New York's holding company act is codified at Article 15 of the New York Insurance Law. Section 1504(b) sets forth the Insurance Superintendent's authority to examine holding companies themselves: ``Every holding company and every controlled person within a holding company system shall be subject to examination by order of the superintendent if he has cause to believe that the operations of such persons may materially affect the operations, management or financial condition of any controlled insurer within the system and that he is unable to obtain relevant information from such controlled insurer'' (emphasis added). This power does not provide that such non-licensed holding companies or other affiliates are regulated by the Department. It is a far more narrow authority providing for an ability to examine such entities under the specified conditions. In the case of AIG, the New York Insurance Department did not exercise its authority under section 1504(b) to examine the holding company. First, the AIG holding company and its Financial Products unit were regulated by the Federal Office of Thrift Supervision. AIG chose OTS as its primary regulator in 1999 based on the fact that the company owned a tiny savings and loan. It is worth noting that the courts have stopped other State agencies that tried to take action against federally regulated companies. Second, at no time did the Department request ``relevant information'' from an insurer in the AIG holding company system that we were ``unable'' to obtain from that insurer. To the contrary, the AIG insurance entities domesticated in New York have been responsive to requests for information from the New York Insurance Department. Further, insurers like American Home Assurance in AIG's commercial insurance group have had such strong financial positions--with billions of dollars of policyholder surplus, and, until September 2008, top credit ratings from rating agencies--that the Superintendent had no ``cause to believe that the operations'' of AIG's holding company might ``materially affect the operations, management or financial condition of any controlled insurer within the system.''Q.4. AIG Securities Lending Operations: Based on data provided by the company, it appears that several insurers suffered losses on their securities lending during 2008 that exceeded the amount of their total adjusted capital at the start of 2008. Due to the Fed's loan, these companies have been recapitalized. If the Fed had not intervened, however, it appears several companies, including New York insurers, could have been close to insolvency. Had the Fed not intervened to rescue AIG, was the New York State Guaranty Fund prepared to handle the insolvency of one or more AIG companies? Please provide data to support your answer.A.4. The data provided below do not support the view that AIG's life insurance companies would have been insolvent both before and after the Financial Products crisis without the intervention of the FRBNY. As of the end of 2007, the companies had adjusted capital and surplus (inclusive of asset valuation reserves) of $27 billion. Their aggregate securities lending losses in 2008 totaled $21 billion, leaving them with remaining adjusted capital and surplus as a group of about $5.8 billion. The AIG parent company contributed $5.3 billion apart from any action by the FRBNY. So without accounting for any action by the Federal Reserve, and without accounting for any ordinary course earnings during 2008, the life insurance companies had total adjusted capital and surplus of $11 billion. As a result of the Federal Reserve action, that total increased to $19 billion. Adjusted Capital & Surplus for AIG Life Insurance Companies Participating in Securities Lending ($ in billions)---------------------------------------------------------------------------------------------------------------- Total Adj. Capital 12- 31-07 Securities Parent Net Surplus 12-31-08 State % of Pool (includes Lending Gross Cap Capital (Gap) After FRBNY asset Losses 2008 (C&S-losses) Infusions Before FRBNY Capital valuation pre-FRBNY Infusions reserve)---------------------------------------------------------------------------------------------------------------- 3 NY Co's 8.4% $1.682 ($1.82) ($.138) $.722 $.584 $1.901 All AIG 100% $27.078 ($21.305) $5.773 $5.387 $11.16 $19.069---------------------------------------------------------------------------------------------------------------- As noted, the New York domestic companies would not have been insolvent without Federal Reserve intervention. As to the New York State Life Insurance Guaranty Fund, under the Life Insurance Company Guaranty Corporation of New York, the basic answer is that the New York Department was and is prepared to deal with the potential insolvency of a life insurer. Generally, the first effort is to determine if the parent company has the ability to cure the insolvency. If that is not possible, the second step is usually to seek a buyer. This is often possible. The final step is to take a company into rehabilitation or liquidation. Since life insurance obligations extend over a long period, there is generally some time to determine the extent to which a company's assets are insufficient to meet its liabilities. Had it been necessary to take the three AIG New York life insurance companies into rehabilitation and/or liquidation, the Department would have been ready for such action. It is important to note that two of the three New York domestic companies are licensed in all 50 States and would be subject to the guaranty funds of the 50 States, not just the New York Guaranty Fund. The third company is licensed in three States, so the guaranty funds of the three States would be involved. In New York, as well as the other 49 States, the guaranty funds are funded by assessments from its licensed companies. Even if a company is deemed insolvent, assessments may not be required immediately. Generally, assessments are only imposed as they are actually needed. The Department believes that the guaranty funds would have been ready to handle the insolvency of one or more AIG companies." CHRG-111shrg62643--152 Mr. Bernanke," If you don't control the deficits over time, eventually, the markets won't lend to you at reasonable interest rates. Senator Menendez. Now, speaking about lending at reasonable interest rates, if we continue--you know, my colleagues from Montana and Colorado, I could echo in New Jersey the reality of what banks tell us, particularly community banks and others. So it gets to be a little wide swath of the same set of statements that are being made, which always make me think a little bit about the truthfulness in terms of there seems to be more voracity when I continuously get from a wide range of entities the same answer. But if you can borrow from the Federal Reserve at, what is it, one point? " CHRG-111hhrg58044--176 Mr. Snyder," Thank you. Lending scores and insurance scores are very different. We have included some materials in our statement from FICO, which is one of the major modelers, indicating they have not seen an overall pattern of insurance scores declining. It is because of the different make-up of the scores. You have heard no doubt and read newspaper articles about lending scores. That has not been the case with insurance scores. They continue to be very stable over time, and they continue to reflect differences in risk. Insurers also have the ability to adjust their rating tier so that if you have an overall decline in the economy, you can understand that across-the-board, so you have not had the impact on insurance scores that has occurred with regard to lending scores that you might otherwise assume would be occurring. Mrs. McCarthy of New York. Just a follow-up question, so many homes have actually de-valued in their worth, and yet they are continuing with basically--I just thought of this when you were speaking. My homeowner's insurance basically has gone up even though my home value has gone down. Are you seeing a trend like that across the Nation? " FinancialCrisisInquiry--642 CHAIRMAN ANGELIDES: OK. But we certainly would like to see that. All right. And I guess I would ask you to what extent did you see these products migrate out from, you know, a narrow band of the population to a larger band? GORDON: Well, I actually want to divide things into a couple of different categories, so we don’t conflate different things. In terms of lending to people with lower credit scores, which is sometimes what people call subprime lending, that is something that our organization does. And there are ways to do that safely and sustainably for the people involved. January 13, 2010 CHRG-110hhrg46596--359 Mr. Feeney," A finance background. The severity of the credit crisis today is reminiscent, certainly not as severe, as what happened after the October 29th stock market crash in America. At the time, it was a contraction in the monetary supply by some 33 percent over 4 years. Today, the Fed is easing significantly. Interest rates are next to zero, we have TARP trying to pour money into financial institutions, and yet there is more than anecdotal evidence that there is a credit seizure. Even banks often refusing to lend to banks, let alone small business borrowers, etc. If you are not an economist by background, you are familiar with the term ``paradox of thrift.'' If each of us or any particular institution saves, that is probably a good thing at a micro level; but if everybody decides to save and not lend. Yet, that is exactly what is happening as banks and financial institutions put this money in their balance sheets to firm up their own creditworthiness. But they are, for a variety of reasons, not lending to others, including a crackdown by Federal Reserve regulations on existing loans to businesses and others. There is a severe credit contraction that continues today regardless of what you are trying to do with interest rates or with TARP. Are you familiar with what Mr. Isaac at the FDIC did during the 1980's savings and loan crisis to save the credit crunch in the United States? " CHRG-111hhrg49968--87 Mr. Bishop," Understood. One of the policy issues before us over the next several months will be to deal with the President's recommendations with respect to higher education policy. One of his recommendations is to move away from what is referred to as FFEL lending to 100 percent direct lending, monies provided by the Treasury. There are arguments for doing that, and there are arguments that would suggest we should not do that. One of the arguments raised that suggest that we should not do it is that the increased borrowing would be detrimental to our both short and long-term fiscal stability. What is your assessment of that argument? " CHRG-111hhrg48674--307 Mr. Green," Mr. Bernanke, I would like to discuss with you very briefly the efficacy of mark-to-market and a possible modification. My concern with mark-to-market is when we value assets and we write them down as credit losses, which means that we assume that they are losses because the borrower cannot perform or is not performing, as opposed to liquidity losses, which assumes that performance does not necessitate a writing-down of the asset at the current time. My concern is this: If we buy these assets, we do have to assign some value. If we utilize mark-to-market to assign the value, we can create an even greater problem because there is no real market. We write down the assets. When we write down the assets, we find ourselves having to introduce more capitalization. By introducing more capitalization, we find ourselves--also the banks have a liquidity problem in the sense that they don't use that capitalization to lend money. They use the money that they have--they are making on loans to lend money, or they come to your discount window and they borrow to lend money. Now, having said all of that--and I hope it made sense to you--if it did make sense, would you kindly acknowledge so that I know-- " FOMC20080310confcall--90 88,MR. ALVAREZ., That's correct. This is securities lending by the New York Reserve Bank out of the SOMA. FOMC20080724confcall--77 75,MR. LACKER., So you don't think refusing to lend would have forced the FDIC to accelerate closure? FOMC20081216meeting--434 432,MR. LACKER.," You said that investors who bought this and put this and got the lending would have the haircut at risk, right? " CHRG-111shrg49488--105 Mr. Clark," Yes. Although when I started my first house, I bought the insurance and put down less than 20 percent. But you can do it. But, again, we would not lend to that person unless we were sure they were going to pay us back because we are responsible for the collections, we are responsible for managing that, and it is really our customer relationship, which is how we regard it. Senator Collins. I think it is fascinating that homeownership levels are actually higher in Canada than in the United States, because the justification for all these policies that encouraged the subprime mortgage market was to increase homeownership. And, in fact, it has caused a lot of people to lose homes that they could not afford in the first place, and the Canadian experience is very instructive. Mr. Green, last question to you. In the United Kingdom, what are the lending policies? Are they more similar to the Canadian practices or to the American practices? " CHRG-110hhrg38392--153 Mr. Lynch," Thank you, Mr. Chairman. I will try to be brief. I do want to go back to an issue that Mr. Royce and others have talked about, the subprime mortgage problems that we have been having. In your own remarks, Mr. Chairman, you mentioned that the subprime mortgage sector has deteriorated significantly, the conditions there, and that reflecting mounting delinquency rates on adjustable rate loans continue to be a growing problem. You also note that one risk to the economic outcome is that the ongoing housing correction might indeed prove larger than originally anticipated with possible spillovers into the consumer spending area. And in addition, you made remarks that the recent rabid expansion of the subprime market was clearly accompanied by deterioration underwriting standards, and in some cases, by abusive lending practices and outright fraud. And while we all agree that promoting access, as you have noted, to credit and to homeownership are important objectives, we do, in my opinion, need to do something more concrete, not only going forward. And I appreciate that I know you worked with some other Federal supervisory agencies to issue a principles-based guidance and nontraditional mortgage regulation, and that in June, you issued a supervisory guidance on subprime lending going forward. But I do want to note that in Massachusetts, this is just one example that I throw out there, Governor Deval Patrick instituted a moratorium working with mortgage lenders in Massachusetts, instituted a moratorium on foreclosures and a coordinated workout process for some of those folks that were harmed because of the, as you have noted, abusive lending practices and in some cases outright fraud. And I was wondering, is there anything--it is sort of a two-part question. One, are we doing anything going forward more significantly and more specific than described in your general guidance, and are we looking at all at possibilities working--I know you are working with the States--are we looking at any ways to maybe hold those people harmless or to mitigate the damage that might have been done because of abusive lending practices or that fraud? " CHRG-111shrg51290--63 PREPARED STATEMENT OF PATRICIA A. McCOY George J. and Helen M. England Professor of Law University of Connecticut School of Law March 3, 2009 Chairman Dodd and Members of the Committee: Thank you for inviting me here today to discuss the problem of restructuring the financial regulatory system. I applaud the Committee for exploring bold new approaches to financial regulation on the scale needed to address our nation's economic challenges. In my remarks today, I propose transferring consumer protection responsibilities in the area of consumer credit from Federal banking regulators to a single, dedicated agency whose sole mission is consumer protection. This step is essential for three reasons. First, during the housing bubble, our current system of fragmented regulation drove lenders to shop for the easiest legal regime. Second, the ability of lenders to switch charters put pressure on banking regulators--both State and Federal--to relax credit standards. Finally, banking regulators have routinely sacrificed consumer protection for short-term profitability of banks. Creating one, dedicated consumer credit regulator charged with consumer protection would establish uniform standards and enforcement for all lenders and help eliminate another death spiral in lending. Although I examine this issue through the lens of mortgage regulation, my discussion is equally relevant to other forms of consumer credit, such as credit cards and payday lending. The reasons for the breakdown of the home mortgage market and the private-label market for mortgage-backed securities are well known by now. Today, I wish to focus on lax lending standards for residential mortgages, which were a leading cause of today's credit crisis and recession. Our broken system of mortgage finance and the private actors in that system--ranging from mortgage brokers, lenders, and appraisers to the rating agencies and securitizers--bear direct responsibility for this breakdown in standards. There is more to the story, however. In 2006, depository institutions and their affiliates, which were regulated by Federal banking regulators, originated about 54 percent of all higher-priced home loans. In 2007, that percentage rose to 79.6 percent.\1\ In some states, mortgages originated by State banks and thrifts and independent nonbank lenders were regulated under State anti-predatory lending laws. In other states, however, mortgages were not subject to meaningful regulation at all. Consequently, the credit crisis resulted from regulatory failure as well as broken private risk management. That regulatory failure was not confined to states, moreover, but pervaded Federal banking regulation as well.--------------------------------------------------------------------------- \1\ Robert B. Avery, Kenneth P. Brevoort & Glenn B. Canner, The 2007 HMDA Data, Fed. Res. Bull. A107, A124 (Dec. 2008), available at http://www.federalreserve.gov/pubs/bulletin/2008/pdf/hmda07final.pdf.--------------------------------------------------------------------------- Neither of these phenomena--the collapse in lending criteria and the regulatory failure that accompanied it--was an accident. Rather, they occurred because mortgage originators and regulators became locked in a competitive race to the bottom to relax loan underwriting and risk management. The fragmented U.S. system of financial services regulation exacerbated this race to the bottom by allowing lenders to shop for the easiest regulators and laws. During the housing bubble, consumers could not police originators because too many loan products had hidden risks. As we now know, these risks were ticking time bombs. Lenders did not take reasonable precautions against default because they able to shift that to investors through securitization. Similarly, regulators failed to clamp down on hazardous loans in a myopic attempt to boost the short-term profitability of banks and thrifts. I open by examining why reckless lenders were able to take market share away from good lenders and good products. Next, I describe our fragmented financial regulatory system and how it encouraged lenders to shop for lenient regulators. In part three of my remarks, I document regulatory failure by Federal banking regulators. Finally, I end with a proposal for a separate consumer credit regulator.I. Why Reckless Lenders Were Able To Crowd Out the Good During the housing boom, the residential mortgage market was relatively unconcentrated, with thousands of mortgage originators. Normally, we would expect an unconcentrated market to provide vibrant competition benefiting consumers. To the contrary, however, however, highly risky loan products containing hidden risks--such as hybrid adjustable-rate mortgages (ARMs), interest-only ARMs, and option payment ARMs--gained market share at the expense of safer products such as standard fixed-rate mortgages and FHA-guaranteed loans.\2\--------------------------------------------------------------------------- \2\ A hybrid ARM offers a 2- or 3-year fixed introductory rate followed by a floating rate at the end of the introductory period with substantial increases in the rate and payment (so-called ``2-28'' and ``3-27'' mortgages). Federal Reserve System, Truth in Lending, Part II: Proposed rule; request for public comment, 73 Fed. Reg. 1672, 1674 (January 9, 2008). An interest-only mortgage allows borrowers to defer principal payments for an initial period. An option payment ARM combines a floating rate feature with a variety of payment options, including the option to pay no principal and less than the interest due every month, for an initial period. Choosing that option results in negative amortization. Department of the Treasury et al., Interagency Guidance on Nontraditional Mortgage Product Risks: Final guidance, 71 Fed. Reg. 58609, 58613 (Oct. 4, 2006).--------------------------------------------------------------------------- These nontraditional mortgages and subprime loans inflicted incalculable harm on borrowers, their neighbors, and ultimately the global economy. As of September 30, 2008, almost 10 percent of U.S. residential mortgages were 1 month past due or more.\3\ By year-end 2008, every sixth borrower owed more than his or her home was worth.\4\ The proliferation of toxic loans was the direct result of the ability to confuse borrowers and to shop for the laxest regulatory regime.\5\--------------------------------------------------------------------------- \3\ See Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008), available at www.mbaa.org/NewsandMedia/PressCenter/66626.htm. \4\ Michael Corkery, Mortgage `Cram-Downs' Loom as Foreclosures Mount, Wall St. J., Dec. 31, 2008. \5\ The discussion in this section was drawn, in part, from Patricia A. McCoy, Andrey D. Pavlov, & Susan M. Wachter, Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure,__Conn. L. Rev. __(forthcoming 2009) and Oren Bar-Gill & Elizabeth Warren, Making Credit Safer,__ U. Penn. L. Rev. __ (forthcoming 2009).---------------------------------------------------------------------------A. The Growth in Dangerous Mortgage Products During the housing boom, hybrid subprime ARMs, interest-only mortgages, and option payment ARMs captured a growing part of the market. We can see this from the growth in nonprime mortgages.\6\ Between 2003 and 2005, nonprime loans tripled from 11 percent of all home loans to 33 percent.\7\--------------------------------------------------------------------------- \6\ I use the term ``nonprime'' to refer to subprime loans plus other nontraditional mortgages. Subprime mortgages carry higher interest rates and fees and are designed for borrowers with impaired credit. Nontraditional mortgages encompass a variety of risky mortgage products, including option payment ARMs, interest-only mortgages, and reduced documentation loans. Originally, these nontraditional products were offered primarily in the ``Alt-A'' market to people with near-prime credit scores but intermittent or undocumented income sources. Eventually, interest-only ARMs and reduced documentation loans penetrated the subprime market as well. \7\ FDIC Outlook, Breaking New Ground in U.S. Mortgage Lending (Summer 2006), available at www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer04.html. --------------------------------------------------------------------------- If we unpack these numbers, it turns out that hybrid ARMs, interest-only mortgages, and option payment ARMs accounted for a growing share of nonprime loans over this period. Option payment ARMs and interest-only mortgages went from 3 percent of all nonprime originations in 2002 to well over 50 percent by 2005. (See Figure 1). Low- and no-documentation loans increased from 25 percent to slightly over 40 percent of subprime loans over the same period. By 2004 and continuing through 2006, about three-fourths of the loans in subprime securitizations consisted of hybrid ARMs.\8\--------------------------------------------------------------------------- \8\ See generally McCoy, Pavlov & Wachter, supra note 5; FDIC Outlook, Breaking New Ground in U.S. Mortgage Lending (Summer 2006), available at www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer04.html. --------------------------------------------------------------------------- Figure 1. Growth in Nontraditional Mortgages, 2002-2005\9\--------------------------------------------------------------------------- \9\ FDIC Outlook, Breaking New Ground in U.S. Mortgage Lending (Summer 2006), available at www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer04.html. As the product mix of nonprime loans became riskier and riskier, two default indicators for nonprime loans also increased substantially. Loan-to-value ratios went up and so did the percentage of loans with combined loan-to-value ratios of over 80 percent. This occurred even though the credit scores of borrowers with those loans remained relatively unchanged between 2002 and 2006. At the same time, the spreads of rates over the bank cost of capital tightened. To make matters worse, originators layered risk upon risk, with borrowers who were the most at risk obtaining low equity, no-amortization, reduced documentation loans. (See Figure 2). Figure 2. Underwriting Criteria for Adjustable-Rate Mortgages, 2002- 2006 FOMC20081216meeting--445 443,MR. DUDLEY.," No, I don't think that is quite right. We are in basically a market disequilibrium, where the traditional buyers of these securities have vanished. In a normal market environment, it would be completely reasonable to lend against these securities on a leveraged basis. But the people who would do that lending--banks and dealers--are balance sheet constrained, and that is why they are not willing to make those loans. If we had a normal banking and dealer situation today in which they were willing to extend loans to their counterparties, they would be providing the leverage. But that is just not happening. " CHRG-110shrg50420--425 Mr. Fleming," Senator, there is a very great danger, I think, in preempting franchise laws at a State level. The first issue, I think, that would arise is that the lending institutions in the States depend on the franchise laws with respect to the risk that they are going to assume. So one of the unintended consequences of Federal preemption of State franchise laws, or another concern, of course, would be going into bankruptcy, would be that the lending institutions would further tighten credit. I also think, Senator, that there is a misunderstanding about whether or not franchise laws could prevent the Big Three, in this case, from doing the things that they are recommending to you today. I don't think that State franchise laws do that. I brought a copy, Senator, of a boilerplate franchise agreement, General Motors agreement. When I was Commissioner of Consumer Protection, one of my jobs was to make sure that contracts that renters sign, for example, the average consumer wasn't lopsided. This agreement is absolutely lopsided toward the manufacturer. They can basically do anything they want. Many of the franchise holders in Connecticut that are-- " CHRG-111hhrg50289--10 Mr. Heacock," Chairwoman Velazquez, Ranking Member Graves, and members of the Committee, thank you so much for the opportunity to testify on behalf of the Credit Union National Association. I am honored to address the impact SBA lending has on our local economy, our credit union, and our members, and to suggest ways to improve SBA programs. Black Hills was first authorized to do SBA lending in January 2003, and we truly value our partnership with the SBA. We wrote more SBA loans than any other financial institution in South Dakota during 2008, 29 loans for a total of $1.6 million. We are looking forward to working with new SBA Administrator Karen Hills and find working with the SBA beneficial to the credit union and our members for several reasons. We have a number of members who started small businesses using SBA loan funds while continuing to work at their primary job as their main source of income. The SBA helped us be there for our members, and this has resulted in additional employment opportunities. There is additional risk to these types of borrowers, and quite frankly, other lenders shy away from helping them because there is not a proven cash flow. We are able to do this type of lending because of the guarantee that SBA provides. The programs allow us to help the borrower who comes in and may not have the equity investment we would generally like to see but has a good business plan. The SBA helps us create an acceptable level of risk, and it is a win-win situation for all of us, the credit union, the SBA, and the borrower. CUNA is a strong supporter of the 7(a) and 504 loan programs, essential tools for achieving our mission to serve the needs of members. However, several important factors discourage more credit unions from participating as SBA lenders. First, the statutory cap on credit union MBLs restricts the ability of credit unions from helping their members even more. Even though the cap does not apply to SBA loans, it is a real barrier, keeping some credit unions from establishing an MBL program at all. Not all loans fit SBA parameters, and credit unions are reluctant to initiate an MBL program when they may reach the cap in a fairly short order. CUNA is also aware that some lenders have not had a positive experience with the SBA, citing the application process, fees, and time of decision making. In that vein, we think there are ways to improve the work that is done by the SBA. As the Committee reviews SBA programs, we encourage Congress to make additional funds available to the agency so that fees can remain low and the guarantees can remain sufficient. We appreciate Congress setting aside $375 million for the temporary elimination of fees and raising the guaranty percentage on some loans to 90 percent as part of the Recovery Act. In closing, credit union business lending represents just over one percent of the depository institution business lending market. Credit unions have about $33 billion in outstanding business loans compared to $3.1 trillion for banking institutions. We are not financing skyscrapers or sports arenas. We are making loans to members who own and operate small businesses. Despite the financial crisis, the chief obstacle for credit union business lending is not the availability of capital. Credit unions are, in general, well capitalized. Rather, the chief obstacle is the statutory limits imposed by Congress in 1998. Under current law, credit unions are restricted from member business lending in excess of 12.25 percent of their total assets. This arbitrary cap has no basis in either actual credit union business lending or safety and soundness considerations. And the U.S. Treasury Department found that delinquencies and charge-offs for credit union business loans were much lower than that for either banks or thrifts. The cap effectively limits entry into the business lending arena on the part of small and medium size credit unions, the vast majority of all credit unions, because the costs and requirements, including the need to hire and retain staff with business lending experience exceed resources of many credit unions. While we support strong regulatory oversight of member business lending, there is no safety and soundness rationale for the cap. There is, however, a significant economic reason to eliminate the cap. America's small business needs access to capital. We estimate that if the cap on credit union business lending were removed, credit unions could safely and soundly provide as much as $10 billion for new loans for small businesses within the first year. This is an economic stimulus that would not cost the taxpayers a dime or increase the size of government. Madam Chairwoman, thank you very much for convening this hearing and inviting me to testify. I look forward to answering the Committee's questions. [The prepared statement of Mr. Heacock is included in the appendix.] " CHRG-111hhrg52400--140 Mr. Royce," Yes. Thank you, Mr. Chairman. I will pick up on Mr. Spence's point. Insurance operations were not regulated by the Fed. The New York Insurance Department reviewed and monitored AIG's securities lending program. AIG's securities lending program heavily invested in long-term mortgage-backed securities, as a matter of fact, took that money from the insurance subsidiaries. AIG Life insurers suffered $20 billion in losses related to their securities lending operations last year. And of course, the bottom line, the Federal Reserve has provided billions now to recapitalize AIG Life Insurance companies. So, you know, we have a patchwork quilt here of regulation. We had--as I said in my opening statement, we had problems with the Financial Products unit, we had problems with the Securities Lending unit and the Securities Lending program. So we have a difficulty here. Now, at this--as we have discussed at this subcommittee, there was an implicit belief in the market that, should Fannie Mae and Freddie Mac get into trouble, the Federal Government would step in to save them. In part, it was that perceived Federal lifeline that enabled these firms to borrow cheaply and take on so much risk. As we discuss reforming our regulatory structure to address firms that are too-big-to-fail, I am concerned that we run the risk of bifurcating our financial system between those that we designate as systemically significant and everybody else that is in competition. As our experience with the housing Government-Sponsored Enterprises demonstrates, this would be a big mistake. And it would provide competitive advantages to companies that have the implicit backing of the taxpayers, and they would be incentivized to engage in higher-risk behavior. That's what economists who look at this model tell us when they fret about what we're doing here. So, in the context of systemic risk regulation, do we run the risk of distorting the market by labeling those institutions that are too-big-to-fail as such? And would it be more effective for a systemic risk regulator to focus on potentially high-risk activities in the market, instead, rather than a set of large financial firms? Mr. Spence? " CHRG-111hhrg53244--119 Mr. Bernanke," We are continuing to look at floor plan lending, and there are several possibilities. One in particular is we are doing a review right now of the credit rating agencies, the nationally recognized rating agencies, whose ratings we will accept and the criteria on which we will accept those ratings. Depending on what that list is and what views they have about floor plan lending, it may be that some floor plan deals can get the AAA rating that they need to be eligible for the TALF. But we will be putting out rules very soon on the criteria for choosing the rating agencies. " CHRG-111hhrg53240--129 Mr. Carr," Yes. First of all, I am on the executive committee of Americans for Financial Reform. It is the official position of the organization that CRA should and must be included in the new consumer protection agency. Second of all, I will go back to something I said in my opening comments. The goal of that agency is to ensure access to safe and sound products, and it can't do so to minority communities if it is only looking at individuals, because the financial system doesn't treat individuals the same in minority communities. They treat them as markets. And so getting at systemic issues of failing to lend--failing to lend, as opposed to using exploitive products--the Community Reinvestment Act is the only real act that really promotes and holds banks and other financial institutions--well, banks now, hopefully other financial institutions--accountable for proactively lending in communities and not ignoring the legitimate credit needs. So if it is not in that agency, we have left a major piece of support for minority communities out. The second thing is that we should understand that that agency will have that accumulated knowledge and expertise of researchers, data--how will it in any way enhance their jobs to have the people who look at things at a geographic and at a market's level--systemic market level not part of those daily conversations, sharing of information and, ultimately, the creation of products and the enforcement of the law? It must be in order for that agency to work as it is designed. It must be able to look at broad-based community lending. " FinancialCrisisReport--171 OTS recommended, and the bank agreed, to spell out its new lending strategy in a written document that had to be approved by the WaMu Board of Directors. 610 The result was the bank’s January 2005 High Risk Lending Strategy, discussed in the prior chapter, in which WaMu management obtained the approval of its Board to shift its focus from originating lower risk fixed rate and government backed loans to higher risk subprime, home equity, and Option ARM loans. 611 The High Risk Lending Strategy also outlined WaMu’s plans to increase its issuance of higher risk loans to borrowers with a higher risk profile. The purpose of the shift was to maximize profits by originating loans with the highest profit margins, which were usually the highest risk loans. According to actual loan data analyzed by WaMu, higher risk loans, such as subprime, Option ARM, and home equity loans, produced a higher “gain on sale” or profit for the bank compared to lower risk loans. For example, a presentation supporting the High Risk Lending Strategy indicated that selling subprime loans garnered more than eight times the gain on sale as government backed loans. 612 The WaMu submission to the Board noted that, in order for the plan to be successful, WaMu would need to carefully manage its residential mortgage business as well as its credit risk, meaning the risk that borrowers would not repay the higher risk loans. 613 During the Board’s discussion of the strategy, credit officers noted that losses would likely lag by several years. 614 WaMu executives knew that even if loan losses did not immediately materialize, the strategy presented potentially significant risks down the road. OTS did not object to the High Risk Lending Strategy, even though OTS noted that the bank’s five-year plan did not articulate a robust plan for managing the increased risk. 615 610 6/30/2004 OTS Memo to Lawrence Carter from Zalka Ancely, OTSWME04-0000005357 at 61 (“Joint Memo #9 - Subprime Lending Strategy”); 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001483 [Sealed Exhibit]. See also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302978, Hearing Exhibit 4/13-2a (“As we implement our Strategic Plan, we need to address OTS/FDIC 2004 Safety and Soundness Exam Joint Memos 8 & 9 . . . Joint Memo 9: Develop and present a SubPrime/Higher Risk Lending Strategy to the Board.”). 611 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302978, Hearing Exhibit 4/13-2a; see also “WaMu Product Originations and Purchases by Percentage – 2003-2007,” chart prepared by the Subcommittee, Hearing Exhibit 4/13-1i. 612 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690894, Hearing Exhibit 4/13-3 (see chart showing gain on sale for government loans was 13 basis points (bps); for 30-year, fixed rate loans was 19 bps; for Option ARMs was 109 bps; for home equity loans was 113 bps; and for subprime loans was 150 bps.) 613 The Home Loans presentation to the Board acknowledged that risks of the High Risk Lending Strategy included managing credit risk, implementing lending technology and enacting organizational changes. 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690899, Hearing Exhibit 4/13-3. 614 1/18/2005 Washington Mutual Inc. Washington Mutual Bank FA Finance Committee Minutes, JPM_WM06293964-68 at 67; see also 1/2005 Washington Mutual, Higher Risk Lending Strategy Presentation, at JPM_WM00302987, Hearing Exhibit 4/13-2a (chart showing peak loss rates in 2007). 615 See 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001509, Hearing Exhibit 4/16-94 [Sealed Exhibit]. CHRG-111shrg57319--218 Mr. Schneider," Chairman Levin, Dr. Coburn, and Members of the Subcommittee, thank you for the opportunity to appear before you today. My name is David Schneider.--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Schneider appears in the Appendix on page 158.--------------------------------------------------------------------------- Beginning in July 2005, I served as President of Washington Mutual's Home Loan Business, which originated prime mortgage loans. In 2006, I was given the additional responsibility for Long Beach Mortgage Company, which was WaMu's subprime lending channel. Before I arrived at WaMu, its management and Board had adopted a lending strategy for the coming years. I understood that its strategy was intended, at least in part, to reduce WaMu's exposure to market risk, that is, its exposure to interest rate changes. WaMu planned to do so by shifting the assets it held on its balance sheet away from market risk towards credit risk, for example, by holding more adjustable-rate mortgages. This strategy was called a higher-risk lending strategy and would have been implemented through the bank's Asset and Liability Committee. ALCO made decisions on which loans to hold and which to sell based on the loans' risk-return profile and other relevant issues, including the type and geographic location of the loans WaMu already had on its books. Although WaMu intended to change its business strategy, market conditions soon caused WaMu to go in another direction. As house prices peaked, the economy softened, and credit markets tightened, WaMu adopted increasingly conservative credit policies and moved away from loan products with greater credit risk. WaMu increased documentation requirements, raised minimum FICO scores, lowered LTV ratios, and curtailed underwriting exceptions. My team also enhanced WaMu's fraud detection programs. During my time at WaMu, we reduced and then entirely stopped making Alt A loans and Option ARM loans. Alt A lending ended in 2007. Option ARM loans decreased by more than a half from 2005 to 2006, and by another third from 2006 to 2007. WaMu stopped offering Option ARM loans altogether at the beginning of 2008. When the subprime lending operation at Long Beach was placed under my supervision in 2006, I was asked to address the challenges its business presented. During that year, I changed Long Beach management twice. As I became more familiar with Long Beach Mortgage, I concluded that its lending parameters should be tightened, so across various loan products we raised FICO scores, lowered LTV ratios, established maximum loan values, increased documentation requirements, improved programs to detect and prevent fraud, and in 2007 eliminated stated income lending. As a result, the percentage of approved Long Beach loans that were based on full documentation increased every year I oversaw Long Beach, and the percentage of loans with combined LTV ratios greater than 90 percent decreased every year over that same period. More broadly, WaMu eliminated many subprime products and then stopped originating subprime loans entirely. As a result, WaMu's subprime lending declined by a third from 2005 to 2006 and by 80 percent from 2006 to 2007. When I began my job at Washington Mutual, my goal was to evaluate and improve our home lending efforts in all respects. As market changes began to change, my team and I worked very hard to adapt to the new conditions and at the same time address the challenges WaMu faced. During the time I was President of Home Loans, we acted to reduce the size and associated risk of the Home Loans business. Specifically, we closed its broker and correspondent lending channels. We closed Long Beach Mortgage. We eliminated a number of higher-risk loan products and bolstered quality controls through tightening credit standards, improving the automated underwriting tools, enhancing fraud detection and prevention, and curtailing underwriting exceptions. I hope this brief summary has been helpful and I look forward to your questions. Thank you. Senator Levin. Thank you very much, Mr. Schneider. Mr. Beck. TESTIMONY OF DAVID BECK,\1\ FORMER DIVISION HEAD OF CAPITAL CHRG-111hhrg55814--143 Secretary Geithner," Congresswoman, this is a very important issue. Small businesses are much more reliant on credit from banks, including small banks. For again, to get that credit, banks have to have the capital they need to lend. The President proposed last week two important new initiatives to make sure small banks can get that capital, as well as community development and finance institutions as well. And I think Congress needs to work with us to help make those banks more comfortable, coming to get capital from the government. If they do that, then they'll have a better capacity to provide credit to small businesses. And we think that's a very important thing to do. The Congress also passed in the Recovery Act some important changes to help encourage small business lending by the SBA. Lending by the SBA since those actions were taken has increased very dramatically. But I think you're absolutely right that for many small businesses across the country, they're still not getting the credit they need to grow and expand. And we need to work with you to try to fix that problem. " FOMC20081216meeting--438 436,MR. LACKER.," So if spreads close in the marketplace, then they get the upside--so we are essentially lending to them to make a leveraged bet on the securities. " CHRG-111shrg62643--122 Chairman Dodd," Senator Bennet. Senator Bennet. Thank you, Mr. Chairman. Thank you for holding this hearing, and to the Ranking Member, thank you, and thank you for being back here, Mr. Chairman. I actually want to pick up right where Senator Tester left off, because the last time we were together, I asked whether or not we might have some metrics where we could start to look at things and be able to distinguish between lending that is not happening because of loan demand, lending that is not happening because of regulators' overreach, lending that is not happening because we are in a different leverage environment, all that stuff, and I was pleased to see that in the addendum you have talked about it a few times. There is a section on research and data, what you are going to start collecting, what you have heard from people that might make it more meaningful, and for the life of me, there are a million things in here that I don't know why we haven't done already, but we haven't. We haven't had the focus on small business lending that we need to have. I don't think the administration has had the focus on it that they need to have. But my question is--and my anecdotal evidence in Colorado continues to be exactly the same as Senator Tester's, which is that small businesses that assert that they can pay on their loans can't get credit, and banks are saying that the reason they can't extend the credit is because the regulators have swung too far over to one side. It is a consistent theme. Every now and then, you hear somebody say, well, there is not really loan demand, or they will say, Michael, look and see if people are actually paying off their letters of credit and they are returning capital to banks. So my question for you is, you talked about the training and the guidance, wanting people to take a balanced approach. In the evidence that you have collected so far that you were just talking about, what is the evidence? What does it tell you about what is happening here? " CHRG-111shrg50564--186 Mr. Dodaro," Well, I clearly think--and I will ask Ms. Williams to comment on this because she has been doing a lot of our work on these instruments. But, first, clearly the goal has to be set for them to do that. And I think if the Congress sets a statutory--as part of the regulatory goal, an expectation that occur, that is there, I think they need to be given then the authorities to be able to hire the necessary people and compensate them appropriately for doing that. And I do think they would have the capability to be able to do it. There is no doubt in my mind that you have some very talented people in the regulatory system right now that, given the proper goals and expectations, can, you know, develop in that area. It will not be easy because of the ingenuity of many of the market participants, but I think it is achievable. Orice, do you have anything? Ms. Williams. The only thing that I would add is that this is an area that the regulators are always going to be at a disadvantage in dealing with because the markets are always looking to come up with new and innovative products. But I think one of the things that would really help--and we tried to speak to this with our principal, focused on having, you know, a flexible, nimble process for regulators to be able to adjust, is to get beyond the type of product and the label that is attached to a particular product and really be able to focus on the risk that that product may pose to the system and making that the focus and the driver for whether or not products need to be brought under a regulatory umbrella. Senator Warner. So actually making a risk assessment of the product, and then if the assessment was the product was too risky, then perhaps saying some universes of consumers might not be eligible to---- Ms. Williams. Or that it needs to be, you know, regulated or looked at from a regulatory perspective and not just focus specifically on it meets this statutory definition so, therefore, it falls out of a regulatory jurisdiction versus it poses this particular risk to the system, therefore, it needs to be subject to some level of regulation and oversight. Senator Warner. We had that situation last week in the Madoff hearing where we had both SEC and FINRA here, and, you know, asked very much suddenly, you know, on broker-dealers, if somebody says they were an investment adviser and FINRA is looking, they are going to suddenly stop and not turn over that information. These regulatory lines clearly in that case might have precluded exposing a real financial scam. Ms. Williams. Exactly. And one example, we have worked looking at credit default swaps, and that is another example of a product that meets a definition and, therefore, there is---- Senator Warner. No examination beyond meeting the definition. Ms. Williams. Exactly. Senator Warner. Amen. Thank you very much. Ms. Williams. You are welcome. Senator Akaka. [Presiding.] Thank you very much, Senator Warner. Mr. Dodaro, it is good to see you again, and our panel. I am so glad that we have a new team that is addressing the problems that we are facing immediately. And I think you know the history of the so-called Financial Literacy and Education Commission. That is chaired by the Secretary of Treasury, and it has a mission that has really not been carried out. And I think that is an answer to some of the problems that have been mentioned here. Previously, I heard about protecting the consumers. Well before the current economic crisis that we are facing at this time, financial regulatory systems were failing--failing to adequately protect working families from predatory practices and exploitation. And this Commission was really put in place to try to prepare strategies that would deal with the problems that people in the country would have. I would tell you that one of the huge problems that this country has is that this country is financially illiterate. And so these financial literacy programs fill that void, and we need to really, I feel, try to bring that back to life and to help the causes here. Families have been pushed into mortgage products with associated risks and costs that they could not afford. And instead of utilizing affordable, low-cost financial services found at regulated banks and credit unions, too many working families have been exploited by the high cost of fringe financial service providers such as payday lenders and check cashers. I would tell you--and I am sure it is not only in Hawaii--that you find offices like these outside of our bases, and so our military personnel really suffer on this. So my question to you, Mr. Dodaro, is: How do we create a regulatory structure that better protects working families against predatory practices? " CHRG-111shrg57709--153 Mr. Volcker," It is an interesting idea. I have not thought of it, I must confess. It is the reverse of many other ideas that you withdraw support if they do not lend enough. The Deputy Secretary mentioned some things that kind of discourage growth and would encourage, I hope, lending. But I would have to think pretty hard about the suggestion of removing, in effect, the safety net from banks that did not act like banks. Senator Reed. Well, food for thought. " Mr. Volcker," OK. We will look at it. Senator Reed. Secretary Wolin, do you have any comments? " CHRG-111hhrg67816--48 Mr. Leibowitz," Thank you, Mr. Chairman, Mr. Radanovich, Ms. Schakowsky, members of the subcommittee, I am Jon Leibowitz. I am the chairman of the Federal Trade Commission, and I really do appreciate the opportunity to appear before you today to discuss the FTC's role in protecting consumers from predatory financial practices. This is my first hearing of several you mentioned, and let me just say this. You are an authorizing committee. We want to work with all of you. We will not be successful agency unless we can work together, and I hope that we will be doing that over the coming weeks and months. The Commission's views are set forth in the written testimony which was approved by a vote of the entire Commission, though my answers to your questions represent my own views. Mr. Chairman, during these times of difficulty for so many American consumers, the FTC is working hard. Whether Americans are trying to stave off foreclosure, lower their monthly mortgage payments or deal with abusive debt collectors the FTC is on the job enforcing the law, offering guidance, and in the process of issuing new regulations. The written testimony describes in great detail the Commission's enforcement, education, and policy tools and how we have used those tools to protect and advocate for consumers of financial services. We brought about 70 cases involving financial services since I came to the Commission 4-1/2 years ago, and we have gotten $465 million in redress for consumers over the past 10 years in this area alone. But let me highlight just a few recent cases. In the fall, Bear Stearns and its EMC subsidiary paid $28 million to settle Federal Trade Commission charges of illegal mortgage servicing practices. For example, they misrepresented the amounts consumers owed. They collected unauthorized fees. They made harassing and deceptive collection calls. In January we sent out more than 86,000 redress checks, 86,000, to reimburse consumers who were harmed. And today the FTC announced two more cases against so-called mortgage rescue operations that allegedly charged thousands of dollars in upfront fees but failed to provide any assistance in saving people's homes. Even worse, these scurrilous companies Hope Now and New Hope gave consumers false hope by impersonating the HUD-endorsed Hope Now alliance, which helps borrowers with free debt management and credit counseling services, mostly low income consumers. I am pleased to report that the courts have issued temporary restraining orders stopping these fraudulent claims and freezing the company's assets. We are announcing a third action today against yet another rogue rescue scam. Less than 2 weeks ago, FTC investigators discovered a foreclosure rescue web site that was impersonating the HUD web site itself. The HUD inspector general had the site taken down. Last week, however, we were told that the same site had popped up again on a differed ISP. Within hours, we filed a complaint against the unknown operators of the site, and armed with a court order we shut it down. Let me assure you, particularly in this economic climate the FTC will continue to target fraudulent mortgage rescue operations, but we can do better and we will. Mr. Chairman, you mentioned the lack of statutory authority, the one hand tied behind our back. First, we are going to vigorously enforce new mortgage rules issued by the Federal Reserve Board that go into effect this fall that will prohibit a variety of unfair, deceptive, and abusive mortgage advertising, lending, appraisal, and servicing practices such as banning sub-prime buyer's loans. Second, the 2009 Omnibus Appropriations Act gave us authority to find violators in this area for the first time. And, third, we are going to use the regulatory authority given to use by the Omnibus to issue new regulations that will protect consumers from other predatory mortgage practices. We expect these rules to address foreclosure rescue scams and unfair and deceptive mortgage modification and servicing practices. At the same time, we are going to focus more attention on empirical research about how to make mortgages and other disclosures more effective so that consumers have accurate, easily understandable information about a mortgage's terms. We have put a prototype disclosure form on your desks. It is clearly better, and we have copy tested this, than what people are using under current law. But we could use more help. FTC law enforcement would be a greater deterrent if we were able to obtain civil penalties for all unfair and deceptive acts and practices related to financial services beyond mortgages, for example, in-house debt collection and debt negotiation. The FTC could also do more to assist consumers if it could use streamlined APA rulemaking procedures to promulgate rules for unfair acts and practices related to financial services other than mortgage loans. These steps, of course, would require congressional action. They may perhaps require some more resources. Will all these measures be enough? Well, they could certainly help to ensure that we are never in this kind of economic mess again. Finally, Mr. Chairman, as you know, right now jurisdiction is balkanized between the FTC and the banking agencies about who protects American consumers from deceptive financial practices. Several bills have been introduced that call for an overall federal consumer protection regulator of financial services. As discussions about these proposals continue, we urge you to keep this in mind. The FTC, the Commission, has unparalleled expertise in consumer protection. That is what we do. We are not beholding to any providers of financial services, and we have substantial experience effectively and cooperating working with the states, especially cooperatively working with the states. In short, if your committee and if Congress determines that such an overall federal regulator is needed, if you do, we ask that the FTC be an integral part of the discussion about how to best protect the American public. Thank you, Mr. Chairman, for the opportunity to speak today about what the FTC has done and what we are going to do. We look forward to working with this committee, and I am pleased to answer your questions. Thank you. [The prepared statement of Mr. Leibowitz follows:] [GRAPHIC] [TIFF OMITTED] T7816A.004 fcic_final_report_full--29 Two former OCC comptrollers, John Hawke and John Dugan, told the Commis- sion that they were defending the agency’s constitutional obligation to block state ef- forts to impinge on federally created entities. Because state-chartered lenders had more lending problems, they said, the states should have been focusing there rather than looking to involve themselves in federally chartered institutions, an arena where they had no jurisdiction.  However, Madigan told the Commission that national banks funded  of the  largest subprime loan issuers operating with state charters, and that those banks were the end market for abusive loans originated by the state- chartered firms. She noted that the OCC was “particularly zealous in its efforts to thwart state authority over national lenders, and lax in its efforts to protect con- sumers from the coming crisis.”  Many states nevertheless pushed ahead in enforcing their own lending regula- tions, as did some cities. In , Charlotte, North Carolina–based Wachovia Bank told state regulators that it would not abide by state laws, because it was a national bank and fell under the supervision of the OCC. Michigan protested Wachovia’s an- nouncement, and Wachovia sued Michigan. The OCC, the American Bankers Asso- ciation, and the Mortgage Bankers Association entered the fray on Wachovia’s side; the other  states, Puerto Rico, and the District of Columbia aligned themselves with Michigan. The legal battle lasted four years. The Supreme Court ruled – in Wachovia’s favor on April , , leaving the OCC its sole regulator for mortgage lending. Cox criticized the federal government: “Not only were they negligent, they were aggressive players attempting to stop any enforcement action[s]. . . . Those guys should have been on our side.”  Nonprime lending surged to  billion in  and then . trillion in , and its impact began to be felt in more and more places.  Many of those loans were funneled into the pipeline by mortgage brokers—the link between borrowers and the lenders who financed the mortgages—who prepared the paperwork for loans and earned fees from lenders for doing it. More than , new mortgage brokers began their jobs during the boom, and some were less than honorable in their deal- ings with borrowers.  According to an investigative news report published in , between  and , at least , people with criminal records entered the field in Florida, for example, including , who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion.  J. Thomas Card- well, the commissioner of the Florida Office of Financial Regulation, told the Com- mission that “lax lending standards” and a “lack of accountability . . . created a condition in which fraud flourished.”  Marc S. Savitt, a past president of the Na- tional Association of Mortgage Brokers, told the Commission that while most mort- gage brokers looked out for borrowers’ best interests and steered them away from risky loans, about , of the newcomers to the field nationwide were willing to do whatever it took to maximize the number of loans they made. He added that some loan origination firms, such as Ameriquest, were “absolutely” corrupt.  FinancialCrisisReport--63 OTS directed the bank to spell out its new lending strategy in a written document that had to be presented to and gain approval by the WaMu Board of Directors. 154 In response, in January 2005, WaMu management developed a document entitled, “Higher Risk Lending Strategy” and presented it to its Board of Directors for approval to shift the bank’s focus from originating low risk fixed rate and government backed loans to higher risk subprime, home equity, and Option ARM loans. 155 The Strategy disclosed that WaMu planned to increase both its issuance of higher risk loans and its offering of loans to higher risk borrowers. The explicit reasoning for the shift was the increased profitability of the higher risk loans, measured by actual bank data showing that those loans produced a higher “gain on sale” or profit for the bank compared to lower risk loans. For example, one chart supporting the Strategy showed that selling subprime loans garnered more than eight times the gain on sale as government backed loans. 156 The WaMu submission to the Board noted that, in order for the plan to be successful, WaMu would need to carefully manage its residential mortgage business as well as its credit risk, meaning the risk that borrowers would not repay the higher risk loans. 157 During the Board’s discussion of the strategy, credit officers noted that losses would likely lag by several years. 158 These documents show that WaMu knew that, even if loan losses did not immediately come to pass after initiating the High Risk Lending Strategy, it did not mean the strategy was free of problems. 153 See 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001509, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 154 6/30/2004 OTS Memo to Lawrence Carter from Zalka Ancely, OTSWME04-0000005357 at 61 (“Joint Memo #9 - Subprime Lending Strategy”); 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001483, Hearing Exhibit 4/16-94 [Sealed Exhibit]. See also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302978, Hearing Exhibit 4/13-2a (“As we implement our Strategic Plan, we need to address OTS/FDIC 2004 Safety and Soundness Exam Joint Memos 8 & 9 . . . Joint Memo 9: Develop and present a SubPrime/Higher Risk Lending Strategy to the Board.”). 155 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302978, Hearing Exhibit 4/13-2a; see also 4/2010 “WaMu Product Originations and Purchases by Percentage – 2003-2007,” chart prepared by the Subcommittee, Hearing Exhibit 4/13-1i. 156 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690894, Hearing Exhibit 4/13-3 (see chart showing gain on sale for government loans was 13 basis points; for 30-year, fixed rate loans was 19; for option loans was 109; for home equity loans was 113; and for subprime loans was 150.). 157 See 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690899, Hearing Exhibit 4/13-3 (acknowledging that the risks of the High Risk Lending Strategy included managing credit risk, implementing lending technology and enacting organizational changes). 158 1/18/2005 Washington Mutual Inc. Washington Mutual Bank FA Finance Committee Minutes, JPM_WM06293964; see also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302987, Hearing Exhibit 4/13-2a (“Lags in Effects of Expansion,” chart showing peak loss rates in 2007). (3) Definition of High Risk Lending CHRG-110hhrg46591--65 Mrs. Maloney," Thank you. What I am hearing from my constituents is they are not getting access to credit still, even though it was reported Monday that the credit markets are easing. And these are established businesses, small and large, that are paying their loans on time, yet some banks are pulling their loans. This could be a downward spiral forcing them into bankruptcy, hurting our economy. So I would like to ask Ms. Rivlin, would one approach to help the stability in the credit markets be that at the very least, we could guarantee the loaning between the banks and have a blanket guarantee of new short-term loans to one another by the central banks? Would that be helpful in this regard? We have seen, so far, a piecemeal approach, as has been mentioned by the panelists, and not only in America, but in Europe and Asia as well. This obviously requires a high degree of international cooperation. I welcome your remarks and other panelists on this idea. Would that ease the credit? Would that help us get the credit out to the substantial businesses that are employing paying taxes part of our economy? Ms. Rivlin. I am sorry, a guarantee of interbank lending? Well, that has been discussed. I think we may not need that. It does look as though interbank lending is coming back. And the international cooperation doing the same thing in different financial markets has been actually I think quite impressive that the central banks and treasuries have been working together. So I am not sure that we actually need at this point a guarantee of interbank lending. The interbank lending rates are coming down and the capital injection, it seems to me, is probably going to be enough to do that. " CHRG-111shrg54789--176 PREPARED STATEMENT OF TRAVIS B. PLUNKETT Legislative Director, Consumer Federation of America July 14, 2009Summary Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. My name is Travis Plunkett and I am the Legislative Director of the Consumer Federation of America (CFA). \1\ I am pleased to be able to offer the views of leading consumer, community, and civil rights groups \2\ in support of the establishment of a Consumer Financial Protection Agency, as proposed first by Senators Durbin, Schumer, and Kennedy and most recently by President Obama. In addition to CFA, I am testifying on behalf of, Americans for Fairness in Lending, \3\ Americans for Financial Reform, \4\ A New Way Forward, \5\ the Association of Community Organizations for Reform Now (ACORN), \6\ Center for Responsible Lending, \7\ Community Reinvestment Association of North Carolina, \8\ Consumer Action, \9\ Consumers Union, \10\ Demos, \12\ Florida PIRG, \13\ The International Brotherhood of Teamsters, \14\ National Association of Consumer Advocates, \15\ National Community Reinvestment Coalition, \16\ National Consumer Law Center (on behalf of its low-income clients), \17\ National Consumers League, \18\ National Fair Housing Alliance, \19\ Neighborhood Economic Development Advocacy Project, \21\ Public Citizen, \22\ Sargent Shriver National Center on Poverty Law, \23\ Service Employees International Union, \24\ USAction, \25\ and U.S. PIRG. \26\--------------------------------------------------------------------------- \1\ The Consumer Federation of America is a nonprofit association of over 280 proconsumer groups, with a combined membership of 50 million people. CFA was founded in 1968 to advance consumers' interests through advocacy and education. \2\ The testimony was drafted by Travis Plunkett and Jean Ann Fox of the Consumer Federation of America, Gail Hillebrand of Consumers Union, Lauren Saunders of the National Consumer Law Center, and Ed Mierzwinski of U.S. PIRG. \3\ Americans for Fairness in Lending works to reform the lending industry to protect Americans' financial assets. AFFIL works with its national Partner organizations, local ally organizations, and individual members to advocate for reform of the lending industry. \4\ Americans for Financial Reform is a coalition of close to 200 national State and local organizations representing people from every walk of life, including homeowners, shareowners, workers, and low and moderate income community residents dedicated to making sure that the ``main street'' voice is heard in the debate on financial regulatory reform. \5\ A New Way Forward is a movement of citizens, started in March 2009. It harnesses the voice of citizens to stop the excessive and dangerous partnership between Government and the largest institutions of the financial sector in order to reinvigorate the public sphere. ANWF organizers are letting the world know that the way Congress is handling the financial crisis rewards the wrong people, is likely to fail, and doesn't get at the core structural problems in our economy. ANWF helped organize 60 protests ad 25 educational forums in the past 4 months. \6\ ACORN, the Association of Community Organizations for Reform Now, is the Nation's largest community organization of low- and moderate-income families, working together for social justice and stronger communities. \7\ The Center for Responsible Lending (CRL) is a not-for-profit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is an affiliate of Self-Help, which consists of a credit union and a nonprofit loan fund focused on creating ownership opportunities for low-wealth families, primarily through financing home loans to low-income and minority families who otherwise might not have been able to purchase homes. Self-Help has provided over $5 billion in financing to more than 60,000 low-wealth families, small businesses and nonprofit organizations in North Carolina and across the United States. Another affiliate, Self-Help Credit Union, offers a full range of retail products, and services over 3,500 checking accounts and approximately 20,000 other deposit accounts, and recently inaugurated a credit card program. \8\ The Community Reinvestment Association of North Carolina's mission is to promote and protect community wealth through advocacy, research, financial literacy and community development. \9\ Consumer Action is a national nonprofit education and advocacy organization serving more than 9,000 community based organizations with training, educational modules, and multilingual consumer publications since 1971. Consumer Action's advocacy work centers on credit, banking, and housing issues. \10\ Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about good, services, health and personal finance, and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with more than 5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial, and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support. \12\ Demos is a New York City-based nonpartisan public policy research and advocacy organization founded in 2000. A multi-issue national organization, Demos combines research, policy development, and advocacy to influence public debates and catalyze change. \13\ Florida PIRG takes on powerful interests on behalf of Florida's citizens, working to win concrete results for our health and our well-being. With a strong network of researchers, advocates, organizers and students across the State, we stand up to powerful special interests on issues to stop identity theft, fight political corruption, provide safe and affordable prescription drugs, and strengthen voting rights. \14\ The Teamsters union represents more than 1.4 million workers in North America. Teamsters work from ports to airlines, from road to rail, from food processing to waste and recycling, from manufacturing to public services. The Union fights to improve the lives of workers, their families and their communities across the global supply chain. \15\ The National Association of Consumer Advocates, Inc., is a nonprofit 501(c)(3) organization founded in 1994. NACA's mission is to provide legal assistance and education to victims of consumer abuse. NACA, through educational programs and outreach initiatives protects consumers, particularly low income consumers, from fraudulent, abusive and predatory business practices. NACA also trains and mentors a national network of over 1400 attorneys in representing consumers' rights. \16\ National Community Reinvestment Coalition is an association of more than 600 community-based organizations that promotes access to basic banking services, including credit and savings, to create and sustain affordable housing, job development, and vibrant communities for America's working families. \17\ The National Consumer Law Center, Inc. is a nonprofit corporation, founded in 1969, specializing in low-income consumer issues, with an emphasis on consumer credit. On a daily basis, NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, Government, and private attorneys representing low-income consumers across the country. NCLC publishes and regularly updates a series of 16 practice treatises and annual supplements on consumer credit laws, including Truth In Lending, Cost of Credit, Consumer Banking and Payments Law, Foreclosures, and Consumer Bankruptcy Law and Practice, as well as bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. NCLC attorneys have written and advocated extensively on all aspects of consumer law affecting low income people, conducted training for tens of thousands of legal services and private attorneys on the law and litigation strategies to deal predatory lending and other consumer law problems, and provided extensive oral and written testimony to numerous Congressional committees on these topics. NCLC's attorneys have been closely involved with the enactment of the all Federal laws affecting consumer credit since the 1970s, and regularly provide comprehensive comments to the Federal agencies on the regulations under these laws. \18\ The National Consumers League has been fighting for the rights of consumers and workers since its founding in 1899. The League was instrumental in seeking a safety net for Americans during the Great Depression and in the New Deal years, writing legislation to gain passage of minimum wage laws, unemployment insurance, workers compensation, social security and health care programs like medicare and medicaid. The League continues to champion the fair treatment and protections for all consumers in today's marketplace. \19\ Founded in 1988, the National Fair Housing Alliance is a consortium of more than 220 private, nonprofit fair housing organizations, State and local civil rights agencies, and individuals from throughout the United States. Headquartered in Washington, DC, the National Fair Housing Alliance, through comprehensive education, advocacy and enforcement programs, provides equal access to apartments, houses, mortgage loans and insurance policies for all residents of the Nation. \21\ Neighborhood Economic Development Advocacy Project (NEDAP) is a resource and advocacy center for community groups in New York City. Their mission is to promote community economic justice and to eliminate discriminatory economic practices that harm communities and perpetuate inequality and poverty. \22\ Public Citizen is a national nonprofit membership organization that has advanced consumer rights in administrative agencies, the courts, and the Congress, for 38 years. \23\ Founded by Sargent Shriver in 1967, the mission of the Sargent Shriver National Center on Poverty Law is to provide national leadership in identifying, developing, and supporting creative and collaborative approaches to achieve social and economic justice for low-income people. The Community Investment Unit of the Shriver Center advances the mission of the organization through innovative and collaborative public policy advocacy to enable low-income people and communities to move from poverty to prosperity. \24\ The Service Employees International Union is North America's largest union with more than 2 million members. SEIU has taken a lead in holding financial institutions, including private equity and big banks, accountable for their impact on working families. \25\ USAction builds power by uniting people locally and nationally, on the ground and online, to win a more just and progressive America. We create and participate the Nation's leading progressive coalitions making democracy work by organizing issue campaigns to improve people's lives. Our 28 State affiliates and partners, and our True Majority online members, bring the voices and concerns of the grassroots inside the Beltway. \26\ The U.S. Public Interest Research Group serves as the federation of and Federal advocacy office for the State PIROs, which are nonprofit, nonpartisan public interest advocacy groups that take on powerful interests on behalf of their members.--------------------------------------------------------------------------- In this testimony, we outline the case for establishment of a robust, independent Federal Consumer Financial Protection Agency to protect consumers from unfair credit, payment and debt management products, no matter what company or bank sells them and no matter what agency may serve as the prudential regulator for that company or bank. We describe the many failures of the current Federal financial regulators. We discuss the need for a return to a system where Federal financial protection law serves as a floor not as a ceiling, and consumers are again protected by the three-legged stool of Federal protection, State enforcement and private enforcement. We rebut anticipated opposition to the proposal, which we expect will come from the companies and regulators that are part of the system that has failed to protect us. We offer detailed suggestions to shape the development of the agency in the legislative process. We believe that, properly implemented, a Consumer Financial Protection Agency will encourage innovation by financial actors, increase competition in the marketplace, and lead to better choices for consumers. We look forward to working with you and Committee Members to enact a strong Consumer Financial Protection Agency bill through the Senate and into law. We also look forward to working with you on other necessary aspects of financial regulatory reform to restore the faith and confidence of American families that the financial system will protect their homes and their economic security.SECTION 1. LEARNING FROM EXPERIENCE TO CREATE A FEDERAL CONSUMER FOMC20081029meeting--92 90,MR. SHEETS.," Just to put some numbers on IMF lending capacity--total IMF lending capacity is about $250 billion. To get even that high they have to call in some special arrangements that they have with a variety of countries. The maximum capacity is $250 billion. So the $120 billion that we're proposing today would be essentially half of what the IMF could do. In that sense I really see what we're proposing as our taking off the IMF's hands some of the largest potential liquidity needs, which then allows them to focus on a whole range of additional countries. A related point is that I understand that, in an IMF executive board meeting today, the managing director indicated that they are getting a fair amount of interest in this new facility. It really is a different kind of facility, and frankly, even a week ago if you told me that the IMF was going to be able to put this facility together in this quick a time, I would have said, ""No way. There's no way that the IMF can move this quickly."" So it is about as good as we could expect and maybe even better than what we could have expected from the Fund. I think that they are doing what they can to minimize stigma. On the other hand, they don't have enough lending capacity to really handle these folks that we're talking about today. " fcic_final_report_full--458 Given the likelihood that large numbers of subprime and Alt-A mortgages would default once the housing bubble began to deflate in mid- 2007—with devastating effects for the U.S. economy and financial system—the key question for the FCIC was to determine why, beginning in the early 1990s, mortgage underwriting standards began to deteriorate so significantly that it was possible to create 27 million subprime and Alt-A mortgages. The Commission never made a serious study of this question, although understanding why and how this happened must be viewed as one of the central questions of the financial crisis. From the beginning, the Commission’s investigation was limited to validating the standard narrative about the financial crisis—that it was caused by deregulation or lack of regulation, weak risk management, predatory lending, unregulated derivatives and greed on Wall Street. Other hypotheses were either never considered or were treated only superficially. In criticizing the Commission, this statement is not intended to criticize the staff, which worked diligently and effectively under diffi cult circumstances, and did extraordinarily fine work in the limited areas they were directed to cover. The Commission’s failures were failures of management. 1. Government Policies Resulted in an Unprecedented Number of Risky Mortgages Three specific government programs were primarily responsible for the growth of subprime and Alt-A mortgages in the U.S. economy between 1992 and 2008, and for the decline in mortgage underwriting standards that ensued. The GSEs’ Affordable Housing Mission. The fact that high risk mortgages formed almost half of all U.S. mortgages by the middle of 2007 was not a chance event, nor did it just happen that banks and other mortgage originators decided on their own to offer easy credit terms to potential homebuyers beginning in the 1990s. In 1992, Congress enacted Title XIII of the Housing and Community Development Act of 1992 6 ( the GSE Act), legislation intended to give low and 6 Public Law 102-550, 106 Stat. 3672, H.R. 5334, enacted October 28, 1992. 453 moderate income 7 borrowers better access to mortgage credit through Fannie Mae and Freddie Mac. This effort, probably stimulated by a desire to increase home ownership, ultimately became a set of regulations that required Fannie and Freddie to reduce the mortgage underwriting standards they used when acquiring loans from originators. As the Senate Committee report said at the time, “The purpose of [the affordable housing] goals is to facilitate the development in both Fannie Mae and Freddie Mac of an ongoing business effort that will be fully integrated in their products, cultures and day-to-day operations to service the mortgage finance needs of low-and-moderate-income persons, racial minorities and inner-city residents.” 8 The GSE Act, and its subsequent enforcement by HUD, set in motion a series of changes in the structure of the mortgage market in the U.S. and more particularly the gradual degrading of traditional mortgage underwriting standards. Accordingly, in this dissenting statement, I will refer to the subprime and Alt-A mortgages that were acquired because of the affordable housing AH goals, as well as other subprime and Alt-A mortgages, as non-traditional mortgages, or NTMs CHRG-110hhrg46596--113 Mr. Neugebauer," Last question then, as a follow-up on that. Do you have evidence that this capital injection has, in fact, led to increased lending activity? Have you monitored that? " CHRG-110hhrg46593--144 Mr. Bernanke," If we invoked our ability to lend under unusual and exigent circumstances, and if we were fully collateralized, we would have that power. We have not made a decision to do that. " FOMC20080130meeting--362 360,MR. MISHKIN., But they could come back. I think subprime lending will come back under a different business model. CHRG-110hhrg38392--135 Mr. Bernanke," Earlier, we mentioned the 30th anniversary of the Humphrey-Hawkins Act. Thirty years ago was also the creation of the Community Reinvestment Act (CRA), the premise of which was to address the fact that banks were not lending in certain neighborhoods--there was red lining--and that it was important to extend credit to low- and moderate-income people. The development of the subprime lending market made that feasible to a significant extent. And I agree with you that legitimate, well-underwritten, well-managed subprime lending has been constructive. It does give people better access to credit and better access to home ownership. Moreover, regulations should take care not to destroy a legitimate part of this market, even as we do all that we can to make sure that bad actors are not taking unfair advantage or confusing or misrepresenting their product to people who are essentially being victimized by them. So it is our challenge--and we take it very, very seriously--to provide regulation and disclosures that will allow this market to continue to function, but at the same time to eliminate some of the bad aspects that we have seen in the last couple of years. " CHRG-111shrg54675--79 PREPARED STATEMENT OF SENATOR MIKE CRAPO Many community banks and credit unions have tried to fill the lending gap in rural communities caused by the credit crisis. Even with these efforts, it is apparent that many consumers and businesses are not receiving the lending they need to refinance their home loan, extend their business line of credit, or receive capital for new business opportunities. Today's hearing will assist us in identifying these obstacles. As we began to explore options to modernize our financial regulatory structure, we need to make sure our new structure allows financial institutions to play an essential role in the U.S. economy by providing a means for consumers and businesses to save for the future, to protect and hedge against risk, and promote lending opportunities. These institutions and the markets in which they act support economic activity through the intermediation of funds between providers and users of capital. One of the more difficult challenges will be to find the right balance between protecting consumers from abusive products and practices while promoting responsible lending to spur economic growth and help get our economy moving again. Although it is clear that more must be done to protect consumers, it is not clear that bifurcating consumer protection from the safety and soundness oversight is the best option. If that is not the best option, what is and why? It is my intention to explore this topic in more detail with our witnesses. Again, I thank the Chairman for holding this hearing and I look forward to working with him on these and other issues. ______ CHRG-111hhrg46820--117 Mr. Schrader," Question for Ms. Dorfman. I am trying to follow up on Bart's comments. In my State oftentimes there is a lot of lip service paid to limited minorities and small businesses and their access to some of the larger construction grants and/or opportunities like the stimulus. And they never really happen. Is there a better way that you or the Women's Chamber has come upon that we should be using to deliver funds to make sure that there is adequate representation by women and minority small business? Ms. Dorfman. Thank you. What we have found is that women have really relied heavily on SBA lending because they often aren't able to access traditional loans, and so putting the money into the SBA lending programs and making sure that they do have access to those programs would be the first, I think, way to get into the money into their hands. " CHRG-111hhrg52261--109 Mr. Hampel," Thank you. Chairwoman Velazquez, Ranking Member Graves, and other members of the committee, thank you very much for the opportunity to testify at today's hearing on behalf of the Credit Union National Association, which represents over 90 percent of our Nation's 8,000 State and Federal credit unions, the State leagues, and their 92 million members. I am Bill Hampel, the Chief Economist. Credit unions did not contribute to the recent financial debacle, and their current regulatory regime, coupled with their cooperative structure, militates against credit unions ever contributing to a financial crisis. As Congress considers regulatory restructuring, it is important that you not throw out the baby with the bathwater. Regulatory restructuring should not just mean more regulation. There needs to be recognition that in certain areas, such as credit unions, regulation and enforcement is sound and regulated entities are performing well. Credit unions have several concerns in the regulatory restructuring debate. These include the preservation of the independent regulator, the development of the CFPA, and the restoration of credit unions' ability to serve their business-owning members. First, it is critical that Congress retain an independent credit union regulator. Because of credit unions' unique mission, governance, and ownership structure, they tend to operate in a low-risk, member-friendly manner. Applying a bank-like regulatory system to this model would threaten the benefits that credit unions provide their members. There is some logic for consolidating bank regulators where competition can lead to lax regulation and supervision, but that condition does not exist for credit unions which have only one Federal regulator, the National Credit Union Administration. The general health of the credit union system proves that our system works well. Considering the CFPA, consumers of financial products, especially those provided by currently unregulated entities, do need greater protection. CUNA agrees that a CFPA could be an effective way to achieve that protection, provided that the agency does not impose redundant or unnecessary regulatory burdens on credit unions. In order for a CFPA to work, consumer protection regulation must be consolidated and streamlined to lower costs and improve consumer understanding. CUNA strongly feels that the CFPA should have full authority to write the rules for consumer protection, but for currently regulated entities, such as credit unions, the examination and enforcement of those regulations should be performed by the prudential regulator that understands their unique nature. Under this approach, the CFPA would have backup examination authority. CUNA urges Congress to take the difficult step of preempting State consumer protection laws if establishing a CFPA. We are confident that by creating a powerful Federal agency with the responsibility to regulate consumer protection law, with rigorous congressional oversight, more than adequate consumer protection will be achieved. And if the CFPA is sufficiently empowered to ensure nationwide consumer protection, why should any additional State rules be necessary? Conversely, if the proposed CFPA is not expected to be up to the task, why even bother establishing such an agency in the first place? Finally, because they are already significantly regulated at the State level, we don't believe that certain types of credit life and credit disability insurance should be under the CFPA. As Congress considers regulatory restructuring legislation, CUNA strongly urges Congress to restore credit unions' ability to properly serve the lending needs of their business-owning members. There is no economic or safety and soundness rationale to cap credit union business lending at 12.25 percent of assets. Before 1998, credit unions faced no statutory limit on their business lending. The only reason this restriction exists is because the banking lobby was able to leverage the provision when credit unions sought legislation to permit them to continue serving their members. The credit union business lending cap is overly restrictive and undermines America's small businesses. It severely limits the ability of credit unions to provide loans to small businesses at a time when these borrowers are finding it increasingly difficult to obtain credit from other types of financial institutions, as was described by Mr. Hirschmann from the U.S. Chamber in the previous panel. It also discourages credit unions that would like to enter the business lending market from doing so. We are under no illusion that credit unions can be the complete solution to the credit crunch that small businesses face, but we are convinced that credit unions should be allowed to play a bigger part in the solution. Eliminating or expanding the business lending cap would allow more credit unions to generate the portfolios needed to comply with NCUA's regulatory requirements and would expand business loans to many credit union members, thus helping local communities and the economy. Credit unions would do this lending prudently; the loss rate on business loans at credit unions is substantially below that of commercial banks. A growing list of small business and public policy groups agree that now is the time to eliminate the statutory credit union business cap for credit unions. And in July, Representatives Kanjorski and Royce introduced H.R. 3380, the Promoting Lending to America's Small Business Act, which would increase the credit union business lending cap to 25 percent of total assets and change the size of a loan to be considered a business loan. We estimate that credit unions could safely and soundly lend an additional $10 billion in small loans in the first year after enactment of such a bill. Madam Chairwoman, thank you very much for convening this hearing, and I look forward to answering the committee's questions. " FOMC20081007confcall--30 28,MR. EVANS.," Thank you, Mr. Chairman. I was jotting down some of the figures on the lending facilities and the magnitudes just to see if I had the right ballpark. You know, from the TAF to the TSLF, the primary dealer credit facility, and on down to today's facility on commercial paper, and then if you throw in the Treasury program, which is not exactly ours, and the swaps as well, I get to something like over $3 trillion that is being put out against collateral and to be lent. Is that the right order of magnitude? I guess the question I have is whether we have any sense that this is likely to get to the point of unlocking the lending capacity that's so important to get the economy going? " CHRG-111hhrg67816--30 REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS Ms. Schakowsky. Thank you, Mr. Chairman, for holding this hearing. And congratulations to you, Mr. Leibowitz. We are glad to have you here. The repercussions of years of irresponsible mortgage lending continued to unfold. According to the Center for Responsible Lending, there have been nearly 550,000 new foreclosure filings since 2009 began, 6,600 each day or 1 every 13 seconds. We were trying to calculate how many since this hearing began. It is more than 100, in every 13 seconds yet another. In my State of Illinois more than 100,000 families are projected to lose their homes to foreclosure this year, and this Administration and this Congress are obviously taking steps to mitigate this crisis and ensure it never happens again. But to do that, I really think we have to ask how did we get here. We are here not just because the banks were a problem, and it is not just bank lending that is responsible for billions of dollars worth of bad loans that now must be dealt with in order to put our economy back on track. Lending by non-bank entities has exploded in recent years and a major factor in today's financial crisis Country Wide and other non-bank mortgage lenders are responsible for 40 percent of the home loans made in 2007 and 55 percent of the sub prime loans. It was the Federal Trade Commission's responsibility to exercise oversight of these mortgages where abusive practices have hurt consumers. Clearly, they missed something. The FTC's authority extends to, it is my understanding, auto loans, pay-day loans, car title loans, and other non-traditional forms of credit that often flows to non-bank entities and currency exchanges. We have those in Chicago big time. It is a vital role of this subcommittee to exercise oversight over FTC and its rulemaking enforcement actions over non-bank lenders, and I look forward to working with you, our committee does, to make sure that these improvements are made as we move forward. I thank you again, Mr. Chairman. " CHRG-110shrg50414--194 Secretary Paulson," Senator, I will give a quick view and I am sure the Chairman will. From a policy perspective, you have heard me express disapproval. I think that that is--although many people have considered it and advocate it, I very respectfully think it is a mistake, and when I look at what we are trying to do here, is to get lending going again and increase lending, I think this really mitigates against that and it is in contradiction with what we are trying to do, is to get lenders to do more if we do these bankruptcy modifications or cram-downs. But I understand there are differences of opinion and I respect the other view. I just think it is a mistake. Senator Casey. Chairman Bernanke. " CHRG-111hhrg54868--40 Mr. Neugebauer," Thank you. So your response, let me be clear, is that in response to the consumer protection, you weren't doing anything, what you are saying is in that area, for example, FDIC, you do not feel like you had any jurisdictional authority to address consumer issues? Ms. Bair. We feel we did not have strong enough rules against abuses like overdraft protection and credit card and subprime lending. Our subprime lending cases were brought as safety and soundness cases because those weren't prudent loans either. But we didn't have rules in place to tackle it from a consumer protection standpoint. " FinancialCrisisInquiry--658 VICE CHAIRMAN THOMAS: Ms. Gordon, in terms of your Center for Responsible Lending, do you deal with folks with credit cards as well? CHRG-111hhrg48674--187 Mr. Bernanke," Yes, sir. Every week in the H41 there is a breakdown of our lending programs and details on the maturities of the different loans, and we are looking to add more information. " FOMC20070810confcall--16 14,MR. MISHKIN.," So is it spending directly? Are the banks buying commercial paper, or are they lending directly to the people who can’t roll over their commercial paper?" FinancialCrisisReport--181 The ROE also reported on an unsatisfactory review of loans that had been originated by Long Beach and warned that, if the problems were not promptly corrected, “heightened supervisory action would be taken”: “Based on our review of 75 subprime loans originated by [Long Beach], we concluded that subprime underwriting practices remain less than satisfactory …. Given that this is a repeat concern and MRBA [Matter Requiring Board Attention], we informed management that underwriting must be promptly corrected, or heightened supervisory action would be taken, including limiting the Bank’s ability to continue SFR subprime underwriting.” 664 In the fourth quarter of 2007, WaMu’s loan portfolio lost $1 billion in value. Despite that loss, and the strong language in the 2007 examinations, OTS took no enforcement action against the bank that would result in WaMu’s tightening its lending standards or strengthening compliance with the standards it had. 2008 Lending Deficiencies. In the first six months of 2008, WaMu continued to incur billions of dollars in losses, as its high risk loan portfolio lost value and its share price fell. In July 2008, about two months before the bank failed, OTS met with the WaMu Board of Directors to discuss, among other matters, the bank’s deficient lending standards. While the presentation to the Board reiterated the concerns from past years, it failed to convey a sense of urgency to a bank on the verge of collapse. Instead, the presentation focused on long term corrective action that WaMu should take. The OTS written presentation to the Board included the following: “High SFR [Single Family Residential] losses due in part to downturn in real estate market but exacerbated by: geographic concentrations[,] risk layering[,] liberal underwriting policy[,] poor underwriting. … Discontinuing higher risk lending and tightened underwriting policy should improve asset quality; however, actions should have been taken sooner. … Significant underwriting and process weaknesses noted again in the Home Loans Group[.] ... Reducing higher risk lending products and practices should have been done sooner.” 665 Failure to Correct Deficient Lending Practices. In various reports for nearly five consecutive years, OTS criticized WaMu’s lending standards, error and exception rates, and loan documentation, and directed the bank to improve its performance. When WaMu failed to improve during that span, OTS failed to take action, such as requiring a board resolution, 663 9/18/2007 OTS Report of Examination, at OTSWMEF-0000046679, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 664 9/18/2007 OTS Report of Examination, at OTSWMEF-0000047146, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 665 7/15/2008 OTS Presentation to WaMu Board of Directors based on Comprehensive Examinations, Polakoff_Scott-00061303_007, 012, 027, Hearing Exhibit 4/16-12b. memorandum of understanding, or cease and desist order compelling WaMu to tighten its lending standards and increase oversight of its loan officers to reduce underwriting error and exception rates and improve loan documentation. The result was that WaMu originated or purchased hundreds of billions of dollars of high risk loans, including stated income loans without verification of the borrower’s assets or ability to repay the loan; loans with low FICO scores and high loan-to-value ratios; loans that required interest-only payments; and loan payments that did not cover even the interest owed, much less the principal. (b) Deficiencies in Risk Management CHRG-110hhrg38392--77 Mr. Bernanke," Well, the Federal Reserve has multiple roles, and the primary purpose of this hearing is to talk about monetary policy in the economy, and that is normally the only topic I would cover. In this case, though, the Federal Reserve also has some regulatory roles in reference to subprime mortgage markets in particular, and I thought this would be a useful opportunity to update this committee on some of the actions we are taking specifically in this particular market. The concerns are in terms of what the effects of tightened lending standards might be on the housing demand, for example, which is one of the factors affecting the growth of the overall economy. But the main concerns I was addressing in the latter part of my testimony were really the maintenance of legitimate subprime lending and the protection of consumers from abusive practices. " CHRG-111hhrg56241--182 Mr. Bachus," Yes, I do want to say this. I think we are dealing with executive compensation, and I think one thing that does trouble most Americans and Members on both sides of the aisle is that some of the very large banks do borrow very cheaply from the Fed, and that is taxpayer subsidized in one way or the other. Whether they invest them in Treasury bonds or carry trade, or whether they use them to trade and make additional profits, the original premise was that money would be loaned, and it is not. Now, I will say this: The flip side of the argument is that they are using those trading profits to cover some of their lending losses, and in some ways that makes the banks stronger and it may avoid the government having to come up and pick up liability. You know, that is one of their answers. Another one that they say is that there are no borrowers; they can't find borrowers who are qualified. Now, I talk to many people back in Alabama, and they say when they deal with the large banks, they say they are not interested in loaning someone $200,000. They are interested in $100 million deals. So I think that is a real problem. Particularly as banks get bigger and bigger, they are not lending on Main Street. They are lending to large corporations, but smaller businesses can't get loans. And I do think the American people do believe that by being able to borrow cheaply from the Fed and some of the guarantees that have been extended, that money is finding its way into compensation, which gives the appearance of being excessive. And so I think these are valid concerns. And also, the last concern, and I will close with this, and I think it is a concern we all have, as they do this trading they tend to be going back and doing what got them in trouble in the first place, and that is speculating, leveraging, and what happens, do we get right back into the problem we had? And if they are going to get in trouble, they say, you know, you don't want us to make bad loans. That is true. We also don't want them to make trades that are risky. And if anything, the trades benefit themselves, proprietary trading, whereas the lending at least gets the economy going. " CHRG-110hhrg46591--375 Mr. Yingling," I agree with that answer completely. I think one of the problems with this idea of putting capital into community banks is a perception problem. And that is--and you see it on TV, you see it in the media--are we bailing out these banks? We don't need to bail out these banks. These banks are solid banks, willing to lend, and they don't have to take this capital. But the capital markets are pretty well closed to them right now. So if you want them to have more lending, you have to say, we want you to do this. And in a way, you are a hero to do it. It is not a natural thing for community banks to say, I want a government investment. That is against their philosophy. But they need to know they are not going to have a scarlet ``A'' around their necks if they do this kind of thing. " CHRG-111shrg57319--40 Mr. Melby," That is correct, yes. Senator Levin. Now, wholesale specialty lending was its broker-initiated subprime operation, right? " CHRG-111hhrg49968--62 Mr. Scott," Some banks have also complained that the additional FDIC fees will reduce their lending capacity and, therefore, have an adverse effect on the economy. Do you have a comment on that? " CHRG-111hhrg53244--52 Mr. Bernanke," Certainly. Most central banks do have this authority, and they set a Fed funds equivalent rate in the open market, but they use the interest on reserves rate as sort of a floor or backstop. The Fed's authorities go back to the 1930's, and we are actually somewhat more limited on a number of these areas than other central banks. Other central banks have somewhat broader power to buy assets, to pay interest on reserves, and to lend to financial institutions. For example, we had to invoke the 13.3 authority to lend to the primary dealers and the investment banks. Whereas in Europe, for example, any financial institution can borrow from the central bank. " CHRG-109hhrg31539--244 The Chairman," The gentlelady from California, Ms. Lee. Ms. Lee. Thank you, Mr. Chairman. Good to see you again Mr. Chairman. I don't want to have to get back on my soap box on this, but I guess I will because I have been trying to get, since Chairman Greenspan, some real answers to this issue so that we can move forward. So in the past, and I think I have talked to you a little bit about this the last time you were here, I have sought to work with Chairman Greenspan to address the obvious racial and ethnic disparities in small business lending and home mortgage lending as well as I have talked with the CEO of our local Federal Reserve, Janet Yellen. Now, unfortunately, the response that I have received in each case has been totally inadequate. And this has been going on for several years. Mr. Greenspan suggested that the cost to business would prohibit stronger data collection, discounting the positive effects to the economy of increasing minority homeownership and small business lending. And Ms. Yellen also indicated that it would be way beyond the capacity of the Federal Reserve to undertake a community survey of minority homeownership and suggested that we wait until the 2010 Census. I think the Federal Reserve must do more to ensure accountability to these unfair lending practices and to meaningfully address the tremendous gap, and it is tremendous in minority homeownership. Toward that end, I am interested in looking at ways to link the Community Reinvestment Act ratings with lending practices, and I have written you a letter--you probably haven't seen it yet--on July 12th, summarizing all this. CRA, of course as you know, was written to address how banking institutions meet the credit needs of their low- and moderate-income neighborhoods and ensure that banks invested in and strengthened the communities in which they were doing business. And part of this goal also was to reach out to traditionally underserved communities and provide them with access to capital if they needed it so that they could grow with their community bank. But disappointingly, according to much of the data that we have received, and I am sure you know this data, most banks provide on average--now this is on average--about a 1 to 2 percent conventional loan rating to their--in terms of home loans to African-Americans and to Latinos and yet the CRA ratings are ``A's'', and ``outstandings'', and what have you. And so what I am trying to figure out is, understanding the CRA doesn't currently focus on lending to minorities, don't you think that it makes sense to strengthen the statute to do so or at least to increase the amount of data, just increase the amount of data that is collected based on race and ethnicity because I believe--and I wanted to get your sense of this--that the potential economic benefits would definitely outweigh the minimal costs posed to businesses for collecting such information. And again, I hope to hear from you in writing because I did write this up again on July 12th. And just the second question is--or well, yes, it is a question. I wanted to get your sense of the Wachovia regulatory approval of its acquisition of World Savings. That is located in my district, and we, since I have been in Congress, haven't been through this type of acquisition, and I wanted to hear what the underlying factors are in the Federal Reserve's decision and what your timetable is for the approval. " CHRG-110hhrg46593--113 Secretary Paulson," Well, okay, to answer that question, there are no banks, when the system is under pressure, unless they are ready to fail, that are going to raise their hand and say, please, I need capital; give me some capital. What happens when an economy turns down and when there is a crisis, they pull in their horns. They say, I don't need help. They don't deal with other banks. They don't lend, and the system gets ready to collapse. So the step that we took was very, very critical, and to be able to go out and go out to the healthy banks and go out before they became unhealthy and to increase confidence in the banks and of the banks so that they lend and that they do business with each other, that was absolutely what we were about. And when we came here to-- " CHRG-111hhrg55809--110 Mr. Bernanke," It is a loan from the banks, but it is not a loan that requires capital to back it up. And therefore, in that sense, it doesn't crowd out other lending. But there are no good solutions there, and I know the FDIC has really struggled with the right approach. " FinancialCrisisReport--75 Likewise, Steven Rotella, WaMu’s President and Chief Operating Officer, who began with the bank in January 2005, testified before the Subcommittee: “In particular, I want to be very clear on the topic of high-risk lending, this Subcommittee’s focus today. High-risk mortgage lending in WaMu’s case, primarily Option ARMs and subprime loans through Long Beach Mortgage, a subsidiary of WaMu, were expanded and accelerated at explosive rates starting in the early 2000s, prior to my hiring in 2005…. In 2004 alone, the year before I joined, Option ARMs were up 124 [percent], and subprime lending was up 52 percent.” 195 In his testimony, Mr. Rotella took credit for curtailing WaMu’s growth and high risk lending. 196 Mr. Rotella’s own emails, however, show that he supported the High Risk Lending Strategy. On October 15, 2005, Mr. Rotella emailed Mr. Killinger about WaMu’s 2006 strategic plan: “I think our focus needs to be on organic growth of home eq, and subprime, and greater utilization of [the Home Loans division] as we know it today to facilitate that at lower acquisition costs and greater efficiency.” 197 Mr. Killinger replied by email the next day: “Regarding Longbeach, I think there is a good opportunity to be a low cost provider and gain significant share when the industry implodes.” 198 Responding to Mr. Rotella’s ideas about the Home Loans division, Mr. Killinger wrote: “It makes sense to leverage the home loans distribution channels with home equity, sub prime, and alt. A.” 199 In this late 2005 email exchange, WaMu’s two senior-most executives contemplate reducing prime lending, not subprime. Mr. Killinger wrote: “If we can’t make a shift in our business model, we might be better off exiting the prime space.” 200 Mr. Rotella replied to Mr. Killinger’s email later on October 16, 2005. He continued to emphasize the importance of focusing on high risk lending, referring to his previous experience as a mortgage banker at JPMorgan Chase: “We did these kinds of analyses all the time at Chase which led us to run as fast as we could into home eq, alt a, subprime (our investment banking brethren stopped us from going too far here). We viewed prime as a source of scale benefits in servicing for the other areas and a conduit of higher margin product and aimed to hold our prime servicing 194 April 13, 2010 Subcommittee Hearing at 18-19. 195 Id. at 83. 196 See id., e.g., at 83-84. 197 10/15/2005-10/16/2005 email from Steve Rotella to Kerry Killinger, JPM_WM00665373-75. 198 Id. at JPM_WM00665374. 199 Id. 200 Id. flat to down. I feel strongly that where we need to land is a new home loan unit that includes prime, heq, and subprime. It is a far superior model.” 201 CHRG-110hhrg46591--265 Mr. Yingling," Well, it is really a problem with the larger banks in the international markets. As Mr. Washburn said, it is not really a problem with community banks. The great majority of community banks are in solid shape and are willing to lend. This new program can have a positive impact. One thing we have to watch is how many strings are attached, because these are banks that can do just fine by themselves, but they need capital to support growth in lending, and the capital markets to community banks right now are not functioning very well. So you could have a situation where a bank will take some of this capital for a very short period of time, and then when the capital markets open, they will replace it with private capital. " FOMC20080724confcall--12 10,MR. LACKER.," With the way that we currently operate the Term Securities Lending Facility now in place, is there any upper limit on the fee that some participant can bid? " CHRG-111hhrg51698--90 Mr. Gooch," Yes, I do. The CDS is a specific type of credit derivative that I am concerned about the elimination of the naked risk. If you went to that extent, then I guess you could disallow disinterested parties from buying and selling stock options or shorting stocks. And you could just do the same thing in the foreign exchange markets and the bond markets, and have the same thing in the agricultural markets and have no liquid markets. My concern with the elimination of the naked-risk trading, the elimination of it in the CDS market, is once you do that, you take the risk-taker and capital provider out of the equation, right now I take the contrary view to Mr. Greenberger that the credit derivatives are not the reason the banks aren't lending. The banks aren't lending because they are concerned about their capital requirements. You have mark-to-market, which I said in normal markets makes sense, and they are reluctant to put money out on the street because they can't get it back in a moment's notice; and they don't want to go to you guys for very expensive preferred equity, so they are sitting there not lending. Finally enough, the only lenders in the market are the providers of credit default swap protection that are still very willing to provide that protection, and that is making it possible for some of the most secure credits to be provided with capital. It is also allowing for these very banks to protect some of their risk they have with certain lending relationships they have now, which, otherwise, they might curtail to an even greater extent. So, as you know, I only have 18 percent of my business in credit derivatives. If it disappeared tomorrow, we would find something else to intermediate, probably carbon credits. So I am not speaking from my own personal best interest, I am actually talking about the U.S. economy and the global economy. My concern, as an independent, neutral marketplace for credit derivatives, is that if you take it away, you are going to really significantly damage the very fragile credit market we have now. " CHRG-111hhrg56766--333 Mr. Minnick," If the Chairman has just a few more moments, I would like to ask a couple of questions. During the Reagan Administration and dealing with the problem of commercial bank lending, which we are going to have a hearing on as the chairman said on Friday, in dealing with a similar situation, the Reagan Administration adopted a policy they called ``forbearance,'' which was a temporary reduction in the capital requirements at the discretion of regulators in order to permit banks that were scraping against the very minimum capital levels in the appropriate circumstance to continue to lend. Do you have an opinion as to the efficacy and appropriateness of that kind of a policy, and if you think it has merit, is it something we should consider in the present circumstance? " CHRG-109hhrg31539--245 Mr. Bernanke," I can answer the first three at least. The Federal Reserve has recently expanded the data collection under HMDA, the Home Mortgage Disclosure Act, which collects data on every single home mortgage loan essentially made in the country including pricing, including denial rates, and including ethnicity. So we have a great deal of data on that issue, and we are using it as an initial screen to check for fair lending violations. With respect to CRA, it is absolutely correct that if the purpose of CRA is to get banks and other institutions to reach out to underserved communities, and they get credit for doing that when they do, and if they violate the fair lending laws, that's a debit in their CRA rating. Ms. Lee. But that is not so at this point. " CHRG-111shrg61513--99 Mr. Bernanke," It boils down--well, I do not think--I think Treasury was right not to terminate it unconditionally at this point because there is still some risk out there that we may have further financial problems. I think it is small. But to have some flexibility in case some new crisis were to arise, I think at least for a short period, is not unreasonable. I am afraid I am going to have to defer to Congress on whether or not you think the other programs that are being proposed, like support for small business lending and those things, are within the spirit of the TARP or good programs in themselves. I do not know how to help you on that one. Senator Bennett. All right. Well, this Member of Congress thinks they are not. Thank you, Mr. Chairman. Senator Johnson. Senator Merkley. Senator Merkley. Thank you very much, Mr. Chair. And thank you, Chair Bernanke, for your testimony. I first wanted to note that when Senator Vitter asked the question on whether there is a need to limit the Fed's ability to use Section 13(3) Federal Reserve Act emergency lending power funds to support individual firms, I just wanted to note that in Chair Dodd's draft that action--that is, emergency lending to individual firms--is prohibited. And so a point I was asked to put forward and clarify. I wanted to turn to the issue of recapitalizing our community banks. This is something I hear about back home all the time, the challenge of these banks to be able to put out new loans given their leverage limitations and their capital challenges. And I had supported an effort to recapitalize community banks, and the Administration has now put forward a very similar plan. I was just wondering if you could give us any insights on your perceptions on how the role of community banks in supporting lending to small business might be a factor in the recovery of our economy. " CHRG-111hhrg56766--246 Mr. Paulsen," How long do you think it will be before the Federal funds rate becomes the benchmark again for overnight lending, and how tested are these tools that you have to employ or you plan on employing in the near future, I guess? " CHRG-111shrg62643--229 RESPONSES TO WRITTEN QUESTIONS OF SENATOR DEMINT FROM BEN S. BERNANKEQ.1. In the past months, the European Central Bank has spent billions of dollars to purchase sovereign debt from overleveraged EU countries, in essence bailing out these countries by supporting their ability to continue to finance further debt rather than impose needed budgetary discipline. Prior to this program, the ECB, through liquidity facilities, was accepting sovereign debt collateral from European banks. Here at home in the U.S., some States and municipalities have similarly overleveraged themselves and failed to make the difficult decisions necessary to get their finances in order--the clearest example being the States of Illinois and California. Being concerned that the Federal Reserve could choose to pursue a similar course, is it your opinion that the Fed has the authority: a. To accept municipal debt as collateral from commercial or investment banks? b. To create a special lending facility for private-sector purchases of municipal bonds, similar to what the Fed did in 2009 for commercial real estate securitizations? c. To guarantee or directly purchase municipal bonds in the secondary market, similar to the purchase program for the more than $1 trillion of mortgage-backed securities now on the Fed's balance sheet? d. To lend directly to overleveraged States or municipalities?A.1. Answer not received by time of publication.Q.2. If your answer to any of Question Number 1's subparts is yes, please explain, for each and with specific references, from where this authority is derived?A.2. Answer not received by time of publication.Q.3. Would you ever support any of the following courses of action for the Federal Reserve: a. To accept municipal debt as collateral from commercial or investment banks? b. To create a special lending facility for private-sector purchases of municipal bonds, similar to what the Fed did in 2009 for commercial real estate securitizations? c. To guarantee or directly purchase municipal bonds in the secondary market, similar to the purchase program for the more than $1 trillion of mortgage-backed securities now on the Fed's balance sheet? d. To lend directly to overleveraged States or municipalities?A.3. Answer not received by time of publication.Q.4. If your answer to any of Question Number 3's subparts is yes, please explain your rationale for each.A.4. Answer not received by time of publication. ------ CHRG-111hhrg48674--287 Mr. Bernanke," Sir, the expansion of the assets that we take, it would still work the same way, which is that investors would purchase these assets from the issuers of the ABS, and then we would lend to the--against that collateral we would lend to those investors in an amount between 85 and 95 percent of the principal value, depending on the risk that we saw in those assets. So the participants on the investors side may be very much the same, potentially the same group of people, just general investors. And on the issuers side, you have banks and other institutions which create ABS. The difference would be the types of assets which are being securitized, and that would affect different markets like the commercial mortgage market, for example. " FOMC20080929confcall--16 14,CHAIRMAN BERNANKE., The issue of unusual and exigent is not coming up here because we're not dealing with any section 13(3) lending today. President Evans. CHRG-111shrg57319--485 Mr. Rotella," Senator, I believe given the expansion of stated income lending in the marketplace in general, it would be naive to think that there weren't some who didn't. Senator Kaufman. Do you have reason to believe that WaMu's internal controls are sufficient to deter fraud in these kind of products? " CHRG-111shrg55117--134 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KYL FROM BEN S. BERNANKEQ.1. As I recall at the Republican Policy Lunch a few weeks ago you acknowledged that some or the regional offices of Federal bank regulators may be too strict in their examinations and may have inadvertently discouraged some institutions from making certain loans that would otherwise be viable. Have you been able to make any progress in addressing this problem?A.1. In response to your concerns that actions of our examiners may be inadvertently discouraging bank lending, it is important to remember that the role of the examiner is to promote safety and soundness at financial institutions. To ensure a balanced approach in our supervisory activities, we have reminded our examiners not to discourage bank lending to creditworthy borrowers. In this environment, we are aware that lenders have been tightening credit standards and terms on many classes of loans. There are a number of factors involved in this, including the continued deterioration in residential and commercial real estate values and the current economic environment, as well as the desire of some depository institutions to strengthen their balance sheets. To ensure that regulatory policies and actions do not inadvertently curtail the availability of credit to sound borrowers, the Federal Reserve has long-standing policies in place to support sound bank lending and the credit intermediation process. Guidance, which has been in place since 1991, specifically instructs examiners to ensure that regulatory policies and actions do not inadvertently curtail the availability of credit to sound borrowers. \1\ The 1991 guidance also states that examiners are to ensure that supervisory personnel are reviewing loans in a consistent, prudent, and balanced fashion and emphasizes achieving an appropriate balance between credit availability and safety and soundness.--------------------------------------------------------------------------- \1\ ``Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans'', (November 1991); www.federalreserve.gov/boarddocs/srletters/1991/SR9124.htm.--------------------------------------------------------------------------- As part of our effort to help stimulate appropriate bank lending, the Federal Reserve and the other Federal banking agencies issued a statement in November 2008 reinforcing the longstanding guidance encouraging banks to meet the needs of creditworthy borrowers. \2\ The guidance was issued to encourage bank lending in a manner consistent with safety and soundness, specifically by taking a balanced approach in assessing borrowers' ability to repay and making realistic assessments of collateral valuations.--------------------------------------------------------------------------- \2\ ``Interagency Statement on Meeting the Needs of Creditworthy Borrowers'', (November 2008); www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm.Q.2. If so, how is the Federal Reserve facilitating coordination among the regional offices of our regulators to ensure standards are applied in a way that protects the safety and soundness of the banking system without discouraging viable ---------------------------------------------------------------------------lending?A.2. Federal Reserve Board staff has consistently reminded field examiners of the November guidance and the importance of ensuring access to loans by creditworthy borrowers. Across the Federal Reserve System, we have implemented training and outreach to underscore these intentions. We have prepared and delivered targeted Commercial Real Estate training across the System in 2008, and continue to emphasize achieving an appropriate balance between credit availability and safety and soundness during our weekly conference calls with examiners across the regional offices in the System. Weekly calls are also held among senior management in supervision to discuss issues on credit availability to help ensure examiners are not discouraging viable safe and sound lending. Additional outreach and discussions occur as specific cases arise and as we participate in conferences and meetings with various industry participants, examiners, and other regulators. Additional Material Supplied for the Record" FinancialCrisisReport--70 Mr. Vanasek agreed: “I could not agree more. All the classic signs are there and the likely outcome is probably not great. We would all like to think the air can come out of the balloon slowly but history would not lean you in that direction. Over the next month or so I am going to work hard on what I hope can be a lasting mechanism (legacy) for determining how much risk we can afford to take ….” Despite Mr. Killinger’s awareness that housing prices were unsustainable, could drop suddenly, and could make it difficult for borrowers to refinance or sell their homes, Mr. Killinger continued to push forward with WaMu’s High Risk Lending Strategy. (6) Execution of the High Risk Lending Strategy WaMu formally adopted the High Risk Lending Strategy in January 2005. 179 Over the following two years, management significantly shifted the bank’s loan originations towards riskier loans as called for in the plan, but had to slow down the pace of implementation in the face of worsening market conditions. In retrospect, WaMu executives tried to portray their inability to fully execute the plan as a strategic choice rather than the result of a failed strategy. For example, Mr. Killinger testified at the Subcommittee hearing that the bank’s High Risk Lending Strategy was only contemplated, but not really executed: “First, we had an adjustment in our strategy that started in about 2004 to gradually increase the amount of home equity, subprime, commercial real estate, and multi-family loans that we could hold on the balance sheet. We had that long-term strategy, but … we quickly determined that the housing market was increasing in its risk, and we put most of those strategies for expansion on hold.” 180 Mr. Killinger’s claim that the High Risk Lending Strategy was put “on hold” is contradicted, however, by WaMu’s SEC filings, its internal documents, and the testimony of other WaMu executives. Washington Mutual’s SEC filings contain loan origination and acquisition data showing that the bank did implement its High Risk Lending Strategy. Although rising defaults and the 2007 collapse of the subprime secondary market prevented WaMu from fully executing its plans, WaMu dramatically shifted the composition of the loans it originated and purchased, nearly 179 See 3/13/2006 OTS Report of Examination, at OTSWMS06-008 0001677, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 180 April 13, 2010 Subcommittee Hearing at 88. doubling the percentage of higher risk home loans from 36% to 67%. The following chart, prepared by the Subcommittee using data from WaMu’s SEC filings, demonstrates the shift. 181 CHRG-111hhrg56241--202 Mr. Stiglitz," Yes. We were talking about that at the beginning of the hearing, that money that goes out in bonuses is money that is not available in, you might say, the net worth of the bank and therefore not available as the basis of the leverage that the bank can lend out. " CHRG-111hhrg52406--175 Mr. Yingling," How can they be generated by one agency? One is the Bank Secrecy Act. One has to do with account opening and truth in lending, and one has to do with antifraud. They are different rules. Ms. Seidman. They could be harmonized much better if one agency is harmonizing them instead of many of them. " CHRG-110hhrg46593--395 Mr. Cleaver," This is for both of you. We have to go. I wanted to talk about situational conservatism, but we don't have time, Dr. Feldstein. I mean, it is always amusing that people are opposed to government involvement until they want government involvement, but that is just not what I am going to talk about now, because I don't have time. But the question I want to ask is, do either of you find that there is something wrong with the fact that the banks are able to borrow cheap money from the government? The loan rate, the lending rate between banks is still unstable; and, at the same time, the consumers' borrowing costs seem to be rising. I mean, is there something--does that bother you, trouble you at all, particularly when you consider the fact that we are putting money into these lending institutions? " CHRG-111hhrg53240--127 Mr. Cleaver," Lord help us. Ms. McCoy. Exactly. I think it makes sense for the Community Reinvestment Act to be part of the new agency because the agency is so concerned with access to credit and credit quality. And those two things are at the core of CRA. Ms. Saunders. My organization does not really work on CRA issues. But I can tell you that as I was writing my testimony and the particular history on Rent-a-Bank, payday lending where the banks are lending their preemption rights to the payday lenders, I was struck--I had help on the testimony from Jean Ann Fox at the Consumer Federation. I was struck by the important role that CRA played in eventually bringing--eventually, it was one of the rare successes, all four of the banking agencies, to realize that this was not appropriate and shutting it down. " FinancialCrisisInquiry--196 CHAIRMAN ANGELIDES : You refer to “animal spirits,” in the context of your remarks today. To what extent do the animal spirits extend beyond the housing market? In other words, as we look at causes, perhaps—I don’t want to characterize it—it was certainly a large fire burning, but what were the other fires burning—what were the other areas of excess within the economy in the last few years, in your judgment? If any? ZANDI: I think the... CHAIRMAN ANGELIDES: And by proportion? (LAUGHTER) ZANDI: I think the hubris in the financial system was widespread. I think it was clearest and most evident in the residential mortgage market, thus the focus on that. But I think it extends well beyond that, and, as we can see to this day, into commercial real estate lending, which many small banks are now struggling with, to corporate lending, all various kinds of—of corporate lending. It was evident more broadly in financial markets, in the derivatives market, stock prices, obviously in commodity markets at certain points in time. So I think the hubris among investors, global investors, was extraordinarily widespread and cut across lots of different markets, a whole range of markets. In fact, it would be more difficult to identify the markets that weren’t affected at the height of this by that hubris. CHAIRMAN ANGELIDES: Is there any way of measuring proportionality? CHRG-111hhrg48874--206 Mr. Menzies," Thank you, Mr. Chairman. Thank you, Ranking Member Bachus. It is certainly my honor to be here. As you said, I am president of Easton Bank and Trust from the beautiful Eastern Shore of Maryland. I am especially proud to be the new chairman of the Independent Community Bankers of America. We are a $170 million bank on the Eastern shore, a community bank, a Subchapter S bank. I am thrilled to represent some 8,000 banks from around this Nation and our 5,000 members in the ICBA to talk about exploring the balance between increased credit availability and prudent lending standards. Notwithstanding Mr. Long's concern that community banks are overextended, and community banks need to be prepared for a worse environment, the vast majority of community banks are well capitalized, well managed institutions, actively participating in the economic recovery by lending to small and medium-sized businesses and consumers in their communities. Community banks represent thousands of communities throughout the Nation and they make relationship-based decisions. We do not make decisions based solely on scoring models or rating agencies, algorithms or computer simulations. However, the community bank regulatory climate is causing many community banks to unnecessarily restrict lending activities. For one, there appears to be a disconnect between the banking regulators in Washington who are promoting lending, and we are hearing this, and the field examination staff who require overly aggressive write-down's and reclassifications of viable commercial real estate loans and other assets. Yes, Mr. Bachus, what they are saying at the top is not reaching the bottom. Community bankers report that examiners require write-down's or classifications of performing loans due to the value of collateral irrespective of the income or the cash flow or the liquidity of the borrower. By placing loans on non-accrual, even though the borrower is current on payments, discounting entirely the value of guarantors, substituting the examiner judgment for that of the appraiser, and de-valuing loans merely because it is lying in or close to an area of high foreclosure levels, this all reduces credit available to communities. What we expect is examiners to be more thorough and careful with their examinations during an economic downturn. Based on what we have heard from our members, we believe that in many cases, examiners have gone too far. Excessively through exams that result in potentially unnecessary losses of earnings and capital can have an adverse impact on the ability of community banks to lend, since community banks are the prime engine behind small business lending, any contraction of lending further exacerbates the current economic downturn and impedes the flow of loans to creditworthy borrowers. Community banks are not de-leveraging. We are leveraging up and we need to continue to leverage up. ICBA does appreciate the recent overtures from banking regulators to improve the examination environment for better communications between banks and regulators, and the education of agency field staffs on the consequences of overly restrictive examination practices on credit availability. We have several recommendations in our written testimony that would create a regulatory environment that promotes community bank lending. I would like to highlight a few. Number one, examiners must take a long-term view toward real estate held by banks as collateral on loans and not demand aggressive write-down's and reclassifications of loans because illiquid or dysfunctional markets have forced sales. Real estate assets are long-term assets, and should not be based upon the short-term business cycle valuations that we are facing today. Number two, unlike some large money center in regional banks, the hallmark of community bank loan underwriting is a personal relationship with the borrowers we lend to, and character does in fact count in community bank lending. During this economic crisis, regulators should allow a bank to hold a small basket of character loans from borrowers who have a strong record of meeting contractual obligations and where there are other indicators that support the repayment of that loan. Loans in the basket would be exempt from strict underwriting standards and could not be criticized by examiners as long as they are performing. The amount of loans that could be held in such a basket might be a percentage of capital. Three, the examination in the field process should be strengthened to make it easier for bankers to appeal without fear of examination retaliation. Agency ombudsman determinations should be strengthened and the ombudsman made more independent. Four, the FDIC should find an alternative, and we are pleased they are seeking an alternative, to the 20 basis points special assessment which would consume much of bank earnings in 2009 and further constrain lending. The special assessment should include a systematic risk premium and be based on assets. I have never lost based on deposits and liabilities. Five, OTTI accounting rules are distorting the true value of financial firms and needlessly exacerbating the credit crisis. This does not serve the best interest of investors or the economy. We appreciate the committee's efforts to resolve this accounting issue. We believe FASB's recent proposal could be a positive step in resolving mark-to-market problems. We will be providing further suggestions and clarifications to the FASB. If there is time later, I would be happy to comment about this subject to performing loans, I have strong opinions about the meaning of a ``performing loan'' in today's regulatory world. Thank you so much for this opportunity. [The prepared statement of Mr. Menzies can be found on page 151 of the appendix.] " CHRG-111hhrg54868--84 Mr. Scott," Thank you, Mr. Chairman. Let me ask, it is a great pleasure to have the three of you here, who are our primary regulators in our system. But I would like to take the gist of my questions on the state of the economy now. Because in the final analysis, a major reason why we are putting these financial reforms in place is to, quite honestly, save our economy and our financial system. But if I am the American people out watching us and trying to glean something from what is a very complex, complicated issue, our report card for the American people would get an ``F'' right now. And I want to ask you, Ms. Bair, Comptroller Dugan, Mr. Bowman, and also you, Mr. Smith, why are we at the state that we are after spending $700 billion in TARP money, $700 billion in bailout money, $700 billion in economic recovery? We are looking at almost $2 trillion that we directly put out within the last 7 or 8 months, and yet, as you and I have discussed, Ms. Bair, and I would like for you to lead off, because the indicators are not very good for us. Home foreclosures are still ratcheting through the roof. Bank closings are at a record rate, especially in my home State of Georgia. Unemployment is at 10 percent, and in some areas at Depression levels. Banks that we are supervising and you are regulators of are not lending, particularly to small businesses, therefore bringing out bankruptcies there. So to me, the American people are probably saying, what good does it do for us to be sitting up dealing with these regulatory reforms when, in fact, where is the report on what we have been doing? Why is it that we can't see the jobless numbers go down? Why is it that banks are not moving to mitigate loans? Why is it that banks are not restructuring? And at the same time that this is happening, many of them are going back to their same old ways of bonuses and salaries. The American people have a right to be very angry. So could you please respond to why we are in the state we are in? And what are we doing to get these banks to unleash this money and make loans and mitigate loans so that people can--we can really stimulate the economy and keep people in their homes? I think if we do that, that is the way in which we are going to stop all of these bank foreclosures and small businesses going into bankruptcy. And Ms. Bair, I would particularly like for you, because we moved to give the FDIC the authority and funding to move within the foreclosure area particularly to deal with this area, could you really tell us how we are progressing there, and why we are not doing more? Ms. Bair. Well, a couple of things. Regarding loan modifications, that is something certainly we advocated. And some of the work we did with the IndyMac loan modification program was used by Treasury and HUD to launch their own HAMP program. This is not something we are doing, though we support it and have tried to provide technical assistance. They estimate they can get about 500,000 loans modified in the near future. It is making a dent, but it was never meant to be the complete cure. It is not, but it can help a significant number of folks stay in their homes. To get banks to lend, we have taken a number of steps. We are asking our examiners to do a lot. There was some bad lending going on. There was some lending based on rising collateral values that shouldn't have happened. So, because there was too much credit out there, there needed to be some type of pull back. But the challenge is to make sure it doesn't pull back so far that the credit-worthy loans, the prudent loans, are not being made. We have tried to strike this balance with our examiners. We want our banks to lend. We want prudent lending. But, we don't want them to overreact. There are a lot of cross-currents. There are a lot of people saying that regulation wasn't tough enough; we need to be tougher. And there are other people saying, you are being too tough. It is a hard balance to strike. We have tried to provide clarity in a number of key areas. We have said very specifically that we want commercial loans restructured also. We want small business loans restructured, too. Loss mitigation is a good business practice, whether it is for residential mortgages or commercial mortgages. That needs to be disclosed and done properly. We want the appropriate loans restructured. We don't want good loans written down just because the collateral value has fallen. We don't want that to happen. We have made that very clear. " CHRG-111hhrg48674--315 Mr. Castle," Thank you, Mr. Chairman. Chairman Bernanke, first of all, I am delighted you are here. I am delighted we are having this hearing. I had written to the chairman of the committee some time ago asking for it, and I think all of us looked forward to it, and I think it is very valuable. You made a statement earlier--and you have made it before, I have seen it before at least; and that is that only half of loans at normal times are from banks. Can you briefly summarize where the other--what the percentages might be on the other half, where they might come from? And let me tell you why I am asking the question. We are concerned about not just the liquidity and the capitalization, all of which you are concerned about; it is part of your job. But we are also concerned about what is happening in terms of lending practices and the economy in general; and I am just concerned about what the other lending outlets might be, if you know that. " FinancialCrisisReport--358 The Offering Circular did, however, describe in detail a number of significant risks associated with RMBS securities. For example, it stated: • “The risk of losses on residential mortgage loans is particularly relevant now. While there is always a risk of defaults or delinquencies in payment, recently losses on residential mortgage loans have been increasing and may continue to increase in the future. The losses have been most significant in respect of subprime mortgage loans but all are affected. • A number of factors are contributing to the increase in losses. Residential property values that increased for many years are now declining. … Declining property values also exacerbate the losses due to a failure to apply adequate standards to potential borrowers. Failures to properly screen borrowers may include failures to do adequate due diligence on a borrower (including employment and income history) or the relevant property (including valuation) or failures to follow predatory lending and the other borrower-protection statutes. Increases in interest rates may also contribute to higher rates of loss. ... • The increase in delinquencies and defaults has contributed to a declining market for mortgage loans. The declining market has, in turn, seriously impacted mortgage originators and servicers. … The financial difficulties of servicers in particular are likely to result in losses in respect of securities backed by residential mortgage loans. … At any one time, the portfolio of Residential ABS Securities may be backed by residential loans with disproportionately large aggregate principal amounts secured by properties in only a few states or regions.” 1393 These disclosures demonstrate that both HBK and Deutsche Bank were well aware of the deteriorating mortgage market and increased risks associated with RMBS and CDO securities, even as they were marketing the Gemstone 7 securities and claiming HBK had applied careful analysis in the asset selection process to ensure good quality CDO securities. Long Beach-Fremont-New Century Bonds. A substantial portion of the cash and synthetic assets included in Gemstone 7, 30% in all, involved subprime residential mortgages issued by three subprime lenders, Long Beach, Fremont, and New Century, all known for issuing poor quality loans and securities. 1394 Loans by these lenders were among the first to collapse. According to Moody’s, these three originators, plus WMC Corporation, accounted for 31% of 1393 3/15/2007 Offering Circular for Gemstone CDO VII, Ltd., GEM7-00000427-816 at 483-84. While an earlier offering circular for Gemstone 7, dated February 14, 2007, identifies some risks associated with the CDO, the March offering circular contains additional language, quoted above, on the risks associated with the deteriorating mortgage market. 2/14/2007 Offering Circular for Gemstone CDO VII, Ltd., PSI-M&T_Bank-02-0001-370. 1394 For more information on these three lenders, see sections D(3)(d) and E(2)(c)-(d) of Chapter IV. Mr. Jenks of HBK told the Subcommittee that he saw data showing that Long Beach and Fremont were poor performers, but he thought the performance varied depending upon the tranche, and he believed he could pick the better tranches. He thought he could buy low, structure the deal well, and make money. Subcommittee interview of Kevin Jenks (10/13/2010). the subprime RMBS securities issued in 2006, but 63% of the rating downgrades issued in the second week of July 2007, when the mass rating downgrades began. 1395 CHRG-111hhrg53240--109 Mr. Carr," Good afternoon, Chairman Watt, Ranking Member Paul, and other distinguished members of the subcommittee. My name is James H. Carr, National Community Reinvestment Coalition. On behalf of the Coalition, I am honored to speak with you today. NCRC is an organization of more than 600 community-based associations that promote access to basic financial services across the country for working families. NCRC is also pleased to be a member of the new coalition, Americans for Financial Reform, that is working to cultivate integrity and accountability within the financial system. Members of the committee, the collapse of the U.S. financial system represents a massive failure of financial regulation that suffered from a host of problems, including regulatory system design flaws, gaps in oversight, conflicts of interest, weaknesses in enforcement, failed philosophical perspectives on the self-regulatory functioning of the markets, and inadequate resolution authority to deal with problems after they have occurred. At the request of the committee, I will devote my time today to one issue, and that is consumer protection. Safety and soundness and consumer protection are often discussed as separate issues, yet the safety and soundness of the financial system begins with and relies on the safety and soundness of the products that are extended to the public. If the extension of credit by a financial firm promotes the economic wellbeing and financial security of the consumer, the system is at reduced risk of failure. If the financial products exploit consumers, even if they are highly profitable to financial institutions, the system is in jeopardy of failure. Unfortunately, for more than a decade, financial institutions have increasingly engaged in practices intended to mislead, confuse, or otherwise limit a consumer's ability to judge the appropriateness of financial products offered in the market and make informed decisions. In fact, the proliferation of unfair and deceptive mortgage products led directly to the current foreclosue crisis and massive destruction of U.S. household wealth, which currently stands at about $13 trillion. The tricks and traps, as it has been described by Elizabeth Warren, used to trap consumers into high-cost abusive financial products, greatly complicated if not impaired the ability of a consumer to make an informed financial decision about the most appropriate product for their financial circumstances. Nowhere was this irresponsible and reckless behavior by financial institutions more prevalent than in communities of color. For more than a decade, Federal agencies, independent research institutes, and nonprofit organizations have described and discussed the multiple ways in which people of color have been exploited financially within the mortgage market. The result today, the foreclosure crisis is having its most damaging impact on communities of color in two ways: first, people of color are experiencing a disproportionate level of foreclosures; and second, they are most negatively harmed by rising unemployment. The Obama Administration recently proposed a sweeping reform of the financial system. A core element of the President's plan is the establishment of the Consumer Financial Protection Agency. House Financial Services Chairman Frank has proposed a similar agency in his legislation, H.R. 3126. A consumer protection agency is long overdue. Currently, the financial regulatory agencies compete with one another for fees paid by institutions that they are entrusted to regulate. The winning bid is the regulator that promises the least amount of consumer protection. Although competition is an essential element in a free market, oversight and enforcement of the law is not, nor should it be, available for purchase in a free market. In fact, regulation is one of the few instances in which a monopoly market will result in the most efficient and desired result. A consumer financial agency, as outlined by both the President and the Chairman, would achieve a commonsense goal, and that is to provide standard products to eliminate unnecessary confusion for consumers on routine transactions. The concept of a standard product seems to be an anathema to some observers, but it is worth remembering that a 30-year fixed rate mortgage has been for more than half a century, and remains today, the gold standard loan product. It was created to help the Nation recover from the collapse of the previous major fall of the housing and credit markets during the Great Depression. In short, sometimes a good standard is the best innovation. In order to be most effective, the new consumer financial protection agency must examine lending at a community level as well. Highly segregated communities of color are the primary targets for unfair, deceptive, and predatory lending. As a result, the agency must have the knowledge, experience, and resources to address this critical reality. Moreover, prohibiting reckless and irresponsible products is only half the challenge in making sure there is equal access to reliable financial services. Many financial firms simply deny access to financial services completely. America has a long, unfortunate history of redlining. The Act that most significantly can address that issue at a community level is the Community Reinvestment Act. That law was included in the consumer protection agency proposed by the President, and we recommend that it be included in the bill that is being considered by this House. In conclusion, there has and will continue to be considerable pushback against the idea of a consumer financial protection agency, primarily from financial institutions. Their argument is that such an agency will stifle innovation, limit access to credit, and discourage lending to families most in need. These arguments should be considered as having the same merit as the declaration that the markets are self-regulating. We have seen the folly of self-regulated markets, and the American people are paying an extraordinary price for failed consumer protection. Thank you very much. I look forward to your questions. [The prepared statement of Mr. Carr can be found on page 48 of the appendix.] " CHRG-111hhrg50289--90 Chairwoman Velazquez," Thank you, Mr. Bofill. I just would like to address my first question to all the members of the panel. You were sitting there and you were listening to the previous witnesses, basically those representing financial services, banks and the credit unions, and what they are saying is that they have money to lend, and that by some metrics have actually increased their loans. And what I hear from you today, from this panel, is that that is not the experience that you have had. My question is do you think that the SBA should play a more direct role in small business lending either by refinancing non-SBA loans or making direct loans that could be sold to lenders? Any of the members of the panel, for any of the witnesses. Yes, Mr. Watters. " CHRG-110hhrg44900--39 Secretary Paulson," Well, let me mention the student loans, because here is a case where I think you have seen our department work creatively with the Department of Education to deal with a problem that's here and now, and so we have a program in place which I think is going to be acceptable to most fellow lenders. I think it's going to work. To the extent that we need something else, the Department of Education is ready with their direct lending, their lending of last resort. Meanwhile, we are working creatively at Treasury to come up with other market-based solutions to help this market. So we are working through this. We have a program that's going to get us through this period, and we are working to do things to help that securitization market become more vital. " CHRG-111hhrg48674--348 Mr. Bernanke," We need to get through that crisis, but I very much agree with Mr. Lacker that we need to clarify regulatory responsibilities, and that lending and other such interventions ought to be aligned with those authorities and with congressional intent. " CHRG-111hhrg54872--29 The Chairman," Next, Michael Calhoun, president and chief operating officer of the Center for Responsible Lending. STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF OPERATING CHRG-109hhrg28024--144 Mr. Bernanke," The minimum wage affects a very small number of workers actually. I don't think it would affect a great majority of people that you are concerned about. Be that as it may, I just want to say that I do support very strongly fair lending. I will be actively involved in making sure that our fair lending policies are actively prosecuted. I would also agree with you on the inappropriateness in some circumstances of using FICO scores for evaluating creditworthiness. I know some banks are experimenting with non-standard approaches that take into account people's relatively short credit histories, for example, or alternative backgrounds. I think that is good banking. I think it is good for the society and the Federal Reserve will work with banks to look at those kinds of alternative approaches. " CHRG-111hhrg48674--202 Mr. Bernanke," Sir, I was asked to look at that by a previous speaker, but as I mentioned, there are limitations on our authorities to lend to governments; and it seems, given the longstanding relationship between the Federal Government and the State and local governments through block grants and so on, that a natural approach would be for the Congress to authorize backup facilities or some other support for credit extension to nonprofits and municipalities. " CHRG-111shrg54675--6 Mr. Hopkins," Chairman Johnson, Ranking Member Crapo, and Members of the Subcommittee, thank you very much for the opportunity to provide you with the community bank perspective on the impact of the credit crisis in rural areas. My name is Jack Hopkins, and I am President and CEO of CorTrust Bank in Sioux Falls, South Dakota. I am testifying on behalf of the Independent Community Bankers of America, and I serve on the ICBA's Executive Committee. I am a past President of the Independent Community Bankers of South Dakota and have been a banker in South Dakota for 25 years. CorTrust Bank is a national bank with 24 locations in 16 South Dakota communities and assets of $550 million. Eleven of the communities we serve have fewer than 2,000 people. In seven of those communities, we are the only financial institution. The smallest community has a population of 122 people. Approximately 20 percent of our loan portfolio is agricultural lending to businesses that rely heavily on the agricultural economy. CorTrust Bank is also one of the leading South Dakota lenders for the USDA's Rural Housing Service home loan program. Mr. Chairman, as we have often stated before this Committee, community banks played no part in causing the financial crisis fueled by exotic lending products, subprime loans, and complex and highly leveraged investments. However, rural areas have not been immune from rising unemployment, tightening credit markets, and the decline in home prices. We believe that, although the current financial crisis is impacting all financial institutions, most community banks are well positioned to overcome new challenges, take advantage of new opportunities, and reclaim some of the deposits lost to larger institutions over the last decade. A recent Aite study shows that even though some community banks are faced with new lending challenges, they are still lending, especially when compared to larger banks. In fact, while the largest banks saw a 3.23-percent decrease in 2008 net loans and leases, institutions with less than $1 billion in assets experienced a 5.53-percent growth. Mr. Chairman, small businesses are the lifeblood of rural communities. We believe small businesses will help lead us out of the recession and boost needed job growth. Therefore, it is vitally important to focus on the policy needs of the small business sector during this economic downturn. As I mentioned earlier, most of my commercial lending is to small businesses dependent on agriculture. The Small Business Administration programs are an important component of community bank lending. SBA must remain a viable and robust tool in supplying small business credit. The frozen secondary market for small business loans continues to impede the flow of credit to small business. Although several programs have been launched to help unfreeze the frozen secondary market for pools of SBA-guaranteed loans, including the new Term Asset-Backed Securities Loan Facility--TALF and a new SBA secondary market facility, they have yet to be successful due to the program design flaws and unworkable fees. ICBA recommends expanding these programs to allow their full and considerable potential. Several of my colleagues have told us about the mixed messages they received from bank examiners and from policy makers regarding lending. Field examiners have created a very harsh environment that is killing lending as examiners criticize and require banks to write down existing loans, resulting in capital losses. Yet policy makers are encouraging lending from every corner. Some bankers are concerned that regulators will second-guess their desire to make additional loans, and others are under pressure from their regulators to decrease their loan-to-deposit ratios and increase capital levels. Generally, the bankers' conclusions are that ample credit is available for creditworthy borrowers. They would like to make more loans, and they are concerned about the heavy-handedness from the regulators. Finally, Mr. Chairman, community bankers are looking closely at the regulatory reform proposals. ICBA supports the administration's proposal to prevent too-big-to-fail banks or nonbanks from ever threatening the collapse of the financial system again. Community banks support the dual system of State and Federal bank charters to provide checks and balances which promote consumer choice and a diverse and competitive financial system sensitive to the financial institutions of various complexity and size. Washington should allow community banks to work with borrowers in troubled times without adding to the costs and complexity of working with customers. Mr. Chairman, ICBA stands ready to work with you and the Senate Banking Committee on all of the challenges facing the financial system and how we may correct those issues gone awry and buttress those activities that continue to fuel the economies in rural areas. I am pleased to answer any questions you may have. " CHRG-111hhrg50289--30 Mr. Graves," And my next question is for the lenders out there, and we can start with Mr. McGannon, and it is the same question as far as your lending practices go in light of the economy. Have you all backed off? Have you increased? I mean, are you requiring more from investors? " CHRG-111shrg62643--125 Mr. Bernanke," I am sorry, I didn't understand the question. Senator Bennet. They are saying that the assets that they have to reserve that they can't lend have increased from, I think it is 9 percent to 12 percent. " fcic_final_report_full--528 As the first member of the MBA to sign, Countrywide probably realized that there were political advantages in being seen as assisting low-income mortgage lending, and it became one of a relatively small group of subprime lenders who were to prosper enormously as Fannie and Freddie began to look for sources of the subprime loans that would enable them to meet the AH goals. By 1998, there were 117 MBA signatories to HUD’s Best Practices Initiative, which was described as follows: The companies and associations that sign “Best Practices” Agreements not only commit to meeting the responsibilities under the Fair Housing Act, but also make a concerted effort to exceed those requirements. In general, the signatories agree to administer a review process for loan applications to ensure that all applicants have every opportunity to qualify for a mortgage. They also assent to making loans of any size so that all borrowers may be served and to provide information on all loan programs for which an applicant qualifies…. The results of the initiative are promising. As lenders discover new, untapped markets, their minority and low-income loans applications and originations have risen. Consequently, the homeownership rate for low-income and minority groups has increased throughout the nation. 146 Countrywide was by far the most important participant in the HUD program. Under that program, it made a series of multi-billion dollar commitments, culminating in a “trillion dollar commitment” to lend to minority and low income 144 HUD’s Best Practices Initiative was described this way by HUD: “Since 1994, HUD has signed Fair Lending Best Practices (FLBP) Agreements with lenders across the nation that are individually tailored to public-private partnerships that are considered on the leading edge. The Agreements not only offer an opportunity to increase low-income and minority lending but they incorporate fair housing and equal opportunity principles into mortgage lending standards. These banks and mortgage lenders, as represented by Countrywide Home Loans, Inc., serve as industry leaders in their communities by demonstrating a commitment to affi rmatively further fair lending.” Available at: http://www.hud.gov/ local/hi/working/nlwfal2001.cfm. 145 Steve Cocheo, “Fair-Lending Pressure Builds”, ABA Banking Journal , vol. 86, 1994, http://www. questia.com/googleScholar.qst?docId=5001707340. 146 HUD, “Building Communities and New Markets for the 21st Century,” FY 1998 Report , p.75, http:// www.huduser.org/publications/polleg/98con/NewMarkets.pdf. families, which in part it fulfilled by selling subprime and other NTMs to Fannie and Freddie. In a 2000 report, the Fannie Mae Foundation noted: “FHA loans constituted the largest share of Countrywide’s activity, until Fannie Mae and Freddie Mac began accepting loans with higher LTVs and greater underwriting flexibilities.” 147 In late 2007, a few months before its rescue by Bank of America, Countrywide reported that it had made $789 billion in mortgage loans toward its trillion dollar commitment. 148 6. The Community Reinvestment Act CHRG-111hhrg56847--37 Chairman Spratt," Before going to Ms. Schwartz, we have been informed by the Chairman's staff that you have a plane to catch at 12:30. So I am going to ride the 5-minute space pretty tightly. Ms. Schwartz. Ms. Schwartz. Thank you very much. Thank you, Mr. Chairman, for your--I do want to follow up on, I think, some of the questions that have been asked and you have elaborated, and particularly Mr. Ryan's last set of questions about business growth, small business growth. We do see, many of us, as the answer, both in the short-term and the long-term, as growing jobs in the private sector. And particularly we have focused on the job growth in a small business. And we have taken a number of actions that we feel are making a difference. If you want to comment on some of them. And I wanted to ask you specifically about lending, for you to elaborate a bit more on small business lending. We have done investment tax credits, biotherapeutics, we may do them for biofuels as a way to incentivize small businesses that don't have assets to be able to take regular tax credits, can do investment tax credits. We have extended bonus depreciation for small businesses, making capital investments. We have increased the cashflow for small business by providing a 5-year operating loss carryback. We have actually cut capital gains taxes for investments for small business, stocks would be extended, small business expensing. We have actually created tax credits for small businesses to provide health benefits. And the President has a new initiative on exports, which you referenced very briefly on the importance--I will say it is the importance of expanding our export opportunities, particularly for small business. We tend not to think about the opportunities for small businesses to increase their outreach to the markets in the world and to be able to sell their products around the world. And there is an initiative the President has directly endorsed to double that export number. It is actually really quite small, unlike many other countries. We are looking in the future in two areas to expand these investment tax credits as one way to help innovative new businesses, small businesses that have a hard time accessing capital. And I wanted to know what you think of that. Because many of us do believe that the new technology businesses, some of them in the energy sector, some of them in the health sector, but more broadly are really a great growth area for the United States. We have always been on the cutting edge of innovation and technology. And so I would ask you to comment on the actions we have taken, whether you think we should be continuing those, how much they have made a difference and will make a difference in expanding growth, small business growth in particular and we hope jobs. And secondly to expand on small business lending. We all hear it. We continue to hear it. Our concern, as you pointed out, was making sure whether banks, which is where small businesses go for this lending, are acting too conservatively. They get mixed messages a bit from the regulators to say--and we agree that they have to make sure they have enough capital themselves. But they have got to get some dollars out the door. We are looking this week at small business lending legislation that would actually encourage banks through some Federal dollars to get those dollars out the door to small businesses. And again I would highlight the interests we have in growth areas. Manufacturing, but particularly innovative entrepreneurs who are out there, want to take these steps and have a hard time accessing small business lending. Do you want to comment? I know you try not to comment on legislation, but the access to capital, what the Federal Government can do to encourage banks to do this. And again, more that we might be doing or that you might be able to do to encourage small business growth as one of the ways out of this difficult economy that I believe we have stabilized but really has a long way to go to create those jobs that we all want to see happen. " CHRG-110shrg50417--113 Mr. Campbell," I would say that clearly the intent at Wells Fargo is to use that capital to continue to lend and lend more, as well as to help remedy the crisis that exists in the home mortgage business. And as a result of that, to put other provisions on us that would not allow us to pursue normal activities that we have pursued over the years, I think we would probably would not be in favor of that kind of prohibition, because just like others here, while we are currently not in a position because of decisions we made to pursue acquisitions, in 3 or 4 years we may very well be in a position where we would like to do that, and then having agreed to a provision that would not allow us to do it would certainly not be something we would like. Senator Brown. OK. Thank you. Thanks, Mr. Chairman. " CHRG-111hhrg48873--182 Mr. Bernanke," I don't know where $10 trillion comes from. The Congress has the right to authorize funds, which is what they did in the TARP Program. And in the 1930's, they gave the Federal Reserve the power for emergency lending as a means for addressing financial crises, which is what we have done. " fcic_final_report_full--98 Mortgage credit became more available when subprime lending started to grow again after many of the major subprime lenders failed or were purchased in  and . Afterward, the biggest banks moved in. In , Citigroup, with  billion in assets, paid  billion for Associates First Capital, the second-biggest subprime lender. Still, subprime lending remained only a niche, just . of new mortgages in .  Subprime lending risks and questionable practices remained a concern. Yet the Federal Reserve did not aggressively employ the unique authority granted it by the Home Ownership and Equity Protection Act (HOEPA). Although in  the Fed fined Citigroup  million for lending violations, it only minimally revised the rules for a narrow set of high-cost mortgages.  Following losses by several banks in sub- prime securitization, the Fed and other regulators revised capital standards. HOUSING: “A POWERFUL STABILIZING FORCE ” By the beginning of , the economy was slowing, even though unemployment re- mained at a -year low of . To stimulate borrowing and spending, the Federal Reserve’s Federal Open Market Committee lowered short-term interest rates aggres- sively. On January , , in a rare conference call between scheduled meetings, it cut the benchmark federal funds rate—at which banks lend to each other overnight—by a half percentage point, rather than the more typical quarter point. Later that month, the committee cut the rate another half point, and it continued cut- ting throughout the year— times in all—to ., the lowest in  years. In the end, the recession of  was relatively mild, lasting only eight months, from March to November, and gross domestic product, or GDP—the most common gauge of the economy—dropped by only .. Some policy makers concluded that perhaps, with effective monetary policy, the economy had reached the so-called end of the business cycle, which some economists had been predicting since before the tech crash. “Recessions have become less frequent and less severe,” said Ben Bernanke, then a Fed governor, in a speech early in . “Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed.”  With the recession over and mortgage rates at -year lows, housing kicked into high gear—again. The nation would lose more than , nonfarm jobs in  but make small gains in construction. In states where bubbles soon appeared, con- struction picked up quickly. California ended  with a total of only , more jobs, but with , new construction jobs. In Florida,  of net job growth was in construction. In , builders started more than . million single-family dwellings, a rate unseen since the late s. From  to , residential construction con- tributed three times more to the economy than it had contributed on average since . CHRG-111hhrg55809--256 Mr. Green," Exactly. The market, stock prices are, generally speaking, procyclical, but unemployment is, generally speaking, countercyclical. So I want to talk for just a quick moment about countercyclicality. When a policy is countercyclical, it will cool down an economy that is in an upswing, and it will stimulate an economy this is in a downturn. If this is the case, when we require banks to increase that capital ratio in a recession, while it may be a good thing to do, it can also prove to be procyclical in that it can offset some of the lending that might take place. Would you just kindly give a quick comment on this, the capital requirement, because, if you recall, we started out with a TARP fund that became a capital purchase program that dealt with capital requirements, and that may have had some impact on the lending side of banking, if you would, please? " CHRG-111hhrg50289--65 Mr. Coffman," Would anybody comment on the fact that I often hear that the other shoe is going to drop and it is the exposure to commercial real estate, and what will that do to lending? Is that going to further tighten it up? What is your prognosis of the future here? " CHRG-111shrg54789--144 Mr. Plunkett," But that occurs all the time in the securities world. Suitability is embedded in the new legislation that the House has passed on mortgage lending. It is absolutely possible to make those determinations and it is done in law. " CHRG-111hhrg56766--289 Mr. Bernanke," The discount window is for banks only. The lending we did to investment banks, we did through an emergency facility, which was opened in March 2008, and which we are offering now complete transparency on. " CHRG-109hhrg23738--114 Mr. Greenspan," I do think we, for example, have expanded HMDA over the years--I mean, we will be releasing HMDA data, I believe, in a couple of months for the year 2004--and there are many new sources of information in those data systems. And in that regard, it is a very large data requirement that is involved here, and there are obviously going to be continuing discussions of what types of information, what types of evidence of discrimination occurs, and how does one essentially pick it up. But it is not a simple solution. Ms. Lee. I understand, Mr. Greenspan. Before my time is up, let me just say I understand the fact that this would cost some money. But I think, long-term, the cost of discrimination and the costs of denying loans to minority potential homeowners far exceed the cost of gathering the data. When you look at small business lending, it is my understanding now--and we are looking to verify this information--that African-American-owned businesses receive less than 2 percent of the small business lending; Latino-owned businesses less than 2 percent also. And so at some point, in addition to trying to enforce fair lending laws, we have got to do something to make sure that there does not exist discrimination and that there is a level playing field in the future whether it costs the financial services industry a few dollars or not. " CHRG-110shrg50417--32 Mr. Campbell," Mr. Chairman and Members of the Committee, I am Jon Campbell. I am Executive Vice President of Wells Fargo's Regional Banking group. Thank you for allowing me to comment on Wells Fargo's participation in the Capital Purchase Program. Wells Fargo believes that our financial system is more important than any one individual company. We believe the Capital Purchase Program is a positive step toward stimulating the United States' economy. It is Wells Fargo's intention to use the CPP funds for additional lending and to facilitate appropriate home mortgage solutions. Wells Fargo continues to be one of the strongest and best capitalized banks in the world. The investment from the U.S. Government adds to our already strong balance sheet and will enable Wells Fargo to offer appropriately priced credit at a time when several sectors of the financial industry have shut down. Since mid-September when capital markets froze, Wells Fargo has led the industry in lending to existing and new creditworthy customers. During this time nonprofit organizations, hospitals, universities, municipalities, small businesses, farmers, and many others had nowhere to turn when their existing capital market channels vanished. We were there to provide credit so they could continue to offer the services that our communities depend upon. We are able to lend through these difficult times because of our emphasis on prudent and sound lending which includes understanding what our customers do and what their financing needs are. As demonstrated over the past several years, we are willing to give up market share if a product is not in the best interest of our customers. And simply put, those companies that didn't put the customer at the center of every decision they made are no longer here today. We intend to expand lending in all of our markets. As demand warrants, we will have more than adequate capital to lend to creditworthy customers in an appropriate manner and, as required, will pay back the CPP investment with interest. Wells Fargo remains a strong lender in areas such as small business and agriculture. By volume, we are the No. 1 commercial real estate lender in this country. In fact, we grew commercial real estate loans 37 percent year to date in 2008. And our middle market commercial loans--made to Fortune 1500-sized companies across the country--are up 24 percent from this same time last year. As far as consumer lending is concerned, we are certainly open for business. Our consumer loan outstandings have increased almost 9 percent in the third quarter of 2008 in comparison to the same quarter in the previous year. The Committee has asked whether CPP funds would be spent on executive compensation. The answer is no. Wells Fargo does not need the Government investment to pay for bonuses or compensation. Wells Fargo's policy is to reward employees through recognition and pay based on their performance in providing superior service to our customers. That policy applies to every single employee, starting with our Chairman and our CEO. For example, the disclosures in our 2008 proxy statement show that the bonuses for all Wells Fargo named executive officers were reduced based on lower 2007 performance. Mr. Chairman, since the middle of 2007 when you convened your Housing Summit, Wells Fargo has implemented the principles you laid out by working with borrowers at each step of the mortgage crisis. With the changes in our economy and the continuing declines in property values across many parts of the country, even more people do need our help. As a number of new foreclosure relief programs require capital to implement, the availability of CPP funds will make it easier to successfully reach delinquent homeowners. This capital, leveraged with the announcement this week of a streamlined large-scale loan modification process that applies to loans serviced for Fannie Mae and Freddie Mac, will enable Wells Fargo to utilize a variety of programs quickly and also institutionalize an approach that servicers can rely on going forward. The strength of our franchise, earnings, and balance sheet positions us well to continue lending across all sectors and satisfying all of our customers' financial needs, which is in the spirit of the Capital Purchase Program. Mr. Chairman and Members of the Committee, thank you, and I look forward to your questions. " CHRG-111shrg53085--151 Mr. Patterson," Those institutions obviously in the present environment are capital constrained by the assets that are on their books, the difficult things that they are having to deal with---- Senator Schumer. Yes, I know that. " Mr. Patterson," ----as a result of all this. So they clearly are capital constrained. The vast majority of commercial banks are looking for loans, have the equity to support continuing to expand loans. And I think if you would survey throughout the membership of the ABA, the availability of credit is not an issue, except possibly in metropolitan areas such as where the money center banks had their---- Senator Schumer. Well, let me tell you, I have found in New York, and I compared this to my colleagues--my time is up--that that is not the case, that we not only have a failure for people to get new lending, but you have lines of credit being pulled regularly from institutions that are still profitable, and it is because of what you said. They have an asset on their books that is valued at 80. It was once 100. It is at 80, but they are worried it might go to 50. They are not making a new loan. They are holding their capital in case it falls to 50. I am not right now criticizing the bank that does that. They are looking for their own survival. I am just saying we have to find new ways of lending. One quick last question just to Mr. Patterson. Do you think the TALF will expand more lending, particularly to small business. " CHRG-111hhrg55811--119 Mr. Sherman," Section 1204 is the mechanism by which the Executive Branch can lend unlimited amounts of money or make unlimited investments in any systemically important--which really means top 20--financial institution. " FinancialCrisisInquiry--201 GORDON: Correct. CHAIRMAN ANGELIDES: OK. And you have data for that? GORDON: Yes. CHAIRMAN ANGELIDES: Anecdotal or—or based on... GORDON: No, real data. CHAIRMAN ANGELIDES: And have you provided the underlying data to us? GORDON: I—I can only say I assume I dropped A footnote but if I didn’t, I will get it to you. CHAIRMAN ANGELIDES: OK. But we certainly would like to see that. All right. And I guess I would ask you to what extent did you see these products migrate out from, you know, a narrow band of the population to a larger band? GORDON: Well, I actually want to divide things into a couple of different categories, so we don’t conflate different things. In terms of lending to people with lower credit scores, which is sometimes what people call subprime lending, that is something that our organization does. And there are ways to do that safely and sustainably for the people involved. FinancialCrisisInquiry--205 VICE CHAIRMAN THOMAS: I’d be interested in any comparisons in terms of profiles. I’m actually a child of the ‘50s in Southern California, and so your goal was to get into anything because if you could barely make the payment, the next year was a little easier. The year after that, it was a little easier. And you rode the savings a place. You said they had a roof over their heads. Most of the folk that we knew, the first house my folks were able to purchase was in Garden Grove for $13,500. Just incidentally, it happened to be a four-bedroom, four-stair, hardwood floor home with a two-car attached garage for $13,500. Ten years later, it was sold for over $130,000. That was the way America was. You got into a home. It appreciated. That was your savings. If you could never get on the first rung, as houses went up, it became more difficult to get on the first rung. But if you could sell your first house, you could get into your second, and so on. So we’ve heard a lot of testimony about the kind of predatory structures that you’re talking about, but for a lot of people if you were told you could get into a place without putting 20 percent down or you could do this or you could that, it’s like the Better Business Bureau warning you about all these cons that are out there. People may know about it, but they still take an opportunity to get, as someone says, something for nothing. Mr. Cloutier, we’ve had—in Central California we have a lot of independent banks, as you know. Small, entrepreneurial, they start up small and they grow or they’re picked up by a little larger bank, but they survive quite well. They were not involved in the subprime market. What they were involved in was commercial loans to solid businesses that were growing in the old-fashioned way. And I don’t know if you’re familiar with San Jouquin Bank. It’s no longer in existence because it was the commercial loan that many of those folks operated the same way people who purchased homes operated. It was their equity. That was their savings. They moved to a larger building. They would sell it. I wouldn’t call “flip” it because three years or four years was a long time in continuing that turnover. Do you know, in terms of the community banks that you’re familiar with, of the failures, has it been primarily commercial loans? CHRG-111shrg52619--52 Chairman Dodd," Doesn't that lend itself to shopping again here? The point that Mr. Dugan raised here, that the FDA does not have a national regulator and a State regulator when it comes to food and drug safety. Why not financial products? Why shouldn't they be as safe? Ms. Bair. I think for the smaller banks, for the community banks, they like having the state option. " CHRG-111shrg52619--21 Mr. Fryzel," Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. As Chairman of the National Credit Union Administration, I appreciate this opportunity to provide the agency's position on regulatory modernization. Federally insured credit unions comprise a small but important part of the financial institution community, and I hope NCUA's perspective on this matter will add to the understanding of the unique characteristics of the credit union industry and the 90 million members they serve. The market dislocations underscore the importance of your review of this subject. I see a need for revisions to the current regulatory structure in ways that would improve Federal oversight of not just financial institutions, but the entire financial services market. My belief is that there is a better way forward, a way that would enable Federal regulators to more quickly and effectively identify and deal with developing problems. Before I express my views on possible reforms, I want to briefly update you on the condition of the credit union industry. Overall, credit unions maintained reasonable performance in 2008. Aggregate capital level finished the year at 10.92 percent, and while earnings decreased due to the economic downturn, credit unions still posted a 0.30 percent return on assets in 2008. I am pleased to report that even in the face of market difficulties, credit unions were able to increase lending by just over 7 percent. Loan delinquencies were 1.3 percent, and charge-offs were 0.8 percent, indicating that credit unions are lending prudently. Credit unions are fundamentally different in structure and operation than other types of financial institutions. They are not-for-profit cooperatives owned and governed by their members. Our strong belief is that these unique and distinct institutions require unique and distinct regulation, accompanied by supervision tailored to their special way of operating. Independent NCUA regulation has enabled credit unions to perform in a safe and sound manner while fulfilling the cooperative mandate set forth by Congress. One benefit of our distinct regulatory approach is the 18-percent usury ceiling for Federal credit unions that enhances their ability to act a low-cost alternative to predatory lenders. Another is the existence of a supervisory committee for Federal charters, unique among all financial institutions. These committees, comprised of credit union members, have enhanced consumer protection by giving members peer review of complaints and have supplemented the ability of NCUA to resolve possible violations of consumer protection laws. NCUA administers the National Credit Union Share Insurance Fund, the Federal insurance fund for both Federal and State-chartered credit unions. The fund currently has an equity ratio of 1.28 percent. The unique structure of the fund where credit unions make a deposit equal to 1 percent of their insured shares, augmented by premiums as needed, to keep the fund above a statutory level of 1.20 percent has resulted in a very stable and well-functioning insurance fund. Even in the face of significant stress in the corporate credit union part of the industry, stress that necessitated extraordinary actions by the NCUA board to stabilize the corporates, the fund has proven durable. I want to underscore the benefits of having the fund administered by NCUA. Working in concert with our partners in the State regulatory system, NCUA uses close supervision to control risks. This concept was noted prudently by GAO studies over the years, as were the benefits of a streamlined oversight and insurance function under one roof. This consolidated approach has enabled NCUA to manage risk in an efficient manner and identify problems in a way that minimizes losses to the fund. NCUA considers the totality of our approach for mixed deposit and premium funding mechanism to unify supervisory and insurance activities, to be the one that has had significant public policy benefits, and one worth preserving. Whatever reorganization Congress contemplates, the National Credit Union Share Insurance Fund should remain integrated into the Federal credit union regulator and separate from any other Federal insurance funds. Regarding restructuring of the financial regulatory framework, I suggest creating a single oversight entity whose responsibilities would include monitoring financial institution regulators and issuing principles-based regulations and guidance. The entity would be responsible for establishing general safety and soundness standards, while the individual regulators would enforce them in the institutions they regulated. It would also monitor systemic risks across institution types. Again, for this structure to be effective for federally insured credit unions and the consumers they serve, the National Credit Union Share Insurance Fund should remain independent in order to maintain the dual NCUA regulatory and insurance roles that have been tested and proven to work for almost 40 years. I appreciate the opportunity to provide testimony today and would be pleased to answer any questions. " CHRG-111hhrg52400--180 Mr. McRaith," Right. Thank you for that question, because securities lending has come up in other comments, as well. It is important to understand that the problem--first of all, that the New York Department of Insurance was working to reduce the level of securities lending in the AIG subsidiaries before the crisis. The crisis, remember, was a result of the--essentially, a collateral call on the AIG holding company, resulting from the credit default swaps. This would not have been a problem, but for the CDS failure. And it is also important to remember that the securities which were involved were AAA-rated securities at the time. So it points to the need for better regulation of the credit default swap market. The-- Ms. Bean. So where would the $44 billion have come from? " FOMC20081216meeting--439 437,MR. DUDLEY.," The purpose of this facility is not to give investors profits. The purpose of this facility is to address the fact that lending spreads on AAA-rated securities are extremely wide right now and the securitization market is closed. The idea is that, if you offer moreattractive terms than those available in the market, the demand for these securities will increase, issuers will be able to sell these securities at better prices and lower spreads, and the consequences of that will be lower lending rates and improved credit availability to households. The goal at the end of the day is not to do anything for investors. The goal is to harness investors' profit motivation to drive down spreads in the AAA market. " CHRG-111shrg61513--45 Mr. Bernanke," Well, Senator, I congratulate you on those contributions. As you know, the Federal Reserve developed extensive disclosures for credit cards as well as some rules which were very extensively incorporated in the Congressional bill that passed and was signed by the President. Obviously, as you point out, the more information you can provide consumers, the better decisions they can make and the kinds of information about minimum balances, time to pay off, the cost of the card, the penalties they might face, those are the kinds of things people need to shop. If they can shop, the market becomes more competitive and you get a market that better serves consumers. We have been very focused on good disclosures, good information. We have in our disclosure reform that we did earlier, we--I don't see Senator Schumer here yet today, but there is the so-called Schumer Box, which has---- Senator Bunning. He is at the White House. " Mr. Bernanke,"----has a list of key features of the account. We have done a lot of work on that to make it easier to read and more understandable to consumers. One of the innovations pioneered by the Federal Reserve has been to use consumer testing. We have gone out and instead of having some lawyers just sort of figure out what should be in the disclosure, we have actually gone out to shopping malls and had people look at the disclosures and then we have tested them to see how much they understand and retain. And by doing that, we think we are improving considerably the ability of folks to understand what they are buying and encouraging them to shop around to get a better deal. So again, I congratulate you on your contributions to this and on your longstanding support for financial literacy and for clear disclosures. Senator Akaka. Mr. Chairman, unfortunately, investment banks, credit card issuers, and predatory lenders through their excessive bonuses and unfair treatment of consumers are giving the term ``bank'' an even greater negative connotation. I am afraid that abused or angry consumers may continue to underutilize mainstream financial institutions. After having grown up in an unbanked home, I personally know the challenges that confront the unbanked. Many community banks and credit unions provide vital financial services to working families by providing opportunities for savings, borrowing, and low-cost remittances. The question is, why is it essential that we attempt to encourage the unbanked and the underbanked to utilize mainstream financial institutions more? " CHRG-110hhrg46591--216 Mr. Bachus," Well, now, are you aware that I proposed capital injections with covered bonds or lending or, you know, backup private equity? But we did get a 5 percent rate of return that goes to 9 percent. " CHRG-110hhrg46596--179 Mr. Scott," Thank you, Mr. Chairman. Let me just encourage you to move ahead with all deliberate speed to get these CEOs before our committee. There are pertinent questions that we have to ask and get that answer as to why they are not lending. " CHRG-111hhrg55814--393 The Chairman," You do us no service when you tell us the problem-- Ms. D'Arista. Leverage will help, and if you were to extend the idea of the National Bank Act to limit lending to financial institutions, that would be very helpful. " CHRG-111hhrg56766--258 Mr. Lance," Yes. The rhetoric of the President when announcing this was in direct relationship to the fact that funds were used for TARP and they are being paid back. I just have the greatest concerns that this would mean less lending than would otherwise be the case. " CHRG-110shrg50416--67 Mr. Kashkari," It worries us, too. We want these institutions to lend, absolutely, but also recognize the situation we are all in right now is the situation of unprecedented lack of confidence in the system. Senator Schumer. Understood " CHRG-110hhrg34673--212 Mr. Bernanke," Yes. That is part of the Truth in Lending Act. By nature of the act, it is focused on disclosures, and it will be focused on short-term credit like credit cards. " CHRG-111hhrg56776--204 Mr. Bernanke," This has been one of our top priorities. It's very, very important. What you need to do here is get an appropriate balance, on the one hand, between making sure the banks are safe and sound, making good loans. On the other hand, making sure that credit-worthy borrowers can get credit, and that the economy can grow. So we need to find the appropriate balance there, and we have done that in a number of ways. We have taken the lead on issuing guidance to our examiners and to the banks on small business lending, on commercial real estate lending, where the emphasis is on finding that appropriate balance. And it's giving lots of examples to the banks and the examiners, where you can look at the example and it gives you some insight into what criteria to apply when you're looking at a loan. And, in particular, one point that we have made repeatedly is that just because the asset value underlying a loan, the collateral of the loan has gone down, doesn't mean that it's a bad loan. Because as long as the borrower can make the payments, that still can be a good loan, and we shouldn't penalize the banks for making those loans. So, we have issued those guidances, and we have done an enormous amount of training with our examiners to make sure they understand it. We have been gathering information and feedback from the field, including asking for more data and more information, but at each of the reserve banks around the country, having meetings that bring in small businesses, banks, and community leaders, to try and get into the details of what's going on. We have also tried to support the small business lending market with our TALF program, which has helped bring money from the securities markets into the small business lending arena. So it is a very important priority for us. We were asked before about the interaction between being responsible for the macro-economy and being a supervisor. Well, here is one case where knowing what's going on in the banking system is extremely important for understanding what's going on in the economy broadly. And we take that very seriously. So, I realize it's still an issue. It's going to be a concern, because certainly standards have tightened up. Certainly some people who were credit-eligible before are no longer eligible, because their financial conditions are worse. But we really think it's very important that credit-worthy borrowers be able to get credit, and we are working really hard on that. " FOMC20071206confcall--75 73,MR. LACKER.," I have strong reservations about this term auction facility. I oppose proceeding at this time. I expressed many of my concerns in a letter that I circulated yesterday. The gist of it is that I questioned the need for this. I don’t think our willingness to keep the overnight fed funds rate low and near the target, especially over year-end, is in question. If it were in question, I think something more like what we did about the millennium change would be appropriate. It’s not obvious that there’s an apparent inefficiency in markets. Banks are paying a lot for insurance against term funding costs to them going up, and a lot of banks are forgoing large spreads in order to marshal their resources. It seems as though they have potentially very legitimate reasons to do so. Now LIBOR is 50 basis points over the discount rate, so it’s not obvious that the rate we charge for discount window lending is a significant factor and is germane here. The Europeans and the British markets have the same problem, and they have very different ways of injecting reserves that suggest that maybe this isn’t something that our discount window really needs to address. I pointed out in my letter that the Federal Home Loan Banks are a very significant source of liquidity to banks, and some of the largest banks are some of the largest borrowers at the Federal Home Loan Banks. They’ve increased their lending tremendously. The lending is on virtually the same terms as the lending we propose here. So it’s not obvious to me that banks have any inability to obtain term funding from a government-subsidized entity. I don’t think this lending is going to alleviate balance sheet pressure, and I think balance sheet pressure is at the heart of what’s going on here. More broadly, this sets an unfortunate precedent, I think. It is targeting credit to a narrow segment of the market—it will be subsidized credit to the riskiest borrowers, who are obviously going to be willing to pay the most for this. It harkens back to Operation Twist in the early 1960s, which I don’t think was a well-thought-out policy initiative. I understand that the urge to act is strong at times like this, but I think we might need to recognize that the financial system is coping with genuinely serious and difficult issues, and this might be the normal way a financial system copes with very serious difficulties such as they are coping with now. So while we’d like to see financial systems exhibit the behavior they exhibit in normal times, I’m not sure the fundamentals are normal right now, and I’m not sure this isn’t the way financial markets normally ought to be expected to behave at a time like this. So I oppose this facility at this time." CHRG-111hhrg56766--126 The Chairman," Time has expired. We were going to have a hearing on March 2nd on that very subject. I had to postpone it because there was a major hearing on the fishing industry in my district and I had to fish or cut bait, so I'm going fishing, but also it turned out we had originally thought that would be a day in which there had been votes the day before. It is a day in which there are not votes until that evening and members expressed a lot of interest in it. We will, on the next available hearing day, have a full hearing on exactly that topic and so, Mr. Chairman, we will be looking for an elaboration of those views, but we had the hearing set for March 2nd on precisely the topic the gentleman asked, not just Fannie and Freddie Mac but its interaction with the FHA and Ginnie Mae and the Federal Home Loan Bank and all of the various strains of housing financing. So we'll get the rest of that answer within 10 days at the latest. The gentlewoman from New York, the Chair of the Small Business Committee, who will be co-presiding on Friday on a hearing on this recurring important topic of how do we get loans flowing to small businesses which she's been focused on, the gentlewoman from New York. Ms. Velazquez. Thank you, Mr. Chairman. Chairman Bernanke, you know, you quite well said that economic recovery is tied to jobs creation and we all know that job creators in our country are small businesses, and if you talk to any member in this panel sitting here, they will tell you that each one of us know some creditworthy borrowers who can't access lending and and we know that we have put together all these tools to incentivize lending and we see today's Wall Street Journal with that title about lending, the sharpest decline since 1942. And I know that your answer to me is going to be, well, that is not under my purview, but if we have tried all these tools and are not producing the success in terms of easing or getting credit flowing again for small businesses, even the loan guaranty by SBA, we have seen 50,000 less loans this year compared to last year and we increased the loan guaranty from 75 to 90, we reduced the fees paid by borrowers and lenders. So my question to you is, do you think that there is a time, given this economic crisis, for the Federal Government to play a more aggressive role in direct lending in a temporary basis? " CHRG-110hhrg45625--134 Mr. Gutierrez," You lumped them together. I have heard that time and time again. You know, financial institutions, and we have had hearings here, and Chairman Bernanke has come before us to talk about subprime lending, we have had numerous hearings here about the crisis that was looming because of subprime lending. The victims are in neighborhoods across this country because people decided--I mean, we cannot put somebody who wanted to own a home and be part of the American Dream equally with investment bankers on Wall Street who were bundling these securities and selling them out on the market and making a lot of money because today they still made their profits, they still made their bonuses. But you know what that homeowner has because of his risk? Nothing. As a matter of fact, he has a home that he paid a certain amount for. So what are we going to do to kind of balance the $700 billion to kind of balance those things out? " CHRG-111shrg54789--2 Chairman Dodd," The Committee will come to order. I would like to welcome all here this morning for this morning's hearing on ``Creating a Consumer Financial Protection Agency: A Cornerstone of America's New Economic Foundation.'' We want to thank you, Mr. Barr, for joining us, and our other witnesses we will hear from after your testimony, and the Members of the Committee who are here this morning. And, obviously, my good friend and colleague Richard Shelby, former Chairman of the Committee, will be making some opening comments as well. So let me take a few minutes and share with you my thoughts on this question and then turn to Richard for any comments he has. And since only a few of us are here this morning, Bob, if you have got any opening comments you would like to make as well, I will turn to you, and then we will go to you, Mr. Barr, for your testimony. This morning we are taking an important step in our efforts to modernize our financial regulatory system. The failure of that system in recent years has left our economy in peril, as we all know, and caused real pain for many hard-working Americans who did nothing wrong themselves. And so I would like to start by reminding everyone that the work we do here matters to real people, men and women in my home State of Connecticut and all across our Nation who work hard every day, play by the rules, and want nothing more than to make a better life for themselves and their families. These families are the foundation, as all of us know, of our economy and the reason that we are here in Washington working on this historic and critically important legislation. That is why the first piece of the Administration's comprehensive plan to rebuild our regulatory regime and our economy is something that I have championed as well, and that is, an independent agency whose job it will be to ensure that American consumers are treated fairly and honestly. Think about the moments when Americans engaged with financial service providers. Now, I am not talking about big-time investors or financial experts. We know those people have a level of sophistication. I am talking about just ordinary citizens, working people trying to secure a stable future for themselves and their families. They are opening checking accounts. They are taking out loans. They are building their credit. They are trying to build a foundation upon which their families' economic security can rest for years to come. These can be among the most important and stressful moments a family can face. Think of younger people who have carefully saved up for that down payment on a home. It might be a modest house, but it will be their first home, a starter home. Before they can move into their new home, however, they must sign on the dotted line for that first mortgage, with its pages and pages of complex and confusing disclosures. Who is looking out for them in that process? Think of a factory worker who drives 30 miles to and from work every day and that old car that is about to give out. He or she needs another one to make it through the winter, but wages are stagnant and the family budget is stretched to the max. He has got no choice but to go to navigate the complicated world of an auto loan. Who is looking out for that person at that moment? Think of a single mother--and there are many in our country--whose 17-year-old son or daughter has just gotten into his or her first choice of going to college. She is overjoyed for him or her, but worried about how she is going to pay for that tuition, which grows every year astronomically. Financial aid might not be enough, and she knows that as her son or daughter begins the next chapter in their lives filled with promise, they may be saddled with overwhelming debt. Who is looking out for that family under those circumstances? These moments are the reason that we have invested so much of our time and money to rebuild our financial sector, even though some of the very institutions that the taxpayers have propped up are responsible for their own predicaments. These moments are the reason why we serve on this Committee and why I believe we have all come to the Senate to try and make a difference in the lives of the people we represent. And these moments are the reason that I and many of my colleagues were enraged by the spectacular failure of consumer protection that destroyed economic security for so many of our American families. In my home State of Connecticut and around the country, working men and women who did nothing wrong have watched this economy fall through the floor, taking with it their jobs, their homes, their life savings, and the cherished promise of the American middle class. These people are hurting. They are angry and they are worried, and they are wondering whether anyone is looking out for them. Since the very first hearings before this Committee on modernizing our financial regulatory structure, I have said that consumer protection should be a top priority in our deliberations. Stronger consumer protection could have stopped the crisis before it started, in my view. And where were the regulators in all of this? We know now that for 14 years, despite a clear directive from the U.S. Congress, the Federal Reserve Board took no action to ban abusive home mortgages. Gaping holes in the regulatory fabric allowed mortgage brokers and bankers to make and sell predatory loans to Wall Street that turned into toxic securities and brought our economy to its knees. That is why many of us call for the creation of an independent consumer protection agency whose sole focus is the financial well-being of consumers, an agency whose goal it is to put an end to lending practices that have ripped off far too many American families, and the Administration has sent us a very bold and I believe thoughtful plan for that agency. You would think financial services companies would support protections that ensure the financial well-being of their consumers. An independent consumer protection agency can and should be very good for business, not just for consumers. It can and should protect the financial well-being of American consumers so that businesses can rely on a healthy customer base as they seek to build long-term profitability. It can and should eliminate the regulatory overlap and bureaucracy that comes from the current Balkanized system of consumer protection regulation. It can and should level the playing field by applying a meaningful set of standards, not only to the highly regulated banks but also to their nonbank competitors that have slipped under the regulatory radar screen. Financial services companies that want to make an honest living should welcome this effort to create a level playing field. Indeed, the good lenders--and there are many--are the most disadvantaged when fly-by-night brokers and fly-by-night finance companies set up shop down the street. Then we see bad lending pushing out the good. No Senator on this Committee, Democrat or Republican, wants to stifle product innovation, limit consumer choice, or create regulation that is unnecessary or unduly burdensome. And I welcome the constructive input from those in the financial services sector--who share our commitment, by the way, to making sure that American families get a fair shake. We all want financial services companies to thrive and succeed, but they are going to have to make their money, in my view, the old-fashioned way: by developing innovative products, pricing competitively, providing excellent consumer service, and engaging in fair competition on the open market. The days of profiting from misleading or predatory practices need to be over with completely. The path to recovery of our financial services companies and our economy is based on the financial health of American consumers. I believe that very deeply. We need a system that rewards products and firms that create wealth for American families, not one that rewards financial engineering that generates profits for financial firms by passing on hidden risks to investors and borrowers. The fact that the consumer protection agency is the first legislative item the Administration has sent to Congress since it released its white paper on regulatory reform last month tells me that our President's priorities are in the right place. Nevertheless, with the backing of the Administration, with the support of many in the financial community who understand the importance of this reform, and, most of all, with a mandate from the American families I have discussed who count on a fair and secure financial system, I believe that we will push forward and succeed. I thank all of you for being with us here today as we move forward on this issue. Let me say, as I have said many times already in discussions both informally and formally, Richard Shelby, my partner in all of this, he and I are determined to work together on this to get this right. This is not one where we bring a lot of ideology to this debate but, rather, what works, what makes sense, what will restore the confidence and optimism of people all across this country--and, for that matter, around the world, who look to the United States as a safe and secure place and an innovative place to come and park their hard-earned dollars and hard-earned money. And so, with that, I thank again everyone for being here, and let me turn to Senator Shelby. fcic_final_report_full--575 Transportation and Community Development, 110th Cong., 1st sess., June 26, 2007. 26. Email and data attachment from former Golden West employee to FCIC, subject: “re: Golden West Estimated Volume of Adjustable Rate Mortgage Originations,” December 6, 2010. 27. Herbert Sandler, interview by FCIC, September 22, 2010. 28. Washington Mutual, “Option ARM Focus Groups—Phase II,” September 17, 2003; Washington Mutual, “Option ARM Focus Groups—Phase I,” August 14, 2003, Exhibits 35 and 36 in Senate Perma- nent Subcommittee on Investigations, exhibits, Wall Street and the Financial Crisis: The Role of High Risk Home Loans , 111th Cong., 2nd sess., April 13, 2010 (hereafter cited as PSI Documents), PDF pp. 330–51, available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. 29. PSI Documents, Exhibits 35 and 36 pp. 330–51. 30. Ibid., pp. 330–51, 334. 31. Ibid., p. 345. 32. Ibid., p. 346. 33. Washington Mutual, “Option ARM Credit Risk,” August 2006, PSI Document Exhibit 37, p. 366. 34. PSI Documents Exhibit 37, p. 366, showing average FICO score of 698; p. 356; comparing con- forming and jumbo originations. 35. Ibid., p. 357. 36. Document listing Countrywide originations by quarter from 2003 to 2007, provided by Bank of America. 37. Countrywide October 2003 Loan Program Guide (depicting a maximum CLTV of 80 and mini- mum FICO of 680) and July 2004 Loan Program Guide (showing 90% 620 FICO). 38. Countrywide Loan Program Guide, dated March 7, 2005. 39. Federal Reserve, “Residential Mortgage Lenders Peer Group Survey: Analysis and Implications for First Lien Guidance,” November 30, 2005, pp. 6, 8. 40. Angelo Mozilo, email to Carlos Garcia (cc: Stan Kurland), Subject: “Bank Assets,” August 1, 2005. 41. Angelo Mozilo, email to Carlos Garcia (cc: Kurland), subject: “re: Fw: Bank Assets,” August 2, 2005. 42. Countrywide, 2005 Form 10-K, p. 57; 2007 Form 10-K, p. F-45. 43. See Washington Mutual, 2006 Form 10-K, p. 53. 44. John Stumpf, interview by FCIC, September 23, 2010. 45. Countrywide, 2007 Form 10-K, p. F-45; 2005 Form 10-K, p. 57 46. Washington Mutual, 2007 Form 10-K, p. 57; 2005 Form 10-K, p. 55 47. Kevin Stein, testimony before the FCIC, Sacramento Hearing on the Impact of the Financial Crisis–San Francisco, day 1, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, September 23, 2010, transcript, p. 72. 48. Mona Tawatao, in ibid., p. 228. 49. Real Estate Lending Standards, Federal Register 57 (December 31, 1992): 62890. 50. Ibid. 51. Office of the Comptroller of the Currency, Board of Governors of the Federal Deposit Insurance Corporation, Office of Thrift Supervision, “Real Estate Lending Standards: Final Rule,” SR 93–1, January 11, 1993. 52. Office of the Comptroller of the Currency, Board of Governors of the Federal Deposit Insurance Corporation, Office of Thrift Supervision, “Interagency Guidance on High LTV Residential Real Estate Lending,” October 8, 1999. 53. Final Report of Michael J. Missal, Bankruptcy Court Examiner, In RE: New Century TRS Hold- ings, Chapter 11, Case No. 07-10416 (KJC), (Bankr. D.Del.), February 29, 2008, pp. 128, 149, 128. 54. Yuliya Demyanyk and Otto Van Hemert, “Understanding the Subprime Mortgage Crisis,” Review of Financial Studies, May 2009. 55. Sandler, interview. 56. CoreLogic loan performance data for subprime and Alt-A loans, and CoreLogic total outstanding loans servicer data provided to the FCIC. 57. Christopher Mayer, Karen Pence, and Shane M. Sherlund, “The Rise in Mortgage Defaults,” Jour- nal of Economic Perspectives 23, no. 1 (Winter 2009): 32. 58. William Black, testimony for the FCIC, Miami Hearing on the Impact of the Financial Crisis, day 1, session 1: Overview of Mortgage Fraud, September 21, 2010, p. 27. 59. Richard Bowen, interview by FCIC, February 27, 2010. 60. Jamie Dimon, testimony before the FCIC, January 13, 2010, p. 60. 61. This particular deal would be described as an excess-spread over-collateralized-based credit en- hancement structure; see Gary Gorton, “The Panic of 2007,” paper presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Conference, August 2008, p. 23. 62. FCIC staff estimates based on analysis of data from BlackBox, S&P, and Bloomberg. The prospec- tive loan pool for this deal originally contained 4,507 mortgages. Eight of these had been dropped from the pool by the time the bonds were issued. Therefore, these estimates may differ slightly from those re- ported in the deal prospectus because these estimates are based on a pool of 4,499 loans. 63. Ibid. 64. Federal Register 69 (January 7, 2004): 1904. The rules were issued in proposed form at Federal Reg- ister 68 (August 5, 2003): 46119. 65. See OTS Opinion re California Minimum Payment Statute, October 1, 2002, p. 6. 66. Comptroller of the Currency John Hawke, remarks before Women in Housing and Finance, CHRG-111hhrg74855--355 Mr. Shelk," So under the version that you have suggested essentially the tier one bank wouldn't post the collateral, we would have to post the collateral as the counterparty to the tier one institution and as I indicated earlier, the problem with that is it would tie-up, and the examples we have come up with about an average a quarter of the capital of the end user so we fully agree with your comments that the electric utilities and other generators didn't cause the problem. We think the way to get to your transparency goal which we share because we are in the market too, is to have a data repository so that information on these trades would be available to the CFTC and others, and the problem with electricity is it is very customized. These products are traded over hundreds of different nodes around the country so it doesn't really lend itself, the CFTC doesn't lend itself to the corn example, and the T-bill example and kinds of commodities that the chairman indicated. " CHRG-111hhrg48874--16 Mr. Polakoff," Good morning, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to testify on behalf of OTS on finding the right balance between ensuring safety and soundness of U.S. financial institutions and ensuring that adequate credit is available to creditworthy consumers and businesses. Available credit and prudent lending are both critical to our Nation and its economic wellbeing. Neither one can be sacrificed at the expense of the other, so striking the proper balance is key. I understand why executives of financial institutions feel they are receiving mixed messages from regulators. We want our regulated institutions to lend, but we want them to lend in a safe and sound manner. I would like to make three points about why lending has declined: number one, the need for prudent underwriting. During the recent housing boom, credit was extended to too many borrowers who lacked the ability to repay their loans. For home mortgages, some consumers received loans based on introductory teaser rates, unfounded expectations that home prices would continue to skyrocket, inflated income figures, or other underwriting practices that were not as prudent as they should have been. Given this recent history, some tightening in credit is expected and needed. Number two, the need for additional capital and loan loss reserves. Financial institutions are adding to their loan loss reserves and augmenting capital to ensure an acceptable risk profile. These actions strain an institution's ability to lend, but they are necessary due to a deterioration in asset quality and increases in delinquencies and charge-offs for mortgages, credit cards, and other types of lending. Number three, declines in consumer confidence and demand for loans. Because of the recession, many consumers are reluctant to borrow for homes, cars, or other major purchases. In large part, they are hesitant to spend money on anything beyond daily necessities. Also, rising job losses are making some would-be borrowers unable to qualify for loans. Steep slides in the stock market have reduced many consumers' ability to make downpayments for home loans and drain consumers' financial strength. Dropping home prices are cutting into home equity. In reaction to their declining financial net worth, many consumers are trying to shore-up their finances by spending less and saving more. Given these forces, the challenges ensuring that the pendulum does not swing too far by restricting credit availability to an unhealthy level, I would like to offer four suggestions for easing the credit crunch: Number one: Prioritize Federal assistance. Government programs such as TARP could prioritize assistance for institutions that show a willingness to be active lenders. The OTS is already collecting information from thrifts applying for TARP money on how they plan to use the funds. As you know, the OTS makes TARP recommendations to the Treasury Department. The Treasury makes the final decision. Number two: Explore ways to meet institutions' liquidity needs. Credit availability is key to the lending operations of banks and thrifts. The Federal Government has already taken significant steps to bolster liquidity through programs such as the Capital Purchase Program under TARP, the Commercial Paper Funding Facility, the Temporary Liquidity Guarantee Program, and the Term Asset-backed Securities Loan Facility. Number three: Use the power of supervisory guidance. For OTS-regulated thrifts, total loan originations and purchases declined about 11 percent from 2007 to 2008. However, several categories of loans, such as consumer and commercial business loans, and non-residential and multi-family mortgages increased during this period. The OTS and the other Federal banking regulators issued an ``Inter-agency Statement on Meeting the Needs of Creditworthy Borrowers'' in November 2008. It may be too soon to judge the effectiveness of the statement. And, number four: Employ countercyclical regulation. Regulators should consider issuing requirements that are countercyclical, such as lowering loan to value ratios during economic upswings. Conversely, in difficult economic times, when home prices are not appreciating, regulators could permit loan to value ratios to rise, thereby making home loans available. Also, regulators could require financial institutions to build their capital and loan lost reserve during good economic times, making them better positioned to make resources available for lending when times are tough. Thank you, Mr. Chairman. I look forward to answering your questions. [The prepared statement of Mr. Polakoff can be found on page 163 of the appendix.] " CHRG-111hhrg56241--86 Mr. Stiglitz," I would like to emphasize two things that we did not do when we turned over money to these banks. First, we didn't relate giving them money to their behavior, not just with respect to the issue of compensation schemes, but also with respect to lending, which was the reason we were giving them money. That relates to the issue of jobs that has come up here a number of times. The fact that compensation went out meant there was less money inside the banks and therefore less ability or willingness to lend. The second point is that the U.S. taxpayer was not, when it gave the banks money, compensated for the risk that they bore. In some cases, we got repaid. But we ought to look at the transaction that Warren Buffet had with Goldman Sachs, which was an arm's-length transaction. If we wanted what would have been a fair compensation to the taxpayer, the bailouts would have reflected the same terms, and we would have gotten back a lot more. Mr. Moore of Kansas. Thank you, sir. I am interested in better understanding how the culture of excessive lending, abusive leverage, and excessive compensation contributed to the financial crisis. This applies across-the-board for consumers who are in over their head with maxed-out credit cards and homes they couldn't afford, to major financial firms leveraged 35 to 1. Is there anything the government can and should do in the future to prevent a similar carefree and irresponsible mindset from taking hold and exposing our financial system to another financial crisis? Professor Bebchuk? " CHRG-111shrg57320--214 Mr. Dochow," Actually, I think it raises a different issue---- Senator Kaufman. OK. Mr. Dochow [continuing]. In addition to the potential fraud. It raises the issue of income and incentives. And what I mean by that is stated income programs generally gave the lending institutions a higher margin. Senator Kaufman. Right. " CHRG-110hhrg46593--83 Secretary Paulson," Let me just say three things here. First of all, the key to turning around the housing situation and avoiding foreclosures is going to be to keep lending going. If the financial system collapsed, we would have many more foreclosures, number one. Number two, you are seeing a number of big banks take extraordinary actions, and they have announced them, and you could just tick them off, announcing actions they are taking. So they are doing things, number one. And number two, I would say that I believe that our actions to stabilize Fannie Mae and Freddie Mac, who are the biggest source of home financing in America today, have been critical. So there have been real steps that have been taken that make a difference. More needs to be done. I hear your frustration; more needs to be done. And we are going to keep working on it. Ms. Velazquez. Yes, you hear my frustration. And I hope that you understand the pain and the suffering of so many homeowners in this country who are losing their homes. So it is just not enough to say to the banks, ``Here is the money. And, by the way, I trust you.'' Because they are not lending; they are not lending to small businesses. They are not working on a loan modification strategy. You just told Mr. Frank here that you are examining strategy to mitigate foreclosures. You don't have the strategy to mitigate foreclosures; you are examining. Chairwoman Bair does. Are you willing to support her plan? " FinancialCrisisInquiry--662 VICE CHAIRMAN THOMAS: I’d be interested in any comparisons in terms of profiles. I’m actually a child of the ‘50s in Southern California, and so your goal was to get into anything because if you could barely make the payment, the next year was a little easier. The year after that, it was a little easier. And you rode the savings a place. You said they had a roof over their heads. Most of the folk that we knew, the first house my folks were able to purchase was in Garden Grove for $13,500. Just incidentally, it happened to be a four-bedroom, four-stair, hardwood floor home with a two-car attached garage for $13,500. Ten years later, it was sold for over $130,000. That was the way America was. You got into a home. It appreciated. That was your savings. If you could never get on the first rung, as houses went up, it became more difficult to get on the first rung. But if you could sell your first house, you could get into your second, and so on. So we’ve heard a lot of testimony about the kind of predatory structures that you’re talking about, but for a lot of people if you were told you could get into a place without putting 20 percent down or you could do this or you could that, it’s like the Better Business Bureau warning you about all these cons that are out there. People may know about it, but they still take an opportunity to get, as someone says, something for nothing. Mr. Cloutier, we’ve had—in Central California we have a lot of independent banks, as you know. Small, entrepreneurial, they start up small and they grow or they’re picked up by a little larger bank, but they survive quite well. They were not involved in the subprime market. What they were involved in was commercial loans to solid businesses that were growing in the old-fashioned way. And I don’t know if you’re familiar with San Jouquin Bank. It’s no longer in existence because it was the commercial loan that many of those folks operated the same way people who purchased homes operated. It was their equity. That was their savings. They moved to a larger building. They would sell it. I wouldn’t call “flip” it because January 13, 2010 three years or four years was a long time in continuing that turnover. Do you know, in terms of the community banks that you’re familiar with, of the failures, has it been primarily commercial loans? CHRG-110shrg50409--37 Chairman Dodd," I think Senator Bunning, I believe--no, excuse me. Senator Allard. I apologize. Senator Allard. Thank you, Mr. Chairman. Welcome to the Committee. I always look forward to hearing your comments, Chairman Bernanke. Business lending has--I want to talk about that a little bit, and a big aspect of business lending historically, I am told, has been that business plans and their ability to execute those business plans has been a big factor in assessing credit and whether they get a loan or not. I am told that in recent history that has been minimized considerably. First of all, I would like to know if that is true. And the other question, if it is true, do you think we could help confidence if we had provisions that somehow or the other brought more accountability to the business plan aspect when you apply for a loan? " CHRG-111hhrg53241--46 The Chairman," So, apparently, there was not even any interest in doing it. And the question is, in general, is it your impression that consumer issues like this--Truth in Lending, the Homeowners Equity Protection Act, other areas that the Fed had--did they get equal attention at the Federal Reserve with other regulatory duties? " CHRG-109hhrg28024--141 Chairman Oxley," The gentle lady from California, Ms. Lee. Ms. Lee. Thank you, Mr. Chairman. Welcome, Mr. Chairman. Congratulations to you. Let me say a couple of things. First, I'm glad to hear you say that you recognize that a rise in inequality is a concern and a problem, but you also indicated that part of this had to do with the fact that lower wage workers haven't received a higher level of income, those at least who have no more education than a high school education. I think I heard you correctly, you don't support an increase in the minimum wage. You indicated your policies would be very consistent to Chairman Greenspan. I believe that's probably about where he was. I'm quite frankly very disappointed. I know you do support the tax cuts and making those tax cuts permanent, and it seems to me if you are really concerned about this rise in inequality, somehow you as our new Federal Reserve Chair would say something about increasing the minimum wage for very low wage workers. Secondly, part of this rise in inequality has to do with discrimination in mortgage lending. If you look at the home ownership rates, you have approximately 70 percent nationwide with regard to the Caucasian population, yet you have 46 percent African American, 46/47 percent Latino. There is a huge disparity there. With Mr. Greenspan, we were trying to talk with him about how to make sure that financial institutions provided more mortgage lending to African Americans and Latino's. Right now, conventional loans, I believe probably most banks provide maybe one to two percent of their conventional loans to African Americans. That is just down right shameful. Yet, on the other hand again, going back to Mr. Greenspan and if you are going to be consistent with much of his policies and his work, I have to raise these issues with you. CRA, for example. Many of these banks that receive an A or B on their CRA ratings probably lend one to three percent of their mortgages to African Americans and Latino's. I don't know for the life of me how they can get an outstanding and satisfactory CRA rating, when again, they are not in good faith lending to minority communities. Finally, just with regard to prime loans and sub-prime loans, the data that came out in October of last year, we have a report, and Mr. Chairman, I'd like to put this in the record. " CHRG-111hhrg48874--6 Mr. Castle," Thank you, Mr. Chairman, and thank you for your opening statement, with which I agree. And, I agree that we need to be careful about giving mixed messages, especially to our smaller banks. I recently heard, in fact it was yesterday, from a bank in my State which has heard firsthand from leaders at the Federal Reserve encouraging them to continue lending, but they indicated in real practice as regulators come around, they are actually being discouraged from doing so for capital reasons, or whatever it may be. I am particularly interested in helping banks in my State--I am from Delaware--get the word out that they are open for business and able to lend to responsible borrowers. I think a lot of this issue is local. We need to handle it that way. We need to be extremely careful in our efforts here in assisting these institutions on one hand, and then putting restrictions on their ability to conduct their business with the other hand. And I think that applies to some of the things we are doing in Congress as well, I might add. Ultimately, I believe that this committee, Congress, and the Administration share the goal of doing everything possible to restore economic health, and this cannot be done without our financial institutions. We are all in this together, and I think we need to work on it. I yield back the balance of my time. " FinancialCrisisReport--64 As part of the 2005 presentation to the Board of Directors outlining the strategy, OTS recommended that WaMu define higher risk lending. 159 The January 2005 presentation contained a slide defining “Higher Risk Lending”: “For the purpose of establishing concentration limits, Higher Risk Lending strategies will be implemented in a ‘phased’ approach. Later in 2005 an expanded definition of Higher Risk Lending – encapsulating multiple risk layering and expanded underwriting criteria – and its corresponding concentration limit – will be presented for Board approval. “The initial definition is ‘ Consumer Loans to Higher Risk Borrowers’ , which at 11/30/04 totaled $32 Billion or 151% of total risk-based capital, comprised of: -Subprime loans, or all loans originated by Long Beach Mortgage or purchased through our Specialty Mortgage Finance program -SFR [Single Family Residential] and Consumer Loans to Borrowers with low credit scores at origination.” 160 A footnote on the slide defined “low credit scores” as less than a 620 FICO score for first lien single family residence mortgages, home equity loans, and home equity lines of credit. It defined low credit scores as less than 660 for second lien home equity loans (HEL) and home equity lines of credit (HELOC), and other consumer loans. 161 While the January 2005 presentation promised to present a fuller definition of higher risk loans for Board approval at some future date, a more complete definition had already been provided to the Board a few weeks earlier in a December 21, 2004 presentation entitled, “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management.” 162 This presentation contained the same basic definition of higher risk borrowers, but also provided a definition of higher risk loans. Higher risk loans were defined as single family residence mortgages with a loan-to-value (LTV) ratio of equal to or greater than 90% if not credit enhanced, or a combined-loan-to-value (CLTV) ratio of 95%. These numbers are a notable departure from the 80% LTV ratio 159 6/30/2004 OTS Memo to Lawrence Carter from Zalka Ancely (“Joint Memo #8 - Loans to ‘Higher-Risk Borrowers’”), OTSWME04-0000005357 at 61. 160 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at JPM_WM00302979, Hearing Exhibit 4/13-2a. 161 Id. at JPM_WM00302979. 162 12/21/2004 “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management,” Washington Mutual Board of Directors Presentation, at JPM_WM04107995-8008, Hearing Exhibit 4/13-2b. traditionally required for a prime loan. 163 For home equity loans and lines of credit, WaMu considered a first lien to be high risk if it had a greater than 90% LTV ratio, and considered a second lien to be high risk if had a greater than 80% CLTV ratio. 164 CHRG-111hhrg50289--5 STATEMENT OF CYNTHIA BLANKENSHIP Ms. Blankenship. Thank you, Chairman Velazquez and Ranking Member Graves. I appreciate the opportunity to be here today and present the views of the nation's community banks on both capital markets and small business lending. In addition to small business lending, Bank of the West has been a long time partner with the Small Business Administration and is strongly committed to helping our communities, using the SBA's 7(a) program and the 504 loan program. Bank of the West has more than $10 million in SBA loans in its portfolio, and we service these loans. This represents six percent of our total loans. Notably, as of May, our total small business lending and SBA lending are running ahead of the amount last year in 2008. So we are doing our part and working hard to get capital out there to the deserving small businesses. My bank's SBA loans create hundreds of jobs by financing the local preschool, health center, hardware store, and auto dealer. Community banks represent the other side of the financial story. Community banks like Bank of the West experienced difficult economic times before, and like always, we stick with our communities and our small business customers. As Chairman of the ICBA, I was recently honored to participate with President Obama and Treasury Secretary Geithner, as well as Chairman Velazquez and Ranking Member Graves, in advancing important policy initiatives to small business lending. ICBA strongly supports the recent initiatives to bolster small business loan program included in the American Recovery and Reinvestment Act of 2009. SBA lending program must serve as a counterbalance during these challenge credit markets for small businesses. Unfortunately, at a time when the economy is faltering, the sharp 2009 decline in the number of SBA loans is troubling. The recent uptick in SBA loans is a positive and welcome sign, but we still have a very long way to go before it reaches solid levels again. Community banks are well positioned and willing to help get our economy back on track. While community banks represent 12 percent of all bank assets, they make 20 percent of all business loans and more than half of all business loans under $100,000. Some 48 percent of small businesses get their financing from banks with one billion dollars and less in assets. Therefore, we encourage policy makers to be mindful and supportive of the community banking sector's important role in supplying credit to small business. To that end, ICBA supports strong SBA programs, fair regulatory treatment and tax policies that will foster robust community bank small business lending. Specifically, ICBA appreciates your work, Chairman Velazquez, and the work of the Committee in enacting $730 million in ICBA-backed SBA-related funding in the American Recovery and Reinvestment Act. This included reduced fees for borrowers and lenders and increased guaranty levels, a new deferred payment program, and a secondary market initiative. Given the prolonged length and depth of the recession, the credit crunch, ICBA encourages Congress to extend or make permanent the SBA fee reductions beyond 2009. We urge SBA to follow the statute and Congress' intent to give priority to small banks in implementing the 7(a) lender fee reduction. ICBA is encouraged to see the SBA finishing the implementation of the ARC loan program. This program will allow existing small business bank customers to better service their debt and ride out the economic slowdown. The SBA market must be restored. I know first hand that my bank would be able to make more small business loans if I was able to sell my existing inventory into the secondary market. ICBA offers several additional policy recommendations aimed at returning more community banks to SBA lending. These include insuring SBA makes good on their loan guarantees and provides more flexibility in small business size standards and market-based loan pricing. ICBA also believes the bank regulatory pendulum has swung too far and is crushing many community banks' ability to lend to small businesses. In conclusion, the need for affordable small business capital is greater than ever. Community bankers run small businesses themselves, live and work in the communities with their small business customers, and we will do everything we can to insure that we meet the credit needs of our local community. Thank you. [The prepared statement of Ms. Blankenship is included in the appendix.] " CHRG-111hhrg49968--178 Mr. Bernanke," Actually less, less than it has been, because we know the current account deficit has been declining. And that current account deficit measures the flow of new lending from foreign creditors to the United States. As the Federal deficit has gone up, the private borrowing has gone down. Ms. Kaptur. Thank you. We would like that for the record. How many no-bid contracts has the Fed now signed with the private money management firm BlackRock and any of its subsidiaries. " CHRG-111hhrg55814--142 Secretary Geithner," Before they need money from the government. Ms. Waters. Let me just finish. As we take a look at what has happened in the past, with the bailout that we have supported, and we have found that these institutions that we bailed out, froze the credit, didn't make credit available, they increased interest rates, they did all of that, perhaps we had the power to put some mandates on them, some dictates on them about what they should do in exchange for getting the bailout. For example, our small regional community banks don't have capital now. And you say to them, ``You have to go out and you have to get capital, or we're going to close you down.'' Or FDIC or somebody says that. And we have bailed out some of these big banks, who are now richer. Goldman Sachs is a lot richer, because we bailed them out. Banks lend money to each other, but they're not lending money to the small community banks and regional banks and minority banks. What can you do, or what have you done to make that happen? " CHRG-111shrg54675--9 Mr. Michael," Chairman Johnson, Ranking Member Crapo, and Members of the Subcommittee, thank you very much for the opportunity to testify at today's hearing on behalf of the Credit Union National Association. My name is Frank Michael, and I am President and CEO of Allied Credit Union in Stockton, California. Allied is a small institution with $20 million in assets and approximately 2,600 member owners. Credit unions--rural, urban, large, and small--did not contribute to the subprime meltdown or the subsequent credit market crisis. Credit unions are careful lenders. As not-for-profit cooperatives, our objective is to maximize member service. Incentives at credit unions are aligned in a way that ensures little or no harm is done to our member owners. Rural credit unions are unique in many respects. There are nearly 1,500 U.S. credit unions with a total of $60 billion in assets headquartered in rural areas. Rural credit unions tend to be small--even by credit union standards. Over half of the rural credit unions are staffed by five or fewer full-time equivalent employees. Even in good times, rural credit unions tend to face challenges in a way that larger institutions do not. Competitive pressures from large multistate banks and nontraditional financial services providers, greater regulatory burdens, growing member sophistication, and loss of sponsors loom large for most of the Nation's small credit unions. A bad economy can make things even worse. Small credit unions come under tremendous pressure as they attempt to advise, consult with, and lend to their members. In addition, all credit unions have suffered as a result of the effects of the financial crisis of corporate credit unions. Despite these substantial hurdles, rural credit unions are posting comparatively strong results, and they continue to lend. Loans grew by 7 percent in the 12 months ending in March compared to a 3-percent decline at all banks. There are several concerns raised by small credit unions, and rural credit unions in particular, that deserve mention. The credit union movement has seen small institutions merge into larger credit unions at an alarming pace. And by far, the largest contributor to this consolidation is the smothering effect of the current regulatory environment. Small credit union leaders believe that the regulatory scrutiny they face is inconsistent with both their exemplary behavior and their nearly imperceptible financial exposure they represent. A large community of credit unions, free of unnecessary regulatory burden, would benefit the public at large and especially our rural communities. As the Subcommittee considers regulatory restructuring proposals, we strongly urge you to continue to keep these concerns in the forefront of your decision making. Moreover, we implore you to look for opportunities to provide exemptions from the most costly and time-consuming initiatives to cooperatives and other small institutions. As noted above, credit unions have generally continued to lend while many other lenders have pulled back. This is certainly true in the business lending arena. Currently, 26 percent of all rural credit unions offer member business loans to their members. These loans represent over 9 percent of the total loans in rural credit union portfolios. In contrast, member business loans account for less than 6 percent of all total loans in the movement as a whole. Total member business loans at rural credit unions grew by over 20 percent in the year ending March 2009, with agricultural loans increasing by over 12 percent. Agricultural loans at rural credit unions now account for over one-third of the total member business loans. This is strong evidence that rural credit unions remain ``in the game'' during these trying times. But more could be done. And more should be done. A chorus of small business owners complains that they cannot get access to credit. Federal Reserve surveys show that the Nation's large banks tightened underwriting standards for the better part of the past year, and SBA research shows that large bank consolidation is making it more difficult for small businesses to obtain loans. The chief obstacle for credit union business lending is the statutory limits imposed by Congress in 1998 under which credit unions are restricted from member business lending in excess of 12.25 percent of their total assets. This arbitrary cap has no basis in either actual credit union business lending or safety and soundness considerations. Indeed, a report by the U.S. Treasury Department found that delinquencies and charge-offs for credit union business loans were much lower than those of banks. While we support strong regulatory oversight of how credit unions make member business loans, there is no safety and soundness rationale for the current law which restricts the amount of credit union business lending. There is, however, a significant economic reason to permit credit unions to lend without statutory restriction, as they were able to do prior to 1998. A growing list of small business and public policy groups agree that now is the time to eliminate the statutory credit union business lending cap. We urge Congress to eliminate the cap and provide NCUA with the authority to permit a credit union to engage in business lending above 20 percent of assets if safety and soundness considerations are met. If the cap were removed, credit unions could safely and soundly provide as much as $10 billion in new loans for small businesses within the first year. This is an economic stimulus that would truly help small business and not cost the taxpayers a dime. In conclusion, Chairman Johnson and Ranking Member Crapo, and all the Members of the Subcommittee, we appreciate your review of these issues today. " CHRG-110hhrg41184--35 Mr. Bernanke," Well, Congressman, as I mentioned in my testimony, the subprime problem was a trigger for all this, but there were other things that then began to kick in, including a pull-back from risk taking, concerns about valuation of these complex products, issues about liquidity and so on which, as you say, caused the problem to spread throughout the system. Right now, we are looking at solutions. The Federal Reserve, for example, is engaging in this lending process trying to reduce the pressure in the short-term money markets. I think, very importantly, the private sector has a role to play. I would encourage, for example, banks to continue to raise capital so they would be well able to continue to lend. They also need to increase transparency, to provide more information to the markets so the market could begin to understand what these assets are and what the balance sheets look like. " CHRG-111hhrg53244--73 Mr. Baca," Okay. In the second paragraph, you state that, ``These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credits, including the market for interbank lending, commercial papers, consumer, small lot, business credit, residential mortgages.'' How does that impact, then, those whoe in foreclosure right now? " CHRG-111hhrg52261--150 Mr. Westmoreland," There is somewhere down the line with the credit default swap and all of these derivatives and stuff that, to me, somebody that was--these companies are regulated. The SEC or somebody should have caught this, and I don't know if it was underregulation or the lack of enforcement in people wanting to expose some of these programs that were out there. But the problem that we are having--and I am in Georgia, and we have had more failed banks that anywhere else, and what is happening is--Mr. Roberts, you spoke of this--the regulators are coming in and changing the way some of these banks, that had a good business going on, are able to lend money, how much cash reserves they have got to have versus how much money they are able to lend; reduction in real estate portfolios that are performing assets, but they are wanting them reappraised, more cash put in the deal. And it is really a snowball effect. And Madam Chair, I will yield. I know I have taken more time than the light. But--I would like to have at least one more round of questioning, if that is possible, but I yield back to you. " CHRG-111hhrg52406--44 The Chairman," Thank you. Let me say at the outset to my former colleague, Secretary Galvin, that I do not think there is any likelihood that we are going to increase any preemption. In fact, many of us on both sides were opposed to the breadth of the OCC's preemption of all State banking laws, and I believe we will address that. I had previously spoken to the Secretary of the Treasury, and we had initiated conversations with the Comptroller of the Currency, with the State attorneys general and with State bank supervisors. I think we will have resolved that. I know there is a pending court case, but I think we may moot the case by dealing with it. Next, Mr. Yingling, I just want to say that I welcome and appreciate your comments. I am going to talk about the CRA issue, which is an interesting one, as to how we deal with it. I want to start at the bottom of page 7 of your written testimony. You said it orally, and I think it is very important: ``We agree that CRA''--``we'' is the American Bankers Association because there has been this effort to blame CRA for many of the ills of the world in terms of lending. ``We agree that CRA has not led to material safety and soundness concerns and that bank CRA lending was prudent and safe for consumers.'' That doesn't mean every loan made there was right, but I think that is a very impressive reputation of those who would say CRA was a major part of the crisis. It is also important when you say, ``Bank CRA lending was prudent and safe for consumers.'' The relevance to that is that there is no non-bank CRA lending, because CRA explicitly, by its terms, only applies to banks. So this is a very impressive statement on your part. Let me now ask others. Ms. Seidman also had this, and I do think that raises an important issue about CRA. I understand you say that is because it is within the current context. Let me ask Mr. Mierzwinski and Professor Warren: What is your view about the notion of moving CRA? Is there a problem there? You do have this issue where CRA is enforced, to the extent that it is--and it is not exactly the toughest enforcement mechanism. It is enforced by the regulators in terms of denying a right of a change of ownership. How do you make these two work together? That is the one conflict which I do think needs to be addressed. Professor Warren? Ms. Warren. Well, I would make one point about it. It surprised me to see this particular proposal, but there is something to be said for having someone who worries about how financial products are read and understood by consumers looking at CRA. No one is helped if what happens under CRA is that bad loans are made that ultimately cause families to lose their homes. So to the extent that this injects in the CRA some element of the quality of the loan-making, the quality of the financial decisions that the families are making who were at least supposed to be benefited. I like that aspect of it. " CHRG-110hhrg46591--30 The Chairman," I will now recognize myself for our remaining time. The purpose of this hearing was to be forward-looking, and that is why the panel of witnesses, proposed by both sides, are people who, in their testimony--and I was pleased to see it--talked about going forward. The next panel is a panel of people from the financial industry, and I had hoped we could focus on that, but after the gentleman from New Jersey's comments in having decried partisanship, he then practiced it. It does seem to me to be important to set the record clearly before us. He alluded to a markup in 2005 in which the Democrats refused to support his amendments. The Democrats were, of course, in the Minority on the committee at that time. Had a Republican Majority been in favor of passing that bill, they would have done it. The facts are--and, again, the gentleman from New Jersey continues to return to this, so we have to lay the record out here--that from 1995 to 2006, the Republicans controlled the Congress, particularly the House. Now, he has claimed that it was we Democrats--myself included--who blocked things. The number of occasions on which either Newt Gingrich or Tom DeLay consulted me about the specifics of legislation are far fewer than the gentleman from New Jersey seems to think. In fact, the Republican Party was in control from 1997 to 2005, and it did not do anything. I now quote from the article that came out from the lead representative for FM Watch, which is the organization formed solely to restrain Fannie Mae and Freddie Mac and which is an organization, by the way, after the Congress finally passed the bill that came out of this committee in March of 2007, when Congress finally overcame some Republican filibusters that passed in 2008, that disbanded, saying that our bill had accomplished everything they had wanted. He says he was asked if any Democrats had been helpful. Well, Barney Frank of Massachusetts: ``The Senate Banking Committee produced a very good bill in 2004. It was S.190, and it never got to the Senate floor.'' The Senate was then, of course, controlled by the Republicans. ``Then the House introduced a bill which passed,'' the one the gentleman from New Jersey alluded to, ``but we could not get a bill to the floor of the Senate.'' So here you have the documentation of the Republicans' failure to pass the bill. He goes on to say, ``After the 2006 election, when everyone thought FM policy focus issues would be tough sledding in their restrictions with Democrats in the majority, Barney Frank, as the new chairman, stepped up and said, `I am convinced we need to do something.' He sat down with Treasury Secretary Paulson, and upset people in the Senate and Republicans in the House, but they came up with a bill that was excellent, and it was a bill that largely became law.'' So there is the history. I will acknowledge that, during the 12 years of Republican rule, I was unable to get that bill passed. I was unable to stop them from impeaching Bill Clinton. I was unable to stop them from interfering in Terri Schiavo's husband's affairs. I was unable to stop their irresponsible tax cuts with the war in Iraq and in the PATRIOT Act that did not include civil liberties. Along with the chairman of the committee, Mike Oxley, I was for a reasonable bill in 2005. Mr. Oxley told the Financial Times, of course, that he was pushing for that bill, the bill that's mentioned favorably by the advocate for FM Watch but that, unfortunately, all he could get from the Bush Administration was a ``one-finger salute,'' and that killed the bill. Now, I regret that we have to get into this. I do hope we will look forward. One other factor: There is a book out by Mark Zandi called, ``Financial Shock.'' Mr. Zandi is an adviser to John McCain. Here's what he says on page 151: ``President Bush readily took up the homeownership at the time of the start of his administration. To reinforce this effort, the Bush administration put substantial pressure on Fannie Mae and Freddie Mac to increase their funding of mortgage loans to lower income groups. They had been shown to have problems during the corporate accountingscandals and were willing to go along with any request from the administration.'' This is Mr. Zandi, John McCain's economic adviser. ``OHFEO, the Bush-controlled operation, set aggressive goals for the two giant institutions, which they met, in part, by purchasing subprime mortgage securities. By the time of the subprime financial shock, both had become sizable buyers.'' That is John McCain's economic adviser. That is the advocate for FM Watch. I will throw in one other factor, which notes, ``The Congress in 1994,'' the last year of Democratic control, ``passed the Homeowners' Equity Protection Act, giving the Federal Reserve the authority to regulate subprime mortgage. Mr. Greenspan refused to use it.'' As Mr. Zandi--again, John McCain's economic adviser--notes: ``Democrats in Congress were worried about increasing evidence of predatory lending, pushed for legislation, pushed the Fed. We were rejected.'' I hope we can now go forward and try to deal with this situation. Yes, it is too bad that we did not do anything about subprime lending. I wish the bill that the Congress passed on Fannie and Freddie in 2007 and in this committee in 2008 had been passed earlier, and I wish I could eat more and not gain weight. Now let us get constructive about what we need to do in the future. The gentleman from Alabama is recognized for the final 3 minutes. " CHRG-111hhrg72887--105 Mr. Rush," I know that payday loans play a necessary role in the economy. Payday loans are available to poor people when no one else will lend to them. This is especially true of the type of short-term loans that poor consumers need to get by in emergencies. And I don't like the fact that people have to take out payday loans, but it is the reality of where I come from. I also recognize that there are some extreme and multiple abuses in the industry, and reform is needed. And I have been a long-time champion in the Congress of cracking down on this abusive payday lending. My question is, how do we regulate the payday loan industry without destroying it? Ms. Keest. I think that is one of the areas that we can take an incremental approach on. There is a lot of controversy, and there is a lot of experimentation going on with States that have regulated by different means, ranging from do whatever you want to prohibition and everything in between. And as time comes in, we will have a better sense of what works and what doesn't work. And in the meantime, I think that the proposal or that the recommendation that we have made to look at one tactic which I think is kind of the--it is sort of one of the tools that really makes things not work so well for consumers is the check-hold system. So I would very much welcome--and we did, in fact, recommend that that be one thing that the FTC look at. And if we could start incrementally there, then we can kind of work and see what is happening and see what is working out in the States. " CHRG-110shrg50420--260 Mr. Nardelli," Senator, let me just offer a thought. Again, bankruptcy was something I was hoping never to become an expert in, in my 38 years, and certainly not today. But your point is correct, that as I try to understand it, we cannot just make unilateral rejections, for example, with the union, certainly with the banks that have secured lending. I think certainly this Committee would understand that more than anybody. If that was breached, who would go out and lend money unsecured and not have recovery? I would say that one of the things that was discussed with the Government Accounting Office, I would suggest that we put a date--March 31st as a benchmark data that says give us the funding, allow us to survive, and then by March 31st, have the toll gate to see where we are against those negotiations. At least I am speaking for Chrysler. Senator Crapo. Mr. Wagoner. " CHRG-111shrg51303--41 Mr. Dinallo," Well, for the--no. For the 10 percent--our companies had 8 percent exposure to it. For that 8 percent, we did monitor it, yes. So we were not responsible for the whole securities lending program, sir. I just--I am just telling you what we did was about 8 percent. As I said, we have about 10 percent of the life insurance companies we regulate in the AIG holding empire and we monitored that 8 percent exposure. Senator Shelby. Your testimony, I believe, is ambiguous as to whether you believe AIG's securities lending facilities were activities of its insurance companies or of a non-insurance subsidiary. I think it is clear that they were activities of the insurance companies. Do you agree with that or disagree? " Mr. Dinallo," I, in part, disagree. Senator Shelby. And how do you disagree? " CHRG-111shrg51290--62 PREPARED STATEMENT OF ELLEN SEIDMAN Senior Fellow, New America Foundation and Senior Vice President, ShoreBank Corporation March 3, 2009 Chairman Dodd, Ranking Member Shelby and members of the Committee. I appreciate your inviting me here this morning to discuss consumer protection and oversight in the financial services industry in the context of the current economic crisis, and to provide my thoughts on how the regulatory system should be restructured to enhance consumer protection in the future. In quick summary, I believe that the time has come to create a well-funded single Federal entity with the responsibility and authority to receive and act on consumer complaints about financial services and to adopt consumer protection regulations that would be applicable to all and would be preemptive. However, I believe that prudential supervisors, in particular the Federal and State banking regulatory agencies, should retain primary enforcement jurisdiction over the entities they regulate. My name is Ellen Seidman, and I am a Senior Fellow at the New America Foundation as well as Executive Vice President, National Program and Partnership Development at ShoreBank Corporation, the nation's first and leading community development bank holding company, based in Chicago. My views are informed by my current experience--although they are mine alone, not those of New America or ShoreBank--as well as by my years at the Treasury Department, at Fannie Mae, at the National Economic Council under President Clinton, and as Director of the Office of Thrift Supervision from 1997 to 2001. During my tenure at OTS, we placed significant emphasis on both consumer and compliance issues and on the responsibility of the institutions we regulated to serve the communities in which they were chartered, both because of their obligations under the Community Reinvestment Act and because it was good business. We paid particular attention to compliance, building up our staff and examination capability, establishing a special award (done away with by my successor) to honor the best performer in compliance and community affairs, reaching out to consumers and communities, and enhancing our complaint function. We were by no means perfect, but we worked to put compliance on an equal footing with safety and soundness. Since I left OTS, I have spent much of my time working on issues relating to asset building and banking the underbanked, in which context the importance of consumer protection, for both credit and other products, is plainly apparent. Finally, my years at Fannie Mae and at ShoreBank and the community development work I have been doing have made me both conscious of and extremely sad about what has happened in the mortgage market and the effects it is having on both households and communities. Based on my OTS experience, I believe the bank regulators, given the proper guidance from Congress and the will to act, are fully capable of effectively enforcing consumer protection laws. Moreover, because of the system of prudential supervision, with its onsite examinations, they are also in an extremely good position to do so and to do it in a manner that benefits both consumers and the safety and soundness of the regulated institutions. In three particular cases during my OTS tenure, concern about consumer issues led directly to safety and soundness improvements. Two involved guidance that got thrifts out of sub-prime monoline credit card lending (just months before that industry got into serious trouble) and payday lending. In another case involving a specific institution, through our compliance examiners' concern about bad credit card practices, we uncovered serious fair lending and safety and soundness issues. Consumer protection can be the canary that gives early warning of safety and soundness issues--but only if someone is paying attention to dying birds. We also sounded the alarm on predatory lending. Sub-prime guidance issued in 1998 by all the bank regulators warned of both safety and soundness and consumer protection issues. In speeches and testimony I gave in 2000, concerns about predatory lending and discussion about what we were doing to respond were a consistent theme. Nevertheless, as I will discuss below, I think it is time to consider whether consolidation of both the function of writing regulations and the receipt of complaints would make the system more effective for consumers, for financial institutions and for the economy.The Current Crisis The current crisis has many causes, including an over-reliance on finance to ``solve'' many of the needs of our citizens. When real incomes stagnate while the cost of housing, health care and education skyrocket, there are really only two possible results: people do without or they become more and more overleveraged. Financial engineering and cheap investor funding, largely from abroad, enabled the overleveraging, but a lack of adequate attention to the manner in which the financial services system interacted with consumers certainly kept the process going and caused consumers and the economy to fall harder when it ended. There were really two parallel problems: the proliferation of bad products and practices and the sale of hard-to-understand credit and investment products to consumers for whom they were not suitable; and the lack of high quality products that meet consumer needs, well priced and effectively marketed, especially in lower income communities. I believe that there where three basic regulatory problems. First, there was a lack of attention, and sometimes unwillingness, to effectively regulate products and practices even where regulatory authority existed. The clearest example of this is the Federal Reserve's unwillingness to regulate mortgage lending under HOEPA. However, as the recent actions by the Federal Reserve, OTS and NCUA have demonstrated, there was also authority under the FTC Act that went unused. It is important to understand that this is not only an issue of not issuing regulations or guidance; it is perhaps even more importantly a lack of effective enforcement. Compliance has always had a hard time competing with safety and soundness for the attention of regulators--which is one reason I spent a good deal of my tenure at OTS emphasizing its importance--but there was a deliberate downgrading of the compliance function at the Federal level at the start of the Bush Administration. Moreover, neither the Federal Reserve nor the OTS--at least until fairly recently--has seriously probed the consumer practices of non-depository subsidiaries of the holding companies they regulate. This is not just an issue at the Federal level. While there are certain states--North Carolina, Maryland and Massachusetts prominent among them--that have consistently engaged in effective enforcement of consumer protection laws with respect to the entities under their regulation, others, including California, the home of many of the most aggressive mortgage lenders, were even less aggressive than the Federal regulators. Moreover, ineffective enforcement is not just an issue of consumer protection regulation per se; the ability to move badly underwritten products completely off the balance sheet, earning fees for originating them, but holding no responsibility for them and no capital against them, only encouraged the proliferation of such activities. Second, we need to acknowledge that there were, and are, holes in the regulatory system, both in terms of unregulated entities and products, and in terms of insufficient statutory authority. The clearest case relates to mortgage brokers, where there was no Federal regulation at all, no regulation beyond simple registration in many states, and ineffective regulation even in most of the states that actually asserted some regulatory authority. But there are other examples--payday lending is prohibited in some states, regulated more or less effectively in others, and pretty much allowed without restriction in still others. And then of course there is the question of what kind of responsibility sellers of non-investment financial products have to customers. We know we have not imposed a fiduciary duty on them, but does that mean there is no responsibility to match customer with product? Finally, there is and was confusion, for both the regulated entities and consumers and those who work with them. Consumer protection comes in many forms, from substantive prohibitions like usury ceilings and payday lending prohibitions, through required terms and practices, to disclosures and marketing rules. I would assert it also includes the affirmative mandate of the Community Reinvestment Act; recent experience has demonstrated that where well-regulated entities do not provide quality services that meet needs and are well marketed, expensive and sometimes predatory substitutes will move in. Multiple regulators and enforcement channels exacerbate the confusion. At the Federal level, there are multiple bank regulators, not to mention the NCUA, the FTC and HUD, and their jurisdiction is frequently overlapping. States and even localities also regulate consumer protection, again often through multiple agencies. And of course, sometimes the Federal and State laws overlap. The enforcement mechanisms are just as confusing, involving examinations, complaints, collateral consequences such as limitations on municipal deposits or procurement, and both public and private lawsuits. The system clearly could be improved. But as we do so, we should not be lulled into thing the solutions are obvious or easy. In general they're not, and I would assert that they are harder and more subtle than is the case with manufactured consumer products. The products, even the good ones, can be extremely complex. Just try describing the lifetime interest rate on a Savings Bond or how a capped ARM works. Or for that matter whether a payday loan or a bounced check is more expensive. Many products, especially loans and investments, involve both uncertainty and difficult math over a long period of time, which is hard for even the most educated consumer. And the differences between a good product and a bad one can be subtle, especially if the consumer doesn't know where to look. An experienced homeowner knows the importance of escrowing insurance and taxes, but the dire consequences of the lack of an escrow are easy for a first-time homebuyer to miss. And a relatively safe ARM can turn into a risky one when caps are removed or a prepayment penalty added. Finally, different consumers legitimately have different needs. To take the example economists love, when there is a normal, upward sloping yield curve, most homebuyers are better off with a 5-year ARM than with a 30-year fixed rate mortgage, because with the long-term loan they are paying a higher interest rate for an option they are unlikely ever to use, since they will likely move, prepay or refinance long before 30 years are up. But for a consumer whose income is unlikely to increase, who has few other resources, or who has difficulty budgeting--or who is just plain risk-averse--the certainty of the fixed rate mortgage may well be worth the additional cost.Looking Forward Before turning to regulatory issues, I suggest there is a broader social context of change that we need to consider. To what extent can we turn some of the complex, long-term financial obligations that we have foisted on individual consumers--most clearly retirement and health care--back to more collective management? We also should recognize that there is some level of interest and some level of financial engineering at which ``availability of credit'' is an excuse for both not having sufficient income and collateral supports (such as health care) and an insufficient level of financial understanding--it's not a way of life. We need to educate our children from day one about what money means, how interest rates work, and who to get help from, and we need to create systems of helpers, which can include the internet and things like overdraft alarms, but which also requires low-cost access to people who are competent to give advice and have a fiduciary duty to the consumer. In this period when consumers are being forced to deleverage and cut back, and are actually beginning to save more on their own accord, we should once again make saving easy and an expected part of life. Having an account at a bank or credit union helps encourage saving, although the account needs to be designed so consumers have the liquidity they need without paying for it through excessive overdraft fees. Tying savings to credit, such as by requiring part of a mortgage payment to go into a savings account for emergencies like repairs or temporary inability to make a payment, can also help. And so would moving toward more savings opt-outs, like payroll deductions for non-restricted savings accounts that can be used in an emergency (as well as for retirement accounts), a concept we are testing at the New America Foundation as AutoSave.Principles for Regulation The regulatory framework, of course, involves both how to regulate and who does it. With respect to how, I suggest three guiding principles. First, to the maximum extent possible, products that perform similar functions should be regulated similarly, no matter what they are called or what kind of entity sells them. For example, we know that many people regarded money market mutual funds and federally insured deposit accounts as interchangeable. Either they are, and both the products and--to the extent the regulation has to do with making sure the money is there when the customer wants it--the regulation should be similar, or they are not and they should not be treated as such, including by regulators who are assessing capital requirements. To take another example, payday loans and bounced check protection have a good deal in common, and probably should be regulated in a similar manner. This also means that a mortgage sold directly through a bank should be subject to the same regulatory scheme and requirements as one sold through a broker. Second, we should stop relying on consumer disclosure as the primary method of protecting consumers. While such disclosures can be helpful, they are least helpful where they are needed the most, when products and features are complex. The Federal Reserve's recognition of this with respect to double cycle credit card billing was a critical breakthrough: by working with consumers, they came to understand that no amount of disclosure was going to enable consumers to understand the practice. The same is true of very complex mortgage products. The ``one page disclosure'' is great for simple mortgage products, but where there are multiple difficult-to-understand concepts in a single mortgage--indexes and margins, caps on rate increases and on payments, per adjustment and over the loan's lifetime, escrows or not, prepayment penalties that change over time, option payments and negative amortization, and many different fees--the likelihood is low that any disclosure will enable those for whom these issues really make a difference to understand them. In the last few years, several academics have suggested some potential substitutes for disclosure that go beyond the traditional type of prohibitory consumer protection rules. For example, Professor Ronald Mann has suggested that credit card contracts be standardized, with competition allowed on only a few easily understood terms, such as annual fees and interest rates.\1\ In some ways, this is what the situation was with mortgages well into the 1990s. Professors Michael Barr, Eldar Shafir and Sendil Mullainathan have suggested the development of high quality, easily understood ``default'' products such as mortgages, credit cards and bank accounts, allowing other products to be sold, but with more negative consequences for sellers if the products go bad, such as requiring the seller to prove that the disclosures were reasonable as a condition to enforcing the contract, including in a mortgage foreclosure action.\2\--------------------------------------------------------------------------- \1\ Ronald Mann, `` `Contracting' for Credit,'' 104 Mich LR 899 (2006) at 927-28. \2\ Michael Barr, Sendhil Mullainathan, and Eldar Shafir, ``A One-Size-Fits-All Solution,'' New York Times, December 26, 2007, available at http://www.nytimes.com/2007/12/26/opinion/26barr.html?scp=1&sq=michael percent20barr percent20mortgage&st=cse. See also Michael Barr, Sendhil Mullainathan, and Eldar Shafir, ``Behaviorally Informed Financial Services Regulation'' (Washington, DC: New America Foundation, October 2008), available at http://www.newamerica.net/files/naf_behavioral_v5.pdf. --------------------------------------------------------------------------- Third, enforcement is at least as important as writing the rules. Rules that are not enforced, or not enforced equally across providers, generate both false comfort and confusion, and tend to drive, through market forces, all providers to the practices of the least well regulated. This is in many ways what we have seen with respect to mortgages; it is not just that some entities were not subject to the same rules as others, but also that the rules were not enforced consistently across entities.Who Should Regulate As discussed above, that there are currently a myriad of regulators both making the rules and enforcing them. This situation makes accomplishment of the substantive principles discussed above very difficult. To a substantial extent, both the Federal Reserve and the FTC have broad jurisdiction already; whether they take action to write rules depends to some extent on capacity, will and priorities. But even where they have such authority and take it, significant problems remain concerning both enforcement and to what extent their rules trump State rules. The bank regulators, both together when they can agree and separately when they can't, also write rules and guidance that is often as effective as rules, but those apply only to entities under their jurisdiction, and generate very substantial controversy concerning the extent to which regulations of the OCC and OTS preempt State laws and regulations. As I mentioned at the start, I believe the bank regulators, given the guidance from Congress to elevate consumer protection to the same level of concern as safety and soundness, can be highly effective in enforcing consumer protection laws. Nevertheless, I think it is time to give consideration to unifying the writing of regulations as to major consumer financial products--starting with credit products--and also to establish a single national repository for the receipt of consumer complaints. The mortgage situation has shown that a single set of regulations that governs all parties is a precondition to keeping the market at the level of those engaged in best practices--or at least the practices condoned by the regulators--not the worst. The situation with payday lending, especially in multi-State metropolitan areas, is similar. And among regulators with similar jurisdictions, whether the Federal bank regulators or State regulators, having major consumer products governed by a single set of regulations will reduce the opportunity for regulatory arbitrage. A single entity dedicated to the development of consumer protection regulations, if properly funded and staffed--unfortunately the experience of both the FTC and CPSC over the last 8 years, but in fact for many more years suggests that's a big ``if''--will be more likely to focus on problems that are developing and to propose, and potentially, take action before they get out of hand. In addition, centralizing the complaint function in such an entity will give consumers and those who work with them a single point of contact and the regulatory body the early warning of trouble that consumer complaints provide. Such a body will also have the opportunity to become expert in consumer understanding and behavior. This will enable it to use the theories and practices being developed about consumer understanding and how to maximize positive consumer behavior--the learnings of behavioral economics--to regulate effectively without necessarily having a heavy hand. The regulator could also become the focus for the myriad of scattered and inefficient Federal efforts surrounding financial education. The single regulator concept is not, however, a panacea. Three major issues that could stymie such a regulator's effectiveness are funding, preemption, and the extent of its enforcement authority. How will the new regulator be funded, and at what level? It is tempting to think that annual appropriations will be sufficient, but is that really the case? Political winds and priorities change, and experience suggests that consumer regulatory agencies are at risk of reduced funding. Is this a place for user fees--a prospect more palatable if there is a single regulator covering all those in the business rather than multiple regulatory bodies for whom lower fees can become a marketing tool? In any event, it is essential that this entity be well funded; if it is not, it will do more harm than good, as those relying on it will not be able to count on its being effective. What will be the regulator's enforcement authority? Will it have primary authority over any group of entities? Will the authority be secondary to other regulatory bodies that license or charter those providing financial services? My opinion is that regulators who engage in prudential supervision (Federal and State), with onsite examinations, should have primary regulatory authority, with the new entity empowered to bring an enforcement action if it believes the regulations are not being effectively enforced. Coupled with Congressional direction to the prudential supervisors to place additional emphasis on consumer protection, the supplemental authority of the consumer protection regulator to act should limit the number of situations in which the new regulator is forced to take action. And finally, will the regulations written by the new entity preempt both regulations and guidance of other Federal regulators and State regulation? My opinion is that where the new entity acts, their regulations should be preemptive. We have a single national marketplace for most consumer financial products. Whereas in the past the argument that providers can't be expected to respond to a myriad of rules held sway, as technology has advanced this argument has lost its potency. But consumers are entitled to a consistent level of protection no matter where they live and with whom they deal. Yes, there may be times when the agency does not work as fast or as broadly as some advocates would like. But the point of having a single agency with responsibility in this area is to create a single focal point for action that will benefit all Americans. Where the agency does take action, it should fill the field. But preemption may well be the most difficult issue of all, not only because preemption is ideologically difficult, but also because the uniformity that a single regulator can provide will always be in tension with the attempts of some actors to get around the regulations and of regulators and other parties to move in to respond.Conclusion While the current crisis has many causes, the triggering event was almost certainly the collapse of the sub-prime mortgage market. That is an event that need never have happened if both our regulatory system and regulators had been more completely and effectively focused on protecting consumers. For many years, many of us have been pointing out that bad consumer practices are also bad economic practices. Not only because of the damage it does to consumers, but also because when the music stops, we all get hurt. The current state of affairs provides a golden opportunity to make significant improvements in the regulatory system. If not now, when? ______ CHRG-111hhrg48873--205 Mr. Bernanke," We provide information regularly by law. I think section 129 reports. We have given all of our 13(3) lending, which provides in detail the arrangements we will have, and we will be happy to provide you more information if you would like to have it. Ms. Velazquez. Thank you. " CHRG-111shrg56376--73 Mr. Dugan," We regulated the bank, and it did a portion of its business inside the bank. It did most of its subprime lending outside the bank, not in the bank. The affiliate was subject to California law. Senator Reed. It was subject to California law. " FOMC20080310confcall--40 38,MS. PIANALTO., Yes. I just wanted to clarify that we are being asked to authorize the acceptance of different collateral. Who determines the size of the lending program on an ongoing basis? Is that determined by the Desk? CHRG-109hhrg31539--247 Mr. Bernanke," I would have to discuss it with other board members and the like, but I would certainly think about whether it makes sense in this context. Again, there are other ways to address the issue, through fair lending, for example, but I would certainly be willing to consider that issue. " CHRG-110hhrg46595--288 Mrs. Biggert," According to the Wall Street Journal in an article published Wednesday--I believe Wednesday afternoon--they said that, ``The auto firms don't appear to have collateral that would meet the Fed's lending criteria.'' Is this true? " CHRG-110hhrg34673--230 Mr. Perlmutter," My last question, I had a number of organizations, interest groups, approach me on the issue of banks getting into the real estate business as opposed to remaining in the lending business. Does the Fed have an opinion on that, or do you have an opinion on that? " CHRG-111hhrg46820--97 OF COMMERCE Ms. Dorfman. Chairwoman Velazquez, Ranking Member Graves, members of the committee, thank you again for the opportunity to speak on behalf of America's small business owners at this important time. The future of America small businesses are in your hands. Through your earnest work towards the promotion of economic recovery, you will profoundly influence the future of millions of small businesses and their employees and their families and communities. Literally, the future of the American dream is in your hands today. We all know too well the challenging economic times we are in and the need to act swiftly, strongly and with focused precision to bring about economic recovery. Time is of the essence for Congress and the incoming administration to act. Consumer spending is down. Many of the States, cities and counties have budget shortfalls which will cause local government spending to decline. Unemployment is up, business lending is in a free fall, commodities and health care costs are rising and business margins are declining. To promote an economic recovery, we encourage you to consider policies and investments that will energize consumer, business and government spending, jump start lending, and return liquidity to the lending markets, and bring down the cost of doing business. The Small Business Administration and targeted small business policies can have a great impact in these areas. First, I ask you to support targeted small business spending as we leverage investments in infrastructure, new energy technology and health technology. It is vitally important that we ensure an appropriate percentage of these investments be made with small businesses. It has been discussed that a sizeable amount of the investment in our economic recovery will come through the funding of State and local government infrastructure needs. This committee should assure that these funds at both Federal and local levels require the Federal mandated 23 percent participation by small business and that all socioeconomic goals be met without exception. Next, as small business lending is in a free fall, it will require very strong action to stop. Loan volume has dropped dramatically, thanks in large part to the collapse of the secondary market for small business loans. And this free fall has brought about other negatives as well. We strongly recommend that the SBA act as a catalyst, disburse small business lending. The SBA should directly process small business loans and, when necessary, provide high government guarantees. Let the SBA fully process and close loans, providing the loan as an asset for purchase by the bank. We recommend that funds allocated towards unfreezing secondary markets include appropriate requirements for inclusion of small business lending. There must be secondary market participation so that lenders can sell portions of these assets to make new funds available for additional loans. The SBA should also establish programs and guarantees to bolster confidence in the secondary markets so as to encourage investor participation and increased liquidity. To further drive liquidity and prevent against the potential of rising default, the SBA should be able to engage in refinancing and underwriting, enabling lenders and borrowers to leverage this option to save the loan relationship and prevent default or bankruptcy. The SBA should also relax the rules on refinancing and be able to raise their guarantee so as to bring greater elasticity and save loan relationships. For example, many small business owners have turned to credit cards to cover their cash flow shortfalls and in many instances the equity in their home that was leveraged to establish a loan may have declined. We also recommend that the SBA relax some of the rules that add cost and delays to securing a loan like life insurance requirements and job creation requirements. The final area of attention should be bringing down the cost of doing business. We recommend a combination of tools be used to decrease the cost of doing business generally and decrease the cost associated with keeping employees. We support the reduction in short-term suspension of payroll tax, the abolishment of self-employee tax on health insurance, giving small businesses the ability and incentives to form their own health insurance groups, and extending the net operating cost carry back rules for longer terms. In closing, I ask you to act now. As we watch the falling business lending statistics and the climbing unemployment numbers, I can assure you that the next fatality will be marked by a declining number of small businesses and increased number of business and personal bankruptcies. The majority of the recommendations I have outlined today are short-term positions aimed at getting small business lending moving quickly, improving small business cash flows, and assuring that the one-time big investment in infrastructure includes small businesses. As you complete the work on legislation to spur on economic recovery, please save the broader strategic moves for later. For now, just focus on specific steps to help small businesses get moving back into a positive direction. Thank you. [The statement of Ms. Dorfman is included in the appendix at page 97.] " CHRG-111shrg51290--58 Mr. Bartlett," Yes, I do, Mr. Chairman. Mr. Chairman, lending decisions should not be made by political correctness or by government fiat or by a law or by regulation. Those lending decisions should be based on safety and soundness, good underwriting standards and consumer protection, and every time we get into an attempt to have that, then we sort of skew the outcome. So subprime lending is in and of itself not bad. It is a good thing. We had a large number of terrible abuses, but it shouldn't be therefore outlawed. Second, loans, though, and mortgages should be made for the benefit of consumers by a competitive marketplace where 8,000 lenders or 15,000 lenders compete against each other for the consumers' business. And then those lenders should be regulated for safety and soundness and for consumer protection. But the regulation should not be to design the exact terms and conditions of the loan, as in, well, I think this is what a good loan should be and somebody else says, I think this. The marketplace will do the best job. And then last, and I have some considerable experience with CRA as both a mayor and as a member of the other body, the purpose of CRA has worked quite well. It can be clumsy and so there are exceptions to that, but CRA is the government's requirement that regulated lenders, depository institutions, figure out how they should be making good loans in low-income neighborhoods because that was not occurring prior to CRA in large part, I regret to say, but it was not. So that is the purpose of CRA. That should be kept. It shouldn't be expanded to some other purpose or contracted for other purposes. But that was the underlying purpose and I think that is why the CRA debate is outside this debate that we are having today. " CHRG-111hhrg50289--81 Mr. Cohen," My track record in business and my healthy balance sheet were not enough anymore. So I actually chose to forego the additional borrowing and finance the two new stores or the last two stores using cash generated from operations. The eight stores that I eventually opened required a capital investment of $1.8 million and created 74 new direct jobs, but I will likely delay opening additional stores until the restrictions on credit are eased. Lack of credit is keeping entrepreneurs on the sidelines and delaying our recovery, and the problem is even looking worse for those looking to get into business for the first time. The findings of a recently released study, The Small Business Lending Matrix and analysis prepared for the IFA Educational Foundation, support the notion that an economic recovery and job creation will start with small business lending. In fact, the study determined that for every million dollars in new small business lending, the franchise business sector would create 34.1 jobs and generate $3.6 million in economic output. Now, I would like to ask that this entire report be included with my statement if the Committee would approve that.[Study submitted by Mr. Cohen is included in the appendix.] " CHRG-111shrg52619--195 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HUTCHISON FROM MICHAEL E. FRYZELQ.1. Will each of you commit to do everything within your power to prevent performing loans from being called by lenders? Please outline the actions you plan to take.A.1. NCUA has strongly encouraged federally insured credit unions to work with borrowers under financial stress. While credit unions must be prudent in their approach, there are avenues they need to explore in working through these situations that can result in positive outcomes for both parties. In April of 2007, NCUA issued Letter to Credit Unions 07-CU-06 titled ``Working with Residential Mortgage Borrowers,'' which included an FFIEC initiative to encourage institutions to consider all loan workout arrangements. NCUA subsequently issued Letter to Credit Unions 08-CU-05 in March of 2008 supporting the Hope NOW alliance, which focuses on modifying qualified loans. More recently, NCUA Letter to Credit Unions 09-CU-04, issued in March 2009, encourages credit union participation in the Making Home Affordable loan modification program. NCUA is currently in the process of developing a Letter to Credit Unions that will further address loan modifications. NCUA has been, and will remain, supportive of all prudent efforts to avoid calling loans and taking foreclosure actions. While NCUA remains supportive of workout arrangements in general, the data available does not suggest performing loans are being called at a significant level within the credit union industry. What is more likely to occur is the curtailing of existing lines of credit for both residential and construction and development lending. It is conceivable that underlying collateral values supporting such loans have deteriorated and no longer support lines of credit outstanding or unused commitments. In those instances, a business decision must be made regarding whether to curtail the line of credit. There likely will be credit union board established credit risk parameters that need to be considered as well as regulatory considerations, especially as it relates to construction and development lending. Credit union business lending is restricted by statute to the lesser of 1.75 times the credit union's net worth or 12.25 percent of assets (some exceptions apply). There are further statutory thresholds on the level of construction and development lending, borrower equity requirements for such lending, limits on unsecured business lending, and maximum loan to value limitations (generally 80 percent without insurance or up to 95 percent with insurance). While business lending continues to grow within credit unions, the level of such lending as of December 31, 2008, is 3.71 percent of total credit union assets and 5.32 percent of total credit union loans. Only 6.15 percent of outstanding credit union business loans, or $1.95 billion, are for construction and development, which is a very small piece of the overall construction and development loan market. Credit union loan portfolios grew at a rate of over 7 percent in 2008. The level of total unfunded loan commitments continues to grow, which suggests there is not a pervasive calling of lines of credit. Credit unions need to continue to act independently in regard to credit decisions. Each loan will involve unique circumstances including varying levels of risk. Some markets have been much more severely impacted by the change in market conditions, creating specific risk considerations for affected loans. Additionally, there are significant differences between loans to the average residential home owner who is current on their loan even though their loan to value ratio is now 110 percent, versus the developer who has a line of credit to fund his commercial use or residential construction project. Continued funding for the developer may be justified or may be imprudent. Continued funding may place the institution at additional risk or beyond established risk thresholds, depending on the circumstances. The agency continues to support the thoughtful evaluation by credit union management of each performing loan rather than a blanket approach to curtailing the calling of performing loans. ------ fcic_final_report_full--357 AIG had written on commercial paper, requiring AIG to come up with another  to  billion.  Finally, AIG was increasingly strained by its securities lending business. As a lender of securities, AIG received cash from borrowers, typically equal to between  and  of the market value of the securities they lent. As borrowers began questioning AIG’s stability, the company had to accept below-market terms—some- times accepting cash equal to only  of the value of the securities.  Furthermore, AIG had invested this cash in mortgage-related assets, whose value had fallen. Since September , state regulators had worked with AIG to reduce exposures of the se- curities lending program to mortgage-related assets, according to testimony by Eric Dinallo, the former superintendent of the New York State Insurance Department (NYSID).  Still, by the end of June , AIG had invested  billion in cash in mortgage-related securities, which had declined in value to . billion. By late Au- gust , the parent company had to provide . billion to its struggling securities lending subsidiary, and counterparties were demanding  billion to offset the shortfall between the cash collateral provided and the diminished value of the securi- ties.  According to Dinallo, the collateral call disputes between AIG and its credit de- fault swap counterparties hindered an orderly wind down of the securities lending business, and in fact accelerated demands from securities lending counterparties.  That Friday, AIG’s board dispatched a team led by Vice Chairman Jacob Frenkel to meet with top officials at the Federal Reserve Bank of New York.  Elsewhere in the building, Treasury Secretary Henry Paulson and New York Fed President Timo- thy Geithner were telling Wall Street bankers that they had the weekend to devise a solution to prevent Lehman’s bankruptcy without government assistance. Now came this emergency meeting regarding another beleaguered American institution. “Bot- tom line,” the New York Fed later reported of that meeting, “[AIG’s] Treasurer esti- mates that parent and [Financial Products] have – days before they are out of liquidity.”  AIG posed a simple question: how could it obtain an emergency loan under the Federal Reserve’s () authority? Without a solution, there was no way this con- glomerate, despite more than  trillion in assets, would survive another week. “CURRENT LIQUIDITY POSITION IS PRECARIOUS” AIG’s visit to the New York Fed may have been an emergency, but it should not have been a surprise. With the Primary Dealer Credit Facility (PDCF), the Fed had effec- tively opened its discount window—traditionally available only to depository institu- tions—to investment banks that qualified as primary dealers; AIG did not qualify. But over the summer, New York Fed officials had begun to consider providing emer- gency collateralized funding to even more large institutions that were systemically important. That led the regulators to look closely at two trillion-dollar holding com- panies, AIG and GE Capital. Both were large participants in the commercial paper market: AIG with  billion in outstanding paper, GE Capital with  billion.  In CHRG-111hhrg48674--139 Mr. Henry," Thank you, Mr. Chairman. And thank you, Chairman Bernanke, again, for testifying. This is very helpful and constructive, not just for us on the committee, but for the American people, to know the actions you are taking, and we appreciate it. Secretary Geithner's proposal this morning or outline or vague outline or bullet points, whatever he offered, it mentions the extension of the term asset-backed securities lending facility to other types of assets. One area in particular that some of us have concerns about are commercial-backed mortgage securities. That market has dried up in assets. There was $270 billion lent in 2007; $12 billion in 2008; and a number of loans are coming due in 2009. And so we have seen a vague reference to this. If, in fact, the lending will be extended or the TALF program will include CMBS, when do you see that being up and running and functional? " CHRG-111hhrg48868--117 Mr. Ario," Thank you for that question. I certainly agree with you that there hasn't been a failure of the State system here. In fact, we are the success story within this overall story and that the insurance companies continue to remain strong, stable, well-capitalized companies. And they are the most likely route that the taxpayer will get paid back here is the value in those insurance companies. There are on an ongoing basis many modernization initiatives that we're involved in. The world changes fast these days, and so we're updating our financial regulation, taking into account some of the issues on securities lending. I do agree with my colleague here, Mr. Polakoff, that it's the same thing on securities lending. It was liquidity issues that caused the problem, not losses in the underlying value. But we're looking at that issue. We're looking at modernizing our product approval and market conduct systems, our producer licensing systems, and so forth. But there is nothing in a systemic nature, I think, that we have to do other than be partners as part of a national systemic risk system that protects the functional regulators within an overall collaborative system. " FOMC20070810confcall--33 31,MR. LACKER.," Just in response to you, Richard, I agree with Tim that the last thing we want to do is to be sending a message behind the scenes as we did in ’87, encouraging anybody to lend to anybody they wouldn’t otherwise be interested in lending to under their current operating risk-management standards. What I like about the statement that the Chairman read to us is the focus on keeping the federal funds rate near its target. I think that’s what we should remain focused on. Credit spreads are beyond our ability to peg or influence, and I don’t think we should go down the road of trying to do so. I agree with President Geithner that the statement takes its power from that. It’s important for us in our deliberations to remain clinical about this and very specific in our diagnosis of symptoms and what’s going on. I think markets are working fine. The quantities just happen to be zero right now in some of them, [laughter] and things are going to hell in a handbasket." CHRG-111shrg57319--199 Mr. Cathcart," Well, this report was obviously written 6 months after I left, but I can certainly understand the language. ``Repeat findings, if any, are significant'' is-- and ``requires improvement rating'' is really the only tool that this team and risk management had to be able to bring senior management's attention to these problems. Senator Levin. I have a number of questions that I will have to withhold asking because of the time issue here. But basically I would refer in terms of how this higher-risk lending strategy came into existence, Exhibit 2a,\1\ which is a January 2005 presentation to the Finance Committee of the Board of Directors about the higher-risk lending strategy. Page B1.2 says, ``In order to generate more sustainable, consistent higher margins within Washington Mutual, the 2005 Strategic Plan calls for a shift in our mix of business, increasing our Credit Risk Tolerance while continuing to mitigate our Market and Operational Risk positions.'' It then tasked the Corporate Credit Risk Management ``to develop a framework for execution of the strategy.''--------------------------------------------------------------------------- \1\ See Exhibit No. 2a, which appears in the Appendix on page 229.--------------------------------------------------------------------------- Mr. Vanasek, did you get necessary institutional support to effectively manage the credit risk that is inherent in a higher-risk lending strategy such as that? Did you get institutional support to carry out this kind of a higher-risk strategy? " CHRG-109shrg30354--46 Chairman Bernanke," Senator, so far the credit quality looks to be good. We see that mortgages are, for the most part, fixed-rate despite the fact that we have seen more nontraditional mortgages and ARM's issued recently. We only see about 10 percent of all mortgages being repriced during 2006. Because of these rapid increases in house prices, a lot of homeowners do have a lot of equity. And, therefore, they are able to make the payments on their homes. So we do not see any near-term significant increase in mortgage delinquencies or credit risk. The one area that we are watching very carefully is low and moderate-income subprime mortgage lending. That area, more than the broader market, has seen adjustable-rate mortgage lending. And therefore, there is more susceptibility, I think, there to increases in interest rates affecting the monthly cost of mortgages. " CHRG-111hhrg52261--129 Mr. Roberts," I think that is really a very good question. In my testimony, I spoke about the fact that in 2008, my bank paid $75,000 in FDIC insurance. In 2009, that number could be anywhere between $550,000 and $700,000. When you start looking at those numbers, what in turn you see is, that means profitability. Money that is going to go into the capital of our organization is going to be reduced by $475,000 to about $600,000. In turn, what that relates to is capital to support loans, loans that might be available, supported by that capital, could be anywhere from $5 million to $7 million less. That is certainly going to impact our ability to lend to small businesses as well as customers as a whole. As those capital requirements get to be tighter, it certainly does provide an additional safety net, but one has to keep in mind that it is also going to restrict lending. " CHRG-111hhrg67816--150 Mr. Green," Our office has been hearing from constituents concerned that the free credit reports do not list all the information that credit lending entities have access to. Do you know if there is a case and, if so, do you believe consumers should have access to all this information? It seems that consumers should have access to all the credit information available to them. Have you heard of that or has that been an issue with the FTC? " CHRG-110hhrg46596--129 Mr. Castle," And let me just restate, of course, that I am just talking about those loans which are being made pursuant to these emergency circumstances as opposed to their normal bank lending, which I think takes on a different tone all together. " FOMC20080310confcall--42 40,MR. ALVAREZ.," The resolution that the FOMC will be asked to vote on today will have an outside limit of $200 billion as the total size of the term securities lending facility. If it were to go above that, it would have to come back to the FOMC. " FOMC20081029meeting--70 68,MR. LOCKHART.," So in the case of a foreign bank--they lend to a foreign bank in their country, in Mexico in this case--defaulting, whose problem is it? Is it the home country supervisor's problem, or is it Mexico's problem vis-�-vis us? " CHRG-110hhrg46593--81 Mr. Bernanke," Where do you get the $1 trillion from? There has been $250 billion by the Treasury, and the Fed hasn't spent any money. We only lend money. Ms. Velazquez. Okay. So, of the money that has been lent, how many foreclosures have been prevented, individuals? " CHRG-111hhrg52400--179 Chairman Kanjorski," Without objection, it is so ordered. Ms. Bean. Thank you. And I would also like to acknowledge some of the testimony in response to some of my colleague's questions that no one that is advocating for a national insurance charter in any way is suggesting that we lower consumer protections. And, in fact, we are starting at the baseline of the NAIC models, and only improving by adding a systemic risk regulator, by adding a national insurance commissioner who would have oversight of holding company information, both for insurance and non-insurance subsidiaries, like AIG Financial, who could prohibit activities by non-insurance companies that put those companies or their policyholders at risk. And also the testimony that you mentioned of a Federal prudential regulator only again enhances consumer protections. My question is for Mr. McRaith: If the Federal Government had not stepped in to provide AIG bail-out money, how prepared were the State regulators and the reserve funds to deal with the fall-out? How would the States have come up with the $44 billion of Federal tax dollars that had gone to shore up AIG Life Insurance subsidiaries who took risky bets through their securities lending programs that, notably, were approved by the State commissioners? And a follow-up question to that, what resources have been put in place subsequently by you and other State commissioners to oversee an insurance subsidiary's securities lending program? " CHRG-110shrg50417--14 STATEMENT OF SENATOR CHARLES E. SCHUMER Senator Schumer. Thank you, Mr. Chairman. I want to thank you for your diligence throughout this period of holding a whole series of hearings. It is vital that we make sure that the programs implemented by Treasury and the Federal Reserve are accomplishing the goals of restoring our financial system and our economy, and these hearings play a major role in that, so I thank you. Now, although we seem to have avoided the devastating effects of a full-fledged depression through the recent emergency interventions, particularly the Government backing interbank lending and business deposits at banks, we still face frozen credit markets for consumers and businesses as well as a recession that threatens to be too long and too painful for the entire country. I am glad that Secretary Paulson and the rest of the Treasury team have finally seen the light and decided to abandon asset purchases. It was the worst-kept secret in Washington that the asset purchases and the auctions Treasury proposed would not work and were likely to be scrapped. During the entire negotiations, from the days you and I, Mr. Chairman, and some of the others sat across the table, Treasury never figured out how to price the assets, whether by auction or by purchase. So it was just a matter of time until Secretary Paulson finally acknowledged that reality, and I am glad he did so we could move on. Now, many of my colleagues and I recognized that capital injections were clearly the correct approach from the beginning, and we gave Secretary Paulson the authority to do them without him asking for them. Now I suspect he is grateful we did, since it has become the most indispensable tool to restore confidence in our financial system, and I am glad we have moved away from auction and asset purchase and to capital injection. But the Capital Injection Program is not working either, not because there is a fundamental flaw in the concept of capital injection, but because of the way the program is structured. Because of the way it is structured, it is not meeting its goals of improving stability in the system and increasing lending the way it should. Treasury's stated purpose for the capital injections was to give banks a strong capital base so that they could increase lending into the economy for things like credit cards, auto loans, and small business loans. But in these uncertain and difficult times where nobody is sure of asset values, banks are inclined to hoard rather than deploy capital. They do not know how much lower the value of the assets they have will go, so they are hoarding the new capital in case they go lower. And in its zeal to include the largest banks and avoid any stigma in participating, Treasury failed to make the rules strict enough to overcome that inclination. And as a result, the Capital Injection Program is not producing very much new lending. Even if Treasury may not be able--now I intend to ask the witnesses here from the banks why they are not lending more with this additional capital. But even if Treasury cannot change the terms retroactively, any new capital injection must come with tougher requirements. Treasury should revise the terms for the next $125 billion, and if they come to us and ask us for the additional $350 billion, I intend to write those provisions--do my best with, I know, the support of many of my colleagues here, to put those provisions into the new terms of the law. Because consumers and businesses around the country depend on credit, if it is not available, the recession will be deeper and longer than it has to be. And yesterday Secretary Paulson said, well, let us focus on auto loans and credit card loans and small business loans. But he is ignoring the best way to get to do it, which is through the Capital Injection Program, but a Capital Injection Program with some stringency, with making sure that the institutions who take it--and I am against forcing institutions to take it; I think that was a bad idea--but that those who take it, need it, should have to meet some requirements. It is particularly true for small businesses that need credit to expand and create jobs. I just got a call yesterday and saw up in Buffalo a company of 300 employees, been there for a long time, cannot get a loan. Good-paying jobs in Buffalo, they do not come easy, and they are ready to go under even though the firm has been in business for a long time. And I am sure that story can be repeated in every one of our States over and over and over again. Small businesses need credit to expand and create jobs. They also need it to keep their doors open to protect the jobs they have. Millions more jobs could be in jeopardy if we do not fix the lending markets, and fast. The Federal Reserve Quarterly Lending Report for the third quarter reported that 75 percent of banks have tightened credit on commercial and industrial loans to small firms during the third quarter. That was up from 65 percent in the second quarter and 50 percent in the first. So Senator Kerry and I have been working on adding some targeted small business items to the stimulus package, such as temporarily waiving all lender and borrower fees, and increasing the maximum loan amount, and I will be asking these questions in addition to encourage banks to lend to small business as larger banks. I also believe, as some have stated--I think you, Mr. Chairman, and I could not agree with you more--that tougher terms should include more stringent restrictions on executive compensation to ensure that there are not incentives for executives to take excessive risk and more help for struggling homeowners. Chairman Bair's proposal in combination with the change in bankruptcy laws--and I believe this will only work if we change the bankruptcy laws--is the clearest and cleanest solution. One more point, Mr. Chairman. It is critical that we ensure the Government's capital is not wasted in other ways. I am calling for any mergers completed with the help of TARP money first to be approved by Treasury. And this relates to my colleague from Ohio's point. While there are mergers that should take place to improve systemic stability and encourage lending, in a very weak institution a merger may be the right way to go. Giving away Government money so that it can be used to gobble up competitors in a way that will not have any impact on the overall stability of the financial sector should not be endorsed. Mr. Chairman, the Government's assistance has to include significant help from Main Street as well as Wall Street. Consumers and businesses must see improved access to credit as a result of the Government's actions, and struggling homeowners must see a renewed commitment from the Government to help them avoid foreclosure. I look forward to discussing these issues with the panel, and thank you for holding the hearing. " CHRG-111hhrg52261--96 Mr. Loy," We are looking and we want to, precisely for that reason. We don't provide credit; we provide investment equity capital. But because these start-ups cannot get a home equity loan to finance their start-up, they are needing $500,000 from us; and it is getting harder and harder for us to provide that for the reasons I just said. And the potential for this regulation would be disproportionately felt on the smallest firms that provide that earliest stage of capital. So there is a good chance that entire swath of $500,000 to $1 million of seed-stage capital, if we are forced to follow hedge funds regulation, the cost of that will drive the firms who do that out of business. Ms. Fallin. Can I ask, also, another question? I am hearing from our local bankers that the fee increases to recapitalize FDIC is causing them not to have as much capital and loans to put out into the marketplace. And they have told me, like in my State, that $37 million has gone out in fee increases which they could be lending out to our small businesses and even to those who are wanting to have mortgages. And they are concerned about another fee increase on those small bankers that will once again drive capital and take it out of the marketplace. Are you seeing that back in your individual organizations and States, that it is taking the capital out of the marketplace, lending ability? " CHRG-111shrg57319--549 Mr. Killinger," If I could, again--because I am setting the--with the board setting the strategy for the overall company, it really needs to be in the context, when we talked about diversifying the company, that included having a strategy for entering the credit card business, and we subsequently did the Providian acquisition, which was a significant part. It also had a material reduction in interest rate risk. That is why we sold so many mortgage servicing rights. And we also had, even in the Home Loans area, that this would be a lesser part of our overall business, and that the primary growth of the business would be in our retail banking stores, and that is where we are going to open up significant numbers of retail banking stores. So the overall context of the company is still a shrinkage of the home lending business, but within the home lending business that we would have more of a focus on some of these other products. Senator Levin. Some of the other products being high-risk products. " CHRG-111hhrg48674--66 Mrs. Maloney," What gets me is we keep trying so many things, and what I am hearing from the public and what I hear from my colleagues in Congress is that the loans are not getting out to the public. Now, banks say that they are increasing their loans, but there is some type of disconnect. Maybe they are long-term loans that were made a long time ago. New credit is not getting out into the markets. We just came back from a retreat of the Democrats, and my colleagues were telling me across the country, in every State, they feel that their constituents are telling them they can't get access to credit. Very reasonable, respected businesses are having their long-term credit cut, and there is no credit for commercial loans. There seems to be a huge problem there, and I would like to hear your ideas. Obviously, the bank system is the wheel that has to get our economy going, yet we hear that part of the new program is there is going to be a business and consumer loan program coming from the Federal Reserve. Why is that coming from the Federal Reserve? Shouldn't that be coming from our financial institutions? Why can't we get them working properly? Is the problem the toxic assets? Do we need to get them off the books? I don't think we should have to create a new lending system. Why can't we get the lending system that has served this country for decades working? Why is credit not getting out there to the public, and what can we do about it? " CHRG-111hhrg53241--30 Mr. Mierzwinski," Thank you, Mr. Chairman, Congressman Hensarling, and members of the committee. I am Ed Mierzwinski of U.S. PIRG, as are several of the witnesses here. U.S. PIRG is a founding member of Americans for Financial Reform, ourfinancialsecurity.org, a coalition of civil society members across the spectrum supporting broad reform. My written testimony goes into detail about a number of aspects of the Obama plan, including its new investor protections to provide for greater fiduciary responsibilities on broker dealers, its limits on executive pay, and tying risk to longer-term-pay incentives rather than the greedy, short-term incentives that have helped precipitate the crisis. I also talk about the aspects of prudential regulation and the notion of a new systemic risk regulator. We point out that if it is to be the Fed, the Fed needs democratization and greater transparency. First of all, I also want to mention that one area where we think the proposal is extremely deficient is in the area of credit rating agencies. There needs to be much more regulation of credit rating agencies. We also are disappointed that it doesn't include enough on solving the mortgage and homeowner and foreclosure crises. I want to spend the bulk of my time talking about the centerpiece of the reform, and that is the Consumer Financial Protection Agency. We look at this as a game changer, as a critically important new solution to a failed regulatory system. The system failed because the regulators had conflicts of interest, and the regulators did not impose the civil penalties that they had available to them. The regulators did not establish rules to protect consumers in the marketplace. Those rules could have helped prevent the mortgage crisis, as everyone knows. Fourteen years after the Congress gave the Fed authority over the Homeownership and Equity Protection Act to create rules on predatory lending, didn't do anything until after the crisis had passed. Complaints about credit cards reached a fever pitch while the OCC slept, the overdraft loan problem. And so Congress had to step in and act under the leadership of Congresswoman Maloney and this committee. The regulators finally created some rules on credit cards, but the Congress, fortunately, had already suggested the rules, and then the Congress went further and made the rules into a law. The issue of overdraft fees, banks are now making the bulk of their income on an unfair business model, overdraft fees where the regulators have allowed them to trick consumers into using their debit cards even when they have no money in their accounts. And the regulators have allowed the banks to change the order that deposited checks and items are cleared so that consumers will face more overdraft charges at the end of the day. We have a number of other problems that we describe in our testimony, in our written testimony, both this month and last month, where the regulators have simply failed to go after the banks. So the idea of a new regulator that has only one job, protecting consumers, is one of the best ideas this Congress has had. It will not have conflicts of interest. It will not have two jobs to do. It will focus on consumer protection. But you cannot set the new regulator up to fail. You must keep it independent, and you must also do the other things that the Obama Administration has suggested and that your bill, Mr. Chairman, retains. You must keep the Federal law as a floor of consumer protection and allow the States to go higher. The States are nimbler. Often, they respond more quickly, and they provide good ideas to the Congress. In my testimony, I outline how in the 2003 FACT Act, Congress allowed the States to continue to investigate identity theft. Forty-six States and the District of Columbia came up with a security freeze model that allows consumers to protect themselves. Giving the States the ability to go further is the best way that we can protect consumers from new threats, because the States can act more quickly. And the idea that State attorneys general can enforce the law is not balkanization. Providing State attorneys general at the enforcement level the ability to enforce the law, that is an area where you want competition. You want many enforcers. You don't want many rule writers. You don't want many agencies where banks can choose to charter shop to avoid regulation, but you do want a lot of cops on the beat, and you do want to give consumers the right to enforce the laws. We wish the bill went further on giving consumers a private right of action, but we are very pleased that the new agency will have the authority to ban unfair forced arbitration in consumer contracts. Thank you. [The prepared statement of Mr. Mierzwinski can be found on page 55 of the appendix.] " CHRG-111hhrg48867--101 Mr. Wallison," It offers the opportunity to create an unlimited number of future Fannies and Freddies. The essence of Fannie Mae and Freddie Mac, the reason they became so powerful, so large, and ultimately were able to take so much in the way of risk, is that they were seen by the markets as backed by the government. And no matter what the government said about whether it was backing them, the markets were quite clear about this: The government was going to back them if they failed. Now, that is the kind of situation that we are creating when we are talking about systemically significant companies, because if we create such companies, if we have a regulator that is blessing them as systemically significant, we are saying they are too big to fail. If they fail, there will be some terrible systemic result. And therefore, the market will look at that and say, well, we are going to be taking much less risk if we lend to company ``A'' that is systemically significant rather than lending to company ``B'' that is not. " fcic_final_report_full--82 SUBPRIME LENDING CONTENTS Mortgage securitization: “This stuff is so complicated how is anybody going to know?” .............................................................................  Greater access to lending: “A business where we can make some money” ............  Subprime lenders in turmoil: “Adverse market conditions” .................................  The regulators: “Oh, I see” ..................................................................................  In the early s, subprime lenders such as Household Finance Corp. and thrifts such as Long Beach Savings and Loan made home equity loans, often second mort- gages, to borrowers who had yet to establish credit histories or had troubled financial histories, sometimes reflecting setbacks such as unemployment, divorce, medical emergencies, and the like. Banks might have been unwilling to lend to these borrow- ers, but a subprime lender would if the borrower paid a higher interest rate to offset the extra risk. “No one can debate the need for legitimate non-prime (subprime) lending products,” Gail Burks, president of the Nevada Fair Housing Center, Inc., tes- tified to the FCIC.  Interest rates on subprime mortgages, with substantial collateral—the house— weren’t as high as those for car loans, and were much less than credit cards. The ad- vantages of a mortgage over other forms of debt were solidified in  with the Tax Reform Act, which barred deducting interest payments on consumer loans but kept the deduction for mortgage interest payments. In the s and into the early s, before computerized “credit scoring”—a statistical technique used to measure a borrower’s creditworthiness—automated the assessment of risk, mortgage lenders (including subprime lenders) relied on other factors when underwriting mortgages. As Tom Putnam, a Sacramento-based mort- gage banker, told the Commission, they traditionally lent based on the four C’s: credit (quantity, quality, and duration of the borrower’s credit obligations), capacity (amount and stability of income), capital (sufficient liquid funds to cover down pay- ments, closing costs, and reserves), and collateral (value and condition of the prop- erty).  Their decisions depended on judgments about how strength in one area, such as collateral, might offset weaknesses in others, such as credit. They underwrote bor- rowers one at a time, out of local offices.  CHRG-111hhrg48874--14 Mr. Gruenberg," Thank you, Mr. Chairman. Thank you for the opportunity to testify on behalf of the FDIC on the balance between increased credit availability and prudent lending standards. The FDIC is very aware of the challenges faced by financial institutions and their customers during these difficult economic times. Bankers and examiners know that prudent, responsible lending is good business and benefits everyone. Adverse credit conditions brought on by an ailing economy and stressed balance sheets, however, have created a difficult environment for both borrowers and lenders. Resolving the current economic crisis will depend heavily on creditworthy borrowers, both consumer and business, having access to lending. In response to these challenging circumstances, banks are clearly taking more care in evaluating applications for credit. While this more prudent approach to underwriting is appropriate, it should not mean that creditworthy borrowers are denied loans. As bank supervisors, we have a responsibility to assure our institutions, regularly and clearly, that soundly structured and underwritten loans are encouraged. While aggregate lending activity for FDIC-insured institutions fell in the fourth quarter of 2008, this decline was driven mostly by the largest banks, which reported a 3.4 percent fall in loan balances. In contrast, lending activity at community banks with assets under $1 billion actually increased by 1.5 percent. Community banks are playing an important role in the current stressful environment and appear to be benefiting from their reliance on traditional core deposit funding and relationship lending. Some have questioned whether bank supervisors are contributing to adverse credit conditions by overreacting to current problems in the economy and discouraging banks from making good loans. The FDIC understands the critical role that credit availability plays in the national economy and we balance these considerations with prudential safety and soundness requirements. Over the past year, through guidance, the examination process and other means, we have sought to encourage banks to maintain the availability of credit. We have also trained our examiners on how to properly apply this guidance at the institutions we supervise and how to conduct examinations and communicate their findings to bank management without infringing on bank management's day-to-day decisionmaking and relationships with customers. The FDIC has taken a number of recent actions specifically designed to address concerns about credit availability. On November 12th of last year, we joined with the other Federal banking agencies in issuing the ``Interagency Statement on Meeting the Needs of Creditworthy Borrowers.'' The statement encourages banks to continue making loans in their markets, work with borrowers who may be encountering difficulties, and pursue initiatives such as loan modifications to prevent unnecessary foreclosures. Recently, the FDIC hosted a roundtable discussion with banking industry representatives and Federal and State bank regulators focusing on how they can work together to improve credit availability. One of the important points that came out of the session was the need for ongoing dialogue between these groups as they work toward a solution to the current financial crisis. Toward this end, FDIC Chairman Bair announced last week that the FDIC is creating a new, senior level office to expand community bank outreach, and plans to establish an advisory committee to address the unique concerns of this segment of the banking community. On January 12th of this year, the FDIC issued a Financial Institution Letter advising insured institutions that they should track the use of their capital injections, liquidity support, and/or financing guarantees obtained through recent financial stability programs as part of a process for determining how these Federal programs improve the stability of the institution and contribute to lending to the community. Internally at the FDIC, we have issued guidance to our examiners for evaluating participating banks' use of funds received through the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program. Examination guidelines for the new Public/Private Investment Fund will be forthcoming. Banks should be encouraged to make good loans, work with borrowers who are experiencing difficulties whenever possible, avoid unnecessary foreclosures, and continue to ensure that the credit needs of their communities are fulfilled. In concert with other agencies, the FDIC is employing a range of strategies to ensure that credit continues to flow on sound terms to creditworthy borrowers. Thank you for the opportunity to testify. I would be happy to answer any questions. [The prepared statement of Vice Chairman Gruenberg can be found on page 97 of the appendix.] " CHRG-110hhrg46593--5 Mrs. Maloney," Thank you, Mr. Chairman. I welcome our distinguished guests and thank you for your leadership. I particularly would like to commend Chairman Bair for her leadership in foreclosure prevention and particularly for developing a new loan modification guarantee program to refinance on a large scale, which would help us to save millions of people and help them to stay in their homes. And I would like to be associated with the comments of both the ranking member and the chairman that our intention was to use some of the TARP money to invest in our economy and to get it moving in the right direction. Certainly stabilizing housing, as Chairman Bernanke has said repeatedly, that we must fix the housing crisis before we can get the economy back on track. So whatever the model, I firmly support using TARP money to stabilize housing and our economy. Secondly, my constituents are telling me that many of them still cannot get access to credit. Given that bank lending is still basically shut down, we need to be asking whether and when we should expect at least some fraction of TARP funds injected into banks to be lent. After all, one of the primary purposes of the TARP program was to get credit moving. I have nonbank lenders who are my constituents who lend money to small businesses and want access to the TARP to increase that activity. Today's Wall Street Journal talks about insurance companies that are buying up banks just to get access to the TARP money. And we then read many articles that banks are using TARP money for buying other banks. So we are basically funding mergers and acquisitions, not lending. My basic question is, why shouldn't we be giving TARP money out based on the activity it funds? Why don't we fund organizations that will lend it, whether it is a bank, an insurance company, so that we will be getting the credit out into the communities which was the purpose of the TARP program? Again, every article talks about how it is being used for capital formation, mergers, acquisitions, other activities, buying up swaps, buying other things instead of getting the credit out into the communities. So there are many questions before us today, but those are two of my prime focuses, that we should be helping people stay in their homes, and we should be working harder to get credit out into the communities. Thank you. " CHRG-110shrg50414--38 STATEMENT OF SENATOR DANIEL AKAKA Senator Akaka. Thank you very much, Mr. Chairman. I appreciate your conducting this hearing today, and I want to add my welcome and thanks to the witnesses who are here today. Mr. Chairman, I understand the need to act to stabilize the markets. However, we must not give the Secretary of Treasury a blank check with no accountability or oversight. We must deliberate and provide a solution that protects taxpayers as much as possible and limits the potential for this new authority to be abused. Seven hundred billion dollars is a huge sum of money. I know the President has said that the whole world is watching Congress now. I remind all of you that the Members of this Committee and the rest of the taxpayers will be closely watching the development of the Troubled Assets Program. The purchase and sale of assets has great potential to be abused and lead to corruption. Members of Congress, the GAO, the Treasury Inspector General, and the public must review the activities of Treasury authorized by this proposed act. We must make sure that this situation, which has been caused partially be greed, will not be exploited to enrich individuals and corporations. In addition to stabilizing the markets, we must do more to help working families. We need to help those who have already suffered the consequences of the current economic downturn. We must do more to try and keep people in their homes. Consumer protections must be improved to better protect families from being exploited by predatory lenders. Mr. Chairman, we are here today due to a massive market failure. In addition to this emergency legislation, we need a complete reexamination of our financial services oversight system in order to strengthen regulation and prevent the need for future bailouts. While most of those issues will be considered in the next session of Congress, I look forward to working with all of you to bring together a fair proposal to stabilize the markets, improve the lives of working families, and overhaul the financial services regulatory system. Thank you very much, Mr. Chairman. " FOMC20081029meeting--261 259,MR. FISHER.," Mr. Chairman, if I could just add one other thing. We are hearing more and more about people switching to LIBOR, trying to shift their lending contracts to LIBOR rather aggressively, obviously, because they are higher rates. But I'm wondering if you're picking that up as well. " CHRG-111shrg51303--120 Mr. Kohn," Exactly. Senator Warner. And that AIG's practices, whether it would be in effect a mortgage securities lending business that went from $1 billion of exposure to about $100 billion of exposure between 1999 and 2007, it was a huge rise. " CHRG-111hhrg58044--79 Mr. Price," In the remaining seconds, what factors did Congress rely on when examining and endorsing the non-lending uses of credit information while amending the Fair Credit Reporting Act in 1996 and the FACT Act in 2003? Mr. Snyder? " CHRG-111shrg57320--67 Mr. Rymer," I do not think they should be allowed. I think that if a bank is going to advance funds, secured or unsecured, they certainly need to verify who they are lending to and verify the repayment sources. Senator Kaufman. Mr. Thorson " CHRG-110hhrg46596--59 Mr. Heller," I appreciate the opportunity to spend a few minutes here in this hearing to discuss what I am hearing as frustration in the community banking, especially the small community banks across this country. As they go to the Web site, they fill out these applications and wait. They literally wait, wondering when and if these TARP funds will become available. I think this frustration, as I continue to get these phone calls--they want to know what the criteria are. ``We filled out the 2-page application, and we heard nothing.'' What are the thresholds, what are the expectations, what are the criteria to know the difference--is it assets, is it deposits? What is the threshold that is going to determine between a small bank and a big bank whether they receive assistance? Because these small community banks are not lending, they are saying they are not lending. In fact, most of them are just wondering if we are sitting around, waiting to be acquired by people who do receive TARP funds. So I am hoping that we can get answers to some of these questions. Thank you, Mr. Chairman. I yield back. " FinancialCrisisReport--51 At the same time that WaMu was implementing its High Risk Lending Strategy, WaMu and Long Beach engaged in a host of shoddy lending practices that contributed to a mortgage time bomb. Those practices included qualifying high risk borrowers for larger loans than they could afford; steering borrowers to higher risk loans; accepting loan applications without verifying the borrower’s income; using loans with teaser rates that could lead to payment shock when higher interest rates took effect later on; promoting negatively amortizing loans in which many borrowers increased rather than paid down their debt; and authorizing loans with multiple layers of risk. In addition, WaMu and Long Beach failed to enforce compliance with their lending standards; allowed excessive loan error and exception rates; exercised weak oversight over the third party mortgage brokers who supplied half or more of their loans; and tolerated the issuance of loans with fraudulent or erroneous borrower information. They also designed compensation incentives that rewarded loan personnel for issuing a large volume of higher risk loans, valuing speed and volume over loan quality. WaMu’s combination of high risk loans, shoddy lending practices, and weak oversight produced hundreds of billions of dollars of poor quality loans that incurred early payment defaults, high rates of delinquency, and fraud. Long Beach mortgages experienced some of the highest rates of foreclosure in the industry and their securitizations were among the worst performing. Senior WaMu executives described Long Beach as “terrible” and “a mess,” with default rates that were “ugly.” WaMu’s high risk lending operation was also problem-plagued. WaMu management knew of evidence of deficient lending practices, as seen in internal emails, audit reports, and reviews. Internal reviews of WaMu’s loan centers, for example, described “extensive fraud” from employees “willfully” circumventing bank policy. An internal review found controls to stop fraudulent loans from being sold to investors were “ineffective.” On at least one occasion, senior managers knowingly sold delinquency-prone loans to investors. Aside from Long Beach, WaMu’s President Steve Rotella described WaMu’s prime home loan business as the “worst managed business” he had seen in his career. Documents obtained by the Subcommittee reveal that WaMu launched its High Risk Lending Strategy primarily because higher risk loans and mortgage backed securities could be sold for higher prices on Wall Street. They garnered higher prices, because higher risk meant they paid a higher coupon rate than other comparably rated securities, and investors paid a higher price to buy them. Selling or securitizing the loans also removed them from WaMu’s books and appeared to insulate the bank from risk. From 2004 to 2008, WaMu originated a huge number of poor quality mortgages, most of which were then resold to investment banks and other investors hungry for mortgage backed securities. For a period of time, demand for these securities was so great that WaMu formed its own securitization arm on Wall Street. Over a period of five years, WaMu and Long Beach churned out a steady stream of high risk, poor quality loans and mortgage backed securities that later defaulted at record rates. Once a prudent regional mortgage lender, Washington Mutual tried – and ultimately failed – to use the profits from poor quality loans as a stepping stone to becoming a major Wall Street player. CHRG-111shrg54533--21 Secretary Geithner," Senator, that is an excellent question. As you know, we are proposing the following things to try to be responsive to those basic failures in consumer protection. The first is to create a new agency that would take the existing authority, responsibility, and the expertise, put it into one place with a single core mission of better protecting consumers from the risks they have been exposed to in the marketing of products, particularly credit products to consumers. We are going to give that agency new--we are going to give it exclusive rule-writing authority and primary enforcement authority in one single place of accountability. We have laid out a set of broad standards and principles built in many ways on the credit card legislation that moved through this Committee and a range of other proposals from the consumer advocates and others that would guide the writing of rules and regulations in these areas. The basic principles are: Much stronger disclosure, more simple disclosure so that consumers understand the risks in the products they are being sold; the creation of an option to elect for a more simple standardized instrument, standardized mortgage product, for example, so that, again, you are less vulnerable to the risks of predation in these areas; and, of course, there are some practices that we think fundamentally are untenable and should not be permitted which we would propose to ban. We have laid out some of those broad principles in our paper, but that is the approach we recommend. Senator Akaka. Mr. Secretary, I have concerns about mandatory arbitration clause limitations. I believe we share a concern on that and that it has been harmful to consumers. I have reintroduced my Taxpayer Abuse Prevention Act. The Act is intended to protect Earned Income Tax Credit recipients from predatory refund anticipation loans and expand access to alternative forms of receiving refunds. The legislation also includes a provision that would prohibit mandatory arbitration clauses for refund anticipation loans to ensure that consumers have the ability to take future legal action if necessary. Please share with the Committee why the Consumer Financial Protection Agency should have the authority to restrict or ban mandatory arbitration clauses. " CHRG-111hhrg48874--185 Mr. Foster," Do you think if there was explicit collateral support, that might encourage some slice of lending? Governor? Ms. Duke. Congressman, you're right, and particularly a lot of small businesses that use their home equity to finance their businesses are being squeezed by that. I think some of the progress that we have made in talking about loan modifications and talking about refinance that are now allowing, in the GSE loans, refinances to take place, even when the loan to value might be up to 105 percent. I think that could have some help. On the commercial property side, there is a program under SBA, and I'm not quite sure what the funding necessary is. But SBA does have a program where the bank lends 50 percent of the value and then the SBA loan covers 40 percent and the businessman has 10 percent. That sometimes helps businesses who otherwise wouldn't have largedown payments or equity positions in their buildings. " CHRG-110shrg50416--65 Mr. Kashkari," Again, we do expect, but we are hesitant to put a specific dollar figure because these financial institutions--again, as you know, Senator, we are talking about very large financial institutions and very small. One size fits all is---- Senator Schumer. What are you going to do for banks that do not increase their lending at all that take this capital? " CHRG-111hhrg56847--226 Mr. Langevin," Thank you, Mr. Chairman. Chairman Bernanke, thank you for being here today and the hard work you are doing. When you testified in front of this committee a year ago almost to the day, the economy was still in decline, gross domestic product decreased by over 6 percent and we were shedding about 500,000 jobs a month. I know we have talked about this again here this morning several times. Today our economy is growing at an estimated rate of about 3 percent, adding almost 300,000 jobs in April. That is a significant turnaround. However, in places like my home State in Rhode Island, which continues to have one of the highest unemployment rates in the country--a 12.5 percent rate right now--finding jobs really continues to be a top concern for me, for my constituents. And the other issue is the Federal deficit. I know these have been constant themes here this morning. So my question is that to both on small business job creation--and I do want to adjust the deficit. Small businesses are a key economic driver, particularly in Rhode Island, which we have about 97 or 98 percent of our businesses in Rhode Island are small businesses. Can you give us again an update on the current state of lending to small businesses? In particular, can you also give us an updated status report on the term asset backed lending facility, or TALF, as it relates to small business lending? And in your estimation, do small businesses now have access to the credit that they need to begin expanding and adding jobs? And in really going forward, what do you believe the most effective ways the Federal Government can spur small business growth and speed job creation? How do we really jump-start job creation in small businesses, which is the backbone of our economy, particularly in Rhode Island? The other thing I would like you to get to--as I mentioned before, the deficit and our mounting Federal debt is another large concern for all of us, especially given the recent volatility in the European markets. Do you believe that our economy is stable enough to enact immediate deficit reduction measures? If not, what are the risks of a double-dip recession? And then finally, what are the most effective ways to enact appropriate deficit reduction so that we don't put our economic recovery at risk? " CHRG-111shrg61513--100 Mr. Bernanke," Well, I think it is very important, and I guess on the subject of regulation, I guess I would like to remind the Committee that the Federal Reserve, although we have been very focused on large institutions over the last couple years because of the crisis, we also supervise a large number of community banks, State member banks, and they provide us very important information about the economy. We can learn from them what is happening at the grass-roots level, what is happening to lending. And, you know, to get to your question, that kind of information is very valuable for us as we try to understand what is going on in the economy. As you point out, the community banks have in many cases, when they are able, when they are strong enough, have been able to step up and provide lending. They are very important lenders to small businesses, for example. And as you say--and this was the issue that Senator Bennett was raising--one of the proposals that the Treasury has made is to create a fund that would capitalize small banks that demonstrate that they can increase their lending to small businesses. So in the spirit of my previous conversation with Senator Bennett, I am not going to endorse or not endorse that approach. There are other approaches also for addressing small businesses. But I would say that if you go do that, one suggestion the Treasury makes, which is to separate it from the TARP, maybe to pass it--this would address Senator Bennett's question--to pass it separately so that it is not stigmatized or otherwise associated with the restrictions with the TARP, which increase the chance that that would be a successful program. But we certainly do value the small banks for what they are able to do, and if we are going to get this economy going again and get employment growing again, then small banks, small businesses are going to be critical for that. Senator Merkley. Thank you very much, and I want to turn to another issue, which is that I was meeting with a group of Members of Parliament from Canada two nights ago, and when I asked them about the economic meltdown and the impact on Canada, they smiled and said: Well, you know, we kept the risk out of our banking system, and now there is a huge economic movement in which we are going down, Canadians are going down and buying up the foreclosed real estate in the United States.And certainly in your role, there is the chance to look at and learn how different models interacted around the world. And would you just take a second to comment on the Canada structure, how they managed risk, whether there are any insights for us here in our efforts to provide regulatory reform? " CHRG-110hhrg44901--194 Mr. Bernanke," I can tell you what the legislation says. Under Section 13.3 of the Federal Reserve Act, we can lend to an individual partnership or corporation if conditions are unusual and exigent, and other credit accommodation is not available. So there are some conditions on that, on 13.3, somewhat less restrictive in that respect, but the collateral can only be treasuries or agencies. " CHRG-111hhrg50289--44 Mr. Luetkemeyer," Thank you, Madam Chairwoman. Ms. Blankenship, you made a comment a minute ago and during your testimony with regards to the impact of regulatory authorities coming into the bank. Can you elaborate on that a little bit more? Ms. Blankenship. Certainly. What we have seen is just because of the past six months and the financial meltdown that we are all getting painted with the same brush, and while the big banks got bailed out and were given the TARP money, their primary intent for that was to lend money. But yet what we are hearing from small businesses is that they cannot get it. This is a double-edged sword because the banks are willing to lend. They have capital to lend. We have heard that here today, and that continues to be true the community banks, but the examiners are painting us all with one brush. They are painting the small banks the same way they do the two big to fail banks. And so when they come in and say, ``Okay. If you have got commercial real estate,'' and we have heard stories like this, ``we are going to classify it across the board,'' well, even if you are using an SBA program for our reporting purposes, that has to be reported as commercial real estate, and if you have a regional office, regardless of what the mandate is from Washington, sometimes the examiners in the field do not always carry the same operating procedures and practices as we hear out of the head offices in Washington. So it can make banks hesitant to make those types of loans because at a time like this, we cannot afford for perhaps you are a well capitalized bank, and if you have certain classifications, your ratings go down and you fall into adequately capitalized. Then your FDIC assessment goes up, and all of our costs. There is a tremendous amount of cost being levied on the small banks right now. " CHRG-111hhrg56766--263 Mr. Bernanke," All the things we have talked about from the monetary policy side, lending, from whatever actions Congress wants to take on the employment side, I think those are the issues that will create stabilization in the labor market, and that in turn is one of the keys to consumer confidence. " CHRG-111shrg52966--65 Mr. Polakoff," Absolutely, Senator. We took public enforcement action against AIG regarding some of its inappropriate lending. Senator Reed. No, I am talking about the issue of risk assessment, risk management, the issues that have been the subject of this GAO report? " FOMC20051213meeting--35 33,CHAIRMAN GREENSPAN.," Well, that’s actually a fairly encompassing explanation. It implies that the lessons from 1998, when they were trying to fund in dollars and lend in the domestic currency—trying to unwind the rules of accounting, which got them all into very serious trouble— have been learned, essentially." CHRG-111hhrg56241--201 Mr. Grayson," Well, let's say it was only 10 to one. Isn't it true that every dollar that is paid on executive compensation means $10 less in loan ability for these institutions, the ability to lend out money to the rest of America? Professor? " CHRG-111hhrg50289--60 Mr. Coffman," Thank you, Madam Chairman. Mr. McGannon and Ms. Blankenship, I get complaints from my local bankers and from my small businesses, but particularly from my local bankers who say that, on one hand, the federal government wants them to lend and, on the other hand, I think just the regulatory scheme is such that it is kind of the zero defects, that you know, they had a 20 percent increase, I think, in their capital reserve requirements, if I am using the proper term, ten to 12 percent, and that has caused them to pull back on their lending. I mean, have we gone too far on the regulatory side where we are not allowing bankers to exercise their own judgment in terms of the ability of the borrower to repay the loan? Could you address that issue? Ms. Blankenship, we will start with you. Ms. Blankenship. Certainly. Again, we cannot be painted with the same brush, and you know, yes, has the regulatory gone too far right now? Yes, it has because you find banks are hesitant to lend because of the increasing costs that I talked about. The FDIC, we are additionally being asked to put more money in loan loss reserve. So that takes the money out of loans, money available that could be leveraged back into loans. So all of those are challenges right now. To make this program more effective, we have to continue, as I said, to look at the initiatives and what is working and get back to less paperwork and involving more banks in this program. Additionally, you know, if we could get some Subchapter S reform, you would find that a lot of small businesses could raise their own capital. Right now they are restricted to one type of stock. If they could be allowed to issue preferred stock and increase their shareholders. So I think there are many ways that we could approach this, but again, to really answer your question, the regulatory environment, until we can get some equity there and know that the way you supervise a too big to fail bank is not the way you supervise a small business bank, which is what we are. " CHRG-111hhrg54868--50 Mr. Dugan," I would just echo those remarks. If you only have one set of views, I think you can have problems in emphasizing that aspect of it if you don't have them both blended together and balanced, one against the other, when you have an issue like that. Nontraditional mortgages, the payment option mortgages, were something we identified very early on as having both safety and soundness problems and underwriting problems. We began to try to take action in the national banking system, as my fellow banking regulators did. We couldn't get at the place that was really cranking them out because we didn't have rules that applied in that area. So I think you would need a mixture of the two, and the notion that you can completely separate them gives us pause. Mrs. McCarthy of New York. One of the other things I just want to bring up, and, Chairman Bair, we had talked about this. If you watch TV, and it doesn't matter whether it is early in the morning or late at night or the middle of the day, we are still seeing a tremendous amount, in my opinion, of predatory lenders on TV. I know it is not particularly in this committee that we can deal with it, but this is a perfect example where I see the two entities of different parts of the government aren't working together. We are here talking about--talking about giving consumers protection, and it is blasted all over the TV, it is on every telephone pole in my area: We will get you insurance, we will get you your loan for your house, no downpayment. How far have we actually come on protecting our consumers? Ms. Bair. Congresswoman, that is right. Banks are not doing this. If they were banks, we could stop it. We have both rules now. The Fed finally moved forward with rules under the Home Owner's Equity Protection Act and we have an enforcement mechanism for banks. The nonbank sector is lightly regulated or virtually unregulated in many, if not most, of these areas, and it is a daunting task to try to identify those people, get them registered, get them licensed, and have some type of examination and enforcement mechanism. That is really where the void is, and that is where the focus of this new agency should be. That, in and of itself, is a daunting task. So we think the best leverage in examination and enforcement resources is for this new agency to write rules for everybody, but on the enforcement side focus on nonbank financial service providers that, you are absolutely right, are still out there. Mrs. McCarthy of New York. I thank you all for your testimony. " FinancialCrisisReport--260 Subprime lending fueled the overall growth in housing demand and housing price increases that began in the late 1990s and ran through mid-2006. 1008 “Between 2000 and 2007, backers of subprime mortgage - backed securities – primarily Wall Street and European investment banks – underwrote $2.1 trillion worth of [subprime mortgage backed securities] business, according to data from trade publication Inside Mortgage Finance .” 1009 By 2006, subprime lending made up 13.5% of mortgage lending in the United States, a fivefold increase from 2001. 1010 The graph below reflects the unprecedented growth in subprime mortgages between 2003 and 2006. 1011 1008 See 3/2009 U.S. Department of Housing and Urban Development Interim Report to Congress, “Root Causes of the Foreclosure Crisis,” at 36. See also “A Brief History of Credit Rating Agencies: How Financial Regulation Entrenched this Industry’s Role in the Subprime Mortgage Debacle of 2007 – 2008,” Mercatus on Policy (10/2009), at 2. 1009 “The Roots of the Financial Crisis: Who is to Blame?” The Center for Public Integrity (5/6/2009), http://www.publicintegrity.org/investigations/economic_meltdown/articles/entry/1286. 1010 3/2009 U.S. Department of Housing and Urban Development Interim Report to Congress, “Root Causes of the Foreclosure Crisis,” at 7. 1011 1/25/2010, “Mortgage Subprime Origination,” chart prepared by Paulson & Co. Inc., PSI-Paulson&Co-02-0001- 21, at 4. CHRG-110hhrg46593--195 Mr. Yingling," Thank you, sir. I appreciate the opportunity to testify on the current status of the Troubled Asset Relief Program. The TARP program has served to calm financial markets and does have promise to promote renewed economic growth. However, it is also a source of great frustration and uncertainty to banks. Much of the frustration and uncertainty is because of the numerous significant changes to the program and the misperceptions that have resulted on the part of the press and the public. Hopefully, this hearing will help clarify the situation. ABA greatly appreciates the consistent statements by members of this committee, and particularly its leadership, that regulated banks were not the cause of the problem and have generally performed well. Not only did regulated banks not cause the problem, they are the primary solution to the problem, as both regulation and markets move toward the bank model. Thousands of banks across the country did not make toxic subprime loans, are strongly capitalized, and are lending. As you know, TARP started out focused on asset purchases. But then after European countries announced they were putting capital in undercapitalized banks, everything changed. Overnight, nine banks were called to Washington and requested to take capital injections. As this program was extended beyond the first nine to other banks, it was not initially clear that the program was to focus on healthy banks and its purpose was to promote lending. ABA was extremely frustrated with the lack of clarity, and we wrote to Secretary Paulson asking for clarification. The press, the public, Members of Congress, and banks themselves were initially confused. Many people understandably did not differentiate between this voluntary program for a solid institution and bailouts. Bankers, for a few days, were not sure of the purpose, although they were sure their regulators were making it clear it was a good idea to take the capital. Put yourself in the place of a community banker. You are strongly capitalized and profitable. Your regulator is calling you to suggest taking TARP capital is a good idea. You, the banker, can see that it might be put to good purposes in terms of increasing lending, but you have many questions about what will be a decision that will dramatically affect the future of your bank, questions like, what will my customers think? What will the markets think? What restrictions might be added ? Despite the uncertainty, banks are signing up. In my written testimony, I have provided examples of how different banks can use the capital in ways to promote lending. One aspect of the program that needs to be addressed further is the fact that it is still unavailable to many banks. Last night, the Treasury did offer a term sheet for private corporations, and we greatly appreciated that. However, term sheets for many banks, including S corporations and mutual institutions, have not been issued. This is unfair to these banks, and it undermines the effectiveness of the program. In my written testimony, I have discussed the fact that while TARP is designed to increase bank capital and lending, other programs are actually in conflict and are actually reducing capital and lending. In that regard, I once again call to the attention of the committee the dramatic effect of current accounting policies which continue unnecessarily to eat up billions of dollars in capital by not understanding the impact of mark-to-market and dysfunctional markets. Finally, in our written testimony, ABA also supports efforts to address foreclosures and housing. We have proposed a four-point plan: First, greater efforts to address foreclosures; second, efforts to address the problems caused by securitization of mortgages that you have championed, Mr. Kanjorski; third, the need to lower mortgage interest rates, which are not following normal patterns; and fourth, tax incentives for purchasing homes. Thank you. [The prepared statement of Mr. Yingling can be found on page 194 of the appendix.] " CHRG-111hhrg53021--190 Mr. Costa," Final question, moving over to community banks which provide an important source of lending in my communities. Under the framework, you are saying that agencies also will have the ability to subject banks to additional capital requirements. That is not new, of course. How does the Administration plan to do that? You know, it has been tried in the past. " CHRG-111hhrg53021Oth--190 Mr. Costa," Final question, moving over to community banks which provide an important source of lending in my communities. Under the framework, you are saying that agencies also will have the ability to subject banks to additional capital requirements. That is not new, of course. How does the Administration plan to do that? You know, it has been tried in the past. " CHRG-111shrg54789--180 PROTECTION AGENCY If the CFPA is to be effective in its mission, it must be structured so that it is strong and independent with full authority to protect consumers. Our organizations have strongly endorsed President Obama's proposal regarding what should be the agency's jurisdiction, responsibilities, rule-writing authority, enforcement powers and methods of funding. \73\ His proposal would create a Consumer Financial Protection Agency (CFPA) with a broad jurisdiction over credit, savings and payment products, as well as fair lending and community reinvestment laws. \74\ (Recommendations for improvement to the Administration bill are flagged below.) The legislation has been introduced (without providing the agency jurisdiction over the Community Reinvestment Act) by House Financial Services Chairman Barney Frank as H.R. 3126.--------------------------------------------------------------------------- \73\ Senators Durbin, Schumer, Kennedy and Dodd offered the first legislative proposal to create a consumer financial agency (S. 566), known as the Financial Product Safety Commission. The bill was originally introduced in the last Congress. \74\ ``Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,'' Department of the Treasury, June 17, 2009, pp. 55-70. The White House has since proposed legislation to effectuate the proposal in this ``White Paper.''--------------------------------------------------------------------------- In its work to protect consumers and the marketplace from abuses, the CFPA as envisioned by the Administration would have a full set of enforcement and analytical tools. The first tool would be that the CFPA could gather information about the marketplace so that the agency itself could understand the impact of emerging practices in the marketplace. The agency could use this information to improve the information that financial services companies must offer to customers about products, features or practices or to offer advice to consumers directly about the risk of a variety of products on the market. For some of these products, features or practices, the agency might determine that no regulatory intervention is warranted. For others, this information about the market will inform what tools are used. A second tool would be to address and rein in deceptive marketing practices or require improved disclosure of terms. The third tool would be the identification and regulatory facilitation of ``plain-vanilla,'' low risk products that should be widely offered. The fourth tool would be to restrict or ban specific product features or terms that are harmful or not suitable in some circumstances, or that don't meet ordinary consumer expectations. Finally, the CFPA would also have the ability to prohibit dangerous financial products. We can only wonder how much less pain would have been caused for our economy if a regulatory agency had been actively exercising the latter two powers during the run up to the mortgage crisis.A. Agency structure and jurisdiction. Under the Administration's proposal, the agency would be governed by a five-member board. Four of these members would be appointed by the President and confirmed by the Senate. The final member would be the director of the consolidated bank supervisory agency proposed by the President. We strongly recommend that the stipulated qualifications for board membership be improved to require that board members have actual experience and expertise with consumer protection in the financial services arena. An agency focused solely on protecting consumers must be governed by leaders who have expertise not just in the financial services marketplace, but with protecting consumers in that marketplace. The Administration proposes to have the agency oversee the sale and marketing of credit, deposit and payment products and services and related products and services, and will ensure that they are being offered in a fair, sustainable and transparent manner. This should include debit, prepaid debit, and stored value cards; loan servicing, collection, credit reporting and debt-related services (such as credit counseling, mortgage rescue plans and debt settlement) offered to consumers and small businesses. Our organizations support this jurisdiction because credit products can have different names and be offered by different types of entities, yet still compete for the same customers in the same marketplace. Putting the oversight of competing products under one set of minimum Federal rules regardless of who is offering that product will protect consumers, promote innovation, provide consumers with valuable options, and spur vigorous competition. As with the Administration, we recommend against granting this agency jurisdiction over investment products that are marketed to retail investors, such as mutual funds. While there is a surface logic to this idea, we believe it is impractical and could inadvertently undermine investor protections. Giving the agency responsibility for investment products that is comparable to the proposed authority it would have over credit products would require the agency to add extensive additional staff with expertise that differs greatly from that required for oversight of credit products. Apparently simple matters, such as determining whether a mutual fund risk disclosure is appropriate or a fee is fair, are actually potentially quite complex and would require the new agency to duplicate expertise that already exists within the SEC. Moreover, it would not be possible simply to transfer the staff with that expertise to the new agency, since the SEC would continue to need that expertise on its own staff in order to fulfill its responsibilities for oversight of investment advisers and mutual fund operations. In addition, unless the new agency was given responsibility for all investment products and services a broker might recommend, brokers would be able to work around the new protections with potentially adverse consequences for investors. A broker who wanted to avoid the enhanced disclosures and restrictions required when selling a mutual fund, for example, could get around them by recommending a separately managed account. The investor would likely pay higher fees and receive fewer protections as a result. For these reasons, we believe the costs and risks of this proposal outweigh the potential benefits. The Administration's plan wisely provides the agency with jurisdiction over a number of insurance products that are central or ancillary to credit transactions, including credit, title, and mortgage insurance. \75\ This principal behind this approach is to provide the agency with holistic jurisdiction over the entire credit transaction, including ancillary services often sold with or in connection with the credit. Additionally, there is ample evidence of significant consumer abuses in many of these lines of insurance, including low loss ratios, high mark ups, and ``reverse competition'' where the insurer competes for the business of the lender, rather than of the insurance consumer. \76\ This Federal jurisdiction could apply without interfering with the licensing and rate oversight role of the States.--------------------------------------------------------------------------- \75\ The agency should also be given explicit authority over ``forced-place'' homeowner's insurance, which banks can require borrowers to purchase if they cannot procure their own coverage. \76\ Testimony of J. Robert Hunter, Director of Insurance, Consumer Federation of America, before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the U.S. House Financial Services Committee, October 30, 2007, pp. 8-9.--------------------------------------------------------------------------- The United States has never sufficiently addressed the problems and challenges of lending discrimination and red lining practices, the vestiges of which include the present day unequal, two-tiered financial system that forces minority and low-income borrowers to pay more for financial services, get less value for their money, and exposes them to greater risk. It is therefore, imperative that the Consumer Financial Protection Agency also focus in a concentrated way on fair lending issues. To that end, the Agency must have a comprehensive Office of Civil Rights, which would ensure that no Federal agency perpetuated unfair practices and that no member of the financial industry practices business in a way that perpetuates discrimination. Compliance with civil rights statutes and regulations must be a priority at each Federal agency that has financial oversight or that enforces a civil rights statute. There must be effective civil rights enforcement of all segments of the financial industry. Moreover, each regulatory and enforcement agency must undertake sufficient reporting and monitoring activities to ensure transparency and hold the agencies accountable. A more detailed description of the civil rights functions that must be undertaken at the CFPA and at other regulatory and enforcement agencies can be found in the Civil Rights Policy Paper available at www.ourfinancialsecurity.org. \77\--------------------------------------------------------------------------- \77\ See http://ourfinancialsecurity.org/issues/leveling-the-playing-field/---------------------------------------------------------------------------B. Rule writing. Under the Administration proposal, the agency will have broad rule-making authority to effectuate its purposes, including the flexibility to set standards that are adequate to address rapid evolution and changes in the marketplace. Such authority is not a threat to innovation, but rather levels the playing field and protects honest competition, as well as consumers and the economy. The Administration's plan also provides that the rule-making authority for the existing consumer protection laws related to the provision of credit would be transferred to this agency, including the Truth in Lending Act (TILA), Truth in Savings Act (TISA), Home Ownership and Equity Protection Act (HOEPA), Real Estate Protection Act (RESPA), Fair Credit Reporting Act (FCRA), Electronic Fund Transfer Act (EFTA), and Fair Debt Collection Practices Act (FDCPA). Current rule-writing authority for nearly 20 existing laws is spread out among at least seven agencies. Some authority is exclusive, some joint, and some is concurrent. However, this hodgepodge of statutory authority has led to fractured and often ineffectual enforcement of these laws. It has also led to a situation where Federal rule-writing agencies may be looking at just part of a credit transaction when writing a rule, without considering how the various rules for different parts of the transaction affect the marketplace and the whole transaction. The CFPA with expertise, jurisdiction, and oversight that cuts across all segments of the financial products marketplace, will be better able to see inconsistencies, unnecessary redundancies, and ineffective regulations. As a marketwide regulator, it would also ensure that critical rules and regulations are not evaded or weakened as agencies compete for advantage for the entities they regulate. Additionally the agency would have exclusive ``organic'' Federal rule-writing authority within its general jurisdiction to deem products, features, or practices unfair, deceptive, abusive or unsustainable, and otherwise to fulfill its mission and mandate. The rules may range from placing prohibitions, restrictions, or conditions on practices, products, or features to creating standards, and requiring special monitoring, reporting, and impact review of certain products, features, or practices.C. Enforcement. A critical element of a new consumer protection framework is ensuring that consumer protection laws are consistently and effectively enforced. As mentioned above, the current crisis occurred not only because of gaps and weaknesses in the law, but primarily because the consumer protection laws that we do have were not always enforced. For regulatory reform to be successful, it must encourage compliance by ensuring that wrongdoers are held accountable. A new CFPA will achieve accountability by relying on a three-legged stool: enforcement by the agency, by States, and by consumers themselves. First, the CFPA itself will have the tools, the mission and the focus necessary to enforce its mandate. The CFPA will have a range of enforcement tools under the Administration proposal. The Administration, for example, would give the agency examination and primary compliance authority over consumer protection matters. This will allow the CFPA to look out for problems and address them in its supervisory capacity. But unlike the banking agencies, whose mission of looking out for safety and soundness led to an exclusive reliance on supervision, the CFPA will have no conflict of interest that prevents it from using its enforcement authority when appropriate. Under the Administration proposal, the agency will have the full range of enforcement powers, including subpoena authority; independent authority to enforce violations of the statues it administers; and civil penalty authority. Second, both proposals allow States to enforce Federal consumer protection laws and the CFPA's rules. As Stated in detail in Section 5, States are often closer to emerging threats to consumers and the marketplace. They routinely receive consumer complaints and monitor local practices, which will permit State financial regulators to see violations first, spot local trends, and augment the CFPA's resources. The CFPA will have the authority to intervene in actions brought by States, but it can conserve its resources when appropriate. As we have seen in this crisis, States were often the first to act. Finally, consumers themselves are an essential, in some ways the most essential, element of an enforcement regime. Recourse for individual consumers must, of course, be a key goal of a new consumer protection system. The Administration's plan appropriately States that the private enforcement provisions of existing statutes will not be disturbed. A significant oversight of the Administration's plan is that it does not allow private enforcement of new CFPA rules. It is critical that the consumers who are harmed by violations of these rules be able to take action to protect themselves. Consumers must have the ability to hold those who harm them accountable for numerous reasons: No matter how vigorous and how fully funded a new CFPA is, it will not be able to directly redress the vast majority of violations against individuals. The CFPA will likely have thousands of institutions within its jurisdiction. It cannot possibly examine, supervise or enforce compliance by all of them. Individuals have much more complete information about the affect of products and practices, and are in the best position to identify violations of laws, take action, and redress the harm they suffer. An agency on the outside looking in often will not have sufficient details to detect abusive behavior or to bring an enforcement action. Individuals are an early warning system that can alert States and the CFPA of problems when they first arise, before they become a national problem requiring the attention of a Federal agency. The CFPA can monitor individual actions and determine when it is necessary to step in. Bolstering public enforcement with private enforcement conserves public resources. A Federal agency cannot and should not go after every individual violation. Consumer enforcement is a safety net that ensures compliance and accountability after this crisis has passed, when good times return, and when it becomes more tempting for regulators to think that all is well and to take a lighter approach. The Administration's plan rightly identifies mandatory arbitration clauses as a barrier to fair adjudication and effective redress. We strongly agree--but it is also critically important regarding access to justice that consumers have the right to enforce a rule. Private enforcement is the norm and has worked well as a complement to public enforcement in the vast majority of the consumer protection statutes that will be consolidated under the CFPA, including TILA, HOEPA, FDCPA, FCRA, EFTA and others. Conversely, the statutes that lack private enforcement mechanisms are notable for the lack of compliance. The most obvious example is the prohibition against unfair and deceptive practices in Section 5 of the FTC Act. Though the banking agencies eventually identified unfair and deceptive mortgage and credit card practices that should be prohibited (after vigorous congressional prodding), individuals were subject to those practices for years with no redress because they could not enforce the FTC Act. Not only consumers, but the entire economy and even financial institutions would have been much better off if consumers had been able to take action earlier on, when the abusive practices were just beginning.D. Product evaluation, oversight, and monitoring. Under the Administration's proposal, the agency would have significant enforcement and data collection authority to evaluate and to remove, restrict, or prevent unfair, deceptive, abusive, discriminatory, or unsustainable products, features or practices. The agency could also evaluate and promote practices, products, and features that facilitate responsible and affordable credit, payment devices, asset-building, and savings. Finally, the agency could assess the risks of both specific products and practices and overall market developments for the purpose of identifying, reducing and preventing excessive risk (e.g., monitoring longitudinal performance of mortgages with certain features for excessive failure rates; and monitoring the market share of products and practices that present greater risks, such as weakening underwriting). Specifically, we would recommend that the agency take the following approach to product evaluation, approval and monitoring under the proposal: Providers of covered products and services in some cases could be required to file adequate data and information to allow the agency to make a determination regarding the fairness, sustainability, and transparency of products, features, and practices. This could include data on product testing, risk modeling, credit performance over time, customer knowledge and behavior, target demographic populations, etc. Providers of products and services that are determined in advance to represent low risk would have to provide de minimus or no information to the agency. ``Plain-vanilla'' products, features or practices that are determined to be fair, transparent and sustainable would be determined to be presumptively in compliance and face less regulatory scrutiny and fewer restrictions. Products, features or practices that are determined to be potentially unfair, unsustainable, discriminatory, deceptive or too complex for its target population might be required to meet increased regulatory requirements and face increased enforcement and remedies. In limited cases, products, features or practices that are deemed to be particularly risky could face increased filing and data disclosure requirements, limited roll-out mandates, post- market evaluation requirements and, possibly, a stipulation of preapproval before they are allowed to enter or be used in the marketplace. The long-term performance of various types of products and features would be evaluated, and results made transparent and available broadly to the public, as well as to providers, Congress, and the media to facilitate informed choice. The Agency should hold periodic public hearings to examine products, practices and market developments to facilitate the above duties, including the adequacy of existing regulation and legislation, and the identification of both promising and risky market developments. These hearings would be especially important in examination of new market developments, such as, for example, where credit applications will soon be submitted via a mobile phone, for example, and consumer dependence on the Internet for conducting financial transactions is expected to grow dramatically. In such hearings, in rule-makings, and in other appropriate circumstances, the Agency should ensure that there is both opportunity and means for meaningful public input, including consideration of existing models such as funded public interveners.E. Funding. The Administration's proposal would authorize Congressional appropriations as needed for the agency. It also allows the agency to recover the amount of funds it spends through annual fees or assessments on financial services providers it oversees. Our view is that the agency should have a stable (not volatile) funding base that is sufficient to support robust enforcement and is not subject to political manipulation by regulated entities. Funding from a variety of sources, as well as a mix of these sources, should be considered, including Congressional appropriations, user fees or industry assessments, filing fees, priced services (such as for compliance examinations) and transaction-based fees. See Appendix 4 for a comparison of current agency funding and fee structures. None of these funding sources is without serious weaknesses. Industry assessments or user fees can provide the regulated entity with considerable leverage over the budget of the agency and facilitate regulatory capture of the agency, especially if the regulated party is granted any discretion over the amount of the assessment (or is allowed to decide who regulates them and shift its assessment to another agency.) Transaction-based fees can be volatile and unpredictable, especially during economic downturns. Filing fees can also decline significantly if economic activity falls. Congressional appropriations, as we have seen with other Federal consumer protection agencies over the last half-century, can be fairly easily targeted for reduction or restriction by well' funded special interests if these interests perceive that the agency has been too effective or aggressive in pursing its mission. If an industry-based funding method is used, it should ensure that all providers of covered products and services are contributing equally based on their size and the nature of the products they offer. A primary consideration in designing any industry-based funding structure is that certain elements of these sectors should not be able to evade the full funding requirement, through charter shopping or other means. If such requirements can be met, we would recommend a blended funding structure from multiple sources that requires regulated entities to fund the baseline budget of the agency and Congressional appropriations to supplement this budget if the agency demonstrates an unexpected or unusual demand for its services.F. Consumer complaints. The Administration proposal would require the agency to collect and track federally directed complaints rewarding credit or payment products, features, or practices under the agency's jurisdiction. \78\ This is a very important function but it should be improved in two significant respects. First, the agency should also be charged with resolving consumer complaints. Existing agencies, particularly the OCC, have generally not performed this function well. \79\ Secondly, the agency should be designated as the sole repository of consumer complaints on products, features, or practices within its jurisdiction, and should ensure that this is a role that is readily visible to consumers, simple to access and responsive. The agency should also be required to conduct real-time analysis of consumer complaints regarding patterns and practices in the credit and payment systems industries and to apply these analyses when writing rules and enforcing rules and laws.--------------------------------------------------------------------------- \78\ The CFPA should have responsibility for collecting and tracking complaints about consumer financial services and facilitating complaint resolution with respect to federally supervised institutions. Other Federal supervisory agencies should refer any complaints they receive on consumer issues to the CFPA; complaint data should be shared across agencies . . . , ``A New Foundation'', pp. 59-60, The Obama Administration, June 2009. \79\ Travis Plunkett testimony, July 2007 ``Improving Federal Consumer Protections in Financial Services'', p. 10.---------------------------------------------------------------------------G. Federal preemption of State laws. As the Administration proposal States, the agency should establish minimum standards within its jurisdictions. CFPA rules would preempt weaker State laws, but States that choose to exceed the standards established by the CFPA could do so. The agency's rules would preempt statutory State law only when it is impossible to comply with both State and Federal law. We also strongly agree with the Administration's recommendation that federally chartered institutions be subject to nondiscriminatory State consumer protection and civil rights laws to the same extent as other financial institutions. A clear lesson of the financial crisis, which pervades the Administration's plan, is that protections should apply consistently across the board, based on the product or service that is being offered, not who is offering it. Restoring the viability of our background State consumer protection laws is also essential to the flexibility and accountability of the system in the long run. The specific rules issued by the CFPA and the specific statutes enacted by Congress will never be able to anticipate every innovative abuse designed to avoid those rules and statutes. The fundamental State consumer protection laws, both statutory and common law, against unfair and deceptive practices, fraud, good faith and fair dealing, and other basic, longstanding legal rules are the ones that spring up to protect consumers when a new abuse surfaces that falls within the cracks of more specific laws. We discuss preemption in greater detail in the next section.H. Other aspects of the Administration proposal. As discussed briefly above, the CFPA should also have the authority to grant intervener funding to consumer organizations to fund expert participation in its stakeholder activities. The model has been used successfully to fund consumer group participation in State utility rate making. Second, a Government chartered consumer organization should be created by Congress to represent consumers' financial services interests before regulatory, legislative, and judicial bodies, including before the CFPA. This organization could be financed through voluntary user fees such as a consumer check-off included in the monthly Statements financial firms send to their customers. It would be charged with giving consumers, depositors, small investors and taxpayers their own financial reform organization to counter the power of the financial sector, and to participate fully in rulemakings, adjudications, and lobbying and other activities now dominated by the financial lobby. \80\--------------------------------------------------------------------------- \80\ As his last legislative activity, in October 2002, Senator Paul Wellstone proposed establishment of such an organization, the Consumer and Shareholder Protection Association, S 3143.--------------------------------------------------------------------------- Moreover, we recommend that the Administration's proposal deal more explicitly with incentives that are paid to and whistleblower protections that are provided to employees working in the credit sector. An incentive system similar to one at the top is at work at the street level of the biggest banks. In the tens of thousands of bank branches and call centers of our biggest banks, employees-including bank tellers earning an average of $11.32 an hour-are forced to meet sales goals to keep their jobs and earn bonuses. Many goals for employees selling high-fee and high-interest products like credit cards and checking accounts have actually gone up as the economy has gone down. Risk-taking in the industry will quickly outpace regulatory coverage unless financial sector employees can challenge bad practices as they develop and direct regulators to problems. Whistleblowers are critical to combating fraud and other institutional misconduct. The Federal Government needs to hear from and protect finance sector employees who object to bad practices that they believe violate the law, are unfair or deceptive, or threaten the public welfare. If we previously had more protections for whistleblowers, we would have had more warning of the eventual collapse of Wall Street. Since 2000, Congress has enacted or strengthened whistleblower protections in six laws. They include consumer product manufacturing and retail commerce, railroads, the trucking industry, metropolitan transit systems, defense contractors, and all entities receiving stimulus funds. All of these laws provide more incentives and protections for disclosure of wrongdoing than does the current proposal from the Administration. For example, it does not protect disclosures made to an employer, which is often the first action taken by loyal, concerned employees, and the impetus for retaliation. Also conspicuously absent are administrative procedures and remedies that include best practices for fair and adequate consideration of claims by employees. We recommend the following improvements in any reform legislation before the Committee. Whistleblower protections. Innovation in the industry will quickly outpace regulatory coverage unless bank branch, call-center, and other financial sector employees can challenge bad practices as they develop and direct regulators to problems. The Federal Government needs to hear from and provide best practice whistleblower rights consistent with those in the stimulus and five laws passed or strengthened last Congress to protect finance sector employees who object to bad practices that they believe violate the law, are unfair or deceptive, or threaten the public welfare. Fair compensation. New rules need to restructure pay and incentives for front-line finance sector employees away from the current ``sell-anything'' culture. The hundreds of thousands of front-line workers who work under pressure of sales goals need to be able to negotiate sensible compensation policies that reward service and sound banking over short-term sales.SECTION 5. REBUTTAL TO ARGUMENTS AGAINST THE CFPA Proactive, affirmative consumer protection is essential to modernizing financial system oversight and to reducing risk. The current crisis illustrates the high costs of a failure to provide effective consumer protection. The complex financial instruments that sparked the financial crisis were based on home loans that were poorly underwritten; unsuitable to the borrower; arranged by persons not bound to act in the best interest of the borrower; or contained terms so complex that many individual homeowners had little opportunity to fully understand the nature or magnitude of the risks of these loans. The crisis was magnified by highly leveraged, largely unregulated financial instruments and inadequate risk management. Opponents of reform of the financial system have made several arguments against the establishment of a strong independent Consumer Financial Protection Agency. Indeed, the new CFPA appears to be among their main targets for criticism, compared with other elements of the reform plan. They have basically made six arguments. They have argued that regulators already have the powers it would be given, that it would be a redundant layer of bureaucracy, that consumer protection cannot be separated from supervision, that it will stifle innovation, that it would be unfair to small institutions and that its anti-preemption provision would lead to balkanization. Each of these arguments is fatally flawed:A. Opponents argue that regulators already have the powers that the CFPA would be given. This argument is effectively a defense of the status quo, which has led to disastrous results. Current regulators already have between them some of the powers that the new agency would be given, but they haven't used them. Conflicts of interest and missions and a lack of will have worked against consumer enforcement. While our section above goes into greater detail on the failures of the regulators, two examples will illustrate: No HOEPA Rules Until 2008: The Federal Reserve Board was granted sweeping antipredatory mortgage regulatory authority by the 1994 Home Ownership and Equity Protection Act (HOEPA). Final regulations were issued on 30 July 2008 only after the world economy had collapsed due to the collapse of the U.S. housing market triggered by predatory lending. \81\--------------------------------------------------------------------------- \81\ 73 FR 147, Page 44522, Final HOEPA Rule, 30 July 2008. No Action on Abusive Credit Card Practices Until Late 2008: Further, between 1995 and 2007, the Office of the Comptroller of Currency issued only one public enforcement action against a Top Ten credit card bank (and then only after the San Francisco District Attorney had brought an enforcement action) and only one other public enforcement order against a mortgage subsidiary of a large national bank (only after HUD initiated action). In that period, ``the OCC has not issued a public enforcement order against any of the eight largest national banks for violating consumer lending laws.'' \82\ The OCC's failure to act on rising credit card complaints at the largest national banks triggered Congress to investigate, resulting in passage of the 2009 Credit Card Accountability, Responsibility and Disclosure Act (CARD Act). \83\ While that law was under consideration, other Federal regulators used their authority under the Federal Trade Commission Act to propose and finalize a similar rule. \84\ By contrast, the OCC requested the addition of two significant loopholes to a key protection of the proposed rule.--------------------------------------------------------------------------- \82\ Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and Consumer Credit, hearing on Credit Card Practices: Current Consumer and Regulatory Issues http://www.house.gov/financialservices/hearing110/htwilmarth042607.pdf. \83\ H.R. 627 was signed into law by President Obama as Pub. L. No. 111-24 on 22 May 2009. \84\ The final rule was published in the Federal Register a month later. 74 FR 18, p. 5498 Thursday, January 29, 2009. Federal bank regulators currently face at least two conflicts. First, their primary mission is prudential supervision, with enforcement of consumer laws taking a back seat. Second, charter shopping in combination with agency funding by regulated entities encourages a regulatory race to the bottom as banks choose the regulator of least resistance. In particular, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have failed utterly to protect consumers, let alone the safety and soundness of regulated entities. Instead, they competed with each other to minimize consumer protection standards as a way of attracting institutions to their charters, which meant that they tied their own hands and failed to fulfill their missions. (Note: they weren't trying to fail, but that was a critical side effect of the charter competition.) Establishing a new consumer agency that has consumer protection as its only mission and that regulated firms cannot hide from by charter-shopping is the best way to guarantee that consumer laws will receive sustained, thoughtful, proactive attention from a Federal regulator.B. Opponents argue that the CFPA would be a redundant layer of bureaucracy. We do not propose a new regulatory agency because we seek more regulation, but because we seek better regulation. The very existence of an agency devoted to consumer protection in financial services will be a strong incentive for institutions to develop strong cultures of consumer protection. (The Obama Administration, Financial Regulatory Reform: A New Foundation, p. 57) The new CFPA would not be a redundant layer of bureaucracy. To the contrary, the new agency would consolidate and streamline Federal consumer protection for credit, savings and payment products that is now required in almost 20 different statutes and divided between seven different agencies. As the New Foundation document continues: The core of such an agency can be assembled reasonably quickly from discrete operations of other agencies. Most rule-writing authority is concentrated in a single division of the Federal Reserve, and three of the four Federal banking agencies have mostly or entirely separated consumer compliance supervision from prudential supervision. Combining staff from different agencies is not simple, to be sure, but it will bring significant benefits for responsible consumers and institutions, as well as for the market for consumer financial services and products. \85\--------------------------------------------------------------------------- \85\ The Obama Administration, ``Financial Regulatory Reform: A New Foundation'', p. 57. And today, a single transaction such as a mortgage loan is subject to regulations promulgated by several agencies and may be made or arranged by an entity supervised by any of several other agencies. Under the CFPA, one Federal agency will write the rules and see that they are followed.C. Opponents argue that consumer protection cannot be separated from supervision. The current regulatory consolidation of both of these functions has led to the subjugation of consumer protection in most cases, to the great harm of Americans and the economy. Nevertheless, trade associations for many of the financial institutions that have inflicted this harm claim that a new approach that puts consumer protection at the center of financial regulatory efforts will not work. The American Bankers Association, for example, States that while the length of time banks hold checks under Regulation CC may be a consumer issue, ``fraud and payments systems operational issues'' are not. \86\--------------------------------------------------------------------------- \86\ Letter of 28 May 2009 from the American Bankers Association to Treasury Secretary Tim Geithner, available at http://www.aba.com/NR/rdonlyres/4640E4F1-4BC9-4187-B9A6-E3705DD9B307/60161/GeithnerMay282009.pdf (last viewed 21 June 2009).--------------------------------------------------------------------------- Again, as the Administration points out in its carefully thought-out blueprint for the new agency: The CFPA would be required to consult with other Federal regulators to promote consistency with prudential, market, and systemic objectives. Our proposal to allocate one of the CFPA's five board seats to a prudential regulator would facilitate appropriate coordination. \87\--------------------------------------------------------------------------- \87\ The Obama Administration, Financial Regulatory Reform: A New Foundation, p. 59. We concur that the new agency should have full rulemaking authority over all consumer statutes. The checks and balances proposed by the Administration, including the consultative requirement and the placement of a prudential regulator on its board and its requirement to share confidential examination reports with the prudential regulators will address these concerns. In addition, the Administration's plan provides the CFPA with full compliance authority to examine and evaluate the impact of any proposed consumer protection measure on the bottom line of affected financial institutions. While collaboration between regulators will be very important, it should not be used as an excuse by either the CFPA or other regulators to unnecessarily delay needed action. The GAO, for example, has identified time delays in interagency processes as a contributor to the mortgage crisis. \88\ This is why it is important that the CFPA retain final rulemaking authority, as proposed under the Administration's plan. Such authority, along with the above mentioned mandates, will ensure that both the CFPA and the Federal prudential regulator collaborate on a timely basis.--------------------------------------------------------------------------- \88\ ``As we note in our report, efforts by regulators to respond to the increased risks associated with the new mortgage products were sometimes slowed in part because of the need for five Federal regulators to coordinate their response.'' ``Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System'', Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, February 4, 2009, pp. 15-16.--------------------------------------------------------------------------- For most of the last 20 years, bank regulators have shown little understanding of consumer protection and have not used powers they have long held. OCC's traditional focus and experience has been on safety and soundness, rather than consumer protection. \89\ Its record on consumer protection enforcement is one of little experience and little evidence of expertise. In contrast, as already noted, the States have long experience in enforcement of non-preempted State consumer protection laws. OCC admits that it was not until 2000 that it invoked long-dormant consumer protection authority provided by the 1975 amendments to the Federal Trade Commission Act. \90\--------------------------------------------------------------------------- \89\ See Christopher L. Peterson, ``Federalism and Predatory Lending: Unmasking the Deregulatory Agenda'', 78 Temp. L. Rev. 1, 73 (2005). \90\ See Julie L. Williams and Michael L. Bylsma, ``On the Same Page: Federal Banking Agency Enforcement of the FTC Act To Address Unfair and Deceptive Practices by Banks'', 58 Bus. Law. 1243, 1244, 1246 and n. 25, 1253 (2003) (citing authority from the early 1970s indicating that OCC had the authority to bring such an action under Section 8 of the Federal Deposit Insurance Act, noting that OCC brought its first such case in 2000, and conceding that ``[a]n obvious question is why it took the Federal banking agencies more than 25 years to reach consensus on their authority to enforce the FTC Act'').---------------------------------------------------------------------------D. Opponents argue that a single agency focused on consumer protection will ``stifle innovation'' in the financial services marketplace. To the contrary, protecting consumers from traps and tricks when they purchase credit, savings or payment products should encourage confidence in the financial services marketplace and spur innovation. As Nobel Laureate Joseph Stiglitz has said: There will be those who argue that this regulatory regime will stifle innovation. However, a disproportionate part of the innovations in our financial system have been aimed at tax, regulatory, and accounting arbitrage. They did not produce innovations which would have helped our economy manage some critical risks better-like the risk of home ownership. In fact, their innovations made things worse. I believe that a well- designed regulatory system, along the lines I've mentioned, will be more competitive and more innovative-with more of the innovative effort directed at innovations which will enhance the productivity of our firms and the well-being, including the economic security, of our citizens. \91\--------------------------------------------------------------------------- \91\ ``Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions'', Joseph E. Stiglitz, April 21, 2009, p. 10.---------------------------------------------------------------------------E. Opponents argue that the CFPA would place an unfair regulatory burden on small banks and thrifts. Small banks and thrifts that offer responsible credit and payment products should face a lower regulatory burden under regulation by a CFPA. Members of Congress, the media and consumer organizations have properly focused on the role of large, national banks and thrifts in using unsustainable, unfair and deceptive mortgage and credit card lending practices. In contrast, many smaller banks and thrifts have justifiably been praised for their more responsible lending practices in theses areas. In such situations, the CFPA would promote fewer restrictions and less oversight for ``plain-vanilla'' products that are simple, straightforward and fair. However, it is also important to note that some smaller hanks and thrifts have, unfortunately, been on the cutting edge of a number of other abusive lending practices that are harmful to consumers and that must be addressed by a CFPA. More than 75 percent of State chartered banks surveyed by the FDIC, for example, automatically enrolled customers in high-cost overdraft loan programs without consumers' consent. Some of these banks deny consumers the ability to even opt out of being charged high fees for overdraft transactions that the banks chose to permit. Smaller banks have also been leaders in facilitating high-cost refund anticipation loans, in helping payday lenders to evade State loan restrictions and in offering deceptive and extraordinarily expensive ``fee harvester'' credit cards. (See Appendix 1 for more information.)F. Opponents argue that the agency's authority to establish only a Federal floor of consumer protection would lead to regulatory inefficiency and balkanization. The loudest opposition to the new agency will likely be aimed at the Administration's sensible proposal that CFPA's rules be a Federal floor and that the States be allowed to enact stronger consumer laws that are not inconsistent, as well as to enforce both Federal and State laws. This proposed return to common sense protections is strongly endorsed by consumer advocates and State attorneys general. We expect the banks and other opponents to claim that the result will be 51 balkanized laws that place undue costs on financial institutions that are then passed onto consumers in the form of higher priced or less available loans. In fact, this approach is likely to lead to a high degree of regulatory uniformity (if the CFPA sets high minimum standards,) greater protections for consumers without a significant impact on cost or availability, increased public confidence in the credit markets and financial institutions, and less economic volatility. For example, comprehensive research by the Center for Responsible Lending found that subprime mortgage loans in States that acted vigorously to rein in predatory mortgage lending before they were preempted by the OCC had fewer abusive terms. In States with stronger protections, interest rates on subprime mortgages did not increase, and instead, sometimes decreased, without reducing the availability of these loans. \92\ Additionally, as Nobel Laureate Joseph Stiglitz has pointed out, the cost of regulatory duplication is miniscule to the cost of the regulatory failure that has occurred. \93\--------------------------------------------------------------------------- \92\ Wei Li and Keith S. Ernst, Center for Responsible Lending, ``The Best Value in the Subprime Market: State Predatory Lending Reforms'', February, 23, 2006, p. 6. \93\ ``Some worry about the cost of duplication. But when we compare the cost of duplication to the cost of damage from inadequate regulation--not just the cost to the taxpayer of the bail-outs but also the costs to the economy from the fact that we will be performing well below our potential--it is clear that there is not comparison,'' Testimony of Dr. Joseph E. Stiglitz, Professor, Columbia University, before the House Financial Services Committee, October 21, 2008, p. 16.--------------------------------------------------------------------------- It is also clear that the long campaign of preemption by the OTS and OCC, culminating in the 2004 OCC rules, contributed greatly to the current predatory lending crisis. After a discussion of the OCC's action eliminating State authority, we will discuss more generally why Federal consumer law should always be a floor. F.1. The OCC's Preemption of State Laws Exacerbated The Crisis. In 2000-2004, the OCC worked with increasing aggressiveness to prevent the States from enforcing State laws and stronger State consumer protection standards against national banks and their operating subsidiaries, from investigating or monitoring national banks and their operating subsidiaries, and from seeking relief for consumers from national banks and subsidiaries. These efforts began with interpretative letters stopping State enforcement and State standards in the period up to 2004, followed by OCC's wide-ranging preemption regulations in 2004 purporting to interpret the National Bank Act, plus briefs in court cases supporting national banks' efforts to block State consumer protections. In a letter to banks on November 25, 2002, the OCC openly instructed banks that they ``should contact the OCC in situations where a State official seeks to assert supervisory authority or enforcement jurisdiction over the bank . . . . \94\ The banks apparently accepted this invitation, notifying the OCC of State efforts to investigate or enforce State laws. The OCC responded with letters to banks and to State banking agencies asserting that the States had no authority to enforce State laws against national banks and subsidiaries, and that the banks need not comply with the State laws. \95\--------------------------------------------------------------------------- \94\ Office of the Comptroller of the Currency, Interpretive Letter No. 957 n.2 (Jan. 27, 2003) (citing OCC Advisory Letter 2002-9 (Nov. 25, 2002)) (viewed Jun. 19, 2009, at http://www.occ.treas.gov/interp/mar03/int957.doc, and available at 2003 OCC Ltr. LEXIS 11). \95\ E.g., Office of the Comptroller of the Currency, Interpretive Letter No. 971 (Jan. 16, 2003) (letter to Pennsylvania Department of Banking, that it does not have the authority to supervise an unnamed national bank's unnamed operating subsidiary which engages in subprime mortgage lending (unnamed because the interpretive letter is unpublished) (viewed Jun. 19, 2009, at http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at 2003 OCC QJ LEXIS 107).--------------------------------------------------------------------------- For example, the OCC responded to National City Bank of Indiana, and its operating subsidiaries, National City Mortgage Company, First Franklin Financial Corporation, and Altegra Credit Company, regarding Ohio's authority to monitor their mortgage banking and servicing businesses. That opinion concluded that ``the OCC's exclusive visitorial powers preclude States from asserting supervisory authority or enforcement jurisdiction over the Subsidiaries.'' \96\--------------------------------------------------------------------------- \96\ Office of the Comptroller of the Currency, Interpretive Letter No. 958 (Jan. 27, 2003) (viewed Jun. 19, 2009, at http://www.occ.treas.gov/interp/mar03/int958.pdf, and available at 2003 OCC Ltr. LEXIS 10).--------------------------------------------------------------------------- The OCC responded to Bank of America, N.A., and its operating subsidiary, BA Mortgage LLC, regarding California's authority to examine the operating subsidiary's mortgage banking and servicing businesses and whether the operating subsidiary was required to maintain a license under the California Residential Mortgage Lending Act. That opinion concluded that ``the Operating Subsidiary also is not subject to State or local licensing requirements and is not required to obtain a license from the State of California in order to conduct business in that State.'' \97\--------------------------------------------------------------------------- \97\ The OCC's exclusive visitorial powers preclude States from asserting supervisory authority or enforcement jurisdiction over the Subsidiaries (Jan. 27, 2003) (viewed Jun. 19, 2009, at http://www.occ.treas.gov/interp/mar03/int957.doc), and available at 2003 OCC Ltr. LEXIS 11).--------------------------------------------------------------------------- The OCC wrote the Pennsylvania Department of Banking, stating that Pennsylvania does not have the authority to supervise an unnamed national bank's unnamed operating subsidiary which engages in subprime mortgage lending. \98\ (The national bank and operating subsidiary were not named because this interpretive letter was unpublished.)--------------------------------------------------------------------------- \98\ Office of the Comptroller of the Currency, Interpretive Letter No. 971 (unpublished) (Jan. 16, 2003) (viewed Jun. 19, 2009, at http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at 2003 OCC QJ LEXIS 107).--------------------------------------------------------------------------- The OCC even issued a formal preemption determination and order, stating that ``the provisions of the GFLA [Georgia Fair Lending Act] affecting national banks' real estate lending are preempted by Federal law'' and ``issuing an order providing that the GFLA does not apply to National City or to any other national bank or national bank operating subsidiary that engages in real estate lending activities in Georgia.'' \99\--------------------------------------------------------------------------- \99\ Office of the Comptroller of the Currency, Preemption Determination and Order, 68 Fed. Reg. 46,264, 46,264 (Aug. 5, 2003).--------------------------------------------------------------------------- As Business Week pointed out in 2003, not only did States attempt to pass laws to stop predatory lending, they also attempted to warn Federal regulators that the problem was getting worse. \100\--------------------------------------------------------------------------- \100\ Robert Berner and Brian Grow, ``They Warned Us About the Mortgage Crisis'', Business Week, 9 October 2008, available at http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm, (last visited 21 June 2009).--------------------------------------------------------------------------- A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusion fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute. One cause, though, has been largely overlooked: the stifling of prescient State enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology. Under the proposal, critical authority will be returned to those attorneys general, who have demonstrated both the capacity and the will to enforce consumer laws. In addition to losing the States' experience in enforcing such matters, depriving the States of the right to enforce their non-preempted consumer protection laws raises serious concerns of capacity. According to a recent congressional report, State banking agencies and State attorneys general offices employ nearly 700 full time staff to monitor compliance with consumer laws, more than 17 times the number of OCC personnel then allocated to investigate consumer complaints. \101\--------------------------------------------------------------------------- \101\ See H. Comm. on Financial Services, 108th Cong., Views and Estimates on Matters To Be Set Forth in the Concurrent Resolution on the Budget for Fiscal Year 2005, at 16 (Comm. Print 2004). ``In the area of abusive mortgage lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 in response to consumer complaints, which resulted in 4,035 enforcement actions.''--------------------------------------------------------------------------- Earlier this year, Illinois Attorney General Lisa Madigan testified before this Committee and outlined the numerous major, multistate cases against predatory lending that have been brought by her office and other State offices of attorneys general. However, she included this caveat: State enforcement actions have been hamstrung by the dual forces of preemption of State authority and lack of Federal oversight. The authority of State attorneys general to enforce consumer protection laws of general applicability was challenged at precisely the time it was most needed--when the amount of sub prime lending exploded and riskier and riskier mortgage products came into the marketplace. \102\--------------------------------------------------------------------------- \102\ Testimony of Illinois Attorney General Lisa Madigan Before the Committee on Financial Services, Hearing on Federal and State Enforcement of Financial Consumer and Investor Protection Laws, 20 March 2009, available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/il_-_madigan.pdf (last visited 22 June 2009). This month, General Madigan and seven colleagues sent President Obama a letter supporting a Consumer Financial Protection Agency ---------------------------------------------------------------------------preserving State enforcement authority: [W]e believe that any reform must (1) preserve State enforcement authority, (2) place Federal consumer protection powers with an agency that is focused primarily on consumer protection, and (3) place primary oversight with Government agencies and not depend on industry selfregulation. \103\--------------------------------------------------------------------------- \103\ Letter of 15 June 2009, from the chief legal enforcement officers of eight States (California, Connecticut, Illinois, Iowa, Maryland, Massachusetts, North Carolina, and Ohio) to President Obama, on file with the authors. F.2. Why Federal Law Should Always Be a Floor. Consumers need State laws to prevent and solve consumer problems. State legislators generally have smaller districts than members of Congress do. State legislators are closer to the needs of their constituents than members of Congress. States often act sooner than Congress on new consumer problems. Unlike Congress, a State legislature may act before a harmful practice becomes entrenched nationwide. In a September 22, 2003, speech to the American Bankers Association in Hawaii, Comptroller John D. Hawke admitted that consumer protection activities ``are virtually always responsive to real abuses.'' He continued by pointing out that Congress moves slowly. Comptroller Hawke said, ``It is generally quite unusual for Congress to move quickly on regulatory legislation--the Gramm-Leach-Bliley privacy provisions being a major exception. Most often they respond only when there is evidence of some persistent abuse in the marketplace over a long period of time.'' U.S. consumers should not have to wait for a persistent, nationwide abuse by banks before a remedy or a preventative law can be passed and enforced by a State to protect them. States can and do act more quickly than Congress, and States can and do respond to emerging practices that can harm consumers while those practices are still regional, before they spread nationwide. These examples extend far beyond the financial services marketplace. States and even local jurisdictions have long been the laboratories for innovative public policy, particularly in the realm of environmental and consumer protection. The Federal Clean Air Act grew out of a growing State and municipal movement to enact air pollution control measures. The national organic labeling law, enacted in October 2002, was passed only after several States, including Oregon, Washington, Texas, Idaho, California, and Colorado, passed their own laws. In 1982, Arizona enacted the first ``Motor Voter'' law to allow citizens to register to vote when applying for or renewing drivers' licenses; Colorado placed the issue on the ballot, passing its Motor Voter law in 1984. National legislation followed suit in 1993. Cities and counties have long led the smoke-free indoor air movement, prompting States to begin acting, while Congress, until this month, proved itself virtually incapable of adequately regulating the tobacco industry. A recent and highly successful FTC program--the National Do Not Call Registry to which 58 million consumers have added their names in 1 year--had already been enacted in 40 States. But in the area of financial services, where State preemption has arguably been the harshest and most sweeping, examples of innovative State activity are still numerous. In the past 5 years, since the OCC's preemption regulations have blocked most State consumer protections from application to national banks, one area illustrating the power of State innovation has been in identity theft, where the States have developed important new consumer protections that are not directed primarily at banking. In the area of identity theft, States are taking actions based on a non-preemptive section of the Fair Credit Reporting Act, where they still have the authority to act against other actors than national banks or their subsidiaries. There are 7 to 10 million victims of identity theft in the U.S. every year, yet Congress did not enact modest protections such as a security alert and a consumer block on credit report information generated by a thief until passage of the Fair and Accurate Credit Transactions Act (FACT Act or FACTA) in 2003. That law adopted just some of the identity theft protections that had already been enacted in States such as California, Connecticut, Louisiana, Texas, and Virginia. \104\--------------------------------------------------------------------------- \104\ See California Civil Code 1785.11.1, 1785.11.2, 1785,16.1; Conn. SB 688 9(d), (e), Conn. Gen. Stats. 36a-699; IL Re. Stat. Ch. 505 2MM; LA Rev. Stat. 9:3568B.1, 9:3568C, 9:3568D, 9:3571.1 (H)-(L); Tex. Bus. & Comm. Code 20.01(7), 20.031, 20.034-039, 20.04; VA Code 18.2-186.31 :E.--------------------------------------------------------------------------- Additionally FACTA's centerpiece protection against both inaccuracies and identity theft, access to a free credit report annually on request, had already been adopted by seven States: Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and Vermont. Further, California in 2000, following a joint campaign by consumer groups and realtors, became the first State to prohibit contractual restrictions on realtors showing consumers their credit scores, ending a decade of stalling by Congress and the FTC. \105\ The FACT act extended this provision nationwide.--------------------------------------------------------------------------- \105\ See 2000 Cal. Legis. Serv. 978 (West). This session law was authored by State Senator Liz Figueroa. ``An act to amend Sections 1785.10, 1785.15, and 1785.16 of, and to add Sections 1785.15.1, 1785.15.2, and 1785.20.2 to the Civil Code, relating to consumer credit.''--------------------------------------------------------------------------- Yet, despite these provisions, advocates knew that the 2003 Federal FACTA law would not solve all identity theft problems. Following strenuous opposition by consumer advocates to the blanket preemption routinely sought by industry as a condition of all remedial Federal financial legislation, the final 2003 FACT Act continued to allow States to take additional actions to prevent identity theft. The results have been significant. Since its passage, fully 47 States and the District of Columbia have granted consumers the right to prevent access to their credit reports by identity thieves through a security freeze. Indeed, even the credit bureaus, longtime opponents of the freeze, then adopted the freeze nationwide. \106\--------------------------------------------------------------------------- \106\ Consumers Union, U.S. PIRG and AARP cooperated on a model State security freeze proposal that helped ensure that the State laws were not balkanized, but converged toward a common standard. More information on the State security freeze laws is available at http://www.consumersunion.org/campaigns/learn_more/003484indiv.html (last visited 21 June 2009).--------------------------------------------------------------------------- A key principle of federalism is the role of the States as laboratories for the development of law. \107\ State and Federal consumer protection laws can develop in tandem. After one or a few States legislate in an area, the record and the solutions developed in those States provide important information for Congress to use in deciding whether to adopt a national law, how to craft such a law, and whether or not any new national law should displace State law.--------------------------------------------------------------------------- \107\ New State Ice Co. v. Leibman, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).--------------------------------------------------------------------------- A few more examples from California illustrate the important role of the States as a laboratory and a catalyst for Federal consumer protections for bank customers. In 1986, California required that specific information be included in credit card solicitations with enactment of the then-titled Areias-Robbins Credit Card Full Disclosure Act of 1986. That statute required every credit card solicitation to contain a chart showing the interest rate, grace period, and annual fee. \108\ Two years later, Congress chose to adopt the same concept in the Federal Fair Credit and Charge Card Disclosure Act (FCCCDA), setting standards for credit card solicitations, applications and renewals. \109\ The 1989 Federal disclosure box \110\ (know as the ``Schumer Box'') is strikingly similar to the disclosure form required under the 1986 California law.--------------------------------------------------------------------------- \108\ 1986 Cal. Stats., Ch. 1397, codified at California Civil Code 1748.11. \109\ Pub. L. 100-583, 102 Stat. 2960 (Nov. 1, 1988), codified in part at 15 U.S.C. 1637(c) and 1610(e). \110\ 54 Fed. Reg. 13855 (April 6, 1989, Appendix G, form G-10(B)).--------------------------------------------------------------------------- States also led the way in protecting financial services consumers from long holds on deposited checks. California enacted restrictions on the length of time a bank could hold funds deposited by a consumer in 1983; Congress followed in 1986. California's 1983 funds availability statute required the California Superintendent of Banks, Savings and Loan Commissioner, and Commissioner of Corporations to issue regulations to define a reasonable time after which a consumer must be able to withdraw funds from an item deposited in the consumer's account. \111\ Similar laws were passed in Massachusetts, New York, New Jersey, and other States. Congress followed a few years later with the Federal Expedited Funds Availability Act of 1986. \112\ California led the way on security breach notice legislation. Its law and those of other States have functioned as a de facto national security breach law, while Congress has failed to act. \113\--------------------------------------------------------------------------- \111\ 1983 Cal. Stat. Ch. 1011, 2, codified at Cal. Fin. Code 866.5. \112\ Pub. L. 100-86, Aug. 10, 1987, 101 Stat. 552, 635, codified at 12 U.S.C. 4001. \113\ More information on State security breach notice laws is available at http://www.consumersunion.org/campaigns/financialprivacynow/002215indiv.html (last visited 21 June 2009).--------------------------------------------------------------------------- It is certainly not the case that States always provide effective consumer protection. The States have also been the scene of some notable regulatory breakdowns in recent years, such as the failure of some States to properly regulate mortgage brokers and nonbank lenders operating in the subprime lending market, and the inability or unwillingness of many States to rein in lenders that offer extraordinarily high-cost, short term loans and trap consumers in an unsustainable cycle of debt, such as payday lenders and auto title loan companies. Conversely, Federal lawmakers have had some notable successes in providing a high level of financial services consumer protections in the last decade, such as the Credit Repair Organizations Act and the recently enacted Military Lending Act. \114\ This is why it is necessary for this new Federal agency to ensure that a minimum level of consumer protection is established in all States.--------------------------------------------------------------------------- \114\ Military Lending Act, 10 U.S.C. 987. Credit Repair Organizations Act, 15 U.S.C. 1679h (giving State Attorneys General and FTC concurrent enforcement authority).--------------------------------------------------------------------------- Nonetheless, as these examples show, State law is an important source of ideas for future Federal consumer protections. As Justice Brandeis said in his dissent in New State Ice Co., ``Denial of the right [of States] to experiment may be fraught with serious consequences to the Nation'' (285 U.S. at 311). A State law will not serve this purpose if States cannot apply their laws to national banks, who are big players in the marketplace for credit and banking services. State lawmakers simply won't pass new consumer protection laws that do not apply to the largest players in the banking marketplace. Efficient Federal public policy is one that is balanced at the point where even though the States have the authority to act, they feel no need to do so. Since we cannot guarantee that we are ever at that optimum, setting Federal law as a floor of protection as the default--without also preempting the States--allows us to retain the safety net of State-Federal competition to guarantee the best public policy. \115\--------------------------------------------------------------------------- \115\ For further discussion, see Edmund Mierzwinski, ``Preemption of State Consumer Laws: Federal Interference Is a Market Failure,'' Government, Law, and Policy Journal of the New York State Bar Association, Spring 2004 (Vol. 6, No. 1, pp. 6-12).---------------------------------------------------------------------------Conclusion As detailed above, a strong Federal commitment to robust consumer protection is central to restoring and maintaining a sound economy. The Nation's financial crisis grew out of the proliferation of inappropriate and unsustainable lending practices that could have and should have been prevented. That failure harmed millions of American families, undermined the safety and soundness of the lending institutions themselves, and imperiled the economy as a whole. In Congress, a climate of deregulation and undue deference to industry blocked essential reforms. In the agencies, the regulators' failure to act, despite abundant evidence of the need, highlights the inadequacies of the current regulatory regime, in which none of the many financial regulators regard consumer protection as a priority. As outlined in the testimony above, establishment of a single Consumer Financial Protection Agency is a critical part of financial reform. As detailed above, its funding must be robust, independent and stable. Its board and governance must be structured to ensure strong and effective consumer input, and a Consumer Advocate should be appointed to report semi-annually to Congress on agency effectiveness. Our organizations, along with many other consumer, community, civil rights, labor and progressive financial institutions, believe that restoring consumer protection should be a cornerstone of financial reform. It will reduce risk and make the system more accountable to American families. We recognize, however, that other reforms are needed to restore confidence to the financial system. Our coalition ideas on these and other matters can be found at the Web site of Americans For Financial Reform, available at ourfinancialsecurity.org. Thank you for the opportunity to testify. Our organizations look forward to working with you to move the strongest possible Consumer Financial Protection Agency through the Senate and into law.Appendices:Appendix 1: Abusive Lending Practices by Smaller Banks and ThriftsAppendix 2: Private Student Loan Regulatory Failures and Reform RecommendationsAppendix 3: Rent-A-Bank Payday LendingAppendix 4: Information on Income (Primarily User and Transaction Fees Depending on Agency) of Major Financial Regulatory AgenciesAppendix 5: CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms ______ CHRG-111shrg50814--64 Mr. Bernanke," Providing sufficient capital to make sure that the banks in private hands can continue to provide the lending and liquidity needed for the economy to recover. If I might, Senator, if I may, the way this will be provided---- Senator Corker. Well, let me ask you this: What is the role of the common shareholders at that point? " fcic_final_report_full--545 System and certain of the presidents of the Federal Reserve Banks; oversees market conditions and implements monetary policy through such means as setting interest rates. Federal Reserve Bank of New York One of  regional Federal Reserve Banks, with responsibility for regulating bank holding companies in New York State and nearby areas. Federal Reserve U.S. central banking system created in  in response to financial panics, con- sisting of the Federal Reserve Board in Washington, DC, and  Federal Reserve Banks around the country; its mission is to implement monetary policy through such means as setting inter- est rates, supervising and regulating banking institutions, maintaining the stability of the fi- nancial system, and providing financial services to depository institutions. FHA see Federal Housing Administration . FHFA see Federal Housing Finance Agency. FICO score A measure of a borrower’s creditworthiness based on the borrower’s credit data; de- veloped by the Fair Isaac Corporation. Financial Crimes Enforcement Network Treasury office that collects and analyzes information about financial transactions to combat money laundering, terroristfinancing, and other finan- cial crimes. FinCEN see Financial Crimes Enforcement Network . FOMC see Federal Open Market Committee . foreclosure Legal process whereby a mortgage lender gains ownership of the real property secur- ing a defaulted mortgage. Freddie Mac Nickname for the Federal Home Loan Mortgage Corporation (FHLMC), a govern- ment-sponsored enterprise providing financing for the home mortgage market. Ginnie Mae Nickname for the Government National Mortgage Association (GNMA), a govern- ment-sponsored enterprise ; guarantees pools of VA and FHA mortgages. Glass-Steagall Act Banking Act of  creating the FDIC to insure bank deposits; prohibited commercial banks from underwriting or dealing in most types of securities, barred banks from affiliating with securities firms, and introduced other banking reforms.  In , the Gramm-Leach-Bliley Act repealed the provisions of the Glass-Steagall Act that prohibited affil- iations between banks and securities firms. government-sponsored enterprise A private corporation, such as Fannie Mae and Freddie Mac , created by the federal government to pursue certain public policy goals designated in its charter. Gramm-Leach-Bliley Act  legislation that lifted certain remaining restrictions established by the Glass-Steagall Act . GSE see government-sponsored enterprise . haircut The difference between the value of an asset and the amount borrowed against it. hedge In finance, a way to reduce exposure or risk by taking on a new financial contract. hedge fund A privately offered investment vehicle exempted from most regulation and oversight; generally open only to high-net-worth investors. HOEPA see Home Ownership and Equity Protection Act . Home Ownership and Equity Protection Act  federal law that gave the Federal Reserve new responsibility to address abusive and predatory mortgage lending practices. Housing and Economic Recovery Act  law including measures to reform and regulate the GSEs ; created the Federal Housing Finance Agency . HUD see Department of Housing and Urban Development. hybrid CDO A CDO backed by collateral found in both cash CDOs and synthetic CDOs. illiquid assets Assets that cannot be easily or quickly sold. interest-only loan Loan that allows borrowers to pay interest without repaying principal until the end of the loan term. leverage A measure of how much debt is used to purchase assets; for example, a leverage ratio of : means that  of assets were purchased with  of debt and  of capital . CHRG-111hhrg56778--58 Mr. Royce," What transpired at the time, though, in this case, is that we did not have commissioners who took a look at the health of this holding company, and, given its very varied non-insurance holdings and the fact that its financial position could harm the insurance company in the system, this turned out to be problematic, especially, when you consider that the Securities Lending Division, which has taken up roughly half of the tax dollars that have been pumped into AIG was using money directly from the AIG insurance subsidiaries, and all of those were State-regulated. So I would ask Ms. Gardineer. Would you care to comment? Certainly, OTS had some authority over AIG. Do you agree that the various State insurance commissioners could have taken steps early on to prevent some of the damage caused by AIG? Ms. Gardineer. Congressman, I do recognize that with the speed that AIG Financial Products collapsed, and then ultimately the problem surfaced with regard to the securities lending subsidiaries, there were problems, as you indicated earlier, across all parts of the organization of those that are functionally regulated by the State commissioners as well as the parts that were not functionally regulated and fell to OTS for examination. It imposes a very interesting dynamic as far as all of the complexities of a company of that size when you have so many regulators who are looking into trying to figure out very complex structures of unregulated products. " FinancialCrisisInquiry--177 And so, Mr. Zandi, if you would commence your testimony. Thank you very much. ZANDI: Well, thank you, Mr. Chairman and other distinguished members of the commission. I—I want to thank you for the opportunity to testify today. The views I express are my own and not those of the Moody’s Corporation. The purpose of my testimony is to assess the economic impact of the financial crisis that began nearly three years ago. While the financial crisis has abated and the financial system has stabilized, the system remains troubled. Failures at depository institutions continue at an alarming rate and likely will continue for several years more to come. The securitization markets also remain dysfunctional as investors anticipate more loan losses and are uncertain about various legal and accounting rule changes and regulatory reform. Without support from the Federal Reserve’s TALF program, private bond issuance and securities backing of consumer and business loans would be completely dormant. Households and businesses are struggling with the resulting severe credit crunch. The extraordinary tightening of underwriting standards by nearly all creditors is clear in the lending statistics. Here’s a very astounding statistic. The number of bank credit cards outstanding has fallen by nearly 100 million cards in just over the past year and-a-half, a 20 percent decline. Total household debt, including credit cards, auto loans and mortgage debt has declined a stunning $600 billion, or 5 percent. And outstanding C&I loans, commercial investor loans, have declined by some 20 percent since peaking in late 2008. Some of this reflects the desire of households and businesses to reduce their debt loads. But it also stems from lenders’ inability and unwillingness to lend. Small banks are vital to consumer and small- business lending. And without the ability to sell the loans they originate to investors in the securities market, banks and other lenders don’t have the capital sufficient to significantly expand their lending. The economic recovery will struggle to gain traction until credit flows more freely, which won’t occur until bank failures abate and there’s a well functioning securities market. FOMC20070816confcall--68 66,MR. FISHER.," It is just a very open term, and that’s the only question I have, if you want to state it as that. I fully support this initiative. It seems to me that there are the Countrywides, but the real issue is that banks are not too sick to lend. They’re too scared to lend, whether it’s the stigma that Vice Chairman Geithner mentioned or whatever the pressures might be. What we’re doing is giving them an incentive to lend. I like it because it’s a two-party decision—private banks willing to accept risk and us willing to facilitate the acceptance of that risk. If people show up at the window, it sends a signal that they view this opportunity as profitable. I like that aspect of it. In summary, to me this is a nice, surgical procedure, and the banks get to choose the patients. I prefer that rather than using the very blunt instrument, Mr. Chairman, as you referred to it—not the blunt instrument, but I would phrase it that way—a cut in the fed funds rate, which is for broader macroeconomic purposes. I like the 50 basis point proposal. I like the proposal as it is stated, and I fully support it. As to whatever background work Vice Chairman Geithner has done, I applaud that because I want to make sure this works. On the statement, I have just two suggestions for your consideration. I’m a bit worried about using the word “appreciably” because we’re judging that the downside risks to growth have increased. Putting in the word “appreciably” may go a little too far because we are shifting and we’re acknowledging that there are downside risks to growth. I think that “increased appreciably” runs the risk of frightening people a little, and I’d ask you to consider that. The second suggestion is minor, but I think not unimportant. When you say that the Committee is monitoring the situation and is prepared to act as needed, perhaps you might want to say “if” needed. Those are my suggestions, for what they’re worth. I think this is a good decision, a good move, and it leaves the fed funds rate decision, as President Yellen said, for our normal meeting. It doesn’t look as though we are operating macroeconomic policy under stress in response to markets, and I applaud it. Thank you, Mr. Chairman." CHRG-111shrg50814--35 Chairman Dodd," Thank you, Senator, very much. Senator Bunning. Senator Bunning. Thank you, Mr. Chairman. Welcome, Chairman Bernanke. Outstanding Fed lending hit about $2.3 trillion in December. It has fallen to about $1.9 trillion, but you have pledged another $1 trillion in new lending. The total volume of loans made over the last months may be many times higher than that, but those of us outside the Fed do not have access to that information. Your testimony before this Committee on TARP was that we needed transparency so the American people could understand. One of the causes of the recession is the American people don't believe you or anybody sitting here is telling them the truth. That is one of the problems. But you have not been open about the Fed's balance sheet. I think the American people have a right to know where that money is going. When are you going to tell the public who is borrowing from the Fed and what they have pledged as collateral? When are we going to get the transparency from the Fed? " CHRG-111hhrg48868--123 Mr. Ackerman," They went to AIG because these guys rated AIG triple A, and so everybody assumes that their subsidiary is triple A, which you haven't rated. It's like if I have an 800 credit score, are you going to lend my kid money because you think he has an 800 credit score? " CHRG-111shrg57322--753 Mr. Viniar," I think Goldman Sachs is a major player in the world financial markets. The financial markets, I believe, got over-levered. I think lending standards declined. Senator Ensign. Do you feel that Goldman Sachs has any responsibility, not blame---- " FOMC20080130meeting--41 39,MR. LACKER.," Thanks. Going back to the LIBOR�OIS spread--that was what motivated this. It has fallen a lot. The bid-to-cover ratio is falling. If we try to lend $30 billion three more times, we could get to a point at which we satiate the market in term funds. " CHRG-111hhrg52406--207 Mr. Bachus," Thank you, Mr. Miller. I guess I will ask--is it Ms. Keest? Of course, Mr. Miller and others worked on the subprime bill that has now passed. Does that address most of the problems in subprime lending--that in combination with other things that have been done? Ms. Keest. No. " CHRG-110hhrg46593--33 Mr. Bernanke," The Federal Reserve, like all other central banks, has short-term collateralized lending programs to financial institutions. We have always had that. The main difference is we have extended it to primary dealers as well as depository institutions. It is open to any bank that comes to our window. We take collateral. We haircut it. It is a short-term loan. It is very safe. We have never lost a penny in these lending programs. Now, some have asked us to reveal the names of banks that are borrowing, how much they are borrowing, what collateral they are posting. We think that is counterproductive for two reasons: First, the success of this depends on banks being willing to come and borrow when they need short-term cash. There is a concern that if the name is put in the newspaper that such and such bank came to the Fed to borrow overnight, even for a perfectly good reason, that others might begin to worry, is this bank creditworthy? And that might create a stigma, a problem, and it might cause banks to be unwilling to borrow. That would be counterproductive for the whole-- " FinancialCrisisInquiry--652 GORDON: January 13, 2010 Yes. You know, what we’ve observed over time with traditionally underserved borrowers or people with lower or nontraditional credit histories is that we always had higher delinquency rates than was typical in the prime markets but our actual loss rates always ran under 1 percent. And part of that was because—part of how to run a successful operation, lending to these communities, includes understanding that there can be different kinds of income interruptions and vicissitudes of life and working with borrowers through those periods to keep the loan performing. And so, really, we—you know, now, of course, we’ve been impacted by the larger crisis. But just—then what’s become what we now talk about as subprime lending is loan products that had risky features and, as Professor Rosen’s discussed, lots of layers of risk. And these were not products, for the most part, except in the narrowest, narrowest sense—for the most part, these were never products that provided particular benefits to the consumers. They were products that were push-marketed to, you know, more vulnerable populations and then spread out as the bubble grew and housing became more unaffordable for most families. fcic_final_report_full--188 As late as July , Citigroup and others were still increasing their leveraged loan business.  Citigroup CEO Charles Prince then said of the business, “When the mu- sic stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Prince later explained to the FCIC, “At that point in time, because interest rates had been so low for so long, the private equity firms were driving very hard bargains with the banks. And at that point in time the banks individually had no credibility to stop participating in this lending business. It was not credible for one institution to unilaterally back away from this leveraged lending business. It was in that context that I suggested that all of us, we were all regulated entities, that the regulators had an interest in tightening up lending standards in the leveraged lending area.”  The CLO market would seize up in the summer of  during the financial cri- sis, just as the much-larger mortgage-related CDO market seized. At the time this would be roughly  billion in outstanding commitments for new loans; as de- mand in the secondary market dried up, these loans ended up on the banks’ balance sheets.  Commercial real estate—multifamily apartment buildings, office buildings, ho- tels, retail establishments, and industrial properties—went through a bubble similar to that in the housing market. Investment banks created commercial mortgage– backed securities and even CDOs out of commercial real estate loans, just as they did with residential mortgages. And, just as houses appreciated from  on, so too did commercial real estate values. Office prices rose by nearly  between  and  in the central business districts of the  markets for which data are available. The increase was  in Phoenix,  in Tampa,  in Manhattan, and  in Los Angeles.  Issuance of commercial mortgage–backed securities rose from  billion in  to  billion in , reaching  billion in . When securitization markets contracted, issuance fell to  billion in  and  billion in . When about one-fourth of commercial real estate mortgages were securitized in , securitizers issued  billion of commercial mortgage CDOs, a number that again dropped pre- cipitously in .  CHRG-111hhrg54867--129 Mr. Castle," Along the same lines, worrying about the CFPA, I am concerned about the whole mission creep aspect of this. There are clearly problems, and you are absolutely right; I think we all agree there are things we need to do. I am concerned about mortgages. That could have been spelled out better. We have already dealt with credit cards to a degree, and the Federal Reserve actually had a good plan on credit cards, which we pretty much emulated to a degree. And there are subjects like student loans, which may go by the wayside if the new legislation on direct lending goes through the Senate, etc. But there are many things that financial institutions, particularly banks, do that have not been questioned in terms of how they carried out--commercial lending, I don't think, has been questioned; the way they handled deposits, for example, even auto loans. And you could go through perhaps 10 or 12 subjects. And I am concerned that if we get a very activist agency, that the agency may go beyond where it belongs and all of a sudden be disruptive to normal banking procedures in the United States. I cannot tell you what percentage of customers were actually impacted negatively by problems that perhaps could have been prevented. My hunch is it is a relatively small percentage, versus those satisfied with their banking. But at agencies like this concerns me and the authority that we are giving them. Do you have any thoughts about how to restrict what they could do, other than, obviously, we could do it legislatively, or are taking that up with the Administration as you prepare-- " FOMC20081007confcall--36 34,VICE CHAIRMAN GEITHNER.," I'm not sure this is the right way to think about it, but you could think about the use of our balance sheet as a necessary but not sufficient condition to achieve Charlie's objective, which is to help stabilize the financial system and make sure that intermediation begins again and that people are willing to start lending again on a scale necessary to support some reasonable outcome for the economy going forward. Our basic judgment--and I think everybody's judgment--is that it is going to require capital from the government in some mix of forms for that to happen. I don't think that any of us believes that the expansion of our balance sheet alone is going to be sufficient to achieve that outcome. That's why--and I think you all know this--the Chairman has been working so closely with the Secretary of the Treasury to make sure that the authority that the Congress passes is used in a way that has the maximum possible benefit in things that are about capital so that the probability of default of the financial system goes down and people feel more comfortable lending at term to financials. " CHRG-111shrg53085--16 STATEMENT OF SENATOR CHARLES E. SCHUMER Senator Schumer. I would ask that my entire statement be put in the record. I just want to make three quick points in reference to some of the testimonies. First, in reference to Mr. Mica's testimony, I think it is really important we look for more places for small businesses to get loans. Banks are not doing it right now. And one of the things I will be asking you to comment upon is legislation that we are putting in. I think it was in 1996 we said that credit unions could only do 12 percent of their lending to small business. I have scores, maybe hundreds, probably thousands of businesses in my area that cannot get loans or are actually having lines of credit pulled from them by banking institutions. I have credit unions that would like to lend to these businesses and prevent them--they are profitable, ongoing businesses--from going under, and the credit unions cannot lend because of the cap. I think we ought to lift it, and I will be putting in legislation on that. In reference to Mr. Whalen, having a unitary regulator makes a great deal of sense. Right now, banks can choose their regulators, oftentimes. You know, that is sort of like picking the umpire, and then having the umpire get paid more the more he is picked. We know what would happen. Senator Bunning knows best of all. The strike zone would expand. The calls would be different. And it would not work. And, finally, Ms. Hillebrand, I just wanted to point out Senator Durbin and I have introduced legislation to have a Financial Product Safety Commission. I think that is really important. That avoids the cracks in regulation that Mr. Whalen has talked about because if the product is regulated, not who issues it, you are not going to have mortgage brokers getting around the banks, which is what happened before. So I think that is important to do, and with that I would just ask that my entire statement be entered into the record. " CHRG-111shrg55117--62 Mr. Bernanke," I would have to get back to you with the exact numbers, but we have seen improvements on the interest rates and spreads in the secondary markets, which suggest some increased availability of funds and lower rates. And although it is not a Federal Reserve initiative, I would just take note of the Treasury's initiatives under the TALF to put money into SBA lending and to support that area. But I absolutely agree with you, this is one of the toughest areas because traditionally, in a downturn, small business is the first to get cutoff. Senator Schumer. Right. And what about lifting the credit unions' cap on small business lending? It was put in as part of a political compromise years ago, maybe decades ago. I do not think there is any reason not to lift it. If this is another place where small business could get loans, and credit unions are often tied into their communities and want to help, what do you think of that idea? I think it is now 12.5 percent. Some of us have proposed legislation to lift it. " FinancialCrisisReport--72 Mr. Killinger’s annual “Strategic Direction” memoranda to the Board in 2005, 2006, and 2007, also contradict his testimony that the strategy of expanding high risk lending was put on hold. On the first page of his 2005 memorandum, Mr. Killinger wrote: “We continue to see excellent long-term growth opportunities for our key business lines of retail banking, mortgage banking, multi-family lending and sub-prime residential lending.” 184 Rather than hold back on WaMu’s stated strategy of risk expansion, Mr. Killinger told the Board that WaMu should accelerate it: “In order to reduce the impact of interest rate changes on our business, we have accelerated development of Alt-A, government and sub-prime loan products, as well as hybrid ARMs and other prime products, specifically for delivery through retail, wholesale and correspondent channels.” 185 The 2005 strategic direction memorandum also targeted Long Beach for expansion: “Long Beach is expected to originate $30 billion of loans this year, growing to $36 billion in 2006. To facilitate this growth, we plan to increase account managers by 100. We expect Long Beach to have 5% of the sub-prime market in 2005, growing to [a] 6% share in 2006.” 186 Despite warning against unsustainable housing prices in March 2005, Mr. Killinger’s 2006 “Strategic Direction” memorandum to the Board put even more emphasis on growth than the 2005 memorandum. After reviewing the financial targets set in the five-year plan adopted in 2004, Mr. Killinger wrote: “To achieve these targets, we developed aggressive business plans around the themes of growth, productivity, innovation, risk management and people development.” 187 His memorandum expressed no hesitation or qualification as to whether the high risk home lending strategy was still operative in 2006. The memorandum stated: “Finally, our Home Loan Group should complete its repositioning within the next twelve months and it should then be in position to grow its market share of Option ARM, home equity, sub prime and Alt. A loans. We should be able to increase our share of these categories to over 10%.” 188 Contrary to Mr. Killinger’s hearing testimony, the 2006 memorandum indicates an expansion of WaMu’s high risk home lending, rather than any curtailment: “We are refining our home loans business model to significantly curtail low margin Government and conventional fixed rate originations and servicing, and to significantly 184 6/1/2005 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic Direction,” JPMC/WM - 0636-49 at 36, Hearing Exhibit 4/13-6c. 185 Id. at 644. 186 Id. at 646. 187 6/6/2006 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic Direction,” JPM_00808312-324 at 314, Hearing Exhibit 4/13-6d. 188 Id. at 315 [emphasis in original removed]. increase our origination and servicing of high margin home equity, Alt. A, sub prime and option ARMs. Action steps include merging Longbeach sub prime and the prime business under common management, merging correspondent activities into our correspondent channel, getting out of Government lending, curtailing conventional fixed rate production, expanding distribution of targeted high margin products through all distribution channels and potentially selling MSRs [Mortgage Servicing Rights] of low margin products. We expect these actions to result in significantly higher profitability and lower volatility over time.” 189 CHRG-111hhrg53244--233 Mrs. Biggert," I think that with the securitized lending, how do you plan to address the reality? I think that there have been some that have flagged that the market experts and some of the participants that the markets need to know now and not at year's end whether the programs will be extended in order to see any usefulness in the next several months. Would you agree with that statement? " CHRG-111hhrg48674--132 Mr. Meeks," Let me then move to another area that I think is of critical importance as we move forward. I have also been looking at a number of individuals who talk about the lack of availability of warehouse lending credit facilities. We had a hearing back, I guess it was a couple of weeks ago, and we heard testimony that 85 to 90 percent of the warehouse lending capacity is gone from the market, and some of the remaining warehouse providers may not stay in business. I know that lowering the overall rate is one thing. But if there is no money available by the warehouse lenders, then there is nothing to do at closing, and so people will not be able to take advantage. You know, we want to get folks to refinance or to be able to mitigate the mortgage they are in, but there needs to be some additional money therein. So, first, I want to make sure you are aware of this problem, and, second, what impact will it have in the marketplace if we stimulate demand for mortgages without ensuring adequate funding capacity at closing tables across the country for the warehouse credit facilities? " CHRG-110shrg50416--64 Mr. Kashkari," Well, forgive me, I am not an attorney so I cannot tell you---- Senator Schumer. I am not asking you as an attorney. I am just saying if it says we encourage the banks to lend the money, it is not going to be much. If we say, you know, for every dollar of capital they get, we would expect there would be two or three or four--you know, something like that, we would expect, not mandate. " CHRG-111hhrg48873--94 Secretary Geithner," I think that is a very important thing. I mean, it is very important that the American people understand we are going to devote these resources to things that are going to get credit flowing again, get interest rates down, and improve the access for businesses and consumers to credit. That is the central obligation and purpose of this authority. And if you look at what we have done over the last several weeks, you can see we have moved quickly to put in place very substantial measures to address the housing crisis. You are seeing the actions of the Fed and the Treasury together bring down interest rates, allow Americans to refinance and take advantage of lower interest rates. You have seen us move to put in place very important new programs to help support small business lending, to get lending flowing again across the financial system as a whole. Those are very important things. But as part of that, we need better clarity on the rules of the game going forward. I completely agree. " CHRG-110hhrg46591--259 Mr. Washburn," Absolutely not. Community banks have been around forever, and we operate by a very simple business model. We lend money to people who pay us back. It is very simple. It has worked for years. We continue to want to do that going forward, so I do not see that changing whatever changes here. " FOMC20080724confcall--68 66,CHAIRMAN BERNANKE.," President Yellen, San Francisco did a really good job in a difficult situation. We were following that very carefully. Just a footnote, did the FDIC not give you some assurances as well--protections for lending--because they asked you explicitly to assist them in winding down the bank? " CHRG-110shrg50416--91 Mr. Kashkari," Senator, we share your perspective, and we want these banks to lend, and I do not think we havereticence to it. I think we will look at this with our regulatory colleagues. Ultimately, the regulatory---- Senator Menendez. Why not set a standard, then? Why not set a set of standards by which people could judge by? " FinancialCrisisReport--48 Because of the complex nature of the financial crisis, this chapter concludes with a brief timeline of some key events from 2006 through 2008. The succeeding chapters provide more detailed examinations of the roles of high risk lending, federal regulators, credit ratings agencies, and investment banks in causing the financial crisis. CHRG-109hhrg28024--142 Chairman Oxley," Without objection. Ms. Lee. Thank you, Mr. Chairman. It indicated first of all, taken together, sub-prime loans make up about six percent of all loans to African Americans and Latino's as opposed to two percent to all white borrowers. We looked at this and decided that FICO scores should be revised and possibly take into account rent, utilities, telephone service as a sign of creditworthiness. I'm wondering if you would work with us to help improve the scoring process so we can improve this inequality in mortgage lending to minorities in our country. As you know, and you said earlier, home ownership is really the key to the accumulation of wealth. It's the only way people can send their kids to college, start a small business, and yet you have huge, I mean massive discrimination in mortgage lending to people of color and to minorities in our country. Yet, these financial institutions get off the hook each and every time. Chairman Greenspan wasn't able to help us figure out a way to rectify this and close this gap. Maybe you can. Could you respond and tell us what you think we can do? " CHRG-111hhrg49968--28 Mr. Bernanke," That is a very long question, but I would like to address it, if I might. First of all, on the technical aspects of unwinding, we are confident that we can unwind this process. What we need to be able to do is raise short-term interest rates to tighten policy in the normal way. In order to do that, we have a sequence of things that can happen. First, short-term lending, short-term programs can either decline because of lack of demand, which we are seeing--we have seen a very substantial decline in the usage of our short-term programs over the last couple of months. Secondly, of course, as conditions return to normal we can simply shut down those short-term programs. That is step number one. Step number two and very important is the interest on Reserve's authority that the Congress gave us last year. By setting an interest rate on reserves close to our target for the short-term interest rate, we make it very unlikely that banks would want to lend out in the overnight Federal funds market at a rate below that interest rate. " CHRG-111hhrg56847--15 Mr. Bernanke," Mr. Chairman, that is also a top priority for the Federal Reserve. Our stabilization, our work with the financial markets has restored something close to normal functioning in the public capital markets, the securities markets. So larger firms who have access to the commercial paper market, the corporate bond market, the equity market have been able to raise funding as needed. And in addition, they have pretty liquid balance sheets. Problems still remain for smaller firms that are dependent on banks because banks, although they have stabilized, are continuing to be very conservative in their lending policies. The Federal Reserve, I would be happy to talk about this in quite a bit of detail if time permits. But very briefly, the Federal Reserve has been working very closely with the banks and with the examiners and with small business--I was just at a conference on this last week in Detroit--trying to make sure that the banks are able to lend to all creditworthy borrowers and they are not being excessively conservative or denying good borrowers access to credit. " CHRG-110hhrg46591--34 The Chairman," I thank the gentleman. I would just take a second to note that both of them quite correctly pointed out that credit unions bear absolutely no responsibility for the bad lending practices, and I think they are entitled to that recognition. We will now begin with our witnesses. We will begin with Alice Rivlin, who is a senior fellow at the Metropolitan Policy Program, economic studies, and director at the Brookings Institution. Dr. Rivlin. STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR FELLOW, METROPOLITAN POLICY PROGRAM, ECONOMIC STUDIES, AND DIRECTOR, GREATER WASHINGTON RESEARCH PROJECT, BROOKINGS INSTITUTION Ms. Rivlin. Thank you, Mr. Chairman, and members of the committee. Past weeks have witnessed historic convulsions in financial markets around the world. The freezing of credit markets and the failure of major financial institutions triggered massive interventions by governments and by central banks as they attempted to contain the fallout and to prevent total collapse. We are still in damage control mode. We do not yet know whether these enormous efforts will be successful in averting a meltdown, but this committee is right to begin thinking through how to prevent future financial collapses and how to make markets work more effectively. Now pundits and journalists have been asking apocalyptic questions: Is this the end of market capitalism? Are we headed down the road to socialism? Of course not. Market capitalism is far too powerful a tool for increasing human economic wellbeing to be given away because we used it carelessly. Besides, there is no viable alternative. Hardly anyone thinks we would be permanently better off if the government owned and operated financial institutions and decided how to allocate capital. But market capitalism is a dangerous tool. Like a machine gun or a chain saw or a nuclear reactor, it has to be inspected frequently to see if it is working properly and used with caution according to carefully thought-out rules. The task of this committee is to reexamine the rules. Getting financial market regulation right is a difficult and painstaking job. It is not a job for the lazy, the faint-hearted, or the ideologically rigid. Applicants for this job should check their slogans at the door. Too many attempts to rethink the regulation of financial markets in recent years have been derailed by ideologues shouting that regulation is always bad or, alternatively, that we just need more of it. This less versus more argument is not helpful. We do not need more or less regulation; we need smarter regulation. Moreover, writing the rules for financial markets must be a continuous process of fine-tuning. In recent years, we have failed to modernize the rules as markets globalized, as trading speed accelerated, as volume escalated, and as increasingly complex financial products exploded on the scene. The authors of the financial market rule books have a lot of catching up to do, but they also have to recognize that they will never get it right or will be able to call it quits. Markets evolve rapidly, and smart market participants will always invent new ways to get around the rules. It is tempting in mid-catastrophe to point fingers at a few malefactors or to identify a couple of weak links in a larger system and say those are the culprits and that if we punish them the rest of us will be off the hook, but the breakdown of financial markets had many causes of which malfeasance and even regulatory failure played a relatively small role. Americans have been living beyond their means individually and collectively for a long time. We have been spending too much, have been saving too little, and have been borrowing without concern for the future from whomever would support our overconsumption habit--the mortgage company, the new credit card, the Chinese Government, whatever. We indulged ourselves in the collective delusion that housing prices would continue to rise. The collective delusion affected the judgment of buyers and sellers, of lenders and borrowers and of builders and developers. For a while, the collective delusion was a self-fulfilling prophesy. House prices kept rising, and all of the building and borrowing looked justifiable and profitable. Then, like all bubbles, it collapsed as housing prices leveled off and started down. Now bubbles are an ancient phenomenon and will recur no matter what regulatory rules are put in place. A housing bubble has particularly disastrous consequences because housing is such a fundamental part of our everyday life with more pervasive consequences than a bubble in, say, dot com stocks. More importantly, the explosion of securitization and increasingly complex derivatives had erected a huge new superstructure on top of the values of the underlying housing assets. Interrelations among those products, institutions, and markets were not well-understood even by the participants. But it is too easy to blame complexity, as in risk models failed in the face of new complexity. Actually, people failed to ask commonsense questions: What will happen to the value of these mortgage-backed securities when housing prices stop rising? They did not ask because they were profiting hugely from the collective delusion and did not want to hear the answers. Nevertheless, the bubbles and the crash were exacerbated by clear regulatory lapses. Perverse incentives had crept into the system, and there were instances where regulated entities, even the Federal Reserve, were being asked to pursue conflicting objectives at the same time. These failures present a formidable list of questions that the committee needs to think through before it rewrites the rule book. Here are my offers for that list: We did have regulatory gaps. The most obvious regulatory gap is the easiest to fill. We failed to regulate new types of mortgages--not just subprime but Alt-A and no doc and all the rest of it--and the lax, sometimes predatory lending standards that went with them. Giving people with less than sterling credit access to homeownership at higher interest rates is actually, basically, a good idea, but it got out of control. Most of the excesses were not perpetrated by federally regulated banks, but the Federal authorities should have gotten on the case, as the chairman has pointed out, and should have imposed a set of minimum standards that applied to all mortgage lending. We could argue what those standards should be. They certainly should include minimum downpayments, the proof of ability to pay, and evidence that the borrower understands the terms of the loan. Personally, I would get rid of teaser rates, of penalties for prepayment and interest-only mortgages. We may not need a national mortgage lender regulator, but we need to be sure that all mortgage lenders have the same minimum standards and that these are enforced. Another obvious gap is how to regulate derivatives. We can come back to that. But much of the crisis stemmed from complex derivatives, and we have a choice going forward. Do we regulate the leverage with which those products are traded or the products themselves? " FinancialCrisisReport--77 Effective implementation of the High Risk Lending Strategy also required robust risk management. But while WaMu was incurring significantly more credit risk than it had in the past, risk managers were marginalized, undermined, and subordinated to WaMu’s business units. As a result, when credit risk management was most needed, WaMu found itself lacking in effective risk management and oversight. D. Shoddy Lending Practices At the same time they increased their higher risk lending, WaMu and Long Beach engaged in a host of poor lending practices that produced billions of dollars in poor quality loans. Those practices included offering high risk borrowers large loans; steering borrowers to higher risk loans; accepting loan applications without verifying the borrower’s income; using loans with low teaser rates to entice borrowers to take out larger loans; promoting negative amortization loans which led to many borrowers increasing rather than paying down their debt over time; and authorizing loans with multiple layers of risk. WaMu and Long Beach also exercised weak oversight over their loan personnel and third party mortgage brokers, and tolerated the issuance of loans with fraudulent or erroneous borrower information. (1) Long Beach Throughout the period reviewed by the Subcommittee, from 2004 until its demise in September 2007, Long Beach was plagued with problems. Long Beach was one of the largest subprime lenders in the United States, 206 but it did not have any of its own loan officers. Long Beach operated exclusively as a “wholesale lender,” meaning all of the loans it issued were obtained from third party mortgage brokers who had brought loans to the company to be financed. Long Beach “account executives” solicited and originated the mortgages that were initiated by mortgage brokers working directly with borrowers. Long Beach account executives were paid according to the volume of loans they originated, with little heed paid to loan quality. Throughout the period reviewed by the Subcommittee, Long Beach’s subprime home loans and mortgage backed securities were among the worst performing in the subprime industry. Its loans repeatedly experienced early payment defaults, its securities had among the highest delinquencies in the market, and its unexpected losses and repurchase demands damaged its parent corporation’s financial results. Internal documentation from WaMu shows that senior management at the bank was fully aware of Long Beach’s shoddy lending practices, but failed to correct them. 2003 Halt in Securitizations. For a brief period in 2003, Long Beach was required by WaMu lawyers to stop all securitizations until significant performance problems were remedied. While the problems were addressed and securitizations later resumed, many of the issues returned and lingered for several years. 206 See 1/2007 Washington Mutual Presentation, “Subprime Mortgage Program,” Hearing Exhibit 4/13-5 (slide showing Long Beach Annual Origination Volume). CHRG-111hhrg53244--311 Mr. Bernanke," On issues relating to our 13(3) authority, those sorts of things, where we are putting out money and lending money and so on, we can work that out. I agree with you that where we are putting out taxpayer money, there should be ways for the Congress to be assured that we are doing it in a safe way that has appropriate financial controls and so on and so on. So I agree with that. Monetary policy is a very specific element, though, of that. " fcic_final_report_full--123 HOEPA (Home Ownership and Equity Protection Act) hearings in San Francisco. At the hearing, consumers testified to being sold option ARM loans in their primary non-English language, only to be pressured to sign English-only documents with sig- nificantly worse terms. Some consumers testified to being unable to make even their initial payments because they had been lied to so completely by their brokers.”  Mona Tawatao, a regional counsel with Legal Services of Northern California, de- scribed the borrowers she was assisting as “people who got steered or defrauded into entering option ARMs with teaser rates or pick-a-pay loans forcing them to pay into—pay loans that they could never pay off. Prevalent among these clients are seniors, people of color, people with disabilities, and limited English speakers and seniors who are African American and Latino.”  Underwriting standards: “We’re going to have to hold our nose” Another shift would have serious consequences. For decades, the down payment for a prime mortgage had been  (in other words, the loan-to-value ratio (LTV) had been ). As prices continued to rise, finding the cash to put  down became harder, and from  on, lenders began accepting smaller down payments. There had always been a place for borrowers with down payments below . Typically, lenders required such borrower to purchase private mortgage insurance for a monthly fee. If a mortgage ended in foreclosure, the mortgage insurance company would make the lender whole. Worried about defaults, the GSEs would not buy or guarantee mortgages with down payments below  unless the borrower bought the insurance. Unluckily for many homeowners, for the housing industry, and for the financial system, lenders devised a way to get rid of these monthly fees that had added to the cost of homeownership: lower down payments that did not require insurance. Lenders had latitude in setting down payments. In , Congress ordered federal regulators to prescribe standards for real estate lending that would apply to banks and thrifts. The goal was to “curtail abusive real estate lending practices in order to reduce risk to the deposit insurance funds and enhance the safety and soundness of insured depository institutions.”  Congress had debated including explicit LTV stan- dards, but chose not to, leaving that to the regulators. In the end, regulators declined to introduce standards for LTV ratios or for documentation for home mortgages.  The agencies explained: “A significant number of commenters expressed concern that rigid application of a regulation implementing LTV ratios would constrict credit, impose additional lending costs, reduce lending flexibility, impede economic growth, and cause other undesirable consequences.”  In , regulators revisited the issue, as high LTV lending was increasing. They tightened reporting requirements and limited a bank’s total holdings of loans with LTVs above  that lacked mortgage insurance or some other protection; they also reminded the banks and thrifts that they should establish internal guidelines to man- age the risk of these loans.  High LTV lending soon became even more common, thanks to the so-called piggyback mortgage. The lender offered a first mortgage for perhaps  of the home’s value and a second mortgage for another  or even . Borrowers liked these because their monthly payments were often cheaper than a traditional mort- gage plus the required mortgage insurance, and the interest payments were tax de- ductible. Lenders liked them because the smaller first mortgage—even without mortgage insurance—could potentially be sold to the GSEs. CHRG-111hhrg56766--113 Mr. Manzullo," Thank you. Congratulations on your re-election, Mr. Chairman. You got reappointed, but you had to get elected, just like we do. It was a vote count. Chairman Bernanke, the FDIC reported yesterday that bank lending in 2009 fell by 7.5 percent or $587 billion, $587 billion, and the Wall Street Journal, its headline today said it was epic, the decline. There's a chart behind. Why is bank lending falling so dramatically? It has fallen, I believe, because we're forced to hold greater capital reserves, given the rising default rates on commercial real estate. Up on the committee room TV now is a chart from the most recent Congressional Oversight Panel report which shows the value of delinquencies on CRE loans has increased 700 percent since the first quarter of 2007. You'll notice from the chart behind you, Mr. Chairman, that if the trend continues, the rate of CRE loans will soon be literally off that chart. The dramatic increase in delinquencies to me is really approaching a tsunami, threatening our local communities and banking system. It's estimated to peak between 2011-2012 with over $300 billion in CRE debt expected to mature each year. As you know, the CRE market is huge. It's $3.5 trillion of the total debt. It's about $1.7 trillion held by banks and thrifts. Much of this debt is held by community banks across the country that have survived the first part of the tsunami, the mortgage default crisis, but now are being threatened by this one. The FDIC yesterday informed us that they're adding 450 banks to the Troubled Bank List, more than doubling the number from the start of 2009. Many are small lending institutions that have invested in their communities for decades. Chairman Bernanke, I just held a hearing January 21st on the epidemic of bank failures focusing on the failure and seizure of a great Chicago community institution, Park National Bank. I would rather not have more hearings in the coming year on the autopsies of what have been rather good banks. I want to focus on how we can help these good banks and how we're getting back to lending. So how much do you think of the coming tsunami of these loans, $1.7 trillion held by our local banks, loan defaults are going to harm our communities and local banks, and what have you done about it and what future plans do you intend to make about it? " CHRG-111shrg56415--78 PREPARED STATEMENT OF SENATOR MIKE CRAPO Thank you, Mr. Chairman, for holding this hearing to examine the state of the banking and credit union industry. Failures of small banks continue to grow and key trouble spots are looming, such as commercial real estate loans. According to a recent New York Times article, about $870 billion, or roughly half of the industry's $1.8 trillion of commercial real estate loans, now sit on the balance sheet of small and medium sized banks. I am interested in learning to what extent has the Term Asset-Backed Securities Loan Facility (TALF) encouraged capital to enter the commercial real estate market and what other steps should regulators take to address this problem. Many community banks and credit unions have tried to fill the lending gap caused by the credit crisis. Even with these efforts, it is apparent that many consumers and small businesses are not receiving the lending they need to refinance their home loan, extend their business line of credit, or receive capital for new business opportunities. Regulators need to be mindful that they strike the appropriate balance to bolster capital and meet the credit needs of our economy. FASB's new rules on off-balance sheets will create challenges on this point. As we began to explore options to modernize our financial regulatory structure, it is important that our new structure allows financial institutions to play an essential role in the U.S. economy by providing a means for consumers and businesses to save for the future, to protect and hedge against risk, and promote lending opportunities. Again, I thank the Chairman for holding this hearing and I look forward to working with him and other Senators on these and other issues. ______ CHRG-110hhrg41184--203 Mr. Bernanke," That is an interesting approach. I think you would have to make sure that you were controlling for other factors, like regional and other differences, that might also be affecting the rates. Mr. Miller of North Carolina. Okay. I also asked the Congressional Research Service to look at--before 1978 the law, bankruptcy law is treated, secured or mortgages on investment property and mortgages on homes exactly the same. Neither one could be modified in bankruptcy. After that, at least in some parts of the country, they could not--it remained the same for home mortgages, and it became--it could be modified as to investment properties. I asked them to look at terms of availability of credit before and after 1978 for investment property versus home mortgages. And the conclusion was that if anything credit became more available for investment properties after 1978. There was an increase in mortgage lending, above that for home lending and the terms and credit, the terms and availability, the term seemed to be about the same. But it concluded that it was probably not the result of changes in the law, it was that there were so many forces in effect that it was almost impossible to identify any change. Does that sound correct? " FOMC20080310confcall--89 87,MR. LACKER.," Scott, I'd like you to elaborate a bit on this last part. This was a little confusing. This lending apparently is by the New York Bank. How does it relate to the System Open Market Account? Is it by the New York Bank out of the System Open Market Account? " CHRG-111hhrg53244--117 Mr. Bernanke," The Fed on book value is a little bit underwater on the AIG, Bear Stearns interventions, which we would very much not liked to have done, but we didn't have the resolution regime. On all other lending and all other programs, which is more than 95 percent of our balance sheet, we are making a nice profit, which we are sharing with the Treasury. " FOMC20060510meeting--49 47,MR. LACKER.," I intend to vote “no” on this motion for the reasons related to those I gave in January for voting against the foreign exchange authorization: a general sense of opposition to our central bank’s being involved in foreign exchange operations, much less lending to foreign central banks." CHRG-111shrg56415--39 Mr. Tarullo," So, Senator, I don't want to step on the prerogatives of the Congress, the Administration, various agencies that may have---- Senator Bennet. You can step on my prerogatives. I---- " Mr. Tarullo,"----but here is what I think. So what did we as a government, as a country, try to do with residential mortgages--not yet as successfully as I think many people would have wanted? We tried to do something about people losing their homes and to provide some mechanisms, some special mechanisms that would address those issues specifically, even as we all tried to put a foundation under the economy and get it growing again. And my thought was that something similar probably needs to be done in the small business arena, because I don't think I hear as many of the stories as you do, but I hear enough of them, because I do try to get out and talk to borrowers as well as lenders. So, whether that is trying to streamline SBA lending and make the direct lending possibilities more real, or whether it is a new program which tries to provide guarantees, I don't have a strong view on that and the Federal Reserve certainly has no view on it. But I do think that something targeted is going to be an important complement to the macro, bank regulatory, and TALF efforts that we have. Senator Bennet. Does anyone else have a view on that? Mr. Smith? " FinancialCrisisInquiry--61 HOLTZ-EAKIN: So you have, at this moment, stress tests that look at commercial real estate and the concerns that are out there now in picking up your exposures? MOYNIHAN: Yes, we have. As you said earlier, the work that was done last year about this time to put in a stress test and things like that brought firm-wide stress tests, but we’ve always had a view of commercial real estate really through with the hard knocks taken and the late ‘80’s and stuff to be very diligent about what could happen, too. I don’t think the consumer side had ever seen this kind of recession, and that led us down a path that we’ve learned from. HOLTZ-EAKIN: A lot of this revolves around housing, and I want to pick up on something in your testimony, Mr. Blankfein, where you said—if I have this right—that almost all of the losses that financial institutions sustained over the course of the crisis thus far have revolved around bad lending practices, particularly, in real estate. Can you tell us exactly what those bad lending practices are off the top of your head? What are the list of things that were bad? BLANKFEIN: CHRG-110hhrg38392--148 Mr. Bernanke," We issued the Regulation Z rules on credit cards in May for comment. It was a very comprehensive review of all the regulations applying both to credit cards and to other revolving credit. The comment period is open until October. After that we will move as expeditiously as possible to issue a final rule that will apply to credit card issuers. We are also, as you know, doing a complete overhaul of Regulation Z as it applies to mortgage lending. We have had a series of hearings on that. We are also, as we did with credit cards, going to do consumer testing to make sure that people can understand the disclosures. That is going to take a while. It will probably be next year in 2008, as we come to some conclusions on that. But in a nearer term, in order to address some of the current issues in the subprime mortgage market, we have taken off a few elements that we think we can move on more quickly relating to solicitation and advertising of mortgages and when you have to give information to consumers, how quickly you have to make those disclosures. So there is some element to that that we think we can move up. The full Regulation Z on mortgage lending, however, is going to still take a while because of the need to do consumer testing. " CHRG-111hhrg54872--241 Mr. Calhoun," I think again that is particularly troublesome if you put it in the context that the consumer protection agency could wipe out other State protections, for example, in the field of payday lending. Then the usury prohibition in the bill becomes even more problematic. Ms. Speier. It doesn't offend you that we are tying the hands of the consumer protection agency on one of the biggest financial boondoggles and most egregious conduct by the financial services industry and basically saying that this consumer protection agency can't even deal with that issue? Anyone else have any-- " CHRG-111shrg57319--535 Mr. Rotella," Senator, as I said in my opening statement, shortly after arriving at Washington Mutual and having been an observer from JP Morgan Chase, I was aware of the fact that the company had an extreme concentration in real estate loans as a thrift. It had a concentration in Florida and in California, 60 percent of its mortgage assets. As I said earlier, it was going through explosive growth, particularly in higher-risk lending, and the operating infrastructure was quite weak. That combined with the view that the housing market was softening led a group of us to begin a process of diversifying the company and de-emphasizing the mortgage business, which over time we hoped would lead us to a company that was concentrated less in real estate and had other asset classes. Senator Coburn. So in your testimony, on the one hand you say that you were simply carrying out the chairman and CEO's strategies as far as the high-risk category; but on the other hand, you are saying it was your decision to decrease the high-risk lending. Which is it? " CHRG-111shrg50814--37 Mr. Bernanke," We are looking at all aspects. By the way, it is not all lending. Half-a-trillion is just Treasury securities we hold, so you could count that as lending to the Treasury, I guess. But about half the money we hold is short-term collateralized recourse loans to financial institutions which assures them of sufficient liquidity so that they will be stable and able to make loans and know that there is liquidity there when it is available. Now, hundreds of years of central banking experience shows that if you publish the names of the banks that receive those loans, there is a risk that the market will say that there is something wrong with them, that there is a stigma of some kind, and they will refuse to come to the window in the first place and that causes the whole purpose of the program to break down. So we can provide a great deal of information about the number of institutions. There are hundreds of them. They are well collateralized, short-term loans. They provide an important public purpose. But to provide the names of each borrower, and it would include most of the, or many of the banks in the United States, would defeat the important purpose of the policy. Senator Bunning. OK. I have been trying to get to the bottom of who signed off on the original TARP loans to Citigroup and the Bank of America for several months. Those loans were only supposed to go to healthy--that is in the legislation--healthy banks. Did you approve those initial loans, or who did if you didn't? " CHRG-111shrg62643--29 Mr. Bernanke," I think we do still have options, but they are not going to be the conventional options and so we need to look at them carefully and make sure we are comfortable with any step that we take. Senator Shelby. I want to get into the area of small business lending. Mr. Chairman, I hear reports of a credit crunch for small businesses and calls by other people to initiate more government programs to jump start lending in this area. I have two questions related to small business credit. First, is there some market failure or regulatory failure inhibiting the flow of small business credit which requires even more government intervention? Second, is there any slow down in small business credit because of weaker demand, because of a deterioration in financial conditions of small businesses and values of the collateral that they hold, or because of regulators somehow inhibiting or preventing good loans from being made? In other words, do we know the definitive reason for the slow down in credit flow to small businesses and what is your take? " CHRG-111hhrg53244--360 Mr. Grayson," Well, actually, according to the chart on page 28, virtually the entire amount that is reflected in your current balance sheet went out starting in the last quarter of 2007. And before that, going back to the beginning of this chart, the amount of lending was zero to foreigners. Is that-- " CHRG-111hhrg58044--388 Mr. Pratt," Not really, because it is similar to asking us whether a creditor effectively uses a credit report for a lending decision. You have to have the creditor here in order to answer that question because they are the one that is going to be able to explain how they use the data, whether they include medical debts or do not include medical debts. I think that is very important. " CHRG-111hhrg48873--192 Mr. Bernanke," First of all, it has nothing to do with the bailout. This is short-term lending done by the Federal Reserve to banks, as has been done by central banks around the world for hundreds of years. The purpose is to provide short-term liquidity to these banks. Hundreds of banks, both large and small, come to the discount window. They provide collateral for their loans. We have never lost a penny on this program. " CHRG-111hhrg46820--121 Mr. Merski," That is a very good question. And the programs--the capital purchase program and the TALF that you were instrumental in jump-starting are going to help, but the banking sector has already written off about $700 billion in real estate value that they will not be paid back on. So if you think about the economics of it, about 60 percent of all small business lending is backed up by some sort of real estate collateral. And, as we pointed out in our testimony, unless you stem this decline in real estate values, whether it is commercial real estate or individual's homes, the financial credit crisis and economic crisis is going to continue to get worse, not better. So as the Congress is looking at fiscal stimulus plans to match what the Federal Reserve has done on cutting interest rates to nearly zero, additional policies have to be put in place to stem the tide of declining real estate values, because that is what the collateral is for many small business loans. And also the fact that, until this real estate is stabilized, banks are going to have a very difficult time of lending more. " CHRG-111hhrg54872--74 Mr. Shelton," No, not at all. The biggest problem right now is first the lack of access of capital in the communities you are talking about. Some of the biggest challenges we have are issues not clearly covered by this bill, are issues very much like payday lending, some of those concerns. Too often in the communities that we serve there are so few legitimate financial lending institutions available that they find themselves being victimized by 456 percent APR when they go to, for instance, a payday lending facility in the local community. So the idea is to make sure: one, there is capital available in those communities; two, it is done in a fair way; and three, there is oversight to make sure the same consumers you are talking about don't get taken advantage of in the process. What we saw happening as we saw the economic downturn is very well, even with the policies and oversight available to us now, there are many consumers who are actually led into products that they could not sustain. And we want to make sure there is oversight and transparency there as well. Brokers sat down with racial and ethnic minorities, sat down with the elderly and very well discussed products that they did not get full disclosure on how those products would actually function. As a result, tragedy occurred. There are many Americans who owned their own homes that went to refinance. For instance, elderly to buy new storm windows to address issues of climate change, or new roofs to address leakage of an aging house found themselves not only going into debt, but also going into debt at a rate they were not aware they would be going into because there was not full disclosure or full oversight. So we very well argue that we need the products, we need the oversight, and we need a clear agency whose primary function is to provide some protection of the consumers as we enter these very challenging products. " CHRG-111hhrg56847--56 Mr. Doggett," Mr. Chairman, Ms. Schwartz made reference to the Small Business Lending Fund Act, which as you know is pending here in the House. Without getting into all the details of the legislation, do you believe that we need to take more action to assure the flow of credit to small businesses? Are the efforts that you have described that are underway at the Fed sufficient? " fcic_final_report_full--533 To understand CRA’s role in the financial crisis, the relevant statistic is the $4.5 trillion in bank CRA lending commitments that the NCRC cited in its 2007 report. (This document and others that are relevant to this discussion were removed from the NCRC website, www.ncrc.org , after they received publicity but can still be found on the web 155 ). One important question is whether the bank regulators cooperated with community groups by withholding approvals of applications for mergers and acquisitions until an agreement or commitment for CRA lending satisfactory to the community groups had been arranged. It is not diffi cult to imagine that the regulators did not want the severe criticism from Congress that would have followed their failure to assist community groups in reaching agreements with and getting commitments from banks that had applied for these approvals. In statements in connection with mergers it has approved the Fed has said that commitments by the bank participants about future CRA lending have no influence on the approval process. A Fed offi cial also told the Commission’s staff that the Fed did not consider these commitments in connection with merger applications. The Commission did not attempt to verify this statement, but accepted it at face value from a Fed staff offi cial. Nevertheless, there remains no explanation for why banks have been making these enormous commitments in connection with mergers, but not otherwise. The largest of the commitments, in terms of dollars, were made by four banks or their predecessors—Bank of America, JPMorgan Chase, Citibank, and Wells Fargo—in connection with mergers or acquisitions as shown in Table 14 below. 155 http://www.community-wealth.org/_pdfs/articles-publications/cdfis/report-silver-brown.pdf. CHRG-111shrg55117--68 Mr. Bernanke," But I do think that examiners should be appropriately weighing the fact that profitable lending to creditworthy borrowers is good for the bank and that maintaining those relationships is good for the bank. At the Federal Reserve, we have for a long time tried to communicate that message, and we have ongoing training, workshops, manuals, and other communications with the examiners and with the regional directors of supervision to try and put that message through. Now, I have to admit that it does not always get through, but, on the other hand, it is also probably true that, you know, bank terms and conditions just are going to be tougher now for a while given the difficulties in the economy. And so, you know, not everybody who was used to getting credit is going to get credit, but to the extent that we can continue to make loans to creditworthy borrowers, we really want to support that, and we are trying to put that message to our examiners. Senator Martinez. I think your statement is very helpful and I think also, with no question, that what used to be a good credit may not be a good credit in current circumstances, and we have to be wary of that. But along the same lines, the Federal Reserve implemented a TALF program to restart the securitized debt markets and my question has to do with the commercial real estate and the potential shortfall there. What do you think in terms of your program for the private commercial real estate lending, investing, and what may be coming in the months ahead, which is a very, very serious situation. " CHRG-111hhrg48674--313 Mr. Bernanke," Can I take 30 seconds just to say I think it is again a very good question; and that is one of the reasons it is hard to judge whether a bank is increasing its lending as it should, or not, because it may have funding issues. It may have difficulty finding creditworthy borrowers. They may have other sources of credit. It makes these kinds of measurements very difficult. But it is a very good question. " FinancialCrisisInquiry--222 GEORGIOU: And construction, right. ZANDI: Let me just give you a statistic. Of the 8 million jobs lost after revision, almost 20 percent are in the construction trade. GEORGIOU: No, I think I’m fine. Thank you. I’ll yield the rest of my time. ZANDI: Good luck with that home. CHAIRMAN ANGELIDES: Mr. Thompson? THOMPSON: Thank you, Mr. Chairman. Many of the questions I had have been addressed, but I do want to ask a few specifics. Ms. Gordon, to what extent, in your opinion, might CRA have been a contributor in any way to the housing bubble? GORDON: We don’t see CRA as a contributor to the—the crisis that occurred. CRA had been working for several decades to get some more lending to people who were qualified for the loans that they were getting. CRA was not intended to put unqualified people into home loans. It was intended to get lending to otherwise qualified people who weren’t being serviced by the financial institutions. THOMPSON: And you would agree with that, Dr. Rosen? FinancialCrisisInquiry--604 CLOUTIER: Thank you very much. Chairman Angelides, Vice Chairman Thomas and members of the commission, my name is Rusty Cloutier, and I am pleased to testify today on the current state of the financial crisis and in particular the effect it has had on the small- business lending community. I am president and chief executive officer of MidSouth Bank, a $980 million community bank headquartered in Lafayette, Louisiana, with locations throughout south Louisiana and southeast Texas. I am also the author of the book “Big Bad Banks,” which details how a few megabanks and powerful individuals fueled the current financial and economic crisis. I’m proud to testify today on behalf of the Independent Community Bankers of America and its 5,000 community bank members nationwide. Mr. Chairman, it is difficult to talk about the effects of the financial crisis without speaking to the root cause. Too-big-to-fail institutions and the systemic risks that they pose were the heart of our financial and economic meltdown. Equally responsible were those institutions making up the unregulated shadow banking industry operating just not outside of legal parameters, of the regulatory framework, which made most of the subprime exotic loans and brought the housing markets to its knees. For far too long, these institutions have enjoyed privileges of favorable government treatment, easier access to cheaper funding sources, lower or no compliance cost, and little if any oversight. A little more than a few years ago, a key element of the financial system nearly collapsed due to the failure of these institutions to manage their highly risky activities. January 13, 2010 These reckless and irresponsible actions by a handful of managers with too much power nearly destroyed our equity, real estate, consumer loan and global financial markets and cost the American people some $12 trillion in net worth. This crisis also has pushed our nation to the brink of insolvency by forcing the federal government to intervene with trillions in capital and loans and commitments to large, complex financial institutions whose balance sheets were overlevereged, lacked adequate liquidity to offset the risks that they had recklessly taken. We’re at the point where some of the world markets are even questioning if the United States dollar should be retained as the world’s reserve currency. All of this was driven by the ill-conceived logic that some institutions should be allowed to exist even if they were too big to manage, too big to regulate, too big to fail, and above the law of the United States of America. By contrast, community banks like mine, highly regulated, stuck to their knitting and had no role in the economic crisis. Even though community banks did not cause the economic crisis, we have been affected by it through a shrinking of our asset base, heavier FDIC assessments, and suffocating examination environments. The work of this commission is important if Congress is already actively advancing dramatic financial sector reforms. The ICBA wants Congress to pass meaningful financial reforms to rein in the financial behemoths and the shadow financial industry to ensure that this crisis like this never happen again to the American people. We need a financial reform that will restore reasonable balance between Wall Street and Main Street. So where are we today? While the financial meltdown and deep global recession may be over, economic growth remains too weak to quickly reverse the massive job losses and asset price damage that is resulting. After more than a year and a half of economic decline, the United States economy grew by a modest 2.2 percent in the third quarter January 13, 2010 of 2009, unemployment is still at a 26-year high and new hiring remains elusive at this modest growth level. The long, deep recession has dramatically increased the lending risk for all banks, as individuals’ and business credit risk have increased with the declining balance sheets and reduced sales in most cases. Today bank regulators are far more sensitive to lending risk and force banks to be much more conservative in underwriting on all types of loans. While this is to be expected after a deep recession, the regulatory pendulum has swung too far in the direction of overkill and choking off credit at the community bank level. Indeed, the mixed signals that appear to be coming out of Washington have dampened the lending environment in many communities. On one hand, the administration and lawmakers are saying lend, lend, lend, and on the other, that message seems to be lost on the examiners, particularly in the parts of the nation most severely affected by the recession. Bankers continue to comment that they are being treated like they have portfolio full of subprime mortgages and even though they had no subprime on their books. Under the climate community bankers may avoid making good loans for the fear of an examination criticism, write-down and resulting loss of income and capital. Community banks are willing to lend. That’s how banks generate a return and survive. However, quality loan demand is down. It is a fact that demand for credit overall is down as business suffered lower sales, reducing their inventory, cut capital spending, shed workers and cut debt. In a recent National Federation of Independent Business survey, respondents identified weak sales as the biggest problem they face, with only 5 percent of the respondents saying that access to credit is a hurdle. I can tell you from my own bank’s experience customers are scared about the economic climate and are not borrowing. They are basically panicked. Credit is available, but businesses are not demanding it. The good news is that my bank did make $233 million in new loans this past year. MidSouth is extremely well capitalized and would do even more if quality loans were available. January 13, 2010 For example, my bank’s lines of credit usage is down to the lowest utilization in 25 years. I am pressing my loan officers daily to find more loans, but demand is not there. All community banks want to lend. Less lending hurts profits and income. For the first time in my 44 years in banking I have witnessed a decline in assets in my banks due to lower loan demand. In total, my loans were down from $600 million to $585 million this past year. Most businesses I work with are using cash flow only and are not interested in taking on new debt. The key reason they cite for not seeking credit is their uncertainty of the economic climate and the cost of doing business going forward. Until their confidence in the economic outlook improves, businesses will be unlikely to borrow from any bank. The financial meltdown should be a lesson learned in supporting diversity in the banking and in community banks. Community banks represent the other side of the financial story in credit markets. Community banks serve a vital role in small-business lending and local community activity not supported by Wall Street, who has only an international view. For their size, community banks are enormous small-business lenders. Community banks represent only about 12 percent of all bank assets, they currently make up 31 percent of the dollar amount of all small business loans less than a million dollars. Notably, more than half of all small business loans under $100,000 are made by community banks. In contrast, banks with more than $100 billion in assets, the nation’s largest financial firms, make only 22 percent of small business loans. Community banks in general rely more on local deposits to fund local lending. So they don’t rely on the Wall Street capital markets for funding. In fact, small banks of $1 billion in asset size or less were the only segment to show any increase in net loans and leases year over year in the latest third quarter 2009 quarterly FDIC data. However, small business loan demand is down in general, because businesses and individuals are deleveraging and reducing their reliance on debt after the current meltdown. The FDIC quarterly banking profile for the third quarter of 2009 showed a January 13, 2010 record $210 billion quarterly decline in outstanding loan balances. Net loans and leases declined across all asset size groups on—in a quarterly basis in the third quarter of 2009. Despite a quarterly decline of net loans and leases, at 2.6 percent annual, community banks with less than a billion dollars in assets were the only group to show a year over year increase in net loans and leases of 0.5 percent. While modest, these gains were the best in the financial sector. Our nation’s biggest banks, who were here earlier today, cut back on lending the most. The institutions with more than $100 billion in assets showed a quarterly decline of 10.9 percent annual rate and a 10.5 percent decrease, year over year. Banks $10 billion to $100 billion asset banks, had net loans and leases decline at an astounding 17.8 percent annual rate over the previous quarter. In conclusion, highly regulated community bank sector did not trigger the financial crisis. We must end too big to fail, reduce systemic risk and focus regulation on the unregulated financial entities that caused this economic meltdown on Wall Street. The best financial reform will protect small business from being crushed by the devastating effects of one giant financial institution stumbling. A diverse, competitive financial system will best serve the needs of small business in America. Thank you, and I’m prepared to answer any questions. CHRG-111hhrg54868--178 Mr. Klein," And I cannot tell you enough how that is not in any meaningful sense translating into the local Florida market--where I am from. I can just speak to my local market in south Florida. It is just not happening enough. And I am seeing a little bit of movement, but we have 90 percent of the way to go. And it is just holding back everything in the economy from small businesses. SBA loans, we waived the fees. Ninety percent--if I was in a bank, I would say, wow, that is a good quality loan. Why aren't banks taking up SBA loans? Ms. Bair. That I don't know. I have been hearing this. I heard this during my trip to Las Vegas. I am actually going to be in Florida in a couple of months, and I am going to be meeting with some bankers. I am hearing that small business lending is absolutely key. It is an area where community banks in particular are the lifeblood for small businesses. This has been raised with me. I am concerned about it. I am going to be looking into it more. I can only tell you what we have done now. We have tried to convey to our banks the need for flexibility and our support for prudent lending. If there is more we can do, we want to. " CHRG-111shrg51303--69 Mr. Dinallo," Senator, the only facts I could give you on this that might be helpful are twofold: The securities lending issue is over, and it cost about $17 billion. And the second fact is that, to the extent the American public are ever repaid on this, it will be from the proceeds of selling the insurance operating companies, and---- Senator Bunning. That is why the stock is at 50 cents? " CHRG-111shrg57320--206 Mr. Dochow," You fill out your paperwork, you put down what your income is---- Senator Kaufman. Right. Mr. Dochow [continuing]. And the bank pulls your FICO scores, your credit reports, the loan gets approved or disapproved. Those programs lend themselves more to that type of underwriting. Senator Kaufman. Right. " CHRG-111hhrg53244--231 Mrs. Biggert," Thank you, Mr. Chairman. Thank you for being here, Mr. Chairman. You talked a little bit about the TALF program and said that it was off to a slow start. What are the expectations and the benchmarks with the TALF facility? Will it be sufficient and timely enough to facilitating private investing and lending? Or are you considering other programs? " CHRG-111hhrg56766--90 Mr. Bernanke," Well, there are two separate issues there. It's true that because the economy is weak that some borrowers are not in the market for credit and that's one of the reasons why bank lending is down. The other issue, though, which I think you began with is that in situations where there is a creditworthy borrower who would like credit, we want to make sure that they get credit and we have been very focused on that issue. " CHRG-110shrg50415--29 Mr. Stein," Good afternoon. Chairman Dodd and Members of the Committee, thank you for the opportunity to testify. In the middle part of this decade, Wall Street demand led to literally trillions of dollars of subprime and Alt-A loans to be originated. What was interesting about it was that Wall Street paid more the more dangerous the loan was. For example, in 2004, Countrywide, if they gave a borrower a fixed-rate conventional mortgage, they received 1 percent. If they put that exact same borrower in a subprime loan, they received 3.5 percent. It is not a surprise that they paid their originators more if they put that borrower in the more expensive loan, the one that statistically has been shown more likely to cause a foreclosure. Wall Street then bundled these mortgages into mortgage-backed securities, and credit rating agencies, paid by the issuers only when they are issued, found many too many of them to be AAA quality. And then they were sold around the world. In 2006, the top five investment banks earned $1.7 billion in revenues structuring and packaging these subprime mortgage-backed securities. These are the loans that helped cause the housing bubble, and what they have in common, the subprime and the Alt-A loans, are that they start at what seems like an affordable level, but built into the structure of the loan is unsustainability. They start cheaper, but then they get more expensive. There is no free lunch in a mortgage. And that is what they have in common, and that helped build the housing bubble because people were put in a larger loan than they could actually afford, and on the flip side, once the bubble burst, it caused the massive foreclosures that we have now because when the housing bubble was going up, that unsustainability was masked. Once people could not afford the mortgage, they could refinance or they could sell. When the bubble comes back down, they no longer have those options, and that is why we have the foreclosure crisis that we have today. This leaves the question: This is what Wall Street was doing. Where were the regulators? I will not repeat what has been said. I will just identify a couple, and my testimony goes into more regulatory failings. The first is the Federal Reserve. Back in 2000, my boss testified, and Chairman Leach, I remember him saying that the Federal Reserve is AWOL because they received the authority to prevent abusive lending in 1994 and had not used it. The second one that I would like to mention is the Office of Thrift Supervision. They allowed Washington Mutual and IndyMac to push abusive mortgages until they failed and did not even put them on the watchlist until right before they failed, so the FDIC could not clean them up sooner. It is clear now that a lack of common-sense rules, like how about only making a loan if the borrower can afford it, actually impeded the flow of credit beyond anybody's wildest dreams. Many of us who were trying to get the regulators to crack down on predatory lending abuses were fighting a defensive action in Congress, saying don't preempt the State laws that are there, since the proposed bills would have made the situation worse. And the regulators would always say, ``We cannot stop the free flow of credit,'' and we can see the results today. Since the problem is rooted in excessive foreclosures, the solutions must start there. I would like to identify five very briefly. The first is that Congress should lift the ban on judicial loan modifications, which would allow hundreds of thousands of families to have their loans restructured and stay in their homes at no cost to taxpayers. We are spending $700 billion when we can do something that is free. In Chapter 13 bankruptcy, the only secure debt that cannot be modified is the home on the principal residence, whereas loans on a yacht or investment property can be modified now. I would like to illustrate that point for a second. If you consider Candace Weaver, who is a school teacher from Wilmington, North Carolina, in 2005 her husband had a heart attack, and she refinanced her mortgage with a lender called BMC. She received what seemed like a reasonable rate, a little bit high, 8.9 percent. Two years later, it turns out--she was not told this--it was an exploding 2-28 subprime mortgage. The rate goes up to 11.9 percent, which she just could not afford. She was diagnosed with kidney cancer and had surgery scheduled. She called the servicer and said, ``I cannot make my July payment. This payment is too high. I can barely make it. But I cannot make the July payment because of surgery.'' The servicer said, ``I am sorry. I cannot even talk to you until you are delinquent.'' She had the surgery, became delinquent because she could not keep it up, called again, and they said, ``We cannot talk to you until you are in foreclosure.'' Then she can't keep up, she actually goes into foreclosure, calls again, and they say, ``OK, we will give you a repayment plan. Make your current payments of 11.9 percent, and on top of that catch up the past payments that you did not make,'' which she could not do. The bankruptcy judge cannot help her even though she could afford a market rate mortgage. Consider, on the other hand, Lehman Brothers. They were among the biggest purchasers and securitizers of subprime loans, earning hundreds of millions of dollars. They were a huge investor in these mortgages at 30:1 leverage, which caused their failure, and hurt everybody. Finally, they owned a mortgage lender named BMC, the exact same lender that is potentially costing Ms. Weaver her home--hopefully not because she has representation now. The Wall Street Journal investigated BMC Mortgage and found widespread falsification of tax forms, cutting and pasting documents, forging signatures, ignoring underwriter warnings. Lehman Brothers last month, as everybody knows, went to bankruptcy court. They can have their debts restructured, but Ms. Weaver cannot. The second thing I would focus on is for Treasury under the TARP program to maximize loan modifications, as some of the Senators have mentioned. Whenever Treasury buys equity in a bank, buys securities from a bank, buys a whole loan or controls a whole loan, they should do the streamlined modification program that Sheila Bair is doing at FDIC. What she does is target an affordable payment, first by reducing the interest rate, then by extending the term, then by reducing principal if you need to. And they should focus on a 34-percent debt-to-income ratio, which is the target in the Attorney General settlement with Bank of America over Countrywide. The other thing that they should do, which I think you had something to do with, Senator Dodd, is to guarantee modified mortgages, which would be cost-effective, but you need to make sure that the mortgage is modified well. But that could be a powerful tool. The third thing I would suggest is go ahead and merge OTS into OCC. They have not proven up to the challenge. Fourth, the Federal Reserve should extend their HOEPA rules to cover yield-spread premiums, broker upselling, and, second, extend the subprime protections to nontraditional mortgages. Those are problematic now, too. And, finally, Congress should pass the Homeownership Preservation and Protection Act--two things to mention there--that Senator Dodd sponsored and many Members of the Committee co-sponsored. This would stop abuses. First, no preemption. If there is preemption, there should not be a bill because the States are doing all they can. And, second, if anything is clear by now, it is that Wall Street will pay best money for mortgages and loans that help their short-term profits and that originators will supply those if they are paid well for it. But that is not necessarily the same thing as a long-term sustainable mortgage for the homebuyer. Purchasers need a continuing financial incentive to ensure good lending through the imposition of strong assignee liability. Thank you very much. " FinancialCrisisReport--97 In response to this information, WaMu’s chief risk officer wrote that the impact on the bank “argues in favor of holding off on implementation until required to act for public relations … or regulatory reasons.” Because OTS gave the bank more than six months to come into compliance with the NTM Guidance, WaMu continued qualifying high risk borrowers using the lower interest rate, originating billions of dollars in new loans that would later suffer significant losses. WaMu’s risk-layering practices went beyond its use of stated income loans, high LTV ratios, and the qualification of borrowers using low initial interest rates. The bank also allowed its loan officers to issue large volumes of high risk loans to borrowers who did not occupy the homes they were purchasing or had large debt-to-income ratios. 315 On top of those risks, WaMu concentrated its loans in a small number of states, especially California and Florida, increasing the risk that a downturn in those states would have a disproportionate impact upon the delinquency rates of its already high risk loans. At one point in 2004, Mr. Vanasek made a direct appeal to WaMu CEO Killinger, urging him to scale back the high risk lending practices that were beginning to dominate not only WaMu, but the U.S. mortgage market as a whole. Despite his efforts, he received no response: “As the market deteriorated, in 2004, I went to the Chairman and CEO with a proposal and a very strong personal appeal to publish a full-page ad in the Wall Street Journal disavowing many of the then-current industry underwriting practices, such as 100 percent loan-to-value subprime loans, and thereby adopt what I termed responsible lending practices. I acknowledged that in so doing the company would give up a degree of market share and lose some of the originators to the competition, but I believed that Washington Mutual needed to take an industry-leading position against deteriorating underwriting standards and products that were not in the best interests of the industry, the bank, or the consumers. There was, unfortunately, never any further discussion or response to the recommendation.” 316 (c) Loan Fraud Perhaps the clearest evidence of WaMu’s shoddy lending practices came when senior management was informed of loans containing fraudulent information, but then did little to stop the fraud. 315 See, e.g., OTS document, “Hybrid ARM Lending Survey” (regarding WaMu), undated but the OTS Examiner-in- Charge estimated it was prepared in March or mid-2007, JPM_WM03190673 (“For Subprime currently up to 100% LTV/CLTV with 50% DTI is allowed for full Doc depending on FICO score. Up to 95% LTV/CLTV is allowed with 50% DTI for Stated Doc depending on FICO score. … For No Income Verification, No Income No Ratio, and No Income No Asset only up to 95% LTV/CLTV is allowed.”). 316 April 13, 2010 Subcommittee Hearing at 17. CHRG-110hhrg46596--444 Mr. Kashkari," Congressman, it is not surprising to see that, with confidence still low, both fears of the credit crisis and the economic downturn, that banks are cautious about extending credit. And I hear the same anecdotes you do. Many people call us, saying, ``We need credit, we need help.'' And so the best we can do is to work with the regulators to make sure the banks are making prudent lending decisions. It is a delicate balance, because we don't want to go to a bank and say, ``You must make more loans even if you don't think those are good loans.'' We don't want to return to the bad lending practices that got us here in the first place. And so, how do we strike the right balance of encouraging the banks and pushing them to make prudent loans without taking on undue risk? And the regulators are looking at this. They put out a joint statement of how they are going to be supervising all banks. You know, all banks in America have benefited from the actions that we have taken, not just those that we have invested in. And they all have an obligation to extend credit in their communities. We are very focused on this, but I don't think it is going to happen as fast as you or I would like. But it is going to happen faster than had we not taken this action. " CHRG-111hhrg51698--158 Mr. Gooch," Yes, sir. I am certainly in favor of free markets, but to some extent maybe I have been painted into a corner as somehow not being supportive of this proposed regulation. My strong position here today, and in my opening statement, was in this concept of disallowing naked credit derivatives, because of my knowledge about the market and my concern that you will kill the CDS market. That might be one of Mr. Greenberger's goals, but that it would be a big mistake for the American economy. Right now, as we know, it is very difficult for anyone to borrow money. The banks aren't lending. But some corporations can still issue debt. But one of the things that is going on in the marketplace right now is those debt issuances are very often now tied to CDS prices. Without the willing sellers of CDS that are your speculators, if you like, but I call them risk takers, who are willing to sell that credit risk, you take away a huge portion of willing lenders. They are synthetic lenders. When they sell a credit default swap, they are not lending the money, but they are a synthetic lender. They are effectively underwriting the risk. " FinancialCrisisReport--182 Over the same five-year period, from 2004 to 2008, in addition to identifying deficiencies associated with WaMu’s lending practices, OTS repeatedly identified problems with WaMu’s risk management practices. Risk management involves identifying, evaluating, and mitigating the risks that threaten the safety, soundness, and profitability of an institution. At thrifts, the primary risk issues include setting lending standards that will produce profitable loans, enforcing those standards, evaluating the loan portfolio, identifying home loans that may default, establishing adequate reserves to cover potential losses, and advising on measures to lower the identified risks. When regulators criticize a bank’s risk management practices as weak or unsatisfactory, they are expressing concern that the bank is failing to identify the types of risk that threaten the bank’s safety and soundness and failing to take actions to reduce and manage those risks. Within WaMu, from 2004-2005, oversight of risk management practices was assigned to a Chief Risk Officer. In 2006, it was assigned to an Enterprise Risk Management (ERM) Department headed by a Chief Enterprise Risk Officer. ERM employees reported, not only to the department, but also to particular lines of business such as the WaMu Home Loans Division, and reported both to the Chief Risk Officer and to the head of the business line, such as the president of the Home Loans Division. WaMu referred to this system of reporting as a “Double- Double.” 666 As with the bank’s poor lending standards, OTS allowed ongoing risk management problems to fester without taking enforcement action. From 2004 to 2008, OTS explicitly and repeatedly alerted the WaMu Board of Directors to the need to strengthen the bank’s risk management practices. 2004 Risk Management Deficiencies. In 2004, prior to the bank’s adoption of its High Risk Lending Strategy, OTS expressed concern about the bank’s risk management practices, highlighted the issue in the annual ROE, and brought it to the attention of the WaMu Board of Directors. The 2004 ROE stated: 666 Subcommittee interviews of Ronald Cathcart (2/23/2010), David Schneider (2/17/2010), and Cheryl Feltgen (2/6/2010). “Board oversight and management performance has been satisfactory … but … increased operational risks warrant prompt attention. These issues limit the institution’s flexibility and may threaten its ability to remain competitive and independent.” 667 CHRG-110hhrg34673--44 Mrs. Maloney," Thank you, Mr. Chairman. And welcome back, Chairman Bernanke. Many of my colleagues have been quoting ``American Banker.'' I would like to show you ``The Hill.'' There you are on the cover. It says your testimony sparked a stock price rally, and the Dow is up 87 percent, and there is great optimism for our economy, and I hope you are right. I hope the stock market is right. But regrettably, some of my constituents are not feeling optimistic. They feel that the economic expansion has not ended up in their take-home pay, and some are very concerned about losing their homes, and I share that concern. They are concerned about the rising rate of mortgage defaults and home foreclosures. In my district employment is high and stable, yet I am being told that foreclosures are at rates that are up by an order of magnitude--they have jumped up dramatically from what they were last year. Some of my colleagues tell me that they are experiencing the same thing in their districts around the country, and they are being told that homeowners are losing their homes in very stable neighborhoods, and some say that this is due to various causes such as unemployment. Yet in my district and others where employment is high, and in some other areas, it is due to the decline in the housing market. But many also ask whether certain mortgage products, particularly in the subprime market, have contributed to this foreclosure crisis or challenge. In particular, many point to the so-called 2/28 ARM's, and some have described them--and I quote--as an inherent predatory product. And as you have told me and others, these 2/28 ARM's are 80 percent of the subprime market. Recently the Fed wrote back to Senator Dodd, taking the position that in its recent guidance on nontraditional mortgages, they did not extend to 2/28 for similar projects. And since these are what many people think is the problem, my question is why is the Fed not addressing the 2/28's and issuing guidance for what many people feel is the main problem in the foreclosure rates and the loss of homes of many people? You eloquently have said many times that homeownership leads to participation in our economy and increased wealth for Americans, yet if you are losing your home, it is leading you to a personal crisis, and if it continues, we will be facing a tremendous crisis in our economy and in our districts. And now for your comments on whether or not the Fed plans to extend guidance to the 2/28 subprime project, products. " CHRG-111hhrg48874--126 Mr. Perlmutter," Thanks, Mr. Chairman, and when Mr. Kroeker returns I do have a question or two for him. But he and Mr. Polakoff had a chance to hear me the other day on mark-to-market and I appreciate both of you gentlemen returning. We have had a lot of hearings in this subject, but just, you know, sort of to summarize, we have lost a lot of capital from the securitization market. Chairman Volcker said, you know, it was at a point where it was 70 percent of credit was coming from the capital markets, 30 percent from the banking. We have lost a lot in the capital markets. I think we determined the other day that we have lost a lot of capital for lending and credit purposes because of mark-to-market, legitimately so or not, you know, there's been a lot of loss and Mr. Long, you have been very honest and I appreciate your testimony today that, you know, from a regulator, from an examiner's point of view, OCC is, you know, concerned about, you know, where we're going in the economy and wanting to make sure that the banks are strong, as strong as they can be. But, we really have had a dramatic contraction in capital. And it is hitting hard. It is not anecdotes anymore. You heard from Mr. Jones, you have heard from all of us, businesses, home builders, restaurants, car dealers, who have been good borrowers, good business people in the past, are being shut out of credit. They are. Whether you're hearing that from your examiners or not, they are. That is happening. And so, Governor Duke mentioned the Interagency Statement on Meeting the Needs of Creditworthy Borrowers of November 12th, and there is one sentence in here, I mean, a number of sentences about making sure that credit is extended. I am reading from the third or fourth paragraph, ``The agencies have directed supervisory staffs to be mindful of the procyclical affects of excessive tightening of credit and to encourage banking organizations to practice economically viable and appropriate lending activities.'' So, there are words in there that talk about prudence, but also about encouraging lending. I will start with you, Mr. Long, and then I want to go to Mr. Kroeker on sort of the mark-to-market situation. Did you guys get that memo? " FOMC20070918meeting--36 34,MR. DUDLEY.," I haven’t actually seen any volume data on term. They may, in fact, exist. What we did, though, is look at the volume in the overnight federal funds market, and we saw that go up about 20 percent. So if you start with the premise that the banks that have excess funds to lend aren’t going to change much month to month, you can pretty much infer that most of it is coming out of the term market." CHRG-110shrg50415--12 STATEMENT OF SENATOR ROBERT MENENDEZ Senator Menendez. Well, thank you, Mr. Chairman, for holding what I think is a very important hearing on the genesis of the current economic crisis. You know, it is said over the mantel of the Archives Building, ``What is past is prologue.'' And I think that unless we come to understand what has happened here, we are destined to relive it again--something that I do not think any one of us wants to see. So as we navigate through what are treacherous waters, I think it is pretty critical to understand how we veered off course and ended up in uncharted territory. Now, there are some who say we need to close this chapter in our history and stop looking back, but to me that is like trying to diagnose a patient without looking at the medical records. We need to know what went wrong in order to prevent it from happening again. One of the major things that I personally believe led us to the conditions in which we are today is the administration's repeated mantra of regulatory relief, and now relief from that ideology is what I think we need. The administration was entranced with a mentality that Wall Street can do no wrong, but the inherent flaw in this thinking is that Wall Street is run by human beings who, like anyone else, are capable of greed and bad decisions. They need to be regulated by our regulators. But instead of being the cop on the beat, they were asleep at the switch. Time and time again, the administration turned an absolute blind eye to warning signs. For example, the Federal Reserve sat on authority to regulate predatory lending. Then the Securities and Exchange Commission took a hands-off approach on supervision. That net operating rule decision, one in which they unlocked billions of dollars that were there to cushion against the possibility of loans that might default, and then use the computer modeling of the banks themselves to determine what was risk and what was value is beyond--blows the imagination. This is delegating the regulatory responsibility. This is delegating the responsibility of being the cop on the beat to those who you are ultimately supposed to supervise. And in my mind, that did no good for the American people and the American taxpayers. In March, Mr. Chairman, of 2007--I have repeated this several times because it was a warning sign then. At a hearing that you chaired in these very chambers, I said then before the administration witnesses that we were going to have a tsunami of foreclosures. The administration said that was an overexaggeration. I wish they had been right and I was wrong. The reality is that we have not even fully seen the crest of that tsunami. And so the challenges were there early on, and the lack of the responsibility of regulators, I think, to regulate was just an incredible abdication of responsibility. And they took action only when the house of cards was falling apart. So I look forward to our witnesses today, some of them who have some extraordinary experience in the fields that the regulators of today pursue, but they had those experiences in the past, and I look forward to hearing some of their views and commentaries. Mr. Chairman, I appreciate your calling this hearing. I hope it is one in a series. I am not one to have a great degree of trust in an administration who got us into this mess to get us out of it as successfully as we all want to see, which means, again, oversight. And as we look at the rescue plan, I hope that you will consider at the appropriate time making sure that we have some oversight of what's going on in that rescue plan, because, you know, I want to make sure that, first of all, this funding that we are infusing into banks--which I think is a good idea. However, I also want to make sure that that infusion works its way into Main Street and does not just stay on Wall Street. Mr. Chairman, I think we have not done anywhere near what we need to do on the question of foreclosures. I find it ironic that we can keep a CEO in their office, but we cannot keep a family in their home. And this is the core of the issue--as you have so aptly said many times, this is the core of the issue of what has brought us to the credit problems that we are having in the country, the financial problems we are having. And it seems to me we would want to keep families in their homes and make them performing assets versus nonperforming assets, and everybody wins at the end of the day, as do communities. But we have not done anywhere near--I do not get the sense that the Treasury Department has any real commitment to trying to keep more families in their homes. And so I look forward to today's hearing, to the ones I hope you will continue to call in the future. But, above all, I hope that we will get in the next administration regulators who understand what their duty and obligation is, what their oath is. And at the end of the day, that oath is to protect the American people and its institutions so that, in fact, there is transparency, so that, in fact, there is honesty, so that, in fact, we know what the real value of assets are, so that we do not find ourselves in the set of circumstances we find ourselves today. Thank you, Mr. Chairman. " CHRG-110hhrg44900--170 Mr. Bernanke," Well, the two that we used was our 13(3) authority, which allows us to lend to individuals, partnerships, and corporations, so long as there are not other credit accommodations available. That was set up by Congress with the intention of creating a very flexible instrument that could be used in a variety of situations, and it allowed us to address a situation in which we did not anticipate and which had not been seen before. And so in that respect, having that flexibility, I think, was very valuable. That being said, both in the short term, I think it would be entirely appropriate for us to have discussions. And as I have discussed personally with congressional leadership about what the will of the Congress is and how we should be approaching these types of situations; and, in the longer term, as Secretary Paulson has proposed, it would be better if we had a more formal mechanism that created some hurdles from decisionmaking that set a high bar in terms of when these kinds of power would be invoked and provided more than this lending tool, which was really not well-suited in some cases to address systemically important failures. So I think the IPC authority is an important authority and it has important flexibility, but I certainly agree that ultimately it is the decision of Congress about, you know, in terms of advice and in terms of legislation about how they want the authorities addressing these kinds of situations. " CHRG-111hhrg48674--46 Mr. Bernanke," So, first of all, a couple of points. One is that even though foreign investments in U.S. securities have gone down, the investments have gone down on the private sector side, and investments in Treasuries have gone up because Treasuries are very safe, so there is still plenty of funding for Treasuries. But I think it is very important that, even as we run a large deficit this year and next year, and the President has said the same, that we work very hard to make sure that we restore a fiscal balance as soon as possible. So I think that is very important, and if we do that, that will make it possible for us to finance our way through this emergency. On the Federal Reserve's balance sheet of $2 trillion, as you point out, there is no government debt involved there. There is no borrowing that is not Treasury. And also we have nothing to do with the GSEs. We are not lending anything to the GSEs. You are correct in pointing out that we have a fourth loss position for both Citi and Bank of America which under extraordinarily severe, unprecedented conditions could cause us to lose some money. But, right now, I feel very comfortable that we are not on the watch list, that we have plenty of capital, that our likely losses are quite small. In fact, while I haven't put together numbers, I would guess that the profits we make on our lending programs would be a very substantial offset to any losses that we might make. " CHRG-111shrg55117--69 Mr. Bernanke," It is a very serious situation and that is why we have brought both new commercial real estate, CMBS, and legacy CMBS into the program. The addition of those two asset classes is relatively recent, so we haven't yet seen a whole lot of activity, which is not surprising because it takes time to put together CMBS packages, CMBS deals. What we have seen with the TALF in other categories of securitization, like in consumer loans, small business loans, student loans, and the like, is that it has been very helpful, even without a great deal of lending. So we are optimistic that this will be helpful, but it will be a few more months before we really have a good read on the effect. But at a minimum, I think it will get the CMBS market moving again, get new deals being made, and that should create more interest on the part of investors in getting involved in financing commercial real estate. Senator Martinez. My time is up and I thank you. I just want to mention in conclusion that there is in TALF, I think, still room for there to be more lending in the area of--or more encouragement to do lending in the area of floor planning for RVs, boats. You know, there is a big boating industry in Florida which is back on its heels, as well as the securitized mortgage market for vacation rentals. I don't mean vacation rentals, but time share type of vacation opportunities. Those are all industries that employ a lot of people in a State like Florida that are currently just wanting for credit availability. Thank you, Mr. Chairman. Senator Johnson. Thank you. Senator Menendez. Senator Menendez. Thank you, Mr. Chairman. Chairman Bernanke, thank you for your testimony, your service. As you know, the Congress is in the midst of a very rigorous debate about health care and there are those in this debate who suggest that we can put off for tomorrow further seeking reform of our system. It seems to me that when we look at obligations of the Federal Government, that both under Medicare and Medicaid, these long-term obligations are unsustainable at the rate that we are going, not to mention that it is unsustainable for the private sector in terms of rising costs for health care which they seek to provide for their employees and therefore creating more and more challenges to people who have health care coverage today. Is it not true that this is one of our significant economic challenges moving forward and that the longer we delay, the greater the consequences will be? " CHRG-111hhrg56766--256 Mr. Lance," My point of view is that the tax should not be imposed because the banks by and large have paid back their TARP funds with interest, and those that are still outstanding, General Motors and AIG, would not be liable, as I understand it. I have a concern that it would lead to even less lending than is now the case. Does the Federal Reserve Board have a position on that aspect of what might occur as a result of imposition of these taxes? " CHRG-110hhrg46591--347 Mr. Washburn," Could you go back over my question? Ms. Bean. Sure. Yours was on mortgage reform which eliminated risky lending practices, put liability to the securitizers so they would make sure the originators did what they were supposed to do to avoid that liability; is that a good thing, is that what we need now? Or do we need something else, because I think that bill would have addressed it. And second, if we had done it, would we have avoided some of this fallout? " CHRG-111hhrg54872--37 Mr. John," Well, Madam Chairwoman, when you establish a new agency of this type, the first thing you are going to do is to move numbers of people into a new agency. You are going to disrupt existing patterns of activity, you are going to find yourself with people who are supposedly regulating. But the reality is, they are far more concerned about finding things like where their desk is and who their new reporting relationship is, and etc., etc. What I am proposing is very simple. As the chairman pointed out, when Congress has moved the regulators and indicated to the regulators that they have not met their responsibilities, they have done a fairly good job at coming up with alternate proposals and actually doing their job. Now, I would suggest that the coordinating council that I propose actually will serve the same purpose on a continuous basis. It keeps the regulators, the individual regulators in place, and I think it is very key that the consumer regulators have a good idea of what is going on within the financial institution that they regulate. Regulating a bank is vastly different than regulating a credit union, which is vastly different than regulating a securities house, etc., etc. Moving everyone into one--under one roof doesn't necessarily improve the coordination or improve the activity. It just changes things. Ms. Waters. Well, if I may, we just heard testimony about some of the abuses that really do need to be attended to. In this meltdown and this economic crisis that we have, as it was pointed out by one of our presenters here today, certain communities were targeted. I think it was pointed out by Ms. Bowdler, senior policy analyst, National Council of La Raza. Ms. Bowdler, do you think that these communities that have been targeted, who are suffering still today with foreclosures, who have been paying too high interest rates, were the recipients of predatory loans, do you think they would be satisfied with a coordinating council rather than a consumer protection agency? Ms. Bowdler. No, I don't think that more of the same is going to get us the results that we want. I think what we need is a better way to connect families to the products that they actually qualify for, which means developing new products in some cases, but it also means getting the good guys into our neighborhoods and making sure that they are actually competing for the business of our families, which they haven't been doing. Ms. Waters. Thank you very much. Mr. Castle, for 5 minutes. " FOMC20080310confcall--103 101,MR. MADIGAN.," Okay. ""Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures Yes Yes Yes Yes Yes Yes Yes Yes Yes in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures. To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures."" There is a section called ""Federal Reserve Actions."" ""The Federal Reserve announced today an expansion of its securities lending program. Under this new term securities lending facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA-rated privatelabel residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF. In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank and the Swiss National Bank. These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008. The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the term auction facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion."" Finally, there's a section on related actions being taken by other central banks with links to the other central banks' websites. " fcic_final_report_full--367 Cost o f I nter b an k L end i ng As concerns about the health of bank counterparties spread, lending banks demanded higher interest rates to compensate for the risk. The one-month LIBOR- OIS spread measures the part of the interest rates banks paid other banks that is due to this credit risk. Strains in the interbank lending markets appeared just after the crisis began in 2007 and then peaked during the fall of 2008. IN PERCENT, DAILY 4% 3 2 1 0 2005 2006 200 7 2008 2009 NO TE: C h a r t s h o w s t h e s pr ead b et w een t h e one -m ont h L ondon I nte rb an k Offe r ed Rate (LI BOR ) and t h e ove r n igh t i nde x s w a p r ate ( O I S ), b ot h cl ose l y w at ch ed i nte r est r ates . SOURC E: B l oo mb e rg Figure . pended on those markets.  “When the commercial paper market died, the biggest corporations in America thought they were finished,” Harvey Miller, the bankruptcy attorney for the Lehman estate, told the FCIC.  Investors and uninsured depositors yanked tens of billions of dollars out of banks whose real estate exposures might be debilitating (Washington Mutual, Wachovia) in favor of those whose real estate exposures appeared manageable (Wells Fargo, JP Mor- gan). Hedge funds withdrew tens of billions of dollars of assets held in custody at the re- maining investment banks (Goldman Sachs, Morgan Stanley, and even Merrill Lynch, as the just-announced Bank of America acquisition wouldn’t close for another three and a half months) in favor of large commercial banks with prime brokerage businesses (JP Morgan, Credit Suisse, Deutsche Bank), because the commercial banks had more di- verse sources of liquidity than the investment banks as well as large bases of insured de- posits. JP Morgan and BNY Mellon, the tri-party repo clearing banks, clamped down on their intraday exposures, demanding more collateral than ever from the remaining investment banks and other primary dealers. Many banks refused to lend to one an- other; the cost of interbank lending rose to unprecedented levels (see figure .). CHRG-111hhrg54872--97 Mr. Hensarling," Thank you, Mr. Chairman. Clearly myself and a number of people on our side of the aisle continue to be very concerned about handing what we view as rather draconian powers to an unelected representative to decide upon subjective terms what financial products that our fellow citizens can enjoy. Clearly, many of you on the panel today don't seem to have that same concern. I guess my first line of questioning then would be--I have heard a number of people talk about unfair and fair, but again those are very nebulous and amorphous terms. Mr. Calhoun, I believe I heard you say if the CFPA had been in existence a number of years ago, we probably would not have had this economic turmoil. I for one believe if it had been in effect a number of years ago, we probably wouldn't have ATM machines, frequent flier miles, and the list goes on. But the first question I would have, given that incredible draconian powers are being suggested to be transferred to this government agency, is what are your views on what is fair and unfair? For example, payday lending, is payday lending per se unfair, Mr. Shelton? Yes, no, no opinion? " CHRG-111hhrg48868--124 Mr. Polakoff," Congressman, if I could offer a couple of points for your consideration of the bailout that has occurred. And AIG recently did a press release breaking down the money--$52 billion went for credit default swap-related issues, and $40 billion went for security lending issues. So there were multiple issues associated with AIG. There are many large financial institutions in the United States today that underwrite credit default swaps. The issue is not the product. " CHRG-110hhrg46596--125 Mr. Castle," Thank you, Mr. Chairman. Mr. Dodaro, back in my opening statement, I mentioned what I would like to ask you questions about, and that is the role of the lending by the Federal Reserve and what is being done with respect to overseeing what they have actually been doing. Their loans, actually, are at a rate much higher than anything the Treasury has done. It is close to a trillion dollars. I am looking at their balance sheet now, which is a very odd balance sheet, because assets become liabilities and vice versa. But it is approximately in that range. And I am interested in more oversight and greater detail concerning their expenditures and what they are doing, all of which is pursuant to section 13-3 of the Act allowing these loans. I realize when I say all this that the Federal Reserve has, by legislation and by fiat in general, certain protections with respect to the kinds of lending which they are doing to banks for reasons of security. But, to me, these kinds of loans aren't that dissimilar from what is happening in Treasury. And when we deal with these section 13-3 loans, we are dealing with something of which there should be more transparency and, I think, more knowledge with respect to what is happening. I would just like to get your views on it, since you are the ones who are really overseeing what Treasury is doing. And I realize there is nothing you can do now because of the confidentiality aspects of the Federal Reserve, but should we be doing something as legislators to make sure that transparency is increased? " FOMC20080625meeting--294 292,MS. PIANALTO.," Thank you, Mr. Chairman. I also support extending our lending facilities to get through the year-end funding problems. As many others have already said, I agree that we should undertake an evaluation of the changes to our emergency liquidity facilities. I think it is important that we do it more broadly and that we don't do it in a piecemeal fashion. How the pieces fit together matters greatly. Any extension of Fed authority to provide routine liquidity support beyond insured banks should be something that we consider as part of a comprehensive regulatory and financial safety net reform. My own view may be that I prefer a narrower lending facility than I think was envisioned in some of the documents that we received, but I do think that the top priority is to have a well-thought-out, documented plan for how we move forward. That will help us address some of the moral hazard issues that we have been concerned about. I think it will avoid our having to create any new institutions or new facilities to respond to future crises. I also think it will help better define some of the boundaries. Thank you. " CHRG-110hhrg41184--39 Mr. Bernanke," Well, mortgage rates are down some from before this whole thing began. But we have a problem, which is that the spreads between, say, Treasury rates and lending rates are widening, and our policy is essentially, in some cases, just offsetting the widening of the spreads, which are associated with various kinds of illiquidity or credit issues. So in that particular area, you are right. It has been more difficult to lower long-term mortgage rates through Fed action. We are able, of course, to lower short-term rates and they do have implications. For example, resets of existing mortgages affect the ability of banks and others to finance their holdings of assets. So I think we still have power to influence the housing market in the broader economy, but your points are well taken. A lot of what we have done has been mostly just to offset the tightening of credit that has arisen because of the financial situation. Mr. Miller of California. I am looking at lending since about January 24th has raised about 56 basis points to the consumer. Yet, your cost to the lenders are down considerably based on what CDs are being, you know, sold out today, and such. " CHRG-111shrg54789--166 PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD Good morning. Thank you all for being here today. This morning, we are taking an important step in our efforts to modernize our financial regulatory system. The failure of that system in recent years has left our economy in peril and caused real pain for hard-working Americans who did nothing wrong. The important work we do on this Committee is often complex and painstaking in its detail. And so, I'd like to start by reminding everyone that the work we do here, the details, matter to real people, the men and women in my home State of Connecticut and across America who work hard, play by the rules, and want nothing more than to make a better life for their families. These families are the foundation of our economy and the reason we're here in Washington working on this historic and critically important legislation. That's why the first piece of the Administration's comprehensive plan to rebuild our regulatory regime and our economy is something I have championed: an independent agency whose job it will be to ensure that American consumers are treated fairly and honestly. Think about the moments when Americans engage with financial service providers. I'm not talking about big-time investors or financial experts, just ordinary working people trying to secure their futures. They're opening checking accounts, taking out loans, building their credit, trying to build a foundation upon which their family's economic security can rest. These can be among the most important and stressful moments a family can face. Think of a young couple. They've carefully saved up for a down payment. It might be a modest house--but it'll be their home. Before they can move into their new home, however, they must sign on the dotted line for that first mortgage with its pages and pages of complex and confusing disclosures. Who's looking out for them? Think of a factory worker who drives 30 miles to and from work every day in an old car that's about to give out. He needs another one to make it through the winter, but his wages are stagnant and the family budget is stretched to the max. He's got no choice but to navigate the complicated world of auto loans. Who's looking out for him? Think of a single mother whose 17-year-old son just got into his top choice of colleges. She's overjoyed for him, but worried about how she'll pay the tuition. Financial aid might not be enough, and she knows that even as her son begins the next chapter in a life filled with promise, he might be saddled with debt. Who's looking out for them? These moments are the reason we have invested so much time and money to rebuild our financial sector even though some of the very same institutions the taxpayers have propped up are responsible for their own predicaments. These moments are the reason we serve on this Committee. And these moments are the reason I and many of my colleagues were enraged at the spectacular failure of consumer protection that destroyed the economic security of so many American families. In my home State of Connecticut and around the country, working men and women who did nothing wrong have watched this economy fall through the floor--taking with it jobs, homes, life savings, and the cherished promise of the American middle class. These folks are hurting, they are angry, they are worried. And they are wondering: Is anyone looking out for me? Since the very first hearing before this Committee on modernizing our financial regulatory structure, I have said that consumer protection must be a top priority. Stronger consumer protection could have stopped this crisis before it started. And where were the regulators? For 14 years, despite a clear directive from Congress, the Federal Reserve Board took no action to ban abusive home mortgages. Gaping holes in the regulatory fabric allowed mortgage brokers and bankers to make and sell predatory loans to Wall Street that turned into toxic securities and brought our economy to its knees. That is why I called for the creation of an independent consumer protection agency whose sole focus is the financial well-being of consumers; an agency whose goal is to put an end to unscrupulous lenders and practices that have ripped off far too many American families. And I'm pleased that the Administration has sent us a bold and thoughtful plan for that agency. You would think financial services companies would support protections that ensure the financial well-being of their customers--if not out of concern for their own bottom-lines, then out of simple common decency. But now I read that various industry groups are planning a major PR offensive in an effort to kill this consumer protection agency. To those who helped create this mess and now plan to flood the airwaves with misleading propaganda, I have just two words for you: Get real. The forces of the status quo can run as many ``Harry and Louise'' ads as they want. But Harry and Louise are exactly why we're moving forward on this proposal. We can't have a functioning economy if Harry and Louise can't safely invest and borrow without fear of being cheated by greedy banks and Wall Street firms. And we will not have a financial regulatory modernization bill that doesn't provide the protections American families need and deserve. An independent consumer protection agency can, and should, be good for business. It can, and should, protect the financial well-being of American consumers so that businesses can rely on a healthy customer base as they seek to build long-term profitability. It can, and should, eliminate the regulatory overlap and bureaucracy that comes from the current balkanized system of consumer protection regulation. It can, and should, level the playing field by applying a meaningful set of standards, not only to the highly regulated banks, but also to their nonbank competitors that have slipped under the regulatory radar screen. Financial services companies that want to make an honest living should welcome this effort to create a level playing field. Indeed, the good lenders are the most disadvantaged when fly-by-night brokers and finance companies set up shop down the street. Then we see bad lending pushing out the good. No Senator on this Committee wants to stifle product innovation, limit consumer choice, or create regulation that is unnecessary or unduly burdensome. And I welcome constructive input from those in the financial services sector who share our commitment to making sure that American families get a fair shake. But I do not view as constructive the opposition to the creation of this agency by some industry groups in order to, as Bloomberg News reported, ``protect their fees.'' We all want financial services companies to thrive and succeed, but they will have to make their money the old fashioned way--by developing innovative products, pricing competitively, providing excellent customer service, and engaging in fair competition on the open market. The days of profiting from misleading or predatory practices are over. The path to recovery of our financial services companies and our economy is based on the financial health of American consumers. We need a system that rewards products and firms that create wealth for American families, not one that rewards financial engineering that generates profits for financial firms by passing on hidden risks to investors and borrowers. The fact that the consumer protection agency is the first legislative item the Administration has sent to Congress since it released its white paper on regulatory reform last month tells me that our President's priorities are in the right order. I wish I could say the same for everyone in the industry. Nevertheless, with the backing of the Administration, with the support of many in the financial community who understand the importance of this reform, and, most of all, with a mandate from the American families who count on a fair and secure financial system, we will push forward. I thank you all for being here today. Now let's get to work. ______ CHRG-111hhrg48868--58 Mr. Ario," Thank you, Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee. I appreciate the opportunity to provide an insurance regulator's perspective on what has happened at AIG. Ben Bernanke, Chairman of the Federal Reserve, recently described AIG as, ``A hedge fund attached to a large and stable insurance company.'' He was right on both counts. The hedge fund is AIG Financial Products, which, according to Chairman Bernanke, made, ``Irresponsible bets and took huge losses.'' The large and stable insurance company is, of course, 71 State regulated insurance subsidiaries, including 11 companies in my State of Pennsylvania. The reason the Federal Government decided to rescue AIG was because of the systemic risk created by Financial Products. That risk materialized last September when it became apparent that Financial Products had bet twice the value of AIG on risky credit default swaps and failed to hedge its own bets. To make matters worse, the counterparties to those swaps included many of the world's leading financial institutions. It was to protect those institutions that the Federal Government acted. In Chairman Bernanke's words, ``We are not doing this to bail out AIG or their shareholders certainly. We are doing this to protect our financial system and to avoid a much more severe crises in our global economy. We know that the failure of major financial firms can be disastrous for the economy. We really had no choice.'' To put it bluntly, AIG Financial Products, the hedge fund that failed to hedge its own bets, has become the poster child for systemic risk. Although the September crisis at Financial Products produced collateral damage within the AIG insurance companies, the fact is that these companies do perform well--they are not in a death spiral--well enough that competitors accuse AIG of using its Federal assistance to unfair advantage in the marketplace. The allegations are most prominent in commercial insurance where the Nation's largest insurers routinely bid against each other on multi-million dollar accounts. AIG's competitors claim that AIG is deliberately underpricing in a desperate attempt to maintain premium value. AIG has fired back that its competitors are selectively underpricing to exploit a vulnerable company. Such disputes typically reflect insurers trying to protect profit margins in a soft market, but there is a point at which low pricing can threaten long-term stability. So we have carefully reviewed, we being State insurance regulators, carefully reviewed charges on both sides and to date, have not seen any clear evidence of underpricing on either side. What have we learned from the AIG ordeal? First, we have seen stable insurance companies that demonstrate the efficacy of State insurance regulation. Indeed, the Federal rescue of AIG would have been an even tougher call were it not for the well-capitalized insurance companies providing the possibility that the AIG loans will be paid back. That was true in September. It is true today. The insurance companies have the value they do because State regulation requires healthy reserves backed by conservative investments all dedicated to protecting policyholders and other claimants. This is not to say that regulation is perfect, to the chairman's introductory comment, which brings me to securities lending. Securities lending did not pose systemic risk and would have been resolved without any Federal assistance, but for the Financial Products debacle, which caused the run on the bank that took a net of $20 billion in Federal funds to fully resolve. It is more than $40 billion out, but $20 billion held by the Federal Government today. This was unfortunate and it is a problem for State regulation, but it does not compare to the $440 billion credit default swap mess that continues to pose systemic risk. The securities lending problem: solved today. Completely solved. My written testimony contains more details about securities lending, but let me conclude with a few thoughts on the most important lesson we can learn from the abuses at Financial Products: the need to identify and manage systemic risk. As AIG illustrates, insurance companies are more likely to be the recipients rather than the creators of systemic risk, but as AIG also illustrates, the systemic risk that is received can have significant repercussions. In this case, a manageable securities lending problem turned into a run on the bank back in September. State insurance regulators recognize that Federal action is needed to address systemic risk, but the solution should be a collaborative one that builds on the strength of State regulation (multiple eyes on any problem) by adding the eyes of other functional regulators in a transparent structure that holds all functional regulators accountable and does not compromise one company within the enterprise for the benefit of another. Such a structure would give us, as State regulators, the ability to do what we do best, protect the insurance buying public. Thank you. [The prepared statement of Mr. Ario can be found on page 136 of the appendix.] " fcic_final_report_full--26 Officials in Cleveland and other Ohio cities reached out to the federal government for help. They asked the Federal Reserve, the one entity with the authority to regulate risky lending practices by all mortgage lenders, to use the power it had been granted in  under the Home Ownership and Equity Protection Act (HOEPA) to issue new mortgage lending rules. In March , Fed Governor Edward Gramlich, an ad- vocate for expanding access to credit but only with safeguards in place, attended a conference on the topic in Cleveland. He spoke about the Fed’s power under HOEPA, declared some of the lending practices to be “clearly illegal,” and said they could be “combated with legal enforcement measures.”  Looking back, Rokakis remarked to the Commission, “I naively believed they’d go back and tell Mr. Greenspan and presto, we’d have some new rules. . . . I thought it would result in action being taken. It was kind of quaint.”  In , when Cleveland was looking for help from the federal government, other cities around the country were doing the same. John Taylor, the president of the Na- tional Community Reinvestment Coalition, with the support of community leaders from Nevada, Michigan, Maryland, Delaware, Chicago, Vermont, North Carolina, New Jersey, and Ohio, went to the Office of Thrift Supervision (OTS), which regu- lated savings and loan institutions, asking the agency to crack down on what they called “exploitative” practices they believed were putting both borrowers and lenders at risk.  The California Reinvestment Coalition, a nonprofit housing group based in Northern California, also begged regulators to act, CRC officials told the Commis- sion. The nonprofit group had reviewed the loans of  borrowers and discovered that many individuals were being placed into high-cost loans when they qualified for better mortgages and that many had been misled about the terms of their loans.  FOMC20080130meeting--126 124,MS. LIANG.," In that sense, it does represent a risk that you are going to get dynamic feedback between losses and household spending and lending--it is a high risk. So I wouldn't say ""comforted."" I think we were saying that this is beyond probably what our models could respond to in our typical way or it would be another dynamic feedback loop of some sort that we don't typically adjust for. " CHRG-111shrg51303--43 Mr. Dinallo," Oh, no. I am fully--I take as an agency full responsibility for the, I think percentage-wise, small losses in securities lending that our insurance companies--well, it is by a percentage, Senator, you are talking on your own telling, it is about $17 billion out of a 400---- Senator Shelby. You call that small, $17 billion? " FOMC20070918meeting--43 41,VICE CHAIRMAN GEITHNER.," Our research people have tried to figure out whether they could infer or take from Fedwire data other indications of who’s lending at what maturities and who’s borrowing at what maturities and what the balance is. My own sense from looking at this, and maybe I just haven’t figured it out yet, is that it doesn’t give you the kind of clarity that you were looking for." CHRG-110hhrg44901--51 Mr. Bernanke," Congresswoman, as I indicated in my testimony, we at this point are balancing various risks to the economy. And as we go forward, my colleagues and I are going to have to, you know, see how the data come in and how the outlook is changing and try to find the policy that best balances those risks and best achieves our mandate of sustainable growth and price stability. So I don't know how to answer beyond that, other than to say that we are going to be responsive to conditions as they evolve. I noted today the importance of not letting inflation from commodities enter into a broader and more persistent and more pernicious inflation. That is certainly an important priority. But in general, we are going to have to just keep evaluating the new information and see how it affects the outlook. Monetary policy works with a lag. We can't look out the window and do something that will affect the economy today. So the best we can do is try to make forecasts and try to adjust our policy in a way that brings the forecast towards the desired outcome. Ms. Velazquez. Well, Mr. Chairman, I understand all the steps and actions taken by the Fed. But it seems to me that the lending tools are proving to be ineffective at this point. Doesn't this prove that the current economic conditions have moved beyond a liquidity crisis that can be mitigated through Federal lending and is now proven to be a capital crunch? " fcic_final_report_full--360 On Sunday morning, September , Adam Ashcraft of the New York Fed circu- lated a memo, “Comment on Possible - Lending to AIG,” discussing the effect of a fire sale by AIG on asset markets.  In an accompanying email, Ashcraft wrote that the “threat” by AIG to sell assets was “a clear attempt to scare policymakers into giv- ing [AIG] access to the discount window, and avoid making otherwise hard but vi- able options: sell or hedge the CDO risk (little to no impact on capital), sell subsidiaries, or raise capital.”  Before a : P . M . meeting, LaTorre sent an analysis, “Pros and cons of lending to AIG,” to colleagues. The pros included avoiding a messy collapse and dislocations in markets such as commercial paper. If AIG collapsed, it could have a “spillover effect on other firms involved in similar activities (e.g. GE Finance)” and would “lead to B increase in European bank capital requirements.” In other words, European banks that had lowered credit risk—and, as a result, lowered capital requirements— by buying credit default swaps from AIG would lose that protection if AIG failed. AIG’s bankruptcy would also affect other companies because of its “non-trivial exotic derivatives book,” a . trillion over-the-counter derivatives portfolio of which  trillion was concentrated in  large counterparties. The memo also noted that an AIG failure “could cause dislocations in CDS market [that] . . . could leave dealer books significantly unbalanced.”  The cons of a bailout included a “chilling effect” on private-sector solutions thought to be under way; the possibility that a Fed loan would be insufficient to keep AIG afloat, “undermining efficacy of - lending as a policy tool”; an increase in moral hazard; the perception that it would be “incoherent” to lend to AIG and not Lehman; the possibility of assets being insufficient to cover the potential liquidity hole. LaTorre concluded, “Without punitive terms, lending [to AIG] could reward poor risk management,” which included AIG’s unwillingness to sell or hedge some of its CDO risk.  The private-sector solutions LaTorre referred to had hit a wall, however. By Sunday afternoon, Flowers had been “summarily dismissed” by AIG’s board. Flowers told the FCIC that under his proposal, his firm and Allianz, the giant insurance company, would have each invested  billion in exchange for the stock of AIG subsidiaries. With approval from the NYSID, the subsidiaries would “upstream”  billion to the parent company, and the parent company would get access to bridge financing from the Fed. Then, Allianz would take control of AIG almost immediately. Flowers said that he was surprised by AIG’s unwillingness to negotiate. “I’m not saying it would have worked or that it was perfect as written, but it was astounding to me that given what happened, nobody bothered to check this [deal] out,” he said.  Willumstad referred to the Flowers deal as a “so-called offer”—he did not consider it to be a “serious effort,” and so it was “dismissed immediately.” With respect to the other potential investors AIG spoke with over the weekend, Willumstad said that negotiations were unsuccessful because every potential deal would have required government assistance—something Willumstad had been assured by the “highest levels” would not be forthcoming.  CHRG-111hhrg48874--12 OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Ms. Duke. Thank you, Mr. Chairman. Chairman Frank, Ranking Member Bachus, and members of the committee, I am pleased to be here today to discuss several issues related to the state of the banking system. As you are all well aware, the Federal Reserve is taking significant steps to improve financial market conditions and has worked with the Treasury and other bank and thrift supervisors to address issues at U.S. banking organizations. We remain attentive to the need for banks to remain in sound financial condition, while at the same time to continue lending prudently to creditworthy borrowers. Indeed, the shutdown of most securitization markets and the evaporation of many types of non-bank credit make it that much important right now for the U.S. banking system to be able to carry out the credit intermediation function. Recent data confirm severe strains on parts of the U.S. banking system. During 2008, profitability measures at U.S. commercial banks and bank holding companies deteriorated dramatically. Indeed, commercial banks posted a substantial, aggregate loss for the fourth quarter of 2008, the first time this has happened since the late 1980's. This loss in large part reflected write-downs on trading assets, high goodwill impairment charges, and, most significantly, increased loan loss provisions. With respect to overall credit conditions, past experience has shown that borrowing by households and nonfinancial businesses has tended to slow during economic downturns. However, in the current case, the slow down in private sector debt growth during the past year has been much more pronounced than in previous downturns, not just for high mortgage debt, but also consumer debt and debt of the business sector. In terms of direct lending by banks, Federal Reserve data show that total bank loans and leases increased modestly in 2008 below the higher pace of growth seen in both 2006 and 2007. Additionally, the Federal Reserve Senior Loan Officer Opinion Survey on Banking Practices has shown that banks have been tightening lending standards over the past 18 months. The most recent survey data also show the demand for loans for businesses and households continue to weaken on balance. Despite the numerous changes to the financial landscape during the past half-century, such as the large increase in the flow of credit coming from non-bank sources, banks remain vital financial intermediaries. In addition to direct lending, banks supply credit indirectly by providing back-up liquidity and credit support to other financial institutions and conduits that also intermediate credit flows. In terms of direct bank lending, much of the increase last year likely reflected households and businesses drawing down existing lines of credit rather than extensions of loans to new customers. Some of these draw-downs by households and businesses were precipitated by the freeze-up of the securitization markets. The Federal Reserve has responded forcefully to the financial and economic crisis on many fronts. In addition to monetary policy easing, the Federal Reserve has initiated a number of lending programs to revive financial markets and to help banks play their important role as financial intermediaries. Among these initiatives are the purchase of large amounts of agency debt and mortgage-backed securities; plans to purchase long-term Treasury securities; other efforts including the Term Asset-backed Securities Loan Facility known as TALF to facilitate the extension of credit to households and small businesses; and, the Federal Reserve's planned involvement in the Treasury's Public-Private Partnership Investment Program, announced on Monday. The Federal Reserve has also been active on the supervisory front to bring about improvements in banks' risk-management practices. Liquidity and capital have been given special attention. That said, we do realize that there must be an appropriate balance between our supervisory actions and the promotion of credit availability to assist in the economic recovery. The Federal Reserve has long-standing policies and procedures in place to help maintain such a balance. We have also reiterated this message of balance in recent interagency statements. We have directed our examiners to be mindful of the procyclical effects of excessive credit tightening and to encourage banks to make economically viable loans, provided that such lending is based on realistic asset valuations and a balanced assessment of borrowers' repayment capacities. The U.S. banking industry is facing serious challenges. The Federal Reserve, working with other banking agencies, has acted and will continue to act to ensure that the banking system remains safe and sound and is able to meet the credit needs of our economy. The challenge for regulators and other authorities is to support prudent bank intermediation that helps restore the health of the financial system and the economy as a whole. As we have communicated, we want banks to deploy capital and liquidity to make credit available, but in a responsible way that avoids past mistakes and does not create new ones. Accordingly, we thank the committee for holding this hearing to help clarify the U.S. banking agencies' message that both safety and soundness and credit availability are important in the current environment. I look forward to your questions. [The prepared statement of Governor Duke can be found on page 82 of the appendix.] " CHRG-111shrg55117--59 Mr. Bernanke," It is not prohibited if the variable rate is tied to some publicly available rate, like the LIBOR or something like that. Senator Schumer. I would just say to you--and to everyone else here--that is why so many of us feel we need a Consumer Product Financial Safety Commission, because they always find ways around this. I mean, for years I said disclosure will do the job. It does not. And every law you pass, they find a way around it. Frankly, the Fed is not very lithe about these things. That is way before you got there, but it continues. And we need somebody who is going to focus on consumer products, on making sure when they find a new way to get around the intent of the law, if not the letter, that somebody is able to stop it and stop it quickly. I know you were asked about the consumer products financial safety commission. I hope you will be supportive of it and help us draft it, because we need a regulator who is not going to--who is going to be a little more lithe than you, than the Fed has been, to be honest with you. What is happening is outrageous, and you have the power to change some of those things. Chairman Dodd and I wrote it. Small business lending. The CIT problems have made clear how vulnerable small business is to problems. I have heard stories all over my State of small businesses who need lending. They are profitable businesses. They still have collateral. They cannot get loans for reasons nothing to do with their fault--nothing to do with them and not their fault. Is the Fed considering any additional programs to help small business obtain access to credit? " CHRG-111shrg55278--73 Mr. Reinhart," Sure, a couple points. One is when you give an entity that has macropowers a supervisory responsibility, they have the ability to clean up their mistakes after the fact. Would a Fed that can lend to an institution be more willing to lend to it when it hadn't identified it as a systemic threat? Would it be willing to use its monetary policy tool to make markets function better in an environment where it had failed to identify some market areas as posing systemic risk? Now, for 6 years, I signed off on the minutes and transcripts of the Federal Open Market Committee, a wonderful resource actually giving the details of deliberations of monetary policy. And the next time you hear someone say there is important cross-pollination between monetary policy decisions and bank supervision, you should ask them to go back to the FOMC transcripts and give you the examples where there was a significant discussion about bank supervisory matters that informed the monetary policy decision. The fact is, as has already been noted, an agency is filled with hardened silos and the economists don't talk to the lawyers who don't talk to the bank supervisors. What is important is to enforce an information sharing, and in some ways, it is easier to do that across agencies than within an agency. " CHRG-111hhrg56776--102 Mr. Royce," Thank you, Mr. Chairman. Chairman Bernanke, watching the trends in the market for Treasuries, it appears as though the two major creditors, which would be Japan and China, have begun to scale back their purchases of U.S. Government securities. Filling the void in demand have been other foreign governments or other foreigners, as they say, and I would assume that would be foreign banks and hedge funds, and then also U.S.-based financial institutions. Clearly, there is market play here, the carry trade is in effect here by these banks, which essentially amounts to borrowing at next to nothing from central banks and lending it back to the U.S. Government at 1 or 2 percent, depending on how far out they go on the yield curve. Have we backed ourselves into a corner here? Essentially, if you raise interest rates, the carry trade evaporates, as does the demand in the Treasury market, and our ability to finance the $1.5 trillion deficit this year. Who is going to lend to us if we do that? If foreign governments are scaling back and financial institutions can no longer make money in this market, where will the demand for Treasuries come from? " CHRG-109shrg21981--205 RESPONSE TO A WRITTEN QUESTION OF SENATOR BENNETT FROM ALAN GREENSPANQ.1. In 2002, the Home Mortgage Disclosure Act (HMDA) regulations were revised to allow for additional data collection from the lending industry. On March 1, 2005, banks and other covered lenders will be required to submit data to the Federal Reserve that will include more loan-pricing data and new ethnicity data. Concerns have been raised that this new HMDA data, if taken out of context, might allow for misinterpretation. Can you explain what the intent of the new HMDA data is, the context of the data, and what some of the key limitations of that data are, that is, what the data might show and might not show?A.1. The new public disclosure of price information under HMDA is intended to ensure that the HMDA data set continues to be a useful tool to improve market efficiency and legal compliance with the fair lending laws. Since HMDA was last amended by the Congress, technological advances have made it possible for lenders to more accurately gauge credit risk. Lenders will lend to higher-risk individuals whom they previously would have denied credit, albeit at higher prices commensurate with the higher risk. Broader access to credit has been a largely positive development, expanding opportunities for homeownership and allowing previously credit-constrained individuals to tap the equity in their homes. However, expansion of the higher-priced lending market also has been associated with concerns about the fairness of pricing in the market. The price data newly required to be disclosed under HMDA can be used as a screen that identifies aspects of the higher-priced end of the mortgage market that warrant a closer look. Conclusive judgments about the fairness of pricing, however, must consider all of the legitimate factors that underlie pricing decisions, including risk-related factors. Risk-related factors include measures such as the borrower's credit history and debt-to-income ratio, and the loan-to-value ratio of the specific transaction. The expanded HMDA data do not include these factors, or many others that are potentially relevant to a pricing decision. Absent information about all relevant pricing factors, one cannot draw definitive conclusions about whether particular lenders discriminate unlawfully or take unfair advantage of consumers. Thus, any price disparities by race or ethnicity revealed in the HMDA data will not, by themselves, prove unlawful discrimination. Such disparities will, however, need closer scrutiny. In the case of depository institutions, for example, that scrutiny will be supplied by bank examiners, who will have access to information about all of the relevant variables. CHRG-110hhrg46596--367 Mr. Scott," Thank you very much, Mr. Chairman. Mr. Kashkari, first of all, the great concern we have is--the fundamental need right now are two things for us to get out of this doldrum that we have in our economy. One is we have to lend the money--the banks have to lend the money. We have to get consumers to spend the money. As you well know from finance--and you are a man of finance--the banking system is sort of like the heart of our economy. Like our own heart and our own bodies, the primary function is to pump the blood to get throughout the body. That is what the banks are there for. But they are not pumping the blood, the money, out to the system. It is not getting out to the fingers, and out to the toes. It is not getting out there. It is not getting out to the homeowners who are hanging on by their fingernails, and not getting out to those people who need to keep their jobs. That is what we have to break through with. I want to deal with a couple of specific points, and I think that we can give you an example, and I want to get your answers as to how you might be able to help us to do this. For example, here is one example. In Atlanta, Georgia, we have the Hartsfield International Airport which, I am sure, if you have been around, everybody has gone through. It is the world's busiest airport. We have a great need now. We are building a second terminal, the Maynard H. Jackson International Terminal. However, without access to the short-term credit market, construction will stop. We need that access. The question is: Can Treasury make sure that the reserves and money and resources that are going to the banks be directed to unfreeze the market for State and local debt so that projects like this can go forward? That is nearly over 3,000 jobs that will stop. Now, can we do that? " FinancialCrisisReport--111 WaMu was one of the largest originators of Option ARMs in the country. In 2006 alone, WaMu securitized or sold $115 billion in Option ARMs. 388 Like Long Beach securitizations, WaMu Option ARM securitizations performed badly starting in 2006, with loan delinquency rates between 30 and 50%, and rising. 389 (e) Marginalization of WaMu Risk Managers WaMu knowingly implemented a High Risk Lending Strategy, but failed to establish a corresponding system for risk management. Instead, it marginalized risk managers who warned about and attempted to limit the risk associated with the high risk strategy. At the time it formally adopted its High Risk Lending Strategy, WaMu executives acknowledged the importance of managing the risks it created. For example, the January 2005 “Higher Risk Lending Strategy ‘Asset Allocation Initiative’” presentation to the Board of Directors Finance Committee stated in its overview: “In order to generate more sustainable, consistent, higher margins within Washington Mutual, the 2005 Strategic Plan calls for a shift in our mix of business, increasing our Credit Risk tolerance while continuing to mitigate our Market and Operational Risk positions. “The Corporate Credit Risk Management Department has been tasked, in conjunction with the Business Units, to develop a framework for the execution of this strategy. Our numerous activities include: -Selecting best available credit loss models -Developing analytical framework foundation -Identifying key strategy components per Regulatory Guidance documents “A strong governance process will be important as peak loss rates associated with this higher risk lending strategy will occur with a several year lag and the correlation between high risk loan products is important. For these reasons, the Credit Department will pro- 387 Id. 388 10/17/2006 “Option ARM” draft presentation to the WaMu Board of Directors, JPM_WM02549027, Hearing Exhibit 4/13-38, chart at 2. 389 See wamusecurities.com (subscription website maintained by JPMorgan Chase with data on Long Beach and WaMu mortgage backed securities showing, as of January 2011, delinquency rates for particular mortgage backed securities, including WMALT 2006 OA-3 – 57.87% and WAMU 2007-OA4 – 48.43%). actively review and manage the implementation of the Strategic Plan and provide quarterly feedback and recommendations to the Executive Committee and timely reporting to the Board.” 390 CHRG-111hhrg54872--116 Mr. John," For one thing, I think there are some different causes of the financial crisis and that just focusing on consumer activities and consumers lending is somewhat misleading. If the laws that exist on the books, and this includes both State laws and Federal laws, had been properly enforced and had been carefully considered, meaning the coverage of things like unregulated mortgage brokers and things like that had been covered by some of the States, I think that would have gone a long way toward preventing some of the consumer products breakdowns that caused the situation. As I say, I think there was a lot more than just that. Mr. Moore of Kansas. What laws were not enforced that should have been enforced and who was to have enforced those laws, sir? " CHRG-111hhrg48674--12 Mr. Bernanke," I will. The 5 percent, about $100 billion, is commitments that have been undertaken in government efforts to prevent the failure of major financial institutions. I want to make that distinction. The 95 percent, the bulk of our lending, those programs are extremely safe. They are overcollateralized. I could go through each one, I did in my remarks, and explain why each one is safe, mostly very short term, and very constructive. " CHRG-111shrg55117--85 Mr. Bernanke," Well, one comment is that one of the main sources of small business financing is smaller banks, community banks which have closer relationships, more information, more local information. And to the extent that they remain strong, and some of them are under a lot of pressure for various reasons, but many of them remain strong and they in some cases have been able to step in where the national banks have had to pull back. That is one slightly encouraging direction and that suggests that we should continue to support community banking, which plays a very important role in supporting small business. You know, beyond that, I think we just need to get the banking system working as well as possible again. I think there are even large banks that view small business as an important profit center and will continue to lend there. But clearly, in a downturn like this, small business, which already has a pretty high mortality rate, is even a riskier proposition, and so it does pose a tremendous problem right now. Senator Warner. My time has expired, but Mr. Chairman, I know we have got a lot on the docket, but I would love to have the Committee perhaps take a hearing or some examination of what we as the Congress could do to look at the state of lending in small business and startup businesses, and not just existing small businesses but how we get that next step of innovation, because that financing market has disappeared. I have a lot of folks in that spectrum who say they don't see any signs of it returning, that it is basically totally broken. So I would love to have your thoughts on that. " CHRG-111hhrg54872--163 The Chairman," The gentleman from North Carolina, Mr. Miller. Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. Castle said in his opening statement that the worst subprime loans, the bulk of the bad subprime loans were not made by depository institutions that were fairly closely regulated but by nondepository institution, independent lenders. Mr. John, you testified a few months ago before the Investigations and Oversight Subcommittee, of the Science and Technology Committee, which I Chair, on the role--and one issue that came up was the role of the Community Reinvestment Act. Mr. Castle is right, a relatively small number of the bad subprime loans were made by depository institutions subsequent to the Community Reinvestment Act. And in fact a study by the Federal Reserve Board found that only 6 percent of all the subprime loans were made in assessment areas or in the neighborhoods where CRA encouraged lending--or to borrowers that CRA encouraged lending to. And you agreed then that CRA had a negligible effect in the subprime crisis and the financial crisis generally. Is that still your view? " CHRG-111hhrg52261--128 Chairwoman Velazquez," Thank you. Mr. Roberts and Ms. Donovan, during times of financial duress, higher capital requirements can provide a cushion for lenders. But these increased levels can also restrict a bank or credit union's ability to make loans to small firms. Can you talk about how higher capital requirements might impact your small business lending practices? " CHRG-111hhrg54867--11 Secretary Geithner," Thank you, Mr. Chairman, Ranking Member Bachus, members of the committee. It is a pleasure to be back before you today and to talk about how best to reform the system. I am pleased to hear the enthusiasm for reform across both sides of the aisle. And, of course, we all recognize the task we face is how to do it right and how to get it right. Our objective, of course, is to provide stronger protection for consumers and investors, to create a more stable financial system, and to reduce the risk that taxpayers have to pay for the consequences of future financial crises. We have outlined a broad set of proposals for achieving these. We provided detailed and extensive legislative language. We welcome the time and effort you have already put into considering these proposals and the suggestions you have made, many of you individually and collectively, have made to improve them. As the President likes to say, we don't have a monopoly of wisdom on these things. Our test is, what is going to work? That is our test. What will work? What will create a more stable system, better protections, with less risk to the taxpayer? I want to focus my remarks briefly on what I think are the two key challenges before us at the center of any debate on reform. The first is about how you achieve the right balance between consumer protection and choice and competition. And the other is how to deal with the moral-hazard risk people refer to as ``too-big-to-fail.'' So, first, on the consumer challenge, our system of rules and enforcement failed to protect consumers and investors. The failures were extensive and costly. They caused enormous damage not just to those who were the direct victims of predatory practice, fraud, and deception, but to millions of others who lost their jobs and their homes or their savings in the wake of the crisis. And to fix this--and I will just say it simply--we need to have strong minimum national standards for protection. They need to apply not just to banks but to institutions that compete with banks in the business of providing credit. They need to be enforced effectively, consistently, and fairly. And there need to be consequences for firms that engage in unfair, ineffective practices, consequences that are strong enough to deter that behavior. We believe we cannot achieve that within our current framework of diffused authority with the responsibility divided among a complex mix of different supervisors and authorities who have different missions and many other priorities. We think it requires fundamental overhaul so that consumers can understand the risks of the products they are sold and have reasonable choices, and institutions have to live with some commonsense rules about financial credit. Of course, the challenge is to do this without limiting consumer choice, without stifling competition that is necessary for innovation, and without creating undue burden and cost on the system. Our proposal tries to achieve this balance by consolidating the fragmented, scattered authorities that are now spread across the Federal Government and State government. And it is designed to save institutions that are so important to our communities--credit unions, community banks, other institutions that provide credit--from making that untenable choice between losing revenue, losing market share, or stooping to match the competitive practices that less responsible competitors engage in, competitors that had no oversight, that were allowed to engage in systematic predatory practices without restraint. Now, some have suggested that, to ensure no increase in regulatory burden, we should separate rule-writing authority from enforcement. But our judgment is this is a recipe for bad rules that are weakly enforced--a weaker agency. So we think we need one entity with a clear mission, the authority to write rules and enforce them. Now, just briefly on this deeply important, consequential question of moral hazard and ``too-big-to-fail,'' no financial system can function effectively if institutions are allowed to operate with the expectation they are going to be protected from losses. And we can't have a system in which taxpayers are called on to absorb the costs of failure. We can't achieve this with simple declarations of intent to let future financial crises burn themselves out. We need to build a system that is strong enough to allow firms to fail without the risk of substantial collateral damage to the economy or to the taxpayer. And this requires that we have the tools and authority to unwind, dismantle, restructure, or close large institutions that are at the risk of failure without the taxpayers assuming the burden. It requires that banks pay for the costs incurred by the government in acting to contain the damage caused by bank failures. And this requires higher capital standards, tougher constraints on leverage across-the-board, with more rigorous standards applied to those who are the largest, most complicated, posing the biggest risks to the system. Now, this package of measures is central to reform. You can't do each of these and expect it to work. You have to take a broad, comprehensive approach. And the central objective, again, is to make the system strong enough so we can allow failure to happen in a way that doesn't cause enormous collateral damage to the economy and to the taxpayer. As the President said last week, taxpayers shouldered the burden of the bailout, and they are still bearing the burden of the fallout in lost jobs, lost homes, and lost opportunities. We look forward to working with this committee to help create a more stable system. We can't let the momentum for reform fade as the memory of the crisis recedes. Thank you, Mr. Chairman. [The prepared statement of Secretary Geithner can be found on page 54 of the appendix.] " CHRG-111shrg54675--83 PREPARED STATEMENT OF FRANK MICHAEL President and Chief Executive Officer, Allied Credit Union, Stockton, California, On Behalf of the Credit Union National Association July 8, 2009 Chairman Johnson, Ranking Member Crapo, and Members of the Financial Institutions Subcommittee, thank you very much for the opportunity to testify at today's hearing on ``The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities'' on behalf of the Credit Union National Association (CUNA). CUNA is the Nation's largest credit union advocacy organization, representing over 90 percent of our Nation's approximately 8,000 State and Federal credit unions, their State credit union leagues, and their 92 million members. My name is Frank Michael, and I am President and CEO of Allied Credit Union in Stockton, California. Allied Credit Union is a small institution with $20 million in assets and approximately 2,600 member-owners. Originally my credit union's field of membership was limited to Greyhound bus drivers but it has grown to include employees served by a variety of labor union locals, those who live, work, worship, or attend school in the incorporated and unincorporated areas of Stockton, California, and employees of a number of companies outside of Stockton proper. I also serve as Chair of CUNA's Small Credit Union Committee--which is charged with monitoring issues affecting small credit unions that operate in both urban and rural settings. I am honored to be here to speak to you about the present state of small credit unions in rural communities, the obstacles these institutions are encountering, and the effects of recent legislation on these institutions.Credit Unions Stand Apart From Other Financial Institutions I would like to emphasize that while I am here to represent the views of ``small'' credit unions, credit unions are generally very small by banking industry standards: The average credit union has roughly $110 million in total assets whereas the average banking institution is 15 times larger with $1.7 billion in total assets. \1\ (The median size credit union has just $15 million in total assets and the median size bank is about 10 times larger with $146 million in total assets).--------------------------------------------------------------------------- \1\ Financial data is as of March 2009. Credit union data is from the NCUA, bank data is from the FDIC.--------------------------------------------------------------------------- It is also important to stress that credit unions--rural, urban, large, and small--did not contribute to the subprime meltdown or the subsequent credit market crisis. Credit unions are careful lenders. And, as not-for-profit membership cooperatives the overriding operating objective at credit unions is to maximize member service. Incentives at credit unions are aligned in a way that ensures little or no harm is done to the member-owners. As we have seen, the incentives outside of the credit union sector are aligned in a way that can (and often does) cause harm to consumers. In the case of toxic mortgages such as subprime mortgages, entities operating outside of the cooperative sector focused on maximizing loan originations (specifically fee income from those originations) even though many of the loans originated were not in the borrower's best interest. Further, credit unions hold most of their loans in portfolio. In recent years, 70 percent of credit union mortgage originations have been held in portfolio--only 30 percent have been sold into the secondary market. In the broader credit union loan portfolio the percentage held is even higher. The maintenance of this ownership interest means that credit unions care deeply about what ultimately happens to the loans they originate--they care if the loans are paid back. The subprime crisis, in contrast, has been closely linked to lenders who adopted the originate-to-sell model. These lenders cared little about repayments because the quality of the loans they sold became someone else's problem. In the end these structural and operational differences translated into high asset quality at credit unions. \2\ Annualized first quarter 2009 net charge-offs at credit unions were equal to 1.11 percent of average loans outstanding. In the same period, banking industry net charge-offs were 1.94 percent.--------------------------------------------------------------------------- \2\ High credit union asset quality is doubly impressive given the exemplary record of credit union success in serving those of modest means. For example, credit union mortgage loan delinquency and chargeoff rates are very low compared to other lenders. At the same time Home Mortgage Disclosure Act (HMDA) statistics consistently show that lower income and minority borrowers in the market for mortgages are substantially more likely to be approved for a loan at a credit union. HMDA data also shows that compared to other lenders, a greater percentage of total credit union home loans are granted to low/moderate income consumers.--------------------------------------------------------------------------- Delinquency rates--a forward-looking indicator of credit quality also highlights the credit union difference. As of March 2009, 60+ day dollar delinquency rates on credit union loans were 1.44 percent. In contrast the banking industry's 90+ day dollar delinquency rate was 3.88 percent--over two-and-one-half times higher than the credit union norm despite an additional 30 days of collection efforts. High asset quality helped to keep credit union capital ratios near record levels. At the end of March 2009 the aggregate credit union net worth ratio was 10 percent--substantially higher than the 7 percent regulatory standard that institutions need to be considered ``well capitalized.'' Strong asset quality and high capital kept most credit unions ``in the game'' while the other lenders pulled back and significantly tightened loan underwriting standards. Overall, loan growth rates at credit unions have remained comparatively high. In the year ending March 2009, credit union loans grew by 6 percent--a rate of increase that is well above the 2 percent to 3 percent growth credit unions usually see in consumer-led recessions and a stark contrast to the 3 percent decline in bank loans over the same timeframe. Real estate loans at credit unions grew by nearly 9 percent in the year ending March 2009, while banking industry real estate loans declined by approximately 2 percent. Business loans at credit unions grew by nearly 16 percent in the year ending March 2009, whereas commercial loans at banking institutions declined by 3 percent. Importantly, credit union pricing continues to reflect a strong, long-standing consumer-friendly orientation. According to Datatrac, a national financial institution market research company, credit union average loan rates have remained far lower than those in the banking arena and credit union average yields on savings accounts have remained far higher than those in the banking arena. The pricing advantage to credit union members is evident on nearly every account that Datatrac measures. In the aggregate, CUNA economists estimate that the credit union pricing advantage saved credit union members $9.25 billion in 2008 alone. \3\ This makes a significant difference to tens of millions of financially stressed consumers throughout the Nation.--------------------------------------------------------------------------- \3\ This estimate does not include the procompetitive effects credit union pricing has on banking institutions. Several recent studies indicate that the credit union presence causes other institutions to price in a more consumer-friendly fashion, saving consumers several billions of dollars annually. See Feinberg (2004) and Tokel (2005).--------------------------------------------------------------------------- While credit unions have generally fared well, they are not immune from the effects of the financial crisis. Of course, the ``too-big-to-fail'' issue roils many small credit unions, including those operating in rural areas. In addition, there are some natural person credit unions, especially in States such as California, Florida, Arizona, Nevada, and Michigan that are experiencing serious financial stresses, including net worth strains, primarily as a result of the collateral effects of their local economic environments. Within the credit union system, the corporate credit union network has been particularly hard hit as credit market dislocations saddled several of these institutions with accounting losses on mortgage-backed and asset-backed securities. There are currently 28 corporate credit unions, which are owned by their natural person credit union members. Corporate credit unions are wholesale financial institutions that provide settlement, payment, liquidity, and investment services to their members. The powers of corporate credit unions differ from natural person credit unions. For example, the mortgage backed and asset backed securities that are permissible investments for corporate credit unions and not generally permissible for natural person credit unions. For the most part, the problematic securities were tripled-A rated at the time the corporate credit unions purchased them. However, as a result of the impact of the economy on the securities, and the mortgages and other assets underlying the securities, the National Credit Union Administration (NCUA) has projected substantial credit losses relating to these securities. The recently enacted, ``Helping Families Save Their Homes Act of 2009'' gave NCUA additional tools with which to assist credit unions in dealing with costs related to Corporate Credit Union stabilization actions. We applaud the Banking Committee's leadership on that issue, and thank Congress for acting expeditiously to address these concerns. These stabilization efforts permit credit unions to continue to provide high levels of membership service while reducing the immediate financial impact on credit unions and ensuring the maintenance of a safe and strong Nation Credit Union Share Insurance Fund.Rural Credit Unions Are Playing a Vital Role in the Economic Recovery Rural credit unions are unique in many respects. \4\ There are nearly 1,500 U.S. credit unions with a total of $60 billion in assets headquartered in rural areas. These institutions represent 19 percent of total credit unions and 7 percent of total U.S. credit union assets.--------------------------------------------------------------------------- \4\ For purposes of this analysis ``rural'' areas are defined as non-MSA counties, consistent with OMB definitions. This definition includes 64 percent of U.S. counties and 16 percent of the total U.S. population. Of course, many credit unions that are headquartered in urban areas have branches in rural areas. These institutions are not included in our analysis because financial results are not available at the branch level.--------------------------------------------------------------------------- Rural credit unions tend to be small--even by credit union standards. On average, rural credit unions have just $39 million in total assets (making them about one-third the size of the average U.S. credit union and one-fortieth the size of the average U.S. banking institution.) In addition, nearly one-quarter (23 percent) of rural credit unions operate with one or fewer full-time equivalent employee. Over half (54 percent) of rural credit unions are staffed by five or fewer full-time equivalent employees. These differences mean that even in good times, rural credit unions tend to face challenges in a way that larger credit unions do not. Pressures on the leaders of these small credit unions are great because they must be intimately involved in all aspects of credit union operations. Their small size, without the benefits of economies of scale, magnifies the challenges they face. Competitive pressures from large multistate banks and nontraditional financial services providers each increasingly provide substantial challenges. Greater regulatory burdens, growing member sophistication, loss of sponsors, and difficulties in obtaining training and education also loom large for most of the Nation's small credit unions. A bad economy can make things even worse. Small credit unions have very close relationships with their members. And member needs increase dramatically during recessions: They experience more personal financial difficulty; job losses mount; retirement funds dwindle; debt loads balloon; divorce rates rise. Small institutions come under tremendous pressure as they attempt to advise, consult with, and lend to these members. Despite these substantial hurdles rural credit unions are posting comparatively strong results: Their loan and savings growth rates are nearly identical to the national credit union norms. Their delinquency rates are nearly identical to the national average and their net chargeoff rates are about one-half the national credit union norm. They posted earnings declines, but also reflected stronger earnings results and report higher net worth ratios than the national credit union averages.Rural Credit Unions Face Growing Concerns Although small, rural credit unions are relatively healthy and continue to play a vital role in the Nation's economic recovery, that role is being threatened. There are several concerns raised by small credit unions--and rural credit unions in particular--that deserve mention.Regulatory Burden and Reregulation. The credit union movement is losing small institutions at a furious pace--about one per day. Many of these are rural credit unions. The rate of decline does not seem to be slowing and most observers expect the pace to accelerate. The declines do NOT reflect failures but arise from voluntary mergers of small institutions into larger institutions. If you ask small institutions, they will tell you that one of the larger contributors to this consolidation is the smothering effect of the current regulatory environment. Small credit union operators believe that the regulatory scrutiny they face is inconsistent with both their exemplary behavior in the marketplace and with the nearly imperceptible financial exposure they represent. A large community of small credit unions, free of unnecessary regulatory burden, benefits the credit union movement, the public at large and especially our rural communities. As the Subcommittee considers regulatory restructuring proposals, we strongly urge you to continue to keep these concerns in the forefront of your decision making. Moreover, we implore you to look for opportunities to provide exemptions from the most costly and time-consuming initiatives to cooperatives and other small institutions. Both the volume of rules and regulations as well as the rate of change in those rules and regulations are overwhelming--especially so at small institutions with limited staff resources. Additionally, rural credit unions, like all credit unions, play ``by the rules.'' Yet, they correctly worry that they will be forced to pay for the sins of others and that they will be saddled with heavy additional burdens as efforts to reregulate intensify. Nevertheless, while others in the financial services community call for the Administration to back down on plans to create a separate Consumer Financial Protection Agency (CFPA), CUNA President and CEO Dan Mica met with Treasury Secretary Geithner last week to discuss the administration's financial regulatory overhaul legislation. In that meeting, Mr. Mica signaled our willingness to work with the administration and Congress, to maintain a seat at the table and to continue the conversation to obtain workable solutions. Credit union member-ownership translates to a strong proconsumer stance but that stance must be delicately balanced with the need keep our member-owned institutions an effective alternative in the marketplace. Of course, any new legislation and regulation comes with possibility of unintended consequences, and credit unions are particularly sensitive to the unintended consequences of otherwise well-intentioned legislation, especially given an issue that has arisen with respect to the Credit Card Accountability Responsibility and Disclosure Act (CARD Act).Credit Card Accountability, Responsibility and Disclosure Act CUNA supports the intent of the CARD Act to eliminate predatory credit card practices. Although it will require some adjustments in credit card programs in the next 6 weeks to provide a change-in-terms notice 45 days in advance and to require periodic statements to be mailed at least 21 days in advance before a late charge can be assessed, CUNA supports these provisions and credit unions are diligently working with their data processors to effectuate these changes by the August 20, 2009, effective date. However, Section 106 of the CARD Act also requires, effective August 20, 2009, that the periodic statements for all open-end loans--not just credit card accounts--be provided at least 21 days before a late charge can be assessed. This means that a creditor must provide periodic statements at least 21 days in advance of the payment due date in order to charge a late fee. Open-end loans include not only credit cards, but also lines of credit tied to share/checking accounts, signature loans, home equity lines of credit, and other types of loans where open-end disclosures are permitted under Regulation Z, the implementing regulations for the Truth in Lending Act. We believe extending the requirements of this provision beyond credit cards was unintended, and ask Congress to encourage the Federal Reserve Board to postpone the effective date of this provision. If this provision is not postponed and considered further, the implementation of this provision will impose a tremendous hardship on credit unions. Simply put, we do not think credit unions can dismantle and restructure open-end lending programs they have used for decades in order to meet the August 20th deadline. By way of background, this provision appeared for the first time in the Senate manager's amendment to H.R. 627. The House-passed bill only applied the 21-day requirement to credit cards and was to be effective in 2010. During the Senate's consideration of this issue, the 21-day requirement was described as applying only to credit cards. \5\ In the weeks since enactment, many began to notice that the provision was not limited to credit card accounts and wondered if it was a drafting error. The confusion over this provision continues, as evidenced by the fact that as recently as June 25, the Office of Thrift Supervision released a summary of the CARD Act which states that the 21-day rule only applies to credit cards. \6\--------------------------------------------------------------------------- \5\ Remarks of Senator Dodd during consideration of S. Amdt. 1058 to H.R. 627. Congressional Record. May 11, 2009, S5314. \6\ http://files.ots.gslsolutions.com/25308.pdf.--------------------------------------------------------------------------- There is a great deal of uncertainty about this particular provision, which makes it quite understandable that creditors may not even know about the ramifications of this new provision and the changes they need to have in place in 6 weeks. This provision creates unique issues for credit unions because of their membership structure; as you know, credit unions serve people within their fields of membership who choose to become members. Because of this membership relationship, most credit unions provide monthly membership statements which combine information on a member's savings, checking and loan accounts other than for credit cards. For almost 40 years--since the implementation of Regulation Z--credit unions have been authorized to use multifeatured open-end lending programs that allow credit unions to combine an array of loan products and provide open-end disclosures for compliance purposes. Today, almost half of the Nation's credit unions--about 3,500 credit unions--use these types of open-end programs, which can include as open-end lending products loans secured by automobiles, boats, etc. CUNA is still trying to determine the full impact of the new law if credit unions will have to provide a 21-day period before the payment due date of all open-end loan products. Here are some preliminary compliance problems we have identified: 1. Credit unions will need to consider discontinuing the use of consolidated statements, something they cannot possibly do in the next 6 weeks, because different loans on the statements often have different due dates. 2. In order to comply with the 21-day mailing period, credit union members will no longer be able to select what day of the month they want designate as their due date for their automobile payments, a practice often allowed by credit unions, and no longer may be able to have biweekly payments to match repayments with biweekly pay checks, which helps members to budget. 3. Credit unions may have to discontinue many existing automated payment plans that will fail to comply with the 21-day requirement and work with members to individually work out new plans in order to comply with the law. 4. The 21-day requirement as it applies to home equity lines of credit (HELOCs) may raise contractual problems that cannot be easily resolved. These complicated changes simply cannot be executed within the next 6 weeks, and CUNA requests that Congress urge Federal Reserve Board to limit the August 20 effective date to the two credit card provisions in Section 106, at least for credit unions.Credit Union Lending to Small Businesses As noted above, credit unions have been able to ``stay in the game'' while other lenders have pulled back. The credit crisis that many small businesses face is exacerbated by the fact that credit unions are subject to a statutory cap on the amount of business lending they can do. This cap--which is effectively 12.25 percent of a credit union's total assets--was imposed in 1998, after 90 years of credit unions offering these types of loans to their members will no significant safety and soundness issues. CUNA believes that the greater the number of available sources of credit to small business, the more likely a small business can secure funding and contribute to the Nation's economic livelihood. Currently, 26 percent of all rural credit unions offer member business loans to their members. These loans represent over 9 percent of total loans in rural credit union portfolios. In contrast member business loans account for less than 6 percent of total loans in the movement as a whole. Total member business loans at rural credit unions grew by over 20 percent in the year ending March 2009, with agricultural MBLs increasing by over 12 percent and Non-Ag MBLs increasing 26 percent in the 12 month period. This is strong evidence that rural credit unions remain ``in the game'' during these trying times. But more could be done. And more should be done. A chorus of small business owners complains that they can't get access to credit. Federal Reserve surveys show that the Nation's large banks tightened underwriting standards for the better part of the past year. In 2005, an SBA research publication noted that large bank consolidation is making it more difficult for small businesses to obtain loans. \7\ Given the fact that the average size of a credit union member business loan is approximately $216,000 this is a market that credit unions are well suited to serve. And this is a market that credit unions are eager to serve.--------------------------------------------------------------------------- \7\ Small Business Administration. The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks. March 2005.--------------------------------------------------------------------------- Chairman Johnson, you undoubtedly hear a lot of rhetoric surrounding credit union member business lending. However, please allow me to paint a more complete picture of the member business loan (MBL) activity of credit unions. Member business loans that credit unions provide their members are relatively small loans. Nationally, credit union business lending represents just over one percent (1.06 percent) of the depository institution business lending market; credit unions have about $33 billion in outstanding business loans, compared to $3.1 trillion for banking institutions. \8\ In general, credit unions are not financing skyscrapers or sports arenas; credit unions are making loans to credit union members who own and operate small businesses.--------------------------------------------------------------------------- \8\ All financial data is March 2009. Credit union data is from NCUA; Bank data is from FDIC.--------------------------------------------------------------------------- Despite the financial crisis, the chief obstacle for credit union business lending is not the availability of capital--credit unions are, in general, well capitalized. Rather, the chief obstacle for credit unions is the arbitrary statutory limits imposed by Congress in 1998. Under current law, credit unions are restricted from member business lending in excess of 12.25 percent of their total assets. This arbitrary cap has no basis in either actual credit union business lending or safety and soundness considerations. Indeed, a subsequent report by the U.S. Treasury Department found that business lending credit unions were more regulated than other financial institutions, and that delinquencies and charge-offs for credit union business loans were ``much lower'' than that for either banks or thrift institutions. \9\--------------------------------------------------------------------------- \9\ United States Department of Treasury, ``Credit Union Member Business Lending.'' January 2001.--------------------------------------------------------------------------- The statutory cap on credit union member business lending restricts the ability of credit unions offering MBLs from helping their members even more, and discourages other credit unions from engaging in business lending. The cap is a real barrier to some credit unions establishing an MBL program at all because it is costly to create an MBL program and it is easy to reach the cap in fairly short order--this is especially true for small rural institutions. The cap effectively limits entry into the business lending arena on the part of small- and medium-sized credit unions because the startup costs and requirements, including the need to hire and retain staff with business lending experience, exceed the ability of many credit unions with small portfolios to cover these costs. For example, the average rural credit union that does not now engage in business lending has $17 million in average assets. At the institution level, that translates to roughly $2 million in MBL authority which, in turn translates to an average of only nine loans. The cap is overly restrictive and undermines public policy to support America's small businesses. It severely restricts the ability of credit unions to provide loans to small businesses at a time when small businesses are finding it increasingly difficult to obtain credit from other types of financial institutions, especially larger banks. Today, only one in four credit unions have MBL programs and aggregate credit union member business loans represent only a fraction of the commercial loan market. Eliminating or expanding the limit on credit union member business lending would allow more credit unions to generate the level of income needed to support compliance with NCUA's regulatory requirements and would expand business lending access to many credit union members, thus helping local communities and the economy. While we support strong regulatory oversight of how credit unions make member business loans, there is no safety and soundness rationale for the current law which restricts the amount of credit union business lending. There is, however, a significant economic reason to permit credit unions to lend without statutory restriction, as they were able to do prior to 1998: America's small businesses need the access to credit. As the financial crisis has worsened, it has become more difficult for small businesses to get loans from banks, or maintain the lines of credit they have had with their bank for many years. A growing list of small business and public policy groups agree that now is the time to eliminate the statutory credit union business lending cap, including the Americans for Tax Reform, the Competitive Enterprise Institute, the Ford Motor Minority Dealer Association, the League of United Latin American Citizens, the Manufactured Housing Institute, the National Association for the Self Employed, the National Association of Mortgage Brokers, the National Cooperative Business Association, the National Cooperative Grocers Association, the National Farmers Union, the National Small Business Association, the NCB Capital Impact, and the National Association of Professional Insurance Agents. We hope that Congress will eliminate the statutory business lending cap entirely, and provide NCUA with authority to permit a CU to engage in business lending above 20 percent of assets if safety and soundness considerations are met. We estimate that if the cap on credit union business lending were removed, credit unions could--safely and soundly--provide as much as $10 billion in new loans for small businesses within the first year. This is economic stimulus that would not cost the taxpayers a dime, and would not increase the size of government.Conclusion In closing, Chairman Johnson, Ranking Member Crapo, and all the Members of this Subcommittee, we appreciate your review of these issues today. Every day, credit unions reinforce their commitment to workers, small business owners, and a host of others in rural communities seeking to better their quality of life by providing loans on terms they can afford and savings rates that are favorable. We look forward to working with you to ensure the credit union system continues to be an important bulwark for the 92 million individuals and small businesses that look to their credit union for financial strength and support. ______ CHRG-110hhrg44901--42 Mr. Bernanke," Well, at the current moment, as we all know, the subprime market is pretty moribund, and so these rules are important but they are not having much impact on the market. What we hope to do is have rules in place so that when the market comes back, as it some day will, that the lending will be done in a way that is prudent and also supportive of homeownership among people with a more modest means. That is our intention, and we have followed the regulatory principles in order to do that. " CHRG-110hhrg41184--199 Mr. Bernanke," Again, the concern is that the economy will be producing less than its capacity, that there will be insufficient demand to use the existing capacity of the economy--that is the definition of economic slow-down. So, monetary policy and fiscal policy can be used to address that problem. I don't think it would change the practices of lenders, but it might make them somewhat more confident that the economy would be stronger and make them a little bit more willing to lend. " FinancialCrisisReport--6 Documents obtained by the Subcommittee reveal that WaMu launched its high risk lending strategy primarily because higher risk loans and mortgage backed securities could be sold for higher prices on Wall Street. They garnered higher prices because higher risk meant the securities paid a higher coupon rate than other comparably rated securities, and investors paid a higher price to buy them. Selling or securitizing the loans also removed them from WaMu’s books and appeared to insulate the bank from risk. The Subcommittee investigation indicates that unacceptable lending and securitization practices were not restricted to Washington Mutual, but were present at a host of financial institutions that originated, sold, and securitized billions of dollars in high risk, poor quality home loans that inundated U.S. financial markets. Many of the resulting securities ultimately plummeted in value, leaving banks and investors with huge losses that helped send the economy into a downward spiral. These lenders were not the victims of the financial crisis; the high risk loans they issued were the fuel that ignited the financial crisis. (2) Regulatory Failure: Case Study of the Office of Thrift Supervision The next chapter focuses on the failure of the Office of Thrift Supervision (OTS) to stop the unsafe and unsound practices that led to the demise of Washington Mutual, one of the nation’s largest banks. Over a five year period from 2004 to 2008, OTS identified over 500 serious deficiencies at WaMu, yet failed to take action to force the bank to improve its lending operations and even impeded oversight by the bank’s backup regulator, the FDIC. Washington Mutual Bank was the largest thrift under the supervision of OTS and was among the eight largest financial institutions insured by the FDIC. Until 2006, WaMu was a profitable bank, but in 2007, many of its high risk home loans began experiencing increased rates of delinquency, default, and loss. After the market for subprime mortgage backed securities collapsed in July 2007, Washington Mutual was unable to sell or securitize its subprime loans and its loan portfolio fell in value. In September 2007, WaMu’s stock price plummeted against the backdrop of its losses and a worsening financial crisis. From 2007 to 2008, WaMu’s depositors withdrew a total of over $26 billion in deposits from the bank, triggering a liquidity crisis, followed by the bank’s closure. OTS records show that, during the five years prior to WaMu’s collapse, OTS examiners repeatedly identified significant problems with Washington Mutual’s lending practices, risk management, asset quality, and appraisal practices, and requested corrective action. Year after year, WaMu promised to correct the identified problems, but never did. OTS failed to respond with meaningful enforcement action, such as by downgrading WaMu’s rating for safety and soundness, requiring a public plan with deadlines for corrective actions, or imposing civil fines for inaction. To the contrary, until shortly before the thrift’s failure in 2008, OTS continually rated WaMu as financially sound. The agency’s failure to restrain WaMu’s unsafe lending practices stemmed in part from an OTS regulatory culture that viewed its thrifts as “constituents,” relied on bank management to correct identified problems with minimal regulatory intervention, and expressed reluctance to interfere with even unsound lending and securitization practices. OTS displayed an unusual amount of deference to WaMu’s management, choosing to rely on the bank to police itself in its use of safe and sound practices. The reasoning appeared to be that if OTS examiners simply identified the problems at the bank, OTS could then rely on WaMu’s assurances that problems would be corrected, with little need for tough enforcement actions. It was a regulatory approach with disastrous results. fcic_final_report_full--112 During the early years of the CRA, the Federal Reserve Board, when considering whether to approve mergers, gave some weight to commitments made to regulators. This changed in February , when the board denied Continental Bank’s applica- tion to merge with Grand Canyon State Bank, saying the bank’s commitment to im- prove community service could not offset its poor lending record.  In April , the FDIC, OCC, and Federal Home Loan Bank Board (the precursor of the OTS) joined the Fed in announcing that commitments to regulators about lending would be con- sidered only when addressing “specific problems in an otherwise satisfactory record.”  Internal documents, and its public statements, show the Fed never considered pledges to community groups in evaluating mergers and acquisitions, nor did it en- force them. As Glenn Loney, a former Fed official, told Commission staff, “At the very beginning, [we] said we’re not going to be in a posture where the Fed’s going to be sort of coercing banks into making deals with . . . community groups so that they can get their applications through.”  In fact, the rules implementing the  changes to the CRA made it clear that the Federal Reserve would not consider promises to third parties or enforce prior agree- ments with those parties. The rules state “an institution’s record of fulfilling these types of agreements [with third parties] is not an appropriate CRA performance cri- terion.”  Still, the banks highlighted past acts and assurances for the future. In , for example, when NationsBank said it was merging with BankAmerica, it also an- nounced a -year,  billion initiative that included pledges of  billion for af- fordable housing,  billion for consumer lending,  billion for small businesses, and  and  billion for economic and community development, respectively. This merger was perhaps the most controversial of its time because of the size of the two banks. The Fed held four public hearings and received more than , com- ments. Supporters touted the community investment commitment, while opponents decried its lack of specificity. The Fed’s internal staff memorandum recommending approval repeated the Fed’s insistence on not considering these promises: “The Board considers CRA agreements to be agreements between private parties and has not fa- cilitated, monitored, judged, required, or enforced agreements or specific portions of agreements. . . . NationsBank remains obligated to meet the credit needs of its entire community, including [low- and moderate-income] areas, with or without private agreements.”  FOMC20080724confcall--110 108,MR. ALVAREZ.," I think you have all received the resolution. It is the second resolution on the third page. ""The FOMC extends until January 30, 2009, its authorizations for the Federal Reserve Bank of New York to engage in transactions with primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established by the Committee."" " FOMC20080430meeting--24 22,CHAIRMAN BERNANKE.," Well, we have seen the breakdown of a particular structure of lending that was based on the credit ratings. The credit ratings have proven to be false. Therefore, there is an informational deficit--an asymmetric information problem, would be my interpretation--which has, in turn, triggered a massive change in preferences. But I don't think we are going to settle this at the table here. President Evans. " FOMC20070918meeting--37 35,MR. LACKER.," Both large banks in our District have gone from being net borrowers to being large net lenders. One, in fact, says it’s the largest in the market and lends $10 billion to $15 billion every night overnight, and they used to borrow a couple of billion dollars every day. Could something like that account for the volume in the funds market?" FinancialCrisisInquiry--62 In the consumer area—and there are other people here who have consumer businesses— clearly, all that’s been written about origination and Jamie referred to stated income without tests, and I’m sure he can pick up that cudgel and talk about on the consumer side. On the more corporate side, I would say it had to do with leverage and it had to do with terms, covenants, conditions. The markets got more competitive. There was a sense that the world had a lot of liquidity. And so the commodity of money got less scarce and people paid less attention to it. BLANKFEIN: And as a consequence, people were lending to support transactions, which is a business that we’re very familiar with, that had more multiples of debt for the equity and the conditions that applied—the covenants, the maintenance, the things that allowed a lender to intervene in the company became more and more lax, and so you could intervene less. So that lack of rigor on the—on the transactional side I think had its counterpart in the consumer side and in the commercial lending side, which others here are more familiar with. HOLTZ-EAKIN: Were you aware of this at the time? Did you see the standards going down? And if so, how did you highlight this in your risk management? BLANKFEIN: In all honesty, we did—we did know. You cannot miss the fact that the covenants are getting a little lighter and that the leverage is getting bigger. With the benefit of hindsight, I wish I weren’t in the position of having to explain it. But at the time, I know we all rationalized the way a lot of people—other people—have rationalized. “Gosh, the world is getting wealthier. Technology has done things. Things are more efficient. Interest—there’s no inflation. Things belong low. These businesses are going to do well.” And I think we talked—much of the world did—talked yourself into a—into a place of complacency, which we should not have gotten ourselves into and which, of course, after these events, will not happen again in my lifetime, as far as I’m concerned. CHRG-111hhrg54872--140 Mr. Calhoun," If I can add, the question boils down to who do you the Congress want to trust carrying out this authority. For me a telling statistic, we heard about the disparate lending practices, but if you look from 2002 to 2008, the OCC did not make a single referral to the Department of Justice for equal credit violations. Do you want to trust authority back to them or do you want to try a different approach? " FOMC20050809meeting--89 87,MR. WILCOX.," It’s a measure of the sustainable rate of output which can be maintained with all other factors either contributing to inflation or deducting from inflation so that productive capacity isn’t itself lending any impetus up or down to inflation. That’s not to say that output can’t transitorily go above potential. It’s not to suggest that producers have met their physical capacity—their limit on production. August 9, 2005 25 of 110" CHRG-110hhrg44901--77 Mr. Bernanke," Well, first on the lending rules, the Federal Reserve normally issues guidance and rules for the banks that it supervises. But of course as the mortgage market has evolved, more and more mortgage lending took place in nonbank companies, various kinds of mortgage companies, brokers and the like. And our rules will apply to all of those types of companies. In some cases, when they are outside of our enforcement authority, we have to rely on State and other regulators to enforce the rules. And therefore, as part of this effort, we are working closely with them, doing some joint examination exercises, and so on, to try to help them ensure that they will enforce these rules. You made a good point, that the global oil market, about 84 million barrels a day, is large. And so it takes--you know, that very small change in oil supply and demand would not necessarily have a big effect. But I would make a couple of comments on that. One is that the fact that we have to import most of our oil hurts our trade balance, forces us to send money overseas, so to speak. It would be better for the dollar and better for our economic prosperity here at home if we had more sources of energy domestically. So that is one consideration. The other consideration is that--and we can see this in the tremendous movements in oil prices up and down, over a short-term period even though there is a large market, the elasticity of supply and demand, the ability of suppliers or demanders to change their behavior in the short run is quite limited. So sometimes relatively small events like a strike or political unrest in a given country can have a big effect on the price because there is so little spare capacity. So to the extent that that spare capacity could be enlarged and have more flexibility, that could have-- " CHRG-111hhrg48874--22 The Chairman," I will begin with Mr. Gruenberg. The assessment question is one, obviously, we are focused on. I hope I can reassure people to some extent. My understanding from the Chair, Ms. Bair, and with the concurrence I know of the Board, is if the Congress provides adequate additional lending authority so that the FDIC will be well-positioned in the case of any unforeseen, potential negatives, that the special assessment could be reduced from the proposed 20 cents. Is that accurate? " CHRG-111shrg51290--50 Mr. Bartlett," Yes, I do. Senator Shelby. Seventy percent, so say 19 banks in the United States have approximately 70 percent of all the deposits. Then you say every other bank, the 8,000 banks have 30 percent. But a lot of those 30 percent, a lot of those banks, although small, are very important to their communities and a lot of them have stayed with the fundamentals of banking and are relatively, as I understand Professor McCoy, in relatively good shape, considering the plight of some of the bigger ones. Is that fair? Ms. McCoy. Yes. Yes. When I looked at the smaller banks, for the most part, they were not into these mortgages. Senator Shelby. They weren't buying credit default swaps and all this from AIG, were they? Ms. McCoy. No. They had pretty simple balance sheets. Senator Shelby. Balanced. Ms. Seidman. Let me just say, though, that while in general the small banks are doing better than the very big ones, it would be hard to do a lot worse. But even though they didn't participate in the kind of lending we are talking about, some smaller banks, particularly those that are in communities that have been devastated by that kind of lending---- Senator Shelby. Sure. Ms. Seidman.----are running into trouble because the value of their loans is declining, and where you also have unemployment, the borrowers, even the prime borrowers, are in trouble. This is a big issue for some smaller banks. Senator Shelby. So a lot of that--I know it is everywhere to some extent, but a lot of the things you are referencing are in California, Florida, Nevada---- Ms. Seidman. And in the Upper Midwest. Senator Shelby. In the Upper Midwest, the Rust Belt. " FOMC20071206confcall--93 91,MR. MISHKIN.," Thank you, Mr. Chairman. I support both measures. The way I think about this is that the TAF, particularly, has the advantage of getting funds to the institutions that need it most. So it’s not so much that Operation Twist is the issue that’s relevant. The issue here is that distribution—where funds go—really does matter. That’s why I think that the discount facilities have a special role to play and, in fact, give us more flexibility. The TAF is a finer tool to get funds to different parts of the financial sector where they may do the most good. Therefore it gives us more options in focusing our overall market operations on monetary policy, which is exactly what they should be focused on. Clearly there is an issue that we create some moral hazard in terms of liquidity management, but I think that the danger here is not that large. I consider the moral hazard problem that might be created from people not worrying quite so much about liquidity management to be much less severe than the moral hazard in terms of credit risk. Second, a lot of the issue of moral hazard occurs when it is idiosyncratic—one institution is doing something, and they’re going to get away with it. Well, here clearly we are trying to deal with a systemic liquidity problem not with an idiosyncratic liquidity problem. Furthermore, there are protections here in terms of the credit risk—we are going to be lending only to institutions that qualify. The Reserve Banks, if they’re uncomfortable with having this facility go to a particular institution, can pull the plug. I think that’s extremely important. That’s exactly the key issue of the role that we have—we lend, but we know to whom we lend. So the Reserve Banks have an extremely important role to play in this regard. Obviously, we’re not sure that this is going to work. But in the circumstances, which are complicated and difficult, being creative and trying different things—ones that we think have very low downside risk but might have some positive benefits—is exactly what we need to do. In this context we are flying a little in difficult waters—I mixed the metaphor somehow on that one. [Laughter] But the key point is that this does have the backing in terms of thinking about how lender-of-last-resort operations can work well. This is not out of line with that. It is, I think, a more creative way of solving certain problems, and in my view, it’s definitely something that we should try. Thank you very much." FOMC20081216meeting--478 476,MR. PARKINSON.," Well, that's the fundamental problem. Again, some of them were these classes of investors, who are no longer around. Even if they were around, I don't think we'd want them around--the SIV and securities lenders et cetera. But then you have the pension funds, the insurance companies, and so forth that are not in the market, and this really doesn't do anything at least initially to bring them back to the market. We have scratched our heads at some length trying to figure out a program that the Federal Reserve could develop that would entice them into the market. But I think the fundamental problem is that our tool is the ability to lend, and if we're lending, there has to be a borrower. If you're talking about pension funds or life insurance companies that are not leveraged investors, it's just not clear how we can do much to help them get enthusiastic again about buying these securities. In the longer run, the agenda of providing liquidity to markets has to be joined with the reform agenda and figuring out what we can do to bring back confidence in structured credit products by those types of investors. There are lots of recommendations out there--from the President's Working Group and the Financial Stability Forum--and SIFMA came out with a long study about restoring confidence in the securitization markets. All of that, unfortunately, is going to take a while to implement, and as with so many other things these days, we're in uncharted territory. Nobody knows for sure, I think, whether any of those things, even though they make sense, will really be sufficient to bring those investors back. But as much as we try to come up with programs to address that, it seems at the moment to be beyond our power. " CHRG-111shrg62643--30 Mr. Bernanke," Senator, we have done a great deal of work on this and the addendum to my remarks gives you some of the findings of our meetings around the country on this issue. Certainly, a significant part of the reduction in lending to small business is the result either of lower demand, because firms don't want to expand, they don't have the final demand to grow---- Senator Shelby. Uncertainty, perhaps? " CHRG-110shrg50416--68 Mr. Kashkari," And so the immediate reactions may be more reserved. I think as things--as the markets begin to sort themselves out, I would expect to see these institutions lending. Senator Schumer. I would urge you to consider putting out these guidelines. And then there is one that may be easier. What about guidelines inveighing against new investments in these exotic financial instruments that brought so many of the institutions down to begin with? That is an easier one for you to write. " CHRG-111hhrg56778--69 Mr. Dilweg," I think one important point going back to Congressman Royce's question is, should we have seen it coming sooner? Should we have done something on securities lending? You are stuck looking at securities that are rated triple A. Now, once they all collapsed, all the various regulators were coordinating basically through New York, Pennsylvania, and Texas on the AIG side from the insurance side. " FOMC20081216meeting--463 461,MR. PARKINSON.," But we could accelerate that process by raising the minimum rate at which we would lend and so make it a higher spread above LIBOR. If we are going to do it through an auction--there are still some questions about how to allocate the credit within this program--and if there is a minimum rate at which we would make funds available in the auction (that would be the spread over LIBOR) and we adjust that spread upward, we're giving them more of a push to go back to relying on market financing. " CHRG-110hhrg46594--475 Mr. Slaughter," I am optimistic in the sense that it is thawing. I mean some of the spreads that Dr. Sachs referred to have been coming down in the past several days and a few weeks relative to the levels they hit in mid-September. I, like many other people, don't have great visibility about when we might get back to the type of lending activity we had 12 to 18 months ago. " CHRG-111hhrg48873--92 Secretary Geithner," That is a very important question. Thanks for asking it. Within the first weeks of taking office, we put in place a set of clear commitments to put in the public domain the precise terms of all the financial contracts that my predecessor entered into and that we would enter in the future that would provide taxpayer assistance to financial institutions under the Emergency Economic Stabilization Act. Because of that commitment, the American people will be able to see, as I said, the precise terms for the first time of those commitments. In addition, we are going to require extensive reporting by any recipient of TARP assistance to go into how they are going to use those resources, what it is going to do to their lending capacity, and what is actually happening to lending. We have proposed very strong conditions on compensation, on dividends, and a range of other things. But I completely agree that the American people deserve to see much higher standards for transparency and accountability over the use of these resources, and they are understandably skeptical that they are going to see enough benefit from these resources, in part because of the decisions you have seen made across the financial sector in the wake of Congress passing that exceptional authority back in September. " CHRG-110hhrg46596--485 Mr. Foster," Okay. And the second thing, I guess for both of you, you had mentioned two metrics, the TED spread and the LIBOR-OIS spread, as ways to tell that you have really unlocked at least the interbank lending part of this thing. And there are problems with both of these as metrics. You know, the Treasury rate is being depressed by this flight to safety and so on. And I was wondering, is there really some combination of metrics that will give us a better feeling than these sort of simple things that we are talking about now? " CHRG-111hhrg54869--117 Mr. Volcker," Well, bank lending, I guess, is declining. This is an area of the market that is still clogged up. It is a matter of confidence in part, in large part. And a lot of them are in financial difficulty. And I think it is going to take time for that to unlock. The big market has opened up considerably, but the small bank market has not, although there are some signs it is beginning to change. So I hope that we can see evidence of that before too long. " CHRG-111hhrg51698--50 Mr. Gooch," Yes. I think that there is a danger in doing something drastic with a marketplace that exists now that is very liquid, and has actually functioned very well throughout the credit crisis. I would just like to point out that the taxpayer, in any case, in the United States of America, 50 percent of the country doesn't even pay taxes under Obama's tax plans; and so they are not picking up the tab. During the boom, when things were going very well and profits were being made, the government was taking a 35 percent corporate tax, the government was taking 38 percent, 35 percent taxes on incomes, and 15 percent capital gains. So, during the boom times, the government was taking more than 50 percent of the upside. And when you go through a cycle, which this one happens to be extremely severe, the government needs to then become involved in stepping in and paying their fair share in stabilizing the marketplace. But to step in now and kill the credit derivative market at this point in time where we are very delicately trying to get banks to lend, and they won't lend until they get these bad assets off their balance sheets. All this money that is sitting on the sidelines is willing to sell credit derivatives, which reduces cost of borrowing; and they won't be willing to sell them if they can't buy them naked. You will kill the credit derivative market and, in my opinion, extend the recession, possibly even creating a deeper recession for a very, very long period of time. " CHRG-111hhrg72887--40 Mr. Rush," The Chair thanks the gentlelady. Now it is my honor and privilege to recognize this panel of experts that have taken time out from their busy schedules to participate in this hearing. They come from well-established institutions, and they are, indeed, highly esteemed individuals in their line of work. First of all, to my left is Ms. Eileen Harrington. Ms. Harrington has made a habit of coming before this committee, and you are always welcome. And she often appears before this subcommittee, and she is the Acting Director of the Bureau of Consumer Protection at the FTC. Next to Ms. Harrington is Ms. Kathleen Keest. She is the senior policy counsel for the Center for Responsible Lending. And our next witness and panelist is Mr. John Beisner. Mr. Beisner is the managing partner of the firm O'Meleveny & Myers. He is appearing on behalf of the U.S. Chamber of Commerce. I want you to know, again, that you are welcome to this committee. And we are looking forward to your testimony. And you can please begin your testimony with 5 minutes of opening statements. The Chair recognizes Ms. Harrington. STATEMENTS OF EILEEN HARRINGTON, ACTING DIRECTOR, BUREAU OF CONSUMER PROTECTION, FEDERAL TRADE COMMISSION; KATHLEEN KEEST, SENIOR POLICY COUNSEL, CENTER FOR RESPONSIBLE LENDING; AND JOHN BEISNER, MANAGING PARTNER, O'MELEVENY & MYERS, ON BEHALF OF THE FinancialCrisisReport--5 WaMu also originated an increasing number of its flagship product, Option Adjustable Rate Mortgages (Option ARMs), which created high risk, negatively amortizing mortgages and, from 2003 to 2007, represented as much as half of all of WaMu’s loan originations. In 2006 alone, Washington Mutual originated more than $42.6 billion in Option ARM loans and sold or securitized at least $115 billion to investors, including sales to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). In addition, WaMu greatly increased its origination and securitization of high risk home equity loan products. By 2007, home equity loans made up $63.5 billion or 27% of its home loan portfolio, a 130% increase from 2003. At the same time that WaMu was implementing its high risk lending strategy, WaMu and Long Beach engaged in a host of shoddy lending practices that produced billions of dollars in high risk, poor quality mortgages and mortgage backed securities. Those practices included qualifying high risk borrowers for larger loans than they could afford; steering borrowers from conventional mortgages to higher risk loan products; accepting loan applications without verifying the borrower’s income; using loans with low, short term “teaser” rates that could lead to payment shock when higher interest rates took effect later on; promoting negatively amortizing loans in which many borrowers increased rather than paid down their debt; and authorizing loans with multiple layers of risk. In addition, WaMu and Long Beach failed to enforce compliance with their own lending standards; allowed excessive loan error and exception rates; exercised weak oversight over the third party mortgage brokers who supplied half or more of their loans; and tolerated the issuance of loans with fraudulent or erroneous borrower information. They also designed compensation incentives that rewarded loan personnel for issuing a large volume of higher risk loans, valuing speed and volume over loan quality. As a result, WaMu, and particularly its Long Beach subsidiary, became known by industry insiders for its failed mortgages and poorly performing residential mortgage backed securities (RMBS). Among sophisticated investors, its securitizations were understood to be some of the worst performing in the marketplace. Inside the bank, WaMu’s President Steve Rotella described Long Beach as “terrible” and “a mess,” with default rates that were “ugly.” WaMu’s high risk lending operation was also problem-plagued. WaMu management was provided with compelling evidence of deficient lending practices in internal emails, audit reports, and reviews. Internal reviews of two high volume WaMu loan centers, for example, described “extensive fraud” by employees who “willfully” circumvented bank policies. A WaMu review of internal controls to stop fraudulent loans from being sold to investors described them as “ineffective.” On at least one occasion, senior managers knowingly sold delinquency-prone loans to investors. Aside from Long Beach, WaMu’s President described WaMu’s prime home loan business as the “worst managed business” he had seen in his career. CHRG-110hhrg46593--48 Mr. Bernanke," Well, I think we need to do what we need to do to keep the U.S. credit system working and to try to create a recovery in the financial system. By law, our lending has to be against fully collateralized, secure backing. We are actually making money in some of our programs. I don't see us as having a substantial exposure. It is a liquidity provisioning process, not a credit or a fiscal process. " CHRG-111hhrg53244--54 Mr. Bernanke," Many central banks around the world use what is called a corridor system, where they have an interest rate on reserves as the floor and then a lending rate like the discount window rate as the ceiling, and that keeps the market interest rate between those two levels. A lot of banks use that. So, yes, it is a very powerful tool; and we would not have been able to expand our balance sheet as we have if we had not had that tool to help us with the exit. " FOMC20080430meeting--257 255,MR. MEYER.," Though they had a few trades above their lending rate, in fact that was not much of a problem. Their system worked quite well. Interestingly, the country with the smallest rate volatility during the whole period of market turmoil was Canada, and that's because they knew the demand for balances at the end of every day and could adjust the supply by adjusting the government balance at the end of every day. So they hit it basically every day. " FinancialCrisisReport--183 At another point, the ROE warned: “Ensure cost-cutting measures are not impacting critical risk management areas.” 668 Another OTS examination that focused on WaMu’s holding company identified multiple risks associated with Long Beach: “[P]rimary risks associated with Long Beach Mortgage Company remain regulatory risk, reputation risk, and liquidity of the secondary market in subprime loans.” 669 Its concern about WaMu’s risk management practices prompted, in part, OTS’ requirement that WaMu commit its high risk lending strategy to paper and gain explicit approval from the Board of Directors. 2005 Risk Management Deficiencies. In 2005, after adoption of the High Risk Lending Strategy, OTS again highlighted risk management issues in its examination reports and again brought the matter to the attention of WaMu’s Board of Directors. In March 2005, OTS observed that WaMu’s five-year strategy, which increased credit risk for the bank, did not “clearly articulate the need to first focus on addressing the various operational challenges before embarking on new and potentially more risky growth initiatives.” 670 OTS also wrote: “We discussed the lack of a clear focus in the plan on resolving operational challenges with CEO Killinger and the Board.” 671 OTS continued to express concerns about the bank’s weak risk management practices for the rest of the year, yet took no concrete enforcement action to compel the bank to address the issue. In June 2005, OTS described risk management weaknesses within WaMu’s Corporate Risk Oversight group, a sub- group within the ERM Department responsible for evaluating credit and compliance risk. OTS wrote that it had deemed its comments as “criticisms” of the bank, because of the significance of the risk management function in addressing ongoing problems with the bank’s lending standards and loan error rates: “Most of the findings are considered ‘criticisms’ due to the overall significance of CRO [Corporate Risk Oversight] activities and the fact that we have had concerns with quality assurance and underwriting processes within home lending for several years.” 672 In August 2005, in its annual Report on Examination, OTS urged the WaMu Board to obtain progress reports from the ERM Department and ensure it had sufficient resources to 667 9/13/2004 OTS Report of Examination, at OTSWMS04-0000001504, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 668 Id. at OTSWMS04-000001488. 669 4/5/2004 OTS Report of Examination, at OTSWMEF-0000047477, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 670 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001509, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 671 Id. 672 6/1/2005 OTS Findings Memorandum, “Corporate Risk Oversight,” OTSWMS05-005 0002046, Hearing Exhibit 4/16-23. become an effective counterweight to the increased risk-taking entailed in the High Risk Lending Strategy: “Monitor and obtain reports from management on status of [Enterprise Risk FinancialCrisisReport--86 In June 2007, WaMu decided to discontinue Long Beach as a separate entity, and instead placed its subprime lending operations in a new WaMu division called “Wholesale Specialty Lending.” That division continued to purchase subprime loans and issue subprime securitizations. Some months later, an internal WaMu review assessed “the effectiveness of the action plans developed and implemented by Home Loans to address” the first payment default problem in the Wholesale Specialty Lending division. 255 After reviewing 187 FPD loans from November 2006 through March 2007, the review found: “The overall system of credit risk management activities and process has major weaknesses resulting in unacceptable level of credit risk. Exposure is considerable and immediate corrective action is essential in order to limit or avoid considerable losses, reputation damage, or financial statement errors.” 256 In particular, the review found: “Ineffectiveness of fraud detection tools – 132 of the 187 (71%) files were reviewed … for fraud. [The review] confirmed fraud on 115 [and 17 were] … ‘highly suspect’. ... Credit weakness and underwriting deficiencies is a repeat finding …. 80 of the 112 (71%) stated income loans were identified for lack of reasonableness of income[.] 133 (71%) had credit evaluation or loan decision errors …. 58 (31%) had appraisal discrepancies or issues that raised concerns that the value was not supported.” 257 July 2007 was a critical moment not only for WaMu, but also for the broader market for mortgage securities. In that month, Moody’s and S&P downgraded the ratings of hundreds of RMBS and CDO securities, including 40 Long Beach subprime securities. 258 The mass downgrades caused many investors to immediately stop buying subprime RMBS securities, and the securities plummeted in value. Wall Street firms were increasingly unable to find investors for new subprime RMBS securitizations. In August 2007, WaMu’s internal audit department released a lengthy audit report criticizing Long Beach’s poor loan origination and underwriting practices. 259 By that time, Long Beach had been rebranded as WaMu’s Wholesale Specialty Lending division, the subprime market had collapsed, and subprime loans were no longer marketable. The audit report nevertheless provided a detailed and negative review of its operations: 255 9/28/2007 “Wholesale Specialty Lending-FPD,” WaMu Corporate Credit Review, JPM_WM04013925, Hearing Exhibit 4/13-21. 256 Id. at 2. 257 Id. at 3. 258 7/10/2007-7/12/2007 excerpts from Standard & Poor’s and Moody’s Downgrades, Hearing Exhibit 4/23-99. 259 8/20/2007 “Long Beach Mortgage Loan Origination & Underwriting,” WaMu audit report, JPM_WM02548939, Hearing Exhibit 4/13-19. “[T]he overall system of risk management and internal controls has deficiencies related to multiple, critical origination and underwriting processes .… These deficiencies require immediate effective corrective action to limit continued exposure to losses. … Repeat Issue – Underwriting guidelines established to mitigate the risk of unsound underwriting decisions are not always followed …. Improvements in controls designed to ensure adherence to Exception Oversight Policy and Procedures is required …. [A]ccurate reporting and tracking of exceptions to policy does not exist.” 260 fcic_final_report_full--469 One of the many myths about the financial crisis is that Wall Street banks led the way into subprime lending and the GSEs followed. The Commission majority’s report adopts this idea as a way of explaining why Fannie and Freddie acquired so many NTMs. This notion simply does not align with the facts. Not only were Wall Street institutions small factors in the subprime PMBS market, but well before 2002 Fannie and Freddie were much bigger players than the entire PMBS market in the business of acquiring NTM and other subprime loans. Table 7, page 504, shows that Fannie and Freddie had already acquired at least $701 billion in NTMs by 2001. Obviously, the GSEs did not have to follow anyone into NTM or subprime lending; they were already the dominant players in that market before 2002. Table 7 also shows that in 2002, when the entire PMBS market was $134 billion, Fannie and Freddie acquired $206 billion in whole subprime mortgages and $368 billion in other NTMs, demonstrating again that the GSEs were no strangers to risky lending well before the PMBS market began to develop. Further evidence about which firms were first into subprime or NTM lending is provided by Fannie’s 2002 10-K. This disclosure document reports that 14 percent of Fannie’s credit obligations (either in portfolio or guaranteed) had FICO credit scores below 660 as of December 31, 2000, 16 percent at the end of 2001 and 17 percent at the end of 2002. 31 So Fannie and Freddie were active and major buyers of subprime loans in years when the PMBS market had total issuances of only $55 billion (2000) and $94 billion (2001). In other words, it would be more accurate to say that Wall Street followed Fannie and Freddie into subprime lending rather than vice versa. At the same time, the GSEs’ purchases of subprime whole loans throughout the 1990s stimulated the growth of the subprime lending industry, which ultimately became the mainstay of the subprime PMBS market in the 2000s. 2005 was the biggest year for PMBS subprime issuances, and Ameriquest ($54 billion) and Countrywide ($38 billion) were the two largest issuers in the top 25. These numbers were still small in relation to what Fannie and Freddie had been buying since data became available in 1997. The total in Table 7 for Fannie and Freddie between 1997 and 2007 is approximately $1.5 trillion for subprime loans and over $4 trillion for all NTMs as a group. Because subprime PMBS were rich in NTM loans eligible for credit under HUD’s AH goals, Fannie and Freddie were also the largest individual purchasers of subprime PMBS from 2002 to 2006, acquiring 33 percent of the total issuances, or $579 billion. 32 In Table 3 above, which organizes mortgages by delinquency rate, these purchases are included in line 1, which had the highest rate of delinquency. These were self-denominated subprime—designated as subprime by the lender when originated—and thus had low FICO scores and usually a higher interest rate than prime loans; many also had low downpayments and were subject to other deficiencies. Ultimately, HUD’s policies were responsible for both the poor quality of the subprime and Alt-A mortgages that backed the PMBS and for the enormous size to which this market grew. This was true not only because Fannie and Freddie 31 2003 10-K, Table 33, p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ w84239e10vk.htm#031. 32 See Table 3 of “High LTV, Subprime and Alt-A Originations Over the Period 1992-2007 and Fannie, Freddie, FHA and VA’s Role” found at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf . stimulated the growth of that market through their purchases of PMBS, but also because the huge inflow of government or government-directed funds into the housing market turned what would have been a normal housing bubble into a bubble of unprecedented size and duration. This encouraged and enabled unprecedented growth in the PMBS market in two ways. CHRG-110shrg50417--114 Chairman Dodd," Thank you very much, Senator Brown. Let me ask you, I have just been going over the numbers for our lending institutions that are here that the capital infusion allows. In the case of Wells Fargo, you will be receiving or have received $25 billion. In the case of Bank of America, it is $15 billion, but I notice that Merrill Lynch is getting $10 billion, so I presume that is $25 billion for Bank of America. Goldman Sachs gets $10 billion, and JPMorgan Chase gets $25 billion. Just out of curiosity, there are two sets of issues. Obviously, the foreclosure mitigation is a set of issues, and then the question is, of course, getting lending, getting credit out the window. Have any of your institutions set up Committees, forming any groups at all within your institutions that are out trying to identify creditworthy customers that may be the source of some of these billions of dollars, $125 billion that is going out to nine institutions; for some of them here today I have identified the number. I would be interested in yes or no, we have or we have not. Has there been any effort at all to utilize this money, this pool of money, to go out and identify the kind of borrowers out there that would help begin to release the stagnation that is occurring in the credit markets? Mr. Campbell. " CHRG-111shrg57319--42 Mr. Cathcart," Yes, that is correct. Senator Levin. Now, if you will look at Exhibit 21,\1\ you will see there a review of wholesale specialty lending FPD, which is first payment defaults, and that was distributed to you, Mr. Cathcart, so presumably you saw that at the time. Is that correct?--------------------------------------------------------------------------- \1\ See Exhibit No. 21, which appears in the Appendix on page 477.--------------------------------------------------------------------------- " CHRG-111hhrg50289--64 Mr. Heacock," I would just like to say from a credit union perspective, we have been heavily regulated for many years on business loans, a tremendous amount of regulation, but having said that, so far our examinations have been fair. I have heard from other colleagues that maybe there is not that kind of consistency. In other areas of the country the examinations are very difficult, and it is maybe kind of anti-business lending philosophy on the part of the examiner. " CHRG-111shrg53085--91 Mr. Patterson," Certainly, there is at least some discussion that there may be a mixed message. But the fact is that the vast majority of banks are lending, do have lendable funds, do have strong capital ratios. And regulators in the field are always going to be focused on safety and soundness of the performance of the individual bank. Senator Tester. But I am hearing from the banks right now they are more concerned about that than they were a year ago. " CHRG-110hhrg46595--420 Mr. Lester," Yes. They are to the point of asking for--curtailing their floor plan loans. They are shutting down lines of credit. They are not providing any access to capital to the standpoint where, when you had available credit made available, they have actually closed those lending down. Ms. Waters. Do you believe that if we are to rescue these big automobile manufacturers we should insist or include in our language support for the small independent dealers? " CHRG-110hhrg45625--223 Mr. Meeks," Let me--well, furthermore, then in that regard--because when you have a situation where there is so much money that is gone, the banks want to make sure that shareholders are back, money is back in regards to the shareholders. Some are saying that therefore lending right now is not the best way to get back to their stability. They have to reinvest in shareholders. So the $700 billion that we are talking about--because many are telling me that is the low end and we are really talking about over a trillion dollars here. " CHRG-110hhrg46593--174 Secretary Paulson," I think they are keys, and I think they will do a lot of lending. And I had said in my opening testimony that we have published regulations yesterday which have now extended the term sheet for private banks, C corps, there are thousands of them. We expect to get applications from a number of community banks and banks that are going to be very vital to this economy, and we are expecting regulators to forward many of those applications to us, and we are expecting to put capital into many of them. " CHRG-111shrg54789--81 Mr. Barr," Thank you, Senator Bayh. I think one key area where we saw abuse was in mortgage broker conduct. We saw brokers who were offered incentives to get consumers to take out loans that were more costly than the ones they qualified for---- Senator Bayh. And you forgive me for interrupting you. I agree with that wholeheartedly. That has been fairly well documented. How about in areas beyond mortgage lending? " FOMC20081007confcall--61 59,MR. LACKER.," Thank you, Mr. Chairman. Economic growth has undoubtedly weakened in the past two months, and that was getting me comfortable with a 2 percent funds rate. I don't have any objection to the cut in interest rates at this time. I am sympathetic to President Plosser's suggestion about the language about inflation. It is quite a swing from our previous language to what we have in the draft here, although actually part of me likes the joint statement better. But I can see the need for our own statement. About use of our balance sheet, it's hard for me to see why it's absolutely necessary for a recovery. A lot of what we've done has been sold to us as insurance against the possibility of runs, fire sales, margin spirals, or various theoretical possibilities that involve some inefficient devolution of activity separate from fundamentals. If the fundamentals improve, it seems to me likely that lending is going to return whether or not these facilities are in place. More broadly, I'm worried about unwinding these. I'm afraid that it might be as difficult as it would be for the FDIC to reduce their deposit insurance premium back from $250,000 to $100,000 after this. I think it would be worthwhile, as we go on with financial markets in such turmoil, to reflect on whether what we're seeing is genuine fundamental uncertainty about counterparties and whether our lending is the equivalent of pushing on a string, to use another metaphor from the Great Depression. " CHRG-111hhrg48874--103 Mr. Long," No, that is okay. I don't know the answer to it. I mean obviously with all the communications we have and in talking to bankers, I have made it a point over the last several months to talk to as many bankers as I can and ask them point blank, ``Are you making loans to creditworthy borrowers? Are you making credit available into the industry?'' And everybody I talk to is telling me, ``Yes, we are.'' However, there are some bankers, some banks, that as I said earlier have gone so far out on the risk curve and they are so loaded up on problem assets that they are maybe not able to lend into the market as much-- " CHRG-111shrg54675--66 Mr. Hopkins," If they combine the ones at the Fed level, we ask that they consider keeping a separate division to help with the OTS, because those institutions do focus on home lending and that is still their charter and mission. Senator Tester. OK. And this can go to either one. There was a point in time not too many years ago--I know for a fact two-and-a-half years ago--interest-only loans were very, very common. Low down payments, no down payments, were reasonably common. Has that changed? " CHRG-111hhrg56776--119 Mrs. Maloney," It is interesting. I have received a number of calls today on this proposal, many from small banks who are concerned that they would not be part of the Federal Reserve supervisory system, that they want to be a part of it. Mr. Bernanke, could you comment on the Federal Reserve's supervisory powers over your member institutions on various financial activities in which they operate? What is your role with derivatives, lending and custodial services? Why is it important that you have a supervisory or role over these particular activities and what is your role in those activities? " FinancialCrisisReport--65 The December 2004 presentation also defined higher risk lending on the basis of expanded underwriting criteria and multiple risk layering: “Expanded Criteria -‘No Income’ loan documentation type -All Manufactured Housing loans … Multiple Risk Layering in SF[R] and 1 st lien HEL/HELOC loans -Higher A- credit score or lacking LTV as strong compensating factor and -An additional risk factor from at least three of the following: -Higher uncertainty about ability to pay or ‘stated income’ documentation type -higher uncertainty about willingness to pay or collateral value[.]” 165 This document indicates that WaMu considered a mortgage to be higher risk if it lacked documentation regarding the borrower’s income, described as a “no income” or “stated income” loan. WaMu held billions of dollars in loans on its balance sheet. 166 Those assets fluctuated in value based on the changes in the interest rate. Fixed rate loans, in particular, incurred significant interest rate risk, because on a 30-year fixed rate mortgage, for example, WaMu agreed to receive interest payments at a certain rate for 30 years, but if the prevailing interest rate went up, WaMu’s cost of money increased and the relative value of the fixed mortgages on its balance sheet went down. WaMu used various strategies to hedge its interest rate risk. One way to incur less interest rate risk was for WaMu to hold loans with variable interest rates, such as Hybrid ARMs typical of WaMu’s subprime lending, or Option ARMs, WaMu’s flagship “prime” product. These adjustable rate mortgages paid interest rates that, after the initial fixed rate period expired, were typically pegged to the Cost of Funds Index (COFI) or the Monthly Treasury Average (MTA), two common measures of prevailing interest rates. 163 See, e.g., 10/8/1999 “Interagency Guidance on High LTV Residential Real Estate Lending,” http://www.federalreserve.gov/boarddocs/srletters/1993/SR9301.htm, and discussion of high LTV loans in section D(2)(b), below. 164 12/21/2004 “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management,” Washington Mutual Board of Directors Presentation, JPM_WM04107995-8008 at 7999, Hearing Exhibit 4/13-2b. 165 Id. This slide lists only the two additional risk factors quoted, despite referring to “at least three of the following.” 166 See 9/25/2008 “OTS Fact Sheet on Washington Mutual Bank,” Dochow_Darrel-00076154_001 (“Loans held: $118.9 billion in single-family loans held for investment – this includes $52.9 billion in payment option ARMs and $16.05 billion in subprime mortgage loans”). (4) Gain on Sale CHRG-110hhrg45625--95 Mr. Bernanke," Well, we really had two stages in this credit cycle. The first stage was the write-downs of subprime and CDOs and those kind of complex instruments. We are now in the stage, with the economy slowing down, where we are seeing increased losses in a variety of things, ranging from car loans and credit cards, to business loans and so on. And that is going to put additional pressure on banks. It is another reason why they are pulling back, building up their reserves, building up their capital, de-leveraging their balance sheets, and that is going to prevent them from providing as much credit as our economy needs. Ms. Velazquez. Thank you. Secretary Paulson, we are hearing about small business loans being called in, and up to a third may have a callable provision and not be delinquent. Lenders are also reducing credit to entrepreneurs, and we are aware that the Federal Reserve reported that 65 percent of lending institutions tightened their lending standards on commercial and industrial loans to small firms. Given these challenging conditions, how will the current proposal specifically address the challenges facing small business? Before, you said in your intervention how this is going to help small businesses. Well, they too are victims now of the financial market mess that we are in. " CHRG-110hhrg46593--172 Secretary Paulson," I am not sure that is going to be a successful strategy. We are going to look only at applications that we think make sense after they are forwarded to us by the regulator. Now, there are a number of insurance companies that already and have been bank holding companies for some time, have been regulated at the Federal level for some time. And in my judgment, it may make sense to put capital into those institutions who are playing a vital role lending and keeping our economy going. " CHRG-111hhrg56847--203 Mr. Bernanke," Okay. Ms. Kaptur. Thank you. Number three, how can you use your power--and this goes to the housing issue--how can you use your power as the Fed to get these megabanks and the servicers that they have hired to the table to do housing workouts to avoid the ghost towns and ghost neighborhoods that we are getting across this country? There is a real stop-up in the system, a real blockage. Even though, for example, home values have lost 30 percent of value, that isn't booked on the books of the banks. And you can't get a negotiation at the local level because there is nothing requiring the servicers to come to the stable. And there is a contractual relationship due to the subprime bonded nature of the instrument. We need the Fed to take a look at this since you deal in the bond markets, and you deal with these companies anyway. We need to get people to the table. And with the number of underwater loans, this isn't going to get any better. Across the country--I was talking to Dennis Cardoza yesterday, from California. He and I are in the same boat, and his boat is actually sinking faster than ours. And we really need somebody to hold these servicers accountable. Is there some way you can use your power to do that? That is question one. And then, question two, since the crisis began, the megabanks actually have a larger share of assets in the market than they did at the beginning, and the big investment banks that are very important to the Fed and the way you operate particularly up there in New York. And they had about a third of the assets of the country prior to the crisis. They now have nearly two-thirds. In the meanwhile, institutions in places like I represent are paying huge FDIC fees, up from maybe $20,000 5 years ago up to $70,000 last year, this year $700,000. The reason that lending is constricted at the local level is because these large institutions are really holding so much of the power, and we don't have a really balanced financial system. So they are not making the small business loans. So my question is, what role can you play as the Fed in restoring prudent lending and broad competition across our financial system? So question one relates to getting the servicers to the table, working with the megabanks. And number two, what can you do to help restore lending across this country through a competitive financial marketplace? " CHRG-111hhrg54869--27 Mr. Volcker," Right. " Mr. Bachus," --I think you have indicated, and I think many of us realize there is a difference in what was a commercial bank, a lending facility, and an investment or trading bank. In fact, if you look at the two investment banks, the two largest ones, their last report showed substantial profits from trading, which indicates a trade that they are still basically--their profits are being derived from trading derivatives and some of the things that you described. Do we go back to that system? " CHRG-111hhrg48867--268 Mr. Grayson," Mr. Plunkett, if our goal is simply to extend credit and give people the credit that they are used to getting and the credit that they need and to keep the economy as a whole afloat, is it more effective to help healthy institutions expand their lending or is it more effective to give money to failed banks and see that that money goes directly to having them meet their already-overwhelming credit needs internally? " FOMC20080929confcall--33 31,VICE CHAIRMAN GEITHNER.," Second would be some expanded section 23A approvals to facilitate what the clearing banks need to do to provide liquidity. Another option would be to expand the scope of instruments that might be supported through that program. Another option might be to lend directly to money funds against a broader class of assets, and of course, it's possible that the Treasury may rejigger, change, expand, or add to their guaranty. " CHRG-110shrg50410--21 Mr. Bernanke," We do have the authority, although we have a regulation we would have to address which says only under economic circumstances that are stressed. But, again, I do think that the lending and the decisionmaking ought to be lodged with the fiscal authorities. I would point out that what the Secretary is proposing is not a simple expenditure. Either a liquidity provision or an equity purchase is a loan or an investment that has an asset on the other side. So it is not quite the same thing as a simple fiscal expenditure. It is a loan as the Government makes in many contexts, or an investment. " FOMC20051101meeting--174 172,MR. REINHART.," The sequence I envision is first surveying you on general principles. Are November 1, 2005 88 of 114 would you prefer it to be about interest rates or the risks to your objectives? There are differences of opinion on a number of those basic questions. Then once those survey results are collated—to see if there really is a middle ground or if there are a couple of distinct alternatives that lend themselves to these questions—I’d send a document around." CHRG-111shrg55117--17 Mr. Bernanke," Our general view is that the Congress should have the ability to oversee all aspects of our operations, including whether or not we have the appropriate financial controls, whether we are lending on a good basis of collateral, and so on, and so we would be willing to work with you on that. We do think that the Congress has the right to see how we are using taxpayer money. Where we are concerned is that the Congress would be intervening in our specific policy decisions relating to monetary policy in the economy. So---- Senator Shelby. And I understand that. " FinancialCrisisInquiry--194 For example, my bank’s lines of credit usage is down to the lowest utilization in 25 years. I am pressing my loan officers daily to find more loans, but demand is not there. All community banks want to lend. Less lending hurts profits and income. For the first time in my 44 years in banking I have witnessed a decline in assets in my banks due to lower loan demand. In total, my loans were down from $600 million to $585 million this past year. Most businesses I work with are using cash flow only and are not interested in taking on new debt. The key reason they cite for not seeking credit is their uncertainty of the economic climate and the cost of doing business going forward. Until their confidence in the economic outlook improves, businesses will be unlikely to borrow from any bank. The financial meltdown should be a lesson learned in supporting diversity in the banking and in community banks. Community banks represent the other side of the financial story in credit markets. Community banks serve a vital role in small-business lending and local community activity not supported by Wall Street, who has only an international view. For their size, community banks are enormous small-business lenders. Community banks represent only about 12 percent of all bank assets, they currently make up 31 percent of the dollar amount of all small business loans less than a million dollars. Notably, more than half of all small business loans under $100,000 are made by community banks. In contrast, banks with more than $100 billion in assets, the nation’s largest financial firms, make only 22 percent of small business loans. Community banks in general rely more on local deposits to fund local lending. So they don’t rely on the Wall Street capital markets for funding. In fact, small banks of $1 billion in asset size or less were the only segment to show any increase in net loans and leases year over year in the latest third quarter 2009 quarterly FDIC data. However, small business loan demand is down in general, because businesses and individuals are deleveraging and reducing their reliance on debt after the current meltdown. The FDIC quarterly banking profile for the third quarter of 2009 showed a record $210 billion quarterly decline in outstanding loan balances. Net loans and leases declined across all asset size groups on—in a quarterly basis in the third quarter of 2009. FOMC20050630meeting--125 123,VICE CHAIRMAN GEITHNER.," My second question is about policy, but not monetary policy. Glenn, in your note, you allude to other instruments if monetary policy doesn’t seem to be the appropriate tool to address a concern about lower value prices. What do we know about the history of the use of the supervisory tool in past periods of concern about real estate bubbles or imprudent lending? Do we have a rich history on the use of those instruments that tells us something about the efficacy or about our foresight in deploying them?" CHRG-110hhrg46594--285 Mr. McHenry," Well, a far more positive comment from you. So, as a potential vote on whether or not to lend you money, I believe it will be a fair assessment to say that you should turn over those plans on how you would enter bankruptcy and what your state of preparation is for Chapter 7 or Chapter 11. As somebody that you are seeking money from, I think I need to have that information in order to make a proper assessment of whether or not you are creditworthy. Because the truth is the doom and gloom of Mr. Wagoner, he says, you know, this is not what--it would be devastating, it would go to Chapter 7. Therefore, what you are telling me and what you have said in your testimony is that you would go into liquidation. Well, that is a hell of a thing to tell somebody before you ask them for money. Therefore, you are telling me that inherently you are not creditworthy. Therefore, we should loan you money? Explain this to me. " CHRG-110hhrg46596--486 Mr. Dodaro," Yes, Congressman. I mean, actually, what we are developing is sort of a set of metrics where you can look at a number of them to draw some overall conclusions. And in addition to the ones that you mentioned, we are looking at foreclosure rates, for example, mortgage origination rates to see if there is new lending in the mortgage area. So we are going to be continuing to develop those sets of indicators. In our future 60-day reports, we expect to flesh those out more. " CHRG-110hhrg46593--16 DEPOSIT INSURANCE CORPORATION Ms. Bair. Thank you. Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to testify on recent efforts to stabilize the Nation's financial markets and to reduce foreclosures. Conditions in the financial markets have deeply shaken the confidence of people around the world and their financial systems. The events of the past few months are unprecedented to say the least. The government has taken a number of extraordinary steps to bolster public confidence in the U.S. banking system. The most recent were measures to recapitalize our banks and provide temporary liquidity support to unlock credit markets, especially interbank lending. These moves match similar actions taken in Europe. Working with the Treasury Department and the other bank regulators, the FDIC will do whatever it takes to preserve the public's trust in the financial system. Despite the current challenges, the bulk of the U.S. banking industry remains well capitalized. But what we do have is a liquidity problem. This liquidity squeeze was initially caused by uncertainty about the value of mortgage-related assets. Since then, credit concerns have broadened considerably, making banks reluctant to lend to each other and to lend to consumers and businesses. As you know, in concert with the Treasury and the Federal Reserve, we took a number of actions to bolster confidence in the banking system. These included temporarily increasing deposit insurance coverage and providing guarantees to new senior unsecured debt issued by banks, thrifts, and holding companies. The purpose of these programs is to increase bank lending and minimize the impact of deleveraging on the American economy. As a result of these efforts, the financial system is now more stable and interest rate spreads have narrowed substantially. However, credit remains tight and this is a serious threat to the economic outlook. Regulators will be watching to make sure these emergency resources are mainly used for their intended purpose--responsible lending to consumers and businesses. In the meantime, we must focus on the borrower side of the equation. Everyone agrees that more needs to be done for homeowners. We need to prevent unnecessary foreclosures, and we need to modify loans at a much faster pace. Foreclosure prevention is essential to helping find a bottom for home prices, to stabilizing mortgage credit markets, and to restoring economic growth. We all know there is no single solution or magic bullet. But as foreclosures escalate, we are clearly falling behind the curve. Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and to the broader economy. Last Friday, we released the details of our plan to help 1.5 million homeowners avoid foreclosure. Our program would require a total of about $24 billion in Federal financing. The plan is based on our practical experience in modifying thousands of mortgages at IndyMac Federal Bank. As we have done at IndyMac, we would convert unaffordable mortgages into loans that are sustainable over the long term. The plan would set loan modification standards. Eligible borrowers would get lower interest rates and, in some cases, longer loan terms and principal forbearance to make their monthly payments affordable. To encourage the lending industry to participate, the program would create a loan guarantee program that would absorb up to half the losses if the borrower defaults on the modified loan. While we applaud recent announcements by the GSEs and major servicers to adopt more streamlined approaches to loan modifications along the lines we have employed at IndyMac, the stakes are too high and time is too short to rely exclusively on voluntary efforts. Moreover, these recent announcements do not reach mortgages held in private label securitizations. We need a national solution for a national problem. We need a fast-track Federal program that has the potential to reach all homeowners regardless of who owns their mortgages. What we are proposing is a major investment program that can yield significant returns by attacking the self-reinforcing cycle of unnecessary foreclosures that is placing downward pressure on home prices. Average U.S. home prices have declined by more than 20 percent from their peak and are still spiraling down. If this program can keep home prices from falling by just 3 percentage points less than would otherwise be the case, over half a trillion dollars would remain in homeowners' pockets. Even a conservative estimate of the wealth effect this could have on consumer spending would exceed $40 billion. That would be a big stimulus for the economy and nearly double our investment. In conclusion, the FDIC is fully engaged in preserving trust and stability in the banking system. The FDIC stands committed to achieving what has been our core mission since we were created 75 years ago in the wake of the Great Depression--protecting depositors and maintaining public confidence in the financial system. Thank you. [The prepared statement of Chairwoman Bair can be found on page 100 of the appendix.] " CHRG-111shrg56415--40 Mr. Smith," I would say in the absence of the type of a program of the type Governor Tarullo is talking about, it seems to me what clearly is needed is for small and medium-sized banks to clear up their balance sheet problems they have right now. I mean, the problems small businesses have in part are based on the fact that balance sheets have impaired real estate on them that has to be dealt with some way and that they have insufficient capital to make additional loans until that is cleared up. So until we work through--I mean, with all due respect to Senator Gregg, until the real estate, the follow-on problem of the commercial real estate problem for many of our banks is that it clogs up the balance sheets or impairs them in a way they can't make loans. Senator Bennet. I guess I would ask, Chairman Bair, maybe you or Mr. Smith, to what extent--I mean, I am told that in the early 1980s when we ran into trouble on agriculture, we did some things like stretch out the period of time that assets had to be marked down. And I don't want to tread into this too much, but I wonder whether, given how serious the commercial real estate problem is, whether we are in a position to unclog the assets in a way that puts banks again in a position to be able to lend to small businesses. Ms. Bair. You need to be careful, obviously. You want to provide flexibility to try to restructure the loans and accommodate borrowers in a way that preserves value but is fully disclosed. You don't want to defer losses. If the losses are there, they need to be realized. There is this difficult balance. You would not want to go over to the regulatory forbearance situation, which I think did get us in trouble during the S&L days. So, like anything, it is an important balance. I wish Senator Gregg was still here, because regarding the capital support for the smaller banks, the smaller banks are disproportionately a source of lending, particularly for small business. That is what they do. They do small business lending. They do commercial real estate. I am not normally an advocate for government support programs, but I do think the tremendous disparities in TARP between the 25 largest banks, with 100 percent participation, and for the smaller banks, less than 9 percent participation has created competitive disparities between large and small institutions--between the too-big-to-fail institutions where funding costs are going down, and the smaller institutions where funding costs are going up. Again, with a matching program that provides market validation that an institution is viable, markets are more willing to put more capital in. Additional capital could help balance-sheet capacity to enable more of this type of lending by the smaller banks. Ms. Matz. Senator, I just wanted to make the point that credit unions make loans to small businesses, or club member business lending, and the average loan is only about $170,000. So they really are targeted to small businesses. In the current year, the lending is up almost $2 billion. Last year, it was up $5 billion. So, more and more, credit unions are making more and more loans to small businesses. Senator Bennet. Thank you, Mr. Chairman. Senator Johnson. Senator Corker. Senator Corker. Mr. Chairman, thank you, and as always, I thank each of you for your testimony. I always learn something when you are here. I also wish Senator Gregg was here. I think we share some of the same intuitions and concerns, and while you know I respect the FDIC and your leadership very much, I tend to hear regulators talking about them wanting assistance to the banks that they have liabilities to. I know Chairman Dugan, who I also respect greatly, very much appreciated the TARP assistance to the banks that he regulated so they wouldn't fail, and now you very much would like TARP assistance to the banks that you have depositor worries with. I just hate to hear us move into that mode, and again, I respect you both very, very much and have worked with you on lots of legislation. I do hate hearing that kind of thing. Chairman Bair, I know you mentioned the underwriting wasn't really the issue because loans were underwritten well in the past today are problems. But again, I think that was driven by the fact that we had poor underwriting in the beginning and it created a financial system issue that has really put us into this situation. So, I do think those are very much tied together. I will have to say that as we have looked at the regulatory reforms, it seems like we are just sort of rearranging the deck chairs. I mean, the issue has been always real estate in modern times. As we have had financial crises, it has always been real estate. I haven't heard anything in the regulatory reform--I know we talk about capital requirements, but the kinds of losses we have had, we would have blown through those capital requirements you all are talking about very, very quickly. We still would have needed a systemic bailout or some kind of mechanism. So, to me, that is not it. I know that we talked a little bit gratuitously about maybe we ought to put that in regulation--I mean, in laws. I can't imagine us writing laws up here that talk about what the equity ought to be in homes and those kind of things. You all don't really want us to do that, do you? So, it seems to me that actually the Fed is supposed to put out that type of guidance, is that correct? " CHRG-111hhrg55814--496 Mr. Wallison," Thank you very much, Congressman. I think it should be obvious that deposit insurance does enable the taking of risk, and reduces market discipline. In fact, I think that's why banks are regulated, because once the government is backing their deposits, the only way for the government to protect itself against excessive risk-taking--because the creditors, then, and at least the depositors--have no significant incentive not to lend to an institution that is backed by the government. That is, of course, the whole reason why everyone is supposed to be concerned about ``too-big-to-fail.'' And I was quite surprised by the chairman's comments about ``too-big-to-fail.'' But if we have a system in which any institution is looked upon as though when it fails, there will be no serious losses to people--and that's what this legislation does--we're in the same position as we are when we have institutions that are covered by deposit insurance--people will have much less concern about lending to them. They will get much more favorable terms. And, unfortunately, that will enable them to take more risks. And eventually, we end up with failed institutions. Fannie Mae and Freddie Mac are the poster children for exactly that. That was systemic risk writ large, and the American people are now going to have to spend something like $200 billion to $400 billion to pay for the losses that are embedded in their balance sheets right now. " CHRG-111hhrg49968--100 Mr. Bernanke," Certainly. There has been a pretty widespread improvement in financial markets; credit spreads are down through most types of credit markets, activity is up. This is true both in the short-term money markets, and it is also true in the longer-term corporate markets. As you point out, an area which is still quite tough is consumer lending and small business lending. And that is true for a couple of reasons. And the Fed is trying to address both of them. It is true, first of all, because consumers and small businesses rely very heavily on banks. And banks have not only had their capital reduced by losses, but they have become more reluctant to extend credit to these customers either because they are worried about losses or because they are worried about their own financial positions. In this respect, we have heard complaints that bank examiners from the Fed and other agencies are too prone to prevent banks from making loans in the interest of safety and soundness. We had a joint statement, the Federal Reserve and the other banking agencies, last fall making the point that making loans to creditworthy borrowers, maintaining credit relationships is profitable for banks and therefore good for banks. And that in addressing whether or not certain types of loans should be made, the examiner should balance the need for conservatism in a difficult situation and the need to allow creditworthy borrowers to receive credit. " FOMC20081007confcall--73 71,MS. DUKE.," Thank you, Mr. Chairman. I don't have an awful lot to add to what has already been said. I'm not optimistic that this will necessarily increase financial institutions' confidence in lending to each other, but I think the coordinated action at least will be something that maybe helps to give some confidence in the certainty of future actions. I think a lot of it has been the unpredictability of what government is going to do. So that may help on that score, and I support the action. " CHRG-110hhrg46593--214 Mr. Campbell," Thank you. Let's talk about what the TARP did not do for the three of you again; and then I have one more final question for you, Mr. Findlay. I won't ignore you there. What it did not do is buy troubled assets, which was obviously what we originally thought we were going to do. Are you seeing any liquidity in that market whatsoever? Are those trading at all? Has there been any thawing in that as there has been a little thawing in commercial paper, a little thawing in interbank lending, a little thawing in a few of these other things? Is there any liquidity in that market right now? " CHRG-111hhrg48868--705 Mr. Liddy," I wasn't fighting anything. The Federal Reserve has a policy against disclosure of counterparties, and, when we saw the testimony of Chairman Bernanke and Vice Chairman Kohn, I had a conversation with the people at the Federal Reserve and said we should figure out a way to disclose this. We made the various telephone calls to make sure that the counterparties would be okay with that, and so we disclosed on the credit default swaps, and the RMBSes, the securities lending and municipalities. We disclosed all of it, so it really wasn't on the part of AIG that we were attempting to husband any information or not disclose. " FinancialCrisisReport--163 Washington Mutual. 595 In connection with the hearing, the Subcommittee released a joint memorandum from Chairman Levin and Ranking Member Coburn summarizing the investigation to date into the role of the regulators overseeing WaMu. That memorandum stated: “Federal bank regulators are supposed to ensure the safety and soundness of individual U.S. financial institutions and, by extension, the U.S. banking system. Washington Mutual was just one of many financial institutions that federal banking regulators allowed to engage in such high risk home loan lending practices that they resulted in bank failure and damage to financial markets. The ineffective role of bank regulators was a major contributor to the 2008 financial crisis that continues to afflict the U.S. and world economy today.” On March 16, 2011, the FDIC sued the three top former executives of Washington Mutual for pursuing a high risk lending strategy without sufficient risk management practices and despite their knowledge of a weakening housing market. 596 The FDIC complaint stated: “Chief Executive Officer Kerry K. Killinger (“Killinger”), Chief Operating Officer Stephen J. Rotella (“Rotella”), and Home Loans President David C. Schneider (“Schneider”) caused Washington Mutual Bank (“WaMu” or “the Bank”) to take extreme and historically unprecedented risks with WaMu’s held-for-investment home loans portfolio. They focused on short term gains to increase their own compensation, with reckless disregard for WaMu’s longer term safety and soundness. Their negligence, gross negligence and breaches of fiduciary duty caused WaMu to lose billions of dollars. The FDIC brings this Complaint to hold these three highly paid senior executives, who were chiefly responsible for WaMu’s higher risk home lending program, accountable for the resulting losses.” 595 See “Wall Street and the Financial Crisis: Role of the Regulators,” before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 111-672 (April 16, 2010) (hereinafter “April 16, 2010 Subcommittee Hearing”). 596 The Federal Deposit Insurance Corporation v. Kerry K. Killinger, Stephen J. Rotella, David C. Schneider , et al., Case No. 2:11-CV-00459 (W.D. Wash.), Complaint (March 16, 2011), at http://graphics8.nytimes.com/packages/pdf/business/conformedcomplaint.pdf (hereinafter “FDIC Complaint Against WaMu Executives”). FOMC20080724confcall--151 149,MR. ALVAREZ.," Sure. This is the first resolution on the third page. ""In addition to the current authorizations granted to the Federal Reserve Bank of New York to engage in term securities lending transactions, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to offer options on up to $50 billion in additional draws on the facility, subject to the other terms and conditions previously established for the facility."" " FOMC20070918meeting--282 280,MR. LACKER.," Thank you, Mr. Chairman. I’ve been thinking a lot about this since I heard about it last week. I want to start by complimenting the staff at New York and the Board who wrote the summary memo. I think it does a very good and balanced job of articulating the costs and benefits of this proposed facility. I was going to say that they undoubtedly did it in a compressed timeframe, but then I heard you guys have been working on it for weeks. [Laughter] But in any event, my hat is off to them. I very much agree with the staff that weighing the costs and benefits to reach an assessment about the desirability of this is inherently a difficult judgment. For me the critical question concerns the normative implications of what we’re seeing in the marketplace for term funding and the normative implications of this proposed intervention. Banks that are borrowing at term now are paying up for insurance against the eventuality that their funding costs rise—for example, because of a deterioration in their perceived creditworthiness. Banks that have viewed themselves as more at risk are naturally willing to pay more for such insurance, and some reports suggest, as Mr. Dudley did this morning, the presence of an adverse-selection problem in the sense that borrowing at term reveals oneself to be a borrower of high risk, and so only high-risk borrowers are willing to pay more. Banks that are reluctant to lend at term are placing a high value on being able to use their liquidity to accommodate assets that may come on their balance sheet soon. We had a lot of discussion about this in the morning. Balance sheet capacity appears genuinely to be a scarce valuable commodity these days. That’s consistent with the notion that raising bank capital is expensive in the current environment. I think the adverse-selection story is worth considering seriously in this context because it’s the interpretation of what we’re seeing that provides the best hope for this being an intervention that improves market functioning in the microeconomic sense of the term. But if adverse selection is what has impaired the functioning of the term market in this normative sense, then there must be lower-risk banks that are unwilling to borrow at the same high rates as high-risk banks but that are rationed because they’re unable to distinguish themselves from high-risk banks. Now, if this is the case, the only way to improve market efficiency by lending is to lend more than the current volume of term lending because otherwise we’re just going to lend it to the current term-lending borrowers and none of these rationed-out, lower-risk banks are going to get access to it. In other words, if we do lend through an auction facility to draw in disadvantaged borrowers to try to reach them with credit, we can do so only by subsidizing the high-risk borrowers as well. Now, I’ll mention that, from the discussion this morning, my understanding is that we have very little idea what the volume of that term lending is. So I don’t see how we chose this number and how we can be confident that it’s going to do this and reach through the high-risk borrowers to pick up the low-risk borrowers. More broadly, I’m not sure I see how this facility could improve the normative functioning in the market. We’re going to auction off only the same contracts that market participants are capable of offering now, only we’re also going to subject ourselves to the additional constraints imposed by our single-price auction format. So we’re not improving on any contract out there. The only unique attribute we would appear to bring is our ability to subsidize lending terms. We could conceivably improve market functioning if adverse selection is the right story here by doing something that market participants are incapable of doing, and that would be compelling borrowing by everybody or by a set of people to achieve a superior pooling allocation. But I don’t think we want to do that. Or we could conceivably improve market functioning by acting on information that’s superior to that of market participants—a knowledge of the creditworthiness of institutions, for example. But it isn’t clear that this is a key part of the proposal either, because institutions have to be rated 3 or above to get access and I think virtually all the currently affected institutions in these sorts of high-risk and low-risk categories are in the 3 or above categories already. A related point here is that, if we really think information constraints are at the heart of the problem, it might be better to address this problem by addressing those constraints directly by using our supervisory authority to encourage and facilitate greater transparency. So my sense is that this facility would just subsidize borrowing banks without doing anything to mitigate underlying informational asymmetries or any other type of market friction that I can think of. That means to me that this proposal raises the usual moral hazard concerns. The staff memo was very clear and articulate about those. I think there’s a danger with this facility of raising expectations that, in the future, significant increases in interbank funding spreads are going to be ameliorated by central bank intervention. If we raise that expectation, we’re going to undermine to some extent market mechanisms for assessing the relative risk of institutions. I’m a little worried that if this does not produce a demonstrable effect on relevant market conditions, it could erode confidence in us, and I feel so especially in light of our previous change in discount window policy, which I think is widely viewed as having had little substantive effect so far. I think that’s the view out there. I also worry that this could complicate the resolution of failing institutions whose condition, as Vice Chairman Geithner suggested, deteriorates while they’re borrowing from this auction facility. It would put us in a very awkward place. As Governor Kohn said, this isn’t like a one-day emergency kind of thing—it takes some time. But some institutions in questionable situations, some problem institutions, look for term funding and are willing to wait four days to get it and know enough about their condition to line it up ahead of time. I worry about this sounding like a cloak for the ECB, for us to give money to the ECB, and I worry about President Rosengren’s issues as well, and I’d be more comfortable with the swap line than I am with the domestic facility. If those foreign authorities want to extend credit and have the knowledge and capacity to do so, and it’s on their dime and they’re bearing the credit risk and they want to borrow the dollars from us, I see that as a reasonable step for a central bank to take. I also worry about valuing collateral. I don’t think that our mechanisms for doing that are robust and strong, especially in the current environment with at least standard haircuts. Now, I can appreciate the broader problem articulated by the staff and others that banks that are constrained in the term funding market might tighten borrowing terms for consumers and businesses and that might have real economic consequences. But if that’s the problem, I think it would be better for us to just cut the funds rate rather than alter the relative funding costs of different banks. This is essentially what we did today. We cut the funds rate to offset the macroeconomic effects of higher credit spreads. Just a final set of comments. More broadly, I’ve been hoping for some time that banking policy in our country was moving slowly but surely toward greater reliance on market discipline and away from forbearance and subsidization. I’ve been hoping that we as a central bank would gradually move away from things that are tainted with credit allocation. Times like these don’t come around very often—you know, once a decade—and my sense is that the precedent we set here is going to be remembered for a long time and it’s going to affect market behavior for a long time to come as well. In my opinion, we ought to look at these episodes of market stress as an opportunity to make some reputational progress on the time-consistency problem that is at the heart of moral hazard. So for me the balance of considerations weighs heavily against this proposal, Mr. Chairman." fcic_final_report_full--530 December 3, 2008, 151 in which he said in pertinent part: Only 6 percent of all the higher-priced loans [those that were considered CRA loans because they bore high interest rates associated with their riskier character] were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their assessment areas , the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. [emphasis supplied] There are two points in this statement that require elaboration. First, it assumes that all CRA loans are high-priced loans. This is incorrect. Many banks, in order to be sure of obtaining the necessary number of loans to attain a satisfactory CRA rating, subsidized the loans by making them at lower interest rates than their risk characteristics would warrant. This is true, in part, because CRA loans are generally loans to low income individuals; as such, they are more likely than loans to middle income borrowers to be subprime and Alt-A loans and thus sought after by FHA, Fannie and Freddie and subprime lenders such as Countrywide; this competition is another reason why their rates are likely to be lower than their risk characteristics. Second, while bank lending under CRA in their assessment areas has probably not had a major effect on the overall presence of subprime loans in the U.S. financial system, it is not the element about CRA that raises the concerns about how CRA operated to increase the presence of NTMs in the housing bubble and in the U.S. financial system generally. There is another route through which CRA’s role in the financial crisis likely to be considerably more significant. In 1994, the Riegle-Neal Interstate Banking and Branching Effi ciency Act for the first time allowed banks to merge across state lines under federal law (as distinct from interstate compacts). Under these circumstances, the enforcement provisions of the CRA, which required regulators to withhold approvals of applications for banks that did not have satisfactory CRA ratings, became particularly relevant for large banks that applied to federal bank regulators for merger approvals. In a 2007 speech, Fed Chairman Ben Bernanke stated that after the enactment of the Riegle-Neal legislation, “As public scrutiny of bank merger and acquisition activity escalated, advocacy groups increasingly used the public comment process to protest bank applications on CRA grounds. In instances of highly contested applications, the Federal Reserve Board and other agencies held public meetings to allow the public and the applicants to comment on the lending records of the banks in question. In response to these new pressures, banks began to devote more resources to their CRA programs.” 152 This modest description, although accurate as far as it goes, does not fully describe the effect of the law and the application process on bank lending practices. In 2007, the umbrella organization for many low-income or community “advocacy groups,” the National Community Reinvestment Coalition, published a report entitled “CRA Commitments” which recounted the substantial success of its members in using the leverage provided by the bank application process to obtain trillions of dollars in CRA lending commitments from banks that had applied to 151 152 Randall Kroszner, Speech at the Confronting Concentrated Poverty Forum, December 3, 2008. Ben S. Bernanke, “The Community Reinvestment Act: Its Evolution and New Challenges,” March 30, 2007, p2. federal regulators for merger approvals. The opening section of the report states (bolded language in the original): 153 CHRG-111shrg57319--446 Mr. Rotella," Thank you. Chairman Levin, Ranking Member Coburn, and distinguished Subcommittee Members, thank you for inviting me to testify and for sharing these remarks with you. This is my first public statement since the FDIC seized Washington Mutual in September 2008, so I want to be clear about the key factors that led to an elevated level of risk at WaMu during the financial crisis, risks that were created over many years prior to my arrival at WaMu in 2005.--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Rotella appears in the Appendix on page 169.--------------------------------------------------------------------------- I also want to summarize how the team that I was a part of recognized those risks and made solid progress in proactively reducing them. In particular, I want to be very clear on the topic of high-risk lending, this Subcommittee's focus today. High-risk mortgage lending in WaMu's case, primarily Option ARMs and subprime loans through Long Beach Mortgage, a subsidiary of WaMu, were expanded and accelerated at explosive rates starting in the early 2000s, prior to my hiring in 2005. In 2004 alone, the year before I joined, Option ARMs were up 124 product, and subprime lending was up 52 percent. As the facts in my written statement to this Subcommittee show, those extraordinary rates ceased after 2005, and we then reduced total high-risk mortgage volume substantially every year after that. Total high-risk lending was not expanded and did not accelerate after 2005, as some have reported. The facts show the opposite. I provide my statement to you from my vantage point as a 30-year veteran in financial services, from nearly 18 years at JP Morgan Chase, and as WaMu's chief operating officer for 3\1/2\ years. When I joined WaMu in 2005, the company had over $340 billion in assets. As a nationally chartered thrift, WaMu had already developed a high concentration of mortgage risk relative to more diversified banks. And as I noted, the company had been accelerating its growth in higher-risk mortgage products and, in addition, it had serious operating deficiencies, particularly in mortgage lending. WaMu's concentration risk was particularly acute because nearly 60 percent of its mortgage loans were from California and Florida, which had experienced large and unsustainable home price increases. What happened at WaMu was principally the combined effect of those risks developed over almost two decades, which would be magnified and stressed by the extreme market conditions of late 2007 and 2008. The team that I was a part of worked very hard to adjust to a rapidly changing environment and addressed those risks. As public data shows, we reduced the absolute size of WaMu's mortgage business, including new production, total high-risk lending, and its portfolio every year after 2005 and by a substantial amount in aggregate. We made progress in diversifying the company and had plans to do more, but there simply was not enough time to complete the enormous transformational change needed in a $340 billion thrift given the collapse of the housing market roughly 2 years after we started. In fairness to all concerned, few experts, including the Chairman of the Federal Reserve Board and the Secretary of the Treasury, anticipated what occurred in the housing market and the economy as a whole. Now, I would like to provide you with a bit more detail about WaMu. Prior to 2005, when I joined the company, WaMu had been growing its mortgage business at an accelerating rate. By 2003, it was the No. 2 mortgage lender with a market share of over 11 percent, and its subprime volume had been growing by nearly 50 percent every year from 2001 forward until 2005. WaMu's stated strategy was similar to many firms with large mortgage units during the pre-crisis economy. With the benefit of hindsight, that strategy was ill advised. As the financial crisis conclusively established, credit risk was mispriced for a declining housing market. In 2003 and 2004, the company's mortgage business experienced very serious risk management and operating missteps. A management shake-up ensued, and it was around this time that a new executive team began to take shape, including my hiring in 2005. That team believed that with enough time and effort, WaMu could resolve its issues and take its place among the country's finest financial institutions. I and others recognized that due to WaMu's combination of risks, changes needed to be made. As the market softened, we began to migrate the company away from its mortgage legacy. By the end of 2005, we were making solid progress, and by the time of the seizure, WaMu's market share in mortgages had been cut by nearly two-thirds, from over 11 percent to about 4 percent, and we had shut down Long Beach and Option ARM lending. Far from accelerating or expanding, as some large competitors did during this time, we were slowing and contracting faster than the market as a whole. Looking back now, of course, I would have tried to move even faster than we did in the areas where I had direct control. Unfortunately, after the capital markets stopped operating in the third quarter of 2007, we were unable to execute on aspects of our strategy. Subsequently, the decline in the housing market accelerated, and it was not long before the financial crisis was in full swing. We continued our efforts as the team raised capital, and, in fact, the day the company was seized, our primary regulator, the OTS, determined that WaMu was well capitalized. All of us wanted the opportunity to finish what we had started in 2005. I thank you for inviting me here today, and I look forward for your questions. Senator Levin. Thank you very much, Mr. Rotella. Mr. Killinger. TESTIMONY OF KERRY K. KILLINGER,\1\ FORMER PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD, WASHINGTON MUTUAL CHRG-111hhrg48873--250 Mr. Bernanke," The law requires that we lend on a fully secured basis; in other words, to be comfortable that the collateral we are taking will allow for repayment of the loan. That is why in the TALF and in the program that Secretary Geithner just announced, we are not only taking a variety of protections, including haircuts and the like, but we are also having TARP capital to stand between us and the credit risk, so we will be very, very careful not to take any credit risk. " CHRG-111hhrg50289--22 Mr. McGannon," I would certainly agree with Cynthia. As far as Country Club Bank goes, we have always held our SBA loans. I think that we just have never had reliance on the secondary market. If it is out of our control, I think that we feel like we need to try to take care of what we are funding. But Cynthia is right. If the secondary market does open up, it does give every bank an opportunity to re-leverage those dollars into more SBA lending. " CHRG-110shrg50416--66 Mr. Kashkari," Sure. As I mentioned previously, Senator, I think that the provisions on preventing dividend increases and stopping share buybacks provides very strongincentive for these institutions to want to lend again. Senator Schumer. But we have had a couple of leading executives talk about they think that the banks--and they were talking not about their own specific institution alone--are going to just sort of hoard the money for a while, and they thought was in their best interest, and that worries me. " CHRG-111shrg57709--204 Mr. Volcker," But, in essence, that is what we are---- Senator Menendez. Now, with that, if we pass a law preventing commercial banks from engaging in proprietary lending, one possibility is that a Goldman Sachs or a J.P. Morgan will simply drop their bank holding company status and continue to engage in proprietary trading, hedge fund, private equity activity. If they do that, will our financial system be less systemically at risk? " FOMC20080130meeting--35 33,MR. DUDLEY., I wouldn't say it's about their willingness to lend to their institutions. It's their sense of what their responsibility is in terms of providing dollar liquidity to their institutions. To the extent that they could just passively take the dollars and funnel them through this auction process in which their auction was very passive--their auction was essentially a noncompetitive auction that was based off ours--they were willing to do that. They were less willing to do something in which they were taking responsibility for the problem and saying that they were going to get the dollars and supply them to those banks. FOMC20081216meeting--494 492,MR. DUDLEY.," I think we're in disequilibrium. We're in a disequilibrium in which the dealers and banks that used to do this lending are in the process of dramatically shrinking their balance sheets. Goldman announced their fourth quarter today. They shrank their balance sheet by 18 percent from the end of their third quarter to the end of their fourth quarter. That's certainly not any notion of equilibrium in the marketplace, and I think that is what's causing the stresses in the securities markets. " CHRG-111hhrg55809--106 Mr. Bernanke," Well, the FDIC has some tough choices because they are trying to replenish the fund without creating a ``procyclical effect,'' that is, without hurting the banking system in a way at a bad time when we want the banking system to be lending. The solution they have, as I understand it, is that even though there would be prepayments by the banks, that those prepayments would be treated as assets on the bank balance sheets, and therefore capital would not, at least in the a regulatory sense, be affected. And that is the solution they have chosen. " CHRG-110shrg46629--54 Chairman Bernanke," That is exactly right. On the consumer side, the issue is where was the loan made? In some cases, the bank simply bought up packaged loans that were made somewhere else. And there part of the problem is that it used to be that you could only get a loan at the bank or a thrift. Now of course, there is a great diversity of lending institutions and it is not entirely a level playing field in terms of the oversight of their consumer protection. Senator Bunning. Please get to my question. " CHRG-111hhrg48867--120 Mr. Garrett," Not even the servicing it. As the chairman said, you might be able to get rid of that somehow. But even just the fact you have to hold it, your ability to loan might be constrained somewhat. Ms. Jorde. Well, certainly the more that you can sell off, it leaves your capital available for lending. But for the most part we are portfolio lenders. It is whether or not you can give the advantage to the borrower as far as 30-year fixed rate mortgages, how you price those things, so that a community bank doesn't end up with asset liability issues. I think those are the things that would need to be worked out. " FinancialCrisisInquiry--741 ZANDI: Well, my interpretation of this discussion is what is the root cause of this mess? And my answer is there are many—it’s a mélange of problems. But three things—first is the surfeit of global saving, which provided the fodder for all this lending. Second was the failure of the process of securitization. The intent of securitization was to take all this global saving and funnel it into good loans, and it failed to do that. And there are a lot of bad actors in that process. And then third was the regulatory failure. There was no regulatory oversight, and this is where I would agree with—with Ken. That the key regulator is the Federal Reserve. It failed in that process. CHRG-111hhrg56776--22 Mr. Bernanke," Congressman, first of all, the Federal Reserve was not the supervisor of Lehman Brothers, and indeed, one of the issues I was talking about was that under the existing system, an investment bank like Lehman Brothers would not have a consolidated supervisor. We did not have that information. We had only a couple of people in the company whose primary objective was to make sure we got paid back the money we were lending to Lehman through our primary lender credit facility. We were not the supervisor, and in any case, we would not have had the authority to address accounting and disclosure issues in that context. " CHRG-111hhrg46820--101 Mr. Merski," Chairwoman Velazquez, Ranking Member Graves, and members of the committee, I am pleased to present the ICBA's views on the small business economy and on recommendations to promote an economic recovery. ICBA represents 5,000 community banks throughout our country, and community banks are independently owned and specialize in small business relationship banking. Notably half of all small business loans under $100,000 are made by community banks. Forty-eight percent of small businesses get their financing from community banks with 1 billion and under in assets. Today our small businesses are facing the most difficult economic conditions in decades and accessing credit is getting more problematic due to the turmoil in the credit markets. The National Federation of Independent Business Index of Small Business Optimism has dropped to its lowest level since it began in 1986. Additionally, the free fall in SBA lending is cause for alarm and immediate action. Therefore, fiscal policies focused on restoring consumer confidence, broad credit availability, a robust housing market and job growth are all vital to an economic recovery. We all know that many of our Nation's largest lenders and money center banks tripped up on subprime lending, toxic investments and now they are the ones pulling in their lending, writing down losses, and rebuilding their capital. However, there is another story out there. Thousands of community banks represent that other side of the financial story. Community banks rely on relationships in their communities, not on relationships with investment banks or hedge funds. Community bankers actually live and work in their communities that they serve and they certainly do not put their customers in loan products that they cannot possibly repay. While community banks did not cause the current turmoil, they are very well-positioned and willing to help get our economy back on track. To complement the aggressive monetary policy easing, ICBA recommends additional fiscal incentives, including individual and small business tax relief, enhanced home buyer tax credit, expanding SBA programs and Subchapter S tax reforms. Additionally, we really need to address our fair value accounting system and improve community banks' access to the TARP and TALF programs that this committee has worked hard on. SBA lending programs are vital. SBA lending should serve as a counterbalance during these challenging credit times for small businesses. Unfortunately, what we see is a dramatic drop in the dollar amount and number of small business loans being made. While the typical commercial small business loan has a maturity of 1 to 3 years, SBA 7(a) loans typically average 12 or more years in maturity. This lowers the entrepreneur's monthly loan payments and frees up needed cash flow to start or grow the small business. ICBA recommends immediately offering a super SBA loan program for 1 year as an economic stimulus to help small businesses access the capital they need. This could be an expedited 7(a) loan program with a 95 percent guarantee for small business loans up to 500,000. The vicious downward cycle in the housing sector must also be broken. Extending the $7,500 first-time home buyer tax credit and removing the repayment provision will help jump-start home sales, stabilize home prices, and address foreclosures. ICBA also recommends an immediate increase in the annual limit on tax-exempt municipal bonds from 10 million to 50 million. This would create greater low cost funding for local projects such as school construction, water treatment plants and other municipality projects. Chairwoman Velazquez, ICBA greatly appreciates your efforts to work with the Treasury and the Federal Reserve in successfully launching the TALF program. By providing liquidity to issuers of consumer asset backed paper, the Federal Reserve facility will enable more institutions to increase their lending. ICBA also appreciates the Small Business Committee's attention to the TARP capital purchase program. Community banks are very concerned that 3,000 financial institutions still do not have access to the capital purchase program. In conclusion, community banks did not cause this financial crisis, but we certainly will be there to help ensure our Nation's small businesses will have the access to credit that they need. I appreciate the opportunity to testify. Thank you. [The statement of Mr. Merski is included in the appendix at page 100.] " FinancialCrisisInquiry--203 Yes. You know, what we’ve observed over time with traditionally underserved borrowers or people with lower or nontraditional credit histories is that we always had higher delinquency rates than was typical in the prime markets but our actual loss rates always ran under 1 percent. And part of that was because—part of how to run a successful operation, lending to these communities, includes understanding that there can be different kinds of income interruptions and vicissitudes of life and working with borrowers through those periods to keep the loan performing. And so, really, we—you know, now, of course, we’ve been impacted by the larger crisis. But just—then what’s become what we now talk about as subprime lending is loan products that had risky features and, as Professor Rosen’s discussed, lots of layers of risk. And these were not products, for the most part, except in the narrowest, narrowest sense—for the most part, these were never products that provided particular benefits to the consumers. They were products that were push-marketed to, you know, more vulnerable populations and then spread out as the bubble grew and housing became more unaffordable for most families. CHAIRMAN ANGELIDES: All right. Thank you very much. And, last question here, before we move on, which is that—do you have data on—and maybe, again, it’s contained. I’ve read a lot, but at 56, I don’t retain all. And that is, do you have data on the extent to which community banks engaged in subprime origination? CLOUTIER: Yes, we—we—I’m sure we have data on that, but it was very, very little. Let me—can I just add on to both of these comments... CHAIRMAN ANGELIDES: Can you—well, let me just say, can you get us some data on... CLOUTIER: CHRG-111shrg51303--49 Mr. Dinallo," No. As I said in my opening statements, our calculations are that even after taking into account the losses for the securities lending, the U.S. life insurers were $11 billion to the solvent side. They were not insolvent. And that would be going to statutory accounting, yes. Senator Shelby. Governor Kohn stated in his testimony that, quote, ``A substantial contributor to AIG's massive fourth quarter losses were the losses on AIG's investment portfolios that are primarily, primarily attributable to its insurance subsidiary's holdings.'' In light of those facts, do you care to modify your prior testimony that AIG's problems did not come from its insurance operations? This is your testimony---- " CHRG-111hhrg55809--257 Mr. Bernanke," No, you are absolutely right. Banks do have various ways to raise capital. They can go to the public markets, for example. But one of the tensions we face now in this and other spheres is that there certainly is a desire, both in the United States and abroad, to raise bank capital levels so that they will be safer in the future, but recognizing though that, in the short run, raising capital levels may cause banks to reduce their assets and to reduce lending. We need to find a way to phase that in, sufficiently gradually that it doesn't impede the recovery. So we face that problem in a lot of cases. We want people to save more, but not immediately because the economy is in a recession. So it is the timing that is very important. " CHRG-111hhrg55811--303 Mr. Bachus," We didn't really have any problem with commodity derivatives. What we had problems with was basically the subprime market, that it was junk, and they put junk in derivatives, and if you put junk in, then the derivative is junk. And so if you regulate, if you put rules which the Congress has on subprime loans, and you--we have regulations on underwriting, and we had unregulated subprime lenders, but if we regulate those, and we try to have some credit-rating reform, and we have had subprime lending reform, that wouldn't be repeated hopefully, would it? " CHRG-111hhrg53244--301 Mr. Bernanke," Well, one way to do it is by raising the interest rate we pay on those reserves, which induces banks to keep the money with us instead of lending it out or circulating it through the economy. Another way to do it is through various open market operations that we can do that essentially pull those reserves out and bring them back into the Fed. So we do have a number of tools to do it. And we are quite aware of this issue, and we will not allow the broad measures of money circulating in the economy to rise at a rate rapid enough that would cause inflation eventually. " CHRG-111hhrg51698--67 Mr. Cota," Yes. With regard to risk of customers and those sorts of issues, that risk did present itself. In July, prices had stayed where they were at. Just my possible margining of positions would have created a huge cash-flow issue that most banks would not have loaned into. Generally what banks will do is they will loan on the basis of inventory and assets, the principal asset being the receivables. They took a look at the amounts required at that point for our industry; it would have been multiples of company values. So the bank also looks at what the underlying company value is, because the receivables go to a zero value if you don't stay in business, so that is a risk. On the positive side of how it affects banking, it is the largest banks that have dried up the liquidity in our markets. My market region, actually the small business banks and the small banks in our region are deposit-based lending, so they have tons of money. They are actually encouraging me to go out and do additional work right now to deploy capital that they need to put to work. It is only the large financial institutions that didn't have prudent reserves in order to be able to do that. So the impacts and risks are there. I think that if you are prudent, and you don't necessarily give authority to Congress, but to the CFTC, we can get more of those credit requirements that would lend itself to prudent business relationships. " FinancialCrisisReport--193 The memorandum identified several matters that required resolution prior to a WaMu purchase of Long Beach, including the establishment of pre- and post-funding loan quality reviews that were already in place at the bank. The memorandum also stated that Long Beach management had “worked diligently to improve its operation and correct significant deficiencies … reported in prior years,” and observed, “there is definitely a new attitude and culture.” 724 OTS continued to review Long Beach’s lending practices and found additional deficiencies throughout the year. Those deficiencies included errors in loan calculations of debt- to-income ratios, lack of documentation to support the reasonableness of borrower income on stated income loans, and lack of explanation of a borrower’s ability to handle payment shock on loans with rising interest rates. 725 OTS also determined that Long Beach’s newly created portfolio of subprime loans “had attributes that could result in higher risk” than WaMu’s existing subprime loan portfolio. 726 Nevertheless, in December 2005, OTS examiners wrote that, even though Long Beach was “engaged in a high-risk lending activity and we are not yet fully satisfied with its practices,” they recommended approving WaMu’s purchase of the company with certain conditions. 727 Those conditions included WaMu’s reconsidering its high risk lending concentration limits, including “stated income loans with low FICOs and high LTV ratios”; WaMu’s assurance that Long Beach would comply with certain loan guidance; a WaMu commitment to continue to bring down its loan exception and error rates; and a WaMu commitment to ensure its Enterprise Risk Management division would provide a “countervailing balance” to “imprudent” desires to expand Long Beach’s subprime lending. 728 About the same time as this memorandum was completed, OTS learned that, during the fourth quarter of 2005, Long Beach had been required to repurchase tens of millions of dollars of loans it had sold to third parties due to early payment defaults. 729 By December, this unexpected wave of repurchases had overwhelmed Long Beach’s repurchase reserves, leading to a reserve shortfall of nearly $75 million. Altogether in the second half of 2005, Long Beach had to repurchase loans with about $837 million in unpaid principal, and incurred a net loss of about 724 Id. See also 5/19/2005 OTS email, “LBMC Fair Lending,” OTSWMS05-005 0002002, Hearing Exhibit 4/16-20 (“I would not … feel comfortable with their moving [Long Beach] under the thrift without some conditions”). 725 See 12/21/2005 OTS internal memorandum by OTS examiners to OTS Deputy Regional Director Darrel Dochow, OTSWMS06-007 0001009-16, Hearing Exhibit 4/16-31. 726 Id. at OTSWMS06-007 0001011. 727 See 12/21/2005 OTS internal memorandum by OTS examiners to OTS Deputy Regional Director Darrel Dochow, OTSWMS06-007 0001009-16, Hearing Exhibit 4/16-31. 728 Id. at OTSWMS06-007 0001015-16. 729 See 10/3/2005 OTS Report of Examination, OTSWMS06-010 0002530, Hearing Exhibit 4/16-94 [Sealed Exhibit] (noting that, after a field visit to Long Beach that concluded in December 2005, OTS learned that loan repurchases had surged: “Subsequent to our on-site field visit, management informed us that loan repurchases had increased considerably. … Management indicated that approximately $0.6 billion in loans were repurchased during the fourth quarter of 2005 out of approximately $13.2 billion in total whole loan sales. The gross financial impact at December 31, 2005, was $72.3 million.”); 1/20/2006 email from Darrel Dochow to Michael Finn and others, with chart, OTSWMS06-007 0001020 to 1021 (describing Long Beach repurchases). $107 million. 730 In response, its auditor, Deloitte and Touche, cited Long Beach for a fcic_final_report_full--16 Finally, as to the matter of whether government housing policies were a primary cause of the crisis: for decades, government policy has encouraged homeownership through a set of incentives, assistance programs, and mandates. These policies were put in place and promoted by several administrations and Congresses—indeed, both Presidents Bill Clinton and George W. Bush set aggressive goals to increase home- ownership. In conducting our inquiry, we took a careful look at HUD’s affordable housing goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was enacted in  to combat “redlining” by banks—the practice of denying credit to in- dividuals and businesses in certain neighborhoods without regard to their creditwor- thiness. The CRA requires banks and savings and loans to lend, invest, and provide services to the communities from which they take deposits, consistent with bank safety and soundness. The Commission concludes the CRA was not a significant factor in subprime lend- ing or the crisis. Many subprime lenders were not subject to the CRA. Research indi- cates only  of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law. Nonetheless, we make the following observation about government housing poli- cies—they failed in this respect: As a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure that the philosophy of opportunity was being matched by the practical realities on the ground. Witness again the failure of the Federal Reserve and other regulators to rein in irresponsible lending. Homeown- ership peaked in the spring of  and then began to decline. From that point on, the talk of opportunity was tragically at odds with the reality of a financial disaster in the making. * * * W HEN THIS C OMMISSION began its work  months ago, some imagined that the events of  and their consequences would be well behind us by the time we issued this report. Yet more than two years after the federal government intervened in an unprecedented manner in our financial markets, our country finds itself still grap- pling with the aftereffects of the calamity. Our financial system is, in many respects, still unchanged from what existed on the eve of the crisis. Indeed, in the wake of the crisis, the U.S. financial sector is now more concentrated than ever in the hands of a few large, systemically significant institutions. While we have not been charged with making policy recommendations, the very purpose of our report has been to take stock of what happened so we can plot a new course. In our inquiry, we found dramatic breakdowns of corporate governance, profound lapses in regulatory oversight, and near fatal flaws in our financial system. We also found that a series of choices and actions led us toward a catastrophe for which we were ill prepared. These are serious matters that must be addressed and resolved to restore faith in our financial markets, to avoid the next crisis, and to re- build a system of capital that provides the foundation for a new era of broadly shared prosperity. FinancialCrisisReport--52 Washington Mutual was far from the only lender that sold poor quality mortgages and mortgage backed securities that undermined U.S. financial markets. The Subcommittee investigation indicates that Washington Mutual was emblematic of a host of financial institutions that knowingly originated, sold, and securitized billions of dollars in high risk, poor quality home loans. These lenders were not the victims of the financial crisis; the high risk loans they issued became the fuel that ignited the financial crisis. A. Subcommittee Investigation and Findings of Fact As part of its investigation into high risk lending and the Washington Mutual case study, the Subcommittee collected millions of pages of documents from Washington Mutual, JPMorgan Chase, OTS, the FDIC, eAppraiseIT, Lenders Service Inc., Moody’s, Standard & Poor’s, various investment banks, Fannie Mae, Freddie Mac, and others. The documents included email, correspondence, internal memoranda, reports, legal pleadings, financial analysis, prospectuses, and more. The Subcommittee also conducted more than 30 interviews with former WaMu employees and regulatory officials. The Subcommittee also spoke with personnel from the Offices of the Inspector General at the Department of Treasury and the FDIC, who were engaged in a joint review of WaMu’s regulatory oversight and the events leading to its demise. In addition, the Subcommittee spoke with nearly a dozen experts on a variety of banking, accounting, regulatory, and legal issues. On April 13, 2010, the Subcommittee held a hearing which took testimony from former WaMu officials and released 86 exhibits. 106 In connection with the hearing, the Subcommittee released a joint memorandum from Chairman Carl Levin and Ranking Member Tom Coburn summarizing the investigation to date into Washington Mutual and the role of high risk home loans in the financial crisis. The memorandum contained the following findings of fact, which this Report reaffirms. 1. High Risk Lending Strategy. Washington Mutual (WaMu) executives embarked upon a High Risk Lending Strategy and increased sales of high risk home loans to Wall Street, because they projected that high risk home loans, which generally charged higher rates of interest, would be more profitable for the bank than low risk home loans. 2. Shoddy Lending Practices. WaMu and its affiliate, Long Beach Mortgage Company (Long Beach), used shoddy lending practices riddled with credit, compliance, and operational deficiencies to make tens of thousands of high risk home loans that too often contained excessive risk, fraudulent information, or errors. 106 “Wall Street and the Financial Crisis: The Role of High Risk Loans,” before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 111-67 (April 13, 2010) (hereinafter “April 13, 2010 Subcommittee Hearing”). 3. Steering Borrowers to High Risk Loans. WaMu and Long Beach too often steered borrowers into home loans they could not afford, allowing and encouraging them to make low initial payments that would be followed by much higher payments, and presumed that rising home prices would enable those borrowers to refinance their loans or sell their homes before the payments shot up. 4. Polluting the Financial System. WaMu and Long Beach securitized over $77 billion in subprime home loans and billions more in other high risk home loans, used Wall Street firms to sell the securities to investors worldwide, and polluted the financial system with mortgage backed securities which later incurred high rates of delinquency and loss. 5. Securitizing Delinquency-Prone and Fraudulent Loans. At times, WaMu selected and securitized loans that it had identified as likely to go delinquent, without disclosing its analysis to investors who bought the securities, and also securitized loans tainted by fraudulent information, without notifying purchasers of the fraud that was discovered. 6. Destructive Compensation. WaMu’s compensation system rewarded loan officers and loan processors for originating large volumes of high risk loans, paid extra to loan officers who overcharged borrowers or added stiff prepayment penalties, and gave executives millions of dollars even when their High Risk Lending Strategy placed the bank in financial jeopardy. CHRG-110hhrg46593--157 Mr. Sherman," Thank you, Mr. Chairman. I would like to associate myself with your statements, particularly those dealing with the mortgage foreclosure prevention and the use of TARP funds to achieve that goal. Earlier in our discussion, there was discussion of the intent of the Secretary of the Treasury and the intent of Members of Congress being balanced in interpreting this law. I want to point out that, under the Constitution, Congress writes the law, and legislative intent is the only intent that should govern the construction of a statute. I have a question for the record that I hope all three of you would respond to, and that is whether you will use your influence over banks to remind them of how important it is to lend to creditworthy projects being done by charitable organizations? The work of charities is very important during this recession, and all too often, banks refuse to lend or refuse to provide letters of credit to charitable projects because they are concerned about the bad public relations that they would have if they ever had to foreclose. I think it is important that they get some bad public relations for refusing to lend and some pressure from you folks in achieving that objective. Secretary Paulson, I want to commend you for buying preferred stock rather than toxic assets. First, your approach ensures that we are only bailing out U.S. institutions and not buying toxic assets that were in safes in Beijing on September 20th. Second, you are buying a much more valuable asset. Any 9th grader would tell you, any 9 year-old would tell you that a toxic asset is less valuable than preferred stock. But I can't commend you on accepting half the rate of return and one-sixth the number of warrants that Warren Buffet was able to get on similar transactions. Our children will have a larger national debt because we have been so generous in the terms on the preferred stock. I would also point out that, as Mr. Secretary, this would bother me a lot except I wasn't in favor of buying toxic assets, but you have basically testified here that October 3rd, you had already decided to change your mind and not buy toxic assets and instead buy preferred stock, and you didn't tell Congress immediately before our vote that you would be going in a different direction. Perhaps I have misinterpreted your comments, and, if I have, I am sure the record will reflect that if you hadn't made that decision until after our vote on October 3rd. I gather from your facial expression that is what you are meaning to say. " CHRG-111shrg57319--292 Mr. Schneider," Senator, I think we were all very concerned about it. We tightened credit standards in our subprime space significantly in 2006 when we started to see the challenges, and then we tightened credit standards in our prime space, in our Option ARM book, and on, frankly, all lending types throughout 2007 as we experienced challenges with the performance. Senator Kaufman. Did you have any reason to believe that WaMu's internal controls were insufficient to deter fraud in these products? " CHRG-111shrg57322--634 Mr. Viniar," Correct. Senator Levin. Then, keep reading there, you ``effectively halt new purchases of sub-prime loan pools through conservative bids.'' In other words, you made bids that were so low that you weren't going to be able to buy them. Your warehouse lending business reduced. That is now the direction that you took, according to what you told the Board. You reversed your long market position, pretty directional. " CHRG-110hhrg44901--33 Mr. Manzullo," Thank you, Mr. Chairman. Chairman Bernanke, earlier this week you took an action to crack down on a range of shady lending practices that have hurt the Nation's riskiest subprime borrowers and also have caused a tremendous amount of economic distress in this country. Among other things, the Fed issued regulations that would prohibit lenders from lending without considering the borrower's ability to repay and also would require creditors to verify their income and assets at the time of the borrowing. These are pretty basic. Although hindsight is a 20/20 issue, and it is easy to sit here and say the Fed should have done this a long time ago, the evidence of this housing bubble has been going on for some time. And my question is, what took the Fed so long to act? And then the regulation you are coming out with is not going to be effective until October 1st of next year. Those are the issues just involving in the subprime borrowers. As to the regular borrowers, you came up with another landmark regulation that says, whenever a borrower gives a check to the bank that the bank has to credit it that day to the borrower's account. I mean, this shows knowledge of some very basic problems that have been wrong in the housing industry. But what took the Fed so long to act? And why wait 15 months before the regulations go into effect? " CHRG-111hhrg56776--3 Mr. Bachus," Thank you, Mr. Chairman. As Congress looks at ways to reform the country's financial infrastructure, we need to ask whether bank supervision is central to central banking. It is worth examining whether the Federal Reserve should conduct monetary policy at the same time it regulates and supervises banks or whether it should concentrate exclusively on its microeconomic responsibilities. It is no exaggeration to say the health of our financial system depends on getting this answer right. Frankly, the Fed's performance as a holding company supervisor has been inadequate. Despite its oversight, many of the large complex banking organizations were excessively leveraged and engaged in off balance sheet transactions that helped precipitate the financial crisis. Just this past week, Lehman Brothers' court-appointed bankruptcy examiner report was made public. The report details how Lehman Brothers used accounting gimmicks to hide its debt and mask its insolvency. According to the New York Times, all this happened while a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York were resident examiners in the headquarters of Lehman Brothers. As many as a dozen government officials were provided desks, phones, computers, and access to all of Lehman's books and records. Despite this intense on-site presence, the New York Fed and the SEC stood idle while the bank engaged in the balance sheet manipulations detailed in the report. This raises serious questions regarding the capability of the Fed to conduct bank supervision, yet even if supervision of its regulated institutions improved, it is not clear that oversight really informs monetary policy. If supervision does not make monetary policy decisions better, then the two do not need to be coupled. Vince Reinhart, a former Director of the Fed's Division of Monetary Affairs and now a resident scholar at the American Enterprise Institution, said that collecting diverse responsibilities in one institution is like asking a plumber to check the wiring in your basement. It seems that when the Fed is responsible for monetary policy and bank supervision, its performance in both suffers. Microeconomic issues cloud the supervisory judgments, therefore impairing safety and soundness. There are inherent conflicts of interest where the Fed might be tempted to conduct monetary policy in such a way that hides its mistakes by protecting the struggling banks it supervises. An additional problem arises when the supervision of large banks is separated from small institutions. Under Senator Dodd's proposal, the Fed would supervise 40 or 50 large banks, and the other 7,500 or so banks would be under the regulatory purview of other Federal and State banking agencies. If this were to happen, the Fed's focus on the mega banks will inevitably disadvantage the regional and community banks, and I think on this, Chairman Bernanke, you and I are in agreement, that there ought to be one regulator looking at all the institutions. H.R. 3311, the House Republican regulatory reform plan, would correct these problems. It would refocus the Fed on its monetary policy mandate by relieving it of its regulatory and supervisory responsibilities and reassign them to other agencies. By contrast, the regulatory reform legislation passed by the House in December represented a large expansion of the Fed's regulatory role since its creation almost 100 years ago. Senator Dodd has strengthened the Fed even more. His regulatory reform bill empowers the Fed to regulate systemically significant financial institutions and to enforce strict standards for institutions as they grow larger and more complex, adopts the Volcker Rule to restrict proprietary trading and investment by banks, and creates a new consumer financial protection bureau to be housed and funded by the Fed. In my view, the Democrats are asking the Fed to do too much. Thank you again, Mr. Chairman, for holding this hearing. I look forward to the testimony. " Mr. Watt," [presiding] I thank the gentleman for his opening statement. Let me see if I can try to use some of the chairman's time and my time to kind of frame this hearing in a way that we will kind of get a balanced view of what folks are saying. The Federal Reserve currently has extensive authority to regulate and supervise bank holding companies and State banks that are members of the Federal Reserve System, and foreign branches of member banks, among others. Last year, the House passed our financial services reform legislation that substantially preserved the Fed's power to supervise these financial institutions. The Senate bill recently introduced by Senator Dodd, however, would strip the Fed's authority to supervise all but approximately the 40 largest financial institutions. This hearing was called to examine the potential policy implications of stripping regulatory and supervisory powers over most banks from the Fed, especially the potential impact this could have on the Fed's ability to conduct monetary policy effectively. Proponents of preserving robust Fed supervision authority cite three main points to support their position that the Fed should retain broad supervisory powers. First, they say that the Fed has built up over the years deep expertise in microeconomic forecasting of financial markets and payment systems which allows the effective consolidated supervision of financial institutions of all sizes and allows effective macro prudential supervision over the financial system. Proponents of retaining Fed supervision say this expertise would be costly and difficult if not impossible to replicate in other agencies. Second, the proponents say that the Fed's oversight of the banking system improves this ability to carry out central banking responsibilities, including the responsibility for responding to financial crises and making informed decisions about banks seeking to use the Fed's discount window and lender of last resort services. In particular, proponents say that knowledge gained from direct bank supervision enhances the safety and soundness of the financial system because the Fed can independently evaluate the financial condition of individual institutions seeking to borrow from the discount window, including the quality and value of these institutions' collateral and their overall loan portfolio. Third, proponents say that the Fed's supervisory activities provide the Fed information about the current state of the economy and the financial system that influences the FOMC in its execution of monetary policy, including interest rate setting. On the flip side, there obviously are many critics of the Fed's role in bank supervision. Some of these critics blast the Fed for keeping interest rates too low for too long in the early 2000's, which some say fueled an asset price bubble in the housing market and the resulting subprime mortgage crisis. Consumer advocates and others accuse the Fed of turning a blind eye to predatory lending throughout the 1990's and 2000's, reminding us that Congress passed the HOEPA legislation in 1994 to counteract predatory lending, but the Fed did not issue final rules until well after the subprime crisis was out of control. Other critics accuse the Fed of ignoring the consumer protection role during supervisory examinations of banks and financial institutions across a wide range of financial products, including overdraft fees and credit cards and other things. Perhaps the appropriate policy response lies somewhere between the proponents and critics of the Fed bank supervision. I have tried to keep an open mind about the role of the Fed going forward, and hope to use today's hearing to get more information as we move forward to discussions with the Senate, if the Senate ever passes a bill. We are fortunate to have both the current Chairman and a former Chairman who are appearing today to inform us on these difficult issues, and with that, I will reserve the balance of our time and recognize Dr. Paul, my counterpart, the ranking member of the subcommittee. Dr. Paul. I thank the chairman for yielding. Yesterday was an important day because it was the day the FOMC met and the markets were hanging in there, finding out what will be said at 2:15, and practically, they were looking for two words, whether or not two words would exist: ``extended period.'' That is, whether this process will continue for an extended period. This, to me, demonstrates really the power and the control that a few people have over the entire economy. Virtually, the markets stand still and immediately after the announcement, billions of dollars can be shifted, some lost and some profits made. It is a system that I think does not have anything to do with free market capitalism. It has to do with a managed economy and central economic planning. It is a form of price fixing. Interest rates fixed by the Federal Reserve is price fixing, and it should have no part of a free market economy. It is the creation of credit and causing people to make mistakes, and also it facilitates the deficits here. Congress really does not want to challenge the Fed because they spend a lot. Without the Fed, interest rates would be very much higher. To me, it is a threat to those of us who believe in personal liberty and limited government. Hardly does the process help the average person. Unemployment rates stay up at 20 percent. The little guy cannot get a loan. Yet, Wall Street is doing quite well. Ultimately, with all its power, the Fed still is limited. It is limited by the marketplace, which can inflate like crazy. It can have financial bubbles. It can have housing bubbles. Eventually, the market says it is too big and it has to be corrected, but the mistakes have been made. They come in and the market demands deflation. Of course, Congress and the Fed do everything conceivable to maintain these bubbles. It is out of control. Once the change of attitude comes, when that inflated money supply decides to go into the market and prices are going up, once again the Fed will have difficulty handling that. The inflationary expectations and the velocity of money are subjectively determined, and no matter how objective you are about money supply, conditions, and computers, you cannot predict that. We do not know what tomorrow will bring or next year. All we know is that the engine is there, the machine is there, the high powered money is there, and of course, we will have to face up to that some day. The monetary system is what breeds the risky behavior. That is what we are dealing with today. Today, we are going to be talking about how we regulate this risky behavior, but you cannot touch that unless we deal with the subject of how the risky behavior comes from easy money, easy credit, artificially low interest rates, and the established principle from 1913 on that the Federal Reserve is there to be the lender of last resort. As long as the lender of last resort is there, all the regulations in the world will not touch it and solve that problem. I yield back. " fcic_final_report_full--125 In the end, companies in subprime and Alt-A mortgages had, in essence, placed all their chips on black: they were betting that home prices would never stop rising. This was the only scenario that would keep the mortgage machine humming. The ev- idence is present in our case study mortgage-backed security, CMLTI -NC, whose loans have many of the characteristics just described. The , loans bundled in this deal were adjustable-rate and fixed-rate residen- tial mortgages originated by New Century. They had an average principal balance of ,—just under the median home price of , in .  The vast major- ity had a -year maturity, and more than  were originated in May, June, and July , just after national home prices had peaked. More than  were reportedly for primary residences, with  for home purchases and  for cash-out refinancings. The loans were from all  states and the District of Columbia, but more than a fifth came from California and more than a tenth from Florida.  About  of the loans were ARMs, and most of these were /s or /s. In a twist, many of these hybrid ARMs had other “affordability features” as well. For ex- ample, more than  of the ARMs were interest-only—during the first two or three years, not only would borrowers pay a lower fixed rate, they would not have to pay any principal. In addition, more than  of the ARMs were “/ hybrid balloon” loans, in which the principal would amortize over  years—lowering the monthly payments even further, but as a result leaving the borrower with a final principal pay- ment at the end of the -year term. The great majority of the pool was secured by first mortgages; of these,  had a piggyback mortgage on the same property. As a result, more than one-third of the mortgages in this deal had a combined loan-to-value ratio between  and . Raising the risk a bit more,  of the mortgages were no-doc loans. The rest were “full-doc,” although their documentation was fuller in some cases than in others.  In sum, the loans bundled in this deal mirrored the market: complex products with high LTVs and little documentation. And even as many warned of this toxic mix, the reg- ulators were not on the same page. FEDERAL REGULATORS: “IMMUNITY FROM MANY STATE LAWS IS A SIGNIFICANT BENEFIT ” For years, some states had tried to regulate the mortgage business, especially to clamp down on the predatory mortgages proliferating in the subprime market. The national thrifts and banks and their federal regulators—the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC), respectively—resisted the states’ efforts to regulate those national banks and thrifts. The companies claimed that without one uniform set of rules, they could not easily do business across the country, and the regulators agreed. In August , as the market for riskier subprime and Alt- A loans grew, and as lenders piled on more risk with smaller down payments, reduced documentation requirements, interest-only loans, and payment-option loans, the OCC fired a salvo. The OCC proposed strong preemption rules for national banks, nearly identical to earlier OTS rules that empowered nationally chartered thrifts to disregard state consumer laws.  fcic_final_report_full--102 SUBPRIME LOANS:  “BUYERS WILL PAY A HIGH PREMIUM ” The subprime market roared back from its shakeout in the late s. The value of subprime loans originated almost doubled from  through , to  billion. In ,  of these were securitized; in , .  Low interest rates spurred this boom, which would have long-term repercussions, but so did increasingly wide- spread computerized credit scores, the growing statistical history on subprime bor- rowers, and the scale of the firms entering the market. Subprime was dominated by a narrowing field of ever-larger firms; the marginal players from the past decade had merged or vanished. By , the top  subprime lenders made  of all subprime loans, up from  in .  There were now three main kinds of companies in the subprime origination and securitization business: commercial banks and thrifts, Wall Street investment banks, and independent mortgage lenders. Some of the biggest banks and thrifts—Citi- group, National City Bank, HSBC, and Washington Mutual—spent billions on boost- ing subprime lending by creating new units, acquiring firms, or offering financing to other mortgage originators. Almost always, these operations were sequestered in nonbank subsidiaries, leaving them in a regulatory no-man’s-land. When it came to subprime lending, now it was Wall Street investment banks that worried about competition posed by the largest commercial banks and thrifts. For- mer Lehman president Bart McDade told the FCIC that the banks had gained their own securitization skills and didn’t need the investment banks to structure and dis- tribute.  So the investment banks moved into mortgage origination to guarantee a supply of loans they could securitize and sell to the growing legions of investors. For example, Lehman Brothers, the fourth-largest investment bank, purchased six differ- ent domestic lenders between  and , including BNC and Aurora.  Bear Stearns, the fifth-largest, ramped up its subprime lending arm and eventually ac- quired three subprime originators in the United States, including Encore. In , Merrill Lynch acquired First Franklin, and Morgan Stanley bought Saxon Capital; in , Goldman Sachs upped its stake in Senderra Funding, a small subprime lender. Meanwhile, several independent mortgage companies took steps to boost growth. FinancialCrisisReport--43 A third problem, exclusive to state regulators, was a 2005 regulation issued by the OCC to prohibit states from enforcing state consumer protection laws against national banks. 91 After the New York State Attorney General issued subpoenas to several national banks to enforce New York’s fair lending laws, a legal battle ensued. In 2009, the Supreme Court invalidated the OCC regulation, and held that states were allowed to enforce state consumer protection laws against national banks. 92 During the intervening four years, however, state regulators had been effectively unable to enforce state laws prohibiting abusive mortgage practices against federally- chartered banks and thrifts. Systemic Risk. While bank and securities regulators focused on the safety and soundness of individual financial institutions, no regulator was charged with identifying, preventing, or managing risks that threatened the safety and soundness of the overall U.S. financial system. In the area of high risk mortgage lending, for example, bank regulators allowed banks to issue high risk mortgages as long as it was profitable and the banks quickly sold the high risk loans to get them off their books. Securities regulators allowed investment banks to underwrite, buy, and sell mortgage backed securities relying on high risk mortgages, as long as the securities received high ratings from the credit rating agencies and so were deemed “safe” investments. No regulatory agency focused on what would happen when poor quality mortgages were allowed to saturate U.S. financial markets and contaminate RMBS and CDO securities with high risk loans. In addition, none of the regulators focused on the impact derivatives like credit default swaps might have in exacerbating risk exposures, since they were barred by federal law from regulating or even gathering data about these financial instruments. F. Government Sponsored Enterprises Between 1990 and 2004, homeownership rates in the United States increased rapidly from 64% to 69%, the highest level in 50 years. 93 While many highly regarded economists and officials argued at the time that this housing boom was the result of healthy economic activity, in retrospect, some federal housing policies encouraged people to purchase homes they were ultimately unable to afford, which helped to inflate the housing bubble. Fannie Mae and Freddie Mac. Two government sponsored entities (GSE), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), were chartered by Congress to encourage homeownership primarily by providing a secondary market for home mortgages. They created that secondary market by purchasing loans from lenders, securitizing them, providing a guarantee that they would make up the cost of other requirements, the rules prohibited lenders “from making loans based on collateral without regard to [the borrower’s] repayment ability,” required lenders to “verify income and obligations,” and imposed “more stringent restrictions on prepayment penalties.” The rules also required lenders to “establish escrow accounts for taxes and mortgage related insurance for first-lien loans.” In addition, the rules “prohibit[ed] coercion of appraisers, define[d] inappropriate practices for loan servicers, and require[d] early truth in lending disclosures for most mortgages.”). 91 12 CFR § 7.4000. 92 Cuomo v. Clearing House Association , Case No. 08-453, 129 S.Ct. 2710 (2009). 93 U.S. Census Bureau, “Table 14. Homeownership Rates by Area: 1960 to 2009,” http://www.census.gov/hhes/www/housing/hvs/annual09/ann09t14.xls. any securitized mortgage that defaulted, and selling the resulting mortgage backed securities to investors. Many believed that the securities had the implicit backing of the federal government and viewed them as very safe investments, leading investors around the world to purchase them. The existence of this secondary market encouraged lenders to originate more loans, since they could easily sell them to the GSEs and use the profits to increase their lending. CHRG-111hhrg54869--5 Mr. Scott," Thank you, Mr. Chairman, and welcome, Mr. Volcker. We are at a juncture in our dealing with this in terms of putting the regulatory reforms to--I think at the same time do a little check on our record going forward of how well what we have done and is it doing the job? The American people are registering some great concerns. Poll after poll has indicated that there is a--while Wall Street and those at the top appear to be saying that this economy is changing, we are bottoming out. That is not so on Main Street because we have another set of parameters that are working there. And I would like to get your opinions on--I have a great deal of respect for you and your history and your knowledge. But I think as we look at this issue, we need to be concerned about any variations of what we would refer to as a double dip recession. There are people who are still expressing concerns over the economy and problems that will loom greater. I am particularly concerned, Mr. Volcker, about unemployment. The issue in our focus really needs to be on jobs now because if we don't get to the bottom of that we gradually begin to lose the faith of the American people. The issue needs to be on jobs, the issue needs to be on our banks. For some reason, with all of the money we have given them, with the bailouts we have given them, with many of them going back to their ways of directing bonuses and huge salaries, there is a hypocritical nature that is setting in because at the same time, these banks are not lending. So if you are not lending, especially to small businesses, they are going out of business. They are the ones that created the jobs. So I think as we go forward with our regulatory reforms we have to look at it with a very jaundiced eye and see as we put these regulatory reforms in place, what more can we do to prime the pump to get money flowing out into the communities. The other area of great concern to me--and certainly to my folks down in Georgia--is a record number of bank closures. And as we look at these regulatory reforms, one size does not fit all. What is the future of those small community banks that basically do the lending, that are the foundations in many of our smaller communities? Those are the banks that are being closed left and right. We lead the Nation in Georgia in those bank closures, and a part of the reason is they can't get the capitalization. So I think as we go forward I would be very interested to hear some of your concerns on giving us a scorecard, giving us a report card. We have been at this now for basically a year. This thing happened a year ago. We have been moving at it, and I think it is about time to get a little report, and I would be interested to hear your comments on that. " CHRG-111shrg55117--14 Chairman Dodd," Let me quickly jump last to this issue involving the power the Fed presently has over the bank holding companies. And again, all of us here, we go back to our respective States and we get an earful on a daily--hourly--basis about the unwillingness of these lending institutions to provide the necessary credit at a critical time, when businesses are out there asking for it and demanding it and there just seems to be no response at all. Now, we can jawbone on the issue, but the Fed has the power here to really exercise some greater influence. Why is that not happening? Why aren't we getting more support in order to demand that these institutions start being far more responsive to the demands of industry and business out there that are relying on these institutions to expand and grow and help recover? " CHRG-111hhrg54868--5 Mr. Scott," Thank you very much, Mr. Chairman. Thank you for this hearing. I want to start by thanking you, Ms. Bair, for your quick response and coming to the phone and talking with us about the particular situation in my home State of Georgia, where, as you know, unfortunately we almost got a double tragedy, of course, with the flooding that is going on there now, but, of course, with our flood of bank foreclosures. And I appreciate your comments on that and doing everything we can to stem the tide of losing banks. That is an unfortunate thing that my State, unfortunately, leads the Nation in this regard. I guess my major concern that I want to certainly put before this panel today, and I will get to some of it in my questions, simply that the fact that there needs to be a heightened awareness and interest and emphasis placed upon what we are doing and must do to reclaim the confidence of the American people in our economic system. We have, I think, played a much heavier hand and placed a greater interest on dealing with our banks, Wall Street, who are apparently getting well now, under the belief that as we move forward with unfreezing the credit markets and making sure that we help bail out Wall Street, we have forgotten to place the necessary emphasis on doing something to help Main Street, to help people. So now here we are with unemployment hovering at 10 and 11 percent, and in some communities they are at Depression levels. I think there ought to be something for us to discuss today on what we are going to do as we move forward to make sure we are getting jobs created in this country, because that, in all reasoning, is the key to getting our economy back moving. It is jobs. Unemployment continues to go up. And as we spoke, Ms. Bair--and unfortunately home foreclosure rates are continuing to go up. So the fundamental question becomes to me is there seems to be a freezing of the arteries within the banking system. We need to get to the fundamental reason why banks are not lending, why are they not lending, especially to small businesses which create the jobs? And with that I will yield back the balance of my time. " CHRG-110hhrg44900--221 Mr. Bernanke," The investment banks have had a more ad hoc relationship because we have been working with the SEC, as you know. But as I have mentioned, between us we have made strong demands on the firms. We have insisted that they raise their liquidity holding in particular, because that turned out to the major point of vulnerability for Bear Stearns. And we have also asked them to raise their capital, to improve the practices of risk management, and so on. So we are doing very much the same kind of thing between the Fed and the SEC in the investment banks that we and other regulators already do in the commercial banks. So there is a quid pro quo that if we are going to lend to you, you have to take steps to-- " CHRG-111shrg57320--12 Mr. Rymer," Yes, sir, I do. I really can see no practical reason from a banker's perspective or lender's perspective to encourage that. That is just, to me, an opportunity to essentially encourage fraud. Senator Levin. Now, on the Option ARMs issue, OTS allowed Washington Mutual to originate hundreds of billions of dollars in these Option Adjustable Rate Mortgages, these Option ARMs. OTS was also allowing the bank to engage in a set of high-risk lending practices in connection with the Option ARMs. Some of these high-risk lending practices included low teaser rates as low as 1 percent in effect for as little as a month to entice borrowers; qualifying borrowers using lower loan payments than they would have to pay if the loan were recast; allowing borrowers to make minimum payments, resulting in negatively amortizing loans; approving loans presuming that rising housing prices and refinancing would enable borrowers to avoid payment shock and loan defaults. Now, it was the Option ARM loans in 2008 that was one of the major reasons that investors and depositors pulled their money from the bank, and did those Option ARMs, particularly when connected with those other factors, raise a real safety and soundness problem at WaMu? Mr. Thorson. " CHRG-111shrg61513--64 Mr. Bernanke," It depends on exactly how the resolution authority is structured. It might be that you want the Fed to be available to provide liquidity as part of the resolution process, for example. But, generally speaking, I prefer that you develop a process that leaves the Fed to do only its standard discount window lending against collateral as it always has done, without use of the emergency authority. Senator Vitter. So if we get the resolution authority right, you do not see any need for that other authority with regard to individual firms continuing to exist? " CHRG-110shrg50417--115 Mr. Campbell," I would be happy to comment on that. Wells Fargo has demonstrated an ability to generate revenues at double-digit levels for long periods of time, and so for us, it is not a new endeavor. Our company has always been about driving our performance through prudent revenue growth, and so for us, this is just what we do for a living. We are constantly seeking to increase the levels of credit that we provide to our marketplaces, and as I said in my testimony earlier, I think we are proud of the amount of lending that we have been able to do during these very unprecedented, difficult times. " CHRG-111hhrg48868--816 Mr. Liddy," The original arrangement that the Fed and the Treasury put in place for AIG worked. We did not go bankrupt and we walled off the securities lending and the credit default swap issues. They are gone. So what is left in AIG FP is really just--I am going to use the term ``traditional'' book of derivatives contracts, although it is hard to use traditional and derivatives in the same sentence. Ms. Speier. So what is left are derivative contracts. Are they going to be more difficult to unwind because they are still there? " CHRG-111shrg57319--466 Mr. Rotella," Senator, this report labeled ``Wholesale Specialty Lending'' is about the subprime business. By August 2007, we had shut that business down. This audit report is reflective of the actions that I took, which were to relieve management of their duties, take the volume down, and ultimately shut this business down by the time this was issued. Senator Levin. But you said you first became aware of fraud in 2008 and this shows significant fraud in 2007. " CHRG-111hhrg48674--18 Mr. Bernanke," Yes, sir. The terms and conditions, to my knowledge--and if you have any exceptions, I would be glad to get information to you--but the terms and conditions of all our agreements, to my knowledge, are fully disclosed. There are two types. There are the lending programs, such as the discount window and commercial paper facility. Those are all public information and all on the Web site. The testimony has a list of 5 pages of Web sites where information can be obtained. That information is fully disclosed. The one-off deals associated with AIG and Bear Stearns likewise, to my knowledge, they are fully disclosed in terms of-- " CHRG-110hhrg38392--31 Mr. Bachus," Thank you. My last question is this: When we looked at the subprime lending problem last year, we found that probably about 3 percent of the brokers and actually, also, not only brokers, but mortgage bankers, people who worked for nationally regulated bankers--about 3 percent of them caused about 90 percent of the mischief and the fraud, and they will lose their licenses in one State. Then they go to another State, and they set up shop, and they are really creating havoc. These are basically--to me, they are criminals, and they are inflicting a tremendous amount of pain. Would you like to comment? I introduced a bill, along with several of my colleagues, which called for a national registration and licensing standard for all mortgage originators. Would you like to comment on that, or on the legislation we introduced? " CHRG-110hhrg46596--160 Mr. Kashkari," The mark-to-market is a very important issue. We are focused on stabilizing the financial system so that they can recognize their losses and also raise additional capital and get lending going in our community again. We believe that both by helping the consumers directly; for example, through our facility with the Federal Reserve that I have spoken about, and putting more capital in the banks, it puts them in a better position so that we can weather this downturn and get these assets moving again. So there is no one tool. All of the regulators are bringing the various tools to bear in a complementary manner to try to get through the financial crisis. The TARP is very important, but it complements the other tools that we have. " fcic_final_report_full--264 Disruptions quickly spread to other parts of the money market. In a flight to qual- ity, investors dumped their repo and commercial paper holdings and increased their holdings in seemingly safer money market funds and Treasury bonds. Market partici- pants, unsure of each other’s potential subprime exposures, scrambled to amass funds for their own liquidity. Banks became less willing to lend to each other. A closely watched indicator of interbank lending rates, called the one-month LIBOR-OIS spread, increased, signifying that banks were concerned about the credit risk involved in lending to each other. On August , it rose sharply, increasing three-to fourfold over historical values, and by September , it climbed by another . In , it would peak much higher. The panic in the repo, commercial paper, and interbank markets was met by imme- diate government action. On August , the day after BNP Paribas suspended redemp- tions, the Fed announced that it would “provid[e] liquidity as necessary to facilitate the orderly functioning of financial markets,”  and the European Central Bank infused billions of Euros into overnight lending markets. On August , the Fed cut the dis- count rate by  basis points—from . to .. This would be the first of many such cuts aimed at increasing liquidity. The Fed also extended the term of discount- window lending to  days (from the usual overnight or very short-term period) to of- fer banks a more stable source of funds. On the same day, the Fed’s FOMC released a statement acknowledging the continued market deterioration and promising that it was “prepared to act as needed to mitigate the adverse effects on the economy.”  SIV S : “AN OASIS OF CALM ” In August, the turmoil in asset-backed commercial paper markets hit the market for structured investment vehicles, or SIVs, even though most of these programs had lit- tle subprime mortgage exposure. SIVs had a stable history since their introduction in . These investments had weathered a number of credit crises—even through early summer of , as noted in a Moody’s report issued on July , , titled “SIVs: An Oasis of Calm in the Sub-prime Maelstrom.”  Unlike typical asset-backed commercial paper programs, SIVs were funded pri- marily through medium-term notes—bonds maturing in one to five years. SIVs held significant amounts of highly liquid assets and marked those assets to market prices daily or weekly, which allowed them to operate without explicit liquidity support from their sponsors. The SIV sector tripled in assets between  and . On the eve of the crisis, there were  SIVs with almost  billion in assets.  About one-quarter of that money was invested in mortgage-backed securities or in CDOs, but only  was in- vested in subprime mortgage–backed securities and CDOs holding mortgage-backed securities. Not surprisingly, the first SIVs to fail were concentrated in subprime mortgage– backed securities, mortgage-related CDOs, or both. These included Cheyne Finance (managed by London-based Cheyne Capital Management), Rhinebridge (another IKB program), Golden Key, and Mainsail II (both structured by Barclays Capital). Be- tween August and October, each of these four was forced to restructure or liquidate. Investors soon ran from even the safer SIVs. “The media was quite happy to sen- sationalize the collapse of the next ‘leaking SIV’ or the next ‘SIV-positive’ institution,” then-Moody’s managing director Henry Tabe told the FCIC.  The situation was complicated by the SIVs’ lack of transparency. “In a context of opacity about where risk resides, . . . a general distrust has contaminated many asset classes. What had once been liquid is now illiquid. Good collateral cannot be sold or financed at any- thing approaching its true value,” Moody’s wrote on September .  CHRG-111shrg52619--200 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HUTCHISON FROM DANIEL K. TARULLOQ.1. Will each of you commit to do everything within your power to prevent performing loans from being called by lenders? Please outline the actions you plan to take.A.1. The Federal Reserve's survey of senior loan officers at banks has indicated that banks have been tightening standards for both new commercial and industrial loans and new consumer loans since the beginning of 2008, although the net percentage of banks that have tightened standards in both categories has diminished a bit in recent months. We also are aware of reports that some banking organizations have declined to renew or extend new credit to borrowers that had performed on previously provided credit, or have exercised their rights to lower the amount of credit available to performing customers under existing lines of credit, such as home equity lines of credit. There is a variety of factors that potentially could influence a banking organization's decision to not renew or extend credit to a currently performing borrower, or reduce the amount of credit available to such a borrower. Many of these factors may be unique to the individual transaction, customer or banking organization involved. However, other more general factors also may be involved. For example, due to the ongoing turmoil in the financial markets, many credit and securitization markets have experienced substantial disruptions in the past year and a half, which have limited the ability of banking organizations to find outlets for their loans and obtain the financing to support new lending activities. In addition, losses on mortgage-related and other assets reduced the capital position of many banking organizations, which also weakened their ability to make or renew loans. The Federal Reserve, working in conjunction with the Treasury Department, has taken a number of important steps to help restore the flow of credit to households and businesses. For example, the Term Asset-Backed Securities Leading Facility (TALF), which began operations in March 2009, is designed to restart the securitization markets for several types of consumer and commercial credit. In addition, the recently completed Supervisory Capital Assessment Program was designed to ensure that the largest banking organizations have the capital necessary to fulfill their critical credit intermediation functions even in seriously adverse economic conditions. Besides these actions, we continue to actively work with banking organizations to encourage them to continue lending prudently to creditworthy borrowers and work constructively with troubled customers in a manner consistent with safety and soundness. I note that, in some instances, it may be appropriate from a safety and soundness perspective for a banking organization to review the creditworthiness of an existing borrower, even if the borrower is current on an existing loan from the institution. For example, the collateral supporting repayment of the loan may have declined in value. However, we are very cognizant of the need to ensure that banking organizations do not make credit decisions that are not supported by a fair and sound analysis of creditworthiness, particularly in the current economic environment. Striking the right balance between credit availability and safety and soundness is difficult, but vitally important. The Federal Reserve has long-standing policies and procedures in place to promote sound risk identification and management practices at regulated institutions that also support bank lending, the credit intermediation process, and working with borrowers. For example, guidance issued as long ago as 1991, during the commercial real estate crisis that began in the late 1980s, specifically instructs examiners to ensure that regulatory policies and actions do not inadvertently curtail the availability of credit to sound borrowers. \1\ The 1991 guidance also states that examiners are to ``ensure that supervisory personnel are reviewing loans in a consistent, prudent, and balanced fashion and to ensure that all interested parties are aware of the guidance.''--------------------------------------------------------------------------- \1\ ``Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans,'' (November 1991).--------------------------------------------------------------------------- This emphasis on achieving an appropriate balance between credit availability and safety and soundness continues today. To the extent that institutions have experienced losses, hold less capital, and are operating in a more risk-sensitive environment, supervisors expect banks to employ appropriate risk-management practices to ensure their viability. At the same time, it is important that supervisors remain balanced and not place unreasonable or artificial constraints on lenders that could hamper credit availability. As part of our effort to help stimulate appropriate bank lending, the Federal Reserve and the other federal banking agencies issued a statement in November 2008 to encourage banks to meet the needs of creditworthy borrowers. \2\ The statement was issued to encourage bank lending in a manner consistent with safety and soundness--specifically, by taking a balanced approach in assessing borrowers' ability to repay and making realistic assessments of collateral valuations. This guidance has been reviewed and discussed with examination staff within the Federal Reserve System.--------------------------------------------------------------------------- \2\ ``Interagency Statement on Meeting the Needs of Credit Worthy Borrowers,'' (November 2008).--------------------------------------------------------------------------- Earlier, in April 2007, the federal financial institutions regulatory agencies issued a statement encouraging financial institutions to work constructively with residential borrowers who are financially unable to make their contractual payment obligations on their home loans. \3\ The statement noted that ``prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term interest of both the financial institution and the borrower.'' The statement also noted that ``the agencies will not penalize financial institutions that pursue reasonable workout arrangements with borrowers who have encountered financial problems.'' It further stated that, ``existing supervisory guidance and applicable accounting standards do not require institutions to immediately foreclose on the collateral underlying a loan when the borrower exhibits repayment difficulties.'' This guidance has also been reviewed by examiners within the Federal Reserve System.--------------------------------------------------------------------------- \3\ ``Federal Regulators Encourage Institutions To Work With Mortgage Borrowers Who Are Unable To Make TheirPayments,'' (April 2007).--------------------------------------------------------------------------- More generally, we have directed our examiners to be mindful of the pro-cyclical effects of excessive credit tightening and to encourage banks to make economically viable loans, provided such lending is based on realistic asset valuations and a balanced assessment of borrowers' repayment capacities. Banks are also expected to work constructively with troubled borrowers and not unnecessarily call loans or foreclose on collateral. Across the Federal Reserve System, we have implemented training and outreach to underscore these objectives. ------ FinancialCrisisReport--218 At another point, the same Examiner-in-Charge wrote a long email discussing issues related to a decision by WaMu to qualify borrowers for adjustable rate mortgages using an interest rate that was less than the highest rate that could be charged under the loan. He complained that it was difficult to force WaMu to comply with the OTS “policy of underwriting at or near the fully indexed rate,” when “in terms of policy, I am not sure we have ever had a really hard rule that institutions MUST underwrite to the fully indexed rate.” 823 He also noted that OTS sometimes made an exception to that rule for loans held for sale. NTM Guidance. While some OTS examiners were complaining about the agency’s weak standards, other OTS officials worked to ensure that new standards being developed for high risk mortgages would not restrain WaMu’s lending practices. The effort began in 2006 with an aim to address concerns about lax lending standards and the risks posed by subprime, negatively amortizing, and other exotic home loans. The federal banking agencies convened a joint effort to reduce the risk associated with those mortgages by issuing interagency guidance for “nontraditional mortgage” products (NTM Guidance). Washington Mutual filed public comments on the proposed NTM Guidance and argued that Option ARM and Interest-Only loans were “considered more safe and sound for portfolio lenders than many fixed rate mortgages,” so regulators should “not discourage lenders from offering these products.” 824 It also stated that calculating a potential borrower’s “DTI [debt-to-income ratio] based on the potential payment shock from negative amortization would be highly speculative” and “inappropriate to use in lending decisions.” 825 During subsequent negotiations to finalize that guidance, OTS argued for less stringent lending standards than other regulators were advocating and bolstered its points using data supplied by Washington Mutual. 826 In one July 2006 email, for example, an OTS official expressed the view that early versions of the new guidance focused too much on negative amortization loans, which were popular with several thrifts and at WaMu in particular, and failed to also look closely at other high risk lending products more common elsewhere. 827 He also wrote that OTS needed to address this issue and “should consider going on the offensive, rather than defensive to refute the OCC’s positions” on negatively amortizing loans, defending the loans using WaMu Option ARM loan data. 828 In August, several OTS officials discussed over email how to prevent the 822 Id. 823 9/15/2005 email from OTS Examiner-in-Charge Lawrence Carter to OTS Western Region Deputy Director Darrel Dochow, OTSWMS05-002 0000535, Hearing Exhibit 4/16-6. 824 3/29/2006 letter from Washington Mutual Home Loans President David C. Schneider to OTS Chief Counsel, Proposed Guidance – Interagency Guidance on Nontraditional Mortgage Products 70 Fed. Reg. 77249, JPM_WM04473292. 825 Id. at JPM_WM04473298. 826 Subcommittee interviews of Sheila Bair (4/5/2010) and George Doerr (3/30/2010). The Subcommittee was told that OTS was the “most sympathetic to industry” concerns of the participating agencies and was especially protective of Option ARMs. 827 7/27/2006 email from Steven Gregovich to Grovetta Gardineer and others, “NTM Open Issues,” OSWMS06-008 0001491-495, Hearing Exhibit 4/16-71. 828 Id. proposed restrictions on negatively amortizing loans from going farther than they believed necessary, noting in part the “profitable secondary market” for Option ARMs and the fact that “hybrid IO [interest only] ARMs are a huge product for Wamu.” One OTS official wrote: “We have dealt with this product [negatively amortizing loans] longer than any other regulator and have a strong understanding of best practices. I just don’t see us taking a back seat on guidance that is so innate to the thrift industry.” 829 CHRG-110hhrg44900--210 Mr. Bernanke," Well, again, there are several ways of doing that. The first is prudential supervision, a consolidated supervision, where you're there and you make sure that they meet the appropriate standards. If the capital regulations tie the amount of capital they hold to the risk that they take, so if they want to take bigger risk, they have to hold more capital. So by ensuring through prudential supervision on capital and liquidity and risk management, we can ensure--well not ensure, but at least make much more likely that those firms won't get into trouble or take excessive risks in the future. Secondly, I suggested in my testimony a few other steps we can take to make the system as a whole stronger, so that should the time come, if a Bear Stearns were to ever happen again, unlike in March, when we just felt that the system was not strong enough, resilient enough to suffer the consequences of that, we might be able to make a different decision in the future, because we would say this is something that the system can absorb. So, as I have noted earlier, along with our lending decisions, we have also been looking at ways in which we and the Congress can move forward to make sure that there's a commensurate supervision that balances out whatever lending privileges the investment banks get. Ms. Speier. Mr. Chairman, I would like to just point out that there probably is some action that we should take as the committee sooner than later, as it relates to the authority of the Fed over investment banking institutions, because another Bear Stearns can happen, it could happen in the course of 6 months while we are campaigning for re-election. And if it's as important as you say it is to get some authority in place, so it's very clear, I would think that would be one priority-- " CHRG-111hhrg67816--268 Mr. Tierney," I guess I would say, Congresswoman, I, like many of us, was studying the proposal by Professor Warren. It has been called the so-called Durbin-Delahunt bill. I have not taken a position on it yet but it has a lot to it. But, if I may, to go back to your earlier point about pay-day lending, and remember the name of the song, If You Can't Be With the One You Love, Love the One You're With, we have enough authority now between the states and the trial lawyers and the legislatures and the Federal Trade Commission. If we just want to do something and focus on the problem such as pay-day, take the resources we have, set a national strategic goal, and just go do it. And my concern about discussion of the larger institution is that while we play that huge congressional effort that goes on for so long, that we have millions of people suffering every day, and we should do something right now. " CHRG-111hhrg54872--180 Mr. Scott," Thank you, Mr. Chairman. I would just like to kind of focus my remarks on unintended consequences, one-size-fits-all dangers of this, as well as the confusion between State and Federal laws as we move forward. It is an important legislation. Let's take my first problem of unintended consequences and whether or not this would work, particularly with some unique situations. I am sure you all are familiar with the Farm Credit Administration. The Farm Credit Administration is very, very unique. They already have what they call a borrowers' bills of rights, which basically covers much of what we are attempting to do in this bill, resulting in if they were into this duplicatory obligations, burdensome regulatory concerns as well. Consumer lending is a very, very small part of what they do. Mortgage lending, for example, is only allowed in communities with less than 2,500 individuals. Their products were not anywhere near the toxic level that caused the problem in the first place. So my question is, would not we be doing a better service here if we allowed the farm credit to continue to operate under its own current regulatory process away from this legislation? I take it all of you agree that it would be the best thing to do in this situation, to allow farm credit. The reason I mention that is, also, farm credit does not come under the jurisdiction of financial services. It is an agricultural area. And I am simply saying that it makes sense--this is a complex, complicated area, covers a lot of the waterfront when we are dealing with the financial services industry. And it might be wise as we move forward with this to look inward-outward instead of outward-inward. And I think that what I am getting from the committee here is that you agree that the Farm Credit Administration should be left away from this or doing what they are doing with the bill of rights; weren't a part of the problem in the first place; and this would be a duplication. " CHRG-111shrg52619--33 Mr. Smith," I would like to emphasize a few points that are contained in it. The first of these points is that proximity, or closeness to the consumers, businesses, and communities that deal with our banks is important. We acknowledge that a modern financial regulatory structure must deal with systemic risks presented by complex global institutions. While this is necessary, sir, we would argue that it is not itself sufficient. A modern financial regulatory structure should also include, and as more than an afterthought, the community and regional institutions that are not systemically significant in terms of risk but that are crucial to effectively serving the diverse needs of our very diverse country. These institutions were organized to meet local needs and have grown as they have met such needs, both in our metropolitan markets and in rural and exurban markets, as well. We would further suggest that the proximity of State regulators and attorneys general to the marketplace is a valuable asset in our efforts to protect consumers from fraud, predatory conduct, and other abuses. State officials are the first responders in the area of consumer protection because they are the nearest to the action and see the problems first. It is our hope that a modernized regulatory system will make use of the valuable market information that the States can provide in setting standards of conduct and will enhance the role of States in enforcing such standards. To allow for this system to properly function, we strongly believe that Congress should overturn or roll back the OTS and OCC preemption of State consumer protection laws and State enforcement. A second and related point that we hope you will consider is that the diversity of our banking and regulatory systems is a strength of each. One size does not fit all, either with regard to the size, scope, and business methods of our banks or the regulatory regime applicable to them. We are particularly concerned that in addressing the problems of complex global institutions, a modernized financial system may inadvertently weaken community and regional banks by under-support for the larger institutions and by burdening smaller institutions with the costs of regulation that are appropriate for the large institutions, but not for the smaller regional ones. We hope you agree with us that community and regional banks provide needed competition in our metropolitan markets and crucial financial services in our smaller and more isolated markets. A corollary of this view is that the type of regulatory regime that is appropriate for complex global organizations is not appropriate for community and regional banks. In our view, the time has come for supervision and regulation that is tailored to the size, scope, and complexity of a regulated enterprise. One size should not and cannot be made to fit all. I would like to make it clear that my colleagues and I are not arguing for preservation of the status quo. Rather, we are suggesting that a modernized regulatory system should include a cooperative federalism that incorporates both national standards for all market participants and shared responsibility for the development and enforcement of such standards. We would submit that the shared responsibility for supervising State charter banks is one example, current example, of cooperative federalism and that the developing partnership between State and Federal regulators under the Secure and Fair Enforcement for mortgage licensing, or SAFE Act, is another. Chairman Dodd, my colleagues and I support this Committee's efforts to modernize our Nation's financial regulatory system. As always, sir, it is an honor to appear before you. I hope that our testimony is of assistance to the Committee and would be happy to answer any questions you may have. Thank you very, very much. " CHRG-111shrg50814--193 Mr. Bernanke," No, Senator. As I said, we are going to transparency. We want to find out what their true positions really are, and if we, the regulators, the Treasury, were to determine that a bank were really not viable, that would be a different question. But right now the view is that these assessments will determine how much capital they need to continue to lend and support the economy. Senator Shelby. Last, how do you get the market to believe that what you are doing is the right thing? Obviously, most of them do not. Most of the participants in the market that are keen observers do not believe in what you are doing with the banks, because look at the bank stocks. " CHRG-111shrg51303--40 Mr. Dinallo," Well, yes, but on the very first one, I would say that when we--prior to 2007, I don't think it was monitored as well as it should have been, so I am actually agreeing--what you want to get from me, I will agree with you. I don't think it was as coordinated and as monitored, given it was a group activity, as you pointed out, as it could have been---- Senator Shelby. So my question was, did the New York Insurance Department, which you headed, reviewed and monitored AIG's securities lending program, and you say not adequately, is that right? " CHRG-110hhrg46594--436 Mr. Green," Let me ask you this if I may, because time is of the essence. This is a loan, so it is not a bailout. It may be considered a means of helping them out. But it is a loan. The bill specifically indicates this, and it indicates that there are terms, 7 years, 5 percent the first 5 years, 9 percent thereafter, no prepayment penalty. We have a superior position with the obligations that are accorded us. What part of this loan creates a problem? We did lend to Chrysler before. They did repay. We did make money. What part of the loan is a problem? " CHRG-111hhrg56847--261 Chairman Spratt," The gentleman yields back. Mr. Chairman, thank you very, very much for finding the time to testify and for your full and forthright answers. Those members who did not have an opportunity to submit questions may submit questions for the record if there is no objection. There is none. So ordered. Thank you once again for coming. We very much appreciate your testimony and your service to our country. [Questions submitted and their responses follow:] Questions Submitted for the Record to Chairman BernankeCongressman Aderholt 1. On April 1, the Federal Reserve began requiring escrow accounts to be established for first-lien higher-priced mortgage loans. Many community banks protested this requirement since they do not have the resources to create these escrow accounts. Since the rule went into effect, many community banks, including one in my district, have stopped offering these mortgages. Is the Federal Reserve reviewing this policy and how it affects community banks? Do you foresee the Federal Reserve exempting community banks from this regulation in the near future? 2. I hear stories from community bankers in my district about overzealous regulators going so far as to demand changes on individual $8,000 car loans. Do you believe that some of this over regulation could hinder our economic recovery more than help it? Will increased regulations in the financial reform legislation in Congress decrease the availability of credit to consumers, especially from small banks? 3. During the hearing, you stated that some banks are taking second looks at loan applications to ensure consumers get the credit they deserve. In discussion with small bankers in my district, I have learned that many community banks are taking second, third and fourth looks. While it is good that they are reviewing these applications, it is slowing down access to credit. The fact is that many of these banks are afraid to lend money. What is the Federal Reserve doing to give community banks more confidence in lending and free up credit for consumers?Congresswoman Kaptur 1. Mr. Chairman, what role, if any, should the Federal Reserve System play in working to solve the housing crisis continues to ravage our nation's communities? 2. Mr. Chairman, the Treasury is pouring money into Fannie and Freddie, keeping it afloat to support the current structure of housing finance. What should be done to stop us from dumping money into Fannie and Freddie to cover the losses of bad paper dumped into both institutions by big banks at profits and to return our housing finance system to a prudent lending, sound system that supports homeownership and affordable housing? 3. Mr. Chairman, in the House bill on financial regulatory reform, we created the Consumer Financial Protection Agency. In the Senate bill, a bureau was created within the Federal Reserve System, underneath the Board of Governors. The conference is using the Senate bill as the base bill for discussion. Therefore, Mr. Chairman, do you feel that the Federal Reserve should have any responsibility for consumer protection? Do you feel that this fits in with the roles of the Federal Reserve System, which is to formulate the nation's monetary policy, supervise and regulate banks, and provide a variety of financial services to depository financial institutions and the federal government? Please including any related information to support your responses. Responses to Mr. Aderholt's Questions From Chairman Bernanke 1. On April 1, the Federal Reserve began requiring escrow accounts to be established for first-lien higher-priced mortgage loans. Many community banks protested this requirement since they do not have the resources to create these escrow accounts. Since the rule went into effect, many community banks, including one in my district, have stopped offering these mortgages. Is the Federal Reserve reviewing this policy and how it affects community banks? Do you foresee the Federal Reserve exempting community banks from this regulation in the near future? As you note, the Board's rules for higher-priced mortgage loans require that creditors establish escrow accounts for taxes and insurance. The Board issued these rules in July 2008 using its authority under the Home Ownership and Equity Protection Act to prohibit unfair practices in connection with mortgage loans. Compliance with the rule did not become mandatory until this year because the Board recognized that some lenders would need time to develop the capacity to escrow. As background, the Board adopted the escrow requirement to address specific concerns. The Board found that lenders generally did not establish escrow accounts for consumers with higher-priced loans. The Board was concerned that when there is no escrow account, lenders might disclose a monthly payment that includes only principal and interest. As a result, consumers might mistakenly base their borrowing decision on an unrealistically low assessment of their total mortgage-related obligations. The Board was also concerned that consumers not experienced at handling taxes and insurance on their own might fail to pay those items on a timely basis. Nonetheless, we do appreciate the concerns you have raised about the cost of establishing escrow accounts, and whether the cost may be prohibitive for lenders that make a small number of loans and hold them in portfolio. In fact, community banks also have raised these concerns with the Board directly during the past several months. As a result, we have been discussing with their representatives the potential impact of the escrow rule. Please be assured that the Board is monitoring implementation of the new escrow rule by small lending institutions and the availability of credit in the communities they serve. If it is determined that the costs of the rule outweigh the benefits, we will explore alternatives that do not adversely affect consumer protection. 2. I hear stories from community bankers in my district about overzealous regulators going so far as to demand changes on individual $8,000 car loans. Do you believe that some of this over regulation could hinder our economic recovery more than help it? Will increased regulations in the financial reform legislation in Congress decrease the availability of credit to consumers, especially from small banks? In retrospect, loan underwriting standards became too loose during the run up to the recent financial crisis. Accordingly, some tightening of underwriting standards from the practices that prevailed just a few years ago was needed. However, as your question suggests, there is a risk that over-correction by banks and supervisors could unnecessarily constrain credit. To address this risk, the Federal Reserve and the other banking agencies have repeatedly instructed their examiners to take a measured and balanced approach to reviews of banking organizations and to encourage efforts by these institutions to work constructively with existing borrowers that are experiencing financial difficulties. Examples of such guidance include the November 12, 2008 Interagency Statement on Meeting the Needs of Creditworthy Borrowers and an October 30, 2009 interagency statement designed to encourage prudent workouts of commercial real estate loans and facilitate a balanced approach by field staff to evaluating commercial real estate credits (SR 09-7). More recently, on February 5, the Federal Reserve and other regulatory agencies issued a joint statement on lending to creditworthy small businesses. This statement is intended to help to ensure that supervisory policies and actions are not inadvertently limiting access to credit. If bankers in your district believe that Federal Reserve examiners have taken an inappropriately strict approach on a supervisory matter, they should discuss their views with bank supervision management at their local Reserve Bank or raise their specific concerns with the Federal Reserve's ombudsman (see details on the Board's website at http://www.federalreserve.gov/aboutthefed/ombudsman.htm). Regulation imposes costs on small banks and can affect their capacity and willingness to lend. However, on balance, it is likely that the benefits of implementing reforms to prevent a future financial crisis outweigh the costs of these changes. Indeed, a repeat of the recent crisis in all likelihood would be far more costly to community banks and consumers seeking credit than the costs of the proposed financial reform package. 3. During the hearing, you stated that some banks are taking second looks at loan applications to ensure consumers get the credit they deserve. In discussion with small bankers in my district, I have learned that many community banks are taking second, third and fourth looks. While it is good that they are reviewing these applications, it is slowing down access to credit. The fact is that many of these banks are afraid to lend money. What is the Federal Reserve doing to give community banks more confidence in lending and free up credit for consumers? As discussed above, the Federal Reserve has developed guidance for its examiners to ensure that they are taking a measured approach to evaluating lending activities at small banks. In addition, the Federal Reserve has supplemented these issuances with training programs for examiners and outreach to the banking industry to underscore the importance of the guidance and ensure its full implementation. Also, in an effort to better understand small business lending trends, the Federal Reserve System this month is completing a series of more than 40 meetings across the country to gather information that will help the Federal Reserve and others better respond to the credit needs of small businesses. As part of this series, the Federal Reserve Bank of Atlanta hosted five small business roundtable discussions at locations across its district during the spring and summer. Emerging themes, best practices, and common challenges identified by the meeting series were discussed and shared at a conference held at the Federal Reserve Board in Washington in early July. Responses to Ms. Kaptur's Questions From Chairman Bernanke [Whereupon, at 12:20 p.m., the committee was adjourned.] " CHRG-111shrg52966--60 Mr. Polakoff," So, Senator, you are right, and you identified what is either a hole or an overlap, depending on one's view. Those activities, as you remember, were regulated by the State insurance commissioners. So under Gramm-Leach-Bliley, the umbrella regulator typically will defer to the functional regulator to assess the risks and then report up to the umbrella regulator. Senator Reed. But, you know, it goes back to the question I raised before, to which I think you affirmatively responded, that in terms of overall risk mechanisms or risk compliance, that it was clear that the umbrella regulator had that responsibility. And here, if you had communicated with the supervisor and they had indicated that this was the investment pattern of the securities lending--their regulated insurance part, it would have seemed to have raised a huge red flag. You both cannot be right. " CHRG-111hhrg56766--311 Mr. Bernanke," On the first point, I am not advocating and I do not think anyone is advocating trying to balance the budget this year or next year. Obviously, there has been a big drop in revenues, a lot of extra expenses. The issue is trying to have an exit strategy, try to find some years down the road a sustainable fiscal path that will give confidence that we can in fact exit from this extraordinary situation. I have talked, as you know, a good bit about getting lending going again and talking about supervisory efforts that we are doing. I think it is worth noting that there was a poll this morning the NFIB put out and asked small firms what their most important problem is. We got an answer which we have seen before which is only 8 percent said credit was their most important problem. The majority of them think weak demand, the weak economy, is the most important problem. This is not a complete answer to your question, but I do think as we get the economy moving again and strengthening, that is going to make banks more willing to lend and it is going to bring good borrowers to the banks to get credit. I think just strengthening the economy is going to be a big help. It is important for us as supervisors, and I have mentioned, for example, the various new efforts we are making to get feedback, to get data, to do analyses, to try to make sure our examiners are taking a balanced perspective and are not blocking loans to good creditworthy borrowers. We do not want to make loans to borrowers who cannot pay back, but we do want to make loans to those who are creditworthy. That is an important objective we can continue to work on. " CHRG-111shrg54789--123 Mr. Plunkett," Mr. Chairman, Ranking Member Shelby, Members of the Committee, it is good to be back with you. I am testifying today on behalf of the Consumer Federation of America and 23 consumer, community, civil rights, and labor organizations. We strongly support the Administration's proposal to create a Federal Consumer Protection Agency focused on credit, banking, and payment products because it targets the most significant underlying causes of the massive regulatory failures that have led to harm for millions of Americans. First, agencies did not make protecting consumers from lending abuses a priority. In fact, they appeared to compete against each other to keep standards low and reduce oversight of financial institutions, ignoring many festering problems that grew worse over time. If they did act, and they often didn't, the process was cumbersome and time consuming. As a result, they did not stop abusive lending practices in many cases until it was too late. Finally, regulators were not truly independent of the influence of the financial institutions they regulated. The extent and impact of these regulatory failures is breathtaking. I offer 10 pages of detail on 12 separate regulatory collapses in my testimony over the last decade that have harmed consumers and increased their financial vulnerability in the middle of a deep recession. This involves not just the well-known blunders that we have heard about on mortgage lending and credit card lending. I also offer lesser-known but quite damaging cases of regulatory inaction, such as the failure of regulators to stop banks from offering extremely high-cost overdraft loans without consumer consent, the permission that Internet payday lenders have gotten from regulators to exploit gaps in Federal law, and the fact that regulators have not stopped banks that impose unlawful freezes on accounts containing Social Security and other protected funds. Meanwhile, the situation for consumers keeps getting worse as a result of these regulatory failures and the economic problems in our country. One in two consumers who get payday loans default within the first year. Mortgage defaults and credit card charge-offs are at record levels. Personal bankruptcies have increased sharply, up by one-third in the last year. Combining safety and soundness supervision with its focus on bank profitability in the same institutions, regulatory institutions, as consumer protection magnified an ideological predisposition or antiregulatory bias by Federal officials that led to unwillingness to rein in abusive lending before it triggered the housing and economic crisis. But we now know that effective consumer protection leads to effective safety and soundness. Structural flaws in the Federal regulatory system compromised the independence of banking regulators and encouraged them to overlook, ignore, and minimize their mission to protect consumers. The Administration's proposal would correct these structural flaws. Key facets of this proposal include streamlining the Federal bureaucracy by consolidating consumer protection rulemaking for seven different agencies in almost 20 statutes; providing the agency with authority to address unfair, abusive, and deceptive practices; ensuring that agency rules would be a floor and not a ceiling and that States could exceed and enforce these standards. In response to this far-sighted proposal, the financial services industry has launched an elaborate defense of the status quo by minimizing the harm that the current disclosure-only regime has caused Americans, making the usual threats that improving consumer protection will increase costs and impede access to credit, and offering recommendations for reform that barely tinker with the existing failed regulatory regime. These critics are hoping that this Committee will overlook the fact that the deregulatory regime that they championed and largely controlled has allowed deceptive, unsustainable, and abusive loan products to flourish, which has helped cause an economic crisis and a credit crunch. In other words, the regulatory system that creditors helped create has not only led to direct financial harm for millions of vulnerable Americans, but it has reduced their access to and increased their costs on the credit they are offered. Only a substantial restructuring of the regulatory apparatus through the creation of this kind of agency offers the possibility of meaningful improvement for consumers in the credit markets. The agency will be charged with spurring fair practices, transparency, and positive innovation in the credit markets, which should lead to a vibrant, competitive credit marketplace for many years to come. We strongly urge the Committee to support this proposal. Thank you. Senator Reed. Thank you, Mr. Plunkett. Mr. Wallison, please. STATEMENT OF PETER WALLISON, ARTHUR F. BURNS FELLOW, AMERICAN CHRG-110shrg50417--117 Chairman Dodd," Is this chicken-and-egg, though? You know, one of the things is they are obviously not borrowing because credit has seized up, and credit has seized up because people are not borrowing. I mean, it seems to me we are going to in a circular motion here. I am looking for some proactive kind of thing that says, you know, here is a new pool of money for us and we are going to go out there and advertise and shop and people step up to the plate here, we are ready. Ms. Finucane. Right. Well, I think that we are ready, and we are certainly there to lend to any creditworthy individual or business, but we have got to do it judiciously, as you would expect us to. " CHRG-111shrg49488--104 Mr. Clark," Maybe I should just mention one other feature that I have not underscored but we found a tremendous difference on the two sides of the border. In Canada, because we hold all the mortgages, modifying the mortgages is easy to do. We do not have to ask anyone's permission to modify the mortgage. And it is not the government coming to us and saying, ``Would you start? Here is our modification program.'' We just were instantly modifying the mortgages. Last year, we represented about 20 percent of the mortgage market in Canada. We only foreclosed on 1,000 homes in a whole year, to give you an order of magnitude. And every one of those thousand we regarded as a failure. And so the last thing we would ever want to do is actually foreclose on a good customer. And so we go out of our way to modify the mortgages, and that is just natural practice for us because I do not have to ask permission of some investor whether or not I want to do this or can do it or what rules are governing it. So I do think that has turned out in this crisis to be a second feature that, frankly, none of us would have thought about until the current crisis. In terms of our specifics, we are required, if we, in fact, lend more than 80 percent loan-to-value, to actually insure the mortgage so that represents a constraint. It would not have represented a constraint to the kind of no documentation lending that was done in the United States because the actual underwriting we are doing. But then again, because we actually would be holding the mortgages, we insisted on full documentation. There is not interest deductibility. I think there is no question that the feature of having interest deductibility in the United States is a major factor for leveraging up. And despite the fact that it is justified on the basis that it encourages homeownership, historically homeownership has actually been higher in Canada than it has been in the United States. So there is no evidence that the two are linked at all. All it does is inflate housing prices because, in fact, people look at the after-tax cost in computing the value on which they are to bid for the houses. So I would say those are the main features. We do have mortgage brokers, but they are originating mortgages which we then hold. We do not sell them on. And I think that is the core feature. Senator Collins. And just to clarify, in most cases the homebuyer is putting down 20 percent. Is that correct? " CHRG-111shrg51395--30 Mr. Pickel," Thank you, Mr. Chairman and Ranking Member Shelby and Members of the Committee. Thank you for inviting ISDA to testify here today. We are grateful for the opportunity to discuss the privately negotiated derivatives business, and more specifically, the credit default swaps market. I have submitted written testimony, and as you noted, Mr. Chairman, it is a lengthy submission and so I would like to summarize some of the key remarks that I included in that testimony. I think first and foremost, we need to understand that the benefits of the OTC derivatives business are significant for the American economy and American companies. They manage a broad range of risk using these instruments that are not central to their businesses, allowing them to manage these financial risks typically so that they can focus on the business that they run. So a borrower borrowing on a floating basis can use an interest rate swap to manage its exposure to exchange fixed for floating obligations. Currency exposure--many companies have significant operations around the world and have significant currency exposure and use currency swaps, OTC currency swaps, to manage that risk. ISDA itself uses currency swaps to manage its overseas exposure. Commodity exposure--airlines have significant exposure to fuel costs and they typically look to utilize OTC derivatives to manage that exposure. And finally, credit exposure--using credit derivatives, credit default swaps, exposure to suppliers or to customers where credit is a significant concern, companies can use these products to help manage that risk. These products also create efficiencies in pricing and wider availability of credit, particularly credit default swaps. They facilitate lending at lower rates, and they are critical to have available, and have them widely available, as we come out of this recession. I think they will be an important part of the ability of firms to manage credit risk as they look at these important credit issues that we face in this financial crisis. As far as the role of the credit default swaps and OTC derivatives generally in the financial crisis, first of all, I think, and this Committee has certainly heard testimony, the fundamental source of the crisis is imprudent lending, particularly in the U.S. housing sector, but extending to other markets, as well, credit cards and commercial lending as an example. We must distinguish between the credit default swap business and the collateralized debt obligation business. There has been reference to the originate to distribute model. That certainly applies to the securitization process and to the CDO process. In the credit default swap business, a company, a bank that has lent money may use a credit default swap to hedge its exposure on that credit. In that process, it will be maintaining its lending relationship with the borrower and it will also be taking on credit risk and paying a fee to the company that is selling protection. So it is distinctly different from the originate to distribute model. We certainly have heard testimony, and this Committee heard testimony last week on the AIG situation. I think we need to spend some time and this organization needs to spend some time talking about that. AIG obviously was significantly involved in credit default swaps. It was the means by which it took risk. But we must understand the poor choices, the adverse policies, and the misunderstood risk that were involved there, and this Committee heard a lot about that in the testimony last week, particularly from Mr. Polakoff from the Office of Thrift Supervision. These were the source of their problems, these misunderstood risks and poor decisions. They were contrary to the best practices in the industry and to the experiences of swap market participants for the past 20 years. The fundamental decision that AIG made was to take on exposure to the housing market. They did that, yes, via credit default swaps. They also did that, as the Committee heard last week, in other means, as well, through their securities lending business, in which they actually continued to lend and take exposure to those markets into 2006 and 2007, when the worst of these securities were generated through the lending process. They also had a very myopic view of loss. They were only looking at the payout potential, the possibility they would actually have to pay out on these transactions. There was no consideration of the implications of the mark-to-market losses that they could face and to the effects on their capital and their liquidity. They seem to have completely ignored the possible effects of that. They relied on their AAA rating and refused to provide collateral from the start of their trading relationships. It takes away the discipline that collateral provides in that trading relationship. Collateral is extensively used in the OTC derivatives business to help manage risk and also introduce discipline to the trading relationship. They agreed, on the other hand, to provide collateral on the downgrade of their credit rating. That led to a falling off of a cliff, effectively, leading to substantial liquidity problems which eventually led to the decision to intervene. So yes, these decisions and policies are important to understand and we need to take steps to make sure that this does not happen again, but those relate to the decisions they made and not to the products themselves. The products, in fact, have performed as the parties intended. In fact, just yesterday, the Senior Supervisors Group, which is a group of senior supervisors from the G-7 countries, talked about how the CDS product had performed multiple times over the course of last fall and into this year in helping to settle transactions, credit default swaps that parties had engaged in, and they acknowledged that this process has been extremely effective. And then finally, this is a very important week in the credit default swap market. I believe Mr. Ryan referred earlier to the fact that one of the clearinghouses that has been talked about for many, many months has now actually begun to clear transactions, and that is a very significant development. And later this week, ISDA itself will introduce some changes to the standard contract that will facilitate the settlement of these trades in the future and will also facilitate moving more transactions onto a clearinghouse. So that is a very important development. There is much to be done by ISDA, by the industry, in close consultation with this Committee and other committees in Congress as well as the regulators here in the United States and globally and we are committed to be engaged in that process. We look forward to working with you as you analyze the causes of this financial crisis, and based on that analysis, consider changes to our regulatory structure with a goal to obtaining greater transparency, greater disclosure, and greater coordination among regulators. Thank you again for your time, and I look forward to your questions. " CHRG-111hhrg49968--12 Chairman Spratt," In undertaking these countercyclical steps, we have advanced large sums of money and taken back, in many cases, assets like preferred stock in the major banks which were recipients of TARP funds. In addition, the Fed has a TALF lending facility for asset-backed securities. Can you give us some idea of what you expect in the way of recovery or repayment on these assets so that we can, in turn, look towards the recovery of some of these moneys to be used to pay off the debt that was incurred in advancing these loans in the first place? " CHRG-111shrg57709--68 Mr. Volcker," Well, I don't know if that is a big problem. Neal may want to speak to it. I don't believe the other is--sometimes you will the argument that they have to do proprietary trading to make a lot of money to support the lending business. I mean, I don't believe the banks think that, oh, I will make a lot of money in proprietary trading so I will go out and make more loans than I would otherwise make. They will make the loans if they think the loans are profitable, quite regardless of whether they are making or losing money in the proprietary trading, in my view. Senator Merkley. Mr. Wolin? " CHRG-111shrg50564--2 Chairman Dodd," The Committee will come to order. Let me thank all of my colleagues, and I think you all understood we intended, obviously, at some time earlier to have this hearing a little earlier. But as I think all of you may know, we had an interesting session on our side of the aisle, gathering today to listen to some of our new economic team under President Obama, as well as the President himself and others, talk about many of the issues that are confronting the country, not the least of which was the issue of the subject matter of this hearing, the modernization of the U.S. financial regulatory system. I am particularly honored and delighted to have Paul Volcker here with us, who has been a friend for many years, someone I have admired immensely for his contribution to our country. How we will proceed is, because we are getting underway much later than normal for the conducting of Senate hearings, with the indulgence of my colleagues, I will make some opening comments myself, turn to Senator Shelby, and then we will go right to you, if we could, Chairman Volcker. Then I will invite my colleagues and tell them that any opening comments that they do not make for themselves, we will include them in the record as if given. And since there are not many of us here, we can move along pretty quickly, I hope, as well. So, with that understanding, we will get underway and, again, I thank all of you for joining us here today. Today, we continue the Senate Banking Committee's examination of how to modernize our outdated financial regulatory system. We undertake this examination in the midst of a deepening recession and the worst financial crisis since the Great Depression in the 20th century. We must chart a course forward to restore confidence in our Nation's financial system upon which our economy relies. Our mission is to craft a framework for 21st century financial regulation, informed by the lessons we have learned from the current crisis and designed to prevent the excesses that have wreaked havoc with homeowners and consumers, felled financial giants, and plunged our economy into a recession. This will not be easy, as we all know. We must act deliberately and thoughtfully to get it right. We may have to act in phases given the current crisis. But inaction is not an option at all, and time is not neutral. We must move forcefully and aggressively to protect consumers, investors, and others within a revamped regulatory system. Last Congress, this Banking Committee built a solid foundation upon which we will base our work today, and I want to once again thank Dick Shelby, former Chairman of this Committee, and my colleagues, both Democrats and Republicans, who played a very, very constructive role in the conduct of this Committee that allowed us to proceed as we did. Subcommittees and Committees held 30 hearings to identify the causes and consequences of this crisis, from predatory lending and foreclosures, to the collapse of Bear Stearns, the role of the credit rating agencies, the risks of derivatives, the regulation of investment banks and the insurance industry, and the role and condition of banks and thrifts. The lessons we have learned thus far have been rather clear, and let me share some of them with you. Lesson number one: consumer protection matters. The current crisis started with brokers and lenders making subprime and exotic loans to borrowers unable to meet their terms. As a former bank regulator recently remarked to me, ``Quite simply, consumers were cheated.'' Some lenders were so quick to make a buck and so certain they could pass the risk on to the next guy, they ignored all standards of prudent underwriting. The consumer was the canary in the coal mine, but no one seemed to notice. Lesson number two: regulation is fundamental. Many of the predatory lenders were not regulated. No one was charged with minding the store. But soon the actions of these unregulated companies infected regulated institutions. Banks and their affiliates purchased loans made by mortgage brokers or the securities or derivatives backed by these loans, relying on credit ratings that turned out to be wildly optimistic. So we find that far from being the enemy of well-functioning markets, reasonable regulation is fundamental to sound and efficient markets, and necessary to restore the shaken confidence in our system at home and around the globe. Lesson number three: regulators must be focused, aggressive, and energetic cops on the beat. Although banks and thrifts made fewer subprime and exotic loans than their unregulated competitors, they did so with impunity. Their regulators were so focused on banks' profitability, they failed to recognize that loans so clearly unsafe for consumers were also a threat to the banks' bottom line. If any single regulator recognized the abusiveness of these loans, no one was willing to stand up and say so. And with the Fed choosing not to use its authority to ban abusive home mortgages, which some of us have been calling for, for years, the regulators were asleep at the switch. Lesson number four: risks must be understood in order to be managed. Complex instruments, collateralized debt obligations, credit default swaps designed to manage the risks of the fault loans that backed them turned out to magnify that risk. The proliferation of these products spread the risk of subprime and Alt-A loans like an aggressive cancer through the financial system. Institutions and regulators alike failed to appreciate the hidden threat of these opaque instruments, and the current system of regulators acting in discrete silos did not equip any single regulator with the tools to identify or address enterprise or systemwide risks. On top of that, CEOs had little incentive to ferret out risks to the long-term health of their companies because too often they were compensated for short-term profits. I believe these lessons should form the foundation of our effort to shape a new, modernized, and, above all, transparent structure that recognizes consumer protection and the health of our financial system are inextricably linked. And so in our hearing today and those to come--and there will be many--I will be looking for answers to these questions. What structure best protects the consumer? What additional regulations are needed to protect consumers from abusive practices? We will explore whether to enhance the consumer protection mission of the prudential regulators or create a regulator whose sole job is protecting the American consumer. How do we identify and supervise the institutions and products on which the health of our financial system depends? Financial products must be more transparent for consumers and institutional investors alike. But heightened supervision must not stifle innovation of financial actors and markets. Third, how do we ensure that financial institution regulators are independent and effective? We cannot afford a system where regulators withhold bold and necessary action for fear that institutions will switch charters to avoid stricter supervision. We should consider whether a single prudential regulator is preferable to the alphabet soup of regulators that we have today. Fourth, how should we regulate companies that pose a risk to our system as a whole? Here we must consider whether to empower a single agency to be the systemic risk regulator. If that agency is the Federal Reserve Board, we must be mindful of ensuring the independence and integrity of the Fed's monetary policy function. Some have expressed a concern--which I share, by the way--about overextending the Fed when they have not properly managed their existing authority, particularly in the area of protecting consumers. Fifth, how should we ensure that corporate governance fosters more responsible risk taking by employees? We will seek to ensure that executives' incentives are better aligned with the long-term health of their companies, not simply short-term profits. Of course, my colleagues and our witnesses today may suggest other areas. I do not mean to suggest this is the beginning and end-all of the questions that need to be asked, and I welcome today's witnesses' as well as our colleagues' contributions to this discussion and the questions that ought to be addressed. I look forward to moving forward collaboratively in this historic endeavor to create an enduring regulatory framework that builds on the lessons of the past, restores confidence in our financial system, and recognizes that our markets and our economy will only be as strong as those who regulate them and the laws by which they abide. That is the responsibility of this Committee. It is the Republican of this Congress. It is the responsibility of the administration. I will recognize Senator Shelby for an opening comment and ask my colleagues if they might withhold statements, at least at the outset, so we can get to our witnesses. With that, I turn to Senator Shelby. CHRG-110hhrg46591--370 Mr. Klein," Thank you, Mr. Chairman. And thank you, gentlemen, for being here today. When speaking to people at home, large sophisticated borrowers, real estate, and large businesses as well as small businesses, we continue to hear, as you know, that it is difficult to get credit. And I appreciate the fact that community bankers have been very astute in their lending practices over the years. But generally speaking, we are not hearing that there is a lot of capital available. And when we are hearing it is available, it is available under very difficult terms to borrow. So I want to just--if people are listening at home, watching this today, some would think, based on some of the comments, that some lending is really free flowing out there. Maybe it is in different parts of the country. I am from Florida, South Florida, and it has been very very difficult. So just as a thought, one of the things we were talking about back home with small business, SBA loans for example, is maybe expanding the underwriting capacity a little bit. Those are high-quality loans for the most part; the default rate is fairly low, and we already have an institution in place. And that is something that, to the extent we can maybe get SBA loans out there quicker, that may be something to consider. I know there has already been an effort to do that, but if we can really push hard, it is a faster way of getting capital in businesses hands. So if you have some thoughts on that. And then just in general, also to the extent that we know that this is an immediate problem--and there are no silver bullets--whether it is the large, sophisticated borrowers or the smaller borrowers, is there anything that we can or should be doing other than maybe the SBA loans, Treasury, Fed, Congress, that can try to advance the small business side of this thing a little quicker? And if you could direct that to Mr. Yingling and Mr. Washburn. " CHRG-111hhrg49968--79 Mr. Bernanke," Yes, that was part of the original intent. Unfortunately, because of the restrictions and other reasons, including just bad publicity, many banks want to repay the TARP. So it won't be able to serve that function. On the other hand, after the stress test and our supervisory reviews, many banks are raising private equity, which will I think be a more permanent form of capital, a higher quality form of capital in which they will be more willing to base their lending strategy. " CHRG-111shrg51303--42 Mr. Dinallo," Well, because it was coordinated--it was orchestrated and coordinated by the holding company, by the holding company management, by the management of the holding company. They essentially set up a securities lending pool. You could not do it without holding company support. In fact, our agreements with the holding company under the ``make whole'' clauses that we established for $5 billion were with the holding company. So it is not--again, I am not trying to be evasive. It is not that clear. It is true that we were responsible for our exposures---- Senator Shelby. Are you trying to evade your responsibility? " FOMC20080625meeting--221 219,MR. LACKER.," Yes. About the general topic of stigma and lending at our facilities, I think it would be a useful agenda item for future research, and it would be useful for us to work at thinking carefully about this. Stigma represents some information revelation to market participants attending on some act, whether it's borrowing from us or from someone else. The usual presumption is that more information is better. We talk as if stigma is a bad thing. So I'd want to see a model that lays out how the sense in which it's a bad thing counteracts the sense in which information is usually a good thing. I'm really curious about that. I think it's something we ought to think more carefully about. " CHRG-111hhrg53244--71 Mr. Baca," Well, I hope we do in Congress here. But let me refer back to an article that appeared in the Wall Street Journal. This is July 20th. In here, you start out, ``The depth of the global recession has required highly accommodative monetary policies,'' and you go on and go on. And then it says, ``We have greatly expanded the size of the Fed balance sheet through the purchase of long-term security through targeted lending programs aimed at restarting the flow of credit.'' What do you mean by this? " CHRG-111hhrg53241--115 Mr. Gutierrez," Agreed. On a lot of different credit that we should--this ability to pay issue is a really big one. Let us just assume for a second that this fine committee and the House doesn't adopt the 36 percent cap, which doesn't say we are not. Maybe we will have the ability to do that and get members here to do what the Senate has failed to do. Do you think in terms of payday lending--I want to ask both of you, would you support a ban on rollovers for payday lenders, eliminate any rollovers for payday lenders? " FOMC20081216meeting--493 491,MR. PARKINSON.," I think it comes back to the point that Bill made earlier. If you're a hedge fund, even LIBOR plus 500 is still not a rich enough return to that hedge fund unless you can borrow against those securities and leverage it up into a higher return. And until 18 months ago you could have gotten the financing from Deutsche Bank, the Swiss banks, or any of our fine U.S. banks; but it doesn't appear at the moment that any of them are terribly interested in lending on a secured basis even to the strongest of hedge funds. They're simply hiding somewhere. " CHRG-111hhrg52261--14 Mr. Hirschmann," Thank you, Chairwoman Velazquez, Ranking Member Graves, members of the committee. I really think this is a very timely hearing. Today, what I would like to do is talk specifically about an issue of great concern to many of our members, especially our small business members, the proposed Consumer Financial Protection Agency. The U.S. Chamber supports the goal of enhancing consumer protection. In fact, the Capital Markets Center that I run was founded 3 years ago before the financial crisis to advocate for comprehensive reform and modernization of our regulatory structure, including strong consumer protection. Consumers, including small businesses, need reforms that will ensure clear disclosure, better information; they need vigorous enforcement against predatory practices and other consumer frauds, and we need to close the gaps in current regulation. However, the proposed Consumer Protection Agency is the wrong way to enhance protections. It will have significant unintended consequences for consumers, small businesses, and for the overall economy. Today, the Chamber will release a study that examines the impact of CFPA on small business access to credit. The study is authored by Thomas Durkin, an economist who spent more than 20 years at the Federal Reserve Board. My remarks draw on the findings of that study to make the following points. [The study is included in the appendix] Small businesses, including those that we traditionally count on to be the first to add jobs in the early stages of an economic recovery, need access to credit to survive, meet expenses, and grow. Small businesses often have difficulty obtaining commercial credit and, therefore, turn to consumer credit and consumer financial products to supplement their short-term capital needs. The CFPA will reduce the availability and increase the costs of consumer credit. As users of consumer credit products, small businesses will see the same result despite being fundamentally different than the average consumer. The proposed CFPA will likely restrict, and in many cases eliminate, small business access to credit and increase the cost of credit they would be able to obtain. This CFPA ""credit squeeze"" could result in business closures, fewer start-ups, and slower growth, ultimately costing a significant number of jobs that would be lost or simply not created. Finally, the CFPA will only exacerbate the weaknesses of our current regulatory system without enhancing consumer protections. In 2006, 800,000 businesses created new jobs in this country; 642,000 of them had fewer than 20 employees. Small businesses generally have trouble borrowing money. Either they can't borrow or they cannot borrow as much as they need, and almost certainly they cannot secure long-term financing available to larger companies. To supplement the reduced access to traditional loans, small businesses rely extensively on consumer lending products, and they use them as a source of credit very differently than consumers. In other words, personal credit is the lifeline that sustains small businesses, particularly start-ups. Many of the products that small businesses rely on may be considered to some as fringe products, but they are the very products that small business owners use to meet their short-term capital needs. As one example, auto title loans provide small business owners immediate access to cash and no upfront fees or prepayment penalties, and therefore can be useful meeting short-term business expense. However, the CFPA in its approach failed to recognize the difference between small businesses and average consumers both in terms of need and sophistication and their appetite for risk. As proposed, the CFPA will likely reduce the availability of these products and increase their costs. It will make it harder for financial firms to meet the needs of small businesses. The CFPA will create considerable new risks to lenders in terms of regulatory fines and litigation risks from extending credit to small businesses. H.R. 3126 is the wrong approach. It simply adds a new government agency on top of an already flawed regulatory structure. As one example, rather than streamline consumer protections to eliminate gaps, regulatory arbitration, and create uniform national standards for key issues like disclosure, the legislation would foster a complex and confusing patchwork of 51-plus States regulation in addition to new Federal rules. As we begin to see signs of economic recovery, we need to be especially careful to fully understand the impact of a new regulatory layer on small businesses, both as consumers and as providers of financial products. We look forward to working with the members of the committee on the modernization of our regulatory structure and appreciate your holding this hearing today. " fcic_final_report_full--493 Lower-income and minority families have made major gains in access to the mortgage market in the 1990s. A variety of reasons have accounted for these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting , and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable lending . 62 [emphasis supplied] Or this statement in 2004, when HUD was again increasing the affordable housing goals for Fannie and Freddie: Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market for reasons such as inadequate income documentation, limited downpayment or cash reserves, or the desire to take more cash out in a refinancing than conventional loans allow, rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create . 63 [emphasis supplied] Or, finally, this statement in a 2005 report commissioned by HUD: More liberal mortgage financing has contributed to the increase in demand for housing. During the 1990s, lenders have been encouraged by HUD and banking regulators to increase lending to low-income and minority households. The Community Reinvestment Act (CRA), Home Mortgage Disclosure Act (HMDA), government-sponsored enterprises (GSE) housing goals and fair lending laws have strongly encouraged mortgage brokers and lenders to market to low-income and minority borrowers. Sometimes these borrowers are higher risk, with blemished credit histories and high debt or simply little savings for a down payment. Lenders have responded with low down payment loan products and automated underwriting, which has allowed them to more carefully determine the risk of the loan. 64 [emphasis supplied] Despite the recent effort by HUD to deny its own role in fostering the growth of subprime and other high risk mortgage lending, there is strong—indeed irrefutable—evidence that, beginning in the early 1990s, HUD led an ultimately successful effort to lower underwriting standards in every area of the mortgage market where HUD had or could obtain influence. With support in congressional legislation, the policy was launched in the Clinton administration and extended almost to the end of the Bush administration. It involved FHA, which was under the direct control of HUD; Fannie Mae and Freddie Mac, which were subject to HUD’s affordable housing regulations; and the mortgage banking industry, which— while not subject to HUD’s legal jurisdiction—apparently agreed to pursue HUD’s 62 63 64 Issue Brief: HUD’s Affordable Housing Goals for Fannie Mae and Freddie Mac, p.5. Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May 2005, HUD Contract C-OPC-21895, Task Order CHI-T0007, “Recent House Price Trends and Homeownership Affordability”, p.85. 489 policies out of fear that they would be brought under the Community Reinvestment Act through legislation. 65 In addition, although not subject to HUD’s jurisdiction, the new tighter CRA regulations that became effective in 1995 led to a process in which community groups could obtain commitments for substantial amounts of CRA-qualifying mortgages and other loans to subprime borrowers when banks were applying for merger approvals. 66 CHRG-111shrg55117--116 Mr. Bernanke," It is very tough and I don't envy you, your task. I think one small piece of advice would be instead of thinking about this as a year-to-year situation, think about the whole trajectory. How are we going to go forward, not just this year and next year, but over the next 5 years and 10 years, taking into account what we know about population aging, health care costs, and those things. So the whole path is what matters, not just this year. Senator Bennet. Well, thank you for your service. Thanks for your testimony. Thank you, Mr. Chairman. Senator Akaka. Thank you very much, Senator Bennet. Senator Kohl. Senator Kohl. Thank you, Senator Akaka. Mr. Bernanke, the Federal Reserve has been increasing their balance sheet over the past year, as you know, and created many new lending programs to continue the flow of credit to consumers as well as stabilize the financial markets. Additionally, the Federal Reserve announced that it will purchase up to one-and-a-quarter trillion dollars of mortgage-backed securities by the end of 2009 to help support the housing markets, and that is good, too. Despite all these efforts, loans and lines of credit are hard to come by for many creditworthy consumers in smaller communities and community banks are having a difficult time originating new loans due to liquidity problems, as I am sure you are very well aware of. The Federal Reserve has done precious little, many people say, for small community banks at the national level. So when and what can the Federal Reserve do to help small banks all across our country start lending again? " CHRG-111hhrg48674--117 Mr. Bernanke," A two-part answer. First of all, the financial crisis has been extraordinarily severe, and those financial effects are incredibly powerful. And the intensification of the financial crisis in September knocked the global economy for a loop, which it is now just beginning to get its feet. So I think that the actions that were taken prevented a much worse situation, a meltdown that would have led to a catastrophic and long-term low level of activity. So the fact that we haven't gotten back to normal is just consistent with the experience that financial crises are very, very serious matters. The second answer I would make, though, and I would just like to emphasize that all these programs I talked about, the program for consumer and small business lending, the mortgage-backed security program, the interbank lending program that affects LIBOR, all these things have already shown up as improvements in those credit markets which directly affect people in South Carolina. They are not banks and investment banks. The 30-year mortgage rate affects your constituents. The commercial paper rate affects the company they work for. The rate on auto loans, on student loans, on credit card loans, all those rates will be affected by the programs we are undertaking. We are doing this, not because we have some nefarious scheme; we are trying to help the American economy recover, and we are using whatever methods we have to overcome what has been an enormous blow from this financial crisis. " CHRG-110hhrg41184--105 Mr. Bernanke," The bond insurer's problem was a difficult one to foresee. I mean, first of all they were buying what were thought to be high-quality credits, and secondly they do have some sophistication of their own, doing some evaluation. So that was a difficult one to anticipate. In general, I think even though we have many regulators, there's a very extended attempt of regulators to work together in a collegial and cooperative way, and at the Federal Reserve we certainly try to do that. As I mentioned, we work with the SEC and the OCC and FDIC, and the like, and will continue to do that. One area where sometimes there have been, I think, some coordination problems is between the Federal and the State regulators, and we saw some of that in the mortgage lending issues in the last couple of years. We have undertaken a pilot program of joint examinations, working with State regulators. The idea is to try to improve even beyond where we are now in terms of our information sharing and coordination with those State regulators, and that is what we are trying to do. But that is sometimes an area where the communication may not be as good as in some other areas. " CHRG-111hhrg52406--31 Mr. Galvin," Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. I want to thank you for this opportunity to testify on these important issues of consumer and investor protection. As Secretary of the Commonwealth, as has been noted, I am the chief securities regulator. The Congress is now considering an array of initiatives to improve consumer and investor protection. These include proposals in the White House, a White Paper on financial regulatory reform, as well as bills proposing the creation of the Consumer Financial Protection Agency. I commend and support the President's plan to strengthen and rationalize financial regulation, to provide greater protection against systemic risk in the financial markets, and to create a Federal agency to protect consumers in credit transactions. I support the proposal to strengthen the U.S. Securities and Exchange Commission that will enable the SEC, along with the States, to oversee the securities markets and to protect consumers. I also applaud other elements of the White House plan that would directly improve investor protection such as making securities brokers fiduciaries. True consumer protection requires that financial firms be fiduciaries for their consumers whether they are licensed investment advisors or brokers. We need to act now on the issue of mandatory arbitration. The documented problems in that area should be an indication that this should be optional for investors rather than mandatory. Too many investors have faced a stacked deck in arbitration. Most especially hedge fund registration, whereas that both hedge fund managers and the funds themselves should register with the SEC. Hedge funds are often low visibility but high impact participants in the financial markets. Hedge funds have also been the source of abusive trading in the commodities and securities markets, including trades that have distorted the oil and food markets. Wild speculation in these basic commodities during the past year has robbed millions of Americans of billions of dollars at the gas pump and the supermarket. I urge Congress to protect our now fragile economy from further damage. We support the creation of a Consumer Financial Protection Agency to enhance the protection of consumers when they enter into credit savings and payment transactions. Sadly, this hearing on the creation of this agency is necessary because existing regulatory agencies dropped the ball. While some proposals have slipped through the cracks--some problems have slipped through the cracks of existing rules too often regulators fail to maintain their independence in the industries they regulate and they fail to use their powers to promulgate and enforce rules to protect the public. Massachusetts and other States have a distinguished record of protecting retail investors and consumers. As financial regulation is redesigned, I urge you to preserve and enhance the abilities of the States and State regulators to protect investors and consumers. There is an acute need for this protection. Retail investors and savers have been forced into the risk market to meet their basic financial goals. Investors and consumers are particularly harmed when the States have been preempted from protecting their interests. These include the preemption of State usury laws, predatory mortgage lending laws, and security law preemption. The National Securities Markets Improvement Act of 1996 preempted State authority in key areas where the States protected investors. NSMIA removed the State's ability to require enhanced disclosure in mutual funds. NSMIA created a regulatory blind spot for hedge funds selling securities pursuant to the Rule 506 exemption. And NSMIA prevented a State enforcement action against large investment advisors even when the violation involved unfair or deceptive practice. Massachusetts and other States have taken the lead in bringing enforcement actions and recovering funds for investors. These include auction rate securities, illegal market timing of mutual funds, and false security analyst reports and pyramid and Ponzi schemes. The States are close to the investing public and have time and time again demonstrated that they can act quickly and effectively to help investors. The States have added value but precisely because they are independent of other agencies and self-regulatory organizations. States have been another set of eyes watching the market. States have also served as a backstop, protecting the interest of investors in important cases when other regulators have not taken action. We urge the Congress not to make the States subject to the authority of the Financial Services Oversight Council or the Federal Reserve. Similarly we urge the States not be made subject to the Consumer Financial Protection Agency. The independence of the States means that they are less likely to yield to pressure from regulated entities and they are much less likely to be captured by the firms and the industries that they regulate. In this regard, I must emphasize the record that States have of cooperating with the SEC and FINRA and this record will continue. The States will cooperate and coordinate with the Consumer Financial Protection Agency that is proposed. However, it is crucial the States not be under the CFPA's authority. The States' independence is vital and it is the key to our record of success. To be effective, the States need the tools we need to regulate effectively. We need to restore States' authority over nonpublic offerings, particularly hedge funds, which are particularly sold pursuant to the exemption under Rule 506. We need to permit the States to police larger federally registered investment advisors for unethical and dishonest practices. The rights for investors to sue for violations of State and Federal securities laws is also a powerful tool that should be reconsidered. I urge the Congress to review the impacts of the private security litigation reforms. We need to strengthen, not weaken, investor remedies. Thank you, Mr. Chairman. [The prepared statement of Secretary Galvin can be found on page 81 of the appendix.] " CHRG-111shrg54789--179 REGULATORS Current regulators may already have some of the powers that the new agency would be given, but they haven't used them. Conflicts of interest and a lack of will work against consumer enforcement. In this section, we detail numerous actions and inactions by the Federal banking regulators that have led to or encouraged unfair practices, higher prices for consumers, and less competition.A. The Federal Reserve Board ignored the growing mortgage crisis for years after receiving Congressional authority to enact antipredatory mortgage lending rules in 1994. The Federal Reserve Board was granted sweeping antipredatory mortgage regulatory authority by the 1994 Home Ownership and Equity Protection Act (HOEPA). Final regulations were issued on 30 July 2008 only after the world economy had collapsed due to the collapse of the U.S. housing market triggered by predatory lending. \47\--------------------------------------------------------------------------- \47\ 73 FR 147, p. 44522, Final HOEPA Rule, 30 July 2008.---------------------------------------------------------------------------B. At the same time, the Office of the Comptroller of the Currency engaged in an escalating pattern of preemption of State laws designed to protect consumers from a variety of unfair bank practices and to quell the growing predatory mortgage crisis, culminating in its 2004 rules preempting both State laws and State enforcement of laws over national banks and their subsidiaries. In interpretation letters, amicus briefs and other filings, the OCC preempted State laws and local ordinances requiring lifeline banking (NJ 1992, NY, 1994), prohibiting fees to cash ``on-us'' checks (par value requirements) (TX, 1995), banning ATM surcharges (San Francisco, Santa Monica and Ohio and Connecticut, 1998-2000), requiring credit card disclosures (CA, 2003) and opposing predatory lending and ordinances (numerous States and cities). \48\ Throughout, OCC ignored Congressional requirements accompanying the 1994 Riegle-Neal Act not to preempt without going through a detailed preemption notice and comment procedure, as the Congress had found many OCC actions ``inappropriately aggressive.'' \49\--------------------------------------------------------------------------- \48\ ``Role of the Office of Thrift Supervision and Office of the Comptroller of the Currency in the Preemption of State Law'', USGAO, prepared for Financial Services Committee Chairman James Leach, 7 February 2000, available at http://www.gao.gov/corresp/ggd-00-51r.pdf (last visited 21 June 2009). \49\ Statement of managers filed with the conference report on H.R. 3841, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Congressional Record Page S10532, 3 August 1994.--------------------------------------------------------------------------- In 2000-2004, the OCC worked with increasing aggressiveness to prevent the States from enforcing State laws and stronger State consumer protection standards against national banks and their operating subsidiaries, from investigating or monitoring national banks and their operating subsidiaries, and from seeking relief for consumers from national banks and subsidiaries. These efforts began with interpretative letters stopping State enforcement and State standards in the period up to 2004, followed by OCC's wide-ranging preemption regulations in 2004 purporting to interpret the National Bank Act, plus briefs in court cases supporting national banks' efforts to block State consumer protections. We discuss these matters in greater detail below, in Section 5, rebutting industry arguments against the CFPA.C. The agencies took little action except to propose greater disclosures, as unfair credit card practices increased over the years, until Congress stepped in. Further, between 1995 and 2007, the Office of the Comptroller of Currency issued only one public enforcement action against a Top Ten credit card bank (and then only after the San Francisco District Attorney had brought an enforcement action). In that period, ``the OCC has not issued a public enforcement order against any of the eight largest national banks for violating consumer lending laws.'' \50\ The OCC's failure to act on rising credit card complaints at the largest national banks triggered Congress to investigate, resulting in passage of the 2009 Credit Card Accountability, Responsibility and Disclosure Act (CARD Act). \51\ While this Committee was considering that law, other Federal regulators finally used their authority under the Federal Trade Commission Act to propose and finalize a similar rule. \52\ By contrast, the OCC requested the addition of two significant loopholes to a key protection of the proposed rule.--------------------------------------------------------------------------- \50\ Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and Consumer Credit, hearing on Credit Card Practices: Current Consumer and Regulatory Issues at http://www.house.gov/financialservices/hearing110/htwilmarth042607.pdf. \51\ H.R. 627 was signed into law by President Obama as Pub. L. No. 111-24 on 22 May 2009. \52\ The final rule was published in the Federal Register a month later. 74 FR 18, page 5498 Thursday, January 29, 2009.--------------------------------------------------------------------------- Meanwhile, this Committee and its Subcommittee on Financial Institutions and Consumer Credit had conducted numerous hearings on the impact of current credit card issuer practices on consumers. The Committee heard testimony from academics and consumer representatives regarding abusive lending practices that are widespread in the credit card industry, including: The unfair application of penalty and ``default'' interest rates that can rise above 30 percent; Applying these interest rate hikes retroactively on existing credit card debt, which can lead to sharp increases in monthly payments and force consumers on tight budgets into credit counseling and bankruptcy; High and increasing ``penalty'' fees for paying late or exceeding the credit limit. Sometimes issuers use tricks or traps to illegitimately bring in fee income, such as requiring that payments be received in the late morning of the due date or approving purchases above the credit limit; Aggressive credit card marketing directed at college students and other young people; Requiring consumers to waive their right to pursue legal violations in the court system and forcing them to participate in arbitration proceedings if there is a dispute, often before an arbitrator with a conflict of interest; and Sharply raising consumers' interest rates because of a supposed problem a consumer is having paying another creditor. Even though few credit card issuers now admit to the discredited practice of ``universal default,'' eight of the ten largest credit card issuers continue to permit this practice under sections in cardholder agreements that allow issuers to change contract terms at ``any time for any reason.'' \53\--------------------------------------------------------------------------- \53\ Testimony of Linda Sherry of Consumer Action, House Subcommittee on Financial Institutions and Consumer Credit, April 26, 2007. In contrast to this absence of public enforcement action by the OCC against major national banks, State officials and other Federal agencies have issued numerous enforcement orders against leading national banks or their affiliates, including Bank of America, Bank One, Citigroup, Fleet, JPMorgan Chase, and USBancorp--for a wide variety of abusive practices over the past decade. \54\--------------------------------------------------------------------------- \54\ Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, April 26, 2007.--------------------------------------------------------------------------- The OCC and PRB were largely silent while credit card issuers expanded efforts to market and extend credit at a much faster speed than the rate at which Americans have taken on credit card debt. This credit expansion had a disproportionately negative effect on the least sophisticated, highest risk and lowest income households. It has also resulted in both relatively high losses for the industry and record profits. That is because, as mentioned above, the industry has been very aggressive in implementing a number of new--and extremely costly--fees and interest rates. \55\ Although the agencies did issue significant guidance in 2003 to require issuers to increase the size of minimum monthly payments that issuers require consumers to pay, \56\ neither agency has proposed any actions (or asked for the legal authority to do so) to rein in aggressive lending or unjustifiable fees and interest rates.--------------------------------------------------------------------------- \55\ Testimony of Travis B. Plunkett of the Consumer Federation of America, Senate Banking Committee, January 25, 2007. \56\ Joint press release of Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision, ``FFIEC Agencies Issue Guidance on Credit Card Account Management and Loss Allowance Practices,'' January 8, 2003, see attached ``Account Management and Loss Allowance Guidance'' at 3.--------------------------------------------------------------------------- In addition, in 1995 the OCC amended a rule, with its action later upheld by the Supreme Court, \57\ that allowed credit card banks to export fees nationwide, as if they were interest, resulting in massive increases in the size of penalty late and overdraft fees.--------------------------------------------------------------------------- \57\ The rule is at 12 C.F.R. 7.4001(a). The case is Smiley v. Citibank, 517 U.S. 735.---------------------------------------------------------------------------D. The Federal Reserve has allowed debit card cash advances (overdraft loans) without consent, contract, cost disclosure, or fair repayment terms. The FRB has refused to require banks to comply with the Truth in Lending Act (TILA) when they loan money to customers who are permitted to overdraw their accounts. While the FRB issued a staff commentary clarifying that TILA applied to payday loans, the Board has refused in several proceedings to apply the same rules to banks that make nearly identical loans. \58\ As a result, American consumers spend at least $17.5 billion per year on cash advances from their banks without signing up for the credit and without getting cost-of-credit disclosures or a contract stating that the bank would in fact pay overdrafts. Consumers are induced to withdraw more cash at ATMs than they have in their account and spend more than they have with debit card purchases at point of sale. In both cases, the bank could simply deny the transaction, saving consumers average fees of $35 each time.--------------------------------------------------------------------------- \58\ National Consumer Law Center and Consumer Federation of America, Comments to the Federal Reserve Board, Docket No. R-1136, January 27, 2003. Appendix ``Bounce Protection: How Banks Turn Rubber Into Gold by Enticing Consumers To Write Bad Checks.'' Also, CFA, Consumers Union, and U.S. Public Interest Research Group, Supplemental Comments relating to Docket R-1136, May 2, 2003. CFA, et al. Comments to the Federal Reserve System, 12 CFR Part 230, Docket No. R-1197, Proposed Amendments to Regulation DD, August 6, 2004. Letter from CFA and national groups to the Chairman of the Federal Reserve Board and Federal Bank Regulators, urging Truth in Lending for overdraft loans, June 8, 2005. CFA, et al., Comments, Federal Reserve System, OTS, and NCUA, FRB Docket No. R-1314, OTS-2008-0004, NCUA RIN 3133-AD47, August 4, 2008. CFA Comments, Federal Reserve System, FRB Docket No. R-1343, March 30, 2009.--------------------------------------------------------------------------- The FRB has permitted banks to avoid TILA requirements because bankers claim that systematically charging unsuspecting consumers very high fees for overdraft loans they did not request is the equivalent to occasionally covering a paper check that would otherwise bounce. Instead of treating short term bank loans in the same manner as all other loans covered under TILA, as consumer organizations recommended, the FRB issued and updated regulations under the Truth in Savings Act, pretending that finance charges for these loans were bank ``service fees.'' In several dockets, national consumer organizations provided well-researched comments, urging the Federal Reserve to place consumer protection ahead of bank profits, to no avail. As a result, consumers unknowingly borrow billions of dollars at astronomical interest rates. A $100 overdraft loan with a $35 fee that is repaid in 2 weeks costs 910 percent APR. The use of debit cards for small purchases often results in consumers paying more in overdraft fees than the amount of credit extended. The FDIC found last year that the average debit card point of purchase overdraft is just $20, while the sample of State banks surveyed by the FDIC charged a $27 fee. If that $20 overdraft loan were repaid in two weeks, the FDIC noted that the APR came to 3,520 percent. \59\--------------------------------------------------------------------------- \59\ FDIC Study of Bank Overdraft Programs, Federal Deposit Insurance Corporation, November 2008 at v.--------------------------------------------------------------------------- As the Federal Reserve has failed to protect bank account customers from unauthorized overdraft loans, banks are raising fees and adding new ones. In the CFA survey of the 16 largest banks updated in July 2009, we found that 14 of the 16 largest banks charge $35 or more for initial or repeat overdrafts and nine of the largest banks use a tiered fee structure to escalate fees over the year. For example, USBank charges $19 for the first overdraft in a year, $35 for the second to fourth overdraft, and $37.50 thereafter. Ten of the largest banks charge a sustained overdraft fee, imposing additional fees if the overdraft and fees are not repaid within days. Bank of America began in June to impose a second $35 fee if an overdraft is not repaid within 5 days. As a result, a Bank of America customer who is permitted by her bank to overdraw by $20 with a debit card purchase can easily be charged $70 for a 5 day extension of credit. \60\ (For more detail, please see CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms, Appendix 5.)--------------------------------------------------------------------------- \60\ Bank of America, ``Important Information Regarding Changes to Your Account'' p. 2. Accessed online June 15, 2009. ``Extended Overdrawn Balance Charge, June 5, 2009: For each time we determine your account is overdrawn by any amount and continues to be overdrawn for 5 or more consecutive business days, we will charge one fee of $35. This fee is in addition to applicable Overdraft Item Fees and NSF Returned Item Fees.''--------------------------------------------------------------------------- Cash advances on debit cards are not protected by the Truth in Lending Act prohibition on banks using set off rights to collect payment out of deposits into their customers' accounts. If the purchase involved a credit card, on the other hand, it would violate Federal law for a bank to pay the balance owed from a checking account at the same bank. Banks routinely pay back debit card cash advances to themselves by taking payment directly out of consumers' checking accounts, even if those accounts contain entirely exempt funds such as Social Security. The Federal Reserve is considering comments filed in yet another overdraft loan docket, this time considering whether to require banks to permit consumers to opt-out of fee-based overdraft programs, or, alternatively, to require banks to get consumers to opt in for overdrafts. This proposal would change Reg E which implements the Electronic Fund Transfer Act and would only apply to overdrafts created by point of sale debit card transactions and to ATM withdrawals, leaving all other types of transactions that are permitted to overdraw for a fee unaddressed. Consumer organizations urged the Federal Reserve to require banks to get their customers' affirmative consent, the same policy included in the recently enacted credit card bill which requires affirmative selection for creditors to permit over-the-limit transactions for a fee. \61\--------------------------------------------------------------------------- \61\ Federal Reserve Board, Docket No. R-1343, comments were due March 30, 2009.---------------------------------------------------------------------------E. The Fed is allowing a shadow banking system (prepaid cards) outside of consumer protection laws to develop and target the unbanked and immigrants; The OTS is allowing bank payday loans (which preempt State laws) on prepaid cards. The Electronic Funds Transfer Act requires key disclosures of fees and other practices, protects consumer bank accounts from unauthorized transfers, requires resolution of billing errors, gives consumers the right to stop electronic payments, and requires Statements showing transaction information, among other protections. The EFTA is also the statute that will hold the new protections against overdraft fee practices that the Fed is writing. Yet the Fed has failed to include most prepaid cards in the EFTA's protections, even while the prepaid industry is growing and is developing into a shadow banking system. In 2006, the Fed issued rules including payroll cards--prepaid cards that are used to pay wages instead of a paper check for those who do not have direct deposit to a bank account--within the definition of the ``accounts'' subject to the EFTA. But the Fed permitted payroll card accounts to avoid the Statement requirements for bank accounts, relying instead on the availability of account information on the Internet. Forcing consumers to monitor their accounts online to check for unauthorized transfers and fees and charges is particularly inappropriate for the population targeted for these cards: consumers without bank accounts, who likely do not have or use regular Internet access. Even worse, the Fed refused to adopt the recommendations of consumer groups that self-selected payroll cards--prepaid cards that consumers shop for and choose on their own as the destination for direct deposit of their wages--should receive the same EFTA protections that employer designated payroll cards receive. The Fed continues to take the position that general prepaid cards are not protected by the EFTA. This development has become all the more glaring as Federal and State government agencies have moved to prepaid cards to pay many Government benefits, from Social Security and Indian Trust Funds to unemployment insurance and State-collected child support. Some agencies, such as the Treasury Department when it created the Social Security Direct Express Card, have included in their contract requirements that the issuer must comply with the EFTA. But not all have, and compliance is uneven, despite the fact that the EFTA itself clearly references and anticipates coverage of electronic systems for paying unemployment insurance and other non-needs-tested Government benefits. The Fed's failure to protect this shadow banking system is also disturbing as prepaid cards are becoming a popular product offered by many predatory lenders, like payday lenders. Indeed, the Fed is not the only one that has recently dropped the ball on consumer protection on prepaid cards. One positive effort by the banking agencies in the past decade was the successful effort to end rent-a-bank partnerships that allowed payday lenders to partner with depositories to use their preemptive powers to preempt State payday loan laws. \62\ But more recently, one prepaid card issuer, Meta Bank, has developed a predatory, payday loan feature--iAdvance--on its prepaid cards that receive direct deposit of wages and Government benefits. At a recent conference, an iAdvance official boasted that Meta Bank's regulator--the OTS--has been very ``flexible'' with them and ``understands'' this product.--------------------------------------------------------------------------- \62\ Payday lending is so egregious that even the Office of the Comptroller of the Currency refused to let storefront lenders hide behind their partner banks' charters to export usury.---------------------------------------------------------------------------F. Despite advances in technology, the Federal Reserve has refused to speed up availability of deposits to consumers. Despite rapid technological changes in the movement of money electronically, the adoption of the Check 21 law to speed check processing, and electronic check conversion at the cash register, the Federal Reserve has failed to shorten the amount of time that banks are allowed to hold deposits before they are cleared. Money flies out of bank accounts at warp speed. Deposits crawl in. Even cash that is deposited over the counter to a bank teller can be held for 24 hours before becoming available to cover a transaction. The second business day rule for local checks means that a low-income worker who deposits a pay check on Friday afternoon will not get access to funds until the following Tuesday. If the paycheck is not local, it can be held for five business days. This long time period applies even when the check is written on the same bank where it is deposited. Consumers who deposit more than $5,000 in one day face an added wait of about 5 to 6 more business days. Banks refuse to cash checks for consumers who do not have equivalent funds already on deposit. The combination of unjustifiably long deposit holds and banks' refusal to cash account holders' checks pushes low income consumers towards check cashing outlets, where they must pay 2 to 4 percent of the value of the check to get immediate access to cash. Consumer groups have called on the Federal Reserve to speed up deposit availability and to prohibit banks from imposing overdraft or insufficient fund (NSF) fees on transactions that would not have overdrawn if deposits had been available. The Federal Reserve vigorously supported Check 21, which has speeded up withdrawals but has refused to reduce the time period for local and nonlocal check hold periods for consumers.G. The Federal Reserve has supported the position of payday lenders and telemarketing fraud artists by permitting remotely created checks (demand drafts) to subvert consumer rights under the electronic funds transfer act. In 2005, the National Association of Attorneys General, the National Consumer Law Center, Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and U.S. Public Interest Research Group filed comments with the Federal Reserve in Docket No. R-1226, regarding proposed changes to Regulation CC with respect to demand drafts. Demand drafts are unsigned checks created by a third party to withdraw money from consumer bank accounts. State officials told the FRB that demand drafts are frequently used to perpetrate fraud on consumers and that the drafts should be eliminated in favor of electronic funds transfers that serve the same purpose and are covered by protections in the Electronic Funds Transfer Act. Since automated clearinghouse transactions are easily traced, fraud artists prefer to use demand drafts. Fraudulent telemarketers increasingly rely on bank debits to get money from their victims. The Federal Trade Commission earlier this year settled a series of cases against telemarketers who used demand drafts to fraudulently deplete consumers' bank accounts. Fourteen defendants agreed to pay a total of more than $16 million to settle FTC charges while Wachovia Bank paid $33 million in a settlement with the Comptroller of the Currency. \63\--------------------------------------------------------------------------- \63\ Press Release, ``Massive Telemarketing Scheme Affected Nearly One Million Consumers Nationwide; Wachovia Bank To Provide an Additional $33 Million to Suntasia Victims,'' Federal Trade Commission, January 13, 2009, viewed at http://www.ftc.gov/opa/2009/01/suntasia.shtm.--------------------------------------------------------------------------- Remotely created checks are also used by high cost lenders to remove funds from checking accounts even when consumers exercise their right to revoke authorization to collect payment through electronic funds transfer. CFA first issued a report on Internet payday lending in 2004 and documented that some high-cost lenders converted debts to demand drafts when consumers exercised their EFTA right to revoke authorization to electronically withdraw money from their bank accounts. CFA brought this to the attention of the Federal Reserve in 2005, 2006, and 2007. No action has been taken to safeguard consumers' bank accounts from unauthorized unsigned checks used by telemarketers or conversion of a loan payment from an electronic funds transfer to a demand draft to thwart EFTA protections or exploit a loophole in EFTA coverage. The structure of online payday loans facilitates the use of demand drafts. Every application for a payday loan requires consumers to provide their bank account routing number and other information necessary to create a demand draft as well as boiler plate contract language to authorize the device. The account information is initially used by online lenders to deliver the proceeds of the loan into the borrower's bank account using the ACH system. Once the lender has the checking account information, however, it can use it to collect loan payments via remotely created checks per boilerplate contract language even after the consumer revokes authorization for the lender to electronically withdraw payments. The use of remotely created checks is common in online payday loan contracts. ZipCash LLC ``Promise to Pay'' section of a contract included the disclosure that the borrower may revoke authorization to electronically access the bank account as provided by the Electronic Fund Transfer Act. However, revoking that authorization will not stop the lender from unilaterally withdrawing funds from the borrower's bank account. The contract authorizes creation of a demand draft which cannot be terminated. ``While you may revoke the authorization to effect ACH debit entries at any time up to 3 business days prior to the due date, you may not revoke the authorization to prepare and submit checks on your behalf until such time as the loan is paid in full.'' (Emphasis added.) \64\--------------------------------------------------------------------------- \64\ Loan Supplement (ZipCash LLC) Form #2B, on file with CFA.---------------------------------------------------------------------------H. The Federal Reserve has taken no action to safeguard bank accounts from Internet payday lenders. In 2006, consumer groups met with Federal Reserve staff to urge them to take regulatory action to protect consumers whose accounts were being electronically accessed by Internet payday lenders. We joined with other groups in a follow up letter in 2007, urging the Federal Reserve to make the following changes to Regulation E: Clarify that remotely created checks are covered by the Electronic Funds Transfer Act. Ensure that the debiting of consumers' accounts by Internet payday lenders is subject to all the restrictions applicable to preauthorized electronic funds transfers. Prohibit multiple attempts to ``present'' an electronic debit. Prohibit the practice of charging consumers a fee to revoke authorization for preauthorized electronic funds transfers. Amend the Official Staff Interpretations to clarify that consumers need not be required to inform the payee in order to stop payment on preauthorized electronic transfers. While FRB staff was willing to discuss these issues, the FRB took no action to safeguard consumers when Internet payday lenders and other questionable creditors evade consumer protections or exploit gaps in the Electronic Fund Transfer Act to mount electronic assaults on consumers' bank accounts. As a result of inaction by the Federal Reserve, payday loans secured by repeat debit transactions undermine the protections of the Electronic Fund Transfer Act, which prohibits basing the extension of credit with periodic payments on a requirement to repay the loan electronically. \65\ Payday loans secured by debit access to the borrower's bank account which cannot be cancelled also functions as the modern banking equivalent of a wage assignment--a practice which is prohibited when done directly. The payday lender has first claim on the direct deposit of the borrower's next paycheck or exempt Federal funds, such as Social Security, SSI, or Veterans Benefit payments. Consumers need control of their accounts to decide which bills get paid first and to manage scarce family resources. Instead of using its authority to safeguard electronic access to consumers' bank accounts, the Federal Reserve has stood idly by as the online payday loan industry has expanded.--------------------------------------------------------------------------- \65\ Reg E, 12 C.F.R. 205.10(e). 15 U.S.C. 1693k states that ``no person'' may condition extension of credit to a consumer on the consumer's repayment by means of a preauthorized electronic fund transfer.---------------------------------------------------------------------------I. The banking agencies have failed to stop banks from imposing unlawful freezes on accounts containing social security and other funds exempt from garnishment. Federal benefits including Social Security and Veteran's benefits (as well as State equivalents) are taxpayer dollars targeted to relieve poverty and ensure minimum subsistence income to the Nation's workers. Despite the purposes of these benefits, banks routinely freeze bank accounts containing these benefits pursuant to garnishment or attachment orders, and assess expensive fees--especially insufficient fund (NSF) fees--against these accounts. The number of people who are being harmed by these practices has escalated in recent years, largely due to the increase in the number of recipients whose benefits are electronically deposited into bank accounts. This is the result of the strong Federal policy to encourage this in the Electronic Funds Transfer Act. And yet, the banking agencies have failed to issue appropriate guidance to ensure that the millions of Federal benefit recipients receive the protections they are entitled to under Federal law.J. The Comptroller of the Currency permits banks to manipulate payment order to extract maximum bounced check and overdraft fees, even when overdrafts are permitted. The Comptroller of the Currency permits national banks to rig the order in which debits are processed. This practice increases the number of transactions that trigger an overdrawn account, resulting in higher fee income for banks. When banks began to face challenges in court to the practice of clearing debits according to the size of the debit--from the largest to the smallest--rather than when the debit occurred or from smallest to largest check, the OCC issued guidelines that allow banks to use this dubious practice. The OCC issued an Interpretive Letter allowing high-to-low check clearing when banks follow the OCC's considerations in adopting this policy. Those considerations include: the cost incurred by the bank in providing the service; the deterrence of misuse by customers of banking services; the enhancement of the competitive position of the bank in accordance with the bank's business plan and marketing strategy; and the maintenance of the safety and soundness of the institution. \66\ None of the OCC's considerations relate to consumer protection.--------------------------------------------------------------------------- \66\ 12 C.F.R. 7.4002(b).--------------------------------------------------------------------------- The Office of Thrift Supervision (OTS) addressed manipulation of transaction-clearing rules in the Final Guidance on Thrift Overdraft Programs issued in 2005. The OTS, by contrast, advised thrifts that transaction-clearing rules (including check-clearing and batch debit processing) should not be administered unfairly or manipulated to inflate fees. \67\ The Guidelines issued by the other Federal regulatory agencies merely urged banks and credit unions to explain the impact of their transaction clearing policies. The Interagency ``Best Practices'' State: ``Clearly explain to consumers that transactions may not be processed in the order in which they occurred, and that the order in which transactions are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumers.'' \68\--------------------------------------------------------------------------- \67\ Office of Thrift Supervision, Guidance on Overdraft Protection Programs, February 14, 2005, p. 15. \68\ Department of Treasury, Joint Guidance on Overdraft Protection Programs, February 15, 2005, p. 13.--------------------------------------------------------------------------- CFA and other national consumer groups wrote to the Comptroller and other Federal bank regulators in 2005 regarding the unfair trade practice of banks ordering withdrawals from high-to-low, while at the same time unilaterally permitting overdrafts for a fee. One of the OCC's ``considerations'' is that the overdraft policy should ``deter misuse of bank services.'' Since banks deliberately program their computers to process withdrawals high-to-low and to permit customers to overdraw at the ATM and Point of Sale, there is no ``misuse'' to be deterred. No Federal bank regulator took steps to direct banks to change withdrawal order to benefit low-balance consumers or to stop the unfair practice of deliberately causing more transactions to bounce in order to charge high fees. CFA's survey of the 16 largest banks earlier this year found that all of them either clear transactions largest first or reserve the right to do so. \69\ Since ordering withdrawals largest first is likely to deplete scarce resources and trigger more overdraft and insufficient funds fees for many Americans, banks have no incentive to change this practice absent strong oversight by bank regulators.--------------------------------------------------------------------------- \69\ Consumer Federation of America, Comments to Federal Reserve Board, Docket No. R-1343, Reg. E, submitted March 30, 2009.---------------------------------------------------------------------------K. The regulators have failed to enforce the Truth In Savings Act requirement that banks provide account disclosures to prospective customers. According to a 2008 GAO report \70\ to Rep. Carolyn Maloney, then-chair of the Financial Institutions and Consumer Credit Subcommittee, based on a secret shopper investigation, banks don't give consumers access to the detailed schedule of account fee disclosures as required by the 1991 Truth In Savings Act. From GAO:--------------------------------------------------------------------------- \70\ ``Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts'', GAO-08-28I, January 2008, available at http://www.gao.gov/new.items/d08281.pdf (last visited 21 June 2009). Regulation DD, which implements the Truth in Savings Act (TISA), requires depository institutions to disclose (among other things) the amount of any fee that may be imposed in connection with an account and the conditions under which such fees are imposed. [ . . . ] GAO employees posed as consumers shopping for checking and savings accounts [ . . . ] Our visits to 185 branches of depository institutions nationwide suggest that consumers shopping for accounts may find it difficult to obtain account terms and conditions and disclosures of fees upon request prior to opening an account. Similarly, our review of the Web sites of the banks, thrifts, and credit unions we visited suggests that this information may also not be readily available on the Internet We were unable to obtain, upon request, a comprehensive list of all checking and savings account foes at 40 of the branches (22 percent) that we visited. [ . . . ] The results are consistent with those reported by a consumer group [U.S. PIRG] that conducted a --------------------------------------------------------------------------- similar exercise in 2001. This, of course, keeps consumers from being able to shop around and compare prices. As cited by GAO, U.S. PIRG then complained of these concerns in a 2001 letter to then Federal Reserve Board Chairman Alan Greenspan. \71\ No action was taken. The problem is exacerbated by a 2001 Congressional decision to eliminate consumers' private rights olfaction for Truth In Savings violations.--------------------------------------------------------------------------- \71\ The 1 November 2001 letter from Edmund Mierzwinski, U.S. PIRG, to Greenspan is available at http://static.uspirg.org/reports/bigbanks2001/greenspanltr.pdf (last visited 21 June 2009). In that letter, we also urged the regulators to extend Truth In Savings disclosure requirements to the Internet. No action was taken.---------------------------------------------------------------------------L. The Federal Reserve actively campaigned to eliminate a Congressional requirement that it publish an annual survey of bank account fees. One of the consumer protections included in the 1989 savings and loan bailout law known as the Financial Institutions Reform, Recovery and Enforcement Act was Section 1002, which required the Federal Reserve to publish an annual report to Congress on fees and services of depository institutions. The Fed actively campaigned in opposition to the requirement and succeeded in convincing Congress to sunset the survey in 2003. \72\ Most likely, the Fed was unhappy with the report's continued findings that each year bank fees increased, and that each year, bigger banks imposed the biggest fees.--------------------------------------------------------------------------- \72\ The final 2003 report to Congress is available here http://www.federalreserve.gov/boarddocs/rptcongress/2003fees.pdf (last visited 21 June 2009). The 1997-2003 reports can all be accessed from this page, http://www.federalreserve.gov/pubs/reports_other.htm (last visited 21 June 2009).---------------------------------------------------------------------------SECTION 4. STRUCTURE AND JURISDICTION OF A CONSUMER FINANCIAL CHRG-111shrg56415--47 Mr. Dugan," Yes. Senator Corker. And are each of you going to write standards that are dramatically different from those that got us into the situation? I mean, each of you agreed with Senator Gregg's questions, but I wonder if we are actually going to take action to make that occur. Ms. Bair. First of all, I want to clarify, there is plenty of bad underwriting. I want to emphasize that, the kinds of new credit problems we are seeing now are more economically driven. There was plenty of bad underwriting in both mortgage lending as well as commercial real estate. We have tightened the standards tremendously. I think we are being criticized in other quarters. Please note that we issued commercial real estate guidance in 2006. Senator Corker. Well, I---- Ms. Bair. The Federal Reserve Board has issued rules that apply to both banks and non-banks for mortgage lending that significantly tighten the standards. That already has taken place. Also, we are working on capital rules that will require greater capital charges against higher-risk loans, such as those with high LTVs. The bank regulators are doing all that, and have for some time. You still have a fairly significant non-bank sector, one that can come back as the capital markets heal. That is why I hope that, going forward, in terms of whatever reforms you come up with, that those reforms will reflect the fact that there are two different sectors, two different providers of credit in this country. We can keep tamping down on the banks as we have been. But if the non-bank sector is left, by and large, unregulated, that is not going to fix the problem. " CHRG-111hhrg55809--200 The Chairman," The hearing will recess. And I appreciate the indulgence of the Chairman. We will return on our side with questions from Mr. Clay, Mr. Scott, Mr. Green, Mr. Cleaver, Ms. Speier, Mr. Minnick and Ms. Kosmas if they wish to do so, and I will be guided by my colleagues on the other side. The hearing is recessed. [recess] " Mr. Watt," [presiding] The hearing will come back to order. The chairman has asked me to preside in his absence, and I think the next person to be recognized is the gentleman from California, Mr. Miller. Mr. Miller of California. Thank you. Mr. Chairman, it is good to have you back. I am glad you decided to stay and were reappointed. I think you are doing a very difficult job, but I think you are doing the best anybody could do in this country. I would be interested in your comments, and we talked about, you said you are trying to increase the national savings rate on the part of individuals and such, which is a goal. I believe you said that earlier. Yet I am looking at what is happening with the banks. The interest rates are so low that people are saying, I have to find some better investment for my money rather than putting it in a savings account. And then, on the other hand, banks aren't lending money still. It is an unusual anomaly we have. It is not as bad as it was last September when they stopped lending to each other. But for individuals with good credit, they are having trouble even going out and getting a loan to keep a business operating. How do you see those in conflict with each other? " CHRG-111shrg54675--77 PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON It is no exaggeration to say that our economy is currently experiencing extraordinary stress and volatility. As Congress and the Administration look at corrective policy changes, I am pleased to hold this hearing today to take a closer look at the role smaller financial institutions, specifically community banks and credit unions, play in our economy, especially in many rural communities. Throughout our Nation's economic crisis there has often been too little distinction made between troubled banks and the many banks that have been responsible lenders. There are many community banks and credit unions that did not contribute to the current crisis--many rural housing markets that didn't experience the boom that other parts of the country did, and community lending institutions didn't sell as many exotic loan products as other lenders sold. Nonetheless, small lending institutions in rural communities and their customers are feeling the effects of the subprime mortgage crisis and the subsequent crisis in credit markets. Jobs are disappearing, ag loans are being called, small businesses can't get the lines of credit they need to continue operation, and homeowners are struggling to refinance. Smaller banks play a crucial role in our economy and in communities throughout our Nation; we need to be mindful that some institutions are now paying the price for the risky strategies employed by some larger financial institutions. In coming weeks, the Banking Committee will continue its review of the current structure of our financial system and develop legislation to create the kind of transparency, accountability, and consumer protection that is now lacking. As this process moves forward, it will be important to consider the unique needs of smaller financial institutions and to preserve their viability as we come up with good, effective regulations that balance consumer protection and allow for sustainable economic growth. I would like to welcome our panel of witnesses, and thank them for their time and for their thoughtful testimony on how small lending institutions in rural communities have been affected by our troubled economy. I would also like to thank Senator Kohl for his interest in today's hearing topic. I will now turn to Senator Crapo, the Subcommittee's Ranking Member, for his opening statement. ______ CHRG-111shrg51303--82 Mr. Polakoff," Independently. I give the company credit for that. Senator Reed. To stop investing in mortgage-backed securities. But at that very time, in the securities lending program, the individual running that program decided to aggressively get into mortgage-backed and asset-backed securities. You have already indicated that your stewardship before 2007 was--you would like to have seen it a bit better, to be polite, but did you have any knowledge that one part of AIG had made a determination that these investments were too risky and another part of AIG that you had access to decided to aggressively get involved? " CHRG-111hhrg54868--186 Mr. Dugan," We will be providing some additional statistics. If you look at the worst foreclosure rates in the worst cities, it was not from the regulated institutions. It is the flip side of people who think that the CRA has caused the problems, which is only done in banks, CRA lending, and the data just does not show it. And it is why we believe having a rulewriter that can write rules that apply the same to banks as well as nonbanks, and why the importance of having new Federal attention being paid to nonbanks to bring their compliance level up to the level of banks is so important. That is the powerful part of the idea behind a CFPA. " CHRG-111shrg50814--62 Mr. Bernanke," Yes. There will be more information, I believe, very soon, but let me give you my view of that. The assessment will look at the balance sheets and the capital needs of each of our 19 largest, $100 billion plus banks over the next 2-year horizon, under both a consensus forecast of where we think the economy is likely to be, based on private sector forecasts, and an alternative which is worse, that is, a more stressed situation. I should emphasize that the outcome of this test is not going to be, say, you pass, you fail. That is not the outcome. The outcome is going to be: Here is how much capital this institution needs to guarantee that it will have high-quality capital and to be well capitalized sufficient to be able to lend and to support the economy, even if the stress scenario arises. So the purpose of the test is to try to ensure that even in a bad scenario, banks will have enough capital, including enough common equity, to meet their obligations to lend. Senator Corker. So what I would take from that is, in earlier comments about--I guess our concern still is about systemic risk and that there are organizations and institutions that are too large to fail. That is what you said earlier. And so, if I am to understand this right, the stress test would simultaneously in many cases, my assumption would be, show there is a need for additional large amounts of capital; and what you are saying is you are going to solve that problem--I think what you are saying is you have a plan to solve that problem simultaneously. " CHRG-111shrg55117--114 Mr. Bernanke," Well, it is not inconsistent. The stress test, first of all, applied to the top 19 banks and we found that there is still $600 billion of losses to be experienced in the next 2 years, so that is quite substantial. And our conclusion was that even after that $600 billion of losses, they would still be able to meet well-capitalized requirements. The other aspect is that a lot of the commercial real estate loans are in smaller banks, and so some smaller banks which were not counted in the stress test, were not examined in the stress test, will be facing those costs going forward. So it is a major challenge to the banking system. I discussed with a couple of your colleagues some of the things that the Fed is doing, and I think what we will see is that banks faced with commercial real estate loans which cannot perform at the original terms will be trying to find renegotiations to allow at least partial performance on---- Senator Bennet. And it is my sense that up until now, there has been an inclination to roll over these financings, but what hasn't happened yet is a resetting of the underlying valuation of the assets, which is still something that we are going to be facing, I think, in the next 12 months--over the next 12 months. One very quick question and then a longer one. I will be very brief. You mentioned twice this morning that I heard that you thought that the TALF had had an effect on small business lending and consumer lending and I just wondered what the evidence of that is. " CHRG-111hhrg48674--5 Mr. Watt," Thank you, Mr. Chairman. Using the authority of unusual and exigent circumstances under section 13(3) of the Federal Reserve Act, the Fed has set up emergency lending facilities to address severe market strains and commercial paper by activating a commercial paper funding facility to address severe strains related to money market funds by activating a money market liquidity facility and announced earlier today that it plans a substantial expansion of this term asset-backed security loan facility. The use of each of these tools will, of course, expand the balance sheet of the Federal Reserve and subject the Fed to more attention, scrutiny, second guessing, and oversight, otherwise as the chairman has indicated we run the risk that the authority granted in the 1933 statute could be out of control or subject to abuse. The use of each of these tools also raises the question, what happens when the unusual and exigent circumstances are over? What is the exit strategy for winding down the various Fed lending programs when we return to normal economic times? Today's review of the Fed's power under section 13(3) of the Federal Reserve Act is the first in a series of hearings and other actions that we must take to evaluate steps that certainly appear to be necessary to combat the current economic crisis that confronts us. I trust that our evaluation will be transparent, open, and fair, and I certainly welcome Chairman Bernanke's testimony. I yield back. " CHRG-111shrg54675--99 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM PETER SKILLERNQ.1. Some have suggested that the Federal Reserve Board's unfair and deceptive practices (UDAP) authority is very broad and could be used to successfully protect consumers. The problem is that this authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from safety and soundness, should Congress consider ways to improve the UDAP authority? If so, what options do you recommend?A.1. As the question states, ``the Federal Reserve Board's unfair and deceptive practices (UDAP) authority is very broad and could be used to successfully protect consumers.'' And ``this authority has not been used in a material fashion prior to the credit card rule.'' The problem is that the Federal Reserve failed to utilize its authority to issue rules or to enforce existing ones to protect consumers. Changing the UDAP authority will not improve consumer protections as it does not address the underlying and fundamental problem of the Federal Reserve's regulatory failure to protect consumers. The Federal Reserve should have greater accountability to Congress and the public in its financial accounting, its policies and programs and the enforcement of consumer protections. Changing the UDAP will not address these needs. Governor Duke suggested in Congressional testimony that the Federal Reserve be required to give a biannual update on consumer protections to Congress. This is a selfdisclosure approach that does not hold the agency accountable. Reform of the UDAP will not resolve the problem of the Federal Reserve failure of will to protect consumers. The Community Reinvestment Association of North Carolina strongly supports the creation of the Consumer Financial Protection Agency (CFPA) to address the deficiencies of the current regulatory structure in protecting consumers.A Single Agency Is More Effective Than Current Fragmented System There are currently 12 Federal agencies responsible for consumer protections in the financial sector. The patchwork of regulatory coverage of differing financial institutions and different types of authority and differing agency objectives and capacity make the current system inefficient and ineffective. Among Federal institutions that charter banks, financial institutions may change regulator if they believe another regulator has a lower enforcement threshold. Because Federal charter agencies receive payment from the firms they regulate, agencies lose revenue if firms switch regulators. Regulators have a disincentive to enforce regulations at the risk of revenue loss. A single agency that has a single purpose with the authority of rule writing and enforcement across all financial institutions and products is a significant improvement of the current structure that has multiple enforcement agencies that regulate by the type of lender not the product.Bifurcation Places Consumer Protections on Equal Basis With Safety and Soundness The two objectives of consumer protection and safety and soundness are complimentary and supportive of each other, but that does not mean that under the current system they are treated equally. Current regulators evaluate products based on safety and soundness, i.e., profitability before evaluation of products for consumer protections. Enforcement actions by the OCC and the FDIC on banks providing payday loans in partnership with payday lenders were conducted based on the lack of oversight of the agents of the bank, not on any ruling that the product at 400 percent interest rate and repeat transactions on a debt trap were harmful to consumers. Regulators have repeatedly stated that safety and soundness is their primary responsibility and has demonstrated that by a lack of material enforcement actions protecting consumers. An example of this is the Office of the Comptroller's lack of enforcement action against Pacific Capital Bank despite the bank's violation of the OCC's publicized guidelines on its supervised bank agencies that conduct refund anticipation loans. Jackson Hewitt prepares taxes and makes refund anticipation loans with Santa Barbara Bank and Trust (SBBT), Pacific Capital's subsidiary. Jackson Hewitt was found guilty of tax fraud through a number of its franchises. Refund Anticipation Loans made by SBBT were used to facilitate the fraud. Recently, another bank partner Liberty Tax Services was found guilty in a jury trial of violations of the Federal Trade Act, Truth in Lending Act and Cross Debt Collection practices in marketing and originating Refund Anticipation Loans. Yet the OCC has not issued any regulatory actions regarding the bank's operations. Instead, the Office of the Comptroller of the Currency recommended the bank for TARP funding and the bank received $180.6 million dollars which was used as capitalization for its operations including Refund Anticipation Loans. Unfortunately, Pacific Capital Bank stock has fallen by 90 percent and lost $7.70 a share including one-time writedowns in the last quarter. This is one example of how Federal regulators have lost credibility that they have the will to protect consumers. This is an example of regulators subordinating profitability over both consumer protection and safety and soundness. The Community Reinvestment Association of North Carolina asks that the United States Banking, Housing, and Urban Affairs Committee investigate the oversight of Pacific Capital Bank by the OCC and the use of TARP funds to make Refund Anticipation Loans. By bifurcating consumer protection and safety and soundness, agencies can better achieve both objectives that have been at cross purposes under the current regulatory structure.The Consumer Financial Protection Agency Will Strengthen Dual Agency Enforcement The current regulatory system has Federal and State regulatory components. Historically Federal agencies did not enforce unfair and deceptive trade practices or provide consumer protections as this was a primarily a State prerogative through the State attorney general of financial regulator. Federal preemption of State regulations through national bank powers allowed institutions operating in States with few consumer protections to operate under jurisdiction of that State rather than the State the borrower lived in. This effectively removed many State consumer protections without putting into place Federal consumer protections or enforcement mechanisms. As an example, North Carolina's usury cap of 36 percent interest rate loans is preempted by any national bank operating in a State with a higher cap, or State chartered banks operating under parity. Thus refund anticipation lenders can make triple digit interest rate loans by partnering with Out-of-State banks. The CFPA will create national standards that create a baseline of Federal consumer protections. The legislation also allows State agencies to regulate financial institutions acting within their borders. State laws that are stronger are not preempted. Consumer enforcement capacity is increased by enabling State regulators to enforce Federal standards. This is a vast improvement over the current turf battle in which Federal regulators prevent State regulators from enforcement of either State or Federal laws, yet which they do not enforce themselves. The OCC sued the New York Attorney General to stop his enforcement of State fair lending laws against national banks. This action was overruled by the recent Supreme Court decision in Cuomo v. The ClearingHouse Association. The OCC claims to support fair housing laws, but can not demonstrate that it has enforced fair housing laws against national banks in any public action. The OCC most public action is the lawsuit to stop State enforcement of fair lending laws. The creation of the CFPA will allow for Federal preemption of State law, but not will empower enforcement of consumer protections.Fair Lending Laws Will Be Better Served by Consumer Financial Protection Agency The GAO July 2009 report Fair Lending Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts documents that the fragmented system of multiple agencies, lack of trained staff, and poor data collection have stymied fair lending enforcement. Only eight fair lending cases by Federal regulators have occurred since 2005. Again existing Federal agencies have failed consumers. The CFPA will have trained dedicated staff, systemic data collection and single purpose to be more effective.Conclusion--Support the Consumer Financial Protection Agency The Community Reinvestment Association of North Carolina supports the creation of the Consumer Financial Protection Agency and rejects the argument that amending the Federal Reserve's authority under the unfair and deceptive trade practices will improve consumer protection." CHRG-111hhrg56778--3 Mr. Garrett," I thank the gentleman, and I thank the members of the panel who are here today. Insurance holding company supervision obviously is a very complex topic and I think the hearing today will help members be able to delve into it and get a better understanding of how insurance companies are structured, how they're operated, and how they're regulated. And as I have delved deeper into this issue and the way that insurers are regulated within holding companies, either through insurance holding companies, financial holding companies or thrift holding companies, my belief that the problems are really more attributed to failures by regulators as opposed to gaps in regulatory structures continues to be reinforced. So while I do agree that there are a number of areas out there within our insurance regulatory system that do need to be updated and modernized, I believe we must be really careful and deliver it in our approach. The insurance industry as a whole, I think, has performed better than most other parts of the financial sector during this crisis. And so we must ensure that we first do no harm in whatever we do. I know my friend and colleague, who is not here right now, Mr. Royce, has continually pointed out that the securities lending problems with the AIG situation highlight the problems with State-based regulation, and he says it shows the need to have a larger Federal role in the regulating of the insurance companies. And I would remind him, while the losses attributed to securities lending were significant, had it not been for the cascade of problems with AIG's Financial Products Unit, the FP, that company would have been able to handle those losses without the need of taxpayer support. Now, once the Office the Thrift Supervision had the Federal regulatory authority over AIG, and they had the power to oversee AIG's FP leverage, they unfortunately failed to identify and correct that problem. And this is really a prime example of the regulator not doing their job; and, it's not really a problem of a gap in regulation. I would even argue that if the securities lending operations of the insurers had been handled by the Federal regulators in this case, things might actually have been much worse than they were. I agree that the securities lending by insurance companies, as I said at the outset, needs additional reforms, and I do look forward to hearing from the Commissioner and Director Frohman, as well, Mr. Dilweg and Ms. Frohman on what reforms have already been made in these areas and other solutions as well. Now, on another topic, though, I would like to briefly discuss a major concern I had with Chairman Dodd's recent release of a financial regulatory reform draft. The Dodd package has a provision that would require an up-front tax on any bank holding company with assets greater than $50 billion. Also, Dodd's plan would tax any financial company, including insurers, who present an extremely low risk with greater than $50 billion in assets after any systemic event occurred. I believe that this tax would simply lead to higher costs for consumers and additional job losses in the private sector as well. I also believe that we greatly increase the moral hazard within the financial sector. I would like to read a quote from the recently released White Paper from the Property Casualty and Insurers Association of America regarding the topic of using the absolute size of a financial company as the basis for determining a systemic risk. The paper states, ``Such a process, if enacted, would create a cross subsidy of significant magnitude from firms that do not pose a systemic risk to those firms whose activities are systemically risky. So the resulting moral hazard would encourage increased risk-taking, and as such could ultimately defeat the legislation's intent of reducing the economy's exposure to systemic risk.'' So ultimately, we need a system here in place that can allow big companies to fail without being bailed out either by the taxpayer or by the consumer as his proposal would allow. So while I agree that there are numerous areas of insurance regulation that need to be addressed and updated and modernized, I believe that the main problems here really were with regulators and not the structure of the regulation. So, once again, I thank my good friend from Pennsylvania for holding this important hearing, and also for the education that we're going to get today. And I look forward to hearing from all the witnesses. " CHRG-111hhrg51591--65 Mr. Webel," I mean, it is really unclear with regard to the securities lending again whether they didn't have the sophistication to know what was going on in AIG or didn't have the authority, or whether they just made the same mistakes that everybody else did, which was thinking that AAA-rated mortgage-backed securities actually were good things to be investing in. With regard to Gramm-Leach-Bliley, from what I can tell and have been told, prior to Gramm-Leach-Bliley, prior to becoming an Office of Thrift Supervision holding company, the AIG at a holding company level would have been essentially unregulated. Ms. Bean. Yes. If they didn't have a thrift, they wouldn't have had-- " CHRG-111hhrg48874--54 Mr. Watt," Does anybody else have any suggestions for me? Mr. Polakoff can't help me. What am I supposed to do in these situations? [no response] Who is next on your list? I guess nobody has a suggestion for me? Ms. Duke. I will take one stab at it. I have been in that situation, and, so you may not find this very satisfactory, but the one thing we are finding is that those that are increasing their loans are banks that are looking at each individual deal one at a time, and they are finding that they are increasing their business, not because there's a lot more loan demand, but they're doing it because there are banks that are pulling out of specific types of lending. And so they're finding that if they can go in and look at the deal on its merits, there are some banks that are out there making those loans. " CHRG-110hhrg46591--373 Mr. Washburn," We hope it will. We have a concern, because right now I think the way it is written, private banks and Subchapter S corporation banks are not eligible or may be left out. We hope there is some change in the dynamics of the bill. But I like what I--the initial read, I like what I see. I think it is a solution. If you read, I think most all the banks that are willing to participate can participate that are healthy. And I think you will see a flow of capital back out, which will result in lending money back into the markets where it needs to be. " CHRG-111shrg51303--45 Mr. Dinallo," It is true that the RMBS exposure for the securities lending business was about 60 percent, but that still is a very small piece. That $40 billion was only 10 percent, or actually about 8 percent of the total life insurance assets. Senator Shelby. So if you are not taking the responsibility or accepting all of it, aren't you, in a sense, saying you are handing over the assets to a non-insurance entity? AIG insurers got the upside. The taxpayers got the downside. And you can claim here today that you have little responsibility, if any, for all of these problems. " CHRG-111shrg61513--62 Mr. Bernanke," In short, yes, I would support that--13(3) has been used two ways. It has been used in what you would call bailouts, and it has been used in developing these broad-based lending facilities to help individual markets, like the ones we just closed down on February 1st. I think the latter is a valuable thing to have in case of a future crisis, but we would be happy to give up any involvement in the wind-down of failing, systemically critical firms. Senator Vitter. And just to make clear, I am talking about the former not the latter, so I think we are on the same page. " CHRG-111hhrg54868--125 Mr. Dugan," Actually, Citi is bigger into credit cards than Wells is. And then U.S. Bank is, and then you have American Express and Discover. It is dominated by a smaller group of providers than other financial services. That is definitely the case. But it is a business of scale. And because it demands such an investment in systems and products, it naturally leads to larger providers. I think you have to watch that in terms of any time you have a smaller number of people providing the same product, you get into questions over time of whether it raises competition questions. But there are certain products that lend themselves to having more or fewer providers in it. " CHRG-111hhrg51698--187 Mr. Duffy," And, just to add on to that, you are seeing the major Wall Street firms agree that a clearing solution is definitely needed for the future of credit default swaps. So I don't think anyone is opposing it. I think what some are saying in this room, and some are saying on Wall Street, that there is a certain type of products that may not lend itself for trading or clearing because of the illiquid nature that they represent. But the majority of the contracts, I think everybody's in agreement they do need to be cleared to avoid the systemic risk in the system. " CHRG-111hhrg53244--277 Mr. Bernanke," You take a loss on it. But we are working with banks in the residential context to try not to create accounting incentives to foreclose as opposed to work out. The same principle ought to apply in commercial real estate. Mr. Miller of California. But we are not starting where we did with the banks where they had adequate liquidity originally, when they got started to get hit with defaults. We are talking about banks today that don't want to lend money. They are trying to keep the reserves and they don't want deposits. They don't have the reserves. " CHRG-111hhrg51585--279 Mr. Perlmutter," Let me ask you this, and then I will turn it over to the other panelists. Mr. Hullinghorst described the purpose of investments in something like a Lehman Brothers or other things. And I am sure Orange County had investments in some other companies, and Merrill Lynch or Citibank or JPMorgan Chase. The purpose was to also bolster commercial paper lending. Everything is connected to everything else in the financial sector. That certainly is something we have found. Now, do you object to taxpayer money coming in through local governments being used to assist with commercial paper? " CHRG-111shrg57709--125 Mr. Volcker," Well, that is a reasonable question. I am sorry I apparently cannot get through with the answer, but I do not want to restrict commercial banks from doing commercial banking, traditional business. I do not want to. I want to encourage their lending. I do not want to encourage their speculative activities. Senator Johanns. Let me just wrap up. I am out of time, and I thank the Chairman. I really appreciate both of your being here. I really do. And we are wrestling with some very tough issues here, trying to figure them out, understand them, without damaging the economy. " CHRG-110hhrg41184--111 Mr. Bernanke," Well, Congressman, as you pointed out, we have two different authorities. We have the Reg Z Truth in Lending authority, which is disclosure authorities, and we have already put out a rule for comment. It was a very extensive rule that involved consumer testing and several years of efforts to put together. I think that proposal is going to improve disclosures a lot. But we also have this Unfair Deceptive Acts and Practices authority, which allows us to ban--not just failure to disclose--but allows us to ban specific practices, which are unfair or deceptive for the consumer, and I think-- " FOMC20080916meeting--38 36,MR. LACKER.," Note here a sense of discomfort with our lending them dollars that they already have and so our serving as a substitute for their mobilizing their own dollar reserves for this purpose. Obviously, the demand could swamp their own reserves, and at that point I would feel differently about this. But my understanding is that the distribution within the European system of central banks is uneven, and in some sense this just provides them with a way to circumvent negotiating how those dollars would be distributed from different central banks to different private-sector banks within their own system. Broadly, I'm uncomfortable with our playing that role. " FinancialCrisisReport--112 The robust risk management system contemplated by in the January 2005 memorandum, which was critical to the success of the High Risk Lending Strategy, was never meaningfully implemented. To the contrary, risk managers were marginalized, undermined, and often ignored. As former Chief Risk Manager Jim Vanasek testified at the April 13 Subcommittee hearing: “I made repeated efforts to cap the percentage of high-risk and subprime loans in the portfolio. Similarly, I put a moratorium on non-owner-occupied loans when the percentage of these assets grew excessively due to speculation in the housing market. I attempted to limit the number of stated income loans, loans made without verification of income. But without solid executive management support, it was questionable how effective any of these efforts proved to be.” 391 Later in the hearing, Mr. Vanasek had the following exchange with Senator Coburn: Senator Coburn: Did you ever step in and try to get people to take a more conservative approach at WaMu? Mr. Vanasek: Constantly. Senator Coburn: Were you listened to? Mr. Vanasek: Very seldom. Senator Coburn: [Had] you ever felt that your opinions were unwelcomed, and could you be specific? Mr. Vanasek: Yes. I used to use a phrase. It was a bit of humor or attempted humor. I used to say the world was a very dark and ugly place in reference to subprime loans. I cautioned about subprime loans consistently. 392 Mr. Vanasek’s description of his efforts is supported by contemporaneous internal documents. In a February 24, 2005 memorandum to the Executive Committee with the subject heading, “Critical Pending Decisions,” for example, Mr. Vanasek cautioned against expanding WaMu’s “risk appetite”: 390 1/2005 “Higher Risk Lending Strategy ‘Asset Allocation Initiative,’” Washington Mutual Board of Directors Finance Committee Discussion, JPM_WM00302975, Hearing Exhibit 4/13-2a [emphasis in original]. 391 April 13, 2010 Subcommittee Hearing at 17. 392 Id. at 32. “My credit team and I fear that we are considering expanding our risk appetite at exactly the wrong point and potentially walking straight into a regulatory challenge and criticism from both the Street and the Board. Said another way I fear that the timing of further expansion into higher risk lending beyond what was contemplated in the ’05 Plan and most especially certain new products being considered is ill-timed given the overheated market and the risk [of] higher interest rates …. CHRG-110shrg38109--12 Chairman Dodd," That was a standard Senator Bayh set there. Senator Martinez. But I will be very brief, Mr. Chairman. Thank you very much. Chairman Bernanke, welcome, and I again join in the high praise that you have been receiving for your first year on the job. I will simply look forward to hearing your comments as it relates to the housing market, a great concern to me, housing affordability; also, the issue that we dealt with last week in this Committee, which is subprime lending and the rate of defaults in that area; and just in general the effect of the hurricanes in the Gulf Coast, which continue to be an impact on the economies of the Gulf States. So, I look forward to your comments, and thank you for being with us today. " CHRG-111shrg54589--54 Mr. Gensler," The clearinghouses and exchanges should be regulated by the principal market regulators, as each of our agencies has for decades, and the derivative regulation should embody that similarly. They should be regulated for risk management, making sure they have capital and margining and various practices on how they net the contracts and also regulation about their clearing members. At the same time, I recognize there may be something for the systemic regulators' interest to make sure that if they are going to be called upon in an extreme case to lend money, that they also have some authorities. Senator Bunning. In other words, you would not rule out the Federal Reserve as being a source they could go to in case of emergency? " FinancialCrisisReport--226 In October 2008, after Washington Mutual failed, the OTS Examiner-in-Charge at the bank, Benjamin Franklin, deplored OTS’ failure to prevent its thrifts from engaging in high risk lending because “the losses were slow in coming”: “You know, I think that once we (pretty much all the regulators) acquiesced that stated income lending was a reasonable thing, and then compounded that with the sheer insanity of stated income, subprime, 100% CLTV [Combined Loan-to-Value], lending, we were on the figurative bridge to nowhere. Even those of us that were early opponents let ourselves be swayed somewhat by those that accused us of being ‘chicken little’ because the losses were slow in coming, and let[’]s not forget the mantra that ‘our shops have to make these loans in order to be competitive’. I will never be talked out of something I know to be fundamentally wrong ever again!!” 860 Failure to Consider Financial System Impacts. A related failing was that OTS took a narrow view of its regulatory responsibilities, evaluating each thrift as an individual institution without evaluating the effect of thrift practices on the financial system as a whole. The U.S. Government Accountability Office, in a 2009 evaluation of how OTS and other federal financial regulators oversaw risk management practices, concluded that none of the regulators took a systemic view of factors that could harm the financial system: “Even when regulators perform horizontal examinations across institutions in areas such as stress testing, credit risk practices, and the risks of structured mortgage products, they do not consistently use the results to identify potential system risks.” 861 Evidence of this narrow regulatory focus includes the fact that OTS examiners carefully evaluated risk factors affecting home loans that WaMu kept on its books in a portfolio of loans held for investment, but paid less attention to the bank’s portfolio of loans held for sale. OTS apparently reasoned that the loans held for sale would soon be off WaMu’s books so that little analysis was necessary. From 2000 to 2007, WaMu securitized about $77 billion in subprime 860 10/7/2008 email from OTS Examiner-in-Charge Benjamin Franklin to OTS Examiner Thomas Constantine, Franklin_Benjamin-00034415, Hearing Exhibit 4/16-14. 861 3/18/2009 Government Accountability Office, “Review of Regulators’ Oversight of Risk Management Systems at a Limited Number of Large, Complex Financial Institutions,” Testimony of Orice M. Williams, Hearing Exhibit 4/16-83 (GAO reviewed risk management practices of OTS, as well as the Federal Reserve, the Office of the Comptroller of the Currency, the SEC, and self-regulatory organizations.). loans, mostly from Long Beach, as well as about $115 billion in Option ARM loans. 862 Internal documents indicate that OTS did not consider the problems that could result from widespread defaults of poorly underwritten mortgage securities from WaMu and other thrifts. fcic_final_report_full--490 III. THE U.S. GOVERNMENT ’S ROLE IN FOSTERING THE GROWTH OF THE NTM MARKET The preceding section of this dissenting statement described the damage that was done to the financial system by the unprecedented number of defaults and delinquencies that occurred among the 27 million NTMs that were present there in 2008. Given the damage they caused, the most important question about the financial crisis is why so many low quality mortgages were created. Another way to state this question is to ask why mortgage standards declined so substantially before and during the 1997-2007 bubble, allowing so many NTMs to be created. This massive and unprecedented change in underwriting standards had to have a cause—some factor that was present during the 1990s and thereafter that was not present in any earlier period. Part III addresses this fundamental question. The conventional explanation for the financial crisis is the one given by Fed Chairman Bernanke in the same speech at Morehouse College quoted at the outset of Part II: Saving inflows from abroad can be beneficial if the country that receives those inflows invests them well. Unfortunately, that was not always the case in the United States and some other countries. Financial institutions reacted to the surplus of available funds by competing aggressively for borrowers, and, in the years leading up to the crisis, credit to both households and businesses became relatively cheap and easy to obtain . One important consequence was a housing boom in the United States, a boom that was fueled in large part by a rapid expansion of mortgage lending. Unfortunately, much of this lending was poorly done, involving, for example, little or no down payment by the borrower or insuffi cient consideration by the lender of the borrower’s ability to make the monthly payments . Lenders may have become careless because they, like many people at the time, expected that house prices would continue to rise--thereby allowing borrowers to build up equity in their homes--and that credit would remain easily available, so that borrowers would be able to refinance if necessary. Regulators did not do enough to prevent poor lending, in part because many of the worst loans were made by firms subject to little or no federal regulation. [Emphasis supplied] 59 In other words, the liquidity in the world financial market caused U.S. banks to compete for borrowers by lowering their underwriting standards for mortgages and other loans. Lenders became careless. Regulators failed. Unregulated originators made bad loans. One has to ask: is it plausible that banks would compete for borrowers by lowering their mortgage standards? Mortgage originators—whether S&Ls, commercial banks, mortgage banks or unregulated brokers—have been competing for 100 years. That competition involved offering the lowest rates and the most benefits to potential borrowers. It did not, however, generally result in 59 Speech at Morehead College April 14, 2009. 485 or involve the weakening of underwriting standards. Those standards—what made up the traditional U.S. mortgage—were generally 15 or 30 year amortizing loans to homebuyers who could provide a downpayment of at least 10-to-20 percent and had good credit records, jobs and steady incomes. Because of its inherent quality, this loan was known as a prime mortgage. FinancialCrisisReport--88 Community Impact. Long Beach’s poor quality loans not only proved unprofitable for many investors, they were often devastating for the borrowers and their communities. Mr. Killinger testified at the Subcommittee hearing that WaMu, “entered the subprime business with our purchase of Long Beach Mortgage in 1999 to better serve an underserved market.” 269 But the unfortunate result of many Long Beach loans was that they left communities reeling from widespread foreclosures and lost homes. In November 2008, the Office of the Comptroller of the Currency (OCC) which oversees all nationally chartered banks, identified the ten metropolitan areas across the United States with the highest rates of foreclosure for subprime and Alt A mortgages originated from 2005 through 2007. 270 Those ten areas were, in order: Detroit, Cleveland, Stockton, Sacramento, Riverside/San Bernardino, Memphis, Miami/Fort Lauderdale, Bakersfield, Denver, and Las Vegas. The OCC then identified the lenders with the highest foreclosure rates in each of those devastated cities. Long Beach had the worst foreclosure rate in four of those areas, and was near the worst in five more, with the lone exception being Las Vegas. The OCC data also showed that, overall in the ten metropolitan areas, Long Beach mortgages had the second worst foreclosure rate of all the lenders reviewed, with over 11,700 foreclosures at the time of the report. Only New Century was worse. (2) WaMu Retail Lending Washington Mutual’s problems were not confined to its subprime operations; they also affected its retail operations. WaMu loosened underwriting standards as part of its High Risk Lending Strategy, and received repeated criticisms from its regulators, as outlined in the next chapter, for weak underwriting standards, risk layering, excessive loan error and exception rates, appraisal problems, and loan fraud. In August 2007, more than a year before the collapse of the bank, WaMu’s President Steve Rotella emailed CEO Kerry Killinger saying that, aside from Long Beach, WaMu’s prime home loan business “was the worst managed business I had seen in my career.” 271 (a) Inadequate Systems and Weak Oversight One reason for WaMu’s poor lending practices was its failure to adequately monitor the hundreds of billions of dollars of residential loans being issued each year by its own loan 268 Id. at 90. 269 Id. at 86. 270 11/13/2008 “Worst Ten in the Worst Ten,” document prepared by the Office of the Comptroller of the Currency, http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf, Hearing Exhibit 4/13-58. 271 8/23/2007 email from Mr. Rotella to Mr. Killinger, JPM_WM00675851, Hearing Exhibit 4/13-79. personnel. From 1990 until 2002, WaMu acquired more than 20 new banks and mortgage companies, including American Savings Bank, Great Western Bank, Fleet Mortgage Corporation, Dime Bancorp, PNC Mortgage, and Long Beach. WaMu struggled to integrate dozens of lending platforms, information technology systems, staffs, and policies, whose inconsistencies and gaps exposed the bank to loan errors and fraud. CHRG-110shrg46629--11 STATEMENT OF SENATOR ROBERT MENENDEZ Senator Menendez. Thank you, Mr. Chairman. Chairman Bernanke, it is always good to welcome a fellow New Jerseyan back to the Committee. I am glad to have the chance to have you before the Committee again this year. I think your presence here is especially important, not just because it gives Congress an opportunity to look critically at the economy to see what is working and what is not, but because it brings a discussion of the economy onto the front pages and into the homes of Americans across the country. I think Americans from all walks of life are clearly affected when the market has a dip, by external pressure on prices, by poor investment. For many, these factors are invisible. I welcome these discussions with you because you help make them much more tangible for average people across the country. And I assume you often ask yourself a question that I certainly do, and I believe all of us should be asking, and that is who is this economy working for? Who is this economy working for? Most middle-class Americans face rising food and energy prices as well as health care costs while median incomes for the last 5 years have remained stagnant. I think that there is a good part of the American middle class who does not think that this economy is working for them. Unfortunately, most are aware of changes in the economy when it affects them negatively. I would like to focus on a specific group of Americans who have been keenly aware of how the economy has not worked for them, those who dreamed of being homeowners but in the wake of the subprime tsunami have seen those dreams wash away in foreclosure and bankruptcy. More than one million Americans lost their homes last year and few have yet to recover. In fact, I would dare to argue that another storm is on its way as adjustable rate mortgages explode in coming months and force more homeowners into foreclosure. And so in my mind this is not just simply a time for suggestions, it is a time for solutions. The Federal Reserve has, and has always had, the tools to protect Americans from this storm. But as the warning signs were posted and as the foreclosures began we saw little to no action. Now I want to commend you for addressing this issue, especially on low document loans and underwriting to the full indexed rate. But I am still hoping for more substantive solutions that will protect the borrower. We are talking also about predatory lenders and we must take swift action. I do not believe this is one that the market is going to handle simply on its own. Congress and the Federal Reserve need to act and I look forward to discussing this more with you today. I welcome the focus you have recently had on discussing certain inequalities in our economy and I will look forward to your thoughts on these and other issues important to the economic prosperity of our Nation. Thank you, Mr. Chairman. " CHRG-111shrg54589--98 Mr. Griffin," It is important that we think about all the different reasons why a company might want to use credit default swaps--or a bank, for that matter. I, for example, could be in the supply chain of an industry and worried that the company to whom I have supplied goods or services may not actually perform. They may go into default. The ability to buy credit default swaps against that company makes it much more economically attractive for me, for example, to enter into a long-term sales agreement to provide goods and services to that company. I do not own the bonds, but I do have a position over time as being a creditor of that company as a supplier to them. Another example--and this one strikes home at Citadel because we lend money to a variety of companies around the world, in the United States from small companies up to the biggest, the Fortune 500. There is often no market for credit default swaps for mid-sized companies. If I want to be a significant lender to a portion of the economy where I absorb a substantial industry risk, for example, to the airlines, let us say I wanted to lend money to a regional carrier, I cannot buy a credit default swap on that regional carrier, but I can buy a credit default swap on the majors--American Airlines, Delta, and others. It will help me to manage the industry-specific risk that I have and that, most importantly, reduces the cost of capital for the mid-size company vis-a-vis the large company. So credit default swaps play a very important role in allowing banks, pension plans, and other lenders to mid-sized companies in America, to allow them to reduce their industry-specific risk and to reduce the cost of capital of the companies in America that have created the most jobs over the last 30 years. " fcic_final_report_full--113 In its public order approving the merger, the Federal Reserve mentioned the com- mitment but then went on to state that “an applicant must demonstrate a satisfactory record of performance under the CRA without reliance on plans or commitments for future action. . . . The Board believes that the CRA plan—whether made as a plan or as an enforceable commitment—has no relevance in this case without the demon- strated record of performance of the companies involved.”  So were these commitments a meaningful step, or only a gesture? Lloyd Brown, a managing director at Citigroup, told the FCIC that most of the commitments would have been fulfilled in the normal course of business.  Speaking of the  merger with Countrywide, Andrew Plepler, head of Global Corporate Social Responsibility at Bank of America, told the FCIC: “At a time of mergers, there is a lot of concern, sometimes, that one plus one will not equal two in the eyes of communities where the acquired bank has been investing. . . . So, what we do is reaffirm our intention to con- tinue to lend and invest so that the communities where we live and work will con- tinue to economically thrive.” He explained further that the pledge amount was arrived at by working “closely with our business partners” who project current levels of business activity that qualifies toward community lending goals into the future to assure the community that past lending and investing practices will continue.  In essence, banks promised to keep doing what they had been doing, and commu- nity groups had the assurance that they would. BANK CAPITAL STANDARDS:  “ARBITRAGE ” Although the Federal Reserve had decided against stronger protections for con- sumers, it internalized the lessons of  and , when the first generation of sub- prime lenders put themselves at serious risk; some, such as Keystone Bank and Superior Bank, collapsed when the values of the subprime securitized assets they held proved to be inflated. In response, the Federal Reserve and other regulators re- worked the capital requirements on securitization by banks and thrifts. In October , they introduced the “Recourse Rule” governing how much capi- tal a bank needed to hold against securitized assets. If a bank retained an interest in a residual tranche of a mortgage security, as Keystone, Superior, and others had done, it would have to keep a dollar in capital for every dollar of residual interest. That seemed to make sense, since the bank, in this instance, would be the first to take losses on the loans in the pool. Under the old rules, banks held only  in capital to protect against losses on residual interests and any other exposures they retained in securitizations; Keystone and others had been allowed to seriously understate their risks and to not hold sufficient capital. Ironically, because the new rule made the cap- ital charge on residual interests , it increased banks’ incentive to sell the residual interests in securitizations—so that they were no longer the first to lose when the loans went bad. FOMC20080130meeting--30 28,MR. LACKER.," I wanted to ask a couple of questions about the term auction facility. First, I'd like to hear more from you about what your understanding is of the effects the term auction facility had on the funding market. The first question under that would be, To your knowledge, were these completely sterilized or just partially sterilized? Another question would be, For the recipients, were these additional funds that they wouldn't have otherwise borrowed, or did they displace some other borrowing? The next question would be, This crowded out something, and if it didn't change materially the total amount of reserves in the system, some lending ought to be shifted from the recipients to someone else--so what do we know about other spillover effects in the markets? The focus of our attention probably for data reasons was the LIBOR market, but there was also discussion in December of the term fed funds market. What do we know about the behavior of that since then? I'd be interested in your sense of whether bidders were riskier than nonbidders and whether riskier institutions bid more than nonrisky institutions. We've done a bit of empirical analysis--it's preliminary--but I'd be interested in your folks' sense of that. About the foreign institutions, I'm interested in learning about what the advantage was of our lending dollar balances via this mechanism to foreign banks versus the alternative of having them borrow dollar balances from their central bank, perhaps funded by a swap or out of the foreign central bank's own dollar balances. Finally--and this is sort of the most important question--how should we evaluate whether this has been a success or not? To what sort of objective evidence should we look to decide whether we achieved our objectives? Related to that, can a case be made for ending this facility soon in light of the fact that the LIBOR�OIS spread is now half of what it was in September, when we decided that it had come down enough to shelve the plan? " CHRG-111shrg54675--89 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM JACK HOPKINSQ.1. Mr. Hopkins and Mr. Johnson, both of your institutions are members of the Federal Home Loan Bank system. How do you use the Federal Home Loan Bank to support your bank's lending in your market? Has the current economic crisis and the liquidity crisis affected your use of the Federal Home Loan Banks? Last year, HERA expanded the number of community banks that can use collateral to borrow from the FHLBanks. Has your institution's ability to pledge this collateral been helpful?A.1. Answer not received by time of publication. ------ CHRG-111hhrg55811--120 Mr. Gensler," I thank you. We believe that it is really important to separate out this central counterparty function from these large financial institutions precisely for the reason that you just raised, that they are so large that there is this moral hazard issue of where is the government, what is the government's role in those institutions. So in separating them out, in central counterparties that are fully regulated and have to take an accounting on a daily basis, have to have collateral posted, and it is separated from a lending business, separated from an insurance or securities or proprietary trading business, we firmly believe that lowers-- " FOMC20081029meeting--173 171,MR. MADIGAN.," That's not how I would think about it. I would think about it as giving, if it works, depository institutions increased incentives to expand their lending by providing them with a great deal more funding than they actually need and thereby increasing spending propensities. I would see this more as part of a package of various ways to stimulate spending by reducing real interest rates but not as something that would feed through directly to inflation. Rather this would more properly be viewed, at least in the way I think about things, as fighting deflation rather than trying to cause a higher positive rate of inflation. " CHRG-110shrg50414--81 Chairman Dodd," Thank you very much. Senator Johnson. And let me just remind my colleagues, we want to try to keep to the time. We are going over, and I want to give everybody a chance to ask some questions. Senator Johnson. Secretary Paulson, the Treasury proposal, it seems to me, rewards the bad actors. Those financial institutions that engage in irresponsible lending have bad assets on their books and need help from the Government to stay afloat. What punitive actions are being taken against these companies and their CEOs? " CHRG-111hhrg49968--34 Mr. Bernanke," Congressman, on the oversight panel request, I am sure we will respond to that. I am not aware of the status of that request. I would just note that the Senate--I think the Congress passed a rule recently that would allow the GAO to directly audit AIG and other individual banks or other interventions, and we are perfectly comfortable with that. We have provided extensive information to the Congress on AIG in those other rescues, including monthly reports required by Congress on all 13(3) lending. So we have been quite open about it. If there are specific issues, I would be---- " CHRG-111hhrg48874--2 The Chairman," The hearing will come to order. Members of this committee, as well as other Members of Congress, have been urging people in the banking system to increase the volume of loans. We hear from some of our constituents that they are not able to get loans that they think would be very helpful economically. And as obvious as we have said, the economy doesn't recover until the credit system does. Essentially, we have had a situation in which borrowers have complained about some of the banks. Banks have in turn complained about the regulators and we are here in one room sequentially. I would hope that our friends on the regulatory panel will be able to stay themselves, or through staff, hear what some of the bankers have said. And I assume they have read the testimony. You know, I don't think there's a matter of ill will. I call it the ``mixed message'' hearing, because I think it is. We do tell the regulators two things: one, tell people to make loans; and, two, tell people not to make loans. Now, they're not supposed to be the same loans, but there is this tension here. And it's a particularly exacerbated tension now, because I think in normal times, the role of regulators is to make sure that bad loans aren't made or to minimize the likelihood. But, we're not in a normal time now. We're in a time where there is a clear problem making good loans. So it is important that the ongoing important safety and soundness is the role of the regulators, and diminishing the number of imprudent loans coexists with the importance of making sure that loans are made that should be made. Now, part of the mixed message issue--and that is why Mr. Kroeker is here from the SEC--has to do with the effect of mark-to-market accounting. We do not want to be post-cyclical, but we also have that potential with regard, for instance, to assessments at the FDIC. Now, some of that is inevitable. If more banks fail, then the assessments go up. But if the assessments go up, some of the banks, small banks, have less ability to lend. It would be nice if we could simply abolish one or the other of the conflicting objectives. We can't. They are both important. So what we then have to do is to make sure they are done in coordination with each other, and in particular with regard to the question of lending standards, that we avoid the potential of there being compartmentalization, in which some parts of the agencies are urging people to lend, and other parts are urging them not to. We need to make sure that the same people are aware of the importance of both of those. We had a hearing in general on mark-to-market. It is of particular relevance, obviously, to banks, particularly to banks that are holding securities long-term. We had a special problem brought to our attention regarding mark-to-market with a couple of the Federal Home Loan Bank regents. So we want to be able to address that as well, and as I said, the purpose here is to make sure that we can increase loans in an atmosphere of security and soundness. And, I think, most importantly, demonstrate that those two objectives are not in fact in conflict, but that they go together, that we are capable of a sound banking system that produces an appropriate flow of credit without endangering the safety of the system. " FOMC20081007confcall--53 51,MR. KOHN.," Thank you, Mr. Chairman. I support the proposal for all the reasons that others have given. I think the incoming data and the events of the last month or so suggest a major downward revision to expected income and a substantial revision to expected inflation. On the income side, we still have very substantial downside risk. This is a credit crunch. Banks won't lend to each other. It's hard to imagine that they will lend much to households and businesses unless they perceive those households and businesses to be super-safe borrowers. I think there's a real risk of a very sharp downturn in the economy here. It's not my modal forecast, but I think that tail has gotten very fat. So even on a mechanical basis, a Taylor rule or something like that on a forecast basis would justify a 50 basis point cut in the funds rate. But this isn't about mechanics. We're in the middle of a crisis of confidence, really, in the financial markets, and I think part of the dynamic that we're seeing out there is concern about how the financial markets and the economy will interact. I agree with everyone else that a cut in the federal funds rate is certainly not a panacea. It's not going to restore confidence instantaneously. But I do think the coordinated action by the central banks will have an effect around the edges on interest rates and on the cost of capital, but even more in confidence that at least some functions here are operating--people are consulting internationally and are willing to take decisive action. It's not going to be sufficient to get us out of where we are, but I think it's a necessary step. Thank you, Mr. Chairman. " fcic_final_report_full--233 Contrary to this view, two Fed economists determined that lenders actually made few subprime loans to meet their CRA requirements. Analyzing a database of nearly  million loans originated in , they found that only a small percentage of all higher-cost loans as defined by the Home Mortgage Disclosure Act had any connec- tion to the CRA. These higher-cost loans serve as a rough proxy for subprime mort- gages. Specifically, the study found that only  of such higher-cost loans were made to low- or moderate-income borrowers or in low- or moderate-income neighbor- hoods by banks and thrifts (and their subsidiaries and affiliates) covered by the CRA. The other  of higher-cost loans either were made by CRA-covered institutions that did not receive CRA credit for these loans or were made by lenders not covered by the CRA. Using other data sources, these economists also found that CRA-related subprime loans appeared to perform better than other subprime loans. “Taken to- gether, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current crisis,” they wrote.  Subsequent research has come to similar conclusions. For example, two econo- mists at the San Francisco Fed, using a different methodology and analyzing data on the California mortgage market, found that only  of loans made by CRA-covered lenders were located in low- and moderate-income census tracts versus over  for independent mortgage companies not covered by the CRA. Further, fewer than  of the loans made by CRA lenders in low-income communities were higher priced, even at the peak of the market. In contrast, about one-half of the loans originated by independent mortgage companies in these communities were higher priced. And af- ter accounting for characteristics of the loans and the borrowers, such as income and credit score, the authors found that loans made by CRA-covered lenders in the low- and moderate-income areas they serve were half as likely to default as similar loans made by independent mortgage companies, which are not subject to CRA and are subject to less regulatory oversight in general. “While certainly not conclusive, this suggests that the CRA, and particularly its emphasis on loans made within a lender’s assessment area, helped to ensure responsible lending, even during a period of over- all declines in underwriting standards,” they concluded.  Overall, in , , and , CRA-covered banks and thrifts accounted for at least  of all mortgage lending but only between  and  of higher-priced mortgages. Independent mortgage companies originated less than one-third of all mortgages but about one-half of all higher-priced mortgages.  Finally, lending by nonbank affiliates of CRA-covered depository institutions is counted toward CRA performance at the discretion of the bank or thrift. These affiliates accounted for an- other roughly  of mortgage lending but about  of high-price lending. Bank of America provided the FCIC with performance data on its CRA-qualify- ing portfolio, which represented only  of the bank’s mortgage portfolio.  In the end of the first quarter of ,  of the bank’s  billion portfolio of residential mortgages was nonperforming:  of the  billion CRA-qualifying portfolio was nonperforming at that date. John Reed, a former CEO of Citigroup, when asked whether he thought govern- ment policies such as the CRA played a role in the crisis, said that he didn’t believe banks would originate “a bad mortgage because they thought the government policy allowed it” unless the bank could sell off the mortgage to Fannie or Freddie, which had their own obligations in this arena. He said, “It’s hard for me to answer. If the rea- son the regulators didn’t jump up and down and yell at the low-doc, no-doc sub- prime mortgage was because they felt that they, Congress had sort of pushed in that direction, then I would say yes.”  “You know, CRA could be a pain in the neck,” the banker Lewis Ranieri told the FCIC. “But you know what? It always, in my view, it always did much more good than it did anything. You know, we did a lot. CRA made a big difference in communi- ties. . . . You were really putting money in the communities in ways that really stabi- lized the communities and made a difference.” But lenders including Countrywide used pro-homeownership policies as a “smokescreen” to do away with underwriting standards such as requiring down payments, he said. “The danger is that it gives air cover to all of this kind of madness that had nothing to do with the housing goal.”  CHRG-111hhrg53245--17 Mr. Wallison," Thank you very much, Mr. Chairman. Leaving aside Fannie Mae and Freddie Mac, which I think are a very special case, if there is such a thing as a firm that is too big to fail, it is only a large commercial bank. And we now have several of them that are enormous. When we say that a firm is too big to fail, we mean that its failure could have a major, adverse effect on the entire economy. This is not simply a mere disruption of the economy. It would have to be a systemic breakdown. We can't define that very well, but it would have to be something greater than simply the kind of disruption that would occur from the failure of a firm. In my view, only a large commercial bank can create this kind of systemic breakdown. When a large bank fails, its depositors are immediately deprived of the funds they expected to have to meet payrolls and to pay their bills. Smaller banks are depositors in the larger banks, so the failure of a large bank can send a cascade of losses through the economy. If there is such a thing as a systemic breakdown, this would be it. For the same reasons, it is difficult to see how a large non-bank financial institution, that is, a bank holding company, a securities firm, a finance company, or a hedge fund can cause systemic risk. And thus it is difficult to see why a non-bank can ever be, in terms we are talking about today, too big to fail. Non-banks do not take deposits. They borrow for the short-, medium-, and long-term, but if they fail, their creditors don't suffer any immediate cash losses that would make it difficult for them to pay their bills. No one deposits his payroll or the money he expects to use for doing business with a securities firm or a finance company. In addition, their creditors are likely to be diversified lenders, so all their eggs are not in the same basket. However, the freeze-up in lending that followed the collapse of Lehman Brothers has led some people to believe, and I think incorrectly, that Lehman caused that event. This is not accurate. They conclude that a non-bank financial firm can cause a systemic breakdown that it can thus be too big to fail. But Lehman's failure caused what is called a common shock, where a market freezes up because new information has come to light. The new information that came to light with Lehman's failure was that the government was not going to rescue every firm larger than Bear Stearns, which had been rescued 6 months before. In this new light, every market participant had to reevaluate the risks of lending to everyone else. No wonder lending ground to a halt. Common shocks don't always cause a financial crisis. This one did, because virtually all large banks were thought at that time to be weak and unstable. They held large amounts of mortgage backed securities, later called toxic assets, that were of dubious value. If the banks had not been weakened by these assets, they would have continued to lend to each other. There would not have been a freeze-up in lending and the investor panic that followed. So if we want to avoid another crisis like that, we should focus solely on ensuring that the banks--we're talking about commercial banks--are healthy. Other financial firms, no matter how large, are risk takers and should be allowed to fail. Accordingly, if we want to deal with the problem of too big to fail and systemic risk bank regulation should be significantly reformed. Capital requirements for large banks should be increased as those banks get larger, especially if their assets grow faster than asset values generally. Higher capital requirements for larger banks would cause them to reconsider whether growth for its own sense really makes sense. Bank regulators should develop metrics or indicators of risk taking that banks should be required to publish regularly. This will enhance market discipline, which is fundamentally the way we control risk taking in the financial field. Most important of all, Congress should create a systemic risk council on the foundation of the Presidents Working Group, which would include all the bank supervisors and other financial regulators. The council should have its own staff and should be charged with spotting the development of conditions in the banking industry, like the acquisition by virtually all banks of large amounts of toxic assets, that might make all major banks weak or unstable and leave them vulnerable to a common shock. If we keep our banks stable, we'll keep our financial system stable. Finally, as a member of the Financial Crisis Inquiry Commission, I urge this committee to await our report before adopting any legislation. Thank you. [The prepared statement of Mr. Wallison can be found on page 79 of the appendix.]STATEMENT OF SIMON JOHNSON, PROFESSOR, MASSACHUSETTS INSTITUTE CHRG-111hhrg48874--142 Mr. Long," We run into this a lot with commercial real estate. It is normal practice in some sectors of commercial real estate lending for the bank to fund an interest carry. And that's simply to bridge the timing differences between the cash outflows and the cash inflows. So, what we run into in a lot in community banks right now in some parts of the country are these busted residential development loans. And technically, they're current because the bank's paying themselves interest and they're going to be current right up until the day they default and that loan has to be foreclosed. " CHRG-111hhrg50289--13 Chairwoman Velazquez," Thank you. Our next witness is Mr. Michael McGannon. He is the Senior Vice President and Chief Lending Officer of Country Club Bank in Kansas City, Missouri. Country Club Bank was founded in 1953 and is based in Shawnee Mission, Kansas. Mr. McGannon is testifying on behalf of the American Bankers Association, found in 1975. The ABA brings together banks of all sizes and charters into one association. Welcome. STATEMENT OF MICHAEL McGANNON " CHRG-111shrg62643--119 Mr. Bernanke," No, we don't think that a double---- Senator Tester. That is good. " Mr. Bernanke," ----is a high probability event. Senator Tester. That is good news. You had talked about--in fact, it was Ranking Member Shelby who had some questions on the credit crunch and the reason for it. You had talked about lower demand. You had talked about collateral, the value decline. You talked about regulators being especially cautious. I want to touch onto that. You said that you were instructing regulators to be more--have more consistency in their regulation. Consistency goes to stability goes to better lending. How are you evaluating that? " CHRG-111hhrg48867--265 Mr. Grayson," Thank you, Mr. Chairman. Gentlemen, if you were interested in increasing lending at a time when the general perception is that credit is in short supply and that we need to expand credit in order to keep the economy afloat, and you had a choice, and that choice was between bailing out huge institutions that have proven that they were not good at allocating credit by the fact that they lost billions upon billions of dollars versus providing additional credit or even relaxing reserve requirements for healthy institutions that had shown they could take that money and make a profit with it, which would you choose? Mr. Silvers? " CHRG-110shrg50417--28 PENNSYLVANIA Ms. Wachter. Thank you. Chairman Dodd and other distinguished Members of the Committee, it is my honor to be here today to provide my perspective on the ongoing mortgage crisis and how and why stabilizing the housing market is essential to stabilizing the broader U.S. economy. The ongoing crisis in our housing and financial markets derives from an expansion of credit through poorly underwritten and risky mortgage lending. Until the 1990s, such lending was insignificant. By 2006, almost half of mortgage originations took the form of risky lending. The unprecedented expansion of poorly underwritten credit induced a U.S. housing asset bubble of similarly unprecedented dimensions and a massive failure of these loans and to today's system breakdown. Today's economic downturn could become ever more severe due to the interaction of financial market stress with declines in housing prices and a worsening economy feeding back in an adverse loop. We have the potential for a true economic disaster. I do not believe we will solve our banking liquidity problems if the housing downturn continues, and the housing market decline shows no signs of abating. Moreover, despite bank recapitalization and rescue efforts, economically rational loan modifications that would help stabilize the market are not occurring. We must directly address the need for these loan modifications in order to halt the downward spiral in mortgage markets and the overall economy. It is critical to bring stability to the housing market. While today prices may not be far from fundamental levels, just as they overinflated going up, there is great danger for overcorrection on the downside. In our current situation, as prices fall, market dynamics give rise to further expectations of price decline, limiting demand, and supply actually increases due to increased foreclosures, causing prices to decline further. A deflationary environment with demand decreases due to expectations of further price decline was in part responsible for Japan's ``lost decade'' of the 1990s. We cannot rely on a price decrease floor at currently market-justified fundamental levels if we rely on market forces alone, even, it appears, if augmented by the interventions so far of the Federal Reserve and Treasury. In fact, home inventories are not declining, and up to half of the inventory of homes are being sold through foreclosures at fire-sale prices in many markets. The Case-Shiller Price Index reflects the massive deterioration of housing wealth so far. Since the peak in 2006, housing values have fallen over 20 percent. While another 5- to 10-percent fall could bring us to market-clearing levels, actual price declines may far exceed this. And as house prices decline, these declines undermine consumer confidence, decrease household wealth, and worsen the system-wide financial stress. While banks have been recapitalized through the Capital Purchase Program--and there is discussion of the use of this funding for acquisitions--as yet, there is little evidence that bank lending has expanded. In order for the overall economy to recover and for conditions not to worsen, prudent lending to creditworthy borrowers needs to occur. Without financing for everyday needs, for education, small business investment and health, American families are at risk. And today the U.S. economy and the global economy are depending on the stabilization of their financial well-being. Moreover, the plans that are already in place do not appear to be leading to the modification of loans at the scale necessary in order to assure a market turnaround at fundamental levels instead of a severe and ongoing overcorrection. Barriers to economically rational loan modifications include conflicting interests, poor incentives, and risks of litigation to modify loans, particularly to modify loans deriving from mortgage-servicing agreements. Given the freefall in housing markets and its implications for credit conditions and the overall economy, there is a need for policies to address these barriers today. It is both necessary and possible to take effective action now. While housing values may not be far from fundamental levels, as housing values continue to fall, resolving the problem will become increasingly difficult and costly. Thus, solutions that are now possible may not be available going forward. Without expeditiously and directly addressing the housing market mortgage crisis, the Nation is at risk. Thank you. " CHRG-111shrg55117--91 Mr. Bernanke," Well, the GAO audits really involve an assessment of the policy itself and the decision process. So it presumably would involve collecting all the materials that we had in our meeting. It would involve interviews of the participants. It would involve depositions from outside experts and so on. It just seems to me that that is more intervention than is consistent with the practice around the world that central banks operate on monetary policy independently of congressional oversight--not of oversight, but of congressional intervention. Let me respond. One thing of concern I know you have is the Fed's balance sheet, the lending we have done, the various unusual actions we have taken, and there I think we have common ground. I think the Congress and the public ought to have comfort and confidence that all the operations that we run, all the lending we are doing, all those things are done at the highest standard of quality with appropriate controls, appropriate attention to collateral and to the taxpayers' interest. And on those sorts of things, I think we agree that that needs to be done in a way that Congress can be satisfied. I am just concerned about what might look like an attempt on Congress' part to, even if indirectly, try to send a message, if you will, to the FOMC to take a different action than it thinks is in the long-run interest of the economy. Senator Vitter. Well, again, I think that is really exaggerated. I think that possible danger would be even further mitigated if these broader audits are regularly scheduled not at a specific request. And, quite frankly, I think that would pale in comparison to possibly perceived intervention than the fact that we call you, you know, sometimes with specific actions in mind to come up here and testify before us. The President can certainly request meetings with you, which I assume you would have, even in the context of his being able to reappoint the Chairman or not reappoint the Chairman. And it seems to me in all of those context, regularly scheduled audits are nothing more significant in terms of any danger of interference. Thank you. " CHRG-111shrg57709--69 Mr. Wolin," Senator Merkley, I think it is an incredibly important question. You know, to the extent that firms are tying up capital through proprietary trading or in hedge fund businesses and so forth, the kinds of things that we have said we think should not be allowable by banking firms, they do not have that capital to be used for things like commercial lending activity and so forth. And so we think that, among other things, is a reason why this is a good set of proposals. Senator Merkley. Could I ask you, Mr. Volcker, to expand a little bit on what the--or Mr. Wolin--on what the actual proposal would be for the 10 percent limit on other liabilities? What other liabilities might be included in that analysis? " FinancialCrisisReport--185 In June 2007, for example, OTS examiners completed a review critical of WaMu procedures to oversee the loans it purchased from third party mortgage brokers. 678 From 2003 to 2007, 48 to 70% of WaMu’s loans were purchased from third parties. 679 An OTS memorandum noted that Washington Mutual had only 14 full-time employees overseeing more than 34,000 third party brokers submitting loans to the bank for approval. OTS also criticized the scorecard used to rate those brokers which, among other problems, did not include the rate at which significant lending or documentation deficiencies were attributed to the broker, the rate at which its loans were denied or produced unsaleable loans, or an indication of whether the broker was included in industry watchlists for misconduct. After describing these and other problems, rather than lower WaMu’s safety and soundness scores for its poor oversight, however, the OTS memorandum made only the following observation: “Given the . . . increase in fraud, early payment defaults, first payment defaults, subprime delinquencies, etc., management should re- assess the adequacy of staffing.” 680 WaMu management agreed with the finding, but provided no corrective action plan, stating only that “[s]taffing needs are evaluated continually and adjusted as necessary.” 681 In the September 2007 annual ROE, OTS wrote: “Risk management practices in the HLG (Home Loans Group) during most of the review period were inadequate …. We believe that there were sufficient negative credit trends that should have elicited more aggressive action by management with respect to limiting credit exposure. In particular, as previously noted, the risk misrepresentation in stated income loans has been generally reported for some time. This information should have led management to better assess the prudence of stated income lending and curtail riskier products well before we indicated during this examination that we would limit the Bank’s ability to continue such lending.” 682 The ROE also faulted management and Board inaction: “Board oversight and management’s performance was less than satisfactory. … Contributing factors should have been more proactively managed by the Board and management. The most significant of these factors include Matters Requiring Board 678 6/7/2007 OTS Asset Quality Memo 11, “Broker Credit Administration,” Hedger_Ann-00027930_001, Hearing Exhibit 4/16-10. 679 Prepared statement of Treasury IG Thorson, April 16, 2010 Subcommittee Hearing, at 5. 680 6/7/2007 OTS Asset Quality Memo 11, “Broker Credit Administration,” Hedger_Ann-00027930_001, Hearing Exhibit 4/16-10. 681 Id. at 011. 682 9/18/2007 OTS Report of Examination, at OTSWMEF-0000046681, Hearing Exhibit 4/16-94 [Sealed Exhibit]. FOMC20081216meeting--500 498,CHAIRMAN BERNANKE.," President Lacker, I guess there are at least a couple of theories you could have. One of them has to do with capital. If you think that certain types of intermediaries have specialized knowledge and their ability to lend depends on their capital, then there are informational asymmetries in which clearly exogenous destruction of part of that capital is going to affect equilibrium outcomes in the market. That's one possibility. The other class of models has to do with liquidity, where you have thick or thin markets depending on ""I trade if you trade"" and so on and you have markets in which nobody is trading and so no one wants to be the first to enter. By becoming a marketmaker, you can perhaps generate more activity. I think there are some interesting perspectives out there. " fcic_final_report_full--494 By 2004, HUD believed it had achieved the “revolution” it was looking for: Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this ‘revolution in affordable lending’. During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-downpayment products , and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants. HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and nonminority families . 67 [emphasis supplied] This turned out to be an immense error of policy. By 2010, even the strongest supporters of affordable housing as enforced by HUD had recognized their error. In an interview on Larry Kudlow’s CNBC television program in late August, Representative Barney Frank (D-Mass.)—the chair of the House Financial Services Committee and previously the strongest congressional advocate for affordable housing—conceded that he had erred: “I hope by next year we’ll have abolished Fannie and Freddie . . . it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.” 68 2. The Decline of Mortgage Underwriting Standards Before the enactment of the GSE Act in 1992, and HUD’s adoption of a policy thereafter to reduce underwriting standards, the GSEs followed conservative underwriting practices. For example, in a random review by Fannie Mae of 25,804 loans from October 1988 to January 1992, over 78 percent had LTV ratios of 80 percent or less, while only 5.75 percent had LTV ratios of 91 to 95 percent. 69 High risk lending was confined primarily to FHA (which was controlled by HUD) and specialized subprime lenders who often sold the mortgages they originated to FHA. What caused these conservative standards to decline? The Commission majority, 65 Steve Cocheo, “Fair-lending pressure builds,” ABA Banking Journal , vol. 86, 1994, http://www.questia. com/googleScholar.qst?docId=5001707340. 66 67 See NCRC, CRA Commitments , 2007. Federal Register ,vol. 69, No. 211, November 2, 2004, Rules and Regulations, p.63585, http://fdsys.gpo. gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf . 68 Larry Kudlow, “Barney Frank Comes Home to the Facts,” GOPUSA, August 23, 2010, available at www.gopusa.com/commentary/2010/08/kudlow-barney-frank-comes-home-to-the-facts.php#ixz z0zdCrWpCY (accessed September 20, 2010). 69 Document in author’s files. echoing Chairman Bernanke, seems to believe that the impetus was competition among the banks, irresponsibility among originators, and the desire for profit. The majority’s report offers no other explanation. CHRG-110shrg50414--69 Chairman Dodd," Well, my quick follow-on question, then, to Secretary Paulson is--and I understand why you have been reluctant to get into the oversight and accountability questions. But given the fact that this is not just a cosmetic issue and a feel-good issue but it goes to the very core of why we are here today, and if that is the core reason--and you have said it over and over again. I have quoted you. It is the ``bad lending practices'' that went on. Why didn't we include some mitigation for foreclosure as part of this, not because we want to send a message that we care about Main Street, but because if we do not address that, the bad mortgages out there are still going to be a lingering problem, and our ability to address this is going to be less. " CHRG-111hhrg56241--42 Mr. Stiglitz," Yes, obviously funds are fungible, and money going out to bonuses reduces the capital base of the banks, and to an extent the money that has been paid out in bonuses, whatever the form, reduces their ability to lend. That is obviously a much more significant amount. Let me just emphasize one point, since we are talking about incentives. The intent of the President's proposal here is changing the current incentives of the banks to have excessive risk-taking, and excessive risk-taking led to the economy being brought to the brink. " FinancialCrisisReport--4 In April 2010, the Subcommittee held four hearings examining four root causes of the financial crisis. Using case studies detailed in thousands of pages of documents released at the hearings, the Subcommittee presented and examined evidence showing how high risk lending by U.S. financial institutions; regulatory failures; inflated credit ratings; and high risk, poor quality financial products designed and sold by some investment banks, contributed to the financial crisis. This Report expands on those hearings and the case studies they featured. The case studies are Washington Mutual Bank, the largest bank failure in U.S. history; the federal Office of Thrift Supervision which oversaw Washington Mutual’s demise; Moody’s and Standard & Poor’s, the country’s two largest credit rating agencies; and Goldman Sachs and Deutsche Bank, two leaders in the design, marketing, and sale of mortgage related securities. This Report devotes a chapter to how each of the four causative factors, as illustrated by the case studies, fueled the 2008 financial crisis, providing findings of fact, analysis of the issues, and recommendations for next steps. B. Overview (1) High Risk Lending: Case Study of Washington Mutual Bank The first chapter focuses on how high risk mortgage lending contributed to the financial crisis, using as a case study Washington Mutual Bank (WaMu). At the time of its failure, WaMu was the nation’s largest thrift and sixth largest bank, with $300 billion in assets, $188 billion in deposits, 2,300 branches in 15 states, and over 43,000 employees. Beginning in 2004, it embarked upon a lending strategy to pursue higher profits by emphasizing high risk loans. By 2006, WaMu’s high risk loans began incurring high rates of delinquency and default, and in 2007, its mortgage backed securities began incurring ratings downgrades and losses. Also in 2007, the bank itself began incurring losses due to a portfolio that contained poor quality and fraudulent loans and securities. Its stock price dropped as shareholders lost confidence, and depositors began withdrawing funds, eventually causing a liquidity crisis at the bank. On September 25, 2008, WaMu was seized by its regulator, the Office of Thrift Supervision, placed in receivership with the Federal Deposit Insurance Corporation (FDIC), and sold to JPMorgan Chase for $1.9 billion. Had the sale not gone through, WaMu’s failure might have exhausted the entire $45 billion Deposit Insurance Fund. This case study focuses on how one bank’s search for increased growth and profit led to the origination and securitization of hundreds of billions of dollars in high risk, poor quality mortgages that ultimately plummeted in value, hurting investors, the bank, and the U.S. financial system. WaMu had held itself out as a prudent lender, but in reality, the bank turned increasingly to higher risk loans. Over a four-year period, those higher risk loans grew from 19% of WaMu’s loan originations in 2003, to 55% in 2006, while its lower risk, fixed rate loans fell from 64% to 25% of its originations. At the same time, WaMu increased its securitization of subprime loans sixfold, primarily through its subprime lender, Long Beach Mortgage Corporation, increasing such loans from nearly $4.5 billion in 2003, to $29 billion in 2006. From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime loans. CHRG-111shrg52619--106 Chairman Dodd," I am sorry, Senator. Senator Menendez. No. Thank you, Senator Dodd. I appreciate it. Just one more line of questioning. You know, we had a witness before the Committee, Professor McCoy of the University of Connecticut School of Law, and she made some statements that were, you know, pretty alarming to me. She said, ``The OCC has asserted that national banks made only 10 percent of subprime loans in 2006. But this assertion fails to mention that national banks moved aggressively into Alternate-A low-documentation and no-documentation loans during the housing boom.'' ``Unlike OTS, the OCC did promulgate one rule in 2004 prohibiting mortgages to borrowers who could not afford to pay. However, the rule was vague in design and execution, allowing lax lending to proliferate at national banks and their mortgage lending subsidiaries through 2007.'' ``Despite the 2004 rules, through 2007, large national banks continued to make large quantities of poorly underwritten subprime loans and low- and no-documentation loans.'' ``The five largest U.S. banks in 2005 were all national banks and too big to fail. They too made heavy inroads into low- and no-documentation loans.'' And so it just seems to me that some of the biggest bank failures have been under your agency's watch, and they, too, involved thrifts heavily into nil documents, low documents, Alternate A, and nontraditionals, and it is hard to make the case that we had an adequate job of oversight given those results. We have heard a lot here about one of our problems is regulatory arbitrage. Don't you think that they chose your agency because they thought they would get a better break? " FOMC20060328meeting--46 44,MS. JOHNSON.," You know, one can approach a general equilibrium process in any number of ways, and finding things that are truly exogenous to that process is very, very difficult. So it is certainly true that the capital flows might be exogenous. However, my guess is they are responding to endogenous economic activity in the United States and the way we are behaving. Trade is certainly endogenous. Saving and investment behavior has some exogenous characteristics and some endogenous characteristics. I take your point, but it is still nonetheless true that, even if the rest of the world wants to invest in the United States, if we saved more, we would not have to borrow just because they wished to lend. And our saving more would have an implication for asset prices and exchange rates and incomes that would lead to a generally improved outcome that would, over time, have a different characteristic than the one that we have observed. So no one exogenous thing is driving everything else, and that statement is as true for the capital flow part of the story as it would be to say that the current account is the driver and everything else is in response." FOMC20081029meeting--254 252,MS. DUKE.," Thank you, Mr. Chairman. I focused on the ""more rapid financial recovery"" scenario, not so much because I thought it was the most likely but just trying to think what it would take to bring that about. I'm not sure that the policy changes we have done recently will do that, but I am fairly certain that we are going to keep at it until we find something that restores confidence. I was shocked when I was looking at the Bluebook at how short a time has passed since the meltdown of all these major financial institutions--Fannie, Freddie, Lehman, AIG, WaMu, and Wachovia. There is a sense among those who were affected, who lost from it, that they just really didn't see it coming, at least not at this speed, and that all of them had adequate regulatory capital, and the bankers at least were used to watching a sort of gradual burndown of that capital before institutions failed. They had a sense of being unable to predict who was going to be saved, who was going to get whacked, and who would be the winners and the losers. So subsequently both the banks and their customers froze, and there has been very little activity since then. All the banks I talked to reported having stopped doing business with one or more counterparties and that one or more counterparties had stopped doing business with them, and they were shocked by both of those things. So, first and foremost, it is clear that we need to restore confidence and predictability. In this sense, the recent moves to increase deposit insurance, to guarantee interbank short-term debt, and to provide capital on the same terms to banks of all sizes should be helpful--but only as long as we can do this without creating new uncertainty about who is going to benefit and who is not. Without being too subjective or too cute, we need at this point just to create confidence in our entire system. The demonstrable and preemptive support of the nine largest financial institutions; our public support of AIG; similar support of globally important banks by their home countries; and the resolution of Wachovia and National City, the two largest troubled institutions, without loss should help us avoid shocking surprises while everybody calms down. In this light, my conversation with the banks centered mostly on their reactions to the recent policy changes. All thought the deposit insurance increase was helpful. They varied in their estimates of the importance of the increase to $250,000, with a lot of them pointing out that for consumers they had already really restructured deposits to insure fairly large amounts, and several were using the CDARS (Certificate of Deposit Account Registry Service) program for larger depositors. They were even more enthusiastic about the coverage of transaction accounts, although one banker felt as though this coverage really hadn't gotten as much visibility as it should, particularly with corporate treasurers, and many had already seen corporate and institutional deposits move into Treasuries and felt as though it was going to be difficult to get those back. There was even much more confusion about the guarantee of short-term debt. One banker questioned how they would know whether the fed funds sold to another bank actually fell inside the 125 percent cap. Another one thought that the all-or-nothing structure of the guarantee was a little difficult to work with. Interestingly, and as I pointed out yesterday when I asked about interest on reserves, nobody had even focused on it. They had bigger fish to fry. So I wouldn't read anything into those early results. As for capital injections, most were taking a hard look at it. Two large community banks had just issued private capital to support growth that had been attracted from competitors, but they thought that they could profitably deploy the new capital. Other banks were interested in having the capital just in case they had the opportunity to buy weaker competitors, particularly deposits or branches in problem resolutions. None was really concerned about the announced restrictions, but a number of them were somewhat suspicious of the possible restrictions that might come later. Some small banks with already high levels of capital somehow felt pressured to apply anyway just to show that they would qualify, although they didn't think it would give them much growth. In all cases, capital is only part of the story. They also need reliable funding if they are going to expand lending. This will have to come either from reliable deposit growth or from the reopening of secondary markets because all of them were reluctant to increase borrowing from any source. The loan-to-deposit ratio is growing new fans. In terms of lending, all reported that they were still lending to their relationship customers, and they were cutting back on credit to credit-only customers. As one defined it, if 90 percent of the revenue is coming from credit, then that was a customer relationship they wanted to exit. They still report no significant deterioration in the C&I book. I asked about drawdowns from companies, and across the board they said they had seen it in a couple of instances but really they had not seen an awful lot of that, so that might be some posturing rather than actual drawdowns on the credit. They are, however, exercising strong pricing discipline, and the pricing decisions, more than credit decisions, are being escalated up the approval chain, actively outreaching to customers that they want to keep and assuring them of credit availability. But because they have no pricing power on the funding side and pricing became very skinny on loans in recent years, there is a high level of sticker shock going on, which might explain some of the complaints about unreasonable terms. They also report very high levels of caution from their customers, with the descriptions ranging from ""hunkering down"" to ""wait and see."" There were more anecdotal reports of companies riding trade credit by trying to accelerate receivables or extend payables. Now, whether this is due to the actual or to the perceived unavailability of credit from banks is not yet clear. Real pressure is on commercial real estate lending. They are very selective in new projects. They are processing renewals for only one year, using the opportunity to shore up pricing and underwriting, and no longer writing mini-perms. Nobody is doing those. So far, the performance is holding up on commercial properties, with strong performance on apartments and weakness showing up in retail. Residential construction and land development continues to be a problem. In visiting the San Francisco and the Kansas City Banks, I was shocked to hear the same story from large builders about land sales. One builder had a 300-acre parcel with a cost of $75,000 an acre, listed it for $15,000 an acre, and sold it for $10,700. Another reported a property with a cost basis of $120 million selling for $12 million. Apparently, the impetus for both of these transactions was a judgment that the cash received from tax refunds was more advantageous than holding out for better pricing. So the outlook for lending in residential construction or commercial real estate is dim far into the future, and I would say the same thing for syndicated or participated lending. However, to the extent that banks can exit those segments, it should free up funds for normal lending for businesses and consumers. Thank you, Mr. Chairman. " CHRG-111hhrg48674--8 Mr. Bernanke," Thank you. Chairman Frank, Ranking Member Bachus, and other members of the committee, I appreciate this opportunity to provide a brief review of the Federal Reserve's various credit programs, including those relying on our emergency authorities under 13(3) of the Federal Reserve Act. I will also discuss the Federal Reserve's ongoing efforts to inform the Congress and the public about these activities. As you know, the past 18 months or so have been extraordinarily challenging for policymakers around the globe, not least for central banks. The Federal Reserve has responded forcefully to the financial and economic crisis since its emergence in the summer of 2007. Monetary policy has been especially proactive. The Federal Open Market Committee began to ease monetary policy in September 2007 and continues to ease in response to a weakening economic outlook. In December 2008, the committee set a range of zero to 25 basis points for the target Federal funds rate. Although the target for the Federal Reserve rate is at its effective floor, the Federal Reserve has employed at least three types of additional tools to improve the functioning of credit markets, ease financial conditions, and support economic activity. The first set of tools is closely tied to the central bank's traditional role of providing short-term liquidity to sound financial institutions. Over the course of the crisis, the Fed has taken a number of extraordinary actions, including the creation of a number of new facilities for auctioning short-term credit to ensure that financial institutions have adequate access to liquidity. In fulfilling its traditional lending function the Federal Reserve enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease conditions in interbank lending markets, reducing the overall cost of capital to banks. In addition, some interest rates, including the rates on some adjustable rate mortgages, are tied contractually to key interbank rates, such as the London Interbank Offered Rate or LIBOR. To the extent that the provision of ample liquidity to banks reduces LIBOR, other borrowers will also see their payments decline. Because interbank markets are global in scope, the Federal Reserve has approved bilateral currency liquidity agreements with 14 foreign central banks. These so-called swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that the foreign central banks may lend to financial institutions in their jurisdictions. The purpose of those liquidity swaps is to ease conditions in dollar funding markets globally. Improvements in global interbank markets in turn create greater stability in other markets at home and abroad such as money markets and foreign exchange markets. The provision of short-term credit to financial institutions exposes the Federal Reserve to minimal credit risk, as the loans we make to financial institutions are generally short-term, overcollateralized, and made with recourse to the borrowing firm. In the case of the currency swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the fund. And the Fed receives an equivalent amount of foreign currency in exchange for the dollars that it provides to the foreign central banks. Although the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea. Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, notwithstanding the access of these firms of central bank liquidity. Moreover, providing liquidity to financial institutions does not directly address instability or declining credit availability in critical non-bank markets such as the commercial paper market or the market for asset-backed securities. To address these issues, the Federal Reserve has developed a second set of policy tools which involve the provision of liquidity directly to borrowers and investors in key credit markets. For example, we have introduced facilities to purchase highly-rated commercial paper at a term of 3 months and to provide backup liquidity for money market mutual funds. In addition, the Federal Reserve and the Treasury have jointly announced a facility expected to be operational shortly that will lend against AAA rated asset-backed securities, collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Association. Unlike our other lending facilities, this one combines Federal Reserve liquidity with capital provided by the Treasury. If the programs works as planned, it should help to restart activity in these key securitization markets and lead to lower borrowing rates and improved access in the markets for consumer and small business credit. This basic framework could also expand to accommodate higher volumes as well as additional classes of securities as circumstances warrant, and Secretary Geithner alluded to that possibility this morning. These special lending programs have been set up to minimize credit risk to the Federal Reserve. The largest program, the commercial paper funding facility, accepts only the highest rated paper. It also charges borrowers a premium which is set aside against possible losses. As just noted, the facility that will lend against securities backed by consumer and small business loans is a joint Federal Reserve Treasury program. Capital provided by the Treasury from the Troubled Asset Relief Program will help insulate the Federal Reserve from credit losses and the Treasury will receive most of the upside from these loans. The Federal Reserve's third set of policy tools for supporting the functioning of credit markets involves the purchase of a longer term securities for the Fed's portfolio. For example, we have recently announced plans to purchase up to $100 billion of the debt of the Government-Sponsored Enterprises, which include Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and $500 billion in agency-guaranteed mortgage-backed securities by midyear. The objective of these purchases is to lower mortgage rates, thereby supporting housing activity in the broader economy. The Federal Reserve is engaged in an ongoing assessment of the effectiveness of its credit. Measuring the impact of our programs is complicated by the fact that multiple factors affect market conditions. Nevertheless, we have been encouraged by the response to these programs, including the reports and evaluations offered by market participants and analysts. Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets. For example, we believe that the aggressive liquidity provision by the Fed and other central banks has contributed to the recent declines in LIBOR and is a principal reason that liquidity pressures around the end of the year, often a period of heightened liquidity strains, were relatively modest. There is widespread agreement that our commercial paper funding facility has helped to stabilize the commercial paper market, lowering rates significantly and allowing firms access to financing at terms longer than a few days. Together with other government programs, our actions to stabilize the money market mutual fund industry have shown some measure of success, as the sharp withdrawals from funds seen in September have given way to modest inflows. Our purchases of agency debt at MBS seem to have had a significant effect on conforming mortgage rates, with rates of 30-year fixed rate mortgages falling close to a percentage point since the announcement of our program. All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened. We evaluate existing and perspective programs based on the answers to three questions: First has normal functioning in the credit markets been severely disrupted by the crisis? Second, does the Federal Reserve have tools that are likely to lead to a significant improvement in function and credit availability in that market? And are the Federal Reserve tools the most effective methods either alone or in combination with other agencies to address the disruption? And third, do improved conditions in the particular market have the potential to make a significant difference for the overall economy? To illustrate, our purchases of agency debt and MBS meet all three criteria. The mortgage market is significantly impaired, the Fed's authority to purchase agency securities gives us the straightforward tool to try to reduce the extent of that impairment. And the health of the housing market bears directly and importantly on the performance of the broader economy. Section 13(3) of the Federal Reserve Act authorized the Federal Reserve Board to make secured loans to individuals, partnerships or corporations, ``in unusual and exigent circumstances,'' and when the borrower is, ``unable to secure adequate credit accommodations from other banking institutions.'' This authority added to the Federal Reserve Act of 1932 was intended to give the Federal Reserve the flexibility to respond to emergency conditions. Prior to 2008, credit had not been extended under this authority since the 1930's. However responding to the extraordinary stressed conditions in financial markets the Board has used this authority on a number of occasions over the past year. Following the Bear Stearns episode in March 2008, the Federal Reserve Board invoked section 13(3) to make primary securities dealers, as well as banks, eligible to borrow on a short-term basis from the Fed. This decision was taken in support of financial stability during a period in which the investment banks and other dealers faced intense liquidity pressures. The Fed has also made use of the section 13(3) authority in its programs to support the functioning of key credit markets, including the commercial paper market and the market for asset-backed securities. In my view, the use of section 13(3) in these contexts is well-justified in light of the breakdowns of these critical markets and the serious implications of those breakdowns for the health of the broader economy. As financial conditions improve, and circumstances are no longer unusual and exigent, the programs authorized under section 13(3) will be wound down as required by law. Other components of the Federal Reserve's credit programs, including our lending to depository institutions, liquidity swaps with other central banks, and purchases of agencies and securities make no use of the powers conferred by section 13(3). In a distinct set of activities, the Federal Reserve has also used the 13(3) authority to support government efforts to stabilize systemically critical financial institutions. The Federal Reserve collaborated with the Treasury to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Company, and to prevent a failure of the American International Group or AIG. And we worked closely with the Treasury and the Federal Deposit Insurance Corporation to help stabilize Citigroup and Bank of America. In the cases of Bear Stearns and AIG, as part of a strategy to avoid impending defaults by the companies, the Federal Reserve made loans against polls of collateral. Activities to stabilize systemically important institutions seem to me to be quite different in character from the use of section 13(3) authority to support the repair of credit markets. The actions that the Federal Reserve and the Treasury have taken to stabilize systemically critical firms were essential to protect the financial system as a whole. And in particular the financial risks inherent in the credit extended by the Federal Reserve were, in my view, greatly outweighed by the risk that would have been faced by the financial system and the economy had we not stepped in. However, many of these actions might not have been necessary in the first place had there been in place a comprehensive resolution regime aimed at avoiding disorderly failure of systemically critical financial institutions. The Federal Reserve believes that the development of a robust resolution regime should be a top legislative priority. If specification of this regime were to include clear expectations of the Federal Reserve's role in stabilizing or resolving systemically important firms, a step we very much support, then the contingencies in which the Fed might need to invoke emergency authorities could be tightly circumscribed. I would like to conclude by discussing the Federal Reserve's ongoing efforts to inform the Congress and the public about its various lending programs. I firmly believe that central banks should be as transparent as possible, both for reasons of democratic accountability and because many of our policies are likely to be more effective if they are well understood by the markets and the public. During my time at the Federal Reserve, the FOMC has taken important steps to increase the transparency of monetary policy, such as moving up the publication of the minutes of policy meetings, and adopting the practice of providing longer-term projections of the evolution of the economy on a quarterly basis. Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and its balance sheet. For example, we continue to add to the information shown in the Fed's H.4.1 release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information about each of the Federal Reserve's lending programs is available online, as shown in the appendix to this testimony. Pursuant to a requirement included in the Emergency Economic Stabilization Act passed in October, the Fed also provides monthly reports to the Congress on each of its programs that rely on the section 13(3) authorities. Generally the Fed's disclosure policies are consistent with the current best practices of major central banks around the world. With that said, recent developments have understandably led to a substantial increase in the public's interest in the Fed's balance sheet and programs. For this reason we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today I would like to mention two initiatives. First, to improve public access to information concerning Fed policies and programs, Federal Reserve staff are developing a new Web site that will bring together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by new explanations, discussions and analyses. Our goal is to have this Web site operational within a few weeks. Second, at my request, Board Vice Chairman Donald Kohn has agreed to lead a committee that will review our current publications and disclosure policies relating to the Fed's balance sheet and lending policies. The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the effectiveness of policy. Thank you. I will be pleased to respond to your questions. [The prepared statement of Chairman Bernanke can be found on page 67 of the appendix.] " CHRG-110hhrg46591--31 Mr. Bachus," Thank you, Mr. Chairman. Mr. Chairman, I have a real concern, and that concern is that we are going to repeat the mistakes of the past. Now, how did we get here? We did it by the overextension of credit. We did it by overleveraging. We did it by too much borrowing and by too much lending. Yet what are we talking about this week and last month? We are talking about how can we stimulate lending, about how can we stimulate consumption, about how can we stimulate spending. I believe that what we ought to be talking about is how we encourage people to save. How do we encourage people to live within their means? How do we encourage the government, not just American families but the government, to live within its means? Another concern--and I think it is wrapped up in this--is this propensity of Americans to borrow more than they can afford to repay and to spend excessively and to not live within their means and to intervene on behalf of those who do. You know, we have talked about the market. Well, the market has been brutally efficient in the past several months. If it is allowed to work--and there will be negative consequences for all of us, but it will penalize those who took excessive risk. It will penalize those who borrowed more than they could afford. It has penalized our investment banks. There are no more investment banks. They have overleveraged. The best way to discourage people from making bad loans is to let the market make them eat those losses. We need, I think, number one, to realize there are limits on what government can do to try to intervene in this market process. Over a year ago, I was interviewed by the New York Times, by one of their editorial boards. I said this is not going to be pretty. It is going to be painful, but to a certain extent--and it is not popular to say--it is cathartic. It has a certain cleansing ability in the market by doing this. But we are going to be right back here in 5 years or in 10 years or in 15 years if we, as a country, go out and we have a stimulus package where we encourage people to spend money, we encourage them to take on loans, to take on debt, as opposed to figuring out a way to encourage them to balance their budgets as families and as a government. If we are going to have an economic stimulus package, I have said it ought to be restricted to those things we have to do anyway, to those things we are going to do, like sewer projects and water projects, even tax policies, which encourage spending. We are here today because we borrowed excessively and because we did not live within our means. I have said this, and I will close with this: On this committee, Ron Paul in a debate said we are not a wealthy nation. We are a nation of debtors. We are in debt. When we are in debt, and if we take on more debt, we are actually going to restrict our ability to grow and to thrive economically. That is a negative. Lending excessively and borrowing excessively is not something we ought to encourage. We are going to probably inflate this economy. We are going to probably print a lot of money, and we are going to, in my mind, it appears that we are going to continue to go down a road that has brought us here today. And that is not living responsibly. Thank you, Mr. Chairman. " fcic_final_report_full--548 Term Asset-Backed Securities Loan Facility Federal Reserve program, supported by TARP funds, to aid securitization of asset-based loans such as auto loans, student loans, and small business loans. Term Auction Facility Program in which the Federal Reserve made funds available to all deposi- tory institutions at once through a regular auction. Term Securities Lending Facility Emergency program in which the Federal Reserve made up to  billion in Treasury securities available to banks or broker/dealers that traded directly with the Federal Reserve. tranche From the French, meaning a slice; used to refer to the different types of mortgage-backed securities and CDO bonds that provide specified priorities and amounts of returns: “senior” tranches have the highest priority of returns and therefore the lowest risk/interest rate; mezza- nine tranches have mid levels of risk/return; and “equity” (also known as “residual” or “first loss”) tranches typically receive any remaining cash flows. Troubled Asset Relief Program Government program to address the financial crisis, signed into law in October  to purchase or insure up to  billion in assets and equity from finan- cial and other institutions. TSLF see Term Securities Lending Facility . undercapitalized Condition in which a business does not have enough capital to meet its needs, or to meet its capital requirements if it is a regulated entity. Write-downs Reducing the value of an asset as it is carried on a firm’s balance sheet because the market value has fallen. fcic_final_report_full--71 Indeed, the regulators, including the Fed, would fail to identify excessive risks and unsound practices building up in nonbank subsidiaries of financial holding compa- nies such as Citigroup and Wachovia.  The convergence of banks and securities firms also undermined the supportive relationship between banking and securities markets that Fed Chairman Greenspan had considered a source of stability. He compared it to a “spare tire”: if large commer- cial banks ran into trouble, their large customers could borrow from investment banks and others in the capital markets; if those markets froze, banks could lend us- ing their deposits. After , securitized mortgage lending provided another source of credit to home buyers and other borrowers that softened a steep decline in lending by thrifts and banks. The system’s resilience following the crisis in Asian financial markets in the late s further proved his point, Greenspan said.  The new regime encouraged growth and consolidation within and across bank- ing, securities, and insurance. The bank-centered financial holding companies such as Citigroup, JP Morgan, and Bank of America could compete directly with the “big five” investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns—in securitization, stock and bond underwriting, loan syndication, and trading in over-the-counter (OTC) derivatives. The biggest bank holding companies became major players in investment banking. The strategies of the largest commercial banks and their holding companies came to more closely re- semble the strategies of investment banks. Each had advantages: commercial banks enjoyed greater access to insured deposits, and the investment banks enjoyed less regulation. Both prospered from the late s until the outbreak of the financial cri- sis in . However, Greenspan’s “spare tire” that had helped make the system less vulnerable would be gone when the financial crisis emerged—all the wheels of the system would be spinning on the same axle. LONG TERM CAPITAL MANAGEMENT: “THAT ’S WHAT HISTORY HAD PROVED TO THEM ” In August , Russia defaulted on part of its national debt, panicking markets. Rus- sia announced it would restructure its debt and postpone some payments. In the af- termath, investors dumped higher-risk securities, including those having nothing to do with Russia, and fled to the safety of U.S. Treasury bills and FDIC-insured de- posits. In response, the Federal Reserve cut short-term interest rates three times in seven weeks.  With the commercial paper market in turmoil, it was up to the com- mercial banks to take up the slack by lending to corporations that could not roll over their short-term paper. Banks loaned  billion in September and October of —about . times the usual amount  —and helped prevent a serious disruption from becoming much worse. The economy avoided a slump. Not so for Long-Term Capital Management, a large U.S. hedge fund. LTCM had devastating losses on its  billion portfolio of high-risk debt securities, including the junk bonds and emerging market debt that investors were dumping.  To buy these securities, the firm had borrowed  for every  of investors’ equity;  lenders included Merrill Lynch, JP Morgan, Morgan Stanley, Lehman Brothers, Goldman Sachs, and Chase Manhattan. The previous four years, LTCM’s leveraging strategy had produced magnificent returns: ., ., ., and ., while the S&P  yielded an average .  CHRG-110hhrg44901--72 Mr. Bernanke," Well, as we look back on it, we see that there were just some serious failures in the management of risks. There were many firms that had exposure to the housing market in a variety of ways across the firm, including holding mortgages and other ways. And they didn't fully appreciate that in the contingency that the housing boom would turn around, that house prices would begin to drop; they didn't fully appreciate their exposure to that situation. The regulators bear some responsibility on that. It is our job to make sure that they measure and manage their risks appropriately. We have been working on that for a number of years related to bank supervision initiatives like the Basel Initiative, for example, and so on. But it is clear that we need to redouble our efforts to make sure that the risk management is sound, that the underwriting is sound, and that we don't get ourselves into this kind of situation again. Ms. Pryce. Well, you mentioned Basel. Are there further risks ahead to our system and therefore the overall economy that might arise, and the new capital adequacy standards in Basel? You know, if we are trying to have this happen simultaneously, could that create new risk to the system? Effects of a crisis in any overseas market, could that affect our system in a negative way? Further decline in the dollar. There is a list of many things that could potentially happen. One of the things I would like your comment on is the commercial real estate market. You know, many banks astutely avoided the subprime lending, and they instead expanded their commercial real estate lending. So everywhere we turn we see increased vacancy signs and downward pressure on rents. And do we expect another wave of pressure from that market? And are we planning ahead as a country to address these things as opposed to, you know, being reactionary as it seems that we have had to be of late? " CHRG-111hhrg53240--76 Mr. Bachus," You know, there was no going into the banks and examining anything. But I know the State charter banks were examined for underwriting standards. One thing I ran into when I was advocating for subprime lending legislation in 2005, I would talk to some of the banks, the big banks, bank holding companies, and they would say, we don't do these subprime loans. And I found out later that was somewhat half true in that they all had nonbank affiliates who were making those loans hand over fist. But I don't think that the Fed did any audits or supervision of those nonbank affiliates, did they? Ms. Duke. I think the authority to do that kind of examination was a little unclear under Gramm-Leach-Bliley. However, we did conduct a pilot program within the last year where we went into nonbank subsidiaries jointly with the FTC, with the OTS, with State regulators, and did full compliance exams on those. And as a result of what we learned there, we are going to continue those examinations. " CHRG-111hhrg54869--116 Mr. Scott," All right. Well, thank you very much. Let me just ask you one other question here. I have a few more minutes. Over the past 6 months, loans and leases have declined at a record annual rate of 8 percent with no hint of an upturn, despite the Fed's massive effort to get credit flowing. Credit is still not flowing sufficiently to assure a strong and sustainable economy. Do you believe this to be a two-sided problem? One, reduced willingness of banks to lend amid the record loan delinquencies; and, two, the subdued desire to borrow. " CHRG-111shrg53085--136 Mr. Mica," Absolutely, and it is being reported throughout the country, and you have heard it here today. Banks and institutions are not lending the way they used to. They have withdrawn. Just the other day, the President made a comment that 70 percent of all jobs in America come from small businesses. We have a cap of 12.5 percent. We do the job well. Our portfolio, by the way, is less than 1 percent default. And I know I get some criticism from some of our opponents who say, well, they don't know how to do it. They made a bad loan in Texas. Tell me about making a bad loan. Senator Schumer. Yes. " CHRG-111shrg55117--67 Mr. Bernanke," Let me use this opportunity to make a clear statement to Federal Reserve examiners everywhere and I hope to examiners of other Federal agencies. It is good for the bank, it is good for safety and soundness for banks to make safe loans to creditworthy borrowers, to maintain those relationships, and to extend credit to profitable and economic purposes. We recognize that there is a kind of a built-in bias among examiners in a period like this where the economy is weak and there is a lot of risk to be overconservative and push banks to be overconservative in their lending decisions. On the one hand, we certainly do not want banks to be making bad loans. That is how we got into trouble in the first place. Senator Martinez. Right. " CHRG-111hhrg54872--36 The Chairman," Next, we will hear from Janice Bowdler, who is the senior policy analyst at the National Council of La Raza. STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, WEALTH-BUILDING POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA (NCLR) Ms. Bowdler. Good morning. Thank you. I would like to thank Chairman Frank and Ranking Member Bachus for inviting NCLR to share perspective on this issue. Latino families have been particularly hard hit by the implosion of our credit markets. Lax oversight allowed deceptive practices to run rampant, driving Latino families into risky products and ultimately cyclical debt. In fact, Federal regulators routinely missed opportunities to correct the worst practices. Congress must plug holes in a broken financial system that allowed household wealth to evaporate and debt to skyrocket. Today, I will describe the chief ways our current regulatory system falls short, and I will follow with a few comments on the CFPA. Most Americans share a fundamental goal of achieving economic security they can share with their children. To do so, they rely on financial products--mortgages, credit cards, car loans, insurance, and retirement accounts. Unfortunately, market forces have created real barriers to accessing the most favorable products, even when families are well-qualified. Subprime creditors frequently targeted minority communities as fertile ground for expansion. Subprime lending often served as a replacement of prime credit, rather than a complement. With much of the damage coming at the hands of underregulated entities, gaming of the system became widespread. Despite the evidence, Federal regulators failed to act. This inaction hurt the Latino community in three distinct ways. Access to prime products was restricted, even when borrowers had good credit and high incomes. This most often occurred because short-term profits were prioritized over long-term gains. Lenders actually steered borrowers into costly and risky loans, because that is what earned the highest profits. Disparate impact trends were not acted upon. Numerous reports have documented this trend. In fact, a study conducted by HUD in 2000 found that high-income African Americans, living in predominantly black neighborhoods, were 3 times more likely to receive subprime home loans than low-income white borrowers. Regulators failed to act, even when Federal reports made the case. And shopping for credit is nearly impossible. Financial products have become increasingly complex, and many consumers lack reliable information. Many chose to pay a broker to help them shop. Meanwhile, those brokers have little or no legal or ethical obligation to actually work on behalf of the borrower. Regulators dragged their feet on reforms that could have improved shopping opportunities. If our goal is to truly avoid the bad outcomes in the future, the high rates of foreclosure and household debt, little or no savings and the erosion of wealth, we have to change the Federal oversight system. Lawmakers must ensure that borrowers have the opportunity to bank and borrow at fair and affordable terms. We need greater accountability and the ability to spot damaging trends before they escalate. Some have argued that it is the borrower's responsibility to look out for deception. However, it is unreasonable to expect the average family to regulate the market and in effect to do what the Federal Reserve did not. The proposed CFPA is a strong vehicle that could plug the gaps in our regulatory scheme. In particular, we commend the committee for including enforcement of fair lending laws in the mission of the agency. This, along with the creation of the Office of Fair Lending and Equal Opportunity, will ensure that the agency also investigates harmful trends in minority communities. This is a critical addition that will help Latino families. We also applaud the committee for granting the CFPA strong rule-writing authority. This capability is fundamental to achieving its mission. Also, we were pleased to see that stronger laws are not preempted. This will ensure that no one loses protection as a result of CFPA action. As the committee moves forward, these provisions should not be weakened. And I will close just by offering a few recommendations of where we think it could be strengthened. A major goal of CFPA should be to improve access to simple prime products. Obtaining the most favorable credit terms for which you qualify is important to building wealth. This includes fostering product innovation to meet the needs of underserved communities. We need to eliminate loopholes for those that broker financing, and for credit bureaus. Real estate agents, brokers, auto dealers, and credit bureaus should not escape greater accountability. And we need to reinstate a community-level assessment. Without it, good products may be developed but will remain unavailable in entire neighborhoods. Including CRA in the CFPA will give the agency the authority necessary to make such an assessment. Thank you. And I would be happy to answer any questions. [The prepared statement of Ms. Bowdler can be found on page 66 of the appendix.] Ms. Waters. [presiding] Ms. Burger is recognized for 5 minutes. STATEMENT OF ANNA BURGER, SECRETARY-TREASURER, SERVICE EMPLOYEES INTERNATIONAL UNION (SEIU) Ms. Burger. On behalf of the 2.1 million members of SEIU and as a coalition member of the Americans for Financial Reform, I want to thank Chairman Frank, Ranking Member Bachus, and the committee members for their continued work to reform our broken financial system. It has been a year since the financial world collapsed, showing us that the action of a few greedy players on Wall Street can take down the entire global economy. As we continue to dig out of this crisis, we have an historic opportunity and a responsibility to reform the causes of our continued financial instability, and protect consumers from harmful and often predatory practices employed by banks to rake in billions and drive consumers into debt. The nurses, the childcare providers, janitors, and other members of SEIU continue to experience the devastating effects of the financial crisis firsthand. Our members and their families are losing their jobs, homes, health care coverage, and retirement savings. As State and local governments face record budget crises, public employees are losing their jobs and communities are losing vital services. And we see companies forced to shut their doors as banks refuse to expand lending and call on lines of credit. At the same time, banks and credit card companies continue to raise fees and interest rates and refuse to modify mortgages and other loans. We know the cause of our current economic crisis. Wall Street, big banks, and corporate CEOs created exotic financial deals, and took on too much risk and debt in search of outrageous bonuses, fees, and unsustainable returns. The deals collapsed and taxpayers stepped in to bail them out. According to a recent report released by SEIU, once all crisis-related programs are factored in, taxpayers will be on the hook for up to $17.9 trillion. And I would like to submit the report for the record. The proliferation of inappropriate and unsustainable lending practices that has sent our economy into a tailspin could and should have been prevented. The regulators' failure to act, despite abundance of evidence of the need, highlights the inadequacies of our current regulatory system in which none of the many financial regulators regard consumer protection as a priority. We strongly support the creation of a single Consumer Financial Protection Agency to consolidate authority in one place, with the sole mission of watching out for consumers across all financial services. I want to thank Chairman Frank for his work to strengthen the Proposed Consumer Financial Protection Agency language, particularly the strong whistle-blower protections. We believe to be successful, the CFPA legislation must include a scope that includes all consumer financial products and services; sovereign rulemaking and primary enforcement authority; independent examination authority; Federal rules that function as a floor, not a ceiling; the Community and Reinvestment Act funding that is stable and does not undermine the agency's independence from the industry; and strong whistle-blower and compensation protections. We believe independence, consolidated authority, and adequate power to stop unfair, deceptive, and abusive practices are key features to enable the CFPA to serve as a building block of comprehensive financial reforms. Over the past year, we have also heard directly from frontline financial service workers about their working conditions and industry practices. We know from our conversations that existing industry practices incentivize frontline financial workers to push unneeded and often harmful financial products on consumers. We need to ban the use of commissions and quotas that incentivize rank-and-file personnel to act against the interest of consumers in order to make ends meet or simply keep their job. The CFPA is an agency that can create this industry change. Imagine if these workers were able to speak out about practices they thought were deceptive and hurting consumers, the mortgage broker forced to meet a certain quota of subprime mortgages, or the credit card call center worker forced to encourage Americans to take on debt that they cannot afford and then they threaten and harass them when they can no longer make their payments, or the personal banker forced to open up accounts of people without their knowledge. Including protection and a voice for bank workers will help rebuild our economy today and ensure our financial systems remain stable in the future. Thank you for the opportunity to speak this morning. The American people are counting on this committee to hold financial firms accountable and put in place regulations that prevent crises in the future. Thank you. Ms. Waters. Thank you very much. [The prepared statement of Ms. Burger can be found on page 74 of the appendix.] Ms. Waters. I will recognize myself for 5 minutes. And I would like to address a question to Mr. David C. John, senior research follow, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation. I thank you for participating and for the recommendation that you have given, an alternative to the Consumer Financial Protection Agency. You speak of the consumer protection agency as a huge bureaucracy that would be set up, that would harm consumers, rather than help consumers, and you talk about your council as a better way to approach this with lots of coordination and outside input. It sounds as if you are kind of rearranging the chairs. Basically, what you want to do is leave the same regulatory agencies in place who had responsibility for consumer protection but did not exercise that responsibility. Why should the American public trust that, given this meltdown that we have had, this crisis that has been created, that the same people who had the responsibility are now going to see the light and they are going to do a better job than starting anew with an agency whose direct responsibility is consumer protection? " CHRG-111hhrg50289--50 Mr. McGannon," Cynthia obviously is right about the regulatory environment. Examinations have never been tougher, and I have found myself on many occasions really working hard to defend in front of regulators good customers of the bank, good borrowers, performing loans. You know, maybe there is a shortfall from a collateral standpoint, but again, that is a secondary source of repayment, the primary source of repayment being their business and their income that they are generating, how they are stepping up to support their businesses. And so it takes a few days to get over an examination and literally to get back into being upbeat about lending into your community. That is what we all want to do. That is what we are paid to do as a community bank. It is our duty to do that, but you almost have to really regroup after an examination. " fcic_final_report_full--124 At the same time, the piggybacks added risks. A borrower with a higher com- bined LTV had less equity in the home. In a rising market, should payments become unmanageable, the borrower could always sell the home and come out ahead. How- ever, should the payments become unmanageable in a falling market, the borrower might owe more than the home was worth. Piggyback loans—which often required nothing down—guaranteed that many borrowers would end up with negative equity if house prices fell, especially if the appraisal had overstated the initial value. But piggyback lending helped address a significant challenge for companies like New Century, which were big players in the market for mortgages. Meeting investor demand required finding new borrowers, and homebuyers without down payments were a relatively untapped source. Yet among borrowers with mortgages originated in , by September  those with piggybacks were four times as likely as other mortgage holders to be  or more days delinquent. When senior management at New Century heard these numbers, the head of the Secondary Marketing Depart- ment asked for “thoughts on what to do with this . . . pretty compelling” information. Nonetheless, New Century increased mortgages with piggybacks to  of loan pro- duction by the end of , up from only  in .  They were not alone. Across securitized subprime mortgages, the average combined LTV rose from  to  between  and .  Another way to get people into mortgages—and quickly—was to require less in- formation of the borrower. “Stated income” or “low-documentation” (or sometimes “no-documentation”) loans had emerged years earlier for people with fluctuating or hard-to-verify incomes, such as the self-employed, or to serve longtime customers with strong credit. Or lenders might waive information requirements if the loan looked safe in other respects. “If I’m making a , ,  loan-to-value, I’m not going to get all of the documentation,” Sandler of Golden West told the FCIC. The process was too cumbersome and unnecessary. He already had a good idea how much money teachers, accountants, and engineers made—and if he didn’t, he could easily find out. All he needed was to verify that his borrowers worked where they said they did. If he guessed wrong, the loan-to-value ratio still protected his investment.  Around , however, low- and no-documentation loans took on an entirely dif- ferent character. Nonprime lenders now boasted they could offer borrowers the con- venience of quicker decisions and not having to provide tons of paperwork. In return, they charged a higher interest rate. The idea caught on: from  to , low- and no-doc loans skyrocketed from less than  to roughly  of all outstand- ing loans.  Among Alt-A securitizations,  of loans issued in  had limited or no documentation.  As William Black, a former banking regulator, testified before the FCIC, the mortgage industry’s own fraud specialists described stated income loans as “an open ‘invitation to fraud’ that justified the industry term ‘liar’s loans.’”  Speaking of lending up to  at Citigroup, Richard Bowen, a veteran banker in the consumer lending group, told the FCIC, “A decision was made that ‘We’re going to have to hold our nose and start buying the stated product if we want to stay in busi- ness.’”  Jamie Dimon, the CEO of JP Morgan, told the Commission, “In mortgage underwriting, somehow we just missed, you know, that home prices don’t go up for- ever and that it’s not sufficient to have stated income.”  CHRG-111shrg61513--119 Mr. Bernanke," We have been working on the charges and they have been substantially increased. We are currently testing out the implications of that. On the particular issue of these off-balance sheet vehicles, as you know, the new accounting standards will force banks to consolidate most of those onto their own balance sheet and so they will have to have a full capital charge against them. Senator Reed. And one final question, Mr. Chairman, and that is we have talked a lot about derivatives. We all do recognize there is a long-term value to derivatives. My recollection is the Chicago Board in 1848 started trading agricultural futures. In fact, I think I recall a story where General Grant and General Sherman showed up to congratulate one of the architects for helping them win the Civil War because of being able to guarantee supply. So that is the question of the utility in that sense, and other senses, is not at stake here. But there also is the growing perception, and I am coming to a conviction, that many times these devices are used to avoid regulatory constraints. In the case of Greece, it might have been strictly legal, but clearly the intent was to avoid the budget limitations and the budget restrictions of joining the European Community. With respect to many other derivatives, for example, even commercial derivatives, because they are not typically recorded as lending, or in some cases not even on the books, it is borrowing that is not in violation of covenance with other lenders. It is borrowing that allows additional leverage. And one of the problems we are trying to recognize now is over-leverage. So to the extent that we have to deal with these derivatives, any thoughts our guidance about how we prevent them from being used not for economic hedging but for clearly and very deliberately--maybe legally, maybe not--avoiding your capital requirements, the lending covenants of a bank, and many other examples. " FOMC20080430meeting--290 288,MR. ROSENGREN.," Okay. Just a quick question, which doesn't have to be answered now--given all of the financial turmoil, it would be interesting to see whether in other countries that have these different arrangements there was a decrease in either overnight or term lending with counterparties. Given the extent to which you can just work with a central bank rather than counterparties, is there any evidence in these other regimes that interbank lending transaction volume disappeared in some of these countries? I would be interested in seeing that. Regarding Governor Kroszner's comment on the H.4.1 release, it does seem that we could probably have a materiality requirement in our balance sheet. Under most circumstances, what we are doing at the discount window would seem not to hit that materiality criterion. I think we could be a little more innovative--I agree with President Lacker's point--but I think that the H.4.1 does seem to have an effect; and if we will be doing all these other things, taking another look at the H.4.1 and making sure that we don't have more untapped flexibilities probably makes a lot of sense. I would like a little more discussion of ""promote efficient and resilient money markets and government securities markets"" as a criterion. I'm not sure I would weight those criteria equally. It seems that all these criteria, for the most part, take care of most of the dead weight loss; and given that the banks still have to administrate for daylight credit, I am not sure that the burden is all that different across these various regimes. But I can imagine that that one might be different, and given we just had financial turmoil--I know this is a bit different from what President Lacker said--I would put a little more attention to that. Overall, I like option 2 and option 5. I'm comfortable with those two. I'm attracted to the voluntary balance program. On net, I would probably prefer a longer maintenance period to a one-day maintenance period, but I don't have a strong preference and could easily be convinced otherwise. " CHRG-110hhrg44901--140 Mr. Bernanke," The Fannie and Freddie function of securitizing mortgages and getting them into the secondary market, providing a new source of capital for mortgage lending, is clearly the most valuable thing that they do. I am not quite sure I understood all of your question, but I do want to reiterate my support for making it possible for them to continue to do that on an expansive scale. Mr. Miller of California. My goal is to say that the more liquidity we can inject into the marketplace will create a higher percentage of--higher possibility that the marketplace will turn much more rapidly and create more stability, and should we do things to create less liquidity in the marketplace that will also have the opposite effect? " CHRG-111shrg56415--38 Mr. Smith," I would only add, Senator, that in the most successful period I know of in home lending in the United States, there were mainly two, maybe three varieties of loans generally in the underwriting standards world, as you say. There was a requirement of a downpayment, for standard documentation, and the people that made the loans kept them. And on the basis of that lending experience, we projected--the magicians on Wall Street did projections about the loans that weren't like that. So, I think there is--as you point out, the issue there is the issue of access to housing, and that is what it is. There is no free lunch and no easy answer. Senator Gregg. Thank you. Thank you very much for your testimony. Senator Johnson. Senator Bennet. Senator Bennet. Thank you, Mr. Chairman, and I would also like to thank the panel for your excellent testimony. Every weekend when I go home to Colorado, what I hear from small businesses is they have no access to capital, no access to credit, and we are in this, as the panel has talked about, in this remarkably difficult period where, on the one hand, the securitized market that blew up or imploded is now gone and has not been replaced, which is probably a good thing from a leverage point of view, but it hasn't been replaced. On the other hand, we have got this looming commercial real estate issue that is still out there. And sort of caught in between all that are our small businesses who need access to capital in order to grow and in order to deal with the unemployment rate that Senator Tester talked about and sort of this folding back on top of itself. And I wondered, Mr. Tarullo, you mentioned in your testimony at the beginning your view that maybe some more direct efforts--I think you described it as temporary targeted programs--might be necessary to get our small businesses access to the credit that they need, and I wonder if you could elaborate a little bit more on that, because I suspect you are right. And in addition to that, I would ask to what extent we think the current accounting regimes are ones that are either helping banks extend credit to small businesses or are intruding on their ability to do that. " CHRG-111hhrg74090--189 Mr. Sarbanes," Yes, I agree with that. I mean, I don't think you can have government totally controlling every single financial dimension in the market. I don't think you can do that. I don't think this tries to do that. I think what this tries to do is provide some oversight and direction and rules of the road so that people stop driving off the road, not only because in the view of Alan Greenspan that causes the drivers to crash and hurt themselves but because they run over hundreds of thousands of innocent bystanders in the process. Let me switch back to a discussion from a few minutes ago because I think it is very relevant. As attractive as the new agency may be to some, and I am partial to it as it is being described, we still have to get from here to there, and I worry a lot because even if we had in place now the regulatory structure that we thought was necessary, it would have to be in overdrive, I would argue, to be on the lookout against predatory action that is lurking out there. But certainly in a transitional phase, predators have a lot of opportunities to make mischief, and I think the discussion about the 120 days kind of points to some of this anxiety, but I would like anyone who would care to, I would like to hear you respond to the idea of some kind of a special initiative or taskforce or consciousness that during this transition we need to be paying attention to, maybe it is a limited set of activities or potential mischief but there has got to be a special focus on that so that we don't make the transition, say now we have got a good regulatory structure in place, but in the meantime while that happened, a lot more people got hurt, and I say this because there is a lot of money that is flowing right now, taxpayer money, into the financial infrastructure of the country and many of the same players that took advantage of people over the last few years are thinking creatively of ways to take advantage of them again by accessing some of these dollars. So speak to that issue of how we can not be caught napping during the transition. We can start with you, Ms. Hillebrand. Ms. Hillebrand. Thank you. I believe you are asking exactly the right question. There will be a danger period during the transition. There are a couple of things, and I don't have the whole answer. One is the work that the FTC does right now and continues to do up to that date of the transfer of rulemaking so it will be incredibly important. It could be up to 2 years after enactment. If these two titles are enacted together, the FTC will get its rulemaking improvements right away and can get some of these rules that have been kind of backlogged because of the limitations on its power moving into place. That will help certainly to put that policing into place. We do need to be paying attention to the new problems that will be developing. One that worries me in particular is a new form of zombie debt. You know, that is a debt where no one has got the paperwork, someone just has a list saying you owe this money, that might come out of some of these mortgage unsuccessful modifications or post kind of mortgage dispositions. So there are new issues, a lot of old issues. The more we can get the FTC to do now before the transfer, I think the better shape it will be in, but we will have to watch for that, yes. And the other thing is, there is not going to be enough enforcement resources. Moving people from where they are over from all the different agencies is not going to give us enough enforcement staff to do the whole job for the country. The FTC worked very hard. They said they had 100 cases over 5 years. If you talk to any State AG in the country, they will tell you, 100 cases, we could bring that in my State tomorrow. There is more need than the number of people that are currently in place to do consumer protection enforcement financial services at the federal level. " FinancialCrisisInquiry--724 ROSEN: Well during most of our lending history, they were done. I think common sense would say that you verify a person’s income. If you can’t verify his income, why would you give him a loan? I mean, he can’t give you a document that tells you his income. I mean, you appraise the house. Common sense. But they stopped doing all this. And it is because of the gatekeeper, which for many years was the rating agencies became the toll taker. So there was no gatekeeper in this whole process. And if someone would buy it, they did it. But I think the consumer should not be given a free pass here. Cause I think a number of consumers lied in their loan applications about their income. Now a stated income loan, you know you’re—I mean no one’s verifying it, so you do it possibly. I would also say that a lot of these investors –help them stay in that unit. And so there’s a lot of things that could be done. Also they’re idea of a non-recourse mortgage. Well in many ways it’s what you want from a borrowing point of view, it’s probably not a wise thing. You want someone to be responsible for the debts they’re taking on. CHRG-111hhrg48868--119 Mr. Ario," We deal primarily with the insurance companies. Certainly, when we have questions we kick them up to the holding company level, since securities lending was actually handled at the holding company level. When we have those kind of questions then about how is it being handled there, because it's using money from the life insurance companies, we generally get answers to those questions. But there is a well there where if we are pressed real hard on some sensitive topics, we don't have clear authority to go into the holding company level. And so I do think you need somebody that has clear authority at that holding company level as well. " FOMC20081216meeting--517 515,MR. PLOSSER.," But in some sense, just to follow up on this point, the limits are what is really important here because, as long as we don't define some limits and we just say limited by TARP capital, well, that doesn't really answer the question. As long as the markets act as if we or someone else is going to step in and rescue them from any more lending arrangements they happen to be facing, the incentives for the intermediary system to repair itself or to gradually adjust are going to be limited. I'm worried about the lack of definition about what constitutes a legitimate market or instrument or firm that we wouldn't save. " CHRG-111shrg56415--6 ADMINISTRATION Ms. Matz. Thank you, Chairman Johnson, Senator Crapo, and members of the Subcommittee. I am pleased to provide NCUA's views on the state of the industry. As you have heard from my counterparts, the stress on the entire financial sector has translated into a challenging time for financial institutions, including credit unions. Nonetheless, I am confident that credit unions can and will weather the storm. Corporate credit unions pose the most serious challenges to the credit union industry. Corporate credit unions are wholesale credit unions created by retail credit unions to provide investment services, liquidity, and payment systems. For four decades, this system worked well. However, in 2008, corporate exposure to mortgage-backed securities created tangible liquidity difficulties. In response to a growing crisis, NCUA asked Congress to increase the borrowing ceiling on our back-up liquidity source--the Central Liquidity Facility. Congress granted NCUA's request, and it is clear to me that if you had not acted in such a swift and decisive manner, the entire credit union system, not just the corporate network, would have been in serious jeopardy. Despite this successful intervention, problems continued. In March, the two largest corporates were placed into conservatorship by NCUA due to the deterioration in their portfolios. Losses flowed through the system and resulted in writedowns of capital not only by other corporates but by retail credit unions that invested in these institutions. Given the tenuous real estate market, NCUA expects additional losses to materialize. These conservatorships permit the corporate system to continue to function and to serve retail credit unions and, most importantly, their 90 million members. Again, a mechanism was developed, the Corporate Credit Union Stabilization Fund, which permitted replenishment by the industry over a 7-year period. This spreading out of costs was critical as credit union earnings were already experiencing pressures. The Corporate Stabilization Fund has permitted NCUA to maintain its mandated equity ratio in the Share Insurance Fund. At no point during this crisis has the equity ratio fallen below the 1.2 percent established by Congress, and today it stands at 1.3 percent, assuring consumers that their insured deposits are safe. Retail credit unions have their own challenges independent of the corporates. The good news is that, despite the troubled economy, credit union lending has increased by almost 8 percent since 2007. However, delinquencies and loan losses have also increased, particularly in real estate lending. In 2007, about 0.3 percent of such loans were delinquent. The figure now stands at 1.62 percent. Industry-wide capital, while still strong, has declined from 11.8 percent in 2007 to 10 percent. On the one hand, I am encouraged by the fact that 98 percent of the 7,700 federally insured credit unions are at least adequately capitalized. On the other hand, 21 credit unions have failed so far this year compared to 18 in all of 2008. That number could well rise in 2010. Most troubling is the increase in credit unions which have been downgraded to CAMEL 4 and 5. Between December 2008 and August 2009, the assets of credit unions in these categories have almost doubled. Clearly, credit unions have not been spared from the harsh effects of the economic downturn. In tandem with the assessment of corporate losses described above, this presents a difficult road for credit unions to travel in 2010 and beyond. NCUA has been proactive in our efforts to mitigate the situation. NCUA examiners work with credit unions to avoid the riskiest types of mortgage lending, and this oversight was complemented by the fact that, as member-owned cooperatives, credit unions try to put their members into lending products they can afford. As a result, the industry largely steers clear of exotic mortgage lending. Only 2.3 percent of all credit union mortgage loans are exotic. Additionally, NCUA has enhanced our supervision. We shortened our examination cycle. We added 50 examiners in 2009 and anticipate adding 57 more in 2010, and we upgraded our risk management system to identify and resolve problems more quickly. NCUA has an obligation to consumers. As a safety and soundness regulator, we will be successful if we preserve strong credit unions capable of meeting the financial needs of their members. Credit union members rightfully expect a reliable and well-capitalized deposit insurance regime. While the year ahead will be challenging, I am confident that we and the credit union industry we regulate will be stronger in the end. I welcome the opportunity to answer your questions. Senator Johnson. Thank you, Ms. Matz. " Mr. Ward," STATEMENT OF TIMOTHY T. WARD, DEPUTY DIRECTOR, EXAMINATIONS, CHRG-111hhrg53246--17 The Chairman," The gentleman from California, Mr. Miller, for 1 minute. Mr. Miller of California. Thank you, Mr. Chairman. In recent months, it has become increasingly clear that accounting policy has tremendous impacts on the credit markets which are experiencing recovery efforts by the financial stability plan. Specifically, the issue of mark-to-market has not been adequately addressed. In fact, private market activities, lending and investing, as well as recovery efforts, remain hamstrung by pricing challenges while the accounting policymakers have been willing to or are unable to offer the necessary guidance. The TALF program is an example. Under TALF, assets that investors owned that were placed as collateral are held in non-mark-to-market accounts to shield the investors from the exposure. To me, this indicates the problem with the current pricing regime and accounting policymakers' ability to address the issues in a meaningful manner. More recently, FAS has made changes to the accounting standards that will have a tremendous impact on securitization known as FAS 166 and 167. These enormous changes are occurring at the same time that the Administration is trying to restart the securitized credit markets to facilitate private lending. It is our understanding that the Federal Reserve has serious concerns with the policy shift that will derail efforts to stabilize financial institutions and get credit flowing. Why is there a disconnect between policymakers who own significant issues at a time when we are experiencing extraordinary economic circumstances. There is tremendous challenge facing the $6 billion--okay, I guess my time is over. Thank you, Mr. Chairman. " fcic_final_report_full--560 September 7, 2010, pp. 6–7. 70. “FBI Warns of Mortgage Fraud ‘Epidemic’ from Terry Frieden,” CNN news report, September 17, 2004. 71. Kirstin Downey, “FBI Vows to Crack Down on Mortgage Fraud; Hot Real Estate Market Drives Reports of ‘Suspicious’ Activity, Agency Says,” Washington Post, February 15, 2005. 72. Financial Crimes Enforcement Network, Regulatory Policy and Programs Division, “Mortgage Loan Fraud: An Industry Assessment Based upon Suspicious Activity Report Analysis,” November 2006. See also Financial Crimes Enforcement Network, “Annual Report: Fiscal Year 2008.” 73. FinCEN response to FCIC interrogatories, October 14–15, 2010. 74. William K. Black, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Miami, session 1: Overview of Mortgage Fraud, September 21, 2010, p. 8. 75. Alberto Gonzales, interview by FCIC, November 1, 2010; Michael Mukasey, interview by FCIC, October 20, 2010. 76. Federal Reserve Consumer Advisory Council Meeting, October 28, 2004, transcript, p. 44. 77. Ibid., p. 45. 78. Ruhi Maker, interview by FCIC, October 25, 2010. 79. Kirstin Downey, “Many Buyers Opt for Risky Mortgages,” Washington Post, May 28, 2005. 80. “After the Fall: Soaring house prices have given a huge boost to the world economy. What happens when they drop?” The Economist, June 16, 2005. 81. Fed Chairman Alan Greenspan, “The Economic Outlook,” prepared testimony before the Joint Economic Committee, 109th Cong., 1st sess., June 9, 2005. 82. Ibid. 83. Fed Chairman Ben S. Bernanke, “The Economic Outlook,” prepared testimony before the Joint Economic Committee, U.S. Congress, 110th Cong., 1st sess., March 28, 2007. 84. Sheila Canavan, comments during of the Federal Reserve Consumer Advisory Council Meeting, October 27, 2005, transcript, p. 52. 85. David Leonhardt, “Be Warned: Mr. Bubble’s Worried Again,” New York Times, August 21, 2005. 86. Raghuram Rajan, interview by FCIC, November 22, 2010. 87. Ibid. 88. Ibid. 89. Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten The World Economy (Prince- ton: Princeton University Press, 2010), p. 3. 90. Susan M. Wachter, interview by FCIC, October 6, 2010. 91. Mark Klipsch, quoted in “Blizzard Can’t Stop ASF 2005 Conference,” Asset Securitization Report , January 31, 2005. 92. Dennis J. Black, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Miami, session 2: Uncovering Mortgage Fraud in Miami, September 21, 2010, p. 1; for the appraiser’s pe- tition, see http://appraiserspetition.com/. 93. Karen Mann, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis— Sacramento, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, September 23, 2010. 94. 2009 Mortgage Market Statistical Annual, vol. 2, The Secondary Market , p. 13, “Non-Agency MBS Issuance by Type,” and FCIC staff estimates based on analysis of Moody’s SFDRS data. 95. Jamie Dimon, testimony before the FCIC, First Public Hearing of the FCIC, day 1, panel 1: Finan- cial Institution Representatives, January 13, 2010, transcript, p. 78. 96. Madelyn Antoncic, interview by FCIC, July 14, 2010. 97. Anton R. Valukas, Report of Examiner, In re Lehman Brothers Holdings Inc., et al., Chapter 11 Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March 11, 2010, 1:114, with n. 418. 98. Richard Bowen, interview by FCIC, February 27, 2010. 99. Richard Bowen, email to Robert Rubin, David Bushnell, Gary Crittenden, and Bonnie Howard, November 3, 2007. 557 100. Robert Rubin, testimony before the FCIC, Hearing on Subprime Lending and Securitization and Government-Sponsored Entities (GSEs), day 2, session 1: Citigroup Senior Management, April 8, 2010, transcript, p. 30. 101. Brad S. Karp, counsel for Citigroup, letter to FCIC, November 1, 2010, in response to FCIC re- quest of September 21, 2010, for information regarding Richard Bowen’s November 3, 2007, email, p. 2. 102. Bowen, interview. 103. J. Kyle Bass, testimony before the FCIC, First Public Hearing of the FCIC, day 1, panel 2: Finan- cial Market Participants, January 13, 2010, transcript, pp. 143–44. 104. Herbert M. Sandler, “Comment on Joint ANPR for Proposed Revision to the Existing Risk-based Capital Rule,” letter to Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, January 18, 2006. 105. Lewis Ranieri, interview by FDIC, July 30, 2010. 106. Angelo Mozilo, email to Eric Sieracki, April 13, 2006, re: 1Q2006 Earnings. 107. Angelo Mozilo, email to David Sambol, April 17, 2006, subject: sub-prime seconds. 108. David Sambol, email to Angelo Mozilo, April 17, 2006, re: Sub-prime seconds (cc Kurland, fcic_final_report_full--89 In , President Bill Clinton asked regulators to improve banks’ CRA perform- ance while responding to industry complaints that the regulatory review process for compliance was too burdensome and too subjective. In , the Fed, Office of Thrift Supervision (OTS), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) issued regulations that shifted the regulatory focus from the efforts that banks made to comply with the CRA to their actual re- sults. Regulators and community advocates could now point to objective, observable numbers that measured banks’ compliance with the law. Former comptroller John Dugan told FCIC staff that the impact of the CRA had been lasting, because it encouraged banks to lend to people who in the past might not have had access to credit. He said, “There is a tremendous amount of investment that goes on in inner cities and other places to build things that are quite impressive. . . . And the bankers conversely say, ‘This is proven to be a business where we can make some money; not a lot, but when you factor that in plus the good will that we get from it, it kind of works.’”  Lawrence Lindsey, a former Fed governor who was responsible for the Fed’s Divi- sion of Consumer and Community Affairs, which oversees CRA enforcement, told the FCIC that improved enforcement had given the banks an incentive to invest in technology that would make lending to lower-income borrowers profitable by such means as creating credit scoring models customized to the market. Shadow banks not covered by the CRA would use these same credit scoring models, which could draw on now more substantial historical lending data for their estimates, to under- write loans. “We basically got a cycle going which particularly the shadow banking industry could, using recent historic data, show the default rates on this type of lend- ing were very, very low,” he said.  Indeed, default rates were low during the prosper- ous s, and regulators, bankers, and lenders in the shadow banking system took note of this success. SUBPRIME LENDERS IN TURMOIL: “ADVERSE MARKET CONDITIONS ” Among nonbank mortgage originators, the late s were a turning point. During the market disruption caused by the Russian debt crisis and the Long-Term Capital Management collapse, the markets saw a “flight to quality”—that is, a steep fall in de- mand among investors for risky assets, including subprime securitizations. The rate of subprime mortgage securitization dropped from . in  to . in . Meanwhile, subprime originators saw the interest rate at which they could borrow in credit markets skyrocket. They were caught in a squeeze: borrowing costs increased at the very moment that their revenue stream dried up.  And some were caught holding tranches of subprime securities that turned out to be worth far less than the value they had been assigned. Mortgage lenders that depended on liquidity and short-term funding had imme- diate problems. For example, Southern Pacific Funding (SFC), an Oregon-based sub- prime lender that securitized its loans, reported relatively positive second-quarter results in August . Then, in September, SFC notified investors about “recent ad- verse market conditions” in the securities markets and expressed concern about “the continued viability of securitization in the foreseeable future.”  A week later, SFC filed for bankruptcy protection. Several other nonbank subprime lenders that were also dependent on short-term financing from the capital markets also filed for bank- ruptcy in  and . In the two years following the Russian default crisis,  of the top  subprime lenders declared bankruptcy, ceased operations, or sold out to stronger firms.  CHRG-111shrg54675--29 Mr. Hopkins," I would say that we do not have the issues with the subprime mortgages in South Dakota and, in general, most of the rural areas of the Midwest. I think it was more of a conservative lending philosophy, and we did not have a lot of the mortgage brokers in our areas. Those that we have had have come in to us, and we did not have the rapid increases in the home valuations as seen in some of the more urban areas of California, Nevada, Florida, Michigan, and some of those areas--Michigan, I take that back, has not had the rapid rise. But some of these other areas that have had the rapid rise, therefore, they have been easier to refinance into conventional mortgages when they have come in. And we have used the loan modification program for those that have come in and have found it to be successful to this point. " FinancialCrisisReport--74 Home Equity originations were projected to grow from $4 billion in 2005 to $30 billion in 2008. On the other hand, WaMu’s low risk originations were expected to be curtailed dramatically. Government backed loan originations, which totaled $8 billion in 2005, were projected to be eliminated by 2008. Fixed rate loan originations were projected to decline from $69 billion in 2005 to $4 billion in 2008. The 2007 “Strategic Direction” memorandum to the Board is dated June 18, 2007, well after U.S. housing prices had begun to decline, as Mr. Killinger acknowledged: “For the past two years, we have been predicting the bursting of the housing bubble and the likelihood of a slowing housing market. This scenario has now turned into a reality. Housing prices are declining in many areas of the country and sales are rapidly slowing. This is leading to an increase in delinquencies and loan losses. The sub-prime market was especially rocked as many sub-prime borrowers bought houses at the peak of the cycle and now find their houses are worth less and they are having difficulties refinancing their initial low-rate loans.” 192 While the memorandum’s section on home loan strategy no longer focused on overall growth, it continued to push the shift to high risk lending, despite problems in the subprime market: “Home Loans is a large and important business, but at this point in the cycle, it is unprofitable. The key strategy for 2008 is to execute on the revised strategy adopted in 2006. … We need to optimize the sub-prime and prime distribution channels with particular emphasis on growing the retail banking, home loan center and consumer direct channels. We also expect to portfolio more of Home Loans’ originations in 2008, including the new Mortgage Plus product. We will continue to emphasize higher-risk adjusted return products such as home equity, sub-prime first mortgages, Alt A mortgages and proprietary products such as Mortgage Plus.” 193 The testimony of other WaMu executives further confirms the bank’s implementation of its High Risk Lending Strategy. Ronald Cathcart, who joined WaMu in 2006, to become the company’s Chief Risk Officer, testified: “The company’s strategic plan to shift its portfolios towards higher margin products was already underway when I arrived at WaMu. Basically, this strategy involved moving away from traditional mortgage lending into alternative lending programs involving adjustable-rate mortgages as well as into subprime products. The strategic shift to 192 6/18/2007 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic Direction,” JPM_WM03227058-67 at 60, Hearing Exhibit 4/13-6a. 193 Id. at 66 [emphasis in original removed]. See also 1/2007 Washington Mutual presentation, “Subprime Mortgage Program,” JPM_WM02551400, Hearing Exhibit 4/13-5 (informing potential investors in its subprime RMBS securities that: “WaMu is focusing on higher margin products”). higher-margin products resulted in the bank taking on a higher degree of credit risk because there was a greater chance that borrowers would default.” 194 CHRG-111hhrg51591--7 Mr. Royce," Thank you, Mr. Chairman. Thank you for your continued leadership on this and for the hearings that you held last year and now on this issue of insurance regulation. I think that a consensus was formed that modernization of our regulatory structure was necessary. And I think part of that consensus is that there is a Federal role here in insurance. I think the events of last year really changed the debate on insurance regulatory reform. I think prior to last year, the regulatory structure of 50-plus separate regulators was criticized as being inefficient, as being duplicate, as being anti-competitive, and certainly costly for consumers. But in early 2008, we had another issue surface, and we saw many of the top bond insurers suffer significant losses and subsequent rating downgrades resulting from their exposure to the U.S. mortgage market. Their rating downgrades contributed to the freezing of credit markets, and that fed, of course, into the larger economic crisis and turmoil that we have had in this country. And then came the fall of AIG. And the bets that brought down AIG were made through the firm's securities lending division as well as the financial products unit. As we consider the events of the past as they relate to regulatory reform, it is worth noting that the securities lending division was facilitated and funded by AIG's insurance subsidiaries as a vehicle to make unwise bets on the U.S. housing market. At least, that is the way I would put it, since they were leveraged 170 to 1. Using capital from their insurance subsidiaries with the approval of the various State insurance regulators, the securities lending division, in tandem with the financial products unit, put at risk the entire company and, to some degree, the broader financial system. The AIG debacle has also reminded us of exactly how global in scope the insurance market really is. AIG had subsidiaries operating in 130 countries and jurisdictions. The now-notorious financial products unit had a significant presence in London. In order to adequately understand the threats within our own financial system, our regulators must be able to look at the entire picture, which often means relying to a certain extent upon equivalent regulators overseas. The European Union continues to move closer to phasing the Solvency II directive in, and that is probably going to pass this year. Solvency II will create one market for insurance throughout all of Europe while we have 50-plus separate markets here in the United States. Another aspect of Solvency II is meant to increase the global cooperation effort by bringing equivalent regulators from around the world into closer consultation with each other. Now, unfortunately, we have not held up our end of the bargain. The various State insurance regulators simply do not have the authority to negotiate with foreign regulatory bodies on behalf of the U.S. market, and as a result of our fragmented State-based system, we will not have that regulatory presence capable of understanding risks from around the globe. I have co-authored the National Insurance Consumer Protection Act with Representative Melissa Bean to establish a Federal insurance regulator that would have the capacity and the legal authority to address these issues and the many others that have surfaced over the years. In closing, I believe any regulatory forum effort will be incomplete without the inclusion of a world-class Federal insurance regulator. I look forward to hearing from our panel of witnesses on this topic. And again, I thank you, Mr. Chairman, for your leadership on this issue. " CHRG-111shrg52619--34 Chairman Dodd," Thank you very much, Mr. Smith. We don't say this often enough in the Committee. The tendency today is to use the word ``bank,'' and I am worried about it becoming pejorative. There are 8,000 banks and I think there are 20--Governor Tarullo can correct me on this--that control about 70 to 80 percent of all the deposits in the country. The remaining 7,000-plus are regional or community banks. They do a terrific job and have been doing a great job. And the tendency to talk about lending institutions in broad terms is not fair to a lot of those institutions which have been very prudent in their behavior over the last number of years and it is important we recognize that from this side of the dais. And so your comments are appreciated. " Mr. Reynolds,"STATEMENT OF GEORGE REYNOLDS, CHAIRMAN, NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS, AND SENIOR DEPUTY COMMISSIONER, fcic_final_report_full--366 Fed Chairman Ben Bernanke told the FCIC, “As a scholar of the Great Depres- sion, I honestly believe that September and October of  was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period . . . only one . . . was not at serious risk of fail- ure. . . . So out of maybe the ,  of the most important financial institutions in the United States,  were at risk of failure within a period of a week or two.”  As it had on the weekend of Bear’s demise, the Federal Reserve announced new measures on Sunday, September , to make more cash available to investment banks and other firms. Yet again, it lowered its standards regarding the quality of the collateral that investment banks and other primary dealers could use while borrowing under the two programs to support repo lending, the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF).  And, providing a temporary exception to its rules, it allowed the investment banks and other financial companies to borrow cash from their insured depository affiliates. The investment banks drew liberally on the Fed’s lending programs. By the end of September, Morgan Stanley was getting by on . billion of Fed-provided life support; Goldman was receiving . billion.  But the new measures did not quell the market panic. Among the first to be di- rectly affected were the money market funds and other institutions that held Lehman’s  billion in unsecured commercial paper and made loans to the company through the tri-party repo market. Investors pulled out of funds with known expo- sure to that jeopardy, including the Reserve Management Company’s Reserve Pri- mary Fund and Wachovia’s Evergreen Investments. Other parties with direct connections to Lehman included the hedge funds, in- vestment banks, and investors who were on the other side of Lehman’s more than , over-the-counter derivatives contracts. For example, Deutsche Bank, JP Morgan, and UBS together had more than , outstanding trades with Lehman as of May . The Lehman bankruptcy caused immediate problems for these OTC derivatives counterparties. They had the right under U.S. bankruptcy law to termi- nate their derivatives contracts with Lehman upon its bankruptcy, and to the extent that Lehman owed them money on the contracts they could seize any Lehman collat- eral that they held. However, any additional amount owed to them had to be claimed in the bankruptcy proceeding. If they had posted collateral with Lehman, they would have to make a claim for the return of that collateral, and disputes over valuation of the contracts would still have to be resolved. These proceedings would delay payment and most likely result in losses. Moreover, any hedges that rested on these contracts were now gone, increasing risk.  Investors also pulled out of funds that did not have direct Lehman exposure. The managers of these funds, in turn, pulled  billion out of the commercial paper market in September and shifted billions of dollars of repo loans to safer collateral, putting further pressure on investment banks and other finance companies that de- CHRG-111shrg51290--52 Mr. Bartlett," I think that regions, being there in Birmingham, and BBVA in Birmingham and Webster Financial in Connecticut, Sun Trust in Atlanta, and others are banks that serve their communities quite well, make good decisions, good loans, have increased their lending as a result of TARP participation, and, in fact, we have an economic decline with unemployment and with frozen liquidity markets, but it is not a matter of those individual banks having made bad decisions. There are lots of bad decisions that have been made by all kinds--and lots of good decisions. Now the issue is how do we build out of it. So I think the banks I cited and others made quite good decisions. They are a big part of the solution. " CHRG-111hhrg54872--234 Mr. Ellison," Ms. Bowdler? Ms. Bowdler. Yes. That kind of structure actually allowed a bifurcated outreach strategy, especially to minority and low-income communities. So we saw an example--I read about it in my testimony--where in conversations with a major lender, we found that their subprime wholesale unit, which offered exclusively subprime products, 80 percent, 90 percent of their lending was going to African Americans, while their retail unit went predominantly to their white bank consumers. It allowed them to actually split these outreach-- " CHRG-111shrg55117--97 Mr. Bernanke," I would go further and say if you had the systemic risk resolution authority, that the Fed's ability to lend to a failing systemic institution ought to be curtailed so that it could be invoked only at the request of the resolution authority as a support of their operation. So I would make our interventions of the sort we did with AIG, I would make them illegal. Senator Merkley. Well, I appreciate the fact that you could envision even going beyond the strength of the statement I was laying out, because we have got to address successfully this issue of moral hazard, or we are perpetually in a cycle that does not serve our financial system or our citizens. And so I will look forward to being in attendance when that speech occurs, and I thank you very much for your testimony. " CHRG-110hhrg41184--137 Mr. Hinojosa," Thank you, Chairman Frank. Chairman Bernanke, I want to follow up on what Congressman Kanjorski touched on briefly in his questions. As chairman of the Subcommittee on Higher Education, I am concerned about the impact that the current crisis in the housing market is having on the liquidity of the overall marketplace, especially on student college loans. I have talked to banks who say that they are lending money to students and then they package the loans but are having difficulty placing them in the marketplace. Do you believe that we should have some contingency plans to ensure access to college student loans and what should those plans include? " FinancialCrisisReport--161 IV. REGULATORY FAILURE: CASE STUDY OF THE OFFICE OF THRIFT SUPERVISION Washington Mutual Bank (WaMu), with more than $300 billion in assets, $188 billion in deposits, over 2,300 branches in 15 states, and 43,000 employees, was by late 2008 the largest thrift under the supervision of the Office of Thrift Supervision (OTS) and among the eight largest financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). The bank’s collapse in September 2008 came on the heels of the Lehman Brothers bankruptcy filing, accelerating the unraveling of the financial markets. WaMu’s collapse marked one of the most spectacular failures of federal bank regulators in recent history. In 2007, many of WaMu’s home loans, especially those with the highest risk profile, began experiencing increased rates of delinquency, default, and loss. After the subprime mortgage backed securities market collapsed in September 2007, Washington Mutual was unable to sell or securitize subprime loans and its loan portfolio began falling in value. By the fourth quarter of 2007, the bank recorded a loss of $1 billion, and then in the first half of 2008, WaMu lost $4.2 billion more. WaMu’s stock price plummeted against the backdrop of these losses and a worsening financial crisis elsewhere on Wall Street, which was witnessing the forced sales of Countrywide Financial Corporation and Bear Stearns, the government takeover of IndyMac, Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, the taxpayer bailout of AIG, and the conversion of Goldman Sachs and Morgan Stanley into bank holding companies. From 2007 to 2008, WaMu’s depositors withdrew a total of over $26 billion in deposits from the bank, triggering a liquidity crisis. On September 25, 2008, OTS placed Washington Mutual Bank into receivership, and the FDIC, as receiver, immediately sold it to JPMorgan Chase for $1.9 billion. Had the sale not gone through, Washington Mutual’s failure could have exhausted the FDIC’s entire $45 billion Deposit Insurance Fund. OTS records show that, during the five years prior to its collapse, OTS examiners repeatedly identified significant problems with Washington Mutual’s lending practices, risk management, and asset quality, and requested corrective action. Year after year, WaMu promised to correct the identified problems, but failed to do so. OTS, in turn, failed to respond with meaningful enforcement action, choosing instead to continue giving the bank inflated ratings for safety and soundness. Until shortly before the thrift’s failure in 2008, OTS regularly gave WaMu a CAMELS rating of “2” out of “5,” which signaled to the bank and other regulators that WaMu was fundamentally sound. Federal bank regulators are charged with ensuring that U.S. financial institutions operate in a safe and sound manner. However, in the years leading up to the financial crisis, OTS failed to prevent Washington Mutual’s increasing use of high risk lending practices and its origination and sale of tens of billions of dollars in poor quality home loans. The agency’s failure to adequately monitor and regulate WaMu’s high risk lending stemmed in part from an OTS regulatory culture that viewed its thrifts as “constituents,” relied on them to correct the problems identified by OTS with minimal regulatory intervention, and expressed reluctance to interfere with even unsound lending and securitization practices. OTS displayed an unusual amount of deference to WaMu’s management, choosing to rely on the bank to police itself. The reasoning appeared to be that if OTS examiners simply identified the problems at the bank, OTS could then rely on WaMu’s assurances that problems were corrected, with little need for tough enforcement actions. It was a regulatory approach with disastrous results. CHRG-110hhrg44900--157 Secretary Paulson," Well, I would say this, whether it reviews in advance or not, I believe that if we had a regulator that was focused solely, completely on consumer protection and investor protection, it is difficult to imagine we would have had some of the abuses that we have had today. In terms of, we did not intend when we set out this Blueprint to get involved in exactly what this regulator would do and how it would do it, but if that was the pure focus, there is no doubt that it would be involved there. I think in the meantime, because that is a long-term vision, the things that we are seeing done by the Fed right now in terms of the HOPE NOW Alliance and in terms of looking at unfair lending practices, it is very, very essential. And again, in the meantime, I do hope, because I think it is unlikely that anytime soon we are going to supplant the State regulation of mortgage origination, I do encourage you, even if it is in the next Congress, to pick up the idea of this mortgage origination commission which will be able to work with States and evaluate the State programs and do it in a very transparent way, and I think that may help. " CHRG-111shrg50564--73 Mr. Volcker," Well, I won't profess to know the answer to that question with any reliability. It is going to take some time. We are not at the end of this business. And I think the immediate challenge is to provide some basis for greater confidence in the banking system and in lending. You know, it is kind of a spiraling process. The worse the economy gets, the less confidence there is, and the less confidence there is, the more difficult creditors and the worse the economy gets. So we have got to break into that cycle, and I think that is why I emphasized earlier the importance of dealing with the banking situation. It is going to cost some money. And if we do that effectively, then I think we could begin seeing the end of this. But it is, I don't know how many months, but it is not going to be overnight. Senator Bennett. It is not going to be soon---- " CHRG-111shrg62643--127 Mr. Bernanke," So there are data. Some of the data that we look at are a survey we do of 100 banks of loan officers and ask them whether they are tightening or easing standards, and they have been tightening for quite a while. So some of this surely is the banks' decision to tighten their lending standards. Now, recently, we have seen a cessation of tightening. That is, standards are no longer getting tighter. In some places, they are getting a little bit easier. So there is some stabilization there. We have also seen that small business lending is still dropping, but more slowly than before. So there are some indications that credit is becoming more available. Whether that has to do with regulatory decisions or whether it has to do with the fact that the economy is looking a little better is hard to say. Senator Bennet. I wanted to, just before I lose my chance here, also talk a little bit about the deficit and the debt situation. You talked about how the markets need to see a compelling--that we are taking it seriously. You have testified to that before. Actually, they are not the only ones. My daughters have heard me talk about this so much that they are enormously agitated about this question themselves, because they don't want to make these decisions that we are failing to make. But Congress after Congress after Congress have failed to make the decisions, and we now have $13 trillion debt on the balance sheet. What is appalling about it, among other things, is that we really don't have much to show for it, I don't think. We haven't invested in this country's infrastructure, for example. We haven't built the 21st century energy infrastructure that we need. So the hole is actually even greater than I think we imagine from a fiscal point of view. You mentioned at the very beginning the difficulty of having one Congress bind the next Congress and the next Congress. What kind of thing do you think about when you are not here but in your office that we could do that would show that we are serious about this, that we are actually putting ourselves on a path of sustainability, knowing that we can't fix this overnight? What is it that we--what will do we need to demonstrate and how do we need to demonstrate it? I realize--I am not asking for specific policies, but what do you say to yourself? " FinancialCrisisInquiry--839 ZANDI: I think two fundamentals—the question being where were the regulators. I think the first point is that the Federal Reserve is the key regulator, and it had a philosophical predisposition towards regulation during this period—had faith in the securitization process that failed us. But, secondly, the regulatory structure also failed us. The Federal Reserve, along with other regulators, would come together and issue interagency guidance with respect to all kinds of lending activity. And this is a very cumbersome process to get consensus among these groups of regulators is very difficult. And to get explicit guidance is nearly impossible. And you can see that, in—with respect to the guidance issued on Alt-A and ultimately subprime, it came well after the fact. So it was this philosophical predisposition but I think it was also the structure of our regulatory framework that doomed us to not having this regulatory oversight. CHRG-111shrg50814--172 Mr. Bernanke," I must not be very clear. I apologize. First of all, I think ``zombie'' was not an appropriate description for any of the banks. I think they all have substantial franchise value. They are all lending. They are all active. They have substantial international franchises. So I don't think that is an accurate description. But the point I want to make is that even as we put capital into these banks, we are not standing by and letting them do what they want, to take risks or to continue to operate in an inefficient manner. We are going to be very tough on them to make sure, along with the private shareholders who still have an interest, that they take whatever drastic steps are necessary to restore themselves to profitability, and that is what is going to make them eventually interesting to private investors. " CHRG-110hhrg46593--137 Secretary Paulson," Okay. Let me also say, for the record, strongly, there was no authority, there was no law that would have let us save Lehman Brothers. We did not have the TARP then. The Fed did not have any authority to lend if it was not properly secured. So, now, with regard to the automotive industry, this Administration has made it clear that, through modifications to the Department of Energy bill, 136, we believe that there is a path that leads towards a viability in the auto industry. And we think these funds should be tapped only if they lead to a long-term viable solution. And, no, we do not believe that it is desirable to have an auto company fail with the economy in its current situation. " fcic_final_report_full--257 COMMISSION CONCLUSIONS ON CHAPTER 12 The Commission concludes that entities such as Bear Stearns’s hedge funds and AIG Financial Products that had significant subprime exposure were affected by the collapse of the housing bubble first, creating financial pressures on their par- ent companies. The commercial paper and repo markets—two key components of the shadow banking lending markets—quickly reflected the impact of the housing bubble collapse because of the decline in collateral asset values and con- cern about financial firms’ subprime exposure. fcic_final_report_full--130 Selected Investors in CMLTI 2006-NC2 A wide variety of investors throughout the world purchased the securities in this deal, including Fannie Mae, many international banks, SIVs and many CDOs. Tranche Original Balance (MILLIONS) Original Rating 1 Spread 2 Selected Investors A1 $154.6 AAA 0.14% Fannie Mae A2-A $281.7 AAA 0.04% Chase Security Lendings Asset Management; 1 investment fund in China; 6 investment funds A2-B $282.4 AAA 0.06% Federal Home Loan Bank of Chicago; 3 banks in Germany, Italy and France; 11 investment funds; 3 retail investors A2-C $18.3 AAA 0.24% 2 banks in the U.S. and Germany M-1 $39.3 AA+ 0.29% 1 investment fund and 2 banks in Italy; Cheyne Finance Limited; 3 asset managers M-2 $44 .0 AA 0.31% Parvest ABS Euribor; 4 asset managers; 1 bank in China; 1 CDO M-3 $14.2 AA- 0.34% 2 CDOs; 1 asset manager M-4 $16.1 A+ 0.39% 1 CDO; 1 hedge fund M-5 $16.6 A 0.40% 2 CDOs M-6 $10.9 A- 0.46% 3 CDOs M-7 $9.9 BBB+ 0.70% 3 CDOs M-8 $8.5 BBB 0.80% 2 CDOs; 1 bank M-9 $11.8 BBB- 1.50% 5 CDOs; 2 asset managers M-10 $13.7 BB+ 2.50% 3 CDOs; 1 asset manager M-11 $10.9 BB 2.50% NA CE $13.3 NR Citi and Capmark Fin Grp P, R, Rx: Additional tranches entitled to specific payments 1 Standard & Poor’s. 2 The yield is the rate on the one-month London Interbank Offered Rate (LIBOR), an interbank lending interest rate, plus the spread listed. For example, when the deal was issued, Fannie Mae would have received the LIBOR rate of 5.32% plus 0.14% to give a total yield of 5.46%. SOURCES: Citigroup; Standard & Poor’s; FCIC calculations Figure . SENIOR 78% MEZZANINE 21% EQUITY 1%  million, went to more than  institutional investors around the world, spread- ing the risk globally.  These triple-A tranches represented  of the deal. Among the buyers were foreign banks and funds in China, Italy, France, and Germany; the Federal Home Loan Bank of Chicago; the Kentucky Retirement Systems; a hospital; and JP Morgan, which purchased part of the tranche using cash from its securities- lending operation.  (In other words, JP Morgan lent securities held by its clients to other financial institutions in exchange for cash collateral, and then put that cash to work investing in this deal. Securities lending was a large, but ultimately unstable, source of cash that flowed into this market.) fcic_final_report_full--529 The most controversial element of the vast increase in NTMs between 1993 and 2008 was the role of the CRA. 149 The act, which is applicable only to federally insured depository institutions, was originally adopted in 1977. Its purpose in part was to “require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operations of such institutions.” The enforcement provisions of the Act authorized the bank regulators to withhold approvals for such transactions as mergers and acquisitions and branch network expansion if the applying bank did not have a satisfactory CRA rating. CRA did not have a substantial effect on subprime lending in the years after its enactment until the regulations under the act were tightened in 1995. The 1995 regulations required insured banks to acquire or make “flexible and innovative” mortgages that they would not otherwise have made. In this sense, the CRA and Fannie and Freddie’s AH goals are cut from the same cloth. There were two very distinct applications of the CRA. The first, and the one with the broadest applicability, is a requirement that all insured banks make CRA loans in their respective assessment areas. When the Act is defended, it is almost always discussed in terms of this category—loans in bank assessment areas. Banks (usually privately) complain that they are required by the regulators to make imprudent loans to comply with CRA. One example is the following statement by a local community bank in a report to its shareholders: Under the umbrella of the Community Reinvestment Act (CRA), a tremendous amount of pressure was put on banks by the regulatory authorities to make loans, especially mortgage loans, to low income borrowers and neighborhoods.  The regulators were very heavy handed regarding this issue.  I will not dwell on it here but they required [redacted name] to change its mortgage lending practices to meet certain CRA goals, even though we argued the changes were risky and imprudent. 150 On the other hand, the regulators defend the act and their actions under it, and particularly any claim that the CRA had a role in the financial crisis. The most frequently cited defense is a speech by former Fed Governor Randall Kroszner on 147 Fannie Mae Foundation, “Making New Markets: Case Study of Countrywide Home Loans,” 2000, http://content.knowledgeplex.org/kp2/programs/pdf/rep_newmortmkts_countrywide.pdf. 148 “Questions and Answers from Countrywide about Lending,” December 11, 2007, available at http:// www.realtown.com/articles/article/print/id/768. 149 150 12 U.S.C. 2901. Original letter in author’s files. 525 CHRG-111hhrg53234--83 Mr. Kohn," I don't think the fact that our power might be expanded is by itself a reason to relinquish the consumer authority. My personal view is that the Federal Reserve is well placed to do a good job in the public interest on consumer regulation. These are congruent, with good consumer regulation, give us a way of balancing issues having to do with consumer regulation. I think in the last years we have stepped up to the plate on high-cost mortgages, on consumer credit. We have revised truth in lending regulations coming out at the end of this month. I would hope that the Congress might think about whether there are ways of strengthening the Federal Reserve's commitment to consumer regulation as an alternative to creating a new regulator. " CHRG-111shrg51290--39 Chairman Dodd," Thank you very much. Senator Shelby? Senator Shelby. Thank you. If we make bad loans and they are securitized, you don't have bad securities. That is a given, is it not? And that is where we are today, isn't it? Ms. Seidman, the suitability standard for credit products, in your written testimony, you state, quote, ``the difference between a good product and a bad one can be subtle, especially if the consumer doesn't know where to look.'' You then suggested that perhaps a suitability standard such as the one used in the securities arena should be fashioned for consumer credit transactions. Who would be the person charged with carrying out that standard? Would it be the loan officers in a bank? How would this apply to credit card transactions and so forth? And how would the regulators enforce this provision? Ms. Seidman. I think--first of all, with respect to mortgage lending, most mortgage lending, particularly purchase money mortgages, is still done on a face-to-face basis and I see no difference in terms of the responsibility that a loan officer or a broker or somebody else would have with respect to the suitability of a mortgage product compared to the securities side. In fact, it is probably the case that the originator of the mortgage should be acquiring at least as much information as the broker acquires in order to understand what product is right. The credit card situation is somewhat more difficult, but I do think that in general, or in the old days, at least, one actually had to fill out a fairly extensive form in order to be able to get a credit card. I think that there are ways of determining from that kind of information--what is my income source, what other kinds of debts do I have--whether a credit card of one type or another is the most appropriate for that consumer. You know, we would have to work it through. There would be uncertainty, but this is not rocket science. This is really not very far away from the ability to pay standard. It just says, not only should you look at whether in the worst possible circumstances the borrower could pay, but also try to figure out what is good for that borrower. Senator Shelby. Professor McCoy, the subject would be the GSE affordable lending practices. You explain in your testimony, Professor McCoy, why you believe reckless lenders will crowd out good lenders. A variety of Federal efforts are aimed at providing borrowers alternatives. For instance, Fannie Mae and Freddie Mac have often claimed as their mission right here in this Committee the expansion of responsible home ownership, which we have supported--responsible home ownership. Do you believe that Fannie Mae and Freddie Mac's purchase of private-label subprime mortgage-backed securities added to borrowers' options for responsible home ownership? Ms. McCoy. Senator Shelby, first of all, while Fannie and Freddie starting around 2005 joined the party with respect to origination standards, they didn't start the party. They were one of these conventional good guys who---- Senator Shelby. They got on the truck, didn't they? Ms. McCoy. They got on the truck, but they didn't start it and it is really the private-label market that started it. I did find it highly problematic that Fannie and Freddie purchased as part of their investment portfolios subprime mortgage-backed securities. They were among many other global investors, part of the glut of money that drove the securitization crisis and the drop in lending standards, but they do not deserve sole blame. Senator Shelby. Sure. So the rationale for the GSEs providing liquidity to the subprime market, although later, rather than focusing on the purchase of whole loans, exacerbated that problem, did it not? Ms. McCoy. Yes, I think that is right. But the purchase of loans by Fannie and Freddie is a very, very important device and I wouldn't want that to be compromised in the efforts to remove the investment portfolio authority. Senator Shelby. Absolutely. I agree with that. But on the other hand, they should purchase good loans or responsible loans, shouldn't they? Ms. McCoy. Yes. Yes. And they were doing that around 2000. They were---- Senator Shelby. Oh, they were doing great for a while. Ms. McCoy. Right. Senator Shelby. But---- Ms. McCoy. Things changed. Senator Shelby. They got on the truck. Sure. Mr. Bartlett, you would suppose that financial institutions have strong incentives well beyond legal compliance to treat their customers well, treat them fairly, and to maintain long-term relationships. In other words, you take care of your customers and your customers will be around. In other words, consumer protection should amount to consumer retention, is what people try to do, I hope. Yet it seems that financial institutions sometimes have not chosen to pursue this course. How can we realign the incentives so that they will be realigned in the future? " CHRG-111hhrg56766--124 Mr. Bernanke," Of course. " Mr. Castle," --and what they're doing with the money they get and either return of capital on the repayment of loans or the issuance of lending out to other banks. Let me ask a different question. Have Fannie Mae and Freddie Mac served their purpose? They are very expensive to this government at this point and the business of packaging mortgages and being able to sell them off could be done perhaps differently than that and, you know, this goes back--maybe this is a question I should have asked 10 years ago, I suppose. But the bottom line is that should we be looking at some different way of dealing with the financing of mortgage structures in this country or do you still believe that they serve that basic purpose and we should leave them intact, even if they have the problems they seem to have? " fcic_final_report_full--463 Figure 1 below, based on the data of Robert J. Shiller, shows the dramatic growth of the 1997-2007 housing bubble in the United States. By mid-2007, home prices in the U.S. had increased substantially for ten years. The growth in real dollar terms had been almost 90 percent, ten times greater than any other housing bubble in modern times. As discussed below, there is good reason to believe that the 1997- 2007 bubble grew larger and extended longer in time than previous bubbles because of the government’s housing policies, which artificially increased the demand for housing by funneling more money into the housing market than would have been available if traditional lending standards had been maintained and the government had not promoted the growth of subprime lending. Figure 1. The Bubble According to Shiller That the 1997-2007 bubble lasted about twice as long as the prior housing bubbles is significant in itself. Mortgage quality declines as a housing bubble grows and originators try to structure mortgages that will allow buyers to meet monthly payments for more expensive homes; the fact that the most recent bubble was so long-lived was an important element in its ultimate destructiveness when it deflated. Why did this bubble last so long? Housing bubbles deflate when delinquencies and defaults begin to appear in unusual numbers. Investors and creditors realize that the risks of a collapse are mounting. One by one, investors cash in and leave. Eventually, the bubble tops out, those who are still in the game run for the doors, and a deflation in prices sets in. Generally, in the past, this process took three or four years. In the case of the most recent bubble, it took ten. The reason for this longevity is that one major participant in the market was not in it for profit and was not worried about the risks to itself or to those it was controlling. It was the U.S. government, pursuing a social policy—increasing homeownership by making mortgage credit available to low and moderate income borrowers—and requiring the agencies and financial institutions it controlled or could influence through regulation to keep pumping money into housing long after the bubble, left to itself, would have deflated. Economists have been vigorously debating whether the Fed’s monetary policy in the early 2000s caused the bubble by keeping interest rates too low for too long. Naturally enough, Ben Bernanke and Alan Greenspan have argued that the Fed was not at fault. On the other hand, John Taylor, author of the Taylor rule, contends that the Fed’s violation of the Taylor rule was the principal cause of the bubble. Raghuram Rajan, a professor at the Chicago Booth School of Business, argues that the Fed’s low interest rates caused the bubble, but that the Fed actually followed this policy in order to combat unemployment rather than deflation. 19 Other theories blame huge inflows of funds from emerging markets or from countries that were recycling the dollars they received from trade surpluses with the U.S. These debates, however, may be missing the point. It doesn’t matter where the funds that built the bubble actually originated; the important question is why they were transformed into the NTMs that were prone to failure as soon as the great bubble deflated. Figure 2 illustrates clearly that the 1997-2007 bubble was built on a foundation of 27 million subprime and Alt-A mortgages and shows the relationship between the cumulative growth in the dollar amount of NTMs and the growth of the bubble over time. It includes both GSE and CRA contributions to the number of outstanding NTMs above the normal baseline of 30 percent, 20 and estimated CRA lending under the merger-related commitments of the four large banks—Bank of America, Wells Fargo, Citibank and JPMorgan Chase—that, with their predecessors, made most of the commitments. As noted above, these commitments were made in connection with applications to federal regulators for approvals of mergers or acquisitions. The dollar amounts involved were taken from a 2007 report by the NCRC, 21 and adjusted for announced loans and likely rates of lending. The cumulative estimated CRA 19 CHRG-111hhrg52261--163 Mr. Roberts," I would agree with you wholeheartedly that securitization has been a part of the problem that has been created in our economy. And I would agree with you wholeheartedly that securitization is one of those avenues that has allowed greater lending to take place. It has provided additional liquidity, additional funding to come into financial institutions that have allowed for continuing loans to take place. It would seem to me, however, that it has been a part of what has caused some systemic risk; and I think that we need to consider what regulations that we can put into place that would not allow the issues that have happened over the past 12 months to happen again. But that does not mean throwing the baby out with the bathwater and stopping securitization. That has been a very important factor in the ability of this country to go forward. " CHRG-111shrg55117--117 Mr. Bernanke," Well, we agree with you that the community banks are very important, and as I was mentioning to one of your colleagues, in many cases where large banks are withdrawing from small business lending or from local lending, the community banks are stepping in, and we recognize that and think it is very important. The Federal Reserve provides similar support to small banks that we do to large banks in that you mentioned liquidity. We provide discount window loans or loans through the Term Auction Facility and smaller banks are eligible to receive that liquidity at favorable interest rates. It is not our department, but the Treasury has been working to expand the range of banks which can receive the TARP capital funds and they have made significant progress in dealing with banks that don't trade publicly. We have worked with smaller banks to try to address some of the regulatory burden that they face, and we have a variety of partnerships, for example, with minority banks to try to give them assistance, technical assistance, and the like. I agree. If I were a small banker, I would be a little bit annoyed because the big banks seem to have gotten a lot more of the attention because it was the big banks and their failures that have really threatened our system. And that is why it is very important as we do financial regulatory reform that we address this too big to fail problem so that we don't have this unbalanced situation where you either have to bail out a big bank or else it brings down the system. That is not acceptable and we have to fix that. But we are working with small banks, and personally, I always try to meet with small bank leaders and the ICBA and other trade associations, and I agree with you that they are very important. They are playing a very important role right now in our economy. Senator Kohl. You say you agree that they are important, that they play an important role in our economy. Are you satisfied that we are doing proportionately as much for small community banks as we are doing for the large banks? " CHRG-110hhrg46591--422 Mr. Washburn," I think you are correct. The lack of that interconnectedness is what made the community bank model successful. And there were failures back in the time you mentioned. But if you look at the overall economy we are still doing--or the overall industry, we are still doing the same thing we have done for years. I mentioned earlier we are lending money to people who pay it back. And we offer some peripheral services that are tied into our client base. So us extending what we normally do, extending into markets we don't understand and into products and services we don't understand, we shied away from that. I don't see that changing going forward, so yes, I think that is correct. " CHRG-110hhrg46596--114 Mr. Kashkari," We are in the process of working with the regulators to monitor that. As I indicated in my opening statement, there are indicators of the credit crisis softening, some confidence returning. It is going to take time. Think of it this way: Remember the economic stimulus checks that Americans got? If a homeowner or a person was nervous about their economic situation, and they got that check, they would be more likely to put it in the bank than to go out and spend it. And so we need to see confidence return to the system to really see the lending take off, and we need to get all the capital in the system. It is not going to happen as fast as any of us would like, but it is going to happen much faster for us having taken this action than if we hadn't. " CHRG-111hhrg46820--120 Chairwoman Velazquez," Mr. Merski, I would like to ask you a last question, since we are going to be dealing with the TARP reform on Financial Services where I serve. Although this recession started from the collapse of the mortgage lending, recent economic indicators have raised significant fears about witnesses in other types of financing, particularly commercial real estate and consumer credit. Do you believe that efforts such as the Treasury's capital purchase plan or the Fed's TALF will be adequate to help small banks weather the extended economic downturn if credit defaults continue to spread? " CHRG-111hhrg56767--153 Mr. Donnelly," If you see them in your travels, as Mrs. McCarthy said, you are a widely traveled man, in your travels, the biggest problem we find is the ability to obtain credit, and we have company after company, not only in my home State of Indiana, but elsewhere, who cannot employ additional people because they cannot get the credit to go out and buy an additional piece of equipment or because their line of credit has been reduced, that if these funds were used for credit purposes instead of bonus purposes, it would be a great way to let the American people know we are all in in bringing this economy back. If you have $20 billion plus in bonuses that are given out, if that was used for lending purposes, think of the job creation that could cause. The only other question I have for you is this, I read an article where it said a gentleman that you talked to about compensation and the mention of $9 million, and he said to you, why don't you like me? Is there any connection between the reality of what the rest of the people in this country go through and this kind of mindset? " fcic_final_report_full--635 Perez, No. 50 2008 CA040805XXXX MB (Fla. Cir. Ct. Dec. 10, 2009), pp. 7, 10. 30. See, for example, Dwayne Ransom Davis and Melisa Davis v. Countrywide Home Loans, Inc.; Bank of America, N.A.; BAC GP LLC; and BAC Home Loans Servicing, LP, 1:10-cv-01303-JMS-DML (S.D. Ind. October 19, 2010). 31. Congressional Oversight Panel, “November Oversight Report: Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation,” November 16, 2010, p. 20. 32. See, e.g., Mortg. Elec. Registry Sys. v. Johnston, No. 420-6-09 Rdcv (Rutland Co. Vt. Super. Ct. Oct. 28, 2009), holding that MERS did not have standing to initiate foreclosure because the note and mortgage had been separated. 33. The Honorable F. Dana Winslow, written testimony before the House Committee on the Judiciary, Foreclosed Justice: Causes and Effects of the Foreclosure Crisis, 111th Cong., 2nd sess., December 2, 2010, pp. 2, 4. 34. Order, Objection to Claims of Citibank, N.A. 4-6-10, (Bankr. E.D. Cal. May 20, 2010), p. 3. The or- der cites In re Foreclosure Cases, 521 F. Supp. 2d 650 (S.D. Oh. 2007); In re Vargas, 396 B.R. 511, 520 (Bankr. C.D. Cal. 2008); Landmark Nat’l Bank v. Kesler, 216 P.3d 158 (Kan. 2009); LaSalle Bank v. Lamy, 824 N.Y.S.2d 769 (N.Y. Sup. Ct. 2006). 35. Winslow, written testimony before the House Committee on the Judiciary, pp. 2–3. 36. See John T. Kemp v. Countrywide Home Loans, Inc., Case No. 08-18700-JHW (D. N.J.), pp. 7–8. 37. Grais, interview. 38. Adam J. Levitin, associate professor of law, Georgetown University Law Center, testimony to Sen- ate Committee on Banking, Housing, and Urban Affairs, Problems in Mortgage Servicing from Modifica- tion to Foreclosure, 111th Cong., 2nd sess., November 16, 2010, p. 20. 39. Congressional Oversight Panel, “November Oversight Report,” pp. 5, 7. 40. Katherine Porter, professor of law, University of Iowa College of Law, written testimony before the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP), COP Hearing on TARP Foreclosure Mitigation Programs, October 27, 2010, p. 8. 41. Levitin, written testimony before the Senate Committee on Banking, Housing, and Urban Affairs, p. 20. 42. Erika Poethig, written testimony for the House Subcommittee on Housing and Community Op- portunity, Impact of the Foreclosure Crisis on Public and Affordable Housing in the Twin Cities, 111th Cong., 2nd sess., January 23, 2010, p. 5. 633 43. National Association for the Education of Homeless Children and Youth (NAEHCY) and First Fo- cus, “A Critical Moment: Child and Youth Homelessness in Our Nation’s Schools,” July 2010, p. 2. In early 2010, NAEHCY and First Focus conducted a survey of 2,200 school districts. When they were asked the reasons for the increased enrollment of students experiencing homelessness, 62% cited the economic downturn, 40% attributed it to greater school and community awareness of homelessness, and 38% cited problems stemming from the foreclosure crisis. 44. Dr. Heath Morrison, testimony before the FCIC, Hearing on the Impact of the Financial Crisis— State of Nevada, session 4: The Impact of the Financial Crisis on Nevada Public and Community Services, September 8, 2010, transcript, pp. 261–64. 45. Gail Burks, testimony before the FCIC, Hearing on the Impact of the Financial Crisis—State of Nevada, session 3: The Impact of the Financial Crisis on Nevada Real Estate, September 8, 2010, tran- script, pp. 230–31. 46. Karen Mann, president and chief appraiser, Mann and Associates Real Estate Appraisers & Con- sultants, written testimony for the FCIC, Hearing on the Impact of the Financial Crisis—Sacramento, session 2: Mortgage Origination, Mortgage Fraud and Predatory Lending in the Sacramento Region, Sep- tember 23, 2010, p. 12; oral testimony, p. 66. 47. Dawn Hunt, homeowner in Cape Coral, FL, interview by FCIC, December 20, 2010. 48. Zip code 33991, default, foreclosures and REO, S&P Global Data Solutions RMBS database, July 2010. 49. Hunt, interview. CHRG-111hhrg56766--204 Mr. Hinojosa," Thank you, Mr. Chairman. Chairman Bernanke, welcome, and thank you for coming to visit with us and give us an update. I represent the 15th Congressional District of Texas, and I refer to it as deep south Texas. We are along the Texas-Mexico border, and our county is about 750,000 people and it has the highest concentration of--about 89 percent Hispanics. Hidalgo County is one of the poorest. I'm going to preface my question by saying our area was plagued by a double digit unemployment for about 35 years before I came to Congress. And to give you an idea, in December of 1990, the unemployment rate was much higher than Detroit, Michigan, is today. It was 29 percent. In January of 1996, when I came to Congress, it was 24 percent. The unemployment rate dropped over the 14 years that I have been in Congress. In April 2008, it was 6 percent. So even though we have seen an improvement, and today even though it is 11 percent, it is very close to the national average. So what do we do to try to bring it back down to 6 percent when the banks tell me--the community banks and the large banks say that they are lending money, but there is no proof that there is because so many businesses have closed, so many signs for rent, buildings that are now empty and spaces that are empty? Then we get the credit banks representatives coming to visit me and say that they want us to support their mission statement to expand it so that they can lend money to small and medium-sized businesses. And I'm torn between supporting that idea. I heard the President say just recently that there was going to be $20 billion from the TARP money being repaid to us in Federal Government available to make money available to the small and medium businesses. Tell me, what is the answer for regions like mine, very poor, very large, and that we can't seem to have access to capital? " CHRG-110shrg50416--117 Mr. Lockhart," What we need to me from the mortgage markets in particular is to get the capital markets working again, and that is the bank liquidity being put in. We need to be able to bring down mortgage rates. We need to be able to borrow longer term for some of these financial institutions. The key thing to me is to stimulate the financial institutions so they can start lending again. Ms. Duke. And given that it is my turn to defer, I will defer to the Chairman of the Federal Reserve, who on Monday did express support. Senator Johnson. Mr. Lockhart, what guidance have you given Fannie Mae and Freddie Mac regarding loan restructuring? And what efforts are being made by Freddie and Fannie to restructure loans? " CHRG-110hhrg46593--78 Secretary Paulson," I will say to you that it is hard to imagine, no matter what program we have, that we are not going to have a good number of foreclosures when you look at what we have gone through here and look at the excesses and look at the shoddy lending practices. Foreclosures take place for a number of reasons. Some of them take place because speculators no longer want to stay in their home. But I think the question to really ask, which is one that we are all asking, is, why are foreclosures taking place when people, homeowners want to stay in their home and they are willing to make an effort to stay in their home and they can afford to stay in their home? And this is, I will tell you, a-- Ms. Velazquez. Sir, I am the one asking the questions here. " FOMC20070918meeting--34 32,MR. DUDLEY.," On the question about volume, there’s no question that volume went up considerably in the overnight market—about 20 percent, as near as we can judge over this period. Since the term market was mostly shut down, especially in term fed funds, there has been very little in term fed funds trading. You can almost infer that most volume is done overnight but probably 20 percent or so is done term. Almost all of that crowded back into the overnight market. So there was an increase, as near as we can measure, of about 20 percent in overnight fed funds activity over the past month compared with normal. Now, in terms of who is actually borrowing at term—well, very few people were actually borrowing at term. There was probably a bit of a “lemons” problem in the term market in the sense that—because term rates were elevated and those rates were not very attractive economically—your wanting to borrow in the term market was a sign that you were probably not in good shape in terms of your own liquidity position. I think that contributed to the shutdown of the term market. Because of the economics really—why are you doing that unless you’re in bad shape and you really need the funds? I think that contributed to the shrinking of the term market. Really two things were going on. One, banks that had the funds to lend didn’t want to lend term because they weren’t sure what they would need that money for down the road, depending on what was going to come onto their balance sheets. Two, people who wanted to borrow term were the least attractive borrowers. That caused the market to essentially dry up over this period. I think it is starting to come back. We’re not back to normal because obviously the term rates are still somewhat elevated relative to the overnight rate. So it’s still not that attractive from an economic perspective, but it is certainly more attractive than it was even a week ago." CHRG-111hhrg67816--116 Mr. Leibowitz," It is really a combination of different areas. It is 7 mortgage advertising, 5 pay-day loan cases--6 pay-day loan cases, a couple of fair lending cases, mortgage servicing cases, 9 foreclosure rescue scam cases, and 12 credit counseling cases, and 11 debt collection cases. Those are the--and, sorry, 17 credit repair cases as well. So it is a combination of--it is different areas mostly within our financial services group, and then we have had our regions. We have 7 regional offices around the country doing more in this area because it is a high priority for us. " CHRG-111shrg52619--153 Mr. Fryzel," I just have one comment. If the Congress takes the action and puts in place a systemic regulator, that is certainly not going to stop or prevent some of the problems that we have now out in the financial services industry. As Chairman Bair talked about, the fact that she has asked for an increase in the lending from the Treasury, as we have at NCUA, which is paramount to us taking care of the problems between now and the time the systemic risk regulator is able to take over and watch over all of our industries. So that there are tools that we are going to be coming back to the Congress for between now and then that the regulators are going to need to solve the problems that are existing out there now. We still need things to get those solved. " CHRG-111hhrg54872--254 Mr. Menzies," Pretty simple answer, you don't make any money on a defaulted loan, and you lose a relationship. So when you underwrite a loan, you don't underwrite a loan with the hopes that it will default and you can go collect legal fees and that sort of thing. But, Congressman, let's understand what really caused the crisis. Do we believe that it was community banks and lenders who live with the people that they lend to? They go to Rotary with them. They sit on the hospice board with them. They live with them. Underwriting products and sticking them into SIVs on Wall Street that are then rated by rating agencies that don't know what they are looking at and selling to investors that don't understand what they are buying; do we really believe that the community banking industry was a player in that game? " fcic_final_report_full--591 Mae and Freddie Mac in the Context of the Mortgage,” February 1, 2010. 199. “HUD Announces New Regulations to Provide $2.4 Trillion in Mortgages for Affordable Hous- ing for 28.1 Million Families,” Department of Housing and Urban Development, press release, October 31, 2000. 200. Mudd, interview. 201. Robert Levin, interview by FCIC, March 17, 2010. 202. “HUD Finalizes Rule on New Housing Goals for Fannie Mae and Freddie Mac,” Department of Housing and Urban Development press release, November 1, 2004. 203. Mudd, testimony before the FCIC, Hearing on Subprime Lending and Securitization and Gov- ernment-Sponsored Enterprises (GSEs), day 3, session: 1 Fannie Mae, April 9, 2010, transcript, pp. 63– 64. 204. See FHFA, “Annual Report to Congress 2009,” pp. 131, 148. The numbers are for mortgage assets + outstanding MBS guaranteed. Total assets + MBS are slightly greater. 205. OFHEO, “2008 Report to Congress,” April 15, 2008. 206. Robert Levin, interview by FCIC, March 17, 2010; Robert Levin, testimony before the FCIC, Hearing on Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs), day 3, session 1: Fannie Mae, April 9, 2010, transcript, pp. 68–72. 207. Tom Lund, interview by FCIC, March 4, 2010. 208. Dallavecchia, interview. 209. Todd Hempstead, interview by FCIC, March 23, 2010. 210. Kenneth Bacon, interview by FCIC, March 5, 2010. 211. Stephen Ashley, interview by FCIC, March 31, 2010. 212. Levin, interview. 213. Mike Quinn, interview by FCIC, March 10, 2010. 214. Ashley, interview. 215. Armando Falcon, testimony before the FCIC, Hearing on Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs), day 3, session 2: Office of Federal Housing Enterprise Oversight, April 9, 2010, transcript, pp. 155–56, 192; .written testimony, p. 10. 216. Lockhart, written testimony for the FCIC, April 9, 2010, p. 6;; Lockhart, testimony before the CHRG-111hhrg53242--50 Mr. Baker," I would not characterize it quite that way. I won't attempt to argue your perspective relative to AIG. I will say that there were other circumstances that contributed mightily to their demise. But if I may, by way of best response, give you an example of concern I would have with regard to the legislation, and then quickly add there are things we can do that would help with your concerns relative to transparency, relative to centralized clearing, exchanges, collateral segregation, enhanced regulatory authorities, I think we can get to the safe point you would wish to go. But let me give the quickest, shortest example of the concern I have that I think you will find as a legitimate validating reason. If there is a pension who has a variety of investments, and let's just call one portfolio a technology-heavy, long-only type of investment strategy. But the pension is worried about having to meet its monthly flat obligations to write those pension checks. We all know there has been extreme volatility in the markets. The pension then wants to protect against that volatility in that technology portfolio. They turn around to a bank and say, we would like to buy credit index protection from you. No need to get into the definition, but it is a way to hedge against the volatility in that broad price swing of those technology stocks, enabling them for a small cost to make those monthly payments to retirees. Not only is that a credit default swap product, it could be defined--and I worry about this--as a naked credit default swap, and here is why: The pension might have 20 technology stocks in that portfolio. When you buy the credit index protection, it might have 100 companies in it, and you would have no underlying relationship, no bond, no debt, nothing with those 80 firms. And technically, if Congress would move ahead in this regard, you might preclude the pension from getting access to the credit index protection. It even gets worse. Because the bank then, because of regulator pressure, wanting to lower its risk profile, will turn that credit index exposure over to a hedge fund. The hedge fund will buy it and then perhaps need to go long on technology stocks because it just shorted the credit index. Amazing as it may sound, people will go buy IBM stock and then turn around and at the same time go short Apple. Now, it is not because they believe Apple is going to go south tomorrow and they are actually doing predatory shorting. They are doing it because they might be wrong on the long side on IBM, but since they have strong belief in the technology sector, they cover both ways. Hence, the definition of hedge fund. We can provide a lot more technical analysis to your staff. The SEC's Office of Risk Analysis has some really good work on the contributing causes to AIG's demise, and I think it would be very helpful in the appropriate context to have that made available to you. Ms. Waters. You see what I meant about Mr. Baker? He just gave us a lesson in credit default swaps and indexes that we probably have not even discussed before. I thank you very much. Let me just complete my remarks by saying I am interested in trying to find out who benefits from bankruptcy with these credit default swaps. " CHRG-111hhrg53244--174 Mr. Klein," Thank you, Mr. Chairman. And thank you, Mr. Chairman, for being with us today. I am going to bring the conversation back to what I continue to believe are the most current issues, and that is home foreclosures and lending to businesses. I have been a believer from the beginning that, when we started this process on dealing with the recession and dealing with the banking crisis, I think you and others said we need to deal with both, you can't do one without the other, can't make the investment in the recovery without making liquidity available to businesses, and you can't fix the banks without stimulating and getting things moving on the private side. What I also believe, and I support your position, is that we are going to have a slow, maybe a little bumpy recovery, but it is probably moving in the right direction. And what our goal, of course, as people in the public and private side, is to mitigate or reduce the amount of time it takes for the natural cycles to work their way through. That being said, I am from Florida, as you and I have talked about, and we are in a very precarious time. The banks are overexposed, in many ways. The residential markets are overexposed. And we do not see enough activity, movement. And that is speaking to Realtors on short sales and workouts and things like that on the residential side; and on the business side, real estate and/or business, the lending practices. And there is a lot of frustration out there, maybe justified, maybe not justified, but certainly intuitively justified, that banks that received Federal assistance--and maybe they are in a separate category--but that they have a higher responsibility to work out this scenario. Nobody is pushing them to make unreasonable and unjustified underwriting decisions. But they really are not part of the process of solving the problem. Specifically on the foreclosure area, I think it was the Federal Reserve of Boston, did a paper that talked about 3 percent of the serious delinquent loans have been resolved since the 2007 period of time. That obviously is not working in any successful way. Can you share with us, whether it is the Federal Reserve or whether just your general experience, what we can do to deal with the foreclosure--what can we do to stimulate the banks to help work this out on a much more efficient, much more quick basis? " CHRG-111hhrg58044--310 CENTER Ms. Wu. Mr. Chairman, Representative Hensarling, and members of the subcommittee, thank you very much for inviting me here today. I am testifying on behalf of the low-income clients of the National Consumer Law Center. And, Mr. Chairman, thank you for holding this hearing about the use of credit reports in areas beyond lending, such as employment and insurance. And we also thank you for inviting us to speak about the need to fix a scrivener's error in the Fair Credit Reporting Act. The use of credit reports in employment is a growing practice, with nearly half of employers involved in it. It's a practice that is harmful and unfair to American workers. For that reason, we strongly support H.R. 3149, and we thank Chairman Gutierrez and Congressman Steve Cohen for introducing it. This bill would restrict the use of credit reports in employment to only those positions for which it is truly warranted, such as those requiring national security or FDIC-mandated clearance. We oppose the unfettered use of credit histories and support H.R. 3149 for a number of reasons. The first and foremost is the profound absurdity of the practice. Considering credit histories in hiring creates a vicious Catch-22 for job applicants. A worker loses her job, and is likely to fall behind on her bills due to lack of income. She can't rebuild her credit history if she doesn't have a job, and she can't get a job if she has bad credit. Commentators have called this a financial death spiral, as unemployment leads to worse credit records, which, in turn, make it harder for the worker to get a job. Second, the use of credit histories in hiring discriminates against African-American and Latino job applicants. We have heard how study after study has documented, as a group, these groups have lower credit scores, including the FTC study that did find the disparities in credit scoring. These are groups that have been disproportionately affected by predatory credit practices, such as the marketing of subprime mortgages and auto loans and, as a result, have suffered higher foreclosure rates, all of which have damaged their credit histories. The Equal Employment Opportunity Commission has expressed concerns over the use of credit histories in employment, and recently sued one company over the practice. Third, there is no evidence that credit history predicts job performance. The sole study on this issue has concluded there isn't even a correlation. Even industry representatives have admitted, ``At this point we don't have any research to show any statistical correlation between what's in somebody's credit report and their job performance, or likelihood to commit fraud.'' Finally, as we have testified here before, the consumer reporting system suffers from high rates of inaccuracy, rates that are unacceptable for purposes as important as employment. And the estimates range from 3 percent, which is the industry estimate, to 12 percent, from the FTC studies, to 37 percent in an online survey. In an environment with 10 percent unemployment, a 3 percent error rate in credit reports affects 6 million American workers, and it's not acceptable. And, remember, a consumer who has an error in her credit report, and is able to fix it--which is very difficult--can reapply for credit. But very few employers are going to voluntarily hold up a hiring process for one or more months to allow an applicant to correct an error in the credit report. The issue at stake is whether workers are fairly judged on their ability to perform a job, or whether they're discriminated against because of their credit history. Oregon recently signed a bill into law restricting this practice. Other States are considering it, and Congress should do the same and pass H.R. 3149. The second issue I want to talk about is a scrivener's error. The amendments of 2003 may have inadvertently deprived consumers of a 30-year-old pre-existing right they had to enforce the FCRA's adverse action notice requirement. This is the notice given when credit or insurance or employment is denied, based on an unfavorable credit report. That was intended to limit the remedies for a totally new notice--the risk-based pricing notice--at 1681m(h). However, due to ambiguous drafting, a number of courts have interpreted this limitation to apply to the entirety of section 1681m of the FCRA, including the pre-existing adverse action notice. Congress can easily and should fix the scrivener's error, because it was never part of the legislative bargain struck by FACTA. In fact, FACTA's legislative history indicates that Congress had absolutely no intention of abolishing any private enforcement of the adverse action notice requirement, and an uncodified section specifically states that nothing in FACTA ``shall be construed to affect any liability under section 616 or 617 of the Fair Credit Reporting Act''--that is the private enforcement provisions--``that existed on the day before the date of the enactment of this act.'' And there is more evidence that Congress didn't intentionally abolish the private enforcement. If it had done so, the banking and credit industry would have trumpeted that change. In fact, the industry has never made that claim, with only the American Banker noting that FACTA perhaps inadvertently eliminated the existing right of consumers and State officials to sue for violations of the adverse action provisions. Even 4 years later, in a hearing before the full committee, my fellow testifiers today declined to claim that FACTA had intentionally abolished this private remedy. Now, despite the clear legislative history, several dozen courts have, unfortunately, held that FACTA abolished this private remedy, depriving hundreds of consumers of their rights. We think that the documented cases are perhaps only the tip of the iceberg, so we assume that customers' damage has-- " CHRG-111shrg57319--134 Mr. Cathcart," Five-fifty is extremely low---- Senator Kaufman. Right. Mr. Cathcart [continuing]. And the only way to--that would definitely be subprime, probably deep subprime. There are ways to lend into that market that involve such techniques as calling the borrower the day before the loan is due, keeping track of them, almost handling them by hand. Senator Kaufman. But what really was happening, what Michael Lewis says, is they were taking the 550s and throwing them in to get an average that passed the rating game, realizing that the 550s are going to fail and there wasn't going to be anybody calling them on the phone and holding their hand, right? Is that fair to say? " CHRG-111hhrg46820--62 Mr. Allison," Main Street needs SBA lending and frankly commercial banks, because of the current shift towards more regulation, more scrutiny, which we can certainly understand given where we have been over the last year in the financial market, but let us not overreact and take it all out on the small business sector. And really this is what I see is probably one of the greatest problems in the capital end of the problem, is you have got local banks that are sitting on money, even with SBA taking the majority of the risk. However, I do recommend that SBA take a greater percentage of the underwriting of these loans in this--in at least the interim period and that we think in terms of lowering qualification standards, that we exempt fees, anything we can do to streamline it and make money more accessible and quickly. " FinancialCrisisReport--620 The tension between Goldman’s efforts to make money on behalf of itself versus on behalf of its clients raises a number of conflict of interest concerns, particularly when its efforts to profit from shorting the mortgage market or particular RMBS or CDO securities occurred simultaneously with its efforts to market mortgage related securities to its clients. Goldman’s Proprietary Activities. Until recently, when asked about the extent of the firm’s proprietary activities, Goldman generally claimed that its proprietary investments contributed only approximately 10% of the firm’s profits. 2784 In January 2011, however, Goldman announced in an SEC filing that it was changing the categories under which it reported income. Goldman added a new category called “Investments and Lending” to segregate the firm’s proprietary investment income from the income it derived from activities undertaken on behalf of clients. 2785 Based on earnings reported in January 2011 for Goldman = s full fiscal year 2010, the proprietary investment income recorded under “Investments and Lending” accounted 2782 1/2011 “Report of the Business Standards Committee,” at 1. In May 2010, at Goldman’s annual shareholders’ meeting, CEO Lloyd Blankfein announced the formation of a Business Standards Committee to conduct an extensive review of the firm’s business standards and practices to determine the extent to which the firm was adhering to its own written “Business Principles,” and to make appropriate recommendations. Id. The Committee’s January 2011 report provided recommendations in the areas of Client Relationships and Responsibilities, Conflicts of Interest, Structured Products, Transparency and Disclosure, Committee Governance, and Training and Professional Development. 2783 9/26/2007 email to Mr. Blankfein, “Fortune: How Goldman Sachs Defies Gravity,” GS MBS-E-009592726, Hearing Exhibit 4/27-135. 2784 See, e.g., 1/21/2010, The Goldman Sachs Group Inc., 4Q 2009 Earnings Call Transcript, Q&A (CFO David Viniar states that, in most years, proprietary trading accounts for “10% roughly plus or minus a couple of percent.”), http://seekingalpha.com/article/183723-the-goldman-sachs-group-inc-q4-2009-earnings-call-transcript?part=qanda. 2785 1/11/2011 Goldman Form 8-K filed with the SEC (announcement of change in reporting categories). Goldman’s change in its reporting categories implemented one of the recommendations outlined in Goldman’s “Report of the Business Standards Committee” published in January 2011. for $7.5 billion, or about 20% of Goldman’s net revenues. 2786 Goldman did not specify how it defined proprietary investments and lending for purposes of its earnings report, nor what desks or activities contributed to the total, how it calculated the reported amount, or why it was double the amount cited a year earlier. CHRG-111shrg51290--11 Mr. Bartlett," Thank you, Chairman Dodd and Ranking Member Shelby and members of the Committee. To start with the obvious, it is true that many consumers were harmed by the mortgage-lending practices that led to the current crisis, but what is even more true is that even more have been harmed by the crisis itself. The root causes of the crisis, to overly simplify, are twofold: One, mistaken policies and practices by many, but not all, not even most, financial services firms; and two, the failure of our fragmented financial regulatory system to identify and to prevent those practices and the systemic failures that resulted. This crisis illustrates the nexus, then, between consumer protection regulation and safety and soundness regulation. Safety and soundness, or prudential regulation, is the first line of defense for protecting consumers. It ensures that financial services firms are financially sound and further loans that borrowers can repay with their own income are healthy both for the borrower and for the lender. In turn, consumer protection regulation ensures that consumers are treated fairly. Put another way, safety and soundness and consumer protection are self-reinforcing, each strengthening the other. Given this nexus, we do not support, indeed, we oppose proposals to separate consumer protection regulation from safety and soundness regulation. Such a separation would significantly weaken both. An example, Mr. Chairman, in real time, today, a provision in the pending omnibus appropriations bill that would give State attorneys general the authority to enforce compliance with the Federal Truth in Lending Act illustrates this problem. It would create additional fragmented regulation, and attempting to separate safety and soundness and consumer protection would harm both. My testimony has been divided into two parts. First, I address what went wrong, and second, I address how to fix the problem. What went wrong? The proximate cause of the current financial crisis was the nationwide collapse of housing values. The root cause of the crisis are twofold. The first was a breakdown, as I said, in policies, practices, and processes at many, but not all financial services firms. Since 2007, admittedly long after all the horses were out of the barn and running around in the pasture, the industry identified and corrected those practices. Underwriting standards have been upgraded. Credit practices have been reviewed and recalibrated. Leverage has been reduced as firms were rebuilt. Capital incentives have been realigned. And some management teams have been replaced. The second underlying cause, though, is our overly complex and fragmented financial regulatory structure which still exists today as it existed during the ramp-up to the crisis. There are significant gaps in the financial regulatory system in which no one has regulatory jurisdiction. The system does not provide for sufficient coordination and cooperation among regulators and does not adequately monitor the potential for market failures or high-risk activities. So how to fix the problem? The Roundtable has developed over the course, literally, of 3 years a draft financial regulatory architecture that is intended to close those gaps, and our proposed architecture, which I submit for the record, has six key features. First, we propose to expand the membership of the President's Working Group on Financial Markets and rename it the Financial Markets Coordinating Council, but key, to give it statutory authority rather than merely executive branch authority. Second, to address systemic risk, we propose that the Federal Reserve Board be authorized as a market stability regulator. The Fed would be responsible for looking across the entire financial services sector to identify interconnections that could pose a risk to the entire financial system. Third, to reduce the gaps in regulation, we propose a consolidation of several existing Federal agencies, such as OCC and OTS, into a single national financial institutions regulator. The new agency would be a consolidated prudential and consumer protection agency for three broad sectors: Banking, securities, and insurance. The agency would issue national prudential and consumer protection standards for mortgage origination. Mortgage lenders, regardless of how they are organized, would be required to retain some of the risk for the loans they originate, also known as keeping some skin in the game, and likewise, mortgage borrowers, regardless of where they live or who their lender is, would be protected by the same safety and soundness and consumer standards. Fourth, we propose the creation of a national capital markets agency with the merger of the SEC and the Commodities Futures Trading Commission. And fifth, to protect depositors, policy holders, and investors, we propose that the Federal Deposit Insurance Corporation would be renamed the National Insurance Resolution Authority and that it manage insurance mechanisms for banking, depository institutions, but also federally chartered insurance companies and federally licensed broker dealers. Before I close, Mr. Chairman, I have also included in my testimony two other issues of importance to this Committee and the policymakers and the industry. One, lending by institutions that have received TARP funds is a subject of great comment around this table. And second, the impact of fair value accounting in illiquid markets. I have attached to my statement a series of tables that the Roundtable has compiled on lending by some of the nation's largest institutions. These tables are designed to set the record straight. The fact is that large financial services firms have increased their lending as a result of TARP capital. And second, fair value accounting continues to be of gargantuan concerns for the industry and should be for the public in general. We believe that the pro-cyclical effects of existing and past policies, which have not been changed, are unnecessarily exacerbating the crisis. We urge the Committee to take up this subject and deal with it. We thank you again for the opportunity to appear. I yield back. " CHRG-111hhrg53240--91 Mr. Green," Attorney Doctor. But I do appreciate his questions and I would like to do a quick follow-up. I thought it was a fantastic point that you make. Quick follow-up, with reference to the complaints that you receive, how many complaints have actually gone from complaint to a case that was referred to the Justice Department with reference to your mission to deal with patterns on practices of discrimination? Ms. Duke. In terms of numbers of complaints received or otherwise, I would have to get back to you in writing on that. I do know that we investigate every complaint that we receive on our member banks that we actually supervise. And with respect to referrals to the Justice Department, they primarily come from reviews of fair lending in the institutions. And to the extent that we find discrimination, we do refer those to the Department of Justice. " CHRG-110shrg50417--134 Mr. Palm," I am assuming one of the issues that they have alluded to is simply the issue that the cost of credit to buy your single-family home is dependent on the fact that the lender thinks that, if all else fails, they at least get the property. And I think that is the theory of the lending, which is why rates are whatever they are. I think for vacation homes, my assumption would be--and you should never assume, I realize--the rates would be at a higher level simply on the basis that you would not have the same type of certainty, and we would perhaps need an economist to verify that fact. And having said that, in general, obviously, people who have multiple homes and vacation homes or whatever--and those are not the people who we are worried about here today--they would normally also have additional other resources, and, therefore, they would probably get--you know, even though the differential in interest is still going to be higher for---- " CHRG-111hhrg50289--14 Mr. McGannon," Thank you, Chairwoman Velazquez, Ranking Member Graves and members of the Committee. My name is Michael McGannon, Senior Vice President and Chief Lending Officer of Country Club Bank in Kansas City, Missouri. Country Club Bank is a family owned community bank with over $650 million in assets. The focus of this Committee is extremely important. Consistently, small businesses are drivers of new ideas, new employment, and new economic growth. For banks like mine, small businesses are our bread and butter. While some might think the banking industry is composed of only large global banks, the vast majority of banks in our country are community banks, small businesses in their own right. In fact, over 3,400 banks, 41 percent, have fewer than 30 employees. The topic of SBA lending for small businesses is especially important and timely. The efforts that have been made by this Committee, the Congress as a whole, and the administration to improve the environment and opportunities for small businesses through changes to the SBA program have been needed for many years. These changes are particularly important in the difficult economic conditions which are affecting all businesses, including banks. The SBA program has struggled over the last several years. SBA Fiscal Year 2008 loan volume figures showed a 30 percent decline year over year in the 7(a) loan guaranty program, and Fiscal Year 2009 figures would indicate a similar reduction in volume. The economy is certainly playing a significant role in overall loan volume decline. However, many lenders are concerned that this decline is also due to SBA programs becoming too costly and difficult for lenders and small businesses who wish to access the program. For this reason we recommend the following changes to the SBA program. First, SBA should work with trade associations like ABA to formulate SBA programs that are attractive to lenders of all sizes, and especially to community bankers. Most small community banks are intimidated by the amount of paperwork required for a regular SBA 7(a) loan. In the past the SBA had a product in which there was a two-page application for the bank to complete and had an 80 percent guarantee. This program has been eliminated. Furthermore, the SBA needs to eliminate the financial and human resource burden on community banks created by SBA audits, particularly a concern with several new programs coming on line this year. These audits review loans already on the books that are already being scrutinized by other federal regulators, such as the FDIC or the OCC. Worse, banks are required to pay for their own SBA audit even though it does nothing to correct or stabilize a loan or to assist if there is the need for a liquidation. Second, SBA should reduce the time it takes for participating banks to collect on loan guarantees. In our own experience, we have been fortunate to collect on all guarantees submitted. However, the time frame for these collections is sporadic. There is a near universal agreement in the lending community that efforts to collect on the loan guarantee from SBA can be a time consuming and costly process. Third, community banks need personal contacts with knowledgeable people who can answer our questions. Our bank has had the benefit of a very cooperative SBA office in Kansas City. This relationship has been vital in making sure we stay on track with new changes in SBA regulations. However, banks in outlying areas do not have the benefit of a local SBA office that understands them, their clients or their town. Instead, they have to contact someone at a 1-800 number and get answers to questions. As a community banker from Missouri, I take pride in knowing the business and the community that an entrepreneur is trying to serve. It is critical that SBA returns to a model of helping local small businesses and banks through off-site training programs that can tend to the needs of the lending partnership. Thank you for your time and attention today. [The prepared statement of Mr. McGannon is included in the appendix.] " FinancialCrisisReport--60 On September 8, 2008, Washington Mutual signed a public Memorandum of Understanding that it had negotiated with OTS and the FDIC to address the problems affecting the bank. Longtime CEO Kerry Killinger was forced to leave the bank, accepting a $15 million severance payment. 137 Allen Fishman was appointed his replacement. On September 15, 2008, Lehman Brothers declared bankruptcy. Three days later, on September 18, OTS and the FDIC lowered Washington Mutual’s rating to a “4,” indicating that a bank failure was a possibility. The credit rating agencies also downgraded the credit ratings of the bank and its parent holding company. Over the span of eight days starting on September 15, nearly $17 billion in deposits left the bank. At that time, the Deposit Insurance Fund contained about $45 billion, an amount which could have been exhausted by the failure of a $300 billion institution like Washington Mutual. As the financial crisis worsened each day, regulatory concerns about the bank’s liquidity and viability intensified. Because of its liquidity problems and poor quality assets, OTS and the FDIC decided to close the bank. Unable to wait for a Friday, the day on which most banks are closed, the agencies acted on a Thursday, September 25, 2008, which was also the 119 th anniversary of WaMu’s founding. That day, OTS seized Washington Mutual Bank, placed it into receivership, and appointed the FDIC as the receiver. The FDIC facilitated its immediate sale to JPMorgan Chase for $1.9 billion. The sale eliminated the need to draw upon the Deposit Insurance Fund. WaMu’s parent, Washington Mutual, Inc., declared bankruptcy soon after. C. High Risk Lending Strategy In 2004, Washington Mutual ramped up high risk home loan originations to borrowers that had not traditionally qualified for them. The following year, Washington Mutual adopted a high risk strategy to issue high risk mortgages, and then mitigate some of that risk by selling or securitizing many of the loans. When housing prices stopped climbing in late 2006, a large number of those risky loans began incurring extraordinary rates of delinquency as did the securities that relied on those loans for cash flow. In 2007, the problems with WaMu’s High Risk Lending Strategy worsened, as delinquencies increased, the securitization market dried up, and the bank was unable to find buyers for its high risk loans or related securities. The formal initiation of WaMu’s High Risk Lending Strategy can be dated to January 2005, when a specific proposal was presented to the WaMu Board of Directors for approval. 138 WaMu adopted this strategy because its executives calculated that high risk home loans were more profitable than low risk loans, not only because the bank could charge borrowers higher interest rates and fees, but also because higher risk loans received higher prices when securitized and sold to investors. They garnered higher prices because, due to their higher risk, the securities paid a higher coupon rate than other comparably rated securities. 137 “Washington Mutual CEO Kerry Killinger: $100 Million in Compensation, 2003-2008,” chart prepared by the Subcommittee, Hearing Exhibit 4/13-1h. 138 See 1/2005 “Higher Risk Lending Strategy ‘Asset Allocation Initiative,’” submitted to Washington Mutual Board of Directors Finance Committee Discussion, JPM_WM00302975-93, Hearing Exhibit 4/13-2a. CHRG-111shrg51303--51 Mr. Dinallo," I fundamentally believe that the problems at AIG had absolutely nothing to do--the problems for which we are on a national stage here had nothing to do with the operating companies. There are--by the way, there are problems with State insurance regulation. I have been a proponent of us revisiting it. I think it is clunky. I think it has issues. But the solvency, the capital requirements of these insurance companies were done well and I am proud of how the regulators maintained themselves. I don't understand--I am not of any other opinion that the operating companies' ex-Financial Products division would have been just fine. In fact, arguably, AIG would be flourishing in this environment. Senator Shelby. Sir, AIG's most recent annual report states that, quote, ``The two principal causes for its unprecedented strain on liquidity during the second half of 2008,'' and these are their words, ``were a demand for the return of cash collateral under the U.S. securities lending program and collateral calls on credit default swaps issued by the Financial Products subsidiary.'' " CHRG-111shrg51290--15 STATEMENT OF ELLEN SEIDMAN, SENIOR FELLOW, NEW AMERICA FOUNDATION, AND EXECUTIVE VICE PRESIDENT, SHOREBANK CORPORATION Ms. Seidman. Thank you very much, Chairman Dodd, Ranking Member Shelby, and members of the Committee. I appreciate your inviting me here this morning. As the Chairman mentioned, my name is Ellen Seidman. I am a Senior Fellow at the New America Foundation as well as Executive Vice President at ShoreBank. My views are informed by my current experience, although they are mine alone, not those of New America or ShoreBank, as well as by my years at the Treasury Department, Fannie Mae, the National Economic Council, and as Director of the Office of Thrift Supervision. In quick summary, I believe the time has come to create a single well-funded Federal entity with the responsibility and authority to receive and act on consumer complaints about financial services and to adopt consumer protection regulations that with respect to specific products would be applicable to all and would be preemptive. However, I believe that prudential supervisors, and particularly the Federal and State banking regulatory agencies, should retain primary enforcement jurisdiction over the entities they regulate. Based on my OTS experience, I believe the bank regulators, given proper guidance from Congress and the will to act, are fully capable of effectively enforcing consumer protection laws. Moreover, because of the system of prudential supervision with its onsite examinations, they are ultimately in an extremely good position to do so and to do it in a manner that benefits both consumers and the safety and soundness of the regulated institutions. In three particular cases during my OTS tenure, concern about consumer issues led directly to safety and soundness improvements. However, I think the time has come to consider whether the consolidation of both the function of writing regulations and the receipt of complaints would make the system more effective. The current crisis has many causes, including an over reliance on finance to solve many of the problems of our citizens. Those needs require broader social and fiscal solutions, not financial engineering. Nevertheless, there were three basic regulatory problems. First, there was a lack of attention and sometimes unwillingness to effectively regulate products and practices, even where regulatory authority existed. The clearest example of this is the Federal Reserve's unwillingness to regulate predatory mortgage lending under HOEPA. Second, there were and are holes in the regulatory system, both in terms of unregulated entities and products and in terms of insufficient statutory authority. Finally, there was and is confusion for both regulated entities and consumers and those who work with them. The solutions are neither obvious nor easy. Financial products, even the good ones, can be extremely complex. Many, especially loans and investments, involve both uncertainty and difficult math over a long period of time. The differences between a good product and a bad one can be subtle, especially if the consumer doesn't know where to look. And different consumers legitimately have different needs. The regulatory framework, of course, involves both how to regulate and who does it. With respect to how, I suggest three guiding principles. First, products that perform similar functions should be regulated similarly, no matter what they are called or what kind of entity sells them. Second, we should stop relying on consumer disclosure as the primary method of protecting consumers. While such disclosures can be helpful, they are least helpful where they are needed the most, when products and features are complex. Third, enforcement is at least as important as writing the rules. Rules that are not enforced or are not enforced equally across providers generate both false comfort and confusion and tend to drive through market forces all providers to the practices of the least well regulated. As I mentioned at the start, I believe the bank regulators, given guidance from Congress to elevate consumer protection to the same level of concern of safety and soundness, can be highly effective in enforcing consumer protection laws. Nevertheless, I think it is time to give consideration to unifying the writing of regulations as to major consumer financial products, starting with credit products, and also to establish a single national repository for the receipt of consumer complaints. A single entity dedicated to the development of consumer protection regulations, if properly funded and staffed, will be more likely to focus on problems that are developing and to propose and potentially take action before the problems get out of hand. In addition, centralizing the complaint function in such an entity will give consumers and those who work with them a single point of contact and the regulatory body early warning of trouble. Such a body will also have the opportunity to become expert in consumer understanding and behavior, so as to regulate effectively without necessarily having a heavy hand. It could also become the focus for the myriad of Federal activities surrounding financial education. The single regulator concept is not, however, a panacea. Three issues are paramount. How will the regulator be funded, and at what level? It is essential that this entity be well funded. If it is not, it will do more harm than good as those relying on it will not be able to count on it. What will be the regulator's enforcement authority? My opinion is that regulators who engage in prudential supervision, whether Federal or State, with onsite examinations, should have primary regulatory authority with the new entity having the power to bring an enforcement action if it believes the regulations are not being effectively enforced, and having primary authority where there is no prudential supervision. And finally, will the regulations written by the new entity preempt both regulations and guidance of other Federal and State regulators? This is a difficult issue, both ideologically and because there will be disagreements about whether the regulator has set a high enough standard. Nevertheless, my opinion is that where the new entity acts with respect to specific products, their regulations should be preemptive. We have a single national marketplace for most consumer financial products. Where a dedicated Federal regulator has acted, both producers and consumers should be able to rely on those rules. The current state of affairs provides a golden opportunity to make significant improvements in the regulatory system to the benefit of consumers, financial institutions, and the economy. If we don't act now, what will compel us to act? Thank you, and I would be pleased to respond to questions. " CHRG-111hhrg56241--38 Mr. Stiglitz," It is both a source of pleasure and sadness to testify before you today. I welcome this opportunity to testify on this important subject, but I am sorry that things have turned out so badly thus far. In this brief testimony I can only touch on a few key points, and many of these points I elaborate in my book, ``FreeFall,'' which was published just a few days ago. Our financial system failed to perform the key roles that it is supposed to perform in our society: managing risk; and allocating capital. A good financial system performs these functions at low transaction costs. Our financial system created risk and mismanaged capital, all the while generating huge transaction costs, as the sector garnered some 40 percent of all corporate profits in the years before the crisis. So deceptive were the systems of creative accounting the banks employed that, as the crisis evolved, they didn't even know their own balance sheet, so they knew that they couldn't know that of any other bank. We may congratulate ourselves that we have managed to pull back from the brink, but we should not forget that it was the financial sector that brought us to the brink of disaster. While the failures of the financial system that led the economy to the brink of ruin are by now obvious, the failings of our financial system were more pervasive. Small- and medium-sized enterprises found it difficult to get credit, even as the financial system was pushing credit on poor people beyond their ability to repay. Modern technology allows for the creation of an efficient low-cost electronic payment mechanism, but businesses pay 1 to 2 percent or more for fees for a transaction that should cost pennies or less. Our financial system not only mismanaged risk and created products that increased the risk faced by others, but they also failed to create financial products that could help ordinary Americans face the important risk they confronted, such as the risk of homeownership or the risk of inflation. Indeed, I am in total agreement with Paul Volcker. It is hard to find evidence of any real growth associated with many of the so-called innovations in our financial system, though it is easy to see the link between those innovations and the disaster that confronted our economy. Underlying all the failures a simple point seems to have been forgotten: Financial markets are a means to an end, not an end in themselves. We should remember, too, that this is not the first time our banks have been bailed out, saved from bearing the full consequences of their bad lending. Market economies work to produce growth and efficiency, but only when private rewards and social returns are aligned. Unfortunately, in the financial sector, both individual and institutional incentives were misaligned, which is why this discussion of incentives is so important. The consequences of the failures of the financial system are not borne by just those in the sector, but also by homeowners, retirees, workers, and taxpayers, and not just in this country but also around the world. The externalities, as economists refer to these impacts and others, are massive; and they are the reason why it is perfectly appropriate that Congress should be concerned. The presence of externalities is one of the reasons why the sector needs to be regulated. In previous testimony I have explained what kinds of regulations are required to reduce the risk of adverse externalities. I have also explained the danger of excessive risk-taking and how that can be curtailed. I have explained the dangers posed by underregulated derivative markets. I regret to say that so far, more than a year after the crisis peaked, too little has been done on either account. But too-big-to-fail banks create perverse incentives which also have a lot to do with what happened. I want to focus my remaining time on the issue of incentives and executive compensation. As I said, there are also key issues of organizational incentives, especially those that arise from institutions that are too-big-to-fail, too-big-to-be-resolved, or too-intertwined-to-fail. The one thing that economists agree upon is that incentives matter. Even a casual look at the conventional incentive structures, with payments focused on short-run performance and managers not bearing the full downside consequences of their mistakes, suggested that they would lead to shortsighted behavior and excessive risk-taking. And so they did. Let me try to summarize some of the general remarks that I make in my written testimony that I hope will be entered into the record. Flawed incentives played an important role, as I said before, in this and other failures of the financial system to perform its central roles. Not only do they encourage excessive risk-taking and shortsighted behavior, but they also encourage predatory behavior. Poorly designed incentive systems can lead to a deterioration of product quality, and this happened in the financial sector. This is not surprising, given the ample opportunities provided by creative accounting. Moreover, many of the compensation schemes actually provide incentives for deceptive accounting. Markets only allocate resources well when information is good. But the incentive structures encouraged the provision of distorted and misleading information. The design of the incentives system demonstrates a failure to understand risk and incentives and/or a deliberate attempt to deceive investors, exploiting deficiencies in our systems of corporate governance. I want to agree very much with Professor Bebchuk's view of the need for reforms in corporate governance. There are alternative compensation schemes that would provide better incentives, but few firms choose to implement such schemes. It is also the case that these perverse incentives failed to address adequately providing incentives for innovations that would have allowed for a better functioning of our economic system. [The prepared statement of Professor Stiglitz can be found on page 68 of the appendix.] " CHRG-111shrg50815--87 Mr. Plunkett," Senator, no one is denying credit cards are convenient and useful for consumers. The question is are their practices fair. I mean, the first thing to say to Mr. Clayton is why are interest rates ticking up when the Federal funds rate has dropped through the floor? The next thing to say is that many national banks, as you point out, have received TARP financing, and then Secretary Paulson set up and Secretary Geithner says he will expand this new program called the Term Asset-Backed Securities Loan Facility to support credit card lending. It is not just a question of interest rates. Are the terms fair that will be supported through this program? " CHRG-110shrg50417--138 Mr. Zubrow," I am sorry to disappoint you, Mr. Chairman. I really do not have a lot to add to what the others have said. I would emphasize what, you know, you and others on the Committee have pointed to, which is that we are really in a very fragile market situation today. Notwithstanding all the very good efforts that the Committee and the Government have led in terms of trying to bring stability back into the markets, the marketplace is still extremely fragile. We lack investor confidence in many of the important markets that are required to really re-liquefy the home lending process. And so I think that there is, you know, grave danger to introduce a major change in the balance of outcomes that investors might be worried about through a major change in the bankruptcy provisions, and such change could really elongate the length of time that it takes to bring investors back into this marketplace. " CHRG-110hhrg45625--196 Mr. Bernanke," The small and community banks are a very good shock absorber because, in some cases, they can come in and make credit available where other banks are not able to. And you are right, in some communities that is true. But there are also a lot of small banks that are feeling a lot of stress. We know, for example, that small banks are very dependent on commercial real estate and that is an area that has gotten extremely stressed right now and there is a lot of concern about it. Residential real estate is another thing that small banks do; small businesses, which they lend to, will come under increasing pressure as the economy remains slow. So I think that many small banks will face a good bit of pressure, and Secretary Paulson mentioned these. They will be eligible to participate in the auctions or other types of asset purchase programs. " CHRG-111shrg57322--924 Mr. Blankfein," Absolutely. I think community banks play a very important role. They are not necessarily--again, not knowing--I am not speaking in general or specifically--maybe some helped author their own situation by over-lending or making imprudent judgments. But I am sure for many, they just conducted their social purpose and lent out money against housing, that people who owe them the money can't pay it back, and the housing that they would have as collateral goes down in value, they may very well be victims of the recession and I can understand--and I share your concern for the situation. Senator McCain. And I know you are not a charitable organization. I know why you are in business. But has Goldman Sachs done anything to try to help these community banks and these homeowners who are struggling to make their mortgage payments? " CHRG-110shrg50369--2 Chairman Dodd," The Committee will come to order. I am pleased to call the Committee to order this morning. Today, the Committee will hear the testimony of Federal Reserve Chairman Ben Bernanke on the outlook of the Nation's economy, the Fed's conduct of monetary policy, and the status of important consumer protection regulations that are under the Fed's jurisdiction. This is Chairman Bernanke's second appearance before the Committee this year. Mr. Chairman, it is good to have you with us, and, again, it is 2 weeks ago and now again today here. You are becoming a regular here, and so we appreciate your appearance before the Committee. When Chairman Bernanke was first before the Committee 2 weeks ago, I laid out the facts of what I consider to be our Nation's very serious, if not perilous, economic condition. Growth is slowing, inflation is rising, consumer confidence is plummeting, while indebtedness is deepening. And just as ominously, the credit markets have experienced significant disruptions. Consumers are unable or unwilling to borrow. Lenders are unable or unwilling to lend. There is a palpable sense of uncertainty and even fear in the markets with a crisis of confidence that has spread beyond the mortgage markets to markets in student loans. And I noted this morning--by the way, 2 weeks ago I pointed out that Michigan was indicating some serious problems with student lending, and this morning I am reading where Pennsylvania today--you may have seen the article--may decide to also curtail student loans as a result of this growing economic situation. We have also seen the problem with credit cards, government bonds, and corporate finance. Unfortunately, the crisis of confidence does not just exist by American consumers and lenders. It increasingly appears that there is a crisis of confidence among the rest of the world in the United States economy. Yesterday, the dollar reached its lowest level since 1973, when the dollar was first allowed to float freely. And the Fed's own monetary report details an alarming fact. Foreign entities have not only stopped purchasing U.S. securities; they have actually been selling them because they have lost, it appears, confidence in their value. Now, I am going to be raising some questions, Mr. Chairman, about that, and I will be interested in your observations about these reports in the Monetary Policy Report. As I have said previously, the catalyst of the current economic crisis I believe very strongly is the housing crisis. Overall, 2007 was the first year since data has been kept that the United States had an annual decline in nationwide housing prices. A recent Moody's report forecast that home values will drop in 2008 by 10 percent to 15 percent, and others are predicting similar declines in 2009 as well. This would be the first time since the Great Depression that national home prices have dropped in consecutive years. We have all witnessed in the past where regionally there have been declines in home prices, but to have national numbers like this is almost unprecedented, certainly in recent history. If the catalyst of the current economic crisis is the housing crisis, then the catalyst of the housing crisis is the foreclosure crisis. This week, it was reported that foreclosures in January were up 57 percent compared to a year ago and continue to hit record levels. When all is said and done, over 2 million Americans could lose their homes as a result of what Secretary Paulson has properly and accurately described as ``bad lending practices.'' These are lending practices that no sensible banker, I think, would ever engage in. Reckless, careless, and sometimes unscrupulous actors in the mortgage lending industry essentially allowed banks--rather, essentially allowed loans to be made that they knew hard-working, law-abiding borrowers would never be able to repay. Let me add here very quickly, because I think it is important to make the point here, that we are not talking about everyone here at all. We are talking about some who engaged in practices that I think were unscrupulous or bad lending practices. But many institutions acted very responsibly, and I would not want the world to suggest here that this Committee believed that this was an indictment on all lending institutions. And engaged--those who did act improperly engaged in practices that the Federal Reserve under its prior leadership, in my view, and this administration did absolutely nothing to effectively stop. The crisis affects more than families who lose their homes. Property values for each home within a one-eighth square mile of a foreclosed home could drop on an average as much as $5,000. This will affect somewhere between 44 to 50 million homes in our country. So the ripple effect beyond the foreclosed property goes far beyond that and has a contagion effect, in my view, in our communities all across this country beyond the very stark reality of those who actually lose their homes, the effect of others watching the value of their properties decline, not to mention what that means to local tax bases, supporting local police and fire, and a variety of other concerns raised by this issue. I certainly want to commend the Fed Chairman--I said so yesterday publicly, Mr. Chairman; I do so again this morning--for candidly acknowledging the weakness in the economy and for actively addressing those weaknesses by injecting liquidity and cutting interest rates. I also am pleased that the administration and the Congress were able to reach agreement on a stimulus package, and our hope is--while some have argued this is not big enough or strong enough, our collective hope is this will work, will have some very positive impact on the economy. Certainly this will have some support, we hope, for working families who are bearing the brunt of these very difficult times. However, I think more needs to be done to address the root cause of our economic problems. Any serious effort to address our economic woes should include, I think, an effort to take on the foreclosure crisis. And, again, there are various ideas out there on how we might do this more effectively, and certainly the Chairman and others have offered some ideas and suggestions. Senator Shelby and I have been working and talking--and Mel Martinez and others who are involved in these issues--about ways in which we can in the coming days do constructive things in a positive way to indicate and show not only our concern about the issue but some very strong ideas on how we can right this and restore that confidence I talked about earlier. We on this Committee have already taken some steps to address these problems. We have passed the FHA modernization legislation through the Committee and the Senate and continue to work to make it law. We had a very good meeting yesterday, I would point out, Senator Shelby and I and the leadership of the House Financial Services Committee, I say to you, Mr. Chairman, in hopes that we can come to some very quick conclusion on that piece of legislation and move it along here. We appropriated close to $200 million to facilitate foreclosure prevention efforts by borrowers and lenders, and I want to commend Senator Schumer and others who have been involved in this idea of counseling and ideas to minimize the impact of this problem as well. In addition, the recently enacted stimulus package that I mentioned already includes a temporary increase in the conforming loan limits for GSEs to try to address the problems that have spread throughout the credit market and the jumbo mortgage market. And while this temporary increase is helpful, we still need to implement broad GSE reform. And as I have said previously, I am committed to doing that, and we will get that done. I have spoken about my belief in the need for additional steps to mitigate the foreclosure crisis in a reasonable and thoughtful manner. These steps include targeting some community development block grant assistance to communities in a targeted way to help them to counter the impact of foreclosed and abandoned properties in their communities. And they include establishing a temporary homeownership loan initiative, which I have raised and others have commented on, either using existing platforms or a new entity that can facilitate mortgage refinancing. But it is not just the Congress that needs to do more, and, again, the Fed needs, in my view, to be as vigilant a financial regulator as it has been a monetary policymaker. That includes breaking with its past and becoming more vigilant about policing indefensible lending practices. And, again, I commend the Chairman of the Federal Reserve--we have talked about this here--on the proposed regulations that you have articulated that would follow on the HOEPA legislation. And while I have expressed some disappointment about how far they go in certain areas here, the Chairman and I have talked about this a bit. We will be involved in the comment period here and are looking forward to finalizing those regulations, and hopefully at least shutting the door on this kind of a problem re-emerging in the coming months and years. So I want to thank you, Mr. Chairman, and your colleagues and urge them to consider some of the stronger measures, and we will offer some additional comments on them. Despite these unprecedented challenges, I think all of us here on this Committee, Republicans and Democrats, remain confident in the future of the American economy, and our concerns that will be raised here this morning should not reflect anything but that confidence in the future. We may need to change some of our policies, regulations, and priorities, but we strongly believe that the ingenuity, productivity, and capability of the American worker and the entrepreneur ought never to be underestimated in this country. And we remain firm and committed to doing everything we can to strengthen those very points. So I look forward to working with my good friend, Senator Shelby, and other Members of the Committee to do what we can here to play our role in all of this in a constructive way, to work with you, Mr. Chairman, and the Federal Reserve, the Secretary of the Treasury, and others of the financial institution regulators to see what we can do in the short term to get this moving in a better direction. So, with that, let me turn to Senator Shelby for his opening comments, and then we will try to get to some questions. And I will leave opening comments for the go-around and question period so we can get to a question-and-answer period here to make this as productive a session as possible. But we thank you again for being with us. CHRG-110hhrg46591--371 Mr. Washburn," I think we have always been big proponents of SBA lending, and that is what we do. We are, again, a community bank in Hoover, Alabama, with probably almost 20 percent of our portfolio concentrated in small- to medium-sized business loans. We have worked with the SBA and hopefully will continue to do so. That is a way to get money back out. As I mentioned earlier in my testimony as well, our loan demand is big, and is great as it has ever been, but capital is holding us back. And so any way to get capital injected into the community bank system, the healthy community bank system will only benefit your area as well as ours and any other area who has a community bank. " CHRG-110hhrg46591--283 Mr. Yingling," I would agree with that. In the dual banking system, the diversity of charters has been critical. It is one area where we differ from some other countries. One of the advantages of it is that there is much more lending and capital available to small businesses and to entrepreneurs in this country because we have such a diverse system. I think another thing--and this committee has worked hard on it--is to recognize that when you pass rules designed to solve a problem, that they quite often apply most heavily to your analogy that did not cause the problem. One of the really big problems for community banks, and it may be the biggest problem in competing today, is just the huge regulatory burden. There are great economies of scale in dealing with these regulations, and the small banks just cannot deal with that. " CHRG-111shrg52619--75 Mr. Polakoff," I will jump in. I think, first of all, there is a keen connection between consumer protection and safety and soundness. That is one of the reasons that I believe all the regulatory agencies, as part of any safety and soundness examination, look at all of the consumer complaints. They keep a file. They look at them. They work through them, because there is a keen connection when consumers are complaining, they have some potential safety and soundness-related issues. I think all of us--certainly OTS has a robust system for addressing consumer complaints. We have made a number of referrals, actually a large number of referrals to Justice for fair lending issues. And I think it is a trend that many of the agencies are seeing. " CHRG-111shrg57319--534 Mr. Killinger," The lead placement for us would have been Goldman Sachs and Lehman Brothers, I believe. Senator Coburn. OK. All right. Mr. Rotella, under Exhibit 2a,\1\ and in your testimony \2\ you mentioned that Washington Mutual had adopted the high-risk lending strategy before you arrived. That is on page 4 of Exhibit 2. You said, ``I did not design this strategy'' on page 5 of your testimony. Did you mean to imply some distance between yourself and this strategy?--------------------------------------------------------------------------- \1\ See Exhibit 2a, which appears in the Appendix on page 229. \2\ See Mr. Rotella's prepared statement which appears in the Appendix on pge 169.--------------------------------------------------------------------------- " CHRG-111hhrg56847--38 Mr. Bernanke," You just gave a very good description. Small business is very important for job creation, particularly in a cyclical upturn. And I would say that in fact as we think about small business, we should also keep in mind startup businesses because they also provide a lot of job creation. So this is a very important part. It is our concern that too slow of a response on the small business side is one of the reasons why job creation is not as quick as we would like it to be. And I think it is important to try to remove the barriers and impediments for small business to expand. You talked about tax policy, you and Mr. Ryan. I agree that we want to make tax policy as small business friendly as possible, to provide the right incentives, to give them the opportunities to invest and hire. Beyond that, though, I think for them to do that, first they need demand, they need sales. So we need to keep the economy growing, and the Federal Reserve is doing its part by maintaining a supportive monetary policy. But we also need to make sure they get credit. And I agree that that is very important as well. I am glad the Congress is exploring these different programs for making credit available. I think it is very useful to do that. Again from our own perspective, we have put bank lending and bank credit at the very top of our priority list and we have increased our information gathering, we have increased our consultation, we have increased our training of examiners. Basically we would like to know--if your constituents are telling you I have been turned down unfairly, we would like to hear about it. We have a hotline. We have a Website. Banks who have problems should talk to the directors of supervision at their local reserve bank. So we do want to know about it, and we will respond to it. But I certainly agree with your sentiments of what you said and we want to do everything we can to get small businesses---- Ms. Schwartz. We look forward to--but I would like to follow up on the issue of startups. I think it is very hard for them to actually get a bank to lend to a new entrepreneur, a new company that is just starting up, the kind of dollars they might need to get through that first year or so, and how you assess that risk. So we have to follow up with you, and thank you for your positive comments. " FOMC20070918meeting--33 31,MR. LACKER.," I want to ask about the term funding market, and I want you to help us understand what we know about that. In typical times, like before this, do we know how much lending was done at term in the fed funds market? Do we know what names were typically involved—is there a flow across the banking system of some particular structure—and what kind of spreads are typical? Then, what have we been observing now, in contrast? Related to this, do we know what names are borrowing at term now? Do we have a sense of the extent to which the elevated spread is a risk premium or some other effect? Are people who are borrowing at term tapped out at the Home Loan Bank? Does that have some significance in the term market? Is there an interaction between options at the Home Loan Bank and the term market?" CHRG-110hhrg45625--94 Secretary Paulson," What we said, Madam Congresswoman, was that the focus should be largely, and that is a major focus, on mortgage and mortgage-related assets. But we asked for broader authority because no one is sure entirely what might be necessary. But the focus and the intent is not to say, let's have this be a Christmas tree, and every lobby group say, why don't you purchase this asset or that asset. The focus is stability in the financial system, and the only reason we want the broader authority is to be able to deal with that. Ms. Velazquez. Thank you. Chairman Bernanke, delinquency rates of commercial and industrial loans, as reported by the Federal Reserve, are at their highest level since the 4th quarter of 2004. To what degree is this impairing liquidity in the commercial lending market? " FinancialCrisisReport--164 The Levin-Coburn memorandum contained joint findings of fact regarding the role of federal regulators in the Washington Mutual case history. Those findings of fact, which this Report reaffirms, are as follows. 1. Largest U.S. Bank Failure. From 2003 to 2008, OTS repeatedly identified significant problems with Washington Mutual’s lending practices, risk management, and asset quality, but failed to force adequate corrective action, resulting in the largest bank failure in U.S. history. 2. Shoddy Lending and Securitization Practices. OTS allowed Washington Mutual and its affiliate Long Beach Mortgage Company to engage year after year in shoddy lending and securitization practices, failing to take enforcement action to stop its origination and sale of loans with fraudulent borrower information, appraisal problems, errors, and notoriously high rates of delinquency and loss. 3. Unsafe Option ARM Loans. OTS allowed Washington Mutual to originate hundreds of billions of dollars in high risk Option Adjustable Rate Mortgages, knowing that the bank used unsafe and unsound teaser rates, qualified borrowers using unrealistically low loan payments, permitted borrowers to make minimum payments resulting in negatively amortizing loans ( i.e. , loans with increasing principal), relied on rising house prices and refinancing to avoid payment shock and loan defaults, and had no realistic data to calculate loan losses in markets with flat or declining house prices. 4. Short Term Profits Over Long Term Fundamentals. OTS abdicated its responsibility to ensure the long term safety and soundness of Washington Mutual by concluding that short term profits obtained by the bank precluded enforcement action to stop the bank’s use of shoddy lending and securitization practices and unsafe and unsound loans. 5. Impeding FDIC Oversight. OTS impeded FDIC oversight of Washington Mutual by blocking its access to bank data, refusing to allow it to participate in bank examinations, rejecting requests to review bank loan files, and resisting the FDIC recommendations for stronger enforcement action. 6. FDIC Shortfalls. The FDIC, the backup regulator of Washington Mutual, was unable to conduct the analysis it wanted to evaluate the risk posed by the bank to the Deposit Insurance Fund, did not prevail against unreasonable actions taken by OTS to limit its examination authority, and did not initiate its own enforcement action against the bank in light of ongoing opposition by the primary federal bank regulators to FDIC enforcement authority. 7. Recommendations Over Enforceable Requirements. Federal bank regulators undermined efforts to end unsafe and unsound mortgage practices at U.S. banks by issuing guidance instead of enforceable regulations limiting those practices, failing to prohibit many high risk mortgage practices, and failing to set clear deadlines for bank compliance. 8. Failure to Recognize Systemic Risk. OTS and the FDIC allowed Washington Mutual and Long Beach to reduce their own risk by selling hundreds of billions of dollars of high risk mortgage backed securities that polluted the financial system with poorly performing loans, undermined investor confidence in the secondary mortgage market, and contributed to massive credit rating downgrades, investor losses, disrupted markets, and the U.S. financial crisis. 9. Ineffective and Demoralized Regulatory Culture. The Washington Mutual case history exposes the regulatory culture at OTS in which bank examiners are frustrated and demoralized by their inability to stop unsafe and unsound practices, in which their supervisors are reluctant to use formal enforcement actions even after years of serious bank deficiencies, and in which regulators treat the banks they oversee as constituents rather than arms-length regulated entities. CHRG-110hhrg46593--10 Secretary Paulson," Thank you very much, Mr. Chairman. Mr. Chairman, Congressman Bachus, and members of the committee, thank you for the opportunity to testify this morning. Six weeks ago, Congress took the critically important step of providing important authorities and resources to stabilize our financial system. Until that time, we faced a financial crisis without the proper tools. With these tools in hand, we took decisive action to prevent the collapse of our financial system. We have not in our lifetimes dealt with a financial crisis of this severity and unpredictability. We have seen the failures or the equivalent of failures of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac, and AIG, institutions with a collective $4.7 trillion in assets when this year began. By September, the financial system had seized up, presenting a system-wide crisis. Our objectives in asking Congress for a financial rescue package were to, first, stabilize a financial system on the verge of collapse and then to get lending going again to support American consumers and businesses. Over the next few weeks, conditions worsened significantly. Confidence in the banking system continued to diminish. Industrial company access to all aspects of the bond market was dramatically curtailed. Small- and middle-sized companies with no direct connection to the financial sector were losing access to the normal credit needed to meet payrolls, pay suppliers, and buy inventory. During that same period, the FDIC acted to mitigate the failure of Washington Mutual and made clear that it would intervene to prevent Wachovia's failure. Turmoil had developed in the European markets. In a 2-day period at the end of September, the governments of Ireland, the U.K., Germany, Belgium, France, and Iceland intervened to prevent the failure of one or more financial institutions in their countries. By the time legislation had cleared Congress, the global market crisis was so broad and severe that powerful steps were necessary to quickly stabilize our financial system. Our response, in coordination with the Federal Reserve, the FDIC, and other banking regulators was a program to purchase equity in banks across the country. We have committed $250 billion to this effort. This action, in combination with the FDIC's guarantee of certain debt issued by financial institutions and the Fed's commercial paper program helped us to immediately stabilize the financial system. The Capital Purchase Program for banks and thrifts has already dispersed $148 billion, and we are processing many more applications. Yesterday, Treasury announced the terms for participation for nonpublicly traded banks, another important source of credit in our economy. We have designed these terms to help provide community development financial institutions and minority depository institutions with capital for lending to low-income and minority populations. These institutions have committed to use this capital for businesses and projects that serve their communities. In addition, we are developing a matching program for possible future use by banks or nonbank financial institutions. Capital strength enables banks to take losses as they write down or sell troubled assets. Stronger capitalization is also essential to increasing lending, which although difficult to achieve during times like this, is essential to economic recovery. We expect banks to increase their lending over time as a result of these efforts and as confidence is restored. This lending won't materialize as fast as any of us would like. But it will happen much, much faster having used the TARP to stabilize our system. As we continue significant work on our mortgage asset purchase plan, it became clear just how much damage the crisis had done to our economy. Third quarter GDP growth showed negative three-tenths of a percent. The unemployment rate rose to a level not seen in 15 years. Home price status showed that home prices in 10 major cities had fallen 18 percent over the previous year, demonstrating that the housing correction had not abated. The slowing of European economies has been even more dramatic. We assessed the potential use of remaining TARP funding against the backdrop of current economic and market conditions. It is clear that an effective mortgage asset purchase program would require a massive commitment of TARP funds. In September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum in a worse economy simply isn't enough firepower. We have therefore determined that the prudent course at this time is to conserve the remaining funds available from the TARP, providing flexibility for this and the next Administration. Other priorities that need to be addressed include actions to restore consumer credit. Treasury has been working on a program with the Federal Reserve to improve securitization in the credit marketplace. While this would involve investing only a relatively modest share of TARP funds in the Federal Reserve liquidity facility, it could have substantial positive benefits for consumer lending. Finally, Mr. Chairman, Treasury remains committed to continuing to work to reduce avoidable foreclosures. Congress and the Administration have made substantial progress on that front through HUD programs, the FDIC's IndyMac approach, our support and leadership of the HOPE NOW Alliance, and our work with the GSEs, including an important announcement they made last week establishing new servicer guidelines that will set a new standard for the entire industry. Our actions to stabilize and strengthen Fannie Mae and Freddie Mac have also helped mitigate the housing correction by increasing access to lower-cost mortgage lending. As some on the committee know, I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent. We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well. Mr. Chairman, the actions of the Treasury, the Fed, and the FDIC have stabilized our financial system. The authorities in the TARP have been used to strengthen our financial system and to prevent the harm to our economy and financial system from the failure of a systemically important institution. As facts and conditions in the market and economy have changed, we have adjusted our strategy to most effectively address the urgent crisis and to preserve the flexibility of the President-elect and the new Secretary of the Treasury to address future challenges in the economy and capital markets. Thank you again for your efforts and for the opportunity to appear today. I would like to just make one last comment in response to a question that Congressman Bachus asked because it is one I hear a lot, the distinction between the financial markets and the economy. So when we have talked about the crisis and the financial markets and being unprecedented and having to go back to the Great Depression to see anything of this magnitude and be presented with this amount of difficulty, we are talking about the financial markets. Now, when the financial markets have problems, they hurt the economy. So the reason that it was very important to get in quickly and stabilize it was to mitigate damage to the economy. When we were here before you, we saw what was happening to the economy. We talked about it. We took the steps. The economy has continued to get worse. The American people look at the worsening economy. And as your chairman said to me yesterday, in politics, you don't get much credit for what might have happened and didn't happen. What the American people see is what is happening to the economy. But again, our purpose in coming to you was to take-- " CHRG-111hhrg53240--75 Mr. Bachus," Now it really took until 2007 or 2008 for them to do that; is that correct? Ms. Duke. 2008. " Mr. Bachus," 2008? I think maybe if we had had something where you came up every year and explained your progress. On occasions members did write and say, what are you doing? Let me ask you this. Even on the lending underwriting standards, I think at the same time or around that same period of time, you were given the jurisdiction on all loan underwriting standards; is that correct? Ms. Duke. I believe, and I am not certain on this, so if I get too deep into it, I may have to respond in writing. But I believe that we issued guidance to those institutions that we supervised on underwriting, but then afterwards when we came out with regulations, those regulations would have governed both bank and nonbank lenders. " FOMC20080430meeting--19 17,MR. LACKER.," Yes. Mr. Chairman, you motivated the expansion of the term securities lending facility by the effect it would have by increasing the amount of Treasuries in the market. Vice Chairman Geithner, you appealed to the effect it would have on the asset-backed securities that would be offered on the market. We didn't discuss the asset-backed securities market, except that I had this exchange with our Manager. I am not aware of any evidence that there is something wrong with the fundamentals of those markets. Now, admittedly, it is not clear that many of our arguments for some of these facilities have been based on some careful diagnosis of fundamentals. If this is about those asset-backed securities markets, that is another thing entirely. I was a little confused about that and wondered about the rationale. " FinancialCrisisReport--50 III. HIGH RISK LENDING: CASE STUDY OF WASHINGTON MUTUAL BANK Washington Mutual Bank, known also as WaMu, rose out the ashes of the great Seattle fire to make its first home loan in 1890. By 2004, WaMu had become one of the nation’s largest financial institutions and a leading mortgage lender. Its demise just four years later provides a case history that traces not only the rise of high risk lending in the mortgage field, but also how those high risk mortgages led to the failure of a leading bank and contributed to the financial crisis of 2008. For many years, WaMu was a mid-sized thrift, specializing in home mortgages. In the 1990s, WaMu initiated a period of growth and acquisition, expanding until it became the nation’s largest thrift and sixth largest bank, with $300 billion in assets, $188 billion in deposits, 2,300 branches in 15 states, and over 43,000 employees. In 2003, its longtime CEO, Kerry Killinger, said he wanted to do for the lending industry what Wal-Mart and others did for their industries, by catering to middle and lower income Americans and helping the less well off buy homes. 105 Soon after, WaMu embarked on a strategy of high risk lending. By 2006, its high risk loans began incurring record rates of delinquency and default, and its securitizations saw ratings downgrades and losses. In 2007, the bank itself began incurring losses. Its shareholders lost confidence, and depositors began withdrawing funds, eventually causing a liquidity crisis. On September 25, 2008, 119 years to the day of its founding, WaMu was seized by its regulator, the Office of Thrift Supervision (OTS), and sold to JPMorgan Chase for $1.9 billion. Had the sale not gone through, WaMu’s failure might have exhausted the $45 billion Deposit Insurance Fund. Washington Mutual is the largest bank failure in U.S. history. This case study examines how one bank’s strategy for growth and profit led to the origination and securitization of hundreds of billions of dollars in poor quality mortgages that undermined the U.S. financial system. WaMu had held itself out as a prudent lender, but in reality, the bank turned increasingly to higher risk loans. Its fixed rate mortgage originations fell from 64% of its loan originations in 2003, to 25% in 2006, while subprime, Option ARM, and home equity originations jumped from 19% of the originations to 55%. Using primarily loans from its subprime lender, Long Beach Mortgage Corporation, WaMu’s subprime securitizations grew sixfold, increasing from about $4.5 billion in 2003, to $29 billion in securitizations in 2006. From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime loans. WaMu also increased its origination of Option ARMs, its flagship product, which from 2003 to 2007, represented as much as half of all of WaMu’s loan originations. In 2006 alone, Washington Mutual originated more than $42.6 billion in Option ARM loans and sold or securitized at least $115 billion, including sales to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). In addition, WaMu dramatically increased its origination and securitization of home equity loan products. By 2007, 105 “Saying Yes, WaMu Built Empire on Shaky Loans,” New York Times (12/27/2008) http://www.nytimes.com/2008/12/28/business/28wamu.html?_r=1 (quoting Mr. Killinger: “We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”). home equity loans made up $63.5 billion or 27% of its home loan portfolio, a 130% increase from 2003. CHRG-110hhrg38392--134 Mr. Royce," Thank you very much, Mr. Chairman. We discussed that since 2000, we have seen stagnant wages for low skilled workers. Well, supply and demand are a reality, and certain business interests on the right want low skilled labor because it will drive down wages. They want more low skilled labor in the country. On the other end of the spectrum, there are those who believe in open borders for the disadvantaged. But the result of the policy is that until we have enforcement against illegal immigration, wages will lag. They are going to lag if you have massive illegal immigration of low skilled wages in the United States. You can't expect anything else to happen if you have 20 million people here illegally other than to have the pressures of supply and demand force down wage rates. Indeed that has happened since--well, for the last decade. To encourage monetary inflation, shifting to that subject, is to encourage a return of the boom and bust in a business cycle and to abandon a stable monetary unit. That is what I think the effect would be if we move towards the direction that didn't attempt to really control inflation. Now, Chairman Bernanke, as you know, in the past decade we have also seen unprecedented growth in the mortgage industry. If you went back to the 1960's, there was very little movement back then in home ownership rates until the development of technology and tools such as risk based pricing, which allowed lending institutions to more accurately calculate the risk associated with potential borrowers. As a consequence of that, in 2004, the home ownership rate went up to just under 70 percent, hitting record highs. Much of this growth which we had not seen in the decades prior was in a sector of the population which was previously locked out from obtaining mortgages, therefore, they rented instead of owning homes. For the most part, they had blemished credit, and they benefited greatly from the transformation in the industry as a result. As you know, the subprime lending market has come under tremendous scrutiny. Some believe we should rush to legislate. I believe we should approach this topic with tremendous caution. While deceptive lending practices should be prevented, I believe effective disclosure is the proper anecdote. Expanding liability to include secondary market participants for abusive loan originations would be a misguided policy. My fear is that if we overlegislate, which we have been known to do, it will prompt a credit crunch for Americans. I believe that the availability of credit has been good for consumers, by and large. The economy has benefited as a result, and any potential solution to concerns that have arisen should be very closely scrutinized. So Chairman Bernanke, I would like to get your thoughts on this issue and whether you believe an ill-conceived legislative fix will have any potential unintended consequences. Lastly, as you know, the outflow of capital from our markets has been discussed at length over the last few months. Much of the debate is centered around two major burdens faced by our public companies. One is cumbersome regulation and the prevalence of securities class action lawsuits. The threat of overregulation and overlitigation has caused many companies to reconsider listing on our public markets. This has resulted in a growth in the amount of capital in a private equity and hedge fund industry. So my second question, Chairman, is if our private equity and hedge fund industries are subjected to a sharp increase in regulation and taxation, what do you believe will be the end result? Thank you. " CHRG-111shrg54675--35 Mr. Templeton," We have seen some of the things more similar to what the gentleman from South Dakota was saying. We just did not see a big inflow into our marketplace of lenders who were offering loans that just didn't make good sense, and I think primarily because we didn't see extreme home value rises over the past 2 or 3 years in our marketplace. It was a more reasonable rise, which I think led to people searching for more reasonable loans. Now, that said, we have certainly had foreclosures. We have had modifications that we have done. But I am not sure that I am--I am not aware of any loan that specifically was a result of some type of egregious act, where somebody put somebody in an interest-only loan or something like that. All we have been seeing is the normal re-fis that people are going through because of the market that we are in. Like the gentleman from South Dakota, we did not originate the sales, so every loan we made through last year is currently in a portfolio. This year, we are originating some for sale, but they are what everybody would call a conforming, main-stream type of loan. I would go one step further to say one thing as concerns the rural areas. In our market, anyway, those brokers weren't interested in the rural areas because those homes were not homes that they could sell as a package to anybody. There was no appreciation in values. They were--before we invented the phrase subprime mortgage, you go back 4 or 5 years ago, if you think about what you would call a subprime home or subprime mortgage, it was an inexpensive home on a dirt street that needed painting and that is what a lot of the homes in our rural communities are and we lend to a lot of those people. So that is what we call internally our subprime, because nobody else will touch a home like that, but that is what we do and that is what we are about. And consequently, we are not suffering in our community from a serious issue with egregious lending. Maybe some are there, I am just not aware of it, but I stay pretty close with the community. Thank you very much. " CHRG-111shrg50814--4 STATEMENT OF SENATOR RICHARD C. SHELBY Senator Shelby. Thank you, Chairman Dodd. Chairman Bernanke, we welcome you back to the Committee. You have spent a lot of time with us. The economic and financial climate has deteriorated significantly since our last monetary policy hearing in July of 2008. In response to the Congress, the administration and the Federal Reserve have taken dramatic steps to navigate our way through this crisis. Since last summer, the Federal Reserve's balance sheet has more than doubled in size and presently stands at about $2 trillion. This expansion is a result of extraordinary actions taken by you and the members of the Board of Governors. Some of these actions were institution specific while others involved establishing new programs aimed at providing liquidity to the banking system and unfreezing credit markets. Because it would take too much of our time this morning to describe each action and program in detail, I will be brief and only discuss a few of them. I would, however, strongly encourage Chairman Dodd to conduct hearings on all of these programs. The Federal Reserve has provided assistance to several large financial entities, according to their words, ``in order to ensure financial market stability.'' Acting along with Treasury and the FDIC, the Federal Reserve has intervened to rescue Citigroup and Bank of America by providing a backstop for large pools of their loans. The Federal Reserve has extended the safety net beyond the banking system by establishing two new lending facilities in connection with the bailout of AIG. These facilities are winding down AIG's holdings and mortgage-backed securities and credit default swap contracts. The Federal Reserve will continue to run a virtual alphabet soup of liquidity facilities through April 30, 2009, at the least. In more recent months, the Federal Reserve announced initiatives aimed specifically at stabilizing our housing and securitization markets. The Fed has announced that it will purchase up to $100 billion in debt obligations of Fannie Mae, Freddie Mac, and Federal home loan banks, as well as up to $500 billion of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Most recently, with securitization markets for all types of consumer credit virtually frozen, the Federal Reserve has announced the establishment of the Term Asset-backed Securities Loan Facility, or TALF. Under the TALF, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated asset-backed securities backed by newly and recently originated consumer and small business loans. The New York Fed will lend an amount equal to the market value of the ABS less a haircut. The U.S. Treasury Department under the TARP will provide $20 billion of credit protection to the New York Fed in connection with the TALF. Given the scope of the Federal Reserve's recent actions, it seems unlikely that any future student will conclude that today's Federal Reserve was too timid in the face of this crisis, Mr. Chairman. Whether the Federal Reserve pursued the most effective actions will be another question, and that will also be the case for the efforts of the administration and the Congress, too. I hope that this Committee will use today's hearing to explore the effectiveness of the Federal Reserve's recent actions. One of the questions foremost in my mind, Mr. Chairman, is whether the Federal Reserve has thought about the long-term implications of its programs, its new programs. Chairman Bernanke, you have already begun discuss the need for an exit strategy, some of which will happen as credit conditions return to normal. Some of the new programs, however, have longer maturities. This presents a problem not only to you but for us. How do you decide when and how to remove the Federal Reserve from the market? This uncertainty may require the Fed to provide more clarity on when and how it will terminate these programs. In addition, Mr. Chairman, the Federal Reserve is likely to take more credit risk through the TALF than is customarily the case of its lending operations. This raises additional questions about transparency and what taxpayers should expect, and perhaps demand, from the Federal Reserve. Hopefully, Chairman Bernanke can begin to address these and other questions today. Thank you, Chairman. " fcic_final_report_full--179 DISCLOSURE AND DUE DILIGENCE: “A QUALITY CONTROL ISSUE IN THE FACTORY ” In addition to the rising fraud and egregious lending practices, lending standards de- teriorated in the final years of the bubble. After growing for years, Alt-A lending in- creased another  from  to . In particular, option ARMs grew  during that period, interest-only mortgages grew , and no-documentation or low-docu- mentation loans (measured for borrowers with fixed-rate mortgages) grew . Overall, by  no-doc or low-doc loans made up  of all mortgages originated. Many of these products would perform only if prices continued to rise and the bor- rower could refinance at a low rate.  In theory, every participant along the securitization pipeline should have had an interest in the quality of every underlying mortgage. In practice, their interests were often not aligned. Two New York Fed economists have pointed out the “seven deadly frictions” in mortgage securitization—places along the pipeline where one party knew more than the other, creating opportunities to take advantage.  For example, the lender who originated the mortgage for sale, earning a commission, knew a great deal about the loan and the borrower but had no long-term stake in whether the mortgage was paid, beyond the lender’s own business reputation. The securitizer who packaged mortgages into mortgage-backed securities, similarly, was less likely to retain a stake in those securities. In theory, the rating agencies were important watchdogs over the securitization process. They described their role as being “an umpire in the market.”  But they did not review the quality of individual mortgages in a mortgage-backed security, nor did they check to see that the mortgages were what the securitizers said they were. So the integrity of the market depended on two critical checks. First, firms pur- chasing and securitizing the mortgages would conduct due diligence reviews of the mortgage pools, either using third-party firms or doing the reviews in-house. Sec- ond, following Securities and Exchange Commission rules, parties in the securitiza- tion process were expected to disclose what they were selling to investors. Neither of these checks performed as they should have. Due diligence firms: “Waived in” As subprime mortgage securitization took off, securitizers undertook due diligence on their own or through third parties on the mortgage pools that originators were selling them. The originator and the securitizer negotiated the extent of the due dili- gence investigation. While the percentage of the pool examined could be as high as , it was often much lower; according to some observers, as the market grew and originators became more concentrated, they had more bargaining power over the mortgage purchasers, and samples were sometimes as low as  to .  Some secu- ritizers requested that the due diligence firm analyze a random sample of mortgages from the pool; others asked for a sampling of those most likely to be deficient in some way, in an effort to efficiently detect more of the problem loans. CHRG-111hhrg54872--72 The Chairman," And I think that helps make the case as well. In the pre-2004 period, it seems to me people who tell us we have to maintain the field preemption exclusion of regulators from the States being involved that came in 2004 have some burden to show us that there was serious problems before that. And frankly, I think the absence of any evidence is a pretty good sign that was not the case. The standard before 2004 was that if there were conflicting things that the national regulators thought were a problem, they could preempt them case-by-case and we could still have other forms of preemption. Second, I did want to talk about Mr. Castle's point that we were not dealing with the causes. This committee passed and this House passed, in a more partisan voice than I wish, very severe restrictions on subprime mortgages. So we have already done that. And as I have previously mentioned to him, we plan to incorporate them. I know he likes to forget that. But the fact is, over the objection of most people on the Republican side who said we were restricting credit unduly to low-income people, we passed very specific legislation which would restrict subprime mortgages and administering that would be part of the charter of this organization. It would also deal with other nonbank entities. Look, I think we should be very clear. If only banks had been involved in the financial lending business, we would not be in the situation we are in. We would not have had the subprime mortgage problem. There are abuses with check cashing, there are some abuses in payday lending, so this is not an anti-bank entity at all. Indeed, I think much of what this entity will do will be to enforce on nonbanks the rules that have guided banks, particularly the community banks. That doesn't mean there have been no bank problems. There have been some, but I don't know why the gentleman from Delaware keeps arguing that we are leaving these other things out. They will be very explicitly covering nonbank competitors of the banks, and I think that will be enhanced. On another point, though, I do agree with him--the gentleman from Texas, Mr. Hinojosa, the gentlewoman from New York, Mrs. McCarthy, and the gentlewoman from Illinois, Ms. Biggert, have been working together on financial literacy. We have had trouble figuring how to deal with this institutionally. One of the things that we expect to be a major part of this new agency is a significant emphasis on financial literacy, I think there is broad agreement. As I said, I think the gentlewoman from Illinois has been a part of that. I now recognize Mrs. Capito. " CHRG-110hhrg46594--137 Mr. Manzullo," Thank you very much. I appreciate the opportunity that we have this afternoon. I especially welcome Mr. Nardelli from Rockford, Illinois, a graduate of Auburn High School. The district I represent is the proud home of one of the great Chrysler facilities. I have two questions. The first one is, you are claiming that no one can buy new cars because the financial crisis has negatively affected the captive financing arms of the Big Three automakers. However, yesterday we heard from the bankers, and we have also heard from the credit unions, that they have tons of money to lend to car customers. What steps are you taking to get the word out to auto dealers and the general public that they shouldn't just use your financing companies to facilitate car and truck sales? " CHRG-111shrg55117--66 Mr. Bernanke," The rating agencies as well, absolutely. But the rating agencies have to show that they have good criteria, that they have eliminated potential conflicts of interest and that they are transparent as well. So they are also a part of the problem as well as the solution at this point. Senator Martinez. The issue of bank regulation and getting money out on the street from banks out at the local level, I continue to hear complaints that banks are not lending, but I also hear from bankers that there is not a clear message and that regulators are giving a different message than what I hear here, from whether it is the FDIC or yourself. What can we do to make sure that the message gets down to the local level and that we are not seeing a situation where bank regulators are overreacting to the situation and expecting banks to do the impossible while the marketplace is in desperate need for credit? " CHRG-111shrg51303--38 Chairman Dodd," I understand that. Just understand, as well, that public confidence in what we are doing is at stake and that right now, the public is deeply, deeply troubled by all of this, and it is their money that is being poured into these operations. And they, frankly, don't understand, nor do we, understand the legal arguments you are giving. But at a time we need to engender public trust and confidence in these very difficult steps, that kind of an answer undermines that effort very significantly. And so I would urge you here--and others may have a different point of view--that you go back and review the answer you have just given with the Chairman and other Members to determine whether or not there is a better answer to this question, because again, in the absence of it, it is going to be extremely difficult, in my view, for the coming requests I am sure will be made of us and this body to be supportive of the efforts to provide the resources, to provide some hope that we will get out of this mess. But we are going to have an awfully difficult time doing that, it seems to me, an awfully difficult time anticipating Congressional support here to provide that kind of financial backing if, in fact, we can't get answers to this, why someone was being paid at par, in a sense, when the value was far less and we now can't find out who they were and the answer to who was actually being rescued. Now, I have additional questions and my colleagues do, as well, but that is not a satisfactory answer, I would say to you, Mr. Vice Chairman, and I would urge you to review that answer and see if there can't be a better one. I know that in the other committee in the other body, a more favorable response was given, but no answers have been provided, and I am sure for the very reasons you have outlined, and I appreciate your answer, but I don't consider that an adequate one, to put it mildly. I have additional questions here, but I have already taken up a lot of time on this point alone and so I will turn to my colleagues, but we will have a second round. Clearly, we will have that. Senator Shelby. Senator Shelby. Governor Kohn, I just want to pick up on what Senator Dodd is talking about. If the American taxpayers' money is at stake, and it is, big time, I believe the American taxpayers and people in this Committee, we need to know who benefited, where this money went. There is no transparency here. And we are going to find out. The Fed and Treasury can be secretive for a while, but not forever. I think your answer here today is very disturbing. As Senator Dodd has already alluded to, you are going to be coming back for more money and more money and more money, and the people want to know what you have done with this money, but more than that, like Senator Dodd just brought up, who benefited from this, because a lot of the people don't believe that the American people have benefited. At least they haven't felt it. So your answer might be the Fed answer, but it is not going to be the answer we are going to accept, and the American people aren't going to accept. I want to now pose some questions to the Superintendent. Superintendent Dinallo, do you agree with all of the following statements. First, the New York Insurance Department reviewed and monitored AIG's securities lending program. Second, AIG's securities lending program heavily invested in long-term mortgage-backed securities. Three, AIG Life Insurance suffered approximately $20 billion in losses related to their securities lending operations last year. And fourth, the Federal Reserve has provided approximately $17 billion to recapitalize AIG Life Insurance Companies? " fcic_final_report_full--551 Session : Firm Structure and Risk Management Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance and Richard N. Rosett Faculty Fellow, University of Chicago Session : Shadow Banking Gary Gorton, Professor of Finance, School of Management, Yale University Public Hearing on Subprime Lending and Securitization and Government-Spon- sored Enterprises (GSEs), Rayburn House Office Building, Room , Washington, DC, Day , April ,  Session : The Federal Reserve Alan Greenspan, Former Chairman, Board of Governors of the Federal Reserve System Session : Subprime Origination and Securitization Richard Bitner, Managing Director of Housingwire.com; Author, Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud, and Ignorance Richard Bowen, Former Senior Vice President and Business Chief Underwriter, CitiMortgage, Inc. Patricia Lindsay, Former Vice President, Corporate Risk, New Century Financial Corporation Susan Mills, Managing Director of Mortgage Finance, Citi Markets & Banking, Global Securi- tized Markets Session : Citigroup Subprime-Related Structured Products and Risk Management Murray C. Barnes, Former Managing Director, Independent Risk, Citigroup, Inc. David C. Bushnell, Former Chief Risk Officer, Citigroup, Inc. Nestor Dominguez, Former Co-head, Global Collateralized Debt Obligations, Citi Markets & Banking, Global Structured Credit Products Thomas G. Maheras, Former Co-chief Executive Officer, Citi Markets & Banking Public Hearing on Subprime Lending and Securitization and Government-Spon- sored Enterprises (GSEs), Rayburn House Office Building, Room , Washington, DC, Day , April ,  Session : Citigroup Senior Management Charles O. Prince, Former Chairman of the Board and Chief Executive Officer, Citigroup, Inc. Robert Rubin, Former Chairman of the Executive Committee of the Board of Directors, Citi- group, Inc. Session : Office of the Comptroller of the Currency John C. Dugan, Comptroller, Office of the Comptroller of the Currency John D. Hawke Jr., Former Comptroller, Office of the Comptroller of the Currency Public Hearing on Subprime Lending and Securitization and Government-Spon- sored Enterprises (GSEs), Rayburn House Office building, Room , Washington, DC, Day , April ,  Session : Fannie Mae Robert J. Levin, Former Executive Vice President and Chief Business Officer, Fannie Mae Daniel H. Mudd, Former President and Chief Executive Officer, Fannie Mae Session : Office of Federal Housing Enterprise Oversight Armando Falcon Jr., Former Director, Office of Federal Housing Enterprise Oversight James Lockhart, Former Director, Office of Federal Housing Enterprise Oversight CHRG-111hhrg48674--88 Mr. Bernanke," I think there are two separate questions. One has to do with the resolution of large firms. I would think there the natural place for the authority would be in the Treasury, because fiscal funds might be used in consultation with the Federal Reserve and other agencies. The other question you are asking me is about a regulator that looks at the broader system and looks at how firms and markets interact and doesn't just focus on each individual institution, the way our system works now. I think that is an important idea. I think we need to work towards having more systemic oversight. I think the Federal Reserve would have a role to play in that, because we have a long-standing commitment to financial stability. We have very broadbased expertise. We have the lending authority under the discount window. But that being said, I think there are many ways that you could structure that that would be satisfactory and would be effective. " CHRG-110hhrg44903--175 The Chairman," The gentlewoman from California will finish. Ms. Waters. Thank you very much, Mr. Chairman. I came in at a time when Congressman Watt was raising some questions about protection for consumers. And my staff had talked with me about the notion of suitability in the lending and broader financial services industry. It gets down to a discussion that was, I guess, led by Harvard law professor Elizabeth Warren's notion of the financial product safety commission as analogous to the Consumer Product Safety Commission. Have you been involved in any extended discussion or given any thought to this idea of a Consumer Product Safety Commission that would be for either--well let's start with Chairman Cox. " FOMC20071206confcall--59 57,CHAIRMAN BERNANKE.," One way to think about it is that you have money market mutual funds that were willing to provide funding for, say, mortgage-backed securities. They are now unwilling to provide funding for those types of assets at essentially any price or at least for any reasonable price. The Fed would, therefore, be funding the mortgage-backed securities and providing the bank with Treasury securities in exchange, which could be funded from the money market mutual fund because that’s the only thing they’re willing to lend against. Again, the presumption is that some assets are more liquid and easily fundable than others. We are changing our balance sheet to hold heavily collateralized but nevertheless more-illiquid assets and replacing them in the banks’ balance sheets with Treasury securities." CHRG-110hhrg46591--67 Mr. Stiglitz," I am not sure that the capital injection is going to be enough. But I do feel nervous about guaranteeing individual loans. I think guaranteeing interbank lending again would facilitate that market. But that itself, again, is not going to suffice. The real problem and the reason that we want to have a good financial system is that credit is the life blood of an economy. And when there is the degree of uncertainty going into an economic downturn, the fundamental problem, the hemorrhaging at the bottom, the foreclosures are going to continue because house prices are going to fall. If we aren't doing anything about either the stimulus, the stimulating economy, or about the foreclosure, banks are going to be more conservative. And so I think it was necessary to recapitalize the banks but it is not going to be sufficient to address our problems. " FOMC20070918meeting--217 215,MR. ALVAREZ.," Well, the auction credit facility doesn’t require the approval of the Reserve Banks. The Board is required to set the rules for lending under 10B, which is what we’ll explain in the program. However, the interest rate on loans under the credit facility would, of course, be established by the Reserve Banks and reviewed and determined by the Board. So depending on the governance of the different Reserve Banks, it may be that the interest rate that is the result of the auction would be something that the board of directors would want to recommend. Our proposal, as you’ll hear it later on, will be that the boards of directors adopt the process rather than a particular interest rate, and that would allow the auction to continue over time." CHRG-111hhrg53241--55 Mr. Hensarling," Mr. Taylor, it is my time. But, with all due respect, you are giving an agency the power to ban products, taking away consumer choice. How do you protect the consumer by taking away their choice? You may disagree, but others believe that you will squash innovation. We will not see the next ATM. We will not see the next set of frequent flyer miles. And so if you think that the members of your organizations are having trouble getting credit now, wait until this legislation is passed, and then you will see real problems. I see my time is up. I yield back. Ms. Waters. [presiding] Thank you very much. I will recognize myself for 5 minutes. Yesterday, in talking with representatives of the banking community, we were admonished for not supporting adjustable rate mortgages. And basically what they said is, you guys don't understand adjustable rate mortgages and how they have helped so many people. It is the same argument we get a lot when people say we don't understand subprime lending. We have never said we are against subprime lending, but there are so many iterations on the subjects. I would like to ask--perhaps you could help me, Mr. Mierzwinski--for a definition of these adjustable rate mortgages. As I understand it, there are option ARMs, and there are products that could reset 6 months, 1 year, 2 years, and when the mortgage is negotiated--and many of these adjustable rate mortgages. They don't look at whether or not the homeowner will be able to afford the mortgage 1 year or 5 months or 5 years from the time that they sign on to these mortgages. And the formula for the increase possibly in interest rates allows something called a margin on top of the interest rates. So you could have an increase in interest rate, plus they can mark up this mortgage another 2, 3, 4 percent. Could you help us with a description of the harmful adjustable rate mortgages? " FOMC20080430meeting--25 23,MR. EVANS.," Thank you, Mr. Chairman. The question that I have gets to the appearance issue, and it is not really about the immediate concerns. To the extent that the markets are not functioning that well, this could be useful, and so I don't really have any disagreement with that. But the facilities that we are talking about currently have a temporary nature to them. The term auction facility is temporary, although of course the Board could make it permanent. The term securities lending facility is an expansion of a program. What's the permanence of that and the primary dealer credit facility as well? As we allow other forms of collateral to be taken, what implications might that have for the future if we try to make these more permanent? This is simply a question; I don't know what the answer is. Do we feel comfortable with these forms of additional collateral on a permanent, ongoing basis, if we were to do that; or do we think it would be possible to turn that off? How costly would it be? " FOMC20080724confcall--76 74,MS. YELLEN.," There was about $1 billion of uninsured deposits out of roughly $30 billion of total liabilities, and some fled. I don't know exactly what proportion fled. Maybe at the end there was something like $700 million of uninsured deposits, and we certainly worried about that in thinking about whether the FDIC's approach was consistent with least-cost resolution. I guess we came to be convinced that, in the absence of our lending, there would have had to be a fire sale of assets and that great losses would have been taken in selling assets on that time frame to cover withdrawals. On balance we accepted the idea that the FDIC was going to close it within a twoweek time frame, and we're reasonably satisfied that it was consistent with least-cost resolution. " CHRG-111hhrg53244--286 Mr. Adler," Frankly, I very deeply share your concern about cost containment being the single most important feature of health care reform. So I thank you for that. You spoke with the gentleman from California a moment ago about liquidity issues. I am aware from studies that we have maybe as much as $1.2 trillion of private earnings sitting in banks overseas, principally in Europe. I am wondering, knowing that there are difficult political questions involving having that money coming back in this country, what would you recommend? And wouldn't you agree that having some of that money come back in would improve balance sheets for banking institutions in our own country and allow them to lend more fully than they have been doing over the last number of months? " FOMC20071206confcall--87 85,MR. KOHN.," Thank you, Mr. Chairman. I also support the implementation of the TAF and the swap. I agree that it might not work or the effect might be very small around the margin. It doesn’t address the capital issue, as President Stern and others have pointed out. The size might not be large enough to have a major effect. Ordinarily, changing our balance sheet composition really shouldn’t affect very much. Someone mentioned Operation Twist, and there is, I think, an element of moral hazard in lending against illiquid collateral without a premium on it. Ordinarily I would think we ought to charge extra for liquefying illiquid collateral, but I don’t think these are ordinary times. I agree with Vice Chairman Geithner that we’re seeing a lot of fear and caution out there. Institutions are protecting themselves against tail risk and against a true Knightian uncertainty that they can’t price and don’t know how to protect themselves against. This is macroeconomic; this is microeconomic; where are the losses? In that context, they are being very, very cautious and very, very conservative. In such a context of a disruption to the normal functioning of the markets, I do think that changing the composition of our balance sheet and liquefying these illiquid assets has a chance of having some success in addressing these issues. I see it as by no means a substitute for monetary policy—that is, for changing the federal funds rate—but rather as a complement. I like the idea of addressing the liquidity issue directly rather than, say, cutting the federal funds rate even more than we otherwise would. I think keeping the federal funds rate part of monetary policy focused on the medium-term macro outlook is the way to go, and if this helps a little bit around the edges, if it addresses the liquidity issue, then I think it will help us keep monetary policy focused where it should be. The current discount window isn’t working. Bagehot said lend freely at a penalty rate. But Bagehot didn’t think about the fact that the banks wouldn’t want to borrow. It’s hard to lend freely if no one wants to borrow in a crisis. Also, the stigma has impaired the operations of our normal discount window, and I do think this facility has a chance of having less stigma attached to it. It will be harder to identify institutions. Part of the problem with the discount window is that institutions bid heavily in markets and then they drop out when they go to the discount window. But this isn’t about that. This is about submitting bids on what was a Tuesday—or a Monday, whatever day it was—for payment on Thursday. So you can’t mistake this for an emergency source of funds. This is more an economic decision that banks will make, and I think it will be perceived as that. It won’t be visible in the market. It will be part of a larger pool and a different bidding operation, so I think there’s at least a chance that there will be a lot less stigma attached to this. Like the Chairman, I like the fact that this is part of or could be part of an international effort. I think that helps to reduce, but not eliminate, the possibility that this would be seen as emergency actions that were taken because we’re concerned about one or two major financial institutions. When a lot of central banks are doing the same thing, I think it would be seen as a problem across lots of different markets and not centered in the U.S. market. So I think that helps to reduce the downside risk of the reaction of markets that we are somehow panicking. I think going together with everyone else helps to damp that down. So I agree—it isn’t obvious that this will work. I think that it has a chance of helping a little around the edges and, under the circumstances, we ought to give it a try. Thank you, Mr. Chairman." FinancialCrisisReport--180 We are concerned further that the current market environment is masking potentially higher credit risk.” 658 Two months later, in May 2006, an OTS examiner wrote: “During the prior examination, we noted numerous instances of underwriters exceeding underwriting guidelines, errors in income calculations, errors in debt-to-income (DTI) calculations, lack of sufficient mitigating factors for credit-quality related issues, and insufficient title insurance coverage on negative amortization loans. … [U]nderwriting errors [] continue to require management’s attention.” 659 While OTS was documenting its concerns, however, it is apparent in hindsight that the agency tempered its criticism. The OTS examiner who authored the memo found that in his review, none of the negatively amortizing loans he analyzed for safety and soundness carried an “exception,” meaning it “probably should not have been made.” 660 Many of the loans made in this time period would later default. Another OTS Findings Memorandum the same month concluded: “Overall, we concluded that the number and severity of underwriting errors noted remain at higher than acceptable levels.” 661 The 2006 OTS ROE for the year concluded: “[S]ubprime underwriting practices remain less than satisfactory. … [T]he number and severity of underwriting exceptions and errors remain at higher than acceptable levels. … The findings of this judgmental sample are of particular concern since loans with risk layering … should reflect more, rather than less, stringent underwriting.” 662 2007 Lending Deficiencies. In 2007, the problems with WaMu’s lending standards were no better, and the acceleration of high risk loan delinquencies and defaults threatened serious consequences. By July 2007, the major credit rating agencies had begun mass ratings downgrades of hundreds of mortgage backed securities, the subprime secondary market froze, and WaMu was left holding billions of dollars worth of suddenly unmarketable subprime and other high risk loans. In September, the OTS ROE for the year concluded: “Underwriting policies, procedures, and practices were in need of improvement, particularly with respect to stated income lending. Based on our current findings, and the 658 3/14/2006 OTS Report of Examination, at 19, OTSWMEF-0000047030, Hearing Exhibit 4/16-94 [Sealed Exhibit]. 659 5/23/2006 OTS Findings Memorandum, “Home Loan Underwriting,” OTSWMS06-008 0001299, Hearing Exhibit 4/16-33. 660 Id. 661 5/25/2006 OTS Findings Memorandum, “Loan Underwriting Review - Long Beach Mortgage,” OTSWMS06- 008 0001243, Hearing Exhibit 4/16-35. 662 8/26/2006 OTS Report of Examination, at OTSWMS06-008 0001680, Hearing Exhibit 4/16-94 [Sealed Exhibit]. fact that a number of similar concerns were raised at prior examinations, we concluded that too much emphasis was placed on loan production, often at the expense of loan quality.” 663 CHRG-111shrg56376--171 Mr. Ludwig," But in terms of bank lending, you would have a highly professionalized institutional regulator, and to Senator Corker's concerns about procyclicality and also--I do not think it would be a super OCC. One of the problems with the current alphabet soup is nobody is large enough, professional enough that there is really the kind of study, focus, or stature for these supervisors to be able to go head to head adequately on things like derivatives, emerging new capital structures, et cetera. So I think that you would have two that would be at the Federal level close to supervision, but the Federal Reserve by nature, with its information gathering, study, and concern would be actively involved in thinking about these issues and prescribing solutions. And the new systemic council or systemic enterprise would also be very much a backstop to the banking supervision, as it would be a backstop to other regulatory issues throughout the Federal and State systems. Senator Reed. Well, let me just take a step further and focus on the point that Professor Baily made about the top-to-bottom bank holding company regulation. Would that be the Federal Reserve, or would that be the new---- " CHRG-111hhrg55814--530 Mr. Baker," Certainly, we feel that a council-like structure would be more appropriate in providing balance and perspective. I understand the concerns Members have with regard to the Federal Reserve unilaterally engaging. There are certain questions with regard to monetary policy obligations and resolution of particular systemically significant entities, which could create issues. Go back to Mr. Volcker during the Mexican currency crisis, when it was advocated that banks extend credit, notwithstanding concerns about creditworthiness, which created considerable concerns about the integrity of monetary policy formulation and bank lending activity. This is a very carefully constructed question that I think we should take time to examine. But certainly having a Presidential appointee unilaterally make the decision or have the Federal Reserve make the decision, both are fraught with inappropriate resolution ability. " CHRG-111shrg54675--94 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM ARTHUR C. JOHNSONQ.1. Mr. Hopkins and Mr. Johnson, both of your institutions are members of the Federal Home Loan Bank system. How do you use the Federal Home Loan Bank to support your bank's lending in your market? Has the current economic crisis and the liquidity crisis affected your use of the Federal Home Loan Banks? Last year, HERA expanded the number of community banks that can use collateral to borrow from the FHLBanks. Has your institution's ability to pledge this collateral been helpful?A.1. The FHLBanks have delivered innovation and service to the U.S. housing market for 76 years, and currently have more than 8,100 members in all 50 States and the District of Columbia, American Samoa, Guam, Puerto Rico, and the Northern Mariana and U.S. Virgin Islands. The Federal Home Loan Bank System (FHLBanks) remains viable and strong, despite losses at a number of the Home Loan Banks similar to those incurred by most of the financial services industry due to the economic downturn. Indeed, without the ability by banks and other lenders to borrow from the Federal Home Loan Banks, the credit crisis of the last year would have been significantly worse. From the outset of the credit crisis, the Federal Home Loan Banks have engaged to ensure liquidity to the financial system. Advances to FHLB Member Banks increased from $640,681 billon at year end 2006 to $928,638 billion at year end 2008. This increase of nearly $300 billion in liquidity went, in large part, to community bank members of the Federal Home Loan Banks. Many small banks rely on the System for term advances to meet day to day liquidity demands. Because the System is a cooperative, members have a vested interest in the prudent lending and operations of the Banks. The result is a liquidity source which is transparent and self monitored. Additionally, the recent GSE reform legislation which combined the regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks has led to a more sophisticated, detailed and experienced regulatory regime for the System and its members. ------ CHRG-110shrg50416--43 Mr. Kashkari," I would return, Senator, to the provisions I talked about, about prohibiting share repurchases and increasing dividends. If you put a bunch of capital in a bank and they cannot return the capital through a share repurchase or dividend---- Senator Shelby. We understand. Mr. Kashkari [continuing]. The return on capital reduces. There are strong economic incentives for them to take that capital and put it to good use. Their own shareholders will demand it; otherwise, their own returns are going to come down. So we feel that the provisions we put into the agreements provide the economic incentives for them to lend. Senator Shelby. Another question. It is my understanding under the capital program nine banks will receive a total of $125 billion. Is that correct? " CHRG-110shrg50415--85 Mr. Rokakis," Mr. Chairman, if you look at what happened in July, just look at the rules that were promulgated--prohibiting loans without regard to making good on that loan; the repayment of the loan; requiring creditors to verify income; banning prepayment penalties in the first 4 years of an ARM was involved; rules against the pressuring, against the coercion of appraisers--if those rules had been put into effect back when they went to the Fed, let's say 2001 or even 2002 or 2003, the outrageous lending practices that accelerated between 2003, 2004, 2005, and 2006 I think would have been prevented, or certainly slowed down, and I think we would be in a different position here today. " CHRG-111hhrg51591--74 Mr. Royce," Thank you very much, Mr. Chairman. And I am going to pick up on some of the questions that Congresswoman Bean had asked. And I appreciate, Mr. Webel, your responses to that. I would also ask this of Mr. Grace and Mr. Harrington: Much of the focus of AIG's failure has been on their speculative use of CDS. There has been a lot of discussion as to whether CDS are insurance products, and it should have been regulated as such. There is no dispute, though, that State regulation failed to detect and address a number of these major problems with AIG. And in February of this year, a report surfaced from the Wall Street Journal, and I will quote from that: ``From $1 billion in 1999, AIG's securities lending portfolio ballooned to $30 billion in 2003, and then 60 billion.'' And as Melissa shared with you, it then went to $70 billion. ``Much of that growth came from lending out corporate bonds owned by AIG's large life insurance and retirement services subsidiaries.'' So over a period of about 7 years, AIG bled the assets of its insurance division, shifting these investments into an overseas casino-like CDS operation, while going completely undetected by the State insurance commissioners responsible for ensuring the solvency of its operations. Now, here is the punch line. Only when the company was on the brink of collapse, after multiple publicly-reported restatements of earnings, did the New York State insurance commissioner and governor propose to redirect $20 billion from the surplus of AIG's insurance company to its parent holding company. Now, fortunately, that plan was aborted. But that is the type--that is the scale of regulation and due diligence and oversight that existed. It turns out the problem was much bigger than State officials realized. And of course, the Federal Government intervened, and the American taxpayers are asked to cover one of the most expensive corporate bailouts in our history. Now, surely there was failure throughout AIG and throughout the regulatory structure overseeing AIG. But doesn't this tragic episode underscore the inability of State insurance regulators to exercise effective oversight of today's large, complex insurance companies? And I again think that Congresswoman Bean is on the right track, and I am a cosponsor of her bill, when we try to give a world-class Federal regulator here not only the authority but also the information to look at the entire financial institution that is involved in insurance and all of its affiliates. It just seems to me, Mr. Harrington, that in the wake of this mess, on top of all of the other arguments, as I say before--you know, we have a national market in everything else and a Balkanized one in this product. But now, on top of it, we deal with this product. So I would ask you, Mr. Harrington, your observations on that, and Mr. Grace as well. " CHRG-110shrg50369--40 Mr. Bernanke," Well, we are certainly aiming to achieve our mandate, which is maximum employment and price stability. We project that that will be happening. We are watching very carefully because there are risks to those projections. One of the risks, obviously, is the performance of the financial markets, and that again, as I mentioned before, complicates the situation. As events unfold--and certainly there are many things that we cannot control or cannot anticipate at this point--we are simply going to have to keep weighing the different risks and trying to find an appropriate balance for policy going forward. Senator Shelby. As a bank regulator, too--this will be my last question, Mr. Chairman--do you fear some bank failures in this country? I know there are big risks where they are heavily involved in real estate lending. Does that bother you as a bank regulator? " fcic_final_report_full--140 Federal and state rules required or encouraged financial firms and some insti- tutional investors to make investments based on the ratings of credit rating agen- cies, leading to undue reliance on those ratings. However, the rating agencies were not adequately regulated by the Securities and Exchange Commission or any other regulator to ensure the quality and accuracy of their ratings. Moody’s, the Commission’s case study in this area, relied on flawed and outdated models to is- sue erroneous ratings on mortgage-related securities, failed to perform meaning- ful due diligence on the assets underlying the securities, and continued to rely on those models even after it became obvious that the models were wrong. Not only did the federal banking supervisors fail to rein in risky mortgage- lending practices, but the Office of the Comptroller of the Currency and the Of- fice of Thrift Supervision preempted the applicability of state laws and regulatory efforts to national banks and thrifts, thus preventing adequate protection for bor- rowers and weakening constraints on this segment of the mortgage market. CHRG-111hhrg48867--267 Mr. Grayson," Ms. Jorde, should we be helping healthy institutions help us, or should we be bailing out institutions that have a history of failure? Ms. Jorde. Well, we should be helping healthy institutions help us, certainly. I don't anybody is advocating that we allow large institutions to come apart chaotically. I think that, certainly, if we start to work toward making these institutions smaller--I am not saying we are going to have 100,000 community banks with less than $50 million in assets, but we can certainly make these institutions of such size that capital will come back into them from the sidelines. I don't think that investors out there are very anxious to be investing in these systematically risky institutions. And I think, going forward, we can have a lot of lending start up again if we plan this right. " CHRG-111shrg57319--5 MUTUAL BANK " Mr. Vanasek," OK. Mr. Chairman, Senator Coburn, and distinguished Members of the Committee, thank you for the opportunity to discuss the mortgage and financial crisis from the perspective of a Chief Credit Officer in the sixth-largest bank in this country.--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Vanasek appears in the Appendix on page 134.--------------------------------------------------------------------------- I was the Chief Credit Officer and later the Chief Risk Officer of Washington Mutual during the period of September 1999 to December 2005, when I retired. Prior to serving in this capacity, I had worked for several large banking companies in senior credit-oriented roles, including PNC, First Interstate Bank, Norwest/Wells Fargo. Altogether, I have 38 years of experience in credit-oriented positions and have been fortunate enough to have well-established histories and constructive relationships with all of the major banking regulators. The failure of Washington Mutual occurred in September 2008, nearly 3 years after my retirement, so much of what I will tell you today is historical information about the company's strengths and weaknesses during the years of my direct involvement. Washington Mutual was a reflection of the mortgage industry characterized by very fast growth, rapidly expanding product lines, and deteriorating credit underwriting. This was a hyper-competitive environment in which mistakes were made by loan originators, lending institutions, regulatory agencies, rating agencies, investment banks that packaged and sold mortgage-backed securities, and the institutions that purchased these excessively complex instruments. It was both the result of individual failures and systemic failures fueled by self interest, failure to adhere to lending policies, very low interest rates, untested product innovations, weak regulatory oversight, astonishing rating agency lapses, weak oversight by boards of directors, a cavalier environment on Wall Street, and very poorly structured incentive compensation systems that paid for growth rather than quality. One must also seriously question the wisdom of the elimination of Glass-Steagall and its impact on the securitization market. Washington Mutual was a company that had grown with exceptional speed due to acquisitions primarily in California during the industry crisis of the early 1990s. By 2000, it was a company in search of identity. At one point, the CEO wanted the company to expand the commercial lending area in an effort to earn a higher price earnings ratio on the stock, only to abandon the strategy 3 years later. The focus then shifted to rapidly expanding the branch network by opening as many as 250 locations within 12 months in cities where the company had no previous retail banking experience. Ultimately, this proved to be an unsuccessful strategy due in part to the effort to grow too quickly. The focus then shifted away from the diversification to becoming the so-called low-cost producer in the mortgage industry. This effort was likewise unsuccessful, in large measure due to an expensive undertaking to write a completely new mortgage loan origination and accounting software system that ultimately failed and had to be written off. By mid-2005, the focus had shifted again to becoming more of a higher-risk subprime lender at exactly the wrong time in the housing market cycle. This effort was characterized by statements advocating that the company become either via acquisition or internal growth a dominant subprime lender. In addition to subprime, the company was a large lender of adjustable-rate mortgages, having had 20 years' experience with the product. As in the case of subprime, the product had only been available to a narrow segment of customers. Adjustable-rate mortgages were sold to an ever-wider group of borrowers. Product features were also expanded. Historically, plain vanilla mortgage lending had been a relatively safe business. During the period 1999 to 2003, Washington Mutual mortgage losses were substantially less than one-tenth of one percent, far less than losses of commercial banks. But rapidly increasing housing prices masked the risks of a changing product mix and deteriorating underwriting, in part because borrowers who found themselves in trouble could almost always sell their homes for more than the mortgage amount, at least until 2006 or 2007. There is no one factor that contributed to the debacle. Each change in product features and underwriting was incremental and defended as necessary to meet competition. But these changes were taking place within the context of a rapidly increasing housing price environment and were, therefore, untested in a less favorable economic climate. It was the layering of risk brought about by these incremental changes that so altered the underlying credit quality of mortgage lending which became painfully evident once housing prices peaked and began to decline. Some may characterize the events that took place as a ``perfect storm,'' but I would describe it as an inevitable consequence of consistently adding risk to the portfolio in a period of inflated housing price appreciation. The appetite of Wall Street and investors worldwide created huge demand for high-yielding subprime mortgages that resulted in a major expansion of what was historically a relatively small segment of the business led by Household Finance. The Community Reinvestment Act also contributed by demanding loans--that banks make loans to low-income families, further expanding subprime lending. One obvious question is whether or not these risks were apparent to anyone in the industry or among the various regulatory or rating agencies. There is ample evidence in the record to substantiate the fact that it was clear that the high-risk profile of the entire industry, to include Washington Mutual, was recognized by some but ignored by many. Suffice it to say, meeting growth objectives to satisfy the quarterly expectations of Wall Street and investors led to mistakes in judgment by the banks and the mortgage lending company executives. A more difficult question is why boards of directors, regulatory agencies, and rating agencies were seemingly complacent. Another question may be my personal role and whether I made significant effort to alter the course of lending at Washington Mutual. In many ways and on many occasions, I attempted to limit what was happening. Just a few examples may suffice. I stood in front of thousands of senior Washington Mutual managers and executives in an annual management retreat in 2004 and countered the senior executive ahead of me on the program who was rallying the troops with the company's advertising line, ``The power of yes.'' The implication of that statement was that Washington Mutual would find some way to make a loan. The tag line symbolized the management attitude about mortgage lending more clearly than anything I can tell you. Because I believed this sent the wrong message to the loan originators, I felt compelled to counter the prior speaker by saying to the thousands present that the power of yes absolutely needed to be balanced by the wisdom of no. This was highly unusual for a member of the management team to do, especially in such a forum. In fact, it was so far out of the norm for meetings of this type that many considered my statement exceedingly risky from a career perspective. I made repeated efforts to cap the percentage of high-risk and subprime loans in the portfolio. Similarly, I put a moratorium on non-owner-occupied loans when the percentage of these assets grew excessively due to speculation in the housing market. I attempted to limit the number of stated income loans, loans made without verification of income. But without solid executive management support, it was questionable how effective any of these efforts proved to be. There have been questions about policy and adherence to policy. This was a continual problem at Washington Mutual, where line managers, particularly in the mortgage area, not only authorized but encouraged policy exceptions. There had likewise been issues regarding fraud. Because of the compensation systems rewarding volume versus quality and the independent structure of the originators, I am confident at times borrowers were coached to fill out applications with overstated incomes or net worth to meet the minimum underwriting requirements. Catching this kind of fraud was difficult at best and required the support of line management. Not surprisingly, loan originators constantly threatened to quit and to go to Countrywide or elsewhere if the loan applications were not approved. As the market deteriorated, in 2004, I went to the Chairman and CEO with a proposal and a very strong personal appeal to publish a full-page ad in the Wall Street Journal disavowing many of the then-current industry underwriting practices, such as 100 percent loan-to-value subprime loans, and thereby adopt what I termed responsible lending practices. I acknowledged that in so doing the company would give up a degree of market share and lose some of the originators to the competition, but I believed that Washington Mutual needed to take an industry-leading position against deteriorating underwriting standards and products that were not in the best interests of the industry, the bank, or the consumers. There was, unfortunately, never any further discussion or response to the recommendation. Another way I attempted to counteract the increasing risk was to increase the allowance for loan and lease loss to cover the potential losses. Regrettably, there has been a longstanding unresolved conflict between the SEC and the accounting industry on one side and the banks and the bank regulators regarding reserving methodology. The SEC and accounting profession believed that more transparency in bank earnings is essential to investors and that the way to achieve transparency is to keep reserves at levels reflecting only very recent loss experience. But banking is a cyclical business, which the banks and the bank regulators recognize. It is their belief and certainly my personal belief that building reserves in good times and using those reserves in bad times is the entire purpose of the loan loss reserves. What is more, the investors, the FDIC, and the industry are far better protected reserves that are intended to be sufficient to sustain the institution through the cycle rather than draining reserves at the point where losses are at their lowest point. At one point, I was forced by external auditors to reduce the loan loss reserve of $1.8 billion by $500 million or risk losing our audit certification. As the credit cycle unfolded, those reserves were sorely needed by the institution. In my opinion, the Basel Accord on bank capital requirements repeats the same mistake of using short-term history rather than through-the-cycle information to establish required capital levels, and as such has been a complete and utter failure. The conventional wisdom repeated endlessly in the mortgage industry and at Washington Mutual was that while there had been regional recessions and price declines, there had never been a true national housing price decline. I believe that is debatable. But it was widely believed, and partially on this premise, the industry and Washington Mutual marched forward with more and more subprime high loan-to-value and option payment products, each one adding incrementally to the risk profile. Thank you for your time and attention. I will be happy to address your questions. Senator Levin. Thanks, Mr. Vanasek. Mr. Cathcart. TESTIMONY OF RONALD J. CATHCART,\1\ FORMER CHIEF ENTERPRISE RISK OFFICER (2006-2008), WASHINGTON MUTUAL BANK " CHRG-110shrg46629--115 STATEMENT OF SENATOR THOMAS R. CARPER Senator Carper. Thanks, Mr. Chairman. Chairman Bernanke, welcome. It is good to see you again. Thank your coming and joining us today, and for your service. Others have asked about the subprime mortgage market. I want to just touch briefly on that as we start out here. Yesterday, we tried to have a hearing in this same room on FHA reauthorization. In my opening statement yesterday, I mentioned that if you look at the increase in the subprime mortgage market it really mirrors the decrease of FHA's market presence for subprime lending. The Administration has come to us with the recommendation, a series of recommendations, on how to change things in the FHA program. I just wanted to ask if you have any thoughts on what might be an appropriate course for us? " CHRG-111hhrg50289--28 Mr. Graves," Thanks, Madam Chair. My first question is to Ms. Huels. Has the economy changed as far as your investment practices go? With the downturn in the economy, have you changed your policies or practices or backed off or anything like that? Ms. Huels. We have not. We invest primarily in midwest based industrial manufacturing companies, and while many may think manufacturing has declined in this country, we find there are significant opportunities to invest in growing middle market, lower middle market manufacturing companies. We have not changed our profile. If there is a profile that has changed, it is really the availability of senior lending available to us. So what we have done is we have had to write a little bit bigger check and provide more of the capital because the senior lenders are typically providing less. " CHRG-111hhrg53244--36 Mr. Bernanke," Well, for a good bit of the recent years the commercial real estate market was actually pretty strong even as the residential market was weakening. But as the recession has gotten worse in the last 6 months or so, we are seeing increased vacancy, declining rents, falling prices, and so more pressure on commercial real estate which is raising the risk of lending to commercial real estate. So that is certainly a negative. As I was mentioning to the chairman, the facilities for refinancing commercial real estate, either through banks or through the commercial mortgage-backed securities market, seem more limited; and so we are somewhat concerned about that sector and paying close attention to it. We are taking the steps that we can through the banking system and through the securitization markets to try to address it. " CHRG-110shrg50415--42 Chairman Dodd," Let me, if I can, I wanted to get Gene Ludwig, if I could, to pick up on this. And, again, we heard the comments on CRA, and, of course, you had dealt directly with this issue when you served as Comptroller of the Currency, and you have some insight into the experience with CRA. At the time you were Comptroller, OCC worked with other banking agencies to overhaul CRA regulations, and you have had experience supervising CRA lending and investment by banks. I wonder if you could tell us about whether CRA helped to fuel the current economic crisis in your view. And on the topic of CRA, I would like to--well, I read that comment earlier. I wonder if you could just pick up on those thoughts as well about the pernicious argument being posed by those who suggest the CRA was a part of this or a major cause of this problem. " FOMC20080805meeting--140 138,MS. DUKE.," Thank you, Mr. Chairman. I was advised to speak of things I know, so all of my comments will have to do with commercial banks and the traditional banking operations within those banks. Also, they are limited to the market area that I operated in. I was in a large community bank. The primary competitors were 2 of the top 5 banks and 4 of the top 20 banks. I hope to expand that on the supervision committee. I guess the major observation I would have is that I can't see lending growth ever resuming until the market for financial stocks improves. That market is not going to improve until it is clear that the credit risk is manageable. I haven't seen the confidence in banking and banking institutions this low since we were well into the S&L crisis back in the early 1990s. At the same time, the credit numbers--or at least the commercial banks' part of the credit numbers--don't look all that bad. At this point, we are sharing those credit losses with a number of other types of institutions, and I think the banks got the better slice of that pie. So I do believe that the banks will be able to manage through this. On the equity side of things, you have had equity destroyed through credit losses, and so those banks are certainly reducing their lending. I don't think there is enough capital in the system. I don't think earnings are strong enough. There is certainly no external capital available to pick up that slack. So while you hear smaller banks say, ""We are getting great business now because the larger banks have cut back on their lending,"" they just don't have the capacity to take in that business. No matter why they are trying to raise capital, capital issuance is viewed as a sign of weakness. It is scarce. It is expensive. The short selling has been just amazing. It has really driven down the prices. For some of the larger banks, it is running anywhere from 10 to 15 percent of total float. It has even gotten down into banks smaller than $5 billion. I was looking at one, and the short interest on July 15 was 10 times that of April 15. It was running about 7 percent of float on a very thinly traded stock. I can't believe that it has anything to do with the fundamentals of the institution. It is just all being painted with the same brush. For institutions that must raise capital or fail, my concern is that the capital that is being raised or being offered comes with an exit strategy. I don't think that the capital is going to have the patience to wait for a longer-term resumption of lending. Those that do have capital cushions seem to be spending them on small buybacks or dividend increases in an effort to demonstrate some confidence in the future. On the liquidity side, central core funding is very tight and incredibly uncertain. CD rates do remain high, and as one institution after another desperately needs money, they raise the rates. As one falls out of that situation, somebody else picks it up again. After the full weekend of IndyMac coverage in the press, the phones just lit up everywhere asking about FDIC insurance. Now there is a renewed interest in the CDARS program. I didn't realize that these deposits are classified as brokered deposits. It will be interesting to see if we have a big jump in brokered deposits in the next couple of quarters. The Home Loan Banks are tightening their collateral requirements. They are introducing risk rating systems, so that source of funding is not as available as it was. Nonconforming mortgages are impossible to place. On the asset side, I talked to several correspondent bankers, and they have been told to cut their overall fed funds lines sometimes in half. It doesn't matter who it is, just cut them in half. A number of the banks are cutting home equity lines across the board and freezing those lines. The full-relationship lending is prized, but even in that it is only to the extent that lending is in some ways self funding. Transaction deals are like hot potatoes; nobody wants to touch them. We had some calls from other bankers who were asking what liquidity premium we were adding to our pricing, so there is clearly a change in the pricing, which may actually improve profitability. However, I think a lot of it is in order not to turn down the credit but simply to price out the credit, so that the borrower makes the decision not to borrow rather than the bank making the decision not to lend. On the credit side, the reserve additions have been incredibly dramatic, but a lot of that is because reserve levels were so low going into this. Capital was strong, earnings were strong, but reserve levels were down at 70 or 80 basis points. I had not ever seen them below 1 percent until two or three years ago. That is because of the change in the accounting for reserves as well as 10 years of no demonstrable losses. Oddly enough, the charge-off and delinquency rates really don't look all that bad. When I looked at first-quarter rates, they didn't look a whole lot different from what used to be the norm, at least in terms of commercial loans. Then, on the consumer side, in this case it was mortgage loans versus consumer loans, but still a 75 basis point loss on consumer loans historically was actually normal. It is really difficult to follow any discussion of what is going on in terms of credit losses because you get confused between what is mark-to-market loss, what is actual credit loss, what are charge-offs, what are reserves, and then who owns those losses. I am not quite sure what the rate of deterioration or the rate of resolution is. In terms of collection, it takes an awful lot of time to ramp up collection and recovery efforts, and I don't know where we are in that cycle, but I think we have a long way to go. The last cycle was all about commercial real estate, and nobody could work up much sympathy for commercial real estate developers. [Laughter] In this situation, there is so much political sensitivity around foreclosures that I think it is going to be much elongated. When a borrower cannot or will not pay and you can't restructure it to create capacity or willingness to pay, then some form of forced sale is the only thing that gets you off go. I think that has been pushed out and pushed out. It is also the only way to clear any junior liens. This process is expensive and time-consuming, and owning the property is even more expensive. So as the lender-owned properties become a larger and larger segment of the properties for sale, I do think price declines are going to accelerate significantly. I will be watching the IndyMac resolution particularly closely. In the last cycle, if you will remember, the properties that were sold by the RTC brought the biggest discounts of all. So it will be interesting to see what this theory of holding off on foreclosures and then at some later point having to move the assets actually does to prices. The good news is that once lenders start selling, they do tend to move units at whatever price it takes. Lenders are going to have to do that. There is no justification for wasting precious capital or liquidity on dead assets. But there is also no justification for selling the portfolios at fire sale prices if the net realizable value of collecting them is higher, and I think it definitely is for the banks. Finally, if I could take one more minute, I did do some very in-depth personal research on the housing decisions of a relocating worker. [Laughter] I purchased a residence in January '06 for a May '06 closing and hit the peak. The current value, I am told, is 80 to 85 percent of the purchase price, marketing time 6 to 12 months. The purchase in the new location--I did do the calculation--it was 15 to 20 times annual rent, but that didn't matter. I had already had all the thrill of ownership that I could stand and will be renting. [Laughter] The second thing is that, if I had financed this property at 80 percent, I would have had no equity to roll into a new purchase anyway, so there would have been no decision involved. The good news is that as long as there is no need to sell, the price doesn't matter, and I could have waited it out very easily. So the conclusion that I came to is that this current elevated inventory we have of housing includes only those who absolutely have to sell because nobody in this market would choose to sell. So once that begins to turn around, again, there just have to be a whole lot of pent-up houses for sale. Thank you, Mr. Chairman. " CHRG-110hhrg46596--473 Mr. Donnelly," So we can give those three folks who were sitting here an answer, and all the car dealers around this country an answer, so we can find out when will these applications be approved. And the sooner, the better, because we are in a crisis situation on that. I also have the privilege of representing a number of recreational vehicle companies, who came to me in the last few weeks and said, ``Our funding has completely dried up.'' The people who were providing them credit for floor planning and other purposes called and said, ``We just don't have the funds anymore. There is no credit that is going to be available.'' And they said, ``Without that, how do we operate a business?'' So the next set of funds that comes along, the $350 billion, can it be put into anybody you give those funds to that they have to sign to agree to put, for every dollar they receive, at least $1 out in lending? Can that be made part of your program? " CHRG-111hhrg53241--51 Mr. Hensarling," Well, if you end up essentially saying that you have a semi-safe harbor for a plain vanilla product and you don't for any other product--we had testimony here just yesterday of a number of banks, including our community banks, that you want to have step-up lending, saying they are not going to roll out new products because they fear that these products will be found unlawful. At least all the people who are in production of the ice cream, the financial ice cream, are saying, you know what? The incentive structure is we are going to produce plain vanilla. So if the impact--I know how it may look to you on the drawing board, but if the impact is we end up with plain vanilla products after--assuming this legislation passes--would it change your mind about the legislation? " fcic_final_report_full--298 On Wednesday, January , , Treasurer Upton reported an internal accounting error that showed Bear Stearns to have less than  billion in liquidity—triggering a report to the SEC. While the company identified the error, the SEC reinstituted daily reporting by the company of its liquidity.  Lenders and customers were more and more reluctant to do business with the company. On February , Bear Stearns had . billion in mortgages, mortgage- backed securities, and asset-backed securities on its balance sheet, down almost  billion from November. Nearly  billion were subprime or Alt-A mortgage–backed securities and CDOs. The hedge funds that were clients of Bear’s prime brokerage services were particu- larly concerned that Bear would be unable to return their cash and securities. Lou Lebedin, the head of Bear’s prime brokerage, told the FCIC that hedge fund clients occasionally inquired about the bank’s financial condition in the latter half of , but that such inquiries picked up at the beginning of , particularly as the cost in- creased of purchasing credit default swap protection on Bear. The inquiries became withdrawals—hedge funds started taking their business elsewhere. “They felt there were too many concerns about us and felt that this was a short-term move,” Lebedin said. “Often they would tell us they’d be happy to bring the business back, but that they had the duty to protect their investors.” Renaissance Technologies, one of Bear’s biggest prime brokerage clients, pulled out all of its business. By April, Lebedin’s prime brokerage operation would be holding  billion in assets under manage- ment, down more than  from  billion in January.  Nonetheless, during the week of March , when SEC staff inspected Bear’s liquid- ity pool, they identified “no significant issues.” The SEC found Bear’s liquidity pool ranged from  billion to  billion.  Bear opened for business on Monday, March , with approximately  billion in cash reserves. The same day, Moody’s downgraded  mortgage-backed securities issued by Bear Stearns Alt-A Trust, a special purpose entity. News reports on the downgrades carried abbreviated headlines stating, “Moody’s Downgrades Bear Stearns,” Upton said.  Rumors flew and counterparties panicked.  Bear’s liquidity pool began to dry up, and the SEC was now concerned that Bear was being squeezed from all directions.  While “everything rolled” during the day—that is, Bear’s repo lenders renewed their commitments—SEC officials worried that this would “proba- bly not continue.”  On Tuesday, the Fed announced it would lend to investment banks and other “primary dealers.” The Term Securities Lending Facility (TSLF) would make avail- able up to  billion in Treasury securities, accepting as collateral GSE mortgage– backed securities and non-GSE mortgage–backed securities rated triple-A. The hope was that lenders would lend to investment banks if the collateral was Treasuries rather than other highly rated but now suspect assets such as mortgage-backed secu- rities. The Fed also announced it would extend loans from overnight to  days, giv- ing investment banks an added breather from the relentless need to unwind repos every morning. fcic_final_report_full--97 CREDIT EXPANSION CONTENTS Housing: “A powerful stabilizing force” ...............................................................  Subprime loans: “Buyers will pay a high premium” ............................................  Citigroup: “Invited regulatory scrutiny” ..............................................................  Federal rules: “Intended to curb unfair or abusive lending” ................................  States: “Long-standing position” ..........................................................................  Community-lending pledges: “What we do is reaffirm our intention” ................  Bank capital standards: “Arbitrage” ....................................................................  By the end of , the economy had grown  straight quarters. Federal Reserve Chairman Alan Greenspan argued the financial system had achieved unprecedented resilience. Large financial companies were—or at least to many observers at the time, appeared to be—profitable, diversified, and, executives and regulators agreed, pro- tected from catastrophe by sophisticated new techniques of managing risk. The housing market was also strong. Between  and , prices rose at an an- nual rate of .; over the next five years, the rate would hit ..  Lower interest rates for mortgage borrowers were partly the reason, as was greater access to mort- gage credit for households who had traditionally been left out—including subprime borrowers. Lower interest rates and broader access to credit were available for other types of borrowing, too, such as credit cards and auto loans. Increased access to credit meant a more stable, secure life for those who managed their finances prudently. It meant families could borrow during temporary income drops, pay for unexpected expenses, or buy major appliances and cars. It allowed other families to borrow and spend beyond their means. Most of all, it meant a shot at homeownership, with all its benefits; and for some, an opportunity to speculate in the real estate market. As home prices rose, homeowners with greater equity felt more financially secure and, partly as a result, saved less and less. Many others went one step further, borrow- ing against the equity. The effect was unprecedented debt: between  and , mortgage debt nationally nearly doubled. Household debt rose from  of dispos- able personal income in  to almost  by mid-. More than three-quarters  of this increase was mortgage debt. Part of the increase was from new home pur- chases, part from new debt on older homes. FOMC20080916meeting--68 66,MR. DUDLEY.," I think a lot of the programs that we have are actually open ended. The discount window is open ended in the sense that it's limited only by the amount of collateral that the banks post there. The Primary Dealer Credit Facility is open ended in that it is limited only by the size of the tri-party repo system. My point here is that, if foreign banks worry about capacity limits, even having a large program could in principle not be sufficient in extremis. But if the program is open ended, the rollover risk problem goes away. If I lend you more dollars today, I don't have to worry about getting those dollars back because I always know that the facility is there. So it's really the elimination of the ability to flatten out your position if you need to in terms of your dollar exposures. " CHRG-110shrg50420--464 Mr. Nardelli," So the point, Senator, is ours is secured and I think this Committee, who has oversight over lending and banking, would have a hell of a time if they just unilaterally reject that on any future financial company's putting money into a company and getting secured positions. But again, you guys have the power to make that go away, I guess. Senator Corker. Mr. Chairman, I thank you. I just want to say that, to me, making them equivalent to the transplants means all the things. It means sub. It means 50 percent on VEBA equitized. It means all those things. But certainly to me that is an interesting thing that apparently all three of these folks, and I don't know what Mr. Gettelfinger and Mr. Wagoner will talk about afterwards, but I think there is a potential here at least for some serious discussion. I thank you for the hearing and I thank all of you for participating. " CHRG-111hhrg50289--2 Chairwoman Velazquez," The House Small Business Committee will come to order. Whether you talk to the owners of a Silicon Valley start-up, a Mom and Pop restaurant or a hardware store on Main Street, entrepreneurs across the nation face a common challenge. They cannot find the capital necessary to sustain their businesses. For many firms, this can make the difference between staying open or going under. During today's hearing we will examine what options are available to help small companies access capital. Lenders and entrepreneurs will share the real world challenges they face in today's tightened credit conditions, as well as their ideas for making things better. In previous recessions, the Small Business Administration has filled the gaps in private capital markets. Today that is not the case. Loans funded by the SBA's flagship program have been double digit declines, meaning when we need the SBA to step in and help lift the capital markets, they are actually doing less. This is a result of poor policy decisions and a lack of funding at the agency over the last eight years finally taking its toll on the programs. The American Recovery and Reinvestment Act has helped lay the foundation to start turning things around. The new law makes loans less expensive for borrowers, putting more money in the hands of small firms. It also gives banks greater incentives to lend by increasing the percentage of a loan the government will guarantee. It is a start, but we have a long way to go. Today the SBA has not implemented over half of the Recovery Act provisions that Congress passed and the President signed, but as more and more of these initiatives come on line, entrepreneurs should see an improved lending environment. Even with these steps, small businesses are still finding it difficult to secure credit. Overall lending is down over 50 percent. At this rate the SBA will make nearly $5 billion less in loans than it made in the previous year, demonstrating the serious difficulties in the credit market still exist. How we overcome these challenges will be an important part of today's discussion. All options are on the table in finding a solution to these very real problems. Where we can enhance existing initiatives we should do so, but when programs no longer work, they must be replaced with measures that do meet small business' needs. No initiative should continue simply because of a special interest. The only measurements should be do these programs serve small businesses and do they help small firms access capital. If we cannot answer yes to both of those questions, then we have to ask why are they here. Our goal must be to expand options for small businesses seeking financing. As with health care in many communities, entrepreneurs have only one or two options for lending. That is no real competition, and it does not give firms the flexibility they need to realize their potential to grow and create jobs. Ultimately the full range of small business' capital needs must be met, from the micro borrower who needs a few thousand borrowers to the high growth company seeking equity investment. No such menu of choices exists today, and the options are becoming more limited. By the end of last year, venture capital was down 26 percent. Venture capital was instrumental to the role technology played in turning the economy around in the 1990s, and it will be just as important today as it was a decade ago. In creating paths to capital for small firms we have our work cut out for us. If we have learned anything in recent years, it is that insuring the capital markets function smoothly requires a robust public-private partnership. It is my hope that today's hearing begins a dialogue about how to renew that partnership. I have always said that access to capital is access to opportunity. In today's economy, the ability to tap into capital means a laid off worker can launch their own venture. It means companies who would otherwise close their doors stay open and keep providing jobs. It means that when the economy improves, small businesses can hire again and sustain our nation's recovery. I thank our witnesses for taking time out of their busy schedule and companies to be here with us today, and now I yield to the Ranking Member, Mr. Graves, for his opening statement. " CHRG-111hhrg56766--74 Mr. Bernanke," Congresswoman, it is not the Federal funds rate, it was the discount rate, the rate at which we lend on a special overnight basis to banks, we cut that very low because of the financial crisis. We wanted to make sure that banks had access to lots of liquidity in case there was a run on the banks. Now that there is easy access to private markets, they do not need that kind of help any more, so we have just slightly reduced the subsidy we are giving to banks. It has nothing to do with the Federal funds rate or the overall stance of monetary policy. It has to do with normalizing our extraordinary support for the banks and the financial markets. We do not anticipate that action having any implications-- Ms. Waters. Let's be clear. The change that you have made, no matter how slight it is, at the discount rate, will increase the amount they have to pay for their loans, the banks; is that right? " fcic_final_report_full--81 Between  and , debt held by financial companies grew from  trillion to  trillion, more than doubling from  to  of GDP. Former Treasury Secre- tary John Snow told the FCIC that while the financial sector must play a “critical” role in allocating capital to the most productive uses, it was reasonable to ask whether over the last  or  years it had become too large. Financial firms had grown mainly by simply lending to each other, he said, not by creating opportunities for in- vestment.  In , financial companies borrowed  in the credit markets for every  borrowed by nonfinancial companies. By , financial companies were borrowing  for every . “We have a lot more debt than we used to have, which means we have a much bigger financial sector,” said Snow. “I think we overdid fi- nance versus the real economy and got it a little lopsided as a result.”  CHRG-110hhrg46593--82 Mr. Bernanke," Well, as the Secretary has described, there has been a whole number of programs, including HOPE for Homeowners and so on. But I also agreed with an earlier questioner that I think we need to do more. Ms. Velazquez. You know, the trouble here, sir, is I supported the bailout package. I agonized with that vote. Still, Main Street America, the people who are watching this debate here or this discussion, they are still waiting to hear an answer as to how this is benefitting them, how this is benefitting Main Street America. You have the silver bullet, it seems to me, that just by giving a blank check to financial institutions--this is a partnership, this is taxpayers' money that is providing capital infusion to financial institutions. But we expect from the banks to do more to help families keep their homes. And so we are giving this money or lending this money without any strings attached to it. " CHRG-111shrg57319--506 Mr. Killinger," I believe--yes. Clearly, our policy and what I believe is that at the time when certain loans were sold--all of our loans were sold--that we felt that would be appropriate for the customer. We had put out responsible lending principles, in fact, that require us to make that proactive look. Is this an appropriate product for the customer, and given the times, do we think it is reasonable? That changed when the housing market changed. That is why we pulled back and stopped originating Option ARMs and did the same on certain subprime products, because given what happened to the housing market, those products were no longer appropriate. But at the times when they were part of our arsenal, we thought that they would be appropriate. Senator Kaufman. What do you think, Mr. Rotella? Is the vast majority of products you were selling through mortgage-backed securities were safe for customers? There wasn't any fraud involved. There were no loans ready to be delinquent, anything like that that you know of? " FOMC20051101meeting--144 142,MS. BIES.," Thank you, Mr. Chairman. What I’d like to do today is to talk a little bit more about some recent trends in consumer borrowing information, which a few people have already mentioned, and then just make some general comments on the economy and on inflation. As a couple of you have already noted, the data on consumer borrowing have shown a lot of noise, as I would call it, in the last couple months. Overall, we’re seeing a slowing in the rapid rate of growth. It’s still growing in general, but the pace of growth is slowing. So it raises the question of what is really happening here. Are consumers saying that they are nearing the point at which they really can’t absorb any more debt? Or are changes in underwriting under way that are slowing the pace of growth? As you know, the Senior Loan Officer Survey, covered in the supplement to the Greenbook, reported only modest changes in demand for credit; it was modestly lower. And to the extent that November 1, 2005 72 of 114 couple of months, as the big incentives came off. Also, we’re beginning to see a moderation in the pace of increase in median housing prices. So that could be consistent with a slowing in demand. On the other hand, if we look at the chart in the Greenbook on bankruptcy filings, there was a huge spike in the week prior to October 17, just before the new bankruptcy law went into effect. And that could have front-loaded anywhere from three to four quarters of bankruptcy filings, as everybody tried to get in before the law changed. We saw a tremendous increase at that point. It doesn’t reflect what the banks are showing in the quality of their credit or in the securitized transactions that are out there in the market where delinquency rates have basically been fairly stable. So this was a blip up ahead of what our normal leading indicators are showing. On home equity lines, I find the numbers really remarkable. Home equity lines grew 31 percent in 2003, 44 percent in 2004, slowed to 17 percent growth in the first half of this year, and now, as Governor Kohn just mentioned, have shown declines in September and October. So the question is: What is happening with these home equity lines? As you know, the banking agencies collectively put out common guidance in May regarding home equity lines. There was really nothing new in this guidance. It just pulled together what was out there to remind everybody what safe and sound lending practices are. We know that the vast majority of banks follow these sound procedures in almost all of their lending. So I felt comforted that in the Senior Loan Officer Survey only a few banks said they had changed their underwriting standards because of the new guidance. That to me says that we did really focus on the outliers, which was our intention. So I don’t believe that this reining in of home equity lines is due to underwriting changes. We know that home equity lines have been used not only to extract equity for spending but also increasingly for downpayments on purchases of homes—more so than in the past. So again, this could reflect something more that November 1, 2005 73 of 114 As you know, the banking agencies later this quarter are going to issue some guidance on mortgages and on loans for commercial real estate. Again, our intention is not to signal alarm that overall credit quality and underwriting are poor, but to call attention to some lending practices at the limit that are raising some concerns. So at the margin it could have some impact on the pace of lending, but we think overall things are in pretty good shape. The other point I want to make is about credit card lending. More than a year ago now, both the OCC [Office of the Comptroller of the Currency] and the Fed started to raise questions about underwriting and credit advances for borrowers who go over their lines of credit and about minimum payments expected on credit card balances. A growing number of customers were not being required to cover late payment fees or fees for going over their credit line and actually were into negative amortization when their outstanding balances exceeded their lines of credit. We’ve given the banks quite a bit of time to figure out how to get into compliance with these guidelines. Some started doing so toward the end of last year and some will be doing it later this year; so they are moving at their own pace. The change in practices will slow credit growth for some clients—the ones who chronically are over their lines and who have paid only the minimum monthly fee. Again, we don’t expect this to be widespread, but it could be a factor in some of these bankruptcy filings. People who have been at the fringe of being overextended are realizing that they’re going to have to get their borrowings down. Now let me shift my focus to the overall economy. I find that the pace of the expansion has been quite resilient, given everything that we’ve been through in the past year. Recently, despite significant difficulties, whether it was hurricanes or the spike in oil prices, growth continued at a November 1, 2005 74 of 114 Inflation has slowed in the last couple of months, but I’ve focused a bit on the nature of the developments there. As you know, some of the slowdown has been in prices of services. And with some of the trends we’re seeing in core elements of inflation, getting a number over 2 percent, as the forecast has, begins to give me some concern. So I look at that and at the forecast for a continued rise in labor compensation costs. A potential slowdown in productivity also suggests that we need to be much more attentive to what’s going on in terms of cost pressures on the labor front that could affect workers’ expectations of compensation increases. So I think it’s even more important for us to watch inflation in the next few months. I support raising the funds rate today. I also support the dialogue, as President Yellen outlined, on the elements of our communication so that we have an orderly transition. We ought to look carefully at every word in our statement. While it will be parsed when we make changes, at least all of us will have had some time to think about the changes. And I would hope that we have that dialogue at our next meeting." CHRG-110hhrg46591--38 Mr. Stiglitz," Mr. Chairman and members of the committee, first let me thank you for holding these hearings. The subject could not have been more timely. Our financial system has failed us. A well-functioning financial system is essential for a well-functioning economy. Our financial system has not functioned well, and we are all bearing the consequences. There is virtual unanimity that part of the reason that it has performed so poorly is due to inadequate regulations and due to inadequate regulatory structures. I want to associate my views with Dr. Rivlin's in that it is not just a question of too much or too little; it is the right regulatory design. Some have argued that we should wait to address these problems. We have a boat with holes, and we must fix those holes now. Later, there will be time to address these longer-run regulatory problems. We know the boat has a faulty steering mechanism and is being steered by captains who do not know how to steer, least of all in these stormy waters. Unless we fix both, there is a risk that the boat will go crashing on some rocky shoals before reaching port. The time to fix the regulatory problems is, thus, now. Everybody agrees that part of the problem is a lack of confidence in our financial system, but we have changed neither the regulatory structures, the incentive systems nor even those who are running these institutions. As we taxpayers are pouring money into these banks, we have even allowed them to pour out moneys to their shareholders. This morning, I want to describe briefly the principal objectives and instruments of a 21st Century regulatory structure. Before doing so, I want to make two other prefatory remarks. The first is that the reform of financial regulation must begin with the broader reform of corporate governance. Why is it that so many banks have employed incentive structures that have served stakeholders, other than the executives, so poorly? The second remark is to renew the call to do something about the homeowners who are losing their homes and about our economy which is going deeper into recession. We cannot rely on trickle-down economics--throwing even trillions of dollars at financial markets is not enough to save our economy. We need a package simply to stop these things from getting worse and a package to begin the recovery. We are giving a massive blood transfusion to a patient who is hemorrhaging from internal bleeding, but we are doing almost nothing to stop that internal bleeding. Let me begin with some general principles. It is hard to have a well-functioning, modern economy without a good financial system. However, financial markets are not an end in themselves but a means. They are supposed to mobilize savings, to allocate capital, and to manage risk, transferring it from those less able to bear it to those more able. Our financial system encourages spendthrift patterns, leading to near zero savings. They have misallocated capital; and instead of managing risk, they have created it, leaving huge risks with ordinary Americans who are now bearing the huge costs because of these failures. These problems have occurred repeatedly and are pervasive. This is only the latest and the biggest of the bailouts that have become a regular feature of our peculiar kind of capitalism. The problems are systemic and systematic. These systems, in turn, are related to three more fundamental problems. The first is incentives. Markets only work well when private rewards are aligned with social returns, but, as we have seen, that has not been the case. The problem is not only with incentive structures and it is not just the level, but it is also the form, which is designed to encourage excessive risk-taking and to have shortsighted behavior. Transparency. The success of a market economy requires not just good incentive systems but good information. Markets fail to produce sufficient outcomes when information is imperfect or asymmetric. Problems of lack of transparency are pervasive in financial markets. Nontransparency is a key part of the credit crisis that we have experienced in recent weeks. Those in financial markets have resisted improvements such as more transparent disclosure of the cost of stock options, which provide incentives for bad accounting. They put liabilities off balance sheets, making it difficult to assess accurately their net worth. There is a third element of well-functioning markets--competition. There are a number of institutions that are so large that they are too big to fail. They are provided an incentive to engage in excessively risky practices. It was a ``heads I win,'' where they walk off with the profits, and a ``tails you lose,'' where we, the taxpayers, assume the losses. Markets often fail; and financial markets have, as we have seen, failed in ways that have large systemic consequences. The deregulatory philosophy that has prevailed during the past quarter century has no grounding in economic theory nor historical experience. Quite the contrary, modern economic theory explains why the government must take an active role, especially in regulating financial markets. Regulations are required to ensure the safety and soundness of individual financial institutions and of the financial system as a whole to protect consumers, to maintain competition, to ensure access to finance for all, and to maintain overall economic stability. In my remarks, I want to focus on the outlines of the regulatory structure, focusing on the safety and the soundness of our institutions and on the systematic stability of our system. In thinking about a new regulatory structure for the 21st Century, we need to begin by observing that there are important distinctions between financial institutions that are central to the functioning of the economic system whose failures would jeopardize the economy, those who are entrusted with the care of ordinary citizens' money, and those who prove investment services to the very wealthy. The former include commercial banks and pension funds. These institutions must be heavily regulated in order to protect our economic system and to protect the individuals whose money they are supposed to be taking care of. There needs to be strong ring-fencing of these core financial institutions. We have seen the danger of allowing them to trade with risky, unregulated parties, but we have even forgotten basic principles. Those who managed others' money inside commercial banks were supposed to do so with caution. Glass-Steagall was designed to separate more conservative commercial banking concerned with managing the funds of ordinary Americans with the more risky activities of investment banks aimed at upper income Americans. The repeal of Glass-Steagall not only ushered in a new era of conflicts of interest but also a new culture of risk-taking in what are supposed to be conservatively managed financial institutions. We need more transparency. A retreat from mark-to-market would be a serious mistake. We need to ensure that incentive structures do not encourage excessively risky, shortsighted behavior, and we need to reduce the scope of conflicts of interest, including at the rating agencies, conflicts of interest which our financial markets are rife with. Securitization for all of the virtues in diversification has introduced new asymmetries of information. We need to deal with the consequences. Derivatives and similar financial products should neither be purchased nor produced by highly regulated financial entities unless they have been approved for specific uses by a financial product safety commission and unless their uses conform to the guidelines established by that commission. Regulators should encourage the move to standardized products. We need countercyclical capital adequacy and provisionary requirements and speed limits. We need to proscribe excessively risky and exploitive lending practices, including predatory lending. Many of our problems are a result of lending that was both exploitive and risky. As I have said, we need a financial product safety commission, and we need a financial system stability commission to assess the overall stability of the system. Part of the problem has been our regulatory structures. If government appoints as regulators those who do not believe in regulation, one is not likely to get strong enforcement. The regulatory system needs to be comprehensive. Otherwise, funds will flow through the least regulated part. Transparency requirements in part of the system may help ensure the safety and soundness of that part of the system but will provide little information about systemic risks. This has become particularly important as different institutions have begun to perform similar functions. Anyone looking at our overall financial system should have recognized not only the problems posed by systemic leverage but also the problems posed by distorted incentives. Incentives also play a role in failed enforcement and help explain why self-regulation does not work. Those in financial markets had incentives to believe in their models. They seemed to be doing very well. That is why it is absolutely necessary that those who are likely to lose from failed regulation--retirees who lose their pensions, homeowners who lose their homes, ordinary investors who lose their life savings, workers who lose their jobs--have a far larger voice in regulation. Fortunately, there are competent experts who are committed to representing those interests. It is not surprising that the Fed failed in its job. The Fed is too closely connected with financial markets to be the sole regulator. This analysis should also make it clear why self-regulation will not work or at least will not suffice. " Mr. Kanjorski," [presiding] Doctor, please wrap up. " fcic_final_report_full--185 In the spring of , the FOMC would again discuss risks in the housing and mortgage markets and express nervousness about the growing “ingenuity” of the mortgage sector. One participant noted that negative amortization loans had the per- nicious effect of stripping equity and wealth from homeowners and raised concerns about nontraditional lending practices that seemed based on the presumption of continued increases in home prices. John Snow, then treasury secretary, told the FCIC that he called a meeting in late  or early  to urge regulators to address the proliferation of poor lending practices. He said he was struck that regulators tended not to see a problem at their own institutions. “Nobody had a full -degree view. The basic reaction from finan- cial regulators was, ‘Well, there may be a problem. But it’s not in my field of view,’” Snow told the FCIC. Regulators responded to Snow’s questions by saying, “Our de- fault rates are very low. Our institutions are very well capitalized. Our institutions [have] very low delinquencies. So we don’t see any real big problem.”  In May , the banking agencies did issue guidance on the risks of home equity lines of credit and home equity loans. It cautioned financial institutions about credit risk management practices, pointing to interest-only features, low- or no-documentation loans, high loan-to-value and debt-to-income ratios, lower credit scores, greater use of automated valuation models, and the increase in transactions generated through a loan broker or other third party. While this guidance identified many of the problematic lending practices engaged in by bank lenders, it was limited to home equity loans. It did not apply to first mortgages.  In , examiners from the Fed and other agencies conducted a confidential “peer group” study of mortgage practices at six companies that together had origi- nated . trillion in mortgages in , almost half the national total. In the group were five banks whose holding companies were under the Fed’s supervisory purview—Bank of America, Citigroup, Countrywide, National City, and Wells Fargo—as well as the largest thrift, Washington Mutual.  The study “showed a very rapid increase in the volume of these irresponsible loans, very risky loans,” Sabeth Siddique, then head of credit risk at the Federal Reserve Board’s Division of Banking Supervision and Regulation, told the FCIC.  A large percentage of their loans issued were subprime and Alt-A mortgages, and the underwriting standards for these prod- ucts had deteriorated.  Once the Fed and other supervisors had identified the mortgage problems, they agreed to express those concerns to the industry in the form of nonbinding guidance. “There was among the Board of Governors folks, you know, some who felt that if we just put out guidance, the banks would get the message,” Bies said.  The federal agencies therefore drafted guidance on nontraditional mortgages such as option ARMs, issuing it for public comment in late . The draft guidance directed lenders to consider a borrower’s ability to make the loan payment when rates adjusted, rather than just the lower starting rate. It warned lenders that low- documentation loans should be “used with caution.”  CHRG-111hhrg55814--27 The Chairman," I want to begin and use my 5 minutes essentially to make some points. I know there will be no dearth of questions, Mr. Secretary. So while I will not be asking you any questions, I do not think you will feel ignored by the end of this morning. First, let me address the timing issue. The ideas that we are talking about here really were first formulated for major public debate by former Treasury Secretary Paulson in April of 2008, and they have been under serious discussion since then. Various versions have gone forward. This particular draft, reflecting a lot of conversations a lot of people have had was recently released. We won't get to mark it up until next week, and probably not until Wednesday now, because we have a couple of things to finish up from Tuesday. The argument that we should wait, we are more open to the criticism that we haven't moved quickly enough rather than we are moving too quickly in this. There was a paralysis in the financial system, but that is happily ending. And we don't want to get behind that curve. Second, I want to address the question of Fannie Mae and Freddie Mac. I am astounded by the notion that we have to regulate them. We did. In 2007, as chairman of this committee, I made as our first major order of business adopting the regulation of Fannie Mae and Freddie Mac that the Bush Administration wanted. We did that in the House. We did not get prompt action in the Senate, surprisingly, and when the first stimulus bill came up in January of 2008, I urged that they take our Fannie/Freddie reform, which was approved by the Bush Administration, and make it part of the bill. They weren't able to get agreement with themselves to do it. The Senate did act on our reform in 2008--too late to stall off the crisis--but the fact is that the Fannie and Freddie that exist today are already the ones that were strictly regulated. Now, they have collapsed. They are not acting as they did before. It is important for us going forward to totally revise the functions of the secondary market and whether or not the subsidy should be a part of that. That certainly will be on our agenda next year. But, Fannie and Freddie are not out there doing what they did before: (A) they are subject to regulation; and (B) there is a collapse. It is not a case that they are two unregulated entities working out. I think part of this debate suffers from serious cultural lag with a little partisan motivation. Next, I want to talk about the comparison between this year and last year. In the events leading up to the collapse of last year, there was no regulation of subprime lending, a major contributing factor. We adopted legislation to control subprime lending in the House. It didn't get enacted in the Senate. The Fed is still active. We have that as part of this bill. We will not have the unrestricted, unregulated, irresponsible subprime lending that led in part to the collapse because so many of the securities that fell apart were of that sort. We had no regulation of derivatives. AIG was engaged in wild speculation and these things all interact. You had bad subprime mortgages that shouldn't have been issued. Then you had AIG without any restriction ensuring against the default of these bad subprime mortgages. That again will be corrected by the time we go forward. We will have hedge fund registration, private equity registration, much more data collection than we had before. We, as I said, have Fannie and Freddie playing a very different role. You had an unregulated Fannie and Freddie before this House began the process of regulating for 2007. You had unregulated subprime mortgages. You had unregulated derivatives. All those things are now incorporated, so yes, we want to avoid the ``too-big-to-fail.'' Part of it is that we have restrictions here that will keep these institutions: (A) from getting too big; (B) from being likely to fail; and (C) having fewer consequences when they do. So the comparison of today to before, as I said, is serious cultural lag. We will have severely restricted the kind of irresponsible activity in derivatives in subprime lending; and another piece that I mentioned, in securitization. I myself think one of the biggest causes that happened here was that 30 years ago people who lent money to other people were the people who were expected to be paid back. Once they were able to get rid of all of those loans, the discipline of the lender-borrower relationship diminished, so we are severely--we are going to reform securitization with some risk retention. We are restricting irresponsible subprime loans. We are regulating derivatives. There will be no unregistered, large financial enterprises going forward. We will have the ability to significantly increase capital requirements, more than proportionally, so all of those things are there. Yes, in the absence of all of those, we had greater problems. We are talking about a regime that puts all those in a place and then in the end says, for all of that, somebody fails. We step in and we hammer them pretty hard and we protect the taxpayers. The gentleman from Alabama. " FOMC20070918meeting--324 322,MR. KOHN.," Thank you, Mr. Chairman. I think this is aimed at addressing a serious problem that I’m afraid we’re losing sight of a bit. The piling-up of financing in very short term vehicles is an issue for financial stability. Partly this is, yes, the term rates are elevated, and if this were just a risk premium on certain counterparties, I don’t think that would be a big deal. But I do feel that there has been a malfunctioning in the markets: As is typical in a financial crisis or panic, people have fled toward liquidity and safety in Treasury bills and overnight lending, and the normal arbitrage that happens across markets just isn’t happening. It’s great that the markets seem to be getting better, but if they continue to malfunction or if it gets worse again, I think there’s a serious problem. The problem is that all these banks are being financed in the one-day to four-day area, and it leaves them open to huge rollover risk and huge liquidity risk. In turn, because they have this risk, they’re more reluctant to lend. They’re more reluctant to use all that capital that you saw in the chart the other day. So it is having a potential macroeconomic effect, and I completely agree with President Stern. We would do it because there’s a macroeconomic effect and because there is a financial stability effect. But I think there is an issue here that we can’t shrug off. I agree that the facility would attract those banks that need it most. That’s what auctions do, right? That’s why they’re designed that way, and I think that’s fine. For the most part, with one exception, that’s the way it would have the maximum effect of relieving some of these issues. You bring in the folks who need it the most, and it relieves some of their problems. That is a problem regarding the borderline institutions that people have been talking about, and if an institution is in transition from being sound to being not sound, this is an issue. It’s an issue for two reasons. One is that it could facilitate the runoff of uninsured liability holders, and the Congress has told us not to do that, and we shouldn’t do it. That’s a moral hazard problem. The second is that it might allow the banks that aren’t being run well to make that last bet—to do some other things that would put them at greater risk. But I think those would be very, very rare institutions that are in that kind of spot where they’re just placing the final bet before going out of business. So the borderline institution is a bit of a problem, but I’m not sure it’s as big a problem as others have said. I think this would have a chance of success. There are no guarantees. I absolute agree. When arbitrage isn’t working, you have very strong preferred habitats. People want to lend short, and other people want to borrow long, and the Fed would be stepping into that breach in some sense where the markets aren’t working. We would be supplying Treasury bills and, to a certain extent, doing matched sale-purchases or reverse RPs or whatever they call them these days, borrowing from the public at the very short term, and we would be extending the term credit. In a sense, we would be stepping in for the arbitrage that’s not happening, and that would relieve pressures on these markets at least a little. It has a chance of having some second-round effects of helping those banks that want to use their capital do so more than they are already. So no guarantees. I don’t know that it would remove the stigma. As I said, I think the auction process, making it a totally separate discount window, and having the long period over which it has to happen makes it look very, very different from a discount rate loan. On the moral hazard issue, of course, this isn’t doing anything really to relieve people who made subprime loans. It’s not going to change the price of those assets, so it’s not really affecting that in any moral hazard way. It’s not aimed at individual institutions. It’s more like open market operations than it is like the old form of discount window lending. Even when normal functioning is restored to markets, banks will be paying for the liquidity insurance that they wrote. There’s no relief on the credit side. They’ll still have to tie up capital, making good on the liquidity insurance, forgoing more-profitable opportunities. It would reduce, perhaps at least a little around the edges, the extra cost of financing this liquidity insurance that they sold that comes from the disruption of the markets, from the fire sale aspect. I think that, if we thought that the markets weren’t improving and it would have a feedback effect on financial stability, stepping in would be worthwhile. That’s the classic central bank thing to do—to step in and relieve some of the extra panicky pressures on the markets to get them functioning again. So I guess I don’t see an important moral hazard issue or, to the extent that there is a moral hazard issue, I think it would be more than offset by the benefits to the macroeconomy of the functioning of financial markets, should we decide that this were needed if those markets weren’t working. Thank you, Mr. Chairman." CHRG-111hhrg48674--234 Mr. Clay," Thank you so much, Mr. Chairman. And welcome back to the committee, Chairman Bernanke. I, like most Americans, have serious concerns about the economy and the remedies that are used to address the problems. Americans are concerned that TARP provided money to financial institutions to provide liquidity for lending, and after investing hundreds of billions of taxpayer dollars, we are still seeing a lack of liquidity. Many smaller banks declared they needed no bailout as they had good paper, yet many of them received tens of millions of dollars, some in excess of $100 million, all unsolicited. I won't name all of the concerns, but I find some of the distributions of funds questionable at best. Mr. Bernanke, did you or are you aware of former Secretary Paulson's forcing some banks to take TARP money? " CHRG-111hhrg52406--201 Mr. Plunkett," Mr. Chairman, we responded to a request to consider if the notion to set up a consumer protection agency focused on a provision of credit and payment systems, to consider insurance in that light, and there are some positive aspects to that idea. In particular, what we threw out just before you arrived was the idea of a holistic jurisdiction from the consumer protection point of view over the entire credit transaction to include insurance products that are directly related to that credit transaction. Title, mortgage, credit, and forced placed insurance are some examples. To answer your previous question, credit insurance has been a major part of single premium credit insurance, in particular, abusive mortgage lending practices. It has been tied very closely. " fcic_final_report_full--388 AIG: “WE NEEDED TO STOP THE SUCKING CHEST WOUND IN THIS PATIENT ” AIG would be the first TARP recipient that was not part of the Capital Purchase Pro- gram. It still had two big holes to fill, despite the  billion loan from the New York Fed. Its securities-lending business was underwater despite payments in September and October of  billion that the Fed loan had enabled; and it still needed  bil- lion to pay credit default swap (CDS) counterparties, despite earlier payments of  billion. On November , the government announced that it was restructuring the New York Fed loan and, in the process, Treasury would purchase  billion in AIG pre- ferred stock. As was done in the Capital Purchase Program, in return for the equity provided, Treasury received stock warrants from AIG and imposed restrictions on dividends and executive compensation. That day, the New York Fed created two off-balance-sheet entities to hold AIG’s bad assets associated with securities lending (Maiden Lane II) and CDS (Maiden Lane III). Over the next month, the New York Fed loaned Maiden Lane II . bil- lion so that it could purchase mortgage-backed securities from AIG’s life insurance company subsidiaries. This enabled those subsidiaries to pay back their securities- lending counterparties, bringing to . billion the total payments AIG would make with government help. These payments are listed in figure ..  Maiden Lane III was created with a . billion loan from the New York Fed and an AIG investment of  billion, supported by the Treasury investment. That money went to buy CDOs from  of AIG Financial Products’ CDS counterparties. The CDOs had a face value of . billion, which AIG Financial Products had guaran- teed through its CDS.  Because AIG had already posted  billion in collateral to its counterparties, Maiden Lane III paid . billion to those counterparties, provid- ing them with the full face amount of the CDOs in return for the cancellation of their rights under the CDS.  A condition of this transaction was that AIG waive its legal claims against those counterparties. These payments are listed in figure .. Goldman Sachs received  billion in payments from Maiden Lane III related to the CDS it had purchased from AIG. During the FCIC’s January , , hearing, Goldman CEO Lloyd Blankfein testified that Goldman Sachs would not have lost any money if AIG had failed, because his firm had purchased credit protection to cover the difference between the amount of collateral it demanded from AIG and the amount of collateral paid by AIG.  Documents submitted to the FCIC by Goldman after the hearing do show that the firm owned . billion of credit protection in the form of CDS on AIG, although much of that protection came from financially unsta- ble companies, including Citibank (. million), which itself had to be propped up by the government, and Lehman (. million), which was bankrupt by the FinancialCrisisInquiry--121 The average volume on the New York Stock Exchange was about the same as 40 years earlier. There wasn’t a large public bond market. The business of commercial banks was lending. The securities firms were usually private partnerships. Investment funds were separate from banks and security firms. I’ve been afforded the opportunity over 50 years to observe the dramatic changes in the financial world from a number of perspectives. My career at Lehman Brothers spanned 29 years. I rose to vice chairman of the firm in the 1980s and was co-chairman of the Investment Banking Division and chairman of the Merchant Banking Division. I have held financial positions in the public sector, as deputy mayor of the city of New York during the financial crisis of the 1970s, and as counselor to the secretary of the treasury in the Carter administration. I have been active on corporate boards, not-for- profit foundation boards, where I’ve been involved in investment decisions. For the past 21 years, I have been chairman of the Peter J. Solomon Company, a private independent investment bank and member of FINRA. Our firm is a throwback to the era of the early 1960s when investment banks functioned as agents and fiduciaries, advising their corporate clients on strategic and financial matters such as mergers and raising of debt and equity capital. Unlike today’s diversified banks, we do not act as principals, nor do we take proprietary positions. We do not trade and we do not lend. For a moment, let me set the scene of the 1960s investment bank. The important partners of Lehman Brothers sat in one large room on the third floor of Number One William Street, the firm’s headquarters. Their partners congregated there not because they were eager to socialize, an open room afforded and enabled the partners to overhear, interact and monitor the activities and particularly the commitments of their partners. Each partner could commit the entire assets of the partnership. You may be interested to know that Lehman’s capital at the time of incorporation in 1970 was $10 million. The wealth and thus the liability of the partners like Robert Lehman exceeded the firm’s stated capital by multiples. Since they were personally liable as partners, they took risk very seriously. CHRG-111hhrg54867--255 Secretary Geithner," Well, again, banks operate with that mismatch. What they do is they take deposits and they lend them to people who need to buy a home or a business who wants to finance investment. That is inherent in any well-functioning financial system. But what you need do is to make sure that, again, you constrain leverage so that there is enough capital against risk and that there is as stable a funding base as you can achieve. And what we did not do well as a country is that there were large institutions, very important, very complicated, very risky, that didn't have effective constraints on leverage and, as you said quite correctly, were allowed to fund themselves overnight with very, very high vulnerability to a run in a panic. And so, you need to make sure that both the capital requirements and the liquidity requirements, margin, etc., are applied to that set of institutions who present those kind of risks. If you don't do that, we will be in this mess again. " FOMC20071206confcall--80 78,CHAIRMAN BERNANKE.," It is about both. The other issue is with the spread between the discount rate and the funds rate—again, I agree with you. That is simpler, more straightforward, and easier to understand. The problem is that we don’t know what spread balances the two risks—one risk being no takers or no interest because the stigma is too great and the other risk being so many takers that we are unable to offset the effects of the borrowing in our management of the funds rate. So there was a lot of discussion, but operationally it seems that there’s an advantage to knowing in advance how much the limit of lending might be. I guess I’d like to say that, beyond all these valid and interesting points, there seems to be an interest from our international partners in working with us with the swap, with activities in other countries, and this TAF seems to be the thing that makes them eager to participate. They were not interested, explicitly, in participating if we were involving only a discount rate cut or any other action. So it has at least that benefit. President Evans." CHRG-111shrg56262--45 Mr. Miller," I would agree. I don't think it is desirable to legislate or regulate underwriting standards per se. I do think it is important, though, for those involved in credit underwriting functions, and I am thinking specifically in the residential mortgage market, for those involved in those activities--mortgage lenders, brokers, and others--to be subject to the same type of regulation so that you have a level playing field and consistent standards that apply to all who are engaged in those functions. Ms. McCoy. I am forced to disagree. We saw a situation in which the residential mortgage lending industry was unable to organize self-regulation, and, in fact, engaged in a race to the bottom in lending standards, which was aided and abetted by our fragmented regulatory system which, as Senator Bunning noted, refused to impose strong standards. That is how we got in this mess, and I think the only way that we prevent that from happening is to have some basic common sense standards that apply to all lenders in all States from the Federal Government. To my mind, the most important one is require borrowers to produce documentation that they have the ability to repay the loan at inception. That is common sense. We don't have to obsess about down payment requirements. But that, to me, is essential. Senator Gregg. I don't want to--doesn't that go to recourse? I mean, should there be recourse? Ms. McCoy. Against the borrower? Senator Gregg. Right. Should that be a standard that we subscribe to in this country, which we don't now? Ms. McCoy. Well, some States do subscribe to it. It depends on the State. Senator Gregg. Well, is it a good idea or bad idea? Ms. McCoy. I think right now, it is causing people who have already lost their houses to be pushed further into crisis and it is not helping the situation right now. Senator Gregg. And didn't this push to the bottom--wasn't the shove given by the Congress with the CRA and the way it set up Fannie Mae and Freddie Mac as basically guaranteed entities? Ms. McCoy. Actually, CRA loans have turned out to perform pretty well, and one of the reasons is that banks held them in portfolios so that those higher underwriting standards actually applied to CRA loans. They have been a success story among different classes of loans. Fannie Mae and Freddie Mac, I agree, they cut their underwriting standards, but they joined the bandwagon late. The private label nonconforming loans created a strong competitive threat that they felt necessary to meet, and so they were not the cause of the problem, although they did join the bandwagon. Senator Gregg. Thank you. " fcic_final_report_full--406 The introduction in October  of the Commercial Paper Funding Facility, un- der which the Federal Reserve loaned money to nonfinancial entities, enabled the commercial paper market to resume functioning at more normal rates and terms. But even with the central bank’s help, nearly  of banks tightened credit standards and lending in the fourth quarter of .  And small businesses particularly felt the squeeze. Because they employ nearly  of the country’s private-sector workforce, “loans to small businesses are especially vital to our economy,” Federal Reserve Board Governor Elizabeth Duke told Congress early in .  Unlike the larger firms, which had come to rely on capital markets for borrowing, these companies had gen- erally obtained their credit from traditional banks, other financial institutions, nonfi- nancial companies, or personal borrowing by owners. The financial crisis disrupted all these sources, making credit more scarce and more expensive. In a survey of small businesses by the National Federation of Independent Business in ,  of respondents called credit “harder to get.” That figure compares with  in  and a previous peak, at around , during the credit crunch of .  Fed Chairman Ben Bernanke said in a July  speech that getting a small busi- ness loan was still “very difficult.” He also noted that banks’ loans to small businesses had dropped from more than  billion in the second quarter of  to less than  billion in the first quarter of .  Another factor—hesitancy to take on more debt in an anemic economy—is cer- tainly behind some of the statistics tracking lending to small businesses. Speaking on behalf of the Independent Community Bankers of America, C. R. Cloutier, president and CEO of Midsouth Bank in Lafayette, Louisiana, told the FCIC, “Community banks are willing to lend. That’s how banks generate a return and survive. However, quality loan demand is down. . . . I can tell you from my own bank’s experience, cus- tomers are scared about the economic climate and are not borrowing. . . . Credit is available, but businesses are not demanding it.”  Still, creditworthy borrowers seeking loans face tighter credit from banks than they did before the crisis, surveys and anecdotal evidence suggest. Historically, banks charged a  percentage point premium over their funding costs on business loans, but that premium had hit  points by year-end  and had continued to rise in , raising the costs of borrowing.  Small businesses’ access to credit also declined when the housing market col- lapsed. During the boom, many business owners had tapped the rising equity in their homes, taking out low-interest home equity loans. Seventeen percent of small em- ployers with a mortgage refinanced it specifically to capitalize their businesses.  As housing prices declined, their ability to use this option was reduced or blocked alto- gether by the lenders. Jerry Jost told the FCIC he borrowed against his home to help his daughter start a bridal dress business in Bakersfield several years ago. When the economy collapsed, Jost lost his once-profitable construction business, and his daughter’s business languished. The Jost family has exhausted its life savings while struggling to find steady work and reliable incomes.  CHRG-111hhrg56766--73 The Chairman," The gentlewoman from California. Ms. Waters. Thank you very much. I would like to thank Chairman Bernanke for being here today. Starting with your discussion on page four, ``In addition to closing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window,'' and you go on to talk about your new Federal funds rate and discussion about why you have done this, and encouraging banks to go to the private market for investments. You say further in this discussion that these adjustments are not expected to lead to higher financial conditions for households and businesses. The last thing I heard before I came here this morning was a prediction by some of the analysts on television that in about one month, we can expect there will be an increase in interest rates on mortgages and home loans. Everybody that I talked to really believes that this change that you have made in the Federal funds rate is what is going to trigger that. Is that true? Did you give any thought to this? How can you guarantee that it will not? " CHRG-110hhrg46591--341 Mr. Garrett," I thank the chairman and I thank you all here for your testimony. One of the things, obviously, that has led to the macro issue, the credit problem issue they are currently experiencing as indicated earlier, is the problems in the mortgage sector. I thought I would take a moment to discuss an alternative to our current mortgage securitization process, and I think one of your members mentioned it before, just very briefly, and that is covered bonds. Covered bonds, as you know, have been used effectively in Europe for centuries and recently were introduced in the United States. Basically, they are debt instruments created from high-quality assets and they are held--and this important--on the bank's balance sheet and secured by a pool, and that is why it is called a covered pool of mortgages. And so in contrast to mortgage securitization where loans are made and then sold off to investors, a covered bond is a debt instrument issued by the lending institutions to the investors. And this debt is then backed or covered by that pool of typically high-rated AAA mortgages, and they then act as the collateral for the investor in the case of a bank failure. This structure keeps the mortgages on a lending institution's balance sheet. And that also provides for greater accountability, if you will, as to the high underwriting standards. And they have the potential to aid and return liquidity to the mortgage marketplace we are in today through improved underwriting and accountability. I will just say as an aside, I dropped in a bill, H.R. 6659, the Equal Treatment of Covered Bonds Act of 2008, and this legislation will clear up some of the ambiguities in the current law and codify several existing parameters of the market. It enshrines in the investment tool the law that will provide greater certainty, stability, and permanency for covered bonds. In addition, the spreads would be narrower, which will encourage more institutions to enter into the covered bond marketplace. And it is a goal to provide an environment through its legislation in which the market would be able to flourish, as it used to be, and produce increased liquidity. So legislation covered bonds provide for a greater sense of legal security than ones through regulations. And so, Mr. Ryan, I will throw that out to you. I know SIFMA announced at the end of July, in the summer, that it was creating a U.S. covered bonds traders committee, possible investors that would support the growth of covered bonds market in the United States and play an active role in fostering and strengthening this market. I know that there have been a lot of other things going on as far as other proposals and recommendations that you have been talking on. But I would ask you, first of all, how is the committee going, what do you see for the future? And then I have another couple of questions. " fcic_final_report_full--263 Asset-Backed Commercial Paper Outstanding At the onset of the crisis in summer 2007, asset-backed commercial paper outstanding dropped as concerns about asset quality quickly spread. By the end of 2007, the amount outstanding had dropped nearly $400 billion. IN BILLIONS OF DOLLARS $1,250 1,000 750 500 250 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NOTE: Seasonally adjusted SOURCE: Federal Reserve Board of Governors Figure . market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”  In retrospect, many investors regarded the suspension of the French funds as the beginning of the  liquidity crisis. August  “was the ringing of the bell” for short- term funding markets, Paul McCulley, a managing director at PIMCO, told the FCIC. “The buyers went on a buyer strike and simply weren’t rolling.”  That is, they stopped rolling over their commercial paper and instead demanded payment on their loans. On August , the interest rates for overnight lending of A- rated asset- backed commercial paper rose from . to .—the highest level since January . It would continue rising unevenly, hitting . in August , . Figure . shows how, in response, lending declined. In August alone, the asset-backed commercial paper market shrank by  bil- lion, or . On August , subprime lender American Home Mortgage’s asset- backed commercial paper program invoked its privilege of postponing repayment, trapping lenders’ money for several months. Lenders quickly withdrew from pro- grams with similar provisions, which shrank that market from  billion to  bil- lion between May and August.  The paper that did sell had significantly shorter maturities, reflecting creditors’ desire to reassess their counterparties’ creditworthiness as frequently as possible. The average maturity of all asset-backed commercial paper in the United States fell from about  days in late July to about  days by mid-September, though the over- whelming majority was issued for just  to  days.  CHRG-111shrg54675--61 Mr. Hopkins," We have adequate dollars available for lending for land acquisition also. Probably the concern there is that we have had a rapid spike in land prices over the last 5 years---- Senator Tester. Yes. " Mr. Hopkins," ----and so that does concern us. Senator Tester. OK. Commercial real estate, and I am sorry I missed your testimony. I got called to the floor, so I apologize for that. I wish I could have heard it all. So I will just kind of go by your titles about what I think you know, and if somebody wants to jump in, they can. This is for Mr. Johnson. I really heard from many of the bankers back in Montana that there is a concern about the commercial real estate sector and actually heard some of it back here, too. They are predicting that may be the next domino in the credit crisis and could impact the Rocky Mountain West in a very negative way. Do you have any perspective or thoughts on that, on the commercial markets and where they are at and where they are headed? " CHRG-111shrg61513--7 STATEMENT OF SENATOR RICHARD C. SHELBY Senator Shelby. Thank you. Thank you, Chairman Dodd. Welcome to the Committee, Chairman Bernanke, again. As our financial markets began to show signs of improvement, many of the Fed's temporary lending facilities have been allowed to expire, and monetary policy has begun to normalize. And while use of the temporary lending facilities wane, expanded purchases by the Fed of Federal agency debt, mortgage-backed securities, and longer-term Treasury securities have kept the size of the Fed's balance sheet unusually large. As of last week, it is my understanding that the banks had over $1.2 trillion in reserve balances at Federal Reserve banks. That is more than 100 times the average level of such balances in 2006. This morning I am interested in hearing, Mr. Chairman, plans for reducing the size of the Fed's balance sheet, withdrawing extraordinary liquidity support from the banking system, and continuing the normalization of monetary policy. In addition, I believe, Mr. Chairman, you should tell us how the Fed plans to use interest on reserves as a monetary policy tool and how you intend to use reverse repurchase agreements to address reserves in the banking system. Finally, the Committee, I believe, should gain a better understanding of how the Fed and the Treasury Department intend to manage the Fed's balance sheet, and I think this is especially relevant given Tuesday's announcement by the Treasury that it anticipates selling securities and injecting around $200 billion into the Department's supplemental financing account at the Fed over the next 2 months. Mr. Chairman, while there are signs of improvement in the economy, conditions remain weak, especially in labor markets. Too many Americans are unemployed or underemployed. Because credible plans for fiscal balance and monetary policy are essential for economic recovery, we need to have transparency and clarity about the Federal Reserve's plans. My hope this morning, Mr. Chairman, is that you will provide that clarity. Thank you. " CHRG-111hhrg54872--39 Mr. Calhoun," Yes, if I may respond on two counts. One it seems to me if we were starting from scratch, and that might be a good place to think about here, it is hard to see that five separate consumer protection agencies are less government than one combined one. And in terms of the council, we tried a version of that over the last few years, the agencies did issue joint guidance. And it proved to not be a workable process. For example, looking at subprime loans, despite all the requests from this committee and all the reports of problems in subprime lending, it was not until July 2008 that the joint agencies finally issued guidance on subprime loans, and then it was unenforceable. They issued guidance 10 months earlier on alternative loans and overlooked subprime loans. And the problem with the council was it became the least common denominator, there were holdouts. " CHRG-111shrg50814--98 Mr. Bernanke," Senator, we have gone beyond interest rate policy to try to find new ways to ease credit markets, and I have talked about in some recent speeches and testimonies three general types of things we have done. The first is to make sure that there is plenty of liquidity available for banks and other financial institutions, not only in the United States, but around the world in dollars. So we have been lending to banks to make sure they have enough cash liquidity so they won't be afraid of loss of liquidity as they plan to make commitments on the credit side. Second, as I already indicated, we have been involved in purchasing GSE securities, which has brought down mortgage rates. The third group of activities encompasses a number of different programs which have been focused primarily on getting non-bank credit markets functioning again. We were involved, for example, in doing some backstop lending to try to stabilize the money market mutual funds and also to stabilize the commercial paper market, and we have had some success in bringing down commercial paper rates and commercial paper spreads and giving firms access to longer-term money than they were getting in September and October. Likewise, one of our biggest programs is just commencing now, which is an attempt to provide backstop support to the asset-backed securities market. That market is one where the financing for many of our most popular types of credit--auto loans, student loans, small business loans, credit card loans, all those things--have historically been financed through the asset-backed securities market. Those markets are largely shut down at this point. Through our TALF facility which is about to open, we, working with the Treasury, expect to get those markets going again and help provide new credit availability in those areas. So it is not just the banks. If we are going to get the credit system going again, we need to address the non-bank credit sources and we are aggressively looking at all the possible ways we can to do that. Senator Martinez. Speaking about the TALF and the credit facilities that have been opened, at some point, the concern shifts to what happens after a recovery begins to unfold in anticipation of perhaps in the latter part of this year, with some good fortune, and perhaps in the beginning of the next if not, that we will be in the recovery mode. At that point, how long will it take to phaseout those types of facilities like the TALF and what factors will determine the timing and the process by which you will do that? " FOMC20080121confcall--43 41,MR. WARSH.," Thank you, Mr. Chairman. Let me just make a few brief points. First, during the discussions on this call, we have described these financial markets as fragile. That strikes me as rather euphemistic for what we have been witnessing really since the first of this year, particularly what is being witnessed overseas today. The losses appear to be selfreinforcing. Panic appears to be begetting further pullbacks by investors, retail and institutional alike. There seems to be continued interest in the safest currencies, and this pullback strikes me as quite nondiscriminate, geographically and in terms of sectors, companies, and even entire asset classes. Certainly, we shouldn't be responding to those moves unless, when we think about our credibility, we think about it both with respect to our inflation-fighting credibility and, I think as Governor Kohn just said, our financial stability credibility. I think the standard for moving between meetings is a very high one; but looking at the evidence, both in the financial markets and in the real economy, and thinking about our own credibility, my sense is that we rather convincingly meet that standard. My judgment would be, if we chose not to act today, that we would in all likelihood not make it until next week. There can't be a ton of conviction that by virtue of 75 basis points today we are going to redress some of this fear and some of the psychology that is working against us in the markets. But just because we don't have a panacea, just because monetary policy can't solve the monoline problem and can't solve some of the other problems, doesn't mean that we shouldn't be doing our part. It strikes me that by taking action today we are doing our part. We are showing the financial markets and the real businesses that we do get it. Speaking for myself, I am glad that the interbank funding markets are working better. That puts them in a better position to take more advantage of changes in monetary policy. Through the TAF and through time they are now lending to each other. But based on what has happened in the last several days, it doesn't look as though they are going to be lending to many others. So our action today needs to be focused very much on that front. With all that said, Mr. Chairman--and recognizing how quickly the decoupling hypothesis seems to have raced away from these markets as quickly as it found its way into their collective wisdom--we look to emerging markets and look to markets here in the United States. I think our actions today will go some small way to ensure that markets come back to a more realistic assessment, but we shouldn't fool ourselves that somehow we in any way are going to be solving this problem between now and the next time we meet. Thank you, Mr. Chairman. " CHRG-110shrg50409--113 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM BEN S. BERNANKEQ.1. The number and severity of credit rating downgrades from credit rating agencies in the last year casts doubt on the reliability of such ratings. What is the Fed doing to verify the credit rating of the collateral you are accepting at the various Fed facilities?A.1. The Federal Reserve regularly updates the credit ratings of assets pledged as collateral and uses multiple ratings rather than just one. Assets are regularly marked to market and haircuts are applied to provide adequate protection against market, liquidity, and credit risks. In cases where ratings are less reliable, we require a higher rating than we would otherwise. It should be noted that the entire pool of collateral pledged by a depository institution secures any loans to that institution; moreover, the Federal Reserve has recourse to the borrower under all of its lending facilities beyond the specific collateral pledged. Although credit ratings are one determinant of the eligibility of collateral pledged to Federal Reserve liquidity facilities, Reserve Banks also perform independent credit analysis when receiving collateral and especially when extending a loan to a depository institution. That analysis is based on publicly available information as well as on supervisory information on both the quality of the collateral and on the financial condition of the pledging institution.Q.2. In 2006, Congress passed the Credit Rating Agency Reform Act, which created a formal process for recognizing and examining credit rating agencies with a goal of increasing competition and rating quality. Under that law, the SEC has now recognized 10 National Recognized Statistical Rating Organizations. However, the Fed only accepts credit ratings from the three largest rating agencies for collateral taken at the various Fed facilities. Why does the Fed not accept ratings from the other approved agencies? Are there any plans to revisit that prohibition?A.2. The Federal Reserve accepts a very large volume of collateral, and it is critically important to be able to access credit ratings and other information on a timely basis in a fully automated fashion. The Federal Reserve is open to utilizing credit ratings of all NRSROs consistent with this basic requirement.Q.3. Given the concerns about the government-sponsored entities that led the Fed to grant them access to a lending facility and the Treasury Department to ask for rescue legislation, has the Fed changed its practices on accepting GSE-backed securities as collateral at the Fed facilities? Have you increased the collateral required when GSE-backed collateral is posted?A.3. Securities issued or guaranteed by the GSEs remain eligible collateral at the Federal Reserve's various liquidity support facilities. The market prices of GSE securities pledged as collateral are regularly updated and the haircuts are determined to provide the Federal Reserve with adequate protection against market, liquidity, and credit risk. The haircuts applied to collateral pledged by depository institutions to the discount window are regularly recalibrated by the Federal Reserve, and it has not been necessary to change those applied to GSE-related securities. Haircuts applied to securities pledged by primary dealers for repurchase agreements, the primary dealer credit facility, and the term securities lending facility are chosen to be consistent with, but slightly more conservative than, market practice.[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]" CHRG-111hhrg48874--114 Mr. Gruenberg," Well, Congressman, the program that was announced on Monday is an effort to deal with the troubled assets on the balance sheets of these institutions. Part of the purpose of the program is to take those troubled assets off the balance sheets and put those institutions in a better position to lend. So part of the objective here is to respond to this issue of credit availability. And that program is still in the process of development, but we are trying to structure it in a way to keep it separate from the Deposit Insurance Fund and have it separately supported by collateralizing those guarantees with the assets that are purchased. Also, fees will be charged for the guarantees, which will be an additional buffer. Furthermore, there will be private equity investment, which would be an additional buffer. So we believe we can structure the program in way to separate it from the Deposit Insurance Fund. " CHRG-111shrg55117--133 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER FROM BEN S. BERNANKEQ.1. 13(3) Authority--By what key criteria will the Board of Governors determine when the unusual and exigent circumstances that permitted the use of the Board's extraordinary powers under section 13(3) of the Federal Reserve Act are no longer present? (Not lots of criteria, but the top three. Follow-up: Did the Board's General Counsel write a memo spelling out these powers? Would you share that analysis with the Committee? Are there any constraints on the Board's discretion here? If so, what are they?)A.1. To authorize credit extensions to individuals, partnerships, or corporations under section 13(3) of the Federal Reserve Act, the Board must find that, among other things, ``unusual and exigent circumstances'' exist. These terms are not defined in the Act and are committed to the Board's discretion. In exercising this discretion, the Board must act reasonably. When it approved the establishment and extension of the various lending facilities under section 13(3) authority, the Board made determinations that unusual and exigent circumstances existed based on its assessment that the condition of the financial markets presented severe risks to the integrity of the financial system and to prospects for economic growth. The approvals of lending programs for individual financial institutions were based on an assessment of the potential disruption associated with the disorderly collapse of the particular firm. The Board reached these conclusions after careful evaluation of all available economic and market data and advice of the Board's General Counsel. The determinations are consistent with the manner in which Congress intended the 13(3) authority to be used. As noted in the Senate report on the 1991 amendments to section 13(3), ``with the increasing interdependence of our financial markets, it is essential that the Federal Reserve System have the authority and flexibility to respond promptly and effectively in unusual and exigent circumstances that might disrupt the financial system and markets.'' \1\--------------------------------------------------------------------------- \1\ S. Rep. No. 102-167, at 203 (Sept. 19, 1991). The Board has already taken steps to terminate or scale back some of the extraordinary liquidity facilities that it has established, including section 13(3) facilities. For example, the Board has decided not to extend the Money Market Investor Funding Facility when it expires in October 2009, and the Federal Reserve has reduced amounts offered under some of its liquidity facilities, such as the Term Securities Lending Facility. In making such determinations to date, and in making similar determinations in the future, the Board has and will likely continue to review a broad range of indicators of financial market conditions. These indicators include credit and liquidity spreads in financial markets, information on trading and issuance volumes, measures of market volatility, assessments of the strength of individual financial institutions, and other measures. The Board's focus will be on the capability of financial markets and institutions to support a sustained recovery in economic activity.Q.2. What are the key objectives of the Board's various special facilities: How will we know if they have been successful? How ---------------------------------------------------------------------------will we know if they have failed?A.2. In general, the Federal Reserve has established special facilities over the crisis for two purposes. The facilities that have been made available for multiple institutions (for example, the Term Auction Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility) are intended to support the extension of credit to households and firms and thus contribute to a reduction in financial strains and to foster a resumption of economic growth. These programs seem to have been helpful in addressing strains in financial markets. Financial data including various risk spreads and indicators of market functioning as well as anecdotal reports from market participants have indicated that strains in financial markets have eased substantially in recent months, and particularly so in those markets in which the Federal Reserve has provided liquidity support. Although it is too early to say whether the improvement in financial conditions will be sufficient to support a sustained pickup in economic growth, economic activity appears to be leveling out, and the prospects for a resumption of economic growth over coming quarters have improved. Other facilities--for example, those related to the difficulties of Bear Stearns and AIG--were established to prevent the disorderly failure of large, systemically important nonbank financial institutions and thus avoid an exacerbation of financial strains during a period when financial stress was already intense. By successfully achieving this objective, these actions helped prevent further harm to the U.S. economy.Q.3.a. On commercial real estate--What are the expectations/benchmarks with the TALF facility? Will it be sufficient and timely enough in facilitating private lending/investing, or are you considering other programs?A.3.a. The TALF program has allocated $100 billion to fund loans with up to 5 years maturity, including loans backed by newly issued commercial mortgage-backed securities (CMBS). We believe that this amount, especially if coupled with a modest revival of the new-issue CMBS market later next year, should be sufficient to allow creditworthy borrowers with maturing loans currently in CMBS pools to refinance. The Federal Reserve and the Treasury have recently indicated that at this time they do not anticipate adding additional collateral types to the TALF facility.Q.3.b. Given the lag time needed to get securitized lending going (4 months), how do you handle the reality (as expressed by market experts and participants) that the markets need to know NOW (not ``year-end'') whether the program will be extended in order to see any usefulness in the next several months?A.3.b. Because of the long lead time required to assemble CMBS, and because the market for newly issued CMBS appears likely to remain impaired for some time, the Federal Reserve and the Treasury announced on August 17, 2009, that TALF loans against newly issued CMBS will be available through June 30, 2010. ------ fcic_final_report_full--261 Committee members discussed the “considerable financial turbulence” in the sub- prime mortgage market and that some firms, including Countrywide, were showing some strain. They noted that the data did not indicate a collapse of the housing mar- ket was imminent and that, if the more optimistic scenarios proved to be accurate, they might look back and be surprised that the financial events did not have a stronger impact on the real economy. But the FOMC members also expressed con- cern that the effects of subprime developments could spread to other sectors and noted that they had been repeatedly surprised by the depth and duration of the dete- rioration of these markets. One participant, in a paraphrase of a quote he attributed to Winston Churchill, said that no amount of rewriting of history would exonerate those present if they did not prepare for the more dire scenarios discussed in the staff presentations.  Several days later, on August , Countrywide released its July  operational results, reporting that foreclosures and delinquencies were up and that loan produc- tion had fallen by  during the preceding month. A company spokesman said lay- offs would be considered. On the same day, Fed staff, who had supervised Countrywide’s holding company until the bank switched to a thrift charter in March , sent a confidential memo to the Fed’s Board of Governors warning about the company’s condition: The company is heavily reliant on an originate-to-distribute model, and, given current market conditions, the firm is unable to securitize or sell any of its non-conforming mortgages. . . . Countrywide’s short-term funding strategy relied heavily on commercial paper (CP) and, espe- cially, on ABCP. In current market conditions, the viability of that strat- egy is questionable. . . . The ability of the company to use [mortgage] securities as collateral in [repo transactions] is consequently uncertain in the current market environment. . . . As a result, it could face severe liquidity pressures. Those liquidity pressures conceivably could lead eventually to possible insolvency.  Countrywide asked its regulator, the Office of Thrift Supervision, if the Fed could provide assistance, perhaps by waiving a Fed rule and allowing Countrywide’s thrift subsidiary to support its holding company by raising money from insured deposi- tors, or perhaps through discount-window lending, which would require the Fed to accept risky mortgage-backed securities as collateral, something it never had done and would not do—until the following spring. The Fed did not intervene: “Substan- tial statutory requirements would have to be met before the Board could authorize lending to the holding company or mortgage subsidiary,” staff wrote. “The Federal Reserve had not lent to a nonbank in many decades; and . . . such lending in the cur- rent circumstances seemed highly improbable.”  The following day, lacking any other funding, Mozilo recommended to his board that the company notify lenders of its intention to draw down . billion on backup lines of credit.  Mozilo and his team knew that the decision could lead to ratings downgrades. “The only option we had was to pull down those lines,” he told the FCIC. “We had a pipeline of loans and we either had to say to the borrowers, the cus- tomers, ‘we’re out of business, we’re not going to fund’—and there’s great risk to that, litigation risk, we had committed to fund. . . . When it’s between your ass and your image, you hold on to your ass.”  fcic_final_report_full--90 When these firms were sold, their buyers would frequently absorb large losses. First Union, a large regional bank headquartered in North Carolina, incurred charges of almost . billion after it bought The Money Store. First Union eventually shut down or sold off most of The Money Store’s operations. Conseco, a leading insurance company, purchased Green Tree Financial, another subprime lender. Disruptions in the securitization markets, as well as unexpected mortgage defaults, eventually drove Conseco into bankruptcy in December . At the time, this was the third-largest bankruptcy in U.S. history (after WorldCom and Enron). Accounting misrepresentations would also bring down subprime lenders. Key- stone, a small national bank in West Virginia that made and securitized subprime mortgage loans, failed in . In the securitization process—as was common prac- tice in the s—Keystone retained the riskiest “first-loss” residual tranches for its own account. These holdings far exceeded the bank’s capital. But Keystone assigned them grossly inflated values. The OCC closed the bank in September , after dis- covering “fraud committed by the bank management,” as executives had overstated the value of the residual tranches and other bank assets.  Perhaps the most signifi- cant failure occurred at Superior Bank, one of the most aggressive subprime mort- gage lenders. Like Keystone, it too failed after having kept and overvalued the first-loss tranches on its balance sheet. Many of the lenders that survived or were bought in the s reemerged in other forms. Long Beach was the ancestor of Ameriquest and Long Beach Mortgage (which was in turn purchased by Washington Mutual), two of the more aggressive lenders during the first decade of the new century. Associates First was sold to Citi- group, and Household bought Beneficial Mortgage before it was itself acquired by HSBC in . With the subprime market disrupted, subprime originations totaled  billion in , down from  billion two years earlier.  Over the next few years, however, subprime lending and securitization would more than rebound. THE REGULATORS: “OH, I SEE ” During the s, various federal agencies had taken increasing notice of abusive subprime lending practices. But the regulatory system was not well equipped to re- spond consistently—and on a national basis—to protect borrowers. State regulators, as well as either the Fed or the FDIC, supervised the mortgage practices of state banks. The OCC supervised the national banks. The OTS or state regulators were re- sponsible for the thrifts. Some state regulators also licensed mortgage brokers, a growing portion of the market, but did not supervise them.  CHRG-111hhrg50289--89 Mr. Bofill," Thank you. Good afternoon, Madam chairwoman, Ranking Member Graves, and distinguished members of this Committee. Thank you for inviting me to testify today on the important topic of expanding affordable wholesale marine floor plan financing access to marine dealerships. My name is David Bofill, and I am President and owner of Dave Bofill Marine. I come to you wearing three hats, one of my company, one of the National Marine Manufacturers Association, and one of being on the board of directors for the New York Marine Trade Association for the last eight years. I sell Cris Craft and Scout boats from my two Long Island locations. I have been in the boating industry for 35 years, and my operation at its peak employed 20 people. I am a small business and, in fact, the majority of the boating industry is made up of small businesses and most boats are might right here in the United States. The brands I carry, Cris Craft and Scout boats, are made in Florida, North Carolina, and South Carolina. Unfortunately, my story is being played out in both dealerships and manufacturing plants across the country. I have had a thriving business for over 35 years, but this credit crisis will force me to close my doors. What frustrates me the most is that most of us in the boating industry are used to riding the ups and downs of the economy, but this downturn is different. Today I am dealing with a reluctant consumer, but more so the sudden loss of wholesale credit at anything close to reasonable rates to finance my inventory. Over the last year, the floor plan lenders to the boating industry, including Key Bank, Textron Financial, Wachovia, and several others, have abruptly stopped lending in the boating industry. Some of these banks, as you know, received federal assistance under the TARP program, but severed their ongoing business relationships with the marine dealers anyway. Today, General Electric Capital has become the dominant lender with over 70 percent of the market. However, G.E. recently has informed all of us that they are radically changing loan terms resulting in doubling of interest payments and, in my case, my interest will go from 10,000 to $20,000 per month. Lenders overall have scaled back lending, dramatically increased their rates, cracked down on curtailments and are not issuing loans or extending current lines of credit to enable marine dealers to finance any new inventory. The inability of dealers to finance current inventory or purchase new model inventory to display means that manufacturers now have shut down production by at least 60 percent. With hundreds of dealerships being forced out of business as mine, 20,000 manufacturing jobs vanishing and 135,000 boating industry jobs that are now gone, something must be done. It is important that you know that these businesses like mine were not failing businesses or companies with flawed business models. We relied in good faith on lenders for typical business credit, and when the financial markets collapsed, we had nowhere to turn. What we need to survive is access to credit at reasonable terms. What Congress could do to help many small businesses in the boating industry is to facilitate the creation of new credit market. Both dealers and manufacturers need to help in encouraging regional banks to create or reestablish floor plan lending departments. The industry strongly supports the Small Business Administration's plan to establish a floor plan lending program for boats, motors and trailers. The industry has welcomed this program as a critical lifeline, but problems still remain. This Committee and Congress could help in three specific ways. One, make the SBA dealer floor plan financing program permanent and do it quickly. As written now, this program only lasts one year. It will be hard to attract new lenders without the important certainty of this program. Two, make the increased business size limits permanent. This is an important change that reflects the marketplace. The traditional standard for marine dealers is far too low to include dealers who sell high cost products but do so with such a small staff. Three, increase the cap on SBA 7(a) loans. The current limits are too low to provide financing for the majority of small dealers and manufacturers. It is common for a small boat dealer to have inventory in the $5 million range. Thank you for inviting me to testify today. The marine industry is suffering. It is an American industry of manufacturing and servicing that deserves support. The lack of reasonable credit is likely going to lead me to close my doors soon, and it will cause other dealers to shut down as well. Thank you, and I am happy to answer any questions. [The prepared statement of Mr. Bofill is included in the appendix.] " CHRG-111hhrg49968--88 Mr. Bernanke," I don't think that is a very strong argument because you are either directly making the loans or you are guaranteeing the loans. And as far as the potential loss to the Treasury is concerned, the guarantee is the same, essentially, as making the loan. So it is really an accounting difference, not a real economic difference. I think there are a lot of other issues that you point out. There are arguments on both sides for using a private lender who may be better at making the loans or may not be versus having the direct lending. I would just point out that if you were to continue using the private lenders, one of the problems that emerged last year was a mismatch between the interest rate they were allowed to charge and the interest rate in which their cost of funding was determined. So there were some technical issues that would have made that situation better. But again, that fundamental question of private versus public, a lot of issues there. " CHRG-111shrg57319--91 Mr. Cathcart," I would say the Board was responsive. The Board would continually ask management why progress hadn't been made on certain chronic issues which were repeat items from both internal audit, credit review, and from the regulators. But it appeared as if there was little consequence to these problems not being fixed. Senator Coburn. OK. Thank you. Mr. Vanasek, on Exhibit 78a,\1\ there is an email exchange between you and Mr. Killinger where he said, ``I have never seen such a high-risk housing market. . . . This typically signifies a bubble.'' You responded, ``All the classic signs are there.'' Wasn't this email written just months after WaMu made a strategic decision to shift to riskier lending?--------------------------------------------------------------------------- \1\ See Exhibit No. 78a, which appears in the Appendix on page 790.--------------------------------------------------------------------------- " CHRG-110hhrg46596--308 Mr. Clay," Thank you, Mr. Chairman, and I thank the witnesses for their amazing testimony today. We have witnessed an amazing set of events since we originally passed TARP--I guess while we passed TARP. The Administration was able to influence a majority of the members of this legislature to go along with the plan that they said they were sure would rescue the U.S. economy. Several weeks later, you dumped the entire plan and said, oh, that probably won't work. I didn't think it would work then, and I don't think you all know what you are doing now. Let me ask you, Mr. Secretary, we own 80 percent of AIG. What benefits do the taxpayers of this country--what have we derived in benefits from owning 80 percent of AIG, lending them a total of $125 billion? Did we buy the assets or were the assets sold? If so, to whom? And how is AIG managing those assets now if they didn't sell them? " CHRG-110shrg50414--230 Mr. Bernanke," Well, we will continue to evaluate. For those institutions that we supervise, we will continue to evaluate their positions, their capital, their risk management, and so on. But I think this will obviously be helpful in removing some risk from their balance sheet and allowing them to expand their lending. So I don't see any problem from this, but we will certainly keep close track of what is going on. Senator Akaka. I am also concerned about the statutory as well as regulatory aspects that what we are trying to do will affect us. So Chairman Bernanke, the Federal Reserve's statutory responsibilities focus on monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. My question is, to what extent will the injection of this $700 billion affect your ability to meet these goals? " FOMC20070918meeting--265 263,MR. ALVAREZ.," We did consider imposing a higher standard, something like “well capitalized and well managed”—the financial holding company type standards—and two concerns were raised. One is that it has the same problem that President Rosengren referred to that we have to rely on the exam rating and the capital adequacy determination by another regulator. We don’t get out of that problem by raising the standards, and most of the institutions that were referred to actually fit into the higher standard. So it didn’t achieve very much. The second thing is that there was some concern that it might have a blackballing effect. For folks that were between the standard for primary credit and the higher standard that we were setting, it might indicate that the Federal Reserve felt those folks were weaker. Those may in fact be people we want to get some funding to. They’re the ones that seem to be struggling with liquidity, and this might make their problems worse because the market will perceive that the Fed wouldn’t even be willing to lend to them under the facility." CHRG-110hhrg45625--189 Mr. Bernanke," I don't know, but I know the system is quite fragile and therefore very vulnerable when shocks occur. I think we need to stabilize it and make it stronger so that it can support the economy to recover. Going back to your previous question, the idea about FIDICIA, that only applies to failing banks. And again we are not dealing with the Japanese situation where banks are either insolvent or practically insolvent. We are dealing with one where there is insufficient capital lending capacity, they are bringing back credit, and that is hurting our economy. Ms. Brown-Waite. Well, if you actually read the 1991 statute, it says it does grant an exception for when there is a risk to the entire financial system. So maybe if the banks had been dealt with using the 1991 law, we wouldn't--if it had been done earlier, maybe we wouldn't be here with a $700 billion bailout. My next question is, does it have to be $700 billion? Could we do this in installments, see how it goes, how it works? " CHRG-109shrg24852--49 Chairman Greenspan," Well, Senator, actually all of these loans, properly used, are not bad instruments. In other words, they give the consumers, the mortgagors, indeed the mortgagees as well, a broader set of instruments which can be employed, so there is greater consumer choice. Our concern is that a number of these instruments are being used to enable people to purchase homes who would otherwise not have been able to do so. In other words, they are stretching to make the payments, and that is not good lending practice for banks or other purveyors of mortgages, and certainly it is not good practice on the part of pending homeowners. It is a concern to us. Fortunately, it is not a large enough part of the market to create serious systemic problems, but it is an issue, and we at the Federal Reserve and other banking supervisors are looking at that. We are examining these issues, and we are making decisions as to what, if any, guidance to the banking system we would endeavor to convey. Senator Allard. So just to follow up on that, you do not see any need for any kind of legislative remedy or anything at this point in time? " CHRG-111hhrg56766--127 Mr. Bernanke," First, let me just say that this is a Federal Reserve concern because we are bank regulators and I won't go through the list again, but we are trying to get more information to try to make sure that the creditworthy borrowers are able to get credit and we consider it very important. Indeed, one of the reasons that we value our bank supervisory role is because it provides us with that information and gives us that ability to understand what's happening in that very important market. In terms of policy, I think there are a number of things that can be done. You mentioned the SBA. There's a proposal to provide capital to small banks that make small business loans. Ms. Velazquez. That would be TARP money that has been stigmatized by Congress and by the people in this country. So if it didn't work before, for example, when the secondary market was--we tried to unlock the secondary market by creating under Treasury small business lending facility and it didn't work, they didn't make one loan, if it didn't work then, why do you think it's going to work now? " FOMC20080724confcall--102 100,MR. KROSZNER.," Thank you very much. I am supportive of these initiatives; and with respect to the options, I do think it is very important for us to be thinking about the perceptions of how we are using our balance sheet. Whether or not the reality is there about how much we can expand and deal with, there are a lot of questions and concerns. I think a better focus does make sense. Options were used successfully with respect to Y2K, so there is a precedent for them. They're not as unusual as some of the other ones, or at least not as new as some of the others. Just being careful about the way we will articulate how we are using our balance sheet and trying to respond practically to questions about the balance sheet stresses make sense. On the extension of the TAF, we have had some very important and valuable discussions. I had ongoing discussions with President Yellen and certainly President Pianalto, both facing very difficult decisions that highlight some of the issues with the longer-term funding. As I said, one thing that I think will be necessary for us going forward, particularly in extending the TAF, is to think about whether this is adding something. I do support the extension, although I agree with Governor Kohn that it makes sense to think about both the 28-day and the 84-day terms. Private market participants deal with a lot of complexities--one-month, three-month, and six-month LIBOR, and I think they may be able to deal with this. I think it may add something to have both the 28-day and 84-day terms; but there may be operational issues, and I defer to the Desk on that. I think it raises questions about consistency in thinking about how to deal with now really a third level of comfort that we would need to have in providing credit to institutions. It's not just secondary versus primary but also primary overnight versus primary term. To that end, I think the proposal that President Rosengren mentioned is important--that we really do need to be thinking about the relationship between these liquidity facilities and our supervisory judgments. To that end I have already asked Brian Madigan and Roger Cole to canvass the heads of supervision and regulation to get a feeling for, and to get a list of institutions, where at least at this stage there may be some differences in our view as an umbrella supervisor from the view of the primary regulator as to the challenges that the institutions are facing. Then either I will or we will have a process by which we will ask each regulator, institution by institution, why there may be differences in assessments and try to understand them. We will also put those regulators on notice that we may be taking a different view and that we, as the lender of last resort, can go in and do our own assessments. We take into account what they provide us, but we are not in any way obligated to follow their particular ratings in making our decisions. If we feel that an institution has more difficulty, we do not have to provide credit to that institution. Similarly, I have talked with some of the presidents about being proactive in thinking about collateral rather than at the last minute, as was described with respect to IndyMac, having to think about what the value is of the collateral that is provided. We should be doing that proactively, both because we need to know that from our lending point of view and because we can provide that information to the institutions so that they can better manage their liquidity, decide where they wish to pledge their collateral, and understand how they are going to go forward. Also, the other regulators will know more in advance what type of lending may be available. I do think that we can manage this and that there is potentially some value to extending the term of the TAF. But it raises a number of challenges. Working with President Geithner and President Hoenig on some of these issues, in some sense I have already taken some actions on what President Rosengren has suggested, and I am very happy to hear any other actions that we may need to be taking. I think that we need to be taking those independently of the particular issues here. We can deal with these issues because, of course, it will be up to the individual Reserve Banks to judge whether they want to make the term lending available. If there is concern about that, the Reserve Bank will ultimately make that judgment if it does not wish to provide that credit. Thank you. " CHRG-111shrg52966--17 Mr. Long," Yes, I do think we began to communicate pretty well in the 2006 range, as my colleague says, but let me back up to answer you. I want to make sure I answer your question. As I stated in my written testimony--it is difficult at times to strike that balance of letting a bank keep competitive and innovative at the same time and order a bank to constrain a certain business activity because we believe they are taking on too much risk. It is always a delicate balance and it is something we work hard to do. But I think we did, going back to 2004. I know at the OCC and amongst other regulators, we did begin to see this buildup of risk and this buildup of excessive aggregation of risk. We issued guidance going back to 2004. We had the interagency credit card guidance. We issued guidance on home equity lending, on non-traditional mortgage products, on commercial real estate lending, and then most recently some interagency guidance on complex structured products. As we issued guidance to the industry, our examiners were in the banks and they were examining for this. We frequently cited matters requiring attention and began taking actions, various types of actions, surrounding these guidance. So from 2004 up to 2007, I think we all saw the accumulation of risk. At the OCC, we looked vertically very well into those companies. If there were lessons learned by us, it was probably in two things. Number one, we underestimated the magnitude of the effects of the global shut-down beginning in August of 2007, and we did not rein in the excesses driven by the market. So a real lesson learned, and I think you have heard it in some of the statements and in the GAO report, the ability to look vertically into these companies is good. The ability to look across the companies in terms of the firms we supervise, we need to get better at that, and looking horizontally across the system is something I think we all need to do. A good example of that is in the firms that we supervise, we underestimated the amount of subprime exposure they had. We basically kicked the subprime lenders out of the national banking system. Our banks were underwriting very little of the subprime loans. What we didn't realize is that affiliates and subsidiaries of the banks that we supervised were turning around, buying those loans, structuring them, and bringing that risk back in in another division in the bank, and that is a good example of being able to look horizontally across a company and see that coming. Senator Reed. What inhibited you from looking across these other subsidiaries? " CHRG-111hhrg49968--102 Mr. Bernanke," Well, it is very, very difficult to get that message from the very top down to the examiners. We have been having workshops and so on. We will continue to try to get that message out. The second reason for the problems is that banks, after they make these loans, have traditionally wanted to securitize them in the secondary market; those markets have not been functioning. Our TALF program has brought those spreads down, has increased activity. For example, in auto loans, we have seen some better availability and lower rates. So as we continue in that area, we expect that will help. You asked me where there are still problems. One area I would mention besides small business and consumer lending is commercial mortgage-backed securities, commercial real estate. That is an area where we are also going to try to address that. But currently, getting refinancing for existing commercial projects is very, very difficult. " FOMC20080430meeting--270 268,MR. HILTON.," We are finding a great reluctance to do intraday arbitrage. We're hearing this from the banks that in the past would do that from time to time. Coming back to one of the other questions that Don had about what we are hearing about stigma from some of the banks, one of our better contacts, Citibank, as Jim mentioned, used to do a lot of arbitraging and using the discount window, the primary credit facility. On occasion, after they borrowed to re-lend in the market at a higher rate last year or so ago, they would call us in the morning to let us know how it was that they were helping us out with the funds rate. That has pretty much stopped cold, and they have decided on sort of classic stigma. They routinely point to the publication of borrowing data in the H.4.1 release, and they are just not interested in the small gain from that kind of activity while taking the risk in the market of being seen as in dire need of liquidity. " fcic_final_report_full--108 Fed officials rejected the staff proposals. After some wrangling, in December  the Fed did modify HOEPA, but only at the margins. Explaining its actions, the board highlighted compromise: “The final rule is intended to curb unfair or abusive lending practices without unduly interfering with the flow of credit, creating unnec- essary creditor burden, or narrowing consumers’ options in legitimate transactions.” The status quo would change little. Fed economists had estimated the percentage of subprime loans covered by HOEPA would increase from  to as much as  un- der the new regulations.  But lenders changed the terms of mortgages to avoid the new rules’ revised interest rate and fee triggers. By late , it was clear that the new regulations would end up covering only about  of subprime loans.  Nevertheless, reflecting on the Federal Reserve’s efforts, Greenspan contended in an FCIC inter- view that the Fed had developed a set of rules that have held up to this day.  This was a missed opportunity, says FDIC Chairman Sheila Bair, who described the “one bullet” that might have prevented the financial crisis: “I absolutely would have been over at the Fed writing rules, prescribing mortgage lending standards across the board for everybody, bank and nonbank, that you cannot make a mortgage unless you have documented income that the borrower can repay the loan.”  The Fed held back on enforcement and supervision, too. While discussing HOEPA rule changes in , the staff of the Fed’s Division of Consumer and Com- munity Affairs also proposed a pilot program to examine lending practices at bank holding companies’ nonbank subsidiaries,  such as CitiFinancial and HSBC Finance, whose influence in the subprime market was growing. The nonbank subsidiaries were subject to enforcement actions by the Federal Trade Commission, while the banks and thrifts were overseen by their primary regulators. As the holding company regulator, the Fed had the authority to examine nonbank subsidiaries for “compliance with the [Bank Holding Company Act] or any other Federal law that the Board has specific jurisdiction to enforce”; however, the consumer protection laws did not ex- plicitly give the Fed enforcement authority in this area.  The Fed resisted routine examinations of these companies, and despite the sup- port of Fed Governor Gramlich, the initiative stalled. Sandra Braunstein, then a staff member in the Fed’s Consumer and Community Affairs Division and now its direc- tor, told the FCIC that Greenspan and other officials were concerned that routinely examining the nonbank subsidiaries could create an uneven playing field because the subsidiaries had to compete with the independent mortgage companies, over which the Fed had no supervisory authority (although the Fed’s HOEPA rules applied to all lenders).  In an interview with the FCIC, Greenspan went further, arguing that with or without a mandate, the Fed lacked sufficient resources to examine the nonbank subsidiaries. Worse, the former chairman said, inadequate regulation sends a mis- leading message to the firms and the market; if you examine an organization incom- pletely, it tends to put a sign in their window that it was examined by the Fed, and partial supervision is dangerous because it creates a Good Housekeeping stamp.  But if resources were the issue, the Fed chairman could have argued for more. The Fed draws income from interest on the Treasury bonds it owns, so it did not have to ask Congress for appropriations. It was always mindful, however, that it could be sub- ject to a government audit of its finances. CHRG-110shrg50414--70 Secretary Paulson," Mr. Chairman, thank you very much. As we thought about what is the best thing we could do to minimize foreclosures and deal with this problem, we thought, first of all, stabilizing Fannie and Freddie; second, Treasury has a program where we are going to be buying and holding agency securities, and now that the Government is really behind them, it is, I think, a good use of taxpayer money, and it will help get--it will help the market. And then, of course, we all believe that the very best thing we can do is make sure that the capital markets are open and that lenders are continuing to lend. And so that is what this overall program does, it deals with that. Now, as the Chairman said, we both have been very involved in working with servicers and others in avoiding preventable foreclosures, and there is no doubt that this program will give us more leverage in doing that, given the securities that will be owned, the second-lien mortgages and so on. So that was the way we looked at it, and we looked at it, let's address the root cause through these authorities we are asking for. " CHRG-111hhrg55814--296 Mr. Tarullo," So, Congressman, before I was on the Board, I was actually quite critical in my former capacity as an academic of the failure of the Board, indeed of the government more generally, to move to do something about subprime lending problems, both directly in their consumer implications, and indirectly in their safety and soundness implications. And, as you indicate, I think Chairman Bernanke came, when he became chairman, he took a look at those prudential and consumer regulatory issues and under his leadership, the Board, I think, has enacted a good set of mortgage related as well as credit card related regulations. So the short answer I guess to your question is that the Congress can give mandates to agencies and then give authority to agencies, but the decisions that the people leading those agencies make and the context in which they make them matter. And to that degree, I think we all just have to recognize that the policy orientations of appointees to these agencies are important things for you and your colleagues on the other side of the Hill to consider. " CHRG-110hhrg41184--209 Mr. Bernanke," Well, the idea of the freeze is to find a strategy by which lenders can work out larger numbers of loans. They are facing an unusual situation. Usually each loan, each foreclosure, each delinquency, is different; it depends on personal circumstances. Here we have a situation where literally hundreds of thousands of families or individuals may be facing foreclosure based on broad macroeconomic phenomenon--basically the decline in house prices and concerns with subprime lending. And the issue is, are there ways to be more efficient in working out loans and at larger scale? A freeze, which is what has been suggested by the HOPE NOW approach, is one way to do that. That could be a way to get more time to work out those loans. Again, it is a voluntary approach that they have come to through discussion. It doesn't address by any means all people in this situation. For example, there are a lot of loans that default even before the interest rate resets. " CHRG-111shrg57319--523 Mr. Killinger," I do not recall my exact timing. I do remember making public comments beginning in the middle part of 2005. I remember talking to the board from time to time about that there was growing risk because housing prices are growing faster than the rate of inflation. But also at the same time, I can remember everybody arguing of why that is going to be OK and it is unlikely to be a significant downturn in housing. We were kind of the front edge of trying to assess that there was a concern here. Senator Coburn. Well, that follows into my second question because in January 2005 is when you pushed forward a high-risk lending strategy for board approval. Only 2 months earlier, if you saw that prices would decline in the near future, why would you be pushing through a high-risk strategy on a market that you thought was a bubble? " CHRG-111hhrg49968--13 Mr. Bernanke," I think that, with respect to the TARP, I think our recovery will be excellent. In particular, a number of banks are looking to repay TARP, the Federal Reserve will announce a list of banks next week that we believe are sufficiently sound and are able to lend, that they are eligible to repay the TARP, with, of course, interest. And if the Treasury accepts that recommendation, then we will see some repayment of the initial TARP outlay. With respect to the TALF, the Federal Reserve's program for asset-backed securities, we have extensive protections, which I would be happy to detail if you would give me a few minutes. But we are very comfortable that this program is, on the one hand, very effective in opening up the markets for consumer credit, including auto loans, student loans, small business loans, at the same time, I think, that the credit risks, especially to the Fed itself, are quite minimal. " CHRG-110hhrg41184--201 Mr. Bernanke," That's correct. Mr. Miller of North Carolina. And I wanted to pursue a question that Mr. Moore of Kansas asked you. He said that there was legislation now pending that would treat home mortgages and bankruptcy the same way credit card debt was treated. I don't know of any legislation like that. There is, however, legislation pending in both the House and the Senate that would make the treatment of home loans and bankruptcy the same as any other form of secure debt, including debt on investment property, mortgages on investment property, mortgages on vacation property, car loans, boat loans, loans on a washer and a dryer, or debt secured by any other asset. You said that you thought one result might be changing the bankruptcy law, higher interest rates. And in fact the opponents of that legislation have made some pretty dire predictions that no lender would lend with less than 20 percent equity, that they would make more than an 80 percent loan and the interest rates would go up a point and a half or two points, two and a half points. But they have not produced any kind of economic analysis to support that. I know one member who has said that they offered to let him see--they had an analysis, they'd let him see it privately, which sounded more the way you got offered to look at dirty pictures in the old days, not how you looked at economic analysis. A couple of weeks ago, there was a Georgetown study by a fellow named Levitan, that compared the terms of availability of mortgage lending in places in the United States at the same time that had different laws in effect. Between 1978 and 1994, the courts in different parts of the country interpreted the bankruptcy laws differently, interpreted whether mortgages could be modified differently, so in some parts of the country they're being modified fairly freely, in some not at all. And the result of that study was that there was no real difference in the terms of availability of credit, and estimated that if there was any real difference at all, it might be 0.1 percent of an interest rate. Are you familiar with any economic study--and again, I assume that I'm correct that the way economists do things is they publish, they let others look at their factual assumptions, follow their logic, and how they reach their conclusions; I think at the Ph.D. level that's called ``peer review``; in 8th-grade math class we called that ``showing your work.'' It's the same concept. Are you familiar with any economic analysis that shows a substantial difference in the availability or terms of credit, based upon how mortgages are treated in bankruptcy? " CHRG-111shrg56376--128 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM DANIEL K. TARULLOQ.1. What is the best way to decrease concentration in the banking industry? Is it size limitations, rolling back State preemption, higher capital requirements, or something else?A.1. Answer not received by time of publication.Q.2. Treasury has proposed making the new banking regulator a bureau of the Treasury Department. Putting aside whether we should merge the current regulators, does placing the new regulator in Treasury rather than as a separate agency provide enough independence from political influence?A.2. Answer not received by time of publication.Q.3. Given the damage caused by widespread use of subprime and nontraditional mortgages--particularly low documentation mortgages--it seems that products that are harmful to the consumer are also harmful to the banks that sell them. If bank regulators do their job and stop banks from selling products that are dangerous to the banks themselves, other than to set standards for currently unregulated firms, why do we need a separate consumer protection agency?A.3. Answer not received by time of publication.Q.4. Since the two most recent banking meltdowns were caused by mortgage lending, do you think it is wise to have a charter focused on mortgage lending? In other words, why should we have a thrift charter?A.4. Answer not received by time of publication.Q.5. Should banking regulators continue to be funded by fees on the regulated firms, or is there a better way?A.5. Answer not received by time of publication.Q.6. Why should we have a different regulator for holding companies than for the banks themselves?A.6. Answer not received by time of publication.Q.7. Assuming we keep thrifts and thrift holding companies, should thrift holding companies be regulated by the same regulator as bank holding companies?A.7. Answer not received by time of publication.Q.8. The proposed risk council is separate from the normal safety and soundness regulator of banks and other firms. The idea is that the council will set rules that the other regulators will enforce. That sounds a lot like the current system we have today, where different regulators read and enforce the same rules different ways. Under such a council, how would you make sure the rules were being enforced the same across the board?A.8. Answer not received by time of publication. ------ CHRG-111shrg56415--35 Mr. Tarullo," What I hope is that this Committee and the Congress as a whole will pass a strong set of reforms, no matter what other people out there are saying. Senator Tester. OK. Thank you very much. Thank you, Mr. Chairman. Senator Johnson. Senator Gregg. Senator Gregg. Thank you, Mr. Chairman, and I want to thank the panel for their excellent testimony. It has been most interesting. First off, I want to congratulate the FDIC for deciding to forward-fund the fees. I think that is the right approach. You do a lot of things right. You have done a lot of things right during this problem. You did a lot of things right when I was Governor in 1989 in New Hampshire and five of our seven largest banks closed. Mr. Seidman came in and basically was our white knight. But you did say something that really concerns me, and that is, how you interpret the TARP, this idea that the TARP should be now used as a capital source for a lot of smaller banks that are having problems raising capital. I think all of you basically in your testimony have said we are past the massive systemic risk of a financial meltdown that would have caused a cataclysmic event. TARP came about because of that massive potential cataclysmic event, and its purpose was to basically stabilize the financial markets and be used in that manner in order to accomplish that. As one of the authors, along with Senator Dodd--we sat through the negotiations of that--I think I am fairly familiar with that purpose. That was the goal. It should not now be used as a piggy bank for housing. It should not be used as a piggy bank for whatever the interest of the day is that can be somehow--it should not have been used for the automobile industry, and it really should not be used in order to have a continuum of capital available to smaller banks who have problems, in my opinion, because then you are just going to set up a new national program which will essentially undermine the forces of the market, and that would be a mistake. I did hear you say, Madam Chairman, that you expect $100 billion in losses. Is that a net number? Or do you expect to recoup some percentage of that? Ms. Bair. No, that is what we project our losses to be over the next 5 years. Senator Gregg. So that is a net number after recoupment? Ms. Bair. Yes. Senator Gregg. Well, is it--do you expect of that $100 billion in bad loans to be getting back 30 percent of---- Ms. Bair. The $100 billion would be our losses. So let us say we had a 25-percent loss rate on our bank failures so far, so you would be talking about $400 billion in failed bank assets. Senator Gregg. Well, OK, so it---- Ms. Bair. That is since the beginning of 2009, though. And, again, a lot of that has already been realized and reserved for. Senator Gregg. And you have got $64 billion, you said, or something, that has been realized and reserved against, so you have got about---- Ms. Bair. That is right, yes. Senator Gregg.----$36 billion to go. OK. I have got a philosophical question here. If we look at this problem--granted, commercial real estate is now the problem, but commercial real estate, as I understand it from your testimony, is not--it is a serious problem. It is just not a systemic event. It is not going to cause a meltdown of our industries--of our financial industry. It may impact rather significantly especially the middle-sized regional banks and some of the smaller banks, but it is not systemic. The systemic event was caused in large part in the banking industry by the primary residence lending activity--subprime, Alt-A, and regular loans. And all I heard about as the proposals for getting at this is regulatory upon regulatory layers to try to figure out a way to basically protect ourselves from having that type of excess in this arena occur again. But when you get down to it, it is all about underwriting. I mean, the bottom line is this is about underwriting. It is about somebody lent to somebody who either did not have the wherewithal to pay it back or who had an asset which was not worth what they lent on that asset. And probably the person who lent it did not really care because they were just getting the fee and they were going to sell it into the securitized market anyway. So if you really want to get at this issue, wouldn't it be more logical and simpler and--it is not the whole solution. Clearly, there has to be regulatory reform. But shouldn't we look at the issue of having different underwriting standards, both of which the OCC and the FDIC have the authority over, in the area of what percentage to asset can you lend? You know, do you have to have 90 percent, 80 percent? Shouldn't we have an underwriting standard that says you either get--that there is recourse? Shouldn't we have underwriting standards that gives you the opportunity to either have an 80-percent or 90-percent choice or a covered loan, something like that? Isn't that really a simpler way from a standpoint of not having--granted, it would chill the ability to get a house because people who could not afford to buy the house and could not afford to pay the loan back probably would not be able to get the loan. But isn't that where we should really start this exercise, with recourse and 80 percent or 90 percent equity--10, 20 percent equity value and/or, alternatively, covered funds? I would ask everybody who actually is on the front lines of lending today. Ms. Bair. Certainly underwriting is key, but poor underwriting is not necessarily the driver of future losses now. We are seeing loans go bad now that were good when they were made. But because of the economy--because people are losing their jobs, or retailers are having to close, or hotels cannot fill up--those loans are going bad. The economic dynamic is kicking in in terms of the credit distress that we are increasingly seeing on bank balance sheets. You are right, the subprime mortgage mess got started with very weak underwriting. It started in the non-bank sector. It spilled back into the banking sector. I think all of us wish we had acted sooner, but we did move to tighten underwriting standards, and strongly encouraged the Federal Reserve Board to impose rules across the board for both banks and non-banks. This, again, is the reason why you need to make sure that the stronger underwriting standards going forward apply to both banks and non-banks. Senator Gregg. Well, what should those underwriting standards be? Ms. Bair. You should have to document income. You should do teaser-rate underwriting. The Federal Reserve Board has put a lot of these in effect now under the HOEPA rules. You have to document income. You cannot do payment shock loans. You have got to make sure the borrower can repay the loan if it is an adjustable rate mortgage that resets. These are just common-sense underwriting principles that have applied to banks for a long time. Senator Gregg. Or should there be recourse? Ms. Bair. That has been a prerogative of the States. Some mortgage lending is recourse, some is non-recourse, depending on the State. Senator Gregg. Should there be a requirement that you cannot lend to 100 percent of value? Ms. Bair. I think there is a strong correlation with loan-to-value ratios (LTVs). We actually recognize that in our capital standards that we are working on now. We would require a much higher risk weighting of loans which have high LTVs. So through capital charges, we are recognizing and trying to incent lower LTVs. Senator Gregg. I am running out of time unfortunately. " CHRG-111hhrg48874--90 Mr. Baca," But those loans weren't created here. It was those that were created because we did it with some foreign countries and others and all this money that has gone back there that we can't even recover because all of these bonuses that were there. I'm sorry. Ms. Duke. I just want to point out we are very aware of the problems with loans to small businesses in particular. One of the functions of the Fed facility that just started up last week is that it included floorplan loans for auto dealers in addition to auto loans to consumers. And then we added to it very recently loans for business equipment, and it also includes SBA loans. In addition, I am reminded from my days as a banker that most small business credit is frankly funded through home equity. A lot of those loans are based on home equity, which again brings me back to anything that we can do to improve mortgage lending in the housing market will also be helpful to small businesses. " CHRG-111hhrg53242--7 Mr. Kanjorski," Thank you very much, Mr. Neugebauer. Now we will hear from Ms. Waters for 3 minutes. Ms. Waters. Thank you very much, Mr. Chairman. As some of our witnesses may already know, I am very concerned with protecting our financial system from similar crises in the future. To accomplish this, we will need stronger and more innovative investor protections. We must also make sure that institutional financial instruments, such as over-the-counter derivatives, never have the chance to halt consumer or small business lending again. While products such as credit default swaps may have been sold to institutions, many of them were used to insure consumer debt in the form of CDOs. As these CDO structures failed and credit events occurred, these credit default swap contracts came due. A lack of transparency, combined with an overwhelming number of improperly collateralized swap contracts, served to freeze our lending markets and transfer billions of dollars from taxpayers to all kind of Wall Street firms such as Goldman Sachs and banks such as Bank of America. Some say we should only be concerned about naked credit default swaps, which is swaps where people have no interests insuring anything they actually own. Those who enter into naked CDS contracts are simply trying to profit from some company's bankruptcy, yet as Gillian Tett pointed out in a recent Financial Times column, even nonnaked CDSs have motivated investors to send a company into bankruptcy. No matter what shape our financial reforms take, rooting for companies, especially American companies, to fail should no longer be allowed. That is why I introduced H.R. 3145, the Credit Default Swap Prohibition Act of 2009. Banning credit default swaps is vital to preserving companies, jobs, and taxpayer funds. Our constituents and their 401(k)s will not be safe until we eliminate this product. I know that is highly controversial, and I am sure we will hear a lot of disagreement. But I thank you for arranging this hearing, Mr. Chairman, and I yield back the balance of my time. " CHRG-110shrg50414--26 STATEMENT OF SENATOR SHERROD BROWN Senator Brown. Thank you, Senator Dodd, for calling today's hearing. Thanks to the witnesses for joining us. They have had many long nights lately and this may be a long morning. I make no apologies for that. I doubt they seek any. Like my colleagues, my phones have been ringing off the hook. The sentiment from Ohioans about this proposal is universally negative. I count myself among the Ohioans who are angry. Had the Federal Government acted to contain the epidemic in subprime lending, I do not think we would be sitting here today. The time we spend this morning will be time well spent, not just for our own benefit but for the benefit of the people we represent. I am not sure they will be convinced, but they sure deserve a better explanation than they have received to date. A man from Westerville, Ohio was so concerned he took a day off work and drove to Washington this week--a 7 hour drive--to share his views with me. He quite rightly asked why we are rushing to bail out companies whose leaders got rich by gambling with other people's money? Here is another communication, and I quote, ``The Federal Government must not prolong necessary corrections in the housing market, bail out lenders, or subsidize irresponsible borrowing and lending at the expense of hard-working people who have played by the rules.'' Except that statement did not come from Ohio. It came from the Office of Management and Budget three short months ago. Throughout this sorry chapter in our Nation's financial history, the Administration has shown extraordinary attention to the problems of Wall Street while at times showing hostility to rebuilding Main Streets across the country. The statement I quoted above was from the Administration's veto threat of the housing bill. Congress had the audacity to include $4 billion to rebuild neighborhoods devastated by the foreclosure crisis but the Administration did not want to reward irresponsible borrowing and lending. Now it does. But before we agree, there are many, many unanswered questions that Congress and the American people have a right to ask that the Administration needs to answer. As Chairman Bernanke knows, the bank panic of 1933 started in Detroit and in 2 weeks spread to Cleveland. Two of the city's largest banks were shuttered and never reopened. One had ties to my predecessor in this seat, Republican Marcus Hanna. Rumors flew that the bank's closure was a political decision. If we do not know the rules now, these types of rumors will be reborn. Secretary Paulson, as much as I respect your judgment, you will not be making the hundreds of individual decisions that this effort will require. And as your colleague, Secretary Kempthorne has found, a lack of close supervision and adherence to rules can lead to disastrous results. Many of the people who will be making these decisions as to the purchase of these troubled assets have come from Wall Street, and they may be returning to Wall Street. The notion that they can operate without clear guidelines is not just unfair to taxpayers, I think it is unfair to them. So I hope this morning we go into considerably greater detail. I hope we can give Main Street a good bit more help and attention than we have to date. I think the taxpayers need to be protected. And I think the leadership of these companies have to be held accountable. If any CEO hesitates to participate because of his or her narrow self-interest, his or her compensation, I would say it is time to get a new CEO. It is fine to say that people's 401(k) accounts may be affected. They will be if we do not act. But for most people, their home is their 401(k). We need to help them, as well. Mr. Chairman, gas is expensive. I want that man from Westerville, Ohio to know that his time and his money were well spent. " CHRG-111hhrg52261--105 Mr. Roberts," Chairwoman Velazquez, Ranking Member Graves, members of the committee, my name is Austin Roberts. I am Vice Chairman, President and CEO of the Bank of Lancaster, which is headquartered in Kilmarnock, Virginia. I am pleased to be here on behalf of the ABA. Small businesses, including banks, are certainly suffering from the severe economic recession. This is the not the first recession faced by banks. Many banks have survived the ups and downs of the economy; mine has survived those for the last 80 years. In fact, most banks have been in their communities for decades and intend to continue to be there for decades. We are not alone, however. In fact, there are more than 2,500 banks, 31 percent of the banking industry, that have been in business for more than a century; 5,000 banks have served their communities for more than half a century. These numbers tell a dramatic story about the staying power of banks and their commitment to the communities they serve. The success of small entrepreneurial businesses are very important to my bank. My bank's focus and those of my fellow bankers throughout the country is on developing and maintaining long-term relationships with these and other customers. In this severe economic environment, it is natural for businesses and individuals to be more cautious. Businesses are reevaluating their credit needs, and as a result, loan demand is also declining. Banks, too, are being prudent in underwriting, and our regulators are demanding it. In fact, in some cases, overly restrictive rules and examinations are hampering the banks' ability to make new loans. While a great deal of attention is rightfully being paid to the administration's regulatory proposal, I would like to share with you other issues that banks like mine are facing. First, the most important threat is the very high premiums being paid by banks to the FDIC. For example, my bank paid $75,000 in premiums in 2008. This year we will pay $550,000 in premiums, with the possibility of it even going to $700,000. There is no question that the industry fully backs the financial health of the FDIC, but such large expenses have a very strong dampening effect on bank lending. ABA has detailed options in a letter to FDIC Chairman Bair that meet the funding needs without creating a financial burden on banks that could reduce bank lending and hurt the economic recovery. Second, ABA is continuing to hear from bankers that regulators are demanding increases in capital and that banks improve the quality of their capital. With capital markets still largely unavailable, especially for community banks, the only course of action in the short run is to reduce lending in order to improve the bank's capital ratio. Third, the recession has strained the ability of some borrowers to perform, which often leads the examiners to insist that a bank make a capital call on their borrower, impose an onerous amortization schedule or obtain additional collateral. These steps can set in motion a death spiral where the borrower has to sell assets at fire sale prices to raise cash, which then increases the write-downs that the banks have to make, and the cycle goes on and on. These actions are completely counter to the notion of working with customers to make sure that credit is available to them or working with borrowers that may even be in distress. There is much more included in my written testimony that details the difficulties that have arisen in the past year, but I want to take a moment to mention one idea that ABA has to increase capital to community banks in areas most hard hit by recession. Banks in these areas are doing everything they can to make credit available, but it is against the significant headwinds of losses from problem loans. The idea, which the ABA shared in a letter to Secretary Geithner 2 days ago, would be to modify Treasury's existing capital assistance program to help well-managed, viable community banks access capital. These banks would match any investment the Treasury makes with private equity. In this way, a relatively small sum of money, say, $5 billion invested by Treasury, matched by $5 billion in private equity, would bring all small banks' capital to levels significantly higher than regulators require to be well capitalized. Having additional capital will provide a cushion for these banks to meet the credit needs of their communities rather than reducing lending to meet regulatory capital requirements. I want to thank you for the opportunity to present these views on challenges ahead for banks that serve small businesses, and I am happy to answer any questions. " FOMC20080310confcall--50 48,MR. FISHER.," Just a comment, Tim, if I may. You are right, and we can't stuff this ugly genie back in the bottle. But I think we should be thinking longer term as much as we can as to how we can reshape things, taking advantage of our franchise. I am not arguing against the program. But we are taking a risk here, and we want to mitigate the risk as much as possible. I am just saying that (a) we need to use this as leverage somehow over the longer term, as we become more comfortable with this, to exert our authority, and (b) in the way you just explained this, we need to have a good way of explaining it to the public because we are going to get severe criticism. I can see the criticism of almost lending blind, taking substandard collateral. That kind of cogent explanation is going to be very, very important, Mr. Chairman. We need to be prepared to explain this to our critics because we are going to have a lot of criticism on this front. So I thank you, Tim, for your response. " CHRG-110hhrg46593--212 Mr. Campbell," The Treasury Secretary today talked a little about the fact that they are studying an idea to leverage private capital so that when there is a private capital, new private capital investment, stock issuance that the Treasury would then have some kind of matching program. Comments on that idea from any of you? Ms. Blankenship. Well, I would just like to comment that until they get the initial program fixed where all banks have access to capital, because still there is--with the Subchapter S and the mutual banks and they did issue the privately held term sheet last night, which is helpful, but you have 8,000 community banks out there that would like access to this capital so they could expand lending in their communities. Because, frankly, that is the only way capital is going to pay off as an investment in a community bank. It is not cheap capital, but it is access to capital; and, you know, that is very much necessary in today's market. " CHRG-110hhrg45625--75 Secretary Paulson," I will do that very quickly. There is $1.7 trillion of commercial paper even in the money markets. Commercial paper is short-term lending for businesses and businesses need this money to flow, to fund daily operations. If they can't use that, it all goes back on the banks and it creates a big problem. So what we did, and we did it in a way in which it didn't disturb the level playing field, we guaranteed all money market funds for a year. We used some emergency powers, the exchange stabilization fund at the Treasury. But we did it--funds that were there, through September 19th. So we weren't going to create a problem with an unlevel playing field going forward and then we are giving the money markets a chance to decide to opt into this program and make some payment. That was our action. There is a lot we all could do to explain how this relates to ordinary Americans and we need to do a better job of explaining that. " FOMC20071211meeting--49 47,MR. STOCKTON.," In response to your first question about whether there is independent information in that estimate of the equilibrium funds rate for the Greenbook-consistent measure, the answer is that there is no independent information. It’s just a transformation of the revision in the GDP outlook into interest rate space. Now, obviously, we provide a few other measures in that table, some based on a large-scale econometric model and some on smaller-scale models. Those have come down, too. So I don’t think our forecast is doing something different from, well, what those other models suggest. In response to your second question, our forecast of housing activity going forward is not driven by the foreclosures. The foreclosure forecast that we have is driven importantly by the house-price developments, and there we have marked down our house-price forecast. We would expect some increase in foreclosures, and obviously that would have some feedback on overall lending and conditions of bank balance sheets. In general, since the October forecast, we have built in more broadly about ¼ percentage point to the level of GDP in additional restraint on spending coming from the increased overall financial turmoil—not just in the housing markets, but we’ve taken down a little our forecast of consumption and our forecast of business fixed investment too. Basically, looking at the past correlation between measures of overall financial stress and the residuals of our spending equations, there’s considerable correlation there. That is, our standard models, as I noted in the past, have very rudimentary financial transmission mechanisms in them—mostly a few interest rates, a few asset prices, housing, equity, and the exchange rate. In the past, periods when we’ve seen significant increase in financial stress have also been associated with significant shortfalls in spending, and we’ve tried as best we can to build that in. Most of that effect overall is in housing—over half of it—but some of it we think will spill over elsewhere. Those bank balance sheets are going to be impaired. We think there will be some restraint on lending going forward. But, boy, it’s a lot of guess work! On the housing side, I do think we can go through more-careful calculations of the implications of the shutdown of the nonprime market and the current impairment in the jumbo markets, but beyond that, I’d say we’re very loosely calibrating it." FOMC20050630meeting--196 194,MS. JOHNSON.," Well, for one thing, the U.K.’s 1990 cycle was amplified by regulatory changes that preceded it, which led to mortgage lending that was excessive and not well supervised. It was a kind of blind-leading-the-blind situation: The regulator changed the rules and the financial institutions moved into the market and practices and norms changed. A great deal of lending took place. The supervisors were learning as much as the lenders were and—well, let me put it this way—it didn’t go well. In the past, there has certainly been a correspondence between household consumption and housing wealth in the U.K. So when they suffered the big drop in the 1990 rundown of housing prices, they also had a big change in household consumption out of disposable income, and so forth, June 29-30, 2005 67 of 234 Now, a couple of the characteristics of the U.K. market have always led us to think that it’s not a telling example. One is the prevalence of variable-rate mortgages, which causes the process of tightening monetary policy to contain the macroeconomy to have a bit of extra leverage over the discretionary income of households—to an extent that is not the case with fixed-rate mortgages Obviously, there’s a counterpart effect on the earnings of mortgage lenders, and so forth, in the U.S. economy that you need to take account of to fully understand that. But there is that characteristic. And there is the fact that house prices actually fell in the U.K., so they had big negative equity problems, which complicated the process of how to unwind the interaction of household behavior and financial intermediary behavior. To the extent people walked away from the houses, the financial intermediaries were getting collateral that perhaps no longer equaled the value of the loan. On the other hand, some households didn’t walk away; they just remained in a negative equity position for some time. And that had a long, dampening effect on their spending patterns. So there were complex reactions involved. But this time around, at least based on my conversations with U.K. officials, they think they’ve improved a lot of those things. So in that sense, there is something to be learned. Financial institutions now know better how to maintain their balance sheets and how to do this lending. The households know better, too; they’ve learned a bit. U.K. officials think they’ve seen a lessening to some degree of this tight link between housing wealth and consumption so that they’re not both on the run-up and then, when it stops, extrapolating what the consequences would be. On the other hand, I have to admit that I occasionally read my little machine while I sit here, and in the last hour it carried three statements from a member of the Bank of England’s Monetary Policy Committee who must have been making a speech. And all three statements the media chose June 29-30, 2005 68 of 234 [Laughter] And all of the statements were slightly two-handed, along the lines of: Monetary policy should not be driven by housing prices, but we must look at them closely. [Laughter] I think there are lessons to be learned; I’m not saying there aren’t. But certainly the 1990s episode had some characteristics that were far more extreme and that would never happen here because of institutional differences. And the present episode, which has remedied some of those earlier problems, I think is not such a bad deal. They’ve slowed the increase in housing prices. They aren’t having negative equity. They don’t have financial institutions that look like they’re going to become or technically are insolvent. I think in that sense they moved to improve their infrastructure, so to speak. They talk about the issue a lot but I think they feel the situation is okay at this time." CHRG-111shrg57320--303 Mr. Doerr," Chairman Levin, I will be even more brief. I appreciate the opportunity to testify on my role with the FDIC in the supervision of Washington Mutual Bank (WaMu).--------------------------------------------------------------------------- \1\ The prepared statement of Mr. Doerr appears in the Appendix on page 155.--------------------------------------------------------------------------- I am George Doerr, Deputy Regional Director for the FDIC in the San Francisco Regional Office, a position which I have held since June 2007. I have been with the FDIC almost 40 years. From September 2002 until June 2007, I was Assistant Regional Director for the FDIC San Francisco Regional Office. The San Francisco Region covers 11 States--Washington, Oregon, California, Arizona, Nevada, Utah, Idaho, Wyoming, Montana, Alaska, and Hawaii, in addition to the Territories of Guam and American Samoa and also Micronesia. As Assistant Regional Director in those years, among my responsibilities was our Regional Large Bank Program, which included WaMu. The three matters the Subcommittee asked me to be prepared to address with respect to WaMu are, one, Non-Traditional Mortgage Guidance; two, WaMu's condition as assessed through the CAMELS ratings; and three, FDIC's Large Insured Depository Institutions Program and ratings, also referred to as the LIDI program. On behalf of the Corporation, we have provided discussion of these three matters in the written statement submitted to the Subcommittee. Thank you again for the opportunity to testify, and I am pleased to respond to any of your questions. Senator Levin. Thank you both. Mr. Doerr, first, take a look at Exhibit 51a, if you would.\1\--------------------------------------------------------------------------- \1\ See Exhibit No. 51a, which appears in the Appendix on page 392.--------------------------------------------------------------------------- " Mr. Doerr," OK. Senator Levin. It is a memo entitled, ``Potential Impact of Possible Housing Bubble on Washington Mutual.'' In this memo, the FDIC wrote an analysis of WaMu's single-family residential loan portfolio, focusing on Option ARMs, hybrid loans, low documentation loans, which means low number of document loans, payment shock, and geographic concentrations. Now, if single-family residential lending was traditionally safe, what were the risks that FDIC saw with these aspects of WaMu's lending that made it less safe than historical times? " fcic_final_report_full--386 The regulators had already decided to allocate half of these funds to the nine firms assembled that day:  billion each to Citigroup, JP Morgan, and Wells;  billion to Bank of America;  billion each to Merrill, Morgan Stanley, and Goldman;  billion to BNY Mellon; and  billion to State Street. “We didn’t want it to look or be like a nationalization” of the banking sector, Paul- son told the FCIC. For that reason, the capital injections took the form of nonvoting stock, and the terms were intended to be attractive.  Paulson emphasized the im- portance of the banks’ participation to provide confidence to the system. He told the CEOs: “If you don’t take [the capital] and sometime later your regulator tells you that you are undercapitalized . . . you may not like the terms if you have to come back to me.”  All nine firms took the deal. “They made a coherent, I thought, a cogent argu- ment about responding to this crisis, which, remember, was getting dramatically worse. It wasn’t leading to a run on some of the banks but it was getting worse in the marketplace,” JP Morgan’s Dimon told the FCIC.  To further reassure markets that it would not allow the largest financial institu- tions to fail, the government also announced two new FDIC programs the next day. The first temporarily guaranteed certain senior debt for all FDIC-insured institutions and some holding companies. This program was used broadly. For example, Gold- man Sachs had  billion in debt backed by the FDIC outstanding in January , and  billion at the end of , according to public filings; Morgan Stanley had  billion at the end of  and  billion at the end of . GE Capital, one of the heaviest users of the program, had  billion of FDIC-backed debt outstanding at the end of  and  billion at the end of . Citigroup had  billion of FDIC guaranteed debt outstanding at the end of  and  billion at the end of ; JPMorgan Chase had  billion outstanding at the end of  and  billion at the end of . The second provided deposit insurance to certain non-interest-bearing deposits, like checking accounts, at all insured depository institution.  Because of the risk to taxpayers, the measures required the Fed, the FDIC, and Treasury to declare a sys- temic risk exception under FDICIA, as they had done two weeks earlier to facilitate Citigroup’s bid for Wachovia. Later in the week, Treasury opened TARP to qualifying “healthy” and “viable” banks, thrifts, and holding companies, under the same terms that the first nine firms had received.  The appropriate federal regulator—the Fed, FDIC, OCC, or OTS— would review applications and pass them to Treasury for final approval. The program was intended not only to restore confidence in the banking system but also to provide banks with sufficient capital to fulfill their “responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation.”  “The whole reason for designing the program was so many banks would take it, would have the capital, and that would lead to lending. That was the whole purpose,” Paulson told the FCIC. However, there were no specific requirements for those banks to make loans to businesses and households. “Right after we announced it we had critics start saying, ‘You’ve got to force them to lend,’” Paulson said. Although he said he couldn’t see how to do this, he did concede that the program could have been more effective in this regard.  The enabling legislation did have provisions affecting the compensation of senior executives and participating firms’ ability to pay divi- dends to shareholders. Over time, these provisions would become more stringent, and the following year, in compliance with another measure in the act that created TARP, Treasury would create the Office of the Special Master for TARP Executive Compensation to review the appropriateness of compensation packages among TARP recipients. CHRG-111hhrg50289--83 Mr. Cohen," Franchise businesses are poised to help lead the economy on the path to recovery. Studies show that the franchise industry consistently out performs the non-franchise business sector creating more jobs and economic activity in local communities across the country. A 2008 IFA report, for example, documents that franchising grew at a faster pace than many other sectors of the economy from 2001 to 2005. Franchise business output over this period increased 40 percent compared to 26 percent for all businesses. The message is clear, Madam Chairwoman, provide small business entrepreneurs and franchisees with access to capital and we will create jobs. We are not looking for a bailout. What we need is functioning credit markets. If the commercial markets cannot function, Congress needs to figure out a way to use the SBA as a temporary alternative. There are several steps that Congress could consider to make it easier for entrepreneurs to access capital, and I have detailed these recommendations in my prepared statements. I have one final note. Unbelievably, the SBA has actually created new roadblocks for small businesses during this recession. In March it shifted policy on goodwill financing of transfers and acquisitions and placed a cap on the amount that can be financed under the guaranteed loan program. Since the true value of most businesses is tied to the cash flow rather than the value of the assets on the books, the policy has placed an arbitrary limit on the valuation of some businesses. Finally, I would like to suggest the best solution for the struggles facing small business is more lending, not more government spending. As shown in my experience in the hundreds of thousands of small franchise businesses in every local community, lending leads to more sustainable renewable job growth and economic recovery. Thank you for the opportunity to participate in today's important hearing on small business capital. I think you will agree with the franchise business community can play a vital role in this recovery. [The prepared statement of Mr. Cohen is included in the appendix.] " CHRG-111hhrg54872--295 Mr. Yingling," Congressman, I just want to say I agree with you completely. I think that our industry--I will speak on behalf of the ABA--made a big mistake. We didn't look at this hard enough, we didn't look at it more globally. We looked at it previously on what does it mean for our regulatory burden on banks. And not to justify but to explain it, it is because we have such a heavy burden that we get paranoid about it, sometimes for good reason, but we should have been more aggressive in looking at this bad lending and looking at the trends and seeing what was happening in communities. And we should have worked with you at the State level; we should have worked with the Fed earlier on to say, look, something is wrong here and it is going to blow us up. One of the lessons for the future is we can't just look at what is going on in our narrow interest, but we have to look at what is going on in the economy and in neighborhoods like yours. So your criticism is justified. Going forward, we need to sit down and figure out how to make this work so we do have more focus on consumer protection, so we don't have the bubbles and bad actors that eventually gobble up all of us. And you have our pledge we are going to work with you to help solve this. We do have concerns about how it is done, but we need to make sure we have protections in place. " FinancialCrisisInquiry--614 ZANDI: Well, the way I think about it is that the hubris was probably running as thick in nearly every market. I mean, just go to junk corporate bond market. The junk corporate spread over treasury at the height of the euphoria in 2007 was 250 basis points. That’s the lowest it had ever been. Average is 500 basis points. At the worst of the crisis and the panic, it was 2,000 basis points. But I think what was important is the magnitude of the—of the lending in these markets. So, to give you context, the residential mortgage market is $11 trillion deep. Right? The commercial mortgage market is $4 trillion deep. The junk corporate bond market is $1 trillion, $1.5 trillion. So what really made the mortgage market so important is the magnitude of the problem. CHRG-111shrg50815--116 LEVITIN Q.1. Access to Credit: A potential outcome of the new rules could be that consumers with less than a 620 FICO score could be denied access to a credit card. Such an exclusion could affect 45.5 million individuals or over 20 percent of the U.S. population. Without access to traditional credit, where do you believe that individuals would turn to finance their consumer needs? A.2. I am unsure to which ``rules'' the question refers; I assume it refers to the recent unfair and deceptive acts and practices regulations adopted by the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration under section 5 of the Federal Trade Commission Act. If so, I strongly but respectfully dispute the premise of the question; the scenario that is presented is exceedingly alarmist. The question wrongly implies that all individuals with FICO scores of 620 or lower currently have access to ``traditional'' credit cards. They assuredly do not. First, nearly 10 percent of the United States adult population is ``unbanked,'' and that means almost by definition that they do not have credit cards; card penetration into the unbanked market is de minimis. Thus, at least half of the impact implied by the scenario is not possible. For the remaining 10 percent or so who have FICOs under 620, many do not currently have access to ``traditional'' credit. Instead, they have access to predatory new credit products like ``fee harvester'' or ``secured'' credit cards. Even if these non-traditional products were included in the term ``traditional,'' I think it is also dubious that all or even most of them would cease to be able to get ``traditional'' credit; nothing in the proposed regulations limits issuers' ability to protect against credit risk through either lower credit limits or higher interest rates or other fees. To the extent that these individuals are not able to get credit cards or choose not to accept them because of onerously high interest rates, the answer to where they would turn for financing needs depends on the particular circumstances of the individual, but I believe that many consumers would first cut down or eliminate non-essential expenses, which would reduce their financing needs. Demand for credit is not entirely inelastic. For these consumers' remaining financing needs, many would turn to family and friends for assistance. See Angela Littwin, Testing the Substitution Hypothesis: Would Credit Card Regulations Force Low-Income Borrowers into Less Desirable Lending Alternatives? 2009 Ill. L. Rev. 403, 434-35 (2009) (noting that borrowing from family and friends is the most frequent form of borrowing for low-income women). It is also important to note that empirical evidence suggests that ``credit cards are actually among low-income consumers' least-preferred sources of credit, meaning that there is no ``worse'' alternative to which they would turn if credit card access were reduced.'' Id. at 454. Beyond family and friends, there are also other legitimate, high-cost sources of credit besides credit cards--pawn shops, rent-to-own, and overdraft protection, e.g. There, of course, is a possibility that some low-income consumers will turn to illegitimate sources of credit, such as loan sharks, but this possibility could be tempered by community-based small loan programs. Indeed, given that the Federal Government is currently subsidizing credit card lending through the Term Asset-Backed Securities Lending Facility (TALF), it seems quite reasonable to support other forms of consumer credit lending. Indeed, in Japan, where there is a 20 percent usury cap, credit rationing and product substitution are significantly tempered by a government-supported small loan system. Nor is it clear that the terms on which ``loan sharks'' lend are actually worse than some subprime credit card products. As Woody Guthrie sang in the Ballad of Pretty Boy Floyd: Now as through this world I ramble I see lots of funny men Some will rob you with a Six gun And some with a fountain pen. But as through your life you travel As through your life you roam You won't never see an outlaw Drive a family from their home.Woody Guthrie, American Folksong 27 (1961). Finally, given the terms on which individuals with FICO scores of under 620 are able to obtain ``traditional'' credit, I think it is quite debatable whether ``traditional'' credit is in any way beneficial to them; fee-harvester cards and other subprime credit card products are as likely to harm consumers with poor credit ratings as they are to help them; these cards can improve consumers' credit scores over time, if the consumer is able to make all the payments in full and on time, but by definition a consumer with a FICO of under 620 is someone who is unlikely to be able to do that. Q.2. Risk-Based Pricing: Banks need to make judgments about the credit-worthiness of consumers and then price the risk accordingly. Credit cards differ from closed-end consumer transactions, such as mortgages or car loans, because the relationship is ongoing. I am concerned by the Federal Reserve's new rules on risk-based repricing for a couple of reasons. First, without the ability to price for risks, banks will be forced to treat everyone with equally stringent terms, even though many of these individuals perform quite differently over time. Second, without a mechanism to reprice according to risk as a consumer's risk profile changes, many lenders will simply refuse to extend credit to a large portion of the population. Do you believe that consumers will have access to less credit and fewer choices because of the Fed's new rule? If so, is this a desirable outcome? A.2. Again, I respectfully disagree with the premise of the question. The new uniform Unfair and Deceptive Act and Practices regulations adopted by the Federal Reserve Board, the Office of Thrift Supervision and National Credit Union Administration under section 5 of the Federal Trade Commission Act (``Reg AA'') do not prohibit risk-based pricing. Reg AA only prohibits retroactive repricing of existing balances. Card issuers remain free to increase interest rates prospectively with proper notice or to protect themselves immediately by closing off credit lines. That said, I would expect that Reg AA would likely reduce credit availability to some degree, although perhaps not to all consumers. This is not necessarily a bad outcome. Credit is a double-edged sword. It can be a great boon that fuels economic growth, but that is only when credit does not exceed a borrower's ability to repay. Credit can also be a millstone around the neck of a borrower when it exceeds the ability to repay. Overleverage is just as bad for consumers as it is for financial institutions. To the extent that Reg AA reduces credit availability, it might be a good thing by bringing credit availability more in line with consumers' ability to repay. Q.3. Consumer Disclosure: You state that the sheer number of price mechanisms make it difficult for consumers to accurately and easily gauge the cost of credit. You cite things such as annual fees, merchant fees, over-the-limit fees, and cash advance fees. You seem to suggest that credit cards should become much more plain vanilla because people simply can't understand the different uses and costs for those uses. Don't these different pricing mechanisms also provide more choices for consumers as they make purchasing decisions? A.3. That depends on the particular pricing mechanism. Many of them provide dubious choices or value for consumers. Consider over-limit fees, late fees, cash advance interest rates, and residual interest and double cycle billing. (1). LOverlimit fees. A consumer has no right to go overlimit and cannot assume that an over-limit transaction will be allowed. Moreover, overlimit can be the result of the application of fees, rather than of purchases. Therefore, overlimit is not exactly a ``choice.'' (2). LA late fee is no different than interest, just applied in a lump sum. I am doubtful that most consumers would prefer an up-front lump sum late fee rather than a higher interest rate. For the large number of ``sloppy payers'' who pay their bills a few days late, a higher interest rate is much better than a large flat late fee, but because consumers systematically underestimate the likelihood that they will pay late, they are less concerned about the late fee than the interest rate. (3). LMost cards charge a higher interest rate for ``cash advances.'' A cash advance, however, is not necessarily the payment of cash to the consumer. Instead, cash advances include the use of so-called ``convenience checks'' that card issuers send to consumers with their billing statements. (Incidentally, convenience checks present a considerable identity theft problem because they lack cards' security features and the cardholder has no way of knowing if they have been stolen. They expose issuers to significant fraud losses and should be prohibited as an unsafe and unsound banking practice.) Convenience checks permit cardholders to use their card to pay merchants that do not accept cards, like landlords, utilities, and insurers. This allows consumers to pay these bills even when they do not have funds in their bank account. But convenience checks carry the cash advance interest rate plus a fee (often a flat 3 percent with a minimum amount). These terms are usually disclosed on the convenience checks only partially and by reference to the cardholder agreement. It is doubtful that most consumers retain their cardholder agreement, so whether consumers understand the cost of using convenience checks is a dubious proposition. (4). LSimilarly, billing tricks and traps like residual interest or double cycle billing are hardly a ``choice'' for consumers; these are not product differentiations that are tailored to consumer preferences, as few consumers know about them, let alone understand them. Restricting card pricing could limit innovation in the card market, but it is important to recognize that not all innovation is good. There has been very little innovation in the card industry over the last twenty years, either in terms of technology or in terms of product. Cards still operate on the same old magnetic stripe technology they had in the 1970s. The card product still performs the same basic service. To the extent there has been innovation, it has been in the business model, and it has frequently not been good for consumers. Even things like the 0 percent teaser rate are hardly unambiguous goods. While 0 percent teasers are great for consumers who can pay off the balance, they also encourage consumers to load up on credit card debt, and if there is a shock to the consumer's income, such as a death, an illness, a divorce, or unemployment, the consumer is much more exposed than otherwise. I recognize that it is important to protect the ability of the card industry to innovate in the future, and that is why I believe the best solution is to set a default rule that simplifies credit card pricing, but to allow a regulatory agency, such as the Federal consumer financial product safety commission proposed by Senators Durbin, Kennedy, and Schumer and Representative Delahunt (S. 566/H.R. 1705, the Financial Product Safety Commission Act of 2009) to have the power to card issuers to introduce new products and product features provided that they meet regulatory consumer safety standards. Q.4. Bankruptcy Filings: As the recession worsens, many American families will likely rely on credit cards to bridge the gap for many of their consumer finance needs. Mr. Levitin and Mr. Zywicki, you seem to have contrasting points of view on whether credit cards actually force more consumers into bankruptcy, or whether credit cards help consumers avoid bankruptcy. Could both of you briefly explain whether the newly enacted credit card rules will help consumers avoid bankruptcy or push more consumers into bankruptcy? A.4. The newly enacted Federal Reserve credit card regulations will not have any impact on bankruptcy filings presently, as they do not go into effect until summer of 2010. When they do go into effect, their impact on consumer bankruptcy filings will likely be mixed. Credit card debt has a stronger correlation with bankruptcy filings than other types of debt. But this is not necessarily a function of credit card billing practices. Card debt reflects the macroeconomic problems of the American family--rising costs of health care, education, and housing but stagnant wages and depleted savings. The card billing tricks and traps targeted by the Fed's rules amplify this distress, but the Fed's rules will not solve the fundamental problems of the American family. To the extent that they limit the amplifying effect that card billing tricks and traps have on card debt levels, it will help some consumers avoid bankruptcy. If the rules result in contraction of credit availability, it might push consumers into bankruptcy, but that would have to be netted out against the number that are helped by a reduction in the amplification effect, and I am skeptical that there would be much contraction. I agree with Professor Zywicki that credit cards can help some consumers avoid bankruptcy. If a consumer has a temporary setback in income, credit cards can provide the consumer with enough funds to hang on until their financial situation reverses. But credit cards can also exacerbate financial difficulties, and even if the consumer's fortunes pick up, it might be impossible to service the card debt. Moreover, there are many consumers whose financial situations are not going to pick up, and for these consumers, card debt just adds to their distress. Q.5. Safety and Soundness and Consumer Protection: I believe firmly that safety and soundness and consumer protection go hand-in-hand. One needs only to look at the disaster in our mortgage markets, for clear evidence of what happens when regulators and lenders divorce these two concepts. A prudent loan is one where the financial institution fully believes that the consumer has a reasonable ability to repay. Do you agree that prudential regulation and consumer protection should both be rigorously pursued together by regulators? A.5. Yes, but not by the same regulators. There is an essential conflict between safety-and-soundness and consumer protection. A financial institution can only be safe and sound if it is profitable. And abusive and predatory lending practices can often be extremely profitable, especially in the short term, and can compensate for the lender's other less profitable activities. The experience of the past decade shows that when Federal regulators like the Office of Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve are charged with both safety-and-soundness and consumer protection, they inevitably (and perhaps rightly) favor safety-and-soundness at the expense of consumer protection. These functions cannot coexist in the same agency, and consumer protection responsibilities for financial products should be shifted to a single independent Federal agency (which would not claim preemptive authority over state consumer protection actions) to protect consumer protection. Q.6. Subsidization of High-Risk Customers: I have been receiving letters and calls from constituents of mine who have seen the interest rates on their credit cards rise sharply in recent weeks. Many of these people have not missed payments. Mr. Clayton, in your testimony you note that credit card lenders have increased interest rates across the board and lowered credit lines for many consumers, including low-risk customers who have never missed a payment. Why are banks raising interest rates and limiting credit apparently so arbitrarily? A.6. Banks are raising interest rates on consumers and limiting credit to cover for their own inability to appropriately price for risk in mortgage, securities, and derivatives markets has resulted in their solvency being threatened. Therefore, banks are trying to limit their credit card exposures and are trying to increase revenue from credit card accounts by raising rates. If banks are unable to competently price for risk for mortgages, where there is often robust underwriting, what confidence should we have in their ability to price for risk for credit cards where every loan is a stated income ``liar'' loan? The current financial debacle should cause us to seriously question banks' claims of risk-based pricing for credit cards. The original pricing failed to properly account for risk and the new arbitrary repricing certainly fails to account for risk on an individualized level. The only risk being reflected in the new pricing is the bank's default risk, not the consumer's. Does this result in low-risk customers subsidizing people who are high-risk due to a track record of high-risk behavior? Yes, it probably does because it is being done so arbitrarily. Q.7. Effects on Low-income Consumers: I want to put forward a scenario for the witnesses. Suppose a credit card customer has a low income and a low credit limit, but a strong credit history. They use their credit card for unexpected expenses and pay it off as soon as possible, never incurring late fees. With the new regulations approved by the Federal Reserve, banks will be restricted in their use of risk-based pricing. This means our cardholder could see his or her interest rates and fees increased to pay for the actions of other card holders, many of whom have higher incomes. Do any of the witnesses have concerns that moving away from risk-based pricing could result in the subsidization of credit to wealthy yet riskier borrowers, by poorer but lower-risk borrowers? A.7. No. The issue is a red-herring. As an initial matter, it is important to emphasize that the Federal Reserve's new regulations do not prohibit risk-based pricing. They only prohibit retroactive repricing of existing balances. In other words, they say that card issuers only get one bit at the risk pricing apple, just like any normal contract counterparty. Card issuers remain free to price however they want prospectively or to reduce or cutoff credit lines if they are concerned about risk. Second, it is important to underscore that to the extent that card issuers engage in risk-based pricing, it is only a small component of the cost of credit. I discuss this at length in my written testimony, but I will note that Professor Zywicki has himself written that 87 percent of the cost of credit cards has nothing to do with consumer risk; it is entirely a function of the cost of operations and the cost of funds. Todd J. Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 79, 121 (2000). The remaining 13 percent represents both a risk premium and opportunity pricing. In many cases the opportunity-pricing component predominates. Therefore, there to the extent that credit card issuers do risk based pricing, it only has a marginal impact on the total cost of cards. As Professor Ausubel demonstrated in his written and oral testimony, a significant component of some credit card fees, like late fees, are opportunity costs. Likewise, in my written testimony, the section comparing my own credit cards, three of which are from the same issuer, but which have different rates that do not correspond with credit limits, indicates that there is significant opportunity pricing in the card market. Regulations that make cards fairer and more transparent would be unlikely to have much impact on consumer pricing. Third, it is not clear why cross subsidization should be a particular concern. It is a common fact of life. Consider flat-fee parking lots. Those consumers who park for 5 minutes subsidize those who park for hours. Similarly, at by-the-pound salad bars, consumers who eat only carrots subsidize those who eat only truffles. When cross-subsidization is regressive, it elicits additional concerns, but there are far more serious regressive price structures, not the least of which is the Internal Revenue Code. That said, I believe the cross-subsidization in the scenario to be unlikely because the risk that matters to card issuers is nonpayment risk, not late payment risk, and income and wealth generally correlate with low nonpayment risk. In sum, then, I think the cross-subsidization scenario presented is unlikely, and to the extent it occurs, the cross-subsidization will only be de minimis because of the limited extent of risk-based pricing. The problem presented by the scenario is a red herring concern and not a reason to shy away from regulating credit cards. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM KENNETH J. CHRG-111hhrg53241--34 Mr. Plunkett," Thank you, Mr. Chairman, and Ranking Member Hensarling. We have been asked to comment on the full range of regulatory restructuring proposals in the Administration's white papers, so I will offer comments on four key components of the plan. First, we support the Administration's fairly strong set of proposals on derivatives as an essential first step but urge you to strengthen it further by driving as much as possible of the over-the-counter derivatives market onto regulated exchanges. Second, the President's plan should offer much more robust reforms of credit rating regulations than it currently does. For example, reduce reliance on ratings by clarifying that using a credit rating does not afford a safe harbor. The investor, whether it is a pension fund, a bank, or a money market fund, must remain responsible for conducting their own evaluation to determine that the investment is appropriate. Our second recommendation on credit rating agencies is to increase rating agency accountability by eliminating the exemption from liability provided to rating agencies in the Securities Act. Our third recommendation for reform to the President's proposal on credit rating agencies is to strengthen oversight by providing either the SEC or an oversight board modeled on the Public Company Accounting Oversight Board the full complement of regulatory tools, including inspections, standard setting, and sanction authority. The regulators, however, should not pass judgment on rating methodologies. The third major component of the President's plan we are commenting on is the excellent proposals to strengthen protections for retail investors, in particular to create a fiduciary duty to act in the best interest of clients for investment advisors by proposing an examination and reform of the compensation practices that encourage financial professionals to act in ways that do not benefit their clients. We do have a recommendation here as well, though. We are concerned that the legislation as drafted leaves the SEC with too much leeway to adopt a watered-down fiduciary duty ``light'' that would deny vulnerable investors the protections they both need and deserve. The SEC has created this problem that has to be fixed, and so Congress is going to have to step in to tell them how to do this. Because, at least until now, they haven't been willing to do so on their own. Finally, we very strongly support the Administration's proposal to create a Federal consumer protection agency focused on credit, banking, and payment products, because it targets the most significant underlying causes of the massive regulatory failures that have led to harm for millions of Americans. Federal agencies did not make protecting consumers from lending abuses a priority, as you have heard repeatedly. They appeared to compete against each other to keep standards low and reduce oversight of financial institutions. They ignored many festering problems that grew worse over time. If agencies did act to protect consumers--and they often didn't--the process was cumbersome and time consuming. As a result, agencies did not act to stop some abusive lending practices until it was far too late. In short, regulators were not truly independent of the influence of the financial institutions they regulate. It is particularly important that the proposal would ensure that consumer protection oversight is no longer subjugated to safety and soundness regulation at regulatory agencies. Combining safety and soundness supervision with its focus on bank profitability in the same regulatory institutions as consumer protection magnified an ideological predisposition or anti-regulatory bias by Federal officials that led to unwillingness to rein in abusive lending before it triggered the housing and economic crisis. For example, why curb abusive credit card or overdraft lending that may be harming millions of consumers if it is boosting the bottom lines of the banks you are regulating? This is the inherent conflict that the objections I am hearing from the banking industry to this proposal don't really address. Regulators viewed, often, safety and soundness regulation as in conflict with consumer protection. We now know that, had they taken the side of consumers, they would have better protected the financial institutions they were charged with and consumers as well. Finally, let me just respond to some of the criticism we have heard by the financial industry. They are threatening broad-scale ``Harry and Louise'' type ads against this proposal. They have offered an elaborate defense of the status quo. They are minimizing the harm that the current regulatory regime has caused Americans, distorting specifics of the proposals and making the usual threats that improving consumer protection will increase costs and impede access to credit. Let me finish by saying we are in a credit crunch right now. We are in an economic crisis right now. The deregulatory regime that these institutions championed helped create that, and a consumer regulator will help move us away from that. Thank you, Mr. Chairman. [The prepared statement of Mr. Plunkett can be found on page 90 of the appendix.] " CHRG-110hhrg46593--95 Secretary Paulson," Let me then make two other points here, because you are dealing with consolidations. I have heard a lot about using capital from the TARP for mergers. And, again--and I am just not going to deal with this--I will make the general point that, if there is a bank that is in distress and it is acquired by a well-capitalized bank, there is more capital in the system, more available for lending, better for communities, better for everyone. No doubt about that in my mind. And so, when we get--and the applications which come to Treasury, when it will come to Treasury--we have not received an application for capital from either of the banks you have mentioned--when it comes to Treasury, we will look at it and act on it. But, again, I just can't emphasize enough that this program, to me, it was very, very important on this program that--this is general; I am not speaking--that it not be used to prop up failing banks or banks that might fail, that this be used for healthy banks. And I looked to the regulators. As a matter of fact, we designed a process with the regulators. They would look at the applications as they would come in. And there is even a peer-review board with the regulators. And they submit them to us, and we make a decision. " FinancialCrisisInquiry--224 ROSEN: Well during most of our lending history, they were done. I think common sense would say that you verify a person’s income. If you can’t verify his income, why would you give him a loan? I mean, he can’t give you a document that tells you his income. I mean, you appraise the house. Common sense. But they stopped doing all this. And it is because of the gatekeeper, which for many years was the rating agencies became the toll taker. So there was no gatekeeper in this whole process. And if someone would buy it, they did it. But I think the consumer should not be given a free pass here. Cause I think a number of consumers lied in their loan applications about their income. Now a stated income loan, you know you’re—I mean no one’s verifying it, so you do it possibly. I would also say that a lot of these investors –help them stay in that unit. And so there’s a lot of things that could be done. Also they’re idea of a non-recourse mortgage. Well in many ways it’s what you want from a borrowing point of view, it’s probably not a wise thing. You want someone to be responsible for the debts they’re taking on. THOMPSON: So your net point is that the regulatory schema around this failed us? ROSEN: The regulatory scheme, common sense, I’ve talked to a lot of the large financial institutions, and some kept those same criteria. Others thought, “We’re not holding it. We’re selling it, so it doesn’t matter.” If you’re holding it in your own portfolio, you would not do these things. THOMPSON: fcic_final_report_full--434 The Commission heard convincing testimony of serious mortgage fraud prob- lems. Excruciating anecdotes showed that mortgage fraud increased substantially during the housing bubble. There is no question that this fraud did tremendous harm. But while that fraud is infuriating and may have been significant in certain ar- eas (like Florida), the Commission was unable to measure the impact of fraud rela- tive to the overall housing bubble. The explosion of legal but questionable lending is an easier explanation for the creation of so many bad mortgages. Lending standards were lax enough that lenders could remain within the law but still generate huge volumes of bad mortgages. It is likely that the housing bubble and the crisis would have occurred even if there had been no mortgage fraud. We therefore classify mortgage fraud not as an essential cause of the crisis but as a contributing factor and a deplorable effect of the bubble. Even if the number of fraudulent loans was not substantial enough to have a large im- pact on the bubble, the increase in fraudulent activity should have been a leading in- dicator of deeper structural problems in the market. Conclusions: • Beginning in the late s and accelerating in the s, there was a large and sustained housing bubble in the United States. The bubble was characterized both by national increases in house prices well above the historical trend and by more rapid regional boom-and-bust cycles in California, Nevada, Arizona, and Florida. • There was also a contemporaneous mortgage bubble, caused primarily by the broader credit bubble. • The causes of the housing bubble are still poorly understood. Explanations in- clude population growth, land use restrictions, bubble psychology, and easy fi- nancing. • The causes of the mortgage bubble and its relationship to the housing bubble are also still poorly understood. Important factors include weak disclosure standards and underwriting rules for bank and nonbank mortgage lenders alike, the way in which mortgage brokers were compensated, borrowers who bought too much house and didn’t understand or ignored the terms of their mortgages, and elected officials who over years piled on layer upon layer of gov- ernment housing subsidies. • Mortgage fraud increased substantially, but the evidence gathered by the Com- mission does not show that it was quantitatively significant enough to conclude that it was an essential cause. CHRG-111shrg57319--200 Mr. Vanasek," I would have to say no, Senator, in the sense that we wanted to impose strict limits in terms of the dollar amounts of various types of loans being made. We found that to be very difficult to do. So there were continuing issues here about the strategy versus the opinion of the credit risk area. Senator Levin. Now, on page B1.4 of that Exhibit 2a, there is a definition of higher-risk lending. It says it consists of ``Consumer Loans to Higher Risk Borrowers,'' including subprime loans, single-family residential, and consumer loans to borrowers ``with low credit scores at origination.'' In the footnote, it says that means FICO scores under 660. Did WaMu, not just Long Beach but did WaMu issue loans to borrowers with FICO scores under 660? Do you know, Mr. Vanasek? " CHRG-111hhrg53241--109 Mr. Gutierrez," So we all know that to get it, it has to come from Congress. But aside from the 36 percent cap for pay loans for military families, which for the record started with my amendment in this very committee, Congress has not had an appetite for passing usury caps. As an aside, I met yesterday--I had an opportunity to meet with an Australian senator who also serves as the assistant treasurer in the current government, and we discussed payday lending there at length. And he indicated to me that they have put caps of 48 percent, and the payday industry has somehow gotten around them. He indicated that rate caps alone have not adequately dealt with the payday industry in Australia, and so he says they just simply extend the terms of the loan. But what they will be doing soon is experimenting with an ability to pay standard in conjunction with a rate cap. So I would like to ask both of you, do you think it is a good idea for the CFPA to look at and implement ability to pay standards for products such as this industry? " CHRG-110hhrg46594--167 Mr. Meeks," Thank you, Mr. Chairman. I was listening to some of the questions by Mr. Watt, and I am trying to be clear on the utilization of the money. I am one who believes that, given the close to 5 million jobs, whether it is direct or related, that we could lose, this industry is tremendously important. But I am concerned about how the money is going to be spent, and I know that, for example, in some places or areas in the country where there is no manufacturing, but there are dealerships which employ a substantial amount of people. And in listening to some of the responses, it is that dealerships are going to shrink substantially. And I don't know whether or not there is any plan with reference to the dollars that the taxpayers will be lending you to help stabilize dealerships and others, because that becomes part of the local community--and both sides, where they go buy their cars and also employment for them. And so I am trying to say, are there any plans with this taxpayer money to keep and to preserve dealerships or to strengthen dealerships? That is my first question. " CHRG-111hhrg48874--130 Mr. Perlmutter," And this really does, back in November, recognize the need to maintain, you know, and extend credit because we have seen, you know, just a loss of demand, a loss of credit, at levels we have never seen before, or at least not for many, many decades. And so, to a degree, we proceed with the prudent lending practices, there still has to be a good look at the borrowers. And my bankers and my borrowers are saying, the examiners are questioning concentration levels. So, if you're a homebuilder, like Mr. Neugebauer was talking about, and you want a new loan, even though you've been a good customer, you're not going to get it because there's too much concentration in real estate. Too much concentration for auto dealers because that's a distressed industry. Restaurants, commercial facilities, you know, retail outlets, what do you say? And then, an increase of capital from 10 to 10 percent. So, they're giving me specific requirements, or at least suggestions, by the examiner. When an examiner makes a suggestion, you follow it. Am I wrong? Are my guys way off? " CHRG-109hhrg23738--102 Mr. Sherman," Thank God she does not. I have got so many questions I will basically be submitting them for the record. We are heading eventually for a realignment of currency values such that our trade deficit is ameliorated, perhaps reversed. It is deferrable. But this realignment is not avoidable. It will have benefits. It will also have enormous harms, even if it is done smoothly. But if it is not smoothly, it could be a disaster. I will be asking in writing how we can work with other countries to assure that there is a smooth currency realignment and not a crash of the dollar. I will be submitting questions about the importance of subprime lending to our economy, particularly when those loans are not made by depository institutions that are insured by the federal government but do not pose those risks because they are made by private uninsured lenders; andd I will also be asking about the importance of the private auditing function to our capital markets. A recent op-ed in the American Banker notes that our committee and the House passed this--well, our committee passed this GSE reform bill, and we reported it out by an overwhelming vote, that it would establish a better regulator for the GSEs; and I will be asking whether you would concur in this assessment or whether you would agree that stronger capital and prompt corrective action authority as provided in the bill makes sense and just how important it is that Congress pass GSE reform legislation this year. One issue I have asked you about before is the issue of the regulations issued by the Treasury Department and the Federal Reserve Board allowing national banks to engage in real estate brokerage and real estate management. As you know, these regulations have been blocked by congressional action on an annual basis, which is hardly an efficient way to provide for a national system to regulate who can and cannot, and under what circumstances, engage in real estate brokerage activity. Now, you have consistently opposed mixing banking and commerce, and a commercial activity is a commercial activity even if it involves financing. For many of my working-class-family constituents, they are not even aspiring to buy a home, they are aspiring to buy a car, and the lending function who will make the loan is the most important part of selecting an automobile dealer. Wheat and steel, even this shirt, can be financed on a credit card, so just because something is financed does not mean it is not commerce. So I hope you would explain: Why is buying and selling of real estate a financial activity if buying and selling cars, steel, et cetera, is not? Perhaps you could respond orally to that question. " CHRG-110shrg50414--183 Mr. Bernanke," Senator, the Federal Reserve and the other Federal regulators are very aware of this situation. We understand it is an unusual situation. It wasn't brought about by bad lending, for example. And we are going to be working with banks to try to find solutions for them. Senator Martinez. Good deal. Thank you. And in the situation that brings us here today, Mr. Secretary, today, I have heard you say that you welcome oversight, so as we try to narrow differences and begin to work in a bipartisan way to find a way of getting to a solution to this problem, which is not just about Wall Street but is directly related to what is happening in Miami and Orlando and Tampa and the small cities across America, so therefore, we have the idea that you have asked for a blank check or that Congress would give you a blank check or that Congress--I mean, we can remove that from the debate. You are not asking for a blank check. We are not going to give you a blank check. There will be oversight. And you accept and understand that that is part of what we have to do? " CHRG-111hhrg53248--152 Secretary Geithner," Let me just say two things in response to that. One is, there are basically two core substantive strategies that you can do that would be helpful in that area. One is again to make sure that banks who need capital have access to capital. That is critical. Without that, you will have further reduction in lending capacity. Banks will have to pull back further. The second is to make sure that our broader credit markets that compete alongside banks are working better. We have done a lot of things in both of those areas, but I think those are the most important effective things we can do. I do think it is important, given the cumulative effect of what a bunch of judgements by banks across the country did to our economy. I think it is very important that they work very hard to earn back the confidence of the American people that they are going to be a source of capital and credit for growing businesses and for families going forward. I think it is very important to them they work hard to earn back that basic trust and confidence. " CHRG-111hhrg48867--266 Mr. Silvers," Well, you know, one of my observations from being on the Oversight Panel for TARP, which I think is, sort of, what you are getting at, is that what is a healthy institution can be a puzzling thing. Every recipient, with the exception of AIG, of TARP money has in some respect been designated a healthy institution by the United States Government. So perhaps your question is, well, we are just giving money to healthy institutions already. I am not sure that is a very plausible statement, but it is, more or less, what the record shows. The question of increasing lending, I think, is complex. There is no question that there is a need for more credit in our economy right now. On the other hand, the levels of leverage we had in our economy during the last bubble are not ones we ought to aspire to returning to or sustaining. Getting that balance right is extremely important. And, furthermore, it is also the case, I believe, that allowing very, very large institutions to come apart in a chaotic fashion would be very harmful to our economy. The punch line is I think that we have not learned enough about to what extent TARP's expenditures have produced the increased supply of credit that your question indicates and to what extent that is because of, I think as you put it, the fact that a majority of that money has gone to a group of very large institutions. Those are questions that I know the Oversight Panel is interested in and questions that I am very interested in. I can't tell you what I believe the answer to them to be today. " CHRG-110shrg50420--71 Chairman Dodd," That is a great question, and it again goes back to the point that, well, 535 Members of the Congress in the next matter of days trying to craft something here is difficult and other options exist for managing this situation where getting these kinds of decisions could be made almost by fiat as opposed to trying to convince two bodies of Congress along with others to draft something here that could work. So I appreciate the observation. Senator Schumer. Senator Schumer. Well, thank you, Mr. Chairman. I want to thank you. This is excellent testimony and I think it is along the right lines we should pursue. I have a couple of points I want to make and then I am going to ask you to comment on them. First and obviously, at least to me, we can't let the industry fail. Millions of workers lose their job. We have to have a domestic manufacturing base. And to let the auto industry fail during a recession would make a sick economy sicker, so we have got to do something. Second, bankruptcy is not a viable option because it will seal the death of the auto companies. No one is going to buy a car from a bankrupt company. No one is going to make a loan to someone buying a car from a bankrupt company. And everyone talks about this prepack. A prepack brings the big players together, but it doesn't bring all the players together and so once you go to bankruptcy, they can delay it for months, even years, and the company fails. So we have to do something, not bankruptcy. And I think I speak for many of us here. We care less where the money comes from--that has been the big debate, should it come from the TARP, should it come from the 136--but much more how it is spent. And speaking for myself and I think a good number of people, I don't trust the car companies' leadership. I worry that if they are left on their own, they will be back a short time later asking for more and we won't be better off. To hand money over with vague, unenforceable promises without an enforcement plan for viability isn't good enough. So that leads us to where you are sort of, which is Chrysler. That is the one model. It is interesting to note, Mr. Chairman, that Chrysler wanted direct money or a tax refund and the Congress said, no, we are setting up a board. But it wasn't just an oversight board. And I think when you call it an oversight board, you run into trouble, because this is a board, I think, that has to do a lot more. If you have a board, and I wouldn't even have a board right now, given the time problem. I would have an individual. I would let the President designate the Treasury Secretary, who I believe was chairing the other board, or someone else, to bring all the big parties together and work out concessions quickly so that then the money can flow. If you give the money and then say, let the auto companies negotiate, you know who is going to lose? It will be the workers. UAW made concessions yesterday, significant ones, but where are the bond holders? Where are the dealers? Where are the other lenders? The only way you can do that is the government has the carrot, in my view, in the view not of a board. It will be too cumbersome, and as Senator Reed alluded to, we don't have the time. You let this President or the next one--it may have to be this one--pick somebody. He calls all the major players into the room, probably the Treasury Secretary, and says, you all have to make concessions. And then the carrots, which are not just some lending but warranties so that people will buy the cars and some back-up for lending, because no one is buying the cars without lending, that is the kind of plan. I think that can be done within the next three to 4 weeks. Look what they did on these financial things. That is not a great example in many instances, but I think they can. So the worry I have with yours is not the basic concept but the timing, the strength of the board to impose conditions, but also to do the negotiating, and perhaps it shouldn't be a board but one individual or maybe the Treasury Secretary and two others, and do it quickly. Now, why isn't that a better plan? It is along the models you say, but that takes the Chrysler model and adapts it to the problems we have now. "