[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]















                      THE DODD-FRANK ACT FIVE YEARS
                        LATER: ARE WE MORE FREE?

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION
                               __________

                           SEPTEMBER 17, 2015
                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-50




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 17, 2015...........................................     1
Appendix:
    September 17, 2015...........................................    57

                               WITNESSES
                      Thursday, September 17, 2015

Gray, Hon. C. Boyden, Founding Partner, Boyden Gray & Associates.     7
Gupta, Deepak, Founding Principal, Gupta Wessler PLLC............     9
Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law, 
  University of Pennsylvania Law School..........................     8
Spalding, Matthew, Associate Vice President and Dean of 
  Educational Programs, Hillsdale College........................     5
Zywicki, Todd J., Foundation Professor of Law and Executive 
  Director of the Law and Economics Center, George Mason 
  University School of Law.......................................    11

                                APPENDIX

Prepared statements:
    Hinojosa, Hon. Ruben.........................................    58
    Gray, Hon. C. Boyden.........................................    60
    Gupta, Deepak................................................    66
    Skeel, David A., Jr..........................................    97
    Spalding, Matthew............................................   112
    Zywicki, Todd J..............................................   124

              Additional Material Submitted for the Record

Zywicki, Todd J.:
    Written responses to questions for the record submitted by 
      Representative Hultgren....................................   137
    Written responses to questions for the record submitted by 
      Representative Murphy......................................   139
Gray, Hon. C. Boyden:
    Written responses to questions for the record submitted by 
      Representative Murphy......................................   141
 
                     THE DODD-FRANK ACT FIVE YEARS
                        LATER: ARE WE MORE FREE?

                              ----------                              


                      Thursday, September 17, 2015

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Royce, Lucas, 
Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer, 
Huizenga, Duffy, Hurt, Stivers, Stutzman, Mulvaney, Ross, 
Pittenger, Barr, Rothfus, Messer, Schweikert, Guinta, Williams, 
Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez, 
Sherman, Hinojosa, Lynch, Scott, Green, Cleaver, Himes, Kildee, 
Delaney, Sinema, and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order. Without objection, the Chair is authorized to 
declare a recess of the committee at any time.
    Today's hearing is entitled, ``The Dodd-Frank Act Five 
Years Later: Are We More Free?''
    Before proceeding further, I would like to sadly inform all 
Members who may not be aware that the gentlelady from Missouri, 
Mrs. Wagner, lost her mother earlier this week, so she will not 
be here for today's hearing. And if you could certainly keep 
her and her family in your thoughts and prayers.
    I now recognize myself for 3 minutes to give an opening 
statement.
    Today, the committee holds the third of its three hearings 
looking at some of the consequences of the Dodd-Frank Act upon 
its fifth anniversary. Earlier, we explored how in many ways, 
Dodd-Frank has made us less prosperous and the economy less 
stable.
    Today, as Americans commemorate the 228th anniversary of 
the signing of the Constitution, perhaps the greatest document 
devised by the mind of man, we explore how Dodd-Frank has, 
regrettably, made us less free.
    We hold these hearings because too many of our fellow 
citizens have still not achieved economic recovery for 
themselves and their family, and many are losing hope. We want 
their lives to be better; we want them to thrive, achieve their 
dreams, pursue happiness, and earn success.
    But none of that is possible without basic economic freedom 
in the rule of law, bedrock principles upon which our republic 
rests. Dodd-Frank erodes the economic freedom and opportunity 
that empowers low-income Americans to rise and generate greater 
shared prosperity.
    Dodd-Frank moves us away from the equal protection offered 
by the impartial rule of law towards the unequal and 
victimizing rule of political bureaucrats. Of all the harm 
Dodd-Frank inflicts, this is the most profound and disturbing.
    Dodd-Frank exemplifies the insidious belief among many 
Washington elites that the American people cannot be trusted to 
make good decisions for themselves so government must do it for 
them. Without Washington's coercive mandates we might just pick 
the wrong health plan, the wrong mortgage, the wrong financial 
advisor, or maybe even, God forbid, the wrong lightbulb.
    Perhaps the ultimate expression of this elitist attitude is 
the Bureau of Consumer Financial Protection. Why? Why in 
America would we trust one American to decide which financial 
products and services the rest of us are allowed to have?
    Pray tell, how does Dodd-Frank empower people to rise when 
it centralizes power in secretive distant bureaucracies and 
takes away consumers' freedom to make their own choices? This 
is not the rule of law; it is the rule of rulers.
    Equally offensive is the Financial Stability Oversight 
Council. By defining vague statutory terms in any fashion that 
pleases them, this amalgamation of regulators can exert 
ultimate functional control of almost any large financial firm 
in our economy, and do so with utter disregard for due process. 
Again, this is not the rule of law; it is the rule of rulers.
    Quite simply, Dodd-Frank hurts the poor and the unemployed 
when it smothers opportunities for their success with 
oppressive and costly rules that squeeze small businesses and 
devour dollars that could otherwise be used to secure a good 
job and a career path for those who need them.
    To restore upward mobility, fight opportunity inequality, 
and create a healthier economy, it is time to move beyond Dodd-
Frank. It is time to reinvest in the power of economic freedom 
and the American people, reestablish the rule of law, and then 
watch the American people rise and create a nation of boundless 
opportunity for all.
    I now recognize the gentlelady from New York, Mrs. Maloney, 
ranking member of our Capital Markets Subcommittee, for 3 
minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, for calling this 
third hearing of the committee.
    Today, we meet to debate the merits of the constitutional 
challenges that have been brought against the Dodd-Frank Act 
and to consider whether the Act has made us ``more free.'' 
However, I am afraid today's discussion won't be much of a 
debate.
    In at least four cases, Federal district courts have 
rejected constitutional challenges against the Consumer 
Financial Protection Bureau (CFPB), the Financial Stability 
Oversight Council (FSOC), and the Orderly Liquidation Authority 
(OLA).
    But today I would like to focus on the challenges to the 
Consumer Financial Protection Bureau because one of the most 
frequent criticisms of Dodd-Frank in these court challenges is 
that the CFPB is somehow a threat to individual liberty because 
the Bureau is not, ``accountable to Congress.'' I agree that it 
is important for the CFPB to be accountable to Congress, but 
exactly what does ``accountable'' mean?
    Webster's dictionary defines the word accountable as, 
``required to explain actions or decisions to someone.'' By 
this definition, the CFPB is definitely accountable to 
Congress. In fact, we are having a hearing next week in which 
Director Cordray will be here to explain his actions and 
decisions to this committee.
    Every court that has addressed the issue of the CFPB's 
constitutionality has concluded that it is perfectly 
constitutional. In fact, just a few months ago a Federal court 
upheld the constitutionality of the CFPB and stated that the 
CFPB is, ``no venture into uncharted waters. It is a variation 
on a theme--the independent regulatory agency with enforcement 
power--that has been a recurring feature of the modern 
administrative state.''
    So instead of arguing about whether the CFPB undermines the 
``rule of law,'' this committee would be better off recognizing 
that Dodd-Frank is the law and working cooperatively to improve 
the law.
    Thank you. I yield back, and I look forward to the 
testimony of our guests today.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, chairman of our Financial 
Institutions Subcommittee, for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    This hearing poses the question: Are we more free? And as I 
look at the government, particularly the structure of our 
financial regulatory system, I think the answer most surely is, 
we are not.
    Seven years ago this week, Lehman failed. And in the 
following weeks our financial institutions experienced more 
failures. Government response focused on the suspension of free 
market principles by policymakers.
    Looking back at this crisis, I can't help but think about 
the quote from Rahm Emanuel: ``Never allow a good crisis to go 
to waste.''
    You see, the financial crisis provided political cover for 
suspending the rule of law and allowing the government to pick 
winners and losers. Crisis is often invoked to rationalize both 
government discretion and the waiver of rule of law.
    Crisis also produced Dodd-Frank, which cemented principles 
that provide to the government broad and unchecked tools to 
micromanage private companies and the financial habits of 
American consumers.
    One such example is the creation of the Orderly Liquidation 
Authority, OLA, over financial institutions in distress. Under 
OLA, once a financial institution is in the hands of the FDIC, 
the government can pick winners and losers of the firm's failed 
creditors.
    This process subverts the carefully calibrated rules 
designated to protect all creditors under the bankruptcy 
principles. Further, OLA's original intent to liquidate failing 
firms has been distorted under the single-point-of-entry 
approach, to focus instead on reorganization of the firm with 
taxpayers taking the risk. Under this framework, the basic 
expectations of the rule of law that rules will be transparent 
and knowable in advance are subverted.
    When the government is granted this much power, we surely 
cannot be free. I hope this committee will continue to take 
steps to restore the rule of law for our financial markets.
    With that, Mr. Chairman, I yield back.
    Chairman Hensarling. The gentleman yields back.
    Today, we welcome the testimony of a distinguished panel of 
witnesses.
    First, Dr. Matthew Spalding, who is the associate vice 
president and dean of educational programs at Hillsdale 
College. Dr. Spalding is the executive editor of the ``Heritage 
Guide to the Constitution.'' He was previously vice president 
of American Studies at the Heritage Foundation. He is a senior 
fellow at the Claremont Institute for the Study of 
Statesmanship and Political Philosophy. And he is a graduate of 
Claremont McKenna College and the Claremont Graduate School.
    Ambassador Boyden Gray is founding partner of Boyden Gray & 
Associates. Mr. Gray has held a number of senior positions in 
government service, including as White House Counsel to 
President Bush 41, and ambassador to the European Union.
    He practiced law for 25 years at an international law firm 
and clerked for Chief Justice Earl Warren. Ambassador Gray is a 
graduate of Harvard College and the University of North 
Carolina at Chapel Hill.
    Professor David Skeel, of the University of Pennsylvania 
Law School, is the author of a number of books on financial 
services and law. In addition to Penn Law, he has taught at 
Georgetown University, the University of Virginia, the 
University of Wisconsin, and Temple University. He is a 
graduate of the University of North Carolina and the University 
of Virginia Law School.
    And I wish to announce to all Members that we will be 
excusing this witness, Professor Skeel, at 12:30 due to a 
previous commitment.
    Mr. Deepak Gupta is a founding principal of Gupta Wessler 
PLLC. Mr. Gupta specializes in Supreme Court appellate and 
complex litigation on a range of issues, including on 
constitutional law matters.
    He was previously Senior Counsel for Enforcement Strategy 
at the CFPB. Mr. Gupta is a graduate of Georgetown University 
Law Center and Fordham University.
    Last but not least, and no stranger to this committee, 
Professor Todd Zywicki of George Mason University School of 
Law. Mr. Zywicki previously practiced law in an international 
law firm, and worked for Judge Jerry Smith at the U.S. Court of 
Appeals for the 5th Circuit.
    He has published many articles in leading journals and has 
held academic appointments at a number of institutions across 
the country. He is a graduate of the University of Virginia Law 
School, as well as Clemson University and Dartmouth College.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. For those of you who have 
not testified before, there is a lighting system before you. 
Yellow means that you have 1 minute to go, and red means it is 
time to stop and yield to the next witness.
    Dr. Spalding, you are now recognized for a summary of your 
testimony.

  STATEMENT OF MATTHEW SPALDING, ASSOCIATE VICE PRESIDENT AND 
        DEAN OF EDUCATIONAL PROGRAMS, HILLSDALE COLLEGE

    Mr. Spalding. Thank you, Mr. Chairman.
    My testimony this morning focuses on the broader issue of 
the rule of law and the rise of bureaucratic government, and I 
will summarize it by making four points.
    First, the rule of law is the most important and 
significant and influential accomplishment for the long history 
of human liberty. One need only read Shakespeare to see that 
Anglo American history for 1,000 years is replete with the 
back-and-forth between despotism and the slow development of 
the concept of the rule of law. English kings regularly sought 
to get around the law by exercising the prerogative power.
    It is associated with four key components: first, a regular 
process of law enforcement and adjudication, not arbitrary 
will.
    Second, rules binding on rulers and the rulers alike and 
the ruled. No one is above the law. No one is privileged.
    Third, there are certain unwritten rules and generally 
understood standards with which lawmaking must conform. No ex 
post facto laws, but there is due process.
    And lastly, the rule of law is based on and emphasizes 
centrality of lawmaking as the authoritative source of those 
laws. In America, we can add to the Declaration of 
Independence, based on natural rights, the idea that legitimate 
governments are organized and structured according to the 
consent of the governed, and a carefully designed and 
maintained written Constitution where the primary functions of 
governing--lawmaking, executing, and enforcing the law--are 
divided into branches with independent, unique powers that 
can't be delegated away.
    The modern state has a very different view that grows out 
of a faith in science applied to public policy. The 19th 
Century progressives took this argument and Americanized it to 
reshape the old constitutional rule of law system into a more 
efficient form they call the administrative state.
    Politics were to remain in the realm of expressing 
opinions, but the real decisions and details of governing would 
be handled by administrators or experts, separate and immune 
from the influence of politics and public scrutiny.
    The United States has been moving down this path for some 
time in fits and starts from the initial progressive-era 
reforms through the New Deal, but a significant shift and 
expansion occurred more recently under the Great Society and 
its progeny, Democratic and Republican. Whereas initial 
regulations dealt with targeted commercial activity, there was 
a turn in the 1970s to broader regulations concerning wide 
areas, such as the environment, employment, civil rights, and 
health care.
    And the modern phase we are currently under is even a vast 
expansion to even more areas, and everything must be dealt with 
comprehensively, meaning centrally, uniformly, and 
systemically, by administrative apparatus that is more 
complicated and expansive than ever.
    The Affordable Care Act is an example of that, but so is 
the Dodd-Frank Act. It requires administrative rulemakings 
reaching not only to every financial institution but well into 
the corners of everything in the American economy. Its new 
bureaucracies operate outside of the public eye and are subject 
to virtually none of the traditional checks.
    The CFPB is literally outside the rule of law. It has its 
own source of revenue, insulation from legislative and 
executive oversight, and broad latitude and discretion to 
determine and enforce its own rulings, which is to say, define 
its own limits of its own authority.
    The result, and my conclusion, is that the rise of 
bureaucratic government has changed the structural workings of 
the United States Constitution to the detriment of liberty and 
self-government. When Congress writes legislation that uses 
very broad language that turns extensive powers over to 
agencies, the result is that most of the practical decisions, 
for all intents and purposes, of lawmaking public policy are 
willingly, by Congress, delegated to others whose rules, there 
is no doubt, have the full force and effect of laws passed by 
Congress.
    Modern administrative forms of governing consolidate the 
powers of government by exercising the lawmaking power, 
executing their own laws, and then judging their application in 
administrative courts, guiding individuals through rulemaking 
based on increasingly broad and undefined mandates with more 
and more authority over an ever-wider range of subjects, all 
the while less and less apparent and accountable to the 
political process and popular consent.
    This is not merely an aspect of modern political life, a 
necessary adaptation. It is a new and all-encompassing form of 
political organization.
    And so here we are 800 years after England's barons forced 
King John to sign the Magna Carta, and we are seeing the 
institutionalization of the very forms of prerogative power 
that, once practiced by feudal monarchs and against which the 
whole development of the rule of law was directed, operating 
outside the law and not responsive to the democratic 
institutions of government.
    We should all--Republicans and Democrats alike--recognize 
and fear this new state of things, whether it is coming from 
the left or the right. If this becomes the undisputed norm of 
how things work in America, the characteristic of the modern 
state, I fear for the future of our experiment in self-
government.
    Thank you.
    [The prepared statement of Dr. Spalding can be found on 
page 112 of the appendix.]
    Chairman Hensarling. Ambassador Gray, you are now 
recognized for a summary of your testimony.
    Mr. Gray. Thank you very much.

 STATEMENT OF THE HONORABLE C. BOYDEN GRAY, FOUNDING PARTNER, 
                    BOYDEN GRAY & ASSOCIATES

    Mr. Gray. Thank you very much for the opportunity to 
testify. I have talked about these issues before, and I have 
enclosed the testimony with my prepared text so that everything 
will be included here before this committee.
    The structural difficulties with the Dodd-Frank Act are, I 
think by now, fairly well known, and they have not been cured. 
The courts are beginning to get into it, and I hope that you 
will, also.
    For example, the Orderly Liquidation Authority has 
legislation introduced in the Senate by Senator Cornyn and 
others to fix the favoritism and the discretion that is 
included in that legislation--included in Dodd-Frank, and 
including the secrecy and the penalties for disclosure to the 
public of what is happening.
    The structural difficulties for the titles that I am going 
to talk about and have been involved in litigation against are 
Titles I, II, and X: the FSOC; the OLA, which you have 
mentioned; and the CFPB, which has also been mentioned. What 
appears to be the characteristic is just a stripping of all 
accountability among the political branches.
    There is no White House supervision over the executive 
actions--or the agency action taken in any of these titles. 
There is virtually no congressional oversight. There may be a 
hearing, but Congress doesn't have control over the CPB's 
budget, and it doesn't have control over the OLA's budget.
    The OLA, the Orderly Liquidation Authority, has the ability 
to raise money, to borrow money from the Treasury and get it 
paid back from a fee. It is called a fee, but it is really a 
tax on the financial community, which bypasses Congress' taxing 
authority and takes away from Congress, of course, as a result, 
Congress' ability really to follow what is going on.
    And then for all three titles, there is truncated judicial 
review. In the case of the first two titles, the key issue 
identified by the White House as the most important defense, if 
you will, from abuse is that the agencies involved have to find 
that there is a systemic danger to the financial stability of 
the United States, but that standard, both as a matter of 
statutory construction and constitutionality, is expressly 
excluded from judicial review by the statute. Whether the 
courts will accept that exclusion is another question, but 
nevertheless, there it is.
    The CPB has gotten the most attention of all of the 
agencies because it is doing the most at the moment. But it, 
again, is insulated from review by the White House, insulated 
from review by the Congress. It gets its money from the Federal 
Reserve, and the courts are required to exhibit deference to 
whatever the CPB says no matter what jurisdiction has--or 
belongs to other agencies that share the execution of these 
statutes.
    The CPB has caused a lot of difficulty, along with Dodd-
Frank, in just heaping regulations on all banks. The big banks 
don't like it, but they can live with it, and they can pay for 
it. And as the chairman of JPMorgan once said, ``It is my 
moat--M-O-A-T--my protection against competition.'' Goldman 
Sachs has said much the same thing.
    And this makes it very hard for community banks to survive. 
They have been consolidating at a very, very rapid rate. And 
the liquidity that I think local communities are used to is 
drying up as the community banks contract.
    Some of the people on this panel have said, well, this is 
really nothing more than the nondelegation doctrine. It is a 
lot more. It involves all branches of the government, all 
three.
    It is a much more serious problem than nondelegation, but I 
would submit that the nondelegation problems here are severe 
enough to cause dramatic change in the way these statutes are 
written and your attention.
    Thank you.
    [The prepared statement of Ambassador Gray can be found on 
page 60 of the appendix.]
    Chairman Hensarling. Professor Skeel, you are now 
recognized for your testimony.

STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF 
      CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL

    Mr. Skeel. Thank you for giving me the opportunity to 
testify. It is a great honor to be here.
    The last time I was here, I said that it sends chills 
through my spine when I sit in this room, and it does, but 
somebody said maybe we should turn down the air conditioning. 
So maybe I shouldn't say that.
    I would like to focus on the single most puzzling and 
worrisome feature of the Dodd-Frank Act. After previous 
economic crises, lawmakers have nearly always made a concerted 
effort to correct any departures from the rule of law. The 
Dodd-Frank Act did precisely the opposite.
    The Dodd-Frank Act set up a corporatist partnership between 
the government and the largest financial institutions that 
perpetuates, in my view, some of the worst abuses of the 
bailouts of 2008 and 2009. The bailouts themselves repeatedly 
subverted rule-of-law principles.
    When Bear Stearns was bailed out in early 2008, its sale to 
JPMorgan Chase flagrantly violated Delaware corporate law. In 
the AIG bailout, the government illegally acquired nearly 80 
percent of AIG's stock. Troubled Asset Recovery Program (TARP) 
money was used for purposes for which it clearly was not 
intended.
    Rather than restoring the rule of law, the Dodd-Frank Act 
reinforced the partnership between the government and the 
largest banks, as Ambassador Gray just mentioned. And it 
invites regulators to channel policy through the banks by 
putting almost no rule-of-law curbs on their regulatory 
discretion.
    Let me briefly mention two examples.
    The most important source of regulation for the biggest 
banks right now is the so-called stress tests they are required 
to undergo, and the requirement that the banks prepare living 
wills. It is not any of the other regulations in Dodd-Frank and 
elsewhere; it really is the stress tests and the living wills. 
The stress tests and the living will process are highly 
secretive in most respects, often quite arbitrary, and put no 
real constraints of any kind on regulators' discretion.
    The second example is the new resolution rules in Title II 
of the Dodd-Frank Act. When the FDIC takes over a bank, the 
bank is given almost no opportunity to respond. There is no due 
process whatsoever involved.
    And although Title II purports to create creditor 
priorities, an orderly priority scheme for an orderly 
liquidation, the FDIC actually can pick and choose which 
creditors it would like to pay and which do not get paid.
    Moreover, the FDIC has announced its intention to ignore 
one of the few very clear commands that the Dodd-Frank Act does 
provide. Although it is instructed to liquidate any big banks 
it takes over--and the liquidation requirement was added with 
great fanfare late in the legislative process--the FDIC has 
developed a strategy that would ignore this command and 
reorganize the troubled bank instead.
    The cost of these and other radical departures from rule-
of-law principles are enormous. Many of these costs--again, as 
Ambassador Gray just mentioned--will actually fall on the small 
and medium-sized banks that lend money to small and medium-
sized businesses throughout our country.
    My hope is that you all will re-work these features of the 
Dodd-Frank Act and establish rule-of-law principles as the 
foundation, once again, of American financial regulation.
    Thank you.
    [The prepared statement of Mr. Skeel can be found on page 
97 of the appendix.]
    Chairman Hensarling. Mr. Gupta, you are now recognized for 
your testimony.

 STATEMENT OF DEEPAK GUPTA, FOUNDING PRINCIPAL, GUPTA WESSLER 
                              PLLC

    Mr. Gupta. Chairman Hensarling and distinguished members of 
the committee, thank you for the opportunity to testify this 
morning.
    I am going to be focusing my remarks on what I think is the 
Dodd-Frank Act's crown jewel, the Consumer Financial Protection 
Bureau, and in particular, the accountability critiques of the 
Bureau and the constitutional critiques of the Bureau that we 
heard from Ambassador Gray. I will make three basic points.
    The first is that the CFPB has already proven that it is 
protecting the freedom of consumers to achieve the American 
Dream, and Congress should resist efforts to gut the agency. 
When we talk about the CFPB, we should not lose sight of the 
fact that Congress created the Bureau in response to an epic 
financial crisis--a crisis that touched the lives and 
livelihoods of millions of Americans and threatened the 
financial system's very stability.
    Underregulated and unregulated risky financial products set 
off a wave of millions of foreclosures and depleted as much as 
$9 trillion in home equity. In just a few years of existence, 
the CFPB has already returned $11 billion for more than 25 
million consumers harmed by illegal practices and has reined in 
some of the worst abuses. That includes $14 million that the 
Bureau won back from the payday lender Cash America for 
targeting and illegally overcharging members of the military.
    And the Bureau's victories go beyond the numbers. Across a 
range of products and services, it is already making financial 
products more transparent and serving as a much-needed 
watchdog.
    The Bureau is working to level the playing field both 
between financial institutions and consumers, and between large 
financial institutions and small financial institutions. And 
that makes all of us more free, not less free.
    Yet the Bureau's opponents--those who stand to gain by 
exploiting consumers--are trying to hamstring its efforts and 
alter its structure to make it less effective. Those efforts 
should be stopped.
    Second, the basic accountability critiques of the CFPB and 
Dodd-Frank are groundless. We should all care about whether our 
institutions of government are transparent and accountable, but 
the CFPB, which was specifically designed to resist capture by 
special interests in the financial industry, is at least as 
accountable to the public as were the existing banking 
regulators before and during the crisis.
    And in several respects, the Bureau is actually more 
accountable. Its budget is capped. Its rules can be vetoed by a 
committee of other regulators, something that is not true of 
any other agency in Washington. And it is subject to special, 
time-consuming small business reviews that only the EPA and 
OSHA similarly face. Finally, the CFPB has also gone beyond 
legal requirements, using technology to make itself more 
directly responsive to the American consumer.
    The third and final subject I want to address is the 
constitutional challenges to Dodd-Frank. These challenges are 
extreme. And they are utterly lacking in legal merit, and have 
failed across-the-board in the courts.
    In the 5 years since the enactment of Dodd-Frank, its 
opponents have invoked every conceivable constitutional 
principle, from the separation of powers to the void for 
vagueness doctrine to procedural due process, in an effort to 
turn back the clock on consumer protection. As I said, these 
efforts have failed in every court that has considered them.
    And these legal challengers are truly at the fringe. To see 
that, look at the recent D.C. Circuit case Big Spring--that is 
Ambassador Gray's case--where there were no amicus briefs; none 
of the major financial institutions or trade groups supported 
those challenges.
    Unfortunately, however, these challengers tell us something 
about the moment we live in, in which every political 
disagreement, from health care to immigration, seems to become 
constitutionalized. When we don't have the votes to do what we 
want here, we take it across the street to the courts.
    And we can have a legitimate policy debate about Dodd-
Frank. We should. But we should be clear that that is not the 
same thing as a constitutional debate.
    The main constitutional arguments against Dodd-Frank are at 
odds with at least 80 years of settled precedent. Most of them 
are really disguised nondelegation arguments, arguments that 
Congress somehow delegated too much or too vague authority to 
the agency.
    That doctrine hasn't successfully been invoked in the 
courts since 1935, at the height of judicial resistance to the 
New Deal, and it has only worked once in the Supreme Court's 
history. As Justice Scalia has explained, the Court has never 
felt qualified to second-guess Congress regarding the degree of 
policy judgment that can be left to agencies.
    The challenges based on Presidential removals similarly 
seek to turn the clock back to 1935, when the Supreme Court in 
Humphrey's Executor removed virtually identical for-cause 
removal procedures for Federal Trade Commissioners as we have 
with the CFPB.
    So at the end of the day, these arguments are not really 
attacks on Dodd-Frank or the CFPB as much as attacks on the 
very foundations of the modern administrative state.
    Thank you.
    [The prepared statement of Mr. Gupta can be found on page 
66 of the appendix.]
    Chairman Hensarling. Professor Zywicki, you are now 
recognized for your testimony.

 STATEMENT OF TODD J. ZYWICKI, FOUNDATION PROFESSOR OF LAW AND 
  EXECUTIVE DIRECTOR OF THE LAW AND ECONOMICS CENTER, GEORGE 
                 MASON UNIVERSITY SCHOOL OF LAW

    Mr. Zywicki. Thank you, Chairman Hensarling, and members of 
the committee.
    By coincidence, yesterday in the mail I just happened to 
receive the Human Freedom Index, and one of the things I found 
from that is today the United States has sunk to 20th in the 
world in economic freedom, and one reason is because we sunk to 
19th in freedom of our financial system, tied with, among 
others, Panama and Mauritius and a few others, lagging behind 
countries such as Poland and a few others.
    Now, what this simple number is telling us is that we are 
learning the hard way lessons we have learned in the past, 
which is giving more power, more money, and less democratic 
accountability to Washington bureaucrats is not a recipe for 
improving the freedom and prosperity for American families.
    We see it every day in the impact on American families and 
small businesses, as they are losing access to mortgages, small 
business loans, and credit cards.
    We see it in initiatives such as Operation Choke Point, an 
initiative which has targeted completely legal businesses, such 
as firearms dealers, payday lenders, and home-based charities, 
all under the theory of so-called reputational risk, while 
other controversial industries such as abortion clinics have 
escaped the net.
    We see it in a crushing regulatory burden that is driving 
community banks out of business at twice the rate that they 
were shrinking prior to Dodd-Frank.
    We see it in Jamie Dimon's remark that was referenced 
earlier, that Dodd-Frank has built a bigger moat around the 
big, too-big-to-fail institutions, protecting them from 
competition. And we see community banks leaving entire markets 
such as mortgages because of the regulatory burden and the risk 
of liability that they confront under those.
    We see it in the inability of small businesses to get a 
loan to start a business, to build a business, to grow a 
business over time. Why? Because community banks provide most 
of the small-business lending in this country and most of the 
agriculture lending, as well.
    And it is reflected in the fact that last year, for one of 
the first times in recent memory, we saw more small businesses 
disappear than were founded in the United States, in part 
because of Dodd-Frank shutting off access to small-business 
capital.
    We see it in the continued inability of many consumers to 
be able to obtain mortgages because of the one-size-fits-all 
regulatory burden that Washington is imposing on banks all over 
the country, depriving community banks of, among other things, 
one of their greatest competitive advantages, which is the 
ability to engage in relationship lending with consumers, and 
the rule-of-law concerns about the threat of put-back liability 
for mortgages that end up going sour later.
    We see it in the CFPB's attack on auto dealers through its 
claim of alleged discrimination, an industry over which the 
CFPB doesn't even have jurisdiction. What they have done here 
is basically weaponized American banks, as they have done with 
Operation Choke Point, to go after and enforce as an arm of the 
Federal Government at the whim of bureaucrats.
    Yet, they have given no notice and comment rulemaking; they 
have never given any formal enforcement action. They 
promulgated their attack on the auto dealers through a five-
page guidance document that contains no cost-benefit analysis, 
no analysis of the impact on consumers.
    And we saw an article last week in The Wall Street Journal 
about what the impact on consumers has been. As a result of the 
CFPB's attack on auto dealers, the average American is now 
paying more for a car loan than they were previously.
    What is the methodology they use for this? So-called 
Bayesian Improved Surname Geocoding, a concoction they came up 
with after the fact and which is shredded as completely 
scientifically unreliable in a report by Charles River 
Associates, yet they seem to continue doing it.
    We see it in the CFPB's unbelievable data-mining 
operations. They scoop up hundreds of millions of credit card 
accounts every month, tens of millions of mortgages, tens of 
millions of bank accounts data, payday lending data, and the 
like.
    Yet, they still have given us no explanation why they need 
so much data when there is no real regulatory purpose for 
needing data on this scale, and at the same time, they admit 
that there is a threat that this data could be compromised. As 
someone who just received a letter last week from the IRS 
telling me that I was a victim of identity theft, I am not 
comfortable with the Federal Government taking this much of my 
personal data without some good reason.
    What we have seen, unfortunately, is something that we saw 
and learned our lesson about the hard way in the 1970s. In the 
1970s, we unleashed unaccountable bureaucrats on the economy, 
and what we saw was declining American competitiveness, 
declining American entrepreneurship, and restrictions on 
freedom.
    We are doing the same thing today under Dodd-Frank, and 
American consumers and small businesses in the economy are 
suffering.
    Thank you.
    [The prepared statement of Mr. Zywicki can be found on page 
124 of the appendix.]
    Chairman Hensarling. Thank you.
    I thank each of you for your testimony. Without objection, 
each of your written statements will be made a part of the 
record.
    The Chair now yields himself 5 minutes for questions.
    Professor Zywicki, on page two of your testimony you 
mention that a loss of the rule of law is ``laying the 
foundation for the next financial crisis.''
    And Professor Skeel, I think you say something similar on 
page seven of your testimony when you say that departures from 
the rule of law might ``magnify the consequences'' of the next 
financial crisis.
    So first Professor Zywicki, and then Professor Skeel, could 
you elaborate on those comments? How is the erosion of the rule 
of law in Dodd-Frank laying the foundation for the next crisis?
    Mr. Zywicki. Thank you for asking that question.
    It really has to do with what by pretty much common 
consensus is the entrenchment of the too-big-to-fail regime. 
Nobody seriously thinks that if there is another financial 
crisis, anybody will actually comply with the rules laid out in 
Dodd-Frank under the Orderly Liquidation Authority.
    And what we have learned over time is that lack of respect 
for the rule of law creates a moral hazard problem. What we saw 
last time around is that the reason we ended up bailing out the 
big banks, Secretary Paulson said, was because the market 
expected us to bail out the big banks.
    According to the studies we have--evidence is mixed, but 
most of this evidence points in the direction that there is 
still a too-big-to-fail subsidy for the largest banks, at least 
according to the GAO report. They said it has gotten smaller, 
but it is still there. And one would expect it would get bigger 
if we actually reach that point.
    As long as the government has the ability to bail out banks 
and is not constrained by the rule of law, people are going to 
expect that they are going to do that. That creates its own 
moral hazard problem, and that creates an entrenchment of too-
big-to-fail.
    Chairman Hensarling. The same question for you, Professor 
Skeel.
    Mr. Skeel. There are a couple of ways in which it seems to 
me Dodd-Frank has made us riskier rather than safer.
    One of them is the effect of the so-called Volcker Rule, 
which prohibits banks from engaging in propriety trading. The 
effect that is already having--it has just gone fully into 
effect, and not even fully into effect, recently--is it is 
pushing a lot of basic banking activities such as market-making 
and trading for clients' accounts, outside of banks.
    And so what is going to end up happening is banks are going 
to be doing less of this. They are concerned about regulatory 
intrusion in what they are doing, and it is impossible to tell 
where the lines are.
    So this is going to end up outside of the banking system, 
and whatever potential problems there are down the road are 
going to blow up away from regulation, it seems to me.
    The other thing I will mention is not so much in the Dodd-
Frank Act itself, but in the litigation against the big banks 
after the crisis. The government leaned on the big banks, as 
part of the partnership that was set up, to acquire troubled 
institutions. JPMorgan was leaned on to acquire Bear Stearns; 
Bank of America was leaned on to acquire Merrill Lynch.
    And then the government turned around and whacked them with 
a bunch of litigation that bears no relationship to traditional 
litigation. Much of the recovery goes to States and to people 
who were not harmed by the alleged misbehavior.
    Next time around, those banks aren't going to be there. 
They are not going to agree to buy anything in a crisis, and so 
if we have another crisis, there is going to be no way to 
minimize its effect or to preempt it.
    So those are two of the ways, I think, that we are in more 
dangerous waters now than we were--
    Chairman Hensarling. Another aspect of your testimonies 
that is somewhat similar, particularly in your close, Professor 
Zywicki--you indicate that this erosion of the rule of law 
ultimately is going to essentially hurt the unemployed, and 
low- and moderate-income persons the most.
    I think, Professor Skeel, you used the term 
``corporatism,'' to where the average American can't afford a 
high-priced lobbyist or a presence in Washington.
    So what aspects of the erosion of rule of law in Dodd-Frank 
are hurting the unemployed, low- and moderate-income, Professor 
Zywicki?
    Mr. Zywicki. That is exactly right. What people don't 
appreciate is that the rule of law exists for all of us. It 
exists for the small banks, the small businesses, and the rest 
of us.
    In a world of chaos, in a world where nobody knows what the 
rules are, the big banks, the Goldman Sachs or the JPMorgans, 
they can hire the lobbyists and the lawyers to weave their way 
through this, to figure out the regulatory burden, to create 
the contacts that they need in order to get through this 
process.
    The rest of us can't afford high-priced lawyers; we can't 
afford lobbyists. All we can do is try to comply by the rules 
as they are written. And when the rules are constantly shifting 
around, when the rules are subject to push and pull of special 
interests and that sort of thing, the rest of us get the short 
end of the stick.
    Chairman Hensarling. Well, in an attempt to set a good 
example for other Members, I see my time has expired, so I 
won't go any further.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you. Thank you very much.
    Mr. Gupta, as you know, prior to Dodd-Frank the 
responsibility of enforcing consumer financial protection laws 
was spread across seven different agencies, and it was not a 
priority for any of them. And because these agencies all 
enforced consumer financial protection laws differently, that 
inconsistency was very confusing and frustrating for the 
financial industry.
    And because it was not a priority, consumer protections 
were not thought about. It was an afterthought. It was the 
secondary thought, the third thought, or not thought about at 
all.
    So we came out with things called the no-doc mortgages. The 
joke in New York was if you can't afford your rent, go out and 
buy a home, because they didn't even look at anything. They 
just signed up knowing that this was a disaster, collecting 
their fees, going on and creating a financial crisis.
    In fact, many people argued back then that what really 
undermined the rule of law was the inconsistent enforcement, or 
not even looking or caring at all about consumer financial 
protection laws. If you looked at the responsibilities of 
agencies, they had this, and then you got way, way down there, 
they might mention consumer protection. And it wasn't 
protected.
    So my question to you is, doesn't consolidating the 
responsibility for enforcement of consumer financial protection 
laws into one Bureau actually promote the rule of law?
    Mr. Gupta. Yes, exactly, Congressman Maloney, it does.
    And I agree at a high level of generality with some of what 
Professor Zywicki said about the rule of law. For the rule of 
law to work, the rules have to be the same across-the-board. We 
can't have special rules for some people and different rules 
for other people.
    And this was a central insight in creating the Consumer 
Financial Protection Bureau. As you said, you had these 
regulatory responsibilities spread out across a very confusing 
patchwork of different agencies with partially overlapping 
authority that left gaps which created very strange incentives, 
where you had, for example, the Office of Thrift Supervision--
an agency that, thankfully, no longer exists--competing to 
basically offer the least regulation possible, and institutions 
could choose which regulator they wanted. That was a 
nonsensical system.
    And, we hear critiques about the Bureau's funding scheme, 
but it was even worse with some of these agencies. They were 
actually getting their funding from the folks they were 
supposed to be regulating, rather than through congressional 
appropriations.
    So it was a very bad system that we had, and part of the 
idea of the CFPB is, let's bring all of these institutions 
under the same umbrella. Let's bring nonbanks and banks under 
the same umbrella so that you can't have products offered by 
one kind of institution that are not allowed to be offered by 
another institution.
    So if we care about rule of law, we should celebrate this 
consolidation so that we have a single set of rules that 
everyone has to play by.
    Mrs. Maloney. Mirroring some of your comments is a set of 
letters from a coalition of consumer groups on the 
constitutional challenges to Dodd-Frank.
    And I ask unanimous consent to place this into the record, 
if I may.
    Chairman Hensarling. Without objection, it is so ordered.
    Mrs. Maloney. Okay. Thank you.
    Mr. Gupta, can you discuss how Dodd-Frank and the CFPB's 
implementation of Dodd-Frank has been tailored to fit the 
unique needs of smaller banks, and credit unions, and consumer 
banks? When you worked for the CFPB, did you find that the 
Bureau was aware of and responsive to the needs of smaller 
institutions?
    Mr. Gupta. Thank you for the question. I think it is an 
important question because we hear today a lot of criticisms of 
the Bureau that are sort of made in the name of small banks or 
community banks. And I think what is really happening is that 
larger financial institutions or opponents of the Bureau are 
using smaller community banks as a guise to make criticisms 
that are really not about those smaller institutions.
    The Bureau cares a lot about those smaller institutions and 
makes a lot of effort to specifically reach out to those 
institutions. There is no question that they are hurting. They 
were hurting before the CFPB was created. They face a lot of 
challenges.
    It is built into the DNA of the CFPB. There is a $10 
billion threshold so that banks under a certain threshold are 
not subject to CFPB enforcement. But it is also part of the 
charge of the agency to make sure that small banks are not 
harmed simply by being small, and that the regulatory 
compliance burden on them doesn't put them out of business.
    So that is something that the agency cares a lot about. I 
think simply by having the same set of rules by all actors in 
the consumer financial marketplace, we ensure that doesn't 
happen, that the smaller players aren't squeezed.
    Thank you.
    Mrs. Maloney. Thank you.
    My time has expired.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I want to review what I think I just heard. What I just 
heard is that consolidating the power to one agency to make 
unilateral decisions on the types of financial products that 
will be available promotes the rule of law and increases 
economic freedom for America's consumers.
    Professor Zywicki, what would be your response to that?
    Mr. Zywicki. I actually don't have a problem--and I have 
testified before--with actually having systematized the Federal 
consumer protections system in one agency. I oppose the idea of 
having a completely unaccountable agency that operates in 
violation of the Constitution and, in fact, does go out and 
ride herd on American consumers.
    I think that the unfortunate thing to me, as somebody who 
has spent his life working in this field, is we had a great 
opportunity with Dodd-Frank to create a truly innovative 21st 
Century consumer protection agency that would promote 
innovation, would promote consumer choice, and would promote 
lower prices for consumers. Instead, what we got was a 
throwback to the 1970s, like a Jurassic Park-type agency that 
learned nothing from the experience of the last 30 or 40 years 
about what makes a responsive, innovative consumer protection 
agency.
    Instead, we have old-fashioned command-and-control 
regulation that is restricting choice, raising prices, and 
restricting innovation, and I think that is a real tragedy.
    Mr. Neugebauer. Professor Skeel, does consolidating all of 
this power and giving the government unilateral control over 
our financial markets promote the rule of law and promote 
economic freedom?
    Mr. Skeel. My answer I think is a little bit more mixed 
than Todd's answer. I do think there was a problem before 2008, 
and the one danger with multiple regulators was that they were 
competing with each other. And you can get a race to the bottom 
if you are not careful how you structure that interaction, and 
I think we had it before 2008.
    So it seems to me there are some things to be concerned 
about with the CFPB, with consolidating the power. I have some 
concerns about not having oversight of the funding. I have some 
concern about the difficulty of overturning rules put in place 
by the CFPB.
    But I, like I think Professor Zywicki suggested, think the 
idea of a consumer bureau is a good idea.
    Mr. Neugebauer. I think the concern I have is that 
basically, there is a lot of talk about the Orderly Liquidation 
Authority and how the rule of law, and you have the government 
picking winners and losers, but I think who ends up being the 
losers in all of this that we don't think about--I think 
Professor Zywicki was trying to go to that point--is that now 
we have consolidated all this power into one agency with one 
person, and that person is basically telling the American 
consumers what kind of financial products that are appropriate 
for them.
    How that promotes freedom in America is beyond my wildest 
dreams. I don't know how anybody can defend that that is in the 
best interest.
    And what is happening, because of the thought out there in 
the credit markets that you can get haircuts arbitrarily, that 
the rule of law will not be followed, that raises the risk 
premium for the people who are actually buying car paper and 
how that trickles down to that single mom who is out there 
working two jobs trying to keep the wheels on her life, is the 
fact that her interest rate on her car may be increased because 
now the people who finance--buy car paper are concerned about 
whether the rule of law will be followed in the future.
    And so I think the two things that are wrong there are, 
one, we have consolidated all that power--and by the way, the 
founders never intended to have a big, massive consolidation of 
power in the government. The power was supposed to reside in 
the people and not the government, and basically what we have 
done is we have tried to make utilities out of the financial 
markets with the government having the controls.
    Professor Zywicki, you wanted to--
    Mr. Zywicki. Yes. I will just add, we know how to design a 
regulatory agency. The Federal Trade Commission has been around 
for a century. It has congressional appropriations; it has a 
bipartisan commission structure; it has a dual mission of 
competition and consumer protection. It has worked for 100 
years.
    And all of a sudden, now we are going to just spring this 
new thing on the economy that has none of those advantages.
    Mr. Neugebauer. I see my time has expired, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Gupta, later today the Small Business Committee is 
holding a hearing to examine the effects of the Dodd-Frank Act 
on small financial institutions and small business access to 
credit. And this is what we know: The CFPB is required to 
comply with both the Regulatory Flexibility Act and the Small 
Business Regulatory Enforcement Fairness Act, SBREFA, to 
specifically examine how small entities will be affected by the 
agency's new regulation.
    In listening to Professor Zywicki, he said that Dodd-Frank 
has hindered the ability of small businesses to access credit 
and to access capital. Yet according to the Thomson Reuters/
PayNet Small Business Lending Index, access to credit continues 
to improve for small businesses.
    The index, which measures the volume of U.S. small business 
lending, reached its highest level ever in June 2015. Small 
business lending is up 19 percent over the same period in 2014.
    Also, the Wells Fargo/Gallup Small Business Index poll, 
conducted in July 2015, indicated a plus-11 percentage margin 
between the 33 percent of small business owners who say credit 
was easy to get in the past 12 months.
    How do you reconcile that, Professor Zywicki?
    And, Mr. Gupta, could you please explain how the CFPB 
implementation of that Act has been tailored to fit the unique 
needs of small business bank and credit unions that, after all, 
yes, Professor, they are the one who lend to small businesses?
    Mr. Zywicki. I haven't carefully studied all the particular 
surveys that you reveal.
    Ms. Velazquez. I will show them to you.
    Mr. Zywicki. I would be happy to look at them. I have seen 
other ones that point the other way.
    What I also know is that--we know that community banks do a 
lot of the small business lending in this country, and we also 
know that community banks are shrinking and disappearing, and 
that is having an impact on small communities and access to 
small business credit and the like. So I would be happy to look 
at the surveys that you suggest.
    Ms. Velazquez. Professor, yes, I welcome you to look at 
both polls conducted by reliable sources. Don't come here and 
make such an assertion that Dodd-Frank is killing access to 
capital when the facts are demonstrated that you are wrong.
    Mr. Gupta?
    Mr. Gupta. Thank you. I also haven't reviewed those 
studies, but--or polls, but I am not surprised to hear it. It 
is hard for me to see how the Consumer Financial Protection 
Bureau is inhibiting access to credit for small businesses.
    This is not--the Consumer Financial Protection Bureau first 
of all doesn't regulate business-to-business lending, right? It 
only regulates consumer lending.
    And we hear the claim that the community banks or the small 
banks are being strapped. It is true. But as I said earlier, 
that was true even before the crisis. It is because community 
banks and credit unions faced a whole host of challenges in the 
financial marketplace.
    There is absolutely no evidence whatsoever of any 
correlation or causation between the existence of the CFPB or 
its regulation and the problems that are facing community 
banks.
    So I am not surprised at all to hear those findings.
    Ms. Velazquez. Thank you.
    Mr. Zywicki, you have stated that the CARD Act would have a 
disastrous effect on the consumer credit market. However, the 
data have shown that not to be the case.
    What do you make of this data? Would you say that the CARD 
Act has been helpful to consumers?
    Mr. Zywicki. First, on the impact of the CFPB on community 
banks, I am just referring to a Mercatus study where 60 percent 
of small banks said that it has a significant impact on their 
bank earnings and that the regulatory cost imposed on them by 
the CFPB is causing a problem.
    With respect to the CARD Act, I have written a 65-page 
paper analyzing the data on this, and the data is quite clear, 
which is that the studies that believe that the CARD Act has 
helped consumers are methodologically flawed because they 
simply do not account for the Federal Reserve regulations that 
came before the CARD Act. They are simply worthless studies.
    In fact, what has happened is consumers lost trillions of 
dollars of credit access, low-income consumers lost access to 
credit cards--
    Ms. Velazquez. Okay. I hear you.
    Mr. Zywicki. --and fees and interest rates went up.
    Ms. Velazquez. Thank you. And so you will say--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee.
    Mr. Garrett. I thank the chairman for this important 
hearing.
    And I think the majority of the panel would agree with the 
axiom that our country lives by, that no one is above the law. 
If you would just nod in agreement if you agree with that?
    I see Mr. Gupta nodding, but I think your statements belay 
that. Your statements are that someone is above the law.
    You lay out a pretty good case, that prior to the CFPB, 
other agencies had a bad system as far as their funding and 
their mechanism. But instead of correcting the problems in 
those other systems or formats, we created a new system, the 
CFPB, which is above the law.
    Why do we say that? If you have come to our hearings in the 
past, this panel knows--Mr. Gupta, you would have learned--that 
when we asked the CFPB and Rich Cordray, ``Are you answerable 
to the House?''
    He replied, ``No.''
    ``Are you answerable to the Senate?''
    ``No.''
    ``Are you answerable to the President of the United 
States?''
    ``No.''
    ``Are you answerable to the inspector general?''
    ``No.''
    ``Are you accountable to anyone?''
    ``Well, no.''
    So here we have an agency that is above the law, and how 
you can come here and say we have had a problem before--and I 
agree, we did--but now you propose or you support an idea that 
we actually have a system of government where some individual 
is above the law is beyond me.
    You say also that there should not be special rules for 
some and not for others. If you dig into the testimony that we 
have here today, if we look in Dodd-Frank, that is exactly what 
we have.
    Ambassador, you talked very plainly about that very fact 
with OLA and with FSOC, saying that what we have done in Dodd-
Frank is something unheard of in the history of this country, 
and that is what? Take away judicial review.
    And in the OLA situation, you actually take away judicial 
review except for arbitrary and capricious, which means, Mr. 
Gupta, that your statement that there should not be special 
rules--there are special rules.
    And whom are those special rules for? It is not the middle 
class, it is not the lower income, it is not the minorities, it 
is not for women.
    Those special rules are for whom? The insiders, the well-
connected, the rich, the powerful, the lawyers, those who are 
able to find their way around the system and get to the 
solutions that they need, unlike the regular people who don't 
have access to those.
    That is not just me speaking; that is various economists 
who are quoted in the testimony of the panel here today--I 
think, Professor, you raised that in some of the testimony 
here--that it is the rich and the powerful, the insiders who 
are able to play the game, those who are making lofty salaries, 
and the regular American people are the ones who are hurt.
    Professor Skeel, would you want to comment in 10 seconds?
    Mr. Skeel. I have said most of what I had to say about the 
Consumer Bureau. I focused more on the other parts of Dodd-
Frank. But--
    Mr. Garrett. Let's take a look at the Consumer Bureau for 1 
second, then. Local auto dealers--we all have local auto 
dealers. One of the things that Dodd-Frank and the CFPB is 
trying to do is to do what? Just tell the banks that they have 
to have a uniform level of lending.
    Whom does that benefit? When some average person goes in to 
get his car loan, there should be a level of lending. Whom does 
that benefit? That benefits the banks, the Wall Street 
insiders, the people who now will make a larger profit on the 
loans.
    Whom does that hurt? The poor, the middle class, the 
minorities who, in the past, went to an auto lender and could 
actually get a lower rate. How? By competition.
    Anyone want to--
    Mr. Skeel. I will jump in for a second on that. I agree 
with you that there are some pretty significant problems with 
some of the things the Bureau is doing. The auto lending is a 
concern to me.
    It is also a concern to me that the qualified mortgage 
requirements are pretty close to making illegal other forms of 
mortgages that have benefited many consumers in the past. So I 
think there is a risk to what turns out to be command-and-
control regulation--
    Mr. Garrett. Dr. Spalding, you referenced that the history 
of where law comes from is--first was--or not law, but where 
power comes from goes to the strong and the forceful through 
force and fraud. And whom does that go to? Those who are in 
power. And whom does that hurt? And that is the weak.
    I am paraphrasing what you said in your testimony. But now 
we have come to a civilized society where that is not the case.
    But doesn't Dodd-Frank turn that on its head? Doesn't that 
take away the rule of law and the equal treatment to all and 
due process rights to all? And isn't that, at the end of the 
day, meaning that what Dodd-Frank does is help the 1 percent 
and hurt the 99 percent?
    Mr. Spalding. Oh, absolutely. I think Dodd-Frank is a 
perfect example of how we have completely turned things on 
their head.
    The American Revolution was precisely to overthrow that old 
regime, and as the only non-lawyer on this panel, I would point 
out the obvious sometimes, which is that we are being ruled by 
someone else who is not responsible to us. That is a blatant 
violation of everything the American Constitution stands for--
in technical detail, which my legal friends who have been 
pointing out, but in general. And the Legislative Branch should 
be very aware of that violation.
    Mr. Garrett. Thanks a lot.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Mr. Chairman, the subject of this hearing is, 
are we more free? I would hope that banks would be less free to 
rip off consumers and less free to rip off the U.S. taxpayer 
through some new bailout program.
    Dr. Spalding, you talk about the regulators having too much 
power. They clearly do.
    We punted the power over to them, and we can take it back 
if we reach bipartisan agreement, but we can't take it back if 
it is only going to be Republican proposals that we will find a 
way to block in the House, the Senate, or at the President's 
desk. Congress will be powerful when Congress acts in a 
bipartisan way.
    There is massive illegality. It was best exemplified by 
Secretary of the Treasury Paulson who just commented for a 
newspaper. His philosophy was to just act boldly and ignore the 
statute. That is what he did. And he got away with it.
    The better example is the Iran Sanctions Act, which several 
Administrations ignored for more than a decade. And then we 
should be surprised that we aren't able to get a better deal in 
Vienna. If you ignore the Iran Sanctions Act because it 
requires sanctioning international oil companies and you don't 
want to do that, you are not only violating the U.S. law for 
the benefit of those who do business with Iran, you are gutting 
American foreign policy.
    This body, when we passed Dodd-Frank, required the SEC to 
deal with the credit rating agencies--the only game where the 
umpire is selected and paid by one of the teams.
    Debt issuances are far more significant than stock 
issuances. They involve trillions rather than billions or tens 
of billions of dollars--not any one issuance, but overall. And 
the SEC's response was to just issue a report saying that they 
are not going to do what Congress instructed them to do, and 
the statute gave them a way to weasel out. It said, ``or they 
can adopt another plan.'' So they decided to do nothing at all.
    We are told by Professor Zywicki about bailouts and how 
there is this subsidy the big banks get, as if the problem is 
Dodd-Frank. We didn't have Dodd-Frank in 2008.
    Everybody on Wall Street was convinced we would pass a new 
law to bail them out. And guess what? They were right.
    And Dodd-Frank doesn't provide a way for government money 
to be put at risk for the benefit of the creditors of giant 
financial institutions. But you know what? Everybody on Wall 
Street thinks that if it comes to it again, we will do the same 
thing again. And they are probably right.
    There is only one way to end too-big-to-fail, and that is 
to say too-big-to-fail is too-big-to-exist. That is why Bernie 
Sanders in the Senate and myself in the House have introduced 
the Too Big to Fail is Too Big--break them up. That is real 
capitalism.
    But you don't find support--enough support on either side 
of the aisle for that. I think we have two cosponsors in the 
House and no cosponsors in the Senate for the only bill that 
will prevent us from being back in 2008 and being told we have 
to pass some new statute, or just have the Administration 
ignore the law completely and bail out the big banks.
    We need small business lending. That is why this committee 
needs to pass the member business lending bill for the credit 
unions.
    Credit unions are prevented from making small business 
loans. You would think that instead of breaking the social 
contract and having TARP and giving money to the banks, we 
would just allow the credit unions to make small business 
loans.
    Democrats control the Executive Branch of Government. They 
are using Operation Choke Point, as I believe Mr. Skeel pointed 
out, against those--who was it that mentioned Operation--
Professor Zywicki. I am always raising the--always the same 
hands.
    Anyway, I think it has been pointed out that we will not 
always control the Executive Branch of Government and the 
``reputational risk'' won't be that a bank provides a checking 
account for a payday lender or the Republican Party or some 
other disreputable organization. There will come a time when 
the DCCC or an abortion clinic cannot get a bank account. That 
is a giant threat to democracy because if we are going to 
regulate abortion or we are going to regulate payday lending, 
we should do it here in Congress by majority vote, not secret 
statements by bank regulators, ``Oh, don't give that group a 
checking account; choke them off.''
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Housing and Insurance 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    We very seldom ever get anything right here in Congress. 
Whenever we pass a bill it is either the pendulum swings too 
far or it doesn't swing far enough.
    And I think in this environment what we have done with 
Dodd-Frank is we have swung it too far, and what we have done 
is created an environment within which the bureaucracy believes 
that they can do more than what the law actually allows them to 
do because they are--we are overreacting to the situation 
created in 2008, they are overreacting to the law itself.
    I think when you do that, I think Professor Zywicki made 
the comment a while ago that the lack of the rule of law 
creates a moral hazard problem, and I think we have done that 
with Operation Choke Point.
    I am the gentleman who carries the bill, and we passed it 
out of committee here recently, and I think that the Oversight 
and Government Reform Committee's own reports of the emails of 
these two agencies, FDIC and DOJ, indicate a collusion there 
and even a disagreement among themselves whether doing 
something is even legal. CFPB is jumping in on this as well, 
although they won't quite admit to it.
    But, Professor Zywicki, have you ever seen a precedent like 
this before for a government agency to try and choke off 
legitimate businesses doing legal business from access to 
credit to actually drive them--or access to financial services 
to actually drive them out of business?
    Mr. Zywicki. I have never seen anything like it. In the 
past, agencies have--in situations in which a payment processor 
is clearly involved in sort of facilitating a fraud, things 
have happened.
    But to target entire legal industries and say, ``We are 
going to choke off the air that they need to breathe basically 
because we don't like those industries and so we are going to 
declare a reputational risk,'' I have never seen anything like 
it, and I would have never dreamed that anybody would even 
think that was an appropriate use of government power.
    Mr. Luetkemeyer. Dr. Spalding, in your testimony you have a 
quote from John Adams, and let me read from your testimony: The 
classic American expression of the idea of the rule of law 
comes from the pen of John Adams when he wrote the 
Massachusetts Constitution in 1780, in which the powers of the 
commonwealth are divided in the document ``to the end it may be 
a government of laws, not of men.''
    It looks like with Operation Choke Point, we have ignored 
the law, and we have a government of men. What do you think?
    Mr. Spalding. No, that is exactly right. The reason why 
these ideas of consolidation and efficiency are problematic is 
that is not the end of government. You, as the Legislative 
Branch, decide where exactly to draw those lines, but you must 
be careful about having gone too far. Process is important.
    Rule of law is there to prevent, on both sides of the 
political aisle, that kind of corruption--moral corruption, 
political corruption, just administrative corruption and small-
mindedness--from taking over our politics. This is clearly the 
rule of men, and the whole system of American constitutional 
government, why power is divided, why power is checked against 
each other, is because we don't trust individual men and women 
to rule. That is why we have popular government in the first 
place.
    Mr. Luetkemeyer. With Choke Point, though, we are not only 
allowing--we are allowing men to have their own interpretation 
of the law and allow their own outside ideas, political 
philosophies, moral judgments, and moral values to be imposed 
on somebody and not the rule of law.
    Mr. Spalding. That is exactly right. You also remember in 
the Federalist Papers when James Madison says the accumulation 
of all powers in the hands of one--executive, legislative, and 
judicial. That is the very definition of tyranny.
    It is not what they do. It is the very idea of putting it 
all together in one place in the hands of one, based on their 
own passions and political own opinions, tends to cause 
problems.
    Mr. Luetkemeyer. Thank you.
    Mr. Gupta, you were in an enforcement branch of the CFPB at 
one time. Is that correct?
    Mr. Gupta. Correct.
    Mr. Luetkemeyer. I had a discussion yesterday with a 
business that was fined by CFPB because they had a word in 
their documents that down the road CFPB is getting ready to 
propose a rule that will make that noncompliant. Now, let me go 
over this one more time. We have a situation where CFPB is 
fining an entity for what a rule down the road is going to 
hopefully--and it may not even go into effect, but they are 
proposing a rule down the road that it would be noncompliant.
    Now, is that something that whenever you were there that 
you would have done?
    Mr. Gupta. No. I am not--
    Mr. Luetkemeyer. Can you tell me the reasoning on how that 
is legal?
    Mr. Gupta. I am not familiar with the facts of that case, 
and I suspect if you have only heard from one side, it might be 
more complicated than that. But the CFPB has a variety of 
tools. It has enforcement and it has rulemaking, and--
    Mr. Luetkemeyer. Okay, let me--
    Mr. Gupta. --lots of other agencies are like that. There is 
nothing wrong--
    Mr. Luetkemeyer. My time is running out, and I just want to 
make one more comment here.
    What has happened with regard to Dodd-Frank, is now not 
only are the financial services folks supposed to be worried 
about complying with all these rules, they now have to be 
clairvoyant. They now have to have a crystal ball on their desk 
to be able to see down the road what may be proposed so that 
they will not be in noncompliance at some point.
    That is how far they have gone. That is how out of control 
this agency is and what Dodd-Frank has allowed to happen with 
this environment.
    Mr. Gupta. I certainly saw nothing like that when I was--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Mr. Chairman, I ask unanimous consent for my 
statement to be made a part of the record so that I can go 
right into questions.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Hinojosa. Thank you.
    My first question goes to Mr. Gupta.
    The general gist of this hearing today is that an army of 
unaccountable bureaucrats over at the Consumer Financial 
Protection Bureau and the Federal Reserve and the Financial 
Stability Oversight Council have essentially overthrown the 
Constitution and the Congress via a regulatory coup d'etat. 
What do you make of these allegations? Why would the CFPB be 
any more unconstitutional than, say, the Federal Reserve?
    Mr. Gupta. Right. In fact, the CFPB is a lot more 
accountable than the Federal Reserve. And it is true that there 
are features of the CFPB that are new. They are designed 
primarily to resist industry capture, which was a problem 
before the crisis with the existing regulators.
    But the various component parts of the CFPB that are being 
attacked here are nothing new. So there have been complaints 
about--we heard from--Congressman Garrett I guess is no longer 
here--that the Director of the CFPB is accountable to no one. 
In fact, the Director of the CFPB is removable for cause by the 
President, and that is the same system that we have for the 
Federal Trade Commissioners, and Professor Zywicki held up the 
Federal Trade Commission as an example of how to design an 
agency.
    So that is nothing new. The Supreme Court in 1935 said--in 
a case called Humphrey's Executor--that is a perfectly 
permissible removal mechanism and is consistent with the 
separation of powers.
    We also hear complaints that there is too much delegated 
authority to the agency--for example, the authority to define 
unfair and deceptive acts and practices. That is authority that 
the Federal Trade Commission has had for 100 years, and it is 
no different from authority that we delegate to agencies like 
the Environmental Protection Agency to consider environmental 
protection rules, and that Justice Scalia himself has said is 
perfectly permissible.
    So the arguments that are being made here--this is why I 
said in my opening remarks--they are really efforts to attack 
the administrative state as a whole. The constitutional 
underpinnings of these arguments, if they were accepted, 
wouldn't simply attack the CFPB; they would sort of demolish 
the administrative state as a whole.
    And I think at least the first witness we have heard, Dr. 
Spalding, is open about that. I think his testimony is an 
attack on the administrative state as a whole.
    Mr. Hinojosa. After that explanation, then tell us how the 
Bureau and the Council are accountable to the American people 
and to the Congress?
    Mr. Gupta. As you know, the Bureau is subject to 
congressional oversight and is up here--if there is another 
agency in Washington that has to face congressional hearings 
more than the CFPB and its Director, I am not aware of it. I 
think the average, if you look at the number of times they have 
been up on the Hill, is about once a month since the Bureau's 
inception.
    So they are subject to congressional oversight. They are 
subject, as I mentioned earlier, to small business reviews that 
only two other agencies face. They are subject to the Financial 
Stability Oversight Council, a committee of other regulators 
that can conclude that--if they think that a substantive 
consumer protection rule poses a threat to the economy, they 
can actually gang up on the CFPB and veto the CFPB's rules.
    The CFPB is subject to a really wide panoply of 
accountability measures that most other agencies are not 
subject to. So that is why I said in some ways this agency is 
more accountable than other regulators.
    Mr. Hinojosa. Thank you.
    Mr. Gupta. But to the extent that it is insulated from the 
appropriations process, that is a good thing.
    Mr. Hinojosa. Thank you for that explanation. My time is 
running out very quickly, and so I thank you for your 
responses.
    My next question is to Professor Skeel.
    Mr. Skeel, in the first footnote of your written testimony, 
you note that you believe that the Bureau has been a valuable 
and necessary innovation. Can you elaborate on what you meant 
by that?
    Mr. Skeel. What I meant was what I was referring to 
earlier, and that is I do believe that there were real problems 
with consumer protection and that the major agencies who had 
responsibility had conflicts of interest. And we did not have 
effective consumer protection in the financial services space 
before 2008.
    I do think there are some rule-of-law issues with the 
Consumer Bureau. I think there are legitimate concerns about no 
accountability with the funding and with the difficulty of 
altering what the Bureau does, but I believe the Consumer 
Bureau was necessary.
    Mr. Hinojosa. I agree with you.
    And I want to put into the record that I was here at the--
in the year 2007 at the end of that year and the first quarter 
of 2008, when we heard many of the leaders on the other side of 
the aisle say, ``We don't want any more regulations. We are 
doing fine. The financial system is strong.'' Vice President 
Cheney said that. Secretary Paulson said that.
    And then all of a sudden, by the third month they wanted us 
to help the financial system be saved because they took us over 
the cliff.
    You are absolutely right.
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Hinojosa. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, chairman of our Monetary Policy 
and Trade Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And I am a little flabbergasted by Mr. Gupta, who believes 
that somehow just because Congress created the CFPB that 
somehow the CFPB is accountable to it, since Congress then 
proceeded to put it outside of its purview. From the funding 
side itself, oversight--congressional oversight is very 
different than power of the purse. That is the constitutional 
power that we had.
    So, Professor Zywicki, if you want to touch base on that. I 
am curious if this is, I think as you laid out, that this 
probably isn't even constitutional in the structure of it, and 
certainly isn't smart to do that. So if you don't mind touching 
on that.
    I really want to get to, because we just had a graphic up 
there about business lending, how suddenly that has become 
apparently very easy to get business loans now that we passed 
Dodd-Frank. As a small business owner, I would like to actually 
give some testimony against that.
    But when we are talking about consumer credit, in 2013 the 
Federal Reserve Board had a report which found that 22 percent 
of consumers who borrowed to buy a home in 2010, one out of 
every five, would not have met underwriting requirements of the 
qualified mortgage. That is the kind of damage, I think, that 
we are seeing from CFPB--maybe not intended, but that is the 
effect.
    And again, this is the Fed saying who this is going to 
affect is 34 percent of the African American borrowers, and 32 
percent of Hispanic borrowers in 2010 would be unable to meet 
the debt-to-income ratio requirements but for the temporary 
GSE-backed loan exemption that the CFPB has so graciously given 
to everybody.
    So, but guess what? If you can give it you can take it 
back, and that is the fear.
    So, Professor Zywicki, do you have a comment?
    Mr. Zywicki. I will try to be brief.
    First, we all know that you have to--that the only way to 
make bureaucracies accountable is to have carrots and sticks, 
otherwise it is just a dog and pony show when they come up 
here. And the power of the purse is, of course, is Congress' 
first prerogative. And this is an agency that is engaging in 
widespread policymaking on the economy and should be subject to 
the power of the purse.
    It is also the case, yes, that removal for cause has been 
held by the Supreme Court to be constitutional, but the idea of 
one person running the entire agency? What we have learned over 
time is the reason why the FTC works to the extent it does is 
because the bipartisan process of deliberation, the ability of 
dissenting Commissioners to speak, that sort of thing, that we 
basically substitute internal accountability into deliberation.
    And the Supreme Court has basically said if you have a 
commission, that is good enough. I don't know that they have 
said that unleashing one person on the economy like this is 
not.
    Just a final word about your comment on CFPB and mortgage 
lending, which is one of the astonishing things about the 
qualified mortgages rule is as it is depriving consumers of 
credit, they did nothing to increase requirements on 
downpayments, for example. So the chairman asked earlier, how 
will this exacerbate the next crisis? One of the reasons is 
they didn't do anything about one of the primary causes of 
foreclosures, which was negative equity. By not requiring 
higher downpayments and that sort of thing, they did nothing to 
stave off that problem.
    Mr. Huizenga. Thank you. I appreciate that.
    Ambassador Gray, I would like to really quickly have you 
touch on the SIFI designation situation. In your testimony you 
wrote about the wide latitude granted to FSOC by Dodd-Frank to 
designate these SIFIs. Is it constitutionally appropriate to so 
drastically alter a designated financial company's standing 
within a greater global financial system?
    So if you wouldn't mind just commenting on that?
    Mr. Gray. The latitude that the FSOC has, that the 
government has--it is a little agency that is set up by Dodd-
Frank--the latitude is very, very wide, and the only standard, 
the only limit to the designation of a financial institution is 
that it may be in trouble and therefore may endanger the 
financial stability of the United States. The problem--
    Mr. Huizenga. Is there an impending threat to that right 
now?
    Mr. Gray. I don't think there is any, but there is a case 
that has been brought that is a designation made of MetLife. It 
is an insurance company. It doesn't pose a threat to anybody.
    I could go into--I don't have time to go into the--
    Mr. Huizenga. Yet they have been designated, correct?
    Mr. Gray. But they have been designated, and there is no 
way really to review it because the courts are prohibited from 
reviewing a question about whether the designation actually 
endangers the--or poses a risk to the economy of the United 
States.
    So there is no accountability. The designation is final. 
There is no appeal. There is no appeal to you; there is no 
appeal to the courts; and there is no appeal to the White 
House.
    I am sure that designation is going to fail, but I think it 
is going to be followed by more and more and more as the 
government continues to try to strengthen its hand and broaden 
its power. That is always the case with bureaucracy.
    Mr. Huizenga. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Professor Zywicki--I hope I got your name right there--
    Mr. Zywicki. Perfect.
    Mr. Scott. --your testimony certainly intrigued me in your 
talk about Dodd-Frank. I want to mention just one of the issues 
you talked about, the impact with community banks, auto 
dealers, and you mention Operation Choke Point.
    Now, what I try to find is ways we can work up in this 
committee in a bipartisan way to get a solution to the problem, 
to solve unintended consequences. And I want to get your take 
on this.
    Operation Choke Point is basically right now an 
investigative issue, really in the hands of the Justice 
Department and the Federal Trade Commission. And it is based 
upon basically one big example with payday lenders with one 
bank, Fair Oaks Bank, I believe, in North Carolina, that they 
have done.
    My concern comes in with this is a growing--rapidly growing 
industry of online electronic transactions. More and more 
people are now shopping at the mall online. Malls are being 
replaced with online. They go on, they get what they want from 
eBay, then they go to something like PayPal, a transaction 
payment processor, to get this.
    So the accounts for our consumers that need protection on 
this rests within this wheel of which at the center of which 
are your electronic payment transaction processors, a growing, 
growing business. My concern is that--and the reach of this 
Justice Department on some of these cases, there is an 
excellent opportunity here for Dodd-Frank to work if it is used 
to work here, because what will happen is if we are not 
careful, because of this action by some bad--one or two bad 
actors--and let me say, everybody is a good actor until they do 
something bad, so how do you catch them?
    And so I am concerned about these people who are vitally 
important to the consumer who goes online, and they have to 
have confidence with that payment processor. So don't you see 
some value here where Dodd-Frank, and particularly with the 
consumer protection angle of that, can come in there and make 
sure that we are not throwing the baby out with the bath water 
in this Operation Choke Point and really doing a devastating 
hit on some innocent people like our payment transaction 
processors?
    Can't Dodd-Frank be a positive role to make sure that 
doesn't happen?
    Mr. Zywicki. Thank you, Congressman Scott. I agree with 
pretty much everything you said, and the nuanced way in which 
you said it, which, as I alluded very quickly earlier, I worked 
at the Federal Trade Commission. I understand that the ability 
to have this sort of power does have a legitimate power, and 
the FTC is using it.
    In situations where a payment processor is basically 
knowingly engaged in and facilitating fraud, it has been a 
longstanding power to be able to do that. The problem is once 
you move beyond that very narrow area, which the DOJ has tried 
to claim that is all Operation Choke Point is, when in reality 
it seems to be much, much more.
    We don't know how much more because they are so--it is 
really like a Black Ops operation, as far as I could tell. It 
is really hard to find out who they are targeting, why they are 
targeting them, and that sort of thing.
    And I agree with you that one of the tragedies of Dodd-
Frank is that we are driving consumers out of the mainstream 
financial system. We have taken away bank accounts as a result 
of the Durbin Amendment; we have taken away credit cards as a 
result of the Credit Card Act; we have targeted--and payday 
loans are disappearing. And we are driving more and more 
consumers online.
    I agree with you that online lending and the way in which 
that is done raises for me real concerns that other things do 
not. That is not to say it is inherently corrupt, but giving 
somebody online your bank account information raises for me 
particular concerns.
    And so I share your concern, and I share a recognition that 
there can be a legitimate power here, and I just don't like the 
sort of targeting of big groups.
    Mr. Scott. Well, okay.
    My time is up. Thank you.
    Mr. Zywicki. I hope I was agreeing with you--more or less--
    [laughter]
    Mr. Scott. But the point I am trying to make is that this 
is a growing industry that is going to grow by even more leaps 
and bounds, and if we don't have something in there to deal 
with these unintended consequences to protect both sides of the 
equation, both the processors and the customers they rely on.
    Thank you, sir.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    I think it appropriate on Constitution Day that we 
celebrate the idea that man could be free, the idea that man 
could govern itself, that Americans could make decisions for 
themselves. They didn't need the elite to govern them. They 
didn't need the elite to make decisions for them.
    Sadly, I think that we are having that debate again 200 and 
some odd years later because there are some across the aisle--
and they don't want to say it; I know they were called out by 
Mr. Gupta, who basically said Americans are stupid. They are 
dumb. And there is a belief that Americans are too stupid to 
make decisions for themselves.
    I don't believe that to be the case. I think if we have 
disclosure, if we have good information, Americans make the 
best choice for them and their family. And bureaucrats at the 
CFPB don't know what is best for them.
    And so it brings me to the idea of the administrative state 
versus elected representatives--who is more accountable?
    There was a really bad health care law that was passed. I 
am hearing stories about monthly costs going up from $800 to 
$1,300 and $1,400 a month. To all of my friends across the 
aisle who voted for that, what happened to many of them?
    To the panel, what happened?
    They got voted out. They lost their elections. Many of them 
are no longer here because America said, ``That is a bad law. 
That doesn't work for my family.'' And they held them to 
account.
    Because it wasn't special interest who on that day carried 
the Obamacare legislation. The real accountability came when 
they had to go back home and face their constituents who said, 
``I am going to vote you out.'' And so now, they are no longer 
here.
    But I want to talk about the CFPB a little bit because I 
think there is this perception that special interest has no 
impact on the CFPB because they are an agency that isn't funded 
through Congress, right? They are unaccountable; they can do 
whatever they want with their single director.
    So there was a recent study that came out and it says the 
Consumer Financial Protection Bureau released a study 
indicating that arbitration agreements restrict consumers' 
relief for disputes with financial service providers by 
limiting class actions.
    Now, does anyone on the panel have an idea on how this 
study might impact the special interests? Anybody?
    Ambassador Gray, enlighten me.
    Mr. Gray. The first think that comes to mind is the 
plaintiffs' bar, which--
    Mr. Duffy. I agree. The plaintiffs' bar.
    Does anyone disagree with that?
    Mr. Gupta, yes?
    Mr. Gupta. I do disagree with that. There is--
    [laughter]
    Mr. Gupta. This is a--the CFPB's--
    Mr. Duffy. Credibility--
    Mr. Gupta. --study on arbitration is the most rigorous 
empirical study on the prevalence of arbitration in consumer 
contracts. You asked them--
    Mr. Duffy. Oh, I know your objection. Let me ask you a 
question, though. Do you think that the trial bar tried to 
communicate and impact the CFPB in regard to their decision 
with regard to class action lawsuits and arbitration?
    Mr. Gupta. Well, obviously.
    Mr. Duffy. Answer my question.
    Mr. Gupta. --obviously everyone weighed in on the study--
    Mr. Duffy. Of course, they did. And are you telling me 
special interests don't have an impact on the CFPB?
    Mr. Gupta. It is an empirical study, and it is really hard 
to argue with the conclusion of the study, which is that--
    Mr. Duffy. Who is going to--
    Mr. Gupta. --class action bans ban class action.
    Mr. Duffy. As Democrats in the Senate and the House lost 
their jobs when they were held accountable to the American 
people, who at the CFPB can be held accountable for bad 
decisions? Are any of them up for election? None of them.
    And to argue that this is a better form of government, that 
you know what is best--that we have this debate today is 
incredibly frustrating.
    The QM rule--that I have small credit unions and banks 
that--a banker wants to lend to a family that they know and 
they will take their risk on; they are not going to send it 
into the market. But they have known the family and the dad and 
the mom and the brothers and sisters. They want to take a risk 
on this family.
    The CFPB says, ``Oh no, you can't. And if you do, there is 
additional liability if that loan goes bad even though you have 
all the risk of the loan because it is on your books.'' Come 
on.
    Mr. Gupta. These are really arguments against consumer 
protection at all--
    Mr. Duffy. No, they are not.
    Mr. Gupta. --or administrative agencies.
    Mr. Duffy. No, they are--and we might have a debate on the 
administrative agencies, but not about consumer protection. I 
believe in disclosure. I believe people should know the deal. 
They should know what they are getting into.
    But I also believe that if they know the deal, let them 
decide if it is right for them.
    With regard to payday lending, you know what? If the credit 
unions and the banks won't give me a loan and you take away 
this source, where am I going to go? I am going to go to Vinny 
down the street or I am doing really bad things that affect our 
society.
    Mr. Gupta. Payday loans are often not that different from 
Vinny down the street. We are talking about interest rates that 
exceed $1,000 and that trap people in a cycle of debt.
    Mr. Duffy. I would love to have a better solution.
    I am concerned that on the settlement side that it is not 
just going to victims; it is going to third-party groups, 
ACORN-esque groups that you will argue, oh, this is great for 
the American people, but you are going to drive money into 
third-party groups not funded through Congress, not funded 
through the appropriations process.
    It is just like the DOJ's settlements with banks. It 
doesn't go to the Treasury. It doesn't go to victims, all of 
it. A great portion of it goes to left-wing community 
organization groups and not through the congressional 
appropriations process.
    And I know my time is done, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Fitzpatrick, chairman of our Terrorism Financing Task 
Force.
    Mr. Fitzpatrick. Thank you, Mr. Chairman, for calling this 
hearing, ``Dodd-Frank Five Years Later.''
    I think that most of the members of this committee probably 
were not in Congress when the law was passed for the reasons 
Mr. Duffy indicated. I was one who ended up here because of a 
series of bad laws and the voters in my district decided to 
send a new Representative.
    And we feel that we have been robbed of the ability to make 
a lot of the decisions, even though they are tough decisions. 
These are tough votes that we should have been sent here to 
make.
    And I do appreciate the acknowledgement of my colleague, 
Mr. Sherman, who indicated earlier--he said we punted in 
passing Dodd-Frank. Essentially, we punted to the bureaucracy.
    So I want to talk a little bit about the regulatory branch 
of government and I want to discuss the amount of regulations 
that have been passed, rules and regulations under Dodd-Frank--
not just those that have been passed but those that have been 
discussed, those have been threatened, those that have been 
noticed and are being discussed now, and the impact of not just 
those that have been passed but those that may be passed on 
institutions, and how do they affect Wall Street?
    My understanding is Dodd-Frank was passed in order to rein 
in Wall Street, but we have heard several references today to 
Mr. Dimon's comment that a larger moat was created around him. 
Wall Street seems to be benefiting from Dodd-Frank 5 years 
later.
    The impacts really seem to be on the small Main Street 
community institutions, the small community banks in districts 
like my district in Bucks County, Pennsylvania, and consumers, 
as well, and innovators.
    And so, Professor Zywicki, perhaps you can start. Who 
really bears the brunt of this new massive wave of regulations 
that have come under Dodd-Frank that we haven't had a chance to 
vote on?
    Mr. Zywicki. I haven't looked at all the methodology, but 
one estimate was that so far it has imposed $21.8 billion and 
60.7 million paperwork hours on compliance costs. It is 
estimated that over the next 10 years it could be $895 billion 
in reduced gross domestic product and $3,346 per working-age 
person.
    I haven't seen a lot of other estimates. I give that as 
some sense of at least what some economists think about this.
    And I think you are exactly right, which is the cost of 
Dodd-Frank is falling on people with the least--the fewest 
options, the least flexibility in their budgets, and that sort 
of thing. We are driving people out of bank accounts; we are 
taking away people's credit cards; we are taking away people's 
mortgages.
    And upper middle-class people largely can avoid that. We 
can carry the higher balances in order to keep a free bank 
account. Smaller people can't, or--and it is lower- and middle-
class people who are really bearing the brunt of this law.
    Mr. Fitzpatrick. Dr. Spalding, we have spoken at great 
length today about the impact of Dodd-Frank, and for good 
reason. But in many ways Dodd-Frank is a symptom of a larger 
disease, which is the growth of the--sort of the modern 
administrative state that Mr. Duffy spoke about.
    You have written about this development and how it is a 
departure from our founding principles. Can you explain the 
difference between our founders' vision of the government and 
that of the progressives who have given us this modern 
bureaucracy?
    Mr. Spalding. Thank you for the question. My testimony does 
go to that answer to some extent.
    In short, the American founders wanted to control the 
powers of government and make them responsible. That is why we 
have a Constitution in the first place, to get around the 
problems that the English kings had.
    Powers were divided into branches. Branches operated the 
main functions of governing--lawmaking, executing, 
adjudicating.
    Those are grants of powers from the sovereign people. That 
is why you can't delegate those powers to someone else. Someone 
else can't exercise the lawmaking power.
    The problem with the modern administrative state--and I am 
launching a challenge to the modern administrative state. It is 
constitutionally illegitimate, and we have clearly crossed a 
Rubicon. Congress has lots of power to regulate. I don't object 
to regulations, per se.
    But we are clearly operating in another world. These things 
that Dodd-Frank is doing, these are laws. They are passing laws 
that you have not approved.
    That is practicing the lawmaking power. The courts might 
not say that it is delegation, but it clearly is, and the 
Legislative Branch must recognize that.
    The idea is based upon the notion that, using modern 
science and using the best forms of efficiency and consistency, 
someone else can rule us better. You are our representatives to 
make sure that doesn't happen.
    So it is a violation of delegation, but it is more largely 
a violation of the whole concept of the rule of law and the 
rule of laws rather than the rule of men.
    Mr. Fitzpatrick. My time has expired. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman.
    And thank you, to the witnesses, for appearing today.
    Let me start by asking each witness this question, and you 
may respond by simply raising your hand if you agree: If you 
were a Member of Congress and you had an opportunity to vote to 
repeal Glass-Steagall--to repeal it; that would be the essence 
of your vote--would you vote to repeal Glass-Steagall? If so, 
would you kindly extend a hand into the air?
    I am not sure about the gentleman on the end. I see four--
all right. All right. Everybody would repeal Glass-Steagall.
    All right. If you had an opportunity in Congress to repeal 
Dodd-Frank in its entirety, would you repeal Dodd-Frank?
    One? All right. Two.
    Mr. Spalding. That depends on the definition of 
``entirety.''
    Mr. Green. Repeal it entirely--entirely as in entirely.
    Mr. Spalding. The Legislative Branch has the ability to--
    Mr. Green. Okay, let me just go on. I really don't want to 
debate it with you. I trust that we can get back to it later.
    So we have at least one person who would repeal it in its 
entirety. All right.
    Now, let's do this. Let's just examine what has happened in 
this whole question of, are we more free. More free to do what?
    More free to go back to 3/27s and 2/28s, when you had 2 
years of fixed rates and 28 years of variable rates? Same thing 
with the 3/27s--go back to teaser rates that coincided with 
prepayment penalties so that if you tried to get out of a loan 
that you were in you would have to pay this huge penalty to get 
out, which most people couldn't do?
    Go back to no-doc loans, such that people could come in and 
get a loan and walk away with a monthly payment that they 
couldn't afford because they didn't have the documentation to 
acquire the loan? Go back to liar loans, when you could 
literally fabricate a story that wouldn't be validated and get 
a loan that you couldn't pay?
    Go back to the yield spread premium, when consumers were 
ripped off by persons who accorded them loans for higher rates 
than they qualified for? Literally, you could qualify for a 
loan at 5 percent and the person working with you that you had 
a great deal of confidence in would give you a loan for 8 
percent and get a kickback.
    All of that was legal because we allowed it to be legal. So 
go back to a time when people were free to just rip off the 
consumer, just take advantage of consumers, just do whatever 
you could to make money off of unsuspecting consumers.
    Many people don't know that they were ripped off by the 
yield spread premium. And I use that highly technical term 
``ripped off'' because we need to be clear and concise about 
this.
    Consumers are being taken advantage of even today with 
other products that are out there, and the CFPB is doing its 
best to try to eliminate some of these products.
    So we are talking about going back to a time when we could 
generate loans without liability. The people who were 
generating the loans knew that they were going to pass them on 
to someone else, the liability wouldn't remain with them, and 
as a result of being able to pass them on, they would take just 
about anything they could to get their numbers up so that they 
could make more money by passing more loans on to the secondary 
market.
    And as a result, consumers would be--again, highly 
technical term--ripped off. A generation of wealth was lost. We 
had literally 9 million jobs lost as a result of this crisis; 
we had 5 million homes lost as a result of this crisis; $13 
trillion of families' wealth was destroyed as a result of the 
crisis.
    Dodd-Frank was the solution that we came up with that is 
not perfect, that we could tweak, that we could mend rather 
than end. Unfortunately, there are a good many people who want 
to see the demise of Dodd-Frank.
    Dodd-Frank is not the problem. The problem is a Congress 
that is unwilling to work together to maybe amend some aspects 
of it, but not to end Dodd-Frank in its entirety.
    I would say to you, my dear friends, as I close, I don't 
concur with you on Glass-Steagall. It took 66 years to 
eliminate Glass-Steagall. Glass-Steagall separated investment 
banking from commercial banking, and prevented people from 
gambling with consumer dollars that were federally-insured.
    I don't know how long it is going to take, but people right 
here in this Congress are going to do everything that they can 
to end Dodd-Frank just like they ended Glass-Steagall.
    Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the House Foreign Affairs Committee.
    Mr. Royce. I appreciate the time here.
    And a quick question, because when we travel overseas with 
the Foreign Affairs Committee, I often have conversations with 
foreign leaders about issues that go to the heart of the 
importance of rule of law and the role that it plays in 
encouraging foreign investment, and the role that it plays in 
political stability, and how badly these foreign nations need 
the rule of law, need the credibility that comes with it. So it 
is a little bit of a shock to me that on our own shores, we 
have blatant examples of discretionary choice and political 
influence running afoul of the rule of law.
    In Europe in the 1930s, there was this concept of fluid law 
and it didn't work out very well. The rule of law for the 
United States has been sort of a cornerstone.
    So you get into these areas with fluid law--the SIFI 
designation process is just one I would make an example of, and 
I appreciate several of my colleagues raising this issue this 
morning. I worry that the costs of what economists call here 
the cloud of political risk that comes into play--Professor 
Zywicki referenced this--this is one of the consequences, this 
is one of the mistakes in Dodd-Frank, one of the things that we 
did not get right.
    And that effect could be permanent. It could be long-
lasting.
    And so, Mr. Gray, we have seen how the CFPB has strayed 
well outside of its legal boundaries, expanding its reach now 
into telecom companies and seeking information protected by 
attorney-client privilege, and even indirectly trying to 
regulate auto dealers and so forth. Given the agency's design, 
are you surprised by any of this behavior?
    Mr. Gray. I am not surprised, because there is nothing to 
constrain them. There is no check or balance. There is no 
operation of the separation of powers that would conduct an 
oversight role to rein them in.
    The White House can't do anything about it. The Congress 
can hold hearings, but they are not supposed to review the 
budget. That statute, as I recall, actually says the Congress 
can't review the budget. I don't expect anyone is going to be 
arrested for doing so, but the budget is not in your hands, and 
that is where your power comes from.
    The courts are required to defer to whatever the agency 
wants to do under the Chevron Doctrine. That is true even in 
the case of rulings, say, on what is abusive. The agency has 
refused to spell out what the law means by notice and comment 
rulemaking, which is the hallmark of American administrative 
law, one of the geniuses of post-war development.
    It is going to be, ``I know it when I see it.'' It is going 
to be an ad hoc decision made after the fact, and so nobody 
knows before they are zapped.
    Mr. Royce. There is going to be fluid law that is 
constantly evolving, constantly requiring new interpretations 
by the regulatory community, constantly causing costs out 
there--compliance costs. This is one of the reasons I opposed 
Dodd-Frank.
    But there is another aspect here which is--and the chairman 
is well aware of this, as well--the fact that the prudential 
regulators have the responsibility for safety and soundness, 
and taking them out of this equation and not allowing them to 
weigh in on these decisions also has a long-term risk in terms 
of the first responsibility, which is safety and soundness.
    If we were smart, what we would have done was put this 
function underneath the prudential regulators. It might 
surprise some to know that every former prudential regulator 
that I talked to, whether Democrat or Republican, felt that 
this was a profound error in the legislation.
    Mr. Gray. Sir, if I might just sort of add--
    Mr. Royce. Yes.
    Mr. Gray. --one thing about the rules about making 
mortgages, it is just a--I grew up in the South, and the South 
didn't have a lot of big banks until all of a sudden they did 
have some big-size banks. But the hallmark of the growth of the 
southern banking industry was making character loans, loans 
based on people's understanding of the character of the person 
who was borrowing, the knowledge of the family, knowledge of 
that person.
    And there are Fed studies saying that character loans are 
better than the cookie-cutter loans that are now being 
required. But you can't make a character loan anymore.
    Who benefits from that? Nobody.
    Mr. Royce. We have choked off so many loans.
    Mr. Gray. Nobody.
    Mr. Royce. Mr. Chairman, thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt.
    Mr. Hurt. Thank you, Mr. Chairman.
    I thank the Chair for continuing to focus on the 
anniversary of Dodd-Frank 5 years later.
    And I thank each of the panelists for appearing today.
    I represent Virginia's 5th District. It is a sprawling, 
rural district, south side, Central Virginia. Over the August 
break we were--had the chance to travel across the district and 
visit across the 23 counties and cities that I represent. Many, 
many Main Streets along the way.
    And we had the opportunity to visit with families, small 
businesses, small farmers; had the opportunity to stop by 
several banks, community banks in Charlotte County, Fauquier 
County, Halifax County. These banks are important to these Main 
Streets because they provide a tremendous amount of capital 
that is necessary now, in a way, more than ever, because of the 
job losses that we have seen over the last several years. There 
was a recent study which indicated that 70 percent of loans 
made in the agricultural sector are made by community banks.
    So as I talked to the bank presidents and the compliance 
officers at these institutions, I think, Mr. Gupta, they would 
be very surprised, maybe even relieved, to find out that 
actually Dodd-Frank has not been the cause of their decline. I 
think they would be relieved to know that their customers are 
really benefiting from Dodd-Frank and the Consumer Protection 
Bureau. And I appreciate Mr. Zywicki's responses to your 
statements.
    And I won't pursue that any further and move on to 
something that is a little--is more in the big picture.
    I wanted to ask Mr. Spalding and Mr. Gray about this: The 
Richmond Federal Reserve recently published something called a 
Bailout Barometer. I don't know if you are familiar with it, 
but it is an estimate that the financial safety net covers some 
$26 trillion in liabilities, or 60 percent of the total 
liabilities of the financial system.
    And I was wondering from the standpoint of too-big-to-fail, 
and from the standpoint of moral hazard, what is the threat to 
the taxpayer when we have accumulated this amount of backstop 
by the Federal Government? What is the threat to the consumer? 
What is the threat to our free markets?
    If Mr. Gray wants to go first, and then Mr. Spalding, I 
would love to have you address that.
    Mr. Gray. I think the threat is not first to the taxpayer 
but to the Fed. It is money they print; it is money they sort 
of manufacture. Their balance sheet is something totally unique 
in the history of America. I don't know how they are going to 
work their way out of it, but it is going to be inflationary, 
it is going to dilute, it is going to degrade the quality of 
the savings of most Americans in order to have this happen.
    And banks are not going to do any more lending. They are 
probably going to do less lending than they would have without 
this crisis, and that is the basic issue. A complicated 
economic one, and I am not an economist, but this is a basic 
issue about when they should start raising interest rates.
    And I think they got themselves in a fix, which is the 
direct result of the government's encouragement of loans that 
couldn't be repaid. And the reason loans couldn't be repaid is 
because the local banker wouldn't make a loan that he knew he 
couldn't repay or that would irritate his neighbor, because he 
would have to see his neighbor in church or at the Safeway.
    No, the loans were made because Fannie Mae and Freddie Mac 
had an insatiable appetite to cook up any loan they could do, 
and so if you got a broker, going to make a loan, and is not 
then responsible for it because he shoved it off to the Federal 
Government or a Federal Government agency, it all--it is all 
easy to do. And why not? Why would you not do that?
    So the government bears a huge responsibility for having 
caused all this. There is nothing in Dodd-Frank which does 
anything about Fannie Mae or Freddie Mac, or about any of the 
other practices that actually led to the crisis that we had and 
the crisis that we haven't gotten out of.
    And I am sorry to say, I can't give you an answer for the 
Fed, because it is going to take years to work out.
    Mr. Hurt. Thank you, Mr. Gray.
    Mr. Spalding?
    Mr. Spalding. That was a very good answer, and I defer to 
it. I would just, again, point out a general point. Vast 
operations of the administrative state of this magnitude going 
into large reaches of the economy, whether it is the health 
care economy or the financial economy, displaces and completely 
takes the place of market mechanisms. And in doing so, it 
prevents the market from making its natural adjustments. The 
rule--
    Mr. Hurt. And who suffers?
    Mr. Spalding. The average person suffers. I mean--
    Mr. Hurt. The consumer.
    Mr. Spalding. --the role of Congress is to uphold the rule 
of law, maintain contracts, make sure that there is a certain 
legal fairness in how it operates, watch out for the problems, 
but otherwise let it correct itself so that the real 
opportunity in the marketplace can serve the American people.
    Mr. Hurt. Thank you, Mr. Spalding.
    My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Ambassador Gray, thank you particularly for your great 
service to our country over the last many decades. I remember 
meeting you a long time ago and I'm just grateful to have your 
expertise involved with us today.
    I would like to ask you, as it relates to CFPB and how it 
has strayed out from its own legal boundaries, expanding into 
the telecom industry, impacting its own attorney-client 
protection privileges, regulating automobile dealers, is this a 
surprise to you?
    And what do you envision in the future? It seems to me that 
we have relegated those--the laws to--in the hands of these 
individuals and other regulators, so would you kind of expand 
on that, please?
    Mr. Gray. I never underestimate the ingenuity of a 
bureaucrat to expand.
    [laughter]
    And I wouldn't really want to predict where they will go. 
But I do think the automobile lending issue is very 
instructive.
    I happen to know--a very close friend of mine was head of 
the National Association of Auto Dealers, and they threw 
everything they could into this fight to get exempted. Now, you 
might argue that, boy, they really abused their monetary power 
or whatever to get this exemption, but they did get it.
    But it is like Mr. Cordray said--or the President said when 
Mr. Cordray was rejected by the Senate the first time around, 
``I will not take no for an answer.'' So they have gone after 
the dealers anyway.
    And that kind of defiance is what really scares me. We are 
at a point--and this is a slightly different point, but it 
encapsulates so much of what keeps me awake at night, frankly; 
not all nights, but some nights. The agencies have captured, 
have aggregated so much power--not just the ones you are 
talking about here and out in the financial industry, but EPA, 
one could--FDA, one could go on--they have so much power that 
they can threaten to go blackmail their subjects into 
submission, into accepting whatever they want to dish out to 
them.
    They can threaten them not to seek judicial review, which 
has happened in the automobile industry. All of the regulations 
against the automobile industry, the auto industry had to 
promise not to challenge for 8 years of the Obama 
Administration.
    It is hard to believe, but they had to make a promise--I 
have seen it in writing, and they have published it. The EPA 
has published it. Why they would be proud of it I don't know, 
but they got a promise from the Ford Motor Company, for 
example, that they would not challenge anything the DOT or the 
EPA ever did to them.
    So this is the way it is going across the government, 
across the administrative state. You are dealing with a 
microcosm--a very big microcosm, a very good example. And if 
you can fix it and get the pendulum going just in the other 
direction, you would serve an enormous benefit to the American 
people because the administrative state is out of hand.
    Mr. Pittenger. Thank you, sir.
    Ambassador Gray, you have also referred to how the moat is 
protecting against competition. Can you discuss further how the 
current regulatory barriers to entry are harming small 
businesses and institutions, while helping the largest ones?
    Mr. Gray. This is not a new problem of what is known in the 
administrative trade--perhaps you should ask Professor Zywicki, 
he may be more expert. He teaches where this doctrine was 
developed; so do I part time--George Mason.
    But it is a common thing across the regulatory state that 
regulations help big business by creating barriers to entry to 
competition. It is as simple as that. And big government likes 
big business because the progressives like not to have to deal 
with 10,000 little guys; they are very happy to deal with 3 or 
4 really big guys.
    Mr. Pittenger. Can you give us some examples, please, of 
how it has harmed the smaller institutions?
    Mr. Gray. I referred to it in my testimony and others have 
mentioned it. To me, the best example is the demise--not the 
demise yet, but the harm to consumer banks because of the 
inability to cope with the regulations that are the moat for 
their much, much bigger competitors like JPMorgan.
    And that is, I think, the best example. There are others. 
There are many others that are like that.
    Take the drug approval process; it takes much too long. The 
FDA asks for way too much information during these clinical 
trials when they know that once the drug gets out in the 
marketplace to millions of people, they will really then find 
out what the reactions are, and that is when they really do 
find out, and that is when they can make corrections.
    But to think they can do that--it is arrogant to think they 
can do that in these relatively small clinical trials, compared 
to public approval or public distribution. And I am sorry to 
speak too long, but that hurts the small drug companies because 
they can't afford an 8-year, $2 billion drug trial.
    Mr. Pittenger. Thank you. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Professor Zywicki, in a recent op-ed for The Wall Street 
Journal, former Senator Phil Gramm argued that President 
Obama's progressive legacy is destined to fail in the long run 
because he enacted vague laws and abused his executive power to 
impose policies that are unpopular with the American people. In 
making this case, Senator Gramm points out that all of the 
President's Executive Orders can be overturned by the next 
President, and that Dodd-Frank can be largely circumvented 
using exactly the same discretionary powers that President 
Obama used to implement it in the first place.
    Do you agree with Senator Gramm?
    Mr. Zywicki. Absolutely. That is the nature of the modern 
administrative state that we have been talking about.
    And one of the things I--I think it is awful, but--
    Mr. Rothfus. What sort of costs would this lingering 
uncertainty have for the U.S. economy?
    Mr. Zywicki. Huge costs. In order to make a loan, you have 
to be able to predict the risk of the loan. To the extent that 
political risk in the regulatory environment is shifting 
around, that makes it more difficult to price the risk of the 
loan, and so you have to either raise interests rates or you 
have to reduce risk exposure.
    Mr. Rothfus. Let's--
    Mr. Zywicki. And so it impacts banks probably more than any 
other sector of the economy.
    Mr. Rothfus. Let's translate that to people. All too often 
when Congress debates issues relating to the rule of law or 
government expansion and overreach, we tend to spend too much 
time on the underlying policy and lose focus on why the debate 
matters in the first place.
    We need to be focused on the impact of Washington, D.C., on 
people--on the family who is trying to purchase their first 
home, on the entrepreneur with a promising startup, on the 
small business who wants to expand their operations and hire 
more of the local community. As we look back on 5 years of 
Dodd-Frank, how have average Americans been impacted?
    Mr. Zywicki. I think a great example is when we--is the 
auto dealer attack that they are doing and this--we don't have 
scientific--the scientific and economic experiment, but what we 
discovered is exactly what we expected from what we know. The 
Wall Street Journal says that everybody has to pay more for a 
car loan now because of this uncertainty and this overreach by 
the CFPB.
    Mr. Rothfus. So are Americans more or less free to pursue 
the American Dream as a result of Dodd-Frank?
    Mr. Zywicki. Clearly, we are all less free as a result of 
this vagueness and this lack of rule of law.
    Mr. Rothfus. Mr. Gupta, you claim on page 10 of your 
written testimony that Dodd-Frank and the CFPB work to protect 
the interests of smaller banks. I have to tell you, this 
committee hears from community bankers all the time, and they 
vigorously argue the precise opposite.
    Are you really claiming that Dodd-Frank has enhanced the 
competitive position of community financial institutions?
    Mr. Gupta. I think the picture is complicated and--
    Mr. Rothfus. Let me tell you, it is not complicated for a 
small community bank in my district which spent 2,000 hours 
going through a CFPB regulation. What would you say to that 
small community bank which has limited resources, versus a 
large bank which has lots of resources?
    Mr. Gupta. Yes. No, I sympathize with the plight of 
community banks. As I said earlier, I think they are facing a 
lot of challenges and--
    Mr. Rothfus. Are there more or fewer community banks today 
than there were when Dodd-Frank--
    Mr. Gupta. There are certainly fewer, and that was 
happening already. That is an independent process that has been 
happening--
    Mr. Rothfus. Has it accelerated the process?
    Mr. Gupta. --before Dodd-Frank, and I--
    Mr. Rothfus. Has it accelerated the process?
    Mr. Gupta. No, I don't think that--
    Mr. Rothfus. Professor Zywicki--
    Mr. Gupta. --the existence of the CFPB is accelerating that 
process.
    Mr. Rothfus. I'm sorry, reclaiming my time, Mr. Zywicki, 
would you care to comment on that, whether Dodd-Frank may have 
accelerated the process?
    Mr. Zywicki. The only study I know about this, and the one 
that everybody seems to think is a good study, is from the 
Kennedy School of Government, which says that community banks, 
the assets are shrinking at twice the rate they were before 
Dodd-Frank.
    Mr. Rothfus. One of the things we see with the CFPB is that 
we have a single director.
    Mr. Gupta, Chairman Frank thought that a five-member 
commission was an acceptable structure for the Bureau. Is he 
wrong?
    Mr. Gupta. I think--
    Mr. Rothfus. Is he wrong?
    Mr. Gupta. I think you can have a legitimate debate about 
how to set up an agency. I think that the CFPB was set up in 
the right way. I think the problem with five-member agencies--
    Mr. Rothfus. Originally, Chairman Frank thought a five-
member commission was a good idea. Is he wrong?
    Mr. Gupta. I think he would support the current structure 
of the agency if you asked him today, and I think that was the 
right decision. And the reason I think it was the right 
decision is--
    Mr. Rothfus. Reclaiming my time here, I would like to move 
over to Dr. Spalding--
    Mr. Gupta. Let me just finish. There are agencies in 
Washington that are five-member commissions that do nothing, 
like the Nuclear Regulatory Commission and the Federal 
Elections--
    Mr. Rothfus. Are you saying that the SEC does nothing?
    Mr. Gupta. No, but I think a lot of agencies that have 
multimember commissions become deadlocked and incapable of 
doing anything, and that is the problem--
    Mr. Rothfus. The CFTC does nothing?
    Mr. Gupta. I'm sorry?
    Mr. Rothfus. Do you think the CFTC does nothing?
    Mr. Gupta. No. I don't think all multimember commissions 
are incapable of doing something, but it is a risk.
    Mr. Rothfus. Yes, but Chairman Frank thought it was a good 
enough idea to put into his original legislation.
    If I could go to Dr. Spalding, Mr. Gupta claims in his 
written testimony that the CFPB must carry out its work 
insulated from the ``partisan vagaries of the appropriations 
process.'' He is arguing that the American people, through 
their elected Representatives, deserve no say in how their 
government spends their money and governs on their behalf.
    This turns the American project on its head. Was that the 
founders' vision?
    Mr. Spalding. Absolutely not. The argument that I am 
hearing in defense of the administrative state appears 
otherwise--is the same you get from Woodrow Wilson forward 
about the modern administrative state: You must protect these 
decision-makers from the public, from Congress--
    Mr. Rothfus. In the administrative state, where does 
sovereignty rest, in the people or in the government?
    Mr. Spalding. It rests in the government. The government 
both secures rights, and the court tells what those rights 
are--
    Mr. Rothfus. Doesn't that turn the--
    Mr. Spalding. --and the administrators carry out those 
policies and tell us how to run our lives.
    Mr. Rothfus. Doesn't that turn the American experiment on 
its head, where it shifts the sovereignty to the government 
instead of the people?
    Mr. Spalding. It completely turns it around.
    Mr. Rothfus. Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the ranking member of the 
committee, the gentlelady from California, for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. Sorry I 
could not be here with the committee earlier today.
    And I am just wondering if we have learned anything new. 
This is the third hearing we have had on Dodd-Frank reform, and 
when I came in, I asked my staff if we learned anything new 
today? And of course, they responded that we have not.
    Let me just say, as I have said over and over again, that 
Dodd-Frank is the law, and we have the responsibility to 
enforce it.
    We believe that on this side of the aisle, we have been 
very responsible in the way that we have handled all of those 
who do not think that Dodd-Frank should have been signed into 
law. We have said over and over again, where there are 
technical problems, where there is confusion, where there needs 
to be some modest modification, we are prepared to do that.
    And we have demonstrated that in the way that we have 
worked. We have not attempted in any way to dismiss the 
concerns that have been raised.
    But honestly, Mr. Chairman, I don't know if we are spending 
our time holding these hearings over and over again in a way 
that is productive for our constituents or for this House, et 
cetera.
    I know these lawsuits have been filed. Let me just kind of 
go through a few of them.
    The lawsuits that filed alleging the unconstitutionality of 
the CFPB tend to come from rather fringe actors in the 
financial marketplace.
    The State National Bank of Big Spring is a $340 million 
Texas bank, and it was not supported by any amicus briefs, by 
any other parties when it filed its lawsuit. Morgan Drexen was 
a debt settlement firm which appears to have sued in 
retaliation for a CFPB enforcement action and now has filed for 
bankruptcy. ITT is a for-profit post-secondary school that has 
had regulatory run-ins with the CFPB, the SEC, and industry, 
where I have worked to correct abuses for much of my career.
    So I don't think I am going to ask a question. I don't want 
to take these gentlemen through that.
    I just want to say--I want to remind all of you what 
happened in this country when Lehman Brothers failed and all of 
a sudden we understood the impact that was going to have on all 
of the financial services industry, not only in this country, 
but offshore. And we were poised for disaster.
    We ended up with a subprime meltdown. Many communities have 
been devastating by the exotic products that were on the 
market, where people signed up for mortgages they couldn't 
afford, they were not vetted properly, no-documentation loans, 
on and on and on.
    We should all want to have to correct what took place in 
this country that took us into a recession, almost a 
depression. And so these attempts to somehow dismantle Dodd-
Frank, and to talk about how it is unconstitutional, and to 
continue to hold these hearings, is a waste of time.
    And so while I am here, and I respect the chairman for 
providing the leadership that he needs to provide on this 
committee, I just wish we could take up some--I need to talk 
about what is happening in America with the homeless population 
that just appears to be expanding--16 percent. I need to talk 
about the lack of affordable housing.
    I need to talk about what we are going to do about real 
consumer issues and how this committee is going to look out for 
these consumers, who expect this Congress to work for them and 
not just the biggest, riches banks and financial institutions 
in America.
    And so I have 20 seconds left, 19 seconds left, 18, 17, 16, 
15, 14, 13, 12, 11, 10, 9, 8, 7, 6, 5, 4, 3, 2, 1. There is 
nothing left to be said.
    Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Maine, Mr. 
Poliquin.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it.
    And thank you all very much for being here today.
    I represent Maine's 2nd District, which is the real Maine; 
it is not northern Massachusetts. It is Western, Central, 
Northern, and Down East Maine. We have about 650,000 of the 
hardest-working people you could possibly imagine. They are 
honest.
    I go back to the district every weekend, and what I hear 
all the time from our small business owners is that, ``Please, 
Bruce, help us get the government off our back.'' I talk to our 
credit unions and our small community banks, and they are 
spending more time dealing with government regulations than 
they are expanding their businesses and pushing out credit and 
loans to folks who really need it.
    And the problem with that, of course, is that your economy 
is not growing the way it should be and folks aren't getting 
the jobs they need so they are more dependent on the 
government. We have one heck of a problem now.
    There is an outfit here in Washington, D.C., called the 
Competitive Enterprise Institute, if I get this right, and they 
have taken a look at all the regulations--now not at the State 
level, but at the Federal level--and they compute that the cost 
of regulations to the American economy is about $1.7 trillion 
per year. That is about one-tenth of our economic output.
    Of course, businesses who have to suffer these regulatory 
costs pass along those costs in the prices that they charge for 
their goods and services. So if my math is right, every family 
in America is now paying about $15,000 per year for these 
Federal-only regulations.
    Dodd-Frank is one of those problems. Now, I understand when 
the housing market collapsed because folks were pushing out the 
ability to buy homes even though you might not have a job, or 
you didn't have to put any money down, and you couldn't afford 
the homes but you were pushed into those homes. And that caused 
a real problem for our economy.
    But now you have this big net--we do a lot of fishing up in 
Maine--and this big net is smothering everybody who should be 
able to swim through that net.
    I will give an example. Let's say you have someone who is a 
great furniture-maker in Bangor, and they also run an organic 
farm. And they are trying to put aside about $100 a month to 
save for their retirement. And they have a fellow down in 
Lewiston who is a financial advisor who is helping them with 
that retirement savings.
    And if you believe the study done by a fellow who used to 
run the CBO saying, if these investment management firms that 
are running these retirement plans come under the SIFI 
designation, too-big-to-fail, it means their costs are going to 
go up to run these accounts, the rates of return of what they 
can charge are going to go down to the tune of about 25 percent 
over the long run, and so the nest egg, the retirement nest egg 
for this organic farmer and the fellow who is also working in 
the family who is making furniture are going to go down, which 
means more dependence on the government and less freedom.
    The bigger our government gets, the smaller the people get. 
And this is a real problem.
    So this, in my opinion, is not fair. Government is supposed 
to work for our people. Where is the compassion in the fourth 
branch of government, these regulators who write the rules that 
we all have to live by and our businesses have to work by?
    Ambassador Gray, you have done an awful lot of work on the 
SIFI designation, the too-big-to-fail, under the Dodd-Frank 
umbrella. And I would like to know what you think, sir, about 
an asset management firm, a pension fund investment firm that 
runs other people's money, represents no risk to the economy, 
if all of a sudden they are designated as too-big-to-fail, they 
have additional regulations, more costs, they offer less 
products for our savers, and the rates of return go down.
    How does an investment firm--how does a pension fund 
management firm that is trying to help our retirees and kids 
going to college--how do they deal with a SIFI designation? How 
do they determine if, in fact, they are ever going to be 
designated so and how do they respond?
    Mr. Gray. Of course, in many ways that is a really good 
question, the $64,000 question. The vagueness of the charter of 
much of the CFPB's business model is so unclear that you 
wouldn't know.
    There is no way a pension fund, a mutual fund, an insurance 
company can pose a systemic risk to anybody--except maybe to 
itself, but certainly not to a widespread community. And why 
that is included and why that is possible is only because the 
terms are so vague, and there is no accountability, and there 
is no court ability to say no, you can't do this. The courts 
are cut out of the key decision about whether or not there is a 
risk to the underlying economy.
    I really can't answer your question except to say that it 
is just--something hypocritical about a comment I just heard 
about the implication that we on, say, my side, our side, your 
side, are representing big business, when I have been at the 
same time criticized for only having as a plaintiff to 
challenge some of this a little teeny $270 million bank in Big 
Springs, Texas, which no one had ever heard of, and must be 
useless. And why should it carry any weight, because it hasn't 
gotten any big-bank amicus briefs filed to support it, as if 
somehow it has no legitimacy as a small bank and can only be 
legitimate if it were joined by JPMorgan as an amicus.
    I will tell you that we can't get any amicus briefs. It 
took 18 months to find Mr. Purcell, one of the great, great 
people I have met in Big Springs. Actually, I met him there; he 
has been here, and wowed this committee in testimony some 
months ago. The only reason we got him at all is because we 
were really lucky.
    But my own law firm cheering me on, ``Go. Go, Gray. Go, go, 
go, go, go.'' And I said, ``You know, I don't need your money 
but I would like a face or two just to show your face to 
show''--no, no, no, no, no, no, no, no. We are not going to 
take that risk. We are not going to--one bank examiner's 
examination can knock out a bank in 24 hours, so I think we 
will just take a back seat.
    But go to it. Go to it. You have all--you have everything 
at our back--at your back.
    Thanks a lot, old firm.
    But that is the problem. No one wants to help out in this 
because the power of the government is so intimidating. But we 
are going to prevail. We are going to prevail.
    Mr. Poliquin. Thank you very much. Let's keep pushing back 
against this law. Thank you very much.
    Chairman Hensarling. The time of the gentleman has long 
since expired.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill.
    Mr. Hill. Thank you, Mr. Chairman.
    And I thank our panel.
    I particularly want to thank Ambassador Gray. I certainly 
think of a hallmark of my career as our service on the White 
House staff for President Bush 41, and thank you. I know you 
looked back fondly this summer with the commemoration of the 
Americans with Disabilities Act that you were such an 
instrumental leader on, in having that passed in the Congress.
    Chairman Royce was talking about how the consumer 
protection rules were basically under the guidance of the 
prudential regulators, and for me that is no academic exercise, 
for I was a CEO of a consumer and commercial bank until 
December 31 of 2014, so this hearing, Mr. Chairman, is no 
academic exercise to me. I have run an institution under the 
first 5 years of Dodd-Frank, or 4\1/2\ years.
    And to me, the CFPB really was a redundant exercise, and 
let me explain why, because I never once in over 2\1/2\ decades 
of commercial banking ever saw a State or a Federal regulator 
shirk their consumer protection responsibility under Federal 
law. So I just want to repeat that at every hearing; that is 
the way I feel very, very strongly.
    And I heard today from both Mr. Green and the ranking 
member that where Dodd-Frank has gone too far, we should work 
in a bipartisan way to amend it, mollify it. I couldn't agree 
more, and I would like to thank the chairman and our bipartisan 
group who are working to take care of one of those things right 
now, which is this new HUD-1 RESPA form, the TRID form, and 
trying to get bipartisan support here in the House and the 
Senate to remove the penalties in the implementation of that 
Act.
    Mr. Cordray has refused to do that in his own authority at 
the CFPB, and we have now had to ask Congress to delay the 
possible penalties to players on that rule of the CFPB.
    And I want to side with the consumer here. Some 230,000 
Americans refinance or buy a new home every month, and they are 
going to be the one who are victimized by this confusing rule 
that didn't get implemented properly either due to a technology 
reason or a misunderstanding at a real estate brokerage or a 
title company or a bank. So I hope we can get this bill passed 
before October 3rd so that our title and commercial banks, 
mortgage bankers, and real estate agents all have some 
confidence that they can go into this new closing regime but 
not be penalized either by the Federal Government or through 
civil liability.
    And I want to thank Mr. Sherman, and certainly Mr. Pearce, 
for their help on this committee, and you, Mr. Chairman.
    We can't defend bureaucratic intransigence at the expense 
of our home-buying public.
    I love this hearing on the rule of law. It is exceptional.
    I thank the chairman. I want to echo appreciate for it.
    And I want to turn to Mr. Gray and Mr. Skeel.
    The missing man in this formation--where the airplanes fly 
over at a funeral, the missing man formation--sort of in the 
Dodd-Frank Act, the missing man is reform of the GSEs, Fannie 
Mae and Freddie Mac. Mr. Gray referenced equal treatment for 
privately--or similarly situated creditors.
    You were referring, I think, to GM in your testimony, but I 
think that might apply in the Fannie Mae and Freddie Mac 
conservatorships.
    And, Mr. Skeel, you talked about the 100 percent sweep that 
is now in place between Treasury on Fannie and Freddie, the so-
called third amendment to their conservatorship.
    It struck me that it is--that may not even have been a 
legal action, given the conservatorship statute. I would like 
both of you to address that.
    Ambassador Gray, if we could start with you?
    Mr. Gray. The actual example I was thinking of was the 
bailout of AIG, where certain creditors were treated 
differently than others, and some got paid 100 cents on the 
dollar, and others didn't. And in the Chrysler bankruptcy, the 
Indiana Pension Fund lost everything just because of the way 
the government played favorites.
    And that kind of favoritism is what is codified in the OLA 
Title II section of Dodd-Frank, and I think it is a very 
dangerous way. The old-fashioned way of doing it is the right 
way: a level playing field, everybody gets treated the same. 
And I wish we could get back to that, and I think there is 
legislation pending in the Senate, as I may have said in my 
testimony, proposed by Senator Cornyn and others, that would 
try to resurrect the historic bankruptcy principles.
    Mr. Hill. Dr. Skeel?
    Mr. Skeel. I do believe there were great problems with what 
was done in 2012. In 2008 Fannie and Freddie were taken over, 
they were put in conservatorship by the government, and they 
were left there for a period of years. And lo and behold, 
Fannie and Freddie started to make money again, and so Treasury 
changed the deal and basically made it impossible for private 
shareholders to get anything.
    I am not a constitutional law scholar, but it sure looks 
like a taking to me. There is some litigation on this. The 
plaintiffs lost one hearing, but there is some other litigation 
going on.
    The worst effect of this, in my view, is it has reduced any 
incentive for you all to do something about Fannie and Freddie. 
As long as they are sitting there in limbo and they are making 
money, there is no pressure to fix them, and Dodd-Frank did 
nothing to fix them.
    Mr. Hill. Thank you, Mr. Skeel.
    And thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    Professor Skeel, I understand that you have asked to be 
excused at this time, so we thank you for your testimony and 
you are excused.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chairman, and thanks for holding 
this hearing.
    I appreciate all the witnesses being here this morning and 
sharing with us the benefit of your expertise.
    As we have been reminded today, Dodd-Frank was drafted in 
response to the financial crisis of 2008 and 2009, during which 
the Federal Government bailed out a large number of financial 
firms at taxpayer expense. At the time of enactment, the law 
was 2,300 pages which required Federal regulators to create 
more than 400 new rules.
    Forgetting for a moment that almost 40 percent of the rules 
needed to implement the 2,300 pages have yet to be finalized, 
my colleagues on the other side of the aisle argue that real 
GDP growth has rebounded since Dodd-Frank was signed into law. 
They say that despite the fact that our average GDP growth 
since 2010 is about 2 percent.
    Now, forgetting for a moment also that if we look back in 
history at the history of economic recoveries after major 
economic crisis in this county, the rebound has been much 
stronger, I want to ask--and I guess I will ask Professor 
Zywicki--my understanding is the way we calculate GDP is we 
include government spending in that number.
    Mr. Zywicki. That is correct, yes.
    Mr. Emmer. And my understanding also is that government 
spending accounts for about 2 percent of that calculation--
close to it, anyway.
    Mr. Zywicki. I would have to take your word for that.
    Mr. Emmer. All right. If that is true, regardless of the 
number, government spending is included. It doesn't give us an 
accurate view as to how our private economy or our private 
economic growth has occurred since 2010. Isn't that fair, 
Professor?
    Mr. Zywicki. That is absolutely right, and pretty much all 
economists agree on that.
    Mr. Emmer. And while there are many factors, including 
excessive regulation beyond the excessive and vague regulation 
created by Dodd-Frank and an overly burdensome tax system that 
contributes to the lack of private economic growth in this 
country, I have to say I am beyond surprised to hear Mr. Gupta 
say that an unaccountable, Soviet-style organization ruled by 
one appointed bureaucrat who isn't subject to judicial review 
should be considered the ``crown jewel'' of the Dodd-Frank 
experience.
    Based on the facts and information I have received directly 
from my constituents, by the way--both involved in the 
financial industry providing opportunity, and the consumers who 
are looking for capital to buy cars, buy homes, to start 
businesses and create new opportunities--to suggest that there 
is absolutely no correlation between the actions of the 
Consumer Finance Protection Bureau and the problems faced by 
our community banks, credit unions, and, yes, our constituents, 
the consumers, who are losing access to the capital necessary 
to do these things I just described, frankly is out of touch 
with the reality that those of us who have been sent here to 
represent these folks--our experience outside of this academic 
bubble known as Washington, D.C.
    In addition to all of the other problems with Dodd-Frank, 
we have an unelected, unaccountable political theocracy called 
the CFPB that is directly impacting the freedom of Americans to 
pursue their dreams.
    Small banks are eliminating or planning to discontinue 
certain products and services, including residential mortgages, 
mortgage servicing, home equity lines of credit, and overdraft 
protection--just some of the most obvious ones. And nearly 64 
percent of small banks that have been surveyed are actually 
making changes to the nature, mix, and volume of mortgage 
products as a direct result of Dodd-Frank and the dictates of 
the CFPB.
    Also, as a direct result of the substantial additional 
compliance costs required by Dodd-Frank, we are losing smaller 
banks and credit unions at an alarming pace, as they either 
cease to exist or are absorbed into larger financial 
institutions.
    And now the CFPB, that some seem to think is accountable 
and responsive to the needs of consumers and of this country, 
is going to eliminate credit access for those with little or no 
other reasonable option, and it is going to violate the 
principle of Federalism by invading the States with another 
misguided top-down Washington approach when it comes to payday 
lending and other opportunities that are available.
    I really hope the members of this committee and Members of 
Congress, on both sides of the aisle, can find a way to correct 
the mistakes of Dodd-Frank and make the CFPB truly accountable 
before it causes even more serious damage to this country and, 
frankly, my constituents.
    Thank you, Mr. Chairman. I yield back.
    Mr. Gupta. If I can, I just want to be on the record--
    Chairman Hensarling. Time--
    Mr. Gupta. I am opposed to Soviet-style dictatorships and 
political theocracies. I wanted to clarify that--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Williams.
    Mr. Williams. Thank you, Mr. Chairman.
    And I would like to thank all of you for being here today 
and for your testimony, and also say hello to my friend, 
Ambassador Gray.
    It is good to see you, and thank you for your service to 
our country.
    This whole dialogue is really personal to me. I am a small-
business owner. I have been in business for 44 years, a family 
business since 1939.
    And in full disclosure, I am one of ``them''--I am a car 
dealer. And so when you start talking about Dodd-Frank, you 
start talking about the CFPB, and you start talking Operation 
Choke Point, it gets personal with me.
    So my first question to you, Mr. Zywicki is, in your 
testimony you stated, ``Lacking the authority to reach the auto 
dealers, the CFPB came up with a creative solution--it decided 
to hold the financial institutions--the indirect lenders, in 
other words--responsible for any alleged discriminatory lending 
patterns by the auto dealers themselves.''
    You and I spoke about this before during your last 
testimony before this committee, but I think it bears me 
repeating.
    We are currently seeing this play out with Ally Financial, 
who, although it has settled--I quote, ``settled''--with the 
CFPB, has yet to actually pay out any funds to those who were 
discriminated against. In fact, the process for how funds from 
the settlement are being distributed is somewhat unknown and 
certainly definitely vague.
    Now, you also highlighted the CFPB's allegations of 
discrimination by auto dealers as examples of regulators 
exceeding their bounds of the rule of law in order to force 
banks to do their bidding and limit consumer choice.
    So, question: Aren't legal businesses entitled to due 
process, and should they, as in the case of auto dealers like 
me, understand that the process is being used to back up 
alleged discrimination?
    Mr. Zywicki. That is exactly what is going on here is by 
evading anything that resembles the rule of law--there is no 
notice and comment rulemaking here; there is no study of the 
impact on consumers. Basically, what they have done is in this 
sort of nudge-nudge, wink-wink, backroom way in which 
Ambassador Gray indicated that they can push around the banks 
now because they are so interwoven with them, they are just 
imposing this rule on the auto dealers, and the auto dealers 
have no say in it, they have no opportunity to object to it.
    And I think this is just an example of an out-of-control 
entity conscripting private financial institutions to do their 
bidding and to go after people that they don't like. And it is 
exactly like Operation Choke Point in that way.
    Mr. Williams. And what they don't understand is the 
consumer tells us if we are doing a good job or a bad job, and 
the government doesn't understand that.
    Mr. Zywicki. That is right. Yes.
    And another thing with the auto dealers is they don't 
understand that you are selling cars, not loans, right? The 
financing and selling of the cars goes together.
    It is a very complicated process, and they are just so 
obsessed with this one little part of it--of a larger 
transaction that those are the kind of--that is why we have 
notice and comment rulemaking, right, so you can point out to 
somebody, ``You don't know what you are doing,'' right? It is 
an opportunity to basically explain the complexity of this 
transaction and explain the impact on consumers, and this is 
what happens when we remake the entire car dealer industry with 
a five-page informal guidance.
    Mr. Williams. With that being said, we both mentioned 
Operation Choke Point. How does Operation Choke Point undermine 
the rule of law, in your opinion?
    Mr. Zywicki. Operation Choke Point is one of the most 
frightening government initiatives I have seen, and one of the 
things--we have talked about the rule of law--that is awful 
about all this is they took an idea that was not necessarily 
unsound, but what we have seen again and again and again over 
the past several years is just the Executive Branch pushing 
things beyond any sort of reason, right?
    And that is the case here, which is it is just blatant 
targeting of companies and industries that they don't like, and 
using this vague notion of reputational risk while there are 
other equally plausible targets that they are not going after 
purely because of political and ideological reasons.
    Mr. Williams. I think most would agree competition and 
consumers should drive the economy, not these regulations we 
see from the Federal Government.
    Mr. Zywicki. That is right. And that is what is awful about 
Dodd-Frank is that Dodd-Frank now basically is picking and 
choosing the winners and losers among banks based on who can 
best arbitrage, pull strings, and bear the regulatory burden, 
rather than the playing field of fair and free competition and 
markets.
    And what it is doing is making the big banks bigger, 
killing the small banks, getting rid of innovation and consumer 
choice, and supplanting marketplace competition with the heavy 
hand of bureaucratic central planning.
    Mr. Williams. And in the end, the consumer is the one who 
is affected.
    Mr. Zywicki. That is right. They know best, not Washington.
    Mr. Williams. In my short period of time, Dr. Spalding, 
quickly, Operation Choke Point--if you had to describe it to 
the Nation's Founders, what do you think their reaction would 
be?
    Mr. Spalding. The problem is that Cass Sunstein has this 
theory of nudging things along; this is a shove, all right, so 
push comes to shove. The problem is that this is government 
actively forcing people to do things and directing their 
behavior. It clearly violates the whole concept of self-
government.
    Mr. Williams. Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Utah, Mrs. 
Love.
    Mrs. Love. Thank you, Mr. Chairman.
    Mr. Zywicki--is that--did I pronounce that correctly?
    Mr. Zywicki. That is great.
    Mrs. Love. Okay, great.
    We have heard a lot today about the centralization of power 
and how it has unleashed arbitrary regulatory discretion and 
empowered interest groups beyond any time in American history. 
Ultimately, this trend has succeeded in taking power out of the 
hands of people, and that is what I want to concentrate my 
questions on today.
    A couple of things that you mentioned in your testimony are 
particularly concerning to me and my constituents--for example, 
the fact that the CFPB is data-mining American families' 
personal financial data. Obviously, my constituents don't want 
their credit card purchases to be tracked by Federal 
Government. Do you know what the CFPB is collecting this data 
for?
    Mr. Zywicki. They have never explained what they are 
collecting it for, or why they need so much of it, or why they 
couldn't do with less. A while back, economist Thomas Stratmann 
submitted a letter where he estimated that the CFPB is 
collecting 70,000 percent more credit card accounts than they 
need for any legitimate regulatory purpose.
    Mrs. Love. What was that percentage?
    Mr. Zywicki. 70,000 percent, in order to get statistical 
significance, as an economist would say. And so, there may be a 
legitimate regulatory purpose, but is there a legitimate 
regulatory purpose why they need 991 million credit card 
accounts instead of 500 million or 2 million?
    The answer is ``no.'' They could do a couple million at 
most is all that is necessary.
    Mrs. Love. Okay.
    Do you have an answer for that, Mr. Gupta, as to why they 
are collecting this data--
    Mr. Gupta. I think--
    Mrs. Love. --so much data?
    Mr. Gupta. --there is so much misinformation about this 
issue that has been put out.
    Mrs. Love. Okay.
    Mr. Gupta. What the CFPB is doing is really no different 
from any of the existing regulators that all have been 
collecting similar data. This is--
    Mrs. Love. So you are actually saying that pretty much all 
of the--
    Mr. Gupta. The prudential regulators, the ones that 
existed--
    Mrs. Love. All of the regulators--
    Mr. Gupta. --before Dodd-Frank. And this is not 
transaction-level data; it is account-level data. It is 
anonymized. It doesn't have information about American 
citizens.
    The reason to collect this data is not to spy on people or 
to collect--
    Mrs. Love. So, what is it for?
    Mr. Gupta. --information about individuals. It is to get an 
aggregate picture of the market. We should want regulators to 
understand what is happening in the market.
    Mrs. Love. Would you assess that most consumers actually 
know that this data is being collected?
    Mr. Gupta. This is data that mostly is already public. This 
is data about--
    Mrs. Love. Okay.
    Mr. Gupta. --who owns automobiles, who owns--
    Mrs. Love. So are you assessing--are you saying that most 
constituents--if I put this video up today, that most of my 
constituents, most of America knows that all of this data is 
actually being collected?
    Mr. Gupta. I think most of your constituents would know 
that mortgages are available in public land records--
    Mrs. Love. Okay. Wait a minute. Hang on a second. Hang on 
one second. This is the problem.
    Where you say most of my constituents would know, that is 
the problem with Washington. You don't know what my 
constituents think.
    Every time I have had about five town hall meetings in the 
last week of August, not one constituent knew that their 
financial data was being collected.
    What responsibility do you think the CFPB has to make sure 
that they know that their financial data is actually being 
collected, and what right do they have to actually collect that 
data?
    Mr. Gupta. I think the Bureau should be completely 
transparent about it.
    Mrs. Love. I agree.
    Mr. Gupta. And I think they have been. And I think--what I 
was saying earlier is that I think your constituents would know 
that mortgages--that who owns what house and the mortgage data, 
that is available in public land records, and the same thing 
with automobile ownership records. I think they would 
understand that the DMV has that information about them.
    The information that the CFPB is collecting is primarily 
that information that is already public. And to the extent it 
is information from financial institutions, it is anonymized, 
it is not transaction-level data--
    Mrs. Love. And again, I still have heard no reason as to 
why this information is being collected, and I am telling you 
right now I think it is the responsibility of the CFPB to stop 
collecting this data or at least tell the American public why 
this is being collected.
    Another question I wanted to ask is that we mentioned that 
the CFPB's intrusion on the business of auto dealers has, 
according to recent reports, resulted in higher interest rates 
for car loans for consumers.
    Again, please explain to me, Mr. Zywicki, how that actually 
helps the poorest among us and those who are struggling to make 
ends meet?
    Mr. Zywicki. Obviously it doesn't, and this is what happens 
when you make a regulation--or whatever this is; you can't call 
it a regulation because it is not--in the back rooms in the 
ways that they are doing here.
    Just one note on the data-mining operation, as this 
committee will know, Director Cordray was once asked, ``Why 
don't you notify consumers and give them a chance to opt out 
from having this information sent to the CFPB?'' And he said, 
``Because nobody would participate and so the program wouldn't 
work.''
    So I think to say that people kind of implicitly understand 
it isn't very accurate.
    Mrs. Love. My time is very short. I have 6 seconds.
    But I just want to make a note and let every American who 
is watching this right now know that their information is 
actually being mined. Their financial information is being 
mined, and the CFPB has yet to tell us why it is being mined, 
why they need this information.
    I again would like to make sure that we let the American 
public know that this government has gotten so big that we 
cannot navigate through that. They have no idea what people are 
collecting, why they are collecting it, and I think that this 
is something that every American should know, and I just want 
to make sure that we put that on record.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman. Thank you for holding 
this hearing examining the Dodd-Frank Act 5 years later, are we 
more free, and especially holding the hearing on Constitution 
Day, where we can examine whether or not the Dodd-Frank law is 
consistent with the Constitution's separation of powers and the 
rule of law enshrined in the Constitution.
    In particular, I think it is timely to make this assessment 
or examination into the constitutionality of the Dodd-Frank law 
in light of the fact that the D.C. Circuit in July has revived 
a constitutional challenge to the structure of the agency and 
conferred a standing to a small $340 million community bank in 
Texas.
    But I would like to first focus on this issue of the 
nondelegation doctrine. Mr. Gupta, in his testimony, dismissed 
the arguments against the constitutionality of the agency, 
saying that these were merely a thin-veiled attempt to breathe 
life into the nondelegation doctrine, which some of us believe 
actually is a pretty profound and important provision in 
Article I, Section 1 of the Constitution: ``All legislative 
powers herein granted shall be vested in a Congress of the 
United States''.
    So I would like to ask Ambassador Gray and Dr. Spalding, as 
students of the Constitution, what the word ``all'' means, and 
whether or not ``all'' implies that Congress should be 
permitted to delegate legislative power to another branch of 
government.
    Mr. Gray. I believe, obviously, it clearly does not. My 
colleague to my left thinks that the nondelegation doctrine was 
buried in 1937 with the sick chicken case, the Schechter 
Poultry case. Cass Sunstein, the great Harvard-law Poobah, 
administrative-law Poobah, has once said nondelegation doctrine 
had 1 good year and 111 bad years.
    But in fairness, there haven't been many statutes--or any 
statutes--thrown out since Schechter, but it has led to the 
creation of a very powerful doctrine of construction called the 
nondelegation canon of construction, and the courts have been 
using it to narrow statutes to avoid the problems of too much 
delegation. And this, I think, is something to bear very much 
in mind.
    One of the recent cases, Whitman v. American Trucking, or 
vise-versa--Justice Scalia looked as though on the surface he 
was throwing out a nondelegation challenge but, in fact, he 
accepted the challenge, ruled that it was valid to the extent 
of saying that an agency can't act unless it has a significant 
risk that it is addressing. And that is a lot of what the CFPB 
does. It doesn't appear to be addressing any significant risk 
of anything.
    Mr. Barr. So if I may just jump in here, when you look at 
the open-ended delegation and the unfettered discretion that 
Congress delegated these authorities to the CFPB, and when you 
see guidance that circumvents the Administrative Procedure Act 
(APA), that doesn't involve notice and comment rulemaking, 
where the agency is not listening to congressional feedback--
bipartisan congressional feedback--do you believe that there is 
a nondelegation doctrine problem with the structure of the 
CFPB?
    Mr. Gray. Absolutely, and I have said so. The legislation 
says that the Congress has to defer to what the agency rules, 
but the Whitman case says equally clearly that in a case of 
nondelegation challenge, the agency has no say in--
    Mr. Barr. In fact, you have circumstances where the CFPB is 
specifically circumventing the expressed intent of Congress by 
indirectly regulating auto dealers--not lenders, auto dealers--
through the guidance that doesn't even involve notice and 
comment rulemaking.
    Dr. Spalding, did you want to just quickly jump in on that?
    Mr. Spalding. No, I think--I completely agree with 
Ambassador Gray.
    The thing I was going to point out is the underlying 
problem here is not nondelegation per se; it is a complete 
breakdown of the separation of powers. Just because the courts 
are unable to see the obvious, which is this nondelegation has 
really gone into a new form, does not mean Congress should not 
and must not protect its own legislative powers.
    These regulatory agencies, this one in particular, are 
clearly exercising your lawmaking powers that ``all'' means all 
and they must stay in article one.
    Mr. Barr. Professor Zywicki, really quickly, Mr. Gupta says 
that the CFPB comes before Congress and that the CFPB is bound 
by the APA.
    To me, that is like saying King George is accountable to 
Thomas Paine simply because Thomas Paine is providing feedback 
to King George. Can you comment on Mr. Gupta's argument that 
the Bureau is, in fact, accountable?
    Mr. Zywicki. I think the Constitution has this right. 
Congress has the power of the purse, and the Executive Branch--
you have to be accountable somewhere in a real way, and they 
are not.
    Mr. Barr. Thank you.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    There are no other Members in the queue.
    Thus, I would like to thank all of our witnesses for their 
testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 12:55 p.m., the hearing was adjourned.]




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