[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A LEGISLATIVE PROPOSAL TO CREATE
HOPE AND OPPORTUNITY FOR INVESTORS,
CONSUMERS, AND ENTREPRENEURS-DAY 2
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
APRIL 28, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-19
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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
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
April 28, 2017............................................... 1
Appendix:
April 28, 2017............................................... 51
WITNESSES
Friday, April 28, 2017
Bertsch, Ken, Executive Director, Council of Institutional
Investors...................................................... 17
Chopra, Rohit, Senior Fellow, Consumer Federation of America..... 19
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia
University Law SchooL.......................................... 8
Edelman, Sarah, Director, Housing Policy, Center for American
Progress....................................................... 20
Gable, Reverend Willie, Jr., Pastor, Progressive Baptist Church,
New Orleans, LA; and Chair, Housing and Economic Development
Commission, National Baptist Convention USA, Inc............... 6
Jackson, Amanda, Organizing and Outreach Manager, Americans for
Financial Reform............................................... 15
Klemmer, Corey, Corporate Research Analyst, Office of Investment,
AFL-CIO........................................................ 5
Liner, Emily, Senior Policy Advisor, Third Way................... 13
Lubin, Melanie Senter, Maryland Securities Commissioner, on
behalf of the North American Securities Administrators
Association, Inc............................................... 11
Randhava, Rob, Senior Counsel, Leadership Conference on Civil and
Human Rights................................................... 10
Warren, Hon. Elizabeth, a United States Senator from the State of
Massachusetts.................................................. 3
APPENDIX
Prepared statements:
Bertsch, Ken................................................. 52
Coffee, John C., Jr.......................................... 73
Gable, Reverend Willie, Jr................................... 81
Jackson, Amanda.............................................. 89
Liner, Emily................................................. 91
Lubin, Melanie Senter........................................ 93
Randhava, Rob................................................ 115
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
``Irish-Americans Outraged by Congressional Proposal to Kill
Shareholders' Resolutions,'' dated April 18, 2017, Irish
National Caucus, Inc....................................... 117
Statement of New York City Comptroller Scott M. Stringer on
the April 19th Discussion Draft of the Financial CHOICE Act
of 2017, dated April 25, 2017.............................. 120
Waters, Hon. Maxine:
Written statement of the National Whistleblower Center....... 123
A LEGISLATIVE PROPOSAL TO CREATE
HOPE AND OPPORTUNITY FOR INVESTORS,
CONSUMERS, AND ENTREPRENEURS--DAY 2
----------
Friday, April 28, 2017
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:20 a.m., in
room 2128, Rayburn House Office Building, Hon. Trey
Hollingsworth presiding.
Members present: Representatives Messer, Williams, Hill,
Tenney, Hollingsworth; Waters, Maloney, Velazquez, Sherman,
Meeks, Capuano, Green, Cleaver, Moore, Ellison, Perlmutter,
Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck, Vargas,
Gottheimer, Gonzalez, Crist, and Kihuen.
Mr. Hollingsworth [presiding]. Good morning. The Committee
on Financial Services will come to order. Without objection,
the Chair is authorized to declare a recess of the committee at
any time.
This is a continuation of the hearing entitled, ``A
Legislative Proposal to Create Hope and Opportunity for
Investors, Consumers, and Entrepreneurs.''
The Chair now recognizes the ranking member of the
committee, the gentlelady from California, Ms. Waters, for 4
minutes for an opening statement.
Ms. Waters. Thank you, Mr. Chairman.
And thank you to the witnesses for joining us today,
especially Senator Elizabeth Warren, who created the idea of
the Consumer Financial Protection Bureau (CFPB) and gave the
force behind it to make it a reality. And later, she helped to
organize the CFPB. We were all supportive of her becoming the
Director, but thank God she is now the Senator from
Massachusetts.
Earlier this week the Majority held a hearing during which
their witnesses shared so many alternative facts, that I was
sure they must be living in an alternative reality.
Today, Democrats are going to set the record straight. We
have asked for this second hearing to hear from experts and
well-informed witnesses who know, understand, and appreciate
the importance of the Dodd-Frank Wall Street Reform and
Consumer Protection Act and who can point out the dangers of
the ``wrong choice act.'' The chairman's wrong choice act
destroys Wall Street reform, guts the Consumer Financial
Protection Bureau, and returns us to the financial system that
allowed risky and predatory Wall Street practices and products
to crash our economy.
We all remember the dark days of the financial crisis and
the Great Recession, the 11 million Americans who lost their
homes to foreclosure, the $13 trillion in household wealth that
went up in thin air, the 10 percent unemployment rate, and the
many retirements deferred.
This bill would erase all of the progress we have made
since then and put us on the road back to economic ruin. It is
not just a bad bill, it is an expansively bad bill with
repercussions for our whole country.
Astonishingly, the chairman had only planned a single
hearing on the wrong choice act. Democrats held 41 hearings in
this committee to consider the House version of Dodd-Frank
before its passage. It was a transparent, open process that
carefully considered a variety of perspectives to ensure a
sensible, well-considered set of reforms. The Republican
approach stands in stark contrast.
The fact that the Majority planned to hold just one hearing
before rushing a nearly 600-page bill to markup sure makes it
look as if they were trying to hide something. It must be that
they realized that the optics of this Wall Street giveaway bill
were pretty bad and hoped the American people were not paying
attention.
I am going to yield the balance of my time to Mr. Kildee.
Mr. Kildee. Thank you to the ranking member for yielding
and for arranging for this really important hearing. And I
welcome our witnesses, all of them, particularly Senator
Warren. I appreciate all the great work that you have done on
this particular subject.
This act, the Financial CHOICE Act, kills so many of the
important Wall Street reforms that this Congress enacted as a
result of the crisis and, in fact, takes us back to a time when
policies allowed and, in fact, policy encouraged banking
practices that wrecked the economy and caused millions of
Americans to lose their homes. That was the focus of my work
before I came to Congress, so I have seen this firsthand.
Policy is what caused that crisis. It created an
environment that allowed institutions to take advantage of
families, take advantage of individuals, and cause them to lose
everything they have worked for. And what I saw in the work
that I did in my hometown of Flint, Michigan, and all around
the country was the consequence of that policy. A single
abandoned home as a result of a foreclosure is like a
contagious disease. It infects an entire community, it reduces
the value of every home, and it wrecks whole neighborhoods.
What this Financial CHOICE Act does would be to reinstate
the very policies that precipitated that crisis and all that
pain, and we need to fight it in every way that we can. And I
thank you for your willingness to join in that battle.
With that, I yield back.
Mr. Hollingsworth. The gentlelady's time has expired, and
the gentleman yields back.
Today, for our first panel, the committee will receive the
testimony of Senator Elizabeth Warren. Senator Warren is a
United States Senator representing the Commonwealth of
Massachusetts. Before being elected to Congress, Senator Warren
was the Leo Gottlieb Professor of Law at Harvard Law School.
She is a graduate of the University of Houston and the Rutgers
School of Law.
Senator, you will be recognized for 5 minutes to give an
oral presentation of your testimony.
Senator Warren, you are now recognized.
STATEMENT OF THE HONORABLE ELIZABETH WARREN, A UNITED STATES
SENATOR FROM THE STATE OF MASSACHUSETTS
Senator Warren. Thank you, Mr. Chairman. And thank you,
Ranking Member Waters, for holding this hearing and for giving
me a chance to speak about the CHOICE Act.
Let me be blunt. This is a 589-page insult to working
families. It would immediately increase the cost of mortgages,
student loans, and small businesses. This bill would let big
banks and payday lenders and financial advisers go back to
cheating people, with no accountability, and it would unleash
the same behavior on Wall Street that led to the 2008 financial
crisis.
When I read this bill, I think why, why, just 8 years after
the worst financial crisis in more than 70 years, are
Republicans lining up to roll back the rules on Wall Street and
make it easier for financial firms to cheat people? Why, just 6
months after the American people elected a Republican
President, who claimed he would take on Wall Street and drain
the swamp, are Republicans in Congress moving in literally the
opposite direction? What exactly is the problem that they think
they are trying to solve?
So here are the arguments I usually hear. Our new rules
have made it too hard for banks to lend money. Really? Check
the facts. Access to consumer credit and small business lending
is at historically high levels, and loan growth at community
banks is up even more than at big banks.
Here is another one: We have made compliance so difficult
that banks just can't operate. Nope. That one's not true
either. Banks of all sizes posted record profits last quarter,
with profits at community banks up even more than at the big
banks.
And here is the last argument I hear. We are making it hard
for our bigger banks to compete internationally. Wrong again.
Our big banks are blowing away their foreign competitors.
This bill doesn't solve a single real problem with the
economy or with our financial system, but it does make some big
time lobbyists happy.
I have heard the Democrats on this committee calling this
bill the wrong choice act, and, boy, is that true. It is the
wrong choice. Wrong choice? No. It is an immoral choice. It is
about throwing working families under the bus so that Congress
can do the bidding of Wall Street.
Shortly after the financial crisis hit, I remember going to
Clark County, Nevada, for a hearing to listen to just a few of
the millions of people whose lives were being torn apart by the
crisis. A man named Mr. Estrada showed up to tell his story. He
and his wife both worked hard, and they had stretched their
budget to buy a house that was right across the street from a
really good school for his two little girls, but the Estradas
had a mortgage with an ugly surprise buried in the fine print.
When the payments jumped, they fell behind, and Mr. Estrada and
his wife talked to the bank over and over, and they thought
they had arranged a modification; then, poof, the house was
sold at auction, and the bank gave his family 14 days to move
out, to move those two little girls out of their home.
Mr. Estrada told us that after they got the notice, his 6-
year-old came home with a sheet of paper with all her friends'
names on it, and she told him that this was her list of the
people who were going to miss her, because her family was going
to have to move. He said he told his daughter, ``I don't care
if we have to live in a van. You are going to be able to go to
the school.''
And as he told this story, Mr. Estrada, a big man, stood
there in front of a room full of strangers and tried not to
cry.
Now, that is a story that was shared by Americans all
across the country, people in each of the districts that you
represent.
We built the Consumer Financial Protection Bureau and the
rest of Dodd-Frank so that Mr. Estrada and other families like
his wouldn't get cheated and wouldn't face that kind of pain
again.
You know, some banks like to say, ``We didn't cause the
crash,'' but let's be clear, Mr. Estrada didn't cause the crash
either, but, boy, did he pay a price for it. We have an
obligation, a moral obligation to make sure that kind of crisis
never happens again in this country; that is why voters sent us
to Washington, to work for them, not for a bunch of high-priced
Wall Street lobbyists.
I hope you will think hard about Mr. Estrada and about the
millions of people like him when you consider this legislation.
Thank you again for inviting me here to testify today.
Mr. Hollingsworth. Senator Warren, thank you for your
testimony. Pursuant to customary practice for Members of
Congress, you are excused, and the second witness panel will be
seated.
Senator Warren. Thank you.
[recess]
Mr. Hollingsworth. The committee will come to order.
We now turn to our second panel of witnesses, whom, in the
interests of time, I will introduce briefly.
Corey Klemmer, corporate research analyst, Office of
Investment, AFL-CIO; Reverend Willie Gable, Pastor, National
Baptist Convention, USA; John Coffee, Adolf A. Berle Professor
of Law, Columbia University; Rob Randhava, senior counsel,
Leadership Conference on Civil and Human Rights; Melanie Lubin,
Maryland Securities Commissioner, on behalf of the North
American Securities Administrators Association.
Emily Liner, Senior Policy Advisor, Economic Program, Third
Way; Amanda Jackson, outreach coordinator, Americans for
Financial Reform; Ken Bertsch, executive director, Council of
Institutional Investors; Sarah Edelman, director, housing
policy, Center for American Progress; and Rohit Chopra, senior
fellow, Consumer Federation of America.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection, any
written statement that you may have will be made a part of the
record.
Ms. Klemmer, you are now recognized.
STATEMENT OF COREY KLEMMER, CORPORATE RESEARCH ANALYST, OFFICE
OF INVESTMENT, AFL-CIO
Ms. Klemmer. Good morning. As you said, my name is Corey
Klemmer. I am here on behalf of the AFL-CIO and our over 12\1/
2\ million members. I thank you for the opportunity to address
the committee, but I wish it were under different
circumstances.
This bill is nothing short of a complete attack on American
workers. U.S. workers are the U.S. economy. We provide the
labor that drives productivity, we are the consumers who
provide demand, and as retirement savers, we are significant
investors.
The economy has not been great to us. Real wages have been
stagnant for decades, while prices continue to rise. After
wildly speculative and unregulated financial activity brought
us the collapse of 2008, working Americans paid the price,
losing millions of jobs, millions of homes, and trillions in
retirement assets.
Today, workers continue to recover slowly, while the
country has made modest but vital progress in implementing
commonsense reforms. The financial actors who got rich driving
the economy to collapse have gotten tired of playing by the
rules and would like to return to the casino of, ``heads, I
win; tails, you lose,'' and this act aims to deliver just that.
The level of Orwellian double speak is remarkable in this
bill. The title stands for creating hope and opportunity for
investors, consumers, and entrepreneurs, while the act
simultaneously seeks to eviscerate the rights and protections
and economic stability on which each of those groups depend.
First, investors need information and faith in the markets.
U.S. capital markets are attractive because they have both: a
reliable system of disclosure, however limited; and a robust
and mature legal framework that has been in place in some cases
for nearly a century. Yet, this act undoes some of the most
fundamental components of those structures. It also essentially
undoes the fiduciary rule, which requires financial actors to
act in the interests of their clients, and would save
retirement savers an estimated $17 billion a year.
It also, incredibly, removes the reporting requirements for
private equity, which in the short time that they have been
required have uncovered incredible and significant fraud and
improper fees. All of this represents less accountability and
less transparency in our markets.
Second, the act would expose consumers to risky and
complicated financial products without warning, blame consumers
who are preyed upon by financial actors exploiting
informational and power asymmetries, and stop the government
from overseeing or regulating these transactions.
I will leave it to the other panelists to get into the
details, but suffice it to say, for all the talk of
accountability, the act explicitly seeks to undermine the
tangible successes in transparency and accountability brought
about since 2008.
Finally, the act attacks working Americans and
entrepreneurs, for that matter, by threatening financial
stability and effectively preventing government from exercising
essential control or oversight of the industry that took our
economy to the brink of complete failure. It enables Wall
Street to do precisely the things that brought about the
crisis: speculating with federally-insured deposits; rewarding
risk-taking executives with lavish bonuses; facilitating the
unregulated flow of products that caused contagion; and further
enabling the consolidation of too-big-to-fail institutions,
just to name a few things.
It also decimates the role of financial regulatory bodies,
introducing the dysfunction of Congress and the politics of the
appropriation process into independent and executive agencies.
For example, under the act, the Federal Reserve would lose one
of its most important tools in fulfilling its duel mandate to
promote full employment and stable prices: setting interest
rates.
By tying interest rates to a version of the Taylor Rule,
the act would have rates set mechanically, limiting the ability
of the Fed to respond dynamically to changing circumstances.
According to estimates from the Minneapolis Fed, had this rule
been in place during the crisis, it would have resulted in the
loss of an additional 2.5 million jobs.
If 2008 should have taught us anything, it is that a blind
fidelity to an elegant theory or formula to the exclusion of
evidence and common sense is not good for markets and it is not
good for people. Financial markets are not linear or static,
and they do not conform to formulas no matter how sophisticated
or clever. Markets are complex and dynamic ecosystems that
require high-level analysis and thoughtful governance. The
total abdication of control to the markets, as advocated for in
this bill, is its own decision. It is a failure of governance
and it is a failure to all Americans.
Thank you, and I will be happy to answer any questions
later.
Mr. Hollingsworth. Reverend Gable, you are now recognized.
STATEMENT OF REVEREND WILLIE GABLE, JR., PASTOR, PROGRESSIVE
BAPTIST CHURCH, NEW ORLEANS, LA; AND CHAIR, HOUSING AND
ECONOMIC DEVELOPMENT COMMISSION, NATIONAL BAPTIST CONVENTION
USA, INC.
Rev. Gable. Thank you, Mr. Chairman, and Ranking Member
Waters. Thank you for inviting me and the other panelists here.
I am Reverend Willie Gable, Junior, and I serve as Pastor
of the Progressive Baptist Church in New Orleans, Louisiana. My
congregation is a member of the National Baptist Convention,
USA, Inc., the Nation's largest predominantly African American
religious denomination.
I am also the Chair of the Housing and Economic Development
Commission of the National Baptist Convention. This
commission's mission is to provide affordable housing for low-
and moderate-income persons, particularly senior citizens and
the disabled, allowing them to live in a place they can call
home. Over 20 years, the commission has developed over 1,000
homes in 30 housing sites in 14 States. I also serve as the co-
Chair of the Faith and Credit Roundtable, and I am a member of
the Faith for Just Lending Coalition.
I am here today before you to discuss the utter devastation
that predatory financial practices have wrought on my community
and on communities across this Nation, and also to talk about
the safer market we have now that newly implemented and
reasonable CFPB rules are coming into place. I also want to
talk about the desperate need for further regulatory actions to
weed out the abhorrent financial abuses in other product areas
that continue to this day.
The CHOICE Act, unfortunately, would take us back, when we
desperately need to continue to move forward. The CHOICE Act
contains many dangerous provisions, I believe, that would take
us back to the unchecked practices that caused the Great
Recession of 2008, but today, I will specifically address a
provision in the bill that would bar the Consumer Financial
Protection Bureau (CFPB) from regulating payday lenders and car
title lenders.
These triple digit, unaffordable payday, car title, and
high-cost installment loans dig borrowers into a deeper hole of
debt than they were when they began. As these types of loans
are specifically aimed at low-income communities and
communities of color, it is imperative, I believe, that we
support the CFPB's efforts to put an end to this predatory
practice on poverty. To be true about it, it is no more than
legalized loan sharking and it is a way of pimping the poor for
a profit.
In my home State of Louisiana, payday lending makes loans
to 57,000 Louisianans each year. In my community, we often
encounter elderly individuals who have taken out payday loans.
The younger family members often don't learn about it until
they are caught up in the deep trap. And it is not surprising,
because payday loans are considered shameful, or kept in
secret, and many individuals feel shame about it.
Also in my State, and certainly in others, there are more
than 4 times as many payday loan storefronts as McDonalds, and
for some strange reason, they concentrate themselves in African
American communities.
Now, I do not believe that this is an indication that
people need or desire payday loans in our communities. The most
common reason people need a payday loan is because of a
specific crisis that occurs. It is not to buy flat screen TVs,
but because an emergency comes up. But what these loans do is
pull them into a cycle, by design, to so-called demand that
generates and feeds itself. It is an intentional exploitation
of the desperate.
Just in our congregation, I had a member who came to me and
told me that her mother, who was in the precursor areas of
Alzheimer's, had four payday loans. She is in the early stages
of Alzheimer's, and yet they preyed on her, and we have to work
with that daughter to get her mother out of those loans. She is
just one example, and yet we have benevolence funds, but we are
underwriting payday lenders, because members of our
congregation are too ashamed to let us know that they have a
payday loan, they bring us a copy of their utility bill. And so
we are not saying that we don't want to help, but we are not
certainly going to undergird them.
In 2015, a diverse group of faith organizations formally
came together to establish Faith for Just Lending, a national
coalition that shares the belief that scripture speaks to the
problem of predatory lending. Our coalition condemns usury and
exploitation of the financially vulnerable. Fortunately, the
Consumer Protection Bureau also works to prevent these
deceptive traps of banks, payday lending, credit cards, and
debt collection, and many other financial product services. We
support the work that they are doing.
And I look forward to answering any other questions that
you may have.
[The prepared statement of Reverend Gable can be found on
page 81 of the appendix.]
Mr. Hollingsworth. Professor Coffee, you are now
recognized.
STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF
LAW, COLUMBIA UNIVERSITY LAW SCHOOL
Mr. Coffee. Thank you, Mr. Chairman, Ranking Member Waters,
and members of the committee.
Time is short, and everybody wants to talk, so I am going
to use a style that all law professors know as the ``bikini''
style of law teaching. Under the bikini style, you cover the
critical points, but only just barely.
And with that preface, let me tell you that the CHOICE Act
unnecessarily and recklessly exposes the American economy and
the American people to a serious risk of a major financial
crisis that could be as severe or greater than the 2008 crisis.
It does so in at least seven distinct ways, in each case
unraveling an elaborate provision that was adopted by Dodd-
Frank or used during the 2008 crisis.
I am going to go through those very briefly and then make
one comment about the overall impact of this legislation on SEC
enforcement. This will devastate SEC enforcement, in my
judgment, reducing by a third or more the cases that the SEC
can bring in any period. Let's go through these seven ways very
quickly.
The first thing that the CHOICE Act does is eliminate the
orderly liquidation authority, which was the new innovation of
Dodd-Frank. I admit that procedure can be simplified and
streamlined, but eliminating it is reckless. In its place is
substituted a bankruptcy provision that is basically skeletal.
This has three serious consequences. First, it takes the
regulator out of the process in determining whether or not a
failing bank should be terminated. The regulator has stress
tests, living wills, all kinds of information, but it can't use
it, because it can't make the decision to terminate. It is up
to the bank to file bankruptcy. That is dangerous, and it will
delay the moment at which a failing institution is shut down,
because the bank will wait until the last possible moment.
The next thing that this substitution does is eliminate any
source of liquidity for a bank that may be facing a liquidity
crisis. Most banks don't fail because of insolvency in the
classic sense; they fail because of a liquidity crisis. Orderly
liquidation authority could solve that liquidity crisis by
turning to the Federal Deposit Insurance Company's basic
stabilization funds. That is eliminated. And if you take
liquidity out of the process, the failure will be worse,
longer, and a total shutdown is likely.
Next point. The CHOICE Act turns to a new idea, it is off-
ramp. This could be a good idea if it were applied to very
small banks, but it doesn't just apply to small banks, it
applies it to all banks, big or small, and it gives them a way
to escape everything in Dodd-Frank if you can just satisfy one
single metric.
That metric is a leverage ratio, which is basically
ambitious, but if you tell banks that they can escape all
regulation just by satisfying that leverage test, you are going
to set off the largest game of regulatory arbitrage that U.S.
financial history has witnessed. You are telling banks that
they can escape everything if they can just meet this 10
percent leverage test. And that leverage test is simple
leverage. Basel III and the rest of the world uses a risk-
weighted leverage test. This is not using a risk-weighted
leverage test.
The real impact of this provision is that it will encourage
banks to shift to riskier assets. If the only standard is a
leverage test, you simply meet that test and then move your
assets from Treasury Securities to the junior tranche of some
exotic securitization.
Other points. The next major failure is the elimination of
the Volcker Rule. You have basically heard of the Volcker Rule,
but the idea is that banks are too big-to-fail. We have to
regulate their risk taking so they don't fail. The Volcker Rule
was a reasonable way of doing that, by getting banks out of the
business of proprietary trading.
The next thing this statute does is eliminate Treasury's
exchange stabilization fund. That sounds very exotic, but the
most dangerous moment in 2008 was the moment at which all of
the holders of America's money market funds, retail investors,
and millions of them, suddenly were getting nervous, suddenly
were panicking, and were going to redeem their money market
funds. That was staved off when the Treasury turned to the
exchange stabilization fund and guaranteed those money market
funds. That is not the ideal solution. That is the solution of
last resort, but don't throw that last resort out. It saved us
in 2008, and not that much has changed in the regulation of the
money market funds.
Next big problem: The CHOICE Act will greatly exacerbate
the possibility, greatly increase the likelihood of a clearing
house failure. Dodd-Frank established clearing houses for over-
the-counter securities, and they concentrate risk. Once you
concentrate risk, you have to regulate these things. Instead,
we are eliminating the financial municipal utility provisions.
The other two provisions, I will leave alone. They are
basically the risk retention rules, which limited
securitizations. Now it will apply only to residential
mortgages and nothing else, and anything that is securitized
can be securitized through a originate-to-distribute model,
which encourages recklessness and lets you package toxic
securities.
My time is running out, so I will just say I have covered
all of those provisions. The last one I left out was that we
will no longer allow the Financial Stability Oversight Council
(FSOC) to ever classify a nonbank as systemically important. I
can't see the future, but I do think there is a real chance
that sometime in the future, there will be such an institution
that needs to be classified as systemically important, just as
AIG came out of the blue and suddenly revolutionized our
financial system and precipitated a crisis. We can't see the
future; we should leave that authority in the FSOC.
In my final seconds--I guess my time is now up, so I will
end.
[The prepared statement of Mr. Coffee can be found on page
73 of the appendix.]
Mr. Hollingsworth. The Chair now recognizes Mr. Randhava.
STATEMENT OF ROB RANDHAVA, SENIOR COUNSEL, LEADERSHIP
CONFERENCE ON CIVIL AND HUMAN RIGHTS
Mr. Randhava. Thank you, Mr. Chairman, and Ranking Member
Waters. I am Rob Randhava, the senior counsel at the Leadership
Conference on Civil and Human Rights. We are a coalition of
more than 200 national advocacy organizations, founded in 1950
at the outset of the civil rights movement. And I am also on
the steering committee of Americans for Financial Reform and a
founding member of the Asset Building Policy Network.
I have to admit that we were torn about being here today.
For us, this bill is a nonstarter, and we are concerned about
giving it an air of legitimacy that we don't believe it
deserves.
We have looked mostly at the parts affecting the CFPB and
its policies. There are other witnesses here today, and others
who have written in, who could do a much better job than,
frankly, I can of getting into the weeds of those parts, as
well as the rest of the bill, so I won't try to do that here,
but I will say what we think in general about the CFPB and its
policies.
We are an organization that for years, before the financial
crisis, begged Congress and Federal regulators to put a stop to
the deceptive, anything-goes kind of lending that was running
rampant in communities of color and everywhere else. Some
Members, like former Congressmen Barney Frank and Brad Miller,
heard our concerns and tried to push for better regulations,
but to a great extent, we were ignored.
And I can't tell you how many times I heard the phrase,
``access to credit,'' being used to justify things like 228 or
pick a payment mortgages. So we joined with consumer groups
like the Center for Responsible Lending (CRL) when it predicted
2 years before the crisis that there would be a wave of
millions of foreclosures, only to hear CRL accused of betting
against housing.
So when the crisis did hit, and when some on this committee
had the audacity to blame it all on people and groups who had
been trying to prevent it, or on the Community Investment Act,
you can bet that we were very involved in the effort to try to
create a better system with Dodd-Frank. And ever since the CFPB
opened its doors, it has worked tirelessly to advance the
financial health of the communities we represent, not just
carrying out the once radical concept of ability to repay, but
trying to address racial discrimination in auto lending
markups, sneaky credit card add-ons, and a whole lot of other
deceptive and abusive practices.
The CFPB and Director Cordray have done their best to apply
the law to bad actors, give clear guardrails to the good ones,
and put billions of dollars back in the pockets of consumers
who have been ripped off. And at the same time, they have
worked to promote consumer education and the growth of more
inclusive financial technology.
I am stunned that anyone can be troubled by a record like
that, and even more stunned by the intensity of the emotions
around this. When we hear the CFPB described as a dictatorship
or as a tyranny by some members of this committee, it is that
kind of rhetoric--I will just say this: Given our involvement
in Dodd-Frank, I am happy to say that various parts of the
industry have engaged the Leadership Conference on consumer
finance issues.
We in large banks want to get more people into mainstream
banking. We have sided with trade organizations to support
flexibility in downpayment requirements. We have teamed up with
community banks and lenders on issues surrounding Fannie Mae
and Freddie Mac. And we worked with our late friend Bill
Bartmann of CFS2 on better debt collection rules. And we have
engaged small dollar lenders that have said they can work with
the rules being proposed by the CFPB.
And, of course, we have disagreed on things too, but we
have been glad to engage the industry, and we would like to do
that even more in the future. The CFPB, of course, does the
same, all the time. We want the system to work for providers
and consumers. And if policies need to be fine-tuned for that
to happen, we are all ears, but nobody has engaged us in two-
way conversations about a dictatorship or a tyranny at the
CFPB.
So when we hear the need for legislation described in those
terms, I honestly don't know how to engage the legislation in a
serious way. The Leadership Conference was proud of Ranking
Member Waters last fall when she described the last year's
version of this bill as a charade and declined to drag it out
in the markup.
However members handle next week's markup, I would suggest
that the real fight over this bill should be in the court of
public opinion. Rest assured, the public is not clamoring for
this bill. In fact, multiple polls have shown strong bipartisan
support for the CFPB's work. And over and over again, the bad
apples in the industry keep on writing the talking points for
us.
One of the best examples of this was seen in last
November's vote on a South Dakota ballot initiative regarding
payday lending, to outlaw payday lending. That vote, which was
down the ballot, mind you, had almost as much participation as
the vote for President, and a whopping 75 percent called for
putting an end to the kinds of debt traps that the Financial
CHOICE Act would enable.
In other States that voted on payday lending, the results
have been the same, and voters haven't been clamoring to go
back. So if the supporters of the Financial CHOICE Act want to
pick this fight, the Leadership Conference won't hesitate to
join in, to continue educating the public and give this bill
the pushback it deserves. Thank you.
[The prepared statement of Mr. Randhava can be found on
page 115 of the appendix.]
Mr. Hollingsworth. Votes have been called on the House
Floor.
The Chair will recognize Commissioner Lubin for her
testimony, after which we will recess for votes and then
return.
Commissioner Lubin, you are now recognized.
STATEMENT OF MELANIE SENTER LUBIN, MARYLAND SECURITIES
COMMISSIONER, ON BEHALF OF THE NORTH AMERICAN SECURITIES
ADMINISTRATORS ASSOCIATION, INC.
Ms. Lubin. Thank you, Mr. Chairman. Good morning, Mr.
Chairman, Ranking Member Waters, and members of the committee.
My name is Melanie Lubin. For the past 30 years, I have
worked in the Securities Division of the Maryland Attorney
General's Office, serving as an Assistant Attorney General, and
since 1998, as Maryland's Securities Commissioner.
I also represent Maryland within the North American
Securities Administrators Association, or NASAA, and currently
serve as a member of its board of directors and Federal
Legislation Committee.
Since 2015, I have also served as NASAA's nonvoting member
on the FSOC. NASAA was organized in 1919 and its U.S.
membership consists of the securities regulators in the 50
States, the District of Columbia, Puerto Rico, and the U.S.
Virgin Islands.
I am honored to testify before the committee today about
NASAA's views on a legislative proposal introduced Wednesday
entitled the Financial CHOICE Act of 2017. Congress enacted the
Dodd-Frank Act in July 2010 in response to the 2008 financial
crisis. The purpose of the Dodd-Frank Act was to strengthen our
financial system and better protect the millions of hardworking
Americans who rely on their investments for a secure
retirement.
State securities regulators are deeply concerned that if
enacted in its current form, the Financial CHOICE Act would
detrimentally change regulatory policies and expose investors
in securities markets to significant unnecessary risks.
NASAA's full written statement submitted for this hearing
addresses 23 provisions in the Financial CHOICE Act. I am happy
to discuss any of these provisions. However, I will use the
balance of my oral testimony to highlight several elements of
the legislation that NASAA considers particularly problematic.
First, Section 391 of the bill includes a provision that
attempts to mandate coordination among financial regulators,
including the States. While the provisions may appear
relatively benign on its face, State regulators are deeply
concerned that if enacted, it will impose Washington's red tape
and priorities on the States.
Today, coordination between State and Federal regulators is
a voluntary process. This process ensures that the
jurisdictional reach of the regulators remains unhindered and
that harmful conduct is addressed in an efficient manner,
without the need to work through Federal bureaucrat obstacles.
Because State securities regulators prioritize protection
of retail investors, forcing States to take a back seat during
investigations that involve more than one agency would put
these mom- and-pop investors more directly in harm's way. We
urge Congress to remove the reference to State securities
authorities from Section 391.
NASAA's second area of concern involves Section 827 of the
bill, a baffling attempt to impose additional procedural
hurdles, which would in turn hinder keeping bad actors out of
the securities industry. The Dodd-Frank Act took an important
step toward reducing risks for investors in private offerings
by requiring the SEC to prohibit bad actors from using the Reg
D, Rule 506 exemption. Enacting any legislation that would
needlessly expose unknowing investors to bad actors would be a
grave mistake.
NASAA's next area of concern is Subtitle P, which would
enact a wholesale revision of the JOBS Act's crowdfunding
provisions less than a year after they took effect. If Congress
is poised to enact policies intended to strengthen the economy,
this provision will have precisely the opposite effect. Among
other things, this provision would eliminate individual and
advocate investment caps, allow an issuer to conduct Federal
crowdfunding without a registered intermediary, remove many
required disclosures to investors and ongoing reporting to the
SEC, and repeal liability provisions that were carefully
crafted to apply to the unique characteristics of a crowdfunded
offering.
NASAA is also very concerned about provision in Subtitles L
and M. Subtitle L creates a new class of security, a venture
security, that would be listed and traded on a new venture
exchange. These securities would be exempt from a significant
number of regulatory requirements, including State
registration, and presumably would be subject to significantly
diminished listing standards.
Subtitle M would allow the SEC to recognize any exchange of
any size or quality as a national securities exchange. All
securities listed on these exchanges would be preempted from
State registration laws. The benchmark for preemption
established by Congress in existing law requires that an
exchange have rigorous listing standards, substantially similar
to those of the major national stock exchanges, like the New
York Stock Exchange.
Allowing an exchange to qualify as a national securities
exchange regardless of the quality of the exchange or the
quality of its listed securities removes vital investor
protections.
The final concern I will discuss is NASAA's opposition to
Section 841. NASAA has long supported a heightened standard of
care for broker-dealers. Clients expect broker-dealers to act
in the client's best interest. This provision would, among
other things, invalidate the rule recently adopted by the
Department of Labor. It would also effectively prevent the
Department of Labor from undertaking any future rulemaking
regarding the conduct of broker-dealers in the management of
retirement accounts until the SEC completes rulemaking.
The provision would also impose on the SEC unduly onerous
requirements for regulatory, analytical, and economic analysis
prior to adopting a rule. Ultimately, Section 841 would delay
and perhaps prevent any effort to establish a meaningful
heightened standard of care for broker-dealers.
Thank you again for the opportunity to testify before the
committee. I would be pleased to answer any questions you may
have.
[The prepared statement of Commissioner Lubin can be found
on page 93 of the appendix.]
Mr. Hollingsworth. Votes have been called. The committee
will reconvene immediately after Floor votes have concluded.
Members are advised that this is a two-vote series.
The committee stands in recess.
[recess]
Mr. Hollingsworth. The committee will come to order.
Ms. Liner is now recognized for 5 minutes.
STATEMENT OF EMILY LINER, SENIOR POLICY ADVISOR, THIRD WAY
Ms. Liner. Good morning, Mr. Chairman, Ranking Member
Waters, and members of the committee. Thank you for the
opportunity to testify at today's hearing. My name is Emily
Liner, and I am a senior policy adviser in the economic program
at Third Way, a centrist think tank in Washington, D.C.
There are many reasons to support the Dodd-Frank financial
reform law. The perspective I am going to take is on Dodd-
Frank's positive effect on economic growth.
My view and the view of Third Way from studying this law
and speaking with dozens of experts in the realm of business
and finance is that Dodd-Frank is pro-growth, pro-market, and
pro-investor. That is why we at Third Way are concerned that
the Financial CHOICE Act would undo the progress that Dodd-
Frank has made in making the financial system safer while still
preserving its ability to innovate and allocate capital.
Let me take you through why we feel this way.
Let's start with risk-weighted capital. Risk-weighted
capital is one of the airbags that protects our banking system
from melting down. It requires banks to maintain a sufficient
level of equity based on the riskiness of its assets.
Because of Dodd-Frank, risk-weighted capital in the United
States banking sector has increased 41 percent since the end of
2009. That means banks are significantly safer. And thanks to
the banking watchdogs at the Federal Reserve, the eight biggest
U.S. banks are required to have risk-weighted capital above and
beyond the industry standard. That keeps banks safe and sound,
which is good for growth, for markets, and for investors.
The CHOICE Act, however, repeals risk-weighted capital as
well as the liquidity coverage ratio. This will make banks less
safe and will at some point cost our economy, undermine growth,
and hurt investors.
What makes Dodd-Frank a pro-market law is its focus on risk
that could be spread through interconnected financial
institutions. Stress tests, for example, are an annual exam of
the Nation's largest and most important financial institutions
to determine if they could survive a bad recession. It is not
an easy test, nor should it be.
Eventually there will be another economic downturn, and we
need to be certain that our largest financial institutions can
weather the storm so that we can return to growth, return to
strong markets, and prevent massive investor losses far more
quickly. If we had had stress tests before the financial
crisis, we could have been prepared to take action before the
chain reaction of bank failures unfolded in 2008.
The CHOICE Act weakens the stress-test exercise by making
the penalty on paying out dividends optional for banks that
meet its low standard for exemption from the rules. Make no
mistake, this will come back to hurt our economy.
Finally, Dodd-Frank is a pro-investor law. The Volcker Rule
ensures that American families who participate in the markets
as retail investors are protected from harm. Investment bankers
can still take risks, but the Volcker Rule prevents that risk
from spilling over and hurting innocent people.
During the financial crisis, $2.8 trillion in retirement
savings alone evaporated. We owe it to the hardworking
Americans who lost the money they spent years scrimping and
saving to never let this happen again. But the CHOICE Act
repeals the Volcker Rule as well as other reforms that keep the
financial system healthy.
The few safety and soundness standards the CHOICE Act does
include, like the 10-percent leverage ratio, are simply not
enough to protect the world's largest economy. Under the CHOICE
Act's regime, the leverage ratio is the only thing standing
between some regulation and no regulation. No one should be
comfortable with just one number determining whether banks can
opt out of the entire framework for financial safety
regulation.
Dodd-Frank is a balanced law that makes banks safer. When
banks are safer, we reduce the probability that a crisis will
happen. That gives the economy more room to run and grow.
According to a cost-benefit analysis of capital and liquidity
requirements we performed at Third Way, we find that Dodd-Frank
contributes $351 billion to U.S. GDP over 10 years. There is a
tangible economic benefit to making the financial sector more
stable.
When the economy is humming along, we rarely acknowledge
that regulations create a safe environment that allows the
economy to expand. But when the economy blows a fuse, it is
Dodd-Frank, not the Financial CHOICE Act, that will make sure
recessions are short and manageable.
For reasons of economic growth, healthy markets, and
investor protection, Third Way opposes this legislation to
repeal our strongest financial reforms and replace them with
such a weak alternative.
Thank you, and I am happy to answer any questions you may
have.
[The prepared statement of Ms. Liner can be found on page
91 of the appendix.]
Mr. Hollingsworth. Ms. Jackson, you are now recognized for
5 minutes.
STATEMENT OF AMANDA JACKSON, ORGANIZING AND OUTREACH MANAGER,
AMERICANS FOR FINANCIAL REFORM
Ms. Jackson. Members of the committee, thank you for the
opportunity to testify today. My name is Amanda Jackson, and I
am the organizing and outreach manager for Americans for
Financial Reform. Americans for Financial Reform is a
nonpartisan, nonprofit coalition working to lay the foundation
for a better financial system.
The hardest part in talking about this bill is figuring out
where to start because it is such a comprehensive disaster.
This legislation would be better dubbed the, ``Wall Street
CHOICE Act'' because it would have a devastating effect on the
capacity of regulators to protect the public interest and
defend consumers from Wall Street wrongdoing and the economy
from risk created by too-big-to-fail financial institutions.
Not only does this bill eliminate numerous major elements
of the Dodd-Frank protections passed in the wake of the
financial crisis of 2008, it would also weaken regulatory
powers that long predate Dodd-Frank. If this bill passed, it
would make the financial regulation system significantly weaker
than it was even in the years leading up to the 2008 crisis.
The basic story that CHOICE Act proponents are telling
about why this legislation is needed is a lie. Financial
regulation is not hurting workers, consumers, or the economy.
There is no evidence that the economy is being harmed by
financial regulation. In fact, lending is growing at a healthy
rate.
Over the past 3 years, real commercial bank loan growth has
averaged almost 6 percent annually, which is higher than the
historical average of 4 percent. It is worth noting that loans
at community banks are growing even faster, with community bank
loan growth exceeding that of larger banks over the last 2
years.
This is not to say that everything is great for Americans.
It is not. And, in fact, one of the reasons for that is the
still-echoing effect of the 2008 financial crisis.
The Center for Responsible Lending's 2015 ``State of
Lending'' report showed two trends. First, families were
already struggling to keep up before the financial crisis hit.
The gap between stagnant family incomes and growing expenses
was being met with rapidly increasing levels of debt. Second,
the terms of the debt itself have acted as an economic weight
and a trap, leaving families with less available income,
pushing them further into debt traps, and causing a great deal
of financial and psychological distress.
Those impacted by the 2008 crisis--low- to middle-income
individuals and families, and communities of color--are still
rebounding. The impact of this crisis is closer to us than we
realize. Just Wednesday, my Lyft driver shared with me that he
had worked for, using his words, ``corporate America,'' and
when the crisis hit, he lost his job. He took a couple of
consulting contracts, a couple of part-time gigs, but, in his
words, he has been in a free-fall since and things have been a
mess.
People live this and are still reeling with the aftermath.
They think, quite sensibly, that big banks have too much power
and influence, not too little.
This legislation is crammed with deregulatory giveaways
that would facilitate abuses by financial institutions, private
equity and hedge funds who want to manipulate the rules to
enrich their executives, mortgage lenders who want to undo the
safeguards against the affordable loans that drove the
financial crisis, payday/car title lenders pushing products
that trap consumers in a cycle of ever-increasing debt, and far
more.
The ``Wall Street CHOICE Act'' would strip, as already
mentioned, the powers of the Consumer Financial Protection
Bureau to address abusive practices in consumer markets,
returning us to the regulatory patchwork that failed before the
crisis as well as the reason the consumer agency was created to
solve.
It would also eliminate critical elements of regulatory
reform passed since the crisis, including restrictions on
unaffordable mortgage lending; the Volcker Rule, as mentioned;
the ban on banks engaging in hedge-fund-like speculation; and
restrictions on excessive Wall Street bonuses and more.
And, lastly, it would increase the ability of too-big-to-
fail financial institutions to hold up the public for a bailout
by threatening economic disaster if they failed.
It just seems that what all this means has escaped members
of this committee. This legislation begs the question, do its
drafters fully grasp the economic devastation unleashed by a
failure to control Wall Street predation?
It would be like a Peace Corps volunteer returned home
after serving abroad for 2 years, only to find out at the
airport that her childhood home had fallen into foreclosure. It
is a pastor who had to put a two-time limit on helping
parishioners who have fallen victim to the online payday debt
trap lending scheme so that he can help the next person. It is
the misuse of the criminal justice system by debt collectors
threatening a mother of two with jail time. It is reflected in
the soulless neighborhoods full of dilapidated properties with
``foreclosed'' signs.
It is profoundly foolish to eliminate safeguards against
the catastrophic consequences of a financial crisis. It is also
wrong to place such severe restrictions on the ability of
regulators to protect the public from exploitation in their
everyday transactions with the financial system. We urge you to
reject this radical and destructive legislation.
Thank you.
[The prepared statement of Ms. Jackson can be found on page
89 of the appendix.]
Mr. Hollingsworth. Mr. Bertsch, you are recognized for 5
minutes.
STATEMENT OF KEN BERTSCH, EXECUTIVE DIRECTOR, COUNCIL OF
INSTITUTIONAL INVESTORS
Mr. Bertsch. Thank you. Thanks, members of the committee,
for the opportunity to be here.
My name is Ken Bertsch. I am the executive director of the
Council of Institutional Investors, a nonpartisan, nonprofit
association of employee benefit plans, foundations, and
endowments, with combined assets exceeding $3 trillion. We also
have associate members, including asset managers, with more
than $20 trillion in assets under management.
I appreciate the opportunity to appear before you today. I
respectfully request that the text of my testimony, including
the Council's April 24th letter to the chairman and ranking
member, be entered into the public record.
Members of the Council include funds responsible for
safeguarding assets used to fund the retirement benefits of
millions throughout the United States. They have a significant
commitment to U.S. capital markets. They are long-term, patient
investors, due in part to the heavy commitment to passive or
indexed investment strategies. As a result, issues relating to
the U.S. financial regulatory system, particularly involving
corporate governance and shareholder rights, are of great
interest to our members.
In its current form, we believe that the Financial CHOICE
Act, if enacted, would weaken critical shareholder rights that
investors need to hold management and boards of public
companies accountable and that foster trust in the integrity of
the U.S. capital markets.
Americans suffered enormously from Enron and other
corporate scandals of 15 years ago and even more from the
failures of oversight that contributed to the 2008 financial
crisis. The bill would heavily damage shareholder rights and
threaten prudent safeguards for oversight of companies and
markets, including sensible reforms made after both the Enron
crisis and the financial crisis.
Let me highlight five areas of concern.
First, the bill would set prohibitively costly hurdles on
shareholder proposals. The bill would require ownership of at
least 1 percent of stock for 3 years, compared with the current
requirement of $2,000 for 1 year, in order to, as a
shareholder, submit a proposal to the ballot for all
shareholders to vote on. This is a dramatic change. So you go
from $2,000 to $7.5 billion at Apple to be able to do this,
$3.4 billion at Exxon, and $2.6 billion at Wells Fargo.
Since the 1940s, and especially since present rules came
into force in the 1970s, shareholder proposals have led to many
important corporate reforms. One example: I used to work at
TIAA, which is an asset manager for university and healthcare
systems. We used resolutions to push for independent boards
that would not be rubber stamps. Expectations for boards now
are much higher than pre-Enron. And that is due in no small
measure to shareholder proposals over many years.
Now, TIAA, with about $850 billion in assets under
management, essentially would not be able to submit shareholder
proposals anymore under this rule. It is not large enough. It
typically owns 0.7 percent of a company. TIAA would be out.
CalPERS owns $300 billion in assets; they would also be out of
luck. Indexers would generally be out of luck, except for
BlackRock, Vanguard, and State Street, who have never submitted
a shareholder proposal. Some corporations are comfortable with
those three among the index providers submitting shareholder
proposals because they don't do it.
Second, the bill would roll back curbs on abusive pay
practices. Shareholders would get an advisory vote on executive
compensation only when there is an undefined material change in
CEO pay. Most U.S. public companies, at the request of their
shareholders, currently offer investors say-on-pay votes
annually. It is not required in the Dodd-Frank Act, but there
is a choice of how often, and investors have opted for
annually. The say-on-pay votes have resulted in much greater
shareholder engagement, much better communication between
companies and shareholders, and progress on executive pay.
Third, the bill would restrict rights of shareholders to
vote for directors in contested elections for board seats. The
provisions of the bill would bar universal proxy cards that
give investors freedom of choice to vote for exactly who they
want to when there is a proxy contest rather than being forced
into a party-line vote only.
Fourth, the bill would create an intrusive new regulatory
scheme for proxy advisers that provide shareholders with
independent research that they need in order to vote
responsibly. The bill would drive up costs for investors,
potentially compromise the independence of advisers, and
impinge on their ability to provide honest advice to clients.
The final thing I want to focus on is that there are
various elements of this bill that would shackle the Securities
and Exchange Commission, including requiring excessive and
unworkable cost-benefit analysis, apparently intended to tie
the SEC's hands. The provisions would severely undercut SEC
authority to fulfill its mission to protect investors, police
markets, and foster capital formation.
So those are the areas I want to summarize. We are glad to
work with committee members on improving U.S. capital markets.
And thank you for the opportunity to speak.
[The prepared statement of Mr. Bertsch can be found on page
52 of the appendix.]
Mr. Hollingsworth. Mr. Chopra, you are recognized for 5
minutes.
STATEMENT OF ROHIT CHOPRA, SENIOR FELLOW, CONSUMER FEDERATION
OF AMERICA
Mr. Chopra. Thank you, Mr. Chairman, and members of the
committee, for holding this hearing today.
My name is Rohit Chopra. I am a senior fellow at the
Consumer Federation of America. I was previously Assistant
Director of the Consumer Financial Protection Bureau, and I
also was named by the Treasury Secretary as the consumer
agency's first Student Loan Ombudsman, a new position
established in the Dodd-Frank Act.
Less than a decade ago, our economy was in free-fall, with
no single accountable regulator to police the mortgage market
against lies and deception, especially in the nonbank sector.
Toxic lending whacked Main Street and Wall Street and our whole
economy down.
Now, the stories and statistics of families who lost their
jobs, their savings, and even their homes are still so raw for
so many, but I want to tell you about another piece. There was
an aftershock of the financial crisis that we shouldn't forget
about, a crisis that crushed both family budgets and State
budgets.
For the millions who went off to, or were already in
college, their families had fewer financial resources to
support their child's education, and State universities across
America had to jack up tuition due to budget cuts. This double-
whammy helped lead to an explosion of student debt.
Since the collapse of Lehman Brothers, outstanding student
debt has more than doubled. Today, roughly 43 million Americans
collectively owe $1.4 trillion in student debt. And that
doesn't even count other debt for college like home equity
loans and credit cards that so many families use.
And as repeated research has shown, problems in the student
loan market bear an uncanny resemblance to what we saw in the
mortgage market: subprime-style lending fueled by
securitization markets and slipshod servicing, leading to
unnecessary defaults.
But, fortunately, there is a lot more accountability for
those who break the law today, and that is because of the CFPB.
But the proposed legislation would essentially destroy the
consumer agency's authorities, forbidding it from engaging in
regular supervision of the student loan industry and stripping
it of its powers to police the market for unfair, deceptive,
and abusive acts and practices.
Here are just a few of the enforcement actions that could
not have occurred if the proposal were the law of the land.
Now, I know all of you know about the Wells Fargo fake
account scandal that came to light in September 2016. But just
2 months earlier, the CFPB also fined Wells Fargo millions for
illegal student loan practices, including allocating borrower
payments strategically in order to maximize late fees. This
would not be possible under the proposal today.
In 2015, the CFPB announced that it had caught Discover,
another big student lender, for illegal billing and debt
collection practices. This would not be possible under the
proposal today.
In 2014, the CFPB sued Corinthian Colleges--this is a
company that was very aggressive in many of the districts that
you serve--for an illegal student loan scheme coupled with
strong-arm debt-collection tactics to shake down their
students. Ultimately, the CFPB secured $480 million in debt
relief for borrowers, and Corinthian is no longer operating.
This action would not be possible if the proposal were made the
law of the land.
And just this year, the CFPB sued student loan behemoth
Navient, formerly known as Sallie Mae, for illegally cheating
borrowers out of their repayment rights through shortcuts and
deception at every stage of the repayment process so that it
could pad its own profits. The allegations are so severe,
impacting millions of borrowers. This action would simply not
have been possible under the proposal since the agency would
lack the authority to enforce all of the critical consumer
protection laws.
We all know that our student loan system is badly broken.
It is not working for borrowers, for taxpayers, or for the
honest student loan companies who are forced to compete with
bad actors.
The way I see it, Congress has a choice. It can choose to
have amnesia and forget about the millions of Americans who
lost their homes and jobs due to a financial system fraught
with fraud and loaded up with risk; it can choose to turn its
back on the millions of student loan borrowers who are just
trying to pay their loans off. Or it can stand with honest
businesses, it can stand with consumers, and it can stand with
everybody who plays by the rules. And we will all be watching
closely to make sure you don't make the wrong choice.
Thank you.
Mr. Hollingsworth. Ms. Edelman, you are recognized for 5
minutes.
STATEMENT OF SARAH EDELMAN, DIRECTOR, HOUSING POLICY, CENTER
FOR AMERICAN PROGRESS
Ms. Edelman. Thank you.
Good morning, Mr. Chairman, Ranking Member Waters, and
members of the committee. Thanks for holding the hearing today,
and thank you for being here with us. My name is Sarah Edelman,
and I direct the housing policy program at the Center for
American Progress.
The proposals laid out in the wrong choice act 2.0 threaten
the stability of the Nation's housing market, economy, and
financial system. The legislation would deregulate Wall Street
and put the United States in the same perilous position it was
right before the 2007-2008 crisis. Yet it is often described by
its supporters as legislation designed to help small community
banks. If the intention is to strengthen community banks, then
we are talking about the wrong bill.
Let's start with a review of the facts about community
banks. First, as Senator Warren said earlier, by many measures,
community banks and credit unions in the United States are the
strongest they have been in decades. Community bank profits are
up to where they were before the crisis. Consumer lending at
small banks exceeds pre-crisis levels. Mortgage lending has
increased by nearly 40 percent between 2012 and 2015, according
to a recent analysis by the Center for Responsible Lending.
Credit unions added 4.7 million new members last year, the
largest annual increase in credit union history, according to
their trade association.
However, it is true that community banks face more
financial and administrative hurdles than larger banks that can
spread operation costs across many bank branches. And since the
1980s, the number of community banks in the United States has
declined every year.
Most community banks are small businesses working to
compete against larger ones in an ever-changing market. And
that is why Congress and regulators have already developed a
tiered regulatory system, where community banks are carved out
from many of the requirements big banks need to meet. For
instance, community banks are generally not subject to many of
the Dodd-Frank provisions, including stress testing, the
requirement to create a living will, or CFPB enforcement.
Community banks are also given greater flexibility with their
mortgage underwriting standards.
The wrong choice act takes many of the carve-outs that are
currently reserved for community banks and gives them to the
big banks that crashed our economy a decade ago for a very
small price. The bill also scraps many of the regulations
Congress applied to nonbank financial institutions, often major
competitors of community banks.
So, while supporters of the bill talk about how it will
help Main Street, it seems best designed to ease standards for
Wall Street.
The proposal would also rattle the foundation of the
housing market. About a decade ago, some of the very
organizations on this panel pleaded with you to stop the
predatory lending that was stripping their communities of
wealth. Nearly 10 million foreclosures later, it is
disheartening that many of our organizations are back here
again, this time trying to keep some Members of Congress from
reopening the doors to practices that drained wealth from
hardworking Americans.
In the aftermath of the crisis, Congress put commonsense
standards in place to protect consumers and the housing market
from predatory mortgage loans. These standards included a
commonsense rule that a lender must evaluate a borrower's
ability to repay a loan before they originate it. It included
more accountability for lenders who make bad loans and
incentives for originating loans with affordable loans.
Title 5 of the wrong choice act undermines many of these
core mortgage protections and turns the clock back to a
dangerous time in our housing market. Buyers of manufactured
housing, in particular, who are already ripped off on a regular
basis by mobile home companies, are made especially vulnerable
by the proposal.
The men and women in your district may not know what the
qualified mortgage or ability-to-repay rules are, but they will
notice if their neighbors and family members begin getting bad
loans again or when there is another housing or financial
crisis. And they know a giveaway to Wall Street when they see
it. Please stand up for families and oppose this bill.
Thank you.
Mr. Hollingsworth. Votes have been called. The committee
will return immediately after the vote. The committee stands in
recess.
[recess]
Mr. Hollingsworth. The committee will come to order.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Mr. Chairman, thank you for recognizing me,
and also thank you to the ranking member.
Let me just ask the panel this question. I have consumer
justice meetings in my district all the time. I also meet with
the Financial Services Committee. I try to talk to everybody.
But in my consumer advocates meeting, I said, well, there is
this CHOICE Act coming up, and one of the things it does is it
undermines the Consumer Complaint Database.
And I want to ask you, how does the Consumer Complaint
Database actually help consumers access even the private bar,
to do some self-help, in terms of bringing forth real
accountability for what might be abuses in the industry?
Ms. Liner, it looks like you kind of feel my drift here.
Would you like to respond?
Ms. Liner. Thank you, Congressman. I am an active listener.
Mr. Ellison. Great.
Ms. Liner. So one thing I would like to point out is that a
corollary to the CFPB is the Consumer Product Safety
Commission. It has a similar mission but in a different sphere,
and they also have a public database where consumers can submit
concerns about products that are on the market, such as cribs
and toys. So it seems appropriate that there is also a public
database for concerns about financial products.
Mr. Ellison. Right. So the CFPB does in fact have such a
database, and people have used it.
Do you guys have any information to share on the importance
of that particular tool? Because the advocates in my district
felt like it was pretty important. Anybody here want to weigh
in on that?
Mr. Chopra. Congressman, I think it was a complete game
changer. When I was at the Bureau and the database came online,
all of a sudden the rhythm with financial institutions and
their consumers changed.
Mr. Ellison. Right.
Mr. Chopra. They knew that those complaints were going to
be out in the public and they were going to be used.
I will tell you one story. We collected a lot of complaints
and did some deep analysis of it, and we found a trend of
servicemembers and their families being overcharged on their
student loans. We actually then referred those complaints to
the Department of Justice. And guess what? It wasn't just a
handful, it was 78,000 of them, who ended up getting $60
million in refunds. And now companies are looking at their
complaints and seeing that they have to treat customers fairly
or they may face some real consequences.
Mr. Ellison. Even if one of those consequences was just the
light of day.
So, Professor Coffee, I would like for you to weigh in on
this issue. I have this theory, and I would like you to offer
your candid comments on it, which is that good consumer
protection actually helps business. Why? Because so much of
business relies upon confidence. And so, if you have a
situation where people are bilked and taken advantage of, it
kind of creates this incentive, where ethical businesspeople
are kind of dragged into that just to stay competitive.
Do you have any comment on that you would like to share?
Or, Ms. Edelman, maybe you have a viewpoint on that issue?
Ms. Edelman. Sure. I think you are exactly right,
Congressman. One of the issues we saw in the run-up to the
housing crisis was even some of the more honest lenders having
trouble competing with the folks who were doing really shady
things, because these shadier practices produced more returns
and higher profits in the short term.
And so it drags even the good guys into it, which is why it
is so important to make sure that there is a solid floor of
regulations.
Mr. Ellison. Mr. Coffee, do you want to comment on that?
Mr. Coffee. I am going to leave that to the people who are
really the experts on--
Mr. Ellison. Okay. Mr. Chopra?
Mr. Chopra. Yes. So, in addition to what I said before, I
think it is pretty unfair for somebody who treats their
customers fairly, plays by the rules, and then they get dinged
by their investors for not hitting the same return on equity as
their competitors.
Mr. Ellison. Right.
Mr. Chopra. And you know what? The ones who end up
following the rules have much more sustainable profitability,
which is probably better for our whole economy. There is
increasing research to this point. And we should really be not
just protecting consumers but protecting the companies that are
playing by the rules in the first place.
Mr. Ellison. Well, absolutely. And my friends on the other
side of the aisle tend to make this case, ``We are for
business.'' They are not for business; they are for short-term
abusers of the process. And we are for long-term sustainability
of the economy.
I think I am pretty much out of time, so I yield back.
Mr. Hollingsworth. The gentleman yields back.
The Chair now recognizes the ranking member of our Capital
Markets Subcommittee, the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. Thank you. Thank you so much. I would like to
thank the chairman and especially the ranking member and all my
colleagues for calling for this important hearing. I can tell
you, it makes a real difference to have a whole panel of
Democratic witnesses on this important bill.
My question is for Professor Coffee from the great
University of Columbia, located in the City of New York.
And I would like to ask you about the chairman's latest
version of the immoral wrong choice act, which would make it
much harder for shareholders to make their voices heard by
making it harder for them to submit a proposal at a company's
annual meeting.
The Comptroller of the City of New York has been very
active on this. I would like to place, with unanimous consent,
his comments, his letter into the record.
Mr. Hollingsworth. Without objection, it is so ordered.
Mrs. Maloney. Thank you.
Specifically, the bill would say that only shareholders who
own at least 1 percent of the company's shares--could be
hundreds of millions of dollars--for at least 3 years can offer
proposals to be voted on at a company's annual meeting. And
this is just plain wrong.
This serious requirement ignores the value that shareholder
proposals have had on companies. For example, shareholder
proposals were the reason why independent directors constitute
a majority on the board, which is now standard practice, and
that the audit and compensation committees are independent.
So, Professor Coffee, given these successes and the
important role that shareholders play in corporate governance,
my question is: Does it make sense to impede the ability of
shareholders to make their voices heard through this proposal?
And I would like to also add to the record the statement
from the Irish National Caucus from Father McManus. And, in
this statement, he brings it down to the reality of what it
means. He says, with these proposed changes, to submit a
shareholder proposal to Wells Fargo or anyone else, one would
have to own $2.5 million in shares, where at present one only
needs to own $2,000 worth of shares for 1 year. So this is a
huge change.
Mr. Hollingsworth. Without objection, it is so ordered.
Mrs. Maloney. And I would just add, to the great Professor
Coffee, aren't shareholders the ultimate owners of the
companies that invest the funds necessary for companies to
raise capital and to grow? And so wouldn't harming their rights
actually harm the companies and actually harm the overall
economy of the United States of America?
Mr. Coffee. It is very easy to answer your question. Thank
you for an easy question, because I think the answer is yes.
As you point out, 1 percent of Apple is something like $7.5
billion. Moreover, there is also real bite in the 3-year rule,
because it disqualifies a whole class of investors, the hedge
funds and other short-term holders. They hold nothing for 3
years.
If you look at the large pension funds, they are generally
indexed, and very few indexed pension funds could own 1 percent
of a giant company like Apple. So you get down to maybe no more
than a dozen or so shareholders that would be in a position to
have that 1 percent and that would have any interest in
sponsoring a shareholder resolution because they represent
either pension or mutual funds or other broad-based people. So
it is a disenfranchisement of shareholders.
Also, as you mentioned in the first part of your question,
the SEC has moved toward the idea of a single ballot on which
all the names of all the contestants for election to the board
would be listed. That simplifies the voting process. But this
bill would expressly reverse the single-ballot proposal. And,
again, that would require you to deal with competing yellow and
blue and green proxy cards, making the process somewhat more
difficult.
So I don't think this is the most important thing in this
bill, but I think, in terms of corporate governance, it does
restrict shareholder access.
Mrs. Maloney. And, also, Professor Coffee, I would like to
ask you about the leverage ratio. Under the chairman's bill,
any bank that meets a 10-percent leverage ratio would be
exempted from all other capital and liquidity requirements,
including the risk-weighted capital requirement that has been
at the center of U.S. banking regulation and international
banking regulation for decades.
So, essentially, the leverage ratio would become the
primary capital requirement, and, as a result, many banking
regulators have commented and contacted us and have argued that
relying solely on the leverage ratio would give banks an
incentive to get rid of their safest assets, like U.S.
Treasuries, and load up with riskier assets.
Do you agree?
Mr. Coffee. I think you have now touched on the most
important provision in this bill, which is the off ramp. And
the off ramp works off a single metric, a leverage ratio of 10
percent.
Now, I could understand the off ramp if it was limited to
smaller banks. We can argue about what smaller banks were--$1
billion, $10 billion, $50 billion--but for smaller banks, there
might be a case for this. This would apply to our largest
banks, and you can escape everything in Dodd-Frank if you can
get the requisite 10-percent leverage.
We have seen what will happen. We saw this with Lehman back
in 2008. They wanted to show an attractive leverage ratio, and
they gamed the system.
Mr. Hollingsworth. The gentlelady's time has expired.
Mr. Coffee. One sentence: Every quarter, they engaged in
one transaction that for one day only gave them the requisite
leverage.
Mr. Hollingsworth. The gentlelady's time has expired.
Mrs. Maloney. Thank you, Professor, for your life's work.
Thank you.
Mr. Hollingsworth. The Chair now recognizes the gentleman
from California, Mr. Sherman, for 5 minutes.
Mr. Sherman. I will pick up on what the last witness was
saying, and that is, credit default swaps would allow a giant
bank to have, yes, 10-percent capital against their
liabilities, but credit default swaps create perhaps a trillion
dollars of contingent liabilities. They are not on the balance
sheet. They don't affect your ratio. You are out of Dodd-Frank.
A bank with a million dollars of assets and $100,000 of capital
would be legally allowed to do a trillion dollars' worth of
credit default swaps.
I have been to over 1,000 hearings in this room organized
by Republicans selecting the bulk of the witnesses, and so I
thought I would rant a bit about the Republicans not being
here, not listening, not gaining insight. And then I realized
what is really happening. They are all back in their offices,
glued to their television sets. They know they can learn more
if they don't interrupt with their own questions.
And knowing that my friend, Chairman Jeb, is watching, let
me implore him: Please split up this bill. This bill includes a
dozen individual bills that a majority of Democrats and a
majority of Republicans voted for. Those bills could become
law.
This bill can never become law unless the Senate goes
thermonuclear, and it is not going to do that. You need eight
Democratic votes to pass anything. You are not going to get a
single Democratic vote in this committee or on the Floor. How
are you going to get eight Democrats in the Senate?
So this is a messaging bill. And what is the message? The
message is: Democrats are voting against every change that
could possibly be made in Dodd-Frank. The Democrats are
treating Dodd-Frank as if it is a canonized scripture.
The fact is, I was a cosponsor of Dodd-Frank. It is not a
perfect bill. I have never voted for a perfect bill. And when
that bill was written, it was written here in 2128; it didn't
come from Mount Sinai. We can improve it.
Now, I had a prior visual up on the board showing the
enormous trade deficit.
And, Ms. Klemmer, we haven't had the great economic growth
in the last few years that we would like to see. Is that
because of Dodd-Frank, or is that because we have trade
policies where we have a $600 billion trade deficit with the
world every year, leading to well over $10 trillion of what we
owe the rest of the world? Now it is up to $11 trillion, excuse
me. It is going fast.
Which is the cause of the slow economic growth, Dodd-Frank
or trade policies that lead to the world's largest trade
deficit?
Ms. Klemmer. I think a lot of the other witnesses have
provided statistics that Dodd-Frank has not slowed lending or
had any negative impact on the economy. In fact--
Mr. Sherman. What about our trade policies? Any negative
impact?
Ms. Klemmer. I am getting to the trade policies, certainly.
The trade policies absolutely have caused tremendous problems
for U.S. manufacturing and all of our industries, and it is
been a series of corporate-authored bills that have undermined
American workers across-the-board. And I--
Mr. Sherman. Thank you.
I want to go on to the next visual, because there is this
argument that the Obama years have been bad years. The fact is
that during his Presidency, which is somewhat coincident with
the application of Dodd-Frank, we have seen the stock market go
up by 180 percent, corporate profits by 112 percent, auto sales
by 85 percent, consumer sentiments up 60 percent. The number of
jobs in the country is up 8 percent, and you can see that
insert showing how the unemployment rate dropped from the
beginning of his Presidency to the end, down to 4.6 percent.
The number of uninsured Americans dropped 39 percent. The
Federal deficit dropped 58 percent.
In contrast, during the first quarter of the Trump
Administration, we have seen the most anemic economic growth
that we have had for many years. And he just came up with a
proposal to take that Federal deficit, which has gone down by
58 percent over the Obama Administration, and have it explode
into many trillions of dollars over what would I guess be his
first 4 years in office.
So this idea that Dodd-Frank and Obama are coincident with
bad economic performance and that the last 3 months have been
spectacular economic growth is very convincing unless you look
at the numbers.
Finally, I couldn't let this go without saying the cause of
the problem was the bond rating agencies. They gave AAA to Alt-
A. Portfolio managers had to buy them in order to maintain a
competitive rate of return on their investment. And as long as
the umpire is selected by one of the teams, namely the issuer,
we are just cruising for the next crisis.
I yield back.
Mr. Hollingsworth. The gentleman yields back.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Liner, during the crisis, when we were concerned that
our banking system could collapse, many large banks paid out
billions in dividends to enrich their shareholders. Dodd-Frank
ended this practice by preventing banks from paying dividends
if they fail their stress test. But in the wrong choice act,
there is no penalty for failing stress tests if the banks
qualify over the low bar that lets them get out of their safety
regulations.
Do you share my concern that the wrong choice act will
reverse this important safeguard?
Ms. Liner. Thank you very much for your question,
Congresswoman. I do share your concern, and thank you for
bringing up this point.
One of the biggest scandals that occurred during the
financial crisis is that banks were still paying dividends,
billions in dividends, at the same time that they were begging
the Fed for help to keep their doors open.
In fact, in the fourth quarter of 2008, banks gave out over
$6 billion in dividends to their shareholders. At the same time
during the fourth quarter of 2008, nearly 5 million Americans
lost their jobs because of the onset of the financial crisis.
So thank you for bringing this up, because stress tests are
a test, and tests have consequences.
Ms. Velazquez. Thank you.
Mr. Bertsch, clearinghouses play a critical role in
managing risk and promoting stability in our financial markets.
Because of this, some clearinghouses that have been deemed
systemically important have been subjected to enhanced
supervision pursuant to Title VIII of Dodd-Frank.
Are you concerned that doing away with this enhanced
supervision and some of the related tools given to the
supervisors will introduce risks to the financial markets and
the small businesses and consumers who rely on them?
Mr. Bertsch. Yes, I am concerned, although that has not
been the primary focus of our attention at this point on this
week-old bill. But, yes, we are concerned--I am concerned about
the oversight structures, not only the SEC but the
clearinghouses and otherwise, that in various ways this bill
undercuts.
Ms. Velazquez. Thank you.
Ms. Liner, under the wrong choice act, if a bank maintains
a 10-percent quarterly leverage ratio, it can choose to opt out
of Dodd-Frank's enhanced prudential standards, including risk-
based capital rules, liquidity requirements, risk management
standards, resolution plans, stress testing, and other
important safeguards.
Can you explain why more than a simple leverage ratio is
required to ensure a global megabank operates in a safe and
sound manner?
Ms. Liner. Yes. Thank you, Congresswoman. You just provided
a really important list of the various tools that Dodd-Frank
uses to ensure that our financial sector is safe, stable, and
healthy.
To explain what some of these are: Liquidity requirements.
This is different from a leverage ratio and capital
requirements because it makes sure that banks not just have
enough assets but enough liquid assets. Because assets like
loans and securities are not as liquid as cash. And the cause
of some of the large bank failures during the crisis is that
they did not have access to enough liquid assets; they couldn't
liquidate many of their assets in time to be able to stay open.
Risk management standards, another excellent example of a
Dodd-Frank reform that keeps consumers and investors safer. It
is incredible to think that a publicly traded bank holding
company did not have to have a risk management committee or a
risk management officer prior to Dodd-Frank.
And, finally, I would just like to add the countercyclical
buffer. So the leverage ratio is always 10 percent, whether we
are in an economic expansion or an economic recession. And in
Dodd-Frank, there is a countercyclical buffer that requires
banks to take on more capital if economic conditions
deteriorate.
Ms. Velazquez. Thank you.
Ms. Liner. Thank you.
Ms. Velazquez. Mr. Coffee, would you like to comment? You
have 25 seconds.
Mr. Coffee. I agree with what she said. As long as you use
a single leverage point, you are inviting banks to greatly
increase the risk level of their assets. They will trade in
those stodgy, old, dull treasuries and buy very risky credit
default swaps. And that is dangerous, but they could do it
under a single metric test.
Ms. Velazquez. Thank you.
Mr. Hollingsworth. The gentlelady yields back.
The Chair now recognizes the ranking member, the gentlelady
from California, Ms. Waters.
Ms. Waters. Thank you very much.
I would like to first thank all of our presenters here
today. It is so important for you to be here to help educate
the public about this wrong choice act and the devastation that
it would cause should it pass.
I would like to say to Reverend Willie Gable, Pastor at the
National Baptist Convention USA, I want to thank you for what
you are doing. You talked about these minority communities,
African American communities being targeted.
Rev. Gable. Yes.
Ms. Waters. And we find that all of the schemes, all of the
ripoffs that anybody can think of, they target them right into
the most vulnerable communities. And I know it creates a lot of
work for those of you who are trying to look out for the least
of these.
You talked about the woman who was taken advantage of with
dementia. Could you just share with us the kind of harm that
you have experienced from those who have been taken advantage
of? Maybe they are similar to the woman with dementia or in
other ways. Do they have to come to the church and then ask
them for money once they are burdened with this debt and they
can't pay it and they can't get any more money? What do you
guys have to do to help them?
Rev. Gable. Thank you, Congresswoman.
First of all, let me say that there seems to be a
philosophy that has occurred in this country that engenders
this idea that the poor should pay more for everything--more
for a car, more for a home, more for food, more for access to
capital. I don't know where it came from. And these are working
poor. We are not talking about people sitting on the street.
What happens is that the faith institutions end up having
to support this. Our Faith for Just Lending Coalition, which is
a coalition of the Catholic bishops, the National Evangelical
Association, Southern Baptists, National Baptists, PICO,
working together, all of us, to a group, an institution, are
finding the same thing, that we are supporting, that every day
we have individuals, every week, coming in who are having
massive problems because of predatory lending--particularly
predatory lending.
And it is a designed, it is a planned effort that these
lobbyists have worked and they continue to work. Even while
this bill, this Wrong Choice bill, is being discussed, they are
planning on how they can come up with ways to get into this
community.
We have individuals every week who come to us and, through
our benevolent fund, we have to give support to them because
they can't get out of debt.
Ms. Waters. Well, Reverend, I would like you to help us get
the word out about this Wrong Choice bill. It would take away
the authority of the Consumer Financial Protection Bureau to
develop rules about how they operate. So when you go back to
the convention and you talk with the other pastors and all
those who you are aligned with, let them know we have to stop
this Wrong Choice bill.
Rev. Gable. We shall do that.
Ms. Waters. Thank you.
Let me just add one other thing. There was a lot of
discussion, I think, from--who is that over there?--yes, about
community banks. And people don't know, for the most part, that
we have exempted them from some of the rules of the big banks.
They come in here and the big banks hide behind the community
banks and would have you think that--they are talking about
regulations that--causing the little banks problems, but really
it is the big banks.
Would you expound on that just a little bit more?
Ms. Edelman. Sure. I would be happy to.
That is exactly right. We have been very concerned that
Congress would roll back financial reform in the name of
helping the little guy, when the wrong choice act is really
about giveaways for the big banks.
Small community banks have exemptions from a number of
Dodd-Frank provisions. Only 2 of the roughly 6,000 community
banks--or 4, I am sorry, 4 of the roughly 6,000 community banks
do stress testing. They don't have to do living wills. They
have more underwriting flexibility. The CFPB has worked with
them time and time again to make sure that the regulations are
properly tailored for them. Small businesses, including many
community banks, get an opportunity to submit early comments.
The CFPB and other regulators have all created new advisory
councils, including with the community banks.
So community banks are already carved out of many of the
provisions that were designed for the bigger banks. And
expanding these exemptions for the big banks isn't going to do
much to help the little guy.
Ms. Waters. Thank you so very much.
And I yield back the balance.
Mr. Hollingsworth. The gentlelady yields back the balance
of her time.
The Chair now recognizes the gentleman from New York, Mr.
Meeks, for 5 minutes.
Mr. Meeks. Thank you.
And thank all of you for your testimony that you have been
giving thus far, because it is very important. We have found
that many of my colleagues on the Republican side of the aisle
have amnesia about what took place before 2008 and the people
that it has affected. And you clearly have in your testimonies
reminded all of America, thereby helping us to let our
constituents know how important it is that we stop the wrong
choice bill because it is not helpful to them.
With that, let me ask Ms. Liner, in 2007 and 2008 we saw
banks were still paying dividends to their shareholders even
though they were experiencing a lot of losses. An example of
this was Lehman Brothers, which eventually received taxpayer
money, continued to pay dividends until after their bankruptcy.
Dodd-Frank allows regulators to prevent such dividends if
banks do poorly on their stress test. Could you explain for my
constituents so that they understand why stress testing is
important and how the wrong choice act's proposals to prevent
regulators from limiting dividends will water down stress
testing?
Ms. Liner. Of course. Thank you, Congressman.
Stress testing is a critical, proactive tool that we can
use to ensure that our banks are strong enough for a future
recession.
And one thing that we saw happen in the financial crisis is
that banks that weren't strong enough to stay open without
extraordinary help were still paying out dividends to their
shareholders and making capital distributions.
Under the wrong choice act, there would be no penalty if a
bank repeatedly failed a stress test to prevent them from
paying out dividends. We saw that this behavior is simply
unacceptable during the financial crisis, and Dodd-Frank does
the right thing by making stress tests matter.
Thank you.
Mr. Meeks. Thank you. Thank you very much.
And then there is one other issue that has been important
to me. Some of you may know that I also serve on the House
Foreign Affairs Committee. And I know that we have been working
very hard and negotiating, for example, with the EU to ensure
that our financial regulatory systems can work in harmony. We
are so interconnected.
So, Ms. Liner, again, many of the institutions we regulate
are also regulated abroad, right? And there are aspects of
Dodd-Frank that would disrupt our cooperation with these
agreements abroad.
So, if you could answer this question, what kind of impact
can the lack of financial cohesion between the United States
and the EU have on the everyday American who we are focused on?
A lot of times, people don't recognize what the global aspects
of something are, how it affects us locally. Can you briefly
explain what effects it would have on the local constituent?
Ms. Liner. Sure.
The United States is a leader in global financial
regulation, and for a good reason: Because we are a leader in
the financial sector. There are a variety of global agreements
that the United States has led and is a party to that ensure
that all banks globally are prepared for anything that may
arise in the global economy.
Some of the things that the United States is a part of,
with global systemically important banks--we have eight banks
that meet this criteria, and they are required to carry higher
levels of capital. They are required to participate in the
liquidity coverage ratio at a higher standard than other banks.
And there are few other regulations by Basel III, the total
loss-absorbing capital and net stable funding ratio rules, that
it would be a concern if we no longer participated in them for
our standing in the global economy.
Mr. Meeks. Thank you very much.
And in my last few seconds, let me just say that I know
that before the crisis of 2007 there was no one anywhere who
spoke for the consumers. And that is the reason why the
Consumer Financial Protection Bureau was created.
And I know, Reverend, that it is difficult for many of your
parishioners who folks are trying to bring these products up
to, and they are not individuals who are reading the fine
print, nor do they have anyone to advise them of where to go.
So, with the Consumer Financial Protection Bureau, I would
hope that--and maybe you can tell me that you have been--that
you can refer or give individuals a name or a number to call
within the Consumer Financial Protection Bureau so that they
can say, ``Check out this proposal,'' so that they could have
confidence that they are doing the right thing and someone is
not trying to pull a con game or trying to do something that is
not good for them.
That is good for you, isn't it?
Rev. Gable. Absolutely. The CFPB has been just a yeoman's
group for protecting the most vulnerable. And it is
unfathomable to me that this Wrong Choice bill would try to
eliminate some of the great things. It brought back $11
billion, that's ``billion, with a B.'' They have returned that
amount of money to consumers and to other agencies. Why would
you try to eliminate something like that?
The proposed rule for payday lending that is coming about
and the work that we have been doing, it is something--and I
hear the tick, tick, tick. But the problem is so immense and
the passion we have--I understand, Mr. Chairman. But this is
something we have to fight for.
Mr. Hollingsworth. The gentleman's time has expired. The
Chair now recognizes the gentleman from Massachusetts, Mr.
Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. And I want to thank
the panelists.
There are so many bad things in this bill that the truth is
there is part of me that doesn't even think we should bother
talking about it, because there is no way this bill can be
fixed enough to make it worth discussing. But here we are, and
we are going to have to vote on it, I think next week? Next
week. So I want to be really clear, for those of you who have
activist communities, you best get them going, because the time
is now and they need to know about it.
But I want to focus on a couple of things. First of all, I
want to follow up on what the ranking member was talking about.
I am a community bank guy. All my money that I have, my
personal money, my campaign money, my wife's money, it is all
in community banks, a couple of credit unions, in community
banks, because I am the guy who likes to know the person behind
the glass and they want to know me. So when I say that, I have
nothing against big banks, I think we need big banks to have an
effective economy. Big business does, but I don't.
All that being said, every time a community bank has come
in to see me, they know I am their friend, and I tell them all
the same thing, basically what the ranking member was saying:
You do realize they are using you, they are hiding behind you.
And I guess, for the sake of discussion, I would like to
ask the panel, does anybody here object if, for the sake of
discussion, again, I know we would have to come up with an
actual number, but if I said for the sake of discussion any
bank below $25 billion is exempt from every Dodd-Frank
provision, and as far as I am concerned, exempt from the QM
provisions if they hold a mortgage on their own books, anybody
here, will your head explode if you hear something like that?
Am I completely off?
Ms. Edelman. Twenty-five billion sounds pretty high. The
FDIC defines community banks as below $10 billion. So if you
move that to $2 billion or $10 billion, I would get more
comfortable there.
Mr. Capuano. But everybody has a different definition. They
have a definition. That $10 billion definition has been around
for a long time and not adjusted for inflation.
I think that is what I would like to do. Again, I am not
sure of the number. I am happy to discuss the number. But that
way we get the people that we never wanted to get off, they can
go home, continue doing their banking, servicing the
communities, and we can talk about the people that, I don't
think they are actively trying to ruin the economy, but they
did it, and they might do it again.
I also want to focus for a minute on items that I think the
average person might have an understanding of. And, again, most
people don't understand capital ratios and living wills and all
that kind of stuff. But I think there is at least one thing
they understand, there are a couple, but I think there is one
in particular, and that is shareholder activism.
We have a provision in Dodd-Frank that says if you own the
lesser of $2,000 worth of shares or 1 percent, whatever the
lower amount is, you have a right to offer a proposal to the
corporation that they have to accept. You may not win, but you
have that right.
This provision says--they changed that to a minimum of 1
percent of the corporation and you have to hold it for 3 years.
That takes everybody I know out of this and many sizeable
investors, not just my mother. It takes out a lot of sizeable
investors. I don't know many people who can invest, oh, let's
say a million bucks. There are some, God bless them, but I
don't know them. And even at that investment, you would have a
hard time making that 1 percent threshold.
The average S&P 500, the market capitalization is about $45
billion of those companies, which means you would have to have
$453 million invested in that company for 3 years before you
could have a voice. And I have always thought that shareholders
were the people who actually owned corporations. Did I make
that mistake? Are they owned by the CEO or are they owned by
stockholders? Did the law change?
Does anybody think that that provision is a good choice?
Ms. Klemmer. If I could respond, there is an SEC study that
actually showed a correlation between improved firm value and
shareholder activism, and I think it was at least by 60 basis
points, which resulted in billions of dollars of added
shareholder value through their activism.
And also, typically when shares come with less rights,
people expect--investors expect a higher return. And so if you
start taking away rights, you could actually drive up the cost
of capital for a firm. And so I think everyone loses with this.
I don't see an upside.
Mr. Capuano. I just get shocked, because I was always under
the impression that the Republican tenets were all about, it is
mine, you can't use it if it is mine. And here is a situation
where it is mine, I own the stock, or I own the stock on behalf
of a thousand other people, and I don't have a voice in the
company. Just stunning to me.
And I see my time has expired. But thank you very much for
being here and lifting your voices in the right directions.
Mr. Hollingsworth. The Chair now recognizes the gentlelady
from Wisconsin, Ms. Moore, who is also the ranking member of
our Monetary Policy and Trade Subcommittee.
Ms. Moore. Thank you, Mr. Chairman. And thank you, Ranking
Member Waters, for this hearing. And I want to add my voice to
those who have thanked this very distinguished panel for very
important testimony.
Let me dive right in. My time is limited. And I don't know
who would best answer this question. Ms. Klemmer, Ms. Liner,
Mr. Bertsch, anybody else who feels that they are better to
answer it, please jump in. But I was stunned with this
legislation to see that it included a provision to repeal the
fiduciary rule, which has jurisdiction under the Labor
Committee, and I have worked very diligently on this best
standard.
I am wondering if any of you could just weigh in for a
brief moment--oh, you want to, okay--and tell us what we
expect.
Ms. Lubin. Thank you. For years, and you heard I have been
a securities regulator for 30 years, we have been trying to
hold the brokerage community to the standards that they
advertise to their clients, that when they say they are
investing their money, they are going to have money for their
kids, for their college education, for their weddings, for
their retirement, that those brokers act in the client's best
interest.
Now, ideally in every context they would have a fiduciary
obligation to their clients. For now, what the Department of
Labor has done is take a big step towards getting us there and
saying when a broker-dealer and their stockbrokers deal with a
client and handle their retirement funds, they have a fiduciary
obligation, they need to act in the client's best interest,
they need to put their interest ahead, they can't just have a--
this is a suitability standard.
And what this bill would do is take away the ability for
the Department of Labor to adopt that rule until the SEC moves.
And, unfortunately, the SEC has had the opportunity to move in
this space for a long time and hasn't had the ability to do so.
So in the school of, half a loaf is better than none, I
think we could get started and make significant progress by
allowing the Department of Labor rule to go forward.
Ms. Moore. Thank you so much for that.
Now, my colleague, Mrs. Maloney, asked about the 10 percent
simple leverage, no risk weighting, but I also would like the
panel to respond to things that have been included. Like at
first, the first draft of this bill had the CAMELS rating by
the FDIC included, and they took that out.
Also, I guess many of you are familiar with--also, I want
to ask you about the off-balance-sheet vehicles that would be
allowed--would be restored under this bill. What impact do you
think that would have, briefly? Whomever it was who talked
about--and this is a big panel--solvency versus liquidity. That
is you, Ms. Liner?
Mr. Coffee. I certainly have talked about liquidity, and I
think that is not a complete answer simply to focus on a
leverage test. But the point that I think I was making earlier
today and I think maybe you are getting near is that the only
way you are ever going to be able to reorganize a financial
institution or a bank in any kind of liquidation or bankruptcy
is by providing some access to short-term liquidity.
We do that today under orderly liquidation authority by
turning to the FDIC's fund, which the industry has to
replenish. We would have nothing similar, nothing else that
would work in the short term if we simply moved to a Bankruptcy
Act provision.
Ms. Moore. But I specifically wanted to talk about the
absence of the CAMELS ratings that are supervised by the FDIC.
No one wants to respond to that? That is fine.
My time is limited. So I think Reverend Gable and some of
the others of you, I know that this is an expert panel, but we
did--we have had other expert panels appear before us on this
topic.
One in particular is a Mr. Wallison, who is a senior fellow
with the American Enterprise Institute, and he says that this
crisis was not caused by credit default swaps, not poor
underwriting, not inflated appraisals, not credit rating
agencies, but because of maybe CRA, Freddie and Fannie, and
predatory borrowers.
So, I guess, Reverend Gable, I would like to hear a little
bit your view of these predatory borrowers that really caused
this crisis. And I just want to remind you, he is an expert.
Rev. Gable. I have had the privilege to speak before that
group before, after Hurricane Katrina, so I could imagine
something like that coming from them.
There is no such thing as a predatory borrower. It does not
exist. These are individuals who are paying 400, 500, 600
percent for a loan. How can they be predatory? They are being
preyed upon. And so for someone to even have the concept as an
expert, I don't know what their expertise is in, but it is not
in being in debt. And having to live in poverty and pay 400
percent interest, or 700 percent interest is just ridiculous.
Ms. Moore. My time has expired. Thank you, Mr. Chairman,
for your indulgence.
Mr. Hollingsworth. The Chair now recognizes the gentlelady
from Ohio, Mrs. Beatty, for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Waters.
And thank you so much to this distinguished panel who is
here today, and, of course, to our very own Senator Warren, who
started the presentations with her testimony this morning.
Certainly, as you know, this bill that is before us today,
named the Financial Create Hope and Opportunity for Investors,
Consumers, and Entrepreneurs, or the CHOICE Act, I believe is
certainly a misnomer, because it is, in fact, the wrong choice
for investors, for consumers, for entrepreneurs, and for the
American economy. I know that firsthand because prior to coming
to Congress, I fell into that category as an investor, as an
entrepreneur.
And certainly it lacks hope and opportunity for the
American people. But it is the wrong choice because it brings
us back to the days that led us to Financial CHOICE. It is the
wrong choice because it takes us back to a time when we were
less investor protected. It is the wrong choice because it
takes us back to a time when consumers could be taken advantage
of without representation. I believe it is the wrong choice
because it takes us back to a time that led the United States
economy to the brink of collapse.
All of that is at stake today. And I ask you to look at the
left of this chamber.
And I am going to say this today, Mr. Chairman, because I
know this is your first year and you probably drew the short
straw to sit in that chair.
Mr. Hollingsworth. I consider it an honor.
Mrs. Beatty. But with that, I am going to say thank you to
you for taking it, whether it was an honor or not. But, Mr.
Chairman, let me just say to you, being on this committee since
I was a freshman, I have heard repeatedly from the Chair who
traditionally sits in that seat that he would hope that we
would work in a bipartisan fashion, that he would hope
Democrats would participate more and come up with ideas to
share, and that he welcomed that we invite people in to express
their ideas and positions.
So, Mr. Chairman, I want you to know that our ranking
member has spent tireless hours looking into this bill,
inviting experts, and asking us to be here today to share with
our colleagues.
Again, I ask everyone to look to this side of the aisle,
and they are absent. So I want you to know, in meetings to come
later, you are going to see a photo of that, as they always put
those charts up there because they believe that the visual
tells the story of our economy. Well, I think what tells a
better story than any numbers, any facts that you can put up
there is that we have 30-some empty seats over here when we are
dealing with one of the most critical things that we could do
to take a look at how we could provide choice for those
individuals in all of our communities and our districts.
Now, with that said, I do have a question. I am from the
seventh-largest State, the great State of Ohio. And I have
heard from members of the Ohio pension system, a system that I
also belong to.
So I am going to look to you, Mr. Bertsch, because I
believe that is your area of expertise. And since I have had
several of the pension funds that invest in our retirement of
thousands of Ohioans express their concerns, can you tell me,
since you represent the interest of the pension funds, like
OPERS and Ohio Police and Fire Pension Fund, the School
Employees Retirement System in Ohio, and State teachers, can
you explain how some of the provisions of this bill hurt the
ability of pension funds to effectively invest and manage the
retirement of thousands of Ohioans?
Mr. Bertsch. What we have been focused on in particular is
their rights as shareholders, since they invest the bulk of
their money in publicly traded companies, are severely cut back
by this bill, and that is what we are most concerned about.
Those rights that they have used historically to push for
sustainable long-term value creation would be badly damaged by
provisions of this bill. That is really the core thing I would
want to address.
Mrs. Beatty. So the short answer is, if it were a yes or
no, the answer is clearly, yes--
Mr. Bertsch. Yes.
Mrs. Beatty. --it hurts thousands of individuals?
Mr. Bertsch. Right. There are many other provisions, but
that is what I would focus on.
Mrs. Beatty. Thank you. I yield back, Mr. Chairman.
Mr. Hollingsworth. The Chair now recognizes the gentleman
from Michigan, Mr. Kildee.
Mr. Kildee. Thank you, Mr. Chairman.
And, again, thank you to the panel for participating in
this hearing.
A hundred and seven years ago, Santayana wrote that those
who cannot remember the past are condemned to repeat it. A
little more recently, Stephen Hawking said, ``We spend a great
deal of time studying history, which, let's face it, is mostly
the history of stupidity.''
The reason I mention that is that I find it almost
impossible to comprehend that those advocating for this
legislation fail to study even the most recent history of this
country.
And as I said in my opening comments, I am now in my third
term, but before I came here, I was working across the country,
working with communities to try to breathe life back into
abandoned properties. I founded an organization called the
Center for Community Progress, still doing a lot of work in
that field. And I saw, not just in my hometown of Flint, where
chronic abandonment was the sort of predecessor to this episode
of abandonment, but I saw strong communities, strong
neighborhoods all across the country impacted in ways that,
unfortunately, is not yet history.
Sure, this was a decade ago, but the impact on our Nation
and on individuals, on families, is still being felt. The loss
of the sole source in some cases, but the primary source of
lifetime savings, the equity in their home, vanished. In a lot
of places around the country, we are not even close to
recovering the value that was lost.
And the consequence of that is significantly weakened
communities, municipal governments that are struggling to try
to provide basic public services, because the main source of
revenue for those local governments has been the value of land
and the ability to hold a community together and generate
income, revenue, that can be put back into public services.
This is a crisis that is still ongoing. So when we talk
about it, we have to resist the temptation to say we want to
just miss another rerun of that history and realize we are
still in the long tail of that crisis.
One area that I would like to get some comments on--and,
Ms. Edelman, if you wouldn't mind beginning and then I will
just see who else has something to say--I think we should be
really clear about how this wrong choice act could put
homeowners and potential new borrowers in a position of
jeopardy.
Because for most Americans the way they understood the
crisis was not big institutional failures or shareholder
losses; it is that they lost their house. Or, their neighbor
lost their house and that abandoned shell that was sold to some
online speculator has undermined the value of their asset that
they continue to support and pay their mortgage on and pay
their taxes for. It wasn't just people who lost their houses,
it was all the people who surround those empty places that have
suffered big losses.
And I wonder, in the minute-and-a-half remaining, if you
could start, Ms. Edelman, and just help us understand how this
takes us back to a place where that could happen again?
Ms. Edelman. Yes. Thanks for your statement. And just one
thing to underscore is that there are still over 7 million
borrowers who are--homeowners who are underwater on their
mortgages, a thousand counties in the United States where
negative equity rates are either stuck or actually getting
worse. So we are not through this crisis in many parts of the
country.
In my mind, there are three or four main threats of the
CHOICE Act to homeowners and homebuyers. First, mortgage
servicing. Part of the reason that the foreclosure crisis was
as bad as it was is that we did not have servicing standards in
place to deal with the volume of delinquent borrowers that we
had. So the CFPB has written new mortgage servicing rules,
which should help going forward. This bill would expand an
exemption that is currently just for very small banks for some
larger banks from those rules.
The second area that really concerns me is the provision of
the bill, part of Title V, that would provide all sorts of
freedom from any legal liability on any mortgage made even if
it has risky features as long as the bank holds it on
portfolio, and that is just not a good enough protection for
homeowners. We learned that with Washington Mutual and
Wachovia, which made plenty of lousy loans that they held on
portfolio. It is not enough to protect consumers. And that, to
me, is one of the provisions that truly keeps me up at night.
And, finally, the one that I will mention with the 6
seconds left, is provisions that would make it easier to steer
manufactured housing borrowers into high cost loans. These are
some of the most vulnerable of our consumers, and this bill
would pose risk to them.
Mr. Kildee. I appreciate that. And if I could just, on that
issue of portfolio loans, I completely agree. We tried. There
was a possibility we could have gotten something done. We tried
to create some lanes to keep those products from going back to
those exotic and dangerous exploding mortgages. But in an era
of bipartisanship--which really doesn't exist--we couldn't get
it done there too.
So thank you very, very much.
Mr. Hollingsworth. The Chair now recognizes the gentleman
from Connecticut, Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman. And thank you to the
panel for participating in this. I would really like to thank
Ranking Member Waters for assembling this group and for doing
this due diligence around a really important and threatening
piece of legislation.
I am one of three Members sitting in the room who was here
when we wrote Dodd-Frank and passed it, and we did it over
many, many months, with hearing after hearing after hearing,
including input from everybody, including representatives of
the industries, consumer groups, unions, you name it. It was a
lot of hard work. And here we have a major revision, maybe even
a repeal of much of the work that we did back then, based on
one hearing.
And here is the interesting thing. The theme that has been
teased out today is that this repeal is being done in the
service of the big banks and Wall Street, and I think there is
something to that. But interestingly enough, when I look at the
witnesses who actually participated in the hearing on April
26th, oddly, there are no big banks, there is no representative
of Wall Street. Instead, let me just read you who was here: the
Cato Institute; The Heritage Foundation; the American
Enterprise Institute; the R Street Institute; and the Mercatus
Center. Each and every one of these groups is a Libertarian
think tank.
Now, there is a lot to be said about think tanks, but I
think we would all agree that people who are in think tanks are
not actually out there in the world regulating, doing things,
participating in this industry. And without exception, these
think tanks, which were the only witnesses in the only hearing
around the CHOICE Act, are dedicated to the idea that
government should shrink almost to the vanishing point. I am
reminded of Grover Norquist, who said he wants to starve the
government of money so that it can be strangled in the bathtub.
Now, that, by the way, is a fair debate. This is why two
parties exist. We should have a debate about how big government
should or should not be. But in this area, this is a really
dangerous instinct. We have 500 years-plus of history of what
happens when you get leverage, fractional banking, when you get
speculation in an unregulated environment, literally 500 years:
the 17th century Dutch tulip bubble; the 18th century South
Seas bubble; the 1929 crash, which devastated this country; the
Japanese property bubble of the 1980s; the S&L crisis of the
1980s, and of course the catastrophe that led to 2008 and all
of the effects that you have been so good at reminding us of.
All of those events happened because of this idea that you
just do away with the regulated market, that when it was
established in the 1930s created the stability that contributed
to this country's middle-class growth. So I think it is a
profoundly dangerous thing, and I want to just explore two
areas.
Number one is, it hasn't been remarked on today, but one of
the things the CHOICE Act would do would be to repeal Section
978 of Dodd-Frank, which provides a steady and predictable
source of funding to the Government Accounting Standards Board
(GASB). Now, we don't talk about it a lot, but these are the
scorekeepers, these are the people who provide the financial
statements that allow the municipal bond market to work. They
are critical to the market, and of course this would, the
CHOICE Act would repeal that provision.
Mr. Chairman, I would like to seek unanimous consent just
to insert into the record a letter to Chairman Hensarling from
a bunch of Members who happen to be CPAs, as well as from the
National Governors Association.
Mr. Hollingsworth. Without objection, it is so ordered.
Mr. Himes. Thank you.
And then, Professor Coffee, first of all, I want to thank
you for the work you have contributed to our efforts here to
deal with insider trading and make the law clear there. But I
want to give you in my remaining minute and 20 seconds or so an
opportunity to talk about the CHOICE Act's replacement of the
orderly liquidation authority. This is the authority that when
we are back in 2008, no one knows who has authority to do what,
says now we have a regime.
I hear time and time again that bankruptcy suffices as a
mechanism to deal with that kind of crisis. I don't happen to
believe that is true. Can you just spend a minute telling us
why bankruptcy, as normal firms think of it, does not work in
the event of a financial crisis?
Mr. Coffee. I want to be clear that I think there could be
a robust bankruptcy provision that would be helpful and that
would be a supplement, but it can't be a substitute. What we
lose when we shut down orderly liquidation authority is
basically four things.
We lose the regulator making the decision to shut the bank
down. Instead, it will be shut down when the bank totally runs
out of money. Lehman was shut down the last day it could
stagger to get any money paid.
It will take much longer to shut down because the bank will
wait until the last minute. So we will have bigger losses
because there has been a longer period of insolvency.
Three, we will lose any access to liquidity. Most bank
failures of large banks are probably more caused by liquidity
failures than by complete insolvency. That is the simplest way
to solve the problem, and the FDIC has done that with small
banks for decades successfully.
Then, we lose accountability. Accountability is there under
the liquidation authority, not there in the Bankruptcy Code.
You can't hold these people liable.
My time is up.
Mr. Himes. Thank you, Professor.
I yield back my time.
Mr. Hollingsworth. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Vargas, for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. And thank
you for being here. I do appreciate it very much. And I also
want to thank the ranking member for giving us this opportunity
to question these witnesses.
And, of course, I thank the panel here today for being here
and allowing us to hear from you and to ask you questions.
Now, I have to say that I think that the Dodd-Frank law has
worked pretty well. I think that it has performed generally
well. It is not perfect.
But the thing that really touched me today was something
you said, Pastor Gable, which is that somehow we get the notion
that poor people should pay more, that they should pay more for
a car, that they should pay more for a home, frankly, they
should pay more for food even, it is more expensive in the
community, and I think that is wrong.
I do think we should love them more, I think that we should
because they are the least among us. And I do believe in
Canonized scripture. I know that my friend Mr. Sherman said a
word about that, and I think more in line with Dodd-Frank. But
I do believe in Canonized scripture, so I do think that we
should love them more and I think we are obliged to do that and
we should.
But the one question I did want to ask about, and it is a
little bit touchy, but I think it is important, which is, I do
hear from some of my constituents these days that it is hard to
get a loan, and I do hear that. I heard a little bit different
today that the loans are being originated, funded at a higher
level. But I do hear still a significant amount, less than a
few years ago, to be frank too, but I do hear people come and
they say, ``Look, I have a study job, I can prove that, I have
the downpayment. Look, my credit score is high. I can show
where I got my downpayment from. I am not hiding anything. I
still can't get that loan.''
Could you talk a little bit about that? And it seems, Ms.
Edelman, you are chomping at the bit to get at it, so why don't
you go ahead.
Ms. Edelman. Yes. No, I am glad that you raised the
question, and I think that this is worth discussing, because--
Mr. Vargas. That is why I mentioned it.
Ms. Edelman. Yes. In the housing market right now, credit
is tight with respect to mortgages, but it has very, very
little to do with Dodd-Frank. Last week, the Urban League
hosted an event with civil rights groups, consumer groups, and
two mortgage banking organizations, and all of them agreed on
four major problems that are keeping access to credit too tight
for most Americans.
Number one, GSE pricing. Right now there is a 350-basis-
point difference between someone who applies for a loan at the
higher end of the spectrum versus the lower end of the
spectrum. If you have below a 700 credit score, you are not
really going to get a loan that is bought by Fannie or Freddie.
That is number one.
Number two is an issue around FHA and the funding that it
has available to really finish what is called the taxonomy to
help mortgage lenders understand sort of the rules of the road.
There are some enforcement and regulatory issues on the FHA
side that people are working on already on a bipartisan basis.
Number three is around credit score models. Right now your
credit score is one of the major determinants of whether you
can get an access to a loan. There are a lot of problems, and
they are not all that representative of your credit risk.
Finally, the final issue that they all agreed on was that
we need more resources to help get borrowers, people who want
to buy homes ready for home ownership. That means help with
downpayments. That means help repairing credit, because we just
came out of a major crisis and recession, and it takes a while
to repair the credit.
So there are a host of issues that are keeping our mortgage
market from being accessible, but Dodd-Frank does not appear to
be one of them.
Rev. Gable. Congressman, in the area--and you are correct--
of small dollar loans, there is that need. Now, we have
attempted to close that vacuum with churches and our
nonprofits. In concert with credit unions, they are making
small dollar loans. Catholic Charities, National Baptist is
establishing a national Federal credit union model, that we
will hope to do that also, working with another Federal credit
union to do small dollars.
It certainly has been our efforts through Faith and Credit
Roundtable and Faith for Just Lending to talk with community
banks to get back in the business of these smaller dollar
loans.
Let me just say this: Those who are trying to get small
dollar loans, it would be okay if the payday lenders who were
doing it and the borrower was getting the same rate that the
military gets, 36 percent. I believe that what is good for the
military ought to be good for America.
Mr. Vargas. My time has expired, unfortunately, but I was
going to ask--thank you. Thank you, Mr. Chairman.
Mr. Hollingsworth. The Chair now recognizes the gentleman
from Texas, Mr. Green, the ranking member of our Oversight and
Investigations Subcommittee.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member as well. I especially thank her, because this panel is
really what America looks like. And this is a rare occasion for
us here in the Financial Services Committee.
So I thank all of you for being here today.
When we talk about homes being lost, we sometimes don't
understand the pain associated with the loss. Suffering can
teach you that which you can learn no other way. I saw the
suffering. I saw the people who were evicted from their homes.
But they were evicted also from their dreams. Their children
were evicted from the schools that they were attending.
It was about more than a house. Many of these people had
just purchased the home of their dreams, and many of them
purchased that home based upon representations that were made
to them by the person who helped them with the loan, that
caused them to buy more than they could afford, when they
qualified for less. They qualified for 5 percent, and they got
homes for 8 percent, 9 percent, even higher.
And the person who sold them the loan for 9 percent got a
kickback. They have a pleasant way of saying it, called the
yield spread premium, but it was a kickback. It was a bait-and-
switch scheme that allowed brokers to qualify people for 5
percent, smile in their faces and shake their hands, and say,
``Good news, you have a loan for 10 percent,'' and never tell
them.
In a righteous world, that would have been a crime. And the
truth is this: We are about to go back to a circumstance that
will allow this to happen again, and it won't be a crime.
People will be taken advantage of.
I remember the circumstances were so bad such that banks
would not lend to each other. They declined to accept the
credit from each other. And at that time, there was something
called proprietary trading, which means that the banks could
take the deposits from hardworking Americans and move them over
to the investment side and go out on Wall Street and gamble.
And if you win, great, you get to keep the profits. Who is the
``you'' in this statement? The people who were making the
investments, not the people who had the deposits in the bank.
I don't believe that most Americans would think that it is
appropriate to take the money that they deposit in a bank,
allow that to go over to the investment bankers and let them
gamble on Wall Street, and if they win, they get to keep the
profits, and if they lose--by the way, those funds are FDIC-
insured. And they are FDIC-insured because at the time this was
done, in 1933, I believe, or thereabouts, the deal that they
cut was that if we allow the FDIC to insure these banks, you
will have a firewall called Glass-Steagall, and Glass-Steagall
will prevent the deposits from being used to gamble with on
Wall Street.
That was the deal that was cut. The deal was broken, and we
are about to break it again, because we are going to rid
ourselves of the Volcker Rule with this Bad Choice Act, which
is the wrong choice.
So I saw the pain and the suffering. And my hope is that by
some miracle the Senate will stop what the House is about to
do, because the Senate is a bit more deliberative and they have
different rules.
But as you can see, the folks who are about to do this are
not really concerned, because they are not here today. God
bless them, I love them all, but I have to tell the truth. This
is almost an insult to what we are trying to accomplish. And I
hope that the camera is constantly panning the other side so
that people can see the lack of interest in what we are trying
to accomplish.
I don't have a question. I thank you, Mr. Chairman. And I
yield back my time.
Mr. Hollingsworth. The gentleman yields back.
The Chair now recognizes the gentleman from Nevada, Mr.
Kihuen, for 5 minutes.
Mr. Kihuen. Thank you, Mr. Chairman.
And thank you to the ranking member as well for bringing us
all together.
And thank you all for your presentations and being here to
speak truth to power. It is very disappointing, looking at the
other side, that only one of my colleagues from the other side
of the aisle chose to be here to listen to your testimony.
I wish that they would visit my district. As you all know,
Nevada was one of the hardest hit States in the country. Las
Vegas was even harder hit. And my congressional district had
the highest foreclosure rate in the country. And as we speak,
people are still losing their homes.
And it is disappointing that I am coming here to Congress
as a freshman to work in a bipartisan manner, to reach across
the aisle to come up with solutions to keep my constituents in
their homes, that we are going back to some of the same
regulations that put them in a financial crisis to begin with.
And this bill is going to do just that.
Look, I am more than happy to sit down with the other side
and come up with solutions, but when we can't even get them at
the table, it is very disappointing. How do you go back to your
constituents and explain to them that they are losing their
home, yet they are not doing anything to try to help keep them
in their home.
So it is disappointing, but nevertheless, I appreciate each
and every one of you for being here, for helping my
constituents stay in their homes and for continuing to fight on
behalf of the hardworking people who are still trying to make
ends meet here in our country.
I do have a question. Ms. Edelman, what kind of important
housing reforms contained in Dodd-Frank would this bill, the
wrong choice act, undermine?
Ms. Edelman. The bill would undermine many of the
protections put in place to prevent predatory mortgage lending.
So after the crisis and after there were millions of predatory
loans made, Congress put commonsense laws in place like, for
instance, a lender needs to evaluate a borrower's ability to
repay a loan before making it. They also put in place
incentives to try and get lenders to make loans without high
fees and risky features.
So overall they encourage a more affordable lending
environment, and the wrong choice act basically would gut,
would undermine some of those new rules, in particular the
qualified mortgage rule. As I mentioned in response to an
earlier question, it would allow banks to get sort of this--it
would get legal liability protection on any loan even if it has
risky features as long as they hold it on portfolio, which we
HAVE found time and time again is not a reliable strategy. It
makes manufactured housing consumers more vulnerable.
In addition to all of the large systemic issues that my
colleagues have spoken to, it turns it back to a day where
there was less trust between a buyer and a lender when you go
into a bank. The Dodd-Frank Act has helped to reestablish some
of that trust, and this proposal would really turn the clock
back to the day where you don't want to send your mother or
your kid or your grandmother in to get a mortgage loan.
Mr. Kihuen. So is it fair to say that if this bill passes,
we could potentially be facing another financial crisis in this
country, and particularly a housing crisis in Nevada in my
congressional district?
Ms. Edelman. I think that is right. I think that most of my
colleagues would agree that this bill, that this proposal would
put the United States financial system in a precarious
situation, similar to where it was right before the crisis, and
it would really undermine the stability of our housing market.
And home ownership, as you know, is really the path to wealth
for most families, it is where most of them have their family
wealth, and we don't want to gamble with that, and this would
gamble with that.
Mr. Kihuen. When you talk about the American Dream, it
entails owning a home, a car, having a good job, getting your
kids a good education. When you spend all your savings in
purchasing that home and because of the bad laws that we are
passing here in Congress you end up losing your home, and then
we are here in Congress and we are not even coming up with
solutions to try to keep them in their homes, that is
incomprehensible to me.
Ms. Edelman. That is right. And one thing to build on that
is that in the crisis many people who got predatory loans were
people who had owned their homes for decades, they had built
equity in their homes, and they were tricked into refinancing
into high interest rate loans that stripped them of their
wealth. So it wasn't just people chasing after the American
Dream, it was people who had achieved the American Dream and
were in a position to pass that equity down to their kids, and
they got derailed.
Mr. Kihuen. Thank you.
Mr. Chopra. If I could just add that you see closely the
physical look of boarded-up homes, of abandoned property due to
foreclosure, but I think sometimes we forget the invisible
wounds that are everywhere. When your child has to change a
school and sit alone at the lunch table. When your kids are
having a tough time sleeping because they see you worrying
about your finances. When you have to lose the neighbor who is
helping take care of your mom later. These wounds are scars,
and they don't go away easily, and we can't forget them.
Mr. Hollingsworth. The gentleman's time has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Crist, for 5 minutes.
Mr. Crist. Thank you very much, Mr. Chairman.
And I want to especially thank the ranking member. She made
this hearing possible. So God bless you and thank you very
much.
Democrats are united under her leadership to protect all
Americans from the wrong choice act and having to relive one of
the worst financial crises in our Nation's history.
I also want to thank the witnesses for agreeing to testify
on such short notice. Thank you for your kindness.
As Governor of Florida, which, as you know, was ground zero
for the foreclosure crisis, I witnessed firsthand how the
policies that led up to the crisis hurt families, hurt my
neighbors, hurt my friends in my hometown of St. Petersburg.
Imagine for a moment playing by the rules as you know them,
achieving a certain level of success, eventually you buy a
home, you achieved the American Dream, only to have it ripped
out from under you. You lose everything. No appeals. No second
chances. Nothing. The financial crisis took $17 trillion of
wealth away from the American people, from families, from
children, from grandparents. I never want to see that happen
again ever.
So I have a question. Ms. Liner, knowing all that we know
about the crisis and what caused it, if the Dodd-Frank Wall
Street Reform Act had been the law of the land in 2001, would
it have prevented the crisis, in your view?
Ms. Liner. Thank you for your question.
What is really important about the Dodd-Frank Act is that
it is proactive, it looks toward the future, about how can we
make our banking system stronger, because we can reduce the
likelihood of a crisis, and if we can reduce the amount of
losses, whether they are financial or social losses, as we have
spoken to both today, then we can prolong economic growth.
I hesitate to speculate if Dodd-Frank could have stopped
the crisis, because it is hard to say, but Dodd-Frank would
have lessened--
Mr. Crist. Let me rephrase, then. Is it less likely that we
would have had the crisis if Dodd-Frank were already in effect?
Less likely.
Ms. Liner. I feel that we could say we could have reduced
the probability that a crisis would have occurred and we could
have reduced the losses that would have occurred in the crisis.
Mr. Crist. If it had already been the law.
Ms. Liner. If it had already been the law.
Mr. Crist. Thank you.
Professor Coffee, same question. Would Dodd-Frank have
prevented the crisis?
Mr. Coffee. I can't tell you it would have.
Mr. Crist. I can't hear you. Sorry.
Mr. Coffee. It would have armed regulators so they could
have acted, if they had the courage and the foresight to do so.
I think you would have had to take action by the beginning of
2008, well before Bear Stearns failed, and it could have been
stopped, but I don't know that it would have been. It depends
on human beings.
Mr. Crist. Right.
Mr. Randhava. If I could add to that. It would have
provided a more streamlined place when it came to other
concerns that groups like ours had about mortgage products that
were out there with so many different regulators. Much to her
credit, former FDIC Chairwoman Sheila Bair really did a good
job of hearing us out, but when there were multiple regulators
dealing with consumer protection, there was not a whole lot she
could do single-handedly.
Mr. Crist. All right. Thank you.
Ms. Liner, we are here to discuss the wrong choice act.
Isn't that right?
Ms. Liner. That is correct, Congressman.
Mr. Crist. Thank you. Okay, then, knowing all we know about
the bill and the financial crisis, if the wrong choice act were
the law of the land in 2001, would it have prevented a crisis?
Ms. Liner. On that question, I feel much more confident in
my response, in that we would have really struggled to contain
the losses of the financial crisis. It could have been much
worse.
Mr. Crist. Okay. Thank you.
Professor Coffee, would the wrong choice act have prevented
the crisis, in your view?
Mr. Coffee. I don't see any way in which the wrong choice
act would have prevented a crisis. It would have left us about
as exposed as we were at that time.
Mr. Crist. Thank you both. That is all I need to know. The
wrong choice act ought to be defeated, and it is going to
affect real people in a real way. And you alluded to it, sir,
in some of your comments, about how this will affect children,
their ability to be able to be in a good learning environment,
so many things that are many times unseen rather than the more
obvious foreclosure on your home that is seen. It has an
incredible effect. So God help us.
Mr. Hollingsworth. Does the gentleman yield back?
Mr. Crist. Yes. I'm sorry. Forgive me.
Mr. Hollingsworth. The gentleman yields back.
The Chair now recognizes the gentleman from Washington, Mr.
Heck, for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
Professor Coffee, I am going to read you a statement and I
am going to ask you to reconcile it with the wrong choice act,
if you can. The statement is as follows: ``If you are a bank
and you want to operate like some nonbank entity, like a hedge
fund, then don't be a bank. Don't let banks use their
customers' money to do anything other than traditional
banking.''
Can you reconcile that statement with the contents of the
wrong choice act?
Mr. Coffee. No, I don't think I can.
Mr. Heck. Do you think the wrong choice act is highly
violative of this statement, both in substance and in spirit?
Mr. Coffee. You have just created a very prophylactic rule:
If you are a bank, don't take a lot of risk. This statute would
eliminate most of the risk-restricting provisions like the
Volcker Rule, so they are contradictory.
Mr. Heck. So if Speaker Ryan, who uttered this statement at
a townhall in front of his constituents, votes in favor of the
wrong choice act, he will in fact be violating what he said he
thought ought to be the policy of this land?
Mr. Coffee. I certainly see a tension.
Mr. Heck. All right.
This next question--I don't know to whom I should address
it, so I will ask anyone who has a good answer--relates to an
abiding concern of mine.
I have the great privilege to represent Joint Base Lewis-
McChord, 55,000 people a day report to work there, most of them
men and women in uniform. We are acutely aware of being
vigilant on their behalf during times of armed conflict, but as
our two theaters of armed conflict have declined in size and
scope, I tend to think and worry that their welfare recedes
from our uppermost thoughts. And indeed, as international
tensions has risen, it is a good reminder that we cannot allow
that to be the case.
One of the features of the Consumer Financial Protection
Bureau is the Office of Servicemember Affairs. And I would like
to ask anyone who can answer what you think the implication
might be to the capacity of the CFPB to educate and protect the
men and women who wear the uniform in furtherance of the
security of this Nation and its ability, the agency's ability
to protect their interest.
Mr. Chopra, you look like you are ready to get in, as a
former employee of that agency.
Mr. Chopra. There is just no question that service members,
veterans, and their families have been a target by so many bad
actors in the marketplace. And under the leadership of Holly
Petraeus and now Paul Cantwell you have seen an aggressive
change about how military families are treated. We saw major
enforcement actions across all the regulators targeting illegal
foreclosures, illegal car repossessions, illegal debt
collection, and illegal student lending.
And according to a report by the Department of Defense, a
major reason for servicemembers leaving service is because of
financial issues. Many lose their security clearances because
of problems with debt. And the DOD even cites data suggesting
that financial stress is a cost not only to increased costs due
to retraining of new recruits, but it has real national
security implications as well for morale and the strength of
the force.
We need to make sure that the Military Lending Act, the
Servicemember Civil Relief Act, and the CFPB with its dedicated
military office, which has been lauded by the senior enlisted
leadership of the military, stays intact and is strengthened.
Mr. Heck. So it would be fair and accurate for me to
surmise from what you just said that you think both our
Nation's security and the best interests of the men and women
who wear the uniform on our behalf would be diminished by the
passage of the wrong choice act?
Mr. Chopra. Absolutely. Senior enlisted leaders have made
clear that they need the CFPB on their side, and this bill
would essentially destroy that agency.
Mr. Heck. In the brief time I have left, I want to quote
one of my favorite American philosophers, albeit he was
Spanish-born, and that is, of course, George Santayana, who
said, those who cannot remember the past are condemned to
repeat it. Those who cannot remember the past are condemned to
repeat it. And if we do not learn the lessons of the Great
Recession and its causes, then we will be condemned to repeat
them, and passage of the wrong choice act will only hasten the
repeat of those very, very painful experiences.
Thank you one and all for giving of your most precious
commodity, your time, and being here with us today.
And with that I yield back, Mr. Chairman.
Mr. Hollingsworth. For what purpose does the gentlelady
from California--
Ms. Waters. I request unanimous consent to enter into the
record a list of 138 groups that are opposing all or part of
the CHOICE Act. These are the groups and I would like to enter
them into the record. Thank you.
Mr. Hollingsworth. Without objection, it is so ordered.
The Chair now recognizes himself for 5 minutes to ask
questions.
Ms. Liner, tell me a little bit about why regulators failed
to recognize the crisis in advance or the potential for a
crisis in advance?
Ms. Liner. Prior to the crisis, we did not have the Office
of Financial Research, which was established by Dodd-Frank.
Mr. Hollingsworth. We certainly had many other regulators,
though.
Ms. Liner. We did, but we didn't have a way for them to
communicate with each other, because the FSOC wasn't in place.
Mr. Hollingsworth. So they knew about it individually and
failed to communicate with each other about it?
Ms. Liner. The records show, the historical records show
that all the regulators were looking at different parts of the
financial system, and there was nothing in place for them to
communicate.
Mr. Hollingsworth. So it begs the question, if they didn't
know about it individually and then, I guess, as you say,
couldn't share the information about it, why do we think more
regulators will uncover these things if the regulators
beforehand couldn't uncover them before the crisis?
Ms. Liner. Just to clarify, I think that the regulators in
their spheres of the financial sector were aware of some of the
issues that were bubbling up. It was the interconnectedness
that really--
Mr. Hollingsworth. So it is not a matter that you are in
favor of the more regulation that Dodd-Frank has put it, you
just want to make sure that those regulators are better
connected?
Ms. Liner. That is one aspect. We support smart regulation,
and we think that Dodd-Frank is a modern smart regulation for
the financial sector.
Mr. Hollingsworth. Tell me a little about, what do you
think the total cost to the FDIC of a bank's trading book
losses were in reference to the Volcker Rule. Because we hear a
lot about from committee members and others that say that banks
used deposits to then make bets, and when, in fact, it was the
loan books that caused the significant amount of losses in each
institution and it was not their trading books, in fact, at
all. Can you specify how much the FDIC lost because of trading
books of various institutions?
Ms. Liner. I don't have that information in front of me,
but I would be happy to look it up and submit it for the
record.
Mr. Hollingsworth. Please do. I think when you look it up,
you will find that it was zero. In fact, zero FDIC dollars were
mobilized because of the losses in trading books, but instead
because of the immense losses in loan books. And I don't think
we are asking banks to get out of the loan business because
they made mistakes in their loan books, are we?
Ms. Liner. We, in fact, are hoping that banks continue to
loan to consumers.
Mr. Hollingsworth. Right.
Ms. Edelman, earlier today, you talked about the inability
of certain people with lower credit scores or who don't meet
certain requirements to get loans. Could you expand upon that a
little bit?
Ms. Edelman. Sure. Right now the average credit score for a
loan that is purchased by Fannie Mae or Freddie Mac is about
740, which is significantly lower than the national average,
which is under 700.
Mr. Hollingsworth. Right. Can you help me understand how
the Dodd-Frank bill addressed that concern and enabled and
empowered more individuals of moderate means to get loans?
Ms. Edelman. The GSE's have made a decision to price credit
in this way. It doesn't have anything to do with Dodd-Frank.
Mr. Hollingsworth. Got it. So when I think about getting
credit out to small businesses and I think about getting credit
out to individuals of moderate means, right, I would want to
ensure that there was a lower spread between those that have
higher credit scores and lower credit scores, right?
Ms. Edelman. Correct.
Mr. Hollingsworth. I think that is what you were pushing
for before. And how do we do that?
Ms. Edelman. I think that that is largely within the
authority of the Federal Housing Finance Agency and the GSEs
themselves, so I think that is a conversation to have with
them. They have set the price--
Mr. Hollingsworth. So the answer is more government price
controls, not getting more capital into the market so that we
can get individuals loans that they need in order to service
their businesses?
Ms. Edelman. Currently, the only reason we have private
capital and that we have liquidity in the mortgage market is
because of Fannie Mae and Freddie Mac.
Mr. Hollingsworth. Yes, a problem that Republicans on this
committee are definitely trying to solve to ensure that we get
private capital back into the markets.
I guess my last question is--I am certainly not a believer
in perfect legislation, and someone else mentioned that as
well--what are the issues with Dodd-Frank? What would you
change about Dodd-Frank today?
Ms. Edelman. Is that question directed to me or to anyone?
Mr. Hollingsworth. Well, actually to the entire panel.
Ms. Edelman. Okay.
Mr. Hollingsworth. I guess the silence means everybody
thinks Dodd-Frank is absolutely perfect?
Ms. Edelman. I will kick it off. I think that there is an
ongoing process with regulators to make sure that regulations
are tailored in a way that works to banks. In the mortgage
space, most of the things that need to be done, as I mentioned
before--
Mr. Hollingsworth. So we are counting on regulators to cut
their own power and their own reach and the bureaucracy to
shrink itself instead of Congress to take upon the
responsibility to trim back the bureaucracy--
Ms. Edelman. No. We are counting on them to do their job
and to make sure that they are responding to what is happening
on the ground.
Mr. Hollingsworth. You mean the job that they did right
before the crisis in ensuring that they found the crisis and
they told everybody about it?
Ms. Edelman. The CFPB wasn't around for the crisis.
Mr. Hollingsworth. So it is the new regulator that we need
and these new individuals are going to do it?
Those are all the questions I have. I yield back.
Ms. Jackson. I was going to say, I would just add that it
is about preventing a regulatory patchwork, one of which we
have seen before, and the pitfalls of having such. I think the
CFPB in its current form, as independent as it is currently in
its current being, allows for it to have the enforcement that
it needs, the leverage that it needs to take on the actors
that--
Mr. Hollingsworth. We can definitely agree that the
regulatory patchwork has been a serious problem for the
financial sector and certainly held back the amount of economic
growth that we can have. I have heard time and time again from
witnesses that because loan amounts are up or because economic
growth is not zero, then suddenly that is a testament to Dodd-
Frank adding economic growth, when in fact the counterfactual
isn't zero economic growth, but should be the economic growth
we thought would occur, especially coming out of such a deep
recession.
I thank all the witnesses for their time.
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 is hereby adjourned.
[Whereupon, at 12:44 p.m., the hearing was adjourned.]
A P P E N D I X
April 28, 2017
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