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IMPROVING FEDERAL CONSUMER
PROTECTION IN FINANCIAL SERVICES

HEARING
BEFORE THE

COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION

JUNE 13, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–40

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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
´
NYDIA M. VELAZQUEZ, New York
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
JULIA CARSON, Indiana
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
´
RUBEN HINOJOSA, Texas
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin,
LINCOLN DAVIS, Tennessee
ALBIO SIRES, New Jersey
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES WILSON, Ohio
ED PERLMUTTER, Colorado
CHRISTOPHER S. MURPHY, Connecticut
JOE DONNELLY, Indiana
ROBERT WEXLER, Florida
JIM MARSHALL, Georgia
DAN BOREN, Oklahoma

SPENCER BACHUS, Alabama
RICHARD H. BAKER, Louisiana
DEBORAH PRYCE, Ohio
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
PAUL E. GILLMOR, Ohio
STEVEN C. LATOURETTE, Ohio
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
CHRISTOPHER SHAYS, Connecticut
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
TOM FEENEY, Florida
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
STEVAN PEARCE, New Mexico
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
GEOFF DAVIS, Kentucky
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
PETER J. ROSKAM, Illinois
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

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CONTENTS
Page

Hearing held on:
June 13, 2007 ....................................................................................................
Appendix:
June 13, 2007 ....................................................................................................

1
63

WITNESSES
WEDNESDAY, JUNE 13, 2007
Antonakes, Steven L., Commissioner of Banks, Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors ..........................
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation ..........
Dugan, Hon. John C., Comptroller of the Currency, Office of the Comptroller
of the Currency .....................................................................................................
Kroszner, Hon. Randall S., Governor, Board of Governors of the Federal
Reserve System ....................................................................................................
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission ...............
Miller, Hon. Thomas J., Attorney General, State of Iowa ....................................
Polakoff, Scott M., Deputy Director and Chief Operating Officer, Office of
Thrift Supervision ................................................................................................

22
16
14
12
17
21
19

APPENDIX
Prepared statements:
Maloney, Hon. Carolyn ....................................................................................
Moore, Hon. Dennis ..........................................................................................
Waters, Hon. Maxine ........................................................................................
Antonakes, Steven L. .......................................................................................
Bair, Hon. Sheila C. .........................................................................................
Dugan, Hon. John C. ........................................................................................
Kroszner, Hon. Randall S. ...............................................................................
Majoras, Hon. Deborah Platt ...........................................................................
Miller, Hon. Thomas J. ....................................................................................
Polakoff, Scott M. .............................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

64
65
66
67
91
120
159
180
205
219

RECORD

Frank, Hon. Barney:
Follow-up letter from Hon. John Dugan, Comptroller of the Currency,
dated August 3, 2007, in response to Chairman Frank’s request .............
Letter from the National Association of Insurance Commissioners, dated
June 12, 2007 ................................................................................................
Bachmann, Hon. Michele:
Additional information requested during the hearing from Hon. John
Dugan, Comptroller of the Currency ...........................................................
Waters, Hon. Maxine:
Responses to questions submitted to Hon. Sheila Bair, Chairman of the
FDIC ..............................................................................................................
Responses to questions submitted to Governor Randall S. Kroszner,
Board of Governors of the Federal Reserve System ...................................
Responses to questions submitted to Scott Polakoff, Office of Thrift Supervision ........................................................................................................

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251

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IMPROVING FEDERAL CONSUMER
PROTECTION IN FINANCIAL SERVICES
Wednesday, June 13, 2007

U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Barney Frank [chairman of
the committee] presiding.
Present: Representatives Frank, Maloney, Watt, Ackerman,
Sherman, Moore of Kansas, Clay, Miller of North Carolina, Scott,
Green, Cleaver, Davis of Tennessee, Ellison, Klein, Wilson,
Perlmutter; Bachus, Baker, Castle, Gillmor, Biggert, Barrett,
McHenry, Campbell, and Bachmann.
The CHAIRMAN. The committee will come to order. There are vacant seats, so if there are citizens who would like to sit in the
seats, please fill them. There are people waiting. We shouldn’t have
empty seats.
This is a very important hearing, in my mind, and it is one
which I hope we will produce a lot of information. Contrary to the
prevailing notion, sometimes Members of Congress have hearings
because we want to learn things. I understand that is not the norm
for hearings, but in this case, there is a need for information, and
it is information to fill, in my judgment, a very clear-cut void.
The preemptions by the Comptroller of the Currency and the Office of Thrift Supervision were controversial. Many of us in Congress on both sides did not like them. A former colleague, the gentlewoman from New York, Ms. Kelly, for example, was a very
strong critic of them on the Republican side. But reality sets in;
those preemptions are not going to be undone in any substantial
way. We have a President in power who would veto any effort to
do that, and by the time we might get a different President, I do
not think we could unscramble that particular set of eggs.
So I regret the scope of the preemptions. I acknowledge the extreme unlikelihood of our being able substantially to cut them
back. There was some uncertainty until the Wachovia case was decided. Those of us who felt it was not an absolutely clear-cut decision take some solace in the fact it was 5–3; it would have been
5–4, I believe, if Justice Thomas had not recused, given his past
voting pattern.
But the preemptions are in place, and that leaves us with the
problem, in my judgment, that we, the Federal Government, have
at this point bitten off much more than we are currently able to
chew. Essentially to change metaphors a little bit, we have bitten
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2
off 50 heads, but we don’t have the brainpower ourselves to replace
them. What we have done is to eliminate the major source of consumer protection in the financial area, because in the American
system, for a variety of reasons, consumer protection has come primarily at the State level.
And let me, as an elected official, explain to people why there is
an institutional reason for that, and why I am particularly concerned about the need to take serious action here. I want to say
what may be imprudent, but making international macroeconomic
supermonetary policy is more fun than arbitrating disputes between a cranky customer and a bank clerk. And it is much better
to debate the Basel accords, or how going forward to do assignee
liability in subprime, or any of a number of other issues that we
have, the effect of monetary policy on employment, those are more
stimulating intellectually, more rewarding than a, ‘‘He said, she
said;’’ ‘‘I did not, yes, you did, no, I didn’t,’’ dispute.
There is a reason why consumer protection has been more often
done at the State level; State regulators are more likely to be elected officials than Federal regulators—State attorneys general, State
insurance commissioners, and other State officials. This is one case
where being the closest to the electorate is a serious fact. And I
will tell you, in my own office, and among Members of Congress,
we do a certain amount of consumer protection because we run for
office. And I will tell you this: If you ask me, where is the greater
intellectual stimulation, where do I think any individual energy is
that I express, where will I get greater results, it is probably in
making broad national policy.
But cumulatively dealing with these individual consumer complaints is very, very important for two reasons: first, for the injustice done to individuals; and second, if there is no consumer protection mechanism in the society, things will go off track, and there
could become this bias against consumers.
Now it is not that I believe that the banks and other institutions
that are regulated are rapacious or greedy beyond the norm that
we are supposed to have in a capitalist system. It is just that we
all make mistakes, and even more of a problem, we don’t like to
admit our mistakes; we like to cover them up, we like to deny that
we made them, and we like to blame other people for them. Those
are human traits. I do not impute them to the banks; I impute
them to human beings.
Consumer protection exists to be something of a corrective force,
and here’s the problem: I do not think that the Federal agencies
as currently and historically constituted, given their mission, are at
present adequately staffed or oriented or legally structured to provide consumer protection.
I had a conversation with one bank regulator who told me that
the existence of safety and soundness powers—and, by the way, we
will take 20 minutes on each side. We have only one panel. This
is a serious issue, and so we are going to go to the fullest extent.
However, I want to lay it out so that people have a sense of where
we are on this. We are going to be within our 20 and 20. I was told
by one of the regulators, well, we can do regulation of consumer
protections under our power to enforce safety and soundness on the
banks, the argument being that a bank that does not treat con-

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3
sumers well can be called to account because it is jeopardizing its
safety and soundness. I wish.
In fact, done cleverly enough, being unfair to consumers can contribute to the safety and soundness of a bank. I believe, for example, that the overdraft fees that people get hit with, where people
go to an ATM and are told by the ATM that they have so much
money, or they read on the ATM—I don’t think we have talking
ATMs yet. I guess we do for people who are vision impaired. But
when people learn from the ATM that they have so much money—
and that includes, without them having asked for it, an overdraft
amount—and they write a check for that, they get whacked with
a fee. I wish that jeopardized the safety and soundness of the
banks who did it, but I see no evidence of that.
The fact is that banks are not stupid, and they do not do these
things to put themselves at risk; they do them because they make
money off of them. And they are there to make money and provide
that money in our capitalist system to people who are invested in
the intermediary function, but there are abuses.
So here are a couple of problems I want to examine. One, legally,
do the various Federal bank regulators have the authority to step
in and replace the regulations that were done at the State level?
Two, do they have the proper resources for enforcement? There is
no reason why these couldn’t be changed. The fact is that even
where State laws have applied, the visitation rights do not apply;
States may not even enforce those laws where they can apply the
law. Why? Are we the world’s best—we, the Federal Government,
are we such super-duper law enforcers that we don’t need any help
from anybody, and we can replace everybody else?
I think the opposite is the case. I think that cooperation in this
area of law enforcement is a good idea. My colleagues want cooperation in other areas of law enforcement on immigration and
elsewhere. I don’t understand why we can say that all of these
State regulators, with all of their experience, are totally incompetent to help us, the Federal Government, the all-wise, all-knowing, omnipotent Federal Government.
So we have the legal authority. We have the statutory powers.
We also have the question of the culture, and I hope that is changing. And then we have this problem, and that is why I have asked
all of you to be here together. And I am going to ask you all to keep
your hands on the table so that nobody goes like this when we are
asking why something isn’t being done. You know, Harry Truman
wanted a one-armed economist. I want regulators without fingers,
because I don’t want them being pointed at other people.
Here is the problem: We have been told by some of the regulators
that they are not fully able to do regulation to the extent that we
want because the Federal Reserve Board of Governors has not used
their authority under the Federal Trade Commission Act to list
things. That is why we appreciate Commissioner Majoras being
here, with, by the way, I will say to you, the full acquiescence of
Chairman Dingell, who has the primary congressional jurisdiction
over the FTC. We have a combination. We are told, well, it is the
FTC Act, and the Federal Reserve has their responsibilities under
the FTC Act, and only they can give responsibilities to the other
bank regulators.

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Well, you are all here, and at the very least, when we leave
today, we are going to know who does what, and who is responsible
for what, and whether, in fact, the failure, as some have said, of
the Fed to spell this out does interfere or not.
So that is where we are. I do believe that we have a common interest. I do believe that the people here before us from the Federal
side do want to do consumer protection, but it is not primarily
what you were instructed.
I have to say, and I am grateful that the Governor is here, but—
let me give you this example. Former Governor Gramlich expressed
a difference of opinion with former Chairman Greenspan about consumers, and Chairman Greenspan’s response was very revealing.
He said, ‘‘Oh, how can people say I wasn’t interested in consumer
affairs? I always followed the staff recommendation on that.’’ Can
anyone imagine Alan Greenspan saying, you know, when it came
to interest rates, I always followed the staff recommendation?
When it came to deciding whether there were problems in the stock
market, I always followed the staff’s recommendation? The fact
that Alan Greenspan always followed the staff recommendation in
consumer affairs is confirmation that this was not highest on his
agenda. Alan Greenspan is not a man who is known for being staffled. He was not known for his intellectual passivity. Yes, he goes
to the staff, because he didn’t become Chairman of the Federal Reserve, the supereconomic chiefdom of the world, to worry about a
couple of people having an argument about a bank deposit in Chicago. And if we don’t do that better than I think we would otherwise do it, then we are going to have a problem. So that is why
we are here.
I now recognize the gentleman from Alabama. He has asked for
5 minutes. It is divided up. So I will just say to the clerks that he
will have his time.
Mr. BACHUS. Thank you, Mr. Chairman.
Let me start by saying that I am a strong supporter of the dual
banking system, and I think it has served our country well. Since
the 19th century, where the OCC regulates our national banks the
OCC, and then our Federal banks by the Federal Reserve and the
FDIC, and our State agencies, the Supreme Court has basically
preempted some State regulation on our national banks and established one national standard, which obviously provides a great deal
of efficiency and ease of operation.
I think a national standard—OCC preemption—reduces the costs
of the banks. It enhances, I think, their ability or at least their opportunity, to serve their customers, particularly in a global marketplace. However, critics have expressed concerns about—and it is a
concern that I share—the adequacy of the OCC’s regime for enforcing consumer protection. I wouldn’t have said that 5 years ago; 5
years ago, I would have said that I am confident that regulation
of our national banks and our State charter banks is sufficient. But
recent practices have really called into question my judgment that
customers are being well served, really, by both State and Federal
regulators.
When we passed Check 21, we were assured by the regulators
that this was a way to modernize our system, take cost out, which
was an excellent opportunity to modernize and bring our banking

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5
system forward. But we were told that it would not prejudice customers. Within 6 months, we began to get complaints that while
checks were being debited to the account realtime, deposits were
not. Deposits were being held until the next day.
I like to cite real examples. And again, a lot of the people who
come to us with these complaints, it is the principle of the matter.
I said that about credit cards. I had a gentleman who was getting
work done at his house, he had a guy working there, and he paid
the contractor an $8,000 check. Before he paid him, he actually
said, ‘‘I have to go to the bank and make a deposit.’’ He went to
the bank, made a deposit, came back, and paid the contractor.
Well, it was about 2:30. The contractor went to a bank around
5:00 and deposited his check. It was the same bank where the gentleman had made his deposit. The deposit wasn’t credited, but the
check was, because the bank explained to the gentleman that after
2:00, it was the next business day for deposits, but not for checks.
It was only the deposit which was the next business day. Now what
really enraged this constituent of mine, and actually I probably had
heard this on many occasions, was that his wife had written two
small checks, one for $6 or $8, and one for about $18. Well, the
bank could have paid those checks, but instead of paying those
checks, they put the larger one in first so it would overdraw the
account. He was actually told by his banker, and I confirmed this,
that the bank had a computer program which took the larger check
first to maximize overdraft charges. And, in fact, that has become
a common practice to take the larger check when there are two or
three checks presented at the same time. It maximizes the profit
of the bank, but it obviously operates to the detriment of the client.
Now, a lot of the people who come to complain to me, they have
time, they have money, they have resources, and it is not a lifeor-death situation to them. But I am in a district that has counties
where the median income is $18,000. After taxes, it is $12,000, and
when someone writes three or four checks, and one overdraws their
account, and the bank chooses to charge them for each of those
three checks, that is $100. That can represent half of their disposable income for a week, and I see that as sharp practice. I see that
as unconscionable.
You heard last week, many of you, in the last week or two, you
had appeared before this committee on credit cards. Many of the
practices—I have heard no one defend them as saying they are fair.
I have had no one stand up and say this. I have had bankers and
institutions that do it say, we realize there is a problem there, but
no one is addressing the problem. And all of these practices are recent practices.
I talk to bankers in Birmingham. I talked to one of the gentlemen who established one of the large banks in Alabama. He said
that as long as he was there—and he is in his 80’s—the bank never
would have done what is being done now. He said they wouldn’t
have even thought to have done such a thing.
I mentioned Check 21, clearing the checks, some of the credit
card things. My fear with preemption, I think it can be a very good
thing. It can only be a very good thing if Federal regulators both
work with the State and coordinate their efforts to protect consumers, and they also get serious about some of these abusive

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6
sharp practices which are not just fact. Yes, it increases the profits
of the bank, but that shouldn’t be—you know, that is not a justification for unfair practice. The customer has to have a seat at
the table. And I would hope that Federal regulators would promote
uniformity in Federal oversight, but also in strong consumer protection in both regulation and enforcement. I think that those are
steps which will ultimately improve the bank’s ability to serve their
customers.
In this regard, the memorandum of understanding between the
OCC and the Conference of State Banking Supervisors to facilitate
proper referral of consumer complaints to Federal and State agencies with the regulatory authority is a step in the right direction,
and I hope we will protect customers. But let me tell you what it
won’t protect, the two things that we keep saying that we have,
and they are important, but they don’t do the job alone. One is financial literacy. It is very important, but it is not an end-all, doall, and disclosure is not an end-all, do-all. The idea that it is in
the agreement, the customer was given notice of this practice, the
chairman and I discussed yesterday. We are both law school graduates, we are very proud of our academic record in law school, and
yet we get these disclosures, and we don’t understand them.
The practice of the banks, to us, appears as something is simple,
what we call sharp practice or unconscionable. And I do believe,
and many of my Republican colleagues might disagree, but I do believe the Federal regulators: one, don’t carry forward on the promises that they made to us when we passed Check 21; and two, if
they do not start addressing some of these egregious practices, I do
believe that the confidence of this committee and this Congress—
if the Federal regulators in concert with State regulators don’t protect the customers, I believe this committee will lose confidence and
take action.
There are some on this committee who will never do that, they
will never intervene. They will basically let the market sort it out
between institutions and banks with a lot of financial resources
and customers with almost no resources and very little ability to
protect themselves. It is not a level playing field. And part of leveling that playing field is strong consumer protection. It has been
a tradition of the Republican Party. It is a tradition I would like
to see honored both on my side and on the other side. And I know
these regulators; I know the people on the first panel. I know that
they want to do what is right for the customer. Thank you.
The CHAIRMAN. How much time has been consumed by both
sides? All right. We have 14 minutes left on this side. The gentleman has 9 minutes left.
I am going to recognize for 2 minutes the gentleman from Ohio,
Mr. Wilson.
Mr. WILSON. Thank you, Mr. Chairman.
Let me start by saying, first of all, thank you for holding this
hearing today, and I am pleased to be able to give an opening
statement. Let me welcome our witnesses.
I am Charlie Wilson. I am from the Ohio Sixth Congressional
District, and it is ironic we should be doing this today because just
a year ago, I was in the Ohio Senate working on predatory lending.
Ohio, ladies and gentlemen, has been a victim of predatory lending,

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7
and unfortunately we lead the Nation, the entire Nation, in foreclosures. That is not something we are very proud of, and we are
a proud State with 11.4 million people, and we do a lot of things
right. So we sincerely want to get started on this at the Federal
level.
As I said, last year we did Senate bill 185. We ran into some
lame duck problems at the end of the session, and lost some of the
teeth that were in Senate bill 185; however, we feel that we have
made some strides toward helping. We realize it is a combination
of problems that brings about the losses that we have.
Let me say that it is an honor to have representation of the Federal Reserve Board, the OCC, the FDIC, the Federal Trade Commission and all of you who are here today. Thank you for taking
your time, and we hope to be able to get some direction and learn
from you as to what we need to do. I say this not only as a State
legislator, but as a former bank chairman, and a guy who spent the
majority of his life on a bank board and saw it grow in great increments and did lots of things right.
I might say that when we did a lot of our investigation on the
predatory lending that is going on in my home State of Ohio, it
didn’t seem to be the banks, it was more the subprime and the
mortgage companies, and we found different things that were really being abused that we needed to address. So I really welcome the
opportunity to hear from you today as to what protections we can
put in, what we can do to be able to move the ball and be able to
clear up this cancer that is in our society.
So I appreciate the opportunity to speak, Mr. Chairman, and
thank you to the witnesses for being here today. I look forward to
hearing from you.
The CHAIRMAN. I thank the gentleman.
Next, the gentleman from Louisiana is recognized for 5 minutes.
Mr. BAKER. Thank you, Mr. Chairman.
I wish to establish that I have been a preemption advocate for
some time, so my position here is not necessarily inconsistent with
past practices. I have challenged Attorney General Spitzer in his
role as assuming the role of promisee in the securities marketplace.
I was in the majority then, but I was in the minority, though, supporting that position. I have now cemented my position in the minority and continue to be in such a minority.
However, I think to attempt to balance the record just a bit, the
issue of preemption begins in 1819 with McCulloch v. Maryland,
when a State attempted to tax the Bank of the United States. This
is not a revelation that has developed since the ATM machine. This
is something that has been a customary practice for one principal
reason: to provide stability in our capital markets and solvency
among our financial institutions who engage in risk-taking by extending credit to those who qualify for the credit they seek.
Let us make clear that this is not about the OCC. The OTS has
a long-standing authority for actions in preemption. In fact, during
the early 1980’s, a painful time in the real estate industry under
President Carter, interest rates, prime, approached 21 percent, and
States began to take action to prohibit individuals from transferring the terms of their mortgage to the new borrower in order to
instill an artificially low interest rate environment while the prime

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rate to the lending institutions themselves were 2, 3, 4, or 5 times
the availability of the funds from the existing mortgage terms.
That was litigated all the way to the Supreme Court, and in the
mid-1980’s, it was held as a right of the OTS for the safety and
soundness of the institutions involved and, I would point out, lost
in this debate is the taxpayers of the United States who stand in
good faith and ready to back up the losses of those institutions
should they become insolvent. And need I remind everyone that in
the late 1980’s, we ultimately created the RTC, and many members
of this committee spent many long hours derailing and bemoaning
the actions of those thrifts in Louisiana and Texas which took extreme action to extend the losses to the American taxpayer. This
is not incidental stuff. It has real-life consequences. Preservation
and market stability is important. It is not necessarily just for
those who are here at the table this morning.
The Credit Union Association, the NCUA, is not represented here
this morning. They have the preemptive right to regulate not only
nationally chartered, but State-chartered, federally insured credit
unions. The National Federal Credit Union Act requires the regulation of federally insured, State-chartered credit unions to comply
with certain provisions of NCUA’s rules and regulations, not merely a regulator’s action, but by action of this Congress. Therefore, to
unwind the preemptive role of the NCUA from the function of regulating credit unions in this country, the Congress would have to
act. We simply cannot beat up a handful of regulators and claim
it is all at fault.
Beyond the question of the credit union, which I suggest would
not likely be a helpful contribution to the overall debate this morning, an Executive Order issued during President Reagan’s term, the
great defender of free markets, said Federal action limiting the policymaking discretion of the State should be taken only when constitutional authority for the action is clear and certain that the national activity is necessitated by the presence of a problem of national scope. There is a way to define the need for preemption to
preserve the integrity of our national capital markets while not at
the same time obviating the States’ ability to intercede on consumer protection advocacy. Both can be done, not mutually exclusive.
When we look back to the authorities of the OCC currently in
question, there are areas where they are not now able to preempt
contract law, criminal law, torts, actionable torts, in some cases the
OTS, even in zoning matters. In other cases, the OTS doesn’t
match up exactly, but is similar in context.
So there is an obligation of the regulator for the sake of the
United States taxpayer, whether a bank, whether a savings and
loan, or whether a credit union, to act in a manner which is reasonable and prudent to ensure the continued solvency of that financial
system. It does not, however, require that a regulator turn their
back on actions which do not serve public policy well, and joining
with State regulators can take action against those who engage in
activities not for the common economic good or to the prejudice of
the individual consumer.
If we can back this down a notch and focus our attention on
where the real problem is, whether a State regulator can govern

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the actions of a subsidiary of a national bank really should not be
an issue. Whether you are in the main office in Chicago, or you are
standing next to the potted plant in west Texas, it is the same institution governed by the same set of rules, and should they violate
those rules, they will be held accountable by the national regulator;
and should they engage in activities which are found to be
cannibalizing the assets of normal, everyday, hard-working consumers, I will join with every other member of this committee in
seeking out those problems and providing a Federal remedy, if necessary, if the States are unable to act.
But if the States are able to act, we should not get in their way.
And I would assume—and questions of those on the panel this
morning—we can determine whether they choose or will choose to
intervene in consumer protection policies and intercede on the behalf of banks, or will you balance your judgment between the consumer and stability of our financial markets.
I yield back.
The CHAIRMAN. The gentlewoman from New York, the chairwoman of the Financial Institutions Subcommittee, is now recognized for 5 minutes.
Mrs. MALONEY. I thank the chairman for yielding and for organizing this incredibly important issue on the overarching issues of
Federal and State consumer regulation. And I compliment you on
the all-star cast of witnesses who are assembled today. And as you
mentioned, the subcommittee which I chair is charged with consumer protections, so this is tremendously important to me, and I
would say to all consumers and all Members of Congress.
Whether it is in the context of credit card regulation or subprime
mortgage lending, the fact of growing OCC preemption requires us
to ask who is best able to make new rules and who can enforce
them.
I do want to mention that I have been involved and concerned
about some of the abuses that Chairman Frank and Ranking Member Bachus highlighted. Chairman Frank mentioned the overdraft
fees as an abuse, and I want to mention that I have legislation concerning this before Congress which would call for notice at ATMs
on these overdraft fees.
And in the area that Ranking Member Bachus mentioned on deposit holds, I had a bill in last year to speed up deposit holds, and
in this Congress I did not introduce it. I was awaiting the response
from the Fed and their report on the bank adoption of Check 21
enforcement. But it is now clear that the Fed will not be regulating, or so they have said in their report, so I will be reintroducing my bill. I do want to note that Chairman Frank and I wrote
a letter last week, literally, to the Fed urging them to regulate in
this area.
On the issue that is before us today, it may be correct, as the
OCC says, that the Watters decision changed the law very little,
if at all, but in legal history books, I believe it will be seen as
marking the end of one era and the beginning of the next. I hesitate to announce the impending death of the dual-banking system,
but I wonder what meaningful role is left for State regulators. As
an elected official, I believe very strongly in the statements earlier
by Chairman Frank that elected officials are the most responsive

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to the needs of the public, to the needs of their constituents and
to the needs of consumers. And as a New Yorker, I know that an
active State AG is a very effective consumer protector. On the other
hand, in today’s global market we may no longer be able to afford
the luxury of having the most banking regulators in the world.
Uniformity may be an advantage we can no longer afford to do
without.
So I would like to see the Federal regulators prove that they can
take up this responsibility and build a record on consumer protection to match the record they have built on safety and soundness.
For instance, I would like to see the Fed use its authority in unfair
and deceptive practices to regulate in both the subprime mortgage
area and in the credit card area to ban abuses. As I suggested at
last week’s hearing, maybe we should extend the power to the
other agencies as well so that there would be more regulatory vigilance. Joint rulemaking would give a seat at the table to the various sectors and provide more input and different views.
I would like to see the OCC and the FDIC ramp up their staffing
and resources to make it possible for consumers to call and complain and get a helpful response. Structurally, I am concerned that
the consumer protection sections of the agencies, that they should
have direct access to the top decisionmakers and have a seat at the
head table.
I also think we should support and encourage efforts by Federal
regulators to work with States. For example, the OCC and the Conference of State Banking Supervisors have agreed on a model
framework for sharing consumer complaints that has been put into
place in my home State of New York with an MOU between the
OCC and the New York State Banking Department. I understand
that 17 other States have followed New York’s lead and have gone
forward with such agreements.
I hope we can explore these and other issues, and I very much
look forward to the testimony on this critically important issue.
And I yield back the balance of my time. Thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentlewoman.
I will await the Ranking Member for the disposition of his last
minutes, and I will recognize the gentleman from Kansas for 4
minutes.
Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, for having
this hearing, and again I want to also thank the witnesses who are
here to testify and to help answer some of our questions about
what we can do to address this issue.
Before I came to Congress, I was for 12 years the elected district
attorney in Johnson County, Kansas, which is a suburb of Kansas
City, and our office early in my tenure investigated and successfully prosecuted a national oil company charged with breaking gas
pumps to cheat consumers. Things seemed to happen again and
again.
We had problems then. We are having problems now. Consumers
who file complaints with the consumer protection division of my office, which was really a very straightforward process, especially
compared, I think, to the prospect of filing a complaint faced by
banking customers today when they have a problem with their fi-

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nancial institution—I don’t think the average person has any idea
where to file a complaint when something has gone wrong with
their bank. In the past, a consumer who had a problem with a
bank would often call the banking regulator or the attorney general’s office, but the role has been significantly reduced in today’s
atmosphere.
When it comes to Federal regulators, I don’t think most consumers have even heard the name of the several of them—Federal
Reserve, OCC, NCUA, FTC, and OTS—and they all, I suppose,
have seen the sign on the bank doors, FDIC, but they don’t even
know what these other institutions do. Even if the consumer knows
the right Federal regulators, it is often then hard to find consumer
complaint resources on the regulatory Web sites. Some of them require a great deal of searching to find a telephone number or complaint form. And when the consumer submits the complaint to the
regulator, the process, I think, can be confusing and intimidating.
Our committee needs to feel confident that if consumers have
fewer opportunities to go to State regulators for satisfaction, the
Federal regulators are doing all they can to make this process as
consumer friendly as possible and using what they learned from
consumers to push financial institutions for better performance.
Generally consumers are seeking assistance from regulatory agencies because they have experienced some level of frustration with
their bank or their financial institution. We owe it to them to ensure that the process they encounter, the resolution they receive is
not a source of greater frustration than the original complaint.
Again, thank you all for being here, and I hope we can work together and address some of these issues.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Colorado is now recognized
for 2 minutes.
Mr. PERLMUTTER. Thank you, Mr. Chairman. Thanks for the opportunity to make a statement this morning.
Recent actions such as Watters v. Wachovia give me some concerns because it weakens the role that States play in consumer
transactions. The Supreme Court ruling, I believe, will make it
more difficult for State banking consumer protections, which are
considerably, in many instances, tougher than Federal measures,
and I would ask those of you who are working with the various
State regulators to continue to do that and allow for the States to
continue to play a significant role in connection with consumer protection. In Colorado, we have really some good consumer protection
laws, and some outstanding regulators, and the States must continue to play a role.
The other day Chairman Maloney convened a hearing on consumer protection and credit card practices, and I didn’t get to
speak until the very end, the third panel, and I missed many of
you. But I went into sort of a tirade, and I will apologize for that
now. But I did it because I come from a background representing
banks and credit unions and financial institutions.
But I can tell you that in Colorado, there is a populist uprising.
And Mr. Bachus, I think, hit it on the head, the chairman hit it
on the head. Just looking at the regulation Z—and people were
calling it the periodic statement. For me it is more confusing than

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the periodic table because people are getting charged so many fees
and such high rates. That is where we are coming from, whether
it is the ATM charge—in Mr. Bachus’ State, it is $39. Thank goodness in Colorado it is only $34. If you have a $2 overdraft, you get
a $34 overcharge. If you have—you believed you paid off your card
that month, but you didn’t realize there was a double billing cycle,
and you still have 50 cents. You don’t pay the 50 cents, so you get
a $25 late charge. That is what people are upset about.
The disclosures are fine and dandy if you can understand them
because they are complicated. I mean, if you look at all the different fees just on the credit card regulation Z table, which we
have simplified, it is still very difficult for anybody to understand,
you know, not just the ordinary guy trying to make some kind of
transaction.
So Mr. Baker is right about the preemption and the role of solvency versus the consumer. But what I think all of us are concerned about is that the consumer, the charges—somebody called
it the other day risk-based lending. I call it profit-based lending.
These fees make a lot of money for the financial institutions at the
cost of the consumers, and they have gotten out of hand.
Thank you, Mr. Chairman. I will yield back.
The CHAIRMAN. All time has expired on this side. I believe we
are through on both sides.
I sincerely apologize for the length of the statements, but I think
it was important for all of you to know how—and I think on a bipartisan basis we express this—we feel this concern.
And we are now going to begin. No inferences should be drawn
by the order. I never know exactly what the order was. Maybe people knew that our two chairs here would be color-coordinated, and
they should be together. But for whatever reason, we will begin
with Mr. Kroszner.
STATEMENT OF THE HONORABLE RANDALL S. KROSZNER,
GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. KROSZNER. Thank you very much. Chairman Frank, Ranking
Member Bachus, and members of the committee, I really appreciate the opportunity to discuss the Federal Reserve Board’s role in
protecting consumers in financial services transactions with you
today.
An important part of the Federal Reserve’s mandate is promoting
the availability of credit throughout the banking system. Equally
important, the Federal Reserve has responsibility for implementing
the laws designed to protect consumers in financial services transactions.
In carrying out its responsibilities related to consumer protection, the Federal Reserve has four complementary roles: First, we
write rules to implement the consumer financial services and fair
lending laws; second, we examine the financial institutions we supervise for compliance and as necessary take action to enforce the
laws and resolve consumer complaints; third, the Federal Reserve
actively promotes consumer education through its publications in a
variety of partnerships with other organizations; and fourth,

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through the community affairs program, we promote community
development and fair and impartial access to credit.
In my oral remarks today I would like to focus on our role as rule
writer. Many of the laws we implement are based on ensuring that
consumers receive adequate disclosures about the features and
risks of a particular product. When consumers are well-informed,
they are in a better position to make decisions that are in their
best interest. Effective disclosure also enhances competition and
has the capacity to help weed out some abuses.
Advances in technology have fostered the development of products that are increasingly diverse, but also increasingly complex.
While this has expanded consumer choices, it also presents a challenge to ensure effective disclosures about these complex products.
The Board is committed to developing more effective disclosures,
and we have recently undertaken an innovative approach, namely
using consumer surveys and testing in detail to understand consumers’ needs in order to develop our regulatory response. Consumer testing can help us improve the effectiveness of disclosures
by providing insight into consumers’ understanding of financial
products and their decision-making processes.
Given the complexity of some products, we must also be aware
of the potential for information overload and design disclosures
that not only are accurate, but clear and simple enough so that
they are meaningful and useful to the consumers.
The Board is keenly aware that disclosures and financial education may not always be sufficient to combat abusive practices.
The consumer laws implemented by the Board contain a number
of restrictions, and the Board has the responsibility to prohibit
other practices by issuing rules, for example, if the Board finds
they meet the legal standard for unfair and deceptive practices.
Crafting effective rules under the unfair or deceptive standard,
however, presents a significant challenge. Whether the practice is
unfair or deceptive depends heavily on the facts and circumstances
of the individual case.
To be effective, rules must be broad enough to encompass a wide
variety of circumstances so they are not easily circumvented. At
the same time, broad prohibitions can limit consumers’ options in
legitimate cases that do not meet the required legal standard. This
has led the Federal Reserve to focus primarily on addressing potentially unfair and deceptive practices through case-by-case determinations rather than through rulemaking. The Federal Trade
Commission, which has authority to prohibit practices from financial services firms that are not depository institutions, I believe has
taken a similar approach. Because prohibition on unfair or deceptive practices applies to all the depository institutions as a matter
of law, the banking and thrift agencies can and do enforce prohibition using their supervised reinforcement powers.
The Board also addresses concerns about some practices under
other statutes, such as the Truth in Lending Act and the Truth in
Savings Act. For example, the Board adopted a rule to address socalled flipping of high-cost mortgages and revised the Truth in Savings Act rules to address concerns about overdraft protection programs.

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In conclusion, the Federal Reserve takes its consumer protections
responsibilities very seriously and is committed to addressing abusive practices. We will consider how we might use our authority to
prohibit specific practices consistent with the legal standards in appropriate cases such as when there are widespread abuses that
cannot be effectively addressed on a case-by-case basis. For example, tomorrow I will be chairing a hearing to examine how the
Board might use its rulemaking authority to address practices in
the subprime mortgage market. We must be careful, however, not
to curtail responsible subprime lending. Any rules should be drawn
sharply to avoid creating legal and regulatory uncertainty which
could have the unintended consequence of substantially reducing
consumers’ access to legitimate credit options.
Again, I want to thank the committee very much for holding this
hearing today, and I look forward to the questions that you have.
Thank you.
[The prepared statement of Governor Kroszner can be found on
page 159 of the appendix.]
The CHAIRMAN. Next we will hear from the Comptroller of the
Currency, Mr. Dugan.
STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

Mr. DUGAN. Chairman Frank, Ranking Member Bachus, and
members of the committee, I welcome this opportunity to discuss
consumer protection. As the Federal Reserve just said, the OCC
also takes this responsibility very seriously, especially since retail
banking has become a much larger part of the activities of national
banks.
Frankly, our comprehensive approach to consumer protection, integrating guidance, supervision, enforcement, and complaint resolution is just not well understood. The fact is consumer protection is
a fundamental part of the OCC’s mission, and we are not simply
a safety and soundness regulator as some have suggested. OCC supervision plays a unique and critical role in ensuring compliance
with Federal consumer protection standards. Our extensive and
continual presence in national banks, from large teams of resident
examiners at our largest banks, to our frequent on-site examinations of our community banks, allows us to identify and fix consumer compliance issues early before they become major problems.
As a result, our compliance regime is not enforcement only. Instead, it is better described as supervision first, enforcement if necessary.
With supervision addressing so many problems early, that formal
enforcement often is not necessary. For this reason, the number of
formal enforcement actions taken by any bank supervisory agency
is a misleading measure of the effectiveness of its consumer compliance regulation. Yet when we have needed to take strong enforcement action, the OCC has not hesitated to do so, often providing
new standards to protect bank customers.
The OCC also has developed a robust process for addressing consumer complaints. Our Customer Assistance Group integrates
skilled professionals and up-to-date technology to redress indi-

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15
vidual problems, answer questions, educate consumers, and support our consumer compliance supervision.
While we believe this comprehensive approach is effective, it does
have three significant limits: statutory limits set by Congress, rulewriting limits in that the OCC has no authority to write most consumer protection regulations; and jurisdictional limits in that our
authority obviously only extends to national banks.
Let me also briefly share our view of the Supreme Court’s recent
preemption decision. The Watters case does not mark a shift in
prevailing law, but it does clarify responsibility and accountability.
In particular, it makes clear that Federal and State regulators both
have important jobs to do, but they are different. Ours is to regulate and supervise national banks for which we should be held accountable. Theirs is to regulate State-chartered entities for which
they should be held accountable.
And to those who argue that there should be both Federal and
State supervision of national banks, that there can never be too
many cops on the beat, I must respectfully disagree. We believe it
is counterproductive for States to focus their finite enforcement resources on national banks that are already heavily regulated, especially when there are lightly regulated State entities, like many
subprime lenders and mortgage brokers, that clearly have been the
source of real problems. You can indeed have too many cops on the
same beat if it means leaving other, more dangerous parts of the
neighborhood unprotected.
We believe consumers benefit most when the OCC and the States
focus on our respective areas of responsibility and find productive
ways to cooperate. The OCC is doing just that. For example, since
last November we have reached agreements with 18 States, as was
mentioned earlier, to refer and share complaint information. Similarly, the OCC and the other Federal banking agencies have cooperated with the States to extend the coverage of the nontraditional mortgage guidance and the proposed subprime lending guidance.
I am also very pleased to announce another cooperative initiative
today on mortgage brokers: parallel examinations of national banks
regulated by the OCC and the mortgage brokers that they use regulated by the States. This intersection of our regulatory jurisdictions provides a real and useful opportunity to coordinate our efforts, especially given the recent criticism of mortgage broker practices. Though still in the early stages, and limited in scope, both
we and the Conference of State Bank Supervisors believe this new
initiative shows real promise.
Finally, my testimony provides the following suggested improvements to Federal consumer protection regulation: First, joint agency authority, including for the OCC, to write regulations defining
unfair and deceptive practices applicable to banking organizations;
second, a requirement that an agency charged with writing consumer protection regulations consult before issuing such regulations with the regulators charged with implementing them; third,
a requirement that consumer protection regulations be revised and
updated more regularly than they are now in order for the regulations to keep pace with change; and fourth, the development of a
centralized Web site for complaints by consumers of any banking

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institution regardless of charter to help eliminate much of today’s
confusion.
Thank you very much. I look forward to answering questions.
[The prepared statement of Comptroller Dugan can be found on
page 120 of the appendix.]
Thank you, Comptroller.
And next, the Chairman of the Federal Deposit Insurance Corporation, Chairman Bair.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION

Ms. BAIR. Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to testify on
Federal consumer protection in financial services.
The U.S. financial system has undergone a significant change in
recent years. Consumers overall have benefited from the huge
number of new and innovative products and services they can now
choose from. But along with all this consumer choice has come
more complexity in product terms and cost structures. This complexity has created financial pitfalls for the unsophisticated and
unwary. We also see many new players in the market, many of
them beyond the reach of Federal regulatory agencies.
The greatest weakness in today’s financial marketplace is the absence of clear consumer protection standards applied uniformly to
all participants in the market. As you know, consumer protection
is a key part of our job at the FDIC. We closely examine our banks
for compliance with consumer protection laws and regulations and
take enforcement actions where warranted. We also devote significant resources to investigating and resolving consumer complaints.
And we carefully monitor and analyze consumer complaints to signal problems in particular services or financial institutions.
We have several recommendations for improving Federal consumer safeguards that would provide stronger, more uniform protections and help level the playing field. First, as I have previously
testified, the FDIC supports national standards for subprime mortgage lending by all lenders through HOEPA rulemaking or by statute. Ideally, national standards would include a number of elements which I detail in my written testimony, such as requiring
underwriting at the fully indexed rate, restrictions on prepayment
penalties, and restrictions against misleading marketing.
Second, Congress should consider expanding rulemaking authority to all Federal banking regulators to address unfair and deceptive practices under the FTC Act, not just to three of the five regulators, as is the case under current law. This change in law would
include the prospective input at the FDIC and OCC in rulemaking
to protect consumers; together, we account for about 7,000 banks.
Third, to enhance enforcement of Federal consumer protection
laws, Congress could consider expanding the Truth in Lending Act
as well as the FTC Act to allow State authorities to enforce those
laws against nonbank financial service providers. Nonbank providers are a significant portion of today’s market. Allowing more
regulators to enforce these laws would beef up compliance.
Finally, I am a big believer in financial literacy. Educated consumers are better able to make sound choices and protect them-

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selves against scams. Integrating financial education into existing
public school curriculum, such as in math classes, would help kids
from all income levels and expose them to basic financial principles
year after year. There are a number of Teach the Teacher programs offered at many universities to assist school systems in integrating financial education into core curriculum, but such programs
could greatly benefit from Federal financial support.
In conclusion, I would say that market competition is the best
way to set prices and allocate resources. However, markets need
rules. Abusive or misleading financial practices not only hurt consumers, they hurt the reputation of the entire industry. The FDIC
stands willing to assist you and our fellow regulators in finding
ways to serve the needs of consumers and the markets. Thank you,
and I would be happy to answer your questions.
[The prepared statement of Chairman Bair can be found on page
91 of the appendix.]
The CHAIRMAN. Next, the Chair of the Federal Trade Commission. And Chairwoman Majoras, we know we are not your usual
venue, so we very much serious appreciate you doing this. But it
did seem to us that having all the regulators together is really the
prerequisite, and we hope that this won’t be the last time you all
will be together talking about this issue. Madam Chairwoman,
please proceed.
STATEMENT OF THE HONORABLE DEBORAH PLATT MAJORAS,
CHAIRMAN, FEDERAL TRADE COMMISSION

Ms. MAJORAS. Chairman Frank, Ranking Member Bachus, and
members of the committee, I am pleased to be here with you and
with my colleagues today.
Because financial issues affect all consumers, whether they are
buying a home, trying to improve their credit rating, or dealing
with rising debt, protecting consumers of financial services is a key
part of the mission at the FTC.
Now, of course, the FTC is primarily a law enforcement agency.
We don’t have the same sort of supervisory authority over particular entities that some of my colleagues here have. And, of
course, we don’t have jurisdiction over banks. But under the FTC
Act and several other consumer protection and financial statutes,
the Commission has broad jurisdiction over nonbank financial companies, including nonbank mortgage companies, mortgage brokers,
finance companies, and some units of bank holding companies.
The FTC uses three main tools to protect consumers: law enforcement; consumer education; and policy research and development.
We focus our investigations and prosecutions on combating and
preventing unlawful acts and practices that are most likely to
cause consumer harm. Recently in this area, we focused on the following: mortgage lending and servicing; nonmortgage lending and
leasing; gift card sales; advance fee loan scams; debt collection
practices; credit and debt counseling services; and credit reporting.
The Commission has targeted deceptive or unfair practices in all
stages of mortgage lending, for example, from advertising and marketing through to loan servicing. In the past decade, the FTC has
brought 21 such actions, focusing particularly on the subprime
market.

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As a result of these actions, courts have ordered the return of
more than $320 million to consumers. And because law enforcement is highly effective, indeed, it is most effective when government agencies cooperate, we have done so whenever possible and
appropriate. For example, we brought an action against Fairbanks
Capital Corp., one of the country’s largest third-party subprime
loan services a few years ago with HUD. We charged that Fairbanks failed to charge consumers’ payments upon receipt, charged
unauthorized fees, and reported consumer payment information
that it knew to be inaccurate to the credit bureaus. And Fairbanks
and its former CEO paid over $40 million in consumer redress.
Attacking debt collection abuses is another critical part of our
agenda. Today, I am announcing the Commission’s 20th debt collection case since 1998. This week, the FTC filed an action to stop
debt collectors who targeted Spanish-speaking consumers and engaged in repeated egregious violations of the Fair Debt Collection
Practices Act. The case has been filed under seal, and we are waiting for the judge to rule in our request for a temporary restraining
order.
Another recent area of enforcement has been gift cards, and we
recently brought two cases against sellers of gift cards that carried
concealed fees. Both Kmart Corporation and Darden Restaurants
agreed to settle claims that they engaged in deceptive practices and
advertising in selling gift cards and are now implementing programs to either refund consumers or restore fees that were deducted from the consumers’ gift cards.
Now, while law enforcement is essential, consumers are best
served if they can avoid the injury in the first place. To empower
them to avoid the harm, we have developed extensive consumer
education programs addressing financial services focusing on expanding the reach of these materials to get them out there.
In the last fiscal year, we distributed over 4 million printed copies of financial education brochures, and had over 6 million hits on
the same publications on our Web site. In addition, we have educated young people who have limited experience with credit by conducting outreach on college campuses, at local district college fairs,
and in high schools, including local high schools here in the District.
Of course, financial services markets are dynamic and continue
to evolve, and recognizing that, we and other policymakers must
continually assess how we adapt our policies and practices, and
how we engage in research and policy development concerning financial services and consumers.
And today the Commission’s Bureau of Economics released a
study that confirms the need to improve mortgage disclosures. The
key findings of that study, which we have with us here today, are:
first, that the current federally required disclosures fail to convey
key mortgage costs to consumers; second, that better disclosures—
there was a prototype that our economists used—can significantly
improve consumer recognition of the various costs; third, that both
prime and subprime borrowers fail to understand key loan terms,
and they benefited from improved disclosures; and fourth, not surprisingly, that improved disclosures provide the greatest benefit for

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more complex loans, whether they were prime or subprime. We
look forward to working with our colleagues on the next steps.
Looking ahead to October, the FTC, in response to a growing
number of complaints about the practices of debt collectors, is holding a public workshop to examine changes in debt collection and
the impact on consumers and competition, and we hope whatever
we learn there we can use to assist policymakers in developing further laws, policies, and procedures.
Mr. Chairman, and members of the committee, I appreciate the
opportunity to provide the FTC’s input today, and I assure you that
you have our commitment to work tirelessly for the consumers of
this Nation. Thank you.
[The prepared statement of Chairman Majoras can be found on
page 180 of the appendix.]
The CHAIRMAN. Next we have Scott Polakoff, the Deputy Director
and Chief Operating Officer of the Office of Thrift Supervision.
STATEMENT OF SCOTT M. POLAKOFF, DEPUTY DIRECTOR AND
CHIEF OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION

Mr. POLAKOFF. Good morning, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to present the views of OTS on the adequacy of consumer
protections in financial services.
Consumer protection, maintaining the safety and soundness of
the thrift industry, and ensuring the continued availability of affordable housing credit are three critical responsibilities of the
OTS.
On the subject of today’s hearing, consumer protection, there are
four important components detailed in my written statement. Briefly, effective consumer protection by regulators requires: Number
one, an emphasis on consumer protection in both the examination
process and the application process; number two, an effective supervision program including the use of formal and informal enforcement actions to address threats to consumer protection; number three, a robust consumer complaint mechanism to address
issues as they arise and to use the information in the supervisory
process; and number four, effective training and continuing education of examiners regarding consumer protection issues.
OTS has a consolidated examination structure that is unique
among the Federal banking agencies. The program combines our
safety and soundness and compliance examinations to better address institutions’ risk during the exam process. Part of the rationale for this approach is that compliance and safety and soundness
go hand-in-hand. We believe this provides a more comprehensive
assessment of an institution’s risk profile, more accurately exposes
weaknesses and deficiencies in an institution’s overall program,
and provides us with an accurate assessment of an institution’s
overall business strategy.
Our examiners are subject to an intensive cross-training program
to acquire the knowledge and skills needed to lead a melded examination. We also maintain a cadre of compliance experts to assist
examination teams in handling complex compliance matters.

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Because Federal thrifts may conduct their lending and deposittaking programs subject only to the requirements of Federal law,
the OTS is required to ensure that Federal thrifts conduct their activities and programs in compliance with applicable consumer protection laws and subject to rigorous scrutiny of all aspects of an institution’s program.
We regularly examine risks for compliance with Federal protection statutes including the Truth in Lending Act, HOEPA, RESPA,
the Truth in Savings Act, ECOA, the Fair Housing Act, and the
Credit Reporting Act, among others.
We also continually track, investigate, and respond to consumer
complaints involving thrift institutions. We follow up with the institution on all consumer complaints filed with the Agency, and we
typically process and conclude consumer complaints investigations
within our 60-day timeframe.
In addition, this data plays a significant role in identifying areas
to focus on during on-site examinations in assessing the adequacy
of an institution’s overall compliance management program and in
pursuing corrective action that may be appropriate to address programmatic weaknesses or deficiencies.
I should also mention that we have finalized the model memorandum of understanding with the Conference of State Bank Supervisors to share consumer complaint data between the OTS and
State banking supervisors.
When an institution’s lending programs are found to be potentially predatory or lacking adequate controls to support responsible
lending, there are numerous options that OTS can take to stop
these practices and correct the situation. These include formal enforcement actions and informal agreements. While we find informal
actions to be an effective mechanism to address these types of supervisory concerns, we do not hesitate to use our formal enforcement authority when appropriate.
Fundamental to our continuing oversight of the industry we regulate is ensuring that institutions conduct their activities in a manner consistent with sound consumer protection. In my written
statement we describe various programs, publications, and initiatives that the OTS has worked on its own and cooperatively with
various other agencies and organizations to promote consumer education and responsibility. We also have various initiatives to improve financial literacy, and we work closely with our institutions
to encourage them to do the same.
Regarding the adequacy of our existing authority to address consumer protection issues and potential abuses that may arise going
forward with the programs of OTS-regulated thrifts and their affiliates, I believe our authority is complete and adequate. I do not believe that an additional statutory authority is necessary at this
time for OTS to continue to effectively supervise, regulate, and enforce Federal consumer protection laws.
I look forward to answering your questions and thank you for the
opportunity to comment.
[The prepared statement of Mr. Polakoff can be found on page
219 of the appendix.]
The CHAIRMAN. Next to represent those involved here, the attorney general of the State of Iowa, who has been active with the

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other State attorneys general, and I believe speaks for many of
them today, Mr. Tom Miller.
STATEMENT OF THE HONORABLE THOMAS J. MILLER,
ATTORNEY GENERAL, STATE OF IOWA

Mr. MILLER. Thank you, Mr. Chairman. Mr. Chairman, Ranking
Member Bachus, and members of the committee, thank you for inviting me, and thank you for listening to the views of myself and
State attorneys general.
The Watters case, I suppose we could debate whether it changed
the law or reaffirmed the law, but that debate is over. What has
happened, though, over the last 5 to 8 years is that the practice
has been changed, the practice of the role of State AGs and State
banking superintendents, in dealing with consumer complaints in
the banking area and related areas. For decades, we dealt with
those complaints, we dealt with those issues. Now we are prohibited from doing so in many instances. So the practice has changed
considerably under the direction and institution of the OCC.
So we—like the chairman, like CSBS—think the law should be
changed. We think the States should have the role that they played
for decades, really, starting from the 1960’s on, with consumer protection, but we recognize that the law probably won’t be changed.
I think the chairman stated the political realities very, very well.
So what happens next?
I think the huge challenge for the Federal people is the volume
of complaints. This is the potentially intractable problem—probably
millions of complaints each year, some of them not heard, but out
there and maybe will be heard by the Federal regulators. How do
they deal with those complaints? Now many of those complaints at
a national level don’t have a lot of significance, but for that individual person, it has a huge amount of significance. That is their
challenge.
Now, what do we, State attorneys general, think might be done?
Well, first of all, they have considerable rulemaking power that
generally in the past has not been used, in part because I think
they thought the States were doing these kinds of activities, and
we were. So they have rulemaking authority. And they have enormous power because of their regulatory authority over the various
banks and institutions. So that is an enormous opportunity, but
they can’t be reticent, for whatever reason, to use their authority.
Recently, as a result of a New York Times story, the demand
draft issue has come forward where people can send through demand drafts, checks that are unsigned, if they get the bank account
number, and clean out a person’s account. Well, that is something
the Federal regulators can take care of. In that story, it indicated
that the bank involved, 59 percent of the checks were returned.
Well, consumer protection people would tell you if it is 2 or 3 or
4 percent, that is fraud in the biggest, strongest possible letters as
a warning signal. So the Federal regulators need to figure out
where the banks—when they get a certain percentage of checks returned for those reasons, they have to investigate, and invariably
they will find fraud. And frankly, if they do that, they can do in
this area more than the State attorneys general and do it more effectively.

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Another area is what I call soft-core fraud dealing with membership clubs and getting people in membership clubs and banks giving the names and sharing the profits. Banks shouldn’t be doing
that. They shouldn’t be using their names. The regulators can stop
that, and, again, more effectively than the States.
The Federal regulators have to get the expertise in consumer
protection. They have some, but they need a lot more, because as
a practical matter, they have a lot more responsibility. They can
draw perhaps on former State officials that dealt with this area,
and many others, to build up their expertise in the consumer area.
And it is also a matter of focus. The chairman was, as always, brilliant on that, that the focus has been safety and soundness. The
focus of consumer protection with this increased role has to increase at the agencies.
And finally, in terms of complaints, I go back to that, that is
something that in an informal way we might help on. But in any
area where there is problems and challenges, there is opportunities, and I think there is one amazing opportunity that is present
today, and that is for all of us to work together in the subprime
area and on predatory lending. That is an area where we still have
some considerable authority. And if we work together, what has
happened is that some of the bad actors are out of business; some
of the better actors are continuing in business and have
reputational issues. There have been problems that have been
raised for the country. There has been pain for both consumers and
investors. This industry, which is a chronic one, could be cleaned
up if we all worked together—meaningful, not just lip service, but
we got together, shared our expertise and shared our power, figured out on an ongoing basis at a staff level—I have a a guy, Patrick Madigan, who works this all the time. He understands it completely. There are other people in the State offices and in the Federal offices. If they worked on it on an ongoing basis, and the principals, the elected officials, the appointed officials, came in at the
appropriate time, we could clean up the subprime industry if we
worked together, and if we had the will to use the powers that we
all have on a complementary, comprehensive basis.
Thank you, members of the committee.
[The prepared statement of Mr. Miller can be found on page 205
of the appendix.]
The CHAIRMAN. And now my own State bank commissioner,
Commissioner Steven Antonakes, from Massachusetts.
STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF
BANKS, COMMONWEALTH OF MASSACHUSETTS, ON BEHALF
OF THE CONFERENCE OF STATE BANK SUPERVISORS

Mr. ANTONAKES. Good morning, Chairman Frank, Ranking Member Bachus, and distinguished members of the committee. My
name is Steven Antonakes, and I serve as the commissioner of
banks of the Commonwealth of Massachusetts. I am also the chairman the FFIEC State Liaison Committee. It is my pleasure to testify today on behalf of the Conference of State Bank Supervisors.
I commend you, Mr. Chairman, for calling this hearing to discuss
consumer protection and financial services. The States have long
been recognized as leaders in providing consumer protection. CSBS

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is committed to working with Congress and our Federal counterparts to further the development of a fair and efficient system of
consumer protection that serves the interest of financial services
customers.
As you may know, nearly every consumer protection that exists
at the Federal level or that Congress is currently contemplating,
has its roots in State law. However, as the result of OCC and OTS
interpretations supported by the courts, it is unclear if the States
will continue to have the ability to serve as the laboratory for innovation for banking consumer law.
Maintaining a local role in consumer protection and a strong
State banking system is more important than ever as our Nation’s
financial system consolidates. As the Nation’s largest banks become
less connected with the communities they serve, they are also finding ways to become less accountable to those communities through
preemption of State law and law enforcement. CSBS believes that
the effective supervision of the financial marketplace requires a coordinated effort among the Federal agencies and the States.
Ultimately the goal for Congress and the regulators should be to
create an efficient supervisory structure that allows institutions to
compete effectively and to make their products and services available to a broad demographic while offering effective consumer protection and recourse against fraudulent and abusive practices.
Recently the States, through CSBS, agreed to a framework for
the sharing of consumer complaints and resolutions between State
agencies and the OCC and the OTS. CSBS and the OCC are also
working with the other agencies to develop a model consumer complaint form. In addition, I look forward to working with Comptroller Dugan to coordinate examinations of national banks and
State license brokers and originators.
These are all positive steps to improve service to consumers,
however, these efforts do not address our fundamental concern
about the impact of OCC and OTS preemption on how consumer
protections are developed and how they are enforced.
Recognizing that only Congress can address our concerns, we
would suggest the following:
Congress should require that the FFIEC write regulations and
guidance for consumer protection. This will allow the States to
have more input in the process and result in more consistent
standards for consumers.
Congress should give the FFIEC rule-writing authority for unfair
and deceptive acts and practices.
Congress should consider creating a centralized system for the
collection and distribution of consumer complaints to the appropriate regulators.
Additionally, banks and their subsidiaries should disclose who
their primary regulator is and how to address consumer complaints
to that specific regulator.
We ask that Congress direct the Federal banking agencies to list
applicable and preempted State laws. The Riegle-Neal Interstate
Branching Act stated that the OCC shall enforce applicable State
consumer protection laws. It is important that banks, the States,
and consumers know which State laws are being enforced and
which have been preempted.

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Congress should clarify State enforcement authority and the limits of applicable State law for federally chartered institutions. State
legislators and attorneys general need a clear statement of their
roles in protecting the citizens of their States. The current state of
confusion is not acceptable.
And Congress should encourage Federal and State coordination
to develop consistent interpretation and enforcement of applicable
State laws.
I urge Congress to continue its examination of the adequacy of
OCC and OTS consumer protections and enforcement. The States,
through CSBS and our involvement on the FFIEC, want to be part
of the solution. We want to ensure that consumers are protected regardless of the chartering agent of their financial institution. We
want to preserve the viability of both the Federal and State charter
options to maintain a meaningful choice in charters and the success of the dual-banking system.
Thank you for inviting me to testify. I look forward to your questions.
[The prepared statement of Mr. Antonakes can be found on page
67 of the appendix.]
The CHAIRMAN. Thank you.
I am going to swap places with the gentleman from Kansas, Mr.
Moore. He will ask in my place, and I will wait until he would have
been reached. I recognize the gentleman from Kansas.
Before that, I want to introduce into the record a letter from the
National Association of Insurance Commissioners, by unanimous
consent, in which they say, ‘‘We would like to share with you some
of the examples of the negative effects of Federal preemption on
State regulation of health insurers.’’ They acknowledge that we
don’t have health, but they are expressing their concerns about the
negative effects of preemption in that area. That will be part of the
record.
The gentleman from Kansas.
Mr. MOORE. Thank you, Mr. Chairman, for swapping time with
me here.
I want to ask a question of Mr. Dugan. Pages 21 and 22 of your
testimony indicate that data derived from your customer assistance
group are used in identifying problems at banks. OCC claims that
it fields 70,000 inquiries and complaints each year compared to the
OTS, which received 5,200 complaints in 2006, and the Fed, which
received 1,900 in each of the last 2 years.
And I want to refer to a GAO report in February of 2006 which
says, in reporting its performance, OCC includes data on its response to consumers’ inquiries which typically take less time,
thereby overstating its performance on timeliness to responses or
complaints.
Could you break down that number, that 70,000 number, for me
in terms of inquiries versus complaints? Can you give examples of
enforcement actions, formal or informal, that originates from consumer complaints? Can you break down the number first, sir?
Mr. DUGAN. I can get the number on breaking it down for complaints versus inquiries in just a moment, but we don’t trace which
inquiry leads to a formal or informal enforcement action. More
often than not, these lead to situations where we assist the con-

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sumer by resolving a dispute and providing financial relief. We
have tracked and provided over $30 million of financial relief to
consumers in the last 5 years that was facilitated through that
process.
Mr. MOORE. You are familiar with this GAO report in February
of last year, correct?
Mr. DUGAN. Yes, I am familiar with it. I am not sure these are
the same ones that you are talking about, but it is the 41,000 inquiries and 29,000 complaints. I am not sure that is the bar that
you were looking at.
Mr. MOORE. That is really what I was looking for.
Mr. DUGAN. And we are very familiar with that recommendation.
We do break that down directly like that now as a result of the report. We are quite conscious of that.
Mr. MOORE. Thank you.
According to this GAO report, OCC agreed with the conclusions
and recommendations.
Mr. DUGAN. Yes, sir.
Mr. MOORE. You are going to follow that?
Mr. DUGAN. Absolutely.
Mr. MOORE. I appreciate that.
I am pleased that some of you mentioned in your testimony, and
the attorney general mentioned in his testimony, that you are
working toward the goal of a uniform consumer complaint. I think
OCC talked about that and OTS and FDIC in your reports. While
you are developing this uniform complaint, which I think is great,
wouldn’t it be helpful to create a single toll-free number—any comments by any of the panelists on that—so people who had a problem with their financial institution would know where to go?
I looked at some of the Web sites, and it is very, very confusing
and takes several clicks sometimes to get to a complaint form or
a toll-free number. Any comments about a single toll-free number
that maybe all financial institutions could use?
Mr. DUGAN. Speaking for the OCC, I think this is an idea definitely worth exploring. We have had some preliminary discussions
in a forum. I think the FTC actually has a number that they use
in these sorts of circumstances. It is more complicated than it first
sounds, but we can do more as a group to have a centralized, easyto-understand, easy-to-find function. And as my testimony indicates, I really do think we should pursue that.
Ms. BAIR. Could I add, since we are the deposit insurer, the
FDIC logo is displayed in all banks and thrifts. Because we recently needed to change our logo due to the merger of two of our
funds, our Web site and all the information that is sent out about
the FDIC is displayed at banks and will have our Web site address
on it.
Anticipating your question, it only took us two clicks to get to the
complaint form on our Web site. But if we could improve that and
put the complaint form on the FDIC home page, I am happy to do
that. But I do think that de facto we serve as a clearinghouse now
because a lot of people come to us because they know our name.
We would be happy to expand upon that role.
Mr. MOORE. Any other comments by panelists up here? Mr.
Kroszner?

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Mr. KROSZNER. We also have been moving towards having a single 800 number for all the Federal Reserve banks, because we have
a system of 12 regional Federal Reserve banks. Rather than have
the customer try to find the regional Federal Reserve bank that is
appropriate to them, by 2008 we will have a centralized clearinghouse with one number for everyone to call. I am very much supportive of that idea.
We also now have a beta version of the Web site up that if you
have your institution’s name, you can type that institution’s name
in, and it will tell you whether it is a Federal Reserve supervisor,
an FDIC supervisor, or an FCC supervisor, etc. Also, if you call
that 800 number, there will be a person who can tell you if it is
a Fed institution, or it is an OCC or other institution, and then direct the person directly to that. But I think it is extremely valuable
that we do this, and we are working towards that end.
Mr. MOORE. A real person you are talking about that consumers
can talk to?
Mr. KROSZNER. A real person, not a series of, ‘‘Press 5 if you
would like to wait for 5 minutes.’’
The CHAIRMAN. In what country will this real person be working?
Mr. KROSZNER. I believe—this will be up in 2008, but I believe
that real person will be working in the United States.
The CHAIRMAN. That is reassuring.
The gentleman from Alabama.
Mr. BACHUS. Thank you, Mr. Chairman.
Comptroller Dugan, you mentioned the importance of working
with State officials. Could you give us some greater detail on areas
where you have worked with them or you are open to working with
them in the future?
Mr. DUGAN. Absolutely. As I mentioned, we have been trying for
some time to figure out a way to share consumer complaint information, and, last November, after a series of meetings and good cooperation of the Conference of State Bank Supervisors, we adopted
a model memorandum of understanding where we can share information about complaints, get referrals, and report back on the disposition of information. And, as a result of that, we entered into
an agreement first with the State of New York, and since then with
17 other States, and we are pursuing that with a number of other
States.
We have entered into similar agreements with 14 State insurance commissioners. When we did our nontraditional mortgage
guidance, it became apparent that a huge part of the mortgage
business is being conducted at the State level, not just by non-national bank people, but by nonbank-affiliated lenders. Over half of
the subprime mortgages were issued there, for example, and it became very important for us to have some kind of agreement by
States to adopt similar rules for that.
Lastly, as we just announced today, we have spoken with Commissioner Antonakes and the State of New York’s commissioner,
Superintendent Neiman, to try to develop a way to look more closely at State-regulated brokers that originate mortgages that are
used by national banks, and have parallel examinations where we
can share information. I believe this will be particularly important
going forward to make sure this new guidance is being imple-

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mented not just by employees of the banks that we supervise, but
by the brokers that they use and with whom the banks don’t necessarily have the same kind of contact as they do with their own
employees.
Those are several types of things. We are open to other kinds of
suggestions. We welcome them.
Mr. BACHUS. Complaints that OCC has not taken any enforcement actions, does that indicate you are not doing your job?
Mr. DUGAN. No. It is something I did try to spend some time discussing in our testimony. First of all, we do take enforcement actions. We are not an enforcement-only regime as is the case in
many places that don’t have regulated institutions.
We, because of our extensive presence in the banks that we supervise, which is also true of the other bank regulators, are able
to effect change much more quickly in a way that never reaches an
enforcement action. We have a series of graduated steps that we
take to effect corrective action beginning with something called a
‘‘matter requiring attention.’’ And, if you look at our record over the
last 5 years, which we did in anticipating this hearing, we totaled
up the number of formal enforcement actions that we took in consumer-related issues. It is about 200. Similarly we took about 200
informal enforcement actions on consumer issues. But if you look
at the ‘‘matters requiring attention’’ that start this process, there
were 1,500 of them. And that is what you want to see. You want
to see identification early of what those problems are, telling management to fix this, and they don’t result in enforcement actions
but instead result in correction.
The problem for us is that as a public relations matter, people
don’t see that. And that is the point really I am trying to get
across, which is you can’t measure how well we do what we do in
this area by only looking at formal enforcement actions.
Mr. BACHUS. All right. Let me ask the total panel, anybody, if
you would like to comment. Neither the OCC or the FDIC has rulewriting authority to define unfair and deceptive practices under the
FTC Act. Is that going to limit your ability to protect consumers?
Ms. BAIR. Well, we enforce UDAP, but we don’t have the ability
to write rules. And so because there are no rules, we are finding
out we have to use case-by-case determinations and consult a great
deal with the Fed and the FTC about what is unfair or deceptive
because we don’t have the ability to define these terms.
Rule-writing authority would be extremely helpful, especially in
the subprime area. If you have a rule, you can have a preventive
effect. You can let the industry know as a whole that certain types
of practices are going to be viewed as unfair and deceptive, as opposed to having to go in bank-by-bank in the supervisory process.
Also, if you take informal action, it is not public, so there is not
any precedential impact.
It will certainly be used in consultation and coordination with
the other regulators, and I do think it would be helpful.
Mr. DUGAN. And I would just add that I agree with that. For
many years it was not clear that banking agencies could even take
enforcement action under unfair and deceptive. The OCC was the
first agency to go down that path. We have taken a number of en-

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forcement actions on a case-by-case basis, but we do think it would
be helpful to have rule-writing authority.
Frankly, I think it would be most helpful to have it on a joint
basis. Our concern is that if one agency adopts a rule, people could
use other charters to do the same activity, although I agree with
my colleague that as a practical matter we would probably work together in any event. But I do think that is important.
Mr. BACHUS. Could I ask one other question? Have any of the
regulators or the FDIC found any credit card practices to be unfair
or deceptive? Let me highlight three or four. One is that they apply
your payment to your lowest interest rate. Another one is universal
default where they increase your interest rate simply because your
credit score goes up, or you approach your credit limit, or you take
out a loan to buy an automobile, or a double-billing cycle, or a short
billing cycle.
Even I now face a situation where you are up here all week, and
sometimes you get home, and you have about 8 days or 6 days to
get that check in the mail. And the cycle continues to shorten, it
appears. And they also—as the chairman documented, many times
they will—even though the payment arrives on a certain day, it is
posted, but it is not credited until the next day.
Mr. DUGAN. We regulate a number of the credit card banks in
the country. We have taken a number of enforcement actions
against credit card banks for unfair and deceptive practices, primarily subprime credit card practices, and as a result there are
very few subprime credit card providers left in the national banking system.
Having said that, the types of practices you described, doublecycle billing, universal default, those are not things that we have
taken or regarded as unfair and deceptive so long as they are adequately disclosed. The regime that we have always operated under
as a statutory matter is that fees and charges are not things that
we generally regulate unless they rise to the level of being something that is unfair and deceptive the way that is defined in the
Federal Trade Commission Act. And if those fees are adequately
disclosed, they have not been treated as unfair or deceptive, and
I don’t know of any regulator that has treated them that way.
Ms. BAIR. I think those practices are highly troubling, but even
assuming we thought they were unfair or deceptive, we would not
have the ability to write a rulemaking that determination, whereas, we can write rules on safety and soundness.
I think previously you mentioned that universal default, in effect,
is piling onto a person who has problems already. Perhaps you
could make a safety and soundness argument to issue a rule to address the problem of universal default.
However, since we only have 15 percent of the credit card market, even if we could find authority under safety and soundness to
write a rule, we would be imposing a rule only on FDIC-supervised
credit card issuers that would not apply to banks not supervised
by the FDIC.
The CHAIRMAN. And you would pretty soon have 1.5 percent of
the market and not 15 percent if you had rules and he did not.
The gentlewoman from New York.
Mr. BACHUS. The Chairman of the FTC was trying to—

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The CHAIRMAN. I am sorry. Please, Madam Chairwoman.
Ms. MAJORAS. I was going to add one thing. At the FTC, we don’t
have jurisdiction over very many credit card issuers because so
many of them are banks, but where they haven’t been, we have
brought cases under deception and unfairness authority. And we do
have a rule that prohibits advance-fee credit card and loan
schemes. A lot of these are out-and-out scams, which is where we
specialize. But I would point out that is one of the places where
we do have a rule, but most of the time we use our deception and
unfairness authority without any rules. We just use it in our enforcements.
The CHAIRMAN. I was glad you mentioned gift cards. That is an
issue where in Massachusetts we went after where you gave a gift,
and pretty soon it was you gave a gift that kept on shrinking, and
you did not know that. By the time the person cashed the gift card,
you looked like Uncle Cheapskate because it was half of what it
was supposed to be.
I congratulate the Comptroller—I think it was the Comptroller’s
predecessor. There was an effort by the issuing banks who were
shilling for the merchants there to invoke the preemption, and the
OCC did not go along with that. So we were able to preserve, I believe, State authority there. But I appreciate you bringing it out.
That is the prime example of the kind of protection we want to
give.
The gentlewoman from New York.
Mrs. MALONEY. Thank you, Mr. Chairman. I was impressed with
the list of reforms Chairwoman Bair proposed for Congress. And I
would like to ask the other panelists about some of them, particularly the Honorable Kroszner and Honorable Dugan. What do you
think of giving the States a greater enforcement role under truth
and lending and the FTC Act against nonbank financial providers?
And also the FTC?
Mr. DUGAN. I think it is a good idea myself. You might say it is
easier for me to say because you are not saying it is providing it
against national banks. But I do think that what recent history has
shown is that the less regulated institution—and here I am not
talking about State banks, I am talking about State-chartered institutions that are not regulated, like mortgage brokers or mortgage lenders—have been a significant source of the problem, and
I think finding a way to devote more resources to addressing that
issue is a good thing.
Mrs. MALONEY. Mr. Kroszner.
Mr. KROSZNER. I certainly agree it is very important to devote resources to protect consumers, and there are many things that are
outside the scope of what the Federal Reserve can do in terms of
enforcement, and so we very much rely on and coordinate with the
States both for the institution—certainly for the institutions that
we regulate, the State member banks. We coordinate very much
with the States on those institutions. But there are many institutions, as Comptroller Dugan mentioned, that are outside of our
purview for enforcement, and so providing appropriate resources to
make sure that the laws are enforced to protect consumers is very
important.
Mrs. MALONEY. And Chairman Majoras?

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Ms. MAJORAS. There is no question in my mind or anyone at the
FTC about the States’ importance in enforcing consumer protection
laws in this country. We work with them all the time, and we are
a relatively small agency, and if we did not have them working side
by side with us, we would do a lot less. So I will start by saying
that.
The FTC has always taken the position that the States don’t
need authority under the FTC Act because—Tom could probably
say it better—if not all of them, almost all of them have what we
call little FTC Acts; in other words, they have passed their own
statute that essentially mocks the FTC Act. And so we have previously said we don’t think it is necessary.
We file cases as co-plaintiffs or in big law enforcement sweeps
where we announce cases on the same day all the time, and it has
not inhibited us. The thing to remember is that if you have too
many regulators all enforcing the same statute, you can end up
with some inconsistency. And what the States have typically done
is look to Federal case law under the FTC Act, and that has kept
us all, I think, marching in the same direction.
Mrs. MALONEY. I am also concerned about this, and it has been
touched upon. I am concerned about banks entering into agreements with unregulated third parties who want to issue subprime
credit cards. And I know the FDIC has investigated some of these
activities, and I would just like to know, or to get a sense of, how
big is the rent-a-charter problem? And is there a role for the States
in this area? And how can Congress help? Maybe start with the
FDIC and the OCC and the Fed.
Mr. DUGAN. Well, as I said earlier, we had a number of significant problems both on the safety and soundness and the consumer
protection side with subprime credit card practices. We took a
number of quite strong enforcement actions, and as a result of that
whole series of actions that we took over a period of years, there
just are not many subprime credit card lenders in the national
banking system anymore.
Ms. BAIR. We carefully scrutinize these arrangements because
they are prone to abuse. We are conducting a joint investigation
with the FTC right now concerning the so-called rent-a-bin arrangements. We have identified about 10. We, again, closely scrutinize them. I don’t know if I can categorically say they are all problematic, but they are certainly prone to abuse, and we are carefully
reviewing them.
Mr. KROSZNER. Fortunately, we do not have any banks that are
engaged in this practice, so we haven’t undertaken any actions because there are no banks doing this.
Mrs. MALONEY. Any other comments? And then my time has expired.
Mr. MILLER. This is our great nightmare, of course, the rent-acharter situation, where there could be enormous bad actors using
the shield of Federal preemption. I think by and large, so far, Federal agencies have been fairly vigilant about that issue, and they
really need to be. That is probably the biggest nightmare that we
are dealing with in the sort of set of circumstances we have been
put in with the Watters case and related cases.

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Mr. POLAKOFF. Congressman, I would offer from the OTS perspective that rent-a-charters are simply not acceptable, and if we
find it, we stop it. And whether it is credit card, subprime credit
card, payday lending, it makes no difference. It is not an acceptable
practice.
The CHAIRMAN. The gentleman from Louisiana.
Mr. BAKER. Thank you, Mr. Chairman.
I am appreciative of the fact that there has not been insurmountable attention given to the preemption issue, but rather where do
we go now, in light of the definitive decision in the Watters case?
Mr. Dugan, in your testimony you recite the observation that the
FTC Act vests with the Federal Reserve the ability to regulate unfair or deceptive practices at banks—comparable authority is invested with the OTS for thrifts, and the NCUA for credit unions.
And so you establish that Congress has acted with regard to each
specific financial sector to provide consumer advocacy responsibilities, but you go on to suggest that a unified working group of sorts
that could provide for joint rulemaking opportunity would do great
service towards the absence of venue shopping and having as best
we can an equitable enforcement practice.
I would like to suggest and seek your counsel. Would it not be
advisable, in light of the comments made by those representing
State interests here today, that a representative of the CSBS at
least in an advisory capacity, because it may not be proper for
them to be voting on national bank regulation, but perhaps they
would have perspectives of value, as well as, of course, the FTC,
to provide some sort of working group format? We have presidential working groups of regulators that come out with reports
which are generally ignored, but we could have a consumer working group, as an example, solely focused on consumer advocacy,
identifying practices inconsistent with sound fiscal policy, and leave
it then to each specific regulator to act consistent with others.
If we were to suggest something of that sort, that would not necessarily in itself require congressional action if agencies chose to
work in such a cooperative manner, quarterly, semiannually, annually, even if it were just to report to Congress and say here is what
we should do and let us evaluate that policy, if that is what you
deem to be most appropriate.
From what I am hearing from everything is can’t we share information? Can’t we work together? No one has the resources to do
this all on their own. Everybody can see problems. You might see
a problem across the fence that is not in your jurisdiction, and if
we got everybody together and had a more uniform system of consumer advocacy rules, the market wins and the consumers win. Is
that an inappropriate observation?
Mr. DUGAN. Not at all. I think it is actually a quite good observation. I think recently in the last Congress, the State representative
was added to the Federal Financial Institution Examination Council, FFIEC as we call it, and that would be a place to share that
kind of information.
I think if you go beyond that to rule writing, which is one of the
things you talked about, I think you did hit on one of the issues
that would be involved as a constitutional matter and appoint-

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ments matter. It is quite murky if you have a State official voting
on something—
Mr. BAKER. Let me be clear. I meant only in an advisory capacity. They would certainly not want you voting on their rules. But
I think the pressure would be if there was an identified problem
by this group, and generally action were taken, that those aberrant
players who did not subsequently act to protect their consumers
would have immense political responsibility for their failure to act
in light of the public discussion.
Let me also suggest that, given restricted resources, multiple 1–
800s and multiple Web pages—I note on page 23 of your testimony
that you will have up this summer your own Web page, which is
helpmewithmybank.gov. So, you can log on and find out what you
need to know and then move to the appropriate regulator.
It might also be appropriate for this group to think about consolidating those informational resources, because with everybody having its own Web page and 1–800, that gets to be confusing, and if
there would be a way to consolidate that where you ultimately end
up with a real person who lives in the United States and can speak
in the language with which you are calling—I know that yours will
be bilingual, I think that is appropriate—you would end up with
something of value instead of having disparate standards which
confuse consumers, and they don’t understand exactly with whom
they should make their complaints. This would be something that
you guys could perform, I think, a significant service and perhaps
break through this idea that you don’t care about consumers.
Mr. DUGAN. Mr. Baker, I totally agree. It is one of the things
that I talk about a little bit in my testimony. As you heard today,
we are all doing different things, and you wonder if there is a way
that we can coordinate and—
Mr. BAKER. What gets this started? Do we have to do it, or can
you do it?
Mr. DUGAN. No, I think we can do this. I think we can do this
at the FFIEC, and we can also invite our colleague at the FTC to
participate as well. But that is one of the things that I haven’t discussed yet with my colleagues, but I think it is something that we
could do if people were amenable to it, and I certainly am.
Mr. BAKER. Mr. Chairman, I hope you will encourage their participation in seeking out a negotiated settlement on this. I take
‘‘yes’’ for an answer and yield back.
The CHAIRMAN. The gentleman from New York.
Mr. ACKERMAN. Thank you, Mr. Chairman.
Last week one of our subcommittees held a hearing that focused
on some of the more disingenuous practices within the credit card
industry, and some of our witnesses and Members made the comment that the Congress has not given the Federal Reserve enough
regulatory authority to sufficiently restrict some of the egregious
practices. Some of them we have talked about were universal default and double-cycle billing and pay-to-pay fees.
The question that I would like to ask first is, does the Federal
Reserve feel, Governor Kroszner, that these are practices that require some type of restriction? In general, would the American people be better served if the Federal Reserve were given increased
authorities to regulate the credit card industry?

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Mr. KROSZNER. Thank you very much.
Certainly we take our responsibilities with respect to credit cards
quite seriously. As you know, in the hearing last week we discussed
a number of the new proposals that we put out to deal with these
issues because we think they are very, very important issues.
The approach that we have so far taken is primarily through our
regulation Z, TILA, Truth in Lending Act, authorities through trying to improve disclosure. I think it is true, as one of the other
Members had said earlier, that the current disclosures are not adequate for consumers to understand what is going on, and that is
why we have really focused on consumer testing to ask real people
real questions about what do they understand, what can they get
out of the forms that they are seeing? And we went back and forth
quite a few times to improve the information that is out there, not
only the accuracy of the information, but the understandability, the
usefulness to individuals.
I believe that we have—we believe that we have sufficient authority to deal with these issues as of today; however, we are continuing to take actions to look further into what needs to be done
in this area and a number of other areas, and certainly we will not
hesitate to come back to Congress to ask for further authority if we
need to.
Mr. ACKERMAN. Thank you. I appreciate that.
I have a second concern. I get these letters in the mail all the
time, besides the credit card ones, again with mortgages, and I get
a lot of them. Sometimes they are very official-looking, and I am
sure that is not by accident. And they are designed to make it look
like it is from the Federal Government or sometimes the State government or sometimes some unknown great official authority. And
it is very, very misleading.
This one does not identify who it is from on the cover. This one
is a similar design. It happened to come from the same source, I
believe. And it says right on the front, Re: Your current loan with
Citibank North America—which is one of the mortgages that I
have a property—Request for immediate action. I think this is from
my bank when I get it. Most people would think that because it
is up there in the return address area. But it is not.
And there are all sorts of warnings on here that are postal regulations that everybody knows about. You don’t have to put it on the
envelope, but you do if you want to make it look official: Warning,
a $2,000 fine and 5 years imprisonment for anyone interfering with
or obstructing the delivery of this letter. This is an important letter. There are all sorts of codes, and then it says, your mortgage
recorded in the county of, and there is all sorts of stuff that actually I once had. I guess they did not know that I paid that one off
and already switched it to somebody.
And it goes on looking real official-like. And then there is a big
notice on this part of the page: Notice, the Queens County property
code in Jamaica, New York, notification date. Recent changes in
our mortgage policy. There are programs now available to Queens
County residents.
Now, I would think this is some kind of government program if
I was an average person or somebody who is not reading this carefully because they don’t have the time, but gets an impression and

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all sorts of things. And they give you—I can get this deal for a rate
of 1.25 percent. Now, if I am a senior citizen on a fixed income, and
I think I had an interest rate that I am paying now of 6 or 7 or
8 percent or something, and I am going to be able to pay 1 percent,
I don’t realize that they could eventually take my house, or I am
going to owe more on the mortgage than the house is worth, but
they don’t care because that is not going to be 1.25 percent for too
long.
I get this one that does not have any return address on the front,
nothing on the back, and it says, ‘‘Certificate enclosed.’’ That is all
it says besides my address. And it comes looking like this. That
certificate of finance, preferred, bearer’s certificate, made out to
me. This looks so official with big ‘‘equal employment’’ thing on
there and FHA things and certificate numbers and guys, you know,
half dressed, carrying shields and swords, and things looking like
they came from dollar bills printed in the color of ink. You have
to read it 10 times to find out that it is not from my bank, but
somebody that wants to snipe my mortgage.
Is this fair? Should the industry not be policing itself, or should
some greater authority be supervising what is going on here?
Mr. MILLER. Congressman, that is deceptive, deceptive in so
many ways, and it is a violation of Federal laws and a violation of
State law, depending on preemption, of course, and that is the kind
of thing that we all should be after.
Mr. ACKERMAN. Are we after it, though? What is being done?
Mr. ANTONAKES. I would add in Massachusetts last year we
passed a law prohibiting those very types of deceptive advertisements featuring the third-party use of a bank name. And we have
taken enforcement actions against entities that we license and referred others that use these types of advertisement. I would also
just add quickly that we will enforce that law whether the complaint is against a State-chartered bank or a national bank.
Mr. ACKERMAN. I always liked Massachusetts. I hope the chairman makes a note of that.
Shouldn’t there be a Federal role in this?
Mr. POLAKOFF. I would like to offer that I suspect that did not
come from an insured financial institution. I suspect it came from
a mortgage bank or a mortgage broker, and I think that is where
the emphasis should be focused.
Mr. ANTONAKES. I would not disagree. They generally come from
third parties. We would enforce the law whether the complaint was
from a State bank or a national bank for the illegal third-party use
of their name, and it has also come from insurance companies, as
well.
Ms. MAJORAS. Briefly, Congressman, the FTC has enforced
against a number of nonbank mortgage lenders that have made deceptive representations to consumers, whether it is about interest
rates or fees and the like. We have done that.
Now, just, you know, what it says on the envelope, that by itself,
to be honest is not the only story, because we can also bring cases
when consumers are truly harmed by it. But if you go inside, and
it is telling you that you can get a mortgage at a particular percentage and can’t and so forth, that we have taken very seriously.

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The CHAIRMAN. Let me ask, we get letters like this all the time.
How can they send that to me? If I got a letter that like that, and
I wanted to refer my constituent to a place where he or she might
be able to get enforcement action, which of your agencies should we
refer that to? In Massachusetts, it would be you.
Mr. ANTONAKES. Absolutely.
Mr. MILLER. Our office too, or State attorney general’s office. But
there is maybe a larger point here.
The CHAIRMAN. Let me ask first, would any of the Federal agencies—I think that is what the gentleman was getting at. I wouldn’t
want his dramatic reading to not get its full impact here. Would
any of the—
Mr. ACKERMAN. I appreciate the rescue.
The CHAIRMAN. Would any of the Federal agencies be responsive
if we were to say, look, what is going on? What can you do about
it?
Ms. MAJORAS. We do get these things all the time at the FTC,
and we look at them. And incidentally, since we have been talking
about complaint filing, too, we get probably 15,000 complaints a
year that would involve actual banks or other depository institutions.
The CHAIRMAN. I would assume, for the three bank regulators,
if it did not come from a regulated financial institution, you have
no jurisdiction. It would be the FDIC.
Ms. BAIR. This is right. I am sure this letter did not come from
an insured institution. I see this all the time. I get these at home.
I get the spam faxes. That is one of the reasons we are urging that
State authorities, the attorneys general, and the Federal supervisors at the State level, be given the authority to supplement what
the FTC already does to go after the entities that are conducting
this type of marketing.
Also we very much work with the Federal agencies with the hope
of rulemaking to expressly say, we think that this is unfair and deceptive. I don’t have the power to write the rule, but the Fed does,
to say specifically that this type of advertising is unfair and deceptive.
The CHAIRMAN. Would the Fed have the right to write that rule
covering both depository institutions and others?
Ms. BAIR. Yes, for the extension of mortgage credit they would.
The CHAIRMAN. The gentlewoman from Minnesota.
Mrs. BACHMANN. I have a question for the Comptroller, Mr.
Dugan.
Mr. Dugan, I understand that the OCC has entered into some
agreements with the States related to the identification and enforcement of State laws, and I was just wondering if you could describe for me some of those agreements?
Mr. DUGAN. I think the agreements I was talking about earlier
are the agreements for information sharing about complaints. So if
we get a complaint filed that really belongs with the States, much
like we were just talking about, we would have a way to get that
to the State efficiently, and vice versa, and if the State got a complaint that related to a national bank that we needed to take care
of, there would be an efficient process not only for us to get it, but

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for us to share information about what we did with it with respect
to a consumer in that State.
And so we entered into a model type of agreement with the Conference of State Bank Supervisors, and then individually have been
contacting States to try to get them to enter into agreements so we
could do it as a practical matter, and since December, we have 18
States that have agreed to do that.
Mrs. BACHMANN. Thank you. Do the State anti-discrimination
laws apply to the national banks?
Mr. DUGAN. State anti-discrimination laws do apply to national
banks by long-standing legal precedent.
Mrs. BACHMANN. How about the State unfair and deceptive practices laws, do they apply to the national banks?
Mr. DUGAN. They do if the way they are applied or the way they
are ordered don’t actually put in specific requirements that regulate, or attempt to regulate, the particular banking activities of a
bank. So if it is a general unfair and deceptive act, what we were
talking about earlier, the little FTC acts, those on its face are not
preempted, we would say.
Mrs. BACHMANN. What consumer protection laws do not apply to
national banks?
Mr. DUGAN. Well, this is an issue of course that has come up and
people have been talking about it recently, and it is something that
the GAO looked at as well. We have pledged to talk with the States
about how we look at which laws we believe are not preempted,
and which ones are. Frankly, a lot of that got put on hold because
of the Watters case and the outcome of it. Now that it is over, we
do recognize that we need to get more clarity on that. We already
have addressed this in significant ways in our regulations and
what we have put out, but we need to provide more.
I think, as GAO recognized, it is not a situation where it is practical to go to each State and go through the code and identify every
single one that is or is not preempted. So there will be principles
that we will be articulating in outreach meetings as we committed
to do.
Mrs. BACHMANN. Mr. Dugan, could you tell the committee, how
does the OCC’s regulation compare with the rules that were adopted by OTS and NCUA?
Mr. DUGAN. To have such a specific comparison, I would love to
be able to get back to you for the record on that. I know what ours
does, but I can’t give you chapter and verse on exactly what theirs
do. But I would be happy to respond for the record if that would
be appropriate.
Mrs. BACHMANN. That would be fine. We have an example of one
of the State attorneys general investigating student lending, and
that suggests that State attorneys general are playing a very important role in consumer protection. I wonder if you could tell the
committee what would be the impact on the national banking system if State attorneys general which bring enforcement actions
against national banks.
Mr. DUGAN. Well, I think this is the same question, whether it
is student lending or other issues that the Supreme Court had to
address, which is what is the legislative scheme that Congress has
adopted with national banks. And it has always been our view that

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historically the idea has been to have a uniform set of Federal laws
that apply to the national banks wherever they operate, or whatever part of the country that they are in. And that is what the
Watters case upheld, that if national banks are exercising their
banking powers, whether at the bank level or at a subsidiary level,
it is a set of uniform rules that applies. And so in those circumstances, State laws would be preempted.
We believe we have robust ways, as I have tried to outline in our
statement, to address the consumer protection issues that we have
been charged with addressing, and that regime is established by
Congress, by you, and can be expanded or contracted. And we will
faithfully implement those laws, but do so in a uniform way
throughout the country.
Mr. MILLER. If I could jump in, I think your question was what
effect would happen if the State AGs enforced the laws, not what
the law is. The effect, I think, would be great. It would be consistent with our Federal system. The State AGs have stepped forward and done some innovative things in the securities area, insurance with Eliot Spitzer, now in the predatory lending area, as well
as in student loans, and the country is better off for that. Those
laws in various forms weren’t being enforced. The AG stepped forward and protected the public and pursued the public interest, and
we are all better off for it. And it is consistent with our Constitution, consistent with the great wisdom of our Founding Fathers
concerning checks and balances and federalism. It is an incredible
system that at least in my view is now frustrated by the recent
practices of the OCC and the Supreme Court decision.
Mrs. BACHMANN. Attorney General, thank you for your comments. I wonder, could you also tell me what resources you have
to examine national banks and Federal thrifts for compliance with
State law?
Mr. MILLER. We don’t, and shouldn’t have, resources to examine
them for safety and soundness. We never suppose that we should
do that nor should our colleagues, the banking superintendents,
and they don’t. But we have enormous resources in the consumer
protection area. That is one of the bread and butter of many of our
offices. And we bring those and used to bring those resources to the
national banks in an effective creative way. I think there was one
estimate in terms of consumer protection, the States bring 17 times
the resources of the Federal agencies that are here today in terms
of consumer protection.
Mrs. BACHMANN. I have a question.
The CHAIRMAN. We are over time.
Mrs. BACHMANN. Thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentlewoman for those questions.
Mr. Kroszner, I am going to ask you a question, but as we proceed I am going to make a statement with regard to your rulemaking authority: use it or lose it. I was struck by the agreement.
The Comptroller and the Chair of the FDIC didn’t agree on everything. It does seem that both are in a position of being criticized
because you did not roll out the rules which they can use. I don’t
think case-by-case does it. I don’t think case-by-case in complex situations like we live in is a good idea. And I think I speak here
probably for the majority of this committee. If the Fed doesn’t start

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to use that authority to roll out the rules, then we will give it to
somebody who will use it. You reinforce my sense that the Fed is
not the best place to do consumer protection. And all of our legal
traditions about people knowing what they are doing, etc., having
some due process, that is important.
It is also the case, it seems to me, that we don’t want to stop people doing bad things after the fact: we want to deter people from
doing bad things. If you are in a case-by-case situation you are
greatly constrained against penalizing people. It is one thing to penalize people who have violated rules. It is another to tell people
to stop doing something case-by-case where they can legitimately
say, well, I didn’t know that. And without rules that would be the
case.
So I think the rulemaking authority is important. Now, there is
a—again, I would rather see the OCC and the FDIC, and I assume
the OTS would agree on this, but the rulemaking decision should
be joint. And obviously, it is better to have one set of rules. If the
Fed is willing to work with them to do it, that is fine. But I will
tell you if we need to begin to see the process of rulemaking going
into effect for this area. And the answer is that it is especially true
now with the preemption. Their workload, what they have to do
with regard to consumer protection, has clearly increased as a result of the most recent decision about preemption, so I think this
just has to happen.
Now, the next two questions. We have—yes, Mr. Kroszner.
Mr. KROSZNER. If I might just very briefly respond. We really do
take the consumer protection area very, very seriously. We have an
entire division—this gets back to an earlier point that you made
about monetary policy versus consumer protection. We have a division of monetary affairs but we also have a division of consumer
community affairs at the Federal Reserve board, and we have similar divisions at all the regional Federal Reserve banks, and so we
do have it at the highest level.
The CHAIRMAN. I don’t think it is what motivates people mostly.
Certainly that wasn’t the experience, it seemed to me, of Governor
Gramlich. But there is also a philosophical distinction. You say specifically in your testimony that the Fed doesn’t think it should use
the rulemaking authority. I believe overwhelmingly this Congress
will think that it should. And I want to put you on notice that it
is not a personal thing, but there is a real difference. And I believe,
particularly now that the role of the Federal regulators has increased, there has to be a change in the rulemaking authority. It
can be done jointly, but it I think has to be done. And I think the
absence of rules is a serious problem that needs to be dealt with.
For example, the Comptroller said with regard to the practices
like these that credit card companies engage in that make a lot of
people angry, justifiably, essentially as long as they are explicit
about what they plan to do, they can do almost anything. Maybe
that is the current state of the law. I will tell you that I think there
are some things that are so counterintuitive to individuals that if
you nailed it to their foreheads, they still wouldn’t fully understand
it. There are some things that consumers think, well, that can’t be.
And I will say for the credit card issuers, no, we don’t want fixed
rates. But there is an intermediate position between rate setting

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and simply telling people—let me put it this way in effect—maybe
I will have to clear up the record later. We are your credit card
company. By the way, here on page 7, it says that we may screw
you from time to time and by signing this application you have
waived any objection to that? That is notification, but it is not
going to be enough.
But two other questions specifically. One, we have unregulated
entities, it has been noted in response to Mr. Ackerman’s question.
We need at a Federal level, I believe, to pass some laws to cover
currently unregulated entities. I think that is right. If only the entities that the banks regulated issued subprime loans, we would
not now be in a crisis. The banks are entitled to have us acknowledge that. There are entities that make these loans that do other
things that are not now regulated. I think there needs to be a national law. Exactly how it fits with State law, to what extent it is
preemptive, we will work that out. But it does seem to me that
there needs to be a national law if only to keep institutions from
leaving a State that has strong laws to go to places that don’t.
What I would want from you, and it doesn’t have to be today, is
a sense of who should be that regulator? It is one thing to create
the rules. We are going to have to create some new rules, I believe,
about subprime. And we are talking about unregulated institutions,
nondepository institutions. Do one of you want to take that over?
I am serious. Or does it go to the FTC or does it go to HUD? We
are not going to adequately be able to regulate that unless we create a regulator. I would ask your advice in writing about that.
The other issue is on the States. I will say that I agree with
much of what you said, but when you talked about your concern
for the overstressed State resources, to be honest, that did not
strike me as your primary motivation. When you say, oh, you don’t
want the States involved in this thing because you have such sympathy with these poor overstressed State regulators, well, we will
worry about them. I appreciate your compassion in this case, but
it does not seem to me that was your primary motive. I think the
States have the resources.
Let me ask you about one specific issue. One entity that has been
very much active in State regulation is the attorney general in
each State; that is why Mr. Miller is here. You don’t have any comparable Federal authority, for example, Ms. Bair doesn’t have any
comparable authority. You have the Justice Department, but it is
not the same. The ability to bring injunctive lawsuits, the ability
maybe even to get punitive damages in abusive cases, but you have
to have rules before you can do that. Are you not somewhat handicapped vis-a-vis the States? And I would say this to the Federal
regulators. Mr. Antonakes can go to the attorney general of Massachusetts. In the absence of that kind of legal enforcement, to the
extent that we transfer from the State regime where the supervisors and the attorneys general work closely together to a national
regime with an attorney general, how is that not a diminution to
some extent of the force with which we can apply these protections?
Mr. DUGAN. Actually, Mr. Chairman, I think we have more authority with respect to the banks that we regulate. We don’t have
to go to a separate agency to get a bank to stop immediately doing
something that we find that violates the law. We have extraor-

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dinary powers under the Federal Deposit Insurance Act to take formal enforcement action. Long before you get there, we have the
power to get—
The CHAIRMAN. You never want to go to court, or you do?
Mr. DUGAN. It is actually quite rare that we go to court because
institutions almost always settle because of the great power that
we have as a formal enforcement matter. That is a reality.
The CHAIRMAN. The other point I want to make is, you talked
about matters requiring attention and how many of you deal with
them. You say that many of them are consumer related. I will close
with this: I guess we are talking about things being unfair and deceptive. I want to get disjunctive. I think we need to make sure we
get things that are unfair or deceptive. A regime in which deception has to be there does not protect consumers. There are unfair
practices that are not technically deceptive. And I guess that is the
sense. You got it from my colleague, the ranking member, and others. We do not think you now are adequately dealing with practices
which are unfair, probably because you don’t have the authority.
You may need the statutory authority. You may need the rulemaking. This is not a personal failing on the part of any of you.
But I guess that is what I would leave you with. In today’s world,
with the banks so creatively making money off fees, off overdraft
fees—I mean, I think that there are people who watch their congressional calendar, and they see when I get a vote on Friday, so
they mail my credit card bill because then I will be a day late getting back to it. There are so many of these other practices that are
not deceptive, but I believe they are unfair.
So I will close with this. Somebody is going to have to do some
rulemaking and you are going to have to go beyond deceptive into
unfairness. We are not talking about rate setting, we are not trying
to put anybody out of business, but I think you have a broad consensus to do that.
Mr. DUGAN. I will defer to my colleague after this from the FTC
because they actually have the authority. I think we need to be
careful here, if unfair or deceptive, but the unfair standard legally
under the Federal Trade Commission Act is not a judgment about
unfairness.
The CHAIRMAN. I understand that, but you are not here arguing
as a lawyer before the Federal Trade Commission. We will rewrite
the Federal Trade Commission Act with Mr. Dingell’s cooperation.
So understand, we are not now into statutory interpretation, we
are into statute writing. And what I can tell you is, and it may be
that you don’t have enough statutory authority, but we have to give
you a broader reach to go after things that are in the perception
of the people in this country unfair. And if the problem is lack of
statutory authority, then it is our job to care about that.
Ms. BAIR. I would just say that there can be a restrictive legal
standard. If you are looking at the statutory language in this area,
you might consider adding the term ‘‘abusive.’’ ‘‘Abusive’’ is a
standard that is contained in HOEPA that the Fed is looking at
using in the context of mortgage lending. But ‘‘abusive’’ is a more
flexible standard to address some of the practices that make us all
uncomfortable.

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Ms. MAJORAS. I just wanted to clarify that, in fact, the FTC Act
allows us to attack practices that are unfair or deceptive, and we
do. And we have brought plenty of cases that attack unfair practices. But it was Congress that went back to the FTC at one point
and said you need to define what unfairness means, because of
course Congress didn’t want it to mean just whatever, whoever
happens to be sitting in my seat thinks it means. So there is a
standard.
The CHAIRMAN. I appreciate that. When was that?
Ms. MAJORAS. I think it was in the 1980’s.
The CHAIRMAN. In the interim, a lot of my good friends work for
financial institutions and they play an essential role in this country
and I am grateful to them and I work with them, but they have
succeeded in angering a significantly large part of the American
people by nickel-and-diming them on credit card late fees and overdraft fees. And I think you are going to find a Congress today that
is less inclined to restrain you and more inclined to encourage you
to reach out and give consumer protection.
Mr. CAMPBELL. Thank you, Mr. Chairman. I just have a few
questions for Mr. Dugan here. The first concerns subprime. My understanding is that over 90 percent of the subprime loans are not
originated in banking institutions that are supervised.
Mr. DUGAN. In national banks last year, that is right.
Mr. CAMPBELL. In national banks, okay, last year, great. Given
that statistic, is this an area where a national rule makes more
sense than a State-by-State if over 90 percent of the loans are not?
Mr. DUGAN. It is certainly true that because we have such a
small part of that market, and because we haven’t frankly had the
same kinds of problems with the banks that we regulate that engage in these activities, you do need broader coverage. But that is
exactly why the bank regulators have gotten together and proposed
guidance that applies to all, not only insured institutions, but companies affiliated with them, which we are about to finalize, and,
getting to your point, we have enlisted the Conference of State
Bank Supervisors to get their agreement to try to get that same
guidance out to the State lenders that none of the Federal regulators touch.
So do I think that there needs to be some kind of national standard? The answer is yes, because so much of this market comes
through the States. It can be done by each of the Federal regulators and each of the State regulators, which is one approach. Another that has been talked about is the Federal Reserve addressing
some of these issues through their rule writing authority. And failing that, the last line would be actual legislation. But it is absolutely imperative that we have some kind of nationwide approach
to this problem.
Mr. CAMPBELL. Just to understand that answer better, that order
you gave is the order that you believe is preferable?
Mr. DUGAN. I guess I would say, one, we can do now and are in
the process of doing and working down that path. I think the second is an area where the Federal Reserve, and Governor Kroszner,
of course, can speak for themselves. But they are holding a hearing
tomorrow to talk about it. And I just think as a matter of time,

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precedent and so forth, getting to Congress is a third practical reality.
Mr. CAMPBELL. Another question along the same lines, but not
just subprime—a lender in one State can make loans to people in
any State. So does that make, if you are looking at consumer protection, does that make some kind of uniform consumer protection
a better approach?
Mr. DUGAN. I think there are certain practices that have become
national products, commodities if you like, and they raise the same
issues over and over again. And those are the ones that I believe
cry or call out more for national kinds of standards. Because as you
say, things can happen in different States.
Mr. CAMPBELL. And the third question, I think you kind of
touched on in discussing things with the chairman a little, but just
maybe you can elaborate on preemption by you guys. We have
talked a lot about resources relative to State license mortgage lenders, resources at the State level versus preemption by you guys. It
sounds like you believe that looking for more resources or more involvement at the State level is something preferable to preemption
by you guys.
Mr. DUGAN. I guess what I would say is that I think we do have
adequate resources to put in place a standard. Let me give you an
example. One of the things that I have spoken about recently is the
use of stated income or totally undocumented income in order to
make loans. It is something that we will address, I think forcefully,
in the guidance we are about to issue to make that no longer the
general rule when you do a subprime loan. If we adopt that guidance, we would be able to implement that guidance in national
banks around the country wherever they are situated to have that
as a standard. There is no similar mechanism to make sure it gets
done in the same way in the more than half of the market that
Federal regulators don’t touch. The States individually are going to
do that. But if they are not actually in those institutions supervising them, it will take a longer time to do it. That is really what
I am getting at. If you have a finite amount of resources, rather
than devote them all to the really heavily regulated insured institutions, doesn’t it make more sense to devote them to the States?
We do the national banks, hold us accountable, but that it is a better division of labor in order to achieve the maximum benefit for
the consumer.
Mr. CAMPBELL. Okay. I yield back. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Missouri.
Mr. CLAY. Thank you, Mr. Chairman. Thank you for this hearing. I certainly will attempt to observe the 5-minute rule. I have
a set of questions for the entire panel. Recently I was reading an
article entitled, ‘‘Unsafe At Any Rate,’’ written by Elizabeth Warren, and I want to use that analogy that she used. It is impossible
to buy a toaster that has a one in five chance of bursting into
flames and burning down your house. But it is possible to refinance
an existing home with a mortgage that has the same one in five
chance of putting the family out on the street and the mortgage
won’t even carry a disclosure of that fact to the homeowner. Similarly, it is impossible to change the price on a toaster once it has
been purchased. But long after the papers have been signed, it is

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possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit
terms in full and on time.
The question is this. And Ms. Warren suggested that perhaps we
create a financial services product safety commission. Should there
be more Federal regulation? Why are consumers safe when they
purchase tangible consumer products with cash, but when they
sign up for a routine financial practice like mortgages and credit
cards, they are left at the mercy of their creditors? The answer
given by the author is regulation.
I ask, where are we dropping the ball? What is your answer to
this problem, and where do we go from here? If we could start with
Mr. Kroszner, please.
Mr. KROSZNER. Thank you very much. It is certainly extremely
important in all areas to protect consumers, whether it is health
and safety regulation, or their financial well-being. So these are
both very important issues. I do think there is a bit of a distinction
between something like a toaster and some financial products. I
think it is very easy to objectively define whether a toaster is likely
to burst into flames. With respect to financial products, some
things that could be helpful and useful to certain types of customers may not be helpful and useful to other types of customers.
I think with respect to a toaster bursting into flames, it is very
clear that one bursting into flames with a one in five chance, that
is harmful no matter who you are, and no matter where you are.
With respect to financial products it becomes a little trickier, because certain types of products which may not be appropriate to
some people may be appropriate for other people. So it is much
more difficult, I think, to set up those types of bright line distinctions.
That said, it is very important to make sure that if there are certain types of practices that are inappropriate, that we address
those, and that is one of the reasons why with respect to mortgages
we are holding the hearing tomorrow on HOEPA to look to see
whether there are sort of certain systematic patterns and practices
that we need to address.
Mr. MILLER. Congressman, I said earlier that if the seven of us
at this table really meant it, and worked together, and used all of
our power in the subprime market, and we all have power, including the States have significant power there, going forward, we
could reform the industry. And I say that because of what has happened. Some of the bad companies are out of business, some of the
better companies are still there. They have reputations to deal
with. There has been pain for the people who have been foreclosed
on, there has been pain for the investors. The time is right. If the
seven of us and the people who work for us really work together
cooperatively and spot the various problems and use our expertise,
we could really clean up the industry.
There is one other thing that needs to be done, and that is that
the current situation with all those foreclosures—there what has to
happen is, with us and with everybody in the industry, they have
to have what we call Iowa common sense. And that is to renegotiate some of the terms so that the consumer, the borrower, can
make the payments and the creditor, the investor, is better off be-

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cause they make more money that way than on foreclosing. We
went through that in the farm crisis. I think more and more people
are understanding that. The whole industry has to understand
that, act on it, and that can ameliorate the current crisis considerably.
So we know what to do. The question is, will the seven of us do
it.
Mr. CLAY. Mr. Miller, have the consumers been unexpectedly
caught off guard as far as knowledge of these balloon payments?
Mr. MILLER. They have, they have. It is a scandal in the sense
that the mortgages, particularly the subprime mortgages, are enormously complex. The people are very much at need. They are the
working, the lower working class Americans, who don’t have any
margin for error. They have an economic situation, they need the
loan, it is very complex. And in the past, there has been so much
willingness on the part of certain players to abuse them, they have
been taken advantage of, and it is a national scandal. And we can
wring our hands about that, and we brought some lawsuits and
that is good. But the big thing is, what do we do now? Do we solve
the current problem and do we work together using our powers and
using them aggressively where necessary, always reasonably, or do
we all sort of splinter up, the seven of us up here?
Mr. CLAY. Thank you for your response. May I?
The CHAIRMAN. Yes, you can continue another couple of minutes.
Mr. CLAY. Ms. Bair.
Ms. BAIR. I have a lot of respect for Professor Warren. She serves
on our Advisory Committee on Economic Inclusion. Although I
haven’t read the complete report yet, I am familiar with some of
her thoughts on this. I agree with your analysis, but I am not sure
that we need a new financial regulator. There are seven of us here
on this panel. I think there are some ways that we can improve existing authorities and use them perhaps more proactively. In a coordinated fashion, I think we can take care of this problem without
a new regulator.
Mr. CLAY. Thank you, ma’am.
Ms. MAJORAS. I would start with this, closure. There have been
comments here about well, closure is not the whole answer. I understand that. But we released a study today that our economists
have been working on for some time which shows that even consumers who are fairly educated, and think they understand the
current mortgage disclosure forms, don’t. Because when our people
sat down and worked through it with them, they realized that
there were costs and charges and they didn’t have any idea what
they are, so people don’t know what this is costing them. We hope
we can use this, and we developed some prototypes on what would
work, what consumers would better understand. Because I do think
it has to start with that. Ray is right in the sense that you have
to be careful here because there are some bad things that happen,
but there are people who did get credit and did get homes that are
still paying for those homes who got them in the subprime market
who wouldn’t have gotten them in any other market. We have to
remember that, too, because those people deserve to have a home
as well.

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Mr. CLAY. What is your opinion about the creation of a financial
services product safety commission.
Ms. MAJORAS. I think I agree with my colleague Ms. Bair that
I think we ought to try to work this out with what we have. There
is no question that we all have different jurisdiction and so forth,
but we all, in some piece, have the consumer protection aspect
here. And we know where consumers are being harmed and so we
ought to be able to attack it with what we have. And if we don’t
come through on that, then I wouldn’t blame you for considering
something else, but I think we should start with that.
Mr. CLAY. Yes, sir.
Mr. POLAKOFF. Congressman, there was a recently publicized supervisory action taken by OTS against the Federal Savings Bank
for—we could characterize it as unfair or deceptive or aggressive
underwriting to take advantage of borrowers. And when we pursued the action, we briefed the other Federal banking agency sitting at the table. And I am convinced if they would have seen a
similar situation they would have taken equally aggressive supervisory action. So I believe when we find predatory practices, which
is entirely different than lending to the subprime community, when
we find it we take appropriate action and we communicate amongst
ourselves to ensure that there is some sort of level or horizontal
analysis.
Mr. CLAY. No matter who the perpetrator is?
Mr. POLAKOFF. If it is within our institutional jurisdiction, we
will take action regardless of the perpetrator.
Mr. CLAY. Yes, sir.
Mr. ANTONAKES. Congressman, we license mortgage lenders and
mortgage brokers in Massachusetts, and they are not unregulated.
We conducted over 400 exams last year that resulted in over 100
enforcement actions, 3,700 enforcement actions by all the States
combined against lenders and brokers collectively. We continue to
do work here, we need to do more work here as well, and we need
to work with our Federal counterparts. The idea brought up by
Comptroller Dugan, to coordinate our examinations of lenders and
brokers, is something I broached 3 months ago, because you can’t
look at broker network solely. Certainly sales and marketing practices of brokers are a concern that needs to be dealt with. But you
also have to look at the internal controls and underwriting processes that took place at nonbank as well as bank subprime lenders.
And then you also have to look at the funding structure and also
what is going on in the secondary market as well. I think disclosure needs to be improved. We support the Federal Reserve using
their broad rulemaking authority whereas we have attempted to
deal with the issue with individual State predatory lending laws,
including my own in Massachusetts, which has only been somewhat successful because not everyone complies with them. And
then also in Massachusetts an attempt to deal—
The CHAIRMAN. You can finish the sentence.
Mr. ANTONAKES. I would just say trying to deal with the issue
now, as well as in the future, we have set up a hotline where anyone who is having foreclosure problems can contact us. We feel that
400 calls in 6 weeks time, trying to refer them to reputable coun-

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seling agencies and also work directly with their lenders and also
mediations as well.
Mr. CLAY. I thank the chairman and the panel for the indulgence.
The CHAIRMAN. The gentleman from North Carolina.
Mr. MCHENRY. Thank you, Mr. Chairman. I am from North
Carolina, and the North Carolina anti-predatory lending law that
has been vaunted here in the halls of Congress is a wonderful
thing that needs to be expanded to the national level, that somehow it had this fabulous effect in North Carolina. In the Sunday
Charlotte Observer, they have a large expose that they are continuing, a long series about the fallouts and the foreclosure rate in
North Carolina and that this vaunted anti-predatory lending law
has actually had an adverse effect in the market. And it sort of
brings to mind something, Mr. Dugan. There is this discussion here
in Washington by consumer advocates that our Federal law isn’t
sufficient, that we are not doing enough to protect the public. Yet
when we get into the details about bad lending practices, predatory
lending practices, it seems that—well, it is apparent that this is
not primarily an issue by federally regulated institutions. We have
seen the main abuses occur through State regulated institutions. Is
that a fair assessment?
Mr. DUGAN. I think it is a fair assessment, and I am not just saying that because I am a Federal regulator. I think, in a brief filed
by the attorneys general, 46 out of the 50 attorneys general agreed
that the real predatory lending practices were not taking place in
regulated insured depository institutions or their subsidiaries.
Those tend to be State chartered companies, some of which have
some ties to Federal regulators, but many of which do not. And just
last year, over 50 percent of subprime originations were in completely nonfederally regulated markets. Not all of those are bad
loans, but some of the problems we have seen, and the more egregious ones I think, it is fair to say have been at those institutions.
Mr. MILLER. If I can just jump in here.
Mr. MCHENRY. If I may finish here. I only have a set amount of
time.
Mr. MILLER. But you raise some issues directed towards us.
Mr. MCHENRY. I appreciate that, and thank you so much, but I
will get to you in a second. I have a follow-up to him, and this is
actually my time, respectfully, sir. But to continue that thought,
would that indicate that we need to create another Federal law? Do
we need to go further with our Federal law or is it kind of adequate? Should the focus be changing the State-by-State regulations
of those State regulated institutions? Would that be a reasonable
conclusion?
Mr. DUGAN. I think there are some things that occur in both
markets in the subprime area, and that is why the Federal regulators got together, as we can do pretty quickly, to issue proposed
guidance in that area. The question is, how do you get those same
kinds of standards to apply to the exclusively State regulated entities. And that takes action by the States and CSBS has committed
to go down a path of going State by State to do that. If that works,
that may address the problem. If it does not, that is when people
are considering other measures to get a national standard, whether

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it is a regulation by the Federal Reserve, which has its own set of
issues, or a congressional law.
But the first place that we are looking is guidance by the Federal
regulators jointly to be with companion guidance to follow by the
States. Of course the question is, you have to have uniform application in the States. It is not enough just to say you are going to do
it, you have to do it. But that is the first place that we are looking.
Mr. MCHENRY. What is the Federal Reserve’s perspective on
this? I know they have taken some action.
Mr. KROSZNER. Well, it is certainly very important for us to coordinate with the States, and it is important for the States to have
sufficient resources to be able to deal with the issues that they
need to deal with with respect to institutions outside of the Federal
regulatory purview. And so we try as much as possible to cooperate
with them.
Exactly as Comptroller Dugan had said, in working up, for example, the nontraditional mortgage guidance that we issued last year,
we have worked very closely with the States. We have even sent
Federal Reserve staff members to testify before various State legislatures to try to convince the States that they should adopt the
same types of guidance, same types of regulation. Some States are
able to do that without legislation. And we have had, I think, a lot
of cooperative success on nontraditional mortgage guidance, and we
will be working exactly the same with the subprime mortgage guidance that should be coming out.
Mr. MCHENRY. My time has expired. And if I may just, Mr.
Chairman, to Mr. Antonakes. There is this disparity between the
amount of bank examiners and oversight that we have. And we
have about 1,800 bank examiners for about 1,850 federally regulated financial institutions. There is a great disparity about the
number of State regulated, State bank examiners versus the number of State banks. Do you think we have enough in the way there?
And when he finishes up, Mr. Miller, if you want to chime in. You
seem anxious to do that.
Mr. MILLER. I am waiting patiently, as long as I get my turn.
Mr. MCHENRY. Welcome to Congress. Mr. Antonakes.
Mr. ANTONAKES. I can speak for my State that we have adequate
resources to fulfill our responsibilities, and I think it is up to the
individual States to make sure in their own discussions with their
administration and their legislatures that they have what they
need to do the job. I would only add that we have been supportive
of the process for the nontraditional guidance. I would suggest if
that takes place within the confines of the FDIC where we can participate, it is a far better process. We don’t have to wait for the
Federal action to be done. We can do it in companion, in part of
that actual process, and not be locked out of the actual rulemaking
process.
Mr. MILLER. The chairman sort of gave the recommendation
early not to have finger pointings on what happened, and it was
a good recommendation that I followed so far. But there have been
repeated statements that most of the loans came from State regulated places in the subprime area a number of times. And with
some uniformity in questions from the minority side, although not
Mr. Bachus, it has come up a number of times. So let me just say

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this, that there is responsibility at the State and Federal level for
the subprime crisis. National banks certainly had some involvement throughout the whole process, including in the securitization
and in the purchasing of the loans. There is responsibility to go all
the way around. The only thing I would point out is that Steve’s
agencies and the attorneys general were working very hard in this
area and accomplished a significant amount of good despite what
happened. We were much more active than our Federal counterparts, is what I would leave you with.
In terms of North Carolina, I would be interested in what the
paper is saying on your statute. There have been other studies that
show that your predatory lending statute has worked very well,
that it hasn’t dried up credit. And indeed the Ameriquest case,
Ameriquest left North Carolina for an extended period of time as
a result of that statute. And the abuse that they directed throughout the country was much less in North Carolina because of your
statute.
The CHAIRMAN. The gentleman from North Carolina.
Mr. WATT. Thank you. To get the view from that side, and you
get the view from this side of North Carolina, my assessment is
much, much more similar to the one that Mr. Miller has outlined.
And I don’t think it does us any good to engage in this kind of activity, pointing at each other and casting blame here. My experience is that there is enough blame to go around for the subprime
debacles at every level. And despite the fact that North Carolina
has a fairly aggressive predatory lending statute, even that doesn’t
stop unsavory lenders who are engaging in the business and trying
to make a quick buck. And then there are the subprime lenders
that I still, even after a series of hearings, haven’t been able to figure out who regulates. The ones that are subsidiaries of national
banks at some level, but somehow have some kind of shield between them and the regulators, I haven’t quite figured that out yet.
So I am not even going to try to engage in this debate with my
colleague from North Carolina. I won’t even read the story that he
read quite like he read it, but that is a subject for another day.
What I would like to know is from my friend from the Fed, I was
pretty abusive to the Fed the other day at the credit card hearing,
but there is one suggestion here that OCC has made, Ms. Bair has
made on behalf of the FDIC, that there needs to be joint rulemaking authority. OCC, FDIC is not currently authorized to do
some things that the Fed and maybe the FTC are authorized to do.
And they I think, for the first time, I have heard them affirmatively say Congress ought to expand that authority.
What is your view and what is the Fed’s view on that, if you
would?
Mr. KROSZNER. Thank you. That is a very important question.
One thing I think that is very important to realize is that the enforcement authority is there regardless of whether there is a particular rule.
Mr. WATT. We are talking about joint rulemaking. You can only
enforce rules that the Fed will make, and I can tell you that there
were a lot of unhappy people in the room when we were talking
about credit cards, when we were talking about the rules that you
all have made or the lack of rules that you all have made. And

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there is some dissatisfaction with the lack of rules that you all
have made. So I am going to get to the enforcement question if my
time doesn’t run out, but I want to know, does the Fed have a position on what is being advocated on giving the OCC and the FDIC
joint rulemaking authority within this area?
Mr. KROSZNER. The Federal Reserve Board has not formally discussed this issue, so we have no formal position.
Mr. WATT. Are you all planning to take up that issue? Would you
encourage them to take it up at your next meeting and let us have
your formal position on it? I think we finally got the formal position of the other regulators that are sitting beside you. They have
kind of told us that off-the-record, but I think from my perspective,
this is the first time I have heard it in a public hearing venue
where they aggressively said, give us this joint rulemaking authority. So it would be nice to hear from you.
Now, second, on the enforcement issue, I am wondering, Mr. Miller, if the Feds got the regulatory authority under Watters now to
basically have absolute authority to make the rules, what implications does that have for enforcement of those rules that are made
at the State level by attorneys general even though the rules that
are being enforced are articulated at the Federal level? Do you
have that authority and could I have the opposite view or the other
view on that, maybe it is not the opposite view, on whether maybe
something needs to be more aggressively done to make it clear that
even when you all make the rules for Federal regulated institutions
the States still have the authority to enforce those rules?
Mr. MILLER. In some limited areas, but important areas like telemarketing rules, when the FTC does telemarketing rules the
States have the authority to enforce that. And in a subprime area
to give us the authority to enforce the Federal rules, I think, would
make a lot of sense for all the reasons that we have mentioned, including the resources. I would offer one sort of caution about joint
rules. I think that it is important to give the OCC rulemaking and
the FDIC in deceptive and unfair practices, but if you give all the
agencies jointly the rules, then—
Mr. WATT. I probably misstated that. I am actually advocating
for exactly what you are saying, but then having them get together
and hopefully do it jointly, but giving them each one independent
authority to do it.
Mr. MILLER. That would be the way to do it, and have them consult, of course, and try to work together. But otherwise you could
get into stalemate and lowest common denominator, and I don’t
think you want to go there.
Mr. WATT. Just to get the other side on the enforcement issue
from Mr. Dugan and Ms. Bair.
Mr. DUGAN. I think there is a statutory prohibition on unfair and
deceptive practices that we are talking about, and we can take enforcement actions just under that without a Federal Reserve rule
with respect to that. That is something that we kind of pioneered
among all the agencies.
Mr. WATT. I am only talking about State.
Mr. DUGAN. On that count, when the Federal Reserve issues a
rule under this that applies to lenders, it applies to all lenders, not
just bank lenders. To the extent it applies to nonbank lenders you

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do need an enforcement mechanism. I believe that, I think this is
right, that the State attorneys general already have that authority
to enforce that rule if a rule is written. I believe that is correct.
I am sorry, that is only with respect to HOEPA, which is the
high cost loan thing. To the extent that is not provided here, I
think it would be a useful thing to do.
Mr. WATT. Thank you very much, Mr. Chairman.
The CHAIRMAN. Would that have to be statutory?
Mr. DUGAN. I think it would have to be statutory.
The CHAIRMAN. To the extent that we have touched on things
where you think we would need a statutory change to fix things up,
follow up with us and let us know.
The gentleman from Georgia.
Mr. SCOTT. Thank you, Mr. Chairman. Much has been said. This
has been a very, very informative and a very, very good hearing.
But we have a serious problem of lack of faith and confidence of
the financial consumer being protected. We have soaring foreclosure rates, we have subprime lending, predatory lending, and
deceptive credit card practices. And nowhere is that more impacted
than those at the lower end of the economic scheme, which makes
it all the more serious. And so while some will argue that the State
is in control, or it is the Federal, these poor people are out there
just looking for help, they are looking for protection. So I think that
we need to establish certain facts. I think one is, without question,
State regulators are in need of clear and concise explanations of
what their role in regulating should be and will be in the near future, and how State and Federal authorities can work together to
ensure above all else that there is protection of the financial consumer.
And with that as a premise, I think we need to ask some questions about the infrastructure at work here between the Federal
and the State level. I would like to ask a series of questions and
maybe get some quick answers because my time is short. The first
thing is, in your opinion, and any one of you can answer these, or
if two can chime in with quick answers, I would appreciate it greatly. First of all, should Federal banking law bar States from regulating the activities of State chartered subsidiaries of national
banks?
Mr. DUGAN. The answer from the OCC is yes, and the Supreme
Court just agreed with that position.
Mr. POLAKOFF. And the answer from the OTS is yes.
Mr. SCOTT. What do you believe should be the appropriate scope
of the National Banking Act?
Mr. DUGAN. I think the scope should be to the activity, all activities in national banks, both from the safety and soundness and the
consumer protection side of what they do.
Mr. SCOTT. Do you believe that State regulation of national
banks helps or hurts the consumer?
Mr. DUGAN. I guess what I would say is that it is duplicative,
and it would be a better use of resources to have States focus on
the place where they can bring the most attention to things that
aren’t otherwise done, and that we should be held accountable to
do what we need to do at national banks.

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Mr. MILLER. I dissent of course. I think that the States and the
Feds both doing it in this important area is the best of both worlds
and is the kind of federalism and checks and balances that our
Founding Fathers intended for this kind of situation.
Mr. SCOTT. You know, I agree with you, Mr. Miller. I love history, and perhaps one of the most fascinating chapters of American
history is the layout of our financial systems and the checks and
balances that basically the architect of which was Alexander Hamilton, who made it very clear to us and has yet in my opinion to
receive the proper credit that he rightfully deserves. But with that,
if Hamilton were here, I think he would ask this question: How
much deference should be given to a Federal agency’s determination that their regulations preempt State law?
Mr. MILLER. I think that obviously there should be some deference, some considerable deference. I think the exception, though,
would be with the OCC and the OTS who are competing with the
States for bank charters, that when that competition continues,
and certainly the temptation or the implication is that we are going
to go easier on you than they will, so come with us, and then put
a different hat on and say, okay, we preempt the States. That is
not a good situation. So I think because of the existence of that situation, the deference to those two agencies should be diminished
or indeed eliminated.
Mr. POLAKOFF. If I could offer two thoughts for your consideration. The first is that preemptions are a rather fascinating discussion, and recently there have been three States that have actually
preempted their city or county ordinances. So preemption exists at
each level, sir.
The second is that, at OTS, when we are asked for a local opinion on a preemption issue, we do share that legal opinion with
CSBS and with the affected States. I am not suggesting that we
are asking for an equal contribution, but I do want to share with
you that we do share that before finalizing our opinion.
Mr. SCOTT. Thank you very much. I have one other point here.
I have heard from my consumer groups in the State of Georgia.
The State of Georgia has been a leader in the Nation of foreclosure
preemption. You name the abuse, you name a need for protection
for financial consumers, and my State of Georgia, unfortunately, is
the poster child for that. And many of the folks back home argue
that Federal regulators cannot adequately police consumer protections that they have worked to promote. Is that a fair statement?
Mr. DUGAN. I don’t think it is a fair statement with respect to
national banks. But of course we cannot promote consumer protections with the places where predatory lending is most in evidence.
And it is not in the national banking system, it is not in insured
depositories, it is outside of them. And we don’t have any jurisdiction over that. That is absolutely true.
Mr. SCOTT. And then I have constituents on the other side, national banks for example. They complain that they shouldn’t have
to spend the money or time complying with both Federal regulations and the rules of the various States in which they conduct
their business.
Mr. DUGAN. Well, I think that is the essence of the dual banking
system and that is the essence of the national banking system his-

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torically, going back to the very strong advocate of a national bank
charter, which was Alexander Hamilton, which is that a set of uniform rules that apply to nationally chartered banks is the system
that Congress set up to be and the reason why it has gotten the
kind of deference it has gotten in the courts over the years. That
is the principle.
Mr. SCOTT. Finally, Mr. Chairman, if I may, just to conclude, do
you believe supervision over national banks and their subsidiaries
is adequate to ensuring financial customers are being treated fairly? This is especially as a crisis in the subprime lending market,
and foreclosure numbers across the country are not foreseen as letting up any time soon given the crisis.
Mr. DUGAN. I do believe we have the resources. We are not perfect. The banks we supervise are not perfect. But I believe our
record on those subprime loans that you are talking about is a
strong one.
Mr. SCOTT. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Texas.
Mr. GREEN. Thank you, Mr. Chairman. And as usual, Mr. Chairman, you have provided great oracularity in helping us to better
understand these issues. I believe that the perception exists in the
minds of many consumers, a great number I might add, that they
are being, to use a highly technical term, ‘‘ripped off’’ by some of
these fees, fees that are noninterest income. They believe they are
being ripped off. And Chairwoman Bair, on page 3 of your statement, starting in the second paragraph, a few lines down, you indicate that fee based overdraft protection programs typically charge
customers at least $20 to $35 for each overdraft. Depending on the
size of the overdraft and length of time for repayment, the effective
annual percentage rate can exceed 1,000 percent. And then you go
on to indicate in the next paragraph that last year insured institutions obtained 42.2 percent of their net operating revenue from
noninterest income. At some point someone might conclude that
this is rapacious and that it is invidious and that something more
than a notice is appropriate.
The truth is that a disclosure of an invidious practice, while it
would disclose it, it won’t eliminate it, and it won’t obviate it. You
just tell the person that if you do a certain thing you will have this
practice to contend with. And it seems to me that at some point
we have to try to end some of these rapacious and invidious practices.
Let me just cite one or two maybe. The ranking member talked
about the overdraft problem. You cash the check and you make a
deposit at the same time you are cashing a check or writing and
having the check honored. The deposit does not have the same rate
of speed with reference to becoming a part of the system that the
check that you have written seems to matriculate through the system. Credit cards, and perhaps I should ask this question before
I make a statement of fact, so let me ask. If I charge something
on a charge card and right immediately after charging decide that
I don’t want it, and I return it and get a credit to my account, is
it true or not true that the credit may take longer to reach my account than the charge?

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Mr. POLAKOFF. Congressman, I could offer from a personal perspective that while it may take longer, there is not an obligation
to pay the amount of the expected credit.
Mr. GREEN. I understand. But consumers are of the opinion that
these things ought to move at about the same rate of speed. If you
take my money on day one, perhaps I ought to get credit on day
one, especially if I hand it back to you right after I have made the
charge. I charge, I give it right back, the charge hits my account,
but the credit shows up some days later. These kinds of practices
are, I think, what is causing the consumer to think that some of
us are not fulfilling our obligations to protect them. Universal defaults, double cycle billing, these things are repugnant to the consumer. And while I hope that we can cure them with notices, I am
not sure that notices alone are sufficient.
One more comment. Mr. Miller, I really admire your optimism.
You talk about folks getting together and working it out. There are
two great powers, many great powers, but there are two that I will
speak of in the universe. One is ‘‘way power,’’ the ability to find a
way. The other is willpower. Many times we can see the way, but
we can’t find the will, and I am hopeful that the will will manifest
itself, because if we do have the will, and I am convinced that this
august body can find a way.
So my question is this: Having said all of this, do you find any—
is there any practice that is rapacious, repugnant, and invidious to
the extent that there ought to be some rule that would alter it?
And I have cited a few. So why don’t we start with the Fed.
Mr. KROSZNER. Certainly it is very important to protect consumers and to make them feel that they are being dealt with fairly
and to make sure that they are dealt with fairly. I certainly agree
with that. And one of the rules—
Mr. GREEN. May I just intercede? And I would beg that you accept my interceding for just a moment. Could you kindly start out
with yes or no? That way I will know what you really said, because
sometimes when folks finish, I don’t know whether they have said
yes or no. So could you start with yes or no and then give me all
the explanation you would like within about a 10-second period of
time?
Mr. KROSZNER. Yes. Under HOEPA, we have undertaken a rule
against loan flipping, which we thought was unfair and deceptive
and inappropriate, and so we prohibited that practice. Tomorrow I
will be holding a hearing where we are going to be discussing other
potential practices that we would consider for a prohibition.
Mr. GREEN. Mr. Dugan?
Mr. DUGAN. Yes, there are. We have had to take action against
some of these. You know, we don’t have the rulemaking authority.
But just to give you one example, in the area of secured credit
cards, we saw a practice where people were charging the amount
of the security to the card, and as a result, there was nothing left
for the consumer to borrow. And that would be the kind of practice
that we certainly would think rises to the level of something that
just shouldn’t happen.
Ms. BAIR. Yes, exploding ARMs. These payment-shock mortgages
that people have no realistic chance of repaying, are what the
Subprime Mortgage Guidance is all about, getting rid of those.

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Also, I think regarding fee-based bounce protection, we are undergoing a careful review of that practice. That product is used
chronically. It is extremely high-priced, and we want to do more
fact-finding about how customers are using it.
Ms. MAJORAS. Sure. The FTC, we have lots of cases alleging that
facts were deceptive or that they were unfair in the financial services area. We had one recently in which the mortgage lenders were
providing all sorts of terms to Spanish-speaking consumers in
Spanish, but then changing the terms and giving them documents
in English that they couldn’t read that had wholly different terms
for the mortgages. So, yes, of course there are practices, and we attack them regularly.
Mr. POLAKOFF. Congressman, absolutely. Our 2005 guidance on
overdraft protection is a perfect example where it is unacceptable
for a consumer to go to an ATM and ask for the available balance
and have included in that the overdraft protection amount without
any notice of the charge associated with accessing that.
Mr. GREEN. My final question is, to what extent were these corrections published?
Mr. DUGAN. Ours was published.
Mr. KROSZNER. We issued a formal rule.
Ms. BAIR. Yes. For subprime mortgages, again, we have imposed
very public formal enforcement actions, and also the Subprime
Mortgage Guidance obviously is public.
Ms. MAJORAS. We filed a case in court and issued a press release
and the like.
Mr. GREEN. Thank you, Mr. Chairman. I yield back the balance
of my time.
Mr. CLEAVER. [presiding] The Chair now recognizes the gentleman from California, Mr. Sherman.
Mr. SHERMAN. Thank you.
Comptroller, if the OCC determined, either by rule or interpretation, that realistic brokerage is a permissible activity for national
banks, would you then view State real estate licensing laws as either obstructing, conditioning, impairing, or interfering with national banks’ ability to engage in such activity, and then go on to
preempt those State licensing laws?
Mr. DUGAN. Mr. Sherman, we have no such rule in our book to
permit real estate brokerage and I have no intention of doing so
as long as I am Comptroller.
Mr. SHERMAN. That pretty much puts that question to rest.
We need consumer protection. We need more of it than we have
now. If we have the States do it, then a lot of people who live in
States where they get inadequate consumer protection, a few will
live in States where consumer protection is so intense that it interferes with business and raises costs, and the whole country will
suffer, because we benefit from an efficient national economy. In
fact, this union was formed perhaps more than for any other purpose to give us the benefits of living in the world’s first common
market where companies could do business across State lines and
now across the continent.
We could act through the Federal agencies. I think you have
some prodding here today, but there is more for you to do. Or finally, we could pass laws through this committee. They are subject

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to possible veto, and they are also subject to a congressional schedule that is now being drawn out on the Floor. I don’t know how
good we would be at writing good consumer protection if we do it
on 3 hours’ sleep, which appears like it is going to be the norm for
a while here in Congress.
My hope, therefore, is that the agencies represented here move
forward with consumer protection, and there are two kinds of consumer protection. One is disclosure, where it provides good information, is always helpful. And the other is when you prohibit an
activity, and the problem there is—I will give you an example. Let
us say you have a group of subprime borrowers, and they can’t
qualify for anything but the really tough subprime loan. If those
loans tend to have a one-fifth default rate, you would say, my God,
what kind of lender is making those loans? We have to stop that.
But if you stop it, then you have stopped—for every foreclosure you
have stopped, you have stopped four people from ever owning a
home.
So I don’t know what the default rate is. If you aim to tell those
financial institutions that you regulate to aim for a 1 percent default rate, a lot of people aren’t going to be able to own homes. If
you allow them to make such loans on such extreme circumstances
that they have a 50 percent default rate, first they are going to go
bankrupt, but second, we don’t want to see those kinds of loans
made.
As a disclosure, we have these credit cards out there, and the
statement tells me what my annual percentage rate is, and it tells
me what my minimum payment is. Should we by law or regulation
require that it say, Mr. Sherman, if you choose to make the minimum payment, even if you don’t use this credit card for any future
purchases, it will take you ‘‘X’’ years to pay us off, and in addition
to paying us the ‘‘X’’ dollars that you owe, that we were going to
add ‘‘Y’’ dollars of interest?
Now, I realize people continue to use their credit cards, but
would it be helpful to American consumers if we knew if I have
this balance at the current interest rate, eliminating the effect of
any teaser rates, this genuine effective rate, and I choose just to
make those minimum payments, what am I in for both in terms
of how long am I going to be making those payments, and the total
amount of interest I am going to pay? I will let anybody respond
to that.
Mr. KROSZNER. Certainly our proposal that was discussed in the
subcommittee of this committee a week ago tries to address exactly
that issue. One of the things that we did is we talked to real consumers and asked them, what do you need to know? What do you
want to know? What is going to be helpful to you? And then when
we have those answers, tried to put that together in a way that
was useful to them, and then asked them, well, is this helpful? Can
you understand that?
And so our proposal is getting at exactly these kinds of issues,
and as part of our proposal, we have discussed disclosing precisely
that type of information. We are now in a comment period, so we
are very open to comments from consumers, and from other parties
who might tell us how useful that is and how to improve that.

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Mr. SHERMAN. And I hope in the limited time that one of the
things you put forward to consumers was a little table: If you make
the minimum payments, this is how long it is going to take, this
is the total amount you are going to pay, and this amount is going
to be your interest, and this is your principal.
I do have a quick question on home lending, and that is, we have
seen home mortgages make the people who would never qualify to
be able to pay the fully indexed adjusted amount. So it is somebody
that says, oh, yes, you can qualify for a $500,000 mortgage because
you can afford to make $2,000-a-month payments, and that is all
you are going to have to make for the first 6 months or a year, at
which point it goes to double that payment. Are the financial institutions that each of you regulate allowed to regard a borrower as
qualified based upon the teaser rate and not based upon whether
they qualify to make the fully indexed payments that will come
about in—and I realize they only come about if the index doesn’t
drop, but assuming the index stays the same.
Mr. KROSZNER. This is precisely the issue that we have put out
in our notice of proposed rulemaking on subprime mortgages. And
we have gotten comments in, and the agencies are working together to finalize that rule. I think when we looked at the comments—or we are looking at the comments, and we certainly can’t
prejudge where we are going to be, I believe there is a lot of support for—
Mr. SHERMAN. Isn’t this a basic issue of bank solvency? If they
go around loaning $500,000 to somebody who can only afford to
make $2,000-a-month payments, and they say, well, that is a goodperforming loan because we got the $2,000 last month, do you
guys—my time—do you guys call that a performing, qualified, good
asset loan?
Mr. KROSZNER. We have always taken safety and soundness very
seriously and looked at the underwriting standards that are regulating institutions’ views. I think the key is making sure that all
institutions use similar types of of high-quality underwriting standards.
And just to address the previous question, it is precisely the
table that you described that is in our proposal on credit cards. So
I think we have tried to address both of the concerns.
Mr. SHERMAN. Thank you for the credit card answer. Hopefully,
for the record, you can provide a somewhat better answer on the
home mortgage issue, and I will yield back.
Mr. CLEAVER. Thank you.
The Chair now recognizes the gentleman from Minnesota.
Mr. ELLISON. Mr. Dugan, in the Watters case, basically, the Supreme Court construed the National Banking Act, and essentially,
you know, the Act vested nationally chartered banks with certain
powers and, ‘‘all such incidental powers as are necessary to carry
out the business of banking.’’ But within the statute, doesn’t it also
say that there are certain exceptions that are carved out under the
Act, and if the Congress wants to regulate in those exceptions, that
they certainly can, right?
Mr. DUGAN. Congress can—we are a creature of Congress. You
can change the National Bank Act in any way that you see fit.

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Mr. ELLISON. Yes. So I guess my question is this: In the area of—
I mean, I know what the decision says and all, but in the area of
consumer protection, don’t you think having more eyes on the problem to protect consumers would augment the Fed’s work in terms
of looking out for the consumer?
Mr. DUGAN. As I said earlier in my testimony, I believe that if
we had an unlimited number of resources, and an unlimited number of staff to have 2 sets of eyes, 3 sets of eyes, 10 sets of eyes,
would obviously put more compliance on an institution, but we
don’t.
Mr. ELLISON. I know that, but let me just say this. If the States
were allowed to help protect consumers as it relates to Federal
banks or State-Chartered subsidiaries of Federal banks, that would
mean you would have more eyes to protect consumers, isn’t that—
Mr. DUGAN. To me what makes the most sense is these are very
heavily regulated institutions that we regulate, and we believe we
should be held accountable for that. That is what we spend our resources on.
Mr. ELLISON. Right.
Mr. DUGAN. To duplicate that effort to me doesn’t make any
sense.
Mr. ELLISON. Sure. Let me ask you the question this way then.
You know, there are banking practices by national banks and State
charters that are owned by Federal banks that have been called
into question to date; isn’t that right?
Mr. DUGAN. Certainly.
Mr. ELLISON. Yes. And as a matter of fact, I think you said
that—and maybe I got this wrong, but I thought you said that the
Fed maybe was—I am not sure of the time period. I think it was
last year—had like 200 formal actions and 200 informal actions.
Did I get that right?
Mr. DUGAN. I said the OCC.
Mr. ELLISON. The OCC.
Mr. DUGAN. 200 over a 5-year period.
Mr. ELLISON. My mistake. I misidentified the Agency. But we are
on the same page. That doesn’t seem like a lot to me, given so
many of the things that I have been hearing about from my constituents.
Mr. DUGAN. Well, all of what I said was—this is a very good example. There are many actions that we take that never arise to
even an informal action, particularly in something that we call
‘‘matters requiring attention,’’ and that is where we first alert bank
management of a problem because we are supervising them and we
are in there. We see it. We have a problem. You need to fix it. And
there were, over the same period, about 1,500 matters requiring attention.
Mr. ELLISON. This is over a 5-year period?
Mr. DUGAN. A 5-year period on consumer-related issues only.
Mr. ELLISON. Fifty States?
Mr. DUGAN. It is the national banking system, yes.
Mr. ELLISON. Plus the territories?
Mr. DUGAN. Yes.
Mr. ELLISON. I can even see how that is not that many.

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Anyway, let me ask Attorney General Miller about this. Do you
feel that there is room for the States to regulate in the areas that
were precluded by the Watters decision? I mean, do you feel like
you could help the citizens of your State notwithstanding Watters?
Mr. MILLER. We could help our citizens a lot. The States, the attorneys general, the banking superintendents, have a lot of expertise, have a lot of resources to contribute here. You know, it is particularly difficult when there is a State-chartered institution that
is sheltered from our authority or a State law that we are prohibited from enforcing. It just doesn’t make any sense at all.
Mr. ELLISON. For example, if a national bank or a State-chartered bank that is a national subsidiary had a credit card section,
and they were doing things like, I don’t know, double-cycle billing,
universal default, pay to pay, all the stuff we have been talking
about, you can’t touch them; is that right?
Mr. MILLER. That appears to be the case. And, you know, the
credit card complaint is the poster complaint for this whole issue,
and the whole—why this context that we have gotten into doesn’t
make sense. And we will handle that individual complaint at the
local level makes just so much sense.
Mr. ELLISON. We live in a country that has negative savings;
people are relying on credit cards to make it. They are at a competitive disadvantage with the banks, and yet their own State that
they live in is without the power to do anything for them.
Mr. MILLER. That is the dilemma, and that is why it doesn’t
make sense.
Mr. ELLISON. Let me ask you this question, Mr. Miller. The argument goes something like this: We don’t want the States to have
their own—to be able to regulate in this area or to enforce in this
area because it would drive up the cost of doing business because
it would cost the national banks money, and, I guess, lawyers, to
comply with these various States. So if this is essentially a costsaving measure, why don’t we see the costs of lending practices
going down? You would think they would be lower. You would
think we would have really cheap money in America.
Do you have any thoughts on this subject? Could I at least get
an answer, Mr. Chairman? I mean, you know, one could argue that
the cost of money is pretty high because there is only—you know,
when you look at some of the practices we have been talking about
today.
Mr. MILLER. I think you can draw that conclusion.
The other thing is that, you know, we are a large, complex, efficient country. And, you know, today banks and institutions know
how to, in a cost-effective way, efficiently comply with the whole set
of rules and regulations. That is not really what we are talking
about. We are really talking about the authority question, between
States and Federal. We are not talking about cost here.
Mr. ELLISON. Mr. Chairman, unanimous consent for 30 seconds?
Mr. CLEAVER. Yes, please.
Mr. ELLISON. Now let me ask you, if the national banks and the
State subsidiaries that are owned by those national banks, if we
really should—I mean, do you think we should be seeing cost savings as a result of the national scheme? And in your view, are we
seeing the benefits of what should be a cheaper, more cost-effective

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59
system, or have we simply given certain banks sort of a free hand
and fewer people to hold them accountable, and, therefore, they are
in more of a monopoly position and can charge consumers higher
prices because there is fewer people watching them; is that possible?
Mr. MILLER. I suppose that is possible. I guess what I am saying
is that obviously we are not seeing lower charges, and that is either because there really isn’t a cost saving by going to the national system, or if the advocates are right, there is additional profit. But I think it is really a question of power and authority and
how we treat consumers. I have said, though, that, you know, I respect the Supreme Court decision. I have to live with it. The chairman said earlier, I think, correctly—
Mr. ELLISON. I don’t.
Mr. MILLER. Yes. I mean, you can change it. But the chairman
said earlier, the prospects of changing aren’t so great. So, you
know, what do we do now?
And, you know, one of the things I talked about is that seven of
us really work together, use our powers in the subprimary. We all
have power; we have retained power there. And, you know, we just
have this enormous opportunity to change that system, particularly
with bad actors out, relatively good actors remaining, those with
national—with reputational interests remaining, and having that
incentive—some pain being felt including by the investors and the
public knowing this is a problem.
Going forward, if the seven of us really work together sincerely
and practically, as the two of us at the end of the table have
worked together for the last 5 years, we could have a much, much
better subprime market.
Mr. CLEAVER. Thank you.
The Chair recognizes the gentleman from Ohio, who has worked
on this issue in the Ohio Legislature, Mr. Wilson.
Mr. WILSON. Thank you, Mr. Chairman.
Ladies and gentlemen, I am fully aware this has been a long,
long time, so I will be brief. However, I have made some observations, and I appreciate the seven of you being here, and so I will
just ask my question in this way.
One of the things that came out today to me is that there are
some—we need to work on connecting the dots, be that State or
Federal, how we can ask the FTC to step up, the Feds, Federal Reserve, and what we can do with the OCC? I think a lot of questions, Mr. Dugan, were directed to you for some obvious reasons.
So without saying anything negative, I really thought that Attorney General Miller had some really good observations in his testimony and saying what things we need to do.
My question would be—and I would like to go through the seven,
and just give me a brief response—is what can we do on the congressional level to help you connect the dots to put this together
so that we can make a better situation for the people in America
and certainly for those in Ohio? If I could.
Mr. CLEAVER. We are going to ask all of you to answer the question and give the Reader’s Digest version.
Mr. KROSZNER. The Reader’s Digest version is you actually already have taken a very important first step in including the Con-

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60
ference of State Banks Supervisors in the FFIEC, the FFIEC Act.
So they are participating, and it is making it easier for us to coordinate.
Mr. WILSON. Thank you.
Mr. DUGAN. We made four suggestions. And for Congress one
would be to give joint rulemaking authority for unfair and deceptive practices. We also think that when regulators write rules that
other regulators have to enforce or implement, that they should be
consulted as part of that process. I think that gets very much to
your connect the dots kind of thought. And then I think that Congress should require that these consumer protection regulations be
updated on a regular basis, that they sometimes can go too long
without being reviewed, and that causes problems for consumers
over time. And then lastly—and this isn’t a congressional thing,
but it was something that was raised earlier. I think we all need
to get together to adopt a centralized way of handling consumer
complaints so they don’t get confused about who is a national bank,
who is a savings association, etc.
Mr. WILSON. Thank you.
Ms. BAIR. Yes. I think you have hit the nail on the head. As I
said in my testimony, we need uniform, consistent, across-theboard protections. I have called again for national standards to address abuses in subprime mortgage lending at both bank and
nonbank lenders.
We would like the ability to write rules regarding unfair and deceptive practices. We need to expand the ability and the authority
of State bank supervisors, as well as State attorneys general and
others who are involved in regulating nonbank providers, to enforce
the existing Federal protections.
And finally, although financial education is not a panacea, I do
think there is an opportunity for Congress to fund more financial
education in public schools in their core curricula. In the longer
term, I think that would help.
Ms. MAJORAS. I think the crux of the matter is to decide what
we want to do with the nonbank lenders who are the major participants in the subprime market. They are currently not regulated at
the Federal level. So I think that is one decision that needs to be
made.
Second, we think that mortgage disclosures based on a study we
have just released are inadequate, and we think we should look at
that.
And finally, if you are going to revise the FTC Act, it is one thing
to give others more authority, and I don’t have an opinion on it.
That is up to them what they need. But if you change our standard
and our enabling statute, remember that the FTC enforces in broad
swaths of the economy, not just this, and that would change it for
everything.
So I do hope we can work together with those who are making
such proposals because, of course, we use that statute every day all
day, and we know what it can do and what it can’t do. Thank you.
Mr. WILSON. Thank you.
Mr. POLAKOFF. Congressman, the Reader’s Digest version, three
issues. The FFIEC, which is a very effective tool for all of us. There
is a consumer forum, I think the Comptroller mentioned it earlier,

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headed by Treasury, and I believe virtually all of us at the table,
including CSBS, and the FTC, and the banking regulators, sit at
that forum and have very robust discussions, and I think that
would—they are the two most critical aspects.
The last is I would commend CSBS and ask them to remain vigilant. Right now only 70 percent of the banks have adopted the nontraditional mortgage guidance. CSBS is very active in getting other
departments to enact that guidance, and I think that is critical.
Mr. WILSON. Thank you.
Mr. MILLER. One of the great roles of Congress is oversight. I
think the most important thing you could do is hold the seven of
us, our feet to the fire, make sure we fully and fairly and effectively use our powers, and make sure we work together to protect
consumers.
Mr. WILSON. Thank you.
Mr. ANTONAKES. Well, presuming overturning the decision isn’t
an option, we would speak for the FFIEC on an expanding role and
have joint rulemaking through the FFIEC. We think we are just
one of six parties, but we think we bring extensive consumer experience.
Mr. WILSON. Thank you. And if I may, Mr. Chairman, in my
opening statement, I said what I really felt our issues were, and
the fact that it is not all bank-related, certainly that most is not.
But this has been very helpful to me, and having sat through this
just last year in Ohio, we have a lot of work to do, and we truly
want to be able to bring all seven of you together in looking at how
we can improve on the States and the Federal level. So I look forward to working with you in the future.
Thank you, Mr. Chairman.
Mr. CLEAVER. Let me express appreciation to all of you. Ms. Bair,
you have spent quite a bit of time with us over the last few weeks,
and we appreciate you coming and being responsive, as you always
have been.
The Congress was in session until about 2 a.m., so you have seen
the hearty Members today, and we feel very strongly about this. I
think the chairman expressed at the opening of the hearing that
this was designed for us to learn, and so I think that, in fact, has
happened. Some Members may want to ask additional questions,
and if they do, they will do it in writing. And without objection, the
hearing record will remain open for 30 days for members to submit
any additional questions to the witnesses, and to place their responses in the record.
If there are no requests to speak, this hearing is adjourned.
[Whereupon, at 1:30 p.m., the hearing was adjourned.]

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APPENDIX

June 13, 2007

(63)

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