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Thursday, April 1, 2004
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
    The committee met, pursuant to call, at 10:18 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the Committee] presiding.
    Present: Representatives Oxley, Leach, Bachus, Kelly, Paul, Gillmor, Ose, Green, Feeney, Hensarling, Garrett, Murphy, Frank, Waters, Maloney, Gutierrez, Velazquez, Watt, Ackerman, Carson, Sherman, Lee, Inslee, Moore, Lucas of Kentucky, Crowley, Clay, Israel, Miller, Emanuel, Scott and Bell.
    The CHAIRMAN. [Presiding.] The committee will come to order.
    The committee meets today for the latest in a series of oversight hearings we have planned for this year on the Federal agencies under the Committee's jurisdiction. Last month, the Oversight and Investigations Subcommittee, under Mrs. Kelly's leadership, held a hearing on the operations of the Federal Deposit Insurance Corporation. Today, we turn our attention to the Office of the Comptroller of the Currency, the independent agency within the Treasury Department that charters, supervises and regulates the more than 2,000 institutions that make up the national banking system.
    We are pleased to have back before the Committee the Honorable Jerry Hawke, who has recently returned from a brief medical leave to resume his duties as the Comptroller of the Currency. Comptroller Hawke, we welcome you back, and we wish you a continued speedy recovery, and from the looks of things, you are doing quite well.
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    In addition to reviewing the operations and regulatory policies of the OCC, today's hearing provides an opportunity to take stock of the health of the national banking system. Last week, the OCC released its report on the condition of national banks in the fourth quarter of last year, reflecting net income 21 percent higher than for the same period a year ago, markedly improved credit quality and record numbers for both return on equity and return on assets.
    Even with all of the shocks that our economy has undergone over the past 4 years—beginning with the bursting of the tech bubble in 2000 and continuing through 9-11 and the scandals in corporate America—the fundamentals of the U.S. banking system appear to have never been stronger. This surely bodes well for the sustainability of the economic recovery that has begun to take hold in recent quarters, as banks with sound balance sheets are well-positioned to make the kinds of loans to creditworthy borrowers that can help to fuel growth and create jobs.
    One by-product of the record profitability that the banking industry has enjoyed in recent years has been an increase in merger activity among some of the country's largest institutions, including, within the past 6 months, three supervised by the OCC: Bank of America, Fleet and Bank One. While the trend toward consolidation in the financial services industry is not a new phenomenon by any means, these most recent mergers nevertheless raise important issues regarding the future structure of the banking industry.
    As the primary Federal regulator for the Nation's largest and most complex banking organizations, the OCC faces a particular challenge in maintaining an examination force with the technical expertise necessary to ensure that these institutions are operated safely and soundly while continuing to meet the needs of the communities they serve.
    Since its inception 140 years ago, the national banking system has offered banks that operate on a multi-state or nationwide basis the ability to do so under unified Federal supervision, and pursuant to one set of rules established at the national level. This fundamental principle, which has been reaffirmed in numerous Supreme Court opinions, has come under fire in recent months from opponents of regulations issued in final form by the OCC in February that seek to codify the supremacy of Federal law as applied to national banks.
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    As a State legislator for 9 years before coming to Congress, I do not dismiss lightly the claims by State banking commissioners and others that the OCC regulations undermine the dual chartering regime that has been a hallmark of the U.S. banking system since Civil War days. However, I simply cannot agree with my friends in the States that subjecting national banks to a patchwork of inconsistent standards set by State legislatures and local municipalities is either required by the dual banking system or in the best interests of the customers of those institutions.
    In January of this year, Mrs. Kelly's subcommittee held the first congressional hearing on the OCC's preemption regulations. The hearing was a fair and balanced look at this complex issue, at which the OCC and its critics were both afforded opportunities to state and defend their positions. Since then, the OCC has taken several constructive steps to address legitimate concerns expressed by members and witnesses at that hearing. On March 1st, the OCC issued guidance to national banks stating the OCC's expectation that when national banks or their operating subsidiaries receive customer complaints forwarded by State authorities, they must take appropriate measures to resolve those complaints fairly and expeditiously.
    Then last week, the OCC published a proposed rule that, once fully implemented, will result in a full listing of all national bank operating subsidiaries being available to the public over the Internet to facilitate the processing of consumer complaints against such entities. I applaud the OCC for taking these important steps, and I encourage the agency to continue to reach out to its State counterparts to address areas of common concern.
    Before I conclude my remarks, let me say a few words about Basel. This committee remains extremely concerned about the potential competitive impact that the Basel proposals might have on the U.S. banking system and about the continued lack of consensus among Federal banking regulators regarding the merits of the proposal. I will be particularly interested in hearing Comptroller Hawke's views on studies released recently by other Federal banking agencies addressing both the competitive issue and the potential effect of the new Basel framework on the prompt corrective action regime that applies to U.S. banks.
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    With that, I now recognize the gentleman from Massachusetts, Mr. Frank.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 52 in the appendix.]
    Mr. FRANK. Mr. Chairman, I want to begin by expressing my full agreement with your last comment and indeed to thank the Comptroller for the work he is done with regard to the Basel agreement. We had our attention called to it, as you know, some time ago and confronted a situation which we thought was unbalanced and in which the full range of regulatory opinion wasn't being represented, and some legitimate concerns were not getting put forward. So I share your continued concerns about Basel, and I want to begin by saying in this case I think the Comptroller as well as the FJC have played a very useful role in giving us a chance to fully understand the implications of what was being proposed.
    Now, no more Mr. Nice Guy. But I did welcome the chance to join you in that, because I want to make it very clear that what we are talking about here on the preemption issue are very profound differences of a policy and indeed even a philosophical nature. And they are not personal. I don't have any criticism; indeed, quite the contrary. I think the Comptroller has done an excellent job, and we are glad to see him back here in good health. But there are profound differences.
    We had a hearing yesterday in this committee room in the Subcommittee on Capital Markets on proposals to basically reverse 60 years of American history in which insurance was essentially a State-regulated matter, and the degree of Federal takeover and Federal influence and Federal preemption was on the table. Today, we talk about an increase in power by the Federal Government over bank regulation, both in terms of the impact it has on national banks and in terms of the approach of the Comptroller's Office to try to increase the number of banks that are nationally chartered, partly induced by this particular set rules.
    Last year, we passed, overwhelmingly, a set of rules which continued the preemption of the States on credit. Now, as we deal with these issue by issue, I think, Mr. Chairman, the time has come for us to begin to acknowledge what we are talking about. And the question is this: To what extent are the States at all economically relevant? An argument can be made that they are very diminished relevance.
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    And we talk about globalization and obviously nationalization is a small piece of globalization. The greater includes the less here. But what we have got—this is not a matter of making partisan points about who is for States' rights or not—there does appear to be a significant shift in opinion, certainly on the majority side, shared to some extent on our side in various centers of opinion, that the time has come significantly to diminish the role of the States in economic regulation. Now, that is something we shouldn't just be dealing with piece by piece; we have to confront it.
    Part of the problem is, and this is where it gets trickier in particular, the States have traditionally taken a lead role in the consumer protection area. And I forgot to add as I talk about this concern about the diminishing role of the States, we had a prolonged debate in this committee about whether or not we should increase the role of the Federal Securities and Exchange Commission and diminish the role of State regulators in the securities area. We ultimately resolved that, Mr. Chairman. I thought you played a very useful role in that. We resolved it, but I think it is a very reasonable way by directing the SEC and urging the States to talk about coordination.
    But there is a pattern here: Securities regulation, insurance, the granting of credit. Now, we are talking about national banks, particularly predatory lending and other consumer roles. In every case, we are talking about a significant shift from State to Federal power, and it ought not to be done piece by piece; we need to really look at it. This committee is best positioned to do that.
    Now as to the specifics here. I really want to urge my friends in the banking community to reconsider the notion that the way to deal with this complex set of issues is by regulatory action alone. This is not a technical matter, and it is not a matter of whether or not the law allows it. That is to be ordered in court, and we are not a court. We decide what the law should be, not what the law is. The implications of this are far-reaching. The Comptroller has said, ''Well, this is just the way the law always was.'' I must say that I am unpersuaded that every Attorney General and every bank commissioner misunderstood the law previously, because it is the unanimous opinion of every Attorney General and every bank commissioner that this represents change. Change isn't necessarily bad, but I don't think it serves us in dealing with important philosophical and economic and policy issue to act as if it really isn't an issue at all.
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    And I want to say to my friends in the banking community, I understand that you would like to deal with this. To some extent I must say I get a little bit of the Thomas a' Beckett emanation from my friends in the financial community, ''Will nobody rid me of this meddlesome priest?'' The meddlesome priest being the States, and they swat him over here in credit and swat him in insurance. Well, be careful, that didn't work out so well for King Henry. Don't get yourself—is that the right king? Don't get yourselves in the same kind of position. I will ask to revise and extend if I got the king wrong.
    And I would just ask for one more minute, Mr. Chairman, if I might, just to say because this is such a thoroughly important issue, let's use a different model. Last year, many of the people in this room, both on our side and in the audience, consumers and members of the industry and regulators collaborated on a bill which extended Federal preemption in the extension of credit in a way that reached pretty good consensus. Our friends from California were understandably concerned because California had been in advance here and to my regret we weren't able to protect California's decision as much as I would like, but for virtually everybody else in the country we preserved the function that credit plays in the economic system while increasing for literally everybody outside of California the degree of consumer protection and giving a reasonable amount of consumer protection.
    I urge my friends, let's work together to duplicate that process. Do not think it is a good idea simply to use the fact that you have got the existing legal authority and push through something that is so controversial. It is not good for the stability of the economic system. One of the things we want is a sense that what we have done will go forward.
    When every Attorney General and every bank commissioner, Republican and Democratic, is so stridently in opposition, when you have a very strong bipartisan leadership of the chairwoman of the Oversight Committee, the gentle woman from New York, ranking member, the gentleman from Illinois, working together this is not the way to do it. Yes, there are arguments for preemption, there are arguments for economic uniformity, there are concerns about whether that is done with adequate consumer protection. Clearly, the Comptroller does not have statutorily the ability to deal with predatory lending that most of the States think or many of the States think are necessary.
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    So I ask the people, let's join together and in the case of the question of the authority of the Comptroller to preempt and deal with national banks, let's follow the model that we followed last year. It is my impression that my friends think that ended well, and even some people who may not be such great friends, but all of us together, I think, thought we had a pretty good process. We preserved the economic needs of the system, and we provided consumer protection and you have a stable consensus system that will go forward. It is not in the interest of the financial community longer term, no matter what you think short term, to use your muscle to push something through that is inherently unstable because of the degree of resistance it has.
    And I would just close by saying, Mr. Chairman, I think we demonstrated on both sides of the aisle last year our ability to come together and deal with these issues in a sensible, balanced way. Please, let's follow that model again.
    The CHAIRMAN. The gentleman's time has expired. Under the rules of the Committee, the Chair is prepared to recognize members for three minutes for opening statements.
    With that, I recognize the gentleman from Iowa, Mr. Leach.
    Mr. LEACH. Just briefly, I would like to comment on the parameters of what was just discussed but from another issue perspective, and that is the contrasting role of States and the Federal Government. This committee has recently passed a significant banking reform legislation that ironically moves in a little different direction than the ranking member just indicated; that is, we are empowering five States to give authorities that have never existed before in the American financial services community, and that is to give the effective power, full power of banking to a charter called the ILC charter. And this takes out of the loop the preeminent Federal regulators of holding companies, that is the Federal Reserve, and puts what in effect is an uneven playing field in regulation in the system all at the command of the potential of five States.
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    And I would only raise this in a significant way in terms of competitive inequity but also in breaches of the current framework of banking where holding company regulation has always been something that we have considered of significant dimension but also in terms of the breaching of commerce and banking where, quite literally, Congress is contemplating giving powers to non-banks greater than powers that are given to banks. And this is a very significant issue that I think ought to be seriously reviewed, and it is an aspect of decentralization that I consider to be wholly unhealthy. It has one modest effect of devaluating all bank charters in America.
    And as the comment was made to friends in the associations, I would say, quite frankly, that several of the associations representing America's commercial banks have let down their community very significantly and that people ought to be thinking about this quite seriously from the perspective of the manner in which American economy is organized, the notion that some large institutions can breach the commerce and banking parameters in ways that have never been breached in modern day before is also very significant circumstance.
    And so it is my view that we have to be very careful as we weigh these issues of States' powers versus Federal powers and recognize that while there can be competitive pluses and minuses, there also can be a real social change that can occur if we are not very careful.
    Thank you, Mr. Chairman.
    The CHAIRMAN. I Thank the gentleman.
    The chair now recognizes the gentleman from Illinois, Mr. Gutierrez.
    Mr. GUTIERREZ. Thank you, Mr. Chairman. Good morning. I want to thank Sue Kelly, my Oversight Subcommittee chairwoman for originally calling this hearing to follow-up on our hearing of January 28. I am pleased that Comptroller Hawke has recovered sufficiently from his illness to join us here today and wish him again a speedy and full recovery.
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    Due to the great interest in this issue, now it has become a full committee hearing, so I am happy to see that it has been expanded, the interest in this very, very important issue.
    I would also like to thank Ms. Kelly and Mr. Paul for their work on this important issue of OCC preemption. We are committed to working together with a number of our other colleagues on both sides of the aisle, including Ranking Member Frank, to ensure that our States have the power to protect consumers and to stop the OCC from eroding strong safeguards that have been used by States for more than a century to enforce consumer protection laws.
    It seems to me to make no sense for the OCC to attempt what many consider an unprecedented and unchecked expansion of its authority when States currently have the tools and the resources to effectively enforce consumer protection and other important laws.
    As many of you know, since our last hearing in January, representative Ron Paul and I passed an amendment to the Financial Services Committee's budget views expressing concern regarding budgetary effects of the OCC's recently published preemption rules. The budget views now put the Financial Services Committee on record that the OCC's preemption rules represent an unprecedented expansion of authority and one that was instituted without congressional authorization.
    Let me just ask that the rest of my statement be included for the record, and with no objection, Mr. Chairman, I would just like to end with a few brief comments.
    The CHAIRMAN. Without objection.
    Mr. GUTIERREZ. Thank you, Mr. Chairman. I would like to see, Mr. Hawke, if we could follow up and expand on what I know your conversations with me and other members of this committee and the House as you recover from your illness to talk to us about this issue. And I want to thank you for taking the time to come to my office, sitting down and speaking with me.
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    I think we have a difference of opinion, and I think people can hold differences of opinion, but I think at the same time what we are looking for, what you are looking for, I know what I am looking for and other members of this committee is that consumers be protected and that the soundness of our banking system be protected in this nation. Both of them are important and shouldn't have to compete with one another.
    I think that if we brought bank examiners together, if we brought Attorney Generals together from throughout the States, if we brought your office and the good offices of this committee and others and sat down at a table where we could—not in some back room but quietly sit down in an open discussion so that we can share frankly our views and find that road that allows us to protect our consumers, which is our primary goal in this issue, and you to fulfill your responsibilities to the soundness of our banking system as one of your main goals, and also I agree with you, consumer protection, I think we can all reach that together. So I hope that after this hearing we can continue to do.
    We are going to take an additional step, Mr. Chairman, and that is that Congresswoman Sue Kelly and I are sending today this letter to the Honorable David Walker, Comptroller General of the General Accounting Office. We will give Mr. Hawke a copy of the letter where we ask for them to see whether or not these are unprecedented moves and whether or not statutorily they can do what they say along with other consumer protection issues.
    Thank you so much, Mr. Chairman.
    [The prepared statement of Hon. Luis V. Gutierrez can be found on page 55 in the appendix.]
    The CHAIRMAN. The gentleman's time has expired. Are there further opening statements? If none, we will now turn to the gentleman from New York seeks recognition for an opening statement?
    Mr. ISRAEL. Yes, Mr. Chairman.
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    The CHAIRMAN. You are recognized for three minutes.
    Mr. ISRAEL. Thank you. I want to thank you, Mr. Chairman and the Ranking Member Frank for conducting this important hearing today on OCC and their recent regulations. I also want to thank my colleague from New York, Ms. Kelly, as well as my good friend, Mr. Gutierrez, for leading the charge on this important issue. While I am not in agreement entirely with their stance, I am pleased that this important debate is taking place.
    I also want to thank our witness, Comptroller Hawke, for being here today.
    The discussion of late concerning the OCC has been about the issue of preemption and the powers of the OCC. But I believe the issue is bigger than that of the powers of national versus State-chartered banks or the presumed powers of the OCC. The real question here deals with ensuring the greatest protection of all American consumers with respect to stopping abusive lending practices.
    While I welcome the approach undertaken by the OCC of creating one uniform Federal standard for all national banks and their operating subsidiaries with respect to predatory lending as a way of creating a level playing field for all national banking customers, I also believe the regulations they have put in place on this front are weak at best. Our constituents have no idea where their bank is chartered, and, quite frankly, they don't care. But they do care about protecting their money and their investments and keeping the access to capital free-flowing.
    The establishment of this national albeit weak standard by OCC drives home the need for real action by Congress this year to address predatory lending with a strong national law that governs lending at all financial institutions and their operating subsidiaries, regardless of where they are chartered.
    These are the issues we need to address in Congress. Thankfully, these actions by the OCC have had the desired effect of reigniting the discussion about real legislation to address the issue of non-prime lending and our Nation's diverse patchwork of regulations governing it. Congress needs to develop legislation to create a new uniform Federal standard in lending practices that crushes predatory lending by correcting the non-prime market which continues to furnish capital to neighborhoods that were traditionally denied these resources, and I represent many of those types of neighborhoods.
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    I look forward to today's hearing and hope for a good back and forth volley on questions and answers, not only on the issue of OCC regulation but, more importantly, on the larger issue of the need for congressional action to address lending abuses this year to protect all banking customers regardless of where their bank is chartered.
    And I thank the chair and ranking member again for allowing me this time to speak, and I yield back the balance of my time.
    [The prepared statement of Hon. Steve Israel can be found on page 57 in the appendix.]
    The CHAIRMAN. The gentleman yields back.
    The gentleman from California, Mr. Sherman?
    Mr. SHERMAN. Thank you. This seizure of power by the OCC is sweeping away congressional intent, sweeping away all State laws. It is illegal, it is wrong and it is politically stupid. It is illegal because you can't go way beyond anything Congress ever intended in terms of changing the way that our whole financial services industry is regulated. It is wrong because you have exposed consumers in my State to practices that my legislature wishes to prohibit without legislative hearings in this Congress. It is wrong because you have given a competitive advantage to one group of financial institutions over another, and, coincidentally, they happen to be the biggest, the most powerful and the biggest campaign contributors in the financial services industry.
    And it is politically stupid because neither the administration nor the majority party can disclaim responsibility for the harm to our Constitution, to our Federalism and to consumers that this is going to cause. Your agency does not have the capacity to deal with the consumer complaints, so you are really saying the consumers will have no way to complain. Your agency does not impose the limits on predatory lending that even this committee would feel necessary as part of national standards. The majority party cannot escape responsibility for this attach on Federalism and attach on consumers and attack on smaller businesses trying to do business with the national banks. You are part of the administration which must bear responsibility for your decisions.
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    The majority party could put an end to this by a suspension bill this afternoon but has not done so. Instead we will await the action of the American people this November as they see that this fits into a pattern of unbridled corporate power and the unleashing of this corporate power, whether it is arsenic in our water or predatory lending in our real estate transactions.
    The CHAIRMAN. The gentleman yields back. Is there further—the gentleman from Georgia, Mr. Scott?
    Mr. SCOTT. Thank you very much, Mr. Chairman. I appreciate this opportunity. Mr. Hawke, thank you very much for coming.
    I am from Georgia, served in the Georgia legislature for over 25 years, worked in banks and banking committee for all of those 25 years. As you know, we are in the catbird seat, one of the leading players in our fight against predatory lending. When you preempted Georgia's fair lending law, there were many concerns that were raised. One, that it might dilute consumer protections, it would be harmful to our dual banking system.
    But the most significant concern to me is this one: That the OCC and you, perhaps, Mr. Commissioner, and your failure to respond to a letter which was written by my commissioner, David Sorrell with the Georgia Department of Banking and Finance. And that letter was dated August 21, 2003. Seven months, Mr. Hawke. That is very, very disrespectful—disrespectful to Georgia, disrespectful to the people of this country that the OCC would preempt a State law.
    Our folks in Georgia in the catbird seat, one of those affected the most, we write letters and not one response in 7 months. And this letter regarded three issues concerning the OCC's preemption of the Georgia's Fair Lending Act.
    And Mr. Chairman, I would like to in the interest of time submit this letter for the record, if I may.
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    [The following information can be found on page 91 in the appendix.]
    The CHAIRMAN. Without objection.
    Mr. SCOTT. I would also like to submit a letter on March the 9th, 2004. Again, our banking commissioner of Georgia, Commissioner Sorrell, again wrote the OCC; no response. And he sent copies to our entire congressional delegation.
    Again, Mr. Chairman, if I may, I would also like to submit this March 9 letter for the record——
    The CHAIRMAN. Without objection.
    [The following information can be found on page 93 in the appendix.]
    Mr. SCOTT.——if I may.
    The CHAIRMAN. Without objection.
    Mr. SCOTT. Which includes, Mr. Chairman, which includes a detailed chronology of the efforts that our State of Georgia has taken to solicit a response from the OCC. Very disrespectful and disregard, Mr. Hawke. I am not convinced yet that we do need a national law to regulate predatory lending practices or what standards would be written into such a law. That very well would preempt the States. My mind is open on that issue. However, the OCC's actions are a good reason for Congress to assert some authority on these issues.
    And while the Georgia Fair Lending Act was indeed a flawed law concerning the assigning liability, we were responding to a very serious issue of predatory lending in that State. Georgia is the poster child for abuses of predatory lending. Federal regulatory preemption should be conducted in an open manner with adequate opportunities for comment and surely secure the respect of the OCC.
    The CHAIRMAN. the gentleman's time has expired.
    The chair would indicate to Mr. Hawke that the reason that the chair decided to have this hearing in the full committee was, as you can tell, there are a lot of strong opinions about the issue, and I thought it would be helpful to have a full committee hearing in that regard as opposed to the Oversight Subcommittee. And I think from the tenor of the debate, I think you can tell that this is why I made the decision I did.
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    Again, we welcome you back to the Committee and you may begin.
    Mr. HAWKE. Thank you, Mr. Chairman, Ranking Member Frank and members of the Committee. I welcome the opportunity to appear before the Committee to review both the condition of the national banking system and the Office of the Comptroller of the Currency and to address other issues of particular significance. I think that members of the Committee have raised some very significant issues this morning that are very much worth discussing in greater detail.
    I also should say, Mr. Chairman, that I very much appreciate, on a personal level, the statements of good wishes with respect to my return to work, and I can only say that I hope I feel as good after this hearing is over as I did coming into it.
    The national banking system, approximately 2,100 financial institutions, holding 56 percent of all commercial banking assets, is in excellent health. By historical standards, the system is exceedingly well-capitalized. Today, all national banks, with minor exceptions, have risk-based capital above 8 percent, and less than 1 percent of national banks have risk-based capital below 10 percent. In 2003, the national banking system set new earnings records as measured by return on equity and return on assets.
    National banks continue to play their traditional role as a key source of investment capital to America's businesses and communities. In 2002 and 2003, total bank loans grew by 7.8 percent and 7.6 percent, respectively. Consumer loans and loans backed by commercial and residential real estate have seen particular growth. Consumers have tended to use funds from mortgage refinancing and home equity lines to pay off higher interest credit cards and installment debt, a trend that has helped sustain overall consumer spending and that has been widely credited with having eased the duration and severity of the 2001 recession.
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    Credit quality today is also strong, particularly for this stage of the economic cycle. The OCC continues to monitor developments in areas that present vulnerabilities, such as small business lending and certain real estate markets and property types.
    Let me now turn briefly to the condition of the OCC, an organization of some 2,800 people—1,700 of them bank examiners in the field. Their skill and professionalism are recognized and respected—and, in my view, unmatched—around the world. Our people work out of the OCC's Washington headquarters, the Ombudsman's office in Houston, and our 4 district offices, 49 field offices, and 23 satellite locations in cities throughout the United States, and our examining office in London. In our large bank program, we have teams of full-time examiners on-site, as many as 35 or 40 in our 25 or so very largest banks, and they constantly monitor the condition of those banks.
    The OCC receives no appropriated funds. All of our funding is derived from assessments and fees received from national banks. We have focused on modernizing our financial operating systems and ensuring that we manage our financial resources wisely. The agency's budget has been balanced every year during my tenure as Comptroller, and we have been building our strategic contingency reserve to ease the impact of unforeseen disruptions to our operations or unexpected demands on our resources. Our present goal is to build the reserve to equal 6 months' operating expenses, a goal that we expect to achieve in mid-2005.
    The OCC's financial condition and the strength of its resources have taken on wider significance in light of some of the questions that have been raised about whether the OCC has sufficient resources to assure adequate protection for customers of national banks and their subsidiaries. These questions have been raised, as they have this morning, in the context of our recent regulations relating to the applicability of State laws to national banks and the role of State officials in enforcing consumer protection laws against national banks and their subsidiaries.
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    I would be pleased to discuss these regulations in further detail, but let me state emphatically that neither regulation involves any fundamental shift in regulatory roles or responsibilities, neither alters the OCC's continuing commitment to consumer protection, and neither should impose new or unmanageable burdens on our enforcement and compliance resources.
    We are proud of our long record of protecting consumers against abusive and unfair banking practices and developing supervisory innovations that have advanced that goal—innovations that have been emulated by other financial regulatory agencies. We have pioneered the use of section 5 of the Federal Trade Commission Act as a basis to take administrative enforcement actions against unfair and deceptive practices; we have thwarted payday lenders and their strategy to evade State laws through alliances with national banks; we have secured millions of dollars in direct restitution for consumers; we have developed comprehensive supervisory guidance to warn banks of the consequences of engaging in predatory lending; we have adopted special procedures to assure full and prompt consideration of customer complaints referred to us by State officials and much more.
    Indeed, our new preemption rule materially strengthens our ability to fight predatory lending by prohibiting national banks from making any consumer loan based predominantly on the foreclosure or liquidation value of a borrower's collateral and disregarding the crucial question of whether the borrower can afford the loan. I think this issue lies at the very heart of predatory lending. Our advisories on predatory lending caution banks that if we find evidence of abusive practices, we will not only take strong enforcement action but we will take it into account in evaluating the institution's CRA performance.
    At the OCC, consumer protection is a long-standing and integral part of our mission. Over 100 OCC examiners throughout the country are compliance specialists. They not only perform detailed compliance examinations but also serve as expert advisors on consumer protection issues to other examiners. And our 1,700 person strong field examination staff is backed by dozens of attorneys who work in enforcement and compliance.
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    I would point out by way of comparison that State banking departments collectively supervise about 113,000 entities, of which approximately 6,000 are commercial banks. For all of these entities, the Conference of State Bank Supervisors reports that the States have a total of 2,308 examiners at their command. In other words, if each and every State examiner spent 100 percent of their official time examining commercial banks, leaving all 107,000 savings banks, thrifts, credit unions, mortgage bankers, payday lenders, check cashers, pawn shops and other sundry financial providers that variously fall under State authority entirely unsupervised, the OCC's supervisory resources would still outstrip those of the States. The chart attached at the end of my written statement illustrates this comparison.
    Supplementing the work of our examining corps is our Customer Assistance Group, or CAG, which is co-located with the OCC's Ombudsman's Office in Houston. In 2003, this world-class operation processed more than 70,000 complaints and inquiries from bank customers in a prompt and sympathetic manner. It has also served as a de facto clearinghouse of complaints and inquiries that have been addressed to us but which really belong in other agencies. We have distributed to the Committee this morning a chart that shows the extent of the referrals that our Customer Assistance Group effects every year. Last year we received 6,550 referrals from State agencies, and we referred over 13,000 inquiries and complaints to other Federal and State agencies, including 755 primarily to State banking agencies.
    While some have mistakenly concluded that CAG is the means by which we carry out our enforcement and compliance responsibilities, that is not at all the case. Enforcement and compliance remains first and foremost the responsibility of our large battery of examiners and attorneys. The CAG is a very important adjunct to that resource. For example, we carefully track the volume of complaints we get, bank by bank, and if we see troubling patterns develop, CAG will promptly get our examiners involved to look into what might be going on at the bank to cause such a result. And we have had very good results from that.
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    The OCC also cooperates with State authorities to accept referrals when the States receive a complaint regarding a national bank, and we make referrals to State authorities when we get a customer complaint regarding a state-supervised institution, as the data that I just referred to demonstrates. I think it is obvious from that data that the OCC and the States are already working together on a routine basis to help bank customers resolve their issues, and we would like to build on that foundation.
    We have invited State bank supervisors and State attorneys general to visit our Houston office to learn more about how we handle consumer complaints. We have established special procedures to handle and track referrals from State authorities concerning national banks and their subsidiaries that are alleged to have engaged in abusive or predatory practices. We issued a new advisory letter to national banks clarifying our expectations about how they should handle consumer complaints forwarded to them by State agencies, and we have made it clear that we will not look kindly on a bank that cites the OCC's exclusive visitorial power as a justification for not addressing referred complaints or providing information about the disposition of complaints to State agencies. And we have proposed a model Memorandum of Understanding to facilitate the sharing of information about consumer complaints with the intent of providing effective coordination of enforcement activities with State agencies.
    By coordinating resources and working cooperatively with the States, we are convinced that we can maximize benefits to consumers, close gaps between existing consumer protection laws, and most effectively target financial predators. And we welcome further dialogue with the States to explore those goals.
    One recent example is the coordination related to Security Trust Company, which was involved in the mutual fund scandals in Arizona. We worked with the SEC and with the Attorney General of New York very effectively and with great good will in that case.
    Finally, let me say a few words about the Basel II process. This is an enormously complex and important project, and the OCC has been deeply involved in it for more than 5 years. There are still important issues to be resolved as we approach the Basel Committee's target date of mid-year 2004 for the release of a ''final'' paper, and we will continue to work hard on those issues.
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    The important thing to understand about this process is that it is far from over. Before we adopt final implementing regulations for national banks, there are a number of important domestic processes that need to be completed. First, we must complete a new quantitative impact study, as we promised this committee, so that we will have a much sounder basis for estimating the actual impact of Basel II on the capital of our banks. Second, we must complete the economic impact analysis required by Executive Order 12866 so that there will be a much clearer understanding of the implications of Basel II for our economy. Third, we need to continue the dialogue with this committee and its counterpart in the Senate on the progress of this process and the issues that have been raised. Finally, we must draft and then put out for comment our final implementing regulations.
    I am confident as this process moves ahead we will uncover a great many more issues that will require us to go back to the Basel Committee for appropriate responses. I also feel confident that the current implementation date of year-end 2006 will be difficult, if not impossible, to realize.
    Let me say, Mr. Chairman, that the interest and involvement of this committee in this very difficult process has been of enormous value to us. Other members of the Basel Committee have followed very closely the proceedings of this committee and the public statements of its members on Basel II. This has not only strengthened our hand in the negotiation process but has sent the message that all legislators intend to have an important role in the oversight of this process, and for this we are very grateful.
    In conclusion, Mr. Chairman, the national banking system is sound, and its recent performance has been strong. It has successfully weathered the recent recession, and it is responding in dynamic fashion to changes in the financial services marketplace. The OCC, too, is keenly focused on keeping pace with change. We look forward to working productively with you, with members of this committee and with State officials as we pursue our efforts to achieve that goal.
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    Mr. Chairman, I wondered if I could just take one additional moment on another matter. I want to pay tribute here to those employees of OCC who have been called to active duty in Iraq and particularly to four members of our staff who volunteered to go to Iraq as part of the U.S. team that is helping to rebuild that country. These courageous OCC staffers are working on the rehabilitation of the Iraqi banking system and are doing a fantastic job. They are in harm's way every day, but they are demonstrating real dedication and we are enormously proud of all of our OCC colleagues that are serving in Iraq.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Hawke Jr. can be found on page 60 in the appendix.]
    The CHAIRMAN. Thank you, Mr. Hawke, and we all share your pride in the OCC folks who are in Iraq, particularly after recent developments in Iraq. They are very brave and strong Americans, and we appreciate their service.
    You mentioned Basel II at the end of your comments. It was about a year ago or so when you testified here before the Committee regarding both your substantive and procedural concerns about the Basel II capital proposal. What is your current position regarding the Basel II? I know we look forward to the quantitative impact study, which will be an integral part of the decision-making process. When can we expect that, and, just generally, where are we? In fact you indicated the 2006 goal would be difficult to attain. If you could give us a little better feeling for that date as well.
    Mr. HAWKE. I would be happy to, Mr. Chairman. The Basel Committee is meeting in May, and it is expected that a as a result of the May meeting what I refer to in quotations as the ''final Basel paper'' will be put out. It is not final except to the extent that it allows domestic processes to move ahead with something that has more specifics than we have seen in the past.
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    There are still some very important open issues we are discussing here in the United States, for example, on an interagency basis, the treatment of retail credit and particularly credit cards. I have felt very strongly that we must be very careful not to adopt rules that have unintended adverse consequences for the enormously successful consumer credit industry that our banks have helped to develop in this country.
    After the Basel Committee comes out with its mid-year paper, we will begin the conduct of the quantitative impact study, which I think is enormously important because we don't really have a solid basis today for determining—estimating the impact of Basel II on the capital of our banks. Following the quantitative impact study, we will begin to prepare domestic rulemaking matters that will translate Basel II into domestic rules, and we will continue the dialogue with this committee.
    During that process, I expect, based on past experience, that numerous issues will be raised that will cause us to go back to the Basel Committee for change or clarification. Just the quantitative impact study, for example, might tell us that the results of Basel II are that there will be an unacceptably expensive impact on the capital of our banks. We need to know that before we sign on to anything. So there is a lot of process still to come and an important role for the dialogue between us and the Basel Committee.
    The CHAIRMAN. Thank you. You have talked about your willingness to talk with State officials regarding ways to improve the handling of customer complaints, and I understand you have an agreement with State insurance regulators in all of the 50 States. Can that serve as a model for working with the State banking supervisors as well?
    Mr. HAWKE. I think it could be a very compelling model. We were not always together with the State insurance commissioners on substantive powers issues, but we have been able to put those issues aside. Congress resolved most of them in Gramm-Leach-Bliley. We now have agreements with 48 State insurance commissioners, and those agreements provide a very effective mechanism for the exchange of information and the referral of complaints about practices engaged in by the insurance affiliates of national banks. We also meet regularly with the National Association of Insurance Commissioners.
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    The CHAIRMAN. The concern has been expressed in some quarters that the OCC's regulations clarifying the applicability of State laws to national banks and their operating subsidiaries would somehow authorize those entities to engage in real estate brokerage activities. My reading of the regulations and current Federal law, namely Gramm-Leach-Bliley, suggests that there is no basis for this concern. Is that an accurate assessment?
    Mr. HAWKE. That is completely accurate. It is unfortunate that the realtors have persisted in misreading our rules, and we have tried to counsel with them and explain that nothing in our regulations remotely bears on real estate brokerage. National banks are not permitted to engage in real estate brokerage even though banks in 25 or 30 States are permitted to do that. This is an issue that is vastly premature. It relates to the realtors' fight with the Treasury Department and the Fed over rulemaking under Gramm-Leach-Bliley. It has nothing to do with national banks or the OCC's recent regulations.
    The CHAIRMAN. Thank you for clearing that up. Finally, in the past year, we have seen several major mergers involving national banks and the creation of an increasing number of megabanks that operate globally. What challenges does the rapid pace of industry consolidation pose to the OCC as the primary Federal regulator for Federally chartered banks? In that vein, we can all recall for a number of years when the largest banks in the world were listed, there would be maybe one U.S. bank in that category and several Japanese banks.
    The world has changed dramatically. There was a lot of concern expressed in a lot of quarters that where were the American banks in this new global economy? And it appears now we are very competitive in that area and will continue to be so, but what kind of pressures and goals does that present to you?
    Mr. HAWKE. Well, let me say first, Mr. Chairman, that we already supervise what I think could fairly be called megabanks. We have several banks in our portfolio that are extremely large, approaching, if not exceeding, the trillion dollar mark. And so we have had a fair amount of experience on the supervisory side in dealing with them.
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    The expansion of the number of megabanks and the growth of the existing large banks will certainly present challenges. There will be an added degree of complexity. The risk management systems, the modeling that they use will become more complex, and we have got to keep up with that. The kinds of instruments that they issue will become more sophisticated. We have excellent people working in all those areas, and I think we are quite ready to take that challenge on. But we are spending a good deal of time in reviewing just how we supervise these large banks.
    As I said before, at the very largest banks, we have full-time, on-site teams of examiners. So our mode of review in these banks is continuous supervision. We are intimately involved with them all the time, and we will continue to be.
    The CHAIRMAN. Thank you.
    The gentleman from Massachusetts.
    Mr. FRANK. Thank you, Mr. Chairman, and I want to join you in expressing our support for the words that Mr. Hawke mentioned about the people serving in Iraq. That is a very important contribution.
    I want to call people's attention to the CD that we are about to show that preaches Mr. Hawke. You are about to see Mr. Hawke in stereo.
    Mr. HAWKE. Before he lost weight.
    Mr. FRANK. You can use this as before and after.
    Mr. HAWKE. ''I am Jerry Hawke, the 28th Comptroller of the Currency. Banks in the United States have a unique privilege: The right to choose their primary regulator. The Office of the Comptroller of the Currency is the primary regulator of banks that hold the national charter, a unique and powerful instrument for carrying on the business of banking. How the OCC and the national charter can help banking organizations achieve their goals is the subject of this presentation.''
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    Mr. FRANK. Thank you, Mr. Chairman. That is a teaser, and if people want to see the whole thing, I am a great respecter of intellectual property, they can contact—I don't know, Jerry, you can give your web site later on and maybe they will download it without paying for it and we will get——
    Mr. HAWKE. We have got extra copies.
    Mr. FRANK. Yes. I appreciate that you do. We are not in a static situation, we are in a dynamic situation, and part of the concern we have, many of us, is as made clear here. The emphasis on the preemption, the firmness of this, the great scope of it, OCC says, ''Well, it has always been that way.'' People didn't know it was always that way, and, clearly, the intention of that is to persuade people who have State charters to come to Federal charters. The problem I have is that it is not purely what we think of as banking activities. You have operating subsidiaries.
    With regard, for instance, to predatory lending, you have made the point that there hasn't been a great deal of accusations in predatory lending at national banks to date accurately. But, again, you are out there advertising, you are encouraging people to come to be regulated by you under these new rules and change their charters and with this preemption. That is part of the problem.
    In particular, I was troubled in this article that is in the Wall Street Journal for the 28th of January by Jess Bravin and Paul Beckett called, ''Friendly Watchdog.'' I would ask unanimous consent it be put in the record.
    The CHAIRMAN. Without objection.
    [The following information can be found on page 87 in the appendix.]
    Mr. FRANK. Here's the example that is particularly troubling to me. In Michigan, the State Motor Vehicle Sales Finance Act passed in 1950 requires auto dealers fully disclose installment payment terms, limits document preparation fees and restricts the conditions under which a car can be repossessed. The statute applies only to dealers who sell cars through installment plans.
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    You have now preempted that, because the National City Bank, which is part of the National City Corp and the Huntington National Bank owned by Huntington Bank Shares of Columbus, Ohio has this relationship with the dealers who market their car loans. As a result of your preemption, Michigan's law which applies to car dealers now doesn't apply to car dealers if they are affiliated with a national bank.
    What is so important to the uniformity of the banking system that you now have to bifurcate Michigan's administration of its laws applying to car dealer loans? Because if you buy a car on the installment plan and it is financed, I guess, by GMAC or by a State bank, it is one thing, but if it is by a national bank, those laws don't apply. Then, additionally, what laws have you got, what rules do you apply? Are there comparable rules that you apply to protect people who buy cars under the installment plan?
    Mr. HAWKE. Well, let me say first, Mr. Frank, that preemption of course is a constitutional doctrine, and we——
    Mr. FRANK. Mr. Hawke, that is not what I asked you. I have only got a limited amount of time. What rules have you got to protect car buyers?
    Mr. HAWKE. We don't have any rules that——
    Mr. FRANK. Any rules at all. So the effect in Michigan was that you canceled out those Michigan rules passed in 1950 and continued—apparently, Michigan hasn't felt any need to change them in, what, 65 years? And you substitute nothing. Is that a good system? I mean now that you have made this clear, do you plan to adopt some rules dealing with people who buy cars?
    Mr. HAWKE. We don't have any such intentions. But, Mr. Frank, I think it is important to recognize that that law prevented national banks effectively from making loans through car dealers, and it was a direct interference with the exercise of their Federal powers.
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    Mr. FRANK. How did it prevent them? Did it prevent anybody else from making loans through car dealers? Are there no loans through—I mean what about State banks, do they make loans through car dealers?
    Mr. HAWKE. I don't know what State banks do.
    Mr. FRANK. Well, they probably do. I mean you say it prevented them. It prevented them from making loans totally unrestricted, but of all places I think Michigan is probably a State where buying cars probably didn't get interfered with. I mean they like buying cars and selling cars in Michigan. So the notion that the State of Michigan would for 65 years have maintained on its—it is 55 years, my arithmetic's off—the notion that for 55 years would have retained on it books a law that made it hard for banks to finance cars is not credible. This is an example.
    Let me, and we are running out of time, so I just want to say why are you sending out the video? I mean do you have an institution or interest in getting banks to switch? Why do you care? I mean shouldn't it just be that you are out there and if banks want to be national, you do this, and if they want to be—why are you recruiting? Why are you out there trying to encourage them to change their charter?
    Mr. HAWKE. Well, I will be happy to address the question why we prepared that video, which was done for——
    Mr. FRANK. No, that is not what I—why are you out there trying to get them to change?
    Mr. HAWKE. I would like to answer the question that you raised about why we distributed the video, Mr. Frank, if I may. The reason that we prepared that video was because we get hundreds of questions all the time from organizers of banks, from lawyers and consultants who want to put banks together, and they ask us what can we tell them about the charter choice that they have to make.
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    Mr. FRANK. Who did you send the video to, Mr. Hawke?
    Mr. HAWKE. If I can finish my answer, Mr. Frank.
    Mr. FRANK. No, because you are going to filibuster. I agree with you on some things, but I don't want this—I am asking you very specific questions, and I think you are frankly evading the point. I think you sent that video in substantial part to persuade State-chartered banks to switch their charter.
    Mr. HAWKE. We send that video to people who are interested in knowing what the difference is between a national charter and a——
    Mr. FRANK. That includes State-chartered banks, right? Do you only send it out to people who ask you or did you—I mean is this like a—is there a ''don't video me'' list?
    Mr. HAWKE. No. We make it available to——
    Mr. FRANK. Did you send this unsolicited to a lot of State banks?
    Mr. HAWKE. We don't send it out unsolicited. We make it available to anybody who wants to pick it up at——
    Mr. FRANK. What do you mean make it available?
    Mr. HAWKE. Mr. Frank, what we did——
    Mr. FRANK. What do you mean by make it available?
    Mr. HAWKE. We have it available when bankers' groups come through to visit us. We make it available——
    Mr. FRANK. Do you suggest—do they ask you, ''Hey, I heard you have got this hot new video, the Jerry Hawke video.'' How do they know about it, these State banks?
    Mr. HAWKE. I will tell you what happens. The State bank supervisors are out there very aggressively marketing——
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    Mr. FRANK. No, no. Come on. I am sorry, now, Jerry, you are just filibustering. What do you do to make it available to State banks? Do you take the initiative in sending that video to State banks?
    Mr. HAWKE. We do not send it out unsolicited.
    Mr. FRANK. Do you call it to their attention? Do you call it to their attention? Come on. Don't play around.
    Mr. HAWKE. If bankers' groups come through, it is among the materials that we distribute to them, but——
    Mr. FRANK. Without soliciting——
    Mr. HAWKE. You are not letting me answer the question, Mr. Frank.
    Mr. FRANK. No. I resent that. You don't want to answer the question. Here's the deal: You are engaged in recruiting. This is part of your recruitment, and you don't want to acknowledge it. And, frankly——
    Mr. HAWKE. No. I do acknowledge it.
    Mr. FRANK.—you are better off acknowledging that you are recruiting.
    Mr. HAWKE. I do acknowledge it, but you won't let me explain why we put this video together or how it is used or what it responds to.
    Mr. FRANK. I was asking you how it was used. You sent it unsolicited——
    Mr. HAWKE. What it responds to is, first of all, inquiries that we get about people who want to form banks and they want to know what the difference is between our charter and the State. Second, we send it to national banks when they ask us if we have any materials to respond to the very aggressive marketing efforts of State bank supervisors who personally get in touch with our CEOs and with boards of directors to try to market the State charter and induce conversion, which is something we do not do. We provide it to them on request——
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    Mr. FRANK. All right. You have given me two categories. One, you send it out to people who ask for it; two, you send it to national banks who ask for it. But there is a third category and you are just being evasive. Clearly, you have acknowledged you make it available to others. Yes, you and the State-chartered banks are in kind of a competition here.
    Mr. HAWKE. I don't deny that at all.
    Mr. FRANK. Okay. Well, you just tried to, I think, and I don't understand why it is appropriate for the Federal bank regulator—I mean you don't get paid by the bank, you are not on commission here. You are a regulator and I just think—and the problem I have is this, and I am going to close with this: If am the regulatee a competition between regulators to have me join up into their shop I think means, ''Oh, gee, I have to look for who is going to regulate me the least.''
    I think it is counter to the public interest to have regulators in a competition. I will say the same thing to the States, but we don't have as much control over them. I do not think the Federal bank regulator ought to be competing with others to try and induce the regulatees to come be regulated, and I think that is a big part of our problem.
    Mr. HAWKE. Well, I would invite you to look at the web sites of most State bank supervisors who very aggressively market State bank charters, and they do it in two ways. First of all, they exploit the Federal subsidy that is made available to State banks, because the Fed and the FDIC don't charge for examination services. That is exploited every day by State bank supervisors. Second, they advertise with kind of wink how close they are and how responsive they are.
    Mr. FRANK. Let me just—I have one more. Why do you care? So some banks leave your regulatory jurisdiction and they go there. Just hurts your pride? I don't understand this, why are you in this competition with them, you said you are. Why aren't you just out there to regulate the banks that want to be national banks, and if they want to be State banks, that is also Okay? What is your institutional interest?
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    Mr. HAWKE. I think the essence of the dual banking system is competition between charters. That is what it is all about.
    The CHAIRMAN. The gentleman's time has expired.
    The gentleman from Iowa, Mr. Leach.
    Mr. LEACH. Well, I would like to raise another question on the competitive regulation issue in another context in relationship to statute the House is advancing. The chairman of the Federal Reserve has argued that the lack of activity limits on and consolidated supervision of the organizations which own ILCs create competitive inequities in the financial marketplace to the disadvantage of traditional national bank charters and traditional State bank charters. Does the 28th Comptroller of the Currency agree?
    Mr. HAWKE. Well, Mr. Leach, ILCs I know are an issue of great concern. It is not an issue that comes within our supervisory or regulatory involvement. The major issue with respect to ILCs is, obviously, as you said before, banking and commerce, which is an issue I know that you feel very deeply about. And the question that present is where to draw the line, a question that this committee has grappled with on many occasions.
    I think it is certainly appropriate for Congress to consider not only that policy but the safety and soundness aspects of depository institutions affiliated with non-banking operations and also the competitive issues that are raised by that. As I say, we haven't really had occasion to take a position on this issue, because it is not something that comes within our regulatory jurisdiction.
    Mr. LEACH. But do you see any competitive inequities?
    Mr. HAWKE. Well, I think there are—any time you have a situation where an institution of that sort has powers that go well beyond those that are available for others, there is a potential for a competitive issue.
    Mr. LEACH. So even though you have already indicated there is competition between State and Federal regulators, you don't think that the Comptroller should be deeply concerned that there are competitive inequities that affect institutions the Comptroller supervises or are you saying that they should? You are suggesting that the competitive inequities exist.
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    Mr. HAWKE. There are a lot of competitive inequities. We hear complaints from our banks all the time about competitive inequities with credit unions, for example, who have a status that enables them to compete very vigorously with our banks. If ILCs, by virtue of the lack of restriction on who can own them, had competitive advantages over national banks, I think that would be of concern to us. Well, I will just leave it at that.
    Mr. LEACH. Thank you. No further questions.
    The CHAIRMAN. The gentleman yields back.
    The gentleman from Illinois, Mr. Gutierrez.
    Mr. GUTIERREZ. Thank you very much, Mr. Chairman. I would like to go back to the preemption because sometimes lenders put clauses in their contracts to discourage borrowers from every pursuing legal claims. In fact, some lenders put clauses in loan documents that make borrowers agree that only certain courts can hear their claims—a lot of language sometimes when you get a car or buy a consumer product. And so they do everything they can so that the consumer can't go into certain courts. I think we all agree that that happens out there in the real world.
    Well, in Georgia, they had an anti-predatory lending that tried to stop this practice, and that law was preempted by the OCC. For the life of me I can't figure out why the OCC would try to prevent Georgians from trying to protect themselves and their consumers and what the OCC would want to do in preempting a Georgia law so that Georgians who are getting ripped off have different avenues that they can go.
    And it seems to me that the Office of Thrift Supervision said that they did not believe they had that power to preempt the Georgia law on thrifts, yet apparently the OCC feels it has the same power that the Office of Thrift Supervision doesn't feel it has over its thrifts.
    So I guess just following up on Mr. Frank's question is that I bet that if each of us, members of this committee, went back to their States—because, Mr. Hawke, there are 50 Attorney Generals, each one of them elected by the people of their State. These are law enforcement officers and all 50 of them said unanimously, ''What Mr. Hawke is doing and the OCC is doing is affecting our ability as State law enforcement officers from carrying out consumer protection laws in our State.'' Pretty broad-based group of law enforcement officers.
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    If the 50, I don't know, Chicago police officers got together, I think you might think that was enough, but imagine New York and all of the police officers, LA, Chicago and all of our cities coming together to say, ''Congress is doing something,'' not in this case, we are not doing anything, ''but a Federal institution is doing something that impairs.'' Because it is a crime. I mean selling drugs on the corner is a crime, right? Mugging, rape is a crime. Murder is a crime. Predatory lending is a crime. So we should not somehow take these State Attorney Generals and these bank supervisors who are out there to fight crime.
    And so it surprised me that when I read your opening statement that you said, ''The OCC's mission is accomplished through three major programs: Supervise, charter and regulate.'' And nothing is said here about consumers and protecting the consumers. It is supervise, charter and regulate. And it wasn't until page 18 that I finally read something that spoke about consumer protection.
    So I don't get it, Mr. Hawke, why we can't sit down and bring elected officials, Attorney Generals and bank supervisors who are appointed, much as you were, the President nominated you, you were confirmed by the Senate. Guess what, these bank supervisors at State banks are nominated by their respective governors and that is State government. You know, we always said here, especially I heard it a lot from my colleagues from the other side is, ''Washington doesn't have the answers.'' They have the answers at the local level because they are closer to the people.''
    States' rights. You know, in this case, I think that is why Sue Kelly and Mr. Paul and I are working together. We do agree that when it comes to fighting crime, even if you, Mr. Hawke, increased and you are not increasing the number of supervisors you have. According to your testimony, you are decreasing the number of people you have. You have it right here in your testimony, you are decreasing the number. But let's say you were increasing it. Let's say I am wrong and I misread your numbers. If you have got 2,000 people fighting crime, why wouldn't you want 2,000 more, 1,500 more, 7 more, 5 more, so when I am affected by crime and 911 doesn't answer, right, which is OCC, 911, doesn't answer, maybe somebody at the local level will take this under their charge and help us fight crime.
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    Having said that, don't you believe——
    The CHAIRMAN. The gentleman's time has expired.
    Mr. GUTIERREZ. Has it?
    The CHAIRMAN. It has indeed.
    Mr. GUTIERREZ. Oh, God.
    Mr. GUTIERREZ. Aren't you going to give the gentleman another minute to answer my question?
    The CHAIRMAN. You are just getting on a roll.
    Mr. GUTIERREZ. Well, don't you believe we can work out a cooperative agreement sharing jurisdiction with the States, preserving their authority to protect consumer rights? I think Mr. Hawke should be given 5 minutes to answer that 5-minute question.
    The CHAIRMAN. That was a 5-minute question, 5 minutes plus, but we will——
    Mr. GUTIERREZ. Well, if I were still the ranking member and this were held in my subcommittee, I would be given a little more latitude.
    The CHAIRMAN. The gentleman may answer the 5-minute question.
    Mr. HAWKE. Thank you, Mr. Chairman.
    First of all, Mr. Gutierrez, our regulation does not preempt the arbitration clause in the Georgia law, so the concern that you have in that respect should be satisfied. Second, 911 does answer. It answers 70,000 times a year. We get 60,000 or 70,000 inquiries and complaints from customers of banks, many of which we refer back to other agencies or to the States. We have an extremely effective consumer complaint processing operation. Third, it is not us who is keeping State Attorney Generals out of national banks, it is Federal law that has been on the books for 140 years.
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    For 140 years, there has been a statute that says that the OCC has exclusive visitorial powers against national banks. That is to examine, to come into them, to take enforcement actions against them. That has been virtually unchanged. There are some very minor exceptions to it, none of which permits State attorneys general to come into our banks. As a matter of fact, 10 years ago when Congress passed the Riegle-Neal Interstate Branching Act, it reinforced that principle by saying that in the interstate branching context, State consumer protection laws, to the extent that they are not preempted, will apply to national banks, and the OCC will be the exclusive enforcer of those laws against national banks. So we operate in a statutory framework in which State law enforcement officials take enforcement actions against State banks and others within their jurisdiction and we take enforcement actions against national banks.
    What is important here is not turf, not who takes enforcement actions against what institutions but how we arrive at coordination and a sharing of information. We have done that on many occasions. In the Providian case several years ago, we worked very effectively with local law enforcement authorities in California. We each worked within our own jurisdiction and we got $300 million in restitution against a bank while the State officials got restitution from the non-bank aspects of the company.
    I mentioned the Security Trust Company case where we worked effectively with the State of New York and the SEC. If we can arrive at a modus operandi with State law enforcement officials where we refer matters back and forth within one another jurisdictions, we can be much more effective than we can if we are jousting about who has got jurisdiction over whom. The ability to send banking——
    Mr. GUTIERREZ. I think, Mr. Chairman, the answer is, yes, you are willing to work out a cooperative agreement with States Attorney Generals.
    The CHAIRMAN. The gentleman's time has expired.
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    The gentleman from Texas, Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman. I will table for the moment the whole question of the desirability of preemption, but since the question was raised by the other gentleman, can you give us in very precise detail the resources that the OCC has to perform the task of consumer protection? Is it fewer resources, is it more resources? What is it that the OCC has to engage in the exercise of consumer protection?
    Mr. HAWKE. We have 1,700 bank examiners, and we have 300 bank examiners who are permanently and full-time on-site at our largest banks. We have over 100—and those 1,700 bank examiners work, many of them, in consumer compliance and consumer protection. We have 100 examiners who are dedicated entirely to consumer protection and compliance. We have several dozen attorneys in Washington and throughout the country who work on enforcement and compliance matters. And we have our Customer Assistance Group in Houston, which has 40 people working full-time, receiving tens of thousands of complaints and processing them very effectively and getting very good results for consumers.
    There has been a misapprehension that the regulations that we put out in January are somehow going to result in a massive switch of responsibilities and a huge in-flow of work to the OCC. That is categorically not the case. Those regulations did not change anything in the environment that would cause the OCC to face a resource shortage because new matters are going to be referred to us of the sort that we didn't handle before.
    Mr. HENSARLING. Although the OCC is principally known as the regulator of very large, some of the Nation's largest banks, in fact it is the community-based institutions, I guess, that make up the bulk of the banks that you regulate. There has obviously been a recent wave of consolidation. Should we in this committee be concerned about this increasing wave of consolidation as smaller banks appear to be gobbled up by megabanks?
    Mr. HAWKE. Let me address the first comment first. It is true that of the roughly 2,100 banks that we supervise, an enormous number of them are community banks. Probably 85 percent by number or over 90 percent by number of banks are under $1 billion in size of our banks, and half of those are under $100 million in size. So we have enormous concern about the health of the community banking system in the United States, and the great bulk of our people are devoted to the examination and supervision of community banks.
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    In terms of mergers and consolidation, I think most of those acquisitions have not involved smaller community banks. The big attention-getting acquisitions have involved mid-size and large banks, and I think in many cases community banks have been the beneficiaries of some of those transactions. Because when a merger occurs it generally opens up new opportunities for community banks to demonstrate how much more effectively they can serve people in their communities than branches of large banks that are headquartered in far distant cities.
    Mr. HENSARLING. One of the goals of Gramm-Leach-Bliley, I believe, was the goal of bringing down barriers to entry so that there would be increased competition in the banking arena, greater choices and hopefully the reduction of cost for consumers. Now that we have had several years of history, do you have any observations as to what extent the law has been working to indeed eliminate and lower barriers of entry?
    Mr. HAWKE. Well, Gramm-Leach-Bliley certainly did lower some of the barriers. I think it is interesting that many of the opportunities that Gramm-Leach-Bliley opened up have not been taken advantage of. We don't see much interest in banking organizations, for example, getting into insurance underwriting. There are a few, but that has not been a big deal. And we haven't seen much in the way of investment banking firms acquiring banks. There is greater latitude for banks under Gramm-Leach-Bliley to engage in investment banking activities, but many of them were able to do that to a great extent even before Gramm-Leach-Bliley.
    So while I would say that Gramm-Leach-Bliley potentially opened up opportunities, they haven't been taken advantage of to a great extent.
    Mr. HENSARLING. My time has expired.
    The CHAIRMAN. The gentleman's time has expired.
    The gentle lady from New York, Ms. Velazquez?
    Ms. VELAZQUEZ. I am supportive of the OCC's tough actions on national bank engaging payday lending, including the issuance of cease and desist orders and monetary penalties. However, I am concerned that some banks that may be looking in the payday lending business will look to other charter types. Do you believe that banks are actively gaming the regulatory structure to be able to remain in the payday lending business?
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    Mr. HAWKE. I have heard indications that some of the payday lenders that we essentially forced out of the national banking system have looked to other banks, and I know the FDIC is concerned that payday lenders may be looking to link up with banks that they supervise.
    Ms. VELAZQUEZ. Can you tell me what can Congress do to further limit the ability of banks to establish payday lending affiliates?
    Mr. HAWKE. Well, the problem has not been so much banks establishing the affiliates, it started with the payday lenders looking for a way to evade State laws by linking up with national banks and holding themselves out as agents for national banks under the preemption doctrine. We thought that was an abuse of preemption, and that was one of the principal reasons that we came down hard on those four national banks that had allowed their charters essentially to be rented out to payday lenders. That was a clear misuse of preemption.
    Ms. VELAZQUEZ. Many financial institutions rely on foreign companies to process customer data and staff call centers, you know, outsourcing of jobs. Gramm-Leach-Bliley required Federal banking agencies to set forth customer safeguarding standards, and the OCC has provided specific guidance in this area. How does the OCC standards protect customer information that is stored abroad?
    Mr. HAWKE. That is a very important question and one that we are presently very much concerned about. As banks outsource data processing activities, for example, that involve confidential customer information, we want to make very sure that the same kinds of protections apply that would apply if the activity was conducted by the bank itself.
    Ms. VELAZQUEZ. Does the OCC examine foreign facilities to ensure that they meet the OCC's guidelines, and how often are such examinations carried out? And are such examinations conducted by OCC staff?
    Mr. HAWKE. I may be wrong about this, but I don't think we have occasion to try to examine overseas a foreign vendor that is providing services. If I am wrong about that, we will correct the record. There is in U.S. law authority for us to examine providers of services——
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    Ms. VELAZQUEZ. So what do you intend to do?
    Mr. HAWKE. Well, I can't tell you—in all honesty, I can't tell you exactly where that stands. It is an issue that is being considered by our supervisory people right now in the context of the concerns about the outsourcing of operations that involve confidential customer information.
    Ms. VELAZQUEZ. The OCC prohibits national banks from making home loans based predominantly on the foreclosure value of the collateral. It does not, however, address the more common practices of high fees, prepayment penalties, mandatory arbitration or loan flipping. As a result, the OCC standard may not be strong enough as lending institutions that charge excessive fees may strip away an owner's equity but may not actually result in foreclosure. Under the OCC standard, it is my understanding that these institutions will not be penalized for their actions. Given these potential shortcomings, can you comment on how the OCC's rules and regulations protect consumers against predatory lending practices?
    Mr. HAWKE. Yes, I would be happy to. First of all, the underwriting standard that you described is, as I said earlier, I think lies at the heart of predatory lending. Everybody has got their own definition of predatory lending, but the essence of predatory lending, I believe, is the unscrupulous actions of non-bank mortgage originators who target the equity in people's homes and come and push credit out at very high prices that strip the fees out in the equity of the house. We have seen evidence of that not in the banking system but in the non-banking system. That is why we put such heavy emphasis on the underwriting standard. The underwriting standard is something that bank examiners can look at and deal with.
    Now, as far as other practices of the sort that you mentioned, we have at the OCC pioneered the use of section 5 of the Federal Trade Commission Act, which deals with unfair and deceptive practices. And we have taken action against abusive practices of a number of sorts that don't involve predatory lending as such but that are unfair and deceptive. And we can go after situations where under all the circumstances we think a bank is engaging in unfair and deceptive practices.
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    The CHAIRMAN. The gentle lady's time has expired.
    The gentleman from New Jersey, Mr. Garrett?
    Mr. GARRETT. Thank you and thank you for being with us today. I am going to do the odd thing and agree completely with all the statements made from the other side of the aisle with regard to the preemption issue. That troubles me as well. That troubles me from the last hearing we had when Sue Kelly held a hearing. I think back to where we are today comes from where our founding fathers established this idea that there was—they were suspicious of the tyranny of a central government and a central bureaucracy. Always for a good cause is what the Federal Government may be doing but with over zealousness it may infringe upon the interests of the people back at home. The people back at home are closer to the issues. They are supposed to be the engines of innovation, as our founders had intended it, and now we are going to be, as far as I can see, stripping it of that right.
    The questions are the same that I had back then, and I haven't heard either from scanning your testimony or hearing what you have said so far what is the harm that we are trying to address here? What is the exigency, what is the immediacy that we have to go forward at this point? What was the immediacy that we had to go forward or you have to go forward with the regulations when Sue Kelly and other members—I don't know if I was on that letter or not—but other members signed on to a letter asking for holding back on those regulations coming forward at that time? What is the exigency of going forward today? And why is it not the purview of Congress and not an agency to establish in statute as opposed to regulation?
    Mr. HAWKE. Well, let me say, first of all, there is obviously a difference of view on this. We don't think we did anything radically new. We didn't expand the standards of preemption, we didn't expand the areas covered by preemption beyond what the courts have repeatedly said or what had been in earlier interpretations and rulings that we put out or that are embodied in the OTS regulations. I think there has been a lot of exaggeration about the effect of our regulations. All we did was to codify principles that are long-standing. They go back well over 100 years. We did not do anything new.
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    And one example of that is when we preempted the Georgia anti-predatory lending law, the Attorney General of Georgia was asked if he could take us to court and he reviewed the precedence and said that he didn't think there was a chance of beating us in court on that issue. What we did was completely in conformity with law, and it did not change the ground rules at all.
    Preemption is a constitutional doctrine and whether we codified the preemption rulings in the regulation or not, these issues were going to come up in court. They have been coming up in court in wholesale numbers. We have had scores of litigations over the last decade involving issues of preemption. Our banks are faced with the uncertainty of litigation as they move into new products and new markets, and we have been asked on dozens of occasions to give interpretations about the applicability of State laws, and the reason we put out our regulation is to try to bring some predictability and clarity to long-standing doctrines.
    We did not intend to and we did not in fact change the basic rules of preemption or do anything remotely resembling what has been attributed to us. So I know there are differences of view on that. What we did has been, I think, grossly mischaracterized by many people, but what we did was completely in conformity with long-standing law.
    Mr. GARRETT. You are correct, it is a constitutional issue, the issue of preemption, I guess, where some of us said that if the courts are making those determinations out there, that there should be or should not be in the certain areas, as defined—as the courts hear it, then some of us would feel that that final arbiter of the decision as to whether you are going to go forward and enforce the preemption should be a congressional decision as opposed to a regulatory.
    I think I have a little bit of time just to go to one other point that was raised, and that is the issue of the confidentiality or the privacy of the information going overseas. And you gave an answer on it where you said you really couldn't speak to it exactly, and I don't want to put words in your mouth. Is that because no decision has been made, that it is still in the process, what you are saying, as far as dealing with it, or just where are we in the process of coming up to it, and when will we have a resolution to that part?
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    Mr. HAWKE. What I meant to say was I just don't have the information at hand. We will be happy to follow up with a supplemental submission. I know this is an issue that our supervisory people have been addressing. The standards that we have applied to our banks domestically with respect to protection of confidential information will apply, do apply to internationally outsourced activities. What I was unable to address specifically is exactly what our supervisory people are doing with respect to the examination of vendors overseas who are engaged in that. And this is a matter that is being discussed on an interagency basis.
    The CHAIRMAN. The gentleman's time has expired.
    Mr. GARRETT. And if you could provide us with that information.
    The CHAIRMAN. Without objection.
    The gentleman from New York, Mr. Crowley?
    Mr. CROWLEY. Thank the chairman, and thank you, Comptroller, for being here today as well. Regarding the national standards for combating predatory lending, one issue by OCC prohibits national banks from engaging in unfair or deceptive lending practices. As FDC governs these issues, there is concern that OCC will not have the authority to identify or enforce any unfair or deceptive practices. Can you explain how OCC plans to identify, enforce and punish those national banks or their operating subsidiaries that engage in unfair and deceptive lending practices?
    Mr. HAWKE. Well, we do have the authority and until we developed it, the concept has sort of been laying dormant whether we could enforce section 5 of the Federal Trade Commission Act. That is now very well-established and accepted by our sister agencies as well. We have instituted a number of actions against banks using that authority under section 5 of the Federal Trade Commission Act to remedy unfair and deceptive practices.
    Information comes to us through a variety of sources: Referrals from State law enforcement, our examination process and our Customer Assistance Group and just through the way it comes to the Federal Trade Commission itself. So I think we have plenty of resources to use that authority, and we see it as a very potent weapon in our arsenal when we deal with abusive practices at our banks.
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    Mr. CROWLEY. Thank you for that. Comptroller, there are been a great deal of concern expressed to my office and to myself among the State regulators, such as Attorney General Spitzer from my State of New York, that the new preemption codifying the OCC's recent regulations will lead to weaker protections for consumers.
    My question deals with how the OCC will address that concern, and in answering the question if you can make reference to the First Tennessee case that Mr. Spitzer made example of. And in viewing that example, how does the OCC plan to rectify that plaintiff, particularly, and how do you plan to proactively ensure that that type of situation doesn't happen again? What type of penalty do you have in mind for First Tennessee if it is decided they committed unfair and abusive lending practices? And, finally, how do you plan to conduct the outreach to State regulators like Mr. Spitzer to address the concerns like the one Mr. Spitzer put forward in his lawsuit?
    Mr. HAWKE. Well, I am delighted to answer that because I think this goes to the heart of how we cooperate with State law enforcement officials. I want to be a little bit circumspect in discussing a pending case, but we had a very, very similar case to the First Tennessee-First Horizon matter come up last year in another bank, in another State. It came into our Customer Assistance Group, and one of the people at the Customer Assistance Group called the examiner in charge at the bank that was having the problem. The examiner in charge walked down the hall to the consumer compliance person and said, ''Get this fixed.'' And it was fixed overnight and immediately.
    Virtually the same set of facts is involved in the First Horizon case. Attorney General Spitzer is using this as a vehicle for trying to establish a principle, but as soon as we learned about the complaint, which we did when he filed the lawsuit, they didn't come to us with a complaint, but as soon as we found out we called the bank and said, ''Get this fixed,'' and it was fixed. The customer has been made whole, the problem is solved and really the case has really no vitality left to it. We have not taken any penalty action against the bank. This appeared to be the case of a bookkeeping foul-up at the bank and a rather obtuse reaction by some lower-level bank people when the matter was brought to their attention.
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    Mr. CROWLEY. In terms of the relationship between yourself, the offices and Attorney Generals, how will that work?
    Mr. HAWKE. Well, I——
    Mr. CROWLEY. See, I noticed in your answer there a little bit, I won't say resentment, but——
    Mr. HAWKE. No, not at all. I had a——
    Mr. CROWLEY. maybe a little hesitation between yourself——
    Mr. HAWKE.——conversation with the Attorney General just a couple of days ago and emphasized the importance of our being able to work together as we did in the Security Trust case. He said he would like to come and visit and I look forward to that.
    A year ago, we proposed to the State AGs that we enter into a memorandum of understanding for information sharing exactly like we have with the State insurance commissioners. And so far only one State has picked us up on that—the State of Maine. But we remain very hospitable to working out a modus operandi with the States that will allow us to share information and coordinate and cooperate on enforcement activities rather than trip over each other's feet, as we race to take competitive actions.
    Mr. CROWLEY. Thank you, yield back.
    The CHAIRMAN. Mr. Murphy?
    Mr. MURPHY. Thank you, Mr. Chairman. I want to shift gears and go another direction and talk about the Basel court issues, as complex as they are. But are the regulators, you, the Fed, the FDIC, OTS, any closer to agreement on how to handle the operational risk issues in Pillar 2?
    Mr. HAWKE. We actually have been together on that issue for quite some time. I think there was a perception that there was a deep gulf between us, and that largely stemmed from the fact that I alone among all members of the Basel Committee was arguing that operational risk should be treated under Pillar 2 rather than Pillar 1. I got nowhere with that argument and the Committee moved ahead to include operational risk under Pillar 1. We then spearheaded the development of what is called the advanced measurement approach under operational risk, and the Fed has joined with us and the FDIC. And we believe that is a very effective way of dealing with operational risk, and we are all together on that now.
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    Mr. MURPHY. There are still some things, though. The Federal regulators have undertaken efforts to ensure that banks have contingency plans to deal with these unforeseen loss issues, but they are costly and will result in pure losses in the event of a disaster. But Basel II requires an addition of mandatory regulatory capital charge to cover operational risk losses. Doesn't this result in some double charge of banks seeking to comply with Basel II and the mandates of the Federal regulators?
    Mr. HAWKE. Well, I think the Committee has been cautious to try to avoid double counting and double imposition of capital. The operational risk rules should not result in double counting of capital as between operational risk and credit risk, although I suppose there are some opportunities for spillover.
    Operational risk does exist, and we have seen examples of it, and our banks themselves hold capital against operational risk. So I think the basic concept of capital against operational risk is a sound one. The big question is how we measure it and how we calculate that capital, and I think we have made tremendous advances in improving the Basel proposal on that score.
    Mr. MURPHY. Thank you.
    That is all I have, Mr. Chairman.
    Mr. BACHUS. [Presiding.] Who is next? Okay. I am sorry. We are going in order of, I guess, who first arrived, and I have Mr. Scott next. The order on this side, just so as long as everybody will know, I have got Mr. Scott, Mr. Bell, Mr. Watt, Ms. Carson, Lee, Emanuel, Israel, Maloney, Lucas, Sherman, Waters, Moore, Miller and Clay.
    Mr. SCOTT. Mr. Hawke, why has the OCC not responded and answered the letter from my banking commissioner, Mr. Sorrell, of August 21 regarding the preemption of the Georgia Fair Lending Act? It seems very strange that you took 6 months to go section by section and preempt the Georgia Fair Lending Act, and yet for 7 months you would not respond to the banking regulator's questions on issues regarding that issue. Why is that?
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    Mr. HAWKE. Mr. Scott, you raise an entirely appropriate issue. The first I learned that we had not answered the commissioner's letter was when the letter came in just a couple weeks ago, and I sent him a note back with profuse apologies, and I was chagrined upon that we had not answered that. It was not the way we usually do business. It was an unfortunately glitch and I am very sorry that occurred. That response should go out by the end of this week. And I very much regret that we didn't meet our usual response time.
    Mr. SCOTT. But 7 months is a long time. There is a purposeful nature to 7 months. And it might be important to note that that March 9 letter was cc'd to me and other members of the Georgia delegation which might have prompted that response. What I would like and humbly ask of you, as we have this trouble with letters and that in the previous question and answer period with the gentleman from New York you mentioned that you had a conversation with the State regulator of New York, is that too much to ask that you could pick up the phone and to call our commissioner and have a two-way conversation much as you have done with other States, especially with the fact that our law has been preempted? Could you do that?
    Mr. HAWKE. Absolutely, and I will.
    Mr. SCOTT. Would you like to have his phone number? Could I give that to you?
    Mr. HAWKE. I have got a crack staff who will find his phone number.
    Mr. SCOTT. Well, please do that because that is very important to me. I am the only Georgia congressman, Democrat or Republic, serving on the Financial Services Committee, and my people in Georgia look to me to raise the issues and most importantly to get my State the respect that they deserve. And it would go a long way to helping that happen if you would be kind enough to pick up the phone and talk to Mr. Sorrell and to ask and answer questions and have that dialogue.
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    Mr. HAWKE. I would be happy to do that, and I couldn't agree more about the very unfortunate lapse in our process. I am deeply apologetic and I appreciate you raising it.
    Mr. SCOTT. Very good. Let me ask you a second question on a broader issue. On the broader rule that you adopted on February 12, 2004, Mr. Hawke, let me ask you why did you decide to adopt your rule without a public debate on the issue before Congress since the rule was rigorously and unanimously opposed by the Nation's governors, State legislators, State attorneys general, State bank supervisors and consumer organizations, and their comments urged public debate and congressional review?
    Mr. HAWKE. Well, that is a question that we have addressed, and I want to start by saying emphatically that we intended no disrespect for this committee or its members. We received views on all sides of this issue. We had gone through an extensive rulemaking process in which comments were received a wide variety of commentators. We believed that the principles that were embodied in the regulation were not new despite the mischaracterization of the rule, that they were embodied in more than a century of precedence. We were seeing uncertainty in the marketplace, as I mentioned before, and that was impacting our banks' ability to serve customers.
    We saw that in some cases these anti-predatory lending laws were impacting on the ability of our banks to provide good subprime credit in these markets. The secondary market was constricting and banks were moving out of markets. As I mentioned earlier, we were facing a high volume of litigation and inquiries about these preemption issues, and we felt that our banks needed guidance and that we needed to move ahead with that guidance.
    And, finally, we thought that it was important that the predatory lending standard that we announced in the regulation go into effect and that that be out there so that banks would have—and I appreciate that people think we didn't go far enough with that—but that predatory lending standard that is in the regulation is something that nobody else has done and no other State or Federal regulators have done, and we believed it was important to get that out there and get that into effect.
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    Mr. SCOTT. But you can see why some of us in Congress feel that you are stepping on our bailiwick here. It is our responsibility to make the laws, to legislate. It is yours to regulate, and this kind of action certainly causes alarm on our side.
    Let me ask you——
    Mr. BACHUS. Thank you, Mr. Scott. Actually, I think you are probably about 2 minutes over.
    Mr. Hawke, as you know, some of your critics have charged that the OCC was not being sufficiently responsive to consumer complaints about unfair or abusive practices at national banks and focusing particularly on predatory lending practices. Walk us through the process that the OCC follows when it receives a complaint that one of its institutions is engaged in possibly unlawful conduct or has otherwise mistreated one of its customers.
    Mr. HAWKE. Well, complaints come in from a variety of sources. We get complaints that are discovered in the examination process, and we get a very high volume of complaints and inquiries that come in through our Customer Assistance Group—70,000 a year. Many of those don't relate to national banks and we kind of pawn those out to the responsible agencies. But that is one way that we learn about practices, and when complaints do come in the bank is contacted, the bank is asked for an explanation of its conduct, and if we find that the bank has engaged in abusive practices, the matter will get referred over to our supervisory staff, and it could form the basis of enforcement action. That is the way many of these things get started.
    Others come up in the routine examination process. We will find that a bank is offering a product or engaging in an activity that reflects abusive practices, and we will take action against them. We have found in the area of credit cards, secured credit cards and like products that some banks are really engaging in unfair and deceptive practices, not predatory lending the way I would describe it, and we go after them. We have had a good record of getting judgments against them.
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    Mr. BACHUS. Have you received any complaints that national banks are engaged in predatory lending practices?
    Mr. HAWKE. We have no evidence that predatory lending is a problem in the national banking system. Indeed, there are repeated statements by all of the State attorneys general that predatory lending is not a problem of regulated financial institutions and their subsidiaries, but it is a problem that exists in the unregulated financial community, the mortgage brokers and the unregulated originators of mortgages. The State Attorneys General have stated emphatically that they have not engaged in enforcement activities against banks and their subsidiaries on predatory lending, they have no evidence of it, and we have invited referrals from consumer groups and from State law enforcement people on predatory practices at national banks.
    I should just add, Mr. Bachus, that last year we put out I think what is the most expensive advisory on predatory lending that any agency of the government, Federal or State, has put out. And I really commend those to the reading of anybody who is interested in predatory——
    Mr. BACHUS. I am going to take your word for it till I hear otherwise. You have mentioned credit card complaints about credit cards. Is that the major area of complaints?
    Mr. HAWKE. Since most of the credit card operations in the country are conducted in national banks, we do become the recipient of complaints from credit card customers.
    Mr. BACHUS. Are those all funneled through the Customer Assistance Group?
    Mr. HAWKE. Many of them are.
    Mr. BACHUS. Some of them aren't, though?
    Mr. HAWKE. Well, some we pick up in the examination process directly, but many of them come in through the Customer Assistance Group. And if find an unusual number of complaints about a particular institution, we will feed that back into the examination process to find out what is going on. And we did in one case a few years ago we noticed a spike up in complaints about a particular institution, and we went back to the institution and said, ''What is going on?'' The management of the institution didn't even know that they had a problem, and we were able to get that fixed in a way that was very beneficial not only to the customers but to the management itself.
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    Mr. BACHUS. What I am hearing, and let me ask you if you are hearing the same thing, I am hearing constituents complain that they will get their credit card bill and from the time they get it to the time they have to pay it is not 30 days, it is not 25 days, it is 14 days or 17 days or the cycle's been shortened. Are you getting a lot of complaints of that nature?
    Mr. HAWKE. We have gotten complaints of that sort, and those issues have been addressed on an interagency basis in our account management guidance, a number of practices of that sort.
    Mr. BACHUS. Have been stopped?
    Mr. HAWKE. I can't represent to you that they have all been stopped, but we put out pretty strong guidance to our credit card banks to avoid abusive practices of that sort.
    Mr. BACHUS. Has any enforcement action been taken against banks who may have been engaged in——
    Mr. HAWKE. I am not aware of any enforcement action as such that we have taken against them, but in some cases it is like—our objective is to make clear what the ground rules are for our credit card banks. There are problems that are reflected in these consumer complaints, and we have had meetings with our credit card banks and told them that they have got to get these things fixed, because, among other things, they are inviting additional regulatory legislation that will impose a remedy on them that they ought to be concerned about.
    Mr. BACHUS. And I can tell you that that is some of the most enraged calls that I receive that are received to me from other members of, say, the Alabama delegation or what they consider an arbitrarily short period to respond to the credit card bill coming in. And I would like maybe if you could supply me with what those guidelines are.
    Mr. HAWKE. We would be happy to.
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    Mr. BACHUS. I think my time is—well, actually, is the light still on? Okay. All right.
    Mr. Watt?
    Mr. WATT. Thank you, Mr. Chairman.
    Welcome, Mr. Hawke. I would have to say that I have listened very intently to your testimony this morning in very great detail and come away very disappointed in several respects. First is in your failure to acknowledge that the OCC has overstepped even in the face of all of the opinion of this committee that you have in fact overstepped. Second, in your insistence that what the OCC did was not a dramatic change even in the face of everybody in the industry saying that what you did was a dramatic change.
    In your, to me, inconsistent positions that it was absolutely imperative that your predatory lending standards be announced and it be gotten into, that these standards be out there, yet the other side saying that everybody is saying that there is no problem of predatory lending with national banks, I am perplexed about that. Your statement that banks were withdrawing from markets yet doesn't seem to square with this notion that there was no problem of predatory lending.
    And then your most recent statement, something about regulatory legislation, which to me—well, I guess it happens all the time that there is regulatory legislation. I think the problem that we are having on this committee is that you are setting standards here that we believe are the prerogative of Congress to set and that you are misapplying the standards that have been set.
    I have looked at the wording of the Barnett case that set a standard which says prevent or significantly interfere with the national banks exercise of its powers. That is the language that the case law uses. The rule that you put out says obstruct, impair or condition a national bank's ability to fully exercise its Federally authorized powers. Do you read those two statements, the legal standard that the court set and the standard that the OCC set in its rule, to be one in the same?
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    Mr. HAWKE. When you look at the whole string of Supreme Court and other Federal court precedence relating to preemption, and they go back well over 100 years, the language in our regulation reflects what has been said in those cases.
    Mr. WATT. So you are saying that the language that I just read that those two set of languages say exactly the same thing?
    Mr. HAWKE. Well, I think when you look at the Barnett case as a whole, it does talk about conditioning the exercise of powers. But this is an issue that goes back to——
    Mr. WATT. Well, I understand that it goes back a long time, but I mean I think what you have done is—maybe all you were doing was codifying your thinking about it, but in the process of codifying it by regulatory standards you have certainly hit a bunch of nerves that nobody thought you were regulating in. Let me just point up one of those that is troubling to me.
    One of the areas that your regulation says you are going to deal with is regulating abandoned or dormant accounts. Now, North Carolina has an escheat laws. Does the OCC have some kind of escheat law?
    Mr. HAWKE. We did not affect escheat laws at all.
    Mr. WATT. Well, what does it mean when you say regulating abandoned or dormant accounts?
    Mr. HAWKE. Let me explain, Mr. Watt. There are two Supreme Court cases that deal with escheat laws, and the law is very clear, that state escheat laws apply at the national banks and are not preempted so long as they provide a due process opportunity for customer to raise—for the owners to raise claims.
    Mr. WATT. So does that not condition a national bank's ability to act or does it significantly interfere with it? I mean which one of those does it do? I mean——
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    Mr. HAWKE. We made clear in the regulation that—the regulation simply reflects the Supreme Court precedent. Where there is no due process provided in the State law, it is preempted. That is what our regulation says, that is what the Supreme Court has said.
    Mr. WATT. No due process in predatory lending law when we don't really have a predatory lending standard at the Federal level, and you have got to write a regulation that tells what the standard is?
    Mr. BACHUS. I think he is talking about the escheat laws.
    Mr. HAWKE. I am just talking about escheat laws.
    Mr. WATT. Well, I am talking about the whole range of laws here. I am trying to figure out where it is in this context that the OCC feels like it has authority to start articulating what the law is at the Federal level when there is no law?
    Mr. HAWKE. Well, Mr. Watt, I have taken an oath to support and defend the Constitution of the United States, just as every elected representative has, and I have to apply our best judgment about what the Constitution provides in the area preemption. These are constitutional——
    Mr. WATT. So when the Congress tells you that you have overstepped and you have applied a standard that is different than what the Congress says is the standard, you are going to say, ''Well, this is my standard, and I haven't overstepped. I am not doing anything dramatically different than has been my prerogative all along.'' Who is the OCC?
    Mr. HAWKE. Well, I firmly believe that to be the case, that we have not done anything different, that we have not overstepped our bounds. We have been involved in dozens of pieces of litigation involving preemption issues over the years. We consistently win these cases. Our views on preemption are constantly reinforce by the courts. Congress, obviously, can change any of those rules, and I think that the States recognize that preemption is a well-established doctrine.
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    When the Georgia legislature passed the Georgia preemption anti-predatory lending law, they had a provision in it saying that if this law is preempted for national banks, it will also fall for State banks. And they were expecting, they were anticipating that the normal doctrine of preemption would preempt the applicability of that law for national banks. And the State Attorney General said that he didn't see any prospect of overturning our judgment on that score. So I don't think this was really a close issue in terms of whether we were reading the existing law correctly.
    Mr. BACHUS. Thank you.
    Ms. Kelly?
    Mrs. KELLY. Thank you. First, I want to thank Mr. Oxley for his recognition of how important this issue is to the American people and for bringing this issue to the attention of the full committee. As you know, several weeks ago, this committee passed a resolution that expressed serious concerns with the rules the OCC had finalized.
    And, Mr. Hawke, I want to thank you for fulfilling your promise to me that you would appear here. I thank you for appearing here today.
    Mr. Hawke, I recently read an article in the American Banker in which you made some very dismissive remarks about the New York State Attorney General and banking superintendent relating to their concerns with these rules that you finalized on January 7. Your comments and what appears to be a dismissive attitude towards the concerns that we have in the banking structures of New York are not constructive and they make it very difficult for some members of this committee to have confidence in your stewardship of the OCC with regard to these regulations—one of the reasons why I have asked today for a GAO examination of the implications of your regulations on consumer protections as well as the process by which you arrived at these rules.
    I hope that as we move forward in reviewing the OCC activities, you will demonstrate a greater recognition of the concerns expressed by the officials in my State and in these other States, as you have heard today, who genuinely believe that these regulations will have a negative impact on consumer protections and on the dual banking system.
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    Mr. Hawke, I would like you to answer a few questions and I want numbers only. No discussion because these are very simple questions. How many full-time people does the OCC have specifically devoted to customer service?
    Mr. HAWKE. We have got about 40 people who——
    Mrs. KELLY. Full-time?
    Mr. HAWKE. Forty full-time people who man our Customer Assistance Group in Houston, but that is not the only way we deal with it.
    Mrs. KELLY. I didn't ask that. I asked for a number, sir. How many full-time people work on regulatory work?
    Mr. BACHUS. Ms. Kelly, I think he is saying that he didn't know. That is not the total answer to the——
    Mrs. KELLY. Well, I know what he is going to say, and so I have already discussed it with him and it is in his testimony if you look at the graphs.
    Mr. BACHUS. I am just saying that he may—in fairness to the Comptroller——
    Mrs. KELLY. Well, are you going to give me more time since you are taking my time?
    Mr. BACHUS. I will. I will, Ms. Kelly, but what I am saying I think he was saying that is not all the people. I don't know if you were asking about——
    Mrs. KELLY. Fine. Mr. Hawke, finish your answer.
    Mr. HAWKE. My answer was that we have 40 full-time people at Customer Assistance Group who are the initial in-take for tens of thousands of customer complaints, and we have 1,700 examiners and 100 examiners who are devoted to consumer compliance.
    Mrs. KELLY. Well, quite frankly, I asked you about customer service only, so you didn't need to amplify the answer.
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    Mr. HAWKE. They all deal with the resolution of customer——
    Mrs. KELLY. I am only interested in what you have dedicated solely full-time to customer service. That is 40 people if I understood your answer. Now, how many people——
    Mr. BACHUS. Ms. Kelly, he actually said that some of the other staff is——
    Mrs. KELLY. I understand that, but I am trying to get at my next question, which is how many full-time people work on the regulatory work, just the regulatory work?
    Mr. HAWKE. Well, I am not sure how to characterize that, Ms. Kelly. The——
    Mrs. KELLY. Well, just give—how many people are in the regulatory work?
    Mr. HAWKE. Lawyers who work on regulatory matters, my Chief Counsel advises me that we have got 20 lawyers who work on regulatory matters.
    Mrs. KELLY. Thank you, Julie. How many people do you have working solely in enforcement?
    Mr. HAWKE. We have got 100 compliance examiners who specialize in assuring compliance with consumer protection laws, the several dozen consumer protection laws that we have, and we have probably got a couple of dozen lawyers in Washington and throughout the system that work on enforcement and compliance cases.
    Mrs. KELLY. I am going to wait for Julie to hand you that paper.
    Mr. HAWKE. Well, Julie tells me I understated it. We have got 25 lawyers in Washington in enforcement and compliance, 25 more in the districts and 10 others in consumer and community relations.
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    Mrs. KELLY. Okay. So it is 25 in D.C., 25 in the districts, and how many more?
    Mr. HAWKE. Ten.
    Mrs. KELLY. Ten, 10 more. Okay. What was the specific caseload for each full-time examiner last year?
    Mr. HAWKE. I will be happy to provide that, Mrs. Kelly, in a follow-up. I don't have that number at my fingertips.
    Mrs. KELLY. With this change, what will be the specific caseload for each full-time examiner this year?
    Mr. HAWKE. Mrs. Kelly, there will be no change as a result of the regulations that we put out. And that is one of the great misconceptions about what we did. The regulations, despite the difference of views, and I respect the fact that our colleagues in the States have different views on this, our regulations codified the long-standing existing rules. They will not result in a significant—in any change in our workload. I think that is a specious argument that is being made by those who have an interest in attacking our position on preemption.
    Mrs. KELLY. I would be interested, sir, in the number, and if you would break it down in terms of who is detailed to the national banks and who is detailed to operating subsidiaries. I would also like to know what the specific caseload is for every full-time employee assigned to your Customer Assistance Group.
    Mr. HAWKE. We will be happy to provide that information.
    Mrs. KELLY. I think that I may have an answer for that. I have an article here from the American Banker quoting Sheila Bair, a former Treasury Department official who is now a management professor at the University of Massachusetts. She states, and she may not be correct, which is why I was trying to find out if you had a different figure, she said the study says—her study says that the OCC has 921 consumer complaints for every full-time employee assigned to its Customer Assistance Group. I just didn't know what that number was that you have assigned. She also points out that the OCC has very high workloads for complaint processing. She says, and I quote, I think that does underscore that the OCC really needs to beef up their complaint-handling ability.
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    My concern here is we need to make sure that the people who are involved in our banking system, their customers, have answers to their questions and have their complaints handled in a timely manner. She quotes in the study that the FDIC has 111 complaints per person involved, and the Federal Reserve has 124. At 921 consumer complaints for every full-time employee, that is a lot. I don't know what number she is using there. I would like you to answer if you do know what the number she is using, and if you don't, if you can get back to me, I would appreciate it.
    Mr. HAWKE. I would be happy to answer that question, because as much as I love Sheila Bair, she really does not know what she is talking about here. The numbers that she gives are relatively accurate. I am willing to accept that they are accurate. But she takes no account of the efficiency of these operations. If you take the 111 or 124 complaints per FTE that the Fed and the FDIC have, that works out to about 1 complaint every 2 days. That is what their ratio is. And ours works out to about four complaints a day. So the people that we have processing cases in our Customer Assistance Group handle, on average, about four complaints a day, based on the ratio of complaints to full-time staff.
    You can't simply take bare bones numbers like that and make conclusions about the quality of workloads or the need for more people. So I think it was gratuitous of her and uninformed to make the conclusion that she did. We constantly review the workload in our Customer Assistance Group. We review it in our budget process, we are presently looking at it. If the workload down there appears that we need more people, we will devote whatever resources are necessary to handle the workload. We have not had workload complaints about that operation. It has a highly efficient operation, it is highly automated, we have put technology to great use down there.
    I think it is a world-class operation that ought to be a model for customer assistance groups any place, and we have invited our colleagues at the States to come down and look at it. Taking bare bones numbers of the sort that Sheila did and drawing conclusions about workloads is totally inaccurate and uninformed, and I am sorry that she jumped to that conclusion.
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    Mr. BACHUS. Thank you.
    Mrs. KELLY. I think I am entitled to a little more time since I have been interrupted so often.
    Mr. BACHUS. Well, actually, you are——
    Mrs. KELLY. Mr. Hawke, I appreciate if what you said is true——
    Mr. BACHUS. You are 5 minutes over.
    Mrs. KELLY. Just let me finish, please, my sentence.
    Mr. BACHUS. Well, I think the record is pretty clear——
    Mrs. KELLY. I think that I am entitled to that.
    Mr. BACHUS.——that he doesn't agree with Mrs. Bair's assessment of the complaint-handling capacity.
    Mrs. KELLY. I think it will come as a bit of a stunning comment to the American Council of Life Insurers and the University of Massachusetts that you think that Ms. Bair is inaccurate in her numbers, which is why I actually wanted numbers from you and I would hope that you get back to the Committee and give us numbers to—if you think these are in error, give us some numbers that are not in error so that we can know what the facts are.
    Mr. HAWKE. I am not disputing the accuracy of the numbers. She got those numbers from us. What I am disputing is the conclusions that she draw gratuitously from the numbers. I think the numbers prove quite the contrary, that ours is a very efficient operation and that when you look at the number of complaints per FTE at the other agencies and look at what that implies as to the number of complaints that they can handle during the course of the year, it averages out to about one complaint every 2 days. And I don't think that evidences a great deal of efficiency in the operation. Ours averages out about one to four and a half complaints a day, and I think that is because we run a very efficient operation.
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    Mrs. KELLY. Perhaps you could give us some numbers then. Thank you.
    Mr. BACHUS. Thank you.
    Ms. Waters?
    Ms. WATERS. Thank you very much.
    First of all, let me thank you for being here, Mr. Hawke. I appreciate the work you have done over the years particularly on payday loans and the effort that you have put forward, and that is very important to me. I am sitting here listening very carefully to my colleagues, and I think you are in a little trouble here. And I am wondering why you are pursuing this at all.
    I am curious about a few things. You have cited your reasons for believing that you have the authority and it is based in the Constitution. You have explained to us you have all of these enforcement resources—1,700 examiners, 300 people on-site permanently and others. I think another group of 100 are involved with consumer protection and consumer complaints.
    I want to know then, given all of that, how many national banks or operating subsidiaries have been cited by the OCC for engaging in abusive real estate lending practices? And I am asking that question because when we take a look at the web site, the OCC's web site lists only five enforcement actions taken against national banks for abusive consumer practices since 2000. Three of these actions involve credit cards, and two focus on small short-term lending. In contrast, State banking supervisors and attorneys general's offices brought thousands of consumer actions during this period. So how do you justify given all the resources, the authority this preemption that you are insisting makes good sense?
    Mr. HAWKE. Well, I don't know what the thousands of actions are that the State AGs brought. We have seen very little evidence of State AGs bringing actions against national banks, largely because Federal law says that they don't have the authority to do that. I will have to get back to you on the number of actions against operating subsidiaries.
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    I think it is important to recognize that when we examine our banks we really don't distinguish between the bank and the operating subsidiaries in terms of the activities that they engage in. If a bank is engaged in the mortgage banking business and they carry it out in an operating subsidiary, we examine that as a unified operation. So if we take action, we may take action against the bank or we may take it against the bank and its subsidiary as well. But I——
    Ms. WATERS. I am trying to find out where you have been effective or how you have been effective in this area. For example, I remember with Wells Fargo out in California there was a case brought by the State of California because Wells Fargo was charging interest before they registered the loans or something like that. And that was not an action that you discovered; that was an action by our State. And then I am looking at this Wachovia case here. That is an action by, I think, Connecticut and maybe one other State. So what are you doing? I mean——
    Mr. HAWKE. The Wells Fargo action involved a statute that does not apply to national banks and was so held by a Federal court in California. The Connecticut action raises a similar question; that is, whether an operating subsidiary of a national bank is subject to the same preemption rules as the parent bank itself. That was involved in the California case, it is involved in the Connecticut case which is a pending decision now. There are two decisions in California that have upheld our position on the inapplicability of that law that you referenced to national banks.
    Ms. WATERS. That was brought to your attention by California, though; is that right?
    Mr. HAWKE. It was brought to our attention I believe by Wells Fargo, because the issue arose as to whether that statute could constitutionally apply to a national bank. This is one of the reasons that we felt that it was important to codify these preemption principles in a regulation, because there is a great deal of uncertainty created by laws of exactly that sort, whether it applies to national banks or not. And in that case, there were two cases out there in which the court said that that law did not apply to national banks or their operating subsidiaries.
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    Ms. WATERS. Well, I guess what I am really getting at—and I understand how you can get involved with the question of who has the authority at some point. I guess what I am getting at is who is initiating the complaint with these kinds of cases? You say Wells Fargo. They may have come to you to ask about the authority, but I believe that it is the State of California to say, ''Something's wrong here. You shouldn't be doing this.''
    Mr. HAWKE. The Corporation Commissioner raised that issue——
    Ms. WATERS. Yes, of course.
    Mr. HAWKE.——with the Wells Fargo Home Mortgage Company, and that raised the preemption question, whether that law applied. And it was determined that that law didn't apply, so there was no enforcement action taken in that case.
    Ms. WATERS. The question remains, in my mind, whether or not—well, I am convinced that the State should not be preempted. I don't think you can do better than North Carolina, for example. I mean I wish every State could adopt the anti-predatory laws that North Carolina has adopted, and I think you would agree that there is nothing in your regs that could do any better than North Carolina. Wouldn't you agree to that?
    Mr. HAWKE. No, I don't agree, with great respect, Mrs. Waters, because these laws and the North Carolina law is one example of this that have had adverse unintended consequences that I think all Members of Congress should be concerned about. They have resulted in and threatened further constriction of the availability of subprime credit—good, non-predatory subprime credit.
    The subprime credit markets have expanded in recent years. They have been one of the reasons that home ownership in the United States is now at a record high level. Credit markets have opened up to people particularly in minorities that have not had access to credit before because of the advances in the subprime credit market. And what has happened with some of these predatory lending laws is that they have constricted the availability of subprime credit. When the New Jersey law was about to go into effect last November there was a story in the American Banker that said that subprime lenders plan to reduce their involvement in the subprime markets in New Jersey by 70 percent because of the New Jersey anti-predatory lending laws.
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    Ms. WATERS. Well, let me just say this, Mr. Hawke. We don't have time to debate it, my time is up, but I can tell you even though you give high praise to the subprime market, and some are very good, some bankers are very good at this, but we have discovered that a lot of minorities who have gotten these subprime loans were eligible for prime loans anyway and should have been getting them anyway. I mean that is one of the things that is come out of this. And then, of course, there is the whole story of the foreclosures, and we don't have time to debate it at this time.
    I guess my concluding remarks are that I think you are in trouble on this issue, and no matter what happens in the court, the Congress of the United States can still legislate and then whoever would like will try and rule it unconstitutional, but I think that is where we are headed.
    Mr. HAWKE. I should just add, Ms. Waters that the question you raise about switching people to higher rate credit where they are eligible for prime credit is one of the issues that we addressed in our predatory lending guidance. That is something that we are concerned about, and we have admonished banks not to engage in that practice. And if we find that that is occurring, we will go after them.
    Ms. WATERS. We will see.
    Mr. BACHUS. Thank you. Thank you, Ms. Waters. It goes from one side to the other. I am just going to take about 30 seconds before I recognize Congressman Miller, though. But I will say this, not in the form of a question, but I think the best news that I have heard this morning, Comptroller Hawke, is that you don't have any evidence that any of the national banks are engaged in predatory lending practices. I think I am correct if that is what I heard.
    Mr. HAWKE. That is what all the State attorneys general say.
    Mr. BACHUS. That is right. And I have heard no evidence to the contrary myself, nor have I heard any today. I have not heard any members accuse any of the banks in engaging in those standards.
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    And I will say just for the record that my belief is that the preemption regulations issued in final form by the OCC in February contain strong standards for national banks to follow in avoiding predatory or abusive lending practices. Number one, there doesn't appear to be any, among the national banks, any predatory lending practices. That may prove to be wrong or they may start, but I think what you are telling this committee is that you have in place what you feel is sufficient assets and sufficient personnel to handle complaints and to process complaints and investigate them.
    Mr. HAWKE. That is correct, Mr. Chairman. And, in addition, we have put out very strong, extensive admonitions to our banks, not only about avoiding getting involved in predatory lending but having policies to make sure—and controls to make sure that they don't purchase predatory loans that are originated by others. And there is no other banking agency that has done anything remotely comparable to that guidance.
    Mr. BACHUS. Fine. Thank you.
    Mr. Miller?
    Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Hawke. You just said that what you have done has led to a diminution of availability of credit and subprime marketing to lower income borrowers. There was one study, I think, in Colorado that said that there was a diminished volume, but then there was a later study by the Kenan-Flagler School of Business, University of North Carolina that said the only diminution in volume was of the bad loans, the ones that were being flipped repeatedly and that in fact, according to that academic study, that there was only a reduction of loans with predatory terms and that there was no restriction of access or increase in the cost of loans to borrowers with blemished credit.
    Morgan Stanley, fairly reputable outfit, concluded a survey in 2001 that I believe was published, that the tougher predatory lending laws had not reduced subprime residential lending volumes in any significant way. Inside B&C Lending, which is apparently a leading trade journal, found that top North Carolina subprime lenders have continued to offer a wide variety, full array of products for borrowers in North Carolina with little or no variation in rate compared to other States. North Carolina commissioner of banks, Joseph A. Smith, said that they had not had a single complaint about the lack of available credit because of this law. The North Carolina bankers supported this law.
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    What is your authority for saying that North Carolina law had led to a diminished availability for credit to subprime borrowers?
    Mr. HAWKE. Well, there are several studies that deal with the effect of the North Carolina predatory lending law, and there is some debate among the academics about the——
    Mr. MILLER OF NORTH CAROLINA. Can you get those to me?
    Mr. HAWKE. I would be happy to.
    Mr. MILLER OF NORTH CAROLINA. Please, because I haven't seen them. I have been looking.
    Mr. HAWKE. I would be happy to provide them. I think they are referred to in my written testimony, but subprime lending went down in North Carolina after the advent of the law compared to——
    Mr. MILLER OF NORTH CAROLINA. Well, have you examined the North Carolina School of Business study? Have you examined that? Has anyone in your office examined that?
    Mr. HAWKE. The so-called Stegman study. Yes, we have examined that very carefully. That has been the subject of a lot of criticism by third parties who have no ax to grind that it was methodologically flawed, because it dealt with securitizations and it didn't look at loan originations. I would be happy to give you——
    Mr. MILLER OF NORTH CAROLINA. Please give me those studies. Please give me those studies. I would love to see it, because there seems to be a heavy volume on the one side saying that the law has worked, it has produced predatory terms but not the availability of credit, but in fact home ownership purchase money loans in the subprime market have increased. That is obviously the kind of money we want to make available. That is increased. And the only thing that is gone down is the volume of loans because of flipping and loans that have predatory terms.
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    There have been a lot of questions and a lot of testimony today about your resources for compliance and enforcement. Ms. Waters referred to thousands at the State level. The information I have got, and I know this doesn't apply to national banks, but the State bank supervisory agencies in 2003 initiated 20,332 investigations in response to consumer complaints, which resulted in 4,035 enforcement actions. How many enforcement actions did the OCC bring in 2003?
    Mr. HAWKE. I will have to furnish that information to you, but in 2003 we did process 70,000 complaints from consumers, most of which got resolved without enforcement action because our Customer Assistance Group is very effective in getting remedies for individuals who raise questions. They solve every day thousands of problems that customers have raised with their banks.
    Mr. MILLER OF NORTH CAROLINA. Okay. Please, if you could get me the number of enforcement actions, that would be very helpful as well.
    And you also said you had ample rulemaking authority under section 5 of the FTC Act.
    Mr. HAWKE. No, we don't have rulemaking authority under the——
    Mr. MILLER OF NORTH CAROLINA. But you can apply that.
    Mr. HAWKE. We can apply it on a case-by-case basis. The Federal Reserve has the exclusive rulemaking authority.
    Mr. MILLER OF NORTH CAROLINA. All right. And my understanding is in the last 30 years since they have had that rulemaking authority that they have promulgated two rules pursuant to that authority?
    Mr. HAWKE. Right. That is exactly why we moved forward to use our authority to issue cease and desist orders in individual cases without the benefit of a rule, and we have probably had—since we asserted that authority, we have probably had 10 or 12 cases where we have used that very effectively.
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    Mr. MILLER OF NORTH CAROLINA. Well, let me ask you about some specific practices that I know are happening right now and whether you regard those as being violations of—prohibitional unfair and deceptive trade practices. Single premium credit insurance is non-refundable.
    Mr. HAWKE. I think you can't simply take a practice out of context and say without benefit of the rule that——
    Mr. MILLER OF NORTH CAROLINA. So I am getting a firm maybe?
    Mr. HAWKE.——it is automatically unfair and deceptive.
    Mr. MILLER OF NORTH CAROLINA. All right. Moving on, we heard testimony in this room, 2 subcommittees of this committee, 2 days ago of lower income borrowers coming away from the closing knowing what they are getting, how much money they are getting at closing, knowing how much money they are paying a month but finding out sometime later that the page after page after page of legally gobbledy-gook amounted to something like $20,000 or $30,000 in points and fees built into the loan. And they have discovered that the equity in their home, their life savings when they tried to sell their home or when their children did when they died that their equity was largely gone, their life savings was largely gone. They didn't even know that it happened. Are you now pursuing any kind of advisory to prevent that from happening? Are you encouraging any rulemaking on that point? Do you think existing law prohibits it? What are you doing about it?
    Mr. HAWKE. In our advisory on predatory lending, we identified a number of practices that frequently accompany predatory lending activities, and we told our banks that if we found any evidence of it in the banks, we would come after them with remedial orders and restitution orders.
    Mr. BACHUS. Okay. Thank you.
    Comptroller Hawke, I am concerned that you have been here since quarter after 10, and that is a mighty long time for you to be in the chair. Mr. Israel and Mr. Gutierrez both want either 5 minutes or whatever. We have been going over. Do you——
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    Mr. HAWKE. I am fine.
    Mr. BACHUS. You are fine. Okay. All right.
    Mr. Israel?
    Mr. ISRAEL. Thank you, Mr. Chairman, and thank you, Mr. Hawke, for hanging in for as long as you have. I do have a question for you. You dealt with it in a limited way prior. But before that I just want to clarify one important point. I was going to make this point in an opening statement but in the interest of the Committee's time, I deferred.
    As you know, this is the only time that the full committee has met to address this issue, and during consideration of the budget views and estimates we were asked to vote on an amendment that questioned the OCC's ability to implement this rule under your budget. I supported that amendment because I am a blue dog and I believe in fiscal responsibility and budget accountability, and I believe that we have to make the budget process and your budget process as accountable as possible.
    But I don't want anyone to interpret my vote on that amendment as opposition to the rule itself. I believe that there is a very strong case to be made that these regulations will help preserve the dual banking system. And without Federal preemption national banks would be subject to State and local laws and the distinctions between State and national banks clearly would disappear. And that was not Congress' intent in establishing Federal banking charters and a Federal regulator, which leads me to my question.
    I have listened carefully to opponents of this rule as they have argued that it will in fact limit the effectiveness of State laws and consumer protections. I believe that I am a very strong advocate for consumers in my district and around the country. I also believe that different levels of government have different resources and capacities and capabilities to enforce consumer rules and regulations that offer the most vigorous and expansive protection of consumers. Everybody has their own tools and toolboxes and collectively that is the strongest mechanism for enforcing consumer protection.
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    Some have said that you do not have enough tools in your toolbox, that your toolbox just isn't big enough to protect consumers and enforce consumer protection laws and that it is impossible for the OCC and State regulators to work in conjunction with each other. You have dealt with that several, maybe hours ago, but you have dealt with that prior in this hearing.
    I just want to ask you for the record to reassure me, as someone who believes strongly in consumer protection, that you have the numbers and the qualifications and sufficient resources to work with State regulators and to enforce the law and protect our consumers.
    Mr. HAWKE. Absolutely. I have an absolutely strong conviction that we do. I believe that our resources are very significant. We have a very rigorous budget process, and our budgets have been well-balanced. We have got all the resources we need to put into this. The issue is, I think, is how we best cooperate and coordinate with State officials so that we are not competing to see who can get to the court first on these issues but that we refer matters back and forth.
    We have the ability with bank examiners—bank examiners have a special relationship with banks, and when a bank examiner comes into a bank and says, ''I want you to fix something,'' they get—by and large, they get very quick responses. And it is a lot more effective for us to use the examination process to cure some of these problems than to have somebody go into court and initiate a proceeding that is going to drag on for years at great expense to everybody.
    So if we could find a modus operandi where if Attorney General Spitzer has a complaint, for example, against one of our banks or a subsidiary of our bank, if he would let us know about it instead of filing a lawsuit, we could get the matter fixed, as we did in the case that is presently pending. I think cooperation is the best way to achieve what we all want for the protection of consumers.
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    Mr. ISRAEL. OCC currently has how many employees?
    Mr. HAWKE. We have got about 2,800 employees.
    Mr. ISRAEL. How many are bank examiners?
    Mr. HAWKE. Seventeen hundred are field examiners. We have another couple hundred who are in management positions.
    Mr. ISRAEL. Thank you, Mr. Hawke.
    And I yield back the balance of my time, Mr. Chairman.
    Mr. BACHUS. Thank you, Mr. Israel.
    Mr. Gutierrez?
    Mr. GUTIERREZ. Thank you very much, Mr. Hawke, for being with us here this morning. I guess I just want to go over a few things and then, once again, implore you and your good offices to sit down with everyone and work this stuff out, because I just want to make it clear and put it on the record that you cite your authority as being 140 years old, going back to the Civil War and the National Bank Act. And as I shared with you in my office, if that were true, then you would be guaranteeing the money that the Mint today produces as really a one dollar bill, a five dollar bill. You no longer do that, nor do you have that authority. The Mint has that authority.
    And I guess I would be writing to you and your examiners on April 15 because you would have the authority under that law to collect my taxes. But I don't deal with you or your bank examiners, although I might like that to be the case that I would be audited. I think you would probably be a fair arbiter of what my taxes would be.
    And I mean it would be so sensational, Mr. Chairman, Mr. Bachus, that if you were representing Alabama, citing the Bank Authority Act, you would be calling President Jefferson Davis and I would be calling President Lincoln. That is how far back this goes in terms of what you are citing. Obviously——
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    Mr. BACHUS. I don't think we had telephones back then.
    Mr. GUTIERREZ. I am sorry.
    Mr. BACHUS. I don't think we had telephones back then.
    Mr. GUTIERREZ. You would be riding on a horse and so would I to call our respective presidents of this country.
    So I think that is pretty old precedent. Things have changed since then, and the authorities you had and that you cite under that act have changed dramatically. Well, I don't know that I would pay my taxes to you under that legislation nor did the Federal Reserve banks and board exist at that time. Things have changed and our Federal banking system has changed since then.
    And so we can argue and debate the merits of one thing or another, but there is a quote from the Wall Street Journal, which Mr. Frank has put in the record, that says, it is a quote of you, ''It is one of the advantages of a national charter, and I am not the least bit ashamed to promote it.'' So I know you promote national banks. I guess as a former representative of a local where we think we do things well, that is at the State level, whether it is Illinois or Georgia or North Carolina, we think we do things well.
    Can't we not—because I believe that the Congress has shared with you, and many congressmen from both sides of the aisle have shared with you this morning and on various other occasions that we disagree. So there are a couple of options when you have a disagreement, right? One is that Congress can take actions, which you have said, ''Please go ahead.''
    But I think that reasonable people—because I want to say this for the record: I think what the OCC does is a great job. We are not here to say you are not doing a great job. But I think there are other institutions that can help and that States now have abilities to help the consumers. It is not an either-or. Maybe it is a plus-plus situation. You know when they used to say English as the official language, I said, ''No, English-plus. Let's learn French and Spanish and every other language.''
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    And in this case, it is kind of like the OCC-plus, and if we could work out among ourselves in a deliberative, conscientious manner, then there isn't the need for hearing, we can all go about what we need to do, and I think you would be strengthened by having the support of both sides of the aisle, whether it is in the Senate or in the House, to do the job that I believe you want to do, which is to regulate and keep the safety and soundness of our national banks and hear from us about our consumer issues.
    Maybe if Attorney General—I am just thinking—Attorney General gets a complaint, shares it with you, 30 days later unresolved, he pursues it. I don't know how we do this, but I am sure we can work out rules in which you can preserve the integrity of the institution that you were nominated and confirmed to protect, and we can do our jobs in terms of helping our States and our consumers be better served. That is my point.
    Mr. HAWKE. Mr. Gutierrez, I completely agree with the importance of coordination and cooperation. We strongly believe I that. The table that I passed out earlier shows that de facto is an enormous clearing mechanism that is working every day. Complaints that are received in our Customer Assistance Group if they don't belong to us, they get referred back to the right authority. Complaints that go to the States are referred to us. Last year, we had 6,500 complaints referred by State authorities to us. We think that we can work very effectively together.
    It is true things have changed in 140 years, but one thing that hasn't changed is the constitutional principle that was first announced by the Supreme Court in 1819, which is that the States do not have the constitutional authority to restrict the powers that Congress has granted to Federally created entities. Congress has the power to change that——
    Mr. GUTIERREZ. I understand that, but I think there is—again, and we have had this discussion before, we can argue, right, about what Congress said and didn't say and so Congress can then say, ''We disagree with Mr. Hawke, so, therefore, we are going to legislate this way.'' That could give this Congress work that maybe some feel it should have, but I think that among reasonable people—because I want to make it absolutely clear: I have stated that I think that what the OCC does is wonderful. I don't have problems with my nationally chartered banks. In my community, most of them they are good, honorable, hardworking people that go out every day and proactively search for lending products for those underserved communities. So I will say that in terms of the banking community. This is not a fight about the banking community. This is a fight about who is going to do that.
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    So all I would say is I will write a letter to the Attorney General. I will say, ''Please, all 50 States, and to all the 50 States, all the bank examiners in those 50 States, please tell me where the OCC preemption on this issue affects consumers.'' And we will start that as a point at which your staff, our staff, I will be involved, others can get involved to resolve this. You win, States win, we resolve the issue, and we move forward. That is all I am trying to do here today.
    Mr. HAWKE. If we can provide more effective protections for consumers, we are eager to pursue that course. And I think the best way to do so is by continuing to coordinate and exchange information with the State law enforcement authorities.
    As I said before, a year ago we proposed a memorandum of understanding that would facilitate exactly what you are talking about, and so far we have had only one response to it. The State of Maine has agreed to it. Nobody else has even come back with comments on it. So we are eager to find a modus operandi that will make sure that we are all informed about what is going on in the banking system and that we are taking steps to protect consumers most effectively within our respective jurisdictions.
    We have very awesome powers, and when we send bank examiners into a bank we can get results. We can fix problems before they become systemic. We can get nationwide remedies if we find systemic problems. I think we far better enforcement barriers than our colleagues at the State level in respect of dealing with banks.
    Mr. BACHUS. Thank you.
    Comptroller Hawke, just following up, and I am not going to ask you questions, but one thing I would be interested in is do most consumers, most homeowners know about the complaint resolution system? I mean is that information prominently displayed in——
    Mr. HAWKE. It is. And, Mr. Bachus, I think the best evidence of that is the fact that we get 70,000 calls a year. Many consumer groups post our 800 number on their web sites. The number gets around, because we get 14,000 to 15,000 complaints a year that don't even belong to us, and we farm those out back to the responsible agencies. So people find their way.
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    And one of the things that we can do with better coordination with the States is to make sure that if there is any question about where a complaint should go that we take steps to make sure that it gets to the right place.
    Mr. BACHUS. Thank you. Let me ask one final question. One thing I want to do just for the record is you stated several times in this hearing room and other venues that you are very concerned about the state of Basel II, the negotiations and the complexity of those. I am going to submit some written questions to you concerning that in the interest of time, but I do want to end with this question. Comptroller, we have heard from some industries but in particular the check cashing industry. The banks have dropped them as customers as a whole industry. They just came in and said, ''We are not going to have check cashers as customers anymore,'' even though there were no individual problems with individual check cashers. And they cite an OCC policy that they need more scrutiny than other businesses. And I think I have talked to you about this, and I think that they may be at a higher risk for money laundering, at least that is one of the things that is offered.
    And my question to you is, and I have looked at the guidelines on the high risk and what is—and attorneys, car dealers, jewelry stores are all considered by our government as in that same category. But I have not heard from any car dealerships, I have not heard from any attorneys, I have not heard from any jewelers that any of their businesses have been dropped by banks. And I am concerned that there is discrimination or unreasonable interpretation of those guidelines, maybe by individual examiners. Would you like to comment on that?
    Mr. HAWKE. I can't say that I know for sure, Mr. Chairman, exactly what the complaints are about the check cashers. I know that when I was at the Treasury Department there was an issue about the linkages between check cashers and banks with respect to direct deposit.
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    Mr. BACHUS. Yes. That is a different issue, I think.
    Mr. HAWKE. The issue here, I suspect, relates more to money laundering, and I would say that we have done nothing that should have resulted in banks dropping check cashers as a class, and I think that is one of the things that has to be looked at on a case-by-case basis.
    Mr. BACHUS. And I would like you to be aware of that, because these are the legitimate licensed businesses. And I might disagree with certain type of businesses, but I think they have the right to have national banks and to—so I would appreciate you looking into that.
    Let me close by saying that you have been subject to a rigorous examination here this morning, and I personally think you have acquitted yourself very well. You have been under a long examination, and I think your answers have been candid, I think they have been open, and I very much appreciate your testimony here this morning. And although I may not be the one that should be offering an apology, I think on at least one or two occasions you were treated somewhat shabbily by members, and I apologize for that.
    Mr. HAWKE. Mr. Chairman, I appreciate the interest and involvement of this committee. These are important issues and there are no easy answers, but I welcome the opportunity to try to clarify our view of the implications of what we did, because I think there have been some significant misstatements and exaggerations about the impact of our regulations.
    Mr. BACHUS. All right. And I think that you were vigorous in pointing that out. And I think you have maintained dignity in a high degree of professionalism, and I thank you for that.
    Mr. HAWKE. Thank you, Mr. Chairman.
    Mr. BACHUS. With that, our committee is dismissed.
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    [Whereupon, at 1:07 p.m., the Committee was adjourned.]