PANEL I OF A HEARING OF THE HOUSE FINANCIAL SERVICES COMMITTEE
SUBJECT: ENFORCEMENT OF CONSUMER AND INVESTOR PROTECTION LAWS
CHAIRED BY: REP. BARNEY FRANK (D-MA) PANEL 1
WITNESSES: JOHN DUGAN, OFFICE OF THE COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE TREASURY; SCOTT POLAKOFF, OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY; RITA GLAVIN, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE; JOHN PISTOLE, FEDERAL BUREAU OF INVESTIGATIONS, DEPARTMENT OF JUSTICE; ELIZABETH DUKE, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM; ELISSE WALTER, SECURITIES AND EXCHANGE COMMISSION; MARTIN GRUENBERG, FEDERAL DEPOSIT INSURANCE CORPORATION
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REP. FRANK: The hearing will come to order. I apologize for the delay. This has been a somewhat busier week than usual. And let me begin by saying, when I asked that this hearing be on a Friday -- I didn't ask; I decided -- I was told there would be votes. And I understand obviously there are members who left town.
I will confess, coming and seeing a manageable number of members, rather than 72, which is our quota, does give me some encouragement. Because I think we may be able to not be here all day. But I do want to explain that it's an important hearing.
I'm not trying to slight it obviously by having it on a day when there were no votes. We were told there were going to be votes. And we do have a very busy schedule, which we are trying to accommodate.
I also want to express my appreciation to my colleagues on the Judiciary Committee. Because we have before us officials who are under the jurisdiction of the Judiciary Committee.
One of the things I've worked very hard on, with my colleagues, is to avoid jurisdictional disputes. We've tried to be cooperative. I had spoken to Mr. Conyers. I know he had spoken to his Republican counterpart.
And we have with us the gentleman from Virginia, Mr. Scott, the gentleman from Texas, Mr. Gohmert, who are the appropriate chair and ranking member of the subcommittee of the Judiciary. So to that extent, this is a joint hearing.
We do invite our colleague Mr. Cummings of Maryland, who also has had a great interest in this, from the Oversight and Reform Committee. So it is a joint effort to that extent.
And it's important, because one of the questions we're going to be asking, of the assembled panel, is whether going forward there is any legislative authority that you would like enhanced.
We, if that was the case, in the Financial Services Committee, would have jurisdiction over some of that. But the Judiciary Committee would have jurisdiction over it.
Anything that is criminal must go to the Judiciary Committee, plus staffing or other requirements for recommendations, from the people in the Justice Department.
And given the rules about personnel and salaries would have to come up with the Government Reform Committee; has jurisdiction. Because one of the things we've been asked, in the past, is in some cases frankly to make some special rules, so some of these agencies could acquire the degree of expertise they would need in dealing with this.
So that explains it all procedurally.
I am very grateful to the witnesses. It is a panel that is fully representative of the capacity of the federal government to enforce the various laws, both civil and criminal that try to keep our financial system honest in the literal sense. It is a -- you can start my five minutes now. I started it -- I used up 10 seconds.
There are two reasons for this hearing, candidly. One is the substance of the subject. We do want to know what, if anything, we -- the Congress, the relevant committees taking the lead -- can do to enhance your ability to protect the public, which is what you do. I mean, there are -- there are agencies here that have dual functions. You'll have general functions for keeping the market going, but every one of you has some law enforcement activity as well, both civil and criminal. And so it's important for us to know what, going forward, we can do to help you.
And I want to make this very clear now. I know there's OMB and all those other people -- I am asking you on behalf of the Financial Services Committee and, I believe, the Judiciary Committee -- we are directing you to volunteer to us -- not to volunteer, but to respond, if you need more resources. This is not a case of you being accused of coming here behind OMB's back. We insist on knowing what your honest assessment is of your resource needs, because we cannot have a situation where the public is being told that we don't have enough people to do this.
We've had efforts before on a bipartisan basis out of this committee. We've talked to Judiciary to try and get more resources, for instance, to the Justice Department to deal with mortgage fraud. And mortgage fraud is obviously one of the issues that we're talking about.
The second part of that, and mortgage fraud gets me into it, is there is in America today a justifiable level of anger at the fact that the great majority of Americans are suffering economically because of the mistakes of a relatively small number of people and of a system that was inadequate to the task. Some of those problems, as I say, resulted from an inadequate system. We cannot prosecute people for breaking rules when the rules didn't exist. And part of what we have to do is to think about what rules we need to have going forward, and you should feel free to tell us about those as well.
But it is also likely that there are people who violated the rules. And if we are to sustain the capacity to govern effectively, if we are to provide the resources that are needed to deal with the current situation, we have to satisfy the American public that everything is being done that can be done legitimately to hold accountable the people who caused this problem.
And so it is important for people to know that to the extent there were crimes committed -- and there almost -- there certainly were crimes committed, if we -- as we hear -- that there will be prosecutions, if these are possible to achieve. And we will have a second panel with state attorneys general who we understand have a large part of the criminal jurisdiction.
There are also civil recoveries that can be made. There are debarments that can be issued.
A great deal collectively can be done to protect the public. And it is important to do that, because if we don't convince the American public that this is being done effectively their response will be, I believe, one that will shut down some of these efforts. That might be paradoxical, but it will -- it will be there.
And then of course we do want to make sure that, going forward, we are better able to protect our financial system from the kind of action and inaction that brought us to where we are today.
So this hearing is very important. Just to summarize, we want you to tell us -- I -- no agency represented here today should go out of this room and be able to say, "Well, the problem is they didn't give us enough resources" or "We need this change in the law," unless you've told us that and given us a chance to respond.
I'll give you one example: We had a hearing with the FHA in January, still under the previous administration, about their role in reducing -- in issuing mortgages of the sort that wouldn't lead to the subprime crisis. What evolved from that hearing was that they did not have sufficient power to debar past bad actors. We elicited that in testimony. My colleague from California, Ms. Waters, my colleague Ms. Speier -- we elicited that testimony. In the bill that the House passed a couple weeks ago, we gave the FHA that authority. That's an example of the kind of things we all came to do.
And let me say, the last thing is I am -- we're not asking you for names. We are not the prosecutors. This is not an appropriate forum in which individuals should be attacked. We are interested in your plans for going forward and what you -- what you intend to do going backward, that is, what you intend to do to prosecute and recover funds where we can, what you need to make sure you do the best possible job going forward.
This is not a hearing in which, as I said, we want you to name names. That would not be an appropriate legislative function. And with that, let me call on the gentleman from Texas, Mr. Gohmert, for an opening statement.
REP. LOUIE GOHMERT (R-TX): Thank you, Mr. Chairman. I appreciate being included in this hearing. And several former lives ago, I helped -- was hired as outside counsel at cleanups in banking and S&L messes.
And so I have a real interest in this.
But those who would seek to commit mortgage fraud often prey on the elderly, those who are -- other members of society that are most vulnerable. And obviously, they shouldn't be allowed to defraud the American public. Honest Americans must have the confidence to know they can enter into a financial deal and the person on the other side won't be able to cheat them without consequences.
Unfortunately, reporting of mortgage fraud on the Suspicious Activity Reports filed with the Treasury's Financial Crimes Enforcement Network shot up by 36 percent from 2007 to 2008, with 63,173 reported last year. The problem with mortgage fraud is getting worse. And federal and state entities that police these activities obviously must have the resources and tools to deal with them.
One of the things that may surprise some folks here that has brought together the ACLU, the Heritage Foundation and, maybe more surprisingly, Mr. Bobby Scott and me all on the same side is that we've often been overcriminalizing way too many activities. And so one of the things some of us have wanted to start taking a look at is if there are ways to stop or slow bad activity by other means. If there's not criminal intent, if there's not mens rea, then would a civil fine or some kind of dollar penalty address the issue?
You look at mortgage companies who intended to get -- to put people in mortgages so it didn't matter if they put people in homes they couldn't afford; it didn't matter if people put down fraudulent information in order to get a mortgage, because they intended to turn around and immediately sell those, package them into a neat little security package and sell them without recourse. Well, maybe if there was recourse civilly you would address this issue and you wouldn't see fraud skyrocketing, because the people would have a real incentive; like Countrywide would have real incentive to make sure that people did not put down fraudulent information, they didn't get in homes they couldn't afford, because they didn't want people coming back to them for the costs of this thing.
But I'm glad to hear the FBI's increased the number of special agents specifically devoted to mortgage fraud nationally by half over the last year from 120 to 186. And I'm looking forward to hearing from the witnesses and learning about how this all affects them and their suggestions.
But my time as a lawyer, as a prosecutor, as a judge, chief justice, congressman has taught me that crises such as the scourge of mortgage fraud can lead to overreaction in the form of new criminal laws that potentially cover people who had no guilty intent.
For example, in this area they were greedy, but they didn't intend to commit a crime.
But one of our problems is this overreaction: Let's criminalize some conduct; let's put people in prison. We've heard some terrible anecdotal evidence of some federal agencies who couldn't wait to get their own SWAT team with the red lights and the ability to slam people to the ground and handcuff them in public because, you know, there apparently is a pent-up desire to do that among some people and, wow, you can do it and get paid for it at the same time.
So we have to be careful about spreading that ability to do that among people who should not have that. But perhaps we could hear thoughts on whether to outlaw combining mortgages into securities. I know I've got friends who think that -- that I shouldn't talk like that, but when you lump mortgages into a security, and you don't examine the value of each mortgage and whether the payments have been made on time, or the property underlying the mortgage is keeping its value, then you're going to end up needing to buy some insurance. Or we'll call it a credit swap, and that way, we don't have to hold money in reserve in the event the insurable event ever occurs.
So there are a number of things we need to look at. If greed's the problem but there's no criminal intent, let's address it with a proportional monetary cost to the wrongdoer, and pop them right where they hurt the worst, in the pocketbook. And if there is criminal intent, then let's go after them. I may be one of the few people in this room that has watched his hand sign an order to have somebody taken and -- and the death penalty administered. I'm serious about crime. But I do want to make sure there's criminal intent. Otherwise, if it's just greed, let's hit them in the pocketbook, where they really hurt.
Thank you, Mr. Chairman.
REP. FRANK: If I could take a second, it's to express agreement with him. That's why I did stress both civil and criminal. And that's why we have people here from both the civil and criminal jurisdictions. And that's why we are working with Judiciary, because we want -- we don't want this to be narrowly done. And the gentleman is absolutely right, and I think speaks for a great majority of both committees.
REP. GOHMERT: And that's why I do appreciate this hearing and being included. Thank you, Mr. Chairman.
REP. FRANK: The gentleman from Virginia, who is the chair of the subcommittee on the Judiciary Committee.
REP. ROBERT SCOTT (D-VA): Thank you. Thank you, Mr. Chairman, for inviting the Judiciary Committee to participate in this hearing on Federal and State Enforcement of Financial Consumer and Investor Protection Laws. As a member of the House Judiciary Committee, and chair of the subcommittee overseeing crime issues, we're exploring ways to hold accountable unscrupulous mortgage brokers and Wall Street executives who are an integral part of the problem.
With the Department of Justice and FBI witnesses, I hope this hearing will give more insight in what is being done and what is needed to be done, and particularly, what is needed in the way of resources to investigate those suspected of serious criminal activity which contributed to the crisis, and what needs to be done to make sure they're prosecuted to the full extent of the law.
The Financial Services Committee has been relentless in investigating and uncovering the causes of financial and of the mortgage crisis. As banks and private mortgage companies relaxed their standards for loans, approving riskier mortgages with less scrutiny, they created an environment that invited fraud.
In the last three years alone, the number of criminal mortgage fraud investigations opened, by the FBI, has more than doubled. The FBI has testified before the Senate that it has currently 1,800 mortgage fraud investigations that are open but only 240 agents specifically assigned to those cases.
In my view, it's my view that to fully protect law-abiding taxpayers from criminal conduct, it is essential that appropriate resources be dedicated to meet the challenges of investigating and prosecuting mortgage and financial fraud.
I am not persuaded that more laws are needed. But what is needed is more resources to enforce existing laws. Many in this industry knew that they were dealing with worthless paper. They had even names for the paper. They had mortgages like Ninja Loans: No Income, No Job.
When these are passed off as AAA assets, someone has committed common-law fraud. I believe that federal mail and wire fraud criminal statutes should be sufficient to address the problem. Those penalties for those violations are substantial.
Mail and wire fraud violations carry a maximum penalty of 20 years. And any mail or wire fraud that affects a financial institution increases that maximum sentence to 30 years.
It's just not mail and wire fraud that's at the disposal of federal prosecutors. The FBI itself has identified nine applicable federal criminal statutes for which this fraud -- for which those committing the fraud may be charged.
In addition to the federal criminal law, these crimes can also be aggressively prosecuted, by state and local law enforcement officials, under aggressive and very punitive state criminal law provisions as well.
So it seems that we may have enough in the way of criminal code provisions. But what we need is to make sure that we have adequate resources, to state and federal authorities, to battle fraud. And we need to ensure that the federal authorities are also coordinating their activities with local and state officials.
So Mr. Chairman, what we need to do is find out what resources law enforcement officials need, to prosecute the fraud, whether it's consumer ID theft, contracting fraud in Iraq or even mortgage fraud before us today.
I was happy to see that the 2009 omnibus appropriations act provided $10 million, to the FBI, to dedicate additional agents to the mortgage fraud investigations.
I'm also supportive of other bills that provide more resources in this area.
In conclusion, Mr. Chairman, I support more resources for the Department of Justice to assist the FBI and the states in enforcing fraud laws to recover the billions of dollars that have been lost. We also need to make sure that we have in place the prosecution and investigations to prevent these same schemes from happening in the future.
Today's hearing is an opportunity to fully discuss these issues, and I look forward to hearing the witnesses today. And I thank you again, Mr. Chairman, for your relentless action to make sure that the public is actually protected. Thank you, and I yield back.
REP. FRANK: I thank the gentleman.
The gentleman from California, Mr. Campbell, will be giving an opening statement for the Financial Services Committee. He had a conflict, which is the unavoidable fate of all of us. He is on his way. I would assume it will be all right with the members if we proceed with the testimony and if Mr. Campbell has a statement. When he arrives, he will give it.
And given the large number of witnesses, I cannot tell you how nice it is to have the witnesses outnumber the members -- (laughter) -- because we'll get some real conversation going. We will now begin with our first witness -- and I'll go down the list -- the Honorable Elizabeth Duke, who is a governor of the Board of Governors of the Federal Reserve System.
ELIZABETH A. DUKE (Governor, Board of Governors, Federal Reserve System): Thank you, Mr. Chairman.
Chairman Frank, members of the committee, I want to thank you for the opportunity to discuss the Federal Reserve Board's ongoing efforts to address and prevent mortgage-related fraud and abusive lending practices in the institutions we supervise.
While the expansion of the subprime mortgage market over the past decade increased consumers' access to credit, too many homeowners and communities are suffering today because of lax underwriting standards and other unfair and deceptive practices that resulted in unsustainable loans. The Federal Reserve is committed to improving consumer protections and ensuring responsible lending practices through each of the roles we play: as supervisor for safety and soundness, as supervisor for consumer compliance, and as rule-writer.
Let me first address the steps that Federal Reserve is taking to combat mortgage fraud. In recent years, there's been a significant increase in suspected mortgage fraud and other mortgage-related criminal activity. Federal Reserve staff regularly reviews suspicious activity reports filed by the financial institutions we supervise. In appropriate circumstances, and particularly when bank insiders may be involved, we initiate investigations, make criminal referrals, coordinate with law enforcement and other regulatory agencies, and pursue enforcement actions against individuals, including seeking prohibition orders and, in appropriate cases, civil money penalties and restitution.
We are currently pursuing numerous investigations involving insiders related to possible mortgage-related fraud, both commercial and residential. More generally, the Federal Reserve's enforcement efforts begin with the examination of its supervised institutions.
In the Federal Reserve's regular safety and soundness examinations of state member banks and bank holding companies, we evaluate their risk-management systems, financial condition, and compliance with laws and regulations.
In assessing a bank's risk management systems, examiners evaluate the adequacy of the bank's practices to identify, manage, and control the credit risk arising from the bank's mortgage lending activity. Examiners look at the bank's underwriting standards, credit administration practices, quality control processes over both its own originations and third-party originations and appraisal and collateral valuation practices.
Institutions with weaknesses are expected to take corrective actions that include improving their underwriting practices in the future. In those instances where the bank is not willing to address the problem, we have and use a full range of powerful enforcement tools to compel corrective action.
The Federal Reserve conducts regular examinations of state members banks to evaluate compliance with consumer protection laws. Each examination includes an evaluation of the bank's fair lending compliance program. Our objective is to identify compliance risk at banks before they harm consumers and to ensure that banks have appropriate controls in place to manage those risks.
When examiners identify banks with weak and ineffective compliance programs, they document the weaknesses in the examination report and take appropriate supervisory action. In addition, when examiners identify patterns or practices of lending discrimination, the Federal Reserve makes referrals to the Department of Justice as required by the Equal Credit Opportunity Act.
Furthermore, Federal Reserve consumer compliance examiners routinely participate in the review and assessment of the adequacy of large bank holding company compliance risk management programs.
In addition to our supervisory activities, in 2008 Federal Reserve Board finalized sweeping new rules for home mortgage loans to better protect consumers and facilitate responsible residential mortgage lending. The rules, which amended Regulation Z, prohibit unfair, abusive or deceptive home mortgage lending practices. Importantly, the rules apply to all mortgage lenders, not just to the depository institutions supervised by the federal banking and thrift regulators.
The rules apply to a newly defined category of higher priced mortgage loans secured by a consumer's principal dwelling. The higher priced threshold would cover all or virtually all of the subprime market. For these loans, the rules will prohibit a lender from making a loan without regard to the borrower's ability to repay the loan from income and assets other than the home's value.
In addition, lenders are prohibited from making stated-income loans and are required in each case to verify the income and assets that they rely upon to determine the borrower's repayment ability.
Again, I want to thank you for the opportunity to discuss what the Federal Reserve does to address and prevent mortgage-related fraud and abusive lending practices in the institutions we supervise.
I'd be happy to answer any questions. Thank you, Mr. Chairman.
REP. FRANK: The comptroller of the currency, John Dugan.
MR. DUGAN: Thank you, Mr. Chairman and members of the committee.
I welcome this opportunity to appear before you today to discuss the OCC's enforcement authority and how we've exercised that authority.
Recent unprecedented losses at financial firms, the mortgage crisis, and shocking examples of fraud and excess have prompted your questions about the adequacy and use of enforcement powers by federal and state authorities. The OCC vigorously applies laws and regulations to national banks through supervisory activities and enforcement actions, both -- to protect the safety and soundness of national banks and their customers.
The OCC and the other federal banking agencies have a broad range of supervisory and enforcement tools that are used to supervise banks and protect consumers, investigate and halt fraudulent activities and remove and prohibit those responsible from ever working in the banking industry again.
Unlike the Department of Justice and the FBI, however, the federal banking agencies are not criminal-law-enforcement agencies, and we do not have the authority to investigate and prosecute crimes of fraud. Rather, the federal banking agencies refer suspected criminal fraudulent acts to the Department of Justice for prosecution.
My written statement today covers the OCC's activities and perspectives on enforcement in four areas. The first is our approach to enforcement. National banks are subject to comprehensive, ongoing supervision that, when it works best, enables examiners to identify problems early and obtain early corrective action, before enforcement action is necessary. Once problems or weaknesses are identified, we expect bank management and the board of directors to correct them promptly. And because of the tremendous leverage that bank supervisors have over banks, management normally takes great pains to do so.
That's not always true, however, and in other cases the seriousness of the problem requires an enforcement response. In those circumstances, we have a range of enforcement tools at our disposal, from informal enforcement actions, such as a commitment lemmer -- letter or memorandum of understanding, to formal enforcement actions, such as a Formal Agreement, Cease and Desist Order, or Removal and Prohibition Order.
We use all of these tools, depending on the circumstances, to vigorously implement our safety-and-soundness and consumer-protection mandates, as a chart in my written statement summarizes. These include actions taken to address a wide range of issues, including capital adequacy, unfair and deceptive practices, managerial competence, mortgage fraud and many others.
The second part of my testimony describes how we have employed enforcement actions, in problem bank situations, to protect consumers and eliminate fraud. Problem banks warrant special supervisory attention. And our actions here are designed to remedy various unsafe and unsound practice and compliance violations.
The various corrective measures incorporated, into our enforcement actions, have included requiring the bank to raise capital, restrict borrowings, eliminate certain activities and even entire business lines, adopt appropriate underwriting standards and policies, to govern lending activities, limit the transfer of assets and eliminate payments of bonuses or dividends.
The third part of my statement describes how we coordinate with state and federal regulatory agencies and law enforcement agencies. As an example, when the OCC issues a remedial enforcement action, against a national bank, the Federal Reserve Board will often take a complementary action, with respect to the bank's holding company.
We also coordinate extensively with other regulatory agencies and with law enforcement authorities. The OCC has entered into similar information-sharing agreements with most state banking agencies and all 50 state insurance departments and recently with the Federal Trade Commission. And we regularly share information with the SEC. When we suspect criminal conduct, we made referrals to the Department of Justice.
Finally my statement concludes with a description of the measures we have taken to address mortgage-lending practices. Abusive lending practices, by mortgage lenders and brokers, and the current foreclosure crisis understandably have raised questions, about the role and effectiveness of bank regulators in anticipating and preventing mortgage-lending abuses. This area represents a good example of how we apply our approach to supervision and enforcement.
It is important to be clear about who did what. The OCC extensively regulates the mortgage business of national banks and their subsidiaries. And as a result of the standards applied, by the OCC, national banks originated less than 15 percent of all subprime loan mortgages.
In contrast, the vast bulk of such loans were originated by non- depository institution mortgage lenders and brokers that were not subject to our regulation. It is these lenders and brokers that have been widely recognized as the overwhelming source of abusive subprime mortgages, resulting in waves of foreclosures.
The OCC has been aggressive in combating abusive lending practices and in preventing national banks from engaging in such activities. We were the federal banking agency, first federal banking agency, to issue anti-predatory lending regulations.
And in recent years, we have issued, with the other agencies, a number of supervisory issuances covering payday loans, title loans, unfair and deceptive practices, risk associated with subprime mortgage practices and other related issues.
Although many of these statements were issued as guidance, compliance is not optional for national banks. We require it. We describe a number of enforcement actions that we have taken, in our testimony, including several that I won't go into the details here, because the details were reported there.
And thank you very much. I'll be happy to answer questions.
REP. FRANK: Next we have Commissioner Elisse Walter, a new commissioner, relatively, of the Securities and Exchange Commission.
MS. WALTER: Thank you, Mr. Chairman. And good morning to you, members of the committee and members of the Judiciary Committee.
I am one of the five commissioners of the Securities and Exchange Commission, and I am testifying here today on behalf of the commission as a whole.
I very much appreciate the opportunity to discuss our enforcement program, and more specifically our efforts to address violations of the law arising out of the current financial crisis. We are fully committed to pursuing wrongdoers and returning as much money as possible to injured investors.
The commission's enforcement program is in a critical transition period. Since joining the commission in January, our new chairman, Mary Schapiro, has been taking important steps to bolster our enforcement efforts and restore investor confidence to our markets. Among other things, she has hired a new director of enforcement, Robert Khuzami, an accomplished former federal prosecutor who is scheduled to join the agency at the end of this month. And she has begun streamlining our enforcement processes.
Today, as detailed in my written statement, I'd like to talk about the SEC's law enforcement authority and the steps we are taking to address the current crisis. As you know, the SEC is a capital markets regulator and a law enforcement agency. We are charged with civil enforcement of the federal securities laws, and our enforcement division is authorized to investigate any potential violation of these laws. We have the authority to take action against any form of fraud in connection with the purchase or sale of securities.
Our enforcement division, which numbers about 1,100, initiates investigations based on information from many sources, including referrals from within the commission itself and from other regulators, investor complaints and tips. In fiscal year 2008, the division received more than 700,000 complaints, tips and referrals.
The enforcement staff coordinates its work with other law enforcement bodies across the country and around the globe in order to leverage enforcement resources effectively.
In our actions, we seek a variety of remedies, including disgorgement of ill-gotten gains, permanent injunctive relief against violations of the law, remedial undertakings, civil penalties, revocation of registration and bars to prevent a wrongdoer from serving as an officer or director of a public company or from associating with any broker dealer or investment adviser.
Whenever possible, the commission seeks to return monies to harmed investors under the fair funds provisions of the Sarbanes-Oxley Act. Under the authority granted to us by Congress in that legislation in 2002, we have authorized approximately 220 fair funds with an estimated total value of more than $9.3 billion that has been or will be distributed to investors.
To halt an ongoing fraud or to prevent misuse of investor funds, we have the ability to seek emergency relief in court, including temporary restraining orders, preliminary injunctions, asset freezes and the appointment of a receiver to conduct operations during the case or to marshal any remaining assets for the benefit of injured investors. During this fiscal year thus far, we have already obtained 20 temporary restraining orders to halt ongoing frauds.
I'd like to take a minute to give you a few examples of our recent work to address the current crisis.
Our enforcement division has already filed nine cases involving subprime issues and has many more under active investigation. And through the collective efforts of SEC enforcement, state regulators and FINRA, the self-regulatory organization for broker dealers, over the past year, tens of thousands of auction-rate securities investors have received or will soon receive over $67 billion of liquidity. These cases involve the largest monetary settlements in the history of our agency.
Also, we are investigating the possible manipulation of the securities of six large financial issuers involved in the recent market turbulence, with particular focus on claims that credit default swaps were being used to manipulate equity prices.
We have also brought many cases involving hedge funds. As you know, hedge funds and their advisers are not required to register with us, but we still have authority to pursue fraud cases against them. The SEC has dozens of active investigations involving individuals associated with hedge funds.
Over the past two years, the commission has filed enforcement cases against the perpetrators of more than 75 Ponzi schemes, including 12 such cases since December 2008. For example, we recently filed an emergency action against Robert Alan Stanford and others, alleging a massive Ponzi scheme. At our request, the court issued a temporary restraining order, appointed a receiver and ordered an asset freeze.
Also, this week we filed a complaint alleging fraud by the accountant who purportedly audited the firm run by Bernard Madoff. A criminal fraud case was brought at the same time.
The SEC is committed to finding ways to improve, to act more quickly and efficiently. Within days after her appointment as SEC chairman, Mary Schapiro repealed the pilot project under which enforcement staff were required to seek preauthorization from the five-member commission before negotiating civil money penalties against public issuers. In addition, she streamlined the process for obtaining formal orders, and now they can be authorized by a single commissioner.
We are also working with the Center for Enterprise Modernization, a federally funded research and development center, to establish a centralized process that will more effectively identify leads for potential enforcement, as well as areas of high risk for compliance. But these steps are just the start. We're carefully examining our processes from top to bottom.
However, while our job has grown substantially, our resources have not kept pace. Our staffing levels have actually declined in the recent past and our technology must be improved.
As the sole agency charged with protecting investors, the SEC is committed to restoring the confidence needed for our marketplace to thrive.
Thank you again for the opportunity to testify, and I look forward to answering any questions you have.
REP. FRANK: Next, Martin Gruenberg, who's the vice chair of the Federal Deposit Insurance Corporation.
MR. GRUENBERG: Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to testify on behalf of the FDIC regarding enforcement of consumer- and investor-protection laws.
Earlier this month, in a speech before the National Association of Attorneys General, FDIC Chairman Bair stated that many of the current problems in the economy were caused by a widespread failure to protect consumers. She noted that it is essential that those whose actions contributed to the current crisis and who are engaging in practices harmful to consumers be held accountable and that we take steps to prohibit these practices from occurring again.
The FDIC has a strong commitment to the vigorous and effective enforcement of consumer-protection laws and other statutes under its jurisdiction. The FDIC brings a unique perspective to this issue because of the variety of functions it performs, including deposit insurer, bank supervisor and receiver for failed insured depository institutions.
Immediately following the closing of every failed institution, FDIC investigators and attorneys begin an investigation. The purpose is to determine whether the failed institution's directors; officers; and professionals, such as accountants, appraisers and brokers, were responsible for its losses, and if so, to hold them accountable.
Recent failures of insured institutions -- 3 in 2007, 25 in 2008, and 17 thus far this year -- have resulted in a substantial increase in our investigations and professional-liability workload. Since the beginning of 2007 through today, investigations of mortgage-fraud claims have increased from 0 to 4,375; investigations of professional- liability claims other than mortgage fraud have increased from 34 to 427; and mortgage-fraud lawsuits have increased from 9 to 113.
As receiver of a failed institution, the FDIC has the authority to terminate contracts upon an insured institution's failure. The FDIC routinely terminates compensation and other contracts with senior management whose services are no longer required.
In addition to the development and support of civil claims brought by the FDIC with regard to failed institutions, our investigators also identify signs of possible criminal activity in a failed institution. These findings support the Department of Justice's subsequent prosecution of the wrongdoers. The FDIC also coordinates with other federal, state and international agencies to detect and deter bank fraud.
The FDIC in addition pursues enforcement actions against open insured depository institutions, their directors and officers, employees, and other institution-affiliated parties, where warranted, including third parties and independent contractors, such as accountants, attorneys and appraisers, under its Federal Deposit Insurance Act authority.
When FDIC examiners find either violations of law, breaches of fiduciary duty, unsafe and unsound practices or mismanagement in banks' consumer protection responsibilities, the FDIC requires corrective action.
During 2007 and 2008, the FDIC issued 142 cease-and-desist orders and 102 removal-and/or-prohibition orders, banning individuals from banking. These enforcement actions were based on variety of harm or risks caused, to an insured institution, and include theft and embezzlement, by employees of the bank, poor lending policies or procedures and fraudulent actions on the part of a lending officer.
Removing from office and prohibiting from banking those who commit financial crimes is a primary goal of FDIC enforcement actions. The employees found to have committed financial crimes are removed from these positions of trust and are often required to make restitution and pay a financial penalty to remedy these transgressions.
The FDIC's Office of Inspector General brings another level of enforcement. The OIG conducts investigations of fraud and other criminal activity, in or affecting FDIC-regulated open financial institutions, all closed institutions and receiverships and other FDIC-related programs and operations.
Currently the OIG has about 170 active investigations, involving open and closed institutions. The work focuses on various types of fraud including mortgage, securities, wire and mail or bank crimes, such as embezzlement or money laundering.
Investigations of financial institution fraud currently constitute about 88 percent of the OIG's investigative caseload. Over the last two years, it has closed about 100 investigations, with the crimes occurring almost exclusively in open institutions. These investigations have resulted in over 230 indictments, 170 convictions and over $530 million in fines, restitution and monetary recoveries.
The FDIC expects the enforcement challenge, in both the closed- bank and open-bank context, to increase for the foreseeable future. In order to handle the substantially increased workload, in the closed-bank area, we are increasing our enforcement staff as well as retaining outside counsel. We've also added to both our civil and criminal investigations staff.
In the open-bank area, the FDIC has added 87 full-time compliance examiners, in 2007 and '08, and has authorized the hiring of 79 more. Since 2007, we have increased our legal staff responsible for open- bank enforcement by 29 attorneys.
The FDIC's core mission is to maintain public confidence in the banking system.
Critical to the achievement of that mission is to hold accountable those who do not comply with applicable laws and regulations. The FDIC looks forward to continuing to work closely with the committee to achieve that goal.
Thank you, Mr. Chairman.
REP. FRANK: And next, the acting director of the Office of Thrift Supervision, Mr. Scott Polakoff, to whom this committee gave, I think, two days off this week.
MR. POLAKOFF: (Chuckles.) Yes, sir.
REP. FRANK: So welcome back. Mr. Polakoff. Please.
MR. POLAKOFF: Thank you, sir.
Good morning, Chairman Frank and members of the committee. Thank you for the opportunity to testify on the enforcement authority that the OTS exercises over regulated institutions and their affiliates, and, in particular, OTS enforcement of consumer-protection laws.
The OTS has broad powers to protect the customers of federally regulated thrifts, their affiliates and thrift holding companies. These powers include specific authority regarding truth in lending and unfair or deceptive practices. As you know, the OTS used that authority over unfair practices to initiate a process resulting in a final interagency rule in January 2009 banning unfair credit-card practices. We exercise our enforcement authority when our examiners find problems during their examinations of thrifts as well as when we receive consumer complaints and referrals from other agencies.
Throughout 2008 and into 2009, we have seen a steady increase in OTS enforcement actions. Formal actions such as cease-and-desist orders and monetary penalties increased by 45 percent from 2007 to 2008, and the pace is accelerating further this year.
I would like to highlight two particularly notable cases. The first one occurred in June of 2007 and involved a federal savings bank and two affiliates that were charging excessive fees to mortgage customers and failing to adequately evaluate their creditworthiness. We required these institutions to immediately stop these practices, establish a fund of $128 million to reimburse consumers and commit an additional $15 million to support financial-literacy and credit counseling.
The second case, in June of 2008, involved a federal savings bank and its subsidiaries that were charging inappropriate, and in some cases very large, broker and lender fees to mortgage customers. The enforcement action required the bank to reform its practices and establish a $5 million fund to reimburse consumers. Since 2007, I believe that OTS is the only federal banking agency to require institutions to make restitution to bank customers for abusive lending practices, enabling the customers to stay in their homes.
On criminal matters, the OTS makes referrals to the Department of Justice and U.S. attorneys' offices. The number of these referrals is increasing, particularly in the fair-lending area. Five recent cases involve steering customers to more expensive mortgages based on their race or national origin.
I would also like to point out that the OTS has been increasing its enforcement resources for several years. Since 2006, the agency has increased the number of attorneys in its enforcement division by 67 percent. The agency has also been expanding the size of its staff devoted to fair-lending issues.
As we discuss actions that would better protect consumers, I think it's important to point out that gaps in laws and regulations over mortgage lending leave some sectors of the financial market underregulated and therefore may leave consumers unprotected.
These sectors include mortgage brokers and mortgage companies. We urge Congress to establish a level playing field in mortgage lending, with the same rules and oversights for all players. Consumers do not understand, nor should they need to understand, distinction between types of lenders offering to provide them with a mortgage. They deserve the same service, care and protection from any lender.
Finally, I would like to offer two suggestions for legislative changes that would improve consumer protection. Number one, expand and enhance the temporary cease-and-desist authority to make it easier to apply in consumer protection cases. Number two, improve the jurisdiction of federal banking regulators over third parties, such as mortgage brokers, appraisers and consultants, to whom depository institutions outsource key parts of their business.
Thank you again, Mr. Chairman.
REP. FRANK: Thank you, Mr. Polakoff. Those last two points are very much what we are hoping to -- (inaudible).
Next, with the cooperation of the Judiciary Committee, which has the primary jurisdiction over the Department of Justice, Ms. Rita Glavin, who is the acting assistant attorney general of the Criminal Division.
MS. GLAVIN: Good morning, Mr. Chairman and members of the committee and members of the House Judiciary Committee. Thank you for you invitation to speak today.
The nation's current economic crisis has had devastating effects on the mortgage markets, credit markets, the banking system, and all of our nation's citizens. And although not all of our current economic ills are the result of criminal activity, the financial crisis has laid bare criminal activity, such as Ponzi schemes, that may have otherwise gone detected (sic) for years.
The Department of Justice is committed to redoubling our efforts to uncover abuses involving financial fraud schemes, mortgage lending and securitization frauds, foreclosure rescue scams, government program fraud, bankruptcy schemes and securities and commodities fraud.
And we're committed to adopting a proactive approach for better detecting and deferring such fraud in the future. Put simply, where there is evidence of criminal wrongdoing, including criminal activity that may have contributed to the current economic crisis or any attempt to criminally profit from this crisis, the department will prosecute those wrongdoers, will work tirelessly to recover assets and criminally derived proceeds, and strive to make whole victims of such schemes.
Historically, the department has had tremendous success in identifying, investigating and prosecuting massive financial fraud schemes. Last year, for example, the department secured the convictions of five former executives, including the owner and president of National Century Financial Enterprises, one of the largest health care finance companies in the United States until its bankruptcy in 2002, on charges stemming from an investment fraud scheme resulting in $2.3 billion in investor losses.
Similarly, last year the department obtained the conviction of a former AIG executive and several Gen Re executives who engaged in corporate fraud by executing two false reinsurance transactions to conceal a $59 million decrease in the loss reserves of AIG.
From the department's prosecution of executives of Enron to WorldCom to Adelphia to Revco, the prosecution of mortgage fraudsters and architects of Ponzi schemes across the country, the department has considerable institutional experience which it can and will draw upon in fighting crimes that relate to the current crisis.
Indeed, in recent weeks the department has made clear that its commitment to prosecuting financial crimes will not abate. The department secured a guilty plea from Bernard Madoff for securities fraud and mail fraud violations. The department filed a criminal complaint against the chief investment officer of Stanford Financial, alleging that she obstructed a Securities and Exchange Commission investigation into the activities of Stanford Financial. And these are just two examples of the department's ongoing vigorous enforcement efforts.
The department has approached the current financial problem with three primary goals.
First, coordination: The department has sought to aid in coordination among law enforcement agencies. The sharing of information and ideas is essential to identifying and prosecuting financial fraud and the mortgage fraud problem. Accordingly, the department has encouraged and led by example a comprehensive information sharing effort within the department and amongst our partner agencies.
Second, investigation and prosecution: The department has focused on the investigation and prosecution of financial fraud and mortgage fraud for many years. When criminals go to jail, we deter similar conduct by others. The department over the last several years aggressively prosecuted mortgage fraud cases, and we've yielded nationwide sweeps, resulting in hundreds of convictions and sending criminals to jail when appropriate.
Third, in addition to deterring, detecting and prosecuting crimes, the department is committed in its responsibilities to help the victims of financial fraud and mortgage fraud schemes, and to the extent possible attempt to make them whole. To this end, prosecutors and law enforcement partners work to locate and recover assets from the criminals and provide restitution to the victims.
Unquestionably, the crisis now demands an aggressive and comprehensive approach, and we're going to do that, doing it the way we've always been doing it, through vigorous investigations and prosecutions of those people who defraud their customers, the American taxpayer and may otherwise have unlawfully placed billions of dollars of private and public money at risk. We're committed to the effort. We're going to look at allegations of fraud closely, follow the facts where they may lead, and bring our resources to bear to prosecute those who have committed crimes.
Thank you for the opportunity to address the committee. And I'd be happy to answer any questions.
Thank you for the opportunity to address the committee. And I'd be happy to answer any questions.
REP. FRANK: Thank you, General.
Next, Mr. John Pistole, who's the deputy director of the FBI.
MR. PISTOLE: Thank you, Chairman Frank -- and from Judiciary, Chairman Scott -- and other members of the committee.
Today, I'd like to give just a very brief overview of what we in the FBI are doing, facing the challenges that we have, and describe some of the current efforts to combat the fraud that has been described previously.
To state the obvious, we have experienced a significant increase in mortgage-fraud-related cases since 2005, when we had approximately 720 investigations. Today, the FBI has more than 2,000 active mortgage fraud investigations and an additional 566 corporate fraud investigations, a trend which we expect to continue.
Our work in mortgage-fraud-related crimes generally appears in two distinct areas: fraud for profit and fraud for housing. Our primary focus is in the fraud for profit area, which refers to those individuals who falsely inflate the value of property or issue loans related to fictitious properties.
These schemes rely on industry insiders, those appraisers, accountants, mortgage brokers and other professionals who override lender controls designed to prevent this crime from happening.
The second area, fraud for housing, occurs when an individual borrower, often with the assistance of a real-estate professional, acquires a house in which to live under false pretenses.
The current financial crisis has also produced an additional consequence: the exposure of pervasive fraud schemes that have been thriving in the global financial system.
These schemes are not new but are coming to light, as has been described, as a result of market deterioration. For example, numerous Ponzi schemes, such as Madoff, and other investments frauds have been uncovered, which we are actively pursuing in the following ways.
We have shifted resources and now have over 250 agents and approximately 50 financial analysts and other intelligence analysts assigned to mortgage fraud and related investigations.
We also have another 100-plus agents working corporate fraud matters. We also augment our efforts with approximately 250 state and local law enforcement officers, assigned to 18 mortgage-fraud task forces and 47 working groups.
We also established, at our FBI headquarters, a national mortgage fraud team to coordinate and prioritize the FBI efforts, across the country, and to provide tools to identify the most egregious fraud perpetrators and to work even more effectively with our counterparts in law enforcement, regulatory and industry leaders.
Even before the creation of this national initiative, we were seeing results from our increased focus in this area. For example, last June, we completed the initial phases of what we called Operation Malicious Mortgage, involving the arrest of more than 400 offenders nationwide, believed to be responsible for more than $1 billion in estimated losses.
This initiative has focused on three types of mortgage fraud: lending, of course, mortgage rescue schemed and mortgage-related bankruptcy schemes.
Our work in that initiative and others continues.
In closing, it is clear to us in the FBI and our law-enforcement partners that more must be done to protect our country and our economy from those who try to enrich themselves through illegal financial transactions. We are committed to doing so, and we appreciate the committee's support. Thank you.
REP. FRANK: Let me begin with Mr. Polakoff.
On page 17, roman numeral V, "Closing the Regulatory Gaps," you talk about establishing a level playing field and talk about unregulated or underregulated people in the mortgage market.
Now, the Federal Reserve has proposed some rules, as you know -- actually, under the better-late-than-never category, the Federal Reserve is invoking authority that this Congress gave it in 1994. It was not used. Mr. Bernanke, to his credit, decided to use it.
Do they -- do we need further -- actually, (I believe ?) in many respects we do -- but let me -- is that the kind of thing you're talking about? And what specific language would you be looking for?
MR. POLAKOFF: Mr. Chairman, what I'm talking about is boots on the ground: examiners. The difference is -- you take your respective state; Steve Antonakes does a great job with examining mortgage brokers and mortgage companies in your state. Not all states are -- have such a robust program. Sometimes it's because they don't have sufficient budget, and there's other reasons. So the rules need to be consistent across the board, but the boots-on-the-ground actual examinations --
REP. FRANK: So you think we need uniform federal mortgage regulations for the non-banks? I mean, I assume we were talking about the non-banks.
MR. POLAKOFF: Yes, sir. Yes, sir. But it's the two-part -- it's the uniform regulation, and it's then the prudential supervision of such.
REP. FRANK: Well, in those cases where you think the states may not have enough, would you authorize federal regulators to step in? How would we deal with that?
MR. POLAKOFF: Yes, sir. So we're suggesting that the state charter remains as it currently is for these mortgage brokers or mortgage companies and there be a joint examination program with a federal partner and a state partner.
REP. FRANK: Would that be -- well, that's an interesting approach -- triggered by the state's request, or would you have the right to go in with or without a request?
MR. POLAKOFF: Just like state-chartered banks now, sir, we would suggest it be an alternating program.
REP. FRANK: I'm not sure what I know -- mean -- know what it --
MR. POLAKOFF: So -- I'm sorry, sir. Right now, for the -- for a state-chartered bank, typically the state examiners go in one year, conduct the examination, then the FDIC or the Federal Reserve goes in the other year to conduct the examination.
REP. FRANK: And you would say to do the same with the OTS? Is that the --
MR. POLAKOFF: Yeah, our recommendation is there should be a federal agency; we would love to take that responsibility. It would be up to you, sir, and the Congress.
REP. FRANK: All right. And then I also appreciate your very specific requests about cease-and-desist power and the third parties. And I -- we will be taking those seriously.
Mr. Pistole -- if that's the correct pronunciation -- I apologize if it's -- incorrect pronunciation --
MR. PISTOLE: It's correct, Mr. Chairman.
REP. FRANK: But on the other hand, I don't pronounce anything that well, so you shouldn't feel singled out.
MR. PISTOLE: Pistole is correct.
REP. FRANK: The -- obviously, the complaint, accusation, explanation -- depending on it -- has been that since September 11th of 2001, understandably, you have become a first line of defense for American safety in ways that we had not anticipated.
We are all grateful for that. The argument has been made that that has led to a diminution of activity elsewhere, that, for instance, mortgage fraud lacks the sense of physical threat.
And so a two-part question: Has enforcement in that area suffered because of other priorities? And if so, do we need to do something to overcome it? I mean, I guess that's the general sense is -- not criticism of the FBI, because I think people would say if we had to choose between being blown up and being defrauded, defrauded would win. But can we avoid that choice, in some ways? And is that a legitimate explanation of what's happened in the past?
MR. PISTOLE: Thank you, Mr. Chairman. After 9/11, obviously, we moved a number of our traditional criminal investigative resources to national security, particularly counterterrorism. Most of those resources were in our drug enforcement areas, recognizing -- the department, obviously -- that the DEA had that primary responsibility and the FBI did not frankly need to be in the drug enforcement business.
There were some lower level white-collar crime such as bank teller fraud and things like that that we did get out of that business. So we did have that. But we did continue in the significant corporate fraud investigations and other financial frauds as appropriate, depending on the U.S. Attorney's Office, prosecutive guidelines and all that. So as we -- as I mentioned, we have more than doubled our resources toward the mortgage fraud, corporate fraud investigations in the last two years, trying to address those allegations that have been coming in and also trying to be proactive.
I would note that we have several ongoing undercover operations, for example, in the corporate fraud and financial fraud area, where we are bring proactive about seeking out perpetrators of frauds on a wide-scale basis, not just sitting back, waiting for referrals to come in.
REP. FRANK: Thank you.
The gentleman from California, who has graciously waived his opening statement and will have his five minutes.
REP. JOHN CAMPBELL (R-CA): Thank you. I don't know how gracious I was by being tardy, but I'll accept -- I'll accept that.
REP. FRANK: Well, let me -- I would say to the gentleman, as chairman of the committee, I never mind members' absence. (Laughter.)
REP. CAMPBELL: Should I take that personally, Mr. Chairman?
REP. FRANK: No, no.
REP. CAMPBELL: (Laughs.) All right.
Anyway, thank you all for being here.
My question's going to be very broad and to all of you. I could go specifically and all that, but in front of us today we have representatives of the Federal Reserve, Comptroller of the Currency, the SEC, the FDIC, the Office of Thrift Supervision, Department of Justice and the FBI, so seven separate agencies, all testifying in reasonable detail about the investigative and things you are doing relative to the financial services area and issue.
My question -- first overall question is, do any of you believe that there are duplicative areas where two out of the seven of you or three out of the seven of you have an overlapping jurisdictional responsibility that results in -- and that has a lack of coordination?
Or, alternatively, are there areas where there is a gap in the current jurisdiction, and so none of the seven of you believe that it's actually your primary responsibility to investigate? (No response.) Don't all speak at once.
MR. POLAKOFF: Congressman, I would offer only one example, and it's not a gap. It's possibly an overlap, but I don't think it's bad. The example I would offer, sir, is if in a financial institution there is an individual who may have, or his activities or her activities warrant an investigation on our part to possibly remove that individual from a bank, quite possibly, the FBI or Justice will be looking at that same individual and ask us to stand down while it completes its investigation. That's not bad. That's an overlap. And we'll work together through that. But that's the only example I can think off the top of my head, sir.
REP. CAMPBELL: Yes, commissioner? Or whoever -- Commissioner Walter?
MS. WALTER: Thank you.
REP. CAMPBELL: And then I'll get to you, Ms. Glavin.
MS. WALTER: In the securities arena, there are gaps in the SEC's authority with respect to certain types of instruments or entities. For example, a few years ago, we attempted to regulate hedge funds, and those rules were struck down by the court, so that today we do not regulate hedge funds. As I noted in my oral statement, we do have antifraud authority, but what we don't have is the access to information about who all of them are, unless they voluntarily register, what the principles are, the nature of their activities.
And similarly, we specifically have no authority with respect to the credit default swap market. So there are a number of areas in which there are regulatory gaps that should be filled so that the appropriate regulatory agencies -- in this case, we think, the SEC -- have full information about what's going on and can proceed vigorously.
REP. CAMPBELL: Thank you. Ms. Glavin?
MS. GLAVIN: What I was going to mention from the Department's perspective is that we work with each of these agencies. One of the best, most recent examples is we're working now with the SEC in the Stanford Financial investigation. They work at it from the civil side; we work at it from the criminal side.
One of the ways that we try to check on overlap and on coordinating our efforts is that we have within the criminal division a bank fraud enforcement working group, where we meet on almost a monthly basis with a number of the agencies that are represented here to talk about what they're doing regulatory-wise, do some information sharing and coordination. And there are a number around the country. And it's just not limited to just the agencies here, but there are task forces and working groups around the country that are specifically formed with the aim to try and coordinate our efforts, do de-confliction, where it's appropriate, and coordination where it's appropriate as well, so the taxpayer gets the most bang for its law- enforcement regulatory buck.
REP. CAMPBELL: Okay. Any of the rest of you wish to -- yes, Comptroller?
MR. DUGAN: I would just highlight and amplify what Director Polakoff said earlier about having a common mortgage standard that goes across all providers so there are no gaps in what the rules are. And secondly, to have comparable kinds of supervision and enforcement, to make sure those rules are enforced comparably. I think that was a big issue that led to where we are now with respect to the mortgage crisis, and I think the kind of legislation the committee passed last year, with some amendment, I think is quite appropriate.
REP. CAMPBELL: Thank you.
Governor Duke, did I see you?
MS. DUKE: I would really echo what Comptroller Dugan said and point out that this was the focus of the HOEPA regulations that the Federal Reserve issued last year, which was to cover all lenders. And also we have a pilot program to go in with both federal and state examiners into the subsidiaries of holding companies that we supervise and look at the mortgage operations for consumer compliance as well as consumer protection. And I think using the authorities that we already have in new ways is also going to be important in addition to any new authorities we might get.
REP. CAMPBELL: Thank you very much. My time is expired.
REP. MAXINE WATERS (D-CA): Thank you very much. I'll recognize myself for five minutes.
In my work on the foreclosure crisis, I have noticed an explosion of fake websites that try to confuse homeowners into believing that they're official government sites. On Wednesday I contacted the Federal Trade Commission and the Federal Communications Commission to alert them about such a fraudulent website that was purporting to offer loan modifications through the Making Home Affordable program. Of course, within hours of my letter, the website was taken down.
However, I'm really concerned about those websites and the national ads. For example, there's one called the Federal Loan Modification Company, that's getting more and more aggressive. There is no oversight for a business that springs up, purporting to do loan modifications, with names and sound like government names.
Who and what can be done? And who's doing something about that, or at latest looking at it? Yes?
MR. PISTOLE: We in the FBI, Madame, look at any fraud that would be perpetrated by one of those businesses, primarily through our Internet Fraud Complaint Center, which receives thousands of complaints from people around the country, such as you've seen on the websites. So we look at it from the fraud perspective and whether -- whatever type of fraud it is, but we're not in the prevention business, if you will, of preventing those sites going up, obviously. We don't do that. But we have a number of those type investigations ongoing right now.
REP. WATERS: Well, let me just ask you: If the Federal Loan Modification Company is advertising that for $3,500 -- when you talk to them -- I've called them -- they will take care of modifying your loan, they almost guarantee it, they assure you that they can do that -- and they collect $3,500 from you but they say, "Well, we tried, and the loan servicer just wouldn't cooperate," what is that? Is that fraud?
MR. PISTOLE: That -- I don't know the specifics about that one, but typically that is an advance fee scheme, where somebody is required to pay a fee for a service that is not rendered. And it's oftentimes used by people around the world. The Nigerian fraud schemes are prevalent. I n fact, my name and Director Mueller's name's been used in letters saying the FBI has endorsed this so it's okay to provide that information.
So I'll get calls from friends and family saying, is this accurate? And it's obviously not.
REP. WATERS: Do we need to regulate this whole servicer industry? It has become very important. We have servicers who are independent, some who are working for our own government agencies. Everybody has got to have them.
Whether it is Fannie or Freddie, et cetera, they all have servicers that they're contracting with. But the servicers; I don't know who they are. I don't know where they get their training from. There's no licensing required. And anybody can be a servicer.
Do we need some new public policy to deal with servicers?
MR. PISTOLE: I would suggest that we would work with the department and the committee to explore that further.
REP. WATERS: All right.
I have another little question I want to ask. It may not seem so big or important. But yesterday, I heard information about overdrafts that really bothered me.
I understand that there are debit cards that students may use. Parents get it for them. They buy a cup of coffee or something at Starbucks. And they're -- they can use that card, even if they don't have enough money on it. And then they follow up with a $35 charge on a $4 item.
What is that considered? I mean, let the marketplace work as it may. Should there be any consumer protection in that at all?
MR. PISTOLE: I would defer to my colleagues on that one.
MS. DUKE: Yes, ma'am.
The Federal Reserve has regulations out for comment right now that would govern overdrafts and particularly those that are with electronic means, debit card overdrafts. And those regulations are out for comment. I'm not sure exactly how far we are through the comment period. But it would address exactly that.
REP. WATERS: But it is something that you're taking a look at.
MS. DUKE: Yes, ma'am.
REP. WATERS: Now, finally let me just say to all of you, obviously Countrywide emerged as the poster non-bank for what was wrong with predatory lending and the subprime market?
How did they stay in business so long, get so far as a non-bank, with the kind of exotic products that they were putting on the market, with untrained brokers on the street? Who was looking at that? And what could have been done with what Countrywide was doing?
MR. POLAKOFF: Congresswoman, from an OTS perspective, I can only speak from early 2007, when Countrywide converted to a thrift. And as you very astutely point out, a good portion of the predatory lending business or subprime business was conducted outside of the insured financial institution.
So we would have looked at that, looking back and looking at all those activities, it would have been under the responsibility of the state banking or the state entity, to look at that particular mortgage company.
REP. WATERS: Yes.
MR. DUGAN: Before it became a thrift, Countrywide had a national bank and also had a holding company that engaged in its mortgage activities. A relatively small proportion was conducted in the bank.
We did not allow the subprime to be put in the bank, and so the mortgages that were actually booked in the bank were not the issue. But it eventually left our charter and became a federal thrift.
REP. WATERS: Well, I've got to go to our next member now, but I -- before I do that --
MR. : Madame Chair?
REP. WATERS: Yes?
MR. : If there are others that want to respond, I'd love to hear --
REP. WATERS: Oh, I'm sorry. Are there others who would like to respond?
MR. : (Off mike) -- question.
REP. WATERS: (Laughs.) Yes -- just one second.
Okay, we don't have anyone else who would like to respond.
Lastly, the so-called exotic products that keep springing up -- and all of the products that were on the market, whether they were alt-A or adjustable-rates, options, et cetera -- am I to understand that any product that can be thought of by somebody, a mathematician or somebody assisting banks in ways to make more money, can go on the market without your stopping them? Does anybody have the ability to stop an exotic product that obviously is going to defraud our consumers?
MR. POLAKOFF (?): I'll take the first stab at it. What all of the banking regulators have the ability to stop is a predatory product, an unsafe and unsound product. So the important test for us, Congresswoman, is whether the borrower has the capacity to repay, whether that is properly assessed. And equally important is to -- whether the borrower has the ability to understand the product that they're committing to.
REP. FRANK: The gentleman from Texas.
REP. GOHMERT: Thank you, Mr. Chairman. I'm pleased you came back just to hear me. Thank you.
I am curious -- we've had the credit default swaps brought up a number of times -- what do you think would have been the most effective way to regulate or control these things that really threaten to bring down our financial system? Obviously (it is?) a threat. Should they have been regulated by some type of insurance standards? Or do one of you all have the ability and the wherewithal to actually regulate them effectively? What do we need to do? I'm throwing that open to anybody.
MS. WALTER: Let me start. I believe that, like many other innovative financial products, it is very important that there not be a lack of transparency. That's the first critical step.
REP. GOHMERT: Oh, you think there might have been some?
MS. WALTER: Oh, only a little, perhaps.
But -- but when you have a product like this spring up and grow by leaps and bounds and become huge and become systemically important before anyone has any information about it, I think that's the first place to start. You need to -- we can all attack the issues to a certain extent from the institutions we regulate -- for example, we regulate broker-dealers and investment advisers -- but unless there is transparency within the marketplace itself --
REP. GOHMERT: Well, I agree with the transparency.
But I'm asking specifically, who really should have the ultimate authority? Now that we know how un-transparent they were, who should have the ultimate authority to regulate them and who'd have the wherewithal to do it the most effectively?
MS. WALTER: I think it would be a combination of different regulators. We, for -- on the one hand --
REP. GOHMERT: Well, that's pretty specific.
MS. WALTER: No, I --
REP. GOHMERT: Could you maybe get just a little more specific?
MS. WALTER: Of course. I'll go on from there.
I think that the SEC has a role to play in terms of looking at the market forces that go on, in terms of how these instruments are traded. You are right, they are essentially an insurance product, so there may be a role for insurance regulators to play. There obviously is a role for my colleagues up here at the table to play, because a lot of these instruments are held by institutions they regulate.
And -- but I do think in the first place you need a market regulator that can look at the forces that are operating and the trading that is going on in the market as a whole.
REP. GOHMERT: And you're talking specifically about which market regulator?
MS. WALTER: I'm talking about the market actually in trading and the transactions that are going on in the credit default swap market.
REP. GOHMERT: No, no, but what entity, when you say it requires a market regulator --
MS. WALTER: -- place regulator, I believe that the SEC is the right regulator to do that.
REP. GOHMERT: Okay. All right. That's what I was trying to get to. Thank you.
Anybody else? Governor?
MS. DUKE: The Federal Reserve is -- has believed for some time that these should be traded on a central exchange, on a counterparty. And we've just approved a central counterparty for that, and the Federal Reserve Bank of New York has been working on this for a number of years. And there is now one up and running. And I think that will also improve the trading of the credit default swaps.
REP. GOHMERT: Do you think -- do you think that would -- these things that you both mentioned would be enough to control the -- what has become basically criminal because of the effect on our economy? But would civilly that be sufficient to regulate this group without imposing new criminal laws?
MS. DUKE: I believe that the criminal laws that are out there are sufficient to cover it. One of the things that will happen with the centralized counterparties -- and there are two others that are going to be up and running soon, we think, and have been approved -- is that you will get more regularized pricing information, which will provide the public with some indicators that are better than the ones that are out there.
But if you put them in a system, for example, where you call them securities, securities fraud will apply. The --
REP. GOHMERT: Okay. So we don't need more --
MS. DUKE: The mail fraud as well will apply. So I believe that the criminal statutes are sufficient, but I would defer to the criminal authorities to my left.
REP. GOHMERT: Okay. Well, let me ask a quick question -- my time is running out -- regarding the FBI. Mr. Pistole, appreciate your being here.
White-collar crime requires, from my experience, what I've seen, more experience, more expertise, more training and I know that since Director Mueller has been in charge, he has his "five year up or out" policy that's forced out thousands and thousands of years of experience. Are you still forcing out all our best experienced agents in charge out in the field or have you backed off of that policy a little bit?
MR. PISTOLE: We have modified that policy. We have --
REP. GOHMERT: Because I haven't heard that from the field yet.
MR. PISTOLE: Okay. Yes.
REP. GOHMERT: I hear of people still having to retire.
MR. PISTOLE: We modified that for our field supervisors from five years to seven years and even given them an option to go up to over eight years if they do some time back at headquarters. So yes, we have modified that.
REP. GOHMERT: Okay. I see my time's expired. Thank you.
REP. FRANK: Let me now turn to the chair of the Judiciary Subcommittee, who's our partner in this, Mr. Scott -- or Mr. Moore first, who is -- no, let's go to Mr. Scott first, to recognize the joint jurisdiction.
REP. ROBERT SCOTT (D-VA): Thank you. Thank you, Mr. Chairman.
I wanted to follow through -- follow up on that last question a little bit to Ms. Glavin and Mr. Pistole. If everybody knew that they had these so-called ninja loans -- no income, no jobs, no assets -- you know, passed off as triple-A assets secured by real estate, when in fact no one had done any due diligence to ascertain he reasonable value of the collateral nor whether or not the borrower had any capacity to pay for the loan after the readjustment from a teaser rate, and if everybody knew all of that was going on and an investor bought the package based on a triple-A rating, is there any problem with the criminal law, fraud, wire fraud and other things to go after that kind of activity? Do we need any new criminal laws?
MS. GLAVIN: There is a bill that just got out of Senate Judiciary Committee which the Justice Department supports. It's the Fraud Enforcement and Recovery Act of 2009. It's sponsored by Senators Leahy and Grassley.
A couple of the key provisions of that act which would add tools to the prosecutors' arsenal beyond traditional mail fraud and wire fraud is that it would amend the definition of financial institution in Title 18 to provide private mortgage lending businesses. So you make a false statement to a private mortgage lending business, which did a lot of these subprime loans, we can prosecute you under some different statutes, not just the mail and wire fraud statutes.
And so that would be helpful and expand the menu of options that prosecutors can use. Also, I think it could help us make cleaner presentations in grand jury and to juries.
One of the second things --
REP. SCOTT: Is that a jurisdictional issue, that you don't have to prove mail, you can just prove a financial institution?
MS. GLAVIN: You would have to -- mail and wire fraud, you do have to find the mails and the wires. On the amendments to that particular statute, I think there has to be some type of a federal nexus, which I think you would probably be able to find in a loan to of the private mortgage lending companies, that there's an interstate --
REP. FRANK: If the gentleman will yield, very few of them operate wholly intrastate.
MS. GLAVIN: Yes. That's true.
REP. FRANK: I don't know of any company that does its business only intrastate.
MS. GLAVIN: So I don't think there would be difficulty in a lot of cases if prosecutors wanted to use statutes beyond 1341 and 1343 to prosecute fraud on the mortgage lending businesses.
In addition, one of the things that that particular proposed statute does is it would -- the major fraud statute, which I believe is 1031, would also explicitly cover fraud in connection with TARP funds and fraud in connection with the stimulus package. It's not to say that we don't have other tools that we can prosecute such fraud, but it gives us a broader menu of options which the department supports.
REP. SCOTT: In your comments, you mentioned restitution involving the Iraq contracting.
At a previous hearing in the last Congress, we heard that the department was hesitant to get involved in False Claims Act cases involving Iraqi fraud, and in fact had many of the cases -- many of the cases sealed, which put whistleblowers out on a limb, where they couldn't get evidence to prove what they were saying. Is that policy, of being reluctant to go after false claims cases in Iraq and sealing those cases, going to change?
MS. GLAVIN: Congressman Scott, I come from the criminal side of the department. I think you're referring to the False Claims Act, which is enforced by the civil side of the department. I'm not aware -- and I'm happy to get back to you on this -- on a slowdown. And I think you're talking about the sealing of cases, the qui tam cases. And I think there are time limits for when it can be sealed, and then a showing --
REP. SCOTT: Well, if you could get back to me on the details?
MS. GLAVIN: Yes, happy to do that.
REP. SCOTT: And finally, for, I guess, you and Mr. Pistole, how many accountants would you need to effectively go after these cases without transferring people from homeland security and terrorist cases?
MR. PISTOLE: Well, Congressman, to give you some context, we have a little over 250 agents currently working on these type of investigations, along with about 50 financial analysts, forensic accountants and intelligence analysts.
To go back to the S&L crisis, we had about 1,000 agents. And obviously, the scope of what we're dealing with now just hugely dwarfs the S&L crisis, so we are --
REP. SCOTT: Has the department submitted a potential budget so we know -- if we wanted to deal with it, we could deal with it?
MR. PISTOLE: Well, in the '09 budget, we receive an additional 58 positions, which we are getting onboard and applying to that. And then, obviously, we're going through the '10 process right now.
REP. SCOTT: Okay. Well, Mr. Chairman, I think he said 59. The order of magnitude he was suggesting was that 1,000 wouldn't be enough. So obviously, we have a lot of work to do.
REP. FRANK: Thank you. And it does sound like that's a piece of legislation where our two committees would be able to cooperate. It's broadening the financial dimension, but it does sound to me like something we'd want to move on.
The gentleman from Florida.
REP. BILL POSEY (R-FL): Thank you very much, Mr. Chairman.
I have a lot more questions than we have time to have answered here today. I wish I could have about an hour with each of you individually.
REP. FRANK: Well, of course, we do have the option of getting the answers, follow-up answers, in writing, which we would then make part of the record.
REP. POSEY: Thank you, Mr. Chairman. I was going to ask for your permission to do that. Thank you, Mr. Chairman.
The first thing I'd appreciate from all of you, if you can see your way clear, would be a one-page summary -- not a book, a one-page summary -- of how each of you, without corroborating your theories with each other -- what you think the root core -- the root cause of this financial crisis is. You know, not just the word "greed" but, if your life depended on solving this puzzle, how would you do it?
And what do all the indicators point to?
And if you think that Congress is somehow culpable, I would expect you to say that, in all honesty and forthrightness, for which you all have a reputation. You know, stealing is still stealing, even if the government is doing the caper, unfortunately.
Also since time won't allow an answer to these, I just will request that you respond to us in writing.
First, to Governor Duke, the number of employees that you have and the number of prosecutions and convictions to date that you had.
To Mr. Dugan, if and when you find criminal conduct, you said you would refer it to an agency. I want to know how often you've ever found criminal conduct and who you referred it to.
Commissioner Walter, I noticed on your testimony, you have 1,100 attorneys in your organization. It looks like an attorney handles a case every other year. It doesn't say anything about convictions. So I'm interested in knowing how many convictions they've ever had, if any.
I want to know, after the Madoff fiasco, when Mr. Markopolos took that thick dossier to your organization, almost a decade ago, and tried to get them to investigate Bernard Madoff, and you refused to do it, your agency, not you.
I wonder what discipline was taken for the employees who had disregarded the best interest of the citizens of this country and allowed that to be perpetrated and allowed $75 billion to disappear from the face of the earth.
You know, there are quite a few people in my constituency that think crime wouldn't pay if the SEC was in charge of it. You know, just to put it in a local perspective, if you have a local police force, and your street cops write one ticket every other year, you probably have more than you need, or they're not doing enough.
Mr. Gruenberg, yours doesn't say how many employees you have or how many prosecutions or convictions you've had; just that you've had 4,375 mortgage-fraud claims filed. And they're expected to result in 900 additional civil mortgage-fraud lawsuits over the next three years.
I'd like your estimate, your prognosis, on what you think the success rate will be, what just you think will come, to the American public, what amount of money you think we'll be able to recover from the bad people involved in that.
Mr. Polakoff, there's a list attached of total numbers of OTS formal enforcement actions. It's a very, very modest number. It looks like it's probably under 200.
I wonder how many employees it takes to get this many enforcement actions. But more importantly I'd like to know how many of them were criminally prosecuted successfully and how many of them you expect to see successfully prosecuted. Thank you.
Ms. Glavin, your agency has 62,000 suspicious activity reports.
I'd be interesting in knowing -- or having a breakdown of how those were handled and how they were referred. And that was between just the years of 2007 and 2008.
I wonder if your agency needs an invitation to invite the companies who've received TARP money to be investigated under the RICO, the racketeering statutes, if you would need Congress to ask you to do that or if somebody from the Treasury or someone else could ask for that. I think the public would just like a good cleansing of the possibility that there's racketeering involved.
You know, Ken Lay went to prison for fleecing investors. We've got people in some of these companies that have fleeced every member of the American public and future generations as well. And I think the public deserve to know there was no racketeering involved, if in fact there wasn't any.
And I would pose that same question basically to the FBI, you know, would like a short summary of the prognosis you have for the team you established in 2008. You know, unfortunately I think we're a day late and a dollar short in getting in front of this crime wave. We got behind it and we've got a lot of clean-up to do. But I'd like your thoughts as to prognosis, what you forecast, statistically, if necessary, to be the consequences and result of the new fraud team that you have -- that you have put in place there.
And again, I would wonder if you have done any investigations on any of the companies that received TARP money or bailout money, and, if you haven't, what it would take to have you take a perfunctory view to see if there's evidence of racketeering there. I think much of the public suspects that it's there and for better or for worse I think we probably deserve to know.
Thank you. Thank you very much for your indulgence, Mr. Chairman.
REP. FRANK: Yeah. We would like those answers, obviously, in writing. They'll be made part of the record and shared with all members of the committee.
The gentleman from Kansas, the chairman of the oversight subcommittee.
REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman.
Mr. Pistole, in your written testimony, you discuss the rise in mortgage fraud investigations the FBI is conducting and you say, quote, "The number of FBI mortgage fraud investigations has risen from 881 in fiscal year 2006 to more than 2,000 in fiscal year 2009. In addition, the FBI has more than 566 open corporate fraud investigations, including 43 corporate fraud and financial institution matters directly related to the current financial crisis. The increasing mortgage, corporate fraud and financial institution failure case inventory is straining, and I repeat straining, the FBI's limited white-collar crime resources," end quote.
Mr. Pistole, if you would, please give us your best estimate. How many more agents do you need, does the FBI need now to keep up with the growing number of fraud investigations?
MR. PISTOLE: Thank you, Congressman.
We are obviously doing a scrub of all of our investigative resources internally, initially to assess whether we can move additional resources from -- first, within our criminal investigative division, from violations that are not as high a priority as this.
And that's where we have gleaned those additional bodies, doubling from 2000 -- from 2000 two years ago to where we are now.
We also look at the enhancement through the task forces, which I also mentioned.
I would have to get back with you in terms of a precise number, but we obviously --
REP. MOORE: I would appreciate that, sir.
MR. PISTOLE: -- will do that. We're obviously working with the department and OMB --
REP. MOORE: Absolutely.
MR. PISTOLE: -- to assess what we may be able to get in an -- in the out years, 2010 and beyond. In the meantime, we are moving those resources as we can do that.
REP. MOORE: Well, that would be very helpful, because I think every member of this committee want -- would want to make sure that your department, your agency, has sufficient personnel resources to conduct the investigations necessary to stop what's going on.
MR. PISTOLE: Thank you, Congressman. Greatly appreciate that.
REP. MOORE: Thank you.
And Ms. Glavin, as a former -- I was a district attorney for 12 years in my home district, and I certainly understand how important personnel resources, especially prosecutors, are in trying to stop some of what's going on here. My question to you is basically the same as I just asked the FBI agent: Do you have, you think, adequate personnel resources in terms of prosecutors right now -- does the Department of Justice -- to do what needs to be done to get this thing under control?
MS. GLAVIN: It just so happens that the attorney general made some public comments about this a couple days ago, and had indicated that he'd asked the president and OMB to take a look at our budget numbers to -- from 2010 to give additional resources for what the attorney general calls the traditional side of the department, which would be the non-national-security side, so that we have the ability to hire new agents, look at financial-fraud matters as well as hire additional prosecutors to look into those matters.
REP. MOORE: Thank you, Ms. Glavin. I truly, truly believe that every member of this committee, Republicans and Democrats, believes that we want to provide sufficient resources to the agencies here to stop what's going on when there are abuses and violations of criminal law. And I thank you for that. And if you can provide any written more -- any more written information about what you need, we'd appreciate that as well.
Thank you, Mr. Chairman. I yield back my time.
REP. FRANK: Gentleman from Texas.
REP. AL GREEN (D-TX): Thank you, Mr. Chairman.
I thank the witnesses for appearing today, and I also thank my colleagues for the questions that I've heard. I -- the questions themselves have been beneficial to me.
Ms. Walter, ma'am, you indicated that the credit default swaps were -- and I'm using my terminology now -- but under the radar, such that they had become quite pervasive before we had an opportunity to discover the impact. Is this a fair rendition of what you're saying? Or would you prefer to say it another way?
MS. WALTER: Yes, Congressman, I think that's part of what happened, because unlike in -- with respect to instruments that trade on an organized and regulated market, the information wasn't available. Everyone knew they were growing, and growing fast, but we knew very little about the underlying aspects of them.
And because they were not standardized, the terms vary.
REP. GREEN: A follow-up question quickly. My time is limited. I'm sorry.
MS. WALTER: That's okay.
REP. GREEN: If this is true, is there some agency that these products are required to be registered with? Is there some clearinghouse? Is there some methodology by which we can ascertain that such a product exists so that we can make some determination as to the worth of it?
MS. WALTER: There has not been an agency with which these types of instruments have to be registered. We do obtain piecemeal information about them, various of us up here, through institutions that we regulate. As Governor Duke mentioned earlier, there is now one central clearinghouse that is up and running, and that will cause some further information to come forth. There are likely to be at least two more. And that will cause some standardization of the instruments as well.
But we think participation in a central clearinghouse should be mandatory and there should be an information flow to the regulators across the board.
REP. GREEN: And just for my edification, does everyone agree with the commentary accorded -- just presented? If you disagree, will you kindly extend a hand into the air.
If such a clearinghouse is needed, and if it should be mandatory, should the penalty for failure to comply be civil or criminal? And can you give me some indication as to how we would enforce such a penalty, please?
MS. WALTER: If there were a requirement placed in -- by statute, there would be, depending on the statute in which it was placed, there would be civil law enforcement authority. And I once again will defer to the criminal law enforcement authorities about how best to address criminal sanctions for failure to follow the law.
REP. GREEN: Are you of the opinion that they should be criminal as well as civil, the penalties or sanctions?
MS. WALTER: Yes. I would certainly support of that, of course with the appropriate state-of-mind requirements and the like that are true in general with respect to criminal prosecution.
REP. GREEN: Mr. --
MR. PISTOLE: I think we'd have to look at the details. If it's tantamount to a false statement, then obviously there would be those criminal sanctions. But absent that, in terms of a central clearinghouse, I think the thing we would not want to happen is to slow down anything in terms of the sense of urgency and focus on where we're going. And we have fairly robust reporting requirements now to the individual components here, so my own concern would be in going to a central clearinghouse, does that somehow slow something down.
If it acts as a de-confliction mechanism, that's always beneficial.
REP. GREEN: Well, my concern is, these products, they embrace so many people and so many lives. If we -- do we slow down at the end and prosecute over some long period of time, or do we take the time to make sure that they are products that will not harm us, is the question.
But, listen, don't answer that. I want to go to a closing statement. I do not favor invidious persecution. I do favor vigorous prosecution. And I think the public is not privy to prosecutions that are taking place. I believe you when you say they are, but my suspicion is most members of the public would say not enough is being done. And if it is as you say it is, we have to find a way to get this message to the masses, so that not only will they know that the prosecutions are taking place, but also such that there will be a proper deterrent.
My time has expired. I yield back.
REP. WATERS: Thank you very much. Mr. Foster?
REP. BILL FOSTER (D-IL): Yes. Governor Duke, my first question, do you think that detection of fraudulent mortgage originators would have been quicker without teaser rates and so on that temporarily hid borrowers' inability to repay?
MS. DUKE: I'm not sure -- I'm not sure that I can understand the characterization of the fraud as the inability to pay, because at the time the inability to pay was not necessarily required by regulation or by statute. It was only in the HOEPA regulations that the requirement of identification and verification of the income that would be used to pay became a requirement for making a mortgage loan -- if that's responsive to your question.
REP. FOSTER: Yeah. Well, I was just wondering, you know, if the only kind of mortgages that were allowed to be originated were things that had a constant level of payment, just this sort of -- this sort of, you know, fraudulent --
MS. DUKE: The regulations actually address not only fixed-rate mortgages, but also variable-rate mortgages, and require that they be underwritten to the fully-indexed rate, so that they be underwritten to the rate that they would automatically go to after the teaser time expired.
REP. FOSTER: Okay. Is there anyone else that can make a comment on that?
MR. GRUENBERG: Congressman, I would just say I think that the teaser rate was one of the means by which those trying to engage in predatory practices drew in borrowers who didn't really fully understand the terms of the mortgage, when it would adjust upward. So in a sense, it was part and parcel of the problem. And indeed, the guidance and the rules issued by the Fed under HOEPA try to address that by requiring lending based on the borrower's ability to pay, which hopefully would address that kind of a mortgage product.
REP. FOSTER: Okay. Let's see, Comptroller Dugan, I guess this question is for.
How comprehensive is the list of banned individuals? Is the list public? Is it nationwide? And does it span all financial services industry?
MR. DUGAN: I'm sorry, Congressman, could you --
REP. FOSTER: Oh, yeah.
I was just wondering how comprehensive the list of banned individuals is. Is it public? Is it nationwide? And does it span all financial services industries?
MR. DUGAN: Yes, it is public. And we publish it whenever we issue such an order. And it's put on our website. And it's distributed to all the law enforcement agencies as well; well understood in the community.
REP. FOSTER: Okay.
Is it easy for consumers to sort of get at it and be aware that --
MR. DUGAN: Yes. It's on -- there's a central website that all the agencies -- there are links from all the agencies about who's banned and who's not.
REP. FOSTER: Okay.
And then the last question I had, I guess, is to everyone. And it will probably require a written response. I'm trying to get my arms around, what is the optimum level of effort and money to put into enforcement? And so what I'd like -- if you could answer first, you know, what is your budget associated with enforcement activities? What is a best estimate of the losses in the area under your purview?
So for example, for the SEC, that would be security fraud and related activities. And what would be the effect of increased avoidance of losses for a 10 percent and a factor of 2 increase in your budget? Do you understand my question? I'm trying to just sort of prod the shape of the curve. From a purely economic point of view, there's some best amount to spend on enforcement activities.
And if we're underspending, then giving you an additional dollar will result in more than one dollar of losses avoided. And if we're past that point, giving you an additional dollar will result in less than a dollar of avoided losses. And I'm just trying to get some feeling for where we are, on that curve, for each of your activities.
Okay, I yield back.
Ms. Chairman, I yield back.
REP. WATERS: Thank you very much.
REPRESENTATIVE ANDRE CARSON (D-IN): Thank you, Madame Chairwoman.
I appreciate first of all all the witnesses for joining us today to discuss these very important issues. My colleagues briefly touched on the recent growth or mortgage-foreclosure rescue schemes.
I represent Indiana's 7th Congressional District, a district that has seen dramatic rates of foreclosures in the past two years. I am extremely invested in making sure my constituents are armed with an effective knowledge base about these scams.
My first question goes to Mr. Pistole, a federal Hoosier. You said earlier, sir, that the FBI has cases, has open cases, and mentioned the problems with foreclosure rescue fraud in your testimony.
Would you please elaborate on the most common forms of scams your agency and its regulatory partners have seen lately, and what specific kinds of action that they bureau has taken so far against these operations?
MR. PISTOLE: Thank you, Congressman.
Yes, what I can talk about is from Operation Malicious Mortgage, which I mentioned, that is ongoing, but where we've had over 400 people arrested. Part of that was focused on upfront lending, all the false statements and the fraud involved in those mortgage applications.
We've also seen areas of bankruptcy fraud associated with that. So you're further downstream, in terms of the fraud, where people who are caught up in it simply can't pay. And they may be even unwitting people involved there. But then there is a bankruptcy fraud committed.
Another aspect is on even in the reverse mortgage area, where people, senior citizens, are able to get reverse mortgages.
There has been fraud that has been uncovered in that area.
We're looking at all of those to try to assess the systemic nature of it and the numbers that would represent, again, under prosecutive guidelines for each U.S. Attorney's Office, what makes sense in terms of trying to prioritize our limited resources in a way that can have the maximum impact, for example, on Indianapolis.
And so those are some of the areas that we have focused on. There's virtually -- as one of the other members mentioned earlier, virtually any scheme that could be conceived or devised has been and we believe we have uncovered virtually all of them. It's simply a matter of applying those resources to the problems in the various districts. And that's where we are right now.
REP. CARSON: Thank you, sir.
Secondly, Mr. Dugan, Mr. Gruenberg and Ms. Dugan (sic), would you please comment on whether or not banks have been stepping up their outreach to troubled borrowers, at least warning them of these scams that are taking place?
MR. DUGAN: Speaking for the OCC --
REP. CARSON: Sure.
MR. DUGAN: -- we have put information up on our website about the scams. And I also wanted to mention that the NeighborWorks organization, which a number of us sit on the board of and is funded by Congress in part, also has an initiative that's specifically related to this particular issue, which we support.
MR. GRUENBERG: (Off mike) -- Congressman, I should mention the -- pursuant to a directive from -- from the Congress, the FDIC recently conducted a large nationwide survey of banks in terms of their outreach efforts, particularly to those who lack access to mainstream banking institutions. And I think it's fair to say that the survey indicated that in terms of efforts to outreach and inform people in the community about the services that mainstream financial institutions offer, there has been an increasing effort by insured institutions to do that.
REP. CARSON: Okay. Thank you, Madame Chairwoman. I yield back the balance of my time.
REP. WATERS: Thank you very much.
Mr. Gohmert had a request.
REP. GOHMERT: Yes. Thank you, Madame Chair. I have two questions that I would like to ask for written answers to, if I could, to be submitted within the next two weeks --
MS. WALTER: Yes, sir.
REP. GOHMERT: -- if that would be appropriate.
One, this is to everybody -- and we've got a pretty amazing panel here, when you look at everybody's title. And it is this question: What would you recommend we do legislatively to keep at least some financial risk with those who put people in mortgages and with those who package and sell them as securities?
If your answer is do away with mortgage-backed securities, fine, but I'm not looking for a treatise on what all is involved or who could. The question is very specifically what do you personally recommend, because if you don't have suggestions on something that nearly has brought down the financial system, then we're in bigger trouble than I thought.
And the other question is to the FBI. And that is, what is the status of providing the states access to the criminal history information through the nationwide mortgage licensing system and registry as required by the SAIF act, specifically since states are going to need that information (this summer ?). Has that, or when will that access be granted?
Two, what is the status of setting up the distribution mechanism between Department of Justice and the appropriate state agency? And three, who within the FBI is responsible for granting this access?
And last, can the FBI provide this committee and Judiciary Committee with periodic progress reports on the status of this issue?
REP. WATERS: All right.
REP. GOHMERT: Take care of that? Thank you. Thank you.
REP. WATERS: Thank you.
Mr. Posey, I think you had an additional question you wanted to ask.
REP. POSEY: Well, thank you very much, Madame Chairman. This would be for Ms. Galvin and Mr. Pistole. Written responses too, just in the interest of time. I appreciate the patience of the Madame Chairman.
To what extent are the RICO laws useful to convict those committing white-collar crimes? I understand that DOJ prosecutors do not use RICO approach very often. How often is it used? And why is it not used more often?
Are the RICO statutes sufficiently broad to capture the kinds of activities white-collar criminals engage in? What are the limitations of a RICO approach in deterring and prosecuting financial white-collar crimes? How do prosecutors determine criminal intent apart from recklessness or general incompetence?
And then finally, how best could members of Congress strengthen criminal statutes to discourage some executives from running off with big bonuses while running their companies into the ground? I mean, that's the bottom line that we're looking for.
And I thank all of you for your attention and your courtesy and for appearing here today.
REP. FRANK: Did the gentleman from Virginia want to ask some questions?
REP. SCOTT: Yes, if I could, Mr. Chairman, just very briefly pose a couple of questions to be answered for the record.
Ms. Walter indicated some of the exotic instruments that are being used. One of the problems we've had is the deviation from insurance standards for what are essentially insurance products. If you could comment on the need for assets to back what are essentially insurance products and the deviation from the need for an insurable interest before you can buy what is essentially an insurance product.
And for Ms. Glavin, whether or not there are any changes that we need in restitution laws to make sure that we can get our assets recovered, and whether conspiracy laws are sufficient to -- and also Mr. Pistole, if you could answer this -- whether conspiracy laws are sufficient to get those who may also be involved, like the accountants and others who may be involved.
And finally, to Mr. Polakoff, you indicated -- cease-and-desist orders. Could you give us an idea of what you're using these cease- and-desist orders for? Because my initial reaction is that some of these should have -- could possibly be referrals for criminal activity rather than "stop breaking the law" -- if you could give us an idea of what you're using those for.
Thank you, Mr. Chairman.
REP. FRANK: I thank the panel. It has been useful, and I must say I thought the questions asked by my colleague Mr. Posey from Florida were useful ones. We will look forward to those answers.
And Mr. Polakoff, you gave us some specific legislative suggestions -- Ms. Glavin did as well, although those will go to the Judiciary Committee. I promise you we will take all of them very seriously, because we clearly have got, collectively, to do a much better job than we've done, as we go forward.