we'll have any for turn on equity. that would overstate the costs. there are a number of other things that are just different about the way we operate. we are not a profit oriented institution. we don't have shareholders that need to return go and those portions of the city don't make sense for the way you look at fha. and, frankly, they're not required by the law. >> i understand it's not required. that's what we need to change the law. i see my time is up. >> with that, ms. velasquez for five minutes. >> welcome, mr. secretary. for me take a moment to thank you for the leadership and your foresight in dealing with this massive housing disaster that you were confronted with. and i want to thank your behalf of the 13 million families who have been able to keep a roof

over their heads, and everything that you're doing to assist those that are at risk of foreclosure. representing -- excuse me. [inaudible] representing the 99% of this country. so my question is, mr. secretary, during the housing bubble the fha insured less than 500,000 mortgages. after less than five years fha's obligation has expanded to cover over 1.7 million mortgages more than a threefold increase. did the fha take any steps to prevent private lenders from shifting the risk of underperforming loans to the fha and, therefore, taxpayers?

>> it's a very important question, and we were very concerned when we came into office that risk management was not strong enough at fha, that we had not taken sufficient steps to make sure that we were not going to get those very same subprime lenders that had caused such damage to shift over to fha. and so we appointed the very first chief risk officer in the history of fha. we have created a whole organization risk management organization under that chief risk officer. that has taken an important step. we institute a whole set of underwriting changes which have improved the quality of our book. we have also taken substantial steps to increase our enforcement. i mentioned more than 1600 letters we've excluded from doing business with, with fha. more than four times the number of lenders of the prior

administration had penalized in its entire eight years. and so we've taken a whole series of steps, and others, that are critical along those lines. and i really do think that's a big reason why the performance of our loans has been so much better since, over the last two years. >> thank you. according to the hud report, and then the fight alone does not expect him to come and solve it and will return to congressional, congressionally mandated percent capital ratios by 2014. mr. secretary, is this projection based on home values increasing over the next few years? and if that is the case, how will the fha protect taxpayers if home values do not rise as suspected causing the indemnify fund to seek help from treasury? >> very, very important, and just to be specific.

the actuarial report predicted that home prices would decline in 2011 by 5.6%. and then would begin to rise about 1%, 1.3% next year. that's sort of a base case that it is projected onto and based based on that it's rejected we would recover to the 2% capital ratio by 2014. obvious none of us has a crystal ball and it is real risk that home prices could perform worse than that. and the actuaries looked at a whole range of scenarios there. to ensure that we have protection against that we are looking at a series of steps. i laid out five different steps in my written testimony, including premium increases, further steps in lenders enforcement. but i think it's very important of the committee to understand balance. given that the actuary predicts

that hundred any economics care that they look at, the new loans that we are making are profitable. given that our premiums are already at the highest level they been in the history of the fha, given that the losses are really coming from old books of business, we have to balance any premium increases or other steps that we might take on new loans against both the fairness of that, given that they are already profitable, and the fact that that has some risk to the housing market more broadly by limiting the number of people who might purchase homes and pushing home prices down further. and so what we need to look at as well is how do we recover what we should be recovering from the overload. and that means increased lender enforcement and other steps that we are looking at as well. >> the gentleman's time has expired. with that, mr. neugebauer for five minutes. >> thank you. secretary donovan, it's good to

see you again. i want to go back to something i said in my opening statement, and it may be a conversation you all had about market share. but what i want to talk about is something you were just alluding to, and that is your new business, is priced differently than your old business once. because it turns out your old business probably wasn't priced appropriately because you didn't have enough money to cover that. and so now the funding levels are actually would be much worse than they are today if you hadn't had their substantial increase in market share, would you say that's true of? >> i think there's no question that the quality of the new loans that we are making has helped balance losses on the overload bit as i said earlier, that is, congress set us up to

be countercyclical, and so this is not something that we intended. in fact, we're working to shrink our market share, and that's beginning to have an effect. but certainly those new loans are balancing losses from those older loans. >> provided a profit in the cash flow to sustain the losses in those. and so one of the questions that i wanted to ask you about, putting these new risks management tools in place, you have raised your guarantee fees. are you doing locational risk analysis? because obviously there are pockets where if you're looking at, she said, the study showed maybe a 5% additional decline in prices, so, but there are other areas in the country as i'm sure you've looked at that probably could actually have more than 5% decrease, further decrease in prices. so when you're looking at making

loans in those areas, are you saying, are you increasing the fee or are you saying you know what, we may not want to be making 97% loans in that area because we have a downside, or is that a part of your risk management? >> congressman, i would love to be able to have a way of knowing what's going to happen in the individual housing markets, and the national housing market. if you know someone who could help us do that with precision, that would be a wonderful tool. the truth is that there are not great ways of knowing what's going to happen a year out or two years out at the national level, much less at the local level. we work with appraisers. we have very clear appraisal techniques. we've been trying to improve those to try to get to real market value. and to look at the kind of

things you're talking about. certainly we have gone to a disaggregated more geographically specific set of home price indicators in the modeling. that's one of the improvements we have made. but the truth is, and nobody is able to do this to get, you, very precise geographically specific pricing. the most important thing we can do, and this is what we did to come is to look at the risk factors for a particular borrower and to raise to 10% the down payment requirement for riskier borrowers. frankly, what we've seen since we have done that is that our early payment defaults have declined by two-thirds in those riskiest loans. so the evidence is that that policy is really having a good effect. >> let's just go to the fact that you're a subject them and i think it's one of your best case scenarios, in the study was that you thought it would be additional 5%, you know, decline in housing prices, bright?

>> actually a predicted that it would be 5.6% this year. since that was done in june, we have another corner of data and it's better than was predicted by the actuary. so it's likely at this point that that 5.6% isn't quite as bad. but that was the prediction for this year. >> so if you're making come if you predicted that you're going to have a 5% decline in housing prices and you're making 97% loans, aren't we setting people up to be underwater? i mean, and when you talk about predicting the future of these locational issues, that is historical data entry with inventory levels are at many of these locations, how long it takes to foreclosure properties in different jurisdictions. and to me if it is an important part of the risk and us is about what you're saying is we don't do that?

>> what we come in what we clearly looking at is what are the risks of different factors in underwriting. down payment is a critical piece but it is one of a number of factors. and what we see on the performance of our high ltv loans, because we have excluded the highest risk borrowers from doing that is very, very strong performance. early payment defaults are far lower for the highest credit score borrowers with high ltv than 10% down payment with lower credit score borrowers. i would be happy to share with you more of the data but what we're basing this on is real experience in real-time, and the performers there is strong enough. the other thing i would use it is -- [talking over each other] i will let you finish. >> we look back at last year. if we had even gotten rid of the highest ltv loan on purchases,

our estimate is that 10% of the bar was an entire country would not have been able to buy a home. and so what we are balancing here to declare it is making it as safe as possible but also not trying to do anything that would threaten the housing recovery. and, frankly, anything that would hurt the housing recovery would do much more damage to the taxpayer, not only at fha but in gses and elsewhere, and that's where the balance we're trying to maintain. >> thank you, the gentleman's time has expired. mr. eichmann from new york for five minutes. >> thank you. i want to probe if i can't for a moment and reflect on the philosophical differences within the committee as far as the role of the public sector and the private sector, which i think is indicative of the same discussion in the country.

there are those who believe that the government or the public sector should play very little or no role in many aspects of public life, housing in particular in this case. and it should be left up to the private market. i think is very reflective of our votes, our attitude and our approach to things. that being said, how much money do you make? >> me personally? fha? >> on your day job. >> i would say i make a fair salary. it is under $200,000 spent it's about what we may, bright? >> yes. >> and if you took a bonus from somebody, you would go to jail? >> we do have certain, very,

very small we can make to employ. i'm not one of those who can get one of those bonuses. >> there's no incentive for you to gobble up business from other sources, is there? >> was other than getting an attaboy. >> based on discussions of the committee today i was a there are lots of incentives for me not to do more business. >> but they are not financial? >> absolute not. >> you have no motivation, right? right? ..

>> thus far, although we continue to be vigilant given the risk. >> how come you did so well when they did sew poorly in the private sector and those who are you in now under conservatorship? >> i think the main factor fha continued to make plain-vanilla, 30-year, fixed-rate, fully-documented loans. that's why our market share shrunk to 2%. >> you have no problem with your market share shrinking? you don't take it personal. >> that is what congress

intended us to do. >> as part of your mandate? >> we would not, when the private market is operating correctly -- we would need to do very limited business. >> when you were establish back after the depression for the purpose of expanding in the brink, into the breach when there was a crisis within the system, and you expanded to fill that roll those who said, oh, my god, look what they're doing, they're stepping into the breach and that is a private, that is dangerous place for them to be, how terrible, you were really fulfilling your role and your mission and obligation were you not? >> we believe so, yes. >> you would be very happy to have a smaller market share and be stable and ready to fill that breach again once the problem has been resolved within the housing market? >> more than that, i believe we are taking affirmative steps to reduce our market share. >> i want to thank you and your agency doing a great job you're doing and standing ready to be the professional fireman that you are.

withstanding the criticism. people who say you're preventing the good samaritans from coming in and fighting the fire. >> thank you. >> thank you very much. yield back the balance of my time. >> thank you, with that, mr. posey from florida for five minutes. >> thank you, mr. chairman. thank you for coming, mr. donovan. first of all i would probably be remiss if i didn't compliment your buzz osley in the orlando office. >> thank you. >> been a great asset to our office. been a great asset to educating the public in my district how to stay out of trouble and if you're in trouble with your mortgage, how to best handle it. great, great job down there helping educate the public and mitigate losses. >> thank you. i'll let him know. >> couple questions. what are you doing to prosecute the fraud that you've discovered that helped put us into this undesirable position we're in now? >> we are working very closely with the department of justice. we obviously don't do the

prosecuting ourselves. the department of justice represents us. we have active cases against a range of lenders. a good example of that is tbw, which was not only one of the larger fha lenders but also a large fannie mae and freddie mac lender. we discovered working closely with our inspector general serious problems including fraud in the work that they were doing with fha lending. >> okay. just because time is limited i'm going to ask if you would send me a memo and brief me on that. >> absolutely. >> the number of cases and scope of it and i will follow up with you on that. do you see any needed improvement in the reo process? >> let me, one thing i would just mention related to the enforcement, we have legislative changes that we would like to pursue with the committee that we'd love to work with you on to

improve our ability to go after lenders and kick them out of the program when they're not doing their job. so that is an important next step. >> you will get 100% from both sides of the aisle, i promise you that. >> we worked well with the re. >> reo we worked closely with freddie mac and fannie mae and asked new ideas from the public things we could do to improve our reo processes. we expect by the first quarter of next year to implement new pilots around our work on reo to improve those processes. >> if you issue any bulletins on that i would like to be kept in the loop. on paper it is a pretty attractive process. on the ground in reality it is devastating. it is inefficient. it causes you greater losses than you would sustain otherwise. harms neighborhoods to a greater degree than would happen if that process was streamlined, more effective, allow people to participate in it. on paper it looks really

good but on ground level from my observation at least it needs to be vastly improved and can't even wait a year for that. what effect do you think it would have to make fha loans full recourse loans? >> i think you could argue about the amount but there is no question they would be substantially more expensive. and, in exchange for that i think there would be some potential improvement in performance. it's hard, various people have modeled in different ways. hard to predict how significant that would be. >> i would like if you have any data on that in your office i would appreciate if you would send it to me. if anyone has prognosticated what would happen there. and i wonder if there's somehow you might even make the awareness, i've heard it said by many people, the point made by many people and most recently by former senator graham that we hear

a lot of people are upside down in their mortgages and he compares that to somebody driving a new car off the car lot. the second they drive off, if they financed their car they're upside down on their car too. that doesn't mean it makes good sense to abandon a car and go buy another one. so i just wonder if there is some way you might initiate that in your education program. i know there's so-called financial advisors telling people, hey, if you're rund water walk away. if you're underwater walk away, and that doesn't help really at the end of the day anybody. if people would hang in there a little bit better probably like they do their automobile, just view it a little bit differently. i think there is a negative propaganda being perpetrated to a large part of the population, and no positive information coming from the other way to put it into proper perspective. more reality, i believe and i'm sure you read the book, reckless endangerment.

would have been a good title for a former congress but, you know, the authors of that book believe that the worst of this market is still ahead of us. we've been unable to get anybody from the the department of treasury to tell us whether or not they think we have bottomed out it give us any real information to people we think are the most knowledgeable about it, can not give us that information. i'd appreciate any insight that you have. i see my time is up. thank you, mr. chairman. >> happy to follow up. >> all right. with that, mr. capuano from massachusetts for five minutes. >> thank you, mr. chairman. mr. donovan, do you have any idea, approximately how many loans fha currently has out there right now, about? >> the total value of our portfolio? >> the number of loans. >> over a trillion dollars. the exact number? >> the number of loans. >> right about seven million. >> about seven million? just curious of those 7

million people, these are all first-time homebuyers, is that correct? >> not all of them are first-time home buyers. >> most. >> refinancing available. that is much smaller share. >> 90% are first-time? >> our estimates of all the first-time home buyers who bought a home last year, about 56% used an fha mortgage. it is not only one our programs a huge share, it is a huge share of the overall -- >> the vast bulge of all fha home mortgages, first-time home buyers, people getting in the market, young people for obvious reasons. i'm just curious. i know you don't know the answer but at some point somebody to take a look see how many of them if it wasn't for fha could they afford a 50% down payment and then afford to carry a mortgage over five years period? i ask that question because correct me if i'm wrong, i know you have staff that has great history in their mind, before fha, wasn't that the typical mortgage in america,

50% down and a five-year repayment period? >> that was very typical before fha, that's correct. still in many countries around the world, those are the types of terms. >> and the creation of fha instituted the 30-year mortgage we now come to take as a given. they instituted the practice of limited down payment, 20%, 10%, down to 3 1/2% whatever the number might be. is that a fair historical memory? >> yes. >> i ask that, but i'm not against the private market but that was the private market did when there was no government involvement. the private market basically disallowed most people in this country, my guess is of the 7 million mortgages you have now, very few of them would ever have been able to have put 50% down and pay a mortgage back at rates that would be required over a five-year period. very, very few of them. which is why homeownership has gone up in this country. i think it is a fair debate we're currently having as a

society where the level of homeownership should be but i don't think anyone has the audacity to suggest you go back to 30 or 40% it was before the fha and i say that because all this discussion about somehow you've done something wrong is ridiculous if you believe that homeownership and middle class go together. and i guess i do. those who don't, should turn to their own constituents, tell them to sell the house and rent. so i guess the other way, the other thing i am concerned about, i think you are as well, some of the issues relative to the capital requirements, the reserve account. and i actually think that it's long overdue and well-done to tie down payments requirements and other requirements to fico scores. not that i think fico scores are the holy grail but you have got to have something and they're as good as any. i have actually think it's a good thing. out of curiosity i think you already said it but i want to be clear, have the repayment levels improved now that you increased fico

score requirements? >> our early payment defaults have dropped by 2/3. >> so they have improved? so defaults have gone down as increased fico requirements? >> the other thing, and i have to thank the committee for this, the most serious problems we had, the worst loans were seller-funded down payment loans and those, alone, our estimate are responsible for $14 billion in losses and that was stopped by this committee in just in the beginning of 2009. >> is it also fair to, is it a fair conclusion that in the, in the average home, the more valuable homes that you're allowed to do, ones closer to your cap, are the ones that have a lower rate of default? is that a fair conclusion? >> given that we haven't been doing those larger loans for very long, it was raised as we went into the crisis by congress. we don't have definitive data but the early default performance suggests that

those larger loans actually perform somewhat better. >> so it would be fair as with, because again, i haven't heard any disagreement from you the idea is to get the capital reserve up back where it is supposed to be so everybody can feel better about this. the fact that you have raised these standards and narrowed down some of the scopes who can get in and you're raising that number, it would be fair, i would think to do this statutorily say not just for you but for the next hud secretary the next congress to say, if those capital levels go down, then it will automatically trigger some of the things you already instituted. and if we do that, and you continue ton the course that you're at, kind of tightening it up when the reserves go low, not to get you out of the market but because no one wants a bailout, no one wants you to default, no one wants problems with fha, we want you to be stable why shouldn't we do this statutorily in general way exactly type of things you've done and more things as well? >> gentleman's time has expired on that.

i will allow very brief, very brief response. >> be happy to follow up. i think the only thing we need to be careful of is the balance between recovering on old loans that were the problem versus putting increased costs on new borrowers and given that our premium levels are already at the highest level, i think making sure we maintain that balance, not just focusing on underwriting of new borrowers, but also what we're doing around old loans on enforcement is critical as well. >> and we will go to congressman schweikert from arizona. and the chair will make a historical note that the fha was created in 1934 according to my memo in front of me. so with that, mr. schweikert. >> thank you, mr. chairman. i'm glad someone had the memo. forgive me for doing this, but there is so many questions i would love to run through, mr. secretary. so we'll try to pretend to do the lightning round. first off, and i think there may be an informational correction from the left

that exchange of testimony. fha is not restricted to first-time homebuyers correct? >> that's correct. >> okay. the way the last dialogue went, almost listening they would have to be first-time homebuyer and we want to make sure that on the record it is not that way. also, you're talking about the performance of particularly on higher end of your ltd, your loan limits, performing pretty darn well. if we're walking into this environment where some of our regulators are actually doing the qualifying residential mortgage and the qualifying mortgage definitions, isn't that going to ultimately continue to inhibit or drive more business to fha and stymie the creation of a private label mbs market? >> just to be clear, first of all, i think we were talking about large balance loans. >> i was just using that as an example, loans that are

performing well. so that would actually be, if you and i were going to go out start our own private label mortgage you are not going to start securitization business that is probably where we go first because it is performing well. if i have qualifying residential mortgage and risk retention and all these other things over here how will i ever compete with fha? >> there is no question that there's an important balance that needs to be instruct in the qrm between making sure that we don't repeat the mistakes of the past but at the same time creating a robust private market. so i think you raise an important tension but for fha, we have a range of mechanisms, including our premium levels and other underwriting, that have allowed us and loan limits of course, which have allowed us to insure that the private market can function very well. >> well mr. chairman, actually that is really not true. i mean, you have your gfe,

your fees and you do have loan limits but because of the current loan limits which my understanding you weren't particularly thrilled with, there is no private market out there. now a lot of that there is uncertainties within dodd-frank and those mechanics. i'm just, you know, please understand, i've had an fha loan. i've sold, my brokerage firms over the years probably sold hundreds if not thousands, you know of them. so it is not my opposition there. it's sort of mission creep in many ways. you are a huge portion of the market today. mr. chairman, mr. secretary, has your legal staff thrown out any warnings or concerns about the fact that you're well beyond the statutory 2%, and any sort of recourse that either you, in your capacity or as an agency hold by violating the law right now? >> so, i would say we've had a lot of discussions with the legal staff.

it is obviously, my concern is not just on legal side, it's on the business side, that we need to take significant steps to make sure that that capital reserve gets rebuilt. just in terms of the specifics of the law, my understanding is that it requires if fha goes below the 2%, that there be a plan put in place to insure that the fund recovers as quickly as possible. those are the steps that we've described. those are the additional steps that i talked about that will be in our 2013 budget. all or parts of what is required by the law to put in place steps that will help to fund recovery. >> mr. chairman, secretary, why i'm a little concerned i go back to previous year as testimony, sounded very similar. we'll build the plan. please understand, i don't want there to be a shock to fha where all of sudden, some legal opinion comes and you have to stop writing loans or you do this and that because i don't think

the real estate market can handle that. i want to bounce to something mr. posey said because i think there might have been an exchange error there. i think he was, he touched on what do you think would happen if fha loans were nonrecourse, were full recourse, excuse me. would that help your credit quality? would that also help us in some way where, for many of us that have concern someone gets an fha loan, 3 1/2, 5% down and i somehow am able to get a credit line or stacking a second instrument behind that, that there is absolutely no equity, in many ways you're incentivized to walk away from the loan. should that trigger recourse on my first mortgage or deed of trust? >> gentleman's time has expired but i will allow you to answer quickly. >> would actually need some clarification on the question. i'm not sure i'm clear. be happy to follow up afterwards or. >> mr. chairman unanimous

consent for 30 seconds. >> without objection. >> okay. right now an fha loan, nonrecourse. correct? >> uh-huh. >> if i go and put a second loan behind that, in most places other than texas, it's still nonrecourse but i have chewed up what little equity built in there and actually made it even more likely that i'm going to default or there will be a higher loss ratio on it. should, has there ever been discussion of policy on if i stack up, if i use what little equity i have in the property that the first should become recourse? >> i have not heard extensive discussion of that. there is certainly been a significant amount of discussion about whether to allow second liens. how to insure we don't get the same kind of problems that we've had in terms of the stacking of debt in first and second and thirds in many cases. that's clearly been a significant problem.

i think it's important that we have policies that insure that doesn't happen going forward. >> gentleman's time has expired. >> thank you, mr. chairman. thank you to the committee for your tolerance. >> on behalf of the committee you're welcome. with that, ms. mccarthy from new york has five minutes. >> thank you, mr. chairman. and thank you for having it hearing. and thank you for spending so much time with us because this is a great concern for all of us on both sides of the aisle because we're dealing with an awful lot of constituents at home that are trying to get modified mortgages. the, i think there is only, not going to mention the name but there's only one bank that has been working with us and only ones that have actually remodified a number of the mortgages we have been asked to help. but something that i wanted to ask you about especially what's been in the paper with our veterans coming home from afghanistan and iraq and coming home to find

that their house is underforeclosure when we had passed legislation to make sure that wouldn't happen. what can you be doing to protect these veterans coming home, even though we have laws but obviously, i mean, to me, it is, whatever is the highest fine that you can give to these particular banks, it should be and it should be. >> these, these examples are shameful and we have worked closely where we have found examples of that in fha we work closely with the department of justice. they brought a series of cases. i would be happy to follow up to give you background information on not only cases they brought but where they have won judgements against companies for that. the other thing i would add though too is in addition to examples on the foreclosure we have many, many servicemembers that are being hurt by being

underwater and the inability -- when particularly when they're asked by the country to relocate to another base and they're stuck in a house that's underwater. they can't sell it. hurts their credit rating. there's work that the department of defense has done, a set of programs that congress has established, that are very helpful in terms of making sure servicemembers aren't hurt by being underwater where they need to move as well. so that's another step that we can take that's very important. >> guest: if there is -- >> if there is anything you think we need to be doing more so please let us know. those that are defending this country and coming home, those that are lucky enough to come home uneninjured, we can't let this one go. >> couldn't agree more. >> certainly an awful lot of our constituents that through no fault of their own, they had a good credit rating, they bought a home, i live on long island.

a starter home used to be 500,000 but now it is 430 but still that is an awful lot of money for a young couple to get together to do that. i thank you for the fha loans. but also, i'm along with mr. gary miller from california, you know, unless we somehow come up with getting this housing market going again, through the real estate and building, our economy is not going to come back to the way we want it, and i hope that you're looking at, i know number of legislators here have given you different ideas, pieces of legislation, that we have written to jump start that. i hope that we, i was hoping that we could actually do it sooner than later but this session is almost over. but the question i want to ask you, your testimony states that the default rate on fha loans have been relatively stable throughout this year due to a number about factors and i know you

touched upon it but can you discuss the overall state of the housing market particularly to the stable default rates and anticipated rebuilding of fha's mutual mortgage insurance fund for 2012? >> i think what's critical there, we've seen a substantial decline over the, about a year, year-and-a-half leading into this year. we have seen stabilization and even a small increase in delinquency rates in fha but also across the board. i think that with the kind of slowdown that the economy had in the late summer really impacted that to some degree and saw it come up somewhat but they have remained stable and substantially lower than we had seen historically and i think most importantly there the decline of about 45% in the number of people falling into foreclosure has been a

combination of both lower overall serious delinquency rates as well as the more than 5 million modifications, loan modifications that i talked about earlier in my testimony. those have been key, key pieces. >> my time is short. i know the president had mentioned and something i had mentioned years ago, that people that are going into foreclosures from unemployment or whatever to try to rent the homes to them until things got better. my time's going to be up but i hope that you are working on that. >> we did institute increased forbearance for unemployed homeowners in fha we required, went from a minimum of four months to a minimum of 12 months forbearance. we did the same thing with the treasury programs and we hope that the rest of the market will follow us on that. it is very, very important. >> thank you. >> lady's time has expired. with that mr. canseco from texas for five minutes. >> thank you, mr. chairman and thank you, mr. secretary,

for being here today. in your testimony, your written testimony you mentioned that over the past three years fha has made homeownership possible for 2.27 million first-time buyers. how many of these first-time home buyers used the $8,000 home buying tax credit included as part of the 2009 stimulus bill for their down payment? >> given that the tax credit is claimed after closing, we don't have precise estimates of how many families used the tax credit. so i can't give you a specific answer on that. >> all right. but you mentioned earlier in your testimony to some of the questions that the down payment is a critical piece in the risk analysis, is that correct? >> correct. >> okay. does the fha categorize using this $8,000 tax credit as a self-funded down payment loan which data

shows are three times as likely to default as other loans? >> in fact we were very aware of that history when we established our policy. what we said was we banned any use of the tax credit as a loan or something else that would be, go directly towards reducing the down payment. we allowed the, the tax credit to be used to increase the amount of down payment but we did not allow any homebuyer to monetize that tax credit to go out and borrow against it or do anything else. the down payment had to come from their own funds or from family in a way that any other loan would be required. so we made sure to, specifically to avoid the experience that you're talking about with the tax credit. >> so given that $8,000 tax credit could have come after the finalization of all of the documents you can't

really follow that $8,000 whether it went to make up for that $8,000 that went into the down payment? >> let's be clear about this. a family closes. they're required to have a $10,000 down payment for an fha loan. we check to make sure that that is coming from allowable fund. a bank account they may have. a family member. you know, very, so we would check. if they go and then get a refund from their taxes at the end of the year of $8,000, all that does is replenish savings that they might have. so it actually puts the homeowner in a better position relative to repaying their loan, not worse. our job was to make sure at closing that those fund were coming only from allowable fund, not, for example, by going out to a scam artist

or a lending, some, you know, local lender and saying, well i'm getting this tax credit, lend me the money to do that. so that was our requirement. >> so this tax credit, your answer is this tax credit did not go into the seller-funded down payment assistance? >> it is a completely different phenomenon. just to be clear the risk with the seller funded down payment was that you basically had the seller of the home raise the price. we often saw bogus appraisals and effectively get to zero down payment, or worse. here the requirement was that they have that down payment in their own cash, in gift from family, anything that would be traditionally allowable. so it did, we were very specific about the way that tax credit could be used. >> thank you. so fha estimate that is the capital reserve fund could with stand and additional

decline in housing prices up to 4% and remain positive. does this mean that the housing price declines in excess of 4% will trigger a taxpayer bailout of fha? >> so to be clear about that, the expectation of the actuary was a 5.6% decline this year, and our estimate, this is only an estimate, there are many other factors, that everything else staying equal, an additional 4% decline next year could trigger the need for additional assistance. but that is before any changes or other steps we might take. for example, and i lay out five different things we could do in my written testimony. premium increases or series of other steps that would add capital to the fund. and help to avoid that. >> does the recent increase in loan limits for fha encourage private capital to get back into the markets?

>> i, it does not and that is why we laid out in our white paper our position, the administration's position, that the loan limits ought to step down. on the other hand i do think it is important to point out that they do not, based on early data, put the fund at greater risk. >> gentleman's time has expired. >> thank you very much. >> mr. sherman from california for five minutes. >> thank you. i do want to emphasize that last commend and gave a similar response to gary ackerman. this increase does not put the fha fund at greater risk. if anything, as i understand your data it should help the fha absorb some of the risk it absorbs on blown -- loans of less than 625,000.

one concern that people is, are the fha reserves adequate? we obviously prefer that they be higher but it's my understanding that those reserves would not be exhausted if we ended up this year with a 5.6% decline in national home prices. and then there was a 4% decline next year. is this right? and do you predict a 4% or greater decline in the home prices next year? please tell me no. >> i will tell you what our independent data that was used for the acutarial predicted was that 5.6% decline, it appears we got third quarter data yesterday from fhfa and case-shiller. it appears likely the decline this year will be smaller than that 5.6%. it is now year-over-year

about just under 4%. and their prediction, moody's analytics prediction for 1.3% increase next year in home prices. so, i will tell you that is the base case that the acutarial is run off of. >> so we, the predictions have been more gloomy than actuality over the last several months and if the predictions hold, the fha will not need an infusion of federal fund? >> under the base case that's correct. i will note though however, that obviously we can't predict the future. that the predictions last year, the performance this year has actual been somewhat worse than was predict by moody's last year and that is why we are evaluating a series of steps that we could take and that we expect to be as part of our, included in our --

>> you ought to be planning for everything but the best estimate is home prices will go up infinitesimally next year and if they even go down by 4%, fha will not need money from this congress. as to, one thing i think we tend to agree on here is we want to give consumers as much choice as possible. another thing, i think we all agree on is that we want the federal government to take as little risk as possible. and the private sector to take as much of that risk as possible. and i would like to see fannie and freddie's conforming loan limit in high-cost areas raised to 729 because then you may in many of those cases have private mortgage insurance. as i understand the current situation, if somebody gets an fha loan the federal government is on the hook for the first dollars lost. if instead that loan was

privately mortgaged insured and fannie and freddie, then the private sector is on the hook for the first losss. do i have that right? >> that's correct. >> and so, if we can give consumers in high-cost areas like los angeles a chance to use fannie and freddie, that opens additional doors to them and those doors would involve less of the risk being absorbed by the federal government? than an fha-insured loan? >> i, as i, i think, i'm not sure if you were here earlier. i did talk about the fact that we've never had a situation where fha loan limits were actually higher. >> yeah. i remember when they were lower. >> and overall, i would just restate our position that we

do think we need over the long term to bring those loan limits down to more historical levels for fha. >> while increasing them for fannie and freddie i would hope because the one way you can get a double-dip recession is to see a decline in values, precipitous decline in values of homes in the 10 high-cost areas of the country. with that i yield back. >> thank you. and at this time the chair recognizes himself for five minutes. i want to say thank you to a couple of my colleagues allowing me to jump ahead here before i have to take off. my background is real estate as well as a few of the others that are here and, when i was in real estate back in the early '90s and into the late '90s, fha loans were extremely difficult to get. they were very unusual. and were sort of that last resort because they did go to those that were underserved and, i'm glad to

hear your position. i hope that's a clear position you have shared with the senate. who has pushed this increase on the fha loan limits and i encourage you to do that and talk to them as we're trying to readjust this. i do have one quick question. on page 3 of the report that you had given us talking about the underserved borrowers part of that, there's a note that, let me read. 56% of all first-time home buyers in 2010 according to the national association of realtors were fha buyers. is that, am i reading and understanding that correct? >> that is their estimate, that's correct. >> so do you believe that 50%, 56% of all first-time home buyers are underserved buyers? >> what i would say is we have a dual mission as far as i understand congress's creation of fha. in normal times to serve

underserved borrowers but that in times of crisis where there's a lack of private capital for fha to acts as a counter-cyclical force and to be able to serve a broader group and i think that's in fact what's happened during this crisis and i think the fact that it is 56% of first-time buyers is to some degree a result of that lack of private capital. so i would certainly expect and in fact would hope that that number would go down and return to a more normal level. but that certainly is not a level that i believe is the right level over longer term and in normal times. >> i would hope so as well. and, the countercyclical element role for fha, i think leads logically to the next question is, should all of these first-time home buyers, these sub-700 credit score buyers, i think it was noted 580 was a score that was out there and, should

these people be in a position to be in a position to be buying homes? >> would be happy to spend time with you showing the performance data. i think the fundamental question is if they're buying a price, a home they can afford with a product that is going to be safe and sustainable, and they demonstrate that they can be successful homeowners that's what we're looking at. certainly performance wee received, improved performance, by and large they can be successful homeowners. >> the fear a lot of us have in this current economy with the job situation as it is that may be more risky which goes back to a number of questions about, you know, requirements for reserves and those kinds of things. so, you had i believe it was mr. ackerman asked you a question and talked a little bit about bailout for fha your exact quote was, we don't need one thus far. the page 13, what, you're making the claim that the

current underwriting and premium structures have created an actual -- actuarially sound basis for growing capital at a rapid rate in the economy. i for one am pleased that it sound like it will be a easy pledge from all of us on this committee to say there won't be an fha bailout. i don't know if that is how sure you are of that but i guess i'm looking for some reassurance that the fha is not going to need that government assistance because that is what a lot of the concern is, that a number of us have on this committee. the. >> and it is my concern as well and we've been working very hard to do everything we can to make sure that we protect the taxpayer. to be clear, the new loans that we're making, even under the most severe economic scenarios that the actuary looked at, would remain profitable. so fundamentally what we're talking about here is a risk,

if the economy and the housing market performed worse than expected in the acutarial, that is the risk that could push fha's capital reserves it to the negative. i can't tell you here today that is zero risk. >> but doesn't that sort of go counter to your argument that the fha is needed for counter-cyclical and if you guys are that rock solid why isn't the private sector stepping in? some suspects that regulators are sort of clamping down on amounts of loans that banks are holding and those types of things. but i think you're seeing sort of that push-me-pull-you aspect to some of my concern at least. my time has expired and continue. >> just briefly i would say, i think we agree that we need to encourage private capital to come back and the fact that our market share is now shrinking is, evidence, i believe that, are the steps that we're taking on premiums and on underwriting are in fact moving in that direction. >> thank you.

and with that, mess waters from california for five minutes. she has, i believe the chairman had also made a commitment to you because you missed their opening statement there would be additional time and i will let the next person in the chair take care of that. >> i appreciate that. >> let's go with five minutes and you can ask for additional. >> thank you, very, very much. i'm appreciate tiff for secretary donovan and the time that he's putting in on this very, very important issue today. i'd like to remind the committee we saw this coming last year with when the capital reserve level fell to .53%. in response i worked across the aisle with then ranking members capito and baucus of the fha reform act which passed house on bipartisan vote, 406-4. although that bill wasn't signed into law, parts of it, most notably the provisions which allowed fha to raise

annual up front premiums were enacted separately. these provisions were the most important pieces from my bill because they were designed to give fha the resources they would need to raise their capital reserve levels however the provisions on fha being able to police fraud where likewise important and i'm disappointed that the senate didn't take up our bill. however, secretary donovan has taken advantage of the flexibility we were able to get signed into law last year and fha has tightened its lending standards. the average. fico score of fha borrowers has risen from the 620 to 700. in addition to more credit-worthy borrowers the recently extended higher loan limits will help fha to strengthen its reserves. there's been a lot of speculation in the press about whether or not fha need as bailout and i'm certain that you, secretary

donovan, may have gotten questions to that effect from members on both sides of the aisle but i just want to be clear, that fha remains the only source of mortgage credit for most americans today. investors are still reluctant to enter the mortgage market after being burned by originator misrepresentations and fraud during the run-up to the financial crisis. conflict of interest problems continue to plague mortgage servicers and just last month one private mortgage insurer filed for bankruptcy. in the wake of these problems and uncertainty fha has taken on a larger market role. that role has helped the middle class. there are millions of working credit worthy middle class borrowers would not be able to buy a home or refinance an existing mortgage if not for the availability of fha mortgage insurance. . .

>> if i may continue, i'd like to ask a few questions of the secretary. the fha has made changes to the down payment requirements for borrowers with fica scores with 579 or lower, 10% down payment and prohibits loans for borrowers with fica scores below 500. has this changed contribute to the strong economic value of the

current a book of business, is the new premium structure better aligned with market conditions? >> first of all, congresswoman, thank you for all your work with us on the fha bill that you talked about. we do continue to believe that many of those provisions that were not passed, that were part of the bill are critical to allowing us to continue to increase enforcement and other steps, so thank you for your work on that. we look forward to continue to partner with you on it. specifically on your questions the answer is yes. we've seen roughly two-thirds reduction in early payment defaults. in that class of loans, and that really i think is a result of the underwriting changes we talked about. >> had said underwriting minimums that combined credit score and down payment requirements to balance risk management with broad access to housing credit for borrowers would have a stroke of the fha credit quality standards.

could you comment on the impact of this panel, fha current book of business? >> well, what we see as between the last two years, the actuary predicts about an $18 billion positive net worth or those two books of business, so $18 billion of benefit to the taxpayer from those two books. i would also say the work we have done to look at what would happen if we removed the option for lower risk borrowers to get higher ltv loans, we think we could lose as much as about 10% of all the buyers last year, and that's the concern we have in terms of risk to the housing recovery if we were to restrict credit too much. it might actually perversely hurt attacks thereby increasing the lawsuits that we would see

on loans that were made in 2008 and before that. >> may i have unanimous consent for another minute and a half for ranking member? >> thank you very much. mr. secretary, could you comment on the steps hud is taking to increase enforcement of fha slender policies eliminates approval for lung correspondence and increased net worth requirements for lenders wanting to underwrite an fha loan? >> absolutely. i think one of the first steps that we took was to really create a strong risk management team and culture at fha, created the first effort, chief risk officer in the history of fha. we also increased net worth requirements for lenders that have not been increased in quite some time.

we stepped up dramatically both the investigations that we were doing, the sheriff loaned that we were reviewing, and consequently we have seen four times more lenders renewed from the fha rules during the period of this administration than in the entire eight years of the prior administration. and we worked actively with our partners at the department of justice to bring cases against the worst offenders. and have been successful in a number of those as well. >> thank you very much. i think you're done a great job, and again, i appreciate all of the attention we pay to fha and the way that you proceeded even without all the legislation we would have liked to have had passed. i yield back the balance of my time. >> thanks. >> the chair recognizes mr. hensarling for five minutes. >> think you madam chair. mr. secretary, in the 2011

actuarial study that i guess was released last month, if i read it correctly, we have a proxy 1.2 billion in value supporting insurance in force of about 1.9 trillion on the single-family in m. i s. is that correct? >> is actually not correct, congress been. there's a total of 33 points $7 billion in reserves that are held against the book. that's the highest level of reserves in history of fha, and contrary to what was predicted last year, those total reserves -- >> i was talking about a single family. >> this is the single-family that i focused on. i think you're focused on, there are two reserve accounts. the capital reserve account and the financing account. the financing account is the peace i believe you're focused on, and that is only excess

reserves that are, i'm sorry, the capital reserve account is only excess reserves that are held above and beyond expected losses. and this is very important. the total cash reserves we are holding against of that book is a total of 33 points $7 billion. >> but the insurance in force at is 1 trillion come is that correct? >> it is over $1 trillion, that is correct. >> now, in that report, if i quote you quickly, with economic net worth been close to zero under the base case forecast, the chance of future net losses with the current outstanding portfolio could exceed capital resources is close to 50%. i'm under the impression that study was based upon june and july datacom is that correct?

>> it was based on both predictions for house prices and the latest data as of june, that's correct. >> and the serious delinquency rate has increased from june to my data show we now have 50,000 more serious delinquent fha loans as compared to june. >> well, as the portfolio grows, obviously the number typically increases. there was, as with i think all types of loans there was a slight increase industry's delinquency rate. at the end of the summer. i would also say though home prices have performed better than expected since the june 30 prediction, given that home prices are the single most important factor in predicting the value of the fund. that it's likely that, in fact, the actuarial understate the

capital reserves relative to what's happened since june 30 as a result. >> mr. secretary, mi8 to discern your more optimistic than the statement that was included? >> optimism is not something that i think is relevant here, frankly, given the scale of capital reserves. this is a serious issue here there are serious risks to the fund. we need to take further steps to protect the taxpayer and we will continue to do that. >> you have discretion, and let me say i appreciate the comments that you have made with respect to the conforming loan limits, with respect to average a and what i would do as mission creep. i understand again that you have the discretion to increased insurance premiums. i know it's been done once or twice, but i think now the annual premium for a 30 year loan with a 95% ltv is 1.15, i

think statutory, am i correct? you have the authority to increase that to 1.5. and if chosen not to do so, given the precarious state of the mmi. why had he chosen not to do that? >> that is something we're actively looking at, given that we have just gotten this actually our review. we are actively evaluating that and we expect in our 2013 budget proposal to propose additional steps. but i would say, congressman, understand that the balance here is that we are now charging the highest premiums in history of fha. and under any economic scenario, even the most dire, the actuary predicts that new loans that we are making will be profitable. and so, while increasing fees

for new borrowers is an option, it's also critically important that we could use the help of the committee in further enhancing our enforcement to maximize recoveries on old lows. those are what i really driving the lawsuits. 2008 and prior books of busine business. and we must balance changes that we make the new loans with focusing on enforcement and recovery envelopes that really are causing the problem. we can't go back and and make those loans, unfortunately they were made, but we can do as much as we possibly can to enforce him to cover on those loans and that's what we need help from the committee as well. >> thank you. i see my time has expired. >> the chair recognizes mr. lynch for five minutes. >> thank you, madam chair. i want to thank the secretary and ms. galante for your patience and your willingness to help the committee with its work. the question for me is not

whether fha is needed. of course, it's needed and it will be needed for the foreseeable future. the question is whether or not fha and sobbing in a way that will be sustainable without a massive taxpayer bailout. that's what i worry about. i've got a very, very good report here that i'm going to refer to. it's by the gao director financial markets for community investment, not surely. you'll be on the second panel, sometime this evening i suspect. [laughter] but he does a very good job at this. you know, according to the gao analysis, this 4.7 billion, the end of your balance and the funds capital reserve account. you're saying there's 33 billion in that account. spent actually 33 points 7 billion is combined. >> but the one we used in this committee, and when your

predecessors came up was always the capital reserve account. based on earlier testimony by your predecessors, we have always gone by this account. and now you're saying we're combining it with another account? >> no. it's two different things, congressman. >> if we could deplete a $33 billion account, and you're not willing to say that we will not deplete a $33.7 billion account, then we have a serious problem. >> that -- >> because york saying we will not go negative on this account. are you talking about the $33 billion account? are you talking about the $4.7 billion account? >> the total cash reserves is what i was talking. in other words, we are holding against expected losses, those reserves. i was just correcting, i did

want to leave the impression with the committee that somehow we were only holding $4.7 billion against potential losses. >> let's talk about the ratio reserves, the capital reserve ratio. statutorily it's supposed to be 2%. you are at .24%, is that correct? >> that's correct. >> here's the problem. under the feds analysis when they give us a number of homes underwater, number of homes in arrears, number of homes in the fall come into the foreclosure, they chose a very different story than the actuary is telling us that we're going to remain positive next year. and the actuary told us and this committee in 2008-2009-2010 not to worry. things are going to be okay. and we watched that account go from 22 billion in 2007, the 4.7 billion the end of 2010. what i'm saying is, i know

you're working as hard as you can do the right thing here. no question about that. we are trying to do the same thing. congress hates surprises. we hates surprises. so when someone tells us things are going to be okay next year, and didn't you report, once a year, this actuarial review, and we get terrible news that things are not all right because the medevac year after year it is getting worse and worse, that creates a tension between what we are expecting to do by our constituents and what's happening here with fha. so here's my problem. you are required under the national housing act to report this actuary review, to conduct and publish it once a year. my problem is that in this market, in this market, that's too long a period of time. we are going to get surprise one way or the other. it may be a pleasant surprise, and it may sustain with the actuary is saying, or it may be something that is very negative and we will be in a calamitous

situation. when i fell back in 2009 was to ask fha to file, to conduct their actuarial review every six months, semiannually, rather than waiting a full year when we don't have time to react and we get terrible news, puts us at a real disadvantage here in congress. i could understand when we had 22 billion in that account, we didn't need a review every year. now we are at .24% on that capital reserve ratio. we are at a precipitous point, and it might be the european debt crisis, the sovereign debt crisis there that tips this economy the wrong way and then we're in trouble. i'm just asking you, would you support and enhance, the name of my the was the enhanced fha oversight act, and what we are looking for is we are looking

for this data -- >> the gentleman's time has expired. >> we are looking for the data twice a year rather than just once a year. would you support that? >> first of all, let me say i don't think you heard me or say today you don't need to worry, that everything is going to be fine but i said consistently that we need to be vigilant because none of us can predict where home prices are going to go. >> what i'm saying is if we have the information every six months instead of once a year, up to the committee to decide and the congress to decide what the legal requirements are, what i would say is we're running these numbers are more than annually. [talking over each other] >> the gentleman's time has expired. you can continue your questions in writing. and i think the secretary for having remained with us past is hard stop at 12:30. i'm calling on mr. stivers of ohio for five minutes. >> thank you, madam chair, and i'm always worried that my

senior is so low by the time i get to question you we know you have been here a long time. i appreciate you hanging with us. appreciate your candor today. we're all concerned about the actuarial report that i would like to ask you a couple structural questions about fha and then ask some questions about your five recommendations, if that's okay. first, you refer to your chief risk officer i little while ago, and that's it is in the congress of eyes you to fear lest you my understanding is that that position was filled and the person has left. has that position been filled? is it filled currently? >> and i apologize, congressman, i do need to depart, but actually our chief risk officer has been promoted to senior advisor to me directly. we have just brought on another senior advisor for wrist. we are taking positions that we filled in that office this year so we are, strongly working to fill out and complete that risk. >> and with thanks to the secretary, ms. galante will remain to answer further

questions to ms. galante, have you read the geo a report on risk mitigation one of the things that it says is that there's no comprehensive strategy on risk mitigation, and it calls for three specific actions to be taken, place? it also says the two important parts of the agency, single-family housing quality control activities and the office of risk management activities are still separate as the date of this report? has that changed since then? >> congressman, i had read the report and i have commented on the report for the gao. we generally think the gao did a very good assessment of the integrating the risk office into the overall fha operations. and so we are working on a number of the recommendations

that they had. some of them work well in progress by the time the gao risk mitigation strategy is time. know that direction. still have one right. up further.

wanted to talk to him about it wants them to be. is that something that is under consideration? i've asked this before and it's always been under consideration and know he seems to do anything about the fee increases. >> again just to be clear, you're talking about premium increases in our case? and the answer is all the options -- >> talk about tearing premium increases the are you serious the considering it, like to the point you would actually do it because you considered it apparently in the past. >> i would just take all the options are on the table, including some kind of teetering. i think the secretary of the two

that. particularly given the higher loan limit that we had. there's some opportunity there, and -- >> please tell us if you need limited to 1.5% if you need more you requested more authority on the settee because, frankly, i'm a freshman and it's unclear to me and i'm not so much with everything it, i'm still learning. >> there are several provisions in the fha reform bill that we would like that additional authority to seek indemnification from certain types of lenders at we do not have the authority for now spent could you answer in writing to me about the specific authority you require from congress? it looks like my time has expired and i yield back. thank you for your time today.

i appreciate the sector is time for at least one of my five minutes. >> the chair recognizes mr. scott of georgia for five minutes. >> thank you very much. just listen to the testimony and just gathering in what we've heard today, it seems like hud, you're sort of like a catch-22. i mean, you have a situation where as result of in your falling reserves in your capital funds, you probably will become more vulnerable than. these defaults have to be covered because the federal guarantee that we offer to the lender eric they have to be covered. and that's done for the taxpayers. and the final analysis it means if your funds are out, the treasury has to step in. and at the same time, the secretary has pointed out, that the key, the real key to turning

this around and stop the bleeding and defaults and is home counseling, homeowners counseling. and yet in april this congress slashed the money for you to provide the counseling. $88 million, slashed all of it. so when they look at this, there seems to be a bigger priority here in congress. so given that, what impact has this slash of the 88 million had? because i can tell you this from firsthand experience. i agree with the secretary, the most critical weapon we have to turn all of this around is getting that counseling to the struggling homeowner. we forget how complex and complicated easy with this whole issue is for your average homeowner. they refused to answer the 1-800

number because a lot of them are scared. when you don't have information and intelligence, you do nothing. and so when we had our homeowners even come being able to get the borrowers under one roof with the lenders under one roof, what i found the key ingredient that helped us more than anything else was having those hud counselors there. we found out, for example, having fha there, and had the hamp program from treasury, that if they qualified with fha program then the banks immediately would come together with him because they would support that. and so my question to you is, you come in september, in your attempt to make up for some of this, you put in about $10 million in unspent funds from the previous year to be utilized for this home counseling program. but despite this move, you have expressed concerns over the gap in funding going forward for the

2000 level pay. so my question then is what level of funding would hud actually need in order to operate your nonprofit housing counseling program effectively for this year coming up, 2012? >> well, thank you for raising the issue of housing counseling. we agree it's a very important one. and we were fortunate with the appropriations bill that just passed that some level of housing counseling dollars in the conference community was approved for, i think $50 million so we didn't get 88, that we were able, or we are able to provide fiscal year 12 some level of counseling dollars agencies. and i'm happy you asked that because the nose of funding availability for fiscal year 12 was hosted today. >> and so it's a done do.

we have the money for 2012? >> we have some money for 2012, yes. >> is a sufficient? >> we originally asked for more, and we think we could effectively use more. and i would also say we are doing everything in our power to make sure that the housing counseling program, not just for the grantee, but for the administration of it, is as effective as it can be. and so we certainly could use additional funds for the program if they were available. >> some hud approved housing counseling agencies have been inundated with new clients with every new federal program. wouldn't it be beneficial if hud could contract directly with these housing council agencies in assisting delinquent homeowners with qualifying mortgage work out solutions? >> a number of these housing counseling agencies are directly helping borrowers to get to

their processes with servicers, that they're very effective in helping people through the loan modification process, for example,. >> and my -- >> the gentleman's time has expired, with permission. ms. galante, did you want to finish that after? >> i think i did. >> the chair recognizes ms. biggert from illinois for five minutes. >> thank you, madam chair, and ms. galante. it's nice to see you here. can you talk a little bit about as are being currently promulgated by the regulars, do they have the potential to drive more business to fha at the exclusion of the private market? or will it might, private market be able to increase in this area

and? >> so, so i think as we have discussed on some prior occasions, qrm rule still in process, multiple federal agencies looking at what it will be. you know, one of the aspects that was in the proposed qrm rule was high retention level for loans with higher down payment. and there's a concern that, you know, that will drive more business to the fha. obviously, we don't know what google is going to be, so we don't know what the ultimate impact will be. but we are concerned and are monitoring that has we are part of the discussions on qrm. >> would they be anything that would be put in their that would ensure that the private market will have access? or is it just because the way that they are drawn? >> again, i'm not close enough to all the negotiations on the

qrm, negotiations on what's ultimately going to come out. so i think it's difficult for me to answer that. >> okay. and then fha has estimated that the capital reserve fund could withstand an additional decline in house prices. and talk about 4% beyond the baseline decline, without experiencing negative capital situation. and does that mean that a decline in access of 4% would result perhaps in the taxpayer-funded bailout of fha, would you need more money? >> socom appreciate that question, and the answer is this. without any other kind of policy changes, with no premium increases, if house prices again got to a much worse point than they are today, or that, unicode

we projected we projected will be today, then there is a possibility we would need some additional support. but we are doing everything, that's part of this five-point plan we've been talking about. we're going to do everything in our power to look at actions that we can take to ensure that we avoid that situation. >> thank you. i think most of my other questions have been asked so i will yield back. >> the chairman recognizes mr. green from texas for five minutes. >> thank you, madam chair. i thank the witness for staying with us, and i'd like to explore last questioning that will help us better understand what fha has done and continues to do with the economy. let's start with loan origination. these fha loans tell us quickly

please, where, meaning in what facility on most of them originated? would that be a bank? >> yes. so again, fha is insurance, and private lenders are actually the bonds that are originating the fha loans. >> no, most of them today are originate with banks, is this correct? >> yes. there are financial institutions, banks are certainly -- >> banks benefit from it. banks don't do this for free. no.there is a loan origination ? >> certainly, yes. >> banks then hire people who do this type of work? >> direct. >> my point is that there is a broader impact on the economy than just the person buying the home. the banks benefit.

realtors benefit because realtors help persons by homes. they insist with the home buying process. purveyors of products. they benefit when the home is built, and by the way, builders benefit because they will build more homes and homes are selling. the purveyors of products, washing machines, dryers, stoves and carpet, all of these things going to homes. they benefit. the benefits go far beyond the simple purchase of the home. that is actually not the genesis of the process because the builder who constructed the home, understanding that there was a market for it to be sold in. manufacturers of products that benefit. so at a time when we need a countercyclical force, fha is serving a meaningful come needed purpose, and not only helps us with some of the home, but the home becomes so important to

other industries associated with the home buying process. and with the construction of the home. but fha is, in my opinion, an entity if it did not exist we would probably try to create it, or something similar to it. because it did not come into existence on a whim. there were some severe problems that we were contending with in the '30s. and fha was produced and gave us this exotic product known as a 30 year loan. i think we can attribute that to fha. because at the time a 30 year loan was not commonplace. it was something that we have now come and we think little of the notion of getting one. but at one time it was very difficult to get a 30 year loan, if not impossible because your big balloons and you had to refinance and people of little

means, of modest means, middle income americans, they didn't get homes to extend that they do today. so fha serves a meaningful purpose. do you have empirical evidence to support the actual impact that you have had in the area of homes being sold by realtors, the impact on builders, the impact on manufacturing, the impact that goes beyond the simple purchase of the home? which is important that what they have empirical data that deals with these other industries and how they are impacting? >> that data certainly exist. i don't have a multiplier effect specifically in front of me, but absolutely there's no doubt that what you described is the case. and many of the data support that. i know for new construction, for example, you know, you could essentially assume long-term

certain number of jobs for house built. so there's no doubt that the our many, many industries involved in providing jobs and economic benefit to communities as a part, not just a i was is not just homeownership our new home purchase, but also just as a matter of refinancing. you could put additional money in people's pockets if you refinanced at today's low interest rates, for example, and it also puts more money into people's pockets to spend on needed goods and services spent my last five seconds let me just say quickly that this service that is rendered has help to keep unemployment that is high front been even higher because if we did have the 56% of first time home buyers -- >> the gentleman's time has expired. >> thank you, madam chair. i'm grateful, thank you.

>> the chair recognizes mr. cleaver for five minutes. >> thank you, madam chair. ms. galante, i've been in and out and i actually hope someone offers raise this issue because i think it to be extremely pertinent to this conversation. one of the former chairs of this committee, henry gonzález, along with that created the ken salazar cranston gonzalez affordable, national afford a housing act. and i say close to accurate? okay. and they treated the 2% capital reserve ratio. and it was designed to strengthen the fund. one of the things that had not been discussed here today, a lot of it has been said of the

capital racial been below 2%, and so one of my, many of my colleagues both sides, are not aware of the fact that there is a separate cash fund, and it was put in place to address the unexpected losses in the mmi fun. i think that is somewhere, maybe 33 billion? >> that's correct. >> if everything i'm saying is close to correct, you can correct it further. but what i'm interested in is that fund is growing, and if that's true, then maybe this

committee could benefit from having a contextual discussion from you about this. because i see them as inextricably connected and we have not connected in this discussion today. >> yes. so again speed and correct me gently. >> this is complicated. and it's easy for people to mix things up so i just want to say again, total cap a resource available to fha today is the 33 points 7 billion, which consists of refinancing account which is what, when we pay our claims out of, where we, so to speak, transfer funds into to actually pay expected claims. the capital reserve account is the additional account but it's part of that 33 points seven but it is a piece that is

specifically supposed to be far unexpected claims above and beyond the expected ones that would transfer into the financing. so that's a total cap a resource of able to fha today. the capital reserve ratio is actually based on yet another calculation of the total insurance and the expected economic values of that, of the book of business and the minus potential claims over time. so so it's kind to different calculations that you have to keep in mind. >> but we have more, we have more funds there today than we had last year at this time? >> that's correct. >> that's so relevant to the discussion. i feel painful that my colleagues were not able to get that information out.

well, i actually have another question, but it would be my hope that somehow we are able to get some kind of a discussion, or some information, the members about gonzales cranston, or is that cranston-gonzalez? >> cranston-gonzalez think i apologize to mr. cranston. but i do think it is relevant and we need to get some information. is there any, do you have any ideas how we can get members of this committee a where? >> i can, we are happy to continue to have conversation, have individual meetings, you know, have dialogue, work session. we do produce the annual report to congress here we also produce quarterly report that are delivered not go into, you know, -- >> do you think members are

reading those? >> pardon me? >> i was speaking out of turn. go ahead. >> the gentleman's time has expired. the chairman would like to thank ms. galante for remaining with us. and with that the chair knows that some members may have additional questions for the panel. which they may wish to submit in writing. without objection to record will remain open for 30 days for members to submit written questions to these witnesses and record. the chair now calls the second panel. [inaudible conversations] [inaudible conversations] >> congress is back in session next week. funding to keep the government open expires a week from today. that means the house and senate

must come to an agreement by friday to avoid a government shutdown. in addition to the spending legislation the house of representatives is set to take up a republican proposal to extend the payroll tax cut, extend unemployment benefits and avoid a cut in medicare payments to doctors. house coverage is live on c-sp c-span. and the senate against the weak consent state department nominations. they were also work on spending legislation and extending the payroll tax cut. u.s. senate coverage as always, live here on c-span2. >> pay a dollar an hour for your labor. have no health care. that's the most expensive single element taking the cut. has no environmental control, no pollution controls and a retirement. and you don't care about anything but making money. they would be a giant sucking sound going south. >> ross perot spoke out about trade issues during the 1992 presidential debate. the billionaire businessman made

two attempts for the presidency. the first time getting over 19 million votes. more popular votes in any third party candidate in american history. although he lost he has had a lasting influence on american politics. he is our final candidate in c-span's 14 work series the contenders live tonight at eight eastern. to preview of the video and see you see all the programs go to c-span.org/thecontenders. >> throughout my career i've tried it myself on not being afraid to tell people what i thought because juan, the worst thing you can do is to let us senior their head down down the wrong road. in the back of your mind you're thinking maybe well to pick another look at this picnic and we look at this from this perspective. because people's lives are at stake, or we have an obligation and a duty to be good stewards of the resources that the public interest as with. so you sometimes have to be kind of courageous any meaning

whatever else had got up and down and you're going, i think i have a different perspective. >> major general marsha anderson on her life and cover as the highest-ranking female african-american in history of the united states army. sunday night at eight eastern and specific. >> the senate banking committee held a hearing on implementing the dodd-frank financial regulation law. testifying before the committee, the deputy treasury secretary and the heads of the security and exchange commission, the commodity futures trading commission, and the fdic. south dakota senator tim johnson chaired the hearing. >> good morning. i call this hearing to order. today, this committee continues its oversight of the

implementation of wall street reform act. since the last implementation hearing in july there have been significant developments regarding rural proposals, and more broadly additional concerns about the impact of the crisis in europe. we don't have to imagine to be reminded of why we passed wall street reform. the current situation in europe under those the importance of implementing new rules that enhanced supervision of large, complex financial firms, and the financial system as a whole to reduce risk in the market place in support of financial stability. over the past 18 months, since passage of the wall street reform bill, much progress has been made.

agencies have been -- [inaudible] on some very important rules including the rules for liquidation and living wills have been finalized. the consumer financial protection bureau has opened its doors it is doing excellent work on projects like simplifying mortgage and student loan forms through its new rule initiative. but work remains to be done. some of the most complex rule makings saw the wall street reform act are the ones still under consideration. the qualified residential mortgage determination, otherwise known as qrm, provision to enhance the supervision of non-bank financial and bank holding companies, and the rules under

which non-bank financial firms will be designated, systemically important. i want time to resolution of these critical outstanding rule makings, and am looking forward to hearing about the next steps with the usual solar panels today. i recognize that these rule makings are difficult, but this is a time when tough decisions have to be made by our regulators. while our economy is starting to show signs of recovery from the financial crisis, the ongoing turmoil in europe is a stark reminder that we must continue to monitor threats to financial stability. the wall street reform law gives our regulators new tools to better address potential threats to create well-funded partners

were also reducing systemic risk and to improve supervision. but until the new rules are implemented, our financial system and our economy will remain vulnerable to these threats. i want to thank the regulators that are before us today for their tireless work over the last 18 months, continuing implementation of this important law. in addition, you are all dealing with many challenges, including funding constraints, mf global and others to supervisor issues that the institutions to regulate face as the economy continues to recover from the financial crisis. i have no doubt that you and all of your staffs will keep up the important work. senator shelby, your opening statement. >> thank you, mr. chairman. welcome to the committee, all of

you. today, our financial regulars will give us a progress report on their implementation of the dodd-frank act. when dodd-frank was passed with the american people were promised that financial regulators would have all the tools and powers that they need to properly regulate financial institutions and to protect investors and consumers. unfortunately, for the american people, more powers and more tools cannot help when regulators failed to do their jobs. this lesson is vividly demonstrated by the commodity futures trading commission's failed regulation of mf global. nctc's most basic responsibility is to ensure that customers are protected when a firm fails. yet 37 days have passed since mf global filed for bankruptcy, and more than $1 billion in customer funds are still missing and unaccounted for. it's unclear how much longer

customers must wait while a bewildered cftc searches for their money. holding the cdc accountable for its failures will not be an easy task. already chairman gensler has been evading questions about his role in the regulation of mf global. buyer to the first bankruptcy, it appears that chairman gensler had contacts with mf global and its ceo, jon corzine, concerning cftc's regulation of the firm. but when he was called to account for the first bankruptcy in the missing customer funds, chairman gensler decided that he needed to recuse himself from matters dealing with mf global. the victims of mf global i believe deserve better. accordingly, i've asked the cftc inspector general to examine the commission's oversight and regulation of mf global. i've also asked him to determine whether chairman gensler's

recusal was appropriate and whether mr. kinsler should have recused himself much earlier in the process. in the absence of a committee investigation, the i.t.'s examination will help to determine whether mf global receive special consideration by the cftc. although the see ftc's failures have received the most attention, our other financial regulators have had their own difficulties. over the last year it appears that the securities and exchange commission has been operating as a no-doc regular in its rule makings and enforcement action. first the sec's roxie access rule was struck down as arbitrary and capricious by the d.c. circuit because the sec failed to properly conduct economic analysis before issuing the rule. just last week a federal court refused to endorse a major sec settlement because the sec failed to provide sufficient evidence that the settlement was

in the public interest. meanwhile, banking regulators have struggled to effectively implement several key roles. most importantly the proposal to implement the poker rule has been marred by misconduct, ambiguity and enter agency discord. drafts of the proposed rule were leaked to the press prompting inspector general inquiries into whether agency personnel violated confidentiality rules. when regulators finally issued a proposed rule, it came in the form of a 298 page concept proposal with over 1300 questions. we all agree that banks should not be allowed to gamble with taxpayer guarantee deposits. yet the ambiguity in the proposed rule threatens to make compliance costly and difficult, especially for smaller banks. further, the cftc has not signed on to the poker proposal and may opt to draft its own rule. financial stability oversight council was established to

ensure that regulators properly coordinate their rulemaking. i hope to hear today by the council wasn't able to secure agreement on the volcker rule. more than a year has passed now since the enactment of dodd-frank, and it's now evident that it has not lived up to its promises. in fact, it has exacerbated many problems by creating large bureaucracies, greater powers, while further insulate them from congressional oversight. for much too long we have sacrificed the voice of the people on independence. what we are left with our massive bureaucracies, insulated from the people they are supposed to be protecting and unaccountable for their actions. this week the president is calling for the confirmation of the director of the fear of consumer financial protection. this massive new bureaucracy was designed by the drafters of dodd-frank to be virtually unaccountable to the american people. before we spent hundreds of millions of dollars on a new

federal government agency i believe we should ensure that it can be held accountable for its actions. therefore, i and 44 of my republican colleagues have informed the president that we will not consider the nomination of anyone to be the first director into the. is made accountable to the american people and to we've had some legislative structure to the office of dodd-frank plea that more government was better, more regulated, more rules, more regulations and more bureaucrats with more independence empowered to make choices for others. we were told that we could expect great things. the first year has shown that little has changed. dodd-frank contains many flaws, but good to improve the accountability of our financial regulators may be its greatest shortcoming. thank you. >> thank you, senator shelby. are there any other senators who wish to make a brief opening statement?

>> yes. >> senator menendez. >> thank you, mr. chairman, for holding the hearing. thank you all to all of our witnesses. i was proud to support the wall street reform and consumer protection act. is implemented with the i believe it will result in better loan underwriting, better protection for consumers, better oversight of risk that affect the stability of financial system, greater transparency and derivatives, and progress toward ending too big to fail. so the decision of those who, large institutions ultimately became the click of risk of the entire country i don't want to relive 2008 again. so it's important to get, take the time to get the rules right, but it's also important to know that progress is being made so i look forward to hearing from the witnesses. and finally with respect to the consumer financial protection bureau, that i also advocated for, regardless of what you think of the new consumer watchdog, it's time for the

senate to understand something about majority rule. a majority, a bipartisan majority of the united states senate voted for the dodd-frank wall street reform law. part of that law is the consumer financial protection bureau. it needs a director. it gets a director to ultimately level the playing field. this nominee has been highly commended by both the private sector and the consumer sector. but without having a director there are a whole host of rules that can't be written, which only perpetuates an uneven playing field were commuted banks and credit unions have to abide by regulations and not bank lenders don't pick which is not fair to consumers or the industry member to play by the rules. so it is time to allow for an up or down vote on richard cordray. and to get us moving in forward

on proposition that a bipartisan majority of the united states senate representing the country should be able to have it stay. thank you, mr. chairman. >> senator brown? >> thank you, mr. chairman. i want to act on the boards for my colleague, senator menendez about the importance of our financial protection bureau. imi thing going think the one on the panel who knows attorney general cordray personally, fairly well. as senator menendez said, he has sported the public sector and private sector for republicans and democrats including his successor as attorney general, former senator, is supporting him. and it's the only time i have mentioned this to the committee before, and talk to chairman johnson about it, and ranking member shelby, this is the only time where one political party has blocked a nominee because they don't like the makeup of

the agency. they don't agree with the existence of the agency so they block the administrator for the agency. that just doesn't make sense, and it's unprecedented, as i said, and it doesn't serve this country. and we know that banks are treated differently from non-banks as a result. that doesn't serve anybody's interest will. it doesn't protect the public, and it's just the kind of overreaching that we have seen far too often around here, and i'm sorry to say that, that i think that a chimp speaks volumes why we need, why we need what we need to do. thank you, mr. chairman. >> thank you all. i want to remind my colleagues that the record will be open for the next seven days before opening statements and any other material you would like to submit. i want to welcome our witnesses back to the banking committee, and will keep the introduction brief. the honorable neal wolin is that the second of years department of the treasury. the honorable daniel tarullo

currently serves as a member of the board of governors of the federal reserve system. the honorable mary schapiro is chairman of the u.s. securities and exchange commission. the honorable gensler is the chairman of the committee trading commission to the honorable martin gruenberg is the acting chair of the federal deposit insurance corporation. mr. john walsh is acting comptroller of the currency of the office of the comptroller of the currency here i thank all of you for being here today. i would like to ask the witnesses to please keep your remarks to five minutes. your full written statements will be included in the hearing record. secretary wolin, you may begin your testimony. >> thank you, chairman johnson, ranking member shelby, members of the committee for the opportunity to appear today.

congress passed financial reform 18 months ago in the aftermath of a financial crisis that cost this country 9 million jobs, trillions of dollars, and countless opportunities. today our country's foremost challenge is helping the millions of americans who lost their jobs in the recession find new employment. nearly 3 million private sector jobs have been greater within the last two years. ..

time for broad public engagement in debate, time for coordination among see u.s. regulators and their international counterparts to help achieve a level playing field, and time for analyses of cost and benefits to help insure rules that build a stronger, more resilient financial system without placing unnecessary burdens on industry. since reform was passed last july we have made substantial progress while abiding by these bonds will. financial regulators have now publicly proposed or finalized nearly all of the major rules relating to the core elements of reform. the ultimate shape of both individual rules and reform as a whole is becoming clear by the weak. treasury has also made substantial progress damning of new institutions to help insure our financial system is stronger and more resilient going forward the members of the financial stability oversight council have been meeting regularly for over

a year. the office of financial research is providing with critical data and analytical support, and the federal insurance offices began carrying out its mission to monitor the insurance industry. treasury has also been responsible for standing up to consumer financial protection. president obama has nominated richard court break, and now standing advocate for american consumers to services first director. it's confirmation as number four. without a director of bis cfpb is unable to exercise its full authority, and as a result our economy remains vulnerable to some of the same regulatory gaps that contributed to the financial crisis. consumers continued to lack common-sense protection. this siepi be limited authority affect the financial ability of tens of millions of american families who rely on non-bank institutions for financial products and services. until the director is in place the cfpb cannot supervise on

banks that do business with americans every day in the mortgage, payday, and private student lending markets among others. we have a responsibility to make sure the cftc can exercise its full authority to protect service members, students, seniors, and the american people as a whole from the types of unfair and predatory practices that proliferated in the run-up to the financial crisis. full implementation of the dodd-frank act is critical for protecting americans not only from poor consumer protections but also from the excess risk and fragmented oversights that played such important roles in bringing about the crisis. in implementing reform our goal is to build a financial system that is not prone to print it did not panic and collapse, house americans save for retirement and barrault's finance and education or a home without experiencing deception or abuse. and it tells businesses finance growth and investment and

strengthens our economy. we appreciate the leaders and support of this committee throughout the process, and we look forward to working with congress as we move forward toward this common goal. thank you. >> thank you. please proceed. >> thank you, mr. chairman, senator shelby, and members of the committee. a lot of witnesses and senators. let me make to the introductory points. first, i think you all recognize that there is a bit of tension between the various goals of we all have in trying to employment a very complicated piece of legislation. we wanted did it right. you want to have a process that is very considered. what to have a very open and transparent process commander want to get it all done quickly. and it's not going to be possible to get everything done quickly if the fairness, openness, transparency, and the considered quality of the deliberations are going to be adhered to.

i think we are making considerable progress, and although few of the steps toward that lines are not met him i think we are well on our way to getting the major pieces of dodd-frank into place. the second point, like to make will come as no surprise to many members of the committee since i try not to miss any opportunity to reemphasize the importance of capital in our regulatory system dodd-frank, of course, dressed in several particulars. it did not provide a comprehensive approach to capital, but what we have tried to do is to incorporate the elements of capital regulations set forth in dodd-frank into an overall integrated approach to capital regulation that tries to take account of the shortcomings of that the system prior to that crisis. i think the shortcomings are basically three. one, but the quality and quantity of capital and individual institutions was lower than it needed to be before the crisis.

too, there was only a micro provincial, a farm by farm approach to looking at capital, rather than looking at how firms and the stability of firms affected the system as a whole in a macro provincial fashion. third, capital assessment was too static. we tended to take snapshots of how to the particular moment rather than the dynamic perspective that suggests or shows where capital ratios could be if bad things occurred. what we have done is in coordination with our banking colleagues here and abroad to negotiate and now your ready sentiment this set of enhancements to both quality and quantity of capital for individual firms. that has helped from my perspective a lot by the collins amendment because since collins puts a floor under the amount of capital is required for a firm it allays a lot of the concerns

that i have been nothing some members of the committee had that it might allow capital to drift to low. secondly, with respect to macro provincial -- macro capitol regulation we are moving forward with a set of enhanced provincial standards for the larger more systemically important institutions. third, with respect to the snapshot dynamism issue, dodd-frank calls for stress tests, larger u.s. institutions. a full provision and the full stress test approach will be implemented next year. in the beginning of this year and now starting again for the beginning of 2012 we have been running and will be running stress tests on our largest institutions as part of our annual capital review. so i just close by saying that i think their is a lot going on in dodd-frank. we are making progress. again, i just want to remind everybody of the centrality of

capital regulation to the safety and soundness of our financial system. thank you. >> thank you. please proceed. >> chairman johnson, a ranking member, members of the committee, thank you for inviting me to testify on the securities and exchange commission on going limitation of the dodd-frank act. the dodd-frank act significantly changes the sec regulatory landscape britney hedge fund and other private fund advisers under the regulatory umbrella, creates a new whistleblower program, establishes an entirely new regime for over-the-counter derivatives markets and enhances the fcc's authority of a credit rating agencies and clearing agencies and heightens regulation of asset backed securities. in the months as the act's passage we have made significant progress in our efforts to meet these broad new responsibilities of the more than 90 provisions that require sec rulemaking we have proposed or adopted rules were over three-fourths of them. in addition we have finalized will studies and reports required by the act.

as i've noted in my prior testimony before this committee and unremitting efforts are informed by substantial average effort. but dissipated in scores of meetings. hundreds of interested groups and individuals including investors, academics, and industry participants and have received, reviewed, and considered thousands of public comments. all of these efforts in addition to congressional input and robust commission debate are helping us write rules that effectively protect investors and the financial system without imposing undue burdens on market participants. myron's statement underscores the detail, the breadth and complexity of our dodd-frank will making activities. i would like to emphasize a few of our recent actions. just over a month ago the commission adopted a new rule that requires hedge fund and other market fund advisers registered with the commission to report system across information.

this rule adopted jointly and in heavy consultation with. [inaudible] and distilled to the size of the fund. in august our final rule became effective establishing a whistleblower program mandated by the act. since then the commission has received hundreds of tips to the program from individuals all over the country and in many parts of the world. we already are are reaping the early benefits of the whistleblower program through active and promising investigations utilizing crucial whistle-blower information, some of which we expect to lead to rewards in the near future. with regard to credit rating agencies the commission proposed rules and tries to strengthen the integrity of credit rating. among other things improving transparency. in addition the commission received public comment to informants upcoming study on the feasibility of establishing a system in which a public or private utility or self-regulatory organization was assigned.

in the coming months we expect to propose a last of several sorting capital margins segregation and record-keeping requirements for security based dealers as well participants. along with our fellow regulators the commission proposed rules to implement the bogor role and provide increase regulation of financial my utilities and vanessa restitution the engage in some and activities at a designated as systemically important. in addition to these areas the commission proposed rules affecting the registration of municipal advisers, asset backed securities and governance. in the next few months we expect to adopt additional rules regarding specialized as those provisions related to a complex -- minerals stock will come over the mine safety and payments by a resource extraction issuers to foreign or u.s. government

entities. in addition we intend to address the relevant international issues of title seven holistic lee in a single proposal, and we expect to seek public comments on an implementation plan for all of the rules under title seven with the goal of ensuring the rules take effect in a logical progressive, and efficient manner that minimize unnecessary disruption and also a market. the sec has made tremendous progress, but the provisions of the dodd-frank act vastly expand our responsibilities and will require additional resources to fully implement the law. well we use resources as efficient as possible, the new responsibilities assigned to us are so significant that they cannot be achieved solely by rigging efficiencies out of our existing budget. tented to do so will severely hamper our ability to me both new and existing responsibilities. i would note that regardless of the amount appropriated to the sec our budget will be fully offset by the. [inaudible] and will have no impact on the

nation's budget deficit. thank you for inviting me to share with you our progress today and plans going forward and tell afford to answer your questions. >> thank you. co-chairman, please proceed. >> members of the committee. and glad to be here with all regulators. >> the financial system and the financial regulatory system, 8 million jobs were lost says the demise america's continued to struggle. played a central role in the crisis so importance that managing and lowering risk for end users also concentrated rest from the financial system and their response congress and the president came together and enacted the historic dodd-frank act. working to complete the dodd-frank rules of fully, not against the clock, and congress gave as one year to complete the task we will take more. time as is appropriate, i believe.

the agency has benefited from significant public input, including more than 25,000 common letters, 1100 meetings, and we have conducted 14 public round tables. yesterday we announced two more public round tables and no doubt would benefit from even more beyond that. the commission has substantially completed the proposal base of the royal wedding. this summer they turned the corner and began finalizing rules after asking people to comment on the whole mosaic a onetime. we have finished 20 rolls and have a full schedule meeting well into next year. each of the final rules are benefited from careful considerations of cost and benefits, and we ask the public to continue to give us advice in this area. mincing just a few areas that we finalized, large trader reporting, so for the first time we now know what the lawyers riders during fiscal commodities. registration of the data repositories, every position limits, risk-management for the clearing houses, these are going

to have significant more transactions. we also finished rules giving the commission more authority to prosecute wrongdoers to recklessly manipulate markets giving us authorities that the sec has had for years. and yesterday we completed zero greuel first proposed in october october 2010 to enhance customer protection. this will bring customers back to the protections of the have prior to the exemptions granted by the commission between 2000 and 2005, and it will prevent and the president of customer funds and foreign debt as well as lending customer money within the firm which caught intercompany or in-house repurchase agreement. i have consistently felt the cftc needed to strengthen customer funds protection, and i'm pleased that the commission acted yesterday in this regard. commissions also looking to us in finish rules on segregation for clear swaps. these are cleared swaps, but segregation of funds both in the

futures market and in the swaps market is the core foundation of customer protection, and our agency is looking across the board, the other is teams, the examination resumes, the custodial regimes, the working relations with the self-regulatory organizations. what can we do more to enhance these protections and protect customers. moving forward we are working to finish key transparency rules, including the specific data to be reported to regulators, so all of us at this table and have more information and the public and have more information in what is called real time importing. as mandated by dodd-frank, the cftc is working closely with the ftc on further definitions of a swap dealer and swab. i hope that we can get these done shortly. an important matter to all of us is non-financial and users have a choice on whether or not to use central clearing. this was congress's mandate, but i think consistent with that intent as well, the cftc margin

proposal states that non-financial and users will be required to post margin on unclear swaps, and the cftc has dedicated to maintain the ability of end-users to hedge risk without being pulled into those margin and karen regimes. now, as the cftc finalizes rules i will say we do need more resources. readjust over 700 staff members, that's about 10% more than we were in the 1990's, and since then the futures market has grown dramatically, about fivefold. in addition we are asked to oversee this complex and very large 300 trillion notional map sobs market. we rely a lot of self-regulatory organizations, but i dare say we probably need more funding so that the nation can be assured we can actually oversee the futures and swaps market and imports the rules to promote the transparency and protect the public. furthermore, as many members of mentioned, the current debt crisis in europe is but a stark reminder of the need for us to

move forward, a complete reform, and adequately resource the agency. i think you. >> thank you. chairman, please proceed. >> members of the committee, i think you for the opportunity to testify on the ftse implementation of the dodd-frank act. the fdic has made substantial process to the progress on implementing the requirements of the act and especially in the two primary areas where we have principal role making responsibility. deposit insurance reform and orderly liquidation of tory. regarding deposit insurance, the fdic has issued final rules that permanently increase the standard coverage limit to $250,000 temporarily provide unlimited deposit insurance for non-interest bearing transaction accounts. in addition the fdic adopted a final rule that redefines the

deposit insurance assessment base from domestic deposits to assets. the new definition reduces the share of assessments paid by community banks as a group compared to the largest institutions better reflecting each group's share of industry assets. as a result of this new rule second quarter 2011 assessment for banks with less than one -- $10 billion in assets were about 1/3 lower in aggregate than first quarter assessment. the overall amount of assessment the fdic also has a judge of flexibility to manage the deposit insurance. the fund management plan designed to maintain deposit fund balance, even during a banking crisis while producing a steady and effective raise their economic and credit cycles.

a fundamentalist the most substantial stability by improving regulators' ability to deal with systemic risk. the challenges posed by systemically important financial institutions. the final rule implementing the ftse orderly liquidation authority. the rule defines the with creditors will be treated and how clams will be resolved in an fdic receivership. many aspects of the ruler similar to the rules of bankruptcy. shareholders and creditors in receivership will be exposed to losses under the statutory priority of claims. the rule, however, will allow continuity of critical operations, both to prevent the financial system from freezing of and to maximize the value recovered from the assets of the failed systemically important financial restitution. the fdic also has adopted to rules regarding resolution.

the first resolution plan rules on these with the federal reserve board. requires bank holding companies cut total consolidated assets and $50 billion more. certain non designated systemically important financial a seditious to develop and maintain and periodically submit a resolution last regulators. the tell the manner in which each company will be resolved under the bankruptcy code. reduce information credit exposures, cross guarantees, an organizational structure. complementary resolution plans for an insured depository resolutions on assets of $50 billion more. in the event of a cross border resolution of a cover financial company the dodd-frank act requires the fdic to coordinate to the maximum extent possible with appropriate foreign regulatory authority. through the financial stability

board of the g20 countries and the basel committee the fdic and u.s. regulators are working to promote greater harmonization of national laws governing resolutions and improved coordination. we have also been engaging in a bilateral basis with foreign supervisors on resolution planning. in regard to bank capital interagency agreement has been reached on an alternative to the use of credit ratings as required by the dodd-frank act that will be included as part of a notice of proposed rulemaking to implement new capitol requirements on assets held in the bank's trading but. this notice of proposed rulemaking will be acted on by the fdic board at a board meeting tomorrow, and this rule making is pursuant to the committee capitol agreement. finally, given the effects of the recent financial crisis on community banks and concerns raised about the potential impact of the dodd-frank act on these institutions the fdic is

undertaking a series of initiatives relating to community banks. the ftse will hold a national conference early next year. a series of regional roundtable discussions. undertaking major research initiatives to study a variety of issues. it will undertake a review of the examination. i identify waste makes supervision more efficient. without compromising supervisory standards. i include my statement and will be glad to respond to your questions. >> thank you. chairman johnson, ranking member , i appreciate the of which in its report on the process and implementing its as of last testified before the committee on july 21st the integration of of t s staff has

been successfully completed, and the supervision of federal savings associations has been integrated into our bank supervision operation. we also have continued our work to support the cfbb and the episodic as well as our efforts to strengthen risk-based capital leverage and liquidity requirements. finally we have made significant progress on key regulations to implement the dodd-frank act. this morning and would like to highlight a few of the items that are detailed in my written statement. in operational terms the integration of the zero t s in to the sec has been successfully completed, but we are continuing to participate in a variety of outreach activities to maintain an active dialogue with federal savings associations, including expansion of the former ot as advisory committees on mutual savings associations and minority institutions. our integration efforts are now focused on coordinating in consolidating the various rules and policies that apply to

federal savings associations and national banks, and as part of this effort we aim to eliminate duplication and reduce unnecessary regulatory burden. our dealings with the siepi of the last several months of focused on consumer complaints and policy and exam coordination the sec has continued to provide significant as the staff and empress structure support to process consumer complaints on the siepi behalf. with respect to rulemaking the siepi be has required to consult with the regulators prior to proposing a rule and during the rule making process. this siepi be currently as in process of rulemaking is for interagency consultation, and we are working on a consultation and agreement that will provide the provincial regulators reasonable time to review, this does, and comment on siepi will make things. another area of focus is the coordination of supervisory activities among the siepi be encouraged to regulators.

the dodd-frank act requires the siepi be to consult with the provincial regulators regarding respective schedules for examination to conduct their respective exams simultaneously and to share and comment on resulting graf purports of examination. some of these requirements to not mesh well with how bank examination activities are actually conducted, so the sec and other provincial regulators are working with siepi be to develop an end of you to implement a practical approach to core nation that avoids unnecessary regulatory burden on insured depository institutions which we believe to have been the congressional intent. the sec continues to be an active participant in the activities since july the council issued its 2011 annual report to congress, and has held additional meetings and conference calls to discuss current market and regulatory developments that could have potential systemic risk implications for the u.s. financial sector and broader economy.

facilitating candid confidential exchanges of them permission regarding risk to the financial system is one of the principal benefits. a clear lesson of the financial crisis was the need to bolster the quality and quantity of capital held by financial stations as others of mentioned. harmonizing dodd-frank kapor requirements with the revised basel standard is one of the principal challenges that the sec and the other federal banking agencies face, and we are working with the other agencies to ensure the reforms are carried out in a coordinated mutually reinforcing manner. finally, since the july hearing the sec has issued a number of rules under credit risk retention, margin, and capital requirements for cover swap entities and incentive compensation. sec and agencies that are carefully evaluating the thousands of comments received on these three proposed rule making is and are now actively engaged in considering the many issues raised. more recently and after months

of intense study and analysis the banking agencies and the fcc jointly published the book rule which is open for public comment through january 13th 2012. in some july has been accomplished. continue to move forward to complete the many projects under way. alec for keeping the committee advised of progress and happy to answer questions. >> thank you. i would like to thank all of our witnesses for their testimony as we begin questions. i will ask the clerk to place five minutes on the clock for each member. secretary and governor, how would delaying the implementation of wall street reform bring the u.s. economy more susceptible to fallout from the european debt crisis and the chairman, the situation in europe to the failure of large

connected financial firms. the ftse prepared to resolve it? secretary. >> mr. chairman, the core elements are designed to build a stronger more resilience financial system, one that is less prone to prices and less vulnerable to stress. and europe's only underscores the importance of moving forward with implementation of the statute to make sure that appropriate capital cushions and other enhanced standards have put in place to make sure that derivatives are brought within the regulatory full to make sure that we continue to make progress on orderly liquidation authority and its modalities and living wills and so forth so that we can both be best protected from whenever your provides us, but also whether other stresses our financial system happens to encounter, so

i think it's critically important that we move forward. >> thank you, mr. chairman. dodd-frank was structured, i think, to respond to two kinds of stresses for problems in u.s. firms. one, some of the specific, if i can put it this way, internally generated problems that characterize the pre crisis time with mortgage-backed securities and the like, and secondly as secretary just indicated, a generalized capacity to absorber loss. i think what we are facing in europe right now is the prospect or the possibility of an externally generated set of problems for the u.s. firms. rather than the internally generated problems. here i think that the capitol is the most unborn consideration, and here we began moving back in 2009 to push our institutions to

enhance their capital buffers to is the beginning of 2009, 19 largest institutions have raised approximately $300 billion in capital, more than a 40% increase in what was so beforehand. i don't think any of us would discount the possibility for difficulties in the united states if there were severe problems in europe. i do think that at the core which is to say that capital and liquidity positions of our large institutions, we have made a lot of progress since the beginning that it does nine. progress which is enhanced and rounded out. >> chairman. >> thank you. >> if we were confronted with the failure of a systemically significant financial restitution it would only be in that event that the system of resolution authorities of the dodd-frank act would be

triggered if that were to occur. we believe today we have the authorities in the capability to carry out the fdic responsibilities under the law. we have been working for the past year since the -- since the enactment of the legislation on internal resolution plans for our major more systemically important financial restitutions we have been consulting closely with our fellow agencies, and we have also been in beijing with the foreign supervisors of the foreign operations of our major companies. it is necessary, we think we are prepared today to carry out our responsibilities on the long. >> my office has been contacted, people from all across south dakota. people are concerned about the frozen accounts and missing funds connected of mf global. chairman, what has been done to

cut down the estimated billion in missing funds, and what steps i your agencies taking to oversee to insure the integrity of accounts at other broker-dealers and f tnc to make sure that nothing like this ever happens again to make. >> chairman. >> senator, as i'm not participating in the matters of this specific company it may be appropriate for someone else at the agency or commissioner summers to follow up and take the specifics on the company, but more generally with regard to the importance of protecting customer funds and segregated funds we're taking a number of

steps. yesterday we finalize the rule on customer funds that consistently felt we needed to since we propose that much obrecht's. we are also working along with self-regulatory organization is doing a limited review where they are as of november and december of this year, but that did not know on the specifics will you wanted. >> commissioner, do you have anything you would like ted? >> thank you, senator. the cftc currently has dozens of staff members working imf global issues. we have auditors and investigators and attorneys looking into the matter.

we are working closely with the trustees, staff, and with the forensic accountants to make sure that we are tracing all of the transactions that went in and out of the customer segregated funds at mf global. the number of different accounts and the number of different transactions that did occur have made this a very complex process for both our staff in the forensic accountants that the trustee is using, but we all are working through these issues and hope to resolve them very shortly. >> chairman, do you have anything to add? >> what i would add is that the securities side was very much smaller. only about 400 securities accounts compared with many thousands of teachers accounts, and while the company did not report a shortfall in the reserve account, the equivalent of the segregated account on the security side, we are, of course

, realign any representations whatsoever from the company. real working closely with them to ensure that money can be traced and recovered for the estate. we are also looking at our rules to see if there are other things like to be doing differently to bolster the integrity of the custody practices of broker-dealers. we have a very strong customer protection rule that would only already allow customer funds to be invested in u.s. government securities backed by the full faith and credit of the united states, but we have proposed some rules with respect to requiring separate audits a broker-dealer custody practices that would also enhance the s0 and sec examination authority of broker-dealers and would require broker-dealers to file regular reports with the agency with respect to the customer practices. there is a pending rule proposal of for common right now that would greatly enhance financial

reporting by broker-dealers. so we are also looking carefully to see if there are additional things we could be doing. the trustee has filed a mission to cut motion with the court to transfer the bulk of those former securities accounts to another firm. that motion will be heard on friday by the court. >> chairman, cftc staff participated in the interagency effort in questioning the rule proposal, but the cftc does not hang on to the joint tax adopted by the of the regulars almost two months ago. when can we expect to see ftc to issue its broker rule proposal and will there be any differences says the cftc see proposal from the text issued by the other regulators in october? >> mr. chairman, we did a staff level participate.

i have a vision that we move forward with the proposal consistent with what other regulators have done. it has really just been a capacity issue. bringing things for to a commission. we've had our last meeting in october, and the next one december 5th. we also had a changeover of one commissioner retiring in another one coming on board. so i would envision to get feedback from staff and commissioners and move forward with something consistent with what other regulators have done. >> i do have additional questions for all of you regarding to rm implementation roadmap. the oversight of the sec. senator shelby. >> thank you. chairman, according to the mf global bankruptcy trustee, as much as $1 billion or more of

customer funds are missing from the cftc, missing. cftc is a regulator. where have you been there? secondly, do you know where the money is? >> senator, as i am not participating in the matters it may be appropriate. >> why are you not participating? for the record. >> absolutely. i think it's a good question. though the attorneys at the cftc, the chief ethics officer and general counsel have indicated to me that they did not see a reason, legal or ethical for me to not participate, i reached out to them as a deterrent to enforcement matter and before we had our first closed-door surveillance meetings. we have closed-door surveillance meetings every friday and have for 30 plus years. he said that did not really want

my participation to be a distraction. it had already prompted some questions from the support matter. >> are you not participating because you have a prior relationship with the chairman of mf global, jon corzine? >> i left wall street 14 years earlier, but i participated with this committee on the -- no, that was -- >> you can recuse yourself because of your relationship pastor present with the chairman of mf global, jon corzine. >> i indicated the general counsel that there is a november november 3rd that but did not want my participation to be a distraction. >> the answer is yes or no to met with a minute. i ask you a question. are you -- did you recuse yourself from proceedings dealing with mf global because of your prior relationship with jon corzine way back 14 years

ago? >> well, i did not want to be a distraction because i had been at the same firm and he had been my boss. >> well, you thought you might have a conflict with the perception of one, is that right? >> the lawyer still be pretty straightforward was that there was no reason that i needed to not participate. as it turned to enforce the batter and investigation, these very important matters because it's critical to find out where the money was, i did not want my participation to be a distraction. there are excellent career staff . >> i'm asking another question. since you have been chairman of the cftc, as the chairman of jon corzine -- mf global, contacted you regarding the regulation in any way to mac. >> i don't know about his

contacts with the rest of the agency. there was one courtesy -- >> wait a minute. you had a meeting. there was a meeting. you call that a courtesy meeting you had a meeting with the chairman of mf global. >> there was a courtesy meeting when he took the job. then there was one -- >> excuse me. i don't mean to be rude. was the meeting at cftc? >> yes. >> was it after jon corzine became chairman? >> yes, it was. >> what did that have to do with him taking the job? >> he was the head of an agency, head of a company, and he came by. there were staff and myself. yes. the spring of 2010. >> did you or any of the staff ever have any conversations, biological or interaction regarding the regulation of what

he could do or not do? >> well, as reported on our website there was one general call. >> i'm not interested in reporting on website. just tell us what happened. >> well, there was a broader thing. july of this year there was reaching out as part of the 1100 meetings that we have had on the dodd-frank rulemaking, one of them including cftc staff, myself, a telephone call about this rule about investment of customer funds. >> so you had a meeting regarding the chairman of mf global. >> that's correct. conducted by telephone. >> now, my last follow-up is part of my first question to you because my time is limited. do you or the cftc know where the $2 billion yesterday? if you don't know why don't in a?

>> senator, we are working closely with the forensics accounts that have been hired by the trustee to try to locate any missing customer funds. we continue to work through those issues, but we have not located all of the funds that are missing, but we continue. >> the answer is you don't know where the money is. >> that's right. >> thank you. >> senator. >> they key very much. let me begin with you. you and your colleagues have a complicated challenge implementing the poker rule. that is coming to me, a broader issue with respect to how derivatives and complicated instruments are going to be treated on the books. it is complicated. that is why congress directed

the agency's to it because the process of reaching out and getting an opinion from the affected industry, getting comments is something that in our legislative process we don't do a systematically. the other complicating factor is clearly an attack on the budget. so how their resources are in question, whether they can carry out some of these sophisticated issues. we are also seeing the potential for challenges at the circuit court on the administrative procedure act with respect to the economic analysis. i find it interesting because that was not even part of dodd-frank. that is a predecessor statute that called for consideration of the economic consequences, not a cost-benefit analysis. the courts are running into the statute. but all of that having been said , and this time with his

pectorals the only focus capital. will assure the congress and american public that will not have to go and as they did in 2008 and provide hughes direct financial support. as we discovered recently, in direct financial support to the borrowing facilities of the fed. is that your perspective? are you prepared to a expressly consider the additional capital that must be borne if we cannot effectively deploy these rules to back. >> senator, as i indicated earlier we have been proceeding with the improvement of capital regulation across the board. with respect to the trading side

who of major institutions where obviously the rule has particular salience we are on the verge of putting l a proposed regulation along with our fellow banking agencies which would implement the so-called 2005 rules, the ones applicable to the trading books. secondly, when we did a capital review exercise earlier this year and as we undertake it again which we have just begun to do for early 2012 we have included for our largest institutions a so-called trading but shock, something which would effectively deal down dead and trading assets, distress' test from under the current environment. this year we have also added a specifically european component to that taking into account the potential impact on sovereigns in the eu.

the reason i mention this just as part of this is back to the point i made in my introductory remarks that we need a dynamic as well as a static picture capital. so what we try to do in the stress tests is to say that a salmon adverse scenario, some bad things happening, but in the banking book and the trading book, and make sure that the firms could sustain the kinds of losses associated with that adversarial and still emerge sufficiently well-capitalized to be a viable financial intermediary. so i absolutely think that capital is central your. to realize it has become a bit of a broken record, but i do think that capital is the foundation for a well structured financial regulatory system, which definitely needs to be complemented with other forms of regulation. >> without these other forms of regulation then i don't want to the words in your mouth, but it would seem to me that the capitol level would be some

percentage point higher because you just don't have these other complementary transparent platforms or rules. >> when we -- when we -- when we setup requirements we do try to look at how those requirements relate to other regulatory arrangements. so i think it is the case that in the absence of, for example, restrictions on proprietary trading we would -- we would need to look at the potential losses associated with an unregulated proprietary trading. >> so there is a point, at least analytically at which if the rule was adopted and these other measures more effective use of clearing platforms, more products taking -- being cleared rather than over the counter bilateral transactions, that potentially capital would not be

as high for banks, and i find one of the ironies is that, you know, the industry and others are fighting so hard against these. they may end up with higher capital levels that impede their ability to be lending to participating in the economy. and i guess the moral of the story is, at least i hope it is, you can't have it both ways. undermine all of these regulatory structures and expect to have very low capital levels because there is no protection for the taxpayer. >> certainly the riskiness of a particular asset is affected by the regulatory environment in which that assets can be purchased, and i think that is a core point. obviously if the firm is able to take on a substantial portfolio of risky assets, cover requirements will have to be higher. >> thank you very much. senator. >> thank you, mr. chairman. chairman, this is the second

time that you have appeared before me sense mf global hit the front pages. i must admit, your nonparticipation explanation makes less sense to me today than before you appeared the first time. let me try to understand this. you worked for a former senator 14 years ago. is that correct? >> well, i worked with goldman sacks, the firm, for 18 years finishing in 1997. that's correct. >> right. and up until the time you decided on november 3rd that you weren't going to participate anymore you had regulated mf global correct?

>> says. as chairman of the commission overseeing the hundred and 25 futures commission merchants and thousands of other restaurants. >> right. it never occurred to you prior to november 3rd that you should not be participating with mf global? >> i raise the question of the staff when i came on board at the cftc, which companies to be involved in or not involved in. and they had said there was no specific reasons not to participate, but then as this turned to an important matter, october 31st on halloween, as it turned to an enforcement matter their repeated that, but as we were getting closer to that friday surveillance meeting i had indicated to them that i thought that it will be best not to be a distraction, hard-working and very excellent

staff of the agency with regard to something that could be as specific investigation of the specific individual as well, and -- >> why would you be a distraction? ec, it feels like appear having been in something like your sheet myself is that when this cut uncomfortable because money is in there that should be there, and for whatever reason you folks did not discover that and so it looks like it's too late. you don't want to come up here and answer questions. every hard question your. ♪ awoke, not participating. u.s. commissioner summers to step up and offer something. and to me it looks like you're ducking the responsibilities of your job. i understand why you'd be a

distraction. >> senator, i take the responsibility of the job very seriously. i think the protection of customer funds and physicians is just paramount and its core to our regime and the farmers and ranchers and many energy merchants because those of the people that really need to work on and use these instruments. critical to there. >> so preferred actually, as you suggest, to be able to address it, but when i turn to the general counsel, and in my two and a half years is not the first time that i might not be involved in a specific investigation of individuals there is excellent career staff, 170 plus attorneys and so forth and the enforcement area. auditors and so forth to get the direction of four other excellent commissioners and not be a distraction by my personal

involvement or participation. and enforcement matter. >> but as president truman so famously observed the buck stops with you. so after this hearing when farmers from nebraska called me and say what did the chairman said looking my money back, response to them as well, did not want to become a spectacle. ..

and i had judgment and it was a knock first time over this to a half years return to an enforcement matter that may involve particular individuals and in this case that was 14 years earlier and nine years earlier when the sarbanes-oxley work was done that thursday said to the general counsel, you know, what do you recommend here and how do you have me not participate so i'm not a distraction to the american public and to the important matters, the critical matters that we do share on this is ensuring the customer funds are protected, that money is accounted for, that segregation happens everyday and that people can have confidence in these markets. >> well let me just wrap up with this. you know, it seems to me very very fundamental if you have money from customers in this

account and you have your own account over here or the company's account, you don't mix the two and you don't appropriate money from customers to do your own risky trading. that seems to be a sick and i'll bet that has been the law since the beginning of time, and this isn't tough. and i don't understand and you are not clarifying to me why you would not be participating in this. >> in terms of the law, the law is absolutely clear. the commodities and exchange act is clear. there were some exemptions granted in 2005 that yesterday the commission voted to narrow and take back but there were exemptions granted about lending customer money to other parts of the firm or something called repurchase agreements and in october 2010 we proposed to

narrow that, to dial that back. i have been insistent about that for the last 14 months and believe we needed to do that but we went through the healthy process of notice and comment in hearing from the public as well. >> and that is not what happened here. >> well i can't comment. >> because you are not participating? >> thank you mr. chairman. secretary let me ask you the 60 members of the senate voted to pass the wall street reform act. that is well beyond a simple majority. that included the consumer financial protection bureau. now, it seems to some of us it is both unprecedented and rather extreme for republicans to refuse to confirm anyone regardless of how qualified they are as to lead an agency because they oppose the existence of an agency that is accountable and a dozen different ways under the

law. and that it is meant to help consumers versus large financial institutions. if republicans and the congress continue to oppose even and up-or-down vote, but allowing us to pass an up-or-down vote to confirm a director, can you explain what the practical consequences of not having a director means for consumers and for middle-class families for this agency? >> thank you senator for that question. absolutely, as you said in my opening statement says, without a confirmed director in this position, the consumer financial protection bureau will not have authority to supervise and enforce very common sense consumer protections with respect to payday lenders, mortgage brokers and mortgage lenders, mortgage servicers, student loan providers and i think if you look at what the consumer bureau has done to date, you see that kind of

overwhelming importance of their effort. they are trying to make clear mortgage disclosure, clear credit card disclosure, clearer disclosure for students who take out loans, trying to help servicemembers and seniors make sure that they get the information they need in the clear form so that they can make essential choices about what consumer products they want to purchase or not and what kinds of variations of those products. we know the absence of all that disclosure was an important element of what caused the financial crisis in 2008 and 2009, and so from our perspective we are talking about very common sense, very tangible protections for everyday americans of all sorts with respect to some of the most important financial judgments they will have to make. >> isn't it true for example community banks and credit unions will be at a disadvantage

because they will have to live under the regulations but non-bank institutions or certain others, whole universe of institutions that cannot be regulated unlike immunity banks and credit unions unless there is a director to help promulgate the regulations? >> that's true senator. the consumer bureau has authority now to do these things with respect to banks. is only the non-banks that don't have the authority so we have the unhappy circumstance of banks being regulated in these weights which i should we put all the non-banks, with whom millions and millions of americans engage every day are not eating looked after. >> in pursuing this line of questioning in a different respect, i have heard a lot of rhetoric about regulations of wall street causing a loss of jobs or slowing economic growth. but can you name a single action in all of american history that caused a greater loss of american jobs or slowing the growth that we have had in this

economy band when we allowed wall street financial institutions to largely do whatever they wanted, running up to the financial crisis that culminated in 2008? isn't it a fact that it was the failure to regulate the big wall street banks in the derivatives market that caused the losses of billions of american jobs over the last several years? >> we know senator the financial crisis led to the destruction of enormous amounts of jobs and wealth in people to lose their homes. we know that important reason for that was our not having a financial regulatory system that was aggregate to the pass. that is why enactment by this congress of dodd-frank was so critical in the implementation work that my colleagues to the left are currently engaged in is so critically important so we make sure we have a system that is stronger and more resilient and that better protects not just the financial system but the well-being and the resources of americans across our country.

>> finally on a different matter, as the subcommittee chair on housing i am very concerned that it's the qualified residential morgan -- mortgage definition being worked out, several of you who are engaged in this and i would like you to respond to this by regulators isn't broad enough, that it could hurt the housing market especially if you proceed with high down payments of 20% or more, which is where the marketplace has already taken itself to in expectation that this is what you are going to do. now this is a whole universe of very responsible borrowers that will be largely eliminated at the end of the day. for example, that was where i bought my first home and i have been a responsible borrower over a long period of time. why would you seek to eliminate that whole universe of very potentially responsible

borrowers by you know systematically just saying 20% or above is the mark? >> i am happy to start on that one. the cure is a narrow definition in a risk retention rule and the basic point of the rule we believe and the requirement of law is to encourage risk retention in securitizations. the question is, should there be exemptions or exceptions to the securitization requirement and they qrm definition is drawn pretty narrowly in order to identify the mortgages that are so well underwritten that no risk retention is needed. but then leaving substantial space for other products that do not meet the qrm definition to be provided to the market but to do so within the risk retention framework that they allow requires. it is one of the issues we have to confront.

there have been many, many, many comments on that issue but it's not intended to define what an acceptable mortgage is. is intended to define an exception from the broader rule, so it's one of the things we will be grappling with. >> are you going to be -- you know there is a lot of uncertainty surrounding whether your next issue is another proposed version. can you assuage the concerns of borrowers and lenders alike by singer plan to issue a re-proposal? >> well that is a collective decision of people down the table here based on the comments but i think for myself, it will depend on how different a proposal we are looking at once we have made the series of decisions in response to comments. it is very fundamentally different than i would like to see more comment, but we will have to decide that collectively. >> mr. chairman, thank you. i just want to say there are many different ways in which we look at how to make sure that

risk is reviewed and i just find this movement towards this 20% to me to be, it's one of a series of factors and should be considered but it shouldn't be the driving factor. this housing that -- market does not any -- does not need any more of body blows to it. >> thank you very much. chairman gensler based upon your voluntary recusal i don't think you can answer this question at this moment and it's not necessary for your colleague to join us at the table that maybe the cftc can answer this. the reforms, i thought the cftc at least the first question made a sensible reform yesterday in regard to the use of the segregated accounts, altered the investment opportunities for customers in those segregated accounts. and while that does appear to be at least sensible, everything that i have read about the ms global i don't see that role has changed any of the outcome of what has transpired in that

global and while they may have been doing things with that money, that this rule would affect we really, what i read is we have the taking of customers funds and they are gone. and so, i would like to have the cftc explained to explain to me why this change in this rule may have been a tool that would at prevented what occurred at mf global from occurring, and no need again for you to answer that today but if cftc could respond to the committee with that question i would appreciate it. and then let me ask chairman shapiro a question. senator warner and i assume this week are going to introduce legislation that we hope will generate additional startups and entrepreneurs -- revive entrepreneurship in this country's economy. present obama's talked about section 404 of sarbanes-oxley. we heard testimony last week in

this committee about how it remains one of the most egregious deterrence toward entrepreneur, small businessmen and women accessing capital but i don't know that you or the sec has said anything about the cost benefit analysis of section 404 and its compliance as it relates to small firms. >> senator i'm happy to talk about that. as you know we share the concern of asset of capital to help us confront capital issues. we are looking at all kinds of initiatives including raising the limit on regulation a offering whether 500 shareholders is still the right number or right company to have to begin public the reporting to the sec, whether she we should relax the general solicitation ban and an number of other things. we have a lot on her plate and a lot of initiatives ongoing. i will say that i have

personally weighed in on, with concern about raising the 404b exemption as high as i believe some bills are considering doing that. is currently $75 million which at that cover 60% of all public companies do not have to do 404(b) reporting, to go to a billion dollars which i think some bills are contemplating, it would concern me because we have understood from investors consistently that the independent auditors reporting on internal controls is a very important investor protection and gives them a lot of confidence in investing in companies. the worst result i think we could have would be for investors to lose confidence generally again as it did after enron and the quality and integrity of financial statements. the bigger the company gets the more the concern i would have about that. in addition we are looking at this very carefully that exempting from 404(b) with these

larger companies would in fact save audit costs because internal controls have to be tested in the audit of the financial statements anyway. so we would be happy to work with you and talk with you in detail about it, but i do have some concerns because 404(b) investors consistently tell us it is. -- been very important. >> i do think it's important we have your expertise, the sec's expertise on this topic. i think it's timely and i think entrepreneurship startup companies are great opportunity for countries economy and i certainly believe there's an impediment and we need to find the right threshold and balance for protection but also to increase the opportunity to access capital so i would welcome your more timely answers to those questions. my final question and it's a broad one, and this comes from chairman johnson's question. my take on what i heard across the table was that dodd-frank, and i was not on this committee at the time that dodd-frank was

passed and signed into law, it may have reduced the risk of failure of financial institutions that create a systemic risk, and regulators have additional authorities to winds downed businesses that are failing. but i didn't hear anybody indicate that dodd-frank reduces the number of institutions are too big to fail, that would meet that definition that the public i think you and me as a member of the house of representatives thought to dodd-frank was addressing, reducing the number of firms that if they failed, there would be a systemic risk. what i heard today in your response to the chairman's question was, nothing that suggests that the concentration of economic power is any less today or that there are fewer firms whose failure would cause the dramatic consequence to the u.s. economy but two things. nothing wrong with either one of

those two things as we have greater authorities to wind down one of those firms in that circumstance and we have a greater opportunity to prevent any of those institutions from risky behavior that causes them to fail. what have i missed in that discussion that you had in response to the chairman's question? >> senator, i think all those things are true. that is to say the statute decreases the probability that firms will fail by making sure that they are better protected and are offered, have a stronger standards are engaging in less risky activity and also of course as chairman gruenberg noted we had new tools to deal with failure if and when it does occur in ways that are orderly and don't require the taxpayers

resources to deal with the situation but i think it also does this, which is what you are getting at. admixtures are better protected from each other, so that the buffers, the kinds of things that make it less likely for any one firm to fail help make sure that when a particular firm fails, other firms are better insulated, better protected from the circumstances. one key element of that whole dynamic is what governor tarulla pointed to is of course the central aspect to this which is n. there are lots of other ways and i'm sure other colleagues on the panel can speak to them but i think it is all of those things. it is reducing the likelihood of failure, better making sure that other firms are protected from failure of a particular firm and dealing with a firm that fails in a way that is orderly and is protected from the taxpayer. >> senator let me add two things

to what secretary wolin said. first, i do think it's important that the markets disciplined play a much greater role than it did, so a number of the things we are talking about here whether the fdic liquidation authority or the enhanced credential standards, the disclosure that we are doing with stress test, all of those are means to enhance market discipline as a complement to basic regulations. the second thing i would say is that, they there are two forms of systemic risk we need to be concerned with. one is the one you highlighted which is the number of firms which in and of themselves would cause a systemic problem if they were to fail. but second is a set of activities, correlated activities within the financial system that may be conducted by a broader number of not huge

organizations, which themselves could create some systemic risk if for example they were shocked to the value of the assets underlying those transactions and that is really what mbs was. india is involved big institutions to be sure but it involves a lot of other so when you talk about derivatives reform, you are talking central clearing and the like that though you are talking as much about systemic problems that can arise in non-gigantic firms as well as gigantic ones but i will tell you quite honestly i think we are going to need some more work and thinking there, to make sure we are identifying those forms of risk and not just allowing an arbitrage out of one set of institutions into another. >> when you say market discipline, is that moral hazard? >> it's the other side. is the flipside of moral hazard, sir, yes. >> senator merkley. >> thank you very much mr. chair and i wanted to start with a bit of it brief discussion, the

difference between qualified residential mortgage which was an exception to the risk retention role as mr. walsh pointed out and a qualified mortgage, which was a term used to define a mortgage that needs ability to pay standards, that is getting rid of the liar loans. mr. wolin, under the section for the qualified mortgage, given the ability to pay the standard, series of requirements that are laid out and those requirements include not being a balloon mortgage, and being fully amortized, not being negatively amortizing, being verified income and so forth. and meeting their ratios in regulation or statute for debt-to-income. all of those basically, yes, yes. this is an underwritten ability to pay. two terms are used in this

section. one of which refers to a presumption and the other two safe harbor. technically those are two different things in the law they think you have reduced two different roles based on which direction the rules will go, two different draft rules. do you have a sense right now which way you are going to go on this? >> i don't, senator. i think it is yet to be determined and i think you know, how the qrm and aqm which as you know have different purposes but also have some interplay relates to one another i think is also something that needs to be worked through. in the end of course, by regulators, we will you now offer our views and you know, in the case of the qrm rule we have a coordinating function of the statute provided to us. but the regulators will of course in the end make their

judgments. >> the qualified mortgage is completely under the section presumption of ability to repay and its distinct and different from the risk retention version and i will note that later in that section, there is a reference to directly to the safe harbor. certainly that was the discussion that was taking place among those of us who were in murzin trying to get rid of the liar loans was that you have the safe harbor. thank you. governor tarulla i wanted to turn to the surcharge and i believe that earlier in the year, you called for a surcharge which we might call an anti-bailout equity buffer as it is much as 20% which could bring the total amount for -- of 15% but i think the fed ultimately adopted a 3%, that is essentially instead of getting to 15% they get to 11% and for

most organizations, on the scaled bucket structure, 1% or 2%, so is it fair to say that you lost and you are still concerned about that? >> no, senator what i said in that speech in june i believe was the methodology that week, which is fed economist, have pursued in trying to calibrate what an appropriate surcharge would need, had reduced a range of possible surcharges that would have been somewhere between 1.5 and 7%. as you indicate, the basel agreement was for 3%, as being at the top. that is obviously within the two to 2.5 that would have applied rakove it is obviously within

that range. i didn't have the time propose it but i did want people to see that a methodology, which says, which asks the question, how can we equalize the risk of failure of one of the systemic institutions and the impact that would have on the financial system to that of a medium-sized institution, could under some not impossible presumptions produce an amount of the surcharge greater than we had intended to propose. i mean there are other -- this is relevant to my response to senator reid's question earlier. when one thinks about which number to choose once you have got a range, i think several things should be taken into consideration. one, how are you feeling about the underlying capital system, the quality of capital and the like, two, to what degree are there other regulatory structures which suggests that you need to go higher or lower

in that range that you have got? and three, they think we do take this into consideration, the degree to which we can get agreement from our international counterparts to move their tzipi's in a similar direction. so you know, as with the basel iii personally i would have been a little happier with a little higher number, but i do think that the numbers that we got in the international negotiations and in coordination with the occ and the fdic are well within their range which analytically we think will provide the kind of additional buffer support that is needed. >> thank you. go because my time is up, i will just close by noting that the total amount of buffer becomes much less than many of the standard business school have proposed and is in the context of certainly significant

exposure to european banks and some exposure and it is not fully understood in terms of the credit default swaps and how the dominos lined up in that manner. i applaud your ongoing effort to have this first line of defense, being one that is robust and substantial. thank you. >> senator corker. >> again mr. chairman thank you for calling in hearing and i thank each of you for being here. mr. wolin the cfpb, the consumer financial protection bureau we have had numbers of conversations about it and i have talked to the white house several times over the course of the last several months but in fairness, even the treasuries for postal that came forth regarding the bureau and the treasury secretary has said yes, we felt there should be a board. i don't know whether you are enjoying being part of a political game that is taking place regarding this but i would

just say that look, some just basic balances, checks and balances for this organization i think would cause the log jam, the log jam that is taking place on this to really be broken up and i'm sort of surprised that you all continue to be a part of this political game that is taking place. but i do hope at some point in time we will be able to have a meeting of the minds and have just a simple kind of thing that most people in tennessee and across our country would like to see him that is some accountability. you don't need to answer that, i know it's not going to happen this week because everybody's having so much fun with it. but, on tsc's in february you came forthwith a multiple choice of what could happen with gse's. i am surprised that you have not come forthwith any solution towards the gse's and you don't

have to go on forever but explain to me why you haven't. i mean it's a pretty basic issue that all of this node needs to be dealt with. we look forward to working with you and when we realize you really just didn't have the appetite for taking it on, we have offered ourselves and we hope you will look at that but could you tell us why you are not really pursuing any type of gse reform at this time. >> senator and i want to come back to the cfpb thing for second as well. we are keenly interested in pursuing proposals for housing and finance reform. we laid out options as you know. we have continued to work on refining sort of what we think the right approach is and have tried to make clear working with folks across the congress that we intend to engage in a conversation, so we have been working on plans. we have engaged -- >> are you going to come forward with a plan? >> i don't know whether we are

going to have a specific thing or when but certainly we hope to. is obviously critical and some point we will bring something for. >> at what to say the general observation is that you all are really succumbing to politics, and i am willing to take on the tough issues that need to be dealt with that really caused people in our country to the divided, taking on tough issues like this. really promoting other political stances like you are right now with the cfpb and not trying to solve it. just want to tell you it's disappointing and i do hope that very soon somehow that might change. mr. gansler -- >> may i respond to that senator? >> sure, briefly. >> we have tried to take on lots of very complicated -- >> you are not working on gse's as he said he would. you have not taken it on. you came out with a multiple choice that makes everybody happy and you did not do what you said you would do.

you all said you would all come forward at the beginning of this year with a real proposal. the year is almost over and you have not done that. >> i would say this senator, that we have put out some very serious ideas. we continue to work on proposals and we will work with whoever on the hill wants to work with us. >> thank you. i wasn't going to weigh in on this. i figured others with do it. i do have some other questions i want to ask other folks, but i just wasn't going to do it, to tell you that it appears to me, don't know if you would make the same decision again, but the people that care about mf global really care about what happened running up to the point in time for you recused yourself. the enforcement piece, i mean it will take its own course and i'm sure it will be tough but it feels to me like you panicked, and it was more about a career enhancing situation to avoid accountability.

i just have to tell you, and i know i fall short of this, but i do try to take on the tough issues and not dodge tough issues. i may not be coming back because of that, but, but you know, it appears to me candidly that you really took a career enhancing, think it is actually not turning out to be the case but a career enhancing position by trying to take yourself out of this at a moment in time when really the rest -- corzine is not the chairman and anymore the company so it seems like now is a great time for you to be involved. i was disappointed with your testimony and i would love to talk to you about it some other time. it doesn't seem to me that it makes any sense at all and was done solely to enhance your career here. >> senator i look forward to that and i feel you have given me good advice throughout my two and a half years here. but really what happened is it

turned to a specific enforcement matter that could involve specific individuals, not just the company but specific individuals. about compliance with the laws, not just one law but various laws. and there were some questions coming that thursday. i was up in the senate testifying on physician limits actually but i reached out to the general counselor and i said i know you are saying it was 14 years ago and nine years ago and so forth, but that my very participation would be such a distraction on the enforcement matter and that i said so what do we do and to your very good question the general counsel said well enforcement involves the bankruptcy come involves the very heart of the questions, where's the money and so forth. so i don't think sir and i appreciate what you are saying because it is a balance. all of us that are in this town, there is a balancing of these very hard decisions and so i made a judgment on that

thursday. it was certainly not for the reasons you are saying because you have observed this is still a very challenging topic, even not participating is a challenging topic. >> mr. wolin and mr. tarulla i know the treasury came out and my guess is that there are people at the treasury that thought what in the world, especially when it came out. and then you oppose fulcher internally and now it is part of our law. over time i guess you figured out the best way to deal with bulger was to make sure the treasuries were exempt. all other trading and dead is going to become far less liquid in other words you buy a ge bond there will be no liquidity but you are fully exempted treasuries. so it wouldn't have any effect on treasuries ability to have liquidity in trading debt

instruments that are very important to you. just wondering if you think that was an appropriate response to basically say okay we will let it apply to everybody else but us and i wonder if you and mr. tarulla will respond what that will do by crowding people out of a crowded side and causing people to focus on something that they know is highly liquid? >> let me start senator bayh saying they were in favor of the rule. i testified with paul bulger. on the statute, was the creation of this congress. i think from our perspective we wanted to make sure and i think industry was keen for us to make sure that we excluded certain things from the provisions. how that gets through in the rulemaking obviously is not for the treasury to participate in so i will defer to governor tarulla but i have a hard time imagining this is going to have

a particularly important effect when all is said and done on the over all debt markets and their liquidity. >> senator with respect to liquidity on the instruments more generally, i think part of, a lot of this will depend on the efficacy of one of the concepts behind the proposal, which is to try to adjust the metrics and the oversight to the relative liquidity of the markets for the particular assets, so for example in the exceptions for underwriting and market making, it will be a -- appropriate to evaluate what a firm does differently if it is making a market in a relatively less liquid assets which were example could be a bond in a smaller firm, then as opposed to making a market in a fortune 500 equity

traded on the new york stock exchange. so we will try to minimize the effect upon liquidity in markets by implementing market making and underwriting sections as sensibly as we can, taking account of the differences in markets. i don't know what three or four, well, it will surely be more than that because the rule won't take effect for another two and half years but what five, six or seven years now -- from now how the nature of trading in these instruments will have changed it may be a bunch of it migrates to some different terms. >> senator hagan. >> thank you mr. chairman and thank you for holding this committee. governor tarulla, in your opening testimony you devoted much of your discussion to capital regulation after dodd-frank and i agree that this is an issue of most importance. the european banks currently

hold large portfolios of sovereign debt that would satisfy liquidity coverage ratios under basel iii, get as we all know, they certainly have seen declines in liquidity and value of these assets. it has been reported that the rasul committee may add equity and corporate debt to the list of debts that can be used to satisfy liquidity requirements. could you discuss this possibility and would you agree that banks are best served by holding a diverse pool of high-quality, liquid assets such as cash, u.s. treasuries covered bonds and central bank reserves? >> certainly, senator. i should say at the outset that the interest in taking another look at the capital liquidity coverage ratios began well before the current period of stress european sovereigns. week, that is to say the federal reserve, where one of the entities which asked internationally to take another

look at liquidity coverage ratio and i would say to be fair to those who came up with the original proposal, it was in large part because we never had quantitative liquidity requirements before come either nationally or internationally and so we, that is to say the board, thought that it was particularly important that before putting any such requirement in place, there be a pretty close look at a me look that involved principles at central banks and regulators. and one of the precepts i think for the renewed look who was just the point that you were making. that if you are worried about the liquidity of a firm, what you are really asking is how well is the liabilities and the assets of that firm matched so that in a period of stress, it can cover its needs and, over some period of time so it has a

plan, can develop a plan for longer-run survival. what i had thought was that the 2008 period gave us a very good real life it experiments to test what kinds of instruments actually to remain liquid even during a period of stress like that. for example highly traded equities in large companies, so that is in fact one of the motivations and i believe that once the international group and the basel committee that is looking at the lcr has finished it's a valuation next year, that you will see some changes and things like what qualifies in assam to run rates and the like, to try to conform the requirements somewhat more closely to the experience we actually had in late 2008. >> let me follow-up on follow up on that. the volcker ruled establishes the purposes of the bona fide

liquidity management, and i would expect that the basel committee's definition of that bank stock of liquid assets are liquidity coverage ratio purposes and the trading account exclusion for bona fide liquidity management would be closely linked. is that an appropriate expectation? >> well, i think for certain we would want to take the revised liquidity coverage ratio into account and thinking about what is a legitimate liquidity management program but remember, the lcr is only a 30-day window and if you are looking at sound liquidity management for a firm, 30 days is important because of that period i mentioned a moment ago but you actually want to make sure that the book is better matched going well out dionne 30 days. so while we would take lcr into account, good sound liquidity management will include things other than just the lcd market. >> thank you.

chairman schapiro, the proposed volcker rule prohibits a banking industry from acquiring an ownership interest or sponsoring it covered fund unless otherwise permitted under the rule, and i wanted to ask your help to clarify certain aspects of what constitutes a covered fund. would be covered fund definition applies to foreign funds such as mutual funds or other regulated investment vehicles to u.s. investors? >> senator, it's a little hard to answer that straightforwardly but i will try to. we started first of all working very closely with our colleagues in the bank regulatory world because at the end of the day his rule is about protecting safety and soundness of the banks as a result of their investment or sponsorship. we started with the statutory revision given to us by congress which is really quite broad and then we worked to try to determine where that was overinclusive and in some instances underinclusive and

came up with what we thought was a pretty tailored definition. i think comments will be critically important to us and refining so they come up with a meaningful definition that doesn't create gaps and loopholes but also as i said not overinclusive. we did propose to include and the cftc may want to respond to this, commodity pools and foreign funds because we thought this was an area where there ought to be coverage. we have gotten a lot of pushback on those issues and so we will be reviewing those comments very very carefully. >> i was relieved to see that a joint venture between a banking entity in the operating company would still be permitted under the rule however to my knowledge the term upgrading company remains undefined. then given the joint ventures are not the type of corporate structures the volcker world was intended to cover i would expect that definition would be brought. can you comment and is meant by

the upgrading company? >> i would just say that is actually an example where we saw the statute was overinclusive and so we thought to create exemptions there for joint ventures operating companies are vehicles used to merge an entity with or into a banking entity or facility. i understand that we do make those exclusions broad enough and so we are looking into that. >> one final thing under that question is i noted that the covered funds that originate in invested loans and other extensions of credit on a long-term basis were not exempted from the covered fund's definition. would you agree that credit funds allow the banking system to share credit risk with investors? >> while i think again, i don't have a good answer for you on that but again we will be sure we look at that carefully. all of these issues around

covered funds are obviously complex and technical but that is why the comments will be very valuable to us as well as the input from our colleagues who regulate the bank's. >> thank you mr. chairman. >> senator vitter. >> thanks to all the witnesses. like a lot of folks i have a broad concern with the notion of regulation and the general concern is that in trying to deal with too big to fail in this way, we are going to end up encouraging or incenting too big to fail, specifically just as an example. "the wall street journal" has reported that the biggest too big to fail thanks pays 78 basis points less for their funds than their rivals. has that sort of factor in the market then examined in terms of the issue? what will be the impact of designated, these non-banks as systemically important in the market and is there going to be a consequence that some of them actually gain advantage?

has that been examined in a rigorous way? >> i see and you are addressing me senator. >> i guess i would love your reaction governor as well as secretary wolin. >> let me start. i think with respect to too big to fail, it's not a binary, this is not a binary exercise. that is one doesn't go from being perceived as fluid and too big to fail one day and clearly not too big to fail the next day and i think what you have heard today and probably have heard on past panels is a process has been in place to try to change in a real way that perception is too big to fail among systemically important institutions in the united states. that happens first through the kinds of capital standards i was describing earlier. i think secondly, it happens through making market discipline real for these institutions.

windy fdic is able to develop this process of doing a credible liquidation authority, what -- what you begin to see as i think you have probably observed, outsiders including rating agencies saying there is not the level of implicit support that they had imputed to u.s. firms in the past any longer and that is actually way behind some of the downgrades that the ratings agencies have done. they have said explicitly this is not about the condition of the bank. it is just how much we think the government would stand behind them. so we absolutely look at market indicators to show us to what degree market discipline is becoming a reality for these firms in the same way that it's a reality for a middle sized regional bank in the midwest. >> secretary? >> senator i would just add at this time to what governor

tarulla said that as no one is lining up to be designated as sifi. they are all quite, those who might be designated lining up as quite displeased with the prospect and that is because it comes with a set of enhanced prudential standards that they will have to meet and ties into what the governor was saying i think with respect to how we think about what the ultimate implication is. more buffers, more standards and so forth. so, i don't think being designated as a sifi is something that people see as an advantage with respect to -- or otherwise. it will come with a more onerous set of requirements. >> thank you. just one other comment about it completely separate topic to the chair of the sec, chairman schapiro. first of all, the stanford case as you know has been very important to me because of the number of louisiana victims,

senator shelby's in a similar situation. a lot of folks are affected. the sec did take action in june and i thank you for that. it was very long in coming and going back to well before your tenure but the sec finally took positive concrete action and i thank you for that. you have been personally very engaged since then to try to get sifi to do the the right thing and act. we have had many conversations about it and i also thank you for that. i am sincere about both of those things. having said that, this again is dragging on six months after your positive concrete actions. so i would just encourage you publicly the same way i would encourage -- that i think the sec needs to take definite action again, before the end of the year in a positive way and i

am afraid that is going to mean suing sifi. it seems to me that is what is going to be required based on my information and my conversation's. i hope there could be another more positive and immediate outcome but autumn line, i really encourage you in the strongest possible terms to make sure to take the next step, definite action, before the end of your. >> senator i do appreciate that and i do know you are deeply concerned about this and it's absolutely necessary retry to get to the best possible results of the victims. that is what we are working hard on in the commission is equally engaged in getting two resolutions as quickly as we possibly can. >> there is then a vote pending in the senate. senator shelby has some quick questions. >> thank you mr. chairman. sec, chairman schapiro, your

tenure as chairman of the sec has been marked by a number of major failures. these failures include investment failings that you just brought up, stanford, failures in court by the recent cd corp. settlement decision, roe making fighters like the proxy access rule that was rejected by the d.c. circuit go there have also been operational failures like the commissions constitution center. management failures like your general counsel's involvement in the madoff case and the continuing internal control failures identified either gao, general accountability office. as head of the sec, do you take responsibility for any of these failures? does the balk -- does the buck stop with you or what do you say? >> let me start by saying the sec had no material weakness in

it, internal controls over financial reporting and for the first time in quite a long time so the agency's issues with respect to that have gone on through many administrations and we cleared oath material weaknesses this year. i'm extremely proud of that in extremely an extremely proud of the status work. the agency has had some stumbles. i have always taken responsibility for the transparent about them and fixing them going forward but i think your recitation ignores the unbelievable amount of great work that has gone on at the sec in the last three years including the fact that we had a record year in enforcement last year, or in enforcement cases filed a never before in the history of the agency, more rulemaking successfully completed, more rulemaking successfully completed three unanimous votes by the commission then in a very long time. now we have worked hard to remedy many issues that have been a long-standing concern at the agency. i do take responsibility and testify off at about them but i am enormously proud of this

agency's record. >> secretary wolin your opening statement gave the impression to some of us that non-bank lenders are completely unregulated. of course you know that is not totally true. explained to the american people how these lenders are currently regulated at the state level and also by the federal trade commission. >> senator shelby i would say they are substantially unregulated for consumer protection. they are depending on the state and what kind of non-bank financial firm it is, regulated in states, but i would say that what we have now is no federal regulator who is focused on the non-bank financial sector with respect to consumer protection in a serious way and that of course leaves an unevenness between banks and non-bank's. >> are you in treasury and on behalf of the administration, are you guys, senator corker, are you seriously interested in

talking to the republican leadership about how we can move forward on the consumer protection head on this? in other words we submitted three recommendations to you. one of which you brought up with senator corker dealing with the treasury's initial recommendation that this consumer agency be accountable, have a board and so forth. are you guys seriously interested in trying to negotiate with us on this and let us move forward, where we can regulate a lot of these banks? >> i think senator or what we are very interested in the senate considering and mr. cordray. as you know the -- a very intricate set of checks and balances with respect to the cfpb. it has got oversight by this congress by the gao, independent audits, reporting requirements.

its rules are subject to coordination with the regulators to my left. it can be overturned by a vote of fsoc. there are a whole set of things there that in the end congress determined were the right governing structures for the sin city and we that having done that, it's important for the senate to consider the president presidents nominate. >> one last question mr. chairman. i will just go back to chairman gensler. you were involved in crafting the dodd-frank legislation. you testified at many hearings, crafted statutory language and attended countless meetings. you've been set at the table during the agriculture committee markup with staff members into the early morning hours here in the congress. since the passage of dodd-frank, you have testified numerous times against changes in dodd-frank and get into europe any times to lobby their regularly. in fact according to your written testimony you will be meeting with foreign regulators on thursday.

chairman gensler, in all candor, don't you think if you had spent less time protecting your political turf, your regulatory turf and more time protecting customers and overseeing firms like mf global, it's less likely that mf global would be where they are today and the customers money would not be missing? >> senator, i think it is about protecting the american public is what the cftc does every day. prior to dodd-frank and after dodd-frank, it's about ensuring that and users and their customers get the benefit of these markets, lock and a price into what they do well. we are an agency that relies heavily on self-regulatory organizations. we are only 10% larger than we were in the 1990s. >> making you larger does not make you better does it? >> not necessarily. we agreed on that. we have to be more efficient

with technology, use the collaborative process with other regulators here and around the globe, enter into memorandums of understanding having mutual recognition with those international regulators. we are small regulator that has the leverage really hope the self-regulatory organizations and other regulators, but i think that hard-working staff of the cftc is there and as chairman i did take responsibility for those things that do well and those things that do poorly. i do take responsibility in this job seriously, sir. >> do you believe that the cftc has failed the american people as far as mf global is concerned? >> again i'm not participating in that matter but let me answer more generally. >> they have either failed or they haven't. obviously they have failed. >> i think that when our legal

system says to segregate funds, to segregate funds and customers need to be able to rely on that every day from every firm. >> if people haven't done it, they should pay the consequences then? if they break rules and laws? >> that is what our laws they. >> yes thank you mr. chairman. >> thank you all for your testimony and for being here with us today. currently the senate will take another significant vote to ensure that the american consumers, including servicemembers and other americans, have the strong consumer protections that they want, need and deserve. i urge my colleagues and to -- trump the needs of american consumers on the nomination for the first director of the consumer protection bureau. mr. cordray is extremely well-qualified and deserves the

vote of this nomination. thank you all for your hard work and continue to implement the wall street reform and consumer protection act. this hearing is adjourned. [inaudible conversations]

>> the transportation department wants to reduce the amount of time truck drivers spend on the road. currently truckers are allowed to drive continuously for 11 hours. the government wants to reduce that to 10 hours. a house oversight subcommittee last week looked at the proposed rules. we will hear from representatives of the trucking industry, businesses that ship their products on trucks, highway safety advocate, and ahead of the federal motor carrier safety administration. >> the welcome everyone to our hearing this morning.

we want to get started and i'm glad we have my friend and ranking member here, mr. kucinich. i will start with opening statements and i have a longer opening statement the normal so i will read fast. this last week ordinary people across the strait united states have engaged in the tradition of shopping for christmas gifts rising a predawn hours to take advantage of black friday sales and cybermonday deals. shopping is vital to the survival of so many small retailers. the vast majority of retailers and 80% depends solely on trucks to deliver and supply the products sold in stores or on line. at last count the trucks moved a $.3 trillion worth of goods annually facilitating nearly 60% of the economy. unfortunately these merchants and professional truck drivers who bring their goods to market have a very real reason to be worried this year. the department of transportation federal motor carrier safety frustration has produced a

multibillion-dollar regulation for the hours of service ruled that threatens to raise prices and cut revenues this holiday season. further jeopardizing our fragile economic recovery. d.o.t. hours of service rule which is one of only seven regulations president obama and pose an annual cost of at least $1 billion on the economy. this is being reviewed at the white house. this regulation will hurt an array of job creators and truckers to grocers, bakers and retailers all of whom rely on trucking. the row which has received nearly 30,000 comments has been the subject of widespread and bipartisan concern. radix of the rule include models of democratic senators in the administration small-business watchdogs and small business administration. at this time i would like to enter into the record a comment letter from the office of efficacy to administrator ferro. february 2011 i joined the bipartisan group of 122 house members who wrote the u.s.

department transportation secretary ms. lahood to express a concern that altering the current hours of service rules is unnecessary and would result in more trucks and drivers on the road to transport the same amount of goods, increasing a final product cost and congestion on the nations already overcrowded highways. the proposed rules could actually decrease safety because they could cause drivers to rush adding stress and increasing the likelihood of an accident. while a support the goals of increased highway safety and reducing the driver fatigue, this rule appears to be a solution in search of a problem. even d.o.t. admits that quote the data shows that declined on highway safety said the implementation of the 2003 hours of service rule and its re-adoption in 2005 and the 2007 final rule. moreover trucking related accidents are at all-time low. the department transportation zone data shows 2009 saw the largest decline in fatal

trucking accidents on record. meanwhile the number of truck miles traveled and the number of registered trucks have increased from 221 billion miles to 288 million miles today. the number of registered large trucks has also increased by nearly 3 million. accordingly it appears the current rules are working and are striking a corporate balance. ..

however, it is my sincere belief to regulation currently proposed could actually have a negative impact. the purpose of today's hearing is to bring truth to each of the rulemaking process so that we understand the full consequences of federal regulation before it becomes law. and with that i now yield to the distinguished member from ohio. >> mr. chairman, thank you for holding this hearing and for the opportunity to make this presentation. this question is being framed about how much proposed rule, which limits the number of hours commercial truck drivers can be on the road could cost consumers. but i respectfully submit that there are far more appropriate questions whether his proposed rules to ensure that all of our loved ones are safe and enjoy each other's company's. superposed rule is about saving

lives. truck driver fatigue is a serious safety problem that threatens everyone that gets on the highway every day. each average 4000 people are needlessly killed and 100,000 are injured. the evidence suggests us drivers a major factor in these crashes. under the hours of service currently in effect, chart drivers can drive more than 77 hours a week. think about that. you know, we are all used to thinking about a 40 hour week. when congress is in session, we probably put in an 80 hour week. and you get tired. but if you're driving a truck with all of that machinery and mass in motion, there are consequences when fatigue sets in. as a human dimension that cannot be ignored. under the amount of driving currently allowed to 65% of drivers reported that they often are sometimes still drowsy. 40% fall asleep while driving the previous year.

i will say this again. you know, some of us here have been in legislature. when you run a scheduled to legislature is in session, you know, you have a long drive and you can get drowsy. they tap into all of us. it happens in winter restaurant trainers and on-demand from it. to get accommodation needs truckers driving 80,000 pounds can make a lethal weapon that we don't want a lot better families driving on highways. they're great people to sacaton to support stricter standards for truck drivers because they've been unfortunate to have felt first-hand the little affects the truck driver fatigue. at slattery is here with that and they submitted the statement, which i would like here but i want to read parts of this statement. so the members of the subcommittee will note that cross the truck crashes involving trekkers. without objection i'd like to submit the entire statement for the record.

but i want to quote from a compelling testimony. mr. slattery, thank you to you and your son for being here. as a beautiful clear day in august 16, 2010 of my family's lives are changed forever. my wife susan and her two sons, peter and matthew were returning home from a big family reunion and rock river ohio which is in my district. that was the home of susan parents, church and schindler palmer appeared susan griffin cleveland all her family still lives in ohio. mr. slattery writes, i wasn't able to travel because i was recovering from shoulder surgery. as i neared 190-mile marker on the turnpike in the streets around 11:45 had fallen asleep at crash in the back of our car. mr. slattery writes, in an event i lost my wife, peter and matthew in its emergency

surgery. following the impact of their credit check want to hit two other semites and former passenger vehicles before stopping the divider from bursting into flames near the weeks following the crashers meeting with doctors, lawyers and funeral directors, all while ensuring that some of us thought peter not decide because sometimes i spend each day if they would make it to the next. after a month, the boys are stabilized to return to baltimore where we had a journey with the long-term effects of the crash including the loss of my wife, susan. she suffered a broken pelvis and face many over the paramedics announce his mother dead. recovered physically but the long-term psychological effects are yet to be determined. matthew is in a coma from massive head trauma continues to make progress and is permanently disabled and requires around-the-clock care. i myself never be the same but i can work to produce so another family will not have to suffer the terminus loss of my family.

we would not impede the process of departments has been protect the well-being of families. i just want you to know we are very expensive to set terms expressed here we thank you so much and you can listen to the testimony. >> let me thank the ranking member for statement can also express on behalf of the chair the entire committee to slattery family into your son, peter. obviously, we are all concerned about safety and we just want to make sure that whatever was put forward doesn't protect people as best we can, but also takes into account the economic

concerns are valid as well. so i appreciate that from our ranking member. as the gentlelady from new york want to make an opening statement? >> no thank you. i yield back. >> .you're from tennessee. okay, we'll get right back to eyewitnesses and let me introduce. first we have mr. ed nagle, president and ceo of entry and five in the trucking industry for over 45 years. we also have mr. glenn keysaw, director of food stores company. mr. robb mackie, president and ceo of the american bakers association has served on the food industry coalition for hours of service regulation to work directly with the issue in front of us. mr. frank miller, director logistics that babcock and more coming home furniture company

headquartered in mulberry, florida and a search on transportation issues for over 20 years. we have also mr. henry jansy, vice president and jennifer advocates for highway and not a safe tea. and dr. jesse david, an economist and senior vice president at economics or 15 years of experience in regulatory policy evaluations pursuant to the subcommittee all witnesses are sworn in. so please stand and raise your right hand. do you solemnly swear or affirm that the testimony you're about to give will be the truth, the whole truth and nothing but the truth. let the record show that everyone answered in the affirmative and we are going to start with mr. nagle and then we'll move down the line. you guys are the rules. you get five minutes. stay as close to that as you can then we'll get to our questions once we have heard from all six of you. mr. nagle. >> good morning, mr. chairman and members of the subcommittee.

in addition to being employed in the trucking industry over 30 years, i grew up and miss my late grandfather began driver after world war ii and several trucking have basically to do so until retirement. our company service most of the top 10 food manufacturers and the largest food distributors in the united states. there are two elements of the proposed hours of surgery for an all critically affect the industry. the reduction in the allowable driving hours from 11:00 to 10:00 and combined with the 34 hour provision that requires two consecutive midnight to 6:00 a.m. off-duty periods. for our company, this effectively reduces our ability to generate revenue by 17% and our operation drivers would be limited to working 50 hours a week from the current 60. our cost of operations to fix cost of $75 an hour with our equipment, changing it to this proposed 50 hours, our fixed cost now becomes $90 an hour

with nothing more than a stroke of the pen. it states that we not the proposed rule, so on and so forth without significantly compromising the driver's ability to do their jobs and earn a living. i need to secretary of the buddhist definition a significant nice. basically they are admitting the driver's ability to perform duties and earn an income will be compromised. our tribe payments, drivers wages, insurance costs and all the associated cost of business don't go down just because our ability to produce revenue has been restrict it. the current proposal is effectively influenced by the union ltl daytime only try various. they represent 10% of the entire industry workforce and by placing great emphasis on the studies, they are essentially based on the percentage of the entire trucking industry is a smokescreen. it is an illusion up at his been

proposed would be a one fit for all an ethereal solution for industry safer today than any time in recorded history. in order for a company just to break even with all the proposed can trains, we would need to raise our rates about 20%. go have a serious hyperinflationary consequence on our economy and households will be suffering the most. since 2003, there have really been no prior -- excuse me, since 1938 there've been no substantial changes in the our service. since 2003, this will be the fifth proposed change. what has occurred in our industry over the last eight years require so many legislative actions. sadly, those of us who eat, breathe them a transportation bill that politics is becoming the pulse of our industry and that pragmatic supply-chain solutions. since 2003, there's been a a 33% drop in traffic related

fatalities as well as a 40% drop in truck related injuries. not only percentage basis, but on a per million mile basis has been significantly reduced. our company is a regular route carrier and with no predictability and i scheduled freight. drivers encounter a fence everyday that are unplanned and totally out of their control. we have lost a very important provisions starting in 2003 and eliminated in its entirety in 2005, which is a split sleeper berth provision. i was one fundamental provision that gave our drivers flexibility to comply with hours of service in the areas in which they can involved in unpredictable and not control situations. the receivers will not let us drop our equipments and stay there for 10 hours and will be in force at times to run illegally because right of hours until he gets a safe haven. as an industry, we are asking

that even the fnc essay acknowledges the lack of available rest areas, provide us the opportunity in the drivers to remain legal with the flexibility of finding a place they can accommodate them comfortably. so in summary, please keep the 11 hour driving role, and maintain the current 34 hour restart provision that would not include two consecutive midnight to 6:00 a.m. off-duty. and if we can continue to get that sleeper berth provision, that would dh or menace benefit to the industry. thank you very much and best wishes to you and your family for the holiday season. >> thank you, mr. nagle. mr. keysaw. >> mr. chairman and members of the committee my name is glad keysaw, logistics associated based in salt lake city, utah. the retail cooperative founded in 1940 for a privately held company that provides pressure projects and services to about 500 independently on resale

supermarket in a western states from three warehouse distributions. thank you for many today. my testimony is presented on behalf of facilities or two stores, which represents retail supermarkets and food wholesalers throughout the united states. i plan to summarize the entire written testimony be made part of the record. mr. chairman, associated food strongly supports the current hours of service regulations. we do not support versus service rules and proposed by the department of transportation for the following important reasons. penny marjah services will not be good for grocery store industry as it will not be good for my company in particular truck drivers. proposed hours of service will negatively impact consumers who shop for groceries in our stores. if the d.o.t. decides to finalize the rulemaking that will affect in terms of cost. an economic estimate on the rules to our first warehouse.

under the hos proposal if required to maintain the same mobile service to retail accounts, we need to make a capital investment of $1.7 million for new acquit pant, handmade tractors and trailers, new track to reduce labor costs $116,000 in a trailer cost $75,000. will occur kosygin salary and benefits for additional drivers toiling within $20 million annually and the strict safety perspective that we won't have enough qualified drivers available to fill our future needs under the new hos rules. i should mention since the inception of the current hos rules with 52 million miles, during this time we've had a professional d.o.t. reportable accents. this translates to one accident per million miles compared to the national average of .7 accidents per million miles. in addition we've not had had a single inspection being put out of service. were proud of our safety and to

want to see any changes that might negatively impact. may come to encourage the army ants cost scott's cost for acquired equipment over $100,000 along with expenditures for insurance and miscellaneous fixed costs. the total cost of rulemaking for a warehouse will be over $2 million. for an industry that operates on a profit version 1%, any cost will be felt immediately. earlier i mentioned the d.o.t. rulemaking will be good for truck drivers. with the drive to the will be more. my company is part of factors over 65% of our drivers able to go home and be with their families after they complete their shift. this won't be the case under the hours of service proposal. this means drivers quality of life will suffer. by the letter from one of our drivers who traditionally does a route from the fire was warehouse in twin falls, idaho petabyte to enter into the record. this takes about 10 to 11 hours. the reason he likes his job is

to just disseminate a home of his family and under the new rules will have to sleep in his truck two to three nights a week. consumers unfortunate will pay more for groceries because the transportation costs will increase. the proposed rules also increase transportation costs for all agricultural related sectors from farmers all the way to retail. sadly, consumers of the federal areas will be hurt most in terms of how much the being paid for their groceries because of his throat making good with the current economic recession we can afford unnecessary regulation within your service proposal. higher prices for groceries of a tougher families already struggling financially, especially 14 million americans who are unemployed and those living on fixed incomes in the dependent on domestic feeding programs such as wac, his benefits won't buy as much when the food prices go up. it's difficult to project how much the proposed hours of service rules will ultimately cost consumers, but we know there'll be increased costs and virtually have to be passed as

well. to conclude, we believe the current hours of service rules are working well. we seen a quantifiable reason to change that. the rules on the books are easily understood, promoting safety and compliance. over the past seven years since the current hours of service rules put in place, fatalities and entries are down by more than one third as a matter of fact, fatality and injury statistics are the lowest levels, even though the number of miles driven is increasing. our industry strongly supports current hours of service framework and it should be retained. thanks for allowing me to participate. >> thank you. mr. mackie. >> mr. chairman, members of the subcommittee. i am robb mackie, president of the of the american bakers association. kb is the base of the wholesale baking industry and advocates on behalf of the $102 billion banking industry employing 630,000 skilled employees in more than 700 baking a supplier facilities around the country.

aba members produce bread, rolls, thanksgiving pies, tortillas and many other wholesome nutritious bake products for america's families. the wholesale baking industry currently operates the fourth-largest with the vehicles behind the postal service, fedex and ups. aba greatly appreciates the opportunity to provide its respect to the federal motor carrier administration's hours of service regulations. the majority utilized the goods to their customers. the industry views itself as bakers and not as trucking companies. drivers incidental to sales representatives which is sales and customer service. the wholesale baking industry makes living on delivering the freshest possible product to grocery stores and restaurants. in addition to safety at the industry's employees and the public, the idea of the company or family name on the side of the involved in a traffic accident is a huge incentive to

operate in a safe manner. the nature of many bakers distribution systems above operators making repeated and sometimes lengthy stops during the course of their workday. representatives may make a couple dozen stops in a single day. they spent more than half of their time in nondriving dvds on the servicing the customer, stocking shelves or in store marketing activities. the rural part of today's hearing marks the fourth major rewrite of this regulation by fmc essay in the past 12 years. the current hours of service regulations have been affect to an improving safety as demonstrated by the current grasp data transfer. the safety performance of tracks has improved at unprecedented rates under the current hours of service regulations. the number of failed accidents and industries large trucks have declined by more than a third to historically low levels. given these facts would find it difficult to understand the

rationale for added regulation, if ashley wanted even recognizes disproportionately negatively impact the short-haul segment of the trucking industry of which bakers are part. typically d.o.t. has treated the vehicles that operates similarly even though you can see there different indeed. according to the relative costs and benefits differ considerably most of the cost arise on the short-haul segment, but all of the reported benefits come from reducing munhall crashes. fatigue and fatigue related crashes are considerably less common in short-haul operations for the operator is simply returning home at the end of their work day. fmcma crash data it says commercial boat goes less than 26,000 pounds account for 52% of registered tracks, but account for 10% of fatal accidents and 14% of nonfatal accidents. clearly any fatality is too

many. but logic and cost benefit analysis take eighth in a regulatory effort be proportional to the risk. another undue burden would be created on proposed change in the 34 hour restart provision requiring drivers to rest a minimum of two consecutive complete nice. it's a do little to promote safety and short-haul operations and wreak havoc with finely tuned distribution systems. typical route sales representative will not have to consecutive days off his bakeries are down on tuesdays and sundays. also, most deliveries by bakers take place in the early morning, the very hours required by the rule that they be a raspy or to ensure that local grocery store shelves are well-stocked with the freshest possible product for customers. many baked goods have fortified gates of shelflife, making timely delivery critical. the change to the restart provision outlined in the road could also require short-haul operators to deploy more

equipment and resources during peak commuter driving hours. this could adversely impact safety in air emissions while also negatively impacting product chickadee for both the drivers and customers. this may result in lost sales as well as production delays. if the new hours of service the regulation become effective it will be more difficult and costly to deliver products, increase traffic through the most congested times of the day and result in more dangerous roads. in conclusion, there is little safety benefit or rationality change the existing rules. again, the proposal would require significant changes to baking industry distribution systems have an impact employee work hours and increase the cost of delivering fresh bakery products. ultimately the consumer will feel these costs at the checkout aisle. the high unemployment and high food inflation, now is the worst time to be pushing regulation for regulations take to the aba appreciates opportunity to provide input and would be happy

to answer any questions. thank you. >> thank you, mr. mackie. mr. miller. spectrum in jordan, i am the director of logistics deadliest corporation. thank you for the opportunity to come today to testify in department of transportation proposed changes to drivers hour of service regulations. today i'll testify in behalf of the corporation and the retail peer come and are often members strongly support current hours of service regulations in question the need to make changes. the federal motor carrier safety agency must consider economic impact that changes to the current hours of service across the industry, including the impact to retail operations in both the store and distribution center level. unfortunately, we do not believe the proposed changes meet these requirements and will have a significant negative impact on the industry, economy and potentially drivers safety. dubious corp. some of the largest privately owned

retailers in the united states founded in 1904, has been operating for more than 100 years with 300 stores in 1200 associate throughout the southeast. as the world's largest retail trade association and the voice of retail trade worldwide, nrf represents retailers of all types and sizes come including chain restaurants come industry partners from the united states and more than 45 countries abroad. retails operate within 3.6 million u.s. establishments that support one for u.s. jobs. 42 million working americans contributing 2.5 showing its annual gdp retail is truly the daily barometer for the nation's economy. babcock's transformation or consists of more than 45 tractor-trailers which run more than 4 million by a family in southeastern states and a fleet as trucks operating from stores to the customer's homes.

in addition, tenders were than $3 million in freight annually with u.s.-based common carriers. we estimate that the proposed change in hours of service rules to increase transportation costs for by 10% to 20% annually. this would result in an estimated increase of approximately 2.8 million annually. we are also concerned about the possibility for adverse unintended consequences as a result of the proposed changes that could lead to further increases in costs. a reduction in driving time from 11 hours to 10 hours would affect an estimated 11% of load resulting in an approximate cost of $1.5 million. force the company to increase driver compensation or chain drivers and increase its fleet size and pay higher rates for tracking. the changes to the 34 hour restart could affect an

estimated 6.6% of badcock was the year, resulting in additional annual cost of $940,000. those common carriers used by the company would most certainly also be impacted by the change. we feel changes will result in more lost carrier productivity that will be passed directly to the consumer as millions of dollars in rate increases. in addition it's important to note the distribution networks are experiencing increased demand and what is expected to grow substantially. this is if you can as economy recovers from one of the worst recessions in history. additional trucks and drivers are necessary to meet the growing and regardless of the hours of service requirements, adding new capacities be extremely difficult as there is currently a shortage of available space qualified drivers. were also concerned about potential at or send pac-10 road and highway safety and many environmental investments in the transportation industry. the proposed changes to the hours of service rules may increase number of trucks

deployed to the same for you while restricting the ability to move a portion of the freight train nonpeak community towers. and a transportation sector, many retailers are at play pursuing strategies to greatly reduce their carbon footprint and supply chain. many initiatives about efforts to reduce homes and deploy tracks during nighttime hours. to conclude on behalf of ws badcock corp. the national retail federation a candidate to thank you for the opportunity to testify during today's hearing. on behalf of america's retailers, we urge the fmcma to retain the hours which are working and i look forward to answering any questions for members of the committee may have. thank you. >> thank you, mr. miller. mr. jansy. >> thank you, mr. chairman. and thank you for inviting me to this testify today. i am henry jansy, vice president for advocates for highway safety

and coalition of public health, safety consumer groups and insurers dedicated to advancing highway safety. advocates of her contract safety issues and driver fatigue for 20 years, participating in national summits with hours of service regulatory docket, which we borrowed many comments on and in the legal litigation has been ongoing. truck rations are a serious and deadly problem that killed thousands and injure tens of thousands of people each year get even with the recent decline in large truck crashes over 3380 people were killed and 73 dozen injured in 2009. this equivalent to a major airplane crash every other week in annual cost to society remains over $40 billion. to put a face to the statistics, i know that mr. slattery was introduced in the son matthew earlier by ranking member could finish also in the audience is marcia was who lost her college-age daughter and her friend to a trekker crashed in

2002 appeared to d.o.t. estimates the crashes involving truck drivers fatigue kills as many as 500 people year, but the actual number we think maybe twice that figure. we think that this shopping christmas season, consumers will want to know when they go to pick up their bargains that they can return home safely without running into a tired trucker. the research and science support the hus rule. today's has found since the current hos rule went into effect, large numbers of truckers admit to falling asleep behind the wheel while operating commercial motor vehicles do is the way up to 80 we saw one side regarding nearly half of the truckers in 2006 after the current rule went into effect that they have fallen asleep at least once in the prior year. the statistics are a clear warning that driver fatigue remains a major safety problem and needs to be addressed by changing the rules.

2003 final rule in which the current rules are based contradicts the scientific research and incidence regarding fatigue and the fmcma zone finding of fact. track number cannot harass causes to take shown in crash track data. crash risk increases geometrically after the eighth consecutive hour driving a truck. driving during the 11 consecutive hours exposes drivers in the public to an additional hour of danger when the crash risk is at its highest level. allowing only 34 hours off duty instead of taking more time for rest and recovery as was allowed in the prior rule before 2004 results and cumulative fatigue due to lack of sufficient sleep. finally, truck drivers say between 78 hours hours of sleep each night between shifts to be alert while driving. fmcma founder risk at less than six in hours between work shifts under the current rule. the current rule violates this basic principle of science it is

fundamentally flawed and needs to be revised. furthermore claims there is no safety problem under the current rules for the current rules are contributed to safety or false. i have no scientific support and no basis in fact. they are literally junk science. the legal decisions also support reform of the rule. the two unanimous decisions at the u.s. court of appeals court of appeals had vacated the road reinforce the view that the current rule is unsafe and needs to be reformed. the initial decision held that the lack of analysis of the driver health issue was filled to the rule. the corbin on to point out that many legal deficiencies in the agencies recent founding. among them the core question of the efficiency of the agency's justification for the 11 hour than it for not addressing cumulative fatigue resulting from the short dirty for our priest or provision. the judge who wrote that initial opinion was nominated to the federal court bench by senator

jesse helme. the cost of reform of the rule. not refer many hours of service rule will cause consumers and tax payers notice the dollars and deaths, injuries in crash causes those driver health class in short my stance. the benefit to society at the options supported by advocates to the 10 hour will far the cost and will result in economic benefit to the country between 380,000,001.2 billion annually for reducing tax and driver health coupled with prevention of numerous deaths and injuries in crashes. the reform option also supported by advocates also creates 40,000 new driver jobs here this is a major benefit in a critical time for job creation. this is in stark contrast to the current rule, which eliminated nearly 50,000 jobs since it took effect in 2004. unfortunately, not all companies have good safety records like

mr. t. shaw's company, so they need to be governed by regulations that will keep them in line. finally, in closing i'd like to say that the edgeworth analysis they even introduced to the record recommends that there be no calculation for driver health and safety costs, medical cause. we think that is an unreasonable position and if that was adopted by the agency that that would build an arbitrary and capricious argument is the rule goes for unreviewed to the court once again. but that, mr. chairman, i would like to introduce a written statement to the record. i'd also like to submit that to the record and i'd be ready to answer any questions. >> thank you, mr. jansy. that may also express on behalf of the chair of the committee that we thank you for being here today. dr. david.

>> mr. chairman, members of the subcommittee. i'm an economist and vice president at edgeworth economics consulting firm based here in washington. i have a phd with specialization in public finance in environmental economics in 15 years of experience in regulatory policy evaluation. i was retained -- my firm was retained by the ata to analyze cost-benefit calculations and fmcma. the report focuses on whether the agency's methods are accurate and consistent with current data and compares the agency's approach to the approach taken in previous ra's. to summarize, the proposal to restrict driving 10 to 10 hours a day from the current limit of 11 hours, fmcma estimates 1 billion a year and benefits of 1.4 billion per year related to reduce crashes and improve driver health. so the net benefits estimate that the agency for that option about $380 million per year. to obtain the results, fmcma

several changes to their previous approaches using previous ra's. i find it every incidence the new map that increase the purported benefits of the proposed rule. however, many new approaches to supply available data can be as outdated information or lack of empirical data entirely and i'll describe your three of the most significant issues. first, fmcma uses outdated information for large truck crashes. since the proposed rules intended to reduce crash frequency, obviously this a key input to analysis. fmcma uses a figure 434 crashes per year, which is approximate the rate of crashes 10 years ago before the current rules were implemented. large truck crashes however have fallen steadily since then and recently following to 286,000 in 2009 at the 34% lower than the agency's figure. i will note the decline was occurring before as well as during the current economic

downturn as you can see from a chart, which i attached my testimony. fmcma's use of old data inflate the benefit of the proposed road by about 250 million per year. the second issue relates to the fmcma's calculation of the fraction of crashes caused by driver fatigue. obviously not a critical assumption since the proposed rule would affect only those types of crashes. in the 2007 ra, fnc a sad it was a factor of 7% of crashes. the agency is in supermarkets and data and in particular the large truck crash causation study calculates if they care twice as high. however, the agency's new method is flawed. fmcma inappropriately assumes that each associated fat are identified for a particular crash was the cause of the crash, even if was both factors are present.

for example, suppose investigators identified three associated factors for a crash, prescription drug use, speeding and fatigue. the agency assumes eliminating only driver to take would've caused that crash to be avoided. this he meant that contradicts fmcma some conclusions in their report when a high-technology to secede if that area should not be considered to represent independent cause of the crash. increasing the fraction of crashes caused by fatigue from 7% to the unsupportable 13% figure inflates the benefits of the proposed road by $330 million per year. a third issue relates to benefits and increase the time for driver health. previously fmcma concluded existing rules did not adversely affect driver have. the agency now includes substantial wealth benefits from small increases in sleeptime within the normal range is 16 hours and according to the fmcma, half the total benefits of the rule accompanist from reduce crashes.

the approach list of application result from a study by a sleep researcher. ferry measured mortality rates from the british several servants in the 1980s he reportedly bubbles in the categories or less, six, seven, eight and nine hours or more. while writing mortality of i'm the lowest and highest of levels, researchers found no statistically significant differences between mortality rates people reported between 16 hours of sleep. other academic research confirms the conclusion. for example, capriccio founders have been sleeping officially between six and eight hours a day is associated parman long-term health is. has fmcma ignores this key signing. i understand her festers fmcma submitted a report into the dock is seen in the her prodigious research to support conclusions.

fmcma's unsupported assumptions about reduce driver vitality inflate the benefits of the proposed road by $690 million annually. in addition to these three issues there's other unsupported assertions and methodological errors which further inflate the apparent in a fit of the proposed rule. if these problems are corrected i find the new rule would result in a net cost of $320 million annually, rather than a net benefit of 380 million is calculated by the fmcma. i note that mr. jansy stated we had a recommendation that the new rule not include benefits from improved driver health. that is certainly not my position. i just believe calculations should be done based on the most accurate and the best available data. i thank you for your time and encourage you to read my report. >> thank you. that may start with you. mr. jansy said this proposal would create 30,000 jobs we heard from four witnesses that it's going to cost them more

money with this new role. yet mr. jansy said it will creep our jobs as an economist. what is your take on what may happen with the new rule? >> well, the good still have to be transported. so under the fmcma's assumption of the drivers now driving fewer hours. those hours need to be replaced. i assume their income would go down impossibly someone else is income would go up and perhaps the new drivers. i think the overall amount of driving probably wouldn't change that much. >> okay. let me come to mr. mackey. it seems to me the current rules are working. we had the safety numbers have been good. bassett increased miles -- increase trekking miles over the last decade. if in fact the current will work in your estimation just the way it's supposed to? >> was simply not perfect as it applies to short-haul to

continue to work at d.o.t. on issues around the edges. by and large it works and the data as we've heard today clearly illustrates that. it's a pretty substantial reduction, 33, 34% reduction. so it seems to be working pretty well. >> would you also agree there's the potential at least if the new rules put in place that we could see potentially more accidents and because you harm to the safety record because as mr. david just talked about, they would not be more drivers on the road? my understanding of what would work as well as there's potentially more drivers during the daytime hours and also more people, non-truck drivers during the shopping, going to work and doing the things they do. is that a fair assessment? >> it absolutely is. our members indicate they had a higher swing drivers to cover additional hours. frankly, beyond the margin of safety and error so they don't

run the risk of going over reduced hours available. particularly in our industry as mr. keysaw can attest to, we deliver projects in the early morning hours, 4:00, 5:00 a.m. so they walk in the fresh bread. so you're going to push those hours into the daytime hours -- >> what about the midnight rule? you think there's potential that some drivers may want to drive a little faster to beat that deadline? >> i don't have any data to back that up, but indicates that do not want to get home sooner. >> it's fair to assume they may increase speed to increase chances of accidents and harm. >> absolutely. >> and it seems to me the curb was working. there's a potential increase safety concerns under the new rule and as we have heard from the first for witnesses, all this is going to create more cost. and i would still argue that the

idea that we're going to have more jobs is okay, with the example was given economics class? lets break everyone's windows that will have to hammer people to fix the windows. we created jobs, but did that add to the overall economy? i would argue this is an families move moving in that direction. it just doesn't make sense. mr. nagle, todd briefly about the 34 hour rule two consecutive nights and what that may mean. it seems to me that could be the one that potential because to trucking companies. >> that is potentially a real problem because of the fact that you may have a driver that can't same after midnight, could be 12:15, 12:30 and he now has to literally go 54 hours until his next available driving time. so he is going to lose an entire day of productivity, ultimately

to his wage. and the company itself is going to have the same loss of revenue, increasing our fixed cost per hour even further. drivers are going to stay away. fmcma states even though they don't have the statutory authority to address the lack of available rest areas and combinations for truck drivers, it is going to cause these guys for force these guys to step in areas where there are no accommodations. they are going to be a shopping mall parking lots. they are going to be pulled off the road on some of the major highways. they are not going to have rest. essentially forcing the guy to stay 54 hours in an area the size of the top of mower bonds of their children's homes is inhumane and cruel. they're not going to have any restroom facilities. they're not going to be looked to have hot food or any combinations.

how somebody can rest better under those conditions is beyond my reasoning. so the quality of life is going to diminish further and for our area of service, we are a regional carrier that services primarily these from baltimore, d.c. or up to portland, maine. it is going to just reduce our product dvd substantially. >> thank you, mr. nagle. i tend to set field not the ranking member. >> thank you, mr. chairman. since the debate is minor taken the cost of regulation versus monetizing the cost of not having effective or better regulation. i want to submit for the record to documents. one speaks to the regulatory impact analysis for the hos rule estimates that taste on a 10 hour workday, to monetizing the safety benefits of terror help

benefits range from below 300 million to more than 2.4 billion quantifiable benefits are reduced crashing entry cost, lower medical and health payments and a longer healthier driver life expectancy. m1 of dead -- you know, you can't just talk about the cost of regulation, with which out look at the compensating fact yours if you don't have the extra cost to this crashes. how do you monetize the cost going beyond that to this flattery family? you know, actually juries do come which is one of the reasons why the insurance institute of highway safety filed the research industry filed an amicus brief in the lawsuit that supports and confirms fatigue and insurance companies are members of that the kids for auto and highway safety support reducing fatigue. if we are going to have a hearing on the cost -- and i

think it's a legitimate question. but she got to weigh it in terms of what are the costs to society on the other side. if you don't do both come you don't get a fair reading. now mr. nagle, i want to ask you questions that accompany my staff is identified. my staff found there is nagle toledo inc. listed on the safety measurement system as d.o.t. 422-3609. you are here is the ceo of nickel company. i have a copy of the bio submitted to this committee that goes over your involvement in the industry. and as u.s. ceo of nagle companies and also was nagle toledo company as well. is that correct? >> yes, sir.

>> i want to discuss something with you because the federal motor carrier safety administration's compliance review, which i have a copy of here are nagle toledo reviews -- reveals serious hours of service and other safety violations. now according to the federal motor carrier safety administration, nagle toledo has received 12 unsafe driving violations within the past year and 23 are the past two years. is that information? >> that is correct. >> the motor carrier safety management system shows that nagle toledo has received 13 fatigue driver relations within the past year, 32 over the past two years and in the past year, nine of the 13 violations resulted in the out of service order, including seven violations for requiring or permitting the driver to drive after 14 hours on duty.

once all supported drivers record duty status and one violation for requiring or permitting the driver to drive more than 11 hours. if this information that was given to the government, is that correct? >> that is correct, sir. >> is it true that nagle toledo has been involved in to truck crashes over the past year and five in the past two years? is that correct? >> i would have to defer that it's probably correct. >> let me ask you this. i understand you are here opposed to going back to the 10 hour limit on consecutive driving. but help us in this committee in terms of your own experience, your own experience, how is that practical? and how can i take your testimony based on the record that's been here?

e-mail, help me square the record in here with your testimony, mr. nagle, please. >> thank you for those points. i'm glad to address the issue. first of all, the cfa and for us that we also did the same of internal controls. but the report doesn't tell you was there were seven or eight offenders during that time period. prior to that audit, we had fired four or five of those individuals because of those violations and that was prior to the idea. the other two or three were on their final warning and have since been terminated before we've received that report back from the ps tco. now we take that very seriously. >> listen, i imagine if you're running a company have to take it seriously because you have to be concerned about insurance costs. what i'm wondering is the busted coworkers putting in all these

more hours. do you have some concern they might be working too many hours and make sure company vulnerable if not just your company? you know, people in larger community? don't you have a concern at all? >> served, and a tremendous concern about that. in fact, i personally spend time educating the general public about sharing the road and also communicating to them that our drivers are not just these killer tracks that some of the people try to portray. it's more than just a cost benefit analysis. okay, i have a moral obligation to make sure that our drivers operate in a safe fashion. now part of the issues that came up. fatigue is probably one of the most missing things. and several of those were literally a clerical error, where the driver missed saturday's hours of service. but more importantly, but the

split sleeper berth issue i mentioned before in my report with one of our drivers will go into an area that's heavily populated, we get detained beyond the hours of service. they are not allowed to stay at a customer birkeland or wherever the place may be. we are forced at times during a period of time to go to safety them. so i would say half of those violations were a result of multiple changes occurred over the last five years. >> i appreciate your indulgence and giving the witness time to respond. i just want to add to this if i may. you got rid of some of these employees, said they are a little bit more in a clerical error. the only point i'm making,

mr. chairman. i want to thank you for being fair here and that is it is important to year for mr. nagle. but look, there are issues that fatigue here and we can't cross over. that's my point. you know, i didn't rip you apart for this record. you know, we can be dramatic s-sierra, but i'm not interested in that. i just want to point out this is a legitimate issue a driver fatigue. >> real quick before yielding. mr. keysaw, do you want to teach an unsafe drivers on the road representing companies you run? >> mr. mackey? mr. miller? now, because it is in your best interest for the well-being, because the profitability of your company. in fact, i would assume many trucks on the road for you guys probably have a few dollars my driving, call a number. you have a number on the strokes? >> absolutely.

>> mr. mackie? >> mr. miller, do you? [inaudible] >> i assume the reasons you have that is because you probably get some insurance wise, insurance payments or you just want the public to know if your name is on the trailer of that track you have safe drivers. there is market forces involved as well. >> there's clearly a margin of the economic benefit. but clearly these drivers and in our industry are 20, 25 year employees. so there's a family connection there as well. you do what these people getting hurt more than anyone else. >> mr. nagle understands because many drivers who were following the rules to cut rid of them. correct, mr. nagle i through night through determined. through mike not through full through day. i appreciate the indulgence. i'll go do the same for folks with all due respect to the last two witnesses. i really think this is about

people who actually operate trucking fleets here today and what is the practical implication. i know the numbers are not supported based on past arithmetic. i know numbers are supported slightly based on current arithmetic. bullets growth or some arithmetic and how it impacts you. mr. thank you, mr. nagle i'll su because you are record was called into contacts. please don't call because ob distract did as a car driver. the number one issue of the department of transportation overall cabinet officer reloaded is in fact distracted drivetrain. it's not as much a part of the problem at the accidents and problems picher drivers receive have a lot to do with their lack of focus? not necessarily how long they've been a come of a lack of focus. it's not a major point you look

for in your drivers? >> one of the things we find out what is typically it's not because of a distraction. when they start this because of increased enforcement. they will use another reason to check a drivers box for stopping. it could be a marker lights out. the driver could be going at three-mile an hour speed limit. so the fatigue curve or logbook factors have not been the reasons for their stops. it's been for something else. >> mr. keysaw, and i've had the opportunity of driving more drinks in my quite distant past, including more buses and trucks, but my father had a trucking company, tracking repair company primarily. the one thing i find interesting about large rig drivers is that their ability to be employed depends on the record, no question all. use your record in user employability. but here's the other thing i was

questioned. and your experience, the fourth u.s. operators are overseers of operation, is there anything in these few regulations that is going to insure it eight hours of restful sleep? anything? now or you're familiar with the crash in buffalo in which two pilots were so tired from having flown across country and then got on the plane had been up for endless hours, even though their actual duty was only couple hours when the to the ice building up on the wings and apparently were so tired they couldn't figure out they're going to crash? now, faa has regulations about sleep. there actually is their regulation. they try to create regulation that duty day, but they have the same problem you have. nothing in this regulation i saw all positive heads knocking. nothing is going to guarantee the driver goes to bed and stays in bed and sleep celebrate ours. if were not actually guaranteeing rest, the last two

witnesses attacked about these studies and what they showed doesn't mean a darn thing. if you've got sleep apnea come you could be off the road for 54 hours and come back just as incapable of being a good driver. for the four that have operated, how many of you to fire people for drinking within the window of their training either just before, during or after? >> all of you. you've all fired people for drinking. same question. is anything in this regulation going to know that when they leave work for the prescribed period of time that they are not just going to the bar? so you can come back tired with a hangover, having actually driven for maybe six or eight or 10 hours to go see mom in upstate michigander from toledo and you come back and knew that all the requirements of this deregulation, but in fact you are not fit for the next 10 or