the state level, not the federal level. i think that's important for us to understand. so if the title costs and regulations are done at the state level, shouldn't you be working on legislation and regulation in the states to address your concerns rather than at the federal level? >> regulation varies among the states. ten of them don't regulate the price. others use very different procedures. the concern is the difference between those two numbers i gave you goes for affiliated insurance largely to the lender, which gives them an advantage over other lenders because they're capturing that difference and the effect of that is to push title insurance rates going up. title insurance rates issued be going down with automation.

this is real money. that's our big concern. as i said, we continue to work with mr. emerson to see if we can find something that works for lenders like him but that don't fuel the increasing cost of title insurance which is too high for home buyers. >> recently i met with a group of missouri bankers who came to my office after they had been to visit some representatives over in their building and my bankers were talking about things that we're talking about this morning. qm rule. they were told by the representatives that they were the 41st group to meet with them and basically the gist of the conversation at the end of it

was that thank you for coming. we know more about the effects of what's going to happen to the bo borrowers, lenders and market than you do. as a result of that, a number of my delegation members wrote to the director and he responded back to us and madame chair, i would like those two letters made as part of the record. >> without objection. >> in the letter the director indicates the bureau shares your concern that regulation should not place unnecessary burdens on community banks. we recognize that with few exceptions community banks and credit unions did not engage in risky lending that led to the mortgage crisis. we're glad to hear that the director and see the director believes where the problem was and hopefully he'll be willing to work with the committee and with the legislation that comes out of this as a result of our hearings today because it's pretty obvious there's a lot of negative effects that are occurring here. along that line, i would like to talk with the lenders here for a

moment and sort of get some things clear. i think that mr. harding and mr. wickenand said you won't do non-qm loans. >> that's correct. >> okay. why not? give me a quick answer because i've got this lady behind me who has a stop watch on me and general ronald reagan once said trust and verify but since she's a nice lady, i'm not going to verify. i'm going trust her. i need to get done quickly here. >> as a community banker we like to keep things simple to afford to be able to do it in our setting. i don't do higher price mortgages today for the same reason because of the extra regulatory burden. the real fear of litigation and what at that means long-term. i know we talked about this as marking it today and we'll know six months from now or a year from now how it is affected.

my concern is those consumers that want to buy a house in the next six months or year because they'll are harmed if we're not right about this regulation. i believe it will restrict credit. >> i agree with mr. hartings. by the very nature of qm and that's the loan that you should be making and there's a stigma that lending outside of qm is a loan that's not necessarily a good loan. you think about reputational risk and repurchase risk and liability associated with that and not to mention the fact as i said in the testimony there isn't a secondary market for a non-qm loan so if an independent bank wanted to originate that loan, which we don't want to, you couldn't because there's no place to effectively sell that loan. >> i would agree with the gentleman previously that for us, the idea of charging more for a loan that i wouldn't have charged differently from the previous year is something i can't stomach.

plus the fact that balance in my balance sheet with alm concerns and things of that nature not being able to offload loans like i am today. it will impact and according to my records for the last three years if you assume it's 11%, which may not seem a lot unless you're part of that 11%. >> that's right. >> we need certainty. we need to know that we're within the bounds and i can say that i'm sitting here representing 278 other affiliates who signed the letter in support of hr-3529, and we hope that we can get that certainty rather than trying to sort out uncertainty in the regulations as we've heard earlier. >> i think you hit on the point i was trying to get to here that is heart of this matter. if it's a nonqualified loan, automatically there's a perception that there's a problem there or there's something that doesn't fit into

the box and while before these rules the bank had the flexibility to price a loan and look at the customer and be able to figure out what was best not only for the customer but what would work for the bank and now that flexibility has been taken away from them and if it doesn't fit in the box, it opens you up to the opposite of what can happen here is that if it doesn't fit in now, all of a sudden it's a negative. there's an exposure and risk there. and my concern is have any of you talked to your regulators about the problem that this could have when they come in and regulate you? this is the reason you stepped back because if regulator comes in and sees you have a lot of non-qm loans, they're going to assess that against your capital or have you have an extra fund to sort of go back against for these funds or have you talked to them at all about this? >> i have reached out to my regulators. it's kind of a wait and see today. i would like to comment something a little different. what mr. emerson said talking about secondary mark and not

being able to portfolio these loans. that's the advantage of allowing community banks to portfolio these non-qm loans and have safe harbor. it's that litigation risk is preventing us from continuing to make non-qm loans. >> we can do quick answers because the gentleman's time has expired. >> i don't have anything to add to what we already added on my previous response. >> thank you, gentlemen. >> thank you. >> thank you, madame chair, and thank you ranking member and all of the panelists as well for the hard work and the information you bring to this process. i would like to ask some questions of mr. emerson. obviously quicken does a lot of loans. could you tell me what percent of the loans that you guys issue, what percentage do

borrowers choose not to use title source or other title insurance firms affiliated with quicken. >> i don't have that at my ready. i would give you a range probably 5% of the time. 5% to 10% of the time. >> thanks a lot. i did look at your testimony and i thank you for providing it on page 6 and 7 of your testimony you stated that the quote rationale for excludeing title insurance paid to affiliates from calculations of points and fees is unclear. i respectfully submit i would disagree with that. congress required the cfpb to exclude affiliated title companies from the points and fees cap explicitly to lower cost for borrowers and increase transparency in mortgage transactions. and you say studies have shown that when affiliates have been

excluded, title insurance has risen. that's not what my research shows. i would be happy to be better educated on the subject. could you identify which studies you're referring to. >> i am not sure what you're referencing in the testimony. what i can tell you is from a title insurance perspective, you know, i appreciate the fact you disagree. we had the dialogue and regulation around title insurance. what we're not debating is any other title fees. we're not asking for closing fees or anything else associated with that. those are obviously -- >> thank you, sir. i appreciate your answer. i just was hoping to look at those studies because in your testimony you say studies have shown that when affiliates have been excluded from the market, title insurance charges have risen. i would like to read those studies. if they're out there, i want to know more about the issue. let me also say that there has been -- this question has been looked at. i would submit that the studies

you're referring to either don't say that or say something quite different and any way let me finish. i also looked at a number of studies including those by the urban institute, gao, last month the consumer federation of america, national association of independent land title agents, calling for major reform in a title insurance industry. i would like to submit for the record some of the testimony of bob hunter from consumer federation of america before the new york state department of financial services on december 10th, 2013. and i would also like to submit for the record the testimony of the national association of independent land title agents before the national association of insurance commissioners on december 16th, 2013. >> without objection. >> and the cfa testimony says

title insurance system is highly concentrat concentrated, opaque and raises cost to consumers. the one-stop shop system that's been praised in some quarters is noncompetitive in an overpriced marketplace and for each title insurance payment a consumer makes, i'm curious to know what percent of that fee from title source or another affiliate is provided back as commission on investment to quicken? >> two things i'll address. quicken loans receives nothing back from title source. it's an independent company. and so there's nothing that will transact back from that. testifying on behalf of nba, we'll be happy to provide you the information and studies we looked at to come to those conclusions. >> appreciate that, sir. so annually i'm curious to know how many quicken loans earn in revenue from -- you said from title source they should be a zero? >> title source is an independent company. >> and quicken doesn't make any

money from -- >> correct. >> okay. so any way, you know, consumer affairs website shows that there are issues going on about quicken loans and also about 88% of the filings give quicken the lowest satisfaction rating. for the record, i'm titled by the fact that title insurance industry allows referral sources to take pieces of title agencies as bounty for the referrals. i want to thank you for your candid answers. this should be a truth seeking process. i don't have all of the answers. i don't claim to. you guys have some of them. so i appreciate you responding back and i look forward to you sharing the information you have with me. >> gentleman's time has expired. excuse me. sorry. i would like to submit also without objection for the record

statements from the following organizations. credit union national association, national association of realtors, american bankers association, manufactured housing institute, and the american land title association. >> thank you, madame chair. thank you, gentlemen. your testimony today and for your responses to a lot of good questions. i want to say thank you for what you intend to provide for constituents and for americans across the country. i just find it unfortunate that in today's economy that we're seeing americans being squeezed harder and harder from every different direction, whether it's trying to get a home loan to buy either a new home or upgrade into another home or whether it's health care,

whether it's their job seeing stagnant wages, this economy is not working for the american people. and listening to the testimony from you all today, obviously we hear that your customers and consumers across the country are in for another surprise. i would like to drill down into dti a little bit if you could give us some of your thoughts. i found it interesting that cfpb of course sets the threshold for debt income at 43% but the federal reserve as they were drafting ability to repay rules did not require lenders to consider dti. mr. hartings, i would like you to comment on it and then move

down the line quickly because i have another follow-up question to that. >> i think there is two issues with dti. first, setting a hard dti limit. it's lifestyle that depends on what you can live on and not 43% or 36. that will exclude borrowers because they can afford it with their lifestyle and kind of homes they live in. the other item with dti, i can't remember what i was going to tell you right now, i'll pass on that one. >> dti is one calculation to look at when you evaluating the risk of a loan you should evaluate more than just dti. i think as we evaluate dti, we'll see how that affects home buyers and first-time home buyers and how they'll be able to qualify. >> thank you. if you could also maybe include a metric that you would use as a strong performance measure that you might use. >> we use dti to determine what qualifies for us regardless of the type of loan.

i think it's very important to be used. however, again, what's being taken out of my hands is personal knowledge of the person sitting in front of me applying for that mortgage loan. >> what threshold might be too dangerous for you? >> you know, i can't really go there. there's always outliers to every circumstance. we're in the lending business. i am here to try to help people improve their lives. so what may work for somebody may not work for another. >> thank you. mr. spencer? >> as borrowers have lower income, those ratios actually need to go down to be conservative. so we actually work far below those standards. we try to stay at 30% and so what's critical there is what else -- how much absolute dollars is left to live on and

so we try to take a very conservative approach on that measure. >> sure. thank you. would you like to comment? >> if i can add, the original rule did not have dti. it had very general standards. it was at industry's request that a bright line standard was put in place because that's essential to have the certainty needed to get secondary market capital in and if you didn't have the bright line, lenders were going to be very conservative because they wouldn't know where the line was. so i just want to make sure the record is clear. it was industry who asked for brighter line standards including the nba and these are fha levels and i have not heard clamor that fha credit is too restrictive. i hear concerns people think it's too loose. >> i would like to ask this quickly of the bankers. you said that none of you are

going to be offering qm loans. have you heard of anyone in the industry that's going to be? >> yes. navy federal will be. he made that abundantly clear. >> i think you'll find lenders in the marketplace that will provide those loans to folks in their high net worth brackets. those loans will take place. >> i don't know many other community bankers that will do non-qm loans. >> i think certain habitat affiliates will do non-qm loans. >> gentleman's time has expired. mr. dwregreen. >> thank you, madame chair. i thank the witnesses for appearing. i regret i won't be able to ask questions of all of the witnesses. i do want to ask mr. hartings, you indicated that you have a $400 billion institution, is that correct? >> that's correct.

>> and how many first lien loans per year? >> it does vary from year to year but in 2012 we did right at 493. in '13 we did closer to 400. >> and it's that 493 number that gives you some degree of consternati consternation. >> yes, because of the small creditor exemption. either you're a $2 billion institution which is five times as large as i am or 500 first mortgage originations. >> i see. so what you would wlilike to ses the $500 cap lifted, is that correct? >> yes. there's two ways to do that either raise the cap or currently it includes secondary market loans, which are already qm qualified. if we just look at portfolio loans in my last two years approximately 20% to 30% of my

loans are portfolio loans. the rest go to secondary markets sold to freddie or federal home loan bank. >> thank you. i'm always interested in trying to find a way to help the smaller institutions. within in your association, you indicated you have about 7,000 community banks, is that right? >> our association has approximately 5,000 members and there's approximately 7,000 community banks around the united states. >> but you have about 5,000. how large is the largest in terms of assets? >> that's really not my expertise to tell you, to know that question. i could get back with you if you like. i could check with our association. >> you're not aware of the size of your largest bank? >> i don't know that off the top of my head. i could find out for you. >> would it be more or less than 50 billion? >> probably less than 50

billion. less than 50. >> more or less than 40 billion? >> it's 17 billion. i just got the answer for you. >> thank you. that's what we like about community banking. it just cuts to the chase. >> that's what i like about persistence. amazing how these things happen. 17 billion. can any size bank become an associate? >> again, you're asking me something that i don't know all of the details to. we certainly have to be a community bank. >> this is what i'm getting to. this term community bank. we use it a lot. and i think that when i hear it, i may hear one thing and when a colleague hears it, that colleague may hear an entirely different thing. so just for assets alone, there

may be other aspects of this. what is a community bank with reference to assets, to size? >> what's a qualified mortgage? there's extenuating circumstances. >> my time is limited. the reason i'm asking you is because we continually hear talk about community banks and we've had testimony that a community bank can be as much as 30 billion to $50 billion. and when i want to help community banks, i'm trying to get a sense of the size bank i'm talking about such that i can help you. >> i can tell you our average member is approximately 250 million. again, our largest member is 17 billion. i don't have all of the numbers in between there for you, sir. >> let me quickly move to mr.

calhoun. mr. calhoun, do you have some help that you can give me with reference to the size of a community bank? >> i think it's fair that over 9 0% are below the level and covered by the small business provision. i don't think there's a precise definition. the vast bulk are below that. >> i have nine seconds. yes or no. $30 billion, is that a community bank? >> i don't consider that a community bank. >> more than $30 billion a $30 billion a community bank, raise your hand. anyone? i yield back. thank you. >> thank you, madame chair. following up on your opening, madame chair, with respect to the roundtable we had in pittsburgh, i would like to

offer or ask unanimous consent to put into record statements from participants in that roundtable. >> without objection. >> these individuals all expressed concern. this was november 12 we had the roundtable in pittsburgh. as currently written the qm rule will cause harm to the housing market and make it more difficult for working families in western pennsylvania and around the nation to buy homes. congressman mooreland asked questions about who was going to be impacted. my question -- i'll ask this to mr. hartings. if you don't offer nonqualified mortgages, where might these working families turn for mortgage credit? >> certainly to competition that may not be in our area and not know our area as well. certainly probably a higher price cost of that mortgage

could be the result of that. i can't tell you. i don't know exactly who that will be. it will certainly shrink their communiti opportunities and these people need all opportunities to get themselves qualified. >> do you have an opinion on where these individuals might turn for mortgage credit? >> no. i'm sure some entrepreneurial type of individuals who will charge a premium on these things in a lot of ways will go into that market just for trying to make money. >> in a speech on october 29th, 2013, senator elizabeth warren said that "the potential liability associated with writing non-qm loans is relatively small. in good times, lenders can compensate for those possible losses with higher rates or fees." she added that, "we need to consider strengthening or

supplementing the qm rule so it provides an adequate check on overly risky lending even during housing booms." i'm going to ask mr. emerson this question. do you agree with senator warren's assessment that potential liability is relatively small? >> no, we don't agree that potential liability is small. unfortunately we're going into new territory. i think ultimately time will tell what that's going to look like. from a quantitification perspective trying to understand litigation risk associated with that, there's a distinct possibility that if you take that process all of the way through that the amount of cost associated with that loan is going to be greater than principle balance of the loan that you lent. >> there's been some press lately about the shrinking number of financial institutions. "wall street journal" had an article in the last month that talked about we're now under 7,000. mr. hartings, in your testimony you testified that community banks like yours do not have

legal resources to manage the risks that accompany nonqualified mortgages. how many of qm related lawsuits could a small community bank or credit union withstand before it's put out of business? >> it could be one. as a community banker, most of our directors are local businessmen and farmers, agriculture individuals that live in our area. the one thing they want is they want to serve the community but they don't want the fear of litigation so that fear of litigation to our reputation, one may be enough. you know, that is a hard number to answer at this point in time. >> do you have an opinion on how many qm related lawsuits a typical credit union can handle before it would be put out of business? >> i give you an example of where we were part of a class-action lawsuit on something we didn't do, it was a process and payment, share

drafts and things of that nature we were accused of manipulating it to drive up fees. we didn't do that. it cost us between $50,000 and $100,000 to prove we were innocent. that's a case where we were allowed to get out of a case. i can't imagine if we did a nonqualified mortgage and they have something to hold us to. that would be a very dangerous situation. >> mr. spencer, you mentioned that you had engaged in a consultant to walk through some of the qualified mortgage rules. i think her name was jill. you talked about 1,000 hours that she had to date. >> she's actually on staff. >> she's on staff. >> can you quantify in dollars what it's costing your organization to comply with this rule? >> we estimate that we have invested both human and financial resources of $40,000 to $50,000 over the last 12 months. and to put that in perspective for our operation, we could let you sponsor a house for $70,000

so that's one house we didn't build. >> thank you. i yield back. >> gentleman's time is expired. mr. murphy. >> thank you, madame chair. thank you all for being here. thanks for your time. mr. spencer, i just first want to thank you for everything you do and everything that your organization does for your community and really all of our communities. also want to take a second just to thank others for working together on a bipartisan bill to improve the legislation so you can continue to do what you do. obviously no legislation out of this place is perfect so we have a lot of work to do to improve it. we will continue trying to do that. i wanted you to just take a second to explain to everybody what makes organizations like yourself, habitat, different from others so provisions like dti and servicing limits are not needed to protect consumers. >> well, we were created,

habitat came into being with the mission of eliminating poverty housing worldwide. it was bold. what we do in our individual communities is work with families. we provide financial counseling. we can't cover costs out of fees because we don't charge them. we can't cover expenses out of interest because we don't charge that either. and so what we do is we work with our local communities to assemble resources so that we can provide these deserving families with noninterest bearing mortgages. because we believe strongly that these families need a hand up and not a handout. we don't give away houses. and so we work very closely to

make sure that our families have both the support and the capacity to repay the mortgages. overwhelmingly, they do. we don't want to be caught up in a bill that was not aimed at this kind of housing ministry to begin with. >> great. thank you for that. mr. hartings, mr. emerson and mr. weickenand, it sounds like amendments are continuing to improve qm and you all are happy with it. my question is timing. with new clarifications as late as last fall, does that timing put you -- do you feel like you need an extension to ensure that you get it right or do you think that that would just put you at a disadvantage? >> we're a small shop. i've got 68 full-time equivalent

employees and seven offices we have to manage. we have all hands on deck today from our mortgage lenders, our commercial lenders trying to figure out everything we need to do with the new mortgage regulations. more time would be very helpful. we also have to see how software vendors -- they may put in fixes but we need to make sure we know how that integrates. multisoftwa software vendors ha integrate with one another. it's difficult trying to do anything else other than trying to comply with qm and regulations that go with it. >> do you think that holds true for all community bankers? >> yes, i believe it does. >> i would agree with confusion that's out there trying to communicate and educate your employees on the changes and then trying to communicate to the members that come in the door can lead to a lot of disruption and confusion. >> thank you.

>> i mean, the amendments are out there, the rule is out there so from that perspective there isn't much we can do from time. there's a lot of work that goes into technology and everything associated with getting systems right not only internally but lenders rely on third-party vendors to make sure they have it correct. the industry has done the level best to get to place where they're trying to comply with the rule, with the qm rule. we appreciate the director's statement that there will be some grace period. it's not defined. of making sure you give a good faith effort to comply and get it in there. more time would have been helpful. >> last question for mr. calhoun. if a lender originates a loan and willing to keep it on the portfolio from a policy standpoint, why is it not safe to assume that lender already determined the ability to repay? >> the challenge is we have a long history on this. a lot of the past and even

present subprime lenders were portfolio lenders and they won one of two ways. if the loan paid, they collect the high fees and interest. these loans, 90% of subprime loans, were refinancing, not first-time home loans. so they would target people who had equity in the home that would cover the losses if they had to foreclose. and that's one of the challenges. i think it raises the point -- let me be clear. we support the need for clarity and the broader standards. a lot of which have been talked about today. but for example, fha is in its problems today with finances in large part because a nonprofit housing program, seller assisted down payments was operated through nonprofits and produced $15 billion of losses greater the rate of business so we do need to draw these lines carefully. i think the cfb with guidance

from this committee and house and congress can get us there. >> thank you. >> gentleman's time is expired. >> i thank the chairwoman for recognition and for holding this important hearing. i thank the witnesses for their testimony. i think few would disagree that some kind of ability to repay analysis should obviously be part of the mortgage underwriting process. what i'm hearing from most of the witnesses here today is that the qm rule is one size fits all solution that deprives mortgage lenders to make judgments about the credit worthiness about a particular borrower and then at the same time deprives credit worthy borrowers from a range of products that might not fit within the cfpb's bureaucratic credit box. so my question -- my first

question would be directed to mr. harting. i appreciate your advocacy of potential solution to provide additional flexibility specifically a bill that i introduced, the portfolio lending and mortgage access act. and it kind of dovetails on the comment from mr. calhoun that he didn't think that portfolio lending would really remedy the problem with what caused the financial crisis. it seems to me that one of the principle causes of the financial crisis was government policy that encouraged and originate to distribute model and that if you had an incentive through an amendment to the qm rule that would encourage lenders like community banks to retain the risk on their portfolio, you would actually prevent some of the problems that caused the financial crisis and at the same time provide that flexibility for credit

worthy borrowers who wouldn't necessarily fit into that bureaucratic credit box created by the cfpb. if you could, mr. harting, please elaborate on your support for this particular solution and maybe respond to mr. calhoun's objections. >> well, you know, i can talk about my own experience. we went through the mortgage meltdown and we didn't have a lot of issues because we couldn't put our customers in a product and i talked about it before that will put them in a subprime situation actually create a foreclosure. when you have it on your books, you have 100% of the risk. i look at it that i always made qualified mortgages because everyone that comes into my institution, i try to qualify them. there are always outliers. i can't prevent those. let's look at our regulators. we do have prudential

regulators. i have fdic and the state of ohio. if they find i'm doing something incorrectly, unfair and deceptive practices can pull that into to look at those institutions. we have to look at those regulators to be able to control that situation going forward versus trying to regulate it because when you try to regulate it, if i were to write a qm rule today, it would exclude people. i couldn't write it without excludeing. unless you tier that regulation and say portfolio lenders we're going to give you a tier to allow you to make those and take those responsibilities, i think it's a great solution. >> one other piece of legislation i introduced i would love the panel to comment on is a legislation called cfpb rule. one of the concerns i have with the qm rule as currently constructed is impact it will have on rural communities. as you may know in rural

communities, access to balloon loans for example can be particularly important in agricultural context and other places. these loans will go away if they continue to be designated as non-qm. so what we want to make sure is that the cfpb's designation is accurate but it's simple legislation, bipartisan, allowing a community to petition for a correction to be designated as rural if it truly is a rural community so that those mortgage lenders could originate balloon loans and fit within the qm safe harbor. my understanding is that senator mcconnell introduced companion legislation in the senate today and i'm appreciative of that. could you all comment on that as a potential solution as well in terms of modifying the qm and providing responsible mortgage

credit? >> our association does support your bill. i think any time you try to be that prescriptive on what a rural area is, it's difficult in the united states. i like the idea of being able to petition to get into rural. >> we haven't studied the rule yet. we will look at it and get back to you and let you know what i think. >> my time has expired. i yield. thank you very much. >> thank you, madame chair. i would like to add my expression of gratitude for spending a considerable amount of time here today. i would like clarification on a couple points or some provocative responses to questions beginning with mr. calhoun's assertion that there is a documented history actually of banks and credit unions making loans to people held in portfolio that did not go well. mr. calhoun, i do want to amend one thing you said when you laid it off to nonprofits.

actually, the bulk of the red ink at fha is attributable to mortgage defaults. a problem that's been fixed in large part. this question fascinates me. let me preface this by saying i think it's beyond the pale for us to assert that every hair on the head of every proposed rule is inherently virtuous and perfect. that's never the case. it's certainly not the case here. having said that, there is a clear and fundamental difference of opinion between perhaps mr. hartings and mr. calhoun on this issue of mortgages held in portfolio. mr. hartings, you asserted that we bear 100% of the risk. but frankly and with all due respect, that seems not to be

true if there is substantial equity and a refinanced interest or making this loan into a rapidly rising market and fees and interest rates are sufficient that even in the eventual unfortunate headache of a foreclosure, your opportunity to recoup is virtually insured. any time you define a bright line in reduced flexibility, you'll exclude someone that on basis of merits may be warranted an opportunity. sir, how do you counter the factual statement that you're not bearing 100% of the risk given market conditions and context? >> i am a lender. i have my lender certificate. as a bank president, i have to make that decision if we're going to foreclose. i also have to work through the courts and the customer on those. i can tell you, that is

absolutely the last thing i want to do in any situation. >> excuse me. i take you at your word. i believe you. then why did it happen so often? >> i think sometimes if you look at the types of products, they don't pass the smell test. if it's an adjustable rate mortgage, the predatory lending in some of those situations, interest only loans can have a tendency to get a customer in trouble because they're not paying back any equity. so i don't know. there's always going to be those players. i look at the same situation of if you look at the mortgage crisis, it was really everybody figured out how to game the system. i shouldn't say everybody but folks that got them in trouble figured out that there is this loan out there. i know how to do that system. when you make hard fast rules and you think that's going to fix something, what it ends up doing is just the outlier

figures out how to game the system. i don't design my products that will put them in trouble. they become in trouble from time to time. absolutely. that happens everywhere in the economy. i can't answer the outliers because i'm not one of those. >> as one of the newbies here, let me just lay off some of my frustration on the panel. i'm frankly a little tired of finger pointing. it's all government which is a two syllable word. it's all predatory lenders or borrowers made stupid decisions that they new better than. the truth of the matter is there is plenty of culpability to spread around. i can walk away from this frustrated that we have amplified beyond measure the

differences of opinion about how we might fix this proposed rule when in the wider scheme of the thing, we really are fixing a problem that was very, very material to our nation's economy and our family's well-being and maybe i can walk away celebrating a little bit that the differences between us in the broader context frankly really aren't that big so let's get to work and make it work. thank you, madame chair. i yield back the rest of my time. >> for allowing me to participate in this hearing as nonmember of the subcommittee. i have an interest in this subject so i have found it to be as helpful as i expected it to be so i appreciate your willingness to allow me to join. in respect for time, i just have two subjects that i would like to quickly get some responses

on. many of the questions that i had planned to ask have been asked and answered quite adequately. before i do that, i want to make a comment on mr. emerson and his company. i don't represent detroit. i represent flint. my district starts 35 miles north of detroit. i had a very good conversation with mr. gilbert last week. i want to say while i suspect we agree on a lot of policy issues but even though we may not agree on all of them, i will say that quicken from the standpoint of corporate citizenship is demonstrating what a company can do to not only do well in terms of your business plan and your business model and be a productive and profitable company, but to make sure that in doing so that some of that profitability is actually shared in rebuilding the community that's the host to your company. i know that other folks here in this room appreciate that as well. as an urban -- as a person involved in urban policy for a

long, long time, i just want to say that to you and convey to your company and to other members of your company that appreciation. thank you. >> thank you. we appreciate it. >> i wonder if perhaps mr. spencer to be quick about this could comment on some of the compensating factors that might open up home ownership and access to credit particularly from perspective of habitat. can you just tell me about the experience with your clients, your customers, and what you do to prepare those individuals who otherwise might not succeed? setting aside the rule of habitat as a developer but in preparing folks to be able to become homeowners particularly through home ownership counseling and how that has affected the success rate of your clients. >> absolutely. every habitat homeowner goes

through a financial training and actually more than just financial. if you have never grown up living in a home, there are things you don't know about changing filters and fuse boxes and we train everything from financial literacy through being a good neighbor and how to resolve disputes with your neighbor. so we work on all of that. the result is that -- then we stay involved with the families. the result is our overall foreclosure rate although it does happen is extremely low. i think it would be a number that most of our for profit brethren might envy. depending on the affiliate, we run 2% to 4% is about our failure rate and so we try to avoid it.

we're very successful at it. and overwhelmingly more families have paid their loans in full by an order of magnitude than have ever been foreclosed on. >> thank you for that. thank you for being a qualified setup man for the follow-up question and that is -- i would invite mr. calhoun to comment as well. particularly for the three lenders, what do you think can be learned from the experience of habitat particularly if as a compensating factor we were able to integrate housing counseling into the home ownership process generally? given that experience, i don't think there's anything pick about your clients that's distinguishable from many other folks who go directly through a traditional lending experience. do you think there's value in thinking about counseling as an integrated part of the mortgage origination closing servicing process?

if you could, either of the three. or any of the three. >> certainly. we do that already. i think the example habitat shows is that, you know, giviin people an opportunity through your judgment and your processes is not necessarily -- is not a bad thing meaning that you give people an opportunity that you normally would not give an opportunity to provide home ownership and things of that nature. >> if i may add, we have proposed and supported that counseling could be one of those compensating factors to provide more room there and i would say just in general one of the problems here is we're not writing the rule for the groups that you see here at this table today. these are the responsible lenders. the challenge is how do you write a rule that protects both home borrowers and responsible lenders from folks that drove the market in an unsustainable way that caused our country so much harm. >> our time is expired. i thank you for your indulgence

in allowing me to participate. >> mr. lynch. >> thank you, madame chair. i want to thank the panel members for your help today. i feel bad coming back to ask more questions because you probably suffered enough. i want to say to your credit, community banks and credit unions and god knows habitat for humanity, the reason that your programs especially with credit unions and community banks outperformed the big banks during the crisis is because you know your customer. you know the people who you are lending to. and so you have the ability to look beyond even those crit eer laid out in the qm rule. as i bought my first home, i

probably didn't have the credit history required here today in this rule. thank god my banker knew i was a hard worker and so gave me a mortgage. our difficulty here is trying to craft a rule that fits everyone. so the way this works, the way it's set up to work by cfpb is that small banks will still be able to make that loan that's on the margins. you'll still be able to make that loan even though it will be a non-qm loan and to be honest with you, it makes you, the people who are best able to judge that risk, liable. if you're going to hold it in portfolio. the challenge for us is if we lower the bar and the rule, it will allow every bank to allow every customer who might have

insufficient assets or insufficient income to get that loan. and we saw the consequences of that in the last housing crisis. that's the difficulty we have had. one thing i keep coming back to is this threat of liability. when i look at the ability to repay standards here, it requires you to look if a person is currently regionally expected to earn a certain income or have certain assets. it requires you to look at their current employment status. the monthly payment on the covered transaction. it requires you to look at the monthly payment on any simultaneous loan. current debt obligations and alimony and child support are factors that should be considered when you give someone

a loan. and someone's credit history. so i don't think that the requirements and ability to repay rule is really unreasonable. what i'm hoping is that there are some instances you brought up where folks, you know -- we might need to tweak it the rule a little bit. we are in a much better situation if you are making that decision on whether or not a person qualifies for a mortgage where you have the best information and i don't see a lot of lawsuits coming from people if you do that due diligence. i don't get the threat of liability that comes with this rule. i don't. i don't see it. i don't think lawyers are lining up. if you go through scrutiny to

make sure a person has the ability to repay, i don't think you're going to have a long line of lawsuits. i don't see the litigation risk here that i think is being overstated in every single case. mr. calhoun, i would like to have your thoughts on that. >> so we have worked through 15 to 20 state laws where this was a major concern. a lot of those including north carolina have a lot more legal liability and a lot more signee liability than these do. countrywide mortgage said they won't make loans in north carolina because of the north carolina law. we only wish they did stay in the state to its harm. people found there have not been lawsuits and this is tailored to make it extraordinarily difficult to bring a class-action lawsuit. so that by itself is a major reduction. rating agencies have been looking at this and coming to

similar conclusions. there is liability there but practically these are not cases that lawyers can make money on and that's what lawyers look for. whether they decide to take a case. borrower in default that wants to try to stay in their home, there's no big contingent fee for the lawyer in these cases. >> madame chair, i yield back. >> i don't see any other witnesses. without objection, all members have five legislative days within which to submit additional written questions to the chair which will be forded to the witnesses. i ask witnesses to respond as quickly as you were able. i would like to thank the witnesses. we covered a lot of ground. we have a lot of questions and this sets the bar as we move forward and we'll have another hearing or at least more information as we move through this to see where we actually are. i appreciate all of your patience and your information. without objection, all members

will have five legislative days with which to submit materials to the chair for inclusion in the record. without objection, this hearing is adjourned.

part of three days of american history tv this holiday weekend on c-span3. >> friday, president obama will speak about new limits to nsa surveillance programs.

is expected to call on congress to help determine the future of the agency's programs. tuesday the presidents intelligence review group laid out its recommendations on reforming the nsa surveillance programs at a senate judiciary hearing. it's 90 minutes. >> senator grassley will be joining us. we have a roll call vote expected soon, but i wanted to get this started and then wehis can, when the vote occurs atnden some point, we can recess for a few minutes while we go and a so vote. but what's important about thiss buaring, we're going to hear from the president's review group on intelltigence andhearie communications technologies. i wasgr talking briefly with thm in the back, and i know this is

the first time they appeared together this is the first time they've appeared together publicly since the groundbreaking report was released last month and i thank them as i know the president has and others have for taking the time, a lot of time and effort, to prepare this report. and i know it will be reflected what the president's going to say later this week. and the review group's report releases the weighty issues. we know what the technology is today. none of us can predict what it will be five to ten years from now. we also know that more and more data will be created by all of us as each day passes. and the questions are obvious. when should our government be allowed to collect and use that data? to what extent does it improve

our national security? and what will the answer to these questions mean for privacy and free expression in the 21st century? and all three branches of government are grappling with whether to let the nsa's dragnet collection of america's domestic phone records to continue. we're finding doing so with public participation in that debate. i think americans across the political spectrum want us to have this debate. and want to have a clear understanding of what is going so we're trying to get as much as we can into a public hearing. all of us on this committee have had access as have the five witnesses to highly classified matters but we're trying to go into as much as we can in open session. and the most critical factor to decide whether to conduct any particular intelligence activity

is the assessment of its value. particularly important evaluating the phone records program conducted under section 215 of the u.s.a. patriy tri ya act. i have concluded the program is not uniquely valuable enough to justify massive intrusion on americans' privacy. and the review group likewise concluded the program has not been essential and i'll quote the review group. the information contributed to terrorist investigations by the use of section 215 meta data was not essential to preventing attacks and could have been obtained in a timely manner using conventional section 215 orders. and even a few pages later, they said section 215 is generated relevant information only a small number of cases and there's been no incidents in which nsa says with confidence that the outcome would have been different without the section

215 te pefny meta data program. the report explains that nothing in 215 is interpreted by the fisa court precludes the mass collection of americans' personal information beyond phone records. and the private sy implications of this sort of massive surveillance in the digital age can't be overstated and the report provides valuable insights. the report appropriately questions whether we can continue to draw a rational line between meta data and content. and i think that's a critically important question given that many of the surveillance laws depend on did distinction between the two and the insights were also important as we take up reforms to the national security letter sta chuts. we don't talk as much art the national security letters but using them the fbi can obtain detailed information about individuals' communication records and financial

transactions and credit reports. do that without judicial approval but the thing that's troubling to many is the recipients of nsls are subject to permanent gag orders. we're fighting for additional safeguards on this controversial authority for years. to limit the use. to ensure that nsl gag orders comply with the first amendment. and to provide recipients of nsl was a meaningful opportunity for judicial review. something that most americans would assume already exists. and the review group makes a series of important recommendations to change the way national security letters operate. we haven't seen as much about these recommendations in the press vice president generated that much -- as much attention but they should. and i think that we have to look at it. and the report also recommends creating an institutional public interest advocate at the fisa

court. i strongly support that proposal. i'm concerned that merely allowing to participate in the fisa court from time to time will neither improve the substantive outcome of the proceedings nor rebuild public confidence in the process. and the stakes are high. quh you think about we're really having a debate about what are americans fundamental relationship with their own government. the government exists for americans. not the other way around. and about whether government should have the power to create massive databases of information about its citizens. and this is the feeling i would have no matter is the head of our government. i believe strongly that we must impose stronger limits on government surveillance powers. i'm confident that most vermonters agree with me. i believe most americans agree with me. having said that, we want to do it right.

now, in our panel today we'll have richard clarke who's a ceo of good harvest security risk management. he's chairman of the board of governors of the middle east institute. during his 30 years of public service he's a senior white house national security adviser to presidents george h.w. bush where i first met him, bill clinton and george w. bush. michael mor elll, recently retired as deputy director of the central intelligence agency after more than 30 years of service and during that time he served as acting director. he earned the bash lor's degree of university of akron and master's doog from georgetown. and geoffrey stone, professor at the university of chicago law school. previously clerked for supreme court justice brennan and

professor stone also served as dean of the university of chicago law school and the provost of the university. cass sunstein is currently professor of harvard law school. previously administd miministra office of regulatory affairs and attorney adviser at the office of legal con sell and a law clerk for supreme court justice marshall. and last, professor peter swir, professor of georgia institute of technology. previously ohio university's school of law. and co-chair of do not track standards process of the worldwide web consortium. he served as the clinton administration's chief counselor of privacy from 1999 to 2001. now, gentlemen, how did -- did you have any particular way you wish to proceed? >> after consultation with your staff, we have a very brief

opening statement if that's agreeable to you, mr. chairman. well, notwithstanding our diversity which you just signaled, we began this process with great admiration and gratitude for the intelligence community and we'd like to start by honoring their extraordinary work in keeping the nation safe. the risks associated with terrorism and associated threats are real and one of our main goals has been to suggest reform that is are compatible with combatting those risks. after extensive discussions and consultations during the last months, the gratitude and admiration that we had for the intelligence community has only increased as a result of interacting with them. we found the highest levels of professionalism. we found no evidence of political or religious targeting or targeting because of people because of political dissent. the focus genuinely has been on

national security. we are also grateful to them for their help and cooperation on a very tight time schedule and they provided us with great access to information making our report possible. we're also grateful to many organizations and individuals over two dozen, in fact, who actually met with us concerned with technology and innovation, with privacy, with civil liberties, with freedom of the press and rights of journalists, with the relations with other nations. friendly nations and some that aren't particularly friendly. but insuring that the relations are as cooperative as possible. countless organizations and individuals have devoted energy and time to informing our work and we are grateful to them. much of our focus has been on maintaining the ability of the intelligence community to do what it needs to do and we emphasize if there's one thing to emphasize it's this. that not one of the 46

recommendations in our report would in our view compromise or jeopardize that ability in any way. on the contrary, many of the recommendations would strengthen that ability explicitly by increasing safeguards against insider threats and eliminating certain gaps in the law that make it hard to track people under circumstances in which we have reason to believe they don't wish to do us well. in terms of the reforms we favor, just three very general points. the first is the immense importance of maintaining a free and open internet promoting both democratic and economic values. across partisan lines, there's a commitment to internet freedom and what's done in this domain we believe should be compatible with that commitment. the second is the importance of risk management signaled i think, mr. chairman, by your opening remarks. that's a central, unifying theme considering multiple risks first and foremost the risk to national security, but

including, also, the risk to public trust, risk to privacy, risk to economic values and risk to democratic self governance. so, a major task going forward, what our report tries to thread a needle on is to try to ensure a full set of rirkss are taken into account and we aren't optimizing only along one dimension. the third point is the importance of accountability which is a unifying theme for our 46 recommendations. accountability to senior level policy officials, accountability to the legal system, to congress and this committee through increased transparency and disclosure and above all to the american people. through transparency and disclosure. and i should emphasize that one form of accountability includes steps that would help increase public trust not just within the united states but throughout the world. this is a diverse group as noted. we reached all of our recommendations, this is a bit

of an upset, by agreement. there are no dissents. there was no horse trading. and there is no compromising. there are 46 -- >> you never make it in the senate. >> there are 46 recommendations if my arithmetic is right. we have 230 votes. that is all five of us are behind all 46 recommendations. no team bats a thousand or even comes close. and our transmittal letter makes clear to the intelligence community, to this committee, to the american people that we offer our recommendations with a great deal of humility and as a mere part of a process, prominently including the deliberations and judgments of this committee. we look forward to your questions. >> thank you very much. and i notice the comment i made i think a couple of things are extraordinary here. one that you did reach a consensus and i wish we could reach the same kind of consensus

in the senate. and many things we do but not enough. and secondly, your comments about the professionalism of our intelligence men and women in the various intelligence communities, i totally agree with you. as mr. morell knows without going into subject some of our closed door briefings, he's heard both republicans and democrats praise the work and some of the things he's had to bring before us. some very critical matters. and i have spent enough time with stations chiefs around the world in different places and realized how important the work that they all do. now, when the bulk phone records program is made public last

year, there were some who immediately began arguing the program was critical to national security. they cited 54 terrorist plots have been thwarted. you have had reason to review those 54 examples as i have. as i read the report it reaches the same conclusion as i and others here did. that the section 215 program contributed to only a few of those cases. was not essential to preventing any terrorist attacks. so that's been put to record. i think it's also important to look at another thing we keep hearing that somehow if this program had been in place before 9/11 it could have prevented that. now, mr. clarke, you were a senior counterterrorism official at the time of those attacks. would the bulk phone records program have prevented 9/11? >> senator, i think it's

impossible to go back and reconstruct history and i think while what if history is interesting academically, it's very difficult to say with accuracy if one fact had been changed if the outcome would have been significantly different. i think we can say this. that if the information that the federal agencies had at the time had been shared among the agencies, then one of them, the fbi, could have gone to the fisa court and could have in a very timely manner gotten a warrant to monitor the appropriate telephones. they didn't because they were unaware of the information that existed elsewhere in the government at the time. but there was a period of over two years where that information was available. so it would have been possible

in a very timely manner to get a warrant from the fisa court. >> wasn't that one of the things that the senator graham and his review committee found, that it was a sharing? >> that's exactly right. the joint committee. the two intelligence committees of the house and senate found that the information was in the government at the time. it just wasn't shared. >> thank you. now, i raise the issue of national security letters or nsls. and as you know, for those who are not familiar, they permit the government to obtain certain communications and financial and credit report records without a court order. also, as i raise, the fbi can impose a virtually permanent, permanent gag order on nsl recipients. number of us have been trying to reform that. your recommendations on nsls haven't had as much attention as

other topics covered by the report but i think they're just as important. and so, professor swire, how did the review group arrive at its conclusions regarding nsls? >> thank you, mr. chairman. well, we arrived at it. the group amongst us includes three law professors so on legal matters we were particularly vofld. we went to the fbi and we interviewed fbi counsel in detail. we also amongst us had worked quite a bit on issues related to nsls previously. based on that, one of the things we focused on was the so-called gag orders or nondisclosure orders. in the criminal world, when there's an organized crime investigation, there's often nondisclosure orders on the order of 45 or 60 days. we found out that they're heather permanent or come up for review for the first time in 50 years under current law for nsls and that's very, very different

from the way that grand jury subpoenas or investigations in the criminal side happened and so that lack of disclosure and the long, long period of secrecy is certainly one thing we were concerned about. >> well, and doesn't that create a real problem in some cases of person receiving in nsl, the gag order? >> so it poses problem for the e-mail providers, phone carriers receiving the nsls where they're not a position to describe the activities they're taking leading to situations where among other things the actual facts might be quite reasonable if understood more broadly. many of the providers expressed concern that they under this gag order cannot reassure their customers about the good practices that exist and that's been a concern for the industry, certainly. >> let me, before i yield to senator grassley, professor sunstein, let me ask you. some would say the nsls are like

a grand jury subpoena. and you can have the can have t nonjudicial review and so on. do you agree with that? >> there is an overlap and the fbi has been driving that analogy. there's also another analogy, 215 itself where we recommend the certain process that's more consistent with the normal one for getting access to people's records. we think if 215 has the structure it should, then the national security letter should follow the same structure, that the situation between them is extremely hard to justify. there is a earn analogy to the administrative subpoena, a question with breadth and scope and we think given the urgency exception that of course there would be to treat the national security letter like a 215 record seeking would not compromise any national security

goal. >> thank you. and thanks, senator grassley to intrude one more question. i'll say this to mr. morell, we've heard some government officials talk about section 215 programs. they say we shouldn't -- americans shouldn't be concerned about them because phone records and nsa obtains are just m metadata and not particularly sensitive. the review group said there were some risks in opposed by the government obtaining massive amounts of met adata, could you elaborate on that? >> i'll say one of the things that i learned in this process that i came to realize in this process, mr. chairman, is that there is quite a bit of content in metadata, when you have

records of the phone calls that a particular individual made, you can learn an awful lot about that person. that's one of the things that struck me. there's not in my mind a sharp distinction between meta data and content, more of a continue up. >> in the new york times op-ed, the government should ends it domestic program, current program creates potential risk to public trust, personal privacy and civil liberty. and of course the concern i've had and some others have had, no matter who is president or who is the head of these agencies, we don't want the temptation in there to misuse it. but senator grassley, thank you for coming over and i note that senators have been joining us. i think we were all told there was going to be a vote at 2:30

and that has not happened. if we keep looking over your head, we're looking at the little white dots up on the clock to see when the next one might be. senator grassley go ahead. >> the chairman explained, what i wanted to explain. it is a very important hearing but you may not conclude that since other members aren't here. we are all told there was going to be a vote at 2:30. before i ask questions, i have an opportunity of an opening statement. i thank all of you for being here and for your work on the committee. this is the latest in a series of hearings on government surveillance that our committee has held, nsa continues to be of great concern to my constituents and many across the country. the most important responsibility is to protect our national security while at the same time preserving our civil liberties, this is a responsibility that's quite hard to meet.

rapid changes in technology are making our enemies more lethal and world more interacted and privacy more subject to possible intrusion. under these circumstances, it's useful to hear a variety of perspectives including from those outside the government. and i thank the members of the review for your service. some of the conclusions in the review groups report may help clarify the issues before us as we consider possible reforms. first according to the report, quote, although recent disclosures in commentaries have created the impression in some quarters that the nsa surveillance is indiscriminate and persuasive across the globe, that's not the case. then the report that i quote again concludes quote, we have not uncovered any official efforts to suppress the scent or

any ability to intrude in people's lives without proper justification. none of this means that the potential or abuse of these authorities shouldn't concern us. it should. and or that the nsa hasn't made serious mistakes or the law in this area couldn't be improved. indeed there's a place for additional transparency and safeguards and oversight, but these conclusions are helpful in clarifying issues. the report recommends that the national security in the united states depends upon continued capacity of nsa and other agencies to collect essential information. in considering proposals for reform now and for the future, policy makers should avoid the risk of overreaction and taking care and making changes that could undermine capability of the intelligence community, end quote. and that's very good advice. one recommendation that may

reflect this advice is the review group's proposal to reserve the controversial ability to querry telephone metadata but with some changes. one of those recommended changes is private entities, this is an interesting idea perhaps worth investigating. i think it's legitimate to have concern that it may create some -- as many privacy problems as it solves. indeed, private companies seem to be allowing their customer's information to be hacked on what seems to be a daily basis. just as importantly, i'm concerned that in other snapss a review group may not have fooled its own advice. some of its other recommendations may seriously threaten our national security if adopted collected. for example, some of the recommendations in the report appear to make it more difficult because to investigate a

terrorist than a criminal and extend to rights to foreigners without good reason and some appear to rebuild the wall between national security communities that existed before september 11th of 2001. of course, that wall helped contribute to our inability to detect and thwart the attacks on that day and thousands died as a result. i don't mean to criticize the effort or intentions of review group but i'm concerned the group was giving such a relative shoort time to to their work as a result, for example, i understand that the group spent only one day at the nsa and if i'm wrong you can correct that. i'm also concerned that the group lacked some important perspectives, for example, none of the members experienced sup advising terrorism investigations at the department of justice or the fbi. the concern that the group produced a large number of recommendations and didn't develop some of them fully as

the review group wrote, its recommendations, quote, will require careful assessment by wide range of relevant officials with close reference to those -- to the likely consequences. end of quote. that's pretty good advice. i'll look forward to continuing that process today. i have a question for dr. morell after the review group issued its report, you wrote an opinion piece in which you emphasize that the report recommends changing the metadata program rather than any, you wrote have the program been in place more than a decade ago, it would likely have prevented the september 11th terror attacks, end of quote. further you wrote the program has quote, has the potential to prevent the next 9/11. so i would like to have you expand upon why you hold those

two opinions and can you give us any specific examples of how metadata program was valuable to you when you headed the cia? >> senator, let me first say, that the reason i wrote the op-ed with regard to 215 is i felt there was a misperception on the part of the media and much of the american public that the review group had indeed recommended an end to the program. and we did not do that. we recommended a change in our approach. and that was the main reason i wrote the op-ed to make that clear. it is absolutely clear that the 215 program has not played a significant role in disrupting any terrorist attacks to this point. that is a different statement than saying the program is not important. the program as i said in the

op-ed, only has to be successful once to be invaluable. and it does carry the potential going forward to prevent a catastrophic attack on the united states. and that was another point i was trying to make. i believe it. another point i'll make, mr. chairman, is that -- and we talked about this as a group, there is value in a negative quaery of 215 data. it is invaluable to querry the data base and if thep don't have contacts, that gives you some reassurance the attack will not be here. we talk about that in the report. >> i have a question -- let me

read a lead-in. one of the changes that your report recommends concerning the metadata program, a private third party or parties hold the metadata instead of nsa. but we've seen recent instances where companies like target and neiman marcus have been unable to protect private data. my constituents would be very concerned about privacy. so any one of you, but hopefully not all of you because i want to ask another question, what was the group's asession. of the privacy risk associated with the metadata stored in private hands and did you speak to the telephone companies to explore whether they are willing or hold to metadata. >> we did speak with the companies about that and they would rather not uphold the data. our judgment about the government holding the data is that the primary danger of the 215 metadata program is not if it is used only in the way in

which its use is authorized but that it leaves sitting out there a huge amount of information, personal information about the americans that could be abused in awful ways. and the question is how to avoid that potential abuse. and one of the ways we decided it makes sense to avoid that is to take it out of the hands of government. the concern in the fourth amendment, concern of our constitutional history is that government can do far more harm if it abuses information in its possession than private entities can. and therefore our judgment was that the government should not have possession of this information, because if it does, there's always a possibility of someone coming along down the road and seeing this as a great opportunity to get political dirt on individuals, on the activities and associations and that that's a danger that we want to avoid. the other hand, we do believe the data is useful and the idea is to find a way that would

enable the government to have access to the data but minimize the risk that it could be abused in that way. keeping it in private hands would still pose privacy risks and they would be of different order and much less in the sense of the kind of abuse historically we're most concerned about. >> this will be my last question. one of the things i'm concerned about is that we not rebuild the wall that exists between law enforcement and national security commissions, communities before september the 11th. part of that is making sure we don't make it harder to investigate a terrorism case than any other type of crime. fbi director weighed in last week on reforms you proposed to national security. he called these letters quote, a very important tool that is essential, end of quote, to the work of the fbi. he also stated, quote, what worries me about the suggestion that we impose a judicial process on nsls is that it would

actually make it harder for us to do national security investigations than bank fraud investigations. so professor swire -- maybe somebody else more appropriate, but why would we want to make it harder for agents and prosecutors to investigate espionage and terrorism than other crimes? did you consult with the director about these recommendations and finally, aren't your recommendations in this area almost exactly the same as what you i assume professor swire recommended to this committee back in 2007 long before the recent controversy about nsas. >> professors are always thrilled from several years ago and it is wrote on fisa prior to that and we went to the fbi and the fbi lawyers came to us and we met with him to discuss these

issues. we've had quite extensive discussions. in terms of comparisons for criminal, any criminal investigation, you have all of the criminal powers and then you may also have the nsl and foreign intelligence communities. there is one difference that in a criminal investigation if there is some mistake or problem, that comes to light there's a check and balance there, if you have 50 years of secrecy, we never find out what the government is doing. because of that risk of long running see kreltcy and not knowing what it is, some extra safety guards are appropriate for these secret foreign inl intelligence things. >> that's one difference. >> thank you. >> i'm going to yield to the senator feinstein. before i do that i want to place in the record -- meant to have done this earlier, detailed report by the new america foundation includes the executive branch and claims about the effectiveness of

section 215, phone records overblown and misleading and then a record -- new report by hoover institution researcher concluding 215 phone records is only a marginal value. white hou without objection those will be placed in the record. i want to say how much we appreciate the senator feinstein as a member of this with her expertise. and other members who also serve on the intelligence committee in both parties. >> thank you very much. i appreciate those comments. i'd like to submit a statement for the record, if i may. >> i at the same time ask for something to be put in the record? >> absolutely. >> without objection the items by both senator feinstein and grassley be made part of the record. >> thank you, very much mr. chairman. mr. chairman, the intelligence committee and virtually every member was there perhaps missing one, had the opportunity of

talking to the professorial element of this committee last week. the intelligence element wasn't there and we regret mr. clark and mr. morell were not there. but mr. more ll, particularly for your ears, i think what we thought in reading the report and in listening to the testimony was that the group didn't want the program to continue. and then i read your op-ed piece in the wall street journal. -- excuse me, in the "washington post" and i would like to read parts of it and see if the committee agrees, if i may. several news outlets have reported that the review group has called for an end to the program. we did not do that. we called for a change in approach rather than a whole sale rejection to better protect the privacy and civil liberties

of americans key values of our republic and we recommended that the government no longer hold the data and that it be required to obtain an individual court order, which i want to ask about, for each search but make no mistake, the review group reaffirmed that the program should remain a tool of our government in the fight against terrorism. then you go on. another misperception involved is the review group's view of the efficacy of section 215. many comment ators have said it found no value in the program. the report accurately said that the program has not been essential. i want to talk about the word essential, to preventing attacks since its creation. that's not the same thing as saying the program is not important to national security, which is why we did not recommend its elimination. mr. swire, do you agree with

that, yes or no? >> there are about 14 things there. i'm sorry, i was trying to write them down. yes, on going to the private sector and keeping the program. yes on the court order for each search and the last part was -- not that it was useful to have the information from the program roughly speaking? >> yes i agree with that also. mr. sunstein? >> i agree with every word. >> professor stone? >> i agree -- [ inaudible ] needle in the haystack -- i'm sorry, that it is possible that in the future there will be an instance in which 215 if it exists will enable us to prevent a major attack that we could not prevent. it does have value in that way.

>> mr. clark, welcome, it's good to see you again. yes or no? >> senator, i think we are surprisingly all in agreement. >> good. that's what i wanted to know. >> thank you very much. now the word essential. this is a word that's debated as to its meaning. we have one recent court decision out of the southern district of new york and i'd like to read from page 48 of that opinion. the effectiveness of both metadata collection cannot be seriously disputed. offering examples is a dangerous strategy for the government because it discloses means and methods of intelligence gathering, sux disclosures can only educate america's enemies. and nevertheless the government acknowledged several successes in congressional testimony and in declarations that are part of the record in this case. in this court's view, they offer ample justification.

then it goes into al qaeda associated terrorists in pakistan, connected with an unknown person in the united states, and particularly were 215, according to the court came in, was an nsa was able to provide a previously unknown number of one of the co-sprters. the next one is january of '09, an extremist in yemen, connection with khalid o zanny in texas and nsa notified the fbi which discovered a plot to attack the new york stock exchange. using a 215 order nsa inquiried metadata to identify potential connections. three defendants were convicted of terrorism offenses. and the fourth, again, this is a court opinion, in october of '09, while monitoring an al

qaeda affected terrorist, the nsa discovered david headily, who is a major figure was working on a plot to bomb a danish newspaper office that published cartoons depicting the prophet mohammed and goes on from there. so the word essential i think is a word that is often debated. you also say as -- that is it was likely that this could have prevented 9/11 and could quite possibly prevent another 9/11. am i correct about that? mr. morell? >> we as a group -- >> i'm asking you what said in the op-ed. >> yes, i said that. but question never talked about that as a group about 9/11. we never came to a judgment about that as a group. >> it was just your opinion. >> just my opinion. >> let me ask you another, general alexander testified to us that in '09, the nsa did in

fact go to the fisa court and found that it took nine days average to be able collect the information that was necessary. are you aware of that? >> no, ma'am. >> well, that's according to testimony by general alexander, we also know -- my time is up? is that what you're saying to me? would you let me finish? >> of course. >> he can be very strict. thank you. this was used after the fact in the boston bombing. but here's the difference, the boston -- they used emergency powers and they were able to get information quickly. this is used to prevent an attack. so those of us that see it important to revent another attack -- i don't need to tell you, terrorism is up, we know

they'll come after us in they can. there's a real litany of fact. the question comes, do you not find value, substantial value in being able to prevent this attack? >> so i find substantial value in any tool that helps us prevent attacks. i believe that 215 carries the potential to prevent attacks and that's why i think it needs to continue. but one of the important issues i think is the question of efficacy for us did not really impact our view on the change in approach to the program. we do not believe that we're going to add a substantial burden to the government by making the changes we're suggesting. if something can't be done quicker than nine days, then they need to make changes to

make that happen. we also wrote into our report an emergency provision so that in emergency situation, when intelligent community knows they need to move quickly, they'll be air to inquiry the data without a court order, going to the court after the fact. >> thank you very much. >> i should note, you weren't here for this part of the testimony, talked about 9/11, that one of the biggest problems there is that we had the information -- would have prevented 9/11. but the people with it did not communicate as they should have and i recall a number -- some of the information we had finally being translated a week or two after the event. senator lee? >> i'm told my distinguished colleague from south carolina, senior to me, needs to go somewhere so in deference to the gentleman from south carolina,

i'll let him go first. >> do you want to give that much deference? >> can we vote on it? >> senator graham -- >> thank you. okay. >> senator graham, please go next and just so we'll note, we'll then go to senator blumenthal and then back to senator lee and back to senator franken then senator cruz. let's pick up on what the chairman said. you wrote an op-ed. >> turn your microphone up. >> there we go. michael, you wrote an op ed piece that you think if this technology could have been in place before 9/11 it could have prevented the attack. that's your personal opinion? >> yes, sir. >> how many people agree with that? raise your hand if you do. >> i would say, senator -- >> that's not raising your hand. >> i think the reason we're not raising our hand not that we disagree with michael but we're not specialists in the details of 9/11. >> fair enough.

>> fair enough. >> they just said they did when i read it. >> well, we'll just go with what you said. >> we agreed with the quotation, senator feinstein read from mr. morell's "washington post" op-ed. on the 9/11 issue in particular we did not discuss as a group. >> we'll take what she said, they agreed with you. the bottom line, let's get way at the 30,000 foot level, what are we trying to do? do you believe as a group we're at war with radical islam? >> i do. >> how many of you believe we're at war? >> the difference between fighting a crime and war, there's a fundamental difference, do you agree with that? intelligence gathering is a very important tool in fighting a war, do you agree with that? >> that's a critical theme of

our report. >> yeah, so i guess what i'm trying to let the nation know, what you gentleman are trying to do, we're trying to find a way to fight a war within our values and this is an unusual situation. there's no capital to conquer. there's no navy to sink. there's no air force to shoot down. we're fighting an ideology. if we all believe that the enemy doesn't mind dying, as a matter of fact, that's first prize for these guys to die, we have to hit them before they hit us. is that generally the thought process here? we've got to identify the attack before it happens. they will not be deterred by death? >> that sounds fair. some version of that is in our report. >> al awlaki, how did we miss the fact that a major in the united states army was communicating with him?

i mean, we got all of these programs and everybody is wanting to revisit the programs which i totally understand. but we've got a major in the united states army that wound up killing 19 people, that was openly talking for the whole world to see, to one of the chief terror suspects in the world in yemen. how did we miss that and what can we do to make sure we don't miss that in the future? >> i don't quite understand to be honest the thrust of the question. our recommendations do not take away the ability of the government to use the metadata program. we shift where it stays, from the government to private sources and we save the court orders necessary, but as we make clear in the report, we do believe it's critical to protect the national security of the united states and believe our recommendations --

>> the fact that nobody can answer the question. i understand reforming the program and trying to be more sensitive to private concerns, but no one is really talked much about the fact you had a major in the united states army on active duty openly communicating with a known terrorist following his ever word and eventually got radicalized and killed 19 -- >> senator, we do have a section in the report about military and war that talks about how the same internet, the same hardware and software that used in afghanistan and iraq, these days used back home. when it comes to surveillance own hardware and software over there, it's the same hardware and software here. that didn't used to be the true in previous wars. it is a challenge we talk about. >> let's use the anwar aulaqi analogy. if he is calling someone, we got a cell phone and dialing someone into the united states, calling

someone, the program after the changes you're recommending, can it still pick that up? >> yes. >> yes. >> would a court order be necessary? >> unless there was an emergency, yes. >> do you agree with me that you don't need a court order to surveil the enemy in a time of war? >> overseas, yes, not in the united states. >> to you agree he would be an enemy combatant? that he would fit the definition of an enemy combatant? >> probably would want to look at that, the legal authorities on that. i don't think we disagree with it but -- >> the main point is you believe we can still pick up the phone call? >> yes. >> that's good. now, if somebody is calling him from the united states, can we pick up that phone call and do something about it? >> if either end is overseas

it's not 215 that's an issue, it's 702 -- >> most americans could care less about the titles -- >> it's relevant to our recommendation, sir, because on 702, the one side is overseas, we keep the same structure basically it has today. >> can you reassure america that if somebody in the united states is calling a known terrorist in yemen we can pick that up and do something about it? >> yes. >> at the end of the day, my time is up. isn't that what we're trying to do? aren't we trying to find out who's talking to who when the person -- one of the people doing the talking is somebody who we're really worried about attacking the nation and not trying to do anything more than that. >> yes, senator, that's a very important point because it applies both domesticically where there are concerns about american citizens that don't fit and internationally where focus is on the source of situations you're discussing and not on picking on people's private

communications. >> thank you. >> i appreciate you knowing the difference between the 702 and -- senator graham, we'll have to look at what adequate safeguards especially when dealing with an agency that doesn't have adequate safeguards to keep a contractor from stealing millions and millions and millions of file and still are today after spending millions of dollars, don't know all of the details to. and that -- i just don't want to get lured by all of the technology we have lured into kplasantsy. we saw the same thing -- no mean to be picking nsa, when state department and military put all kinds of files and all where a private first class can go in

and download it all under lady ga-ga cd and then cause -- as we all know, enormous difficulties for the united states when these highly classified cables from ambassadors were made public. senator blumenthal. >> thank you, mr. chairman for holding this hearing and thank you to each of you for your very impressive and extraordinarily important work. i think you have elevated and provided credibility to very specific and very significant proposal that advance the reform effort in our intelligence gathering operations. and senator graham referred to the present evidence to counter terrorism as a war, there is a saying, it's an addage, abelieve attributed to the romans, my

classic education isn't good enough to know, but the saying is in war law is the first casualty. and you have provided a really profound important service in making sure we do not have law as casualty and as you say in your report, it's the first principle you states, the united states must protect at once two different forms of security, national security and personal privacy. there's a reason why courts matter and founders of our nation thought they mattered. they wanted to prevent general warrants and secret courts like the star chamber and one of the reasons they rebelled against it. my questions focus on the courts and i've advanced and proposed the constitutional advocate and public interest advocate, however you want to label it, that would be independent institutionalized to ensure

there is an adverse sarial proceeding, whenever the advocate thought it was necessary, not on an ad hock basis, but court's benefit from hearing both sides and from having the advocate decide that another side should be represented. and i'd like to hear from you because we've heard the contrary point of view that it should be an amicus free -- as it has been sometimes called, or some other kind of ad hoc proceeding and maybe beginning with professor sunstein, with you, stating on behalf of the panel, why you chose this structure because obviously the president is going to have to make a decision as to whether adopt that idea and we as a panel and the senate will have to deliberate as well. >> history is relevant here. there was an understanding when

the court was created that it would be basically dealing with issues of fact like whether a warrant was justified, not with large issues of law and policy and as the system is developed over the years as you're well aware, senator, often the judges are being asked to decide the large questions. and so adversary proceeding seemed warranted in a setting of that kind. we're well aware that some judges for whom we have a lot of admiration on the court believe that the judge ought to be in charge of deciding when the public interest advocates normally it isn't the case the judge gets to decide. this interest gets a lawyer. we think someone is a dedicated officer designed to protect privacy and liberty interests is a very important safeguard. >> and the provision of an adversarial proceeding such as you described which reflects the change in the role of the court,

i think that's a very important point. wouldn't necessary delay it or imperil security if there were preclearance. and if warrants were granted and then reviewed afterward, in other words, we'll know in the ordinary criminal process, some of us have knocked on the judges door literally in the middle of the night if we thought it was necessary to get a warrant. and same principle applies here, does it not? >> yes, that's very important senator feinstein and senator graham rightly draw attention to the immediacy of certain threats but the fact that some things coming and we need information fast, and you say it's consistent with our traditions to a comedy emergency situations. >> and in the short term -- short time i've remain perhaps i could ask you to elaborate on the reasons why he recommended a change in the method of selection which i agree is very, very important to the trust and confidence in this process, and i think one of the reasons for reforming the whole system is to

preserve and enhance trust and confidence to the iraqi people that we are doing both forms of security here, national security and personal privacy. >> i think it was justice frankfurter who emphasized both the importance of doing justice and the appearance that justice is done and that's connected with your point. we also think particularly in the context of selection of the judges for the fisa court, a little diversity is a good idea across democratic and republican appointees, and as the report makes clear with all the respect in the world for the chief justice and have nothing critical to say about him in this connection, but it just isn't the case that they can come from one political party in terms of appointing president, that's awkward. so we would like to see some more diversity. .. like to seal more

diversity. >> in accord with the conditions of our judicial system that appearance and deception has to be served because of the immense and many respects undemocratic powers that courts exert undemocratic because we believe in elections generally and here we have unelected fisa court members, operating secret, other members of the judiciary operating in the open. but they too are unelected. i think that your point is very, very important. i again thank you all for your service to our nation. thank you. >> thank you very much, senator blumenthal.