[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
SETTLING THE QUESTION: DID BANK
SETTLEMENT AGREEMENTS SUBVERT
CONGRESSIONAL APPROPRIATIONS POWERS?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
MAY 19, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-90
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
SEAN P. DUFFY, Wisconsin, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota
ROBERT HURT, Virginia JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
----------
Page
Hearing held on:
May 19, 2016................................................. 1
Appendix:
May 19, 2016................................................. 29
WITNESSES
Thursday, May 19, 2016
Gray, Ambassador C. Boyden, Partner, Boyden Gray & Associates.... 5
Larkin, Paul J., Jr., Senior Legal Research Fellow, the Heritage
Foundation..................................................... 8
Min, David K., Assistant Professor of Law, the University of
California Irvine School of Law................................ 9
Rosenkranz, Nicholas Quinn, Professor of Law, the Georgetown
University Law Center.......................................... 6
APPENDIX
Prepared statements:
Gray, Ambassador C. Boyden................................... 30
Larkin, Paul J., Jr.......................................... 53
Min, David K................................................. 72
Rosenkranz, Nicholas Quinn................................... 83
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Letter from Richard A. Epstein, dated May 21, 2016........... 90
SETTLING THE QUESTION: DID BANK
SETTLEMENT AGREEMENTS SUBVERT
CONGRESSIONAL APPROPRIATIONS POWERS?
----------
Thursday, May 19, 2016
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:16 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Fitzpatrick,
Mulvaney, Hultgren, Tipton, Hill; Green, Cleaver, Ellison,
Beatty, and Sinema.
Ex officio present: Representatives Hensarling and Waters.
Chairman Duffy. The Subcommittee on Oversight and
Investigations will come to order. Without objection, the Chair
is authorized to declare a recess of the subcommittee at any
time.
Also, without objection, members of the full Financial
Services Committee who are not members of the subcommittee may
participate in today's hearing for the purposes of making an
opening statement and questioning the witnesses.
Today's hearing is entitled, ``Settling the Question: Did
Bank Settlement Agreements Subvert Congressional Appropriations
Powers?''
The Chair now recognizes himself for 5 minutes for an
opening statement.
Since last year, this committee has been investigating the
Obama Administration's use of bank settlement agreements as a
slush fund to support liberal activists' groups. Today's
hearing examines this practice and its impact on Congress'
constitutional power of the purse.
In the wake of the 2008 financial crisis, the Department of
Justice was charged with investigating the pulling and sale of
residential mortgage-backed securities which played a leading
role in the housing meltdown and contributed to a global
recession. Millions of Americans' mortgages went underwater and
countless families faced foreclosure.
In 2013, the DOJ announced a record breaking $13 billion
settlement with JPMorgan Chase which included $4 billion in
consumer relief to come largely in the form of loan
modifications. Importantly, although it contained a provision
giving credit for donations to certain community redevelopment
organizations, it did not make any donation mandatory and
offered only dollar-for-dollar credit to the bank to fulfill
them.
Several other high-profile settlements with other large
financial institutions followed. In July 2014, DOJ announced a
$7 billion mortgage lending settlement with Citigroup that
included $2.5 billion in consumer relief.
DOJ, which touted these consumer relief provisions as
innovative, required a minimum $10 million in donations to HUD-
approved housing counseling agencies including, for example,
the National Council of La Raza and NeighborWorks.
For every dollar donated, Citigroup could earn $2 worth of
credit against its $2.5 billion consumer relief commitment. In
effect, the Bank was actually incented to donate to these
third-party groups. By contrast, for direct forms of consumer
relief like principal forgiveness for homeowners in the
hardest-hit areas, the base credit is merely dollar-for-dollar.
One month later, DOJ reached a settlement with Bank of
America providing for $7 billion in consumer relief which
included nearly identical terms.
Earlier this year DOJ entered into settlements with Morgan
Stanley and Goldman Sachs, settling for amounts of $2.6 billion
and $5 billion respectively, allowing for much more than
dollar-for-dollar credit.
These terms appeared unprecedented, and as a result liberal
activist groups have or are scheduled to receive over half a
billion dollars outside of the normal appropriations process,
setting up-front, mandatory, minimum donations to non-victim
third parties, and in some instances, liberal activists'
groups.
It marks a substantial and disturbing departure from past
practices. This subcommittee has two questions before it today.
First, is what the Obama Administration did consistent with the
law, and more importantly, Congress' Article 1 appropriations
powers?
And second, should we continue to allow the Executive
Branch, regardless of party, Republican or Democrat, to
structure settlements in such a way as to allow third parties,
who are not harmed, to get funding otherwise owed to victims or
to the government and taxpayers. To answer the first question,
we have invited four legal scholars.
At the very least, I would hope that we can agree that
these settlements subverted or undermined Congress'
appropriations power. And if not a clear violation of the
Constitution, these settlements may very well have violated the
Miscellaneous Receipts Act, which directs that money received
by the government from any source must be deposited in the
Treasury.
Furthermore, the Department of Justice's own U.S.
attorney's manual says this practice is restricted because it
can create actual or perceived conflicts of interest and/or
other ethical issues. As a policymaker, the answer to the
second question is abundantly clear to me.
Regardless of who is in power at the Department of Justice
or any other agency with a role in structuring settlements on
behalf of the U.S. Government, no settlement should compensate
anyone other than a victim. Period.
Based on everything the committee has learned it is clear
that, in fact, these settlements created the very conflicts of
interest that the U.S. attorney's manual warned against, with
certain conservative groups being deliberately excluded from
receiving settlement funds. This kind of practice should not
take place under a Democrat or Republican Administration.
The Department of Justice, and indeed the justice system
itself, is supposed to be blind to this kind of behavior. It
will not be tolerated. For the millions of Americans affected
by the housing crisis, many may not be aware that their bank
had a choice to provide them with direct relief or funnel money
to a liberal activists' group.
I think it is important for our committee to try to
determine why, which is the reason I intend for this
subcommittee to continue to investigate the agencies involved
and prohibit this from happening in the future.
I now recognize the ranking member of the subcommittee, the
gentleman from Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank you for the
time. I do not agree with the hearing. I do not agree with the
hearing because I think that there are a good many other things
that we could be doing today that the American people expect us
to do.
The American people are pretty fed up with what we have
been doing. Not one person lately, and very few at all, have
gone to jail as a result of this crisis that was created in
2008. A good many people are still concerned about our having
hearings that will prevent people from acquiring the necessary
aid that they need to prevent foreclosures while not having
hearings that would help us bring to closure some of the
atrocities that have occurred.
Now some would say that is what the Justice Department
ought to do. We can have hearings to find out what happened and
encourage the Justice Department to go after people. Some would
say, well, this is within the purview of what we are doing.
Yes, it is. But this bill that is going to be mentioned is one
that emanates from the Judiciary Committee.
And if we can take up issues emanating from the Judiciary
Committee with reference to legislation, we can take up these
issues that relate to people going to jail. This is why people
are so upset with us. That is why you see this election going
in all directions. People are fed up.
So let us just talk about what we have here today. I think
a more appropriate title for this hearing would be, ``No Good
Deed Goes Unpunished.'' The Justice Department lawfully settled
these cases and the amounts that have been called to our
attention. I would think that these banks would be a little bit
concerned about the way their names are going to be thrown
around today because they settled these cases for good reason.
They took advantage of consumers, and now they are having
to pay. And if there is something unlawful about this, these
banks have batteries of lawyers who are capable, competent,
qualified, and prepared to take these issues before the
judiciary in this country. Judges that we put in place.
So, it is not some alien country that is going to have to
deal with these issues. If there are unlawful acts going on,
they would take them to court. No court has declared any of
these settlements unconstitutional.
We are doing what is within the law, and the Justice
Department really ought to be commended for the outstanding job
that it has done. I would also add this, at the very heart of
this is the question, are we going to allow monies from
settlements, less than 1 percent by some accounts by the way,
less than 1 percent of the money from these settlements is what
we are talking about today.
Are we going to allow the money from settlements to go to
organizations and entities that can help people stay in their
homes? That is what this is about. Are we going to allow money
to go to counselors who can help people stay out of
foreclosure? Go to lawyers who can help them?
And all of these entities and organizations that people are
all upset about have been vetted by HUD. They are on an
approved HUD list. You can't get on the list without being
vetted.
Do some get through that we might not want? Or someone
might not want? Possibly, but they have still been vetted. And
by the way, if the money could go to just any organization, the
complaint would be, you are letting the money just go to
anybody.
None of these people are vetted. So, either way there is
going to be a complaint. I don't approve of this hearing. I
think this hearing should be called the means by which we will
continue a crisis that started in 2008 with the debacle
associated with banks that took advantage of people.
Yes, JPMorgan Chase has a $13 billion settlement. Yes, Bank
of America has a $7 billion settlement. And then, of course,
there is Goldman Sachs at $5 billion.
I would think that they would get sick of their names being
drawn through the records of Congress and all of these things
being mentioned about them. At some point they ought to say,
look guys we have had enough, we settled that. We are not
complaining. Or maybe they are complaining but they are not
bringing it to our attention.
I don't see one banker here today complaining about what is
going on. If I am wrong someone will tell me. But it seems to
me that if you are a banker, or a surrogate of a banker, you
ought to speak up. The point I would like to make, finally, is
this: At some point, we have to get about the business the
American people expect us to take care of.
They are sick of conservatives and liberals doing nothing.
They want to see us deal with this crisis the way they would be
dealt with if they were the culprits. Somebody ought to go to
jail. We ought to be having hearings to determine who is going
to jail. I yield back.
Chairman Duffy. The gentleman yields back. We now recognize
and welcome our witnesses here today.
First, we have Ambassador Boyden Gray. Ambassador Gray is
the founding partner of Boyden Gray and Associates, a law and
strategy firm in Washington which is focused on constitutional
and regulatory issues.
Second, we have Professor Nicholas Rosenkranz who teaches
constitutional law and Federal jurisdiction at Georgetown
University Law School.
Third, Mr. Paul Larkin is a senior legal research fellow at
the Heritage Foundation where he directs the Foundation's
project to counter abuse of criminal law.
And finally, Professor Min is an assistant professor of law
at the University of California Irvine School of Law. Welcome,
all of you. The witnesses, in a moment, will be recognized for
5 minutes to give an oral presentation of their testimony.
And without objection, the witnesses' written statements
will be made a part of the record. Once the witnesses have
finished presenting their testimony, each member of the
subcommittee will have 5 minutes within which to ask each of
you questions.
On your table, there are three lights: green means go;
yellow means you have 1 minute left; and red means your time is
up.
And with that, Ambassador Gray, you are recognized for 5
minutes.
STATEMENT OF AMBASSADOR C. BOYDEN GRAY, PARTNER, BOYDEN GRAY &
ASSOCIATES
Mr. Gray. Thank you very much, Chairman Duffy and Ranking
Member Green, for inviting me to speak here about the
importance of congressional control over the Nation's purse and
how that control has eroded over the past several years. This
erosion threatens the separation of powers that lies at the
core of our constitutional structure.
An Executive with access to the Treasury could very well
free itself from popular oversight putting the entire idea of
representative self-government at risk. I have been involved
with this set of issues for a long time. I was counselor to the
President and you can well imagine how often this issue came up
in deliberations in the White House, especially in the
Antideficiency Act, which I will mention in a minute.
And later, in private practice, I was deeply involved
representing Congressman Bliley and Senator Hatch in the
American trucking case which addressed questions about the
extent of Congress' ability to delegate authority to the
Executive Branch.
Today, I am challenging the constitutionality of the
Consumer Financial Protection Bureau (CFPB), which is familiar,
I think, to all of you on grounds, among others, of the power
of the purse and on delegation.
As my prepared text makes clear, the Appropriations Clause
is a bulwark of the Constitution's separation of powers and it
goes way back into English history, which is the background for
our constitutional set up. In the end every constitutional
power runs into the appropriations power.
All exercises of constitutional power are limited by the
congressional control over funds in the Treasury. In fact, the
command of the purse is what gives effect to Congress with the
authority to prescribe the rules by which the duties and rights
of every citizen are to be regulated.
Historically, Congress has protected its powers of the
purse. The Miscellaneous Receipts Act, which is the principal
topic of today's hearing, is very relevant and central. It ties
the Executive Branch to Congress by requiring appropriations
for any money received for the Government is spent.
And we will go into this in a little more detail in the
time I have. But let me first say, to put it all in context,
there are three general categories of Appropriations Clause
violations.
The first is establishment of agencies that don't have
congressional funding, it is self-fund, and thus escapes
oversight by you, and one example is the CFTB, with which I
think this subcommittee is familiar.
The second is violations of the Antideficiency Act, which
prohibits the Executive from committing funds not, spending
funds not appropriated by Congress. ObamaCare is an example of
that.
And then there is the Miscellaneous Receipts Act, which
prohibits the kind of discretionary control over funds
received; and enforcement cases, the ones you are concerned
about, give the banking settlements involved extraordinary sums
of money which escape congressional oversight of the purse.
This committee is familiar with the CFPB, which has no
obligation to answer or respond to anything you do. So, when
asked by a member of this committee who is in charge of the
lavish renovation expenditures of CFPB, which cost more than
the building of the Bellagio Hotel in Las Vegas, the Director
of the CFPB answered, ``Why does that matter to you?'' That is
an insolent response which stuns me, and I would think you
would want to clasp him in handcuffs for saying something like
that.
The Affordable Care Act, sort of second bucket, involves
the Antideficiency Act, and there are various payments which
Congress has appropriated and various payments which Congress
has authorized but not appropriated.
So-called cost-sharing reduction payments have never been
appropriated by Congress. The President requested $5.4 billion.
He got $4 billion. When the answer was no, he took the $4
billion anyway. So I think that it is important to watch that
very, very carefully.
You have covered, Mr. Chairman, the sins of the bank
settlements. I don't know that there is much I can really add,
except to say that the amounts are extraordinary in comparison
to the other disbursements.
The CFPB, for example, at $600 million a year, which pales
in comparison to the billions that have been dispensed under
the bank settlement.
So, I commend you for this hearing, and I hope you have
more success with it and stop this practice. And as far as what
the ranking member said, as a Republican I am quite sympathetic
to almost everything you touched on. Thank you.
[The prepared statement of Ambassador Gray can be found on
page 30 of the appendix.]
Chairman Duffy. Thank you, Ambassador Gray.
Professor Rosenkranz, you are now recognized for 5 minutes.
STATEMENT OF NICHOLAS QUINN ROSENKRANZ, PROFESSOR OF LAW, THE
GEORGETOWN UNIVERSITY LAW CENTER
Mr. Rosenkranz. Thank you, Chairman Duffy, Ranking Member
Green, and members of the subcommittee. Thank you for the
opportunity to express my views on this important topic.
The Constitution provides: ``No money shall be drawn from
the Treasury, but in Consequence of Appropriations made by
Law.'' This is not a mere technical provision. This is a
fundamental element of constitutional structure.
It sounds, first, in democracy, reflecting this deep
constitutional principle that the power of the purse should be
vested in the most representative branch. Every dollar
appropriated from the Treasury may represent a dollar in taxes,
so this principle applies equally to taxes and spending. Taxing
and spending are the twin powers of the purse, and the
legislature commands the purse.
Moreover, the House of Representatives is vested with a
special role over revenues, as you know: ``All bills for
raising revenue shall originate in the House.'' The reason is
clear: House Members are more immediately representatives of
the people.
But this structural role of the Appropriations Clause
sounds not only in democracy but also in separation of powers.
Short of impeachment, the power of the purse is Congress' most
potent check on Executive overreach.
If the President can draw money from the Treasury without
an appropriation or otherwise evade the Appropriations Clause,
power would shift decisively from Congress to the Executive.
It is in this context that this Appropriations Clause
question arises. A willful President can evade many of the
constitutional checks on his power, but Congress'
appropriations power is the ultimate backstop. Everything the
Government does costs money, so the power of the purse should
successfully constrain the Executive Branch if all else fails.
Moreover, all negotiations between the President and
Congress, even those that have nothing to do with
appropriations, happen in the shadow of this fundamental power.
Alas, though, a determined President may flout this provision
too.
Just last week, District Judge Rosemary Collyer of the U.S.
District Court for the District of Columbia found that the
Administration has paid billions of dollars to insurance
companies under ObamaCare without an appropriation from
Congress.
She held, in no uncertain terms, that making these payments
``without an appropriation...violates the Constitution.'' Under
these circumstances, then, it is fair to view these provisions,
these bank settlements, with a skeptical eye.
The provisions provide for payments from the banks to these
third-party organizations that are neither parties nor victims
of the alleged wrongdoing. It is certainly fair to say that
these payments circumvent the clause at issue.
If the banks had paid this money to the United States--
which, after all, was the plaintiff in the case--then the money
would have gone into the Treasury. And if, subsequently, the
President or the Attorney General favored using this money to
subsidize various community development organizations or what
have you, they would have had to request an appropriation from
Congress.
By providing for direct payment from the banks to the
organizations, these settlements evade the Appropriations
Clause and cut Congress out of the loop.
Another way to put the point is that these settlement
provisions embody two implicit decisions. The first is the
value of the Government's claims--that is, what we would have
predicted it would have won from a jury, discounted by the odds
of a successful trial. And that is within the core competence
of the Department of Justice. That is what they are supposed to
be doing.
But the second decision is the best possible use of these
funds--whether to subsidize insurance companies under
ObamaCare, or subsidize various community development
organizations, or pay down the $19 trillion national debt, or
do any number of other things. This second decision is
paradigmatically legislative. It is exactly the sort of
decision the Appropriations Clause was designed to reserve to
Congress.
If these funds were first paid into the Treasury and then
appropriated out again, these two decisions would be distinct.
The Attorney General would make the first. Congress would make
the second. But by providing for direct payment, the
Administration effectively arrogates both these decisions to
himself.
Finally, I will just note that at least one of these
provisions is problematic in another way. One of them is
contingent, actually, on the extension of the Mortgage
Forgiveness Debt Relief Act of 2007. This is doubly problematic
because it is contingent on a future act of Congress. Quite
apart from the evasion of the Appropriations Clause, it is
arguably a violation of separation of powers for the Executive
Branch to attach either a tax or a bonus to a legislative act
in this way. To see the point, imagine a settlement provision
that required the Bank of America to pay an additional $100
million if the Senate fails to confirm Merrick Garland to the
Supreme Court. Surely, the Executive Branch can't add a tax to
a Senate prerogative in that way.
In short, these clauses clearly circumvent the text and
subvert the function of the Appropriations Clause, and I
applaud you for holding this hearing. I would certainly support
legislation along the lines that have been proposed.
[The prepared statement of Professor Rosenkranz can be
found on page 83 of the appendix.]
Chairman Duffy. Thank you, Professor.
Dr. Larkin, you are now recognized for 5 minutes.
STATEMENT OF PAUL J. LARKIN, JR., SENIOR LEGAL RESEARCH FELLOW,
THE HERITAGE FOUNDATION
Mr. Larkin. Thank you, Chairman Duffy, Ranking Member
Green, and members of the subcommittee. I appreciate the
opportunity to come and help you address this problem. The
views I state will be my own and not those of the Heritage
Foundation.
And today, I would like to make just two brief points.
First, no private lawyer in settling a case, could enter into
an agreement that has these conditions. No private lawyer could
tell opposing counsel, I know you are willing to pay my client
$100 to settle this case, but he doesn't need it all. Give some
of that money to whomever you want. Pick a charity and hand it
out.
Any lawyer who did that would be disbarred for engaging in
unethical conduct. Now, granted, government lawyers have some
different responsibilities than private lawyers. But the McDade
Amendment subjects government lawyers to the same ethical rules
that apply to lawyers in whatever State where that government
lawyer appears.
The result is the Justice Department cannot escape the
ethical responsibilities imposed on any individual lawyer by
pointing to the fact that they are settling government cases,
rather than private contract cases.
Second, not only do you have the problem here that the
Executive is acting improperly, but you have a practice that
denies voters information they are entitled to receive in
deciding whether to re-elect you and re-elect Senators to
Congress.
What happens when Congress lets the Executive Branch take
over the appropriations process is it delegates that authority
beyond what any reasonable person would think Congress should
do.
What you have, in essence, is the government deciding how
money should come in to the Federal Treasury and by whom it
should be received. That clearly is the sort of sham
transaction that the Justice Department would prosecute as
fraud, if private parties engaged in this. But it does create
other problems.
I agree with the ranking member that there should have been
more investigations into the question of whether there was
fraud on Wall Street. But third-party conditions like this take
money that could be used to hire more FBI agents, and to hire
more SEC investigators to look into that problem, and instead
gives it out in a way that doesn't guarantee that victims will
get it, and doesn't guarantee that the funds will be used only
for lawful reasons.
What you have then is essentially handing out money without
any audit after the fact. And you have the additional problem
that the public is generally unaware of what is happening and,
particularly, who gets this money, and therefore, is deprived
of information that it needs when deciding whether to reelect
the members who voted for any such program, or to throw the
bums out, as they used to say in Brooklyn.
For those reasons, I think these practices that the
government has engaged into, violate the Appropriations Clause
as well as the Miscellaneous Receipts and Antideficiency Acts
and that Congress should recognize that this is a terrible
public policy.
I yield back the rest of my time.
[The prepared statement of Dr. Larkin can be found on page
53 of the appendix.]
Chairman Duffy. Thank you, Dr. Larkin. Professor Min, you
are now recognized for 5 minutes.
STATEMENT OF DAVID K. MIN, ASSISTANT PROFESSOR OF LAW, THE
UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW
Mr. Min. Chairman Duffy, Ranking Member Green, and
distinguished members of the subcommittee, thank you for
inviting me here to testify on the topic of the RMBS
settlements negotiated by the DOJ.
Today's hearing focuses specifically on provisions
contained in three of the five RMBS settlements, which allowed
the settling bank to fulfill some of its obligations by
donating money to third-party charitable efforts, such as
foreclosure prevention, and neighborhood anti-blight
provisions. And it asks whether government settlements
containing these types of charitable payment provisions
subverted Congress' appropriations power.
The legal answer to this question is fairly easy to answer.
Under established law, the answer is no. This is, in fact, a
quite common and ubiquitous practice. While some observers,
including several of my fellow witnesses, have claimed that
these charitable payment provisions violate Federal law by
circumventing Congress' exclusive authority over
appropriations, this claim is not well-grounded in current law.
The Miscellaneous Receipts Act was passed by Congress in
1849 to set the parameters of what was acceptable versus
unacceptable encroachment by the Executive Branch over
Congress' appropriation authority.
Prior to the Miscellaneous Receipts Act, an official or
agent of the government receiving money for the government
shall deposit the money in the Treasury. The key point to note
here is that the government must receive that money before it
is required to send it to Treasury.
The receipt of the money may not be actual receipt but can
be construed as constructive receipt of that money by the
courts. Thus, the long-standing legal standard for whether the
government had received this money in legal settlements has
revolved around two factors.
First, is their admission of finding, for finding of
liability. Second, does the government retain post-settlement
control over the disposition or management of funds or projects
carried out under the settlement?
If the answer to both of these questions is no, then the
government relationship with the money in question is said to
be so attenuated that it could not possibly be construed as
having received it and thus, the settlement funds would not be
subject to the appropriations process.
Importantly, the Comptroller General, which represents
Congress, has endorsed this general legal framework, as have
several courts. Based on this legal framework, and on the
Attorney General's broad authorities to litigate and settle
claims involving government, the Federal Government has crafted
a wide variety of settlements with terms providing for payments
to private charitable groups.
It is fair to say that these types of provisions contained
in the RMBS settlements are ubiquitous and certainly not
unprecedented as several of you have said today. Indeed, the
House Judiciary Committee, which is chaired by Congressman
Goodlatte, one of the more outspoken critics of these types of
provisions, has basically conceded this point by passing H.R
5063 out of committee.
H.R. 5063 would prohibit the DOJ from negotiating
settlements with these types of charitable payment clauses.
Obviously, the Goodlatte bill would not be necessary if
charitable payment terms were already impermissible under
existing law.
The RMBS settlement at issue should clearly fall within the
criteria fall that I described. They do not include a finding
of liability on the part of banks, and the Federal Government
does not maintain post-settlement control over them.
Indeed, the banks themselves maintain full control over how
they can disburse the funds under the Consumer Relief
Provisions, and there is no requirement that they don't donate
any funds to any particular third parties under the terms of
these agreements. Thus, they are plainly permissible under the
law.
Having dispensed with this first question, let us move onto
the second question, which is implied by today's hearing.
Should Congress take action to prohibit these types of
settlement provisions?
I think the answer here is clearly no. It is undeniable
that these types of provisions can serve a valuable purpose.
Indeed, even Dr. Larkin, whom I would describe as the leading
critic of these types of provisions, has acknowledged this
point.
As Dr. Larkin has noted, these provisions can be mutually
beneficial for both government and the private defendant. From
the government's perspective, they can effectively increase the
total amount of the settlement, sometimes by a large amount.
And they can also benefit third-parties. From a defendant's
perspective, charitable payment provisions can provide
significant public relations and community outreach benefits.
Moreover, to the extent that the Federal Government may,
but is not required to negotiate these types of provisions as
part of its settlement, this provides it with additional
flexibility to help negotiate as one of our current
Presidential candidates likes to say, the best deal.
For example, DOJ has negotiated only three of these
settlements, RMBS settlements, with these types of provisions,
but did not include them in settlements with Goldman Sachs and
Morgan Stanley.
Presumably, DOJ made the determination that, due to the
specific facts and negotiating posture on that settlement, it
was in the best interests of the Federal Government to seek
these charitable payment provisions in some, but not all of its
settlements.
So, why would anyone oppose these types of provisions from
a policy perspective? One objection that you have just heard
from Dr. Larkin is that they redirect money away from the
Treasury. But, in fact, I would point out that that is not
entirely true.
Dr. Larkin gives the example of a private attorney settling
a $100 claim and giving that $100 to charitable interests
instead. But, in fact, the Federal Government is often limited
by statutory limitations on the amount of civil penalties that
they can seek.
Thus, it is incorrect to assume that each dollar of
charitable payment secured in a settlement, is a dollar that
otherwise would have been part of the civil settlement. In
fact, the RMBS settlements provide a good example of this very
point.
The DOJ's primary Federal claims in each of these
settlements were claims based on FIRREA violations. Penalties
for FIRREA violations are capped at $1 million. Thus, it is not
clear that DOJ could have put much more, if any, instilled
penalties than it already did, even if it had litigated these
cases and won them.
Thus, the charitable payment provisions adhere to allowed
DOJ to procure much more than it would have been able to get if
it had been limited to civil penalties. And this, I argue in my
written testimony, serves both a deterrent purpose, as well as
a general compensation purpose, which is, in fact, motivating
principles behind civil penalties as it has been addressed by
many legal scholars.
With that, I see my time has ended, so I thank you for your
time.
[The prepared statement of Professor Min can be found on
page 72 of the appendix.]
Chairman Duffy. Thank you, Professor Min.
The Chair now recognizes himself for 5 minutes.
Looking at the 2008 financial crisis, the panel, I think,
would agree that there were a lot of families who were hurt, a
lot of families who lost their homes. I don't think anyone
disagrees with that on the panel, correct?
And to the panel, was every family who was hurt in the 2008
crisis made whole?
Did everyone get reimbursed for their losses in the 2008
crisis, Professor Min?
Mr. Min. The answer is no, but I would argue--
Chairman Duffy. No, you are right. Good answer. They were
not made whole.
And so, is it fair to say that instead of directing
settlement money to victims of the 2009 crisis, the DOJ decided
to take it away from victims and send it to third-party non-
victim groups.
Do you agree with that, Professor Min?
Mr. Min. No, I do not.
Chairman Duffy. So, the money that went to third-party non-
victim groups wasn't taken away from victims?
Mr. Min. I am not sure how you would craft a settlement
that helps out the aggrieved homeowners other than through
community groups that directly interface with them.
Chairman Duffy. There are people who have lost homes; they
have been foreclosed upon. I hear the ranking member talk about
that all the time.
Mr. Min. Sure.
Chairman Duffy. We know who they are in our communities.
Why couldn't that money be directed to actual victims of the
2008 crisis?
Mr. Min. Sure. And I believe that's what the money is
intended to do.
Chairman Duffy. No, it is not. It is going to third-party
groups.
Mr. Min. For foreclosure preventions.
Chairman Duffy. Let me ask you this: Do you think it is
appropriate, as you craft this settlement, that you craft it
behind closed doors in a way to make sure that the money goes
to left-leaning community activist groups instead of
conservative groups?
Do you think that would be a good public policy?
Mr. Min. I think that is actually a flawed premise because
there were a number of different groups that were allowed to be
given money under this.
Chairman Duffy. Would that be a good public policy?
Mr. Min. No, but there were conservative groups--
Chairman Duffy. Okay.
Mr. Min. --that were part of that list as well.
Chairman Duffy. So would you be surprised that if later on
you learned that there were emails from HUD and the DOJ that
actually lay out the fact that they were structuring this deal
to make sure that liberals got the money and not conservatives?
And if you heard that, you would be offended, wouldn't you?
Mr. Min. I would be. I don't think that is what happened.
Chairman Duffy. And so, if there is a deal that is
structured like this, do you think there should be transparency
to the panel? Do we think that the American people should be
able to see the correspondence between the DOJ and HUD and how
they determine what third-party activist group got the money?
Should that be disclosed to the American people, Professor
Rosenkranz?
Mr. Rosenkranz. Yes, Mr. Chairman.
Chairman Duffy. Dr. Larkin, do you think that the American
people should be able to see through their Congress the
documents surrounding this settlement?
Mr. Larkin. Yes.
Chairman Duffy. Mr. Gray?
Mr. Gray. Yes, and how the money is to be ultimately
dispersed is really up to you, not to a prosecutor.
Chairman Duffy. We are going to come back to that in a
second. I agree with you.
Professor Min, do you think that we should be able to see
that?
Mr. Min. Of course. And I think--
Chairman Duffy. Okay. So would the--
Mr. Min. --the fact that we are discussing this means that
it was released.
Chairman Duffy. Yes. Would the panel, by chance, be
surprised that we have actually asked on this committee and
this subcommittee, for the documents from the Department of
Justice and HUD? And do you think that they have actually
provided those documents to Congress? Take a guess.
Mr. Larkin. I would not be surprised by the fact that they
refused to turn them over.
Chairman Duffy. They refused to turn them over. So, not
only do you have a settlement that was done behind closed
doors, that sends money instead of to victims and/or the
Treasury, sends it to third-party activist groups, and Congress
can't see the documentation surrounding that settlement.
Does that offend anybody's sensibilities on the panel?
Mr. Gray. It offends mine, but I think it--more importantly
than what I think, the Comptroller General is taking the view
that all settlements must relate to the underlying violation,
which principle was totally ignored in this series of
settlements.
Chairman Duffy. Professor Rosenkranz, I think you heard
Professor Min's commentary and legal analysis on the DOJ
settlements. Do you agree with his analysis?
Mr. Rosenkranz. I don't agree with his analysis. I would
just make one point. He points out that arguably both sides
win. The banks are happy and the Department of Justice is
happy, but that's not the separation of powers standard.
That is often true in separation of powers problems. It is
really Congress--and thus the American people--who are the
aggrieved party. The fact that the bank is not here complaining
doesn't actually prove the point.
Chairman Duffy. They pay one way or the other, right? And
so, instead of appropriating money-making decisions to the
Congress, we have the Department of Justice, lawyers, and HUD.
And I would just make one note.
My time is almost up, but one of the organizations that
received money was NeighborWorks. Board member Helen Kanovsky
is General Counsel of the U.S. Department of Housing and Urban
Development. So, she is a board member of NeighborWorks but
also General Counsel at HUD, and they got money. Does that
offend your sensibilities, Professor Min?
Mr. Min. I am not sure what the question is, what the
offending sensibility point is.
Chairman Duffy. My time has expired. The Chair now
recognizes the gentlelady from Ohio, Mrs. Beatty, for 5
minutes.
Mrs. Beatty. Thank you, Chairman Duffy, Ranking Member
Green, and the witnesses.
First, I thought I was in the Judiciary Committee when I
walked in because it seems like recently, they had some of the
same witnesses, on the same topic, and for the record, that
seemed very appropriate to me where this would be.
I was also surprised when I reviewed the hearing memo
circulated by the Majority because it stated that this hearing
would examine whether the Obama Administration encroached on
Congress' appropriation powers, and if it overstepped his legal
authority when crafting the settlement.
But what surprised me most about the statement was the
first part is a constitutional question, which, I assume, falls
under the Judiciary Committee's jurisdiction, and the second
part focuses on oversight of the Department of Justice, which
is also the Judiciary Committee.
Mr. Larkin, can you tell me, did you testify in the
Judiciary Committee?
Mr. Larkin. Yes. I testified at a subcommittee of the whole
committee.
Mrs. Beatty. Thank you. Okay. Just like this is a
subcommittee.
Mr. Larkin. That is right.
Mrs. Beatty. And did you think it was appropriate for you
to be there?
Mr. Larkin. I was--
Mrs. Beatty. Did you think this topic was appropriate in
that committee, that it was the best place for it to be?
Mr. Larkin. I think it was appropriate for that committee
to look into it, but whether it was the best place is a matter
for you all to decide.
Mrs. Beatty. But you thought that this is where this issue
belonged?
Mr. Larkin. I thought that they had jurisdiction over it,
no question, because it involved constitutional issues. But
that doesn't mean they have exclusive jurisdiction--
Mrs. Beatty. I didn't ask you that. I simply asked you the
question, did you think it was the appropriate place for you to
go and testify. That is a yes or no.
Mr. Larkin. Oh yes, no, no, I said yes to that and I, that
is, that was an appropriate place.
Mrs. Beatty. Okay. So clearly, a renowned witness with all
the things I have read about, Mr. Chairman, agrees with me,
that Judiciary would be an appropriate place for it to be.
Thank you for that, Mr. Larkin.
I also find this to be ironic, this whole issue of us
having this hearing here. It makes no sense to me. I think that
Judiciary is where it belongs, and I have listened to the
arguments by my colleagues on the other side of the aisle, how
oftentimes it has been said by them that President Obama
oversteps his authority as President.
He encroaches on congressional powers. And this hearing
seems to be the exact same thing that we have accused him of
doing, that we are having congressional overreach by bringing
this here.
Mr. Chairman and Mr. Ranking Member, let me just say for
the record that I take great offense to the claims that the
Department of Justice is somehow diverting funds to radical,
liberal, non-profit and affordable housing groups and I say
that, because the National Urban League was one of those
groups.
And I was so proud yesterday to get the National I am
Empowered Award from them for housing, named after Shirley
Chisholm, and this morning, late to this committee because I
was with the Vice President of these United States at their
conference
The National Urban League has probably done more than any
of the other groups as it relates to housing, and minorities,
and non-minorities and so for legislation by one of my
Republican colleagues to claim that it is some radical, and I
think La Raza was also named in that, so I just wanted to say
that this morning, clearly to the witnesses, you can see that
this is something that is important to me.
Mr. Min, do you believe that any part of these bank
settlements agreements were politically motivated?
Mr. Min. I don't have any basis to make that assessment. I
will say that as far as the left versus right groups, the banks
that agreed to this settlement provision were given a list of
hundreds of different nonprofits they could donate to.
They were able to control which ones they gave to and in
what amounts. And so, there were some conservative groups, as I
mentioned to Chairman Duffy earlier that were part of this list
as well.
I don't see an ideological bent here just by the virtue of
having La Raza and the National Urban League and NeighborWorks
and other groups like that involved.
Those were the groups that you would need to get involved
to try to reach out to the homeowners who were most distressed
by the housing crisis, that is, low and moderate income and
often unrepresented minority households, and so I don't know
how you would craft a settlement that tries to reach those bars
with involving those.
Mrs. Beatty. And lastly, do you believe these settlements
were constitutional?
Mr. Min. Oh absolutely, under current constitutional
understanding, absolutely, as I made clear in my written
statement.
Mrs. Beatty. Thank you very much. Thank you, Mr. Min.
Chairman Duffy. The gentlelady yields back. Congratulations
on your National Urban League award, Mrs. Beatty. I wasn't
aware that you had received that.
The Chair recognizes the gentleman from Arkansas, Mr. Hill,
for 5 minutes.
Mr. Hill. Mr. Chairman, thanks for this hearing.
This separation of powers and the power of the purse has
been such a recurring issue for the Congress, and while I think
that I understand the distinguished gentlelady's comments about
the Judiciary Committee, I think that since these are so
pervasively used in the financial services industry, I am glad
to see that this hearing is being held in this committee too,
just to expose the members of the Financial Services Committee
to this level of detail.
The first thing that I want to ask Ambassador Gray is, does
the worthiness of an organization receiving a mandatory
donation cure the underlying problem of whether the
congressional appropriations process has been circumvented?
Because of this good that Professor Min talks about, is that a
legitimate reason?
Mr. Gray. If I understand your question, it doesn't matter
to the principle involved and the application of the
Miscellaneous Receipts Act, whether any money actually touched
the hands of any man or woman in the Justice Department.
It is money due and owing the United States and should be
deposited in the Treasury, and there is no excuse that the
money went to worthy causes. Whether the causes are worthy is
for you to decide, not for the Department to decide, and the
money belongs to Congress, once it has been agreed to by the
defendant in the case.
Mr. Hill. Thank you, Ambassador.
Dr. Larkin, isn't it true that some of these activist
groups that we have referred to this morning, like ACORN and La
Raza, pressured banks in the past to make certain kinds of
loans and that even possibly contributed to the crisis, if you
look back over the past 15 years or so?
Mr. Larkin. I don't have any personal knowledge to that
effect. I know there have been claims to that effect that have
been reported in the media, and you would have to ask those
journalists. But I couldn't give you any details about any such
claims, because I just don't have personal knowledge in that
regard. Oh, can I just follow up on the first question you
asked?
Mr. Hill. Yes. Sure.
Mr. Larkin. Giving money to Guide Dogs for the Blind is
also going to wind up tremendously benefiting a lot of people
but if Congress hasn't authorized that money to be paid out,
you can't cure the antecedent illegality by virtue of the fact
that the recipient is going to make good use of it. Because you
also are going to have instances where there will be misuses of
it.
Mr. Hill. I yield back the balance of my time, Mr.
Chairman.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking
Member for--well, I am not thankful that you are holding this
hearing, but nevertheless, it is good to be here. Thank you for
being here.
I did the commencement on Saturday for the University of
Missouri Law School, so I am very qualified to talk about legal
matters, even though my degree is in theology. And I am always
frustrated when we travel in parallel universes on this field.
I don't know what is going on.
Some of us were here and so we can speak experientially
about what is going on. First of all, I don't know how in the
world ACORN got into this conversation. I just think that is
one of the most amazing things that happened, but that is just
a weird on my part, I guess
Let me ask Professor Min, are any of you attorneys like me?
Okay. Dr. Larkin, isn't it true that all of these legal
settlements were subject to a court review? Dr. Larkin, is
that--
Mr. Larkin. If there were--
Mr. Cleaver. Go ahead. I'm sorry.
Mr. Larkin. If there was a claim filed in court to start
with, then yes. But, the review is very limited, but I don't
think there were all these types of settlements. There is
always a claim first filed in court. Oftentimes, you see
agreements between the government and private parties to
dispose of a matter without anything being filed.
Mr. Cleaver. Yes, yes, sir. But I am talking about these
settlements.
Mr. Larkin. No, no, and I am trying to remember if they
first filed anything in this case, and I can't remember if
there was a complaint filed or if they settled without filing a
complaint.
Mr. Cleaver. Yes.
Mr. Larkin. It was?
Mr. Cleaver. There were three of them--
Mr. Larkin. Okay. My colleagues said there was and so I
will take that, yes. But the analysis is the same either way.
Mr. Cleaver. It is?
Mr. Larkin. Yes. The reason is, when it is filed in front
of a District Court Judge, essentially the only thing a
District Court Judge can do in approving a settlement is to
look to see, for example, whether or not it was agreed to for
an impermissible purpose.
For example, in a plea agreement, the District Court is
entitled to review the plea agreement to make sure that it
wasn't, for example, a product of a bribe. And I am not saying
anyone was bribed here. But I am just saying the review is very
limited.
Mr. Cleaver. Yes.
Professor Min?
Mr. Min. I would argue that the court review is implicitly
endorse the idea that these types of provisions are in fact
constitutional, and permissible under the Miscellaneous
Receipts Act. A number of my colleagues have given maybe
persuasive theoretical constitutional arguments as to why these
types of provisions might not be constitutional.
But the fact is that as a matter of settled law, these
types of provisions have been found to be permissible under
current law.
Mr. Cleaver. Some of us were here during all of this, from
day one until today, and so we went through it, experientially,
and so we know that there was a judicial involvement, and there
are settlements with the Federal Government, through the
Justice Department, no matter who is in the White House, almost
every day.
Isn't that right Ambassador Gray?
Mr. Gray. If I understand, the--if you back up a little
bit, the question of what is current practice, seems to revolve
around the fact that the Miscellaneous Receipts Act was enacted
a century ago, whatever, but there have been recent Office of
Legal Counsel Opinions coming out of the Department of Justice
which are very, very clear, about what can and what cannot
happen with these settlements.
And the fact that there is a court approval does not, I
think, when no one is there arguing either side of it, which is
not going to happen when you have two parties who are settling
a case, there is never going to be any defense of your
authority and your constitutional obligation to oversee how
these funds are spent and decide how these funds are spent.
Mr. Cleaver. So, a judge is just going to ignore anything
going on around a particular case and just deal with the
settlement? Just forget everything else surrounding that
particular case?
Mr. Gray. There is no one arguing and the issues aren't
raised in the settlement. The settlement agreements are usually
reached in private and presented to the judge of the consent
decree and the judge, as my colleague here has said, is not
being asked to rule on the validity of the settlement under
Miscellaneous Receipts Act, the Antideficiency Act or the
Appropriations Clause of the Constitution.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Colorado, Mr.
Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. I do appreciate your
holding this hearing today. It is interesting to be able to
hear it.
I would like to start with Professor Min. Do you believe,
in your estimation, that people, through some of the alleged
actions of the banks, did suffer personal damage?
Mr. Min. If you are talking about homeowners and average
Americans, sure. Absolutely.
Mr. Tipton. They did. So, we have had abundant testimony
across a variety of our whole committee, subcommittees, going
through that the important thing is standing up for the
individuals to make sure that they have their concerns
addressed, that they are going to actually be helped.
So, if we are taking money to rebuild a bridge, maybe to be
able to rebuild an equestrian center to go through, is that
going to be helping people in those personal instances?
Mr. Min. I think that, as Ambassador Gray said, there is a
requirement that there is a nexus between the proposed
settlement terms and the alleged misconduct. So, that is one
answer.
I think also that I would point out that private parties
are a little different than the government. The Federal
Government is not suing on behalf of individuals. We have
private causes of action for that.
The Federal Government's duty is to try to maintain civil
penalties on behalf of the Federal Government as a whole, and
the country as a whole and that includes, primarily, the
deterrence affects and general compensation for Americans,
rather than to any particular interdictums.
Mr. Tipton. And general compensation for Americans needs to
be focused actually on what the injury was.
Mr. Min. With a nexus, exactly.
Mr. Tipton. Right. So, it probably disturbs you that there
was a report in The Wall Street Journal in terms of
disbursement of those funds where they were being directed for
just exactly what I spoke to.
New York Governor Cuomo was rebuilding an equestrian
center, and rebuilding a bridge. How is that beneficial to
people in that general class to be able to redress those
grievances?
Mr. Min. Right. So I think Governor Cuomo was probably
using New York funds, rather than the provisions, the
charitable payment provisions that issued here.
Mr. Tipton. According to The Wall Street Journal, these
were resources that were coming in off of the--
Mr. Min. Bank settlements.
Mr. Tipton. They were coming in.
Mr. Min. Right, but they would have come in from, a portion
allotted specifically to the State of New York, right?
Mr. Tipton. So, effectively, with fungibility of money,
this--
Mr. Min. I am not an expert in New York law, so I don't
know what New York law allows or does not allow Governor Cuomo
to do. I do find that problematic but I think it is outside the
scope of the particular provisions of that issue.
Mr. Tipton. Dr. Larkin, would you like to maybe comment on
this?
Mr. Larkin. Yes, money is fungible. So, when you give money
to a particular organization, what you are doing is freeing up
other funds for other purposes. So, even if you give somebody
$10 and they use it for the purpose that you have specified,
that means they can use dollars they get from elsewhere for a
different purpose.
And that is why Congress needs to examine critically who
gets money, because it is fungible. The Justice Department
would take the position, under Title VI and Title IX, that if
you get any money, you are now governed entirely by what Title
VI and Title IX provide, because they know that money is
fungible.
And if money is fungible, then you have to be concerned
about supplementing the income of people who may use it in ways
that are improper. You can give money to the Red Cross, but
that frees up money they could otherwise spend. If they use it
for an improper purpose, in essence you have enabled them to do
that.
That is why Congress needs to look into this matter, decide
who gets money, and then have audits done after the fact.
Mr. Tipton. Would you tend to share the opinion, I think
there are a number of us who want to be able to reinforce
Article I, to make sure that Congress is actually controlling
those purse strings, no matter where those resources come from,
be it a fine, a fee coming in, the only reason any of these
entities exist is because of an act of Congress. So, it is very
appropriate for Congress to be able to direct how every one of
those dollars is spent. Would you agree with that?
Mr. Larkin. Absolutely, and one of the ways it can be spent
is to recompense the people who are actually hurt. In criminal
law, there are several acts that are designed to address the
needs of victims of crime. You could do the same thing here,
whether it is a housing matter or generally for a non-criminal
injury, but that is a program Congress can design.
But that is a program Congress can manage and that is a
program that will have to have some oversight by an Inspector
General or someone else to make sure the funds are properly
used.
Yes, you can get money to victims. And yes, they should get
money, but it should be done in the proper manner to make sure
that the taxpayers' dollars are being wisely used.
Mr. Tipton. Great. Thank you. Mr. Chairman, my time has
about expired.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the ranking member of the full
Financial Services Committee, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much.
Professor Min, the Republicans have claimed that they don't
oppose the settlements. Instead, they claim that they merely
want the relief to go directly to homeowners. However, in
February of this year the Republicans brought to the Floor H.R.
766 which would gut the Financial Institutions Reform,
Recovery, and Enforcement Act, commonly referred to as FIRREA,
a savings and loan error law that gave law enforcement the
power to prosecute financial crime. As you know, the RMBS
settlements were brought by the Department of Justice under
FIRREA. H.R. 766 would change the Act to say that only crimes
perpetrated against banks could be prosecuted under FIRREA, not
crimes perpetrated by a bank.
The bill likewise severely limits the discovery power under
FIRREA requiring the attorney general or the deputy attorney
general to directly sign off on subpoenas. This eliminates 98
percent of the individuals in law enforcement who currently
have subpoena power.
What does that suggest to you, Mr. Min, about this claim
that they want the money to go directly to victims?
Mr. Min. I think that if you were to eliminate the
penalties in FIRREA against banks that were--that had engaged
in wrongful conduct coupled with the Goodlatte amendment or
bill you would end up with a situation in which no victims
could be compensated. And that seems very problematic.
Ms. Waters. Thank you.
Does anyone on the panel today believe that there was fraud
committed by financial institutions? I can't see your hands.
Does anyone on the panel believe that predatory lending by
financial institutions caused people to lose their homes and
diminish their quality of life?
Does anybody on the panel believe that they should be
prosecuted or taken to task, or made to settle in some way for
the acts they committed that caused that subprime meltdown in
2008?
And does anyone believe that the groups that are organized
and have the reputation for, and do the daily work of helping
people to have a better quality of life because they are
advocating for changes, they are advocating for justice, they
are working on housing opportunities, they are working on
making sure that they make government work for everybody? Do
you believe that these people have any credibility at all? Any
credibility?
Mr. Gray. If I could respond, just make a--everything you
say has merit. That is about the relevance of these potential
recipients of the money. But that is a choice you should be
making, not the prosecutor.
And I just would add that, although it is not part of your
jurisdiction, the Environmental Protection Agency, which
everyone knows, I think, is no shrinking violet and makes
active use of third-party settlements, does not include cash in
any kind of third-party settlement because, and this is their
words, use of cash could easily be construed as a diversion
from the Treasury of penalties due and owing the government.
What you say, they may very well be a better way. There is
a better way to compensate victims of the original crisis, but
that is not what happened. And that is for you--
Ms. Waters. Well, let me--
Mr. Gray. --to say.
Ms. Waters. If I may--
Mr. Gray. That is for you to decide.
Ms. Waters. Reclaiming my time. Let me just say this. I
would believe some of my colleagues on the opposite side of the
aisle if they have not demonstrated such a dislike for activist
groups. They don't like these grassroots groups that tend to
speak for and act on behalf of poor people, and people who
don't have the resources to go to court.
This is consistent. And, yes, ACORN was mentioned because
they set ACORN up, the same people who say, ACORN came to my
office and tried to set me up. And these are the people that
they like because they want to prove in some--they want to put
them out of business. That is what they want.
But I want to tell you something. Some of us who have been
advocating for poor people and for the least of these all of
our lives because we see every day what happens to poor people
without resources.
We see every day how people are taken advantage of, whether
it is the payday lenders or whether it is financial
institutions with exotic products that literally encourage
people to sign on the dotted line, knowing that they cannot
afford the mortgage that they are getting them to sign.
These were the people who didn't vet. These were the people
who had no documentation loans, on, and on, and on. And they
should be compensated. And we trust the attorney general to do
this work. And if the courts have to sign off on it, fine. Sign
off on it. That is what they did.
And the system is working. And just because you don't like
the activist groups does not mean that you come in here and
talk about somehow we should change the system, and people who
don't like these activist groups should be responsible for
deciding what happens to the victims.
Thank you.
Chairman Duffy. Does the gentlelady--
Ms. Waters. I yield back the balance of my time if there is
any left.
Chairman Duffy. There is no time left to the ranking
member. I trust you more than the DOJ, Ms. Waters.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
And thank you all for being here.
I want to address my first questions to Dr. Larkin, if I
could. In general, if the congressional appropriations process
is being subverted, which I believe flies in the face of
Article I of the Constitution, does it matter what groups the
RMBS settlement money is going to? Isn't this a slippery slope?
Mr. Larkin. None whatsoever. It is as big a problem whether
the money goes out to a conservative or a liberal group, and
whether the disbursement is made by a Republican or a
Democratic appointee. It doesn't matter. The process is one
that is being corrupted.
Mr. Hultgren. I think that is the point that the previous
questioner just completely missed, is it doesn't matter the
groups that it is going to; this is a process that is broken
and a violation really of responsibility.
Ambassador Gray, I think you said it so well. This should
be us. It is our responsibility to do this. And why are we
abdicating our responsibility, giving it over, and whoever the
group is, furthering really, I would say, a dis-justice and a
failure to do our work.
Following up, Dr. Larkin, do you have any concerns with
political appointees at DOJ or HUD being the ones determining
which groups should get the money? And I guess, following up, I
assume I know the answer. But with what Ambassador Gray said,
don't you think Congress should be the one that makes these
decisions?
Mr. Larkin. Absolutely. The Appropriations Clause is quite
clear. And the Supreme Court has said that on several
occasions. It is your responsibility. It is not the Justice
Department's responsibility.
Mr. Hultgren. Yes. And it doesn't matter, I would assume
you would agree with this, that if this happened under a
Republican Administration, you would still say the same thing,
that if it is still a misuse of authority that should be
Congress' authority. We are giving it to somebody else.
Would you agree with that? It doesn't matter what the
Administration is, it doesn't matter what the group is, this is
a broken process.
Mr. Larkin. Absolutely, and on either the last or the
penultimate page of my written statement, I criticized a
Republican U.S. attorney, the current Governor of New Jersey,
for doing exactly that.
Mr. Hultgren. Thank you. And I appreciate that fairness,
and recognition that this is bigger than a couple of groups or
one Administration.
Ambassador Gray, if I could maybe address a couple of
questions to you. First, thank you for your service. Thank you
for being here. But I wonder, are the RMBS settlements
structured to do the most benefit to victims of the alleged
misconduct, do you believe?
Mr. Gray. I do not believe that they are directed at the
people who suffered the most, no.
Mr. Hultgren. What provisions in the settlements detract
from benefiting the victims, do you think?
Mr. Gray. I haven't read every single word of every single
settlement agreement, but I think they basically ignore the
victims of this. I would agree with the terminology,
``predatory lending.'' There was a lot of predatory lending.
Unfortunately, I think a lot of it was, or much of it was
initiated by the government itself, not by the banks, but
however you look at the cause, the victims have not been really
attended to.
Mr. Hultgren. Let me ask your opinion on this, Ambassador.
Why do you think DOJ structured the settlements in a way that
does not provide the most benefit for those who are harmed, in
your opinion?
Mr. Gray. I think--I don't know how politically incorrect
to be in this, but it was easier that way. The government got
multibillion dollar numbers in the front pages of the papers,
or at least the business section. And so, it looked very good
for the prosecution, but I don't think it looked very good for
the process for two reasons.
One, the victims aren't themselves really targeted for
relief, and number two, and this goes back to the S&L crises of
Bush 41, I would like to have seen, I mean, he insisted as a
condition of any bailout that there be prosecutions that
actually resulted in jail sentences for people who had really
violated the criminal law.
And we don't really see that now. And that is, I think, a
failing. Although, I don't want to see anyone go to jail, I do
think prosecutions were appropriate.
Mr. Hultgren. Yes. Thanks, Ambassador.
I just have a few seconds left. Professor Rosenkranz, are
there provisions in these settlements that you would describe
as unprecedented?
Mr. Rosenkranz. Certainly, the scale of these third-party
payments is unprecedented. There are scattered historical
examples, but the sheer number of dollars is kind of startling
in these cases.
Mr. Hultgren. As far as you are concerned, that had never
happened before?
Mr. Rosenkranz. Certainly at this scale, I don't think so.
Mr. Hultgren. Okay. Quickly, also Professor Rosenkranz,
what should Congress do in response to the Administration
usurping our appropriating authority?
Mr. Rosenkranz. That is a great question. The President has
always been tempted to try to evade the Appropriations Clause,
and Congress has often had to defend its appropriations
prerogative.
So, these landmark statutes like the Antideficiency Act and
the Miscellaneous Receipts Act are hugely important and
appropriate. And if the Executive Branch finds a new novel way
to evade this constitutional provision, you should certainly
consider responding with another act of Congress to forbid this
practice.
Mr. Hultgren. Thank you all.
My time has expired. I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Mr. Gray, could you define the term ``slush
fund?''
Mr. Gray. You are asking me to define the term--
Mr. Ellison. The term slush fund.
Mr. Gray. Slush fund. I don't think I use that term.
Mr. Ellison. I just want to know if you can define that
term.
Mr. Gray. It is a fund that the dispensers of the money
have complete discretion over how it is spent, under no
controls or guidance from any other authority.
Mr. Ellison. Is my bank account a slush fund to me?
Mr. Gray. Excuse me?
Mr. Ellison. Is my bank account a slush fund to me?
Mr. Gray. No.
Mr. Ellison. Because I have--
Mr. Gray. You own--
Mr. Ellison. --complete discretion over how it is spent.
Mr. Gray. You own the money.
Mr. Ellison. Right.
Mr. Gray. But the trouble is these settlements--
Mr. Ellison. Well, let me tell you--
Mr. Gray. --who also own the money--
Mr. Ellison. I reclaim my time. A slush fund is defined as
something used for illicit or corrupt political purposes.
And I would just like to know, Professor Min, under the
definition of the fund being used for illicit or corrupt
purposes, I would just like somebody to help me understand how
the funds in this case could be described as illicit or corrupt
when the money is allocated to housing counseling groups like
Catholic Charities USA, the United Way, the National Council of
La Raza, and the Urban League, to help homeowners who were
harmed during the financial crisis.
How could that be a slush fund?
Mr. Min. I have not heard any persuasive evidence that
there is any illicit affect to this. In fact, I would argue
that these particular settlements were crafted the opposite
way.
When we look at actual evidence as opposed to opinion or
hyperbole what we see is that housing counseling, foreclosure
prevention efforts of the types that these consumer provisions
were designed to do, are the most effective way to help
aggrieved and struggling homeowners. That is a fact, not an
opinion.
Mr. Ellison. And going back to you, Mr. Gray, I could have
sworn I heard you say that predatory lending did occur, but it
was done by the government, not the banks. I am not aware of
the government engaging in retail mortgage lending. Are you?
Mr. Gray. Maybe I don't understand anything, but I think
Fannie Mae and Freddie Mac were at the forefront of making--
Mr. Ellison. Freddie Mac and Fannie Mae do not go to home
mortgage buyers, and offer terms like, I don't know, you know,
prepay penalty, 228, 327 balloon mortgages, yield spread
premium. These are the hallmarks of a predatory loan.
Professor Min, are you aware--
Mr. Gray. Can I--
Mr. Ellison. No. Excuse me. I reclaim my time. I gave you a
chance to answer.
But, Professor Min, are you aware of the government
engaging in retail mortgage lending in the way that a
commercial bank, or nonbank lender?
Mr. Min. Absolutely not. In fact, that is, again, a myth,
an opinion versus facts. The facts are the Fannie and Freddie
did not originate, or seek to have originated any of those
types of loans. Those are originated for Wall Street
securitization, which is why all of these particular fraudulent
aspects were attributable to Wall Street RMBS, and these
settlements with private institutions.
Mr. Ellison. Okay.
I have another question, Mr. Gray. Could you explain to me,
sir, now you just said that there were victims of predatory
lending, I believe that was your testimony today, and if there
were settlements why did the banks settle if they had done
nothing wrong, or if all the predatory lending was by the
government?
Why did they settle? They have lawyers. They have a lot of
lawyers. They have well-paid lawyers. Why did they settle at
all? Why didn't they just say, we are going to court, and fight
it out, and we are not paying a thing? Why did they settle?
I don't know. Mr. Min, Professor Min, do you have an
opinion? Because it seems like Mr. Gray doesn't have an
opinion.
Mr. Min. Clearly, I think they were misrepresentations and
warranties that were not satisfied with the products that they
sold and marketed.
Mr. Ellison. So, they settled a case because they had
liability exposure?
Mr. Min. Almost certainly.
Mr. Ellison. Yes. That is why people settle. In 16 years of
me practicing law, I don't know people who settle cases if they
don't think they are going to lose at trial, or at least there
is some chance of it.
So let me just ask you this. Could you talk, Professor Min,
about how housing counseling is actually something that helps
consumers, and that the settlements that help fund this
activity actually makes for clearer better markets and restores
some honesty to this mortgage market?
Mr. Min. Right. When you think about the abundance of
information out there, the average homeowner, particularly the
one who is struggling, doesn't necessarily have a good idea of
their options, how to navigate through the foreclosure
prevention process, how to get a loan refinanced, maybe how to
get a principal reduction, or a qualification for one of the
government programs or other programs available to them.
All of these factors can help them along with some legal
guidance navigate that very, very complex, difficult process. I
am sure those of us who have bought homes know how complex that
mortgage agreement is, how that home purchase agreement, title
insurance, all of that is very, very complex.
And you can imagine that for folks who are really
struggling with a lot of things that is a very, very difficult
terrain to navigate.
Mr. Ellison. I am out of time. Thank you.
I yield back, and I thank all the witnesses today.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman.
Let me start with where Mr. Ellison somewhat left off. I
want to just highlight, emphasize, underline the notion that
JPMorgan Chase settled for $13 billion, $13 billion. JPMorgan
Chase has a battery of lawyers. If there were questions with
reference to constitutionality, JPMorgan Chase has lawyers who
can litigate those questions.
They were not litigated. And no court has concluded that
any one of these settlements is invalid, unconstitutional,
illegal, unethical, not one court. Bank of America, $17
billion. Citigroup, $7 billion. Goldman Sachs, $5 billion.
You would think that at some point, these business folks
would say, hey, guys, quit dragging us into this. Don't keep
bringing our names before the American public with reference to
these things.
You would think that at some point they would want to see
this behind them, unless they are behind this. Who knows?
Let us go now to a claim that was made with reference to
some of this being unethical. All lawyers are aware that if
there is a grievance with reference to ethics, you can take it
to an ethics commission.
They are across the length and breadth of this country.
Every State has an ethics commission. If there were unethical
questions, they could be addressed to an ethics commission, but
we now bring them to Congress. We are going to litigate the
ethics of it when there are commissions established to
investigate, acquire evidence, and make decisions.
Next point. Homeowners need help. That is what these
settlements do. They accord homeowners help. And they need
help. If you have never dealt with one of these circumstances,
you don't understand that a homeowner walks in with just a box
of paperwork. They don't know what they have in the box. All
they know is that they need help.
And when they go into these legal aid societies, to these
NGOs, they have to sort through and sift through. The homeowner
doesn't know that there is a HAMP program, a HARP program. They
don't understand that there is a deed in lieu that they might
engage with and acquire.
They don't understand that there are short sales. They
don't understand these things. That is why these programs are
so beneficial to prevent foreclosure. So the money is going to
help homeowners, to help them keep their homes, and stay in
their homes.
This really is an effort, it seems to me, to legitimize a
process that would prevent homeowners from getting the
opportunity to stay in their homes. And I regret that.
Now, finally, on a couple more points quickly, I am
concerned about the notion that the banks aren't here. If we
really want records from the banks, why don't we call the banks
in? Let them testify. Maybe the banks are here and I don't know
it.
Is anybody here representing a bank today? If so, raise
your hand.
You are? Which bank are you representing, sir?
Mr. Gray. I think you are familiar with it. It is a
gigantic bank of $270 million in Big Springs, Texas.
Mr. Green. Okay. Well, kindly give us the name today if you
would.
Mr. Gray. Give--
Mr. Green. The name of the bank.
Mr. Gray. The National Bank of Big Springs, Texas.
Mr. Green. The National Bank of Big Springs, Texas.
Mr. Gray. Jim Purcell, I think we met when he testified--
Mr. Green. Okay.
Mr. Gray. --before this committee--
Mr. Green. All right.
Mr. Gray. --a year or 2 ago.
Mr. Green. Well, your honor, I appreciate you sharing that
with me.
But we have the opportunity to require JPMorgan Chase, Bank
of America, Citigroup, and Goldman Sachs to come before the
committee and bring the records related to the settlement. You
don't have to require the Justice Department to do it. If you
say they won't do it, then I believe they have given you what
they can. But you can bring the banks in.
Why are we harping on the Justice Department when the banks
are available to be brought in and they can give it to us? Why
not? There is something about this that the American public
doesn't like. And I am telling you right now, the American
public is fed up with this.
They want to see people prosecuted. Here we are finding
clever ways to keep homeowners from staying in their homes when
we ought to be finding ways to put people in jail who
participated in this fraud, that have never been properly
addressed, and, yes, we could appropriate money to do it if we
wanted to, and we could investigate it if we wanted to.
It is time to satiate the desires of the American public.
I yield back.
Chairman Duffy. The gentleman yields back.
I want to thank our witnesses for their testimony today and
a great conversation about what the appropriate role is through
Congress or through bank settlements, where we get information
whether it is from banks or from the government itself.
As the panel might realize, the voting bells have just
rung. We have 10 minutes to get to votes. I was hoping to go to
a second round with the panel, but you can see the room has
cleared because everyone has gone to the Floor to vote.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
I ask the witnesses to please respond as promptly as
possible. I, again, want to thank you for your insight and
testimony today. And with that, this hearing is now adjourned.
Thank you.
[Whereupon, at 10:39 a.m., the hearing was adjourned.]
A P P E N D I X
May 19, 2016
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