WASHINGTON — Sen. Elizabeth Warren turned up the heat Thursday at a Senate Banking Committee hearing on the implementation of Dodd-Frank, demanding to know why regulators are not tougher in pursuing banks in court.
The hearing was a chance for several members to question seven top regulators on a range of financial services issues, including the Volcker Rule, qualified residential mortgages, and Basel III.
But Warren's exchange with agency officials was one of the tensest, with the freshman senator raising the prospect that many banks can settle charges of wrongdoing but pay a fine that is well below the profits they reaped from their improper actions. She suggested regulators were afraid to take banks to court, giving them leverage in settlement negotiations.
"I know there have been some landmark settlements, but we face some very special issues with big financial institutions," Warren said. "If they can break the law and drag in billions in profits, and then turn around and settle, paying out of those profits, they don't have much incentive to follow the law."
The issue of whether some banks are "too big to jail" has gained increasing attention in the wake of several large settlements with mortgage servicers and banks over the past several years for crimes committed before, during and after the financial crisis.
"There are district attorneys and U.S. attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds, and taking them to trial in order to make an example, as they put it," said Warren. "I'm really concerned that 'too big to fail' has become 'too big for trial.' That just seems wrong to me."
Her comments brought an unusual smattering of applause from the audience at the hearing.
For their part, regulators argued they don't usually need to take big banks to court. Comptroller of the Currency Thomas Curry said that the agency takes enforcement actions to stop banks from engaging in improper practices.
"We have not had to do it as a practical matter to achieve our supervisory goals," Curry said.
The agencies also have some limits in what kind of court cases they can pursue. The Federal Reserve, Federal Deposit Insurance Corp. and OCC must refer all criminal matters to the Department of Justice, and can only pursue civil cases against institutions.
The Warren questions were not the only awkward moment for Curry, however.
Sen. Robert Menendez, D-N.J., asked Curry about the OCC's recent $9.3 billion settlement with mortgage servicers, warning that the deal could disenfranchise borrowers who would rather have their file reviewed than take their cut of the larger deal. The OCC ordered banks to top the independent foreclosure reviews because they were taking too long, and settled with the institutions instead.
Several lawmakers, including Warren and Rep. Maxine Waters, have written letters to regulators in recent weeks asking for details about why a settlement was made and the implications for affected homeowners. ()
"Basically what was done here is that we replaced the process with a… settlement that won't really determine which borrowers were [harmed] or not," Menendez said. "And despite keeping their legal rights to sue the banks, most borrowers don't have the financial means to litigate their cases if they feel that the compensation was inadequate."
Menendez suggested borrowers should be allowed to refuse a check from the settlement in favor of a full review of their files.
But Curry said that forgoing a check wasn't an option under the settlement, noting that "this was the impetus for having the $5.7 billion worth of assistance for foreclosure relief, as part of the settlement."
"We've made it clear that those funds should be prioritized, and that they should be directed towards the [affected] population, and towards those individuals with the greatest risk of foreclosure," Curry said. "We want people to stay in their homes."
Regulators also faced questions about when they will complete several key rules under the Dodd-Frank Act.
Fed Gov. Dan Tarullo said regulators are hopeful they can complete most of them by yearend, but noted that some final regulations are likely to be very different from their initial proposals. He cited the Volcker Rule to ban proprietary trading and final Basel III regulations, saying lawmakers should expect "a good bit of change."
Both proposals were criticized as too complex, a concern Tarullo said regulators will take into account.
"I think it's pretty clear that both proposals lean too far in the direction of complexity," Tarullo said.
Tarullo was also vocal about how his views on some institutions being "too big to fail" have evolved over time, in response to a question from Sen. Sherrod Brown, D-Ohio, who has been focused on the issue for several years. Brown noted that in 2009 Tarullo had rejected size limits, but suggested last year that the size of banks might be capped as it relates to the country's GDP.
"You're absolutely right, Senator Brown, that my observation back in 2009 was that people would say something like, 'Break up the banks,'" Tarullo said. "But there wasn't a plan behind it that allowed people to make a judgment as to whether it would address the kind of problems in 'too big to fail,' and others in the crisis, and what costs associated with it would be."
He said Brown's focus on the issue has been helpful, including drawing attention to "short-term, non-deposit" funding that is subject to potential runs.
"That's the one I think we should be debating in the context of 'too big to fail, and in the context of our financial system more generally," Tarullo said.
But regulators were arguably less candid on other issues, including in response to questions by Sen. Bob Corker, R-Tenn., about whether they could name any institution that would pose a systemic risk if it failed right now/
"It's your job," Corker told Treasury Undersecretary for Domestic Finance Mary Miller.
She responded that regulators are working to ensure institutions do not pose a risk to the system.
"I believe that all the work that we've done and continue to do is designed to prevent that effect and to make sure that we have in place rules and regulations that keep firms from engaging in activities or building their business models in ways that are going to transmit that type of financial distress," Miller said in response.
Tarullo also responded with a more general answer, noting that "it's a journey and not a single point where you can say we've addressed the 'too big to fail' issue."
Speaking on another issue, Chairman Tim Johnson, D-S.D., asked regulators whether there was any legal reason the upcoming qualified residential mortgage rule couldn't be defined the same as the recently finalized qualified mortgage rule issued by the Consumer Financial Protection Bureau.
That issue has been raised in recent weeks by industry representatives concerned that differences in the two rules, once QRM is finalized, could have a negative impact on the market.
Several regulators noted that there's no statutory reason the two rules couldn't be coordinated, with Tarullo adding that there is some reason to do so.
"Given the state of the mortgage market right now … I think we want to be careful here about the incremental rule-making that we're doing not beginning to constrict credit to middle and lower-middle class people, who might be priced out of the housing market, if there's too much in the way of duplicate or multiple kinds of requirements at the less-than highly creditworthy end," said Tarullo. "So I think it's definitely the case that on the table should be consideration of making QRM more or less congruent with QM."
Johnson also announced the release of the Government Accountability Office study on the losses due to the financial crisis and the impacts of the Dodd-Frank law.
"The GAO concluded that while the cost, precise cost of this crisis is difficult to calculate, the total damage to the economy may be as high as $13 trillion. I say again, $13 trillion — with a 'T' — dollars," he said. "That should urge you to consider the benefits of avoiding another costly, devastating crisis as you continue implementing Wall Street reform."