Transcripts For CSPAN3 Key Capitol Hill Hearings 20240622

The hotline. Could you give us a sense, director, a ballpark figure is fine, about how many of those complaints were resolved to the Consumers Satisfaction . And how much consumers have recovered financially through this process. Yeah. And ill say the arc of Consumer Complaints continues to increase in terms of volume. I believe thats a function of theres still a lot of lack of visibility. People dont necessarily know what the cfpb is and will know over time, i hope. I hope theyll see that were providing value to them. Thats what we aim to do. I think we had Something Like 700 and some credit card complaints in our first month, and were up to about 25,000 complaints per month across the entire range of Financial Services. What happens then is we give the consumer a chance to tell us whether they were satisfied with the resolution of their complaint or, if not, what they continue to be concerned about. And we then prioritize issues for further investigation or perhaps enforcement action or supervisory activity. The institutions know that. I think that pushes them to be more thoughtful about how they try to resolve those complaints in the first instance. And its i dont know the exact numbers on this, but it may be 20 of consumers continue to feel they have a dispute once weve worked through our process. Then we have, as i say, further sthaeps we can take. In terms of how much resolution theres been for consumers, its been many millions of dollars. Its hard to know exactly for sure. They dont always tell us how the matter was resolved although many come back to our tell your storyline and tell us often with real gratitude that they did get a resolution and couldnt get a resolution for months and months and months but after speaking to us and us working it they got one promptly. And that really thrills us whether we hear that. But the other thing is theres a lot of nonmonetary relief people get from those complaints. Getting something fixed on their Credit Report can loom large hard to quantify. Although i take it sdrnlcertainly does have financial ramifications or get a mortgage, could be worth thousands of dollars. Debt collection issues are a constant source of irritation for consumers. The wrong debt or theyre not the right person or whatever and cant get people to stop calling their home. I dont know how to put a price on. That but getting 12 calls a day or calls in the workplace and thats not the right person or whatever it is us being able to stop that looms large for people. And another point you made to me is its sometimes easier to always easier to quantify the amount of relief we give back to people for thing that happen to them before today. And we cant easily quantify the benefit to them of things that will not happen to them tomorrow because of changes made today. You know those go on into the future and accumulate extensively over time. We dont have any way of putting a price tag on that. I got to think its very significant. Great. Youve created this website. Were getting roughly about 25,000 people a month who come on and rising. And rising website or phone. Or phone. And get resolution. We say looks like roughly about 80 get some kind of resolution here. So the agency also just recently went live with this Consumer Complaint data base. And here you have a collection of thousands of narratives from real consumers about problems theyre having with Financial Products or with companies. And its all sortable now on line. So its possible to go on line and see it by product by date by where the consumer lives. For example just this morning i went to the data base and looked for all the complaints from massachusetts about mortgages. So its a powerful way to see what kinds of issues are cropping up in the communities that all of us represent. Now i know its only been on line for just a few weeks, but i wondered if you could describe how you think this will help improve the market for Financial Products. So the data base has actually been on line longer, although it was really broken into generic categories which i think were less insightful for people than hearing in the consumers own words what the problem was as they saw it. I think thats incredibly important. Weve described the narrative as the heart and soul of the complaint. For me to make a complaint and then have continue categorized as Debt Collection wrong amount, one of a number of complaint, and thats all the more you know about it its not nearly as insightful as to hear exactly what happened to me, the calls i got at home, the effect on my life. Its just tangible, its real. Its the difference between statistics and actual stories. And to me, thats very significant. The data base i think is really causing institutions to have to compete on Customer Service which is a good thing. And the good ones are competing very well on Customer Service, and others are having to improve. Thats a kind of pressure that i think is a positive pressure. Ill also mention that there are many members of congress, many members of this committee who are referring complaints over to us when they come to their office. We encourage you to do that. Were supposedly the experts, and were happy to work those complaints. Then you can see and keep track of how they go. We want every american who has a problem to potentially come to us and see if we can get it resolved. We cant always, but were always going to try. I appreciate that. I see this as a prime example of how government can take small steps that will have a very positive impact on the market. Theres now a bit more accountability for companies that mistreat or just plain cheat their customers. On the other hand theres some public acknowledgment for the companies who treat their customers well and resolve their complaints quickly. Mr. Chairman, if i can, i want to slip in one little followup. Go ahead. To the point that senator brown made earlier. Thats about forced arbitration clauses. As senator brown highlighted, the report that the cfpb recently released contains damning find beings how forced arbitration clauses fundamentally tilt the process against consumers and keep them from effectively fighting back even when theyve been cheated. Now its clear that the biggest banks and some of their republican friends in the house of representatives see the writing on the wall. That is the rule is coming. So theyre pushing legislation that would force the cfpb to redo the report before you issue any new rules. I think this is a stall tactic, plain and simple. The report took three years and 728 pages to complete. It carefully documents a wide range of problems. It is thorough and extensive. I just want to ask you briefly because the chairman is indulging, and im over time here. Can we get on the record the steps the agency took to ensure the study was complete and accurate including soliciting and considering comments from the Financial Services industry . Yeah, sure. First of all we did a request for information at the outset to ask people how we should go about doing the study. We broadly existed peoples thoughts and heard a lot from industry and different kinds of markets and also from consumer groups and others. We erred toward the side of being comprehensive about what we should do in the study and trying to do as much as we could. We found that in many areas this was breaking new ground. There wasnt necessarily data easily accumulated on that. We did go to the american arbitration association. We were able too get significant data about the process which shed light on that that people had not had before. We looked at a number of different ways of try to get judicial resolutions of similar matters. We were helped in part because there were class actions involving certain institutions who at one point had stopped doing arbitration agreement so you could see what the before and after was. Did it actually save consumers money for them to have this enforced arbitration process, and we were able to map that and discern that. We looked at Enforcement Actions as another means of affecting the marketplace, and people talked about the Consumer Complaint process as a new element here. It was a very comprehensive report. I honestly dont think we could of think of a single thing we could have done that we didnt do. Were always happy to hear more. Weve had tremendous input all along. And now since weve given round tables and other opportunities to digest the report, talk to us about it. Thats an ongoing process. As we embark on a rulemaking process, there will be Small Business review panels. We found that useful. And there will be notice and comment process on that. Everybody will have their say. We will listen to it all digest it as best we can and do what were supposed to as Congress Told us to do, act in the public interest, consistent with the results of that report to determine what to do about this. Thank you. And thank you, mr. Chairman for your indulgence. I appreciate it, its an important issue. Senator rounds . Thank you mr. Chairman. Director, earlier in several of the other members of the panel have requested information concerning the collection of data. Probably the reason why its really an item of real interest is because of opm and the loss of the data there. A lot of our employees have come in and have been concerned about the loss of their personal data. I think whether we talk about the collection process that you use and that you utilize, collect the data you that want to do Market Analysis with i think the question comes in really are the organizations that are required to submit data to you, are they submitting from them through perhaps a third party that scrubs it or are they providing data to you thats been scrubbed by the organization itself . Are you aware of how the data gets scrubbed to begin with . Im generally aware and we have people carefully focussed on that. And it depends on the Data Collection. Some is negotiating with industry. They have all this data. They know everything youre doing. They know everything im doing. They use it to market to us. I dont have myself objection to that. Some privacy folks do. Can be positive, can be negative. There are repositories of data that are much more troublesome than what we have. When we can get data on a sampling basis and for certain fields and not other fields it comes in that form. The credit card data base i believe is vetted through experion, one of the leading Credit Reporting companies that scrubs the data before it comes to us and removes certain fields. Were trying very hard to make sure our employees do not have access to personally identifiable information. That only causes me trouble in our work. Let me say, the opm breaches, they affect my employees as well as your employees. Were very sensitive to that. Its something were dealing with to make sure our employees know the rights and whats available, and im sure you are too. The notion we would contribute is not something what it did, though it brought to light the fact whether we collect data that we have an additional obligation to protect that data. Thats right. What i was curious about was is whether you actually received the data and scrubbed it, or if it was delivered by a third party who would have the responsibility. It sound like what you indicated is in the case of the larger bulk data amounts, its being scrubbed by a third party before it gets to you. A Credit Reporting agency that has access to all the data anyway typically. Id be happy to have our folks come and present to you on each individual thing just to i want you to have comfort on this. I think were trying to be careful about it. I want you to know were trying to be very careful about it. I read and see the stories about the nsa. Im an american citizen. I have the same concerns that i think you do about that. I think that thats distinct from what were talking about here. Im happy to have our folks come and spend time giving and if you remain concerned, to know your concerns i think thats a good way to leave it. And we will request that. Thank you. Let me move on. Rural appraisals. Im from south dakota. Weve had challenges im not sure how deep youve gotten into this personally. Rural appraisals have been tough to get. Im not sure how they are, a lot of the more urban areas. Rural south dakota trying to get an appraisal has been very difficult. Two things. One, i know that you tried to set it up so that we could identify rural locations, and im asking is there another way in which we can get a third or fourth look at it . Weve got communities in western south dakota that are clearly rural in nature. Theyre not identified that way. Is there a process where we can gets the challenge set up to get them placed in the appropriate category . Whether we first opened our doors, we had a number of mortgage rules we were required to do by law. One had to do with appraisals. Another was an interagency rule with the Federal Reserve on appraisals. Ive been concerned as to whether we got that right. One of the big issues as i5 im familiar with it in rural areas theres fewer comparables. It is more difficult. Appraisers might have to come from a greater distance. Theyre not as accessible. Just barriers to being able to make rural transactions. I think weve been working at trying to alleviate that. I would encourage you to press on that. Youre pressing with me here so ill be taking it back. Well talk to the Federal Reserve about it. If theres more relief on that because its a peculiar circumstance of the few and far between areas. We want people to be able to get mortgages as they can in the dense areas i think its two different things. One, the appraisals themselves and whats expected of them and comps with regard to rural areas. Which in many cases dont exist. And along with it i think youre seeing legislation proposed now that would actually create the ability for some of the banks who are literally holding those mortgage because they cant qualify in the secondary market. Theyre holding them his. Yesterday, wed want to make sure those are considered an appropriate asset for banks that end up doing that. If i could, mr. Chairman, ive got one more question. I know when you work through the qualified or the consolidated statements and the goal is to simplify. It last year as i was moving around south dakota, one of my Community Bankers said, look, i got a copy of the most recent release or qualification statement. He says, the new disclosure statement as proposed is 164 pages. That was the pdf. Now the only reason i bring this up is if thats the case and hes accurate in his definition and his hes not, but yeah. Look, weve got to have disclosures that people will read. Yeah. Look, that is not correct. What he was talking about is the regulation, the rule that actually implemented these forms is lengthy. I wish it werent, but it is lengthy. The actual forms themselves theyre not 164 pages. I mean, that would be ridiculous. Theyre shorter than they were before when you had the two forms. Theyre not as short as my friend over here, senator warren, really wanted it to be one page at the application stage, one page at the closing stage. We werent able to achieve that. I think its five page and three pages. We might find something we agree on. Look, if congress legislates, congress legislates. Were at five and three pages. T the key information. To me, its the executive summary of the transaction. Were looking to do electronic closings and push the industry that direction which they want to go anyway so a lot of the paper gets taken off and you can focus on the key form here. Weve tested those forms with consumers, and they have found them to be much easier and more accessible and understandable. Thats key for us. Whether its two or three pages, you know, might matter in some sense in the abstract. These are not lengthy forms. Theyre meant to be key summarized forms. Thats what were doing. Again, on the rural and underserved, id be glad to hear more from you. I heard a lot from senator johnson when he was chair of this committee about south dakota and hear from senator tester and others about western states that are the populations more spread out. We have been working to give more latitude toward Community Banks and Credit Unions to portfolio mortgages in their own portfolio and have them be given all the protections of the rule. I think were getting to a good place on that but well hear more from them as we go. And what i would say there is my time is up. Community banks are increasing their market share in the Mortgage Market which im glad of. Its a good thing. Thank you, sir. Senator warner . Thank you mr. Chairman. Director cordray great to see you again. Ive got two or three areas i want to touch on. Ill try to be brief. One is you know, when we started to see hacking concern obviously, future of opm, as well. Im hopeful that the acting director had a couple of conversations is going to move aggressively. One of the areas when we started seeing this on the private sector side early on in terms of credit card and debit card hacking was an area i wasnt that familiar with of the differential Consumer Protections against credit cards and debit cards. And i know as i think particularly about so many young people using deb at this time cards rather than credit cards. I know they had different Business Models. But how do we kind of lean in this a little to make sure at least consumers one, senator kirk and i have legislation that well try to harmonize protections for consumers. Will you speak to that for a moment, how we better inform particularly our as a parent of dhaurts use debit cards daughters who use debit cards rather than credit cards how we equalize the protections . I will. This is interesting because some of the regulation grows up through historical circumstances that dont necessarily make logical sense. So credit card protections were developed at a different time and for different purposes than debit card protections. Another example is prepaid cards. Another card people have in their wallet. Currently no Consumer Protections. People are unaware of that. Weve been working to get the rule finalized so we cover the gap. What youre saying is credit cards and debit cards i think started out as being distinct. Credit cards were about credit and a wait to get away a way to get away from store cards and give you credit generally. Debit cards were seen as having to do with atms and other things. Theyve merged more together as just payment mechanisms. I think people often may pull out one card or the other and not think that carefully about them. Although some people are quite careful. There are differential protections. I believe that the Fraud Protection on a credit card is 50 limit of exposure. And a debit card i believe its 500. That may have made more sense when debit cards were only about the atm and you might be taking out a fair amount of cash. I dont know if it make sense today. Its something that i would invite congress to think about and you may have guidance for us on that. Whether we could fix it or would have to have a statutory fix im not clear. Mr. Chairman, i would say this is an area where i found even within the industry theres i think there is some interest and harmonization. And at least folks ought to know that there is very different protections. Let me move to another subject. One of the areas i spent time on the last eight or nine months is looking at this dramatic growth in the gig economy or sharing economy ondemand economy particularly amongst millennials. One of the good sides and bad sides. Obviously theres freedom that comes with these new work environments. For some folks its quite lucrative to cobble together these revenue sources. There are a host of questions around the fact that theres a lack of a social safety net in terms of unemployment and workmans comp, disability. Areas not necessarily for your purview but something i think we will have to work through. Maybe not with a topdown solution but with public private, opt in opt out models. One area that would have fallen in your areas, weve been starting to hear as more and more there are estimates that as much as 1 3 of the work force falls at least somewhere along this continued contingent workers. As we think about qualifying for mortgage within qm, weve heard concerns that this emerging new kind of 1099 or contingent work force, the traditional Banking System doesnt record their income in a appropriate way so their ability to qualify for q. M. S are somewhat undermined. My understanding is that appendix x is the section within q. Appendix q. Is the section within q. M. With borrowing income s. This an area youve taken a look at . If not i understand because there are not a lot of policymakers looking at. It it is far and away the Fastest Growing sector of the economy. We ought to get ahead of it. Any time someone asks a question that includes the phrase appendix q. , i know theyre in the front weeds. I didnt know about it until my staff. The point is an interesting one, a good one. Its something i have become increasingly aware of and concerned about. There are several aspects. We are moving to an economy in which we have fewer fulltime fullsalary employees in the old model. Just as weve moved over time away from defined benefit pension systems to defined contribution pension systems. This is happening. Interestingly, i read that the Health Care Law is proliberty as a piece of legislation in the sense that it doesnt cause people to have to be stuck in a job to get health care. They can consider being an independent contractor or things and still get health care. I would say it does create more complications for people qualifying for a mortgage because its harder to document their income. Their income may be more fluctuating. But i mean you start adding up and start adding up whose intermittent employees, contract employees, temporary employees, seasonal employees, its a huge portion of the american population. I think we need to look again at our mortgage rules in light of that. Its not an easy thing to figure out how to handle, but its something we need to go back and think about. I would also say from a standpoint of wealth and retirement accumulation for americans, this is going to be increasingly a big problem. Pension plans and even 401 k contributions tend to be limited even in companies that have multiple work forces to the fulltime, fullsalary people. Everybody else doesnt have access to the ability to put away savings for retirement or get a match by an employer. Well have to think hard about what we do about that. Treasury is developing a my ira account that may be an example in this area. Illinois just did something legislatively. Its something we need to think about. Otherwise, people are going to be possibly falling behind in income disparity but also very much falling behind in wealth and retirement disparity. Thank you. Well work with that. Yeah. Thank you. Senator . Thank you, mr. Chairman. Mr. Cordray, thanks for being here. In our office, we talked a little about q. M. And i know we were all working on this issue way back when. The bad old days when so much was happening. We were concerned about sharing where everybodys focus was, trying to figure out a way to get that right. One of the things weve looked at in legislation is dealing with qualified mortgages. And there seems to be this focus to only deal with it at Community Banks. Only smaller institutions. I guess if you look at a qualified mortgage thats held on portfolio that means the institutions keeping 100 of the risk, and i guess ive wondered why weve tried to differentiate, if you will between smaller Institutions Holding qualified mortgages, but larger institutions being unable to do so. I know we talked a little about. I wondered if you might address that. I have one other question. Thats fine. We dont have as much time to talk about it today as we did. Im happy to talk about it more with you. Were trying to find ways to encourage credit banks and unions to do lending. If you look at the data going through the crisis they had lower defaults than anyone else. They are the most responsible lender we have. The more lending they do in accordance with their traditional underwriting models the better for consumers, the better for our economy. Thats why we focused portfolio provisions to benefit them. Im concerned about it at upper levels because the logic of it you know may or may not obtain at larger levels. We had institution thats did portfolio lending and blew up, didnt get it right. Washington mutual, countrywide, a ameriquest. Companies that threatened the economy because they made such a mess of things. They were doing portfolio lending. Portfolio lending isnt always a cureall in terms of im bearing the risk so im responsible about it. It feels to me that Community Bank and Credit Unions who have born the risk have been highly responsible. Were looking to encourage them. Im pleased to see that the Community Banks share of mortgage lending seems to be on the increase. Thats good for america i think. It seems to me, and i agree with much of what you said but it seems on the portfolio lending component, theres Something Different than stopping it at 2 billion or whatever and people going whole slog into it at certain levels. There ought to be some maybe. There ought to be something thats different than that stark line. I think we ought to try to explore that together. On manufactured housing, look i live in a state where we have a lot of people that will have difficulty affording housing. Senator brown lives in a state where there are a lot of people that will have difficulty affording housing. Many of us i know senator cotton does no offense. But the fact is that for some of the lower income citizens that we represent manufactured housing is an outlet. Senator brown and i sponsored legislation in 2012 that actually was more expansive than what was in the shelby bill this time. And yet we have these rules that are in place that really make it difficult. You and i talked about the fact that on a smaller loan 20,000, 30,000, 40,000 loan, the costs associated with doing that up front end up bumping up against some of the regulations we have. I wondered if you might address that, and at least address the fact that you understand thats a problem. I wonder if we might collectively generate a solution. It problem im concerned about a very real problem and not limited to manufacturing housing. As you go to the lower end of the spectrum in terms of size of loans, the smaller the loan theres still a certain amount of costs that have to be incurred to make that loan. You know, at a loan thats 200,000, 300,000 400,000 i guess in california maybe 800,000, the costs are spread over a big base. At 25,000 or 50,000, a lot of houses in my state are of that kind and manufactured homes is very much of that kind. The costs start to get larger. The law as it now currently exist and that we implemented does provide for that says under 100,000 the 3 points and fees cap can rise to four and five and lower level to be a hard dollar amount. Whether those numbers are set exactly at the right spot is a point worthy of attention. Again, thats not specific to manufactured housing but manufactured housing falls very much at that end of the spectrum. I want to know the people lower end of the cost spectrum can get access to mortgages and arent blocked by something in the administration or just costs of this. Just as just as automobile lending actually is going farther down the spectrum. People need their cars. And to me thats a good thing. So im happy to talk further. Weve been trying to look at the data on manufactured housing to understand, people have been raising this problem. Is it really a problem, not really a problem . What we see is that every month of last year from the Census Bureau survey data, manufactured housing lending was up from the month the year before. Some of the leading manufactured housing manufacturers are quite profitable. I dont know what to make of some of the concerns people are raising to me. I will say this issue of costs on a smaller loan i think is a universal issue and problem and one that maybe we should be thinking further about whether the threshold are exactly right. Mr. Chairman thank you for the time. I would close by saying i appreciate you looking at that data. And i understand that in a growing economy youre likely to see more people doing these types of things. Weve seen data that shows numbers of people are unable to be served. And theyre ending up paying more for rental housing than they could be paying for actually purchasing, again a lower cost home of either type, whether its conventional or manufactured. That doesnt sound optimal from anybodys standpoint. I agree. Thank you. Thank you, mr. Chairman. Senator . Thank you mr. Chairman. At the risk of going down this rabbit hole one more time, i just want to kind of begin with where we are with Data Collection. Ive listened and think in some ways i feel like were ships passing through the night here and not really hearing. You do not require the transfer of personally identified information other than to do Consumer Services based on a complaint. Is that what im hearing . Thats generally correct. Although, in enforcement and supervision matters where were going to be getting money back to consumers we ultimately will need to have information to get them the money back to consumers. These wouldnt be individual complaints. This would be kind of a broad sweeping kind of investigation where you then would require individual information . So for example i could name names of institutions, theyre public where we had credit card matters. Ultimately we had to give money back to consumers. We could work with the institution or my point is in terms of your Data Collection the only way you would have personally identified data would be if it were necessary to serve the consumer even in a broad complaint or an individual complaint . I believe thats exactly correct. And theres no purpose of me having it otherwise. It just gets in my way and my teams way in terms of doing work. And do institutions send you a bulk amount of data that actually has that information with it requiring you to scrub it, or do you always get information with that thats been scrubbed and where Social Security numbers and personally identified information has been removed . So on that, what i would like to do is have our staff brief your staff on all of our questions i think theres enough interest here that maybe a report back to the committee would be helpful. Thats fine. We can do that. That is typically our aim. I believe its true in all circumstances. Im always hesitant to say all without my staff telling me thats correct. I want to make one final point. Interesting to me is where we are deeply concerned about what you have we should be equally deeply concerned about the cybersecurity of the information where it resides which is with the companies that you access every day. So they are going to have any breach of their data is much more damaging than access to your your data that is being used for Market Analysis. Sure. Target, home depot, account information, Social Security numbers, very problematic. Another thing that would be helpful obviously we have found great response from your agency on whats rural and what isnt. We think that you probably have meat the right decisions in north dakota. Im concerned to the percentage of land mass in this country that you determine sudden rural. If you could get that to me that would be great. Would reiterate senator testers concern about consultation and would be interested in followup on consultation with tribes, as well. Thats part of the overall scheme in a governmenttogovernment relationship. We need all agencies to appreciate what that means. I know youve got my promising to come visit you. Well make sure we do that. I was going to mention that. I do have to say that where we can disagree i think your personal integrity is unimpeachable. Thank you. I think youre doing a very difficult job, director. And i want to thank you for your service. Someone with your credentials having, i believe clerked for the Supreme Court at one point with your great academic background is someone who is extraordinarily valuable. And i of course am partial to past a. G. S. Thats very kind of you. I want to reiterate the points youve been hearing about where were at with the people were trying to protect. And i think what were all trying to get at is how do you balance protecting the consumer against access to necessary credit whether it is small dollar lending, whether its in manufactured housing whether it is just access to Rural Communities or native American Communities to the market. I think theres a balance there. And i know ive told you frequently my story. I was probably one of the first people who got beat up by trying to shut down payday lending and predatory lending. I learned something in that process which are sometimes people need diapers and gas and have a flat tire and they cant fix it. These are folks living on the margin. I understand the need to protect people. I also understand the need to have some form of small dollar, shortterm lending. What do you think those products this will be my last question what do you think those products should look like and how do we achieve that balance and how do you as the director i think address the concerns we have which is lets give people access to credit. It helps build their credit. It helps build america. Lets also protect them. Thats a tough balance with this population. It really is. And by the way, we first saw this issue with our mortgage rules where we in the doddfrank act they passed things on mortgages at a time when the Mortgage Market was overheated and irresponsible and the underwriting had deteriorated. By the time we came to write the rules, things had crashed. The Mortgage Market was frigid credit of tight. It was a hugely different situation. As we wrote the rules we became keenly aware face to face with the problem of how do you been protections which we want with access to credit which we do not want to choke off. Thats something we tried to balance in the mortgage rules. I think we did well but its something were constantly monitoring and trying to think about. Same thing in the small dollar rules. We know people have a demand for small dollar credit. Theyve had it for over 100 years. They get the demand served in various ways. Some products are more responsible, and some are less responsible. But people have a demand. And we cant choke off a supply to them. At the same time we are concerned about this issue of the debt trap. People ending up thinking theyre getting in and getting out, but many end up rolling over and getting stuck at very high cost over a long period of time. And thats the issue were trying to address. Whether the Industry Business model relies on that to subsidize the single demand loans, im not entirely clear on that. They say they dont, but maybe they do. Its something were trying to figure out as were working on rules. But i have the same objective in mind that you describe. People need to have access phone, and not everybody has an uncle or sister or motherinlaw that they can go to for 300 or 500, or if theyve done it once or twice, they may not be able to go a third time. We get that. At the same time we dont want people to end up in products that harm them further. I dont know that im the right person to say what all the right products are. What we are trying to identify is if there are wrong product, that we want to try to rein in a bit while leaving access to credit. Thats the right answer in that parent. How to get there is complex. Im hopeful and were working to understand it enough to get it right. Thank you, mr. Chairman. I think the senator raised a real important issue. Weve talked about this important, mr. Cordray. We dont want to drive the absolutely consumer underground where there is no regulation. That goes to the thrust of the question. How do we do this without overregulating this. And how do we have access to some type of credit for these because there will be credit. Its a question, is it going to be legal or illegal. Now we can have senator cotton coming up, the ivy League Debate that you referred to. Senator cotton, mr. Cordray . Thank you. Thank you, mr. Chairman. Thank you, director for appearing before us. I want to return to a topic that the senator touched it affordable housing. Census and hud data indicates there may not be a single county in this country, and this is true in the rural state or country where i live, there are not a lot of new Single Family homes being built. Theres not a large stock of multifamily rental units which is why many families find manufactured housing to be the most affordable option, as senator corker described. They end up paying less on the mortgage for a manufactured home than they would pay for a limited supply of rental stock. As you describe, theres a basic math problem. Takes a certain amount of time and resources to process any loan, whether the loan is 40,000 or 400,000 or 4 million. And over a bigger loan, that cost is spread out across the bigger base. Therefore, the percentage cost dont appear to be as high over a smaller loan like for manufactured housing. Its a much smaller base to spread out. It appears higher even though thats the preference of the consumer and you have many Financial Institutions willing to make those loans. You have regulatory flexibility under the doddfrank act under section 1431 to address this, to raise percentage rates. Yet, you havent used that yet. Could you explain why you havent used that . And maybe if youre looking ahead to using it to grant relief for these families and lenders . Yeah. We did consider this and carefully with a lot of input at the time we adopted our mortgage rules, our big set of mortgage rules in 2013. This issue was raised, and the 3 important was not seen as appropriate for loans under 100,000. It went to four at certain levels five at lower levels and a dollar figure at the lowest levels. Now, that was an effort to try to address the issue youre raising that i see as a legitimate issue. Whether weve got those numbers right, whether we should reconsider them and think further about them as weve reconsidereded to think about the rural and underserved issue is a fair point. Its one i will take back from this hearing. I do remain concerned that credit at the smaller at the lower dollar end of the spectrum is tight. It is tight. Its tight for people who also often have lower Credit Scores and more difficult access to credit. I dont want to try to pretend to redo underwriting thats being done by these institutions on that. Whether the numbers are set at the right level. Whether 100,000 is the right level are things im not entirely clear. On i think we should be looking at some more. You should be looking at them more we should have a fruitful discourse on whether there maybe should be changes there. Thank you for that. You reference in your answers to senator corker that you have seen encouraging data that i have seen, as well. I think thats limited to the sale of new manufactured housing. I believe that i see. Used yes theres a robust market also for refinancing and for secondary sales of manufactured housing. Obviously doesnt have the same lifetime that Single Family housing does, but oftentimes families need manufactured housing at a time in their life when theyre going through change, newly married, have new children. Theyre also going through economic change. Hopefully getting higher wage moving up the economic ladder and moving into a different kind of home when theres another family whod be willing to buy their manufactured home. Director, id like to turn to another question now. Last year, you brought an enforcement action against a mortgage lender, phh. You didnt follow a lawsuit. You went in front of an Administrative Law judge. And that judge ruled for cfpb and issued a judgment of 6. 4 million. You overturned that judgment and imposed a fine of 109 million. Could you explain your thinking, both why you pursued an Administrative Law judge as opposed to an article three court, and what evidence and thinking went into your decision to overturn your own l. J. And impose a fine 17 times his initial judgment . Yeah. The use of administrative judges under the court and statute is discretionary decision. Weve used Administrative Law judges sparingly except for consent orders. Weve been in court and are in court in many matter. It does one difference is that the alj route can be faster and can be more streamlined. Whether thats a good or bad thing is in the eye of the beholder. That happened to be the approach used in this particular matter. As for the decision that decision is published. And the reasons for it are set out on their face. I think it was like maybe a 36page decision. Its lengthy. The particular point that youre getting at had to do with whether under the law, and this is not an obvious point and the Administrative Law judge saw it one way, i saw it another way. Under the law whether if you violate the respa statute is the right relief only contract that violated the statute after a certain date, or is it payments made after a certain date on contracts that violated the respa statute but before that day has to do with the limitations period here. Not an obvious point but a point that once you decide it one way or the other makes this huge difference in this matter in terms of the amount of relief. That is the sole reason for it. I thought the law clearly was one way. Others may see it differently. But we tried to come to the right result under the law. Thank you for that explanation, director. Youre right that the implication of my question and concern im driving at is not necessarily even about that specific decision but just about the structure of Decision Making not only within your bureauy about agencies. There are features that exacerbates the problem. Your budget is not subject to appropriations and youre a Single Member as opposed to a fivemember commission. This is is not a reflection on you or any future director. These are concerns about the nature of the bureau. Madison said the powers in the same hands may justly be pronounced the definition of tyranny. Independent of your judgment in a single case or any other case or future directors judgments, im going to continue to have concerns. Thats fine. Having said that, im here in front of you here and consistently happy to be speaking to you any time. I regard that as meaningful. That decision is subject to appeal. It is being appealed to a court. I hope they will see the case the way i did and think i did things right. If they disagree, theyll tell us so. Well comply and abide by that ruling. We are subject to judicial review in that respect. Were glad to have you here and glad for judicial review. Original factfinders without life tenure and salary protections are different from fact findings at agencies and bureaus, not just yours. True. Although Supreme Court judges are not subject to or regulators issuing rules that provide standards of conduct under which the force of law can impose penalties not elected, differ from people up here making those. We will to answer to people we serve back home for the wisdom of those rules. Fair enough. Not a specific commentary on this particular case or any particular thing youve done. I have real reservations about the structure of this bureau. Okay. Senator markley . Thank you very much, mr. Chairman. And thank you, director cordray, for your testimony. I want to thank you in particular for your leadership of finally having a watchdog fighting for consumers and fairness in financial transactions. In your testimony, you note that the Bureau Enforcement activities resulted in more than 10. 1 billion in relief for 17 Million Consumers s. It my understanding this is specific funds that come from addressing predatory practices that has been returned to 17 million families across america . Yeah. It takes different forms. Some of it is direct restitution. Some of it is uncompensated victims that get compensated out of their civil penalty fund. Some of it is say, mortgage relief. Some is debt that they otherwise would be required to pay and might be subject to further costs and court prooedings that is forgiven proceedings that is forgiven and wiped from the books. Yes, its meaningful relief for american consumers. And the other point that senator warren has made to me thats worth making which is every time we correct practices the same things dont happen going forward. And you can expect the same money is being saved each year in the future, but its hard to quantify that. It is hard to quantify. But every time a consumer gets a fair Mortgage Loan rather than a predatory one a great deal of help has been created in terms of a wealth building enterprise versus a wealth stripping one. Your agency is critical to that. I wanted to turn to the subject of payday loans. And youre engaged specifically in laying out a policy framework, not yet a draft regulation and taking feedback on it. In organization we established a pretty rigorous framework reestablishing a usery capotted full range of loans, consumer loans, title loans, payday loans. Weve seen migration from one area to another where the states have tried to tackle the 500 Interest Rate in payday loans. We see aggressive outreach by Payday Loan Companies to solicit people on line and to do so outside the framework of state law. In that regard, about once a week i get a text like this that came the other day,dylan i dont know who dylan is, but whoever he is, hes one click away from a predatory loan. Dylan . Do you need extra dollars . Bad detroit is okay. Approved bad credit is okay. Approved in four minutes. Click here. Im convinced this is not a payday lender operating under the state law. Its probably offshore as most online are. The challenge is that with the ability to reach out to folks through Text Messages in this case i also receive phone calls for dylan, if dylans out there and want his phone message, please contact me. So folks respond and say this is convenient. They dont have to go down to the brick and mortar store. We still have those at Organization Even though they operate at 36 Interest Rate. They are still providing credit as they have in every state thats cracked down on the 500 Interest Rates. Citizens still have access to credit when they need it at a fair rate, but theyre getting ensnared by the online solicitations. The reason this works is because the companies are able to use Electronic Fund transfers or remote checks. So once they have the number of the account of the individual they simply reach in and grab the money even though the loan is in violation of the law. How are we going to stop this . First of all, you may need a better spam filter on your phone, although maybe youre picking up some good intel this way. Second the online lending is a particularly acute problem for any enforcement regime. I saw it as attorney general in ohio. I hear about it from our dlooegs Justice Department who battle colleagues at the Justice Department who battle and deal with Something International . N scope like a scam we dealt with earlier this year. Some of the folks were based in kansas city but were interpreted in turks and caicos i dont know where that is. Someplace in the pacific maybe. Maybe the caribbean. I dont know. And caribbean all right. The enforcement is difficult but important. One might have thought online ledge would be measure efficient because you wouldnt have to have the brick and mortar. The default rates are so high they paying lead generators 300 to 400 to acquire customer. What does that tell if you they think its worth paying 300 to 400 to get the fish on the line for the lending theyll do particularly in small dollar loans. Its going to be astronomic Interest Rate. They are 500 , 700 or more. Thats a major concern. In terms of the small dollar lending rules that were working on now, thats a big piece of it. The account access where they take the money directly from the account create all kinds of risks. That was the case with that kansas city outfit. They were called the hydra group that we shut down last year. These are things were wrestling with because the account access creates vulnerability for consumers and can cause them to be trapped in these loans. And they may not appreciate whats happening when its in the fine print. Its something were trying to think carefully about, but were aware of and sensitive and concerned about the same problem that i think you just described as were trying to work through the issues. Thank you for your efforts to wrestle with this issue. It matters a lot to a family whether or not they asquare a payday loan acquire a payday loan under a 36 cap or whether they respond to the text message or phone call and end up with a 500 interest loan from a group thats operating with no accountability and reaches in and just and takes money without authorization. There has to be a solution to this. Ive suggested several in my stopping abuse and fraud, electronic lending act, the safe act, in 2013. I continue to look for a way for fair lending to happen to help families succeed and to stop these predatory practices. I know thats the business youre in, youre doing an excellent job of it. Thank you for the work you do. Thank you senator. Director coredraycordray, thank you again for appearing before the committee. We appreciate your testimony and frankness. Thank you. Several republican president ial candidates are headed to iowa saturday for the annual family leadership summit. Well have the event live all day beginning at 11 00 a. M. Eastern on cspan as part of our road to the white house coverage. This sunday on q a artist and journalist molly crapapple on her use of drawings to tell investigative stories from around the world. Gang affiliation might mean reading a book by a black panther, drawing aztec patterns or a tattoo. Pelican bay isnt alone in this. Around the country, you can land in solitary for your art, reading, beliefs, sexual orientation, or friends. I go around with a sketchbook and draw. A lot of times thats not necessarily to show the finished drawing. Its also to build rapport with people. Oftentimes a camera puts something between you and the person. A big insect looking thing in front of your face. Youre taking images they cant see what youre taking. Its almost vampiric even though youre producing beautiful things later. When you draw, its vulnerable. They can see exactly what youre doing, if you suck they can tell you so. Its more of an interchange. Most people havent been drawn before. Most people are delighted to be drawn. And so a lot of times i draw people because i like to and because i like talking to them when i do it. On cspans q a sunday at 8 00 eastern and pacific. When frances fulsome married president grover cleveland, she became a first lady with many firsts. Shes the first and only first lady to be married in the white house. And at age 21, the youngest woman to serve as first lady. When she died on october 29th 1947, she lived an additional 51 years after leaving the white house. Longer than any other first lady. Frances cleveland, this sunday night at 8 00 p. M. Eastern on cspans original series first ladies influence and image. Examining the women who filled position of first lady and their influence on the presidency. From Martha Washington to mich michelle obama. Sundays at 8 00 p. M. Eastern on American History tv on cspan3. Next a round table discussion on fixed income markets and liquidity. Representatives from the securities and exchange commission, Commodities Futures Trading Commission and several wall street firms sfoek event hosted by the house Financial Services subcommittee on Financial Institutions. Its two hours. Good afternoon, im congressman from the 19th Congressional District in texas. And i am the chairman of the Financial Institutions subcommittee on Financial Services. And first of all i want to welcome our distinguished panel and thank them personally for coming and sharing i think very important subjects that if youve picked up a paper lately or watched the news account or seen a speech or heard a speech this is a very timely subject. And so i appreciate our panelists participating. Panelists participating in that. Also thank our guests for coming. I think youre in for a real treat. A lot of folks said why dont you have a hearing . And i said we dont want to have a hearing, we want to have a discussion. And this is a panel discussion. And really im going to get to do the very same thing that youre doing, those of you in the audience, those watching on cspan is get to hear these folks have a very important dialogue about a very important subject. One of the things, other than the fact that it seems to be out in the news and a topic for discussion, people said why have a panel . One of the thins that kind of came to my mind was that we focused a lot about whats going on with the individual entities out there . As the markets have changed, Market Structures change, regulatory structures change, a lot of changes to the entities themselves. That i think one of the things that we think is important is also to determine what kind of changes are going on in the marketplace . Because ultimately, thats important to every american citizen. Because in some way or the other, these markets touch america in a lot of different ways. Whether were buying houses, buying cars, financing a business, whatever. And so these Financial Markets are extremely important. And so one of the things i think is important that we all do is that we have an ongoing dialogue about whats going on in the marketplace. Today obviously were going to talk about whats going on in the fixed income space. Particularly as it relates to liquidity. I was going to quote chairman bernanke. He kind of summed it up i think what were talking about today. Says, anybody done a comprehensive analysis of the impact of all of these changes weve seen and he says i cant pretend that anybody really has. You know its very complicated. We really dont necessarily have the quantitative tools to do that. So i think its important for us to have a discussion. And so were going to have that discussion. And youre in for a treat because weve got, as i said, a really great panel. To kick us off, our panel today is s. E. C. Commissioner dan gallagher. As many of you know commissioner gallagher has worked at the s. E. C. In several capacities throughout his career. He was on the front line of the agencys response to the financial crisis. And since returning to the agency as commissioner, mr. Gallagher is focused on issues strength. Ing our Capital Markets and has been an outspoken advocate for increasing the commissions focus on fixed income marketedsmarkets. Commissioner gallagher. Thank you very much mr. Chairman. Its a real honor to be here. It as little nicer than testifying, i must confess. Not that i dont want to do that. No time soon, please. First i have to say as you well expect, my views are my own dont reflect those necessarily of the commission, much to your chagrin, mr. Chairman. Put but i think this is a hugely important subject. Its a hugely important time to talk about it. Three years ago i gave a speech about fixed income markets, muni and corporate marketed talking about some data with respect to the retail participation in those markets to some concerns we were hearing about liquidity at the time. And really putting out a call to action for the commission to spend more time thinking about the structure of the fixed income markets, the lack of transparency. Especially in the corporate debt markets. A joke ive been using lately is that since Michael Lewis came out with his flash boys book last year, weve been spending a lot of time thinking about highfrequency trading. Id like to say if were going to prioritize based on Michael Lewis books i go back to liars poker. The fixed income markets are largely the same they were in 1989. I think we have Unfinished Business there to attend to. Its easy for us to ignore these markets because generally speaking, theyve been operating very well for 30 years. Theres been a bull market. In this current Interest Rate environment, u. S. Corporations for the last several years have hit the debt markets with much success. Its been great for our markets. Its allowed them to grow and exup and down and hire. Thats a good thing but thats of course because of Monetary Policy. We have to get used to an environment and prepare for an environment in which that incentive is no longer in place and we have to worry about the potential for a liquidity crisis in the event that Interest Rates rise and we dont have the inventories that we used to we dont have the buyers to be on the other side of the sale transactions. Im hoping and expecting the commission will continue to spend more time on these issues. Weve traditionally not spent our resources, our staff resources, looking at these issues. And we only get good policymaking when we resource our staff thinking on these issues. Right now we have one half of one fulltime employee thinking about these issues and thats no good. We need to up our game in that space. I hope to continue calling for that as i depart as a commissioner. I know my friend and colleague mike pelavar kill continue as he has done to call for the same. I appreciate your efforts in bringing light on these issues and i look forward to taking part in the panel. Thank you. Next im pleased to introduce the ftc commissioner sharon bowen. Commission bowen was sworn in commission of cftc in june of 2014 for a fiveyear term. And important to our discussion here today, commissioner bowen is the sponsor of the cftcs Market Risk Advisory Committee which has the purpose of providing the commission with Market Intelligence and recommendations from the industry about market risk and structure issues. Commissioner bowen, please. Yes, good afternoon. Its a pleasure to be here today to talk about a subject that i think is fascinating in finance. That topic is about liquidity. I serve as a commissioner of the commodity Futures Trading Commission which has jurisdictions over more than 400 trillion of futures and swaps. Let me preface my remarks by also stating that my comments are my own and do not reflect the viewpoints of my fellow commissioner or cftc staff. You may be asking why my here on a panel discussing fixed income liquidity which the cftc does not regulate fixed Income Securities . Well, the short answer is the line between the markets are breaking down and increasingly interconnected. What affects the futures marketed affects the equities markets. What happens in the bond market doesnt stay in the pond market. The swaps market is integrally connected to pretty much everything that happens in every other market. And given the Global Nature of our Financial Markets and the challenge of harmonizing our rules and regulations, im more mindful of the need to address the issues of liquidity through an even broader lens. As for the longer answer, the truth is while the s. E. C. Does regulate and is the final regulator, we are the primary regulator for swaps based on underlying fixed Income Securities. Joint rule making from 2012 defined the word swap. As many of you know, that was not easy. Certain products are duly registered by both the cftc and s. E. C. As a commissioner i hear a great deal about liquidity for Market Participants including concerns that we have insufficient liquidity in our markets. The cftcs Market Risk Advisory Committee devoted half our meeting last month to discussing the subject. One of the make major takeaways from that meeting for me was that before we can do anything to address liquidity we first need to find a way to craft a generally accepted definition of liquidity. At the very least we need to make sure that Market Participants define what they mean by liquidity before they Start Talking about how it is growing or shrinking. At present liquidity is basically in the eye of the beholder. Some people view the concept drastically differently from others, even in the abstract. Let alone were talking about liquidity in specific markets. We need to define liquidity and then measure changes in liquidity if we hope to enchance or protect liquidity in our markets. Additionally it became clear to me during the meeting that we regulators need to further engage with the industry and other stakeholders in our discussions regarding liquidity. To that end im happying to here today and i look forward to hearing the perspectives of my fellow panelists. Thank you commissioner. Now nelly lang is the director of the office of Financial Stability policy and research at the Federal Reserve board. She is responsible for conducting and coordinating work at the board relating to the analyzing, emerging, and structural ricks to Financial Stability and developing a macro policy to mitigate systemic risks. Thank you very much. Appreciate the invitation to participate. This is an interesting topic for discussion. I will start with saying these are my own views and not those of the Federal Reserve board. Im going to start with a little definition of market liquidity as weve expressed it. Market participants have been expressing quite a bit of concern about reduced Bond Market Liquidity which we have interpreted to be, they are not able to buy or sell securities in reasonable quantities at relatively low cost without materially affecting market prices. So at the Federal Reserve weve been listening to these concerns and weve been monitoring a wide range of liquidity indicators, though no single measure appears able to capture the multiple dimensions. Many available measures including bid as spreads, mark depth, price impact, trading volumes, do not indicate a notable distribution in market functioning although we have seen a decline in average trade size. But there have been some recent events, including the flash rally in treasury markets on october 15th 2014, which suggests its important to continue to evaluate the resilience of liquidity in cash and future markets to stress events. There are a number of possible reasons for why market liquidity may have change the which are related to demand and the provision of liquidity. There are fewer active trading participants and an increase in buy and hold investors which may have reduced the demand for daytoday services. At the same time broker dealers may now be less willing to buy and sell weekends at the request of their clients. Because of new regulatory requirements or changes to Risk Management practices they have made on their own. Technological changes may also be affecting the provision of liquid liquidity. Increased reporting requirements for Corporate Bond transactions have reduced trading costs but may also have reduced trading sizes. In treasury markets greater algorithmic and higher frequency trading may be leading to fundamental changes and also may reduce the profits that dealers can earn by providing liquidity. The interagency staff report on the u. S. Treasury market on october 15th which was released just this morning, highlights that on typical days, principal trading firms that employ proprietary proprietary, automated trading strategies proprietary automated trading strategies account for more than half the transactions in the treasury Securities Markets and traditional broker dealers account for about onethird of the transactions. Some degree of Liquidity Risk will always be present in Capital Markets financing. In terms of whether current perceptions of create Liquidity Risk are unnecessary cost to the economy, a key issue is which sectors of the Financial System are bearing that risk. Looking back to the fall of 2008, which was the greatest market ill liquidity event in recent times due to fears of fire sales from deleveraging, the Liquidity Risk was held by the highly leveraged financial sector, the banks and broker dealers. With hindsight the regulatory structure for this sector was inadequate and much has been done to increase the strength and resilience of the core of the Financial System. More recently Liquidity Risks appear to have shifted towards less leveraged entities such as mutual funds. In principle Financial Stability is enhanced when risks shift from firms that are more levered to firms that are less levered and have more stable funding. If these less levered entities are sufficiently prepared for bearing greater Liquidity Risk, the Financial System and the economy may be better off with these changes. In summary, credit from bond markets has been very strong in recent years and is supported by stable, more stable and less complex funding than before the crisis. To maintain robust credit markets, it is important that investors maintain confidence that they can transact officially in these Capital Markets. In our view while most of the quantitative to date indicates that markets are quite effectively, we will continue to track changes in the market liquidity. Thank you. Thank you. Next panelist is sandy oconnor, shes held several key executive positions at jpmorgan. Most recently she was treasurer and the liquidity. Thank you to all of you sharing a bit of time this afternoon to discuss this important issue. Why does it matter . Well, it matters because in our country marketbased lending through the Corporate Bond issuance funds about 50 of the growth of american businesses with direct lending from banks making up the rest. Our Financial Market as you are well aware have long been a competitive advantage for our country. With benefits for businesses of all types and sizes and the people who work for them and the economy as a whole. So too it provides appropriate support for consumers who are seeking mortgages, auto financing, card financing and things of that nature. Our Capital Markets and the strength of them and their durability have led to the u. S. Economy recovering more quickly than those in europe. And in fact European Union is looking the European Union is looking to put in place a Capital Markets initiative to reduce their reliance and concentration on direct bank lending. So again, much like dr. Lang has said, as we discuss liquidity, i think its very important to define what we mean. And having traded fixed income products myself and as former treasurer of jpmorgan, trade when i want to and the size i want to and with reasonably predictable pricing. It is under that definition that i think we can agree that general market liquidity has in fact been declining and we have hit some air pockets as market depth has been tested. As already noted the 2013 taper tantrum, the treasury flash rally on october 15th and the recent euro tantrum. All of this has been during relatively benign times. And in the most liquid markets in the world, which is what gives us pause. These are the last places that you would expect the level of pricing volatility or for example a six sigma move on treasury pricing we saw on october 15th. Markets have not yet been tested under more severe circumstances. And therefore its important for us to contemplate because we dont know whether liquidity or the depth of liquidity as it presents currently will be an issue or not. But it does need to be carefully considered. It is important to note that markets, the financial industry and the economy are all in transition right now. And as a result there are multiple drivers of this change in liquidity. And again, some already have been mentioned but just to reemphasize, Market Structure has in fact adjusted. Its different today than it had been. Theres an increased reliance on algorithmic and hft trading dont hold a high level of capital and therefore dont hold high levels of inventory. And in fact as part of normal market practice as volatility increases the depth typically declines and pricing widens out. Additionally the share of fixed income instruments owned by mutual funds and etfs has grown significantly. And Central Banks are playing an increased role as Market Participants as part of their role in quantitative easing and implementing Monetary Policy. Market participants have changed their business behavior. Banks have went back to the more sophisticated Risk Management and control frameworks which have resulted in a lower risk appetite. Investor Decision Making has become more homogeneous as become central to an investment thesis. And finally, regulatory changes clearly have contributed to lower dealer liquidity. For example, capital and liquidity rules have increased the cost of holding and financing dealer inventory with the leverage ratio weighing heaviest on the highest quality, most liquid assets like treasuries and high grade corporates. Liquidity rules have required banks to hold high quality liquid assets for their own purposes and not for Market Making. And post trade Disclosure Requirements are reducing banks appetite for underwriting large trades for customers. New regulations, both domestically and internationally within that frame work have led banks to rethink which businesses they are in and which they will stay in in that price. This is an appropriate and intended consequence of regulation. However, markets and economy suffers when multiple rules attempt to reduce the same risk. Increasing regulatory costs without improving safety and soundness. Or rules may mischaracterize a risk. Looking forward market depth is on course for further decline. Upcoming regulations are proposed and implemented. These will include the fundamental review of the trading book, and the feds propose surcharges as an example. Further more, just as the supply of secondary liquidity declines the demand may in fact increase with changes in Monetary Policy and the reversal of quantitative easing. I think its very important as we sit and look forward, given the new base that we are at. Capitol is nearly two times the level it had been at. We had more than a trillion more since 2011, our focus needs to be on resilience, and resilience being define ed as the safety and soundness of the Banking Institutions as well as the resilience of the Capital Markets. Thank you, chairman. Next, we have managing director at black rock where he focuses within the fixed income group. He has previously worked with jpmorgans team for fixed income clients . Thank you. Its my pleasure to attend on behalf of black rock, and i look forward to the discussion. Most fixed markets have adapted to changes intended to have safety and soundness of the global Financial System. Looking back, the conditions leading into the 2008 crisis were healthy and more sustainable. Participants need to accept the changes occurred post crisis. In many cases, intentionally due to regulation. In many cases, intentionally due to regulation. And adapted to achieve their objectives in a fundamentally different market. Black rock has been considering these issues and has been adapting for several years by making changes in our creating platform capabilities, portfolio construction methods and Risk Management. Bond markets are changing as a result of a number of different factors. Central banks have been employing extraordinary measures to maintain low Interest Rates for an extended period of time. Bond issue answer has increased as issuers take advantage of historically low rates. At the same time, deleveraging across the Financial Systems ongoing and broker dealers have been markedly reduced. Broker dealers continue to make markets and fixed income, however, the Market Making activities are more constrained than they were before. The result is, the number of bonds outstanding is significantly outpaced increases in trading volumes. Therefore, reducing lower available secondary liquidity. Primary assurance on the other hand has remained strong and an increase in the size of average issuance. In contrast, secondary markets have been thinner post crisis. In particular, theres more pricing impact for larger transactions in the secondary market. Regulation is a cause for concern, we view the shift as an actual evolution. Policy has created conditions including low levels of volatility which continue to change as Interest Rates evolve. We should expect an increase in volatility goingforward. Further, some policy makers have raised concerns regarding the impact of rising rates given the current environment. We believe there is a need to separate concerns about market losses by investors, versus systemic risk. The environment will likely lead to gains by some investors and losses by others. This reflects a properly functioning market. Where investment results with capital and the risk of different investors. Losses experienced by investors are not the same as systemic risk, nor does this continuous pricing mean that systemic risks will arise. The markts has observed and functioned properly in the past. The market and Market Participants need to adjust to changes and find a new equilibrium. We believe that its time to move forward on market practices. The issue of liquidity is not new, and there are many ways that Market Participants can adapt. In part, this requires open mindedness and a willingness to change behavior, investors like ourselves need to update their Technology Tools and practices, banks and broker dealers need to accept greater adoption of agency like structures and fixed income markets compared to the traditional over the counter Market Structure. Issuers need to think through the imply kagts the cycle beyond todays accommodative environment. Regulators play an Important Role in their ability to require Market Participants to change behavior. We also recommend that all Market Participants and regulators invest in and embrace new and innovative selections. Based on the challenges facing Market Participants and the concerns raised by policy makers, black rock has outlined in several publications several recommendations to move the market forward using a threepronged approach. One, a focus on Market Structure modernization. Two enhanced disclosure and regulation of a the fund level using a tool kit, and three, evolution of new and existing products that are taking advantage of market technologies. We look forward to sharing the ideas with the group in the round table. Thank you. Thank you. Our next panelist is dan leland, he joined the southwest securities in 1995 as the executive Vice President where he was responsible for the Capital Markets division. Hes a former vice chairman of the business committee, national associations. And the bond leaders of america. Mr. Leland . For the old timers around, nasd is now funra. Im head of Capital Markets for south west securities in dallas. I want to thank you for putting this roundtable together. Its a full service Securities Firm based in dallas, and id like to say were a Regional Firm and probably more main street than we are wall street. Regional firms typically are involved in new issuance for municipal debt. When it comes to the taxable side of the arena, theyre not involved in the new issue and trade in the secondary market. That will give us a little different perspective on the market and liquidity than some of the larger markets that are around. Its easy to see that the marketplace is concerned about the conditions in the fixed income markets, that is important, and im glad to be here to offer southwest securities on the markets. Regulation and contribute to discussion. A couple topics i want to make sure we hit. Finra markup rules, the u. S. Fixed income market is a volatile marketplace. The risk dealers accept liquidity for aaa is vastly different. And assets such as high yield. Funeral markup rules are explicitly designed to account for changes in volatility and risk. The enforcement of the markup rules does not reflect the real risks of providing liquidity. And holds credits and time. Market transparency rules should be optimized to allow dealers for larger tran actions. Hedge those positions and then provide liquiddy in smaller trade sizes to Retail Investors. Current trace reporting would better balance the benefits of transparency versus the benefits of dealers being able to provide liquidity. Retail investors would be able to repair pricing of same day priced trades and would benefit from the liquidity and less volatility. Finra and msrb matched trade proposals. The retail price reference and the riskless principle is designed to provide confirmation which is on the confirmation disclosures on retail sized trades on the same principle trades. The purpose of the rule is to inform the Retail Investor about the dealer compensation. However, the proposals do not exclude sophisticated investors from the rule proposal so it may apply to institutional accounts. There are no riskless trades that bring inventory on the Balance Sheet. Basal three, which affects us more so that weve been bought by a holding company. The level of complexity to come ply with basal three. To exit the market completely. The requirement that we i think with those two individuals already exiting, and the additional expense of transacting business in that market, you can see other participants exit and cause less liquidity. Theres a lot of topics to go over, and i know my perspective is going to be from a regional platform and more granular than some of the other perspectives youll hear here today. Thank you. Our next panelist is kathleen yo, joined ge capital in 1990. Is currently the deputy of funding. The courts of ge capital. One of the largest private sector issuers and contributes to the fixed Income Investor relations efforts. Thank you. I add my thanks to you putting together the session. A great deal of interest to ge capital, and i think to any issuer who makes regular use of the bond markets. The whole question of liquidity and if it doesnt function as it should, means the bond markets do not function efficiently. Representing issuers or the viewpoint, which is what im most familiar with, to the extent that the bond markets cease to be effective, more important, a source of capitol, which can be flexible in its form, and allows issuers like ge capitol to hedge its Balance Sheet risk. The reason i say that is concerns about liquidity, having impact on secondary Market Pricing and also on the new issue premium, which investors quite rightly and logically demand to take on in order to buy a new bond transaction. To the extent there is a disconnect in the market, and those issues are elevated. It translates directly into a higher cost of funds for directors and impacts investments that are made. And by further extension, it can affect what business is chosen to go into or not, and ultimately job creation at its very end. The other aspect which i touched upon, the u. S. Debt markets have the most flexibility in terms of the type of securities that they in maturities, in optionality of calls and puts, occasionally in currency denomination. That same flexibility, which can, you know, raise challenges in terms of how you monitor the market is also one which would allow a Corporation Like us to be able to immunize our Balance Sheet from Interest Rate and currency risk. To the extent that the market ceases to behave in a way which is efficient, then that means that you could argue, we have greater risk on our Balance Sheet, by virtue of the fact that its more difficult for us to hedge it, that translate potentially into more Systematic Risk into the market itself for Smaller Companies, its probably even a more crucial issue. Ge capital can probably always get a quote on the new issue. For Smaller Companies that dont come that often. It may not be merely a matter of cost, it could be a matter of access which is of greater concern if you think about the greater economic picture. I think as all the panelists have shown, the liquidity question is a complicated one, i dont think there is a Single Source you could point to as being a cause of the concerns here, and as a result of that, i dont think theres a Silver Bullet thats going to solve everything. Whether its bond market standards, electronic trading platforms, putting securities on exchanges, none of them by themselves is going to fully address the situation that were discussing today. For all of us who have benefited from the markets, whether its as an issuer whos been able to raise money, as the investor whos earned returns, and frankly the broker Dealer Community who has acted as intermediaries in the marketplace, we probably need to look at a full scale view of what has gone on, including recognizing the structural changes that have happened in the market and need to be recognized because you cannot go back to pre2007. Its a fundamentally different world. And all of those have to be taken into consideration with a view frankly for what in the future is going to make this market continue to provide the value it always has to all of us. Thank you. And next dr. Larry harris. Larry harris holding the chair in the Marshall School of business. In the teaching department. Professor harris served as the secs chief economist from 2002 to 2004. Dr. Harris . Thank you, mr. Chairman. This is a great opportunity to participate in what i expect will be an interesting discussion. Several of my co panelists have already identified definitions of liquidity which i completely concur. Its the ability to trade when you want to trade without too much impact and in reasonable sizes. Now, the question is, where does liquidity come from. The ability to trade is provided by other people who are willing to trade with you. And its really important to think about, who are the other people who might be willing to trade with you . Traditionally, we think about dealers as intermediaries, who are willing to do those trades, you want to trade, the dealer will come and provide you with that service. And i expect that dealers will always be very important in fixed income markets and to a lesser extent in equity markets as well. The equity markets is extremely cheap to trade an awful lot of risk. The credit risk associated with equities is much greater than the Corporate Bonds or treasuries. And yet, these securities trade with very small spreads. Measured in single digit basis points. In contrast, the spreads say in corporate debt are on the order of 135 basis points. To put things in perspective, if you applied that spread to a 40 dollar stock, you would be trading a 40 stock at a one half dollar spread. One half dollar spread is really wide. Not unprecedented, though, we used to see spreads like that in the equity markets. We saw those spreads before order handling rules were adopted that allowed the public to offer liquidity to the public. When i say the public offers liquidity to the public, i feen mean that retail or institutional can be the other side that we spoke about a few moments ago about the liquidity is the ability to trade when you want to trade. Who do you want to trade with . If there are people who are willing to trade with you, who arent dealers, thats another set of people who can do trades. The order handling rules in the equity markets converted those markets from 25 cents to 50 cent spreads. The current spreads we see on the order more the more actively traded securities and still 5, 10 cents than the actively traded securities. Much smaller than what we see in the fixed income markets. So what we need among many things is the ability to allow the public to supply liquidity to the public. If were looking for liquidity, we have to look somewhere. So i want to close with just a couple quick observations about what are some absolute truths. Not everyone can be a buyer or a seller at the same time. We think what happens if Everyone Wants to trade, and the bottom line is, that simply cant happen, and people can try to do it, they wont be able to do their trades, thats where the extreme volatility comes from that were worried about with systemic risk. The answer to that is a couple fold, when lots and lots of people want to trade, that theres some procedure that will allow people to step up and profit from those opportunities. All of these liquidity events that scare us create enormous opportunities for profit. These are just like god given the religious experiences for people who are interested in profit, we need to make sure that people can step up when those opportunities arise we have to ensure that information about the economy is widely distributed that not everybody wants to trade at the same time, if everyone thinks they can trade at the same time without having an impact then they may very well do so. And if they did so that would be a problem, how do we get people to not think foolishly . That could be the hardest problem weve ever encountered, right . One way we do that, we inform them about liquidity conditions, we ensure that they understand what costs are likely to be, and we also ensure that they have full information about the economy and about events that potentially might scare them. A couple things i want to mejs. There are a few things that havent been mentioned. We think about the changes in the market. The credit default swap market has grown tremendously in the last 15, 20 years. And to some extent its become a substitute for the discovery of the value of default risk. Of credits of the types that we see in bond markets. A substitute for the normal price discovery we see in the Corporate Bond markets. A lot of that liquidity we fear has gone away from the Corporate Bond market and has ended up in the credit default market. Part of the reason is that people, especially not for Profit Institutions that want to own Interest Rate risk. They dont want to if theyre only interested in pure risk, they will buy treasuries, the problem is, they have to pay a lot because theres a tax advantage to treasuries. They offset it with credit default swap and it never goes away. If it never goes away, it doesnt matter, does it . Well be talking about aging populations, thats why peoples opinions are so important surely theres going to be a shift in dealing in banks to other structures, possibly quite sensible. Because we want to protect the public from exemployeeation of deposit insurance streas. And then finally, the fact that Interest Rates are so low is very important. In part, because if youre paying 1. 25 in trade and bonds are only paying 4 , you end up losing almost 4 months of interest to do a round trip trade in the bond. Who wants to buy a bond when theres four months interest lost just by stepping in and anticipating that some day youre going to have to go out. And as a consequence bonds end up being discounted and corporations cant offer them as the prices that they should. Thank you very much. You mentioned that your recent roundtable you had, it was not necessarily a consensus on the definition of market liquidity. We heard a few folks talk about that issue, what was the consensus that you heard at your roundtable of what is the definition of market lick witty . I wish i could say there was a consensus, i would like to address professor harris comment about the religious experience. One of my comments was that liquidity is not a god given right. It comes at a price one of the things that was great about my committee, we had academics, end users, traders, pretty much every stakeholder at the table, and it was an opportunity for them to talk to each other about liquidity and what that meant. I think the one consensus was that we all need to be working together, thinking about this a little bit more, in a much more serious way. The market clearly has changed. The players are different, the structure is different, we have to be even more mindful to make sure their incentives, to make sure we have more liquidity providers, as opposed to fewer ones. And to make sure that we understand that some of the evolution that was mentioned earlier today means that we may need new tools in place as well. Mr. Gallagher, have you all been talking about that at the s. E. C. . No. No, unfortunately we havent. Ever since larry left at least, in 2004, its obviously a critical regulatory construct beyond being a concept of Market Forces in play right now, liquidity is built in holding rools. Liquidity is something we look at at the broker dealer level, even though we dont have liquidity prescriptions for broker dealers. We have not sought as an agency to seek common definition with folks. I too, like you have heard sandys definition, you hear a bunch. At core theyre very similar, it was a little harder when you tried to define High Frequency trading, that one will really get you. Hopefully liquidity we can get our heads around but it doesnt mean its any less of an issue. For the commission as i pointed out my intro ductry remarks where weve seen as has been pointed out by some of the panelists. Year after year after year, were at 11 trillion plus, if you include asset backed securities, with a Market Structure thats circa 1950, are we okay with that . Its okay when the markets are running. In the panics when theres need for emergency liquidity provision, its not coming out of the s. E. C. s 1. 6 billion budget. No checkbook, no Balance Sheet, im looking at you, dr. Lang, were all going to be looking at you, if theres a dislocation and thats the real problem, thats when bad policy gets made and you have heard me time and again implore the industry to get together, by that i mean the market makers, the buy side, the sell side, the issuer communities. Im glad to see ge here get together and come up with some common private Market Solutions and point out to us the regulatory fixes we need to employ. One of the things you need is proactive regulatory thinking, to stem off something before it happens. Because god forbid in a major dislocated event, they have to provide and we are going to have title seven for cop rate debt. Thats something no one should want. It is a pressing matter even though youve heard me say this until im blue in the face. Weve spent significantly more time addressing this than we have looking at this issue of liquidity. If it wasnt mandated by a 5yearold, were not paying attention to it, and thats a real problem. You know, mr. Harris, dr. Harris brought up the fact that, you know, what happens in the marketplace, when the plays over, and everyones looking for a cab, weve seen a lot of demand for the fixed income product and a lot of it has been produced is the definition then of a functioning liquid market when its just the daily trading or is it when a market has the capacity to respond to anomalies or to in the marketplace. And if thats the case, then what is the right amount of that . I mean, should it be able to respond to a really sudden movement where people may have to wait a few days to move that position, or should they be able to move that position on that day. So as everybody here present recognized, liquidity is a multidimensional concept, it has lots of different characteristics, youre asking now, the day to day liquidity as opposed to deeper liquidity. The bottom line remains that liquidity is the ability to trade when you want to trade, someone has to supply that ability. And so the people who supply liquidity on a day to day basis may be different than the people who supply liquiddy on a deeper basis. And it may be that the Federal Reserve supplies it, what we dont want to see. What we need are mechanisms that allow us to seamlessly transition between the day to day demands for liquidity, and extreme demands for liquidity about the people who are willing to respond on a day to day basis they may get blown by when there are huge demands for liquidity. But those people who would normally not respond can easily step in, when there are big opportunities. For that, we have to think carefully about the structure markets, how we can allow large people to participate easily. And make sure that theyre not inhibited by regulatory problems or structural problems in the design of the markets. Is there anyway to measure what the depth of a market is in that environment . Again i think theres a couple ways to think about market depth. I think that is one of the most critical measures, right . The way we think about it is, what is the abundance of available transactions that could occur in that moment of time. And just to give folks a frame of reference. You know, precrisis, the u. S. Treasury market, for example, back to that definition, you are typically able to trade a block of 500 million without having a Material Impact to the price. The long term average is about 190 million, year to date in 2015, that number is now at 120 million. The real question is, what are the expectations that the marketplace has of liquidity in the u. S. Treasury market. Thats really what the fundamental issue is here, when we think about treasuries, do we expect to move the market at 120 million either side transaction . Probably not, thats why many are having conversations around this, because, you know, i will tell you, it makes the discussion even more complicated than it has been so far, is that in fact liquidity is in the eye of the beholder, right . With regard to certain Asset Classes and certain investors who are likely to buy long term holders, they dont expect deep market depth, they manage their positions accordingly, and in fact they value earning the liquidity premium that they are paid by the marketplace by holding less liquid positions. On the other hand, back to our u. S. Treasury market, if you are a holder of the u. S. Treasury, you may very well be holding it for Cash Management purposes as a high quality liquid asset, if under market stress or just managing cashflows, youre looking to sell it, youre not going to have an expectation to move price. I think measuring market death is important. Theres no single metric, there needs to be a fundamental understanding of what the variety of metrics look like. They are fine, right . Especially in the u. S. Treasury market. Theyre as tight as they were precrisis. Theyre probably a little narrower than they have been. Offers widen when you put too much pressure on the trading you want to do. And thats one of the items we saw on october 15th, a bit surprising. To this list of characteristics, we may add that liquidity varies according to whether you want to trade quickly or whether youre willing to be patient. We have people who are more patient theyre usually able to find liquidity, theres a time dimension as well. Just to interject on that a little bit. I agree to some extent because liquidity is really about the durability and that expectation of it being available. So clearly you manage liquidity youre going to get from your asset base based on market value and market depth, roit . If you have more time, you dont have to see pricing volatility. If you have less time, youre probably going to see some level of pricing volatility. Depending on what youre doing with those assets, you should have a very full understanding of what your expectation is going to be and if your market place is going to be there. Durability matters. Versus just transacting that could occur. Let me illustrate this point as i fully agree with it, the stock market crash of 87 was caused because too many people expected that their portfolio Insurance Strategies would work, in particular, they didnt recognize that if everybody ran for the exits at the same time, there would be insufficient liquidity to meet their needs. And yet the crash ultimately stopped because when prices were reduced enough, people stepped in and they made a lot of money. And we havent seen crashes like that since. In part because people havent had the foolish expectations. And also in part, because there are people waiting in the wings who say, if i see Something Like this again, im going to jump. How is liquidity important to black rock . First of all, i would echo the comments by many of my fellow panelists regarding, there are many different definitions of liquidity, and i think its constructive for the purpose of this discussion, we can largely unite on the definition that liquidity is the ability to trade at a certain size without materially impacting price. Liquidity is important to us as an asset manager because we have we manage investments for many different types of clients. Some of them, for example, a public pension fund, liquidity is not particularly important, those are looking to buy fixed income assets to match long liabilities and they will generally mature the bonds they hold. In other cases we may be managing money that our clients are holding as essentially short term cash Asset Managements, and they maze need their money for other corporate purposes. Liquidity, the importance varies with the client type. End investor type, the importance of liquidity very much varies with the asset class in question. As mentioned liquidity is incredibly important in the treasury market. Given the profile of holders and their transactions. Liquidity is less important in say long term infrastructure debt funding. Mlg are Insurance Companies and investment firms. So the question then, i think we agree primary on a definition of liquidity, and so one of the purposes of this conference was to talk about the question that everybodys asking. So is there a liquidity problem in the fixed income space today. Before we move to folks who would know that, because they do it for a living, you know, just to touch on one point of that definition, that it becomes apparent as we talk this all out together. The import of the definition of liquidity, based on the end investor or the Business Model for a dealer, a bank or a broker, holding positions on their own book for charges associated with that, whether they be capital liquidity charges, the definition is different than i think in an agency structure, and i was pleased to hear dr. Langen say that Asset Management actually provides stability to the system, which i think is hugely important point that can be lost especially in the fsoc debates on systemic importance. But for them the definition of liquidity, if its one i hear economists use, the price at which you can execute a transaction, youre able to do it, its just at what price. In the agency construct, that is a more relevant definition. Youre going to get the deal done, youre doing if on behalf of somebody else, theyre going to get more or less back based on the price. In the context of regulated entities. And capital leverage, the charges. Its wholly separate, avoiding the concentrations, the type of definition that has driven the inventories down, which i guess is a good segue to your next question that you pose to me, is there less liquidity in the markets, as a policy maker, not a trader, nothing somebody on the street, the data that weve seen is what caused me three years ago to give my first speech. Issuance is up, inventorys down, its just basic math. As bad as i was at math, i was able to get that one with some assistance from my council, it wreaks says to you, you have to address it, you have to look at it, it doesnt mean theres a lack of liquidity, and, of course, its asset class by asset class, it means its something we need to Pay Attention to. And so i guess, maybe dan would be in the best position from the trading desk perspective to answer that question certainly on the muni side. From my perspective, im going to assume theres a lack of liquidity until proven otherwise, i have yet to see anything to dispel that notion. I think when liquidity, when it comes to actual securities, by asset class theres going to be a difference in liquidity, in the muni arena, its because of qsep. Youre not going to have tremendous liquidity in that 50,000. Price discovery could be difficult. Because an arated water sewer rev in california may trade differently than an arated water sewer rev in oklahoma. We dont trade treasuries, we use them for hedges. Not that well lately by the way. The other areas where we see liquidity issues happens to be in the mortgage arena. You Start Talking about abs, like a sub prime home ek, youre working with a customer to show them sub prime home ek, you take down x number of bonds, you think its attractive. Youve been watching what is going on with the deal, structure, and you think its Getting Better over time. You show that to an institution to make an acquisition, those folks may look at that piece of paper for a short turn around would be a week, sometimes its two and three weeks before they get their work done and decide to come back. One of the concerns we have from a regional standpoint is, how long can we own that piece of paper in our inventory until we are told its a piece of paper and you have to get out. If im going to do my work on it, and a lot of times, its out for the bid. So my work has to be done relatively quickly because its going to trade that day or the next day. We do our work, we take it down. We start offering the bond out to institutions who are going to take two, three, four weeks to look at it. If i have a regulator who says you cant own it for two, three, four weeks all of a sudden, now, i cant transact in that asset class any more. That was one of the things i mentioned earlier about several dealers stepping out of the nonagency abs arena. So, you know, curious is one thing. Liquidity from the security is one thing, and the amount of time you need to hold it, and the new pressing regulations coming down saying you cant hold it for that period of time, makes you step away from the product. I think we should also think about some of the micro effects. Low Interest Rate environment. Which has an allowed to issue Corporate Bonds. The ten largest u. S. And european issuers have 18,000 bonds. Thats a lot of little bonds out there to trade. Theyre very much a counter market. By definition means its going to be a less liquid market. Were about to leave a period of low volatility. Those two pressures are likely to go up, and greater volatility, thats whats speering the new fear in the market, in terms of, what will liquidity be when Interest Rates go up. If i could add to that. I think sort of saying the same thing, the panel is in agreement generally, all of us are expressing it in different ways. It seems to me that the key issue is whether investors are sort of anticipating what the liquidity in their transactions are, thats more important than whether current market depth is high or low or bid spreads are high or low over time, we had large depth in treasuries before the crisis. And much larger depth in other Asset Classes before the crisis. Which didnt hold up during the crisis. So i think precrisis liquidity was not a predictor of what would hold up. Currently if measures are somewhat less, im not sure that its going to predict how it would react under a stress event. And so was the key one of the key issues is what how are investors anticipating this . Is this part of their Investment Strategy . And do prices reflect it, and do practice Risk Management practices reflect that . I think that there are two