Hearing of the House Commitee on Financial Services Subject: Recent Events in the Credit and Mortgage Markets

Interview

HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: RECENT EVENTS IN THE CREDIT AND MORTGAGE MARKETS AND POSSIBLE IM

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REP. AL GREEN (D-TX): Yes, Mr. Chairman. I'll accelerate the pace and I'll be as terse as possible.

Let's talk quickly if we may about the risk layering that has been mentioned by you, Miss is it Bair? Who's going to regulate this when you have all of these various and sundry risks being placed on top of each other and right now there is nothing regulating it? Who would you propose regulate this?

MS. BAIR: Well, we do regulate bank lending and we have through our guidance and supervisory activities put a lot of constraints on risk layering.

Still, again in the non-bank market, those are state-regulated entities. The Federal Reserve does have the ability to impose national standards on the non-banks.

REP. GREEN: If I may, you mention it in your paper -- and it's very well done, by the way.

MS. BAIR: Thank you.

REP. GREEN: I enjoyed reading it.

MS. BAIR: Thank you.

REP. GREEN: But are you saying that there is more that you will do in the area of risk layering?

MS. BAIR: Well, I think there's -- the risk layering was addressed in our subprime and NTM guidance. And I believe -- we're hopeful that the Fed will be able to address it as well under the HOEPA rules for non-bank lenders.

We can only reach risk-layering lending practices in the banking sector and I think we have very aggressively addressed that --

REP. GREEN: Okay, let me move quickly. Who's going to deal with the 2/28s and the 3/27s and the onerous and sometimes invidious pre- payment penalties? Who will eventually step in and regulate that or deal with that?

MS. BAIR: Well, the -- for the non-bank regulators, the states do have some authority over the -- excuse me, the non-bank lenders -- the states do have some authority. They worked with us in developing our guidance and are trying to apply it.

The Federal Reserve Board I think is really going to be key here. They're undertaking a rule-making right now --

REP. GREEN: And finally, if I may, quickly. We have pension funds that are investing in hedge funds.

MS. BAIR: Yes.

REP. GREEN: Hedge funds are investing in the subprime market funds. Many of these pensioners don't really understand how at risk their pensions are. Who's going to look at this and make some determine that maybe this area needs some sort of scrutiny because of the risk that the pensioners are placed at by virtue of the way this connectivity has developed?

MR. STEEL: I can start if you wish, and then maybe refer to the SEC.

This is an issue of private pools of capital that has been a focus of the President's Working Group. We believe that there are four different actors in this situation: there are the regulators, the regulated entities that finance the private pools of capital, the managers themselves, and investors. And all four need to be diligent and vigilant with regard to their responsibilities.

When I spoke about this issue to Chairman Frank before, I said that -- and I remember quite clearly -- the status quo is not acceptable. We're working hard now to increase the focus on this and develop best practices for each one of these people.

REP. GREEN: Thank you very much. I'll yield back, Mr. Chairman, but I would like to say that I think the president stepped up the plate; I think the Fed chair stepped up to the plate. People are expecting the Congress to step up to the plate as well. People understand that there is a crisis, notwithstanding what is being said.

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