[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
H.R. 3951--THE FINANCIAL SERVICES
REGULATORY RELIEF ACT OF 2002
=======================================================================
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 14; APRIL 25, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-62
U.S. GOVERNMENT PRINTING OFFICE
78-401 WASHINGTON : 2002
________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
BOB BARR, Georgia GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas DENNIS MOORE, Kansas
BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearings held on:
March 14, 2002............................................... 1
April 25, 2002............................................... 35
Appendixes:
March 14, 2002............................................... 57
April 25, 2002............................................... 166
WITNESSES
Thursday, March 14, 2002
Buck, Carolyn, Chief Counsel, Office of Thrift Supervision....... 7
Dollar, Hon. Dennis, Chairman, National Credit Union
Administration................................................. 10
Kroener, William F. III, General Counsel, Federal Deposit
Insurance Corporation.......................................... 6
Little, Roger W., Deputy Commissioner, Credit Unions Office of
Insurance and Financial Services, State of Michigan, on behalf
of the National Association of State Credit Union Supervisors.. 28
McCaul, Elizabeth, Superintendent of Banks, New York State
Banking Department, on behalf of the Conference of State Bank
Supervisors.................................................... 26
Olson, Hon. Mark W., Member, Board of Governors, Federal Reserve
System......................................................... 1
Williams, Julie L., First Senior Deputy Comptroller and Chief
Counsel, Office of the Comptroller of the Currency............. 4
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 58
Capito, Hon. Shelley Moore................................... 59
Gillmor, Hon. Paul E......................................... 60
Royce, Hon. Ed............................................... 61
Buck, Carolyn................................................ 111
Dollar, Hon. Dennis.......................................... 130
Kroener, William F. III...................................... 91
Little, Roger W.............................................. 157
McCaul, Elizabeth............................................ 140
Olson, Hon. Mark W........................................... 62
Williams, Julie L. (with attachment)......................... 72
Additional Material Submitted for the Record
Williams, Julie L.:
Information requested by Hon. Eric Cantor.................... 90
WITNESSES
Thursday, April 25, 2002
Page
Cheney, William, President/CEO, Xerox Federal Credit Union, on
behalf of the National Association of Federal Credit Unions.... 42
Duke, Elizabeth A., Senior Vice President, Government Relations,
South Trust Corporation, Birmingham, AL, on behalf of the
American Bankers Association................................... 47
Gaither, Charlene R., Manager, Eastern Panhandle Community
Federal
Credit Union, Martinsburg, WV, on behalf of the Credit Union
National Association........................................... 40
Hage, Curtis L., Chairman and CEO, Home Federal Bank, Sioux
Falls, SD, Chairman, America's Community Bankers, Washington,
DC............................................................. 46
Stone, Pierce, Chairman, President & CEO, Virginia Community
Bank,
Louisa, VA, on behalf of the Independent Community Bankers of
America........................................................ 44
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 168
Oxley, Hon. Michael G........................................ 167
Gillmor, Hon. Paul E......................................... 169
Cheney, William.............................................. 184
Duke, Elizabeth A............................................ 271
Gaither, Charlene R.......................................... 170
Hage, Curtis L............................................... 237
Stone, Pierce................................................ 229
Additional Material Submitted for the Record
Gaither, Charlene R.:
Written response to questions from Hon. Felix Grucci......... 183
Hage, Curtis L.:
Written response to a question from Hon. Spencer Bachus...... 268
Written response to a question from Hon. Melissa Hart........ 270
Financial Services Roundtable, prepared statement................ 282
H.R. 3951--THE FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2002
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THURSDAY, MARCH 14, 2002,
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 9:56 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
[chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Weldon, Castle,
Kelly, Ryun, Royce, Cantor, Grucci, Hart, Capito, Rogers,
Tiberi, Bentsen, Meeks, Kanjorski, Hooley, Lucas, J. Maloney of
Connecticut, and Sherman.
Chairman Bachus. The subcommittee, after a brief
postponement, meets today for a legislative hearing on H.R.
3951, the Financial Services Regulatory Relief Act of 2002, a
bill introduced earlier this week by my colleagues on the
subcommittee, Ms. Capito of West Virginia, and Mr. Sandlin of
Texas.
We are going to go right to the witnesses. We'll start with
the first panel. We are going to dispense with opening
statements because of the delay, and hopefully, that will put
us right back on time.
Our first panel is the Honorable Mark Olson, member of the
Board of Governors of the Federal Reserve System. We thank you
for your attendance and congratulate you on your appointment.
Ms. Julie L. Williams, First Senior Deputy Comptroller and
Chief Counsel, Office of the Comptroller of the Currency; Mr.
William Kroener, General Counsel for the Federal Deposit
Insurance Corporation; Ms. Carolyn Buck, Chief Counsel, Office
of Thrift Supervision, and Dennis Dollar, Chairman, National
Credit Union Administration.
We welcome our witnesses to the subcommittee. I think there
is agreement we are going to go from left to right. We should
have probably discussed that with you, but if it is all right
with the panel, we will start with Governor Olson and then
proceed with Ms. Williams on down the line. Thank you, Governor
Olson.
STATEMENT OF HON. MARK W. OLSON, MEMBER, BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM
Mr. Olson. Thank you very much, Mr. Chairman, and Members
of the subcommittee. We're delighted to have the opportunity to
testify today on H.R. 3951. The Federal Reserve Board responded
last summer to a request by Chairman Oxley to suggest ways to
improve the banking laws and to relieve unnecessary burden.
In the context of that request, we did submit a number of
options, several of which have been included in your bill. And
I would like to speak briefly to those this morning. We have a
complete statement which I will submit for the record, but I
will abide by the time constraint in the opening statement.
Chairman Bachus. And I will say this. We are not going to,
with this panel, we are not going to enforce the 5-minute rule.
Mr. Olson. In the spirit of the moment, I will stick with
brevity also.
Chairman Bachus. Some of your fellow panel members may
enforce a 10 or 12-minute rule.
[Laughter.]
Mr. Olson. OK. Our first suggestion involves de novo
interstate branching. Members of the subcommittee may recall
that interstate banking legislation was achieved largely, if
not totally, by the various States during the 1980s and during
the 1990s as they passed laws allowing for interstate bank
ownership.
The question of interstate branching was dealt with with
the Riegle-Neal Act of 1994. There are two ways that branching
was allowed. One was by a bank purchasing a bank across State
lines and then converting it to a branch or branching from
there, and the other option was for de novo branching, but that
would only be allowed if the State in which the bank wanted to
enter wold invite them in, essentially an opt in provision.
There are two competitive issues involving that provision.
The first one is that Federal thrifts are allowed to branch de
novo across State lines now. So there is a current imbalance
between the competitive environment for Federal thrifts and for
commercial banks, and this supported amendment would address
that issue.
The second issue involves a significant difference between
the impact on small banks and large banks. Now remember that
there are 17 States that have the opt-in provision and 33
States plus the District of Columbia that have not adopted the
opt-in, so there is not the opportunity to enter those States
by de novo branching.
The distinction is that the smaller banks, whose natural
markets would be across State lines, are at a slight
disadvantage in that environment because the largest banks are
able, with some ease, to purchase a bank and then accomplish
the branching, but the smallest banks would be a significant
burden to do so. We think it would level the playing field if
the de novo option were to be eliminated from the statute.
Having looked at that provision again, though, after we
submitted it, there is one issue that we would like to call to
the subcommittee's attention, and that concerns industrial loan
companies. ILCs, as I think the subcommittee knows, are FDIC
insured institutions whose parent ownership falls outside of
the restrictions provided by the Gramm-Leach-Bliley Act. As
we've looked at this amendment, one unintended consequence
might be to allow ILCs to establish a nationwide presence
completely outside of the parent being under the Federal
restrictions of the Gramm-Leach-Bliley Act. That we don't see
as a minor streamlining. We see that as a major policy issue.
We, Mr. Chairman, have drafted language that if it would be
helpful to the subcommittee we could submit as a further
follow-up.
The second issue that we would like to suggest involves
cross-marketing restrictions between a bank and a company in
which it has ownership in its merchant banking portfolio. When
the Gramm-Leach-Bliley Act was passed, to assure that
institutions were not avoiding the limitations of Gramm-Leach
by putting an entity into its merchant banking portfolio and
then operating it as if it were an affiliate, there were cross-
marketing restrictions. There was one exception to that,
however, involving insurance companies in a financial holding
company. There is a narrow limitation for cross-marketing that
insurance companies can do with institutions that the insurance
company has an equity interest in their merchant banking
portfolio.
We are suggesting that banks in financial holding companies
ought to have the same opportunity.
A third issue involves the removal of the post-approval
wait period. Currently in the statute under mergers and
acquisitions, once they have been approved by the regulatory
authorities, there is a mandatory 30-day wait period for the
attorney general to review the merger or acquisition for
antitrust or anticompetitive implications, the 30 days now can
be lowered to a 15-day period. We are suggesting that after the
approval has been made, and with the explicit approval of the
Attorney General, the 30-day period be eliminated entirely.
The fourth item that we would like to talk about involves
certain unnecessary reports regarding insider loan
transactions. And before I talk about the three provisions, I
would like to assure the subcommittee that the insider loan
issue covered by Reg O is an important regulatory concern. And
nothing that we are suggesting here would diminish either the
bank's responsibility or the regulator's oversight
responsibility in that area. However, there are three small
reporting requirements that in our judgment don't contribute to
safety and soundness, the recordkeeping responsibility of the
institution or the oversight role of the Fed. So we would
suggest that they be eliminated. Had the reports been
regulatory, we would have dropped them. But, they are mandated
by statute, and we are suggesting that the statutory
requirement be eliminated.
Two more exceptions. One involves director interlocks on
small institutions. In 1978 when the Depository Institution
Management Interlock Act was passed, there was a provision that
allowed, in a large metropolitan area--an MSA--for a small bank
or financial depository institution to be able to have a
director on its board but have that same person be a director
of another small bank in that same metropolitan area so long as
they were not in the same immediate market. That was a good
provision in 1978 when the dollar figure was $20 million. We
are suggesting that that dollar figure today perhaps should be
$100 million, and that's what we're suggesting.
The final suggestion that we have involves exceptions to
attribution rules. A bank holding company is not allowed to own
more than 5 percent of the voting shares of any company, and
that includes, under the current statute, shares held in trust
for the company or its employees or shareholders. We are aware
of instances that involved pension plans or 401K plans where
the institutions are allowing their employees the ability to
direct their portion of a 401K or profit sharing so that they
could purchase shares and they could vote those shares, so the
individual would make not only the investment decision but the
voting decision.
In order to monitor the 5 percent requirement, it would be
a massive recordkeeping responsibility, and it doesn't in our
judgment change the effectiveness of the rule. What we are
asking for is on a case-by-case basis, the permission to
provide exception.
Mr. Chairman, that concludes my opening remarks, and I'd be
happy to answer questions.
[The prepared statement of Hon. Mark W. Olson can be found
on page 62 in the appendix.]
Chairman Bachus. Thank you.
Ms. Williams.
STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY COMPTROLLER
AND CHIEF COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Ms. Williams. Chairman Bachus and Members of the
subcommittee, I appreciate this opportunity to discuss with you
ways in which unnecessary regulatory burden on America's
banking system can be reduced, and to express the views of the
Office of the Comptroller of the Currency on the Financial
Services Regulatory Relief Act of 2002.
Let me also begin by thanking Ms. Capito and Mr. Sandlin
for sponsoring this bill, which includes sensible and
appropriate regulatory burden relief for national banks and
other financial institutions, as well as measures that will
enhance bank regulators' ability to maintain a safe and sound
banking system. We and the other agencies have worked with the
subcommittee staff in developing some of the provisions in the
bill, and we very much appreciate the opportunity to have done
so and to continue to do so through the process. My testimony
this morning will highlight a few provisions of the bill that
we believe are especially important.
As the subcommittee knows, effective bank supervision
demands that we achieve a balance among several, sometimes
competing, but equally important, objectives. One of these
objectives is to foster banks' ability to conduct their
business profitably and competitively, free from burdensome
constraints that are not necessary to further the purposes of
the banking laws.
This bill contains several provisions that promote this
objective by streamlining and modernizing aspects of the
corporate governance and interstate operations of national
banks. The OCC strongly supports these provisions.
For example, the bill modifies the so-called ``qualifying
shares'' requirement currently in the National Bank Act, which
has made it difficult for some national banks to obtain
favorable tax treatment as ``Subchapter S'' corporations. The
``qualifying shares'' provision requires every national bank
director to hold a specified minimum equity interest in his or
her national bank. Because of this requirement, however, some
national banks end up with more shareholders than the law
permits for a corporation wishing to elect ``Sub S'' status.
Community banks are most disadvantaged by this result.
The bill solves this problem by authorizing the Comptroller
to permit the directors of banks seeking ``Subchapter S''
status to hold subordinated debt instead of equity shares.
Holding subordinated debt does not cause a director to be
counted as a shareholder for purposes of ``Subchapter S.'' At
the same time, the subordinated debt requirement achieves the
same purpose as the requirement to hold equity shares because a
director holding that sub debt can only be repaid in full if
all other claims of depositors and non-deposit general
creditors of the bank are first paid in full.
A second sensible modernization in the bill that I'll
mention eliminates a provision in current law that requires a
national bank to have cumulative voting in the election of its
directors. The bill permits a national bank to determine, at
its option, reflected in its articles of association, whether
or not to permit cumulative voting. This conforms the National
Bank Act to modern corporate codes and provides national banks
with the same corporate flexibility available to virtually all
corporations and State banks.
A third provision repeals the requirement in current law
that a State must affirmatively enact legislation in order to
permit national and State banks to conduct interstate expansion
through de novo branching. Governor Olson has already
articulated some very good reasons for this particular
provision in the bill. The effect of current law is to require
that, in many cases, banks must structure, if they can,
artificial and unnecessarily expensive transactions in order to
establish a new branch across a State border. Banks and their
customers would benefit by this change, which would permit a
bank to choose which form of interstate expansion makes the
most sense for its business needs and its customer demands.
Federal thrifts have enjoyed this type of flexibility for
decades.
The bill also contains provisions that address a second,
and fundamentally important, objective of bank supervision, and
that is to promote and maintain the safety and soundness of the
banking system. For example, the bill expressly authorizes the
Federal banking agencies to enforce an institution-affiliated
party's or controlling shareholder's written commitment to
provide capital to an insured depository institution. This
provision would address some recent Federal court decisions
which have conditioned the agencies' ability to enforce this
type of written commitment on a showing that the party who made
the commitment was somehow ``unjustly enriched.'' By removing
this impediment to our ability to hold parties to their
commitments to provide capital, the new provision will enhance
safety and soundness of insured depository institutions, and it
should help to reduce losses to the Federal Deposit Insurance
funds.
My written statement touches on several additional
amendments to current law that we believe would enhance the
banking agencies' safety and soundness authority, reduce risk
to the deposit insurance funds, and facilitate our enforcement
efforts when wrongdoing does occur. We are working with the
other banking agencies to develop these recommendations, and we
hope that they can be considered in the legislative process as
it continues.
Mr. Chairman, on behalf of the OCC, thank you, and Ms.
Capito, for your support of this legislation. I'd be happy to
answer any questions you have.
[The prepared statement of Julie L. Williams can be found
on page 72 in the appendix.]
Chairman Bachus. Thank you.
Counsel Kroener.
STATEMENT OF WILLIAM F. KROENER, III, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION
Mr. Kroener. Mr. Chairman and Members of the subcommittee,
I appreciate the opportunity to present the views of the
Federal Deposit Insurance Corporation on the proposed
legislation to provide regulatory burden relief.
The FDIC shares the subcommittee's continuing commitment to
eliminate unnecessary burden and to streamline and modernize
laws and regulations as the financial industry evolves. The
FDIC itself is engaged in a number of initiatives to address
the issue of regulatory burden. Chairman Powell recently formed
a regulatory burden task force within the FDIC to study ways to
reduce the regulatory burden. The task force will review the
FDIC's operating principles, processes and practices, study
ways to make the FDIC more sensitive to the burden issue, and
make recommendations to the Chairman on burden reduction.
The FDIC recently initiated a comprehensive review of
internal processes and operating procedures related to the
supervision of State-chartered non-member banks. We are
identifying ways to better allocate resources in the areas that
present the greatest risk to our insurance funds: problem
banks, larger financial institutions, technological change,
high risk subprime lending, internal control procedures, and
fraud.
We have already implemented several improvements such as
making the report of examination format more user-friendly,
designating Applications Subject Matter Experts as centralized
resources for bankers, and contacting banks between
examinations to discuss issues so that we can do a more focused
and efficient examination.
We are currently also reviewing the examination process to
achieve maximum efficiencies in the examination of small, well
rated banks, and hope to reduce total examination hours in
these institutions by up to 20 percent.
We also are revising our compliance examination approach to
place a greater emphasis on an institution's administration of
its compliance responsibilities. Examiners will evaluate--in
depth--an institution's compliance program. Based on this
review, examiners will then determine where there may be a
significant risk of regulatory violations and appropriately
tailor their transactional testing.
The FDIC continues to work with the other banking
regulators in implementing more efficient regulations and
processes such as the new ``Interagency Charter and Federal
Deposit Insurance Application'' and the new standardized
requests for electronic loan information.
The FDIC also supports statutory changes to reduce
regulatory burden in a number of areas, including those in the
bill that, first, clarify that an agency may suspend or
prohibit individuals convicted of certain crimes from
participation in the affairs of any depository institution.
Second, those that modify the requirement for retention of old
records of a failed insured depository institution at the time
a receiver is appointed, and third, those that permit the FDIC
to rely on records preserved electronically, such as optically
imaged or computer scanned documents.
The FDIC also supports a number of provisions which were
requested by our fellow regulators and included in the
proposal, such as those that streamline merger application
requirements and that grant Federal banking agencies the
authority to enforce conditions imposed in certain written
agreements relating to additional capital contributions.
We are working with staff at the OCC to perfect language in
Section 604 of the bill expanding the prohibition of persons
convicted of certain crimes from participating in the affairs
of uninsured financial depository institutions.
Finally, the FDIC recommends that the subcommittee include
four additional regulatory relief items in the bill. These
additions relate to:
First, authority for supervisory agencies to enforce
conditions on the approval of deposit insurance;
Second, clarification that conversions which result in more
than one bank would continue to require deposit insurance
applications from the resulting institutions, as well as review
and approval by the appropriate Federal banking agency;
Third, amendments to the Bank Merger Act and Bank Holding
Company Act that would require consideration of the potentially
adverse effects on the insurance funds of any proposed bank
merger transaction or holding company formation acquisition;
and
Fourth, language that would make clear that pre-
receivership liens for failure to pay property taxes are
extinguished when the property is acquired by the Federal
receiver.
I have included relevant language as an appendix to my
written statement on these four items.
Thank you for the opportunity to present the FDIC's views
on these issues. The FDIC supports the subcommittee's continued
efforts to reduce unnecessary burden on insured depository
institutions without compromising safety and soundness or
consumer protection.
We are pleased to work with the subcommittee in
accomplishing this goal. Thank you.
[The prepared statement of William F. Kroener III can be
found on page 91 in the appendix.]
Chairman Bachus. Thank you.
Chief Counsel Buck.
STATEMENT OF CAROLYN BUCK, CHIEF COUNSEL, OFFICE OF THRIFT
SUPERVISION
Ms. Buck. Mr. Chairman and Members of the subcommittee,
thank you for the opportunity to present OTS's views on your
initiatives to reduce regulatory burden on our depository
institutions.
During periods of economic challenge, it is particularly
important that we make every effort to remove unnecessary
regulatory obstacles that hinder profitability, innovation and
competition in our financial services industry.
In my written testimony I discuss a number of important
proposals that we believe would significantly reduce existing
burdens on the thrift industry, and I ask that the full text of
that statement be included in the record.
In my oral statement, I'll highlight three areas where
reforms would provide significant relief to the thrift
industry. These are deposit insurance reform, parity with the
banks under the securities laws, and mortgage simplification.
Perhaps the most straightforward and effective means to
provide regulatory relief to our insured depository
institutions is to reform the deposit insurance system under
which they now operate. It is long past time to merge the bank
insurance fund and the savings association insurance fund.
There is no disagreement on this. Merger will promote
efficiency in administering the funds and result in a more
stable insurance system. Therefore, we strongly support fund
merger.
We also believe that the free rider problem should be
addressed in fairness to those who have paid into the funds
over many years.
And finally, the FDIC board should have sufficient
flexibility in setting the designated reserve ratio and
deciding when to increase the assessment rate to assure the
continued stability of the insurance fund. Providing certainty
about the process for determining the amount of deposit
insurance assessments is a very important regulatory burden
initiative.
Another area woefully in need of reform is the mortgage
process. OTS applauds HUD Secretary Martinez's initiatives in
this area. Last fall, Secretary Martinez spoke about making the
home buyer's experience less complicated, the paperwork
requirements less demanding, and the mortgage process itself
less expensive. This is no simple task, but everyone involved
in making the American homeownership dream a reality shares his
goals, and we pledge to do our part to help achieve this
objective. Simplifying the mortgage process will reduce
regulatory burden on thrifts and on all housing lenders and
assist consumers. The importance of this cannot be overstated.
Turning to the bill before this subcommittee, the most
important feature to thrifts and the communities they serve
concerns parity with banks under the Federal securities laws.
OTS strongly supports the amendments to extend the thrifts the
same exemptions as banks from investment advisor and broker-
dealer registration requirements. Thrifts fill an important
niche in the financial services arena by focusing their
activities primarily on residential, community, small business
and consumer lending. The Homeowners Loan Act allows thrifts to
provide trust and custody services on the same basis as
national banks, and investment advisor and third-party
brokerage in the same manner as banks.
Not only are the authorized activities the same, but OTS
examines those activities in the same manner as the banking
agencies. Some may suggest that this is a charter issue; that
this SEC registration disparity is an intended advantage of the
bank operating structure. However, as I have noted, thrifts
have had the ability for some time to conduct these activities,
these investment advisor and broker-dealer activities, under
their existing charter authority. This is not a powers issue,
then, but a cost issue. The consequence of the disparity is the
extra costs the thrifts must incur to exercise the same powers
as banks. This is regulatory burden in its purest form.
We firmly believe that charter choice should be based on
which charter is the best fit for an institution's business,
not which carries the least regulatory burdens associated with
the authorized business activities. The proposed parity
amendments to the Federal securities laws remove distinctions
that have caused thrifts to engage in regulatory arbitrage by
changing charters to reduce costs even though the thrift
charter is the best fit for them.
Although the details of the current situation are complex,
the key points are that banks, but not thrifts, are exempt from
investment advisory registration requirements under the
Investment Advisors Act of 1940. In addition banks, but not
thrifts, enjoy an exemption from broker-dealer registration
requirements under the 1934 Act for certain activities
specified under the Gramm-Leach-Bliley Act.
For purposes of broker-dealer requirements, the SEC has
exercised its exemptive authority to treat thrifts the same as
banks, at least for now. But it has been reluctant to extend
the same parity to the investment advisor requirements.
Treating thrifts and banks the same under the Federal
securities laws makes sense for a number of reasons, but I
think it's best stated in the SEC's own words from the preamble
to their May 2001 interim final rule that did extend broker-
dealer parity to thrifts. They stated, and I quote: ``Insured
savings associations are subject to a similar regulatory
structure and examination standards as banks. Extending the
exemption for banks to savings associations and savings banks
is necessary or appropriate in the public interest and is
consistent with the protection of investors.''
Congress has already spoken on the banks' exemption.
Perhaps the best way to put this matter to rest for thrifts is
for Congress to affirm the SEC's extending the broker-dealer
exemption to thrifts, plus have Congress extend the investment
advisor exemption. This would also have the beneficial effect
of avoiding the need for a series of SEC administrative
exemptions, another potential regulatory burden, if additional
differences come to light later.
OTS is committed to reducing burden whenever it has the
ability to do so, consistent with safety and soundness and
compliance with law. The proposed legislation advances this
objective, and we appreciate that many of the reforms we've
long desired are included in the bill. I especially thank you,
Mr. Chairman, Congresswoman Capito, and all those who have
shown leadership on this issue and look forward to working with
the subcommittee on this legislation. Thank you.
[The prepared statement of Carolyn Buck can be found on
page 111 in the appendix.]
Chairman Bachus. Chairman Dollar.
STATEMENT OF HON. DENNIS DOLLAR, CHAIRMAN, NATIONAL CREDIT
UNION ADMINISTRATION
Mr. Dollar. I am pleased to present the subcommittee with
the following suggestions. I am going to highlight, for the
sake of time, the key points of my written testimony that I
have presented to the Members of the subcommittee that attempt
to address the issues of regulatory relief and productivity
improvements for Federal credit unions.
We feel that these proposals are consistent with the
mission of credit unions and the principles foremost of safety
and soundness. They address statutory restrictions that now act
to frustrate the delivery of financial services because of
either technological advances, current public policy priorities
or practical market considerations.
First of all, the Federal Credit Union Act authorizes
Federal credit unions to provide check cashing and money
transfer services to members. To reach out to the unbanked,
Congress should consider authorizing Federal credit unions to
provide these services to anyone eligible to become a member.
This is particularly important to the overwhelming majority of
Federal credit unions whose field of membership includes
individuals of limited income or means. These individuals often
do not have mainstream financial services available to them and
often pay excessive fees for check cashing, wire transfer and
other services.
Allowing Federal credit unions to provide these limited
services to anyone in their field of membership would provide a
lower fee alternative for these individuals while at the same
time encouraging them to trust conventional financial
organizations. If credit unions are to be, as we feel that they
are and must remain, a part of the solution to the predatory
lending problem in this country, their potential members need
to know the types and value of services that they can receive
from a credit union they are eligible to join. I am pleased to
note that a provision as it relates to this is included in the
Capito-Sandlin bill, and we appreciate that consideration.
Also, Federal credit unions are authorized to make loans to
members of other credit unions and to credit union
organizations. The Federal Credit Union Act imposes various
restrictions on these authorities, including a 12-year maturity
limit that is subject to only very limited exceptions. This
one-size-fits-all maturity limit should, we feel, be eliminated
or at least increased. It is outdated and unnecessarily
restricts Federal credit union lending authority. As in the
case with other federally-chartered financial institutions, we
believe appropriate rulemaking authority should be granted by
statute for NCUA to establish competitive maturity limits
within the bounds of safety and soundness. And again, we
appreciate the inclusion of a provision related to this in the
bill.
The Federal Credit Union Act authorizes Federal credit
unions to invest in organizations providing services to credit
unions and credit union members. An individual Federal credit
union, however, may invest in aggregate no more than 1 percent
of its shares and undivided earnings in these organizations
which are commonly known as credit union service organizations
or CUSOs. CUSOs provide important services such as data
processing, check clearing for credit unions, financial
retirement planning among others. When these services are
provided through a CUSO, financial risks are isolated from the
credit union. So we find that the relatively low statutory 1
percent aggregate limit often forces credit unions to either
bring services in house, thus potentially increasing risk to
the credit union and the insurance fund, or to turn those over
to outside providers and lose institutional control. We feel
that the statutory 1 percent limit should be increased or
eliminated and the NCUA board be allowed to set by regulation a
limit that is appropriate for safety and soundness purposes.
And we appreciate again the fact that the proposed legislation
does include a provision to address this in some manner.
The Credit Union Membership Access Act enacted in 1998
expressly authorized multiple common bond credit unions. The
Access Act, however, provided that a Federal credit union may
add a new group to its field of membership only within very
strict proximity guidelines. This in effect often requires a
credit union to establish a costly physical presence that could
potentially if unchecked present long-term safety and soundness
concerns. This brick-and-mortar limitation on Federal credit
union services is not we feel sound policy in today's clicks
and Windows financial marketplace where most services can be
provided electronically and should, we feel, be reviewed by
Congress for possible regulatory relief.
The Federal Credit Union Act also limits the investment
authority of Federal credit unions to loans, Government
securities and deposits in other financial institutions and
certain other very limited investments. This limited investment
authority restricts the ability of Federal credit unions to
remain competitive in the rapidly changing Federal financial
marketplace. In our view, the Act should be considered for
amendment to provide such additional conservative investment
authority as is approved for other federally regulated
financial institutions and in accordance with the regulation of
the NCUA board. Again, we appreciate the fact that this
provision has been addressed by the legislation.
Last, the Federal Credit Union Act, as amended by the
Credit Union Membership Act in 1998, allows voluntary mergers
of healthy Federal credit unions but requires that NCUA
consider a spinoff of any group of over 3,000 members in the
merging credit union, or, if they convert to a community-based
charter, to spinoff any groups they presently serve outside the
community. When two healthy multiple common bond Federal credit
unions wish to merge and thus combine their financial strength
and improve their safety and soundness position, as well as
service to their members, or a credit union chooses to convert
to a community charter to serve an entire community, we feel
that it is good public policy and they should be allowed to do
so without unnecessary regulatory impediments.
Again, we appreciate the fact that the proposed legislation
does attempt to address this concern in some way. Again, I know
that there are other issues that are in the legislation that we
have mentioned in my written statement, but I wanted to touch
on these highlights, Mr. Chairman, and to thank you today again
for the opportunity to provide this input on this important
bill before your subcommittee.
We want to continue to work with you and offer our staff as
a resource in any way as you continue to move toward what I
know is your goal as is ours, which is removing unnecessary
regulatory burden while maintaining our first and foremost
commitment to safety and soundness and the necessary regulation
that is required to protect the American public. Thank you very
much, Mr. Chairman. I'd be glad to answer any questions.
[The prepared statement of Hon. Dennis Dollar can be found
on page 130 in the appendix.]
Chairman Bachus. Thank you.
I thank the panel. Our primary purpose here is to free up
resources of the institutions so they can actually use more of
their resources to lend to consumers. So we've looked at any
regulation that we think unduly costs them resources that are
unnecessary--that are not necessary for safety and soundness,
are outdated, or, as Counsel Buck said, where you have one
requirement for thrifts and one for banks, equal protection, or
equal treatment argument.
Governor Olson, you mentioned the cross-marketing
restrictions. One reason that we've moved on that--I think we
had a hearing last year about whether financial holding
companies could cross-market products with companies they had
made investments in. And there are restrictions now and I think
the Federal Reserve in their regulations had recommended then
relaxing those restrictions. And there was general consensus at
that hearing that that could be done without, you now, that
there was not a privacy concern. Some people confused at first
blush that there was a privacy concern there. But what we're
talking about is cross-marketing products and services, which
would not violate their customers' privacy.
And there is already a provision that you can do that with
insurance companies. So I think what you said today I heartily
agree with is an equal treatment. And also the fact that it
doesn't diminish a customer's protections. And it certainly I
think was meant by Gramm-Leach-Bliley. That is in the bill. In
fact, several of the things that you have discussed in your
testimony are in the bill.
And Deputy Williams, you mentioned the fact that we've been
working closely before we dropped this bill. This was not
something that we just decided on some things. We have been in
close discussion with all your agencies looking for things
where there was consensus, where there was an agreement between
the parties that it could be done. Now sometimes there may not
be agreement between two of the regulators to do something for
the thrifts or to do something for the banks. But other than
those minor differences of opinion, we tried to go with non-
controversial things.
The only thing in the testimony that I would, Chairman
Dollar, those close proximity restrictions on credit unions,
there was quite a lot of focus on that, quite a lot of
discussion on that. And it is still a very controversial thing,
and if for no other reason, it wasn't included in this
legislation, and that there's so much opposition to that from
the banks. I do sympathize as with technology and what you're
saying, that it does become a problem. But having it in the
bill would be a problem for us.
We have and will continue to work with all the agencies to
refine this bill. I'm sure you will continue maybe to find
things as we move forward. Anything in the bill you object to,
we want to hear about it. Anything that you think ought to be
in the bill that isn't in the bill, we want to hear about it.
We will continue to work closely with you, because you are the
ultimate experts and authority on what regulations need to be
in place for safety and soundness, as opposed to regulations
that don't add anything, simply take resources from what could
be available to consumers.
Mr. Grucci is not here, so Mr. Cantor, we are going in
order of--actually, Ms. Capito. Well, actually, I'm sorry, Mr.
Lucas. Counsel Carter pointed out to me that I had not looked
to my right. Which I always look to my right first. I didn't
know I didn't.
[Laughter.]
Chairman Bachus. Mr. Lucas from Kentucky.
Mr. Lucas. I find this testimony very interesting, sir, but
I have no questions. Thank you.
Chairman Bachus. Thank you. Always efficient.
[Laughter.]
Chairman Bachus. Thank you. Ms. Capito? And if you would
like to make an opening statement, a comment, I think the
Members, as you are the sponsor of this bill, you will
certainly not be held to the 5-minute limit.
Ms. Capito. Thank you, Mr. Chairman.
Chairman Bachus. And I commend you for the work you've done
on this.
Ms. Capito. Thank you. I appreciate your holding this
hearing today, and I appreciate the testimony of our
distinguished witnesses. I particularly want to congratulate
Mr. Dollar on his last name. What a great name for your
business.
Mr. Dollar. I can't say I don't have a dollar to my name.
[Laughter.]
Ms. Capito. I think it's interesting to point out that we
spend a lot of time in this subcommittee room creating new
laws, and I think that periodically it serves us well to look
at provisions in our present laws to see which ones are
dilapidated and old and unused and overlapping and repetitive.
And so I am pleased to be a part of this effort today with this
bill to relieve certain regulatory burdens certainly on the
regulatory agencies, but also on the banking and financial
institutions that have to go forward with these.
I think this type of review will make substantial changes
and it will bring us in greater compliance with the Gramm-
Leach-Bliley Act and also the recently enacted Patriot Act. I
know as the result of some of the Patriot Act regulations that
were put in place, we caused more regulation burden our
institutions, our financial institutions, and certainly on you
all in terms of oversight, and I think it is very timely that
we are updating these provisions as we move through the day
today.
I think you pointed out quite appropriately, Mr. Chairman,
this is certainly not the final bill, and I fully expect after
this hearing we will have many changes, adjustments that we
will be making as we move through this process. And I look
forward to working with you all to see where those changes
might occur.
I would like to ask a couple of questions right now if that
is appropriate to begin asking questions? Yes. Governor, Olson
you addressed the situation of interstate banking. In Section
401, it would preempt State law and allow banks to offer branch
banks, branch offices in other States without first having to
have an existing presence. I represent the State of West
Virginia, which I believe currently allows this type of
branching. And you mentioned 33 States do not offer that as an
option.
I was wondering--I'm a former member of a State legislature
who was very sensitive to Federal preemption, so I was
wondering if there is any opposition from any of these States
to this provision.
Mr. Olson. Congresswoman, we are not aware of opposition.
There might be, but it has not come to our attention at this
point.
Ms. Capito. Thank you. The other question for you, sir,
is--and you brought it up in your opening statement. I'm glad
that you did. Because when we had the press conference
yesterday sort of as a preview of this bill with Chairman
Oxley, this was the first question out of the box, and it dealt
with the insider trading provisions and insider lending. And
people have expressed concerns with respect to the reporting
requirements. And I think you covered in your opening statement
that this would in no way diminish any requirements or
regulations for oversight. But if you could just sort of
restate what that insider lending provision does and how the
protections are still in place.
Mr. Olson. That's a very important point. Insider lending
is covered under Reg O, and there are very specific reporting
requirements and very specific limitations on lending money to
their officers and directors and insiders, and also with
respect to loans from their upstream correspondents. None of
those regulations is altered at all with this amendment.
There are three specific reports, however, that we suggest
could be eliminated, two of them having to do with loans from
outside banks and one having to do with loans that occur
between call report periods that report incrementally the new
loans that had been made. In our judgment, those three reports
don't contribute to our oversight responsibility or to the
record maintenance responsibility of the institutions and
therefore marginally add burden without contributing to the
oversight. But nothing we're saying here diminishes the
importance of monitoring insider lending.
Ms. Capito. Thank you. I have a couple of more questions,
and this one is just sort of a toss-up, so anybody can take it.
In Section 605, it deals with destruction of records. And in
this day and age, destroying records is not something that we
want to go about frivolously or without a great deal of
thought. I realize that a judge under this provision can
require that records be kept for longer than 10 years. Does
anyone feel that this section allows, in the destruction of
records, raise any concerns in anybody's mind on our panel?
Mr. Kroener. Let me take that question, if I may. It's a
provision of great interest to the FDIC. And we are sensitive
to the records problem. And indeed, as Chairman Powell
indicated in a recent speech, we are looking at accountants'
records and whether the FDIC should require preservation in
certain circumstances where we have the authority to do so and
we haven't done so in the past.
But that having been said, this provision is simply
designed as a cost and burden reduction. When an institution
fails, the FDIC will come in as receiver or conservator and
will inherit all the records that institution happens to have.
In some instances, the records can go back more than 100 years.
And we are currently required to preserve those records, and
there is a cost involved--there is a storage cost. And so this
will actually save us money, save our receiverships money and
enable us to pay higher dividends--to more quickly recover for
our insured claims and hopefully pay higher dividends to any
uninsured creditors in the receivership. And so we think it's a
positive, cost saving thing, and we do not see risks in the
provision as drafted. We've worked with the subcommittee to get
the provision as refined as we can on that.
Ms. Capito. OK. Thank you. Can I keep going? Although not
included in the reg relief bill, we have been asked to consider
a provision that would give the Federal Reserve more
flexibility to allow State member banks to engage in investment
activities authorized by their chartering State and approved by
the FDIC as posing no significant risk to the deposit insurance
fund. Currently, State member banks are limited to the
activities granted to national banks, and yet State non-member
banks are allowed to exercise expanded powers within the
confines of safety and soundness. What are your views on that?
Governor Olson? Yes?
Ms. Williams. May I take a crack at that? I think it's
important to understand what the provision that would be
repealed by what you described does. It's not an arcane
provision; it is a safety and soundness-driven provision. And,
it was very recently addressed in the Gramm-Leach-Bliley Act
after painstaking negotiations.
The primary effect of the change that you've described
would be to undo prudential standards and safeguards that were
enacted just over 2 years ago as part of the Gramm-Leach-Bliley
Act. The essence of the statutory change that you've been asked
to consider would be to eliminate a standard currently in
Federal law that applies parallel prudential and safety and
soundness standards to financial subsidiaries of national banks
and financial subsidiaries of State member banks. It would
reopen a set of issues concerning what types of safeguards and
prudential standards need to be in place in connection with
allowing expanded activities to be conducted in subsidiaries of
those types of banks.
You, of course, can decide that those prudential standards
and safeguards are no longer appropriate, but there is no basis
to distinguish whether they are appropriate solely for national
banks or State member banks. If you think that eliminating
those safeguards for State member banks is the way to go, then
you should eliminate them for national banks as well. There's
no basis for a distinction.
Chairman Bachus. I thank the Member.
Mr. Kanjorski. And what we had done is we'd given--Ms.
Capito is sponsor of the bill. We waived her opening statement
and she took 10 minutes.
Mr. Kanjorski. That is certainly agreeable.
Chairman Bachus. But we welcome your membership.
Mr. Kanjorski. Thank you, Mr. Chairman. My questions are
really directed to Chairman Dollar. As you know, I have, for
some time, raised concerns about the value of the Federal
charter. We want to ensure that our Nation's system of dual
chartering remains vibrant and effective.
One provision in this legislation, however, would allow
privately insured, State-chartered credit unions to gain access
to the Federal Home Loan Bank System. Because this section of
the bill raises serious concerns about safety and soundness, I
think that we should consider removing it unless we can
adequately address these concerns.
Additionally, at a time when many in the credit union
movement have raised concerns about the continued value of the
Federal charter, I wonder why we are working in Congress to
increase the value of the State charters. To help the
subcommittee better understand this issue, would you please
outline for us some of the recent trends in charter conversions
from Federal charters to State credit union charters or mutual
savings bank charters?
Mr. Dollar. Congressman Kanjorski, there has been some
trend in recent years of conversion to the State charter from
the Federal charter. Quite frankly, most of it has been driven
by field of membership issues as some of the States under State
law have been able to provide a more liberal field of
membership than is allowed under Federal law.
We have not attempted to in any way preempt the States, for
we like you believe in a dual chartering system that enables a
credit union to have a viable choice of a productive business
opportunity within either the Federal charter or the State
charter. How we have tried to address that has been through
implementing the Credit Union Membership Access Act as
effectively as possible. We think that we have done so. We have
given opportunities for Federal credit unions to be able to
grow within the Federal Credit Union Act. There are some areas,
as we mentioned a moment ago on the proximity issue, where we
would like to see some relief that would enable us to be even
more flexible, I think, in that regard. But I think we've done
a good job. I think we've done a good job in enabling them to
have the powers that are necessary to be able to meet the needs
of their members.
However, each State has the right to pass their own laws as
well. We recognize that and we respect that. One of the reasons
we are here today, and we appreciate the opportunity by the
subcommittee to be a part of regulatory relief legislation, is
because we do believe there are perhaps some regulatory
impediments that are imposed at the Federal level through
Federal statute that are not imposed at the State level that
would enable us to have an even more viable Federal charter.
That's what we want to see, and we appreciate the opportunity
to have a seat at the table here to do that.
Mr. Kanjorski. Thank you. You perhaps were not there, but
in June of 2000, I asked former Chairman D'Amours for an update
from NCUA regarding the relationship of the Federal and the
State charter. I will send you a formal request to get a
further update on this issue.
Mr. Dollar. And we will give you the most recent figures on
that. It has continued. And one of the concerns that we have,
of course, is that as the charter conversions continue that we
ever get to a point where we're out of balance between a viable
Federal charter and a viable State charter. And we think that
one of the ways to respond to that is to try to make the
Federal charter as viable as possible for credit unions who
want to grow and prosper as federally-chartered credit unions,
but still staying within the confines of the Federal Credit
Union Act.
Mr. Kanjorski. Additionally, many of the provisions in the
bill would help Federal credit unions to grow and expand. One
provision, for example, would allow credit unions to cash
checks for anyone eligible to join a credit union. In
Northeastern Pennsylvania, entities like Choice One Federal
Credit Union are working to expand access to our Nation's
financial system in underserved communities. This provision
would certainly help credit unions to offer the unbanked public
affordable services. What are your thoughts on this issue? And
should we expand the provision in the bill to include wire
transfer services, too?
Mr. Dollar. Congressman Kanjorski, in my statement a moment
ago I did state that it is the position of the NCUA board that
in order to facilitate what we are trying to do in our Access
Across America initiative, which is to enable credit unions to
adopt underserved areas and extend credit union services into
many unbanked communities that it's important that the
residents of those communities know the value and the types of
services that they can receive by joining a credit union.
Among those is the ability to get a check cashed at less
than what many times are predatory rates. Credit unions can
provide that service, but today they can only provide it to a
member. And we have long believed that some of those basic
services perhaps could be provided by a credit union not just
to their members but to anyone who is eligible to join the
credit union, not anyone who would not be eligible, but those
who are eligible to join the credit union in order to help them
to understand the value of joining the credit union, the type
of services that they can receive, and we think it could be a
part of providing a much more viable low-cost alternative to
some of the check cashing outlets, the payday loan outlets and
the like that are prevalent in many of these communities. We
think credit unions can be a part of the answer to the
predatory lending issue in this country, and we want to
facilitate that.
Yes, in answer to the second part of your question, we
believe that it should also be extended to wire transfers.
Because particularly as it relates to international
remittances, many American citizens with ties to a homeland are
having to pay 28 and 30 and 32 percent of the amount of an
international remittance to be able to send it back, whereas
most credit unions would be willing to do it for a flat low
cost rate.
Chairman Bachus. Thank you.
Mr. Kanjorski, you have one more question.
Mr. Kanjorski. One more question. Mr. Dollar, would you
comment on how we might change the field of membership
statutory guidelines to ensure that we do not place Federal
credit unions at a competitive disadvantage? Should we, for
example, consider amending the legislation to allow State-
chartered credit unions that convert to a Federal charter to
keep their entire membership base after conversion?
Mr. Dollar. As I said a moment ago, the reason for many of
the conversions to Federal to State charter has been because of
field of membership restrictions. We do not think that the
answer to that, again, as I stated earlier, is to preempt State
law. But we do feel like that we need some greater flexibility
should a credit union decide that they wanted to convert from
State to Federal for us to be able to accommodate a field of
membership that they may have.
In my earlier remarks, I talked about not having to spin
off groups when a credit union converts its charter to a
community charter. What we want is a credit union that is
already serving a community, making a difference in the lives
of that community on a daily basis, or in the lives of the
members of employer groups within its field of membership, to
be able to choose which credit union charter would best benefit
their long-term viability and safety and soundness and make
that choice without being driven by whether or not they're
going to lose some of those groups or some of those members.
Safety and soundness is what drives a great deal of our
concern, but yet field of membership restrictions sometimes
make credit unions make decisions that we would like to see
them to have greater options to make otherwise.
Chairman Bachus. Thank you.
Mr. Kanjorski. Thank you very much, Mr. Dollar. Thank you,
Mr. Chairman.
Chairman Bachus. Congressman Cantor.
Mr. Cantor. Thank you, Mr. Chairman.
Ms. Williams, if I could just ask you, you pointed out in
your testimony that you strongly support relieving the
restrictions in current law of institutions operating as
Subchapter S organizations, which I think everyone is in
agreement or should be in agreement with. But do you know what
the percentage of institutions that operate with that status
is?
Ms. Williams. I don't know the figure off the top of my
head, but I'd be very happy to get back to you with that
information.
Mr. Cantor. Thank you very much.
[The information referred to can be found on page 90 in the
appendix.]
Ms. Buck, if I could direct the next question to you. You
said the OTS supports parity for thrifts under the Investment
Advisors Act of 1940. You pointed out in your testimony that
some individuals have objected to this change because it would
give thrifts a competitive advantage over registered investment
advisors. You further stated that this change will have a
relatively minor impact on the investment advisor industry
because banks are already exempt. Could you just explain that a
little further?
Ms. Buck. Yes. What we've experienced is as our
institutions have increasingly been using trust powers, when
they find that they are subject to registration themselves
under the Investment Advisor Act, and sometimes, depending on
which State they're located in, the individuals who do that
work within the institution may have to register, that they
sometimes are choosing to move to a bank charter where they
don't have to engage in those registration requirements. And so
if the effect here from the investment advisor community is to
believe that somehow preventing thrifts from getting this
parity with banks would give them an advantage over investment
advisors, we've got probably at least a dozen thrifts that we
know of that have converted to banks to be able to escape the
SEC registration requirements.
When you're talking about parity here, we should be talking
about parity as among financial institutions. OTS has the same
regulatory structure as banks. We exercise the same trust
powers as banks have. We have the same structure for
examination. In fact, we just changed our handbook procedures
last year to make them more comprehensive and more in line in
terms of examination procedures with the banks, and we are
about to issue a revised regulation dealing with trust powers,
again to make it more consistent with those that apply to the
banking industry.
So we think that the comparison here should be thrifts with
banks, and not with the investment advisor community.
Mr. Cantor. Thank you very much.
Mr. Chairman, I just have one additional question for
Chairman Dollar. You state that the Administration should be
authorized to establish any maturity limits on loans made by
Federal credit unions in accordance with conventional
marketplace maturities. Could you just describe what the
current limits are on the ability for a credit union to make a
loan and the lending terms, and then the higher maturity limits
that you recommend?
Mr. Dollar. Basically, a credit union, Congressman, cannot
make a loan for a longer term than 12 years with the exception
of a mortgage loan. There are certain other types of lending,
such as recreational vehicles, sometimes certain types of loans
as relates to second homes and the like that the marketplace
carries beyond the 12 year, but do not classify strictly as a
mortgage loan. We don't see this as being an area where there
is a tremendous amount of market that credit unions cannot
meet, but there is some. And the bill as it is proposed extends
that from 12 to 15 years. And frankly, that would very likely
cover any situation that would arise. If the subcommittee and
the Congress were to elect to go from 12 to 15, it would help
the situation tremendously.
We always try to recommend away from those one-size-fits-
all types of caps, because we could set through regulation a 15
year cap and be able to go beyond that if the market changes in
the future. We would prefer that approach. But as the bill
provides, to go from 12 to 15 would cover almost any situation
that we would foresee at this time.
Mr. Cantor. Thank you, Mr. Chairman. Mr. Chairman, I yield
back.
Chairman Bachus. Thank you.
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman. I just have three quick
questions in three different areas. And I guess the first
question I'll address to Mr. Olson. Just in considering the
elimination of the State opt-in program of a de novo branching,
has there been any concern--what have you heard from the
States? Have the States made any comments in regards to that?
What are their opinions or has there been any comment at all
from the States in regards to the elimination of the opt-out?
Mr. Olson. Congressman, that question was asked earlier. I
believe you had just stepped out for a minute. To the best of
our knowledge, we have not had any concerns expressed by the
State, at least to this point.
Mr. Meeks. Thank you.
Chairman Bachus. And, Mr. Meeks, we'll hear from the New
York regulators in the second panel too and you may want to
also address those questions to them in addition.
Mr. Meeks. Thank you, Mr. Chairman. I hope there's not
other questions that I've missed. What about in regards to, and
again, Mr. Olson, to the post-approval waiting period for bank
acquisitions and mergers? Have there been any adverse effects
to the 15-day waiting period? And do you see any adverse
effects in eliminating the waiting period?
Mr. Olson. Congressman, there have not been. The
presumption here is that the regulators have already approved
and that the Attorney General has already reviewed the
circumstances and the facts and have found that there are no
anticompetitive effects of the merger. At that point, right now
the wait period can go from 30 days to 15 days. It would seem
logical that it could go from 30 days to waiving it entirely.
But the underlying presumption is that the regulators have
already approved and the Department of Justice, the Attorney
General, has looked at it as well.
Mr. Meeks. Thank you. My last question, maybe I'll address
this to Ms. Williams, that we live in the post-Enron scandal
days. And just in looking and talking about the elimination of
certain reports and things of that nature, are you concerned or
do you see any concern about the elimination of these reports
that bank officers may be receiving from other banks? And if
possible, are there any conflicts of interest that they may
have as a result thereof?
Ms. Williams. Congressman, I'll defer to Governor Olson on
that. We do support the provisions that are in this bill on
that subject.
Mr. Olson. I think it's important to note that none of the
requirements are being eliminated regarding the reporting of
loans to the bank and the bank's requirements for monitoring
any loans that are covered under Reg O. So all of those
provisions remain. There are three reports, reports that they
are required to file, with respect to those loans that we are
saying are not necessary for either our enforcement or our
regulatory process or for the bank's own responsibility for
those loans. On the margin we're looking to streamline the
process, and we think that those reports are not central to the
process either the bank's or the Fed's responsibilities.
But the underlying issue of insider lending is a very
important one and one that all of the regulators at the table
take very seriously.
Mr. Meeks. Thank you. And I would yield back, Mr. Chairman.
Chairman Bachus. Yes. And Mr. Meeks, I want to say to you
just for the record, at the earlier hearing on FDIC, you had
expressed some concerns about the restrictions on New York
thrifts in accepting municipal deposits. And I wanted to say
for the record that we are working together on that issue to
address your concerns. And I know that New York is actually the
only State that makes that distinction between banks and
thrifts. So we are aware of that. We are aware of your
concerns. And I did want to put that in the record at this
hearing.
Mr. Meeks. We appreciate it, Mr. Chairman, and we are
working together on that. Thank you very much.
Chairman Bachus. Mr. Royce. And I want to commend you. You
have a provision in this bill or two.
Mr. Royce. Thank you, Mr. Chairman. Yes. And on that same
vein, I wanted to ask Mr. Dollar, because as the Chairman said,
Mr. Dollar, a portion of this bill deals with a piece of
legislation I introduced, which was the Faith Based Lending
Protection Act, and specifically deals with member business
loans made by credit unions to non-profit religious
organizations. And the reason this is important to us is
because these are the types of loans that go for the
construction of hospices or that go for soup kitchens or
shelters or churches. And there is a problem with availability
of credit.
Under the current law, credit unions are prevented from
loaning, as you know, more than twelve and a quarter percent of
their total assets to business, and credit unions engaged
primarily in faith-based lending, they're the ones that are
exempted from the cap. But there aren't many engaged in that
line of work, and these faith-based institutions obtain their
liquidity, then, by selling these loans to other credit unions
who are not exempt from the cap. And as a result, the lending
needs of small non-profit organizations are frankly being
crimped, and I think part of the problem is that these
institutions are often ignored by larger banks and thrifts for
a rational reason. I mean, they have very slim profitability
margins.
But the result has been over time that as a number of
credit unions approach their overall business loan caps, these
local enterprises, especially hospices, are seeing their access
to capital steadily decline. And we can fix this problem. And
in this particular bill for regulatory relief, we have included
provisions from H.R. 760, which was the Faith Based Lending
Protection Act, exempting loans made by credit unions to non-
profit religious organizations from the member business loan
cap. And my question to you was going to be what is the
position of the National Credit Union Association's stand on
H.R. 760 and on incorporating that into this regulatory relief
bill?
Mr. Dollar. Congressman Royce, as I said in my original
statement and in answer to one of the questions a moment ago,
anytime that a statutorily one-size-fits-all approach is
applied, you're going to miss something. And when Congress in
1998 applied that 12.25 percent, one-size-fits-all member
business loan cap, it did miss something. And among the very
serious areas that was missed was those credit unions who do
make loans to faith-based organizations.
I want to commend you for introducing the legislation that
you did last year to try to correct that. The National Credit
Union Administration at that time stated its support for that
legislation and has analyzed it and finds no safety and
soundness concerns whatsoever to be able to either pass your
legislation or as is a part of this legislation, to have it
included as a part of a regulatory relief initiative. We
certainly would support that.
Mr. Royce. Well, let me ask you another question then, and
that goes to the performance of these loans for the record in
the past, for the Members. How have these loans to religious
organizations, these loans that go for either churches or
shelters or soup kitchens or hospices, how have they performed
over time? And how would you expect them to perform during
these rather more difficult economic times? Have you got data
going back and can you share that with us?
Mr. Dollar. For the record, very little of credit union
lending is member business lending to begin with. It's less
than a percent and a half of credit union lending. So it is a
very small part of what credit unions do, because it is not
traditional commercial lending as the banks do. It is member
business lending. However, we do monitor this very closely,
because it is an area, of course, that we feel is worthy of our
very close supervision.
We have found that the delinquency rates on all member
business lending in credit unions is lower than the delinquency
rates on personal loans. And among faith-based institutions in
particular is the best delinquency rate in virtually any area
of member business lending. There are, as you stated correctly
earlier, credit unions allowed to do faith-based lending today.
Those that are chartered primarily for that purpose or exempted
from the Act, and those that are below the 12.25 percent cap
are able to make some. We are able to track those loans. We are
tracking the loans. The payment history and the performance of
those loans, are very, very solid.
Mr. Royce. It's in the lowest category of delinquency?
Mr. Dollar. Yes.
Mr. Royce. As you look at your portfolio?
Mr. Dollar. Yes.
Mr. Royce. Thank you very much, Mr. Chairman.
Chairman Bachus. Thank you.
The gentlelady from Oregon.
Ms. Hooley. Thank you, Mr. Chair. I'm sorry I missed your
testimony. I was in another Committee meeting. I just have one
question. Any one of you can answer it. When we talk about
streamlining bank mergers, are you concerned--do you think
we'll see a lot more mergers if this passes? Is that what the
expectation is, that we'll see additional mergers or more than
what's currently happening? Anyone want to take a shot at that?
Mr. Olson. Congresswoman, I think this bill will be neutral
on that issue, because I think what we've done here is
consistent with the whole idea of reg reduction. We have looked
at the reg burden and identified the issues that appear not to
contribute to supervisory oversight and their elimination would
help achieve an appropriate regulatory environment for the
banking industry and the thrifts industry.
And so it would be my judgment off the top of my head that
this bill would be neutral in that regard.
Ms. Hooley. OK. Thank you.
Ms. Buck, when it talks about Federal thrifts investing in
small business investment companies, do you see that as a
conflict of interest? Do you see--tell me what you think about
that whole area.
Ms. Buck. This particular provision was really just moving
authority from the Small Business Act over into the Homeowners
Loan Act. It really does not change our authority at all. It
was really a technical change.
Ms. Hooley. OK. Thank you.
Mr. Dollar, when you look at credit unions and you have a
change here that goes from, it says an individual Federal
credit union may invest right now 1 percent of its shares in
organizations. This amendment raises the limit to 3 percent.
Talk to me about that.
Mr. Dollar. Credit unions are authorized under the statute
to invest up to 1 percent in credit union service
organizations. These are organizations that are formed by
credit unions, either an individual credit union or a group of
credit unions, to offer services to credit unions and credit
union members. It is usually an economy of scale type of
organization that is formed by, particularly, small credit
unions who may need to come together to offer a particular type
of service.
Ms. Hooley. Give me a couple of examples.
Mr. Dollar. There are some that have been formed by
individual credit unions that do such things as check clearing
for smaller credit unions, groups of credit unions who come
together who may not do that on their own. Perhaps even to come
together to have a financial planning initiative, a retirement
planning initiative that a single credit union might have a
difficult time providing but by combining together and
investing in a credit union service organization, which is a
separate entity, separate from the credit union itself, they
are able to provide these services.
The 1 percent limit, particularly for smaller credit
unions, somewhat limits their ability to achieve these
economies of scale. And so instead of being able to form a
credit union service organization and keeping it within the
credit union community, if you will, they end up having to
outsource that to some other third party, thus losing
institutional control.
We feel like that an increase such as the one proposed in
the legislation at least from 1 to 3 percent, if not higher,
would at least enable those credit unions to have more
opportunities to be able to invest in credit union service
organizations where appropriate.
Ms. Hooley. Does that knock out the small person that maybe
has a niche market that you currently use? Does that knock them
out of business?
Mr. Dollar. Usually what it does is provide an alternative
to what would probably be a larger nationwide organization that
is providing that service and enables them to have that local
niche.
Ms. Hooley. Thank you. Thank you, Mr. Chair.
Chairman Bachus. Thank you.
The gentlelady from Pennsylvania, Ms. Hart.
Ms. Hart. Thank you, Mr. Chairman. I'm sorry I did miss the
testimony. But thanks to the Chairman and a lot of his
information, I do have one question and it actually has to do
with credit unions' parity sort of with thrifts and banks. I
guess, unfortunately, I'm going back to Mr. Dollar as well.
You're working hard this morning. What are the reasons to
support parity for credit unions with banks and thrifts under
the SEC Act and the Investment Act of 1940? This has been a
really controversial issue for quite a long time, and I've
never really had a chance to get it sort of direct from
somebody who might be able to give me an answer that isn't as
bent as some of the ones I've gotten.
Mr. Dollar. We'll see if we can give you a straight up
answer. Federal credit unions are authorized to engage in
certain broker-dealer activities such as third party brokerage
arrangements, sweep accounts, and to purchase and sell
municipal securities for their own accounts. That is an
allowable investment. And to the extent--and it is a very
limited extent, admittedly, but to the extent that credit
unions engage in these activities or some other authorized
activity in the future, we feel that they should be afforded
the same treatment as banks and thrifts, and the thrifts are
included in this legislation, with respect to the registration
under the broker-dealer statute. It is very limited,
admittedly, as many of the things that credit unions provide
that the other institutions provide on a much broader scale.
But even in the small areas where they are provided, we think
that the credit unions should have that parity.
Ms. Hart. And once again, the question always arises is if
they have that parity, then obviously under this bill, they're
not given more responsibility as far as disclosure?
Mr. Dollar. Absolutely not. There is nothing in this bill
that would enable a credit union to engage in any type of
broker-dealer authority that it does not already have. It just
says that if a credit union were to, for example, want to buy
municipal securities for its own investment account, that there
would be no question but that they would not have to register
as a broker-dealer to be able to do that. A credit union is not
a broker-dealer, but they do have certain limited authority in
this regard. This does not expand that authority.
Ms. Hart. OK. Is there a concern by any other member of the
panel about the situation as it exists today regarding the
opportunity for credit unions to participate as well as other
institutions? General question. Mr. Olson?
Mr. Olson. We don't have an opinion on that this morning.
Ms. Hart. OK. Ms. Williams.
Ms. Williams. We don't have a position either.
Ms. Hart. Wow. OK.
Mr. Kroener. Nor does the FDIC, Congresswoman.
Ms. Hart. Ms. Buck.
Ms. Buck. I haven't discussed it with our new director yet.
Ms. Hart. OK.
Ms. Buck. So we don't have one as yet.
Ms. Hart. Thank you. Thanks, Mr. Dollar. Thank you, Mr.
Chairman.
Chairman Bachus. You ought to go back to law school.
[Laughter.]
Chairman Bachus. You're like those lawyers in Alabama that
just have one short question.
[Laughter.]
Chairman Bachus. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. I just have one
question.
Ms. Williams, Section 401 of the bill easing restrictions
on interstate branching and mergers, am I right in
understanding this would overturn Riegle-Neal and preempt
existing State law for de novo interstate mergers?
Ms. Williams. It would modify provisions in Riegle-Neal
dealing with de novo branching, not mergers.
Mr. Bentsen. So if a State had not opted in under Riegle-
Neal, and I'm trying to think of a couple of States that that
might apply to, then if this were to become enacted, then that
would be meaningless and any, you know, Acme Bank national
association based in Wisconsin would be able to branch, say, in
Texas de novo or whatever?
Ms. Williams. This is a change that would apply to both
State-chartered and national banks to permit de novo branching.
Mr. Bentsen. And how many States have not opted in?
Ms. Williams. Governor Olson had that number.
Mr. Olson. Congressman, 33 States have not. Seventeen
States have and 33 States, plus the District of Columbia, have
not opted in.
Mr. Bentsen. Is there--and I know you have a second panel
coming up. This would strike me as a somewhat substantial item
in this bill, given the fact that since Riegle-Neal passed in
what, 1993 or 1994, that the States have had some time. I'm
thinking. I don't think my State has opted in, if I recall
correctly, the State of Texas. And I know there have been a
number of cases between the Comptroller of the Currency and the
Texas Department of Banking over questions of whether or not
some banks have violated that. Do you have any indication, or
anybody on the panel, that the States are more complacent to
this idea at this point in time? Or do you think this is
something that they would have a problem with?
Mr. Olson. We have not heard, but I guess as you said
earlier, that's a great question for the next panel. And they
probably have more input on that issue. In our judgement, this
is in every sense the epilogue on this issue. Because the issue
of interstate ownership was long since determined by the State
legislatures. The issue, as you correctly pointed out, the
issue of interstate branching was dealt with in Riegle-Neal.
And what we have now is a certain competitive imbalance caused
by the opt-in option with respect to the competition between
banks and Federal thrifts and large banks versus small banks.
And in our judgment, it's a level playing field,
particularly with respect to smaller banks whose natural
markets are right along the State line.
The issue that you talked about of a Wisconsin bank
branching into Texas is not a major issue for a large
organization. And the fact that they could purchase an
organization and then branch from there isn't a problem. A
smaller bank in an environment where the State line impedes
their natural market would have a more significant issue. And
that's what we're saying.
Mr. Bentsen. So the argument in favor of this would not be
that there's a competitive imbalance for a money center bank?
They'll get some benefit out of this because they won't have to
set up individual charters in each State in order to conduct
their branching where that State has not opted in. You're
saying this is a measure for smaller, non-money center banks,
you know, $10 billion or less?
Mr. Olson. Well, I have to change your premise just
slightly. A larger bank could purchase a bank in the State in
which it wanted to enter, and a $50 billion bank could purchase
a $20 million bank or a charter of that size with relative
ease, where a community bank that would try to branch into that
State and would first have to make a purchase, which is the
other option, as opposed to de novo, would find the purchase to
be a major obligation. And yet, the competitive issue probably
would be more important for the smaller institution.
Mr. Bentsen. So this is for the smaller banks, not for the
larger banks, is the intent?
Mr. Olson. That's correct.
Mr. Bentsen. Let me ask one other question. Would this have
the effect of preempting State banking laws in those States
that have not opted in for purposes of regulation? If I
understand correctly, for a State that has not opted in right
now and someone wants to come in with a new bank, they can
acquire, they can set up a separate charter, there can be
symmetry between the outside bank and the current bank, but the
bank inside the non-opt-in State still is under State law as it
relates to consumer protection and whatever else. To what
extent would repeal of Riegle-Neal's opt-in provision preempt
State law in any respect in addition to just the branching
itself?
Ms. Williams. Congressman, I don't think it would at all to
the extent that the State laws were applicable. There are
various provisions in Riegle-Neal and in some amendments that
were made to Riegle-Neal a couple of years later that deal with
the applicability of State laws to interstate branches. This
doesn't affect that.
Mr. Bentsen. So the parity issues and all that are all the
same?
Ms. Williams. I think that's correct.
Mr. Bentsen. Thank you. Thank you, Mr. Chairman.
Chairman Bachus. I thank the gentleman from Texas for those
thoughtful questions. At this time, unless the sponsor of the
bill has a follow-up question, we will discharge the first
panel. And actually you'll note that you are being discharged
early.
[Laughter.]
Chairman Bachus. We certainly appreciate your testimony. We
also appreciate your willingness prior to this hearing to work
with the subcommittee and to suggest changes even to us before
we started preparing these bills for some reform of the
regulations. So we appreciate your testimony and your
professionalism here this morning.
Mr. Cantor. [Acting Chairman.] Thank you.
STATEMENT OF ELIZABETH McCAUL, SUPERINTENDENT OF BANKS, NEW
YORK STATE BANKING DEPARTMENT, ON BEHALF OF THE CONFERENCE OF
STATE BANK SUPERVISORS
Ms. McCaul. Good morning Chairman Bachus and Members of the
subcommittee. I am Elizabeth McCaul, Superintendent of Banks
for the State of New York, and Chairman of the Conference of
State Bank Supervisors. Thank you for asking us to be here
today to share the views of CSBS on regulatory burden reduction
and the Financial Services Regulatory Relief Act of 2002.
CSBS is the professional association of State officials who
charter, regulate and supervise the Nation's over 6,000 State-
chartered commercial and savings banks, and more than 400
State-licensed foreign banking offices nationwide.
We applaud your commitment and efforts to reduce the
burdens imposed by unnecessary or duplicative regulations that
do not advance the safety and soundness of our Nation's
financial institutions. This subcommittee deserves special
recognition for its efforts to remove these Federal regulatory
burdens, allowing our banks to compete with other financial
entities at home and around the word. This competition
encourages efficiency and innovation, benefiting the economy
and consumers alike.
However, the most important contribution toward reducing
regulatory burden may be empowering the State banking system.
State banks and the State chartering system have created the
vast majority of innovations in banking products, services and
business structures. For this reason, we are very disappointed
that a provision to allow State-chartered member banks to
utilize the powers of their charter was withdrawn from the bill
just prior to its introduction.
Through innovation, coordination and the dynamic use of
technology, States have made great strides in reducing
regulatory burden for the institutions we supervise. My
submitted testimony describes these efforts in more detail.
The Financial Services Regulatory Relief Act of 2002 can be
a valuable Federal complement to these efforts. With respect to
interstate branching requirements, as you may know, current
Federal law has taken an inconsistent view toward how banks may
branch across State lines. While Riegle-Neal gave the
appearance that States could control how banks could enter and
branch within their borders, this has not always been the
reality.
Perhaps because it was believed that the Federal thrift
charter would be eliminated at the time Riegle-Neal was
adopted, the law was not applied to federally-chartered
thrifts. The result is that a Federal thrift can branch without
regard to State law and rules of entry.
Since the passage of Riegle-Neal, the OCC has promulgated
creative interpretations of the National Bank Act that
effectively circumvent the application of Riegle-Neal to
branch-like operations. The result is that State-chartered
institutions, particularly community banks who wish to branch
interstate, are at a competitive disadvantage to those
institutions that can use Federal options to branch without
restrictions.
While 17 States now allow de novo branching, please
recognize in your review of Federal law that the majority of
States have not passed de novo branching laws. Whatever the
outcome, we urge Congress to eliminate the disadvantage it has
created for State banks because of inconsistent application of
Federal law.
CSBS also hopes that the subcommittee will rethink
including the State member bank powers amendment. The provision
would simply give the Federal Reserve more flexibility to allow
State member banks to engage in investment activities where
authorized by their chartering State and approved by the FDIC
as posing no significant risk to the deposit insurance fund.
State-chartered non-member banks have always been allowed
to exercise expanded powers within the confines of safety and
soundness. Therefore, eliminating this prejudicial and
unnecessary distinction between State-chartered member banks
and non-member banks is appropriate regulatory relief.
We also ask the subcommittee and the Congress to address
the implementation and implications of regulatory preemption by
the OCC and the OTS. CSBS believes this request for review of
preemption and applicable law is appropriately a regulatory
burden reduction matter as well.
Our banking system is a complex and evolving web of State
and Federal law, particularly for the State-chartered
institutions. Greater sunshine on OCC and OTS interpretations
of applicable law for the institutions they charter would also
help to clarify applicable law for our Nation's more than 6,000
State-chartered banks, representing nearly 70 percent of all
insured depositories.
The quest to streamline the regulatory process while
preserving the safety and soundness of our Nation's financial
system is critical to our economic well being and to the health
of our Nation's financial institutions. We commend this
subcommittee for its efforts in this area and thank you,
Congresswoman Capito, for sponsoring this legislation.
Thank you for the opportunity to testify on this very
important subject. We look forward to any questions you and any
of the Members may have.
[The prepared statement of Elizabeth McCaul can be found on
page 140 in the appendix.]
Mr. Cantor. Thank you, again, Ms. McCaul.
Now I would like to again recognize Mr. Roger Little. He is
Deputy Commissioner, Credit Union Division, Financial
Institutions Bureau, State of Michigan, on behalf of the
National Association of State Credit Union Supervisors. Again,
welcome.
STATEMENT OF ROGER W. LITTLE, DEPUTY COMMISSIONER, CREDIT
UNIONS, OFFICE OF INSURANCE AND FINANCIAL SERVICES, ON BEHALF
OF THE NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS
Mr. Little. Thank you very much, Mr. Chairman. By way of
introduction, NASCUS represents credit union supervisors across
the country who collectively regulate more than 4,300 State-
chartered credit unions. Like our counterparts in State
government across the country, the Michigan Office of Financial
and Insurance Services is committed to carrying out its mission
through effective, efficient chartering, regulation and
supervision of our State-chartered financial institutions.
NASCUS supports your efforts to reduce the regulatory
burden on all depository institutions and appreciates this
opportunity to present the State regulators' perspective and
views on those aspects of the regulatory relief bill that most
directly impact State-chartered credit unions.
We would also like to address the broader issue of the
overall safety and soundness of the State-chartered credit
union system. NASCUS strongly supports the provisions contained
in the regulatory relief legislation that would authorize
State-chartered, privately insured credit unions to be eligible
for membership in the Federal Home Loan Bank System.
All State-chartered credit unions, regardless of their
insurer, are regulated and examined by agencies of State
governments to ensure that they are operating in a safe manner.
To properly manage and price insurance risk, deposit insurers
rely significantly on the examination reports of the
institution's primary regulator. Most State credit union
agencies use the same examination product, policy and
procedures as the NCUA, who regulates Federal credit unions and
insures all federally insured credit unions.
State agency examiners get the same training NCUA examiners
do, plus any additional training the State agency may require.
NASCUS agencies participate in the development and testing of
NCUA's examination program and procedures. In short, there is
excellent cooperation between NCUA and the State regulators and
substantially similar examination standards for both federally
and State-chartered credit unions.
Regarding privately insured credit unions, it's important
to note that the Federal Deposit Insurance Corporation
Improvement Act of 1991 specifically addressed the issue of
private insurance for credit unions, establishing a series of
safety and soundness requirements both for entities that would
offer private deposit insurance to credit unions and for credit
union that choose to have private deposit insurance.
It's also important to note that permitting non-federally-
insured institutions to join the Home Loan Bank System would
not establish a new membership principle for the system. More
than 50 insurance companies chartered and regulated by State
governments are now members of the Federal Home Loan Bank
System. Opening membership to all credit unions as well would
not inflict any new or unusual exposure on the Federal Home
Loan Bank System.
We also need to recognize that allowing membership only
provides access to the system. Each Federal Home Loan Bank has
a very sophisticated credit screening system to assure that any
borrower, federally insured or otherwise, is creditworthy.
Arguably, access to the Federal Home Loan Bank System provides
an additional level of scrutiny for credit unions and
introduces additional market discipline into the system.
We would appreciate your support for including this
proposal in the regulatory relief legislation and urge the
subcommittee to approve this provision which will help achieve
our Nation's housing and homeownership goals.
I'd also like to touch briefly on the SEC exemption issue
which was discussed earlier and note that NASCUS supports
extending parity to all credit unions from the exemption that
would give State institutions an exemption from SEC
registration requirements, the same exemption that banks were
provided by the Gramm-Leach-Bliley Act. NASCUS requests that
State-chartered credit unions be accorded parity of treatment
in this area and therefore relief from those same requirements
for basically the same reasons as articulated by Chairman
Dollar earlier.
NASCUS also wants to address concerns about a perceived
lack of parity in the credit union dual chartering system. We
are aware of some complaints that State-chartered credit unions
have grown faster than their Federal counterparts in some
States in recent years. As a result, it has been suggested that
the powers of State-chartered credit unions might be rolled
back by the U.S. Congress to restore parity of growth in the
dual chartering system.
In recent years, a number of federally-chartered credit
unions have switched to State charters, because that charter
offers a better fit with the business plan of those
institutions. Perhaps there were specific consumer financial
services that a particular State law or regulation permitted,
or there was a better field of membership provision enabling
that credit union to better meet its members' needs. In other
cases, there have been conversions from State to Federal
charters. That simply demonstrates yet again the benefits of
having a strong dual chartering system to provide that freedom
of choice.
But it's important also to consider some facts to put this
issue in perspective. Today there are still fewer State-
chartered credit unions than federally-chartered credit
unions--4,400 versus 6,200. Statistics on the data for these
various institutions are included with our written testimony.
Also the total assets of State-chartered credit unions are
significantly lower than those of Federal credit unions, $231
billion versus $271 billion. Some have even suggested that the
rapid recent growth of the State system is the result of
regulatory laxity by State regulatory agencies. We vigorously
challenge that contention and would like to take this
opportunity to refute it.
We have attached to our testimony a brief comparison of key
financial performance characteristics of both federally and
State-chartered credit unions. Current data indicates that in
every essential safety and soundness category, the financial
performance of State-chartered credit unions is every bit as
sound as that of federally-chartered institutions.
The recent expansion of fields of membership opportunities
for both Federal and State-chartered credit unions has
diversified geographical risks for these institutions,
enhancing their safety and soundness. In fact, the State-
chartered credit union system which began in the early 1900s,
was in the forefront of diversing credit union fields of
membership. Encouraging diverse employee groups and making a
broader range of community groups eligible for membership helps
ensure the economic viability of credit unions.
There have also been major improvements in both the State
and Federal systems of regulation and supervision for
depository institutions since the savings and loan crisis of
the 1980s and early 1990s. In fact, since 1998, all credit
unions have been subject to prompt corrective action
requirements that actually exceed those of commercial banks and
savings institutions.
We would submit that any public policy prescription to roll
back by Federal law the statues and regulations of the States
to punish State-chartered credit unions for their financial
success in this new era of intensified State supervision would
be a disastrous public policy approach. Ebbs and flows in
Federal and State charter activity are one of the benefits of
the dual chartering system. It happens in the commercial
banking industry and likewise occurs in the credit union
industry. That ebb and flow is a desirable public policy
objective, not a cause for Congressional concern.
Attempting to roll back the powers of State credit unions
would be extremely damaging to the dual chartering system, to
millions of credit union members across the country, and to the
health and viability of the credit union system and the
financial system in general. We urge this subcommittee to
protect and enhance the viability of the dual chartering system
for both credit unions and for banks and to approve the
provisions we have discussed in our testimony.
Thank you very much for the opportunity to present our
position on these issues, and I'll be happy to address any
questions that you may have.
[The prepared statement of Roger W. Little can be found on
page 157 in the appendix.]
Mr. Cantor. Thank you, Mr. Little.
I'd like to direct a question to you, Ms. McCaul. You've
asked us to reconsider a provision that would give the Federal
Reserve more flexibility to allow State member banks to engage
in investment activities authorized by their chartering States
and approved by the FDIC. Behind that request, your position
that there is no significant risk to the deposit insurance
fund. Currently, State member banks are limited to activities
granted to national banks, and yet State non-member banks are
allowed to exercise expanded powers within the confines of
safety and soundness. One, why do you support this provision?
Two, how do you respond to the OCC's view that this would undo
the prudential standards in the Gramm-Leach-Bliley Act?
Ms. McCaul. First I would point out that this section, this
ability of State-chartered banks in general has been a bedrock
of the dual banking system. Our country's successful financial
system has had at its very core the concept of innovation that
has begun at the State level. The States in effect have been
the laboratories for change and new possibilities, new
products, new services tested at the State level have become
nationwide products and services that have benefited our
country.
And so this innovation has been part of our law, part of
system since really the inception of the dual banking system.
In fact, in 1991, in FDICIA the Congress reiterated that this
innovation would remain even at the height of the banking
crisis. It preserved the rights of State non-member banks to
continue to innovate.
If I could, I would like to point out that there has been a
very strong record of that innovation within safe and sound
standards that has been operable with regard to the non-member
banks for a very long time. And in the FDIC's submitted
testimony, they are pointing out, if you would allow me to read
the following: ``Indeed, Section 24 of the FDI Act states that
an insured State bank may not engage as principal in any type
of activity that is not permissible for a national bank unless
the FDIC has determined that the activity poses no significant
risk to the funds and the State bank is and continues to be in
compliance with applicable capital standards prescribed by the
appropriate Federal banking agency.''
That statute makes no distinction between State member
banks and State non-member banks. So the concept of being able
to craft innovation within a State-chartered bank is an
activity that currently exists for non-member banks and is
subject to oversight not only by the State regulator but also
by the FDIC. Including this provision would merely allow
another regulator to have the same authority with regard to
State member banks. And the concept of innovation that has been
at the heart of our country's dual banking system would be
preserved.
Mr. Cantor. Thank you, Ms. McCaul.
I would now like to call upon the bill's sponsor, Ms.
Capito, for comments and questions.
Ms. Capito. Thank you, Mr. Chair.
I'd like to ask a question of Ms. McCaul. We talked about
this in the last panel, and I'd like just a clarification. You
touched on it in your statement, and I appreciate that, the
fact that 33 States do not have the de novo statutes in place
and I mentioned that I was a former State legislator who is
leery of preemption by the Federal laws. We were wondering if
there was any opposition that you would foresee in terms of
States across the Nation.
Ms. McCaul. The CSBS has adopted a policy that encourages
the States to consider adopting de novo branching laws. And at
the same time, CSBS also has a policy that Federal law or
regulation should not put a State-chartered institution at a
disadvantage. And so we have had 17 States that have adopted de
novo branching laws, and a number of States have not moved in
that direction at this time.
The result is that the provisions in law that exist have
created a competitive disadvantage for the State-chartered
where they are not able to branch as easily as thrifts or
nationally-chartered banks.
Ms. Capito. OK. Thank you. I have no further questions. I
yield back.
Mr. Cantor. Thank you.
The Chair now recognizes Mr. Ney for comments or questions.
Mr. Ney. Thank you, Mr. Chairman. I want to thank
Representative Capito and also you for the inclusion of the
Federal Home Loan Bank Membership Act, which I introduced
earlier in this session as Section 301 of the regulatory relief
legislation. I think it's going to be good news to firefighters
and police, postal workers, teachers, State employees, credit
unions have written to me and other Members of the subcommittee
asking for the relief so they can provide home financing to
their members.
Also, as you know, Mr. Chairman, State-chartered privately
insured credit unions cannot apply to become members of a
Federal Home Loan Bank even though nearly 11,000 federally
insured credit unions already are permitted to do so. The
legislation I have corrects this problem. It would give State-
chartered, privately insured credit unions the same permission
available to all other credit unions to apply to a Federal Home
Loan Bank for membership.
After they apply, they would of course still have to meet
all the Federal Home Loan Bank safety and soundness
requirements on top of their existing State regulations as well
as the Federal requirements, which are part of FDICIA, the bill
supported by the Credit Union National Association, National
Association of Credit Union Supervisors as well as a number of
State credit union leagues.
I understand some Members of the subcommittee obviously may
have concerns about the regulation of privately insured credit
unions, so I'm working with my good friend Congressman
Kanjorski, and I want to address those concerns.
I do have a couple of questions for Mr. Little. Mr. Little,
I know some Members of the subcommittee are perhaps not aware
of the private deposit insurance option for credit unions
because it is only available in certain States, but that option
was specifically sanctioned by the Congress in Federal law.
Isn't that correct?
Mr. Little. That's correct, sir, in the FDICIA Act of 1991.
Mr. Ney. And also, could you tell us why a credit union
would want to apply for membership with a Federal Home Loan
Bank and how many federally insured credit unions are already
members of a Federal Home Loan Bank?
Mr. Little. As I understand it, about 650 credit unions
nationwide are currently members. The principal advantage of
membership is an additional source of longer term credit for
those institutions to use for the purpose of financing mortgage
loans for their members in much the same way that banks and
other businesses use the Federal Home Loan Bank now.
It's to the benefit of those credit union members to be
able to receive that financing. It's to the benefit of the
credit union's safety and soundness to be able to have an
additional financing vehicle to use for interest rate risk
management purposes. And as I stated earlier, in our view, it's
beneficial to have yet another set of eyes, if you will,
looking at those credit unions as they borrow from the Federal
Home Loan Bank.
Mr. Ney. So another layer of Federal safety and soundness
is what you're saying?
Mr. Little. Yes, sir.
Mr. Ney. And I appreciate it. And I'm sorry I didn't make
all your testimony, but I'll especially look at the part where
you talk about the additional layer.
Mr. Little. Thank you.
Mr. Ney. Thank you, Mr. Chairman.
Mr. Cantor. Thank you. And if there are no further
questions, I have none. I'd just like to thank the panel again
and the audience's patience with the subcommittee, and the
hearing is now adjourned.
[Whereupon, at 11:58 a.m. the hearing was adjourned.]
H.R. 3951--THE FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2002
----------
THURSDAY, APRIL 25, 2002
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:10 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
[chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Weldon, Roukema,
Baker, Cantor, Grucci, Hart, Capito, Tiberi, Waters, Bentsen,
and Hinojosa.
Chairman Bachus. The hearing will come to order. The Chair
recognizes himself for the purpose of making an opening
statement. And what we do, for witnesses who have not been here
before, we have brief opening statements; they will be brief.
And then some of the Members wanted to introduce the witnesses
who are from their home States. We will do that. The Ranking
Member will speak after I speak. And then we will go right into
your testimony.
We have--I don't know if any of you were told--we have a 5-
minute rule. But we will waive that as long as you don't go 10
or 15 or 20 minutes. But don't--we are not going to be--some of
the audience is shaking their head don't waive the 5-minute
rule. But we will not be very strict on that.
The subcommittee meets today for its second hearing on H.R.
3951, the Financial Services Regulatory Relief Act of 2002. We
just call that ``reg relief.'' This bipartisan legislation was
introduced last month by two of my colleagues on the
subcommittee, Mrs. Capito and Mr. Sandlin.
I am an original co-sponsor, as is the Chairman of the Full
Committee, Mr. Oxley of Ohio.
So I commend you, Mrs. Capito, for your hard work on this.
And at our first meeting on H.R. 3951 last month, the
subcommittee heard testimony from a wide range of Federal and
State banking regulatory agencies whose technical assistance
and expertise has been invaluable to the subcommittee in the
development of this legislation.
Having heard from the regulators, today we hear from the
regulated, those institutions that must contend with the reams
of bureaucratic red tape that issues forth from this city every
year.
Testifying will be five of the leading financial services
trade associations, representing large banks, small community
banks, savings institutions and credit unions, in no particular
order. I could read that the other way around.
As Chairman Oxley and other Members pointed out at our
first hearing, the regulatory burden shouldered by depository
institutions increased significantly last year with the
enactment of the anti-money laundering provisions of the U.S.A.
PATRIOT Act.
Just this week, the Treasury Department issued new
regulations implementing a key provision of that act requiring
financial institutions to have in place programs designed to
detect money laundering and terrorist financing.
In testimony before this subcommittee, and I think this is
very good news for you all as representatives of you all's
organizations, the FBI and other Government agencies have
praised--and lavishly praised--the financial services industry
for its cooperation with law enforcement in the post-September
11 investigations of al Qaeda and other terrorist organizations
operating in the country. The cooperation of the institutions
you represent couldn't have been better, and they have led to
successful seizures.
It has often been said that banks and other financial
institutions are our Nation's first line of defense in the
financial war on terrorism that the Bush Administration is
waging so effectively.
Last week's governmental warning that terrorists might be
planning attacks against U.S. financial institutions in the
Northeast brought home the banking industry's front line role
in the fight against terrorism in stark terms.
So as we consider this important legislation to give
financial institutions and their customers much needed
regulatory relief, we should also take a moment to recognize
the very real contributions to homeland security made by
vigilant bank tellers and other financial services
professionals across the country.
I now recognize the Ranking Minority Member, Ms. Waters,
for an opening statement.
Ms. Waters. Thank you very much, Mr. Chairman.
I would like to thank you for holding this hearing today. I
would like to say that this hearing is certainly necessary.
But, we have to remember that the name of the subcommittee is
Financial Institutions and Consumer Credit. I worry that we
tend to focus too much of our time on the financial institution
part of the subcommittee's jurisdiction, and not enough time on
issues that are very, very vital to consumers.
I am certainly not opposed to the principle of reasonable
regulatory burden relief, and I will even concede that
consumers could possibly experience some minor cost savings as
a result of regulatory relief, but I think some of the
provisions may go too far.
In particular, I am concerned about Section 301 of the
bill, which would permit privately insured credit unions to
become members of the Federal Home Loan Bank system. Membership
in the Federal Home Loan Banks is desirable to credit unions,
but is currently only open to those with Federal insurance.
Unfortunately, in the past, there have been failures of private
and State insurance funds.
In addition, this change could cause a number of credit
unions to abandon their Federal charters and create a potential
race to the bottom by State regulators to attract credit unions
to their State.
We recently completed Federal deposit insurance reform
legislation in this subcommittee, and while we may have had our
differences on some issues, we all shared the goal of
maintaining a strong and safe deposit insurance system. I can't
imagine that we want to turn around and create incentives for
credit unions to switch from safer Federal insurance to riskier
private insurance.
H.R. 3951 needs to be a bit more balanced. There is nothing
here for customers, and there are some very critical matters
that need attention in that arena. For example, the numerical
provisions in the Truth in Lending Act are so hopelessly
outdated that many automobile loans fall outside of the act's
capped amounts, which must be raised to have any meaning.
In addition, basic protections for credit card consumers
are solely needed, and it is virtually an unregulated industry
except for a few basic disclosures. These cards are used to
entice people to take on debt that they can ill afford without
giving them the tools they need to make an educated decision.
In order to meet relief from regulatory burden, there
should be some regulations in place to begin with. Over the
last quarter century, entire industries sprung into being
largely outside of the boundaries of Federal regulation. I am
talking about the check cashiers, the payday lenders, the
mortgage services, and the subprime lenders who fly below radar
in many of their activities.
So, Mr. Chairman, I hope that this bill develops a little
bit more balance as it moves forward, because at this point,
again, I am not so sure that I could point to very much for our
consumers. However, I do look forward to hearing the witnesses
today, and I must reiterate that I am supportive of getting rid
of unnecessary burdens for our regulatory agencies. But, I
would hope to have some initiation of discussion on some of
those areas that I have pointed to, at some point in the work
of this subcommittee.
Thank you very much.
Chairman Bachus. I thank the Ranking Member.
Mrs. Capito, sponsor of the bill, we want to recognize you.
Mrs. Capito. Yes, thank you, Mr. Chairman. I appreciate you
holding another day of hearings on this regulatory relief bill,
and I want to thank our panel for taking the time to travel to
Washington to appear before us today. I want to extend an
especially warm welcome to Charlene Gaither, who comes to us
today from my beautiful home State of West Virginia, and I look
forward to providing the subcommittee with a more formal
introduction in a few moments.
Mr. Chairman, as my colleagues will recall from our last
hearing on this issue, Chairman Oxley, Mr. Sandlin and I
introduced this bill in an effort to help reduce the
substantial regulatory burdens imposed on the financial
services industry.
While the Federal regulations play an important role in
protecting consumers, instilling confidence and ensuring a
level playing field, overregulation can depress innovation,
stifle competition, and actually retard our economy's ability
to grow.
Periodically reviewing and questioning the regulations put
in place over time will ensure that as industries and
technologies change, so too will the rules that govern them.
As I mentioned in our last hearing, I believe we have put
together a good and balanced bill that will benefit both
consumers and business. But this legislation is by no means a
final draft.
These hearings are designed to flush out any potential
problems that may exist, be they mistakes of omission, simple
drafting errors or unintended consequences of what at first
glance appear to be merely technical changes. I hope that
today's witnesses will feel free to provide us with their
expert opinions. I look forward to working with the Chairman as
we move closer to the markup, and I thank the Chair again.
Thank you.
Chairman Bachus. Thank you.
At this time, Mrs. Roukema, do you have an opening
statement?
Mrs. Roukema. No.
Chairman Bachus. We welcome you to the subcommittee.
Are there any other opening statements? Well, at this time
we are going to allow Members to introduce the witnesses that
are from their home States. And at this time I recognize the
Ranking Member, Ms. Waters.
Ms. Waters. Thank you very much. Mr. Chairman and Members,
I would like you to join with me in welcoming Mr. Bill Cheney,
who is the president and CEO of the Xerox Federal Credit Union
in El Segundo, one of the small cities adjacent to my district.
Mr. Bill Cheney, who is the President and CEO of Xerox
Federal Credit Union has a broad background in financial
services, including more than 15 years working in the credit
union industry.
Bill joined Xerox Federal Credit Union, which by the way
had more than $590 million in assets in 1997, after more than
10 years with Security Service Federal Credit Union in Texas.
This credit union serves employees from Xerox Corporation and
related companies nationwide through 18 credit union offices in
nine States, including California, New York, Illinois and
Texas. In addition, the credit union owns 39 percent of Xerox
Credit Union Corporation, a brokerage and insurance company
serving multiple credit unions and their members throughout
offices in 15 States.
Welcome, Mr. Cheney.
Chairman Bachus. Thank you. Mr. Cantor.
Mr. Cantor. Thank you, Mr. Chairman.
I have the distinct pleasure to welcome two fellow
Virginians today. Always, hopefully inspiring to be the
Virginia gentleman that Mr. Stone is, I will go to the lady
first.
It is my pleasure to introduce Ms. Elizabeth, or Betsy,
Duke. She is a lifelong resident of the Commonwealth and began
her career in banking in 1975. She started as a drive-in teller
and worked her way to President and CEO of the Bank of
Tidewater by 1991.
She has also served as an instructor on the banking
industry in numerous locations and is a past member of the
Board of the Richmond Federal Reserve. She currently serves on
the board of the American Bankers Association and is Chairman
of the ABA's Government Relations Council. She is also
President of SouthTrust Bank, Virginia Beach. I consider Betsy
a friend, a valuable resource on banking industry resources and
look forward to her testimony. Again welcome.
I would also like now to welcome, Mr. Chairman, a
constituent of mine, always an honor, and he is a true Virginia
gentleman, Mr. Pierce Stone. Pierce is the Chairman, President,
CEO of the Virginia Community Bank in Louisa, Virginia. He is
also the Chairman of the Independent Community Bankers of
America.
He earned his Bachelor of Science Degree in Business
Administration from the University of South Carolina and is a
graduate of the School of Banking of the South. He also served
as a Director of the Federal Reserve Bank of Richmond from 1990
to 1992. He was appointed by the Governor of Virginia to serve
as a Director on the Virginia Real Estate Appraisers Board.
Long active in the ICBA, Mr. Stone has served as Chairman
of the Long-Term Planning and Marketing Committee and is an
ICBA State Director. He serves on the board of the ICBA Credit
Life Company. He is a member of the Virginia Association of
Community Banks, and is past President of this organization.
He helped organize and was Chairman of Community Bankers
Bank of Virginia. Other businesses and activities include many,
Mr. Chairman. He is Director of a weekly newspaper company, a
radio station, as well as Rockingham Group, which is a property
and casualty mutual company. He is the former treasurer and
board member of the Lions Club in Louisa, and most importantly,
he is married and has two children.
I would say, Mr. Chairman, it is a real honor for me to
welcome Pierce. He is a leader in our community, and I am proud
that he is here today and look forward to his testimony. I
yield back.
Chairman Bachus. I will say this, Mr. Stone. You have been
before the subcommittee before. And, Mr. Hage, you are no
stranger to the subcommittee. So normally we only introduce
folks that are coming before the subcommittee for the first
time. But this time, in this case Mr. Cantor, since he was
introducing Ms. Duke, he was afraid not to reintroduce you.
And, Mr. Stone, so that you know, that is probably very
diplomatic to do.
Mr. Hage, I want to commend you on your recent appointment
to the President's Task Force on Retirement Savings. And, as he
knows, he was appointed by Speaker of the House Denny Hastert.
I think that is quite a recognition of your accomplishments and
professionalism. So I commend you on that. You have important
work ahead of you.
Are there further opening statements? I am sorry. Mrs.
Capito. You have not introduced the gentlelady from West
Virginia, have you?
Mrs. Capito. No, not in full.
Chairman Bachus. All right. Thank you.
Mrs. Capito. Thank you. Mr. Chairman, I want to welcome
Charlene Gaither to Washington and to thank her for taking her
time to provide the subcommittee with her expertise on the
regulatory burden facing our Nation's credit unions. I had the
opportunity yesterday to spend some time with Charlene, and I
was very impressed with her dedication, not only to her members
but with her extensive knowledge of the industry.
As one of seven full-time employees, Charlene currently
serves as the manager of Eastern Panhandle Community Federal
Credit Union in Martinsburg, West Virginia. The Community
Federal Credit Union is a $14 million credit union that serves
more than 2,000 members. Charlene has handled the duties of
Chief Financial Officer and Chief Marketing Officer during her
tenure, and is a volunteer board member of the West Virginia
Credit Union League.
Charlene's 17 years of experience gives her, I think, a
unique perspective on how the regulatory relief bill will help
both consumers and business. I am pleased to have her here, my
fellow West Virginian, and I look forward to her testimony.
Chairman Bachus. Thank you. And we will start, Ms. Gaither
with your testimony. And you can maybe explain to us starting
out how Martinsburg has a 5-story FAA building. But if you
don't want to you don't have to.
STATEMENT OF CHARLENE R. GAITHER, MANAGER, EASTERN PANHANDLE
COMMUNITY FEDERAL CREDIT UNION, MARTINSBURG, WV, ON BEHALF OF
CREDIT UNION NATIONAL ASSOCIATION
Ms. Gaither. Chairman Bachus, Ranking Member Waters and
Members of the subcommittee, especially my own Member,
Representative Capito, thank you for the opportunity to provide
comments on H.R. 3951 and your efforts to design legislation to
lessen the regulatory burden on insured depository
institutions.
I am Charlene Gaither, Manager of the Eastern Panhandle
Community Federal Credit Union, a $14 million credit Union in
Martinsburg, West Virginia. I appear before you today on behalf
of the Credit Union National Association.
We congratulate Representative Capito for introducing this
bill and including the legitimate needs of credit unions for
regulatory relief. I would like to emphasize that my testimony
today will focus on the provisions in the bill which pertain to
credit unions as well as those we would like the subcommittee
to include in any final bill.
We understand that the ABA and other bank trade
associations oppose all or parts of this bill because of the
credit union provisions. We will not lower ourselves to their
level and attack provisions pertaining to them.
While my written statement includes a thorough analysis of
each of the credit union provisions, I will only touch on a few
of them in my oral statement this morning.
CUNA strongly supports Section 301 of the bill, which
permits State-chartered, privately insured credit unions to
become members of the Federal Home Loan Bank. This provision
was originally introduced as H.R. 2796, the Federal Home Loan
Bank Membership Act of 2001, by Representative Bob Ney.
As incorporated into H.R. 3951, it would provide a needed
funding source for home ownership for many credit union members
as well as strengthen the dual chartering system of credit
unions. These 216 institutions with 1.3 million members are
regulated by the States in which they were chartered. They are
subject to safety and soundness requirements from the State
regulator as well as the private insurer.
We also want to commend Representative Capito for including
Section 306 in the bill, which incorporates legislation
previously introduced by Representative Ed Royce, H.R. 760, the
Faith Based Lending Protection Act. This amendment, which we
strongly support, is designed to exclude loans made by Federal
credit unions to non-profit religious organizations from the
statutory member business loan limit of 12.25 percent of the
credit union's total assets. According to the recent testimony
of NCUA Chairman Dennis Dollar, these are the safest of all
loans made by credit unions.
Another very important part of the bill is Section 307,
which allows Federal credit unions to cash and sell certain
checks to non-members of the credit union as long as they are
eligible to join or are within the field of membership of the
credit union. Many of these individuals live from paycheck to
paycheck and do not have established accounts for a variety of
reasons, including the fact that they do not have extra money
to keep on deposit.
Finally, Section 308 would clarify the Federal Credit Union
Act by allowing voluntary mergers of healthy credit unions and
conversions involving multiple common bond credit unions
without numerical limitations. The amendment is a big step
forward in facilitating voluntary mergers as other financial
institutions are permitted to do.
At this point, I will turn to the additional provisions we
would like to see included in a final bill. Again, my written
statement fully covers what we believe are some of the worst
examples of statutory micromanagement that have placed
unreasonable constraints on the ability of credit unions and
their boards to function efficiently and in the best interests
of their members. Given time constraints, however, I will focus
only on two of these items.
First, recall that H.R. 3951, as drafted, permits credit
unions to cash checks for individuals within their field of
membership, even if they are not members. Our original request
also asked for the ability to provide wire transfer services to
non-members within the field of membership.
Such an amendment would help credit unions reach the
unbanked and underserved and provide an affordable and
financially sound alternative to high cost payday lenders.
Those who do not have access to a credit union or other
financial institution must use wire services that charge
outrageously high fees, up to 28 percent of the amount
transferred in some cases, to execute the transaction.
Perhaps one of the most important provisions we are asking
to be included in a final version of H.R. 3951 is one that
would permit credit unions to issue some form of additional or
alternative capital.
As the Chairman of the subcommittee notes, this issue was
first raised in this subcommittee during the markup of the
Deposit Insurance Reform bill. An amendment was introduced,
discussed, then withdrawn. While some consideration was given
to reintroducing the amendment at the full committee markup,
out of deference to the Chairman it was not.
The purpose of allowing some form of alternative capital
would permit credit unions to augment the only current source
of capital that they have, retained earnings. Alternative
capital would allow a credit union that needs to do so to
quickly build its capital.
Advantages of alternative capital are that it would provide
additional stability, allow growth, permit product and service
enhancements and could meet a portion of statutory and
regulatory capital requirements, And, frankly, although CUNA
has a strong position regarding the concept of allowing some
form of alternative capital for credit unions, our position
regarding how to achieve that is evolving.
We are currently in discussion with various Members and
staff of the subcommittee and are seeking a consensus on how to
best achieve this goal while maintaining certain guiding
principles. Foremost of these guiding principles is that any
form of alternative capital must not compromise the cooperative
nature of credit unions.
This capital must not give its holder any voting or control
rights. Additionally, this capital must not be insured and it
must therefore be at risk to the investor. We continue to work
on an appropriate approach that will accomplish these purposes
and seek advice and guidance from Members of the subcommittee.
In conclusion, CUNA is grateful and pleased that H.R. 3951
includes several provisions that will significantly increase
the effectiveness of credit unions in serving their members.
And while we strongly support this bill, we urge the
subcommittee to support our efforts to include the additional
provisions we described in this testimony.
Thank you again for the opportunity to present CUNA's views
on this very important legislation, Mr. Chairman, and I would
be glad to answer any questions of the subcommittee. Thank you.
[The prepared statement of Charlene R. Gaither can be found
on page 170 in the appendix.]
Chairman Bachus. Thank you, Ms. Gaither.
Mr. Cheney.
STATEMENT OF WILLIAM CHENEY, PRESIDENT AND CEO, XEROX FCU, EL
SEGUNDO, CA, ON BEHALF OF NATIONAL ASSOCIATION OF FEDERAL
CREDIT UNIONS
Mr. Cheney. Thank you, Mr. Chairman.
Good morning, Mr. Chairman, Ranking Member Waters and
Members of the subcommittee. My name is Bill Cheney. I am the
President and CEO of Xerox Federal Credit Union, located in El
Segundo, California. I am here today on behalf of the National
Association of Federal Credit Unions to express our views on
the Financial Services Regulatory Relief Act of 2002.
Xerox Federal Credit Union was chartered in 1964 and
currently serves over 72,000 members through 18 offices in nine
States, and is the only credit union chartered to serve Xerox
employees in the United States.
Credit Unions represent a significant cross-section of all
of America's consumers. The Nation's 10,000-plus credit unions
serve a different purpose than other financial institutions and
have a fundamentally different structure, existing solely for
the purpose of providing financial services to our members.
All members of a credit union have an equal say in the
operation of the credit union. One member, one vote, regardless
of the dollars in their accounts. Credit unions are second to
none in providing their members with quality personal service
at the lowest possible cost. According to the 2001 American
Banker/Gallup Consumer Survey, credit unions had the highest
rated service quality of surveyed financial institutions.
Despite their very limited market share, credit unions have
been under assault by the banking industry for nearly 2
decades. The 1998 Supreme Court decision in the field of
membership case brought these issues to a head. Congress'
prompt passage of the Credit Union Membership Access Act, or
CUMAA, in 1998 was seen as a significant victory for credit
unions.
Recognizing a growing trend of credit union conversions
from Federal to State charter, totaling $33 billion over the
past 5 years, and accounting for over 10 percent of all assets
in the Federal credit union system, NAFCU has singled out the
erosion and the perceived value of the Federal charter as an
important issue.
Starting with a task force convened to work on ways to
enhance the Federal charter, we have identified a number of
provisions in both law and regulations which, if changed, would
improve the way Federal credit unions serve their members.
NAFCU believes that H.R. 3951 is a positive step in
addressing many of the regulatory burdens and restrictions on
Federal credit unions that have caused a number of Federal
credit unions to either consider or to convert to State
charter.
NAFCU applauds Representatives Capito and Sandlin for their
leadership in introducing this bill and strongly supports many
of the provisions in the legislation, including the sections
dealing with expanded investment authority, clarification of
the ability for credit unions to merge voluntarily, easing the
limitation on loan terms, credit union service organization
investments, check cashing services, member business lending to
religious non-profit organizations, and land leasing.
We believe H.R. 3951 takes a balanced approach to
regulatory relief. Nevertheless, I would like to call the
subcommittee's attention to some additional issues.
First, credit unions should be exempted from the pre-merger
notification requirements of the Hart-Scott-Rodino Act to the
same extent as other regulated financial institutions.
Second, the usury ceiling for credit unions should be
adjusted. As the Members of the subcommittee realize, Federal
credit unions are the only type of insured depository
institution subject to Federal usury limits on consumer loans.
Third, Congress should remove the word ``local'' from the
definition of community charters. Today's dynamic financial
marketplace characterized by cyber-banking technology rather
than bricks and mortar makes the word ``local'' an extraneous
limitation.
Fourth, eliminate the preference imposed by CUMAA for the
formation of new credit unions over the addition of groups to
an existing credit union. Oftentimes an existing credit union
is better suited to meet the needs of a group and offer them
better services than a new credit union.
Fifth, relax the reasonable proximity requirement on credit
unions seeking to add additional groups to its field
membership. This requirement is an undue burden requiring them
to have a physical presence within a reasonable proximity of
the group that the credit union wants to add to its field of
membership. With the increase in internet and remote banking,
this requirement is unnecessary.
Sixth, relax the current member business loan restriction
imposed by CUMAA and restore the member business lending rules
that were in effect prior to the passage of CUMAA.
Seventh, NAFCU supports allowing all insured credit unions,
not just corporate credit unions and those designated as low
income, to include secondary capital accounts when calculating
net worth under regulations promulgated by NCUA.
Finally, the Federal Credit Union Act contains many
antiquated credit union governance provisions that may have
been appropriate in 1934, but today are outdated. NAFCU
supports including language in H.R. 3951 that would give the
NCUA board greater authority in establishing appropriate
governance procedures.
I would like to conclude by noting that the state of the
credit union community today is strong and the safety and
soundness of credit unions is unquestionable. NAFCU would,
however, urge the subcommittee to carefully assess the trend of
conversions from Federal to State charter. We believe that H.R.
3951 is an excellent first step.
Mr. Chairman, I appreciate the opportunity to appear before
you today, and I will be happy to answer any questions.
[The prepared statement of William Cheney can be found on
page 184 in the appendix.]
Chairman Bachus. Appreciate that.
Mr. Stone.
STATEMENT OF PIERCE STONE, CHAIRMAN, PRESIDENT AND CEO,
VIRGINIA COMMUNITY BANK, LOUISA, VA, ON BEHALF OF INDEPENDENT
COMMUNITY BANKERS OF AMERICA
Mr. Stone. Good morning, Chairman Bachus, Ranking Member
Waters and Members of the subcommittee. My name is Pierce
Stone. I am a community banker from Louisa, Virginia. I also
serve as Chairman of the Independent Community Bankers of
America.
Chairman Bachus, I want to thank you and congratulate you
for the ongoing efforts on behalf of community banking,
especially your leadership in advancing the important deposit
insurance reform bill. Community bankers across the Nation are
truly indebted to you. I also want to thank the subcommittee
staff for the outstanding work that they did on this bill.
I have been asked to testify on H.R. 3951, the Financial
Services Regulatory Relief Act of 2002. ICBA supports a bank
regulatory structure that fosters the safety and soundness of
our Nation's banking system and recognizes the fact that
community banks pose a very different risk to the banking
system than larger banks.
We urge Congress and the agencies to continue to adopt
policies that recognize this important distinction.
In the interest of time, I will limit my remarks to just a
few sections of the bill. Let me first address the provision in
the bill that is very important for community banks, Section
101, dealing with Subchapter S corporations.
This section removes a restriction in current law that
makes it difficult for community banks to qualify for
Subchapter S status. Subchapter S is very important to
community bankers, because it allows them to escape double
taxation by paying income tax only at the shareholder level.
Unfortunately, many small banks are having trouble
qualifying for Subchapter S under the current law and cannot
benefit from Congress' intended tax relief. Section 101
addresses the director/shareholder restriction in the law by
making it easier for banks to comply with the requirement that
directors be shareholders.
ICBA supports reducing the frequency of safety and
soundness exams for small, healthy banks and supports minimally
intrusive examinations. Section 601 gives the Federal banking
agencies the discretion to adjust the exam cycle of insured
depository institutions to ensure that examiner resources are
utilized in the most efficient manner. ICBA strongly supports
this position.
ICBA recommends the subcommittee include a provision in the
bill to amend the Securities Investor Protection Corporation
statute to provide community banks with the same protection
afforded other investors and other depository institutions for
their brokerage account assets when a broker dealer fails.
SIPC does not protect against market risk or fraud. It
allows investors to get back their stock, bonds and cash held
by a broker dealer in the event of a brokerage firm collapse.
Unfortunately, banks are specifically excluded from SIPC
coverage when acting on their own behalf. Thrifts and credit
unions are not excluded from SIPC coverage. The change we seek
in the statute simply affords banks the same SIPC protections
as credit unions and thrifts.
Mr. Chairman, I would now like to address a few provisions
in the bill that cause ICBA some concerns. One issue is the
provision that repeals the prohibition on national and State
banks to expand into another State through de novo branching.
We believe that the individual States should decide whether an
out-of-State national or State bank should de novo branch into
their State. We believe States should be free to make this
decision, because they know best what the banking structure in
their State should be. Congress should not preempt this basic
State right.
Chairman Bachus, there are also several credit union
provisions in this bill which ICBA opposes. Our specific
concerns are outlined in our written statement. Let me just say
generally that Congress should tread carefully in granting
credit unions new powers in areas where they do not have the
experience or expertise to assure safe and sound operations.
Credit unions and community banks both serve the community
and offer many of the same products and services. However,
there is one major difference. Credit unions generally do not
pay taxes and are not subject to CRA, giving them an enormous
advantage over taxpaying and highly regulated banks and
thrifts. We believe the expanded powers granted to credit
unions in this bill goes against the spirit of the Credit Union
Membership Act of 1998, as well as their basic charter.
Chairman Bachus, thank you for the opportunity to testify
before you today on H.R. 3951, and thank you again for your
stellar work on deposit insurance reform. I will be happy to
answer any questions from the subcommittee.
[The prepared statement of Pierce Stone can be found on
page 229 in the appendix.]
Chairman Bachus. Thank you.
Mr. Hage.
STATEMENT OF CURTIS L. HAGE, CHAIRMAN AND CEO, HOME FEDERAL
BANK, SIOUX FALLS, SD; CHAIRMAN, AMERICA'S COMMUNITY BANKERS
Mr. Hage. Mr. Chairman, Ranking Member Waters and Members
of the subcommittee. I am Curt Hage, Chairman and CEO of Home
Federal Bank in Sioux Falls, South Dakota. I am testifying
today as Chairman of America's Community Bankers.
Thank you for this opportunity to testify on H.R. 3951. I
would like to commend the bill's primary sponsor,
Representative Shelly Moore Capito, as well as Representative
Max Sandlin. In addition, I would like to thank Chairman Oxley
and the committee staff for working with ACB in developing this
legislation.
ACB strongly supports many of the provisions contained in
H.R. 3951. By eliminating unnecessary and costly regulations,
these provisions will make it easier for financial institutions
to better serve our customers and communities.
I would like to touch on some key provisions. A more
detailed analysis of the bill can be found in my written
testimony.
ACB vigorously supports Section 201, which would correct
the existing statutory disparity in the way trust and fiduciary
activities of savings associations are treated vis-a-vis those
of banks.
Currently, savings associations do not enjoy the same
exemption that banks do from the Investment Advisors Act and
the Securities Exchange Act for trust and fiduciary activities.
As a result, only savings associations face dual supervision
and regulation when serving the trust and fiduciary needs of
their customers. We are pleased that Section 201 provides a
much needed fix for this problem.
ACB also supports Sections 401 and 105 of the bill. Section
401 would remove unnecessary restrictions on branching by
national and State banks. Section 105 would eliminate the
unnecessary requirement that a national bank meet the same
capital requirements imposed by States on their banks. We
commend the bill's sponsors for including those provisions in
H.R. 3951.
ACB also recommends that the subcommittee include
additional provisions in H.R. 3951. First, we strongly urge the
subcommittee to consider adding a provision that would modestly
increase the business lending limit for savings associations.
Currently Federal savings associations are subject to a 10
percent limit on commercial lending authority and a 10 percent
bucket for small business loans.
With more and more small businesses depending on smaller
associations as community credit providers, those limits pose
an ever increasing constraint on credit availability for small
businesses. This is particularly true in smaller communities
where there are fewer credit providers.
Congress should repeal the lending limit restrictions on
small business loans and increase the aggregate lending limit
on other commercial loans to 25 percent. By doing so, Congress
can accommodate the credit needs of small business without
altering the basic asset requirements of the statutory
qualified thrift lender test.
Let me emphasize this last point. We are not asking for a
change in the QTL test. We are only asking that redundant caps
on business lending be lifted, particularly for small business
loans.
In addition, ACB urges the subcommittee to consider
including in H.R. 3951 the following proposals detailed in my
written testimony: Repealing the $500,000 per unit limit in the
residential housing development exception in the Homeowners
Loan Act; increasing the limit on commercial real estate loans
from 400 percent to 500 percent of capital; and permitting
reimbursement for the production of corporate and
organizational records under the Right to Financial Privacy
Act.
Finally, Mr. Chairman, we would like to raise our strong
concerns about Section 301, which would permit privately
insured credit unions to join the Federal Home Loan Bank
System. Unlike these institutions, every depository institution
that is currently a member of the Federal Home Loan Bank must
be, and is, federally-insured and regulated.
This provides a substantial layer of security for the
Federal Home Loan Bank System. Permitting privately insured
credit unions that undergo no Federal regulatory scrutiny to
borrow from the system would undermine the careful balance
Congress achieved in the Gramm-Leach-Bliley Act.
ACB also opposes the lending limit increase in Section 304,
check cashing for non-members in Section 307, and the
undermining of the common bond in Section 308. These sections
would allow tax-exempt credit unions to assume new bank-like
authorities without having to pay taxes or meet community
reinvestment requirements. ACB strongly urges the subcommittee
to strike those provisions.
Again, Mr. Chairman, thank you for holding today's hearing.
I look forward to addressing any questions that Members of the
subcommittee might have.
[The prepared statement of Curtis L. Hage can be found on
page 237 in the appendix.]
Chairman Bachus. Thank you.
Ms. Duke.
STATEMENT OF ELIZABETH DUKE, SENIOR VICE PRESIDENT, GOVERNMENT
RELATIONS, SOUTHTRUST CORPORATION, VIRGINIA BEACH, VA, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Ms. Duke. Mr. Chairman, Ranking Member Waters and Members
of the subcommittee, I too want to thank you for holding this
hearing. I would also personally like to thank Mr. Cantor for
the introduction, therefore I don't have to use my 5 minutes
explaining who I am.
Regulatory relief is critically important for banks. We
appreciate the bipartisan effort in this and previous
Congresses to preserve safety and soundness while reducing
unnecessary regulations. I would especially like to recognize
the contributions made over the years by Mrs. Roukema.
Regulation costs banks and our communities billions of
dollars every year. It also puts a huge strain on manpower.
SouthTrust is a large banking firm with $48 billion in
assets. We have 65 full-time employees devoted to compliance.
Small banks simply do not have this luxury. There are 3,800
banks with fewer than 25 employees and a thousand banks with
less than 10 employees. As a former CEO of a community bank, I
know that these banks don't have the manpower to both run the
bank and to read, understand and implement thousands of pages
of regulations, directives and reporting modifications that
they receive each year.
Simply put, too much time and too many resources are
consumed by compliance paperwork, leaving too little time to
provide actual banking services. H.R. 3951 contains many
important improvements that genuinely reduce unnecessary
regulatory burdens.
Unfortunately, the bill also contains provisions that are
not directed at reducing regulatory red tape, but to enhance
the competitive position of credit unions over taxpaying banks.
Let me mention a few of the key provisions that we support.
The ABA strongly endorses Section 201, which provides thrift
parity for trust activities and would eliminate an additional
and unnecessary layer of examination.
We also support Section 501, which would allow all
financial holding companies engaged in merchant banking to
cross-market products and services. These provisions have the
strong support of our industry and the Federal Reserve.
Section 502 would help banks preserve benefit plans for our
employees, such as 401(k)s, without worrying about triggering
aggregation rules for ownership of any one company.
We also support provisions, including Section 601, which
allow discretion for regulators to adjust the exam cycle to
more effectively allocate examination staff; Section 101, which
enables banks to choose Subchapter S status to retain qualified
directors; and Section 202, which makes the community
development authority of savings institutions parallel to that
of banks.
The ABA has major concerns with provisions that expand
credit union powers and promotes further consolidation of the
credit union industry. These provisions enhance the competitive
position of credit unions over taxed financial competitors and
expand the credit union tax subsidy.
Section 305 expands the authority of credit unions to
invest in credit union service organizations. These CUSOs can
engage in activities beyond those authorized for the credit
unions themselves.
Furthermore, since most CUSOs are formed as limited
liability corporations, they are taxed at the credit union's
marginal tax rate of zero. Thus, any expansion of CUSOs is an
expansion of the credit union tax subsidy.
Section 308 also would permit mergers at any time among
credit unions. This would further the trend of large credit
unions buying up small credit unions and is in direct conflict
with legislation enacted just a few years ago. Specifically,
Congress directed NCUA to promote the creation of independent
credit unions and to limit the merger of credit unions with
over 3,000 members to situations involving a troubled credit
union.
We also oppose Section 306, which would exempt from the
legal lending limits loans to non-profit religious
organizations. We do appreciate the intent of the provision's
author. However, we are first concerned with eliminating any
categories of business loans from the business cap. There are
already exceptions to the business lending cap. We oppose the
addition of yet another.
Second, the provision is so broad that businesses with only
a remote connection to a religious organization could qualify.
Moreover, many religious organizations operate significant
business enterprises, therefore allowing for a substantial
increase in business lending.
There are two provisions related to credit unions that
could reasonably be considered to eliminate burdens without
expanding powers or enhancing competitive position. The first
authorizes a 15-year maturity limit for loans, and the second
provides additional investment authority for credit unions.
In conclusion, Mr. Chairman, reducing unnecessary paperwork
is a serious long-term goal. The ABA is committed to working
with you and the Members of this subcommittee to achieve this
objective.
Thank you, Mr. Chairman.
[The prepared statement of Elizabeth Duke can be found on
page 271 in the appendix.]
Mr. Bachus. Thank you. That was interesting testimony. That
was actually more exciting and entertaining than I thought it
would be.
Were any of you all home-schooled? None of you? You all
went to public school, right? Have you ever been in a food
fight? You know, food fights get you in trouble when you are in
school. They usually are not that constructive.
Our aim here is to have win-win situations. It is to take
regulations, things the regulators are doing, things that cost
you money that you don't have available to loan out, and try to
eliminate those regulations that make no sense, or barriers
that make no sense.
Now, one of the ones that has been discussed here is this
Section 301 of the bill, privately insured credit unions
authorized to become members of the Federal Home Loan Bank
Board. I know the banks are all opposed to this. One of the
things is they are not banks. Or insurance companies
participate in the Federal Home Loan Bank Board. Insurance
companies can go to them, and really something that I am not
sure that every banker knows, but those that are federally
insured go to the Federal Home Loan Bank Board. So there are
already credit unions participating in the Federal Home Loan
Bank Board system.
The statement was made that credit unions should not
participate. They already participate. So it is just a
distinction on whether they are privately insured or federally
insured.
We have every provision and belief that those that are
privately insured through the right regulatory scheme will, the
taxpayers will be fully protected. That is one thing.
Another thing that I really know the bankers are sensitive
to, and I would be sensitive to it, too, if credit unions were
taking over large amounts of bank business, just a tremendous
amount of market share, and there is actually a belief out
there that that is in fact happening. One of my best friends
who is a banker told me that the credit unions have basically
tripled their business while we have lost business. That is
anecdotal evidence.
First of all, his bank has tripled in size in the past 10
years. I found no credit union in his home county that has
grown anywhere near that amount. But then I came back to
Washington, this was probably 4 years ago, and I asked are
credit unions eating into bank share? I don't know whether you
all can answer that. Are you aware of what the answer to that
is? The answer is no. The credit unions are not. As a total
share of assets under deposit, it has gone from, financial
assets, I think it has gone from 1.4 to 1.7 in 23 or 24 years.
We do not want to do anything in this bill that will give a
credit union an unfair advantage over a bank, an unfair
advantage. What we want to concentrate on is, as I said, win-
win. Here are provisions that will help us.
Section 301 was not something that this Chairman actually
put in the bill. It was put in there by the Full Committee
Chairman, which is even more significant, if you have been
around this place. When he did that, my red flag went up,
because I am sensitive to bankers in my area that tell me that
the credit unions have an unfair advantage. But, a lot of what
has been said about it, I would have to agree with the credit
unions. The arguments simply, when you look at them, they do
not have as much substance as they should.
I am not sure we will get a bill. If we continue to argue
about whether credit unions get something--and the last two
bills did not have anything for credit unions--but, we want
everybody treated fairly, and there are some of the proposals
that, for instance, we do not want anything added anymore for
the credit unions. They have proposals to let them sell money
orders to their membership, or to be able to kick off a board
member. That is their ability to manage their own organization.
I cannot understand how that is unacceptable.
Let me tell you, I am not motivated about helping one group
or the other. I believe we can get a bill that helps all the
organizations.
But, I want to encourage all sides, if you could
demonstrate that it is unfair and it ought not happen, that is
one thing. But if you already have credit unions participating
in the Federal Home Loan Bank Board, and some already do, I am
not sure that the argument is going to fly.
I would use your dynamite and your political might in
looking at things that will benefit your institutions and the
consumers you serve in eliminating barriers.
A good example which the credit unions have come with is
doing a money order, I think it is a wire transfer. Why should
they not be able to offer that to their members? I can't see
any reason why they should not. I was one of 7 people that
voted against the credit unions on the floor of the House in
that famous bill, so I do not think I can be accused of
carrying a lot of water for the credit unions. Four of the
people that voted with the banks on that bill were not running
for reelection. So I am not afraid to stand up for the side I
think is best.
If we are to get a bill out, then there is going to have to
be some of this. You are going to have to pay more attention to
what would benefit your institutions and your association and
their members than say seeing that somebody else gets something
that they do not have now.
Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman. I think you
did a good job of basically representing how many of us are
feeling about this legislation. It appears that there is going
to be some relief that you will all benefit from. There is a
little competition going on here. We understand that.
At the same time, we are often made to believe that all of
you laissez-faire capitalists believe in competition, and that
we should support that, and Government should get its hands out
of the business of protecting one industry over the other. So,
I think that I am going to lean to the right a little bit and
join with my colleague in just saying to you that it is in the
best interests of our citizens and all of us to have you
operating in ways that will service the citizens of this
country to the best of your ability.
Now, I want to tell you, I like the idea that credit unions
will be able to provide products that they have not been able
to provide to the credit union members. I do not like
freestanding check cashers who do not provide any other
services but to cash checks and take a percentage of those
earnings from hard-working people. I don't like freestanding
payday loan folks who simply tie people up for the rest of
their lives lending over and over again with checks that are
kind of signed in advance. I like institutions that provide
multiple services, and all of you do that. You provide multiple
services. And, to the degree that you do that, I think that we
provide better products for our taxpayers out there.
As our Chairman has said, this bill is attempting to do the
right thing for everybody and not really take sides. I think
there are some legitimate questions on Section 301, but I think
that you guys can work that out. The Chairman makes a good
point: If you already have credit unions that are in the
Federal Home Loan Bank system, it is hard to make an argument
to say that somehow there are some that should be kept out.
We do want to just remind you that the numerical provisions
in the Truth in Lending Act are kind of outdated, and I hope
that we have an opportunity to look at that, particularly as it
relates to automobile loans. The limits have failed to keep
pace with inflation, and many of those loans are not covered by
the limits of the act. So, we may be looking at an amendment to
bring TILA up to date and index the numerical provisions for
inflation so we do not have that problem.
For those of you who represent credit unions who want to
lend more money to the churches, I think you need to talk to
some of us. I am told that there are all these ministers who
want this. I have not heard from any of them, and I do not know
what that means. I do not know if that means that a
disproportionate share of your resources are going to end up
proliferating more and more churches, or take away from some of
your business loans. I do not know what it means. So, I think I
would like to hear from the advocates of eliminating that from
the caps in the credit unions.
With that, let me just say we have an opportunity to
tighten up this legislation a bit and have everybody in support
of it, and I would hope that we would all use those
opportunities prior to our votes on markup to do that. I yield
back my time.
Mr. Weldon. [Presiding.] The Chair will announce it is his
intention to recognize Mrs. Capito for 5 minutes of
questioning, and then recess for 20 minutes so that Members
will have an opportunity to go to the floor and vote and then
come back for further questions.
The gentlewoman from West Virginia, I believe the co-author
of the legislation under consideration, is recognized for 5
minutes.
Mrs. Capito. Thank you, Mr. Chairman. Thank you all for
your testimony. I think I mentioned in my opening statement
that it is a work in progress, and I think all of your
testimony shows that there is some work that you all would like
to see from every angle, and I think that is a good thing. That
is why hearings such as this are of great benefit to us as
Members.
I would like to ask Ms. Gaither about a conversation we had
in my office yesterday when we talked about the fact that
credit unions cannot expel members or remove members from their
membership roles. I would just like for you to maybe tell a
little bit about that story and a personal situation that you
had in your office.
Ms. Gaither. Thank you. Yes, yesterday we were talking, I
had explained to Representative Capito that we had actually had
a member come into our office who was dissatisfied for one
reason or another and actually told one of my tellers that if
he ever saw her outside the credit union, he was going to punch
her. We had no means at that point to be able to expel this
member other than calling a full membership meeting.
Mrs. Capito. Does this bill in the present form give you
that power? It will give you that power?
Ms. Gaither. Yes, we would be able to expel for just cause.
Mrs. Capito. I would like, and anybody can answer this
question from your different perspectives, to ask, in terms of
more access for consumers to all of your institutions, it would
seem to me--you mentioned, Ms. Duke, that you have what, 75
regulators that--compliance officers in your bank. I would
imagine that having to deal with fewer regulations, less
duplicative regulations, would not only maybe give you some
relief in terms of staffing issues, but also would provide
greater access along with insurance protection to the consumer
that we would like to see.
Do you envision this bill in any way, because of the fewer
time and the fewer details in some instances that you are going
to have to work on, that it will go to the benefit of an
individual consumer using one of your institutions?
Ms. Duke. Yes. As I stated, any time that you can spend
less of your resources actually working on regulations and the
implementation of regulations gives you more time to serve the
customer and it also--frankly, many of these regulations that
are designed to protect the consumer are often more confusing
to the consumer than the original issue.
The other thing, when I talk about manpower, and this goes
to my experience as a community banker, is as these regulations
come out, you do not have the people who are trained to
actually read them, so the CEO and the upper level management
of the organization are the ones that end up having to spend
time with those.
When FDICIA was passed, I believe it spawned 64 separate
regulations. At that time I had 65 employees. So if I had
assigned one regulation to each employee and given the courier
the time off, that is what it would have taken for us to
actually go through and look at each one of those regulations.
Mr. Cheney. Thank you, Congresswoman. Given the member-
owned nature of credit unions' expenses, I think it is safe to
say if we could reduce our expenses associated with regulation
and compliance, that those funds within the credit union would
either go toward expanded services for our members, or to
capital to make the credit union stronger and support our
growth.
Mr. Stone. I have 62 employees in my bank, and what is
really expensive is when we have to seek outside counsel to
interpret regulations, from CPAs to attorneys. That really is
very, very expensive when some of them can bill $200 and $300
an hour. You get regulation, and we must comply and want to
comply, and we get help from the regulators we have, but we
still have to get outside help so many times from an outside
organization.
Mrs. Capito. Mr. Chairman, I yield back. I would like to
say that the Financial Services Roundtable has testimony they
would like to submit for the record.
Mr. Weldon. Without objection.
[The information can be found on page 282 in the appendix.]
Mr. Weldon. The Chair announces a recess for 20 minutes.
[Recess.]
Mr. Weldon. You are a great group. I did not have to bang
the gavel and you came to order.
The Chair recognizes the gentleman from Texas for 5
minutes.
Mr. Bentsen. Thank you, Mr. Chairman. I thank our panel for
being here.
I want to say, Mr. Chairman, at the outset, I know that the
Chairman of the subcommittee talked about the food fight
aspect, but I do want to say it is somewhat of an historic
moment to see that the testimony of the American Bankers
Association praising the community bankers, the savings & loan
industry, in such great detail, and wanting to give them more
rights. It is something I may get framed just to hold on to,
and actually expanding their charter to some extent as opposed
to eviscerating or eliminating their charter.
I have a couple of questions. I will say on that point,
with respect to the broker-dealer, I have some history in that,
and I do hope that, assuming that we pass this bill and we give
equal treatment for broker-dealer trust operations with
thrifts, that as I hope the SEC is doing working with the
Comptroller and the Fed, that the rules are equivalent to those
required of broker-dealers which are under the auspices of the
Securities and Exchange Commission. I am one that felt that it
ought to just be the same regulation. I know the banks have
felt differently about that. But at least, if nothing else, you
ought to do the series 6 and 7 and all of the others and have
similar requirements.
I have two issues I am interested in in this bill. One has
to do with cross-marketing restrictions from Gramm-Leach-
Bliley, and the other has to do with Riegle-Neal. I think I
will talk about Riegle-Neal very quickly to the independent
bankers.
We had the regulators before the committee a month or so
ago, and I asked about the provision that would preempt Riegle-
Neal's interstate banking preemption. That is an issue that
obviously has been very important in my State and other States.
The argument was made by the Fed that in fact this was a small
bank issue, that the intention here was to help smaller banks,
particularly those who want to branch across the border to
another bank. But since you represent the smaller banks,
obviously that is not the way you all see it?
Mr. Stone. We think it is a States' Rights issue. The
States know better what their market situation is. In
Virginia--we were just discussing that at the break--that I
think in Virginia we have reciprocal agreements with all of
our, off the top of my head, all of our States, and we do
branch back and forth across those lines. But, you know, if you
have a State that has a neighbor that is not so gracious to do
that, it seems like to me that would be their choice.
Mr. Bentsen. Let me go to the cross-marketing restrictions.
Perhaps you all can refresh my memory. When we did the Gramm-
Leach-Bliley, we allowed certain types of cross-marketing to
occur within a financial services holding company. We put
restrictions on third parties and the like because of concerns
about privacy and others.
I guess at the end of the day when we allowed for the
merchant capital subsidiary or affiliate under the holding
company, we decided, for some reason, to impose cross-marketing
restrictions, at least as it applied to securities firms as
opposed to insurance firms. I am not sure exactly why we did
that at the time and, I do not know, maybe the ABA, since you
are a proponent of this provision of the bill, you may want to
refresh my memory as to why we did that and why we should not.
I see again that the ICBA is opposed to that and would like
to keep the current law as it is. I would like to have some
discussion from you all on that.
Ms. Duke. I am afraid I cannot tell you why you did it for
the insurance affiliates rather than the securities affiliates,
because that is exactly our point. We do not see the difference
between an investment bank by an insurance underwriting
affiliate versus a securities writing affiliate, and we think
they ought to have the same cross-marketing provisions.
The cross-marketing provisions, as I understand them,
include statement stuffers and internet websites, and the
restrictions on merchant banking in those investments are
fairly narrow in order to avoid the merger of banking and
commerce. There are anti-tying restrictions. The Board must
determine that the affiliation is within the public interest
and does not undermine separation of banking and commerce and
is consistent with safety and soundness. We feel within those
regulations there is certainly no reason that the securities
affiliates should not have the same powers as the insurance
affiliates.
Mr. Bentsen. Mr. Chairman, with your indulgence, if I could
get Mr. Stone's comment, because I do not understand if what is
good for the goose is not good for the gander, why wouldn't we
do that?
Mr. Stone. Well, here again, we strongly believe in the
separation of the financial services industry and commerce.
Wal-Mart would be a good example of someone that we do not
think should be in the banking business. I believe the Japanese
and the Germans as well have had some unfortunate experiences,
and I do not know all the details on that, other just what I
read, that the mixing of commerce and the financial institution
business has not worked that well, and some of the banks have
suffered in Japan, particularly for that.
Mr. Bentsen. If I can have your indulgence, Mr. Chairman,
on this. State Farm owns a bank. It may be operated as a
holding company, I am not quite sure, but at the same time, why
should they have a broader use if they establish a merchant
capital subsidiary than Bank of Virginia or Chase or your bank
if you choose to go down that route?
Mr. Stone. I would answer by saying I do not think they
should have that right. I do not think they should be allowed
in commerce. But the law is there and we would not have
supported that at that time, either, when it was passed.
Mr. Bentsen. Thank you. Thank you, Mr. Chairman.
Mr. Weldon. The Chair recognizes himself for a question.
Mr. Hage, you recommended exempting savings associations
from the Securities and Exchange Act and the Investment
Advisors Act. Would this affect consumer or investor
protections?
Mr. Hage. Our request is to be put on the same parity that
bank trust departments already are. It would be my opinion that
consumers' protection would not be weakened or put in jeopardy
by including savings associations in that law.
Mr. Weldon. You have also asked for an increase in business
lending authority for Federal savings institutions. How will
this increase the authority and affect your ability to serve
your communities? Can you comment on that, please?
Mr. Hage. Yes, I can. The increase in this authority would
enhance the thrift charter as a continuing charter that can
serve communities better. I can tell you in my own bank
institutional case, we are in Sioux Falls, South Dakota. We are
a bank that is $700 million in size. In the last 10 years we
have consciously established a strategy to offer small business
loans as well as our core housing lending. Today our balance
sheet is pushing the limit of the statutory limit on commercial
lending. We are serving more customers. We are being asked to
serve even more customers and are going to have to face a
choice about how we either turn off that lending or change our
charter.
There are many advantages to the thrift charter that we
think we would like to preserve. So to have relief on this
limitation, which seems artificial and certainly seems to
restrain and constrain the credit available to communities,
does not seem to make sense.
I would add that changing the formula as we proposed would
not threaten the QTL test which is a core test to establish the
thrift charter definition. So we think it makes sense to do
this. It would allow us to offer more loans to more small
businesses to more consumers.
Mr. Weldon. I assume you maintain your support for home and
consumer loans if that moves forward?
Mr. Hage. I would tell you that our portfolio has grown
many times over in the last 10 years as we have continued to
add services. What we found is that many of the small business
people will then bring all of their business to us, including
their home lending business, and we also get access to new
employees that they are bringing into the community so we can
provide home lending and consumer lending to these folks as
well.
Mr. Weldon. Thank you very much. I want to thank all of the
witnesses for their testimony.
Mr. Bentsen. Could I ask a follow-up question to this?
Mr. Weldon. Sure. Go ahead.
Mr. Bentsen. I understand what you are saying is that at
some point you are going to get the ABA back going against you,
because at some point they are going to say why don't you
convert to a bank charter? You are going to go to 25 percent
commercial lending and then more.
But let me ask you, because you raised the thrift
provisions, in your testimony you raised concern about the
ability to branch, interstate branch thrifts. I thought
federally chartered thrifts had national interstate branching
authority already. Unless I misread your testimony, why would
that need to be corrected in some way?
Mr. Hage. We are not asking for a correction on the thrift
branching. We are supporting the ABA request to have comparable
branching for commercial banks.
Mr. Bentsen. So it is a mutual appreciation issue. OK.
Thank you, Mr. Chairman.
Mr. Weldon. Again, I thank all of the witnesses for their
testimony. The subcommittee will keep the record open for 5
additional days for further questions for the witnesses and
further statements.
The hearing is now adjourned.
[Whereupon, the hearing was adjourned.]
A P P E N D I X
March 14, 2002
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