    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                         CUTTING THROUGH THE RED TAPE:
                        REGULATORY RELIEF FOR AMERICA'S
                             COMMUNITY BASED BANKS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                   FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 12, 2004

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 108-85

                        U.S. GOVERNMENT PRINTING OFFICE
    96-289                      WASHINGTON : 2004
    ____________________________________________________________________________
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
    RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
    EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
    FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
    ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
    RON PAUL, Texas                      BRAD SHERMAN, California
    PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
    JIM RYUN, Kansas                     BARBARA LEE, California
    STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    DOUG OSE, California                 RUBEN HINOJOSA, Texas
    JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
    MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
    PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
    CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
    JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
    VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
    GARY G. MILLER, California           JOE BACA, California
    MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
    SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
    PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
    MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
    TOM FEENEY, Florida                  DAVID SCOTT, Georgia
    JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
    SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
    TIM MURPHY, Pennsylvania
    GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
    J. GRESHAM BARRETT, South Carolina
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                     Robert U. Foster, III, Staff Director
           Subcommittee on Financial Institutions and Consumer Credit

                       SPENCER BACHUS, Alabama, Chairman

    STEVEN C. LaTOURETTE, Ohio, Vice     BERNARD SANDERS, Vermont
        Chairman                         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          BRAD SHERMAN, California
    EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    SUE W. KELLY, New York               DENNIS MOORE, Kansas
    PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
    JIM RYUN, Kansas                     MAXINE WATERS, California
    WALTER B. JONES, Jr, North Carolina  DARLENE HOOLEY, Oregon
    JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
    PATRICK J. TOOMEY, Pennsylvania      HAROLD E. FORD, Jr., Tennessee
    VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
    MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
    SHELLEY MOORE CAPITO, West Virginia  JOSEPH CROWLEY, New York
    PATRICK J. TIBERI, Ohio              STEVE ISRAEL, New York
    MARK R. KENNEDY, Minnesota           MIKE ROSS, Arkansas
    TOM FEENEY, Florida                  CAROLYN McCARTHY, New York
    JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
    SCOTT GARRETT, New Jersey            JOE BACA, California
    TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
    GINNY BROWN-WAITE, Florida
    J. GRESHAM BARRETT, South Carolina
    RICK RENZI, Arizona

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 12, 2004.................................................     1
    Appendix:
        May 12, 2004.................................................    51

                                   WITNESSES
                            Wednesday, May 12, 2004

    Abernathy, Hon. Wayne A., Assistant Secretary for Financial
      Institutions, United States Department of the Treasury.........     9
    Goldston, Jim, Branch President, City Bank (TX)..................    30
    Hickman, J. Pat, Chairman and CEO, Happy State Bank (TX),
      representing Independent Bankers Association of Texas..........    40
    Kennedy, Judith A., President and CEO, National Association of
      Affordable Housing Lenders.....................................    37
    Leighty, Dale, Chairman and President, First National Bank of Las
      Animas (CO), representing Independent Community Bankers of
      America........................................................    31
    Macomber, Mark E., President and CEO, Litchfield Bancorp (CT),
      representing America's Community Bankers.......................    35
    Reich, Hon. John M., Vice Chairman, Federal Deposit Insurance
      Corporation....................................................    11
    Rock, Brad, Chairman, President and CEO, Bank of Smithtown (NY),
      representing American Bankers Association......................    34
    Smith, Hon. Joseph A. Jr., Commissioner of Banks, North Carolina
      Office of Commissioner of Banks, representing Conference of
      State Bank Supervisors.........................................    14
    Taylor, John, President and CEO, National Community Reinvestment
      Coalition......................................................    38

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    52
        Oxley, Hon. Michael G........................................    55
        Hensarling, Hon. Jeb.........................................    57
        Hinojosa, Hon. Ruben.........................................    59
        Abernathy, Hon. Wayne A......................................    61
        Goldston, Jim................................................    65
        Hickman, J. Pat..............................................    68
        Kennedy, Judith A............................................    74
        Leighty, Dale................................................    97
        Macomber, Mark E.............................................   115
        Reich, Hon. John M...........................................   123
        Rock, Brad...................................................   154
        Smith, Hon. Joseph A. Jr.....................................   170
        Taylor, John.................................................   192

                         CUTTING THROUGH THE RED TAPE:
                        REGULATORY RELIEF FOR AMERICA'S
                             COMMUNITY BASED BANKS

                                  ----------

                            Wednesday, May 12, 2004

                 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 10:02 a.m., in
    Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the subcommittee] presiding.
        Present: Representatives Bachus, Baker, Gillmor, Biggert,
    Hensarling, Garrett, Brown-Waite, Barrett, Sanders, Maloney,
    Watt, Sherman, Meeks, Moore, Waters, Carson, Hinojosa, and
    Lucas of Kentucky.
        Chairman Bachus. [Presiding.] Good morning. The
    subcommittee will come to order.
        Today's hearing was requested by Congressman Hensarling. We
    will focus on how to strengthen and preserve the important role
    that small banks serve in the communities by reducing the
    burdens imposed on those institutions by outdated and
    unnecessary regulatory requirements.
        Among those testifying at the hearing will be Treasury
    Assistant Secretary Wayne Abernathy, Federal Deposit Insurance
    Corporation Vice Chairman John Reich, North Carolina Banking
    Commissioner Joseph A. Smith, on behalf of the Conference of
    State Banking Supervisors; and a number of industry and
    consumer group witnesses.
        For generations, community-based banks have been the
    financial underpinning for millions of consumers, small
    businesses, family farms, local merchants and rural economies
    throughout the United States. Community-based banks form the
    building blocks of our nation's communities by providing credit
    to all geographic regions of the country. They have contributed
    substantially to the stability and growth of each of the 50
    states by facilitating a decentralized source of lending. This
    dispersion of our nation's assets and investments helps
    preserve the safety, soundness, fairness and stability of our
    entire financial system.
        Community banks are often the linchpin to the survival and
    well being of local communities, particularly small towns in
    rural America. They specialize in doing business in their
    respective cities and towns and reinvest their deposits into
    these communities through local lending. Currently, more than
    8,700 community banks with almost $2.3 trillion in assets
    continue in the tradition of giving back to their local
    communities through nearly 40,000 banking offices. Annually,
    community banks have made more than $3 billion in loans to
    small businesses, totaling over $275 billion and 720,500 loans
    to small farms, totaling more than $37 billion.
        Recently, I introduced H.R. 591, which recognizes the
    importance of small banks in developing our communities and the
    nation as a whole, and designates April as Community Banking
    Month. I am hopeful this legislation will be considered on the
    House floor soon. Although small banks have been prosperous in
    recent years, they face a disproportionate regulatory burden in
    relation to their large bank counterparts. When a new
    regulation is created or an old regulation is changed, small
    institutions must devote a large percentage of the staff's time
    to review the regulation to determine if and how it will affect
    them.
        In addition, compliance with the regulation can take large
    amounts of time that cannot be devoted to serving customers or
    business planning. Easing the regulatory burdens on small banks
    frees up more of the bank's resources for loans to small
    businesses and creditworthy borrowers, helping to promote
    economic growth and greater consumer choice.
        In closing, I would like to thank Mr. Hensarling for
    working with us on this hearing. Congressman Hensarling
    recently introduced H.R. 3952, the Promoting Community
    Investment Act, which would require the banking regulators to
    give banks with less than $1 billion in assets the streamlined
    exam for compliance with the Community Reinvestment Act.
    Currently, streamlined CRA exams are limited to banks with less
    than $250 million in assets. This is just one example of Mr.
    Hensarling's strong commitment to issues affecting community
    banks.
        I see Mr. Baker here. Mr. Baker has also made some
    significant proposals concerning deregulation.
        The Chair now recognizes the Ranking Member of the
    subcommittee, Mr. Sanders, for any opening statement that he
    wishes to make.
        [The prepared statement of Hon. Spencer Bachus can be found
    on page 52 in the appendix.]
        Mr. Sanders. Thank you, Mr. Chairman.
        As a strong supporter of community banks and of credit
    unions, one of the concerns that I have, and Mr. Chairman, one
    of the issues that we might want to be addressing is to try to
    understand why throughout America and in my own State of
    Vermont, there are fewer and fewer community banks. One of the,
    in my view, very dangerous trends that is taking place within
    the financial services industry, as well as virtually every
    other industry in America, is that fewer and fewer large often
    multinational institutions are controlling those industries.
    The smaller guys, the people like community banks who know the
    folks in their neighborhood, who trust people, who have good
    working relationships, they are dissolving all over America. I
    think that that is a bad trend.
        One of the topics that will be raised at this hearing will
    be an attempt to weaken Community Reinvestment Act requirements
    for mid-sized banks. Banking regulators have already proposed a
    regulation to substantially reduce CRA requirements for 1,100
    mid-size banks with assets of $250 million to $500 million, and
    legislation has been introduced to weaken CRA requirements for
    banks even further. If the proposed regulations go into effect
    and this legislation is signed into law, fewer people will
    realize the dream of homeownership; fewer small businesses will
    get off the ground; fewer jobs will be created; and fewer
    neighborhoods will be rebuilt. We must allow that to happen.
        Mr. Chairman, CRA is making homeownership accessible to
    more Americans. It is helping to start small businesses and
    create decent-paying jobs. It is responsible for over $1
    trillion in loans in low- and moderate-income communities. In
    my view the Community Reinvestment Act must be strengthened,
    and not weakened.
        Mr. Chairman, I understand the focus of this hearing is to
    provide regulatory relief to community banks. I happen to
    believe that we need more small banks and credit unions, not
    fewer. I have met with community bankers, as well as credit
    unions in the State of Vermont, and I believe that they are
    doing a very good job. For example, they tell me that they are
    not pulling bait-and-switch credit card interest rate scams
    like many big banks are doing in this country. The reason it is
    important to have community banks, the reason it is important
    to have credit unions is that all over this country, people are
    being ripped off by large banks that are charging excessive
    fees, and extraordinarily high interest rates. That is why we
    need more community banks, not fewer.
        But unfortunately, the massive deregulation of the banking
    industry over the past 2 decades has led to fewer and fewer
    small banks. This has been a disaster for consumers who have
    seen higher credit card interest rates and bank fees as a
    result. Mr. Chairman, according to a 2002 Federal Reserve study
    published in 2002 entitled Whither the Community Bank, ``the
    number of small community banks with assets of less than $100
    million has fallen from around 11,000 banks in 1980 to less
    than 5,000 today. About 55 percent of the bank mergers during
    the past two decades combined two community banks. These
    mergers would not have been possible without the repeal of
    federal and State banking regulations that historically
    restricted the size and geographic mobility of U.S. banks.''
        Mr. Chairman, I am concerned that providing more regulatory
    relief in this instance could lead to even fewer small banks.
    Mr. Chairman, the issue you are touching upon today is
    important, but our goal must be to strengthen community banks,
    allow for diversity all over this country, and not to see fewer
    and fewer large institutions.
        Thank you.
        Chairman Bachus. Thank you, Mr. Sanders.
        Chairman Baker?
        Mr. Baker. Chairman Bachus, I want to commend you for your
    initiative in calling this hearing and your leadership in the
    past on seeking regulatory relief through the Congress for
    community institutions. I also want to say a word about Mr.
    Hensarling's efforts and introduction of his own legislation
    and his initiatives in trying to bring additional relief to a
    critical part of our economy.
        It is a clear fact that America is a nation of small
    businesses. Some testimony I read from this morning's
    presentation of witnesses indicates that 75 percent of all new
    jobs created in America come from companies with less than 500
    employees. Frankly, I thought it was more like 90 percent of
    employment opportunities were created by companies with less
    than 25 employees. Whatever the number, it is clearly
    established that mom-and-pops are the employment engine in
    America today. They are the entrepreneurs. They are the
    innovators. They are the folks who bring products to market
    that we have not seen before.
        Those folks do not get credit by going to Wall Street with
    their widget design. They start in small-town America; sit
    across the desk from the hometown banker who says, I have
    confidence in you, Joe; I am going to extend this credit to see
    how it works out.
        The reality is that we are losing significant numbers of
    those community banking opportunities, that business engine
    development opportunity. One of the contributors, I happen to
    believe, is the plethora of regulatory interventions required
    by the federal government. Since 1989, I was shocked to learn
    by either agency or congressional action, 801 new regulations
    required of community-based institutions. Even for a
    conscientious person doing the best they can with lots of
    resources, that is a lot of change to absorb.
        Second, as Mr. Sanders pointed out in his statement, we
    have gone from 11,780 institutions in 1989 to 4,390 defined as
    community banking institutions by 2003. That is a problem.
    Anyone concerned about concentration of economic assets in a
    handful of very large institutions has got to be troubled by
    these developments. These concerns must be addressed. The
    question I raise is, of course, where do we go? On March 17,
    Chairman Bachus authored a letter to the various federal
    regulators concerning the regulatory burden surrounding CRA, a
    letter which I cosigned with the Chairman because I believe
    that his request was certainly more than appropriate.
        But rather than zero in solely on asset size, isn't what
    Mr. Sanders raised in his concerns this morning about
    inappropriate conduct and where credit is deployed really the
    key? Shouldn't we develop innovative ways to measure community
    institution performance, the percentage of loans that go to
    small businesses, the percentage of loans within a geographic
    area, the percentage of loans to low-income individuals, the
    percentage of loans held in portfolio because loans held in
    portfolio are generally nonconforming loans that cannot be sold
    off to the secondary market because there is some unique asset
    to that lending requirement that the banker thinks is good to
    extend the credit, but does not meet the cookie-cutter approach
    of Wall Street.
        We have to get away from that. I suggest that providing
    regulatory relief after, not in front of, but after someone has
    demonstrated their extending credit to small business in their
    community, especially to low-income people and holding loans in
    portfolio might be the beginning of a measurement screen that
    enables this number of banks to go up instead of down. If we
    are in the middle of a jobless recovery, as some allege, I do
    not believe, this could be one change that might accelerate the
    growth of job opportunities.
        Mr. Chairman, I stand ready to vote for and support any
    measure which you develop which will provide meaningful relief
    for this important engine of economic recovery.
        Thank you. I yield back.
        Chairman Bachus. Thank you, Mr. Baker.
        Mr. Sherman?
        Mr. Sherman. Thank you, Mr. Chairman. Thank you for holding
    these important hearings. I hope we persuade the other body to
    take a look at H.R. 1375, the good work of this committee. I
    think we should focus on the recent actions of the OCC in
    preempting all State consumer protection laws for the big
    national banks. First, this is a disaster for states rights.
    Second, it is a disaster for consumers. And third, it is a
    potential disaster for those banks that are not national banks,
    since it creates an unequal playing field and since it also
    allows those who want to evade state laws to tarnish the name
    of all banks in the community, because the average American
    really does not draw a distinction between national and state-
    chartered banks in evaluating whether banks are doing a good
    job for our community.
        When the 5 o'clock news is out there, to talk to a woman
    who has lost her home due to practices that the State
    legislature tried to protect her from, and where a runaway
    federal agency decided she should lose her home and should be
    subject to the very practices that a State tried to prohibit,
    when that 5 o'clock news appears, the public is not going to
    say, oh, but that was an OCC-regulated bank. Instead, your
    State legislatures are going to pass even more consumer
    protection laws, some of which may be ill-advised, which again
    will only affect those that are state-chartered, thus driving a
    consolidation, driving a migration to the national charter, and
    achieving what may be the purpose of the OCC, and that is to
    expand its regulatory market share.
        So I look forward to us not only providing reasonable
    regulatory relief, but also make sure that when national
    standards are called for, they are the standards voted on
    democratically in this committee and in this House. And that
    they therefore apply to all banks, whether you have the
    national charter or the State charter, rather than a runaway
    agency providing a special benefit to only a segment of the
    banking industry, and in particular the segment that in general
    competes with the community bankers represented here.
        I yield back.
        Chairman Bachus. Thank you, Mr. Sherman.
        Mr. Hensarling?
        Mr. Hensarling. Thank you, Mr. Chairman. Thank you for
    holding this very important hearing.
        Nearly every community throughout America is served by at
    least one small locally based and usually locally owned bank,
    which focuses on meeting the financial needs of the citizens
    living and working within that community. They are built on
    personal contact, communities ties and close lender-borrower
    relationships. They are often the economic lifeblood of rural
    America.
        Chairman Alan Greenspan has called them, ``one of the
    jewels of the international financial system,'' because of
    their uniqueness. They are our nation's community banks. They
    create jobs and hope and opportunity, and they are threatened.
    In 1984, we had approximately 11,000 community banks. Today,
    the number is roughly half that.
        One has to ask why. Now, if banking customers within a
    competitive marketplace are simply deciding through their free
    will they no longer want or need community banks, then we
    should not interfere. However, I fear that it is our
    interference in the first place which is helping cause the
    decline. When you ask community bankers what is the main
    obstacle they face in surviving and/or thriving, the answer is
    almost always the same: overly burdensome, costly and time-
    consuming federal regulations. Currency transaction reports,
    know-your-customer requirements, reg D, reg C, Community
    Reinvestment Act, Privacy Act notices, reg Z, and the list goes
    on and on.
        The federal regulatory burden on smaller banks can be
    significantly disproportionate to their larger counterparts,
    especially for institutions with branches located in rural and
    more scarcely populated areas. This is mainly because the
    compliance costs for banks of all sizes contain a significant
    fixed cost component that all banks have to pay. These fixed
    costs will come out of a much smaller revenue base in a small
    bank. Larger regional or national banks can spread these costs
    out over a much larger revenue base.
        I am convinced that action is needed to remove some of the
    restrictions on community banks and permit them to operate in a
    manner that preserves more resources for creating jobs, saving
    farms and serving their communities. When bankers tell me that
    they spend $300,000 per year on non-safety and soundness
    compliance alone, it is time that we take a hard look at their
    regulatory burden.
        When I hear that two-thirds of many banks's total
    compliance costs are not even related to the safety and
    soundness of the institution, it is time we take a hard look at
    their regulatory burden. When community bank employees can
    spend more than 31,000 hours per year on compliance matters
    alone, it is time we take a hard look at their regulatory
    burden. When approximately one out of every four dollars goes
    to regulatory compliance for the average small bank, it is time
    we take a hard look at the regulatory burden.
        So I believe it is imperative that Congress continue to
    examine the regulations that banks are forced to comply with,
    and act to remove or restructure antiquated and outdated
    regulations that stifle lending opportunities for banks working
    to serve their communities.
        In many cases, the most burdensome of these regulations is
    the Community Reinvestment Act or CRA, which is why Chairman
    Baker and I have introduced legislation that would allow banks
    with less than $1 billion in assets to participate in a
    streamlined small bank CRA exam. $1 billion in assets appears
    to be the industry standard as well as the cut-off for the
    Federal Reserve.
        Today, American consumers at all income levels have access
    to great credit products, great credit availability at low
    cost. We need to keep this phenomena alive, but excess
    regulation is harming that. So I look forward to working with
    you, Chairman Bachus, Chairman Oxley and Chairman Baker, as
    well as other members of this committee to address these
    issues.
        Thank you.
        [The prepared statement of Hon. Jeb Hensarling can be found
    on page 57 in the appendix.]
        Chairman Bachus. Thank you.
        Mr. Lucas?
        Mr. Lucas of Kentucky. Mr. Chairman, I look forward to
    hearing from our witnesses.
        Chairman Bachus. Thank you.
        Mr. Garrett?
        Mr. Garrett. Likewise, Mr. Chairman. I look forward to the
    testimony. Good to see you again, Mr. Abernathy. I commend you
    on holding these hearings.
        The point that I will be interested to see at the end of
    the day is to what end as far as all the regulations that we
    have had, in the business world I guess it would be a cost-
    benefit analysis as to what has occurred over the years. From
    what I hear back at home, and what I hear in previous hearings,
    it has been a negative impact. I commend my colleague
    figuratively, but not literally, to my left, Mr. Hensarling, as
    far as the legislation he has put in play with regard to
    community bankers. What I am hearing back at home is that there
    is a negative impact, so I will be interested to see whether we
    can refute that or whether we can address that.
        Also, in the hearings that we have heard to date in other
    committees and other subcommittees's hearing on money
    laundering and terrorism and those areas, the concern was the
    plethora of information that is coming into Washington today
    from all sources, financial and otherwise, that is just
    something that they just cannot keep up with. It goes back to
    the days prior to the PATRIOT Act with the $10,000 reports and
    now with the PATRIOT Act and others as well. They just
    literally cannot keep up with the information. So at the end,
    it is a question of to what end are some of these regulations
    that we have put in place; maybe it is doing, quite honestly,
    as Jeb's bill is saying, more harm than good both to an
    industry that is suffering under the weight of the burden and
    from our intelligence community as well, from the deluge of
    information that they really just cannot do anything with
    anymore.
        So I appreciate your testimony today. Thank you.
        Chairman Bachus. Thank you.
        If there are no more opening statements, we will go to our
    first panel. I have been told there are no more opening
    statements.
        At this time, we will introduce our first panel. Our first
    panel, and I will introduce from my left to right, we have an
    esteemed first panel. Wayne A. Abernathy was sworn in as
    Treasury Assistant Secretary for Financial Institutions on
    December 2, 2002; nominated by President Bush on August 1, 2002
    and confirmed by the Senate in November of that year. He brings
    more than 20 years of financial policy expertise to the
    position. He most recently served as the Republican Staff
    Director of the U. S. Senate Committee on Banking, Housing and
    Urban Affairs, where he also served as committee Staff Director
    to Chairman Phil Gramm from 1999 to 2001. I am sure you
    probably worked with Mr. Hensarling in that position.
        His previous experience with the Senate Banking Committee
    includes serving as Staff Director of the Subcommittee on
    Securities. Prior to that, he was Republican economist for the
    committee. Prior to that, he worked as a Senior Legislative
    Assistant for Senator Gramm and as an economist for the Banking
    Committee Subcommittee on International Finance and Monetary
    Policy.
        He earned his bachelor's degree from Johns Hopkins
    University, graduating with honors in 1980. He earned his
    master's in international economics, international law and
    organizations from Johns Hopkins.
        I welcome you, Mr. Secretary.
        Mr. John Reich became Vice Chairman of the FDIC board of
    directors on November 15, 2002. He served on the board since
    January of 2001. Following Chairman Donna Tanoue's resignation
    in July 2001, until Mr. Powell took office in August of 2001,
    he was Acting Chairman of the FDIC. He enjoyed a 23-year career
    as a community banker in Illinois and Florida, the last 10
    years as President and CEO of the National Bank of Sarasota.
        Before that, he served for 12 years on the staff of U.S.
    Senator Connie Mack. From 1998 to 2000, he was Senator Mack's
    Chief of Staff. His substantial community service includes
    serving as chairman of the board of trustees of a public
    hospital in Fort Myers, Florida and chairman of the board of
    directors of the Sarasota Family YMCA.
        He holds a BS degree from Southern Illinois University and
    an MBA from the University of South Florida, and also is a
    graduate of Louisiana State University School of Banking of the
    South.
        We welcome you, Mr. Reich.
        Commissioner Smith is the North Carolina Commissioner of
    Banks, having been appointed in June 2002 to fill an unexpired
    firm of a retiring commissioner and was reappointed for a 4-
    year term in June 2003. Was that by Governor Easley?
        Mr. Smith. Yes, sir.
        Chairman Bachus. Okay. Prior to his appointment, Mr. Smith
    was counsel in the Washington office of the New York law firm
    of Thacher, Profitt and Wood, where he was a practitioner in
    the corporate and financial institutions practice group. Before
    moving to Washington, Mr. Smith served as general counsel and
    secretary of Centura Banks, now RBC Centura, in Rocky Mount,
    North Carolina, and engaged in the private practice of law in
    Raleigh.
        A graduate of Davidson College and the University of
    Virginia Law School, he lives in Raleigh, North Carolina. He is
    married and has two grown sons. Any grandchildren yet?
        Mr. Smith. None that I know of, sir.
        [Laughter.]
        Chairman Bachus. Okay. That is good.
        We very much look forward to your testimony. I think our
    tradition is to start with Mr. Abernathy. Is that right? Have
    you all agreed on a different order?
        Mr. Abernathy. We were flipping coins here for a while, but
    we only had a two-sided coin and it did not work out.
        [Laughter.]
        Chairman Bachus. Whoever is most anxious can go first.
        Secretary Abernathy?

     STATEMENT OF HON. WAYNE A. ABERNATHY, ASSISTANT SECRETARY FOR
        FINANCIAL INSTITUTIONS, UNITED STATES DEPARTMENT OF THE
                                TREASURY

        Mr. Abernathy. Thank you, Mr. Chairman. It is a pleasure to
    be here with you and the members of the subcommittee today.
    This is a very good opportunity to testify on the regulatory
    burden faced by community banking institutions.
        Small community banks and thrifts provide services that are
    greatly valued by their neighbors. I emphasize the word
    ``neighbors.'' Their longstanding focus on individual customer
    relationships and in-depth knowledge of local credit needs
    serve our nation's communities well.
        Of significant importance in achieving major goals set for
    us by President Bush, community bankers' expertise enables them
    to provide financial services to small businesses and hard-to-
    reach customers that might otherwise be overlooked. If we chose
    $1 billion in assets as the dividing line today between small
    banks and medium and large banks, the total number of small
    banks and thrifts declined from 1993 to year-end 2003 by almost
    one-third. Some have raised concerns about what these trends
    may mean for the future of community banking.
        Fortunately, chartering activity in recent years
    demonstrates the vitality and attractiveness of community
    banking. According to the FDIC, there were over 1,200 new
    community banks and thrifts established since the beginning of
    1992. Nearly all of these new institutions continue to serve
    their communities today.
        The profitability of small banks and thrifts has been
    relatively stable over the past decade as measured both by
    return on assets and return on equity. It is true that small
    depository institutions have lower returns on equity than
    larger institutions, but that is in large measure because
    smaller banks tend to have more equity and are therefore more
    strongly capitalized than are larger banks.
        Strong capital levels empower small banks to meet the
    particular and often unique business characteristics and credit
    needs of local households and the local businesses in their
    communities, while preserving the safety and soundness of the
    system.
        Though we have great confidence in the strength and
    vitality of small banks and thrifts, they continue to face
    challenges from a variety of sources. A significant challenge
    arises from the burden that regulations impose. Many regulatory
    requirements carry some degree of fixed costs, but these can
    weigh more heavily upon the comparatively smaller revenue base
    of community banks.
        To try to compensate for this imbalance, many of our laws,
    regulations and supervisory practices take into account
    differences between smaller and larger banking institutions in
    ways that help to mitigate potential competitive disadvantages.
    For example, banks and thrifts that have less than $250 million
    in assets are subject to a streamlined CRA test. Smaller
    depository institutions have more liberal access to Federal
    Home Loan Bank advances. At the end of last year, 2019 small
    banks and thrifts received the benefits of subchapter S
    corporation tax treatment, up from 604 institutions at year-end
    1997.
        Still, we believe that more can and should be done to
    reduce burdensome regulations without compromising prudential
    concerns. This was reinforced by a recent call by President
    Bush that we should be sure that all federal, state and local
    regulations are absolutely necessary. An interagency task force
    under the direction of my colleague sitting next to me, FDIC
    Vice Chairman John Reich, has taken on this very important
    task. Last summer, the financial agencies published the first
    of a series of notices seeking feedback on three specific
    regulatory groups: applications and reporting, powers and
    activities, and international operations. In January of this
    year, a second notice was published requesting comment on
    consumer protection lending-related regulations.
        This careful and comprehensive approach to the review of
    regulations could prove fruitful in identifying ways to reduce
    regulatory and compliance burdens on banks, especially on small
    banks, while also relieving corresponding strains on
    supervisory resources without sacrificing important supervisory
    objectives.
        Earlier this year, the banking agencies also issued a
    proposed rule that would make more community banks eligible for
    streamlined CRA examinations. Institutions with under $500
    million in assets would be eligible for this streamlined test.
    The agencies estimate that the proposal would cut in half the
    number of institutions subject to the large retail institution
    test.
        Congress has joined this regulatory relief effort as well,
    moving forward several items of legislation. For example, the
    Treasury Department has consistently supported legislative
    proposals to repeal the prohibition on paying interest on
    business demand deposits. The House of Representatives has
    several times passed legislation that includes this repeal.
    Repeal would also benefit the nation's small businesses by
    allowing them to earn a positive return on their transaction
    balances.
        Depository institutions of all sizes face a heavy
    regulatory burden. This burden falls disproportionately on
    small banks and thrifts. The costs are ultimately passed on to
    banks, consumers and taxpayers. When regulatory burdens are
    excessive and fail to add net value, they take a toll on the
    competitiveness of our financial system and on overall economic
    efficiency. The Treasury Department encourages efforts by the
    banking agencies to reduce regulatory burdens on banks of all
    sizes, an effort that is likely to benefit community banks and
    their customers in particular. We stand ready to work with
    Congress to further these objectives.
        In closing, many have commented on the tremendous benefits
    we derive from our great dual banking system. When they do so,
    they usually refer to the dual system of state and national
    bank charters. But I think that we should include in that
    concept a vibrant, competitive array of banks of all sizes
    meeting the financial needs of our businesses and communities,
    which also come in all sizes, large and small. That is not only
    something worth preserving, it is something worth promoting.
        Thank you, Mr. Chairman.
        [The prepared statement of Hon. Wayne A. Abernathy can be
    found on page 61 in the appendix.]
        Chairman Bachus. Thank you.
        Chairman Reich?

     STATEMENT OF HON. JOHN REICH, VICE CHAIRMAN, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Mr. Reich. Thank you, Mr. Chairman, for this opportunity to
    testify on a subject near and dear to my heart, the impact of
    regulatory burden on community banks.
        As a former community banker with 23 years experience, 12
    years as a community bank CEO, I hope to elevate the concern of
    Congress over the future of small community banks in the United
    States. To summarize and characterize my message to you this
    morning, Mr. Chairman and members of the committee, the small
    community banks of America face an uncertain future and may be
    in danger of becoming an endangered species.
        Mr. Chairman, as you recently noted, community banks play a
    vital role in the economic well being of countless individuals,
    neighborhoods, businesses and organizations throughout our
    country, often serving as the lifeblood of our communities. I
    believe they are too important as sources of local credit and
    economic growth for us to sit idly by and watch them disappear
    due to the unintended consequences of past, present and future
    policy decisions, and also significantly due to the weight of
    accumulated regulatory burdens.
        Most people recognize the considerable consolidation in the
    banking industry that has taken place over the last 20 years,
    but not everyone fully appreciates the extent to which
    community banks have been rapidly disappearing from the scene.
    As chart one indicates, at year-end 1984 there were 11,780
    banks and savings institutions with assets of less than $100
    million. I am talking about small community banks, making up
    nearly 78 percent of all FDIC-insured institutions in 1984. By
    the end of last year, that number had dwindled to 4,390, making
    up only 48 percent of the total number of institutions in the
    United States.
        Even more dramatically, as depicted in the next chart, the
    total market share of small community banks has declined from 9
    percent, this is an inflation-adjusted number, in 1984 to 2
    percent at the end of last year. The size of the community
    banking industry in the United States, the small community
    banks, represent less than 2 percent of all industry assets. By
    contrast, as shown in chart three, the share of industry assets
    attributable to the largest banks in the country, those with
    more than $10 billion in assets, of which there are 110 banks,
    went from 27 percent at year-end 1984 to 70 percent of total
    industry assets at the end of last year.
        It has been widely reported that the industry as a whole
    earned a record $120.6 billion last year, surpassing the
    previous record of the previous year of $105.1 billion set in
    2002. But what is not often reported is the considerable
    disparity in earnings between the largest and the smallest
    institutions. It is indeed, as Chairman Don Powell of the FDIC
    recently said, a tale of two industries. Last year, the 110
    largest banks with assets over $10 billion, which represent
    only 1.2 percent in number of the total institutions in the
    country, earned 73 percent of total industry earnings; 1.2
    percent of the number of institutions represented 73 percent of
    total industry earnings. By contrast, the 4,390 community banks
    that represent 48 percent of the total number of institutions
    earned $2.1 billion in toto, just 1.7 percent of total industry
    earnings.
        As chart four shows, the community bank share of industry
    earnings has been on a downward slope since 1990, and though I
    have seen no official projections going forward, I believe the
    trend is going to continue. Average return on assets for the
    industry as a whole last year was a record 1.38 percent. But
    when you dig deeper, you see that the large banks, those of $10
    billion or more in assets, the 110 institutions that had $10
    billion or more in assets, had an average return on assets of
    1.42 percent, while the small community banks, under $100
    million, had a return on assets of 0.95 percent.
        As indicated on chart five, community banks with assets
    under $100 million generally operated at a higher profitability
    level than the larger banks in the past until the mid-1990s,
    when the lines crossed and larger banks began outperforming
    smaller institutions. I believe this disparity in profitability
    can be attributed at least in part to the disproportionate
    impact of the costs of compliance with accumulated regulations
    on community banks. Smaller institutions generally cannot
    absorb the costs and other burdens of regulations as easily as
    mid-size and larger banks. Since larger banks can spread the
    cost of compliance over many more transactions, the overall
    cost per transaction is often significantly lower for them than
    for community banks.
        As chart six vividly indicates, there is a growing gap in
    the efficiency ratios of smaller versus larger institutions.
    Overhead costs are absorbing a much greater share of community
    bank revenues when compared to larger institutions. I believe
    that this, too, is a direct result of the disproportionate
    impact of regulatory burden on community banks. Since the
    enactment of FIRREA in 1989, the banking and thrift industry
    regulators have issued a grand total of 801 final rules, a
    tremendous number of rule changes for the industry to digest,
    particularly small community banks with limited staff. The cost
    involved in reprogramming computers, retraining staff,
    rewriting procedure manuals and producing new forms for some
    rules can be considerable.
        So what are the regulators doing about this? Today, we are
    engaged in a concerted effort to review all of our existing
    regulations in an effort to identify and eliminate regulatory
    requirements that are outdated, unnecessary and unduly
    burdensome. The agencies have divided all of our regulations
    into 12 categories and are putting one or more categories out
    for comment every 6 months until the project is completed in
    2006.
        We are also conducting banker and consumer community group
    outreach meetings around the country to hear directly from all
    interested parties. Our interagency EGRPRA task force is
    responsible for reviewing and analyzing all the written and
    oral comments that we receive for possible regulatory burden
    reduction initiatives. The agencies will then propose
    amendments to their regulations as appropriate. In those cases
    where statutory changes are required to eliminate unnecessary
    burdens, we will recommend such changes to Congress.
        I expect an interim set of recommendations to be made to
    Congress within the next few weeks, with a final report to
    Congress on the EGRPRA project to be submitted upon completion
    of the project in 2006. I want to emphasize that this is an
    interagency effort and all of the agencies are working together
    superbly in this effort.
        Finally, I want to repeat my concern that if we do not do
    something in the near future to stem the tide of what bankers
    characterize as a continuing avalanche of ever-increasing
    regulation, I fear that America's community banks will continue
    their rapid disappearance from our towns and communities. That
    is why I believe it is incumbent upon all of us, Congress,
    regulators, industry and consumer groups, to work together in
    the short run to eliminate outdated, unnecessary and unduly
    burdensome regulations and to develop longer-range solutions,
    including the possibility of a two-tiered system of regulation
    for the two very diverse industries which make up our banking
    system today in the United States.
        In closing, Mr. Chairman, I wish to thank you again and
    your colleagues for holding this hearing on the impact of bank
    regulation on community banks today, and I look forward to your
    questions.
        [The prepared statement of Hon. John M. Reich can be found
    on page 123 in the appendix.]
        Chairman Bachus. I thank you. That was compelling
    testimony, Vice Chairman Reich, indeed. I am not sure that that
    has been widely publicized, some of the facts that you have
    gone over. I very much appreciate it. You have been very
    valuable to this committee moving forward.
        At this time, I would like to recognize the gentleman from
    North Carolina, Mr. Watt.
        Mr. Watt. Thank you, Mr. Chairman. I believe you have
    already introduced my State Banking Commissioner, Joe Smith,
    but I appreciate your extending the courtesy to me to extend a
    personal welcome to him, and rave about the magnificent job
    that he has done in North Carolina.
        North Carolina, of course, has a great reputation for its
    national and State banks. The regulation at the State level and
    the supervision at the State level is a testament to the
    leadership of our State banking commissioner. I appreciate the
    opportunity to welcome him here and put him on a national
    platform. I look forward to his testimony.
        Thank you.
        Chairman Bachus. Thank you.
        Congressman Watt is a valuable member of our committee and
    we appreciate him giving us that additional introduction.
        Mr. Smith. Thank you for those kind words.
        Chairman Bachus. Thank you.
        Mr. Smith. One gets so few in this business.
        [Laughter.]
        Chairman Bachus. You ought to use those to campaign for
    office.
        [Laughter.]
        Mr. Smith. No, thank you.
        [Laughter.]
        Chairman Bachus. Commissioner?
        Mr. Watt. I think I embarrassed him, so he forgot to turn
    on his microphone.
        Mr. Smith. It is on. I am just naturally quiet and soft-
    spoken.
        (LAUGHER)
        Mr. Watt. Okay.

      STATEMENT OF HON. JOSEPH SMITH, JR., COMMISSIONER OF BANKS,
     NORTH CAROLINA OFFICE OF COMMISSIONER OF BANKS, REPRESENTING
                  CONFERENCE OF STATE BANK SUPERVISORS

        Mr. Smith. Good morning, Chairman Bachus, Representative
    Watt, members of the subcommittee, I am Joseph A. Smith, Jr.,
    North Carolina Commissioner of Banks and Chairman of the
    Conference of Sate Bank Supervisors's Legislative Committee.
        Thank you for inviting CSBS here today to discuss
    strategies for supporting our country's unique community
    banking system. To support our diversified system of community
    banking, CSBS and the State banking commissioners are now
    working with the federal financial institutions examination
    council to implement EGRPRA. This process has highlighted
    several insights that we believe should inform this committee's
    work. I should say, that we hope will inform your work.
        First, a bank's most important tool against regulatory
    burden is its ability to make meaningful choices about its
    regulatory structure. The State banking system sets our
    financial system apart from every other developed nation and is
    a primary contributor to our nation's diverse and responsive
    economy. But diversity in our financial system is not
    inevitable. Community banking, as the charts just showed, is
    not inevitable. Both are products of a consciously developed
    stated-federal system.
        The state charter has been and continues to be the charter
    of choice for community-based institutions because the
    supervisory environment, locally oriented, hands-on and
    flexible, matches the way these banks do business. A bank's
    ability to choose its charter encourages regulators to operate
    more efficiently, more effectively and in a more measured
    fashion. A monolithic regulatory regime would have no incentive
    to efficiency. The state system remains as a structural curb on
    excessive federal regulatory burden and a means of promoting
    wide diversity of financial institutions.
        Second, while our current regulatory structure does
    recognize differences between financial institutions, it too
    often imposes one-size-fits-all requirements that are unduly
    burdensome on smaller or community-based institutions.
    Regulatory burden always falls hardest on smaller institutions
    and state-chartered banks tend to be smaller than their
    federally chartered counterparts.
        The Conference of State Bank Supervisors asked its Bankers
    Advisory Board about regulatory burden. Their responses
    illustrated how disproportionately heavily the regulatory
    burden falls on smaller institutions. One member of our
    Banker's Advisory Board, the CEO of a $150 million bank,
    reported that his bank employs the equivalent of four or five
    full-time employees who focus exclusively on compliance, rather
    than on customer service or lending. This commitment places the
    bank at a competitive disadvantage not only to larger banks,
    but also to non-bank financial services providers that are not
    subject to many federal banking regulations.
        We suggest that Congress and the regulatory agencies seek
    creative ways to tailor regulatory requirements for
    institutions that focus not only on size, but on a wider range
    of factors that might include geographic locations, structure,
    management performance and lines of business. Every new
    national standard is generally a new regulatory burden for the
    majority of banks. Regulatory relief for the handful of market-
    dominating banks that operate in multiple states usually means
    new and unanticipated regulatory burdens for the thousands of
    community banks that operate in a single state or even a single
    community.
        Third, while technology continues to be an invaluable tool
    of regulatory burden relief, it is not a panacea. Technology
    has helped reduce regulatory burden in countless ways. State
    banking departments, like their federal counterparts, now
    collect information from their financial institutions
    electronically, as well as through on-site examinations. Shared
    technology allows the State and federal banking agencies to
    work together constantly to improve examination processes,
    while making the process less intrusive for financial
    institutions.
        The fact that technology makes it so much easier to gather
    information, however, should not keep us from asking whether it
    is necessary to gather all of this information or what we
    intend to do with this information once we have it. Information
    gathering is not cost-free.
        Fourth, no amount of legislative reform can be effective
    unless regulators coordinate to reduce unnecessary duplication.
    The regulatory structure that makes choice possible in our
    banking system also creates a complex network of overlapping,
    sometimes contradictory regulations and policies. Coordination
    among regulatory agencies is the only way to eliminate
    unnecessary duplication, while preserving diversity in our
    system. CSBS brings state and federal regulators together in a
    variety of forums to improve communication and coordination
    among states and with federal agencies.
        Finally, although regulators constantly review regulations
    for their continued relevance and usefulness, many regulations
    and supervisory procedures still endure past the time that
    anyone can remember their original purpose. Many State banking
    statutes include automatic sunset provisions that require
    legislators and regulators to review their laws at regular
    intervals to determine whether they are still necessary or
    meaningful. We urge Congress to apply this approach to as wide
    a range of federal banking statutes as possible.
        The current trend toward greater more sweeping federal
    preemption of State banking laws and a push toward uniformity
    weighs against all of the insights I have just discussed. We
    appreciate that the largest financial services providers want
    more coordinated regulation. We share these goals, but not at
    the expense of distorting our marketplace, denying our citizens
    the protection of state law, or eliminating the diversity of
    regulation and institutions that makes our financial system the
    envy of the world.
        The regulatory environment for our nation's banks has
    improved significantly over the last 10 years, in part, sir,
    because of your vigilance. As you consider additional ways to
    reduce burden on our financial institutions, we urge you to
    remember that the strength of our banking system is its
    diversity. While some federal intervention may be necessary to
    reduce burden, relief measures should allow for further
    innovation and coordination at both the State and federal
    levels.
        The continuing effort to streamline our regulatory process,
    while preserving the safety and soundness of our nation's
    financial system, is critical to our economic well being, as
    well as to the health of our financial institutions. State bank
    supervisors continue to work with each other, with our
    legislatures and with our federal counterparts to balance the
    public benefits of regulatory action against their direct and
    indirect costs.
        We commend you, Mr. Chairman and the members of this
    subcommittee, for your efforts in this area. We thank you for
    this opportunity to testify and look forward to any questions
    that you and the members of the subcommittee might have.
        Thank you very much indeed.
        [The prepared statement of Hon. Joseph A. Smith Jr. can be
    found on page 170 in the appendix.]
        Chairman Bachus. I thank you, Commissioner Smith.
        At this time, the panel will ask questions. I will start by
    asking Mr. Abernathy. Mr. Abernathy, Chairman Powell recently
    suggested that policymakers might want to consider a two-tiered
    approach in pricing of deposit insurance between the large
    complex banks and the smaller institutions. I think Vice
    Chairman Reich suggested the possibility of expanding this two-
    tiered approach to other areas of bank regulation. What are
    your views? What are the possible benefits of separate
    regulatory regimes and also some potential downsides?
        Mr. Abernathy. Mr. Chairman, from a general point of view,
    to the degree that you can tailor the costs of regulation and
    the details of regulation to the nature of the institutions you
    are supervising, to the extent that you can do that, you are
    improving the quality and the effectiveness of your regulations
    and reducing unnecessary costs. So conceptually, it is a great
    idea. That is one of the reasons why we have supported with all
    of the other financial regulators a package for FDIC reform
    that would give increased flexibility to the FDIC to run their
    fund much the same way an insurance company would, which is
    matching the cost of the insurance with the risk that is
    presented. We think that makes a lot of sense.
        Chairman Bachus. My next question, Title V of Gramm-Leach-
    Bliley has imposed some significant financial burden or
    regulatory burdens on our small institutions. One of them is
    the privacy notice, which I think most of us agree a lot of
    them have very little benefit to the consumers, who indicate
    that a large number of consumers find them confusing. I know
    that bank regulators have solicited public comments on ways to
    improve these privacy notices. Do you agree that the current
    system needs to be improved? Has the Treasury developed any
    recommendations for both easing the compliance burden on banks,
    particularly smaller banks, and making the privacy notices
    themselves more meaningful for consumers?
        Mr. Abernathy. Mr. Chairman, one of the first assignments
    that I had in my current responsibility as Assistant Secretary
    was looking at these notices. In that process, I have yet to
    find anyone who is satisfied with the current State of the
    notices. I do not travel very much in the attorney circles.
    Maybe there are some attorneys who are happy with the notices
    because they seem to be made for attorneys, by and for the use
    of attorneys, perhaps, but they do not benefit consumers. I do
    not find any consumers who feel that they are getting
    information they can use. The financial institutions I talked
    to, they indicate that these notices carry significant costs to
    provide, and yet they wonder if they are providing any benefit
    to their customers.
        So for now over a year, Treasury has been advocating that
    we ought to simplify significantly the Gramm-Leach-Bliley
    privacy notices so that they present in the types of
    information that customers can use and understand, and make use
    of at the time that they are making their consumer decisions.
    We have looked at, as an example, the information notices that
    are provided with food labeling. There we have some very
    important information. It is important to consumers that they
    can understand it, that it is presented in a format that is
    easy for them to grasp. We encourage the regulators to move
    forward and look for something that is that easy to use and
    understand.
        Chairman Bachus. I appreciate that.
        Vice Chairman Reich, I know the FDIC and its fellow bank
    regulators have recently proposed regulations that would update
    CRA. Many of us on the committee are concerned that CRA, while
    a well-intended attempt to promote investment in the local
    community, may have had actually the opposite effect of
    strangling community banks with red tape and making it more
    difficult for them to meet their customers's credit needs.
        Can you explain to the committee how the recently proposed
    CRA regulations address those concerns? Are there other reforms
    that the regulators are considering that would further CRA's
    underlying objectives, while at the same time easing the
    compliance burden on our community banks?
        Mr. Reich. With respect to the proposed changes in CRA, Mr.
    Chairman, the agencies have proposed to increase the threshold
    for large bank compliance from $250 million to $500 million.
    The impact of this would cover about 1,100 banks in the country
    and would not relieve them of compliance and CRA
    responsibilities. They would continue to be subject to the
    lending requirements of the Community Reinvestment Act. But it
    would streamline the examination process and relieve them of
    some of the burdens of compliance with the Community
    Reinvestment Act.
        In my view, community banks are the personification of
    community reinvestment in their communities. They are concerned
    about their communities. They each have boards of directors who
    are actively involved in their communities; who care about
    their communities; who care about their bank and its impact on
    the community. So I believe that the small community bank about
    which I am so concerned carries out the spirit and the purpose
    of the Community Reinvestment Act every day that it is open for
    business in its community.
        With regard to the proposed increase from $250 million to
    $500 million, in my own personal view, I would have liked to
    have seen it go to $1 billion, because I really believe that
    the definition of a community bank today encompasses
    institutions up to $1 billion. The proposed move to $500
    million is a very good move that will provide some relief for
    community banks.
        Other areas that we are working on, we do have, or did have
    recently a revised privacy notice out for comment. It was an
    effort to produce a simplified privacy notice. I think it was
    an improvement, but it has not been universally received as a
    great improvement by the banking industry. Small community
    banks feel that if they do not share information with anyone,
    why should they have to send out a privacy notice every year to
    their customers? They would like to be relieved of that
    responsibility and be required to file a privacy notice only
    when they change their practices. If they are a local
    institution that does not share information with any other
    agencies, they would prefer to file privacy notices only when
    their policies change.
        Chairman Bachus. Okay. Thank you. We appreciate your
    remarks and look forward to your continuing to work with us to
    find ways to reverse what appears to be some negative trends
    for our community banks.
        At this time, what we are doing on both sides is going in
    order of members's arrival. At this time, I would recognize Ms.
    Carson. Do you have questions for the panel?
        Ms. Carson. Thank you very much, Mr. Chairman. I think they
    have answered my questions in terms of where they are. My
    concern is where we are as a committee in terms of continuing
    to infuse local communities with tax credits and financial
    support in various neighborhoods to continue to rebuild
    neighborhoods in America. I am afraid your strategy here may
    injure that process, but we will wait and see. I appreciate
    your comments.
        Chairman Bachus. Okay. I thank the lady.
        At this time, Mr. Watt?
        Mr. Watt. Thank you, Mr. Chairman.
        Welcome again, Commissioner Smith. I hope I did not
    embarrass you with my earlier welcome.
        Let me ask you, Commissioner Smith, North Carolina and 15
    other states, plus Puerto Rico, either have usury laws or
    interest caps or direct laws dealing with payday lending. That
    is an issue that has traditionally been handled at the State
    level, is it not?
        Mr. Smith. Yes, sir. That is correct.
        Mr. Watt. Generally, the federal regulators pretty much
    stay out of the way of that?
        Mr. Smith. Yes.
        Mr. Watt. Mr. Reich, I am advised that the OTS, the Federal
    Reserve and the OCC each have taken steps to prevent regulated
    institutions from renting or using their charters to enable
    payday lending where there are state laws that prohibit it. Why
    is it that the FDIC is the only bank regulator that has not
    done that?
        Mr. Reich. Congressman, the FDIC has developed the
    reputation of being soft on payday lending because we have not
    exclusively restricted payday lending activities. I think it is
    our view that there is a market of underserved people who are
    being served by payday lending, and that certain kinds of
    payday lending activities, if tightly supervised and
    controlled, do not represent safety and soundness concerns to
    the banks who engage in those activities. We have not opened
    the door to payday lenders at the FDIC.
        Mr. Watt. Do you have criticism of the other regulators
    that have specifically prohibited their member institutions or
    banks under their regulation from renting their charters?
        Mr. Reich. No, I am not here to criticize any other agency
    for their approach toward payday lending.
        Mr. Watt. How do you reconcile the FDIC's position with
    those other regulators?
        Mr. Reich. I think we are comfortable with the restricted
    nature, with the restricted environment under which we permit
    payday lending activity to take place in institutions. We limit
    payday loans on the books of our institutions to 25 percent of
    their capital. Typically, we require them to fund their payday
    loans with $1 of capital for every $1 of payday loans that are
    on their books. It is essentially self-funding with their own
    assets.
        Mr. Watt. But where a State has prohibited that activity in
    that particular state, isn't that in effect a substitution of
    your judgment for the judgment of the State lawmakers and/or
    regulators who have made a judgment about that particular
    activity in that state?
        Mr. Reich. We are not cheerleaders for payday lending,
    Congressman.
        Mr. Watt. I am not asking you whether you are cheerleading
    for it. I am just trying to reconcile where you are with the
    other regulators. I guess my concern is there is an ongoing
    kind of tug-of-war, not intentional tug-of-war, but ongoing
    debate about what the States will have control over and what
    the federal government will have control over. When you have
    something that has clearly been regulated by the States, and
    there are specific statutory provisions that deal with it, I am
    trying to figure out why the federal regulator, one in
    particular, one out of four, would fail to honor that.
        Mr. Reich. There are very few institutions in the country
    involved in payday lending, and not many states involved. It is
    an issue that we are not championing; that we have been
    reactive to, not proactive about. Those institutions that are
    under our domain that are engaged in payday lending activity,
    we feel they are subject to the terms and conditions of our
    supervisory guidance, and we have been comfortable with our
    experience.
        Mr. Watt. Since this is a hearing about regulatory relief,
    maybe I should ask the question, how many regulations has the
    FDIC issued in this area that is imposing additional burdens,
    whereas if they just said we are going to honor the States,
    wouldn't that reduce some regulatory burdens?
        Mr. Reich. I do not have an answer to that question,
    Congressman.
        Mr. Watt. I yield back.
        Chairman Bachus. Thank you.
        What I am going to do, because I actually recognized two on
    this side, and I am going to recognize Mr. Hensarling and then
    go to Mr. Garrett. And then we will be back in order.
        Mr. Hensarling?
        Mr. Hensarling. Thank you, Mr. Chairman.
        Gentlemen, I have the honor and privilege of serving the
    Fifth Congressional District in Texas, which stretches almost
    from downtown Dallas to the piney woods of East Texas. I have
    had the opportunity in that capacity to meet with community
    banks in urban Dallas, suburban Dallas County and in rural East
    Texas. In speaking to these community bankers, and granted this
    is an unscientific survey, universally they seem to tell me
    that well over half, up to two-thirds of their compliance
    costs, has nothing to do with the safety or soundness of their
    institutions.
        Have your institutions conducted any surveys? Do you have a
    feel if these results are accurate? Starting with you,
    Secretary Abernathy.
        Mr. Abernathy. Congressman, I learned my banking from Texas
    bankers, so I would give a lot of credit to what they have to
    say.
        Mr. Hensarling. So do I.
        Mr. Abernathy. But having said that, we have not conducted
    any kind of what I would call a scientific survey of that. I
    think there would be great value in doing that. I think to the
    extent we ask our safety and soundness regulators to engage in
    a lot of other types of activities, we have to ask ourselves,
    are we distracting them from their number one responsibility,
    which is the safety and soundness of the financial system. I
    think that would be a very valuable exercise.
        Mr. Hensarling. Thank you.
        Mr. Reich, do you have a comment?
        Mr. Reich. I think the Federal Reserve did a study last in
    1999, which indicated that the costs of compliance totaled
    approximately 12 percent to 13 percent of non-interest
    expenses, a number I think approaching $40 billion annually for
    the industry.
        Anecdotally and in the outreach meetings that I have had
    with bankers around the country in the past year, they tell me
    the same kinds of comments that you are hearing, that the
    additional operating costs in recent years have been
    substantially attributable to the costs of compliance. I think
    it is borne out in one of the charts that I presented, which
    was a chart of a bank's efficiency ratio, the ratio of its non-
    interest expenses to its total operating revenue. In the last 7
    or 8 years, the efficiency ratios of community banks in
    comparison to larger banks have been flat or increasing,
    largely attributable to compliance costs.
        Mr. Hensarling. Thank you, Mr. Reich.
        Unfortunately in the interest of time, Mr. Smith, I think I
    am going to move on to another subject.
        I have read in a Congressional Research Service Report that
    a streamlined CRA Exam can save 40 percent of a bank's overall
    compliance costs. Speaking to the same Texas bankers that I
    alluded to earlier, many cite the large bank CRA exam as their
    number one compliance cost. Assuming CRS got it right, is there
    any data point that we have that proves that banks that engage
    in a small bank CRA exam somehow are serving their communities
    less than those who are subject to the larger test? Do we have
    any hard data on this?
        Mr. Smith, we will start with you.
        Mr. Smith. Thanks. To my knowledge, sir, the answer to that
    question is no.
        Mr. Hensarling. Okay. Mr. Reich, do you have any
    information?
        Mr. Reich. I do not, Congressman.
        Mr. Hensarling. Okay. Secretary Abernathy?
        Mr. Abernathy. I have not seen any data that says that.
        Mr. Hensarling. Okay, next question. Obviously, we have a
    line of demarcation presently between the large exam and the
    smaller exam at $250 million in assets. Myself and Chairman
    Baker have proposed a bill to move that to $1 billion. Mr.
    Abernathy and Mr. Reich, I think both of you cited in your
    testimony the $1 billion figure as your line of demarcation for
    the small bank. That appears to be the Federal Reserve
    definition. It appears to be industry standard. So I am
    curious, what is the derivation of your feeling that $1 billion
    ought to be the line of demarcation?
        Mr. Abernathy. It is certainly nothing scientific, frankly.
    It seems to be a number where when you draw that line and you
    look at the banks that are below that line, they seem to fit
    the image that most people have of what community and local
    banks are. When you have the largest bank in the country having
    assets in excess of $1 trillion, to say that the line you are
    going to draw is one one-thousandth of that size suggests to
    me, if you are trying to define the difference between the
    large and the small, that certainly is not drawing the line too
    high.
        Mr. Hensarling. Mr. Chairman, if I could ask one more
    question to Mr. Reich. I have had one banker in Athens, Texas
    ask me: Congressman Hensarling, who reads all these reports
    that my bank has to fill out? What do I tell this gentleman?
        Mr. Reich. Consumer groups read the data. The data is
    collected by our staffs and it is put back out into the public
    arena. It is massaged and manipulated as the users see fit.
    When I started in banking in 1961, the call report form was one
    page, two sides, one piece of paper. Today, it is 40 pages
    long. And whether you are a $10 million bank or a $10 billion
    bank, you fill out the same report. There are some supplemental
    reports, but there is so much information that I believe could
    be eliminated from the reporting requirements.
        Mr. Hensarling. Thank you.
        Thank you, Mr. Chairman.
        Chairman Bachus. Thank you.
        Mr. Garrett?
        Mr. Garrett. Just a flippant comment, I guess. If the
    consumers had to pay for these reports themselves, then I guess
    we could save a lot of money on the other end. Maybe not.
        Before there was the PATRIOT Act, there was the Bank
    Secrecy Act. Now, I am not a constitutional attorney. I am just
    a plain slip-and-fall attorney, so I never did quite understand
    what the constitutional underpinning was of the Bank Secrecy
    Act, that when I engage in a financial transaction with this
    individual, a bank, I give up some of my rights; and when I
    engage in a financial transaction with somebody else, I do not
    give up those privacy rights. So I will just put two questions
    to you.
        At the very least, is there any consideration being given
    to raising the threshold as far as the Bank Secrecy Act, as far
    as what triggers reporting the $10,000 figure up to a more
    realistic higher number of $20,000, $30,000 or higher? Although
    I know there were earlier court cases on it, I would appreciate
    your opinion as to the constitutionality of this requirement
    that I have to turn over my private information in that manner
    as we currently do.
        Mr. Abernathy. Congressman, with regard to the level of the
    CTRs, it is really a factual issue. The question is, at what
    level do we draw the line that is going to give us the kind of
    information that is important in fighting the crooks that want
    to make use of our financial system, whether it is the
    terrorist, the mobsters or whoever else.
        That is a factual question that we are constantly asking.
    Right now, the law says it is at $10,000. Is that too high, too
    low? I think we need to continue to evaluate the data and say
    if we drew that line at a different place, what would the
    result be with regard to the ability to halt money laundering.
    I do not think it should be a static number. I think it is
    something we should continue to investigate, and in fact it is
    something we do continue to look at.
        Mr. Garrett. Maybe along that line, just following Mr.
    Hensarling's question, who looks at that information? This is
    not consumer groups that are looking at this information. This
    is law enforcement that looks at this information. What is the
    word that you get from law enforcement as to the value of this
    information? I understand that it is just a deluge of reports
    that are coming in and in order for them to weed through, it is
    the proverbial needle in the haystack approach. Can you cite
    any specificity as to the value of these reports to law
    enforcement and their use?
        Mr. Abernathy. It is really looking for the needle in the
    haystack. When you want to find that needle in the haystack,
    you do not want to pile on more hay. You want to remove some of
    the hay, but you do not know where the needle is so you do not
    know where to move the hay. That is why it really is a factual
    exercise that we engage in with financial institutions. We ask
    them, where should we look; where don't we need to look.
        Frankly, we get our best information from the suspicious
    activity reports (SARS) because they provide more detailed
    information. To the extent that we can put this information in
    electronic form, we can digest it and use it more effectively.
    That is why we have been trying to encourage financial
    institutions to provide the information as much as possible
    electronically, because we can use it better that way.
        Mr. Garrett. I guess that is another area where I have to
    scratch my head as far as making the law enforcement and making
    the banks and the community banks an extension of law
    enforcement as far as suspicious activity reports as well. I do
    not think most of them said, when I am getting into the banking
    business, I am getting into law enforcement at the same time.
        What sort of feedback, then, is there between Treasury and
    the banks, so to speak, on the suspicious activity reports and
    the validity of these reports and the value of the reports? I
    think this is something that was moving up along the line time-
    wise on the PATRIOT Act. This is where it is supposed to be
    going on.
        Mr. Abernathy. I think there are significant conversations
    that take place, but I think we need to have more. The new
    Chairman of the Financial Crimes Enforcement Network, FinCEN,
    Mr. Bill Fox, has particularly given tremendous emphasis to
    finding out from the financial institutions themselves just
    what is most effective, and helping them know what they are
    providing that we can use.
        Mr. Garrett. Very briefly, can you say that in a timeline,
    shall we look to any changes within the next month, 6 months, 1
    year, 2 years as far as any of these numbers or activities?
        Mr. Abernathy. I am hopeful that on a continuing basis,
    within the next several months, within the next year, to see
    some improvements, significant and important improvements in
    our anti-money laundering efforts.
        Mr. Garrett. Thank you.
        Mr. Reich. May I address that question, Congressman
    Garrett?
        Mr. Garrett. Are you going to give me the constitutional
    basis for that? Certainly, you can answer.
        Mr. Reich. I have had six outreach meetings with bankers
    over the last 9 months across the country. This issue is at the
    top of their list. Twelve million CTRs were filed by the
    banking industry last year. We are working with Director Fox at
    FinCEN. We have had some very good conversations. He came to
    our outreach meeting in Nashville 3 weeks ago. He is very
    interested and anxious to work with us in developing a process
    and processes which will be more efficient. He has expressed a
    hope that by the end of this year, that there will be some
    reform to the CTR process.
        What form that will take, I cannot say. There has been some
    discussion of raising the threshold for businesses. I want to
    emphasize, though, that the banking industry is not looking to
    escape from this responsibility. Bankers are patriots. They are
    good citizens. They want to continue to be. But to the extent
    that there can be greater efficiency put into the process, the
    filing of CTRs, they are hopeful that we can accomplish
    efficiency in the process.
        Mr. Garrett. I thank you for that. I see my time has run
    out. If I had the time, I would just ask you about your
    extension as far as your reporting is being done by 2006 as far
    as your hearings, and how many community banks we may have lost
    by that time, and whether that can be contracted in any manner.
        Mr. Reich. When I first undertook the project, I thought it
    would only take a year to a year-and-a-half to complete, but it
    is a mammoth undertaking and it does require a 3-year time
    period in order to give it thorough consideration.
        Mr. Garrett. Thank you.
        Chairman Bachus. Thank you, Congressman Garrett.
        Did you say you were a slip-and-fall attorney?
        [Laughter.]
        He does not show any ill-effects.
        [Laughter.]
        Mr. Hinojosa?
        Mr. Hinojosa. Thank you, Mr. Chairman.
        I want to say that at the present time, I am reviewing Mr.
    Hensarling's legislation, H.R. 3952, entitled Promoting
    Community Reinvestment Act, which should allow community banks
    with less than $1 billion in assets to participate in a small
    bank institution CRA examination.
        I want to determine if this legislation is the appropriate
    regulatory relief to consider at this time, or if we should
    wait until the regulators complete their regulatory relief
    review. I am also reviewing the Independent Bankers Association
    of Texas's idea for a community bank charter. I welcome their
    appearance here today.
        Mr. Chairman, I want to ask a question of Vice Chairman
    Reich. You state in your testimony that the volume and
    complexity of existing banking regulations, coupled with the
    new laws and regulations, may ultimately threaten the survival
    of our community banks. That concerns me, because they play a
    very important role in my 15th Congressional District in Texas.
        You later note that community banks are healthy in terms of
    their supervisory ratings, but are operating at a lower level
    of profitability than the largest banks in the country. You
    also contend that credit unions, on the other hand, have a
    number of regulatory advantages over banks and thrifts, and
    Congress should reexamine these advantages and see if they can
    resolve them.
        What particular regulatory legislation would you recommend
    that Congress enact? And how do you recommend Congress or
    regulators establish a level competitive playing field for our
    community banks and their counterparts?
        Mr. Reich. Thank you for that question.
        You mentioned Congressman Hensarling's proposal to increase
    the limit on CRA from $250 million to $1 billion. As one
    regulator, I would be very supportive of that effort, and as
    one regulator who has talked with thousands of bankers in the
    past 3 years, that would have a major impact on their
    institutions in a positive way.
        There are a number of other steps, and frankly I would not
    want to see the committee or the Congress wait until 2006 until
    our comprehensive review is totally completed, to enact
    legislation which would relieve regulatory burden. When there
    are good ideas existing such as that one, I would hope that it
    could be enacted as soon as possible.
        There are a number of regulatory issues, Congressman, which
    bankers are concerned about. I mentioned the Bank Secrecy Act.
    That actually is an area that would not require statutory or
    congressional approval. I think the Treasury Department has all
    the authority that it needs to make changes there. There are a
    number of other areas that bankers are concerned about.
    Regulation D, the limitations on transfers and withdrawals from
    money market deposit accounts, was a regulation that was
    enacted in the mid-1980s, and is a regulation which in today's
    economic environment seems to no longer make sense.
        As I indicated earlier, I expect to be coming to the Hill
    within the next few weeks with a platform of legislative
    recommendations which will emanate from our first year of
    activity on this EGRPRA regulatory reduction effort. I think
    that changing the threshold CRA certainly would be a major
    assistance to community banks.
        Mr. Hinojosa. How will we be able to get a copy of that
    platform of recommendations that you propose to bring us?
        Mr. Reich. I assure you, I will hand-deliver it to your
    office.
        Mr. Hinojosa. We certainly have the community bankers
    visiting members just like myself, and expressing those
    concerns, and looking at the charts of what has happened to
    profitability of small community bankers versus the large ones,
    it is a matter of concern to those of us who have such large
    rural districts.
        In closing, Mr. Chairman, I want to ask, or rather make a
    statement more than a question. I want to thank Ms. Judith A.
    Kennedy for stressing in the testimony I read prior to her
    formal presentation here today, how important it is that we
    fully fund HUD's Section 8 voucher program. I have cosigned Ms.
    Nydia Velazquez's letter to the House appropriators requesting
    such funding.
        With that, Mr. Chairman, I yield back the balance of my
    time.
        Chairman Bachus. Thank you.
        We will now recognize Mr. Meeks. That will then conclude
    the questioning for the first panel. I believe, Mr. Abernathy,
    you have an engagement and need to leave at quarter of. We
    tried to facilitate that, so we will recognize Mr. Meeks and
    then close the first panel.
        Mr. Abernathy. Thank you, Mr. Chairman.
        Mr. Meeks. Thank you, Mr. Chairman.
        Let me first say, I just want to make sure of some concerns
    with regard to the CRA because I have found that CRA is good
    business, not only good for local communities, but it is good
    business for the financial institutions also. I know that for
    some of the small banks, we are trying to eliminate some of the
    paperwork and make sure that they do not get caught under the
    deep files.
        So let me ask Mr. Abernathy, how much relief do you think
    the changes in CRA requirements for banks under 500K provide?
    Do you have any idea?
        Mr. Abernathy. That is a factual question. I think the
    process that we are engaged in, during the comment period,
    should reveal to what extent that will be a benefit; whether
    that is the right line to draw. Certainly, the question has
    been asked, and I think there is a lot of validity to it,
    namely is to what extent do you need to remind community banks
    to do business in their communities. I think, frankly, in my
    experience, any community bank that is not doing banking in its
    own community is not going to stay in business very long.
        Mr. Meeks. Let me ask this, then, in regard to some of the
    banks that would be exempted based upon the proposed rules from
    rigorous CRA standards, are you aware of any previous patterns
    of violations of CRA requirements by any of those, or
    antidiscrimination laws by any of those institutions?
        Mr. Abernathy. CRA is not an antidiscrimination statute, as
    you know. CRA's main requirement is that banks are to do
    business in the communities where they are located. There are
    other antidiscrimination statutes.
        Mr. Meeks. Right. I am saying either/or, understand that.
        Mr. Abernathy. Yes. I believe violations that have occurred
    have been fairly small, but I think they have been by some
    small institutions, but still a very minor number, a minuscule
    number of institutions.
        Mr. Meeks. Do you have any idea of how these banks
    generally have scored on CRA examinations?
        Mr. Abernathy. The smaller banks?
        Mr. Meeks. Yes.
        Mr. Abernathy. The vast majority of them have obtained
    satisfactory examination scores.
        Mr. Meeks. Right.
        Mr. Smith, let me ask you a question. Do you think there
    would be any community banking system without a State banking
    system?
        Mr. Smith. I think that the evidence that we have so far is
    that most community banks are state-chartered banks; that most
    community banks being created now are state-chartered banks.
    Other things equal, I think there would be many fewer community
    banks without a State system.
        Mr. Meeks. What do you think is the greatest threat to the
    State banking system?
        Mr. Smith. The greatest threat to the State banking system
    is, in my opinion right now, the perception that the
    comptroller's actions with regard to preemption have created an
    advantage which will lead at the margin to larger state-
    chartered institutions considering more seriously flipping
    charters to the national system. If that happens, then our
    written testimony has some stats in it. There could be a
    significant decrease in the State system in the number of total
    assets, which is the assessment base on which the whole system
    rests. I think that is a serious issue, frankly, for the
    Congress because ultimately this body is going to be in control
    of that issue.
        Mr. Meeks. I agree with you.
        Do you think consumers generally recognize the difference
    between state-chartered and nationally chartered banks?
        Mr. Smith. I think consumers generally recognize the
    difference between a local bank and a bank that is not local. I
    have formed, I will say by way of background, we have had 10
    new charters issued by my agency in the last year, and the
    story I hear is always the same story. It is the leadership of
    small business people who believe that larger institutions, for
    good reasons and bad, do not serve the needs of the community
    in the way they used to when they were smaller. I try to talk
    them out of it, frankly, because starting a bank is a rough
    business, but they are not dissuaded. Many people in many parts
    of North Carolina, at least, believe very strongly that a
    locally established, locally controlled institution is very
    important, in fact crucial to their economic development. I
    hear this over and over again.
        Mr. Meeks. Do you think that disclosure requirement would
    be helpful, if national banks were required to disclose to
    consumers that they did not follow State consumer protection
    laws because there is a difference, you know. Some federally
    chartered banks may not provide the same consumer protections.
        Mr. Smith. I would prefer, frankly, to have a system where
    there is an even playing field, where that is not required.
    Actually, some of my best friends are national bankers, so I do
    not think it is a question of burdening them. I think it is a
    question of being sure that the playing field is in fact even.
    That is more of a concern to me personally.
        Mr. Meeks. Thank you.
        Let me ask Mr. Reich one quick question. In reading your
    written testimony, you do not make any comments on the FDIC and
    the payday lending issue. In this committee, different members
    have had various opinions on the use of it as a financial
    instrument. My biggest concern is the FDIC's role in allowing
    banks to partner with payday lenders so that they can
    circumvent state law, an issue that we are also dealing with
    regarding to OCC.
        What do you feel should be some of the best practices for
    payday lenders and the bank affiliates?
        Mr. Reich. As I indicated to an earlier question on this
    subject, the FDIC is not a cheerleader for payday lending. We
    have issued guidance for the industry and for our examination
    personnel that indicate under what conditions payday lending
    activity may take place, and have placed strong capital
    requirements on those institutions that are involved in payday
    lending activity.
        We believe that it is an activity that carried on at a
    moderate level does not pose safety and soundness problems for
    those banks that we supervise that are involved in that
    activity.
        Mr. Meeks. Okay. I guess I am out of time. I yield back,
    Mr. Chairman.
        Chairman Bachus. Thank you.
        I want to again thank this panel for their testimony.
    Without objection, your written statements in their entirety
    will be included in the record, as will the opening statements
    of the members, if there is no objection, and any written
    questions that the members may wish to submit. Ms. Ginny Brown-
    Waite of Florida has two questions specifically for Mr.
    Abernathy and Mr. Reich, which we will submit to the record
    along with any others.
        I want to conclude by saying that I think your testimony
    today is an alarm bell for what Chairman Greenspan has said is
    the crown jewel of our banking system, and that is our network
    of community banks, which he pointed out is really unique
    worldwide in their scope, their diversity and their mission. It
    is something that is a treasure to our country and its people,
    both to rural America, to agriculture, but to small business
    and to many of our small cities and towns. It gives consumers
    choice.
        I join Vice Chairman Reich in saying that I have serious
    concerns about the future of community banking, and see a
    regulatory burden on them as an important factor in the
    equation for their future success. We have in recent years
    given beneficial treatment to some of their competition. I
    believe that that is beginning to show up in the facts and
    statistics we have heard today. I think the answer to that is
    extending benefits and regulatory relief to our community
    banks. I think that would be the approach to so-called level
    the playing field.
        With that, the first panel is discharged and we thank the
    gentlemen. Watch your step as you leave.
        I would like to welcome the second panel. At this time, I
    am going to recognize the gentleman from Texas, Mr. Hensarling,
    to introduce our first witness.
        Mr. Hensarling. Thank you, Mr. Chairman.
        I am privileged and honored to introduce Mr. Jim Goldston,
    who happens to be the President of City Bank, that is City Bank
    with a ``y.'' In Forney, Texas, they know how to spell
    ``city.'' He is the President of City Bank in Forney, Texas in
    Kaufman County which I have the privilege of representing as
    part of the Fifth Congressional District.
        Mr. Goldston has not only been a bank President, but also
    has the unique attribute of having previously been a bank
    examiner as well, and brings a unique perspective to this
    particular hearing. In addition, I just think to a great extent
    Mr. Goldston represents what is good, what is unique about
    community banking in Texas and I wager in America. Not only has
    he worked to make a very successful bank, but he has previously
    served as the President of the Chamber of Commerce. He has
    served on two different committees of the school district. He
    has been the President of the Lions Club. He has been a deacon
    in his church. He has been a hospital board member. He served
    as a director on the North Texas Council of Substance Abuse.
        Mr. Chairman, I read this items out to let you know that by
    definition community banks have to be involved in their
    communities. Indeed, it goes back to buttress the argument that
    they are indeed the lifeblood of many of our rural communities.
    It is with a great honor and privilege that I introduce Mr.
    Goldston to our committee.
        Chairman Bachus. I thank you and welcome, Mr. Goldston.
        Our second witness, Mr. Dale Leighty, is chairman of the
    Independent Community Bankers of America; chairman and
    president of the First National Bank of Las Animas. We talked
    yesterday, and I have been through there. That is a lovely
    town. Dale, we welcome you. That bank is a $125 million asset
    bank in the northeast corner of Colorado. He is also the past
    President of the Independent Bankers of Colorado.
        In addition to his leadership in the community banking
    industry, he serves on numerous civic organizations, including
    volunteering as treasurer of his local Lions Club chapter,
    executive committee member of the Bent County Development
    Foundation. That is where Bent Fort is in Las Animas, which is
    a historic fort. He is also active, as is Mr. Goldston, and the
    gentleman from Happy, Texas, very active in his local church,
    where he serves many youth groups. He graduated from Kansas
    State University. We welcome you, Dale, to today's hearing.
        Our next witness is Bradley Rock, chairman of the board,
    President and CEO of the Bank of Smithtown and Smithtown
    Bancorp, it is a public holding company, for the past 15 years.
    That is in Long Island, New York. During his tenure, the market
    value of the company stock has risen by more than 2000 percent,
    and the Bank of Smithtown has been recognized by several
    magazines and rating services as the number one community bank
    its size in the United States. That is quite an accomplishment.
        He also serves as vice chairman of the Governmental
    Relations Council of the American Bankers Association, and he
    is representing that association today.
        I may have said, Mr. Leighty, you are actually representing
    the Independent Community Bankers of America at the hearing.
        So we welcome you, Mr. Rock.
        Mr. Rock. Thank you.
        Chairman Bachus. Our third witness is Mark Macomber,
    President and CEO of Litchfield Bancorp in Litchfield,
    Connecticut, a $162 million mutual organization where he has
    been since 1993. He serves as President and CEO of Connecticut
    Mutual Holding Company, a multibank mutual holding company that
    includes Northwest Community Bank in Winsted, Connecticut as an
    affiliate. He is a member of the ICB board of directors and
    executive committee. As are our other gentlemen, he is active
    in many community activities, including President of the United
    Way.
        Our next witness is Judith Kennedy. We welcome you back to
    the committee. She serves as President and CEO of the National
    Association of Affordable Housing Lenders, representing
    American lenders in moving private capital to those in need.
    Under her leadership, the NAAHL has become recognized as the
    premier authority in the nation's capital on private lending
    and investment in low- and moderate-income communities.
        Prior to joining NAAHL, Ms. Kennedy managed government
    relations at two Fortune 100 financial corporations, Sallie Mae
    and Freddie Mac. Her government service has included staff
    positions on the Senate, as well as on this committee, on the
    House Banking Committee. As I said, welcome back. She has many
    awards and community activities, including DC Youth Orchestra
    Foundation. So, we welcome you today.
        Our next witness is John Taylor. You have testified before
    the committee prior to this. I think it was last year. He is
    President and CEO of National Community Reinvestment Coalition.
    He is on the board of directors and is chairman of the
    executive committee of America Works Partnership, an AFL-CIO
    national organization to stimulate job development in poor
    urban areas. He also serves on the board of directors of the
    Association for Enterprise Opportunity. He also is the current
    chairman of National Neighbors, a pro-diversity organization
    and has made appearances in many foreign countries promoting
    economic justice matters. We welcome you back to the committee.
        Did you mention to us last time that you had run for
    Congress? That would have been in Massachusetts. We welcome you
    back.
        Our last witness is J. Pat Hickman. He is the President and
    CEO of Happy State Bank, so it is obviously a bank in good
    shape.
        [Laughter.]
        He is current volunteer chairman of the Independent Bankers
    Association of Texas. He is also very active in his community
    and his church. He put an investor group together in 1989 to
    purchase Happy State Bank in Happy, Texas. The bank was a $100
    million bank with one office and five employees. The bank has
    expanded to eight communities, Happy, Canyon, Amarillo,
    Stratford, Dalhart. That is on the Colorado Southern Railroad,
    isn't it? Dumas, Sunray and Panhandle, with 11 total offices.
    In fact, it is a railroad town, isn't it? Yes, like a lot of
    towns. Its assets total $290 million and he employs 130 people.
    I would like to welcome you.
        I would like to go back and mention that Mr. Macomber is on
    the board of directors of American Community Bankers, not ICBA.
    I think I said ICBA and I wanted to correct that. You are
    actually testifying on behalf of America's Community Bankers,
    which we well know the difference, so I do not know what I was
    thinking. We welcome you, and you represent a fine
    organization.
        With that, we will start from my left to right. The first
    witness is Mr. Goldston.
        Mr. Goldston. I would like to ask that the written comments
    be made a part of the record.
        Chairman Bachus. I am sorry. I did omit to say that without
    objection, your written statements will be made a part of the
    record. You will each be recognized for a 5-minute summary of
    your testimony. So thank you for reminding me of that.

      STATEMENT OF JIM GOLDSTON, BRANCH PRESIDENT, CITY BANK, (TX)

        Mr. Goldston. Mr. Chairman and members of the committee, I
    am honored to appear before you today to discuss the importance
    of community banks to our nation and to ask for your help in
    reducing unnecessary and burdensome regulations.
        My name is Jim Goldston. I live and work in Forney, Texas,
    a small town just east of Dallas. Congressman Jeb Hensarling
    will soon represent our community and I am here today at his
    invitation.
        I have worked in banking for over 20 years, and the past 5
    years I have been branch President for City Bank. That is C-I-
    T-Y, not C-I-T-I. But for 3 years, I was a bank examiner for
    the Texas Department of Banking. During that time, I observed
    many banks both good and bad, and gained some understanding of
    how state and federal regulations can and should improve the
    safety and performance of our banking system to benefit and
    protect both our customers and our FDIC deposit insurance
    structure.
        As an ex-examiner, I have the deepest respect for our
    regulatory forces. Like bankers, they have a tough job
    digesting and enforcing an ever-growing mound of regulations. I
    only want to point out today some consequences, probably
    unintended consequences, of regulations that affect community
    banks like us.
        We are a small but growing bank with just over $800 million
    in assets spread across 12 communities in west and north
    central Texas. We offer a full range of financial services to
    our customers, focusing on doing what we can to meet the
    financial needs of our customers and growing the economies of
    our local communities, while earning an acceptable return for
    our shareholders. One-hundred percent of our stock is owned by
    residents of the communities we serve, and over 63 percent is
    owned by my fellow bank employees and their families. Each
    year, our bank adopts 73 different policies covering all facets
    of our operation and addressing the hundreds of regulations now
    in place.
        Last year, we paid over $565,000 to our internal compliance
    and audit staff and over $160,000 to outside firms just to be
    sure that we are complying with applicable regulations and
    policies. These figures do not include the expense of our other
    employees's time spent actually in complying with those
    regulations. It also does not include the cost of the time
    spent by our state and federal regulators checking up on our
    checking up.
        We believe that regulations should either improve the
    safety and soundness of our financial system or improve the
    services we give our customers. Those that only add to the
    paperwork burden should be abolished. I have gone into more
    detail in regards to some of the burdens dealing with a few of
    the regulations in my submitted testimony.
        Now, I would like to share with you in a graphic way the
    paperwork burden on just one type of loan, the home mortgage
    loan. Recently, I personally refinanced my mortgage. This is
    the stack of paperwork that my wife and I had to sign at
    closing. As we began to sign the papers, my wife asked me if I
    understood what it is all about. I responded, of course, I am a
    loan officer. I know what these documents do and say. When I
    looked more closely at one of the disclosures, I realized that
    truly I was not familiar with this form.
        If a traditional mortgage closing is confusing to an
    experienced bank officer, how much more confusing is it to the
    average customer? This stack includes disclosures mandated by
    truth-in-lending, Real Estate Settlement Procedures Act, Flood
    Disclosure Protection Act, Gramm-Leach-Bliley Act, Internal
    Revenue Code, title insurance requirements. At application
    time, there were disclosures to comply with the Equal Credit
    Opportunity Act, Home Mortgage Disclosure Act, Fair Housing Act
    and the U.S. PATRIOT Act, just to name a few.
        Finally, the expansion of the small bank classification for
    CRA rules has greatly helped many community banks, but many of
    us are still caught in a web of trying to comply with the rules
    for advanced testing designated for massive complex nationwide
    organizations that bear little resemblance to even the biggest
    community banks. The current review of banking regulations
    taking place on the Economic Growth Recovery and Paperwork
    Reduction Act is a good start on seriously reviewing regulatory
    burden, but it must be coupled with statutory change as well.
    Many of the burdensome requirements described in this testimony
    are not a matter of regulation, but rather mandated by statute.
    We community bankers implore you to seriously take up reduction
    of regulatory burden. As a community banker, I, like my peers,
    want to serve my community with reasonably priced products,
    home loans, small business loans, agriculture loans and deposit
    products in investment services, but the cost of unnecessary
    and burdensome regulations increases my cost while not truly
    benefiting the public. Please make real regulatory burden
    relief a reality.
        Thank you.
        [The prepared statement of Jim Goldston can be found on
    page 65 in the appendix.]
        Chairman Bachus. Thank you, Mr. Goldston. I think you and
    Mr. Hensarling are going to get along just fine.
        [Laughter.]
        Mr. Leighty?

       STATEMENT OF DALE LEIGHTY, CHAIRMAN AND PRESIDENT, FIRST
      NATIONAL BANK OF LAS ANIMAS, (CO) REPRESENTING INDEPENDENT
                      COMMUNITY BANKERS OF AMERICA

        Mr. Leighty. Mr. Chairman and members of the subcommittee,
    my name is Dale Leighty, as you mentioned. I am chairman of the
    Independent Community Bankers of America and president and
    chairman of First National Bank of Las Animas, Colorado, a $140
    million community bank located in southeast Colorado.
        I would like to thank the subcommittee for examining the
    important issue of regulatory relief for community banks. This
    is one of ICBA's top priorities, and I am pleased to testify
    today on behalf of our nearly 5,000 community bank members to
    share with you our views and concerns.
        ICBA supports a bank regulatory system that fosters safety
    and soundness. However, statutory and regulatory changes
    continually increase the cumulative regulatory burden for
    community banks. In the last few years alone, community banks
    have been saddled with the privacy rules of the Gramm-Leach-
    Bliley Act; the customer identification rules and other
    provisions of the USA PATRIOT Act; and the accounting, auditing
    and corporate governance reforms of the Sarbanes-Oxley Act. Yet
    relief from any regulatory or compliance obligation comes all
    too infrequently, while new ones just keep being added.
        There is not any one regulation that community banks are
    unable to comply with. It is the cumulative effect that is so
    burdensome. As ICBA President and CEO Cam Fine recently stated,
    ``Regulations are like snowflakes. Each one by itself may not
    be too much, but when you add it all up, it could crush the
    building.''
        Regulatory and paperwork requirements impose a
    disproportionate burden on community banks because of our small
    size and limited resources. We have had to devote so much of
    our resources and attention to regulatory compliance that our
    ability to serve our communities and support the credit needs
    of our customers is diminished.
        Regulatory burden is a perennial problem for community
    banks. In 1992, Grant Thornton conducted a study for ICBA on
    the cost of complying with the 13 bank regulations that were
    deemed the most burdensome for community bankers. At that time,
    over 10 years ago, the annual compliance costs for community
    banks for just 13 regulations was estimated to be $3.2 billion.
    In addition, the study found that 48 million staff hours were
    spent annually to comply with just those 13 regulations.
        ICBA is pleased that, at the direction of Congress under
    the Economic Growth and Regulatory Paperwork Reduction Act of
    1996, the federal bank regulators are now reviewing all 129
    federal bank regulations, with an eye to eliminating rules that
    are outdated, unnecessary or unduly burdensome. We wholly
    applaud this effort and fervently hope that it bears fruit.
        However, Congress must recognize there is only so much that
    the regulators can do to provide relief since many regulatory
    requirements are hard-wired in federal statutes. Therefore,
    effective reduction of regulatory burden will require
    congressional action, and ICBA strongly urges the Congress to
    be bold and open-minded when considering recommendations
    offered by the regulators and the industry for relief.
        The litany of burdensome regulations is long. To name a
    few, truth-in-savings, truth-in-lending, real estate settlement
    procedures, electronic funds transfer; fair lending, privacy
    notices, insurance disclosures, funds availability notices, the
    Home Mortgage Disclosure Act, currency transaction reports,
    suspicious activity reports, call reports, regulation O
    reports, regulation D reports, the Bank Secrecy Act, and
    Community Reinvestment Act, just to name a few. These
    regulations are overwhelming to the 37 employees of my bank who
    must grapple with them every day.
        CRA is a clear example of regulatory overkill. It deserves
    special mention since there is a pending regulatory proposal to
    reduce the community bank regulatory and examination burden.
    Evaluating the CRA performance of large complex banking
    organizations and small locally owned and operated community
    banks using the same examination standards simply does not make
    sense.
        ICBA strongly supports an increase in the asset size limit
    for eligibility for the small bank streamlined CRA examination
    process. While we prefer that it be raised to $2 billion, we
    applaud the regulators's proposal to increase the limit to $500
    million in assets and eliminate the separate holding company
    qualification. Chairman Bachus, we appreciate the letter you
    and Congressman Baker organized in support of the proposal.
        ICBA also strongly supports Congressman Hensarling's
    legislation, H.R. 3952, calling for an increase in the CRA
    small bank size limit to $1 billion, although again we would
    support amending the bill to raise the threshold to $2 billion.
        While community banks will still be subject to CRA under
    the regulatory or legislative proposal, many will be free from
    the more onerous compliance burdens associated with the large
    bank CRA examination, allowing us to focus on serving the needs
    of our customers.
        Community banks pose different levels of risk to the
    banking system and have different abilities to absorb the costs
    of regulatory burden than large national or regional banks.
    Therefore, the ICBA strongly urges Congress and the regulators
    to continue to refine a tiered regulatory and supervisory
    system that recognizes the differences between community banks
    and larger, more complex institutions. Less burdensome rules
    and/or appropriate exemptions for community banks are the
    hallmark of a tiered regulatory system.
        In conclusion, ICBA member banks are integral to our
    communities. However, regulatory burden and compliance
    requirements are consuming more and more of our resources to
    the detriment of our customers. And because the community
    banking industry is slowly being crushed under the cumulative
    weight of regulatory burden, many community bankers are giving
    serious consideration to selling or merging with larger
    institutions and taking the community bank out of the
    community.
        The ICBA urges the Congress and the regulatory agencies to
    address these issues before it is too late. My written
    statement includes more detail including an appendix with
    detailed discussions of the regulatory burden of selected
    regulations.
        The ICBA strongly supports the current regulatory and
    legislative efforts to reduce regulatory burden. We look
    forward to working with you to identify statutory and
    regulatory changes that should be made to ensure that the
    community banks remain vibrant and able to continue to serve
    our customers and our communities.
        Mr. Chairman, thank you for the invitation to testify
    today. I will be happy to answer your questions.
        [The prepared statement of Dale Leighty can be found on
    page 97 in the appendix.]
        Chairman Bachus. Thank you, Mr. Leighty.
        Mr. Rock?

     STATEMENT OF BRAD ROCK, CHAIRMAN, PRESIDENT AND CEO, BANK OF
       SMITHTOWN (NY) REPRESENTING AMERICA'S BANKERS ASSOCIATION

        Mr. Rock. Thank you, Mr. Chairman.
        As you noted earlier, I am the chairman of Bank of
    Smithtown, a 95-year-old, $625 million community bank located
    on Long Island in Smithtown, New York. I am glad to present the
    views of the ABA. Reducing regulatory burden is an important
    issue for all businesses. This morning, I would like to make
    three key points.
        First, regulatory burden is not just a minor nuisance for
    banks. It has a significant impact upon our customers and upon
    local economies. Over the past 25 years, it has steadily grown
    and now permeates all levels in the bank, from frontline
    tellers to the CEO. Based on research in the 1990s, the total
    cost of compliance today for banks is between $26 billion to
    $40 billion per year.
        Certainly, many of the regulatory costs are appropriate for
    safety and soundness reasons and for consumer protection. But
    if this burden could be reduced by 20 percent and directed to
    capital, it would support additional bank lending of between
    $52 billion and $78 billion. The impact on our economy would be
    huge.
        Secondly, regulatory burden is significant for banks of all
    sizes, but pound for pound, small banks carry the heaviest
    load. Community banks are in great danger of being regulated
    right out of business; 8,000 of the nation's 9,000 banks have
    less than $500 million in assets, and 3,350 of those banks have
    fewer than 25 employees. These are the banks that are providing
    credit and deposit services to people in small towns across
    America, yet these same community banks do not have the human
    resources to run the bank and to read, understand and implement
    the thousands of pages of new and revised regulations they
    receive every year.
        A week ago, I was with a fellow community banker in Georgia
    who told me that his bank, with only 20 employees, has had to
    add a full-time person for the sole purpose of completing
    reports related to the Bank Secrecy Act. Community banks in
    such circumstances will not be able to survive for long.
        To illustrate the magnitude of this burden on small banks,
    consider this. Each year the ABA publishes a reference guide
    which summarizes and outlines the requirements embodied in
    thousands of pages of regulations. This summary is 600 pages
    long and will be even longer next year to cover new
    responsibilities under the USA PATRIOT Act and the expanded
    HMDA reporting requirements.
        I personally spend about one-and-a-half days per week just
    on compliance issues. Some CEOs tell me that they are now
    spending nearly half of their time on regulatory issues. This
    means that bank CEOs spend over 5.5 million hours per year on
    compliance, time that could have been better spent on improving
    their businesses and meeting the needs of their customers.
        Many of these regulatory efforts provide little or no
    meaningful benefit to bank customers. As a banker and a lawyer,
    I can tell you that, for example, at real estate settlements
    customers do not read the piles of documents they are required
    to sign. In fact, the only people who read these voluminous
    forms are the bank staffers who are required to complete them
    and process them.
        My third and final point is this: We are hopeful that the
    review of regulatory costs by the federal bank regulators will
    reduce the compliance burden. Many bankers are skeptical,
    however, as we have seen previous efforts at regulatory relief
    come and go without noticeable effect, while the overall level
    of regulatory burden has kept rising. It may take congressional
    action to make a difference.
        The bottom line is that too much time and too many
    resources are consumed by compliance paperwork of little or no
    benefit to customers or investors, leaving too little time and
    resources for providing actual banking services. The losers in
    this scenario are bank customers and the communities that banks
    serve.
        Thank you for the opportunity to present our views.
        [The prepared statement of Brad Rock can be found on page
    154 in the appendix.]
        Chairman Bachus. Thank you.
        There are five votes on the floor. We think that we will
    take, Mr. Macomber, your testimony now, and then we will recess
    until 1 o'clock, because Mr. Sanders and Mr. Hensarling do have
    some questions. So we will take your testimony and then recess
    until 1 o'clock.

    STATEMENT OF MARK MACOMBER, PRESIDENT AND CEO, LITCHFIELD (CT)
           BANCORP, REPRESENTING AMERICA'S COMMUNITY BANKERS

        Mr. Macomber. Good afternoon.
        Chairman Bachus, Ranking Member Sanders and members of the
    subcommittee, I am Mark Macomber, President and CEO of
    Litchfield Bancorp in Litchfield, Connecticut. Litchfield
    Bancorp is a $162 million state-chartered community bank, part
    of a two-bank mutual holding company.
        I am also representing America's Community Bankers, ACB,
    and we are pleased to have this opportunity to discuss with the
    subcommittee recommendations to further reduce red tape on
    community banks. Our goal is that community banks will be able
    to better serve consumers and small businesses in their local
    markets. This hearing and this topic are important and timely.
        Ten years ago, there were 12,000 banks in the United
    States. Today, there are only 9,000 of us left. ACB is
    concerned that community banks are significantly hindered in
    their ability to compete because of the cost of regulations.
    ACB has several recommendations to further reduce regulations
    on community banks that will help make doing business easier
    and less costly, further enabling community banks to help their
    communities prosper and create jobs.
        First, ACB strongly supports passage of H.R. 3952, the
    Promoting Community Investment Act, sponsored by Congressman
    Jeb Hensarling. The bill will allow community banks with less
    than $1 billion in assets to participate in the Community
    Reinvestment Act small institution examination. By passing H.R.
    3952, you will free up capital and other resources for almost
    1,700 community banks across our nation, allowing them to
    invest even more into their local communities.
        We believe that raising the threshold will reduce the
    regulatory burden for those institutions without diminishing
    the activities of community banks or their CRA obligations. The
    goals of CRA are laudable and I take them seriously. But as a
    community banker, I would not be in business if I did not meet
    the credit needs of my community. And I do not need costly
    record keeping or a lengthy examination to tell me if I am
    doing the job.
        Secondly, ACB supports passage of legislation to reform
    subchapter S of the Internal Revenue Code. Although not within
    the jurisdiction of this committee, we urge you to convey
    support to the leadership of the House Ways and Means
    Committee. The legislation should include several provisions:
    one, increase the number of shareholders of community banks who
    are eligible to form a subchapter S corporation from 75 to 200;
    two, permit IRAs to be eligible shareholders; three, clarify
    that interest on investments maintained by a bank to enhance
    safety and soundness is not disqualifying passive income; and
    four, permit bad debts to be charged off at the corporate
    level.
        Because of recent false rhetoric, I hasten to add that the
    shareholders of subchapter S banks are fully taxed on their
    corporate profits. And speaking of taxes, I have to mention
    that a primary burden for many community banks today is that
    they pay taxes, but compete against a new breed of credit
    unions that do not. These credit unions function as full
    service banks wholly exempt from the taxes that we pay to
    support federal, state and local governments.
        So the third way you can help community banks is to support
    Ways and Means Chairman Bill Thomas, who has proposed
    undertaking a review of the roles of tax-exempt institutions,
    and how they compete against for-profit companies. In my own
    state, Charter Oak Federal Credit Union is a $425 million
    institution that offers virtually every service my bank can
    provide. Their earnings last year were $4.6 million. They paid
    not a dime in taxes. Nothing. By simply calling themselves a
    credit union and requiring a $5 fee to become a member, they
    avoided paying over $1.5 million in income taxes.
        In addition to paying taxes, bank-like credit unions should
    also be required to meet the same CRA requirements as banks.
    Credit unions that operate like banks should be treated like
    banks.
        ACB's fourth recommendation is for Congress to make sure
    that Basel II and its attendant capital requirements do not put
    community banks at a competitive disadvantage with very large
    institutions. ACB believes that legislators, regulators and the
    industry should examine and evaluate the cost and complexity of
    the proposed Basel II capital accord.
        We urge you to consider its competitive impact on banking
    institutions of different sizes, and the ability of regulators
    to properly supervise and examine the proposed new minimum
    capital requirements. Congress must make sure community banks
    across the country are not adversely affected by Basel II.
        Finally, ACB urges you to review the rules that require
    community banks to send multiple privacy notices. Banks with
    limited information-sharing practices should be allowed to
    provide customers with an initial notice, and provide
    subsequent notices only when terms are modified. At my bank, we
    send out thousands of such notices each year at significant
    cost in both dollars and staff time, even though our policies
    and procedures have remained consistent for many years.
    Redundancy in this case does not enhance consumer protection.
    Instead, it serves to numb our customers with volume. Let me be
    clear. We do agree a notice should be sent, but it becomes an
    expensive burden to send it multiple times. Once is enough.
        On behalf of ACB, I want to thank you for your invitation
    to testify on the importance of cutting red tape for community
    banks. We strongly support the committee's efforts in providing
    regulatory relief. We look forward to working with you and your
    staff in crafting legislation to further accomplish this goal.
        I will be happy to answer any questions you may have. Thank
    you.
        [The prepared statement of Mark E. Macomber can be found on
    page 115 in the appendix.]
        Chairman Bachus. Thank you, Mr. Macomber.
        At this time, we will be recessed until 1 o'clock. When we
    return, Ms. Kennedy you will be our first witness. Thank you.
        [Recess.]
        Mr. Hensarling. [Presiding.] By Washington standards, to
    reconvene a 1 o'clock hearing at 1:15 is actually pretty good.
        We will continue to await the return of Chairman Bachus.
    Until such time, I believe that, Ms. Kennedy, that we will have
    your testimony at this time. Thank you.

      STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO, NATIONAL
               ASSOCIATION OF AFFORDABLE HOUSING LENDERS

        Ms. Kennedy. I have been sitting here listening to the
    horror stories of the banks' encounters with the CRA exam,
    frustrated and angry that there have been many other bankers
    there before them who had the same bad experiences. But I am
    going to tell you that the National Association of Affordable
    Housing Lenders opposes an increase in the threshold for what
    is called the large bank exam.
        I am going to ask you to think of it this way. There are
    not really tiers of regulation in this program. There is the
    so-called streamlined exam which really is about, are you
    lending in your community? What is the ratio of loans to your
    deposits. As one of these gentlemen said, at 70 percent,
    clearly he is lending in his community.
        But the Community Reinvestment Act was about helping to
    meet the credit needs of your communities. It is crazy if
    regulations are forcing a bank that has no investment needs to
    invest in the community, but it is rational to say, how do we
    know that banks really are lending to low- and moderate-income
    people in their community or are investing in things that
    address the needs of folks in the community, including low and
    moderate income persons. Maybe it is Section 8 housing. Maybe
    it is tax credit housing. Maybe it is a homeless shelter. Maybe
    it is a financial literacy program.
        But I think we have to stop and think, if 1,200 more banks
    are essentially exempt from having to invest in their
    communities and from having to document their loans to low- and
    moderate-income people, how could that play out in the various
    states?
        Let's take Alabama as an example. Alabama currently has 35
    insured depository institutions that are responsible for
    documenting their loans and their services in low- and
    moderate-income communities, as well as making investments in
    those communities. If the regulators' proposal goes through to
    double the threshold to $500 million, Alabama will go from 35
    covered institutions to 18. If the threshold is raised to $1
    billion, Alabama will go from 35 today down to nine. I think we
    have to think about the practical effect of raising the
    threshold.
        What is the practical effect of that? Again, the
    streamlined exam is you just prove you that you have made
    loans. I think the practical effect is that in Alabama, there
    will be at least $33 million less invested in affordable
    housing. It could be Section 8. It could be tax credits,
    homeless shelters, financial literacy. The practical effect of
    what the regulators have proposed is that going forward, only
    12 percent of the insured depository institutions in this
    country will be responsible for documenting loans to low- and
    moderate-income folks and making investments. If the $1 billion
    threshold goes through, only 6 percent of the insured
    depository institutions in this country will have that
    responsibility.
        The numbers are huge. Primarily, as you know, because HUD
    has very little money to spend, leveraging scarce Federal
    subsidy with private capital is critical. If the HUD budget is
    $31 billion, $19 billion of it goes for renewals of Section 8
    voucher contracts. That leaves $12 billion for all the housing
    and community development needs of the country. Mid-size banks
    have been important contributors to housing and community
    development for low- and moderate-income families. I think we
    make a mistake if we think it is okay to simply wave a wand and
    say they do not have to demonstrate that anymore.
        I think you will see significant declines nationwide, and I
    have given you some numbers on that. I think rural areas will
    be hardest hit for obvious reasons. And I will just add that
    the crisis in funding Section 8 where so many conventional
    lenders have reached out and made construction loans, but also
    mortgages for affordable rental housing in their communities,
    compounds all of the risk of taking this lending and investment
    out of low- and moderate-income communities.
        Thanks for having me.
        [The prepared statement of Judith A. Kennedy can be found
    on page 74 in the appendix.]
        Mr. Hensarling. Thank you, Ms. Kennedy.
        Mr. Taylor, we will receive your testimony now.

    STATEMENT OF JOHN TAYLOR, PRESIDENT AND CEO, NATIONAL COMMUNITY
                         REINVESTMENT COALITION

        Mr. Taylor. Good afternoon, Chairman Bachus, Acting
    Chairman Hensarling, and other members of this committee. Thank
    you very much for inviting me.
        I am John Taylor, the President and CEO of the National
    Community Reinvestment Coalition which represents some 600
    community organizations, faith-based organizations, local
    governments, and others who have asked us to come here today
    and give the community perspective on what regulatory relief of
    banks might mean.
        Before I start, I want to say very clearly we love
    community banks. We have no axe to grind with community banks.
    So we are not starting from the premise that we are looking to
    do injury to them. We want them to prosper and do well.
        I also want to point out that most of the members who have
    testified today on this panel who are from lending institutions
    are actually including your good friend, Mr. Hensarling from
    Texas, are actually already under the small bank test. So your
    relief would do nothing for that bank. With the exception of
    Long Island, the Smithtown Bank, which I think is over $600
    million, which also the bank regulatory proposal would do
    nothing to impact their test.
        What stimulates much of this hearing, of course, is the
    EGRPRA, the Economic Growth and Regulatory Paperwork Reduction
    Act of 1996, which asked regulators to eliminate any regulatory
    requirements that are outdated, unnecessary or unduly
    burdensome. I would like to go through that very quickly as it
    relates to CRA. Is CRA oversight outdated? Actually, no one's
    testimony suggests CRA is outdated. Indeed, the record shows
    many Americans have benefited from increased access to credit
    and capital since FIRREA and the establishment of clear tests
    under CRA lending serving investments.
        In fact, the U.S. Treasury and Harvard University's Joint
    Center for Housing Studies have clearly shown in separate
    studies the impact of CRA and of the new CRA regulations.
    EGRPRA says eliminate unnecessary regulations. Again, there are
    few comments that these tests are in fact unnecessary. We know
    statistically that lenders who are tested under the three CRA-
    regulated tests are much more likely to serve low- and
    moderate-income borrowers. In fact, if you eliminate the
    service and the investment tests, we know that banks will have
    little or no obligation to maintain or even open branches in
    working class or working poor neighborhoods.
        At a time in our history, ironically, where predatory
    lending has become a national shame, where America's most
    vulnerable who are elderly and others who are struggling for a
    better life are now having to turn to payday lenders and pawn
    shops and check cashing outlets for their basic banking
    services. In this era, we want to no longer test an additional
    1,100 banks on their record of providing basic banking services
    to underserved people. It makes no sense whatsoever.
        The Baker-Hensarling bill, H.R. 3952, would have the
    opposite impact implied in the bill's title, Promoting
    Community Investment Act. More accurately, H.R. 3952 should be
    called the Demoting Community Investment Act. This bill would
    remove 93 percent of all banks, 8,667 banks to be precise, from
    being tested on their record of providing basic banking
    services.
        Similarly, the investment test, the third leg of the CRA
    regulatory exam, has proved very necessary, and has tremendous
    impact. One needs only to look to institutions that acted as
    intermediaries to assist lenders in making qualified CRA
    investments. Here, you find less than 10 percent of those who
    make investments are made by banks that are not tested for CRA
    investments. Estimates range up to over $50 billion investments
    in LMI areas that would be eliminated over time if the
    investment test no longer applied to banks with $1 billion or
    less in assets.
        Finally, let us turn to the third EGRPRA threshold, to
    eliminate regulatory burdens that are unduly burdensome.
    Frankly, I have sat here through the hearings, the earlier
    testimony, and if you really look at the testimony and really
    listen to what people are saying, it sounds like there was an
    increase in regulatory burden, but it has nothing to do with
    CRA and everything to do with the PATRIOT Act, the Secrecy Act
    and a whole bunch of other things that have occurred.
        In fact, what is interesting is, if you go back to 1990,
    CRA regulations, CRA reporting was number one on the list of
    lenders whenever they talked about regulatory burden. And now
    through various polls, whether you read American Banker, look
    at Mr. Reich's testimony and his studies, and you will find CRA
    has slipped to fifth place, a dubious honor and one that we are
    happy with, but one that should not be the basis for why there
    ought to be consideration of lessening the CRA application to
    financial institutions.
        In any event, I want to wrap up because I see the light is
    on and I want to respect the time period. There is one thing I
    want to make a point of agreeing with my other panelists here,
    including the first panel. I think Mr. Macomber and others have
    made their comments in their testimony. There is an unlevel
    playing field when it comes to credit unions in this country. I
    am not talking about community development credit unions or the
    kind of singular company credit unions that only make loans to
    their employees. I am talking about these credit unions that
    basically say, our common charter is if you breathe, you can do
    business in our credit union; those ones that now have
    geographic distinctions that have no distinction between
    financial institutions.
        My opinion is, if it quacks like a bank, it walks like a
    bank, it looks like a bank, and it acts like a bank, it ought
    to have the same obligations that other financial institutions
    have, and that is including the extension of CRA. So I would
    agree with the comments made earlier about that.
        Mr. Chairman, thank you very much for your indulgence.
        [The prepared statement of John Taylor can be found on page
    192 in the appendix.]
        Mr. Hensarling. Thank you, Mr. Taylor.
        Now, Mr. Hickman from Happy, Texas, please make us all
    happy.
        [Laughter.]

    STATEMENT OF J. PAT HICKMAN, CHAIRMAN AND CEO, HAPPY STATE BANK
      (TX) REPRESENTING INDEPENDENT BANKERS' ASSOCIATION OF TEXAS

        Mr. Hickman. Thank you, Vice Chairman Hensarling.
        My speech is written ``Dear members of the committee,'' but
    it is you and me, Mr. Congressman. I hope the tape works well.
        My name is J. Pat Hickman. I appreciate very much this
    opportunity to appear before the committee today on behalf of
    the Independent Bankers Association of Texas and the 550 banks
    that we represent throughout Texas. We thank you all very much
    for giving us this opportunity, this forum to come together and
    talk about a plot that is affecting our banks to a huge degree.
        In addition to serving as the volunteer chairman of IBAT, I
    do have a day job. I am the chairman and chief executive
    officer of the Happy State Bank in Happy, Texas. Fourteen years
    ago I put together a group of investors that bought that little
    $10 million bank. Today, we are in eight communities, 11
    different offices. We employ 130 people. We have $300 million
    in total assets. Of those eight communities, let me also add
    that four of those communities have less than 2,000 people. We
    are serving an underserved area. In two of our communities, we
    are the only financial institution in those communities.
        In the 14 years that we have owned this bank, we have also
    written you a couple of checks. I went in and totaled it up the
    other day. Our little bank has paid $4.6 million in income
    taxes in the last 14 years that we have gotten to partner with
    you guys, and it is nice to come here and meet some of my
    silent partners that I am sending this money to.
        [Laughter.]
        I appreciate greatly your highways. I appreciate greatly
    the brave men and women who are taking care of us and
    protecting our security and our freedoms. I so appreciate the
    opportunities for life, liberty and the pursuit of happiness.
    You all have been great partners for the most part. But you
    have also been silent partners with some of my competitors.
    While you were doing some nice things for me, quite frankly you
    were doing some nice things for them. Quite frankly, you all
    have left community banks standing out in the cold. I do not
    think you have done it on purpose, but you have actually kicked
    us around pretty good. Just as a reminder in 1997, in H.R.
    1151, you gave the credit unions these broad new common bonds,
    where as some of my former panelists have said, if you can
    breathe, you can join a credit union. They act like banks. They
    smell like banks. They quack like banks. They are banks.
        In 1999, you passed the Gramm-Leach-Bliley Act giving the
    large mega-conglomerate banks all kinds of ways to make more
    money, but quite honestly there was not very much there for
    banks like the Happy State Bank. Just recently, the Federal
    Reserve Bank of Dallas completed a study that proved some
    things that community bankers have been talking about for
    years. This study shows, and I think this was pointed out
    earlier by Vice Chairman Reich, that in 1984 there were 11,000
    banks under $1 billion. Today, there are less than 6,000 banks
    under that size.
        When you have $1 trillion banks, I have a hard time
    deciding how someone can call a $1 billion bank a medium-size
    bank. Those are small banks when they get down under $1 billion
    that have been eliminated. Now, some folks would say that that
    is because I cannot compete. I do not know that it is so much
    that I cannot compete as much as it is that my silent partners
    have been taking good care of my competitors, have been taking
    better care of my competitors than they have been me.
        I am not coming in here to ask you all to shut down the
    easy membership rules that the credit unions have, though there
    are some rather bizarre uses of those rules. I am asking you
    that if they look like banks, to tax them like banks. I am also
    not asking you to take away the expanded powers of the larger
    conglomerates, more power to them. But I am asking that you
    quit regulating me like you regulate the conglomerates. Ease up
    some of the rules. I think that is what some of this hearing is
    about.
        In Happy, Texas, I get excited when somebody walks in the
    door. We have 633 people there and we are investing in those
    people every day. Anybody that walks in the door, we are going
    to take care of them. That is what we do. Why am I paying the
    same FDIC insurance premiums that the megabanks pay? I do not
    own an insurance agency. I certainly do not own an insurance
    company or a securities firm. We are not investing in
    derivatives or underwriting proprietary mutual funds that we
    are going to try to hard sell to our own customers. I will
    never sell my customer's name to another company. Every time
    you call my office, I promise you a human being will answer the
    telephone.
        That same Dallas Fed study that shows that we have 13
    percent of the market showed two other things. I will wrap up
    here. It showed that 37 percent of the small business loans are
    being made by community banks. It showed that 61 percent of all
    agriculture loans were being made by community banks. We have
    13 percent of the assets, but we are supporting the small
    businesses of this country that create the jobs, create the
    output, and the farmers that create the food.
        My contention is, Mr. Chairman, that we are being regulated
    out of business. The trends that Vice Chairman Reich showed are
    trends that show we are disappearing. We would like you to
    please notice those trends and even that playing field some,
    and take care of the community banks that are so vital to this
    country.
        Thank you all again very much for the time to make these
    comments.
        [The prepared statement of J. Pat Hickman can be found on
    page 68 in the appendix.]
        Mr. Hensarling. Thank you, Mr. Hickman, for your testimony.
    If you spend a little bit more time with us, you may discover
    we are your partners, but we are not quite so silent.
        As I look around the room, I think we will start the
    questioning with Chairman Baker.
        [Laughter.]
        Mr. Baker. I am so glad you are in the chair. You are such
    a perceptive leader.
        [Laughter.]
        I want to thank each of you and regret the schedule has
    been prohibitively difficult today, and I have not been able to
    be here for your testimony, but have read each of your written
    statements. I want to explore briefly, but as thoroughly as we
    can, a remedy to the identifiable problems without centering on
    the issue of asset size. That is as unrelated as to what you do
    with credit extension as the number of parking spaces, in my
    view.
        I would prefer to see us flip our current regulatory regime
    from a penalty box system to a reward system. Today, if you do
    not meet certain CRA requirements, then you cannot open a new
    branch or there are other penalties that are incurred. If you
    do comply, you get to pay off the bill for the compliance cost,
    but there is no other added benefit to the current process.
        If, however, an institution were to engage in pre-described
    activities that were beneficial to the community, let's assume
    X percent of loans are made within a 10-mile geographic radius
    of the institution, 50-plus; let's assume a certain percentage
    of loans are held in portfolio; a certain percentage of loans
    go to low-income people below a certain median income level in
    the community in which you are located; that a certain
    percentage of loans goes to small business enterprises.
        As I have listened to the persuasive testimony of those
    engaged in the business practice, you describe activities that
    are centered on individual lending criteria and perspectives
    you have of that particular borrower, and not necessarily the
    hard bottom-line cash collateral associated with the request,
    although you do engage in safe and sound business practices.
        My point is that if we were to proscribe, and I am not
    today saying we have such a screen, but glued together a number
    of issues that describe in the aggregate the conduct that we
    wish to incentivize, extending credit to the dairy farmer or to
    the dry cleaner who otherwise is not bankable somewhere else,
    and you do it within a geographic limit and you also help low-
    income individuals, and then as a result of that you are
    granted certain provisions of regulatory relief. We can talk
    then about what that list is and how we make it operative. If
    you drop the ball, then you go back into the pile again.
        It would seem to me to be a reward for what we all hope is
    to be appropriate community involvement, whether it is
    rebuilding a school, helping low-income, providing financing
    for a water system. To that extent, we did expand the
    provisions of the federal home loan bank collateralization
    provisions to allow access for community banks to 15-year
    fixed-rate portfolio lenders, and there is no other source for
    that that I am aware of.
        So despite our failure to cross the goal line on a number
    of other efforts, I do believe that is an essential partnering
    capability you do now enjoy that you have not had in the past.
    That may be worthy of exploration and further expansion.
        I will start with you, Mr. Taylor, because I know we have
    discussed these issues in the past. I am coming at it in a
    slightly different way than in prior discussions. What is your
    initial reaction to that?
        Mr. Taylor. I am intrigued, actually, except of course you
    have not used the word, that dirty word they do not like to use
    in this committee, called quotas, percentages of loans that
    currently the system does not have that. I have often wondered
    if we did, that communities might not be better served. Could
    the reward be that someone who really does that, if there were
    meaningful measurements that really showed, and the Community
    Reinvestment Act, as you know, is not about race or gender, but
    it is about income.
        Unlike what Mr. Abernathy said, it is not just about
    serving the community credit needs; it is serving the community
    credit needs, and in the statute, including low- and moderate-
    income people. So if we had a measurement that could really
    measure that and showed a standard that was reasonable, to
    reward people down the line that perhaps their regulatory
    burden lessened, I think there is something to that. I hedge my
    comments on this, sir, by saying I do not think the regulatory
    burden right now on folks on the banks who are here or those
    who are complaining has anything to do with the CRA, and
    everything to do with other regulations.
        Mr. Hensarling. But at least you have opened the door.
        Mr. Taylor. Yes.
        Mr. Hensarling. Thank you.
        Ms. Kennedy. I think the burden is outrageous. I compare it
    in my own experience to what HUD was like in the late 1960s and
    the early 1970s where there were 600 questions and answers
    defining how you could spend federal funds. Congress threw all
    that out in 1974 and said, let's have a block grant. Well,
    these banks, some of them have charters from different
    agencies, and are dealing with the same crazy-quilt of
    questions and answers, but there is not one HUD; there are four
    of them. So this bank cannot get credit for doing something
    really incredibly creative, but the bank down the road can.
        Having said that, what you describe, Mr. Baker, I think is
    very much possible under the current regulations. OTS Director
    Gilleran has actually been promoting it. It is called the
    strategic plan option. Some of the new entrants, such as a bank
    I was talking to last night that got a charter in Utah, chose
    the strategic plan option. Essentially, you come up with a menu
    of things, as you have described. You are subjected to public
    hearings. You get feedback from the community, and then you
    come up with a plan that your regulator thinks is appropriate
    to your share of the market, including low- and moderate-income
    people. So that option currently exists and maybe more
    institutions should and could take it.
        Mr. Baker. I can assure you I had no prior knowledge. This
    is not an act of plagiarism. It just seemed to be conceptually
    a reasonable screen through which we could conduct the public
    purpose.
        If no one else, Mr. Chairman, I appreciate your courtesies
    in conducting this hearing and your leadership with the
    introduction of the bill. I really would like to see us at
    least have some conversation going forward about the elements
    that could be put into such a basket for review and then a
    secondary discussion about what does it mean to current
    program. But if you are meeting community need and you are at
    the same time losing customers to credit unions, losing the big
    borrowers to Wall Street, you have people buying their used car
    with a credit card, you have a diminishing number of bank
    customers, I think that is reflected not only as a result of
    mergers and acquisitions, but banks simply are choosing to do
    other things because the competitive market is so difficult.
        I do believe at the margins in some instances the
    regulatory cost, which is estimated to be 13 percent of non-
    interest expense, is an element in whether a bank expands
    services or continues the fight. If we can do something at the
    margins that makes a competitive difference for these folks, I
    think it is in not only the community's, but the nation's best
    interest to do so.
        Thank you, Mr. Chairman.
        Mr. Hensarling. Thank you, Mr. Chairman. And thank you for
    all your leadership on the issue of the regulatory burden and
    what you have done to help make the American financial services
    industry number one in the world.
        I am not quite as studious and industrious as Chairman
    Baker. I did not quite read all of the testimony, but I read a
    lot of the testimony. I noticed a provision of a sentence in
    your testimony, Mr. Taylor. If I can quote from it, ``Without a
    comprehensive CRA, communities, particularly rural areas served
    by smaller banks, would suffer a new round of disinvestments,
    redlining and decay.''
        Mr. Goldston, let me start with you. Given that you are a
    community banker, and I am familiar with your community, what
    is going to happen to Forney, Texas and what is going to happen
    to Kaufman County if you did not have to fill out a
    comprehensive CRA exam?
        Mr. Goldston. The way we handle CRA, CRA is not the
    paperwork we do. Granted, we have a tremendous amount of
    paperwork associated with CRA. I remember when I was an
    examiner in the 1980s, one level of earnings that we looked to
    for banks was 1 percent. Whenever the information was given
    earlier, community banks were making .095, somewhere around
    there. Earnings have diminished, and at the same time our
    regulatory costs have increased.
        When the cost of overhead, we look at loan losses, we look
    at all the costs associated with running the bank, I believe if
    we did not have to do all the paperwork, that we did not have
    to allocate all this money to doing things to say that we are
    providing service to our community, I think there would be a
    tremendous amount, more opportunities for us to take a chance
    on someone, for us to take a chance on businesses. I think it
    would help us grow the level of loans and to cater to different
    clienteles and do a better job of banking.
        Mr. Hensarling. Let me ask you about a provision in your
    testimony. I do not know if it came out in your oral testimony.
    You were alluding at one point to recent changes in regulation
    C concerning how you report home mortgage and home improvement
    loans that you are ``charging an interest rate greater than 300
    points above treasuries.'' And, ``if we make a $5,000 five-year
    maturity home improvement loan, we cannot expend the time and
    paperwork to put that loan on our books, service it for five
    years, and only earn about $175 per year in interest. The
    intent is to disclose if we are engaging in predatory lending,
    but the result is to discourage us from making loans at all.''
        So are you telling us, then, that a regulation is actually
    de facto denying credit to low- and moderate-income people?
        Mr. Goldston. I believe that credit is denied to low- and
    moderate-income people because of the stack of paperwork that
    has to be done. By doing that, I say that whenever you look at
    the cost of that $5,000 home improvement loan, you are looking
    at drawing up the deed of trust, the notes. The costs
    associated with that sometimes are $1,000. To comply with all
    those regulations and all the disclosures we give, it is not
    practical for someone to come in and apply for that loan. So to
    say we deny them, no we do not, but I believe it is cost-
    prohibitive for those customers. A lot of times they may or may
    not have the $1,000 for all the closing costs associated with
    that to apply for the loan or to get the loan.
        Mr. Hensarling. Okay. Thank you. I also noticed, Mr.
    Taylor, in your written testimony that you say that most banks
    no longer complain about the regulatory burden of CRA. For
    those who represent banks that have to do the full CRA exam, do
    you consider it to be burdensome?
        Mr. Rock. Mr. Chairman, my bank is a $625 million bank, so
    we have been subjected to the large bank exam. We used to be
    examined under the streamlined exam. I am in Smithtown, Long
    Island, which is a suburban community about 50 miles outside of
    New York City. The first time that we were examined under the
    large bank exam, we were marked down because we had no loans to
    low-to moderate-income areas. My bank's market area extends for
    about 30 linear miles on Long Island and we have no, according
    to the U.S. Census Bureau, no low-to moderate-income areas in
    our market area.
        So what we did to try to remedy that, because we wanted to
    be socially responsible, we do a lot of construction lending.
    So we looked for builders active in projects building low-to
    moderate-income housing outside of our market area. We made
    those loans to construct homes in low-to moderate-income areas
    outside our market area. The examiners came back and said we do
    not get credit for that because it is outside our market area.
        So that is really the ultimate catch-22. If we make them in
    the market area, we cannot because there are no low to
    moderate, according to the government, in our market area. But
    if we make them outside the market area, we do not get credit
    for them. So we think that the objectives of CRA are laudatory
    and we agree with them, but I think that the issue is how is
    compliance with those objectives measured and administered. I
    think it is quite unfair to my bank and to banks of my size.
        Mr. Hensarling. Thank you.
        I think that I will gavel myself down in respect to
    Chairman Bachus's time. Mr. Chairman, do you care to be
    recognized?
        Chairman Bachus. Thank you.
        My first question, I will ask Mr. Leighty, maybe as a
    representative of the community banks, or Mr. Macomber, what is
    a community bank? Is there a definition?
        Mr. Leighty. I am not aware of a specific definition. I
    know when I started my banking career, a $50 million bank
    seemed big to me, because I was in a $25 million bank. I have
    contemporaries who are part of our association who run $1
    billion banks, and they are clearly community-oriented banks.
    So I agree with some of the comments that have been made. It is
    not just a size issue.
        I have heard it described as if they pose systemic risk to
    our economy, they are not a community bank. So our association
    is actually working on the very issue of defining what is a
    community bank. One thing I am sure, there are many banks that
    are above the threshold we talk about that are $500 million
    today, $250 million, $1 billion, that are very much community
    banks and are meeting the needs of their communities.
        If I could, I would like to point out that the streamlined
    CRA, which our bank is small enough that we already qualify for
    the streamlined exam, I think it is important to point out that
    it shifts some of the burden to the examiners to determine if
    we are meeting the needs. But we are still required to meet
    needs in our geographic area, as well as to income levels. It
    does not allow us to slide away from those responsibilities. It
    simply shifts the burden somewhat and makes the exam process
    more streamlined.
        We believe that while we benefit from it, some of our
    brethren who are a little bigger than we are and maybe more the
    size that we would like to be, if we are successful and are
    able to grow and not become irrelevant as the markets may
    change, that it just makes sense to extend that streamlined
    process to some of the larger banks.
        Chairman Bachus. Mr. Macomber, would you like to comment?
        Mr. Macomber. ICBA, ABA, and ACB are always trying to
    figure out what is a community bank, because we all represent
    community banks. I do not think that it is a function of size.
    I do not think it is a function of charter. I think it is a
    function of focus. The focus of my bank, as is true I think of
    everyone on this panel and most of the banks that are
    represented by the trade organizations represented here, their
    focus is very much on the communities they serve. We are not
    getting involved in esoteric things.
        From a CRA perspective, good business for my bank; CRA
    takes care of itself. I do not turn down loans that are not
    good loans. I would not turn down loans that were good loans if
    I were a $300 million bank. Mr. Taylor noted that my bank does
    fall under the streamlined CRA regulations. However, my partner
    bank and the holding company is now considered a large bank for
    CRA purposes.
        The way we function in the community is by and large the
    same. It has to be documented differently. There are more
    resources being devoted at that bank than at mine for things
    that are not necessarily helping the community. Those
    resources, in my opinion, many times could be better focused on
    doing the business of banking, and that is serving the credit
    needs of everyone in the community, low income on up.
        Chairman Bachus. All right. Mr. Taylor, I am going to ask
    you a different question. Do you operate a community bank?
        Mr. Taylor. Do I operate a community bank?
        Chairman Bachus. Yes. I would rather ask people that have
    banks, as opposed to people who, you know.
        Mr. Taylor. As opposed to consumer interests who want to
    respond to this stuff?
        Chairman Bachus. Yes. I am asking them what a consumer bank
    is.
        Mr. Taylor. Okay. I cannot answer that, what a consumer
    bank is.
        Chairman Bachus. No, a community bank. I must have so many
    questions and so much time. I am going to ask you a question if
    I have time.
        Mr. Hickman. Chairman Bachus, if I may, I would say one
    thing about community banks. You heard me state that I am in
    four communities with populations less than 2,000. In two of
    those, there are no other banks; there are no other credit
    unions. I am convinced that if I leave that community for any
    reason, no one else will go into that community. That almost to
    me defines community reinvestment. I am one of four businesses
    in Happy, Texas and I am under the threshold. The amount of
    time that me and my staff have to spend proving that we are
    serving our communities with a 95 percent loan-to-deposit ratio
    is ludicrous.
        There are some things that common sense goes out the
    window, and I think this is one of those fair issues. If it
    smells like you are serving; if it looks like you are serving;
    you are serving. We do depend to a great degree also on what
    the regulators, their interpretation of serving the community
    is under that threshold.
        Chairman Bachus. Okay.
        Mr. Hickman. It scares me to death, as I grow bigger, if
    that threshold does not go up.
        Chairman Bachus. All right. If I could have a few more
    minutes, since there is only the two of us.
        Mr. Hensarling. Absolutely, Mr. Chairman.
        Chairman Bachus. Mr. Taylor, I apologize to you. I want to
    hear your answer.
        Mr. Taylor. Not necessary, sir. I listened to this
    gentleman from Happy, Texas. It makes me want to go visit
    Happy, Texas, to be honest with you.
        Mr. Hickman. Come on.
        [Laughter.]
        Mr. Taylor. Would you make a loan?
        Mr. Hickman. Sure.
        Mr. Taylor. It would not count for CRA purposes. Although I
    did want to say to my friend from Long Island, if you meet the
    credit needs under CRA in your targeted assessment area and you
    make loans outside of it, you then get credit for it. If you
    have problems with the regulators getting credit, we will help
    you on that.
        Mr. Macomber. I need you to come and help be my advocate.
        Mr. Taylor. Absolutely.
        Mr. Macomber. We have had two exams from the Federal
    Reserve and they tell me quite to the contrary, John. I think
    that is part of the problem. As I say, the issue is
    administration and testing of compliance. I think that is the
    issue. We have very fragmented administration of compliance
    right now.
        Mr. Taylor. Got it. The point I wanted to make, Mr.
    Chairman, if I can get the balance of my time back.
        Chairman Bachus. You have it.
        Mr. Taylor. When Mr. Goldston from Texas mentioned the
    stack of papers that they have to put together for loan
    closings, a tremendous amount of time and it is not worth it
    for these loans, there are actually no documents in there that
    relate to CRA. The fact of the matter is, if we really look at
    this hearing and listen to what the testimony has been, not
    just from this panel but from the previous panel, is there is
    an increased regulatory burden, but it has nothing to do with
    CRA and everything to do with the Privacy Act and the PATRIOT
    Act and the Bank Secrecy Act.
        All the questions relate to CRA, from you folks and most of
    the comments respond to that because that is what is being
    asked. I am wondering why we are not asking questions about
    what happens to the 12 million reports that end up in Detroit
    in some basement of some building someplace that these banks
    are spending a tremendous amount of time filling out that
    information. What happens to all the other things that are
    occurring? We all want to fight terrorism. We all want to be
    patriotic. But is CRA going to be the fallout, a weakening of
    CRA? Is the CRA obligation going to be the fallout under this
    PATRIOT Act and Secrecy Act? That is what strikes me as very
    odd about this.
        Chairman Bachus. I think that is a good point. I will just
    maybe close with this. That kind of brings to mind something
    that you were talking about, other than CRA. There was
    testimony I know from Mr. Macomber about Bill Thomas has some
    tax relief legislation. Ms. Kennedy, has your organization
    taken a look at that? I think it is in you all's best interest
    for these community banks to be strong and competitive. What
    about those?
        Ms. Kennedy. Of our 200-member organization, 70 of them are
    insured depository institutions and probably another 70 or 80
    are nonprofit providers that work in communities like the
    Alabama Multi-Housing Consortium, from zero to $25 million in
    assets in 5 years, but only with investments from banks. We
    will look at it.
        Mr. Taylor. I am with you on that and I am with the desire
    to look at nonprofit credit unions. I think you might have
    missed my comment earlier, a lengthy comment about the need to
    really look at the impact, particularly not so much obviously
    community development credit unions or the single-purpose
    company credit unions that only serve their employees, but the
    kind of credit unions that have grown into looking, acting,
    smelling and being just like any bank, but have tax exempt
    status, have FDIC insurance, and have no obligation under the
    CRA.
        I should point out, when you look at their records of
    lending, these folks out-perform those credit unions in loaning
    to low- and moderate-income people and to people of color and
    to women, and that speaks very much to the fact that the fair
    housing laws and CRA, in fact, work because they are applied to
    these institutions.
        So leveling the playing field, very much indeed I would
    agree, taking a strong look at those credit unions and seeing
    that they at least have the same obligation in those areas as
    our brothers and sisters here at the table who represent
    community banks.
        Chairman Bachus. I think that is a good place to stop, for
    everybody but one group.
        Mr. Hensarling. Thank you, Mr. Chairman. I am informed
    there is due to be markup here in this room in about 60
    seconds. I want to thank the lady and all the gentlemen for
    their testimony. I note that we were joined by Mrs. Maloney.
        The Chair notes that some members may have additional
    questions for this panel which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to these
    witnesses and place their responses in the record.
        This hearing is adjourned.
        [Whereupon, at 1:59 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                  May 12, 2004

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