[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
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa 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
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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
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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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