[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
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

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

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

                   SPENCER BACHUS, Alabama, Chairman

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


                            C O N T E N T S

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

                               WITNESSES
                        Wednesday, May 12, 2004

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

                                APPENDIX

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

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

                              ----------                              


                        Wednesday, May 12, 2004

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                            A P P E N D I X




                              May 12, 2004

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