[Senate Hearing 108-885]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-885

 
                            CONSIDERATION OF
                      REGULATORY REFORM PROPOSALS

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

                      REGULATORY REFORM PROPOSALS

                               __________

                             JUNE 22, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                    Douglas R. Nappi, Chief Counsel

                       Mark F. Oesterle, Counsel

               Patience R. Singleton, Democratic Counsel

                  Lynsey N. Graham, Democratic Counsel

              Stephen R. Kroll, Democratic Special Counsel

                 Dean V. Shahinian, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 22, 2004

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johnson..............................................     2
    Senator Crapo................................................     3
    Senator Stabenow.............................................     3
        Prepared statement.......................................    55
    Senator Sarbanes.............................................     9
    Senator Carper...............................................     9
    Senator Reed.................................................    25
    Senator Hagel................................................    55
    Senator Santorum.............................................    56

                               WITNESSES

Mary L. Landrieu, A U.S. Senator from the State of Louisiana.....     4
    Prepared statement...........................................    56
Blanche Lambert Lincoln, A U.S. Senator from the State of 
  Arkansas.......................................................     5
Donald L. Kohn, Member, Board of Governors of the Federal Reserve 
  System.........................................................    11
    Prepared statement...........................................    59
    Response to a written question of Senator Johnson............   392
John M. Reich, Vice Chairman, Federal Deposit Insurance 
  Corporation....................................................    13
    Prepared statement...........................................    70
    Response to written questions of Senator Johnson.............   395
JoAnn Johnson, Chairman, National Credit Union Administration....    15
    Prepared statement...........................................   104
    Response to written questions of:
        Senator Johnson..........................................   397
        Senator Reed.............................................   401
Julie L. Williams, First Senior Deputy Comptroller and Chief 
  Counsel,
  Office of the Comptroller of the Currency......................    17
    Prepared statement...........................................   118
    Response to written questions of Senator Johnson.............   398
John E. Bowman, Chief Counsel, Office of Thrift Supervision......    19
    Prepared statement...........................................   150
    Response to written questions of:
        Senator Johnson..........................................   398
        Senator Crapo............................................   399
        Senator Reed.............................................   401
John S. Allison, Commissioner of Banking and Consumer Finance for 
  the
  State of Mississippi, on behalf of the Conference of State Bank 
    Supervisors..................................................    20
    Prepared statement...........................................   167
Roger W. Little, Deputy Commissioner, Credit Unions, Michigan 
  Office of
  Financial and Insurance Services, on behalf of the National 
    Association
  of State Credit Union Supervisors..............................    22
    Prepared statement...........................................   185
Mark E. Macomber, President and CEO, Litchfield Bancorp, on 
  behalf of
  America's Community Bankers....................................    29
    Prepared statement...........................................   205
    Response to written questions of Senator Reed................   402
Edward J. Pinto, President and CEO, Lenders Residential Asset 
  Company,
  LLC, on behalf of the National Federation of Independent 
    Business.....................................................    31
    Prepared statement...........................................   225
Dale L. Leighty, Chairman and President, First National Bank of 
  Las Animas
  (Colorado), on behalf of Independent Community Bankers of 
    America......................................................    33
    Prepared statement...........................................   231
Bradley E. Rock, President and CEO, Bank of Smithtown, on behalf 
  of the
  American Bankers Association...................................    35
    Prepared statement...........................................   259
Eugene F. Maloney, Executive Vice President, Federated Investors, 
  Inc............................................................    36
    Prepared statement...........................................   274
Marilyn F. James, CEO, NEPCO Federal Credit Union, on behalf of 
  the
  Credit Union National Association..............................    37
    Prepared statement...........................................   280
Margot Saunders, Managing Attorney, National Consumer Law Center, 
  on
  behalf of Consumer Federation of America, Consumers Union, 
    National
  Association of Consumer Advocates, and National Community 
    Reinvestment Coalition.......................................    39
    Prepared statement...........................................   335
Edmund Mierzwinski, Consumer Program Director, U.S. PIRG, on 
  behalf
  of Consumer Federation of America, Consumers Union, National
  Association of Consumer Advocates, and National Community
  Reinvestment Coalition.........................................    41
    Prepared statement...........................................   335
Bill Cheney, President and CEO, Xerox Federal Credit Union, on 
  behalf
  of the National Association of Federal Credit Unions...........    43
    Prepared statement...........................................   363
William A. Longbrake, Vice Chair, Washington Mutual Incorporated, 
  on
  behalf of the Financial Services Roundtable....................    45
    Prepared statement...........................................   379
    Response to a written question of Senator Crapo..............   400


                            CONSIDERATION OF
                      REGULATORY REFORM PROPOSALS

                              ----------                              


                         TUESDAY, JUNE 22, 2004

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:08 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    I want to thank everyone for being here today, and judging 
by the length of the witness list, that means a lot of thank 
you's. I will offer a blanket expression of gratitude.
    But it should come as no surprise that so many witnesses 
are required for consideration of regulatory reform. The 
reality in today's marketplace is that technological 
development and shifts in consumer demand cause constant change 
in the financial services sector. This constant change, 
however, occurs in an environment where laws and regulations 
remain relatively static.
    I believe that the tension caused by this situation makes 
it incumbent upon this Committee to undertake periodic reviews 
of the impact that the legal framework has on the operation of 
the marketplace. This entails reviewing the objectives behind 
the laws to determine whether they still remain relevant. It 
also requires, in the many instances where regulation is 
necessary, ensuring that compliance with such regulation can be 
achieved in a straightforward manner.
    The bottom line is this: Most financial service firms 
compete to meet consumer demand and maximize profits. They are 
also tasked to meet certain safety and soundness and consumer 
protection requirements. I believe it is our responsibility 
here to ensure that the legal environment is such that firms 
can effectively meet their responsibilities to both the 
marketplace and to the regulatory system.
    I would like to take a moment to thank Senator Crapo for 
his efforts and hard work with respect to regulatory reform. I 
know from past experience that developing a legislation product 
takes a great deal of time, patience, and effort. I want to 
commend him for the work he has done so far and the leadership 
he has shown. I look forward to working with him as this 
process continues.
    Again, I want to thank all the witnesses for being here 
today, and I look forward to their testimony.
    Senator Johnson.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Mr. Chairman, and I want to 
thank Ranking Member Sarbanes as well for his interest and 
concern on this issue.
    I appreciate your holding this hearing to begin our 
dialogue about reducing the regulatory burden faced by bankers 
and other financial service providers. I am confident that this 
hearing will be the beginning of a constructive period of 
collaboration to put together a bill that will maintain high 
standards for safety and soundness while at the same time 
reducing unnecessary red tape for financial institutions. And I 
want to welcome the excellent panels of witnesses that are here 
to join us this morning.
    In South Dakota, we are extremely fortunate to benefit from 
a stable mix of large and small financial institutions. We have 
more than 100 small banks and credit unions scattered 
throughout our State, reaching into even the most remote 
communities. These small banks and credit unions provide 
critical financial services to these communities which might 
otherwise be underserved.
    However, I frequently hear from my constituents that the 
regulatory burden on banks and other financial service 
providers has increased considerably over the past several 
decades. They report increasing amounts of time, energy, and 
dollars spent to comply with the numerous laws and regulations 
governing their operations. The 2003 nationwide survey of 
compliance offices by the American Bankers Association confirms 
these anecdotes.
    Concern about regulatory burden and its impact is not a new 
topic for this body to address. In 1996, Congress, with my 
support, passed the Economic Growth and Regulatory Paperwork 
Reduction Act. That law requires the bank regulatory agencies 
to renew their regulations at least once every 10 years. I 
understand that process is underway, and I look forward to 
seeing progress from agencies in that review.
    Reducing regulatory burden does not always mean eliminating 
laws and regulations. Proper reduction of regulatory burden 
does not sacrifice safety and soundness principles or reduce 
the level of consumer protection deemed adequate for the 
customers of banks and other financial service providers. Good 
public policy simply involves passing laws that allow 
businesses to operate without undue burden. One such example is 
legislation bringing uniformity to the rental-purchase 
industry, a bill I have cosponsored in the past few Congresses 
with one of our panelists, Senator Landrieu. I am pleased that 
Senator Landrieu will have this opportunity to speak about S. 
884, which I believe is worthy of inclusion in any reg relief 
package.
    I want to thank the panel members for joining us today, and 
I look forward to hearing their testimony, and I look forward 
to working with Chairman Shelby, Ranking Member Sarbanes, 
Senator Crapo, and other Members of this Committee to put 
together a reasonable and meaningful and doable regulatory 
relief package.
    Mr. Chairman, I have some competing obligations that I am 
going to be dealing with and will not be able to stay for the 
entire duration of the hearing today. But, again, I thank you 
for calling this hearing. I think it will be a very valuable 
contribution to an urgent issue.
    Thank you.
    Chairman Shelby. Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. I, too, 
want to thank all of the witnesses for coming today and in 
advance will thank you for your cooperation, as we have not 
only a full, busy day here in the Committee but we also have a 
full, busy day on the floor. And we will, unfortunately, expect 
that there will be some interruptions, and we will try to make 
those as minimal as possible.
    Eliminating outdated, ineffective, or unduly burdensome 
regulations that are not justified by either the need to ensure 
safety and soundness or to protect consumers is the focus of 
this legislation. We want to provide consumer protection on 
these critical and persistent issues within the banking purview 
of this Committee. When regulatory burdens are excessive and 
fail to add net value, they take a toll on the competitiveness 
of our financial system and squander scarce resources that 
could otherwise be devoted to productive activities, such as 
making loans or extending credit to small businesses and 
potential homeowners.
    The sheer volume of regulatory requirements facing the 
financial services industry today presents a daunting task for 
any institution. Although there are no definitive studies of 
the total cost of regulation, it is estimated that the banking 
industry spends somewhere in the neighborhood of $26 to $40 
billion annually simply to comply with regulatory requirements.
    As we proceed, we need to make sure that we enact enough 
meaningful reforms so that the cost of change is not a burden 
in and of itself. The specific recommendations of the witnesses 
today will be of great use to me and to the other Members of 
this Committee as we create legislation to address the 
important issues of financial services regulatory reform.
    While finding a consensus on these issues may be difficult, 
I look forward to working with you and the other Members of 
this Committee as we take up the regulatory relief issues in 
this Banking Committee.
    I want to thank again all of you for appearing here today, 
and I look forward to your testimony and the questions and 
answers.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I would ask that 
my full opening statement be placed in the record.
    Chairman Shelby. Without objection, it will be done.
    Senator Stabenow. Thank you. In particular I want, though, 
to welcome our colleagues, Senator Lincoln and Senator 
Landrieu. We look forward to your testimony and appreciate your 
hard work.
    I want to recognize Roger Little from the State of 
Michigan, our Deputy Commissioner of the Office of Financial 
and Insurance Services, and he also serves as Credit Union 
Director from Michigan. So we appreciate your testimony today.
    I also welcome all of the other witnesses. We have a very 
broad array of views that we are going to hear that will help 
us as we focus on regulatory reform. It is a very important 
topic, and it is important we begin this discussion on how we 
are able to proceed.
    Thank you, Mr. Chairman, for your work and Senator 
Sarbanes, Senator Crapo, and everyone who is involved in this 
effort.
    Chairman Shelby. Thank you.
    Our first panel is made up of Senator Mary Landrieu, a U.S. 
Senator from Louisiana, and Blanche Lambert Lincoln, a U.S. 
Senator from Arkansas.
    We will start with Senator Landrieu.

                 STATEMENT OF MARY L. LANDRIEU

           A U.S. SENATOR FROM THE STATE OF LOUISIANA

    Senator Landrieu. Thank you, Mr. Chairman. And you all have 
a very full agenda, so I appreciate the opportunity, Mr. 
Chairman, to just share a few thoughts with you about S. 884, 
the Consumer Rental-Purchase Agreement Act, and ask that you 
would include this, consider including it in your package of 
regulatory relief.
    Mr. Chairman, you are a cosponsor of the bill, along with 
many Members of the Committee, including Senator Johnson, who 
has provided a lot of leadership on this issue in the last few 
years.
    Chairman Shelby. Without objection, it is so ordered.
    Senator Landrieu. Thank you. I will just make a few points 
this morning.
    The rental-purchase industry makes household durable 
goods--appliances, furniture, electronics, computers, musical 
instruments, just to name a few--available to customers for 
rent on a weekly or monthly basis. Many people, Mr. Chairman, 
who rely on rent-to-own have no other means of acquiring 
household products. They are often families just starting out 
with no credit, or they are 
families who have had difficult times and have bad credit; 
military families who are transferred from location to location 
and find themselves only temporarily in a particular place; 
students who need to furnish an apartment or dorm room; and, 
yes, Mr. Chairman, even Members of Congress who have moved to 
Washington have used rent-to-own.
    For these consumers, rent-to-own offers an opportunity to 
obtain the immediate use and eventual ownership, if they 
desire, of the things that many of us just take for granted--
decent furniture, appliances like washers and dryers, et 
cetera--instead of using, as in many instances, laundromats, 
dropping coins into machines they will never own.
    There is a store in a small town in North Louisiana, which 
is how this came to my attention, in Delhi called ``The Easy 
Way.'' The President is Jimmy Strong. I have met with him many 
times and talked with him about his business. He rents a lot of 
air conditioners to people who cannot afford to buy them and 
would otherwise have to suffer through fairly unbearable 
summers, and they can do so through the hot months at very 
reasonable rates.
    His customers, like other rent-to-own customers, are never 
obligated to rent beyond the initial term and can return the 
rental product at any time. So there are advantages to this 
system over the other system of credit currently only available 
under the law.
    This bill attempts to do a couple of things. One, the 
purpose of this Federal legislation is to establish a floor of 
regulation, not a ceiling, and our legislation does not prevent 
other States from enacting either stronger, different, or 
modified consumer protection laws as they see fit. States could 
also outlaw the practice if that is what they want to do.
    It does set a Federal definition of rent-to-own 
transactions as rental-purchases and not as credit sales. This 
is the critical distinction. Under traditional credit 
transactions, the consumers must make all the payments over a 
predetermined period of time or risk default, repossession, 
deficiency judgments, and, at worst, could damage their credit 
or have to take personal bankruptcy.
    By way of stark contrast, the rent-to-own customer enjoys 
control over his or her use of rental goods and the terms of 
the rental transaction itself.
    So, Mr. Chairman, those are just a brief outline of what 
this legislation attempts to do. I know that you personally are 
familiar with this, as well as other Members. I appreciate the 
opportunity just to review again the benefits of this 
legislation and ask that you consider it in your regulatory 
package. Thank you.
    Chairman Shelby. Thank you.
    Senator Lincoln.

              STATEMENT OF BLANCHE LAMBERT LINCOLN

           A U.S. SENATOR FROM THE STATE OF ARKANSAS

    Senator Lincoln. Thank you, Mr. Chairman and Senator 
Sarbanes, and all of our other colleagues here. I have been a 
little overzealous with my statement, so if I get too long, 
just cut me off.
    This is an issue that really only deals with our State of 
Arkansas, and I am very proud to be here to testify in support 
of my bill, S. 904, allowing nonbank lenders in Arkansas who 
are currently subject to State usury restrictions to charge the 
same rates of interest that their out-of-State competitors are 
legally importing into Arkansas under Federal law. It is my 
hope that this bill will be included in your Regulatory Relief 
bill, and I am very proud and appreciative of the hard work 
that you have begun to put into this. The most important thing 
that I would like to ask the Members of this Committee to take 
from my testimony today is the question of whether a State 
usury law is good for consumers or bad for consumers is not the 
issue with what we are trying to do in our bill. With the 
passage of the Riegle-Neal Interstate Banking Act, the debate 
concerning the consumer benefits of State usury laws came to an 
end because lenders were then allowed to import their home 
State interest rates across State lines. The only issue now 
left to consider is whether in-State lenders who were placed at 
a competitive disadvantage because of this Federal law should 
be able to compete on a level playing field with out-of-State 
lenders. For my State, this is an issue of jobs, and I intend 
to fight very hard for the legislation that I have proposed, 
with the unified Arkansas delegation and our Governor. So we 
are very appreciative to be here today to state our case.
    At this point, I would like to submit a copy of a letter 
from our Governor. I would also ask that a copy of an article 
by two professors of finance and one professor of economics 
from the University of Arkansas also be placed in the record.
    Chairman Shelby. Without objection, it will be included.
    Senator Lincoln. Thank you, Mr. Chairman.
    Senator Lincoln. The article is entitled ``The History of 
Usury Law in Arkansas from 1836 to 1990,'' and I encourage all 
of my colleagues, particularly those who are critical of the 
current efforts of the entire Arkansas delegation, to free 
Arkansas' nonbank lenders from unfair out-of-State competition, 
to read the article. It is an excellent account of how Arkansas 
has struggled with this issue over the years before the passage 
of the Riegle-Neal Interstate Banking Act in 1994. I will go 
over some of the history of the issue in my testimony today, 
but I would like to highlight at this point two of the 
conclusions that were made by the scholars.
    First, and I quote:

    To avoid the massive outflow of funds that the State has 
experienced in the past, any new constitutional usury provision 
must be structured so that both the business and financial 
communities are allowed a reasonable differential between their 
cost of funds and what they can charge for those funds.

    The second quote comments that:

    Other costs in the form of a higher unemployment rate, 
higher prices, and the inability of borrowers to gain access to 
needed funds have occurred as a result of the restrictive 
nature of the State's usury law. If all these costs were 
converted into dollar amounts, there is no doubt that the price 
of having an artificially low interest rate at various times 
throughout the State's history would run into millions of 
dollars.

    The Constitution of our State was rewritten in 1874 after 
Reconstruction was ended. Among the provisions written into the 
Arkansas Constitution at the time was a 10-percent cap on 
interest rates. From the very beginning, this cap on interest 
rates has been a limitation on capital that has hindered 
progress in our State. Caps on interest run counter to the 
economic realities of lending and have thus served not as a 
protection of consumers but a hindrance. The cap on the usury 
in Arkansas has limited the availability of capital for start-
up businesses, high-risk loans, and low-income working 
families.
    In 1982, Arkansas voters changes their Constitution by 
adopting Amendment 60 and created a two-tier interest rate cap. 
The opponents to the Amendment 60 were led by the Arkansas 
State AFL-CIO, the NAACP, and the Arkansas Community 
Organization for Reform Now, which is known as ACORN. Endorsing 
the amendment were over 70 organizations as well as our 
Governor, Frank White, Senator Pryor, Senator Bumpers, and 
former and future Governor Bill Clinton. The amendment which 
passed with 59 percent of the vote provided a cap of 5 percent 
over the Federal discount rate for general loans and a 17 
percent above the discount rate for consumer loans. However, as 
is common with voter initiatives that do not move through an 
ordinary legislative process, the amendment was not properly 
designed. The Arkansas Supreme Court subsequently decided that 
the general loan provision overrode the consumer loan 
provision; thus, all loans in Arkansas were at that time capped 
at 5 percent over the discount rate. The clear intent of the 
people to lift the usury cap for consumer loans to something 
more in line with other States was struck down on a 
technicality by the courts. I have included a copy of the 
court's decision in my testimony. Arkansas has thus been left 
as one of the very few States that is still burdened by an 
antiquated and anticapitalistic usury restriction.
    In his book on economic development in the State, 
``Laboratories of Democracy,'' David Osborne wrote of Arkansas 
that:

    The usury law which limits interest on loans to 5 
percentage points above the Federal Reserve Board's discount 
rate continues to inhibit both long-term fixed-rate loans and 
riskier short-term loans. He continues by saying that, 
``Governor Clinton's economic team recommended that it be 
abolished.''

    In the 1980's, the damaging impact of Arkansas's usury cap 
was limited to economic growth and capital availability in the 
State. In 1994, Congress got involved. That is when the 
viability of the Arkansas-based lenders was put at risk by the 
action of Congress. In 1994, Congress passed the Riegle-Neal 
Interstate Banking Act, many of you all will remember. This law 
gave interest lenders the authority to charge either their home 
State or their host State interest rates. The Federal law 
eliminated the practical effectiveness of Arkansas' cap on 
usury for out-of-State lenders and put Arkansas lenders, who 
remained subject to the law, at a competitive disadvantage.
    At this point I would like to ask that a November 1998 
article from The Economist magazine be placed in the record as 
well.
    Chairman Shelby. Without objection, it will be included.
    Senator Lincoln. Thank you, Mr. Chairman.
    The article highlights the sad effects that the Riegle-Neal 
bill had upon Arkansas lenders and our jobs, unfortunately. The 
inequity of this Federal law created an immediate crisis for 
Arkansas banks competing with existing out-of-State bank 
branches in their communities. This prompted a unified Arkansas 
delegation to push to give Arkansas-chartered banks the 
authority to charge the same interest rate as the host State of 
interstate bank branches as part of the 1999 Gramm-Leach-Bliley 
Financial Modernization Act. This provision was specific to 
Arkansas.
    In 1999, other lenders, nonbank lenders, with less 
established competitors did not feel the pressure as acutely as 
the Arkansas bankers did at the time. However, competition from 
out-of-State nonbank lenders has begun to take its toll on 
Arkansas lenders and its jobs just as it did on State banks in 
past years.
    In 2000, with the support of former Senator Hutchinson, I 
introduced legislation to allow nonbank lenders the ability to 
import the rates of their competitors. The bill was modeled 
after the provision that passed in the 1999 bill for banks. 
Democratic Congressman Mike Ross, along with the entire House 
delegation, introduced identical language. The bill was 
reintroduced in the 108th Congress with Senator Pryor. The bill 
enjoys the support of the Democratic legislature, the 
Republican Governor, and countless groups in Arkansas who are 
truly concerned about job losses resulting from the current 
State law. The House Banking Committee has approved the 
legislation twice since introduction, and recently the full 
House approved the measure as a part of their regulatory relief 
bill.
    I would like to close, Mr. Chairman, by addressing the 
three main criticisms I have heard about the legislation that I 
and the Arkansas delegation have proposed, and I will try to be 
brief.
    Number one, doesn't the Arkansas usury provision protect 
consumers? Some argue that the usury cap in Arkansas serves a 
useful purpose for consumers and prevents discriminatory action 
by lenders. However, because the Arkansas usury law only 
applies to Arkansas-based lenders, consumers are not protected 
by this cap at all. An out-of-State lender is contacted anytime 
a person's credit rating is too low to justify a capped rate. 
And as a result of the Federal law, out-of-State lenders are 
allowed to give credit that Arkansas lenders cannot give.
    And, in fact, the Arkansas usury cap, combined with the 
power of out-of-State lenders to import their rates, actually 
leads to discriminatory actions by unscrupulous merchants. In 
order to prevent sales from leaving the State and their stores, 
sellers in Arkansas have begun charging higher prices for 
products in order to compensate for their inability to change 
interest. The high-risk credit consumer can be lured into these 
schemes because he or she has no other access to credit in 
Arkansas.
    Second, shouldn't Arkansas fix the problem at home? And I 
know others think that we should, and that is why I want to 
make sure this Committee understands why we cannot. The problem 
at hand was created by Congress with the passage of the Riegle-
Neal Interstate Banking Act. It is unlikely this Committee or 
the Senate would recommend repealing the Riegle-Neal or 
imposing a usury cap on all States. It was Congress that 
created a comparative disadvantage for Arkansas lenders by 
allowing the out-of-State lenders to import their rates. 
Congress has chosen to occupy the field of interest rate 
restrictions and should act responsibly to negate the 
inequities.
    Further, in an environment where Federal laws and 
regulations have substantively occupied the field, the 
organizing document of a State is not flexible enough to keep 
up with the fluid changes of the Federal law. For example, the 
current Arkansas constitutional provision concerning usury ties 
interest rates in Arkansas to the Federal Reserve Bank's 
discount rate. The calculation of the discount rate was 
discontinued by the Federal Reserve Bank, and the term 
``discount rate'' is no longer used. So the inflexibility of 
the Arkansas Constitution is left subject to interpretation.
    And the last question, the lenders to whom we would extend 
the usury override are not regulated by banks, and so we cannot 
trust them with the power to charge a higher price for borrowed 
capital. Out-of-State nonbank lenders are importing rates into 
Arkansas in acts of interstate commerce. If critics of these 
lenders believe that Congress should regulate nonbank lenders 
operating in interstate commerce, they should propose that 
legislation, and that is something that we could certainly 
consider. However, there is nothing righteous in giving 
nonregulated lenders a competitive advantage over other 
nonregulated lenders because regulation does not exist.
    Mr. Chairman, I thank you so much, you and your staff and 
the other staff and the Members of the Committee, for indulging 
me. This is an issue I have worked on since 1992, and it is one 
that has a tremendous effect on our ability as a State to grow, 
to provide the jobs that working families need, but, more 
importantly, to be a competitive State within this Union. And 
it is so important for us to be able to right the wrongs that 
we have seen and the disadvantages that we have found ourselves 
in. So, I would certainly ask you and the Members of this 
Committee to give every consideration to including our bill in 
your reg relief reform package. And if there are any questions, 
I will be more than happy to work with you all to answer any of 
those questions that exist.
    I did cut my testimony short. I know it is hard to believe.
    [Laughter.]
    I did not give you the full history of Arkansas banking 
law.
    [Laughter.]
    Chairman Shelby. We will make your full testimony a part of 
the record.
    Senator Lincoln. Thank you, Mr. Chairman, and thanks to all 
of you for indulging me.
    Chairman Shelby. Senator Lincoln, let me ask you one quick 
question. Did you say that the entire Arkansas Congressional 
delegation--you, Senator Pryor, and the Congressmen--the 
Governor and everybody is for what you are proposing?
    Senator Lincoln. Yes, sir, the entire delegation as well as 
the Governor are in full support of our legislation, and I have 
included a letter from the Governor, and all of the other 
delegation members are cosponsors.
    Chairman Shelby. Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Mr. Chairman, I know we have a lot of 
other people coming. We have these panels. I have a number of 
questions, but I am not going to pursue them.
    Let me just ask one question. Arkansas could take care of 
this problem by changing its constitution, could it not?
    Senator Lincoln. And we tried. As I mentioned in my 
testimony, the first attempt there was poorly written. Changing 
the constitution is not an easy thing through the voters, and 
what we intended to do was to change it, first of all, and 
being poorly written, I think it was struck down by the courts.
    Senator Sarbanes. Well, it presumably could be well written 
and an effort could be made again to change your own 
constitution in order to take care of the problem, correct?
    Senator Lincoln. Some of our problems, however, do exist 
because of the Federal laws that we have passed, particularly 
the Riegle-Neal Banking----
    Senator Sarbanes. Well, except we passed Gramm-Leach-Bliley 
to even the playing field for the banks.
    Senator Lincoln. Yes, sir, but the nonbank lenders, and 
that is who we address in this bill. But I would be glad to 
visit with Senator Sarbanes on any other questions he may have. 
I promise.
    Chairman Shelby. Senator Crapo.
    Senator Crapo. I have no questions.
    Chairman Shelby. Senator Stabenow, would you like to ask 
any questions?
    Senator Stabenow. No, Mr. Chairman.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Senator Lincoln, how are you?
    Senator Lincoln. I am fine, Senator Carper. How are you?
    Senator Carper. Good to see you. I am fine, thanks.
    I just came from another hearing, and I missed most of what 
you said. I came in right at the end. Just give me a 30-second 
take-away, what you would have us take away from what you said, 
so that when the other Members of our panel who are not here 
say, ``Well, what did Senator Lincoln have to say?'' I will be 
able to capture this in a few words.
    Senator Lincoln. In a nutshell--and I have given them a 
long history already--our usury laws in Arkansas have become 
quite antiquated, and we have tried to address those through 
several fixes in order to make sure that the caps that are on 
our lenders in Arkansas, the interest rate caps, are brought 
into a competitive level with out-of-State lenders who can 
transport their interest rates into our State to make our State 
lenders. Our problem is that nonbank lenders now are out of 
that competitive edge, and we want to just bring them in to 
full competitive nature with others who can import their rates 
into our State because it is causing really quite an economic 
disadvantage for our State, particularly on the parameters of 
the State where we have other States bordering us and we are 
seeing all of our jobs going out of our State. And much of our 
lending and capital as well is not staying in the State because 
they can import rates that are much lower from other places, 
not to mention the fact the disadvantage it puts many of our 
low-income, working families who cannot access those other 
lower rates, and they are only stuck with the in-State rates 
that tend to be higher. We would like to be able to make 
availability to them, too.
    Senator Carper. Thanks very much.
    Senator Lincoln. Thank you.
    Chairman Shelby. Thank you, Senator Lincoln.
    Senator Lincoln. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Crapo, do you want to take over?
    Senator Crapo. [Presiding.] We will now call up our second 
panel, and while they are changing the names, I will announce 
the panel. This panel is Donald Kohn, a Member of the Board of 
Governors of the Federal Reserve System; John M. Reich, Vice 
Chairman of the Federal Deposit Insurance Corporation; JoAnn 
Johnson, Chair of the National Credit Union Administration; Ms. 
Julie Williams, the First Senior Deputy Comptroller and Chief 
Counsel of the Office of the Comptroller of the Currency; Mr. 
John Bowman, Chief Counsel of the Office of Thrift Supervision; 
Mr. John Allison, Commissioner of Banking and Consumer Finance 
for the State of Mississippi, who will be testifying on behalf 
of the Conference of State Bank Supervisors; and Mr. Roger W. 
Little, the Deputy Commissioner of the Credit Union Division 
for the Division of Financial Institutions of the State of 
Michigan, who will be testifying on behalf of the National 
Association of State Credit Union Supervisors.
    Ladies and gentlemen, we welcome you here with us today. 
Before we get started, let me just say several people have 
mentioned the fact that we have a very full hearing today. You 
can see that by the fact that we have to scoot the chairs close 
together and fit everybody into this table. And we have another 
even larger panel following the first panel. In fact, between 
this panel and the next panel, we will actually take a break to 
add another table.
    Senator Carper. Mr. Chairman, is it true you are going to 
stack the tables on top of each other, a double decker?
    [Laughter.]
    Senator Crapo. We are going to keep everybody in suspense 
as to just how we are going to fit that table in here, Senator 
Carper. But that is a possibility under consideration.
    I do not know this for a fact, but this hearing may set a 
record for the number of witnesses that we have before us 
today. And that is going to require that we all cooperate 
together. You should have all been asked in the letter inviting 
you to testify--and this is for the witnesses in the next panel 
as well. You should have received a letter asking you to keep 
your testimony to 5 minutes, and we have these little clocks in 
front of you that it is incredibly hard for people to remember 
to look at when they are testifying. And so I just remind you 
to pay attention to the clock, and if your 5 minutes are up, I 
am going to just rap the gavel a little bit to remind you to 
look at that. And I can assure you that very few of you will 
finish your testimony before the clock runs out.
    I will also assure you that your testimony is going to be 
very carefully read. Many of us have read a lot of it already, 
but your written testimony will be made a part of the record. 
And we want you to try to pay attention to the time limits that 
we have set here so that we will have some time for questions 
and answers and dialogue as we get into some of the issues.
    So please forgive me if I have to rap the gavel a little 
bit to remind you to look down. I am one of those people who, 
once I get going, I do not look around at anything. So 
sometimes we need a little reminder.
    With that, we will go ahead and start up in the order that 
I indicated. Mr. Kohn, you are first.

              STATEMENT OF DONALD L. KOHN, MEMBER

        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Kohn. Thank you, Senator, for the opportunity to 
testify on legislative initiatives related to regulatory 
relief.
    Early this spring Chairman Greenspan, in a letter to you, 
highlighted three important proposals that the Board has 
supported for many years: Authorization for the Federal Reserve 
to pay interest on balances held by depository institutions in 
their accounts at Federal Reserve Banks, repeal of the 
prohibition against the payment of interest-on-demand deposits 
by depository institutions and increased flexibility for the 
Federal Reserve in setting reserve requirements.
    Senator Crapo. Mr. Kohn, you want to pull that mike just a 
little closer to you?
    Mr. Kohn. Sure. Is that better?
    Senator Crapo. Thank you. Yes.
    Mr. Kohn. For the purpose of implementing monetary policy, 
the Federal Reserve establishes reserve requirements on certain 
deposits of depository institutions. These requirements are met 
in part through balances held at the Reserve Banks. Because no 
interest is paid on these required reserve balances, 
depositories try to reduce their reserve requirements to a 
minimum through a variety of reserve avoidance activities such 
as nightly sweeps of funds out of deposits that are subject to 
reserve requirements.
    These activities absorb real resources and diminish the 
efficiency of our banking institutions. Payment of interest on 
required reserve balances would remove a substantial portion of 
the incentive for depositories to engage in such avoidance 
measures. Resulting improvements in efficiency should 
eventually be passed through to bank borrowers and depositors.
    Even greater efficiencies in regulatory burden relief might 
be realized by substantially reducing or even eliminating the 
reserve 
requirements. Required reserve balances are useful for the 
implementation of monetary policy, in part because they provide 
a demand for balances at Federal Reserve Banks that is known in 

advance. When the Federal Reserve supplies balances through 
open market operations, it is able to achieve a given target 
level for the Federal Funds rate because of that predictable 
demand. Also reserve requirements must be met only on average 
over a 2-week period. The averaging allows banks to seek extra 
reserves when rates are low, and hold fewer reserves when they 
are high, and this behavior helps keep the funds rate stable.
    However, if granted the authority, the Federal Reserve 
might be able to reduce substantially, or even eliminate, 
reserve requirements as long as it was authorized to pay 
interest on other types of balances held at the Reserve Banks. 
For instance, contractual clearing balances, which banks 
currently hold to ensure they can clear checks and make wire 
transfers without incurring overnight overdrafts, are also 
known in advance, and have an averaging feature like the 
balances used to satisfy reserve requirements. If explicit 
interest could be paid on such clearing balances, the demand 
for them potentially could be high and stable enough for 
monetary policy to be implemented effectively through existing 
procedures for open market operations, even in the absence of 
reserve requirements.
    The efficiency of our financial sector also would be 
improved by eliminating the prohibition of interest-on-demand 
deposits. In order to compete for the liquid assets of 
businesses, banks now set up complicated procedures to pay 
implicit interest on compensating balance accounts. Banks also 
spend resources--and charges fees--for sweeping excess demand 
deposits of larger businesses into money market investments on 
a nightly basis. Such expenses waste the economy's resources, 
and they would be unnecessary if interest were allowed to be 
paid on both demand deposits and reserve balances that must be 
held against them.
    Interest-on-demand deposits would clearly benefit small 
businesses that currently earn no interest on their checking 
accounts. But banks would likely incur higher costs, at least 
in the short-run. However, any cost increase for banks could 
have offsets through the repricing of other services, interest 
earned on balances held at the Federal Reserve, lower burdens 
of reserve requirements, the elimination of sweep programs and 
other reserve avoidance procedures. Over time these measures 
should help the banking sector, and especially small banks, to 
be more competitive in attracting liquid funds.
    Although the Federal Reserve Board strongly supports 
repealing the prohibition of interest payments on demand 
deposits, the Board opposes the provisions in H.R. 1375 that 
would permit industrial loan companies to offer NOW accounts to 
businesses. ILC's are State-chartered, FDIC-insured banks, but 
their parent companies are not considered bank holding 
companies. Thus, commercial companies can own an ILC that is, 
an FDIC-insured bank, without complying with either the 
limitations on activities or the consolidated supervision 
requirements in the Bank Holding Company Act.
    An amendment that would allow ILC's to offer NOW accounts 
to businesses would permit ILC's to become the functional 
equivalent of full service banks. H.R. 1375 also included ILC's 
in a provision removing limitations on de novo interstate 
branching. While the Federal Reserve supports expanding de novo 
branching authority for depository institutions, we believe 
that Congress should not grant this new branching to ILC's 
unless the corporate owners of these institutions are subject 
to the same type of consolidated supervision and activities 
restrictions as the owners of other insured banks.
    Allowing a commercial or a financial firm to operate a 
full-service, nationwide insured bank outside the framework 
established by Congress for the other owners of insured banks, 
raises significant safety and soundness concerns, creates an 
unlevel competitive playing field, and poses important 
questions for the Congress concerning the Nation's policy of 
maintaining the separation of banking and commerce.
    Thank you, Mr. Chairman.
    Senator Crapo. Thank you very much, Mr. Kohn.
    Mr. Reich.

           STATEMENT OF JOHN M. REICH, VICE CHAIRMAN

              FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Reich. Thank you very much, Senator Crapo, Senator 
Sarbanes, and Members of the Committee.
    My name is John Reich. I am Vice Chairman of the FDIC. I am 
also here as head of the EGRPRA Task Force. As Senator Johnson 
mentioned earlier this morning, in 1996 Congress passed the 
Economic Growth and Paperwork Reduction Act, the EGRPRA, which 
required that all regulatory agencies work together over a 10-
year period to review all regulations with an eye to eliminate 
those that are outdated, unduly burdensome, and no longer 
necessary.
    By way of background, I am a former community banker. I was 
CEO of the National Bank of Sarasota in Sarasota, Florida for a 
number of years, a $450 million bank that had 19 offices along 
the West Coast of Florida. We were essentially a community 
bank.
    In my capacity as Chairman of the EGRPRA Task Force, we 
have held a number of outreach meetings beginning in June of 
last year with the industry and with consumer groups. Last 
year, we had outreach meetings in St. Louis, Orlando, Denver, 
San Francisco, and New York City. We held meetings this year in 
Nashville and Seattle. We have one scheduled in Chicago. We had 
a consumer group meeting in February here in Washington, and 
will hold one later this week in San Francisco, followed by one 
in Chicago slated for September. We are trying to consider the 
interests of all parties concerned.
    My message to you this morning is, after speaking with many 
bankers over the past year, that regulatory burden is indeed an 
important issue for all banks, large and small. It is a 
particularly important issue for small community banks. Small 
community banks, in my opinion, face an uncertain future. 
Unless we take action soon to provide them with regulatory 
relief, and relief from the continuing avalanche of regulations 
which continues to be imposed upon community banks, they may 
indeed become an endangered species.
    I would like to draw your attention to--I hope you have 
them at your seats--charts that are in front of you. Chart No. 
1 is a chart of what has happened in community banking over the 
past 20 years. At the end of 1984, there were 11,780 community 
banks with assets under $100 million in the United States. At 
the end of last year, that number had declined dramatically to 
4,390.
    Chart No. 2 shows the market share of industry assets held 
by community banks. Adjusted for inflation, community banks 
held 9 percent of industry assets 20 years ago. The absolute 
number at that time was 13 percent. As of the end of last year, 
the market share of community banks with assets under $100 
million, had declined to 2 percent.
    Chart No. 3 shows the growth in assets of banks over $10 
billion. There are 110 banks in the United States today with 
assets over $10 billion. Twenty years ago, those banks had a 
market share of 27 percent. At the end of last year, the market 
share of the megabanks over $10 billion in assets, had grown to 
70 percent.
    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 year before of $105 billion. What is not 
often reported is the considerable disparity in earnings 
between large banks and small banks in the country. It is, 
indeed, as FDIC Chairman Powell has stated, a tale of two 
industries.
    Last year, the 110 largest banks in the country earned 
$87.7 billion or 73 percent of total industry earnings. By 
contrast, the 4,390 community banks, representing 48 percent of 
the total number of institutions, earned only $2.1 billion, 
just 1.7 percent of total industry earnings. As Chart 4 shows, 
the community bank share of industry earnings has been on a 
downward slope since 1990, and I expect that this trend will 
continue.
    I believe the disparity in profitability can be attributed, 
at least in part, to the disproportionate impact of the cost of 
compliance with accumulated regulation that has been placed on 
community banks.
    To comply with the requirements of EGRPRA, as I mentioned, 
we are engaged in a joint effort to solicit comments from the 
public. The outreach meetings that I referred to have been 
attended by representatives of all of the Federal regulatory 
agencies: The OCC, the FDIC, the OTS, and the Federal Reserve. 
The State regulatory agencies are also participating at each of 
our outreach meetings. We divided all Federal regulations into 
12 categories and are putting one or more categories out for 
public comment every 6 months until 2006. Through our outreach 
meetings and comment letters we have received to date, we have 
identified a number of possible legislative proposals that I 
believe deserve our careful review and consideration by 
Congress.
    In my written testimony are the following proposals: First, 
to eliminate unnecessary reporting requirements for bank 
officers and directors; second, to streamline the application 
process for certain bank mergers; third, to eliminate the 
annual privacy notice distribution requirement for banks that 
do not share personal information with third parties; fourth, 
to provide consumers the flexibility to weigh their right of 
rescission under certain circumstances and receive their money 
faster at real estate closings; fifth, to update certain 
provisions of the National Flood Insurance Act; and six, to 
repeal the CRA Sunshine Law. This is the first of what I expect 
will be a longer list of legislative proposals that we will be 
reviewing and recommending as a part of our EGRPRA regulatory 
review process.
    Along with a number of issues pending on which we have not 
yet reached consensus, we will also have an opportunity to 
review the ideas and proposals that are suggested at this 
hearing today to develop a comprehensive list of regulatory 
relief initiatives that I hope all of the agencies can and will 
support. I intend to spend a substantial portion of my time 
over the next several months working toward this end.
    Thank you, Mr. Chairman, for holding this hearing. I 
appreciate the opportunity to be here, and look forward to 
questions.
    Senator Crapo. Thank you.
    Mrs. Johnson.

                   STATEMENT OF JOANN JOHNSON

         CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION

    Mrs. Johnson. Senator Crapo, Senator Sarbanes, and Members 
of the Committee, thank you for inviting me to appear on the 
panel today. On behalf of the National Credit Union 
Administration, I am pleased to provide our agency's views on 
regulatory efficiency recommendations. My written comments, 
previously provided to you, cover a number of issues, some of 
which I will highlight for you.
    It is my strong belief that effective regulation, and not 
excessive regulation, should be the underlying principle 
supporting NCUA's critical mission of ensuring the safety and 
soundness of federally insured credit unions. In this regard, 
NCUA is carefully coordinating with the other four Federal 
financial institution regulation agencies in the review project 
mandated by the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996, and we will soon be making our third 
request for public comment.
    NCUA also scrutinizes one third of NCUA existing 
regulations annually to find ways to simplify or improve any 
rule that is outdated or in need of revision. To date, this 
internal process has brought about important regulatory reform 
for credit unions in many of NCUA's rules, including those on 
lending, share accounts, and incidental powers. We are on track 
to meet the EGRPRA deadline of 2006.
    A time sensitive recommendation in my testimony today stems 
from the Financial Accounting Standards Board's proposed change 
in the accounting treatment of credit union mergers. This is a 
recent development. Therefore, it has not previously been 
included in recommendations NCUA has submitted for your review. 
FASB's change will, in effect, prevent credit unions from 
moving forward with mergers which are clearly in the best 
interest of their members. Specifically, the change will 
provide that when two credit unions merge, the retained 
earnings of the discontinuing credit union would not be 
included in the post-merger net worth. FASB expects to 
implement this change as early as January 1, 2006. NCUA has 
suggested addition of statutory language to the Federal Credit 
Union Act, as well as report language, clarifying the limited 
purpose of this amendment to maintain net worth as it is. That 
language is attached to and made part of my written testimony 
for the Committee's consideration.
    Another issue concerning net worth is the statutorily 
imposed requirements for prompt corrective action and NCUA's 
recommendation to move to a more equitable system where net 
worth requirements are more dependent on the risk in an 
individual credit union. Legislation introduced in November 
2003, H.R. 3579, the Credit Union Regulatory Improvement Act of 
2003, CURIA, has begun deliberations over how such a risk-based 
system could be applied to federally insured credit unions. 
NCUA strongly supports a risk-weighted system. A well-designed, 
risk-based system would alleviate regulatory concerns by not 
penalizing low risk activities and by providing credit union 
management with the ability to manage their compliance through 
adjustments to their assets and activities.
    An important area where NCUA does not have jurisdiction 
comparable to the bank regulators, involves third party 
vendors. NCUA does not have direct authority to examine third 
party vendors that provide services to federally insured credit 
unions. Statutory authority previously existed for NCUA, but 
under a sunset provision, expired in 2001. We are currently 
required to work through credit unions to obtain vendor 
information or seek voluntary cooperation from vendors. We 
believe that in these times, privacy, money laundering, and 
financing of terrorism are issues of paramount national 
interest as well as general safety and soundness concerns. NCUA 
should have direct examination authority over those vendors 
providing services for federally insured credit unions.
    A restoration of NCUA's examination authority would provide 
parity with other financial regulators. It would also eliminate 
the need for us to approach the matter indirectly through 
credit unions, thus providing some measure of regulatory 
relief. This is consistent with the October 2003 GAO report, 
which stated that Congress may wish to consider granting this 
authority to NCUA.
    Other issues of which we are supportive: Authorizing 
Federal credit unions to provide check cashing and money 
transfer services to anyone eligible to become a member. This 
will greatly assist reaching unbanked individuals. Allowing the 
NCUA Board to set the investment limit for credit unions and 
credit union service organizations by establishing up to a new 
3 percent investment limit. Seeking a provision to provide 
regulatory relief from the requirement that credit unions 
register with the Securities and Exchange Commission as broker/
dealers when engaging in certain securities activities as banks 
are currently allowed.
    NCUA has reviewed all of the additional credit union 
provisions included in the House passed bill, and the Agency 
has no safety and soundness concerns with these provisions.
    For the record that NCUA is neither the regulator of nor 
the insurer of State-chartered credit unions whose deposits are 
not 
insured by the National Credit Union Share Insurance Fund. 
Accordingly, NCUA has no official position on the public policy 
issue 
related to privately insured, State-chartered credit unions 
being eligible to join the Federal Home Loan Bank System.
    However, it is our belief that there is a problem with the 
language added to the basic provision to Section 301 or H.R. 
1375. In our view, the language requiring private insurance 
providers to submit copies of their annual audit reports to 
NCUA should be removed to avoid potential consumer confusion 
and misunderstanding with respect to NCUA's jurisdiction, and 
with respect to the private nature of this insurance coverage. 
Also, we believe that the consultation language seeking to 
bring the NCUA into a role that appropriately rests with State 
credit union and insurance regulators should also be removed.
    Thank you for allowing me to testify today and address 
these important regulatory reform issues. We hope to gain your 
support for these recommendations, and I would be pleased to 
assist you further on these in any way I can.
    Thank you.
    Senator Crapo. Thank you, Mrs. Johnson.
    Ms. Williams.

                 STATEMENT OF JULIE L. WILLIAMS

                FIRST SENIOR DEPUTY COMPTROLLER

                       AND CHIEF COUNSEL

           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Ms. Williams. Thank you. Senator Crapo and Members of the 
Committee, the Office of the Comptroller of the Currency 
welcomes the opportunity to contribute to the effort to address 
unnecessary regulatory burden on the banking industry. We very 
much appreciate your commitment and your dedication to this 
issue.
    Unnecessary regulation imposes both direct and indirect 
costs. When unnecessary regulatory burdens drive up the cost of 
doing business for banks, bank customers feel the impact in the 
form of higher prices and in some cases, diminished product 
availability. Unnecessary regulatory burden can also become an 
issue of competitive viability, particularly for our Nation's 
community banks, where bankers face competitors that offer 
comparable products and services but are not subject to 
comparable regulatory requirements.
    This is a challenge that we must confront on several 
levels. First, when regulators adopt regulations, and as we 
review the regulations that we already have on the books, we 
have a responsibility to ensure that regulations are effective 
to protect safety and soundness, foster the integrity of bank 
operations, and safeguard the interests of consumers. But we 
also have a responsibility to regulate efficiently so that we 
do not impose regulatory burdens that are unnecessary to 
achieve those goals.
    Second, there are regulatory burden initiatives that must 
come from Congress in the form of Federal legislation, adding 
provisions to law to provide new flexibilities, modifying 
requirements to be less burdensome, and, in some cases, perhaps 
eliminating certain requirements currently in the law 
altogether.
    Finally, it is important to recognize that many of the 
areas that are often identified as prospects for regulatory 
burden reduction involve requirements put in place by Congress 
for the protection of consumers. Over the years, these 
requirements have accreted, and in the disclosure area, in 
particular, consumers today may receive disclosures that are so 
voluminous and so technical that many simply do not read them--
or when they do--do not understand them.
    As we continue our efforts to address regulatory burdens, 
we are going to run out of discrete fixes to make at some point 
and face some more fundamental questions about basic approaches 
that we pursue. If we are to undertake that task, and do that 
responsibly, we need much better data than we have now on the 
costs resulting from particular regulatory requirements and the 
benefits of those requirements--particularly data relative to 
the benefits of other approaches that could achieve Congress's 
goals with lesser burden. I would urge the Committee to 
consider what information and analysis would be needed as a 
foundation for that type of undertaking.
    Congress took an important step to address the challenge of 
unnecessary regulatory burden in 1996 when it passed the 
Economic Growth and Regulatory Paperwork Reduction Act. As you 
know, that Act requires the regulatory agencies to conduct a 
review of all pertinent regulations every 10 years in order to 
identify outdated and unduly burdensome regulatory 
requirements. That review is now well underway, as you have 
heard from Vice Chairman Reich, under the Vice Chairman's very 
capable and dedicated leadership.
    Ultimately, however, some important forms of regulatory 
relief require changes in Federal law. My written testimony 
describes a number of areas that we urge the Committee to 
consider at this time, and I will highlight just a few.
    As both national and State banks seek to establish branch 
facilities to enhance their service to customers, a change that 
would reduce burden would be to repeal the State opt-in 
requirement that today blocks banks in many States from 
expanding interstate through de novo branching.
    We also urge that directors of national banks that are 
organized as Subchapter S corporations be allowed to satisfy 
their directors' qualifying share requirements under the 
National Bank Act by purchasing subordinated debt instead of 
capital stock.
    Another change that would provide some valuable 
simplification for national banks and for Federal thrifts would 
be a clarification, that for purposes of determining Federal 
court diversity jurisdiction, national banks and Federal 
thrifts are citizens only of the State in which these 
institutions have their main office.
    One last change I would mention here is an amendment to the 
International Banking Act of 1978 which would allow the OCC to 
set the capital equivalency deposit for Federal branches and 
agencies to reflect the risk profile of the branch or agency. 
This would create a framework for capital adequacy standards 
for Federal branches and agencies that more closely resembles 
the risk-based capital framework now applicable to our domestic 
banks.
    On behalf of the OCC, we very much appreciate your efforts 
today, and the Committee's efforts in prior years, to identify 
ways to reduce unnecessary burden on the banking industry while 
preserving safety and soundness and looking out for the 
interests of bank customers. We look forward to working with 
you, Senator Crapo, with other Members of the Committee, and 
with your staffs on these issues, and I would be very happy to 
answer your questions at the appropriate time.
    Senator Crapo. Thank you, Ms. Williams.
    Mr. Bowman.

                  STATEMENT OF JOHN E. BOWMAN

          CHIEF COUNSEL, OFFICE OF THRIFT SUPERVISION

    Mr. Bowman. Good morning, Senator Crapo and Members of the 
Committee. Thank you for the opportunity to testify on the 
regulatory burden relief initiatives of the Office of Thrift 
Supervision.
    It is always important to remove unnecessary regulatory 
obstacles that hinder profitability, innovation, and 
competition in our financial services industry. I particularly 
want to thank you, Senator Crapo, for your leadership in this 
area. We look forward to working with you and your staff on 
legislation to address the issues we discuss today.
    In my written testimony, I discuss a number of proposals 
that we believe would significantly reduce burdens on thrift 
institutions. I ask that the full text of that statement be 
included in the record.
    Senator Crapo. Without objection, and the text of all 
statements today will be in the record.
    Mr. Bowman. Today, I will highlight the two items in 
particular that would provide the most significant relief to 
thrifts. These are the proposed amendments that would treat 
thrifts and banks the same under the Federal securities laws.
    Banks and thrifts may engage in the same type of activities 
covered by the investment adviser and broker/dealer 
requirements of the Federal securities laws, and these 
activities are subject to substantially similar supervision. 
The key point is that banks, but not thrifts, are exempt from 
registration under the Investment Advisers Act of 1940; and 
banks, but not thrifts, enjoy an exemption from broker/dealer 
registration under the 1934 Act for certain activities 
specified under the Gramm-Leach-Bliley Act.
    For purposes of the broker/dealer requirements, until 
recently the SEC has treated thrifts the same as banks. 
however, the Commission has just issued two proposals, one in 
the broker area and the other dealing with the investment 
adviser issue, that fail to extend the same treatment to 
thrifts as banks enjoy in these two areas. Treating thrifts and 
banks the same under the Federal securities laws makes sense 
for a number of reasons.
    Thrifts fill an important niche in the financial services 
arena by focusing their activities primarily on residential, 
community, small business, and consumer lending. The Homeowners 
Loan Act allows thrifts to provide trust and custody services 
on the same basis as national banks, and investment adviser and 
third party brokerage in the same manner as banks. Not only are 
the authorized activities the same, but OTS also examines those 
activities in the same manner as the other banking agencies.
    While the bank and thrift charters are tailored to provide 
powers focused on different business strategies, in areas where 
powers are similar, the rules should be similar. No legitimate 
public policy rationale was served by imposing additional and 
superfluous administrative costs on thrifts to register as an 
investment adviser or as a broker/dealer when banks are exempt 
from similar registration. There should be similar treatment 
for regulated entities in similar circumstances.
    The circumstances here are that, first, thrifts, like 
banks, have a regulator that specifically supervises the types 
of activities covered by the investment adviser and broker/
dealer registration requirements. Second, thrifts, like banks, 
are subject to the same functional regulatory scheme endorsed 
by the Gramm-Leach-Bliley Act. Third, thrifts, like banks, are 
subject to substantially similar customer protections with 
respect to the activities covered by the registration 
requirements, which by the way, are based on the SEC's own 
customer protection rules.
    The only difference is that thrifts, unlike banks, are 
subject to an additional and clearly burdensome administrative 
registration requirement. It is best stated in the SEC's own 
words from the preamble to their May 2001 interim final rule 
extending broker/dealer parity to thrifts: ``Insured savings 
associations are subject to a similar regulatory structure and 
examination standards as banks. Extending the exemption for 
banks to savings associations and savings banks is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.''
    OTS strongly supports legislation similar to that in 
Section 201 of H.R. 1375, the bill passed by the House in March 
of this year, to extend the bank registration exemptions to 
thrifts. Absent this treatment, thrifts are placed at a 
competitive disadvantage that is without merit and imposes 
significant regulatory cost and burdens.
    As recently as the Gramm-Leach-Bliley Act, Congress 
affirmed the principles underlying the bank registration 
exemption. We believe the best way to absolve this matter for 
thrifts with certainty and finality is for Congress to extend, 
by statute, the same exemption to thrifts. OTS is committed to 
reducing burden whenever it has the ability to do so consistent 
with safety and soundness and compliance with the law.
    We look forward to working with the Committee to address 
these and the other regulatory burden reduction items we 
discussed in our written statement. I especially thank you, 
Senator Crapo, and all who have shown leadership in this area.
    I would be happy to answer any of your questions.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Bowman.
    Mr. Allison.

                  STATEMENT OF JOHN S. ALLISON

              COMMISSIONER OF BANKING AND CONSUMER

              FINANCE FOR THE STATE OF MISSISSIPPI

                          ON BEHALF OF

            THE CONFERENCE OF STATE BANK SUPERVISORS

    Mr. Allison. Senator Crapo and Members of the Committee, I 
appreciate this opportunity to appear on behalf of the 
Conference of State bank Supervisors to present the views of 
CSBS on the important issue of regulatory burden as it impacts 
the Nation's banking system.
    As current Chairman of CSBS, I am pleased to represent my 
colleagues in all 50 States and the U.S. territories. As 
supervisor of over 74 percent of the Nation's bank charters, 
State banking regulators have the closest vantage point when it 
comes to supervisory issues as well as issues relating to our 
State and local economies.
    Let me mention that CSBS is very concerned over regulatory 
actions that have resulted in a grave imbalance in the dual 
banking system. As of year end 2003, national banks had 
approximately 56 percent of the total assets in the banking 
system. Already since February, when the Office of the 
Comptroller of the Currency finalized its rule preempting 
national banks and their operating subsidiaries from State 
consumer protection laws, two large State-chartered banks have 
announced plans to convert their charters to national banks. 
With the announced and predicted conversions, the State system 
will have shrunk from 44 percent of the banking system's assets 
to under 33 percent in less than a year. Should many more of 
these banks with interstate operations switch charters, the 
State system as a whole will suffer. We believe that without a 
viable State chartering system there would not be community 
based banks.
    Federal Reserve Chairman Greenspan has referred to the 
American dual banking system and its support of the community 
banks as jewels of our economy. The preservation of a State 
chartering and regulatory system sets the United States' 
financial system apart from every other developed Nation and 
has primarily contributed to our Nation's diverse, resilient, 
and responsive economy.
    Centralization of authority or financial power in one 
agency or in a small group of narrowly regulated institutions 
would threaten the dynamic and responsive nature of our 
financial system. Therefore, the most important contribution 
toward reducing regulatory burden may be empowering the State 
banking system.
    With this in mind, there are several provisions that we 
believe should be considered for any regulatory burden relief 
legislation that would be introduced in the Senate, and I will 
go over just a couple.
    First, coordination of State examination authority. Through 
the CSBS Nationwide State-Federal Cooperative Agreements, State 
banking commissioners are working closely with either the FDIC 
or Federal Reserve and banking commissioners in host States 
where their bank operates branches, to provide quality risk-
focused supervision. To further support these efforts, we 
strongly support including the provisions in the House 
regulatory relief bill that reinforces these principles and 
protocols. While the House language gives primacy of 
supervision, including the ability to charge supervisory fees 
to the chartering State, it requires both home and host State 
bank supervisors to abide by any written cooperative agreement 
relating to coordination and joint participation in exams.
    Second, de novo interstate branching. CSBS supports the 
provision in the House regulatory relief bill allowing de novo 
interstate branching for banks and trust companies. Current 
Federal law takes an inconsistent approach toward how banks may 
branch across State lines. Creative interpretations of this law 
have placed State-chartered institutions at a competitive 
disadvantage to those larger federally chartered institutions 
that can branch without restriction. We encourage you to 
revisit the Riegle-Neal Act to eliminate the disadvantage that 
has been created for State banks because of inconsistent 
application of Federal law.
    Third, flexibility for the Federal Reserve. CSBS encourages 
you to grant the Federal Reserve the ability to permit State 
member banks to engage in expanded activities authorized by 
their chartering State and approved by the FDIC as posing no 
risk to the Deposit Insurance Fund. This amendment would remove 
a provision in the Federal Reserve Act that places unnecessary 
limitations on the powers of a State member bank. State-
chartered, nonmember banks have always been allowed to exercise 
expanded powers within the confines of safety and soundness. It 
is an appropriate regulatory relief effort to eliminate this 
unnecessary distinction 
between State-chartered member banks and State nonmember banks.
    Finally, CSBS would like to see a State banking regulator 
have a vote on the Federal Financial Institution Examination 
Council. I am currently Chairman of the State Liaison 
Committee, which consists of State bank, credit union, and 
savings bank regulators, and as such am able to provide input 
at the FFIEC Council meetings. However, neither I, nor any 
other State regulator, have any final say in Federal policy or 
examination procedures impacting the institutions that we 
charter and supervise.
    Improved coordination and communication between regulators 
clearly benefit bankers and reduce regulatory burdens. In that 
spirit, we suggest that Congress should improve the FFIEC by 
changing the State position from one of observer to that of 
full voting member.
    In conclusion, 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. The 
fact that we have enough financial institutions of enough 
different sizes and specialties to meet the needs of the 
world's most diverse economy and society.
    State bank supervisors appreciate the Committee's interest 
in eliminating barriers in the Federal law to allow more 
innovation from the State charter. We thank you for the 
opportunity to testify on this very important subject, and look 
forward to any questions that the Members might have.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Allison.
    Mr. Little.

                  STATEMENT OF ROGER W. LITTLE

               DEPUTY COMMISSIONER, CREDIT UNIONS

                MICHIGAN OFFICE OF FINANCIAL AND

         INSURANCE SERVICES, ON BEHALF OF THE NATIONAL

         ASSOCIATION OF STATE CREDIT UNION SUPERVISORS

    Mr. Little. Senator Crapo, Members of the Committee, I 
serve the citizens of Michigan as Deputy Commissioner of Credit 
Unions for the Michigan Office of Financial and Insurance 
Services, and I appear today on behalf of the National 
Association of State Credit Union Supervisors.
    NASCUS' priorities for regulatory relief legislation focus 
on reforms that will strengthen the State system of credit 
union supervision, enhance the capabilities of State chartered 
credit unions to meet the financial needs of their members, and 
ensure the State credit union system continues to operate in a 
safe and sound manner. Some of our priorities are contained in 
H.R. 1375, but other NASCUS priorities are beyond the scope of 
that bill.
    NASCUS supports Section 306 in H.R. 1375, revising member 
business lending restrictions in the Federal Credit Union Act 
to lift the restrictions on lending to nonprofit, religious 
organizations by federally insured, State-chartered credit 
unions. This is a win-win situation. Credit unions will be able 
to expand their member business lending offerings to members 
involved with nonprofit, religious organizations, thereby 
benefiting entire communities.
    NASCUS supports Section 312 in H.R. 1375, giving all 
federally insured credit unions the same exemptions as banks 
and thrift institutions from premerger notification 
requirements and fees of the Federal Trade Commission. In fact, 
we believe it should be expanded to all State-chartered credit 
unions.
    NASCUS supports Section 313 in H.R. 1375, providing 
federally insured credit unions and savings institutions parity 
with commercial banks regarding exemption from SEC registration 
requirements provided in the Gramm-Leach-Bliley Act. As 
depository institutions credit unions should be exempted from 
SEC registration requirements for the same reasons articulated 
by prior panel members. We urge that credit unions be accorded 
similar regulatory treatment in this manner.
    NASCUS supports Section 301 in H.R. 1375, that permits non-
federally insured credit unions to join Federal Home Loan 
Banks. Federally insured credit unions now have access to these 
banks, while private-insured credit unions do not.
    Today, there are approximately 375 privately insured credit 
unions. All of these credit unions are regulated and examined 
by State regulatory agencies to ensure they are operating in a 
safe and sound manner, and to assure consumers that their 
deposits are safe. We believe regulatory functions are a 
primary determinant of the safety and soundness of the credit 
union system. For these reasons and others detailed in my 
written testimony, it is clear that these credit unions are 
operated in a safe and sound manner. They should be granted the 
same access to the Federal Home Loan Bank System as federally 
insured credit unions. I also note that this is not a new 
precedent since 86 insurance companies, none of which are 
federally insured, now belong to the Federal Home Loan Bank 
System.
    We also support regulatory relief proposals beyond those in 
H.R. 1375. The first addresses the prompt corrective action 
provisions, also known as PCA, of the Federal Credit Union Act. 
NASCUS strongly urges the Committee to amend the PCA provisions 
in the Act to allow federally insured credit unions to include 
all forms of capital when calculating the required net worth 
ratio. Under the current Federal statute credit union net worth 
is defined as ``and limited to retained earnings.'' This 
exclusive reliance on retained earnings limits credit unions' 
ability to grow, to implement new programs, or to expand 
services to meet the changing needs of their membership. 
Limiting statutory net worth to retained earnings has the 
unintended consequence of punishing credit unions for being 
successful.
    NASCUS also supports Federal legislation that would add a 
risk-based capital component to the current net worth 
requirements for PCA. NASCUS has studied the risk-based capital 
reform proposal outlined in H.R. 3579, and supports a risk-
weighted capital regime for credit unions. We believe that 
supplemental capital authority and a risk-based capital system 
are complementary reforms.
    NASCUS also supports amending the definition of ``net 
worth,'' as discussed by Chairman Johnson, to cure the 
unintended consequences for credit unions of business 
combination accounting rules that the Financial Accounting 
Standards Board intends to apply to business combinations of 
mutual enterprises. The new rules may cause significant 
dilution of net worth in credit union merger transactions if 
the definition of ``net worth'' continues to be solely limited 
to retained earnings.
    As a regulator, it makes no business sense to deny credit 
unions access to capital that would improve their safety and 
soundness. We should take very financially feasible steps to 
strengthen the capital base of the Nation's credit union 
system.
    H.R. 1375 expands business lending authority for Federal 
savings associations. NASCUS urges the Committee to include a 
similar expansion for credit union member business lending 
authority in the Senate bill. Raising the statutory limit for 
credit union business lending from 12.25 percent to 20 percent 
of total assets, as the House bill did for savings 
institutions, would provide equivalent regulatory relief for 
credit unions. This would enable credit unions to better meet 
the needs of their members and participate more fully in 
economic development within their communities.
    Finally, preemptive actions of the Office of the 
Comptroller of the Currency have a potentially significant 
impact on the dual chartering system for commercial banks. We 
are concerned similar actions by the Federal credit union 
regulator may impact the States' chartering system as well, 
particularly in the area of consumer protection. Historically, 
States have established predatory lending and other consumer 
protection statutes that are applicable to both State and 
Federal depository institutions.
    In general, national banks have been subject to such 
statutes to ensure protection of the same level to citizens of 
the State opting to use federally chartered financial 
institutions. There is widespread significant and expert 
opposition to these Federal rules. We hope Congress will 
intervene in this matter.
    This concludes my remarks. NASCUS appreciates the 
opportunity to testify today. We welcome further participation 
and dialogue. We urge this Committee to protect and enhance the 
viability of the dual chartering system for credit unions. I 
will be happy to respond to any questions the Committee may 
have. Thank you.
    Senator Crapo. Thank you very much, Mr. Little, and I want 
to thank the entire panel.
    As I indicated at the beginning, we are in a race today to 
get through the testimony and the material in this hearing. 
Many of you may have noticed that a vote has been called. What 
I want to do is, I am going to be very brief in my questions. I 
am probably going to submit written questions to each member of 
the panel and have a dialogue, after we excuse this panel, with 
you.
    I am just going to ask one question to Mr. Reich, then I am 
going to leave time for Senator Reed and if Senator Carper 
wants to ask some questions. We will then excuse this panel 
before we leave to vote. We will have a break at that time, and 
we will rearrange the tables. It is two votes, although if we 
leave at the end of the first vote, it should not take us too 
long to vote twice and get back. So, just to give you a little 
guideline there as to where we are headed.
    The question I have for you, Mr. Reich, is this. Actually, 
I have a bunch of questions for all of you, and as I indicated, 
I will engage with you with regard to those questions after we 
excuse the panel. I just wanted to note I have read the written 
testimony of each of the witnesses who have been here before us 
today, and I have to say it is outstanding testimony. We asked 
you to come before us with recommendations to deal with the 
issue that we have here before us, and each of you did exactly 
that, specifically, in ways that will give us some very 
significant guidance. In terms of the old question, where is 
the beef ? There is a lot of beef here. There is a lot of 
substance in this testimony.
    As we go through this, Mr. Reich, in your capacity with 
EGRPRA, you indicated in your testimony that one of the things 
you were contemplating was looking at the proposals that have 
been made here today, to wind them into the EGRPRA process. I 
was wondering if you could, within a couple of weeks, review 
the proposals made by each of the regulators and get back to 
the Committee with just an analysis as to how the other 
regulators feel about the various proposals that have been put 
forward by this panel. Would that be something that you could 
achieve in that timeframe?
    Mr. Reich. I will do my best, Mr. Chairman. I would be 
delighted to undertake that, prepare a matrix of all of the 
recommendations which have been made and come back to you 
within the next 2 weeks.
    Senator Crapo. Thank you. I appreciate that very much, and 
that certainly is a chore because there is a tremendous amount 
of substance here to go through, but I believe with your help 
and with the help of people in the private sector as well as 
the other regulators, we should be able to get a pretty 
thorough analysis or the recommendations that have been made by 
the members of the panel today.
    With that, Senator Reed, I will turn the time over to you 
and maybe we will be able to get to the vote.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman.
    Thank you for your excellent testimony. Mr. Kohn, can you 
give us an estimate based on your analysis, about the amount of 
resources are consumed in sweep accounts to avoid the interest 
on checking prohibition? Is that a significant number?
    Mr. Kohn. I cannot give you a number, Senator. But I do 
think it is a significant number. We are really talking about 
two kinds of sweep accounts here. One kind is to avoid the 
nonpayment of interest on reserve requirements, and many banks, 
including small and medium-size banks, as well as large banks, 
have instituted programs to sweep deposits out of reservable 
accounts every night into nonreservable accounts. Although the 
computer programs get cheaper and cheaper to make that happen, 
every time the computer system changes, every time there is a 
bank merger, things have to be done again, and I think that 
there is no benefit to the economy or to society from 
activities that try to get around the reserve requirement tax.
    The other types of sweep programs are to get out of the 
prohibition of interest on demand deposits. Obviously, the two 
work in tandem to a certain extent, and banks do that in two 
ways. One is to sweep money, particularly for large businesses, 
out of the demand deposits into market accounts every night, 
into euro dollar accounts and RP's, and things like that, and 
it serves no purpose whatsoever but to get around this 
prohibition.
    The other thing that banks do is pay implicit interest 
through compensating balance accounts. That is, a business will 
hold demand deposits at a bank. It does not earn explicit 
interest but it gets services in return for that. These can be 
complex kinds of calculations. They have cutoff points. 
Businesses are constrained in how flexible they can be in their 
banking. In terms of using the services, they tend to tie the 
business to the bank to use that particular service. So even 
those sorts of things, although they may not cost something 
explicitly, they do cost something in economic efficiency. They 
make markets less effective and less competitive.
    Senator Reed. This underscores your recommendation to 
repeal the interest on checking prohibitions?
    Mr. Kohn. That is correct.
    Senator Reed. Thank you, Mr. Kohn.
    I know we are getting close, so I will be as brief as 
possible. Let me quickly, Mr. Kohn, you indicate in your 
testimony about industrial loan companies, that you would see 
if they could offer NOW accounts that would give them 
advantage, and very briefly, could you just tick off the one or 
two advantages or whatever?
    Mr. Kohn. Industrial loan companies already have advantages 
relative to other companies that own banks. They are exempt 
from the Bank Holding Company Act, and they were given this 
exemption because they were small specialized kind of 
institutions that have limited powers, and the exemption 
therefore did not have major public policy implications.
    The exemption is important in two aspects. One is they are 
exempt from the consolidated supervision. Other depository 
institutions that are affiliated with nondepository 
institutions are subject to overall supervision and regulation 
of the whole company. The thinking is that you cannot separate 
a depository institution from its affiliates and its parents, 
that the health of the institution rises and falls together, 
and they are exempt from that concsolidated supervision.
    The second thing they are exempt from is the banking and 
commerce separation that Congress has embodied in law. Many of 
the ILC's are owned by commercial firms and do not have to 
adhere to the separation of banking and banking and commerce. 
When this exemption was granted, these were small institutions 
that were very specialized, but they have grown very rapidly, 
and to grant them additional powers would make them even more 
like banks, and make the disconnect between their activities 
and the public policy intent of the Congress to govern the 
relationship of a depository institution and its affiliates 
even more stark. So the Board has strongly opposed this 
expansion of the ILC powers.
    Senator Reed. Thank you.
    Mr. Chairman, if I may just make one more comment.
    Mrs. Johnson, I have read your testimony. Now let me 
emphasize your point about this ambiguity now, whether or not 
these privately insured credit unions may be somehow regulated 
by the NCUA. That ambiguity has to be cured very quickly. In 
Rhode Island, we suffered through a serious crisis when a 
private-insured system failed, and part of it was because of 
the confusion as to who was regulating it, was there any 
Federal backstop, et cetera, and I think your comments are 
right on point in terms of it has to be very clear. It should 
be strictly private. There should not be any illusion even to 
the Federal Government regulator. I just wanted to make that 
point.
    Mrs. Johnson. That is correct. We advocate, as the language 
is currently in the other bill, that the regulation should be 
with the State regulators and insurers.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Crapo. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I know there is a vote on. 
I will be very quick. I have two or three points I want to 
register.
    First of all, Mr. Kohn, am I correct that the potential 
with respect to the ILC's for bridging the divide between 
banking and commerce is very serious and a very severe 
question? Would you agree with that?
    Mr. Kohn. I do, Mr. Sarbanes.
    Senator Sarbanes. And, second, any effort that deals with 
the ILC's that fails to provide holding company supervision in 
the Federal Reserve, I mean, not even getting to the bigger 
question, which I think is a quite important one, but not even 
getting there, I do not quite see how you structure a system 
that does not provide the same kind of holding company 
supervision that exists in other banking activities. Would you 
agree with that as well?
    Mr. Kohn. I agree, Senator Sarbanes. I think consolidated 
supervision is a very important aspect in protecting safety and 
soundness and protecting against systemic risks in the banking 
system.
    Senator Sarbanes. Now, Mrs. Johnson, are you all in touch 
with FASB to see if you can resolve your concerns from their 
proposed rules?
    Mrs. Johnson. We have been working on this. We are hopeful.
    Senator Sarbanes. Most people seem to think that, you know, 
we set up this expert body to establish accounting standards 
and that they should be allowed to do their work. You are not 
asking for legislation, for the Congress to start legislating 
accounting standards, are you? I certainly hope not.
    Mrs. Johnson. No, we are not. We believe that there is 
consequence to the current language being proposed by FASB, and 
we are preparing to adjust to it.
    Senator Sarbanes. Do you see your remedy as being an 
interaction with FASB?
    Mrs. Johnson. No. We have suggested statutory language 
which would clarify the Federal Credit Union Act.
    Senator Sarbanes. Is the Congress to start legislating 
accounting standards in issue after issue that comes along?
    Mrs. Johnson. We believe that this can be resolved with 
FASB's concurrence, Senator.
    Senator Sarbanes. Okay.
    Thank you, Mr. Chairman.
    Senator Crapo. I have been notified that Chairman Shelby 
would like me to ask one question on his behalf before we wrap 
up here. Governor Kohn, you get that question.
    His question is: Are there any safety and soundness 
implications associated with repealing the prohibition on the 
payment of interest on business checking accounts?
    Mr. Kohn. I do not believe so, Mr. Chairman. I think it is 
true that small businesses will now be paid explicit interest 
on their demand deposits. Banks will have at least a small 
initial increase in expense. But I think that banks have proven 
very capable of pricing their deposits, pricing their services 
to make good profits. And I think, if anything, the ability to 
pay interest on business checking accounts will enable banks, 
particularly small banks, to increase their competitive 
presence in the community, as Mr. Reich was talking about, and, 
therefore, enhance their viability over long periods of time.
    Senator Crapo. Thank you. And at the risk of opening this 
up when I do not have time, is there anybody else on the panel 
who disagrees with Mr. Kohn's answer there?
    [No response.]
    Senator Crapo. All right. Thank you very much. We will 
excuse this panel, and we will recess this Committee. The 
recess should probably not last longer than 10 or 15 minutes, 
long enough to go over and vote once, get that vote wrapped up, 
vote again, and get back here.
    So this hearing will be recessed.
    [Recess.]
    The hearing will come to order.
    We appreciate everyone's patience. We hope we will not have 
another interruption before 2 o'clock. We know we will have an 
interruption around 2:00 to 2:15. We will see where we are at 
that point.
    First, before I begin with the third panel, Senator Chuck 
Hagel has asked that his opening statement be introduced into 
the record, and without objection, that will be done.
    Senator Crapo. With that, we will begin our third panel 
which consists of Mr. Mark Macomber, who is President and CEO 
of Litchfield Bancorp, testifying on behalf of America's 
Community Bankers; Mr. Edward J. Pinto, President and CEO of 
Lenders Residential Asset Company, who is testifying on behalf 
of the National Federation of Independent Business; Mr. Dale 
Leighty, who is the Chairman and President of the First 
National Bank of Las Animas, Colorado, testifying on behalf of 
the Independent Community Bankers of America; Mr. Bradley Rock, 
President and CEO of the Bank of Smithtown, testifying on 
behalf of the American Bankers Association; Mr. Eugene Maloney, 
Executive Vice President of Federated Investors, Inc.; Ms. 
Marilyn F. James, CEO of NEPCO Federal Credit Union, testifying 
on behalf of the Credit Union National Association; Ms. Margot 
Saunders, Managing Attorney at the National Consumer Law 
Center, and Mr. Edmund Mierzwinski, Consumer Program Director 
of U.S. PIRG, both Ms. Saunders and Mr. Mierzwinski are 
testifying on behalf of Consumer Federation of America, 
Consumers Union, National Association of Consumer Advocates, 
and National Community Reinvestment Coalition; Mr. William 
Cheney, President and CEO of Xerox Federal Credit Union, 
testifying on behalf of the National Association of Federal 
Credit Unions; and, finally, Mr. William A. Longbrake, Vice 
Chair of Washington Mutual Incorporated, testifying on behalf 
of the Financial Services Roundtable.
    Ladies and gentlemen, we welcome you here. I want to remind 
you of our hope that you will pay attention to the clock and 
not be offended if I remind you to look at it when your time 
has expired, and to try to summarize your testimony in 5 
minutes so we can get engaged in some dialogue and some 
questions.
    With that, we will start out in the order I indicated, the 
first being Mr. Macomber.

                 STATEMENT OF MARK E. MACOMBER

             PRESIDENT AND CEO, LITCHFIELD BANCORP

            ON BEHALF OF AMERICA'S COMMUNITY BANKERS

    Mr. Macomber. Thank you. Chairman Shelby, Senator Sarbanes, 
Senator Crapo, and Members of the Committee, 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.
    Before I begin, I would like to recognize and thank Senator 
Dodd, a Member of this Committee, who so ably represents my 
home State of Connecticut.
    I am here representing America's Community Bankers, ACB. I 
serve on ACB's Board of Directors and Executive Committee and 
am the Chair the Mutual Institutions Committee. I want to thank 
Chairman Shelby and Senator Crapo for their leadership in 
initiating the discussion today of the impact of outdated and 
unnecessary regulations on community banks and the communities 
we serve.
    ACB is pleased to have this opportunity to discuss with the 
Committee our recommendations to reduce the regulatory burden 
and unnecessary costs on community banks. All we ask is that 
community banks 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 9,000. ACB is concerned that community 
banks are significantly hindered in their ability to compete 
because of the cost and burden of unnecessary and outdated 
regulations. In our written statement, ACB has endorsed 31 
amendments to current law that will reduce unnecessary 
regulations on community banks. I would now like to discuss 
five of those recommendations.
    A high priority for ACB is a modest increase in the 
business lending limit for savings associations. In recent 
years, community banks have experienced an increased demand for 
small business loans. To accommodate this demand, ACB wants to 
eliminate the lending limit restriction on small business 
loans. We would increase the aggregate lending limit on other 
commercial loans to 20 percent from 10. Expanded authority 
would enable savings associations to make more loans to small 
and medium-sized businesses. That would enhance their role as 
community-based lenders.
    ACB vigorously believes that savings associations should 
have parity with banks under the Securities Exchange Act and 
the Investment Advisers Act. Statutory parity will ensure that 
savings associations and banks are under the same basic 
regulatory requirements when they are engaged in identical 
trust, brokerage, and other activities. As more savings 
associations engage in trust activities, there is no 
substantive reason to subject them to different requirements. 
They should be subject to the same regulatory conditions as 
banks engaged in the same services.
    ACB strongly supports removing unnecessary restrictions on 
the ability of national and State banks to engage in interstate 
branching. Currently, national and State banks may only engage 
in de novo interstate branching if State law expressly permits. 
ACB recommends eliminating this restriction. The law should 
also clearly provide that State-chartered, Federal Reserve 
member banks may establish de novo interstate branches under 
the same terms and conditions applicable to national banks. ACB 
also recommends that Congress eliminate States' authority to 
prohibit an out-of-State bank or bank holding company from 
acquiring an in-State bank that has not existed for at least 5 
years. These changes will extend the benefits of flexible 
branching authority to banks.
    In the area of compliance reforms, ACB urges amending the 
Community Reinvestment Act to allow community banks with less 
than $1 billion in assets to participate in the CRA's small 
institution examination program. According to a report by the 
Congressional Research Service, a community bank participating 
in the streamlined CRA exam can save 40 percent--40 percent--in 
compliance costs. Expanding the small institution exam program 
will free up capital and other resources for almost 1,700 
community banks across our Nation that are in the $250 million 
to $1 billion asset size range. That would allow them to invest 
even more in 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 obligation. The 
goals of CRA are laudable, and I take them very 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 
recordkeeping or a lengthy examination to tell me if I am doing 
my job.
    Prohibiting banks from paying interest on business checking 
accounts is long outdated, unnecessary, and anticompetitive. 
Restrictions on these accounts make community banks less 
competitive in their ability to serve the financial needs of 
many business customers. Permitting banks and savings 
institutions to pay interest directly on demand accounts would 
be simpler. Institutions would no longer have to spend time and 
resources trying to get around the existing prohibition. This 
would benefit many community depository institutions that 
cannot currently afford to set up complex sweep operations for 
their--mostly small--business customers.
    These five recommendations, along with those discussed in 
our written statement, will make doing business easier and less 
costly, further enabling community banks to help our 
communities prosper and create jobs. On behalf of ACB, I want 
to thank you for your invitation to testify on reducing 
regulatory burden. We look forward to working with you and your 
staff in crafting legislation to accomplish this goal. I will 
be happy to answer any questions you may have.
    Thank you.
    Senator Crapo. Thank you, Mr. Macomber.
    Mr. Pinto.

                  STATEMENT OF EDWARD J. PINTO

             PRESIDENT AND CEO, LENDERS RESIDENTIAL

                ASSET COMPANY, LLC, ON BEHALF OF

        THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS

    Mr. Pinto. Good morning. I am Ed Pinto, President of 
Lenders Residential Asset Company in Bethesda, Maryland. Thank 
you, Chairman Shelby and Ranking Member Sarbanes, for the 
opportunity to testify on behalf of NFIB. I also would like to 
thank Senator Crapo. I just wish my wife could be here to hear 
that I have to finish my remarks in 5 minutes.
    In preparing for this testimony, I was reminded of a story. 
Many years ago, a hallway was being painted in the Pentagon. 
After the fifth passerby could not resist touching the wet 
paint, the captain posted an MP to guard either end of the 
hallway. Years later, a professor of mine was teaching a class 
on management at the Pentagon. He asked each participant in the 
class to go out and find some area of efficiency that they 
could find for improvement. One lieutenant called the professor 
to say he could not find any. The professor asked him, ``What 
is the closest thing to you?'' And he said, ``There is an MP 
standing right next to me.'' He said, ``Well find out what he 
is doing.'' He did and got the response, ``I am guarding the 
hall.'' Then he asked why, and the MP said, ``I am guarding the 
hall to make sure no one touches the wet paint.''
    I ask you, does anyone in Congress remember why the law was 
passed over 70 years ago prohibiting the payment of interest on 
small business accounts. I think not.
    I commend the Committee for conducting this hearing on 
regulatory reform. NFIB is particularly interested in this one 
issue. Eighty-six percent of our members support allowing 
business owners to earn interest on their business checking 
accounts. During this Congress, the House has already passed 
legislation overturning this archaic law, once by a voice vote 
and once by a vote of 418-0.
    S. 1967, introduced by Senator Hagel and Senator Snowe, 
repeals this Depression-era law, but the bill continues to be 
stalled in the Senate for reasons that I frankly do not 
understand. The big banks have consistently opposed repealing 
the ban on interest checking and have proposed compromise 
legislation that would delay the implementation for 3 years or 
more. Their efforts to insulate themselves from free market 
competition have hurt small businesses in this country. These 
businesses are the acknowledged job creation engines for the 
United States. This bill is necessary as consumer legislation, 
and every day it is delayed is an injustice to over 25 million 
taxpayers filing business income tax returns with the IRS. Let 
me repeat that number: 25 million taxpayers have business 
income that they file with the IRS each year. They are located 
in every community in America, every State, large and small. 
And the fact of the matter is that big businesses do not need 
to have this provision repealed. They already have cost-
effective alternatives. Consumers do not need this provision 
because they already have had the right to earn interest on 
their accounts over 20 years ago.
    Earlier today, we heard the regulators say there are no 
safety and soundness issues. The House-passed bill as currently 
written contains a 2-year delay, and it is already a 
compromise. NFIB strongly urges the Committee to resist efforts 
to lengthen the phase-in period and deny this much needed 
legislation to these millions of taxpayers.
    Lenders Residential Asset Company, a company I founded in 
1989, provides consulting services to the financial services 
industry. When the company was started, I can still recall my 
astonishment at being told that a business could not earn 
interest on a checking account. I was further astonished to 
find that my business account not only did not earn interest, 
but I had to pay a plethora of fees. My banker said not to 
worry and introduced me to the spellbinding concept of 
compensating balances. Boy, was I in for an education, and it 
had nothing to do with running my new business. I remember 
thinking that all of this seemed quite foreign and not exactly 
consumer friendly. I had been earning interest for years on my 
personal checking account, which had a much smaller balance. I 
asked my banker, ``Why no interest?'' I was simply told it was 
against the law.
    Later, as my business prospered, my banker suggested I set 
up what she called a ``sweep account,'' which, she told me, did 
not have the benefit of FDIC insurance but did pay interest. 
And so that is what we did. Boy, was it complicated.
    First, we analyzed my account history to determine how much 
to keep in my regular account because I still needed those 
compensating balances. Then we had to project what I would earn 
in interest and compare that to the additional fees earned to 
administer my new account. And then I had to authorize the 
amount to be swept each night. Then I could decide whether I 
would do this automatically or by calling each night. Not being 
a glutton for punishment, I decided to do the automatic.
    As any new business owner will tell you, there are better 
ways to spend your time than calling your banker every day.
    What I did not know was that a sweep account is really 
designed for a larger company, one with an in-house accounting 
firm and financial staff to keep up with the flows and ebbs of 
this money, and also to deal with the over 250 pieces of paper 
that I receive over the year because every day I receive a 
notice as to the movement of the money. I now knew why the fees 
were so high on the sweep account. Don't get me wrong. I am not 
arguing against sweep accounts, but they are a bookkeeping 
hassle.
    While I have continued to work with traditional banking 
institutions, without a sweep account, I might add, it makes 
little sense about why it is continued. Repealing this 
provision will, in fact, give banks the opportunity to market 
these accounts on their merits. I do not recall ever seeing an 
ad extolling the virtues of compensating balances.
    I support giving banks at least the choice to offer 
interest-bearing accounts. I urge the Committee to consider 
this bipartisan effort and resist efforts to lengthen the 
phase-in period. Now is the time to act. Thank you very much.
    Senator Crapo. Thank you very much, Mr. Pinto.
    Mr. Leighty.

                  STATEMENT OF DALE L. LEIGHTY

             CHAIRMAN AND PRESIDENT, FIRST NATIONAL

          BANK OF LAS ANIMAS (COLORADO), ON BEHALF OF

            INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Leighty. Thank you, Senator Crapo and Members of the 
Committee. My name is Dale Leighty. I am Chairman of the 
Independent Community Bankers of America and President of the 
First National Bank of Las Animas, Colorado, a $140 million 
bank in southeastern Colorado. I would like to thank you for 
examining the important issue of regulatory relief. This is one 
of ICBA's top priorities, and I am pleased today to testify on 
behalf of the 5,000 member community banks of our national 
association and 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 Camden Fine recently 
stated, ``Regulations are like snowflakes. Each one by itself 
may not be much but when you add them 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 on behalf of 
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 cost 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 that there is only so much 
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 regulatory 
relief.
    The litany of burdensome regulations is long: Truth in 
Savings, Truth in Lending, RESPA, Fair Lending, HMDA, Currency 
Transaction Reports, Suspicious Activity Reports, Call Reports, 
Regulation O 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 daily.
    CRA is a clear example of regulatory overkill. It deserves 
a 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 would prefer that it be raised to $2 billion, 
we applaud the regulators' proposal to increase the limit to 
$500 million in assets and eliminate the separate holding 
company qualification.
    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 difference between community banks 
and larger, more complex institutions. Less burdensome rules 
and/or appropriate exemptions for community banks are the 
hallmark of the 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 appendices with detailed discussion of the 
regulatory burden of selected regulations. The ICBA strongly 
supports the current regulatory and legislative efforts to 
reduce this burden. We look forward to working with you toward 
enactment of statutory and regulatory changes to help 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, and I will be happy to answer your questions.
    Senator Crapo. Thank you very much, Mr. Leighty.
    Mr. Rock.

                  STATEMENT OF BRADLEY E. ROCK

              PRESIDENT AND CEO, BANK OF SMITHTOWN

         ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

    Mr. Rock. Thank you, Mr. Chairman and Members of the 
Committee. My name is Brad Rock. I am Chairman, President, and 
CEO of Bank of Smithtown, a 95-year-old, $630 million community 
bank located on Long Island in Smithtown, New York. I am glad 
to present the views of the ABA. Reducing bank regulatory 
burden is an important issue for all businesses. This morning, 
I would like to make three key points.
    First, bank 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 the front-
line tellers to the CEO. Based on research in the 1990's, the 
total cost of compliance today for banks is between $26 and $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 to $78 billion. The impact on our economy would be huge.
    Second, regulatory burden is significant for banks of all 
sizes, but pound for pound, small banks carry the heaviest 
regulatory load. Community banks are in great danger of being 
regulated right out of business. Eight thousand 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. They provide the 
banking services to people in small towns across America, yet 
these same community banks do not have the manpower to run the 
bank and to read, understand, and implement the thousands of 
pages of new and revised regulations they receive each year.
    A few weeks ago, a fellow community banker 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 
that summarizes the requirements embodied in thousands of pages 
of regulations. The 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.
    Many of these regulatory efforts provide little or no 
meaningful benefit to bank consumers. 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 that they are 
required to sign. In fact, the only people who read those 
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 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.
    Senator Crapo. Thank you very much, Mr. Rock.
    Mr. Maloney.

                 STATEMENT OF EUGENE F. MALONEY

      EXECUTIVE VICE PRESIDENT, FEDERATED INVESTORS, INC.

    Mr. Maloney. Senator Crapo, Senator Santorum, my name is 
Eugene Maloney. I am Executive Vice President and Counsel to 
Federated Investors. Federated is a Pittsburgh-based financial 
services holding company. Our shares are listed on the New York 
Stock Exchange. Through a family of mutual funds used by or on 
behalf of financial intermediaries and other institutional 
investors, we manage approximately $200 billion. For the past 
16 years, I have been a member of the faculty of Boston 
University Law School, where I teach a course in the master's 
program on the securities activities of banks. Our mutual funds 
are used by over 1,000 community banks either within their own 
portfolios or on behalf of their fiduciary customers.
    In connection with the proposed removal of Regulation Q, 
thereby permitting banks and thrifts to pay interest on 
business checking, my firm's position is that we are strongly 
in favor of any rule, regulation, or legislation which results 
in our community bank friends becoming more competitive, more 
profitable, or being able to operate their businesses more 
efficiently. We are concerned that the current initiative to 
repeal Regulation Q will result in the exact opposite. This 
conclusion is based on my personal experience with the 
introduction of ceilingless deposit accounts in 1982 and the 
impact they had on our client base. Friends of long standing 
lost their jobs, their pensions, and their self-esteem because 
of the failure by governmental officials and Members of 
Congress to fully think through the economic impact of 
ceilingless deposit accounts to our banking system and its 
profitability. This failure cost every man, woman, and child in 
the United States $1,500.
    In researching the history of ceilingless deposit accounts 
which were to be ``competitive with and equivalent to money 
market mutual funds,'' we found some fascinating information. 
At the meeting chaired by the Secretary of the Treasury to 
consider the features of the new account, the members were 
advised that if they set the minimum account size below $5,000, 
massive internal disinter-
mediation would occur and it would result in pure cost to the 
banks. The account size was set at $2,500. We have been to the 
National Archives, Senator, and declassified the minutes of 
subsequent meetings. They make for astonishing reading. The 
members were fully briefed on the excesses committed by banks 
and thrifts and elected to do nothing to stop them. In my 
prepared remarks, which I have filed with the Committee, I 
brought some of my favorite ads with me.
    One from First Bank in Atlanta, is particularly provocative 
and illustrates my point: ``18.65 percent.'' This is an 
interview with the chief executive officer. How can you offer 
18.65 percent when money market funds are paying 9 percent? 
``We are offering the 18.65 percent to attract new money from 
money market fund customers and to indicate our own commitment 
to offer customers the best possible product.''
    In this ad and other ads of similar content, there is only 
one piece of information that tells the story: the term 
``insured.'' ``Insured.'' No one else in their right mind would 
ever sell a product for $8 that they are paying $21 to 
manufacture, but that is exactly what happened.
    The legislative record to date indicates that only slight 
attention has been given to the cost to banks of paying 
interest on business checking accounts or the impact on bank 
earnings. We commissioned Treasury Strategies of Chicago, 
Illinois, to, in fact, look at the economic impact that it will 
have on banks, particularly community banks. I have not 
personally found any official of a community bank that is in 
favor of this initiative. These are some of the findings of 
Treasury Strategies.
    One, small businesses will have to grow their deposits by 
80 percent or raise service charges by 34 percent. Mid-sized 
company impact: Grow deposits by 35 percent or raise service 
charges by 16 percent.
    The reason I am here today, Senator, is to make a fact-
based attempt to prevent history from repeating itself.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Maloney.
    Ms. James.

                 STATEMENT OF MARILYN F. JAMES

                CEO, NEPCO FEDERAL CREDIT UNION

       ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION

    Ms. James. Thank you. Senator Crapo and Members of the 
Committee, on behalf of the Credit Union National Association, 
I greatly appreciate this opportunity to express the 
Association's views on legislation to help alleviate the 
regulatory burden under which all financial institutions 
operate today.
    I am Marilyn James, President and CEO of NEPCO Federal 
Credit Union in Pueblo, Colorado. We are a $22 million 
institution. According to the U.S. Treasury, credit unions are 
clearly distinguishable from other depository institutions in 
their structure and operational characteristics. And despite 
their relative small size and restricted fields of membership, 
federally insured credit unions operate under bank statutes and 
rules virtually identical to those applicable to banks and 
thrifts. However, Federal credit unions have more limited 
powers than national banks and Federal savings associations.
    My written statement catalogues and describes the 137 laws 
and regulations that apply to credit unions, including many 
unique 
restrictions that are far more stringent and limiting than laws 
applicable to other depository institutions. Given the limited 
time available today, I will devote the rest of my statement to 
describing a few exceptionally important issues to credit 
unions.
    As part of our mission, credit unions are devoted to 
providing affordable services to all of our members, including 
those of modest means. One provision pending in both the House 
and the Senate would better enable us to meet that goal. I am 
referring to legislation to permit credit unions to provide 
check-cashing and remittance services to those eligible for 
membership.
    Many of the individuals who could benefit from this change 
live from paycheck to paycheck and do not have established 
accounts. We have had members join one day, deposit the 
necessary share balance, and come in the very next day and 
withdraw because they need the money. It is hard to believe, 
but sometimes a $5 withdrawal means the difference between 
eating or not.
    Accomplishing our mission can also be greatly enhanced by 
revisiting two major components of the 1998-passed Credit Union 
Membership Access Act. With 6 years of experience, we have 
learned that what was thought to be good policy at the time has 
actually created new problems that need to be resolved to 
assure that credit unions can continue to meet their mission.
    The first of these issues is the current cap on member 
business lending. There was no safety and soundness reason to 
impose these limits as the historical record is clear that such 
loans are not only safer than those in the banking industry but 
also safer than some other types of credit union loans. In 
fact, public policy argues strongly in favor of eliminating or 
increasing the limits from the current 12.25 percent to the 20 
percent suggested in the House-introduced CURIA bill.
    Small business is the backbone of our economy and 
responsible for the vast majority of new jobs in America. Yet, 
a February SBA study reveals that small businesses are having 
greater difficulty in getting loans in areas where bank 
consolidation has taken hold. CUMAA severely restricts small 
business access to credit and impedes economic growth in 
America.
    Although few credit unions are currently bumping up against 
the cap, in a few years that might not be the case. Then take 
my small credit union. Investing in the expertise needed to 
involve yourself in business lending is a very costly 
proposition. With a 12.25 percent cap, we could not make up the 
costs needed to run such a program. If the cap were increased 
to 20 percent, we could seriously consider entering this line 
of lending.
    Another critical issue needing correction pertains to the 
prompt corrective action regulations governing credit unions. 
Credit unions have higher statutory requirements than banks, 
but credit unions' cooperative structure creates a systemic 
incentive against excessive risk-taking, so they may actually 
require less capital to meet potential losses than do other 
depository institutions. And because of their conservative 
management style, credit unions generally seek to always be 
classified ``well'' capitalized as opposed to just 
``adequately'' capitalized. To do that, they must maintain a 
significant cushion above the 7-percent level. PCA requirements 
incent credit unions to operate at overcapitalized levels.
    CUNA believes that the best way to reform PCA would be to 
transform the system into one that is much more explicitly 
based on risk measurement. It would place much greater emphasis 
on ensuring that there is adequate net worth in relation to the 
risk a particular credit union undertakes. Reforming PCA along 
the lines of a risk-based approach would preserve and 
strengthen the National Credit Union Share Insurance Fund. It 
would more closely tie a credit union's net worth requirements 
to exposure to risk.
    Just briefly, we would like to say that we agree with 
NCUA's position on FASB's proposed merger rule. We think it is 
important that it come to your attention.
    In summary, Mr. Chairman, we strongly urge the Committee to 
act on this very important issue this year. Credit unions would 
benefit greatly from reducing unnecessary and costly regulatory 
burdens, and so would American consumers benefit from the 
savings that credit unions would pass on to their 85 million 
credit union members.
    Thank you very much.
    Senator Crapo. Thank you very much, Ms. James.
    Ms. Saunders.

                  STATEMENT OF MARGOT SAUNDERS

        MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER

                          ON BEHALF OF

        CONSUMER FEDERATION OF AMERICA, CONSUMERS UNION,

          NATIONAL ASSOCIATION OF CONSUMER ADVOCATES,

         AND NATIONAL COMMUNITY REINVESTMENT COALITION

    Ms. Saunders. Thank you, Senator Crapo. Mr. Chairman, 
Senator Sarbanes, and Members of the Committee, as our written 
testimony indicates, Mr. Mierzwinski and I have filed joint 
testimony in an attempt to represent all consumers regarding 
the huge number of proposals that are pending before you today. 
We want you to be sure to understand that if we have not 
specifically identified a proposal and said that we do not like 
it, it does not mean that we do like it. We just did not catch 
it.
    [Laughter.]
    Senator Crapo. Understood. You are allowed to supplement 
your testimony, too.
    Ms. Saunders. I appreciate that, Senator.
    Today, I will deal briefly with a number of proposals that 
we have concerns with and then also address some proposals that 
we are hoping you will adopt.
    First, I would like to address Senator Lincoln's support 
for Senate bill 904, which would override the Arkansas 
Constitution and override the express sentiments and votes of 
the Arkansas voters. The people of Arkansas have determined 
that there should be a usury limit, and they have passed one in 
their State Constitution. There have been numerous attempts to 
amend the Constitution, and on numerous occasions, the voters 
of Arkansas have resisted those changes.
    I have been in touch with a variety of consumer 
representatives, including the unions in Arkansas, and have 
asked the question whether or not there is any perceived or 
actual lack of available credit in Arkansas. And I have been 
assured by Legal Services, by representatives of State offices, 
and by the unions, that there are no complaints from consumers 
that there is a lack of available credit. In fact, I am told 
that recent decreases in interest rates have led to an 
increased availability of financing, making more consumers able 
to afford credit than has been the case in previous years.
    It is necessary for this Congress to understand that if 
Senate bill 904 passes, Arkansas would change from being in the 
forefront of consumer protection, because that is what Arkanas 
voters have mandated, to be in the absolute last place. Senate 
bill 904 would cut off all usury ceilings the State has 
altogether, and unlike every other State in the Union, the 
voters or the legislature would not be able to impose any 
protections for consumers on interest rate limits.
    Second, I want to address the pending proposals to allow 
virtually unlimited diversity jurisdiction in the Federal 
courts for both national banks and Federal thrifts. This is a 
very bad idea. It would make the Federal courts essentially 
collection mills for the banks and the thrifts. It would also 
establish a legal procedural morass which would prevent 
consumers from defending against foreclosures in a variety of 
situations. While I do not have time in this verbal testimony 
today to explain the details of why this would be the case, but 
I am happy to answer any questions. My written remarks do 
provide these details.
    The concept of diversity jurisdiction is based on the idea 
that people who are out of State may not get a fair hearing in 
the State courts. Yet, in fact, we are talking about creating a 
legal fiction where national banks or thrifts would have very 
active presences in the States, yet would be called ``out of 
State'' simply for the purpose of creating diversity 
jurisdiction in the Federal courts.
    In my one and a half minutes left, I want to support a 
number of actions that you should consider which would actually 
protect consumers. The EGRPRA process has been mentioned 
several times. There is nothing in the law that tells the 
regulators that they should solely look at how to change 
regulations to benefit the industry. I have looked at it 
numerous times, yet to our great disappointment, the numerous 
papers that have come out of the agencies in the pursuit of the 
EGRPRA process have indicated that the agencies have yet to 
notice that, their job is not only to look after industry, but 
it is also to look after consumers. We ask you to tell the 
agencies that they should be cautious in their recommendations 
for change and, in fact, should include recommendations for 
change which would further protect consumers.
    We also ask you to consider prohibiting the FDIC from 
allowing banks to rent their charters for payday loans. The 
FDIC is the only one of the Federal regulatory agencies that 
permits its regulated State banks to engage in payday lending. 
This is in derogation of State law. There have been a number of 
attempts by States to stop payday lending in the States. And it 
is only because the FDIC permits its State-chartered banks to 
rent the charters and avoid State usury limits that this is 
permitted to go on.
    Finally, I urge you to address a very mundane but very 
important change in the law. The Truth in Lending Act is the 
single most important consumer protection act that we have on 
the books, and it has a jurisdictional limit for nonreal 
estate, secured loans of $25,000. That means if you purchase a 
car with a loan of more than $25,000, you have no Federal law 
that covers your loan. That needs to be updated. The equivalent 
number from 1968, when TILA was passed, to 2004 would go from 
$25,000 to $132,000. We ask you to consider at least some 
update.
    Thank you. I am happy to answer any questions.
    Senator Crapo. Thank you very much, Ms. Saunders.
    Next is Mr. Mierzwinski.

                STATEMENT OF EDMUND MIERZWINSKI

              CONSUMER PROGRAM DIRECTOR, U.S. PIRG

                          ON BEHALF OF

        CONSUMER FEDERATION OF AMERICA, CONSUMERS UNION,

          NATIONAL ASSOCIATION OF CONSUMER ADVOCATES,

         AND NATIONAL COMMUNITY REINVESTMENT COALITION

    Mr. Mierzwinski. Thank you, Senator Crapo, Senator 
Sarbanes. I am Ed Mierzwinski of the U.S. Public Interest 
Research Group. I would like to highlight a couple more of the 
significant parts of our joint testimony.
    First of all, the consumer groups and community groups 
strongly support the Federal Reserve's position that expansion 
of the authority of industrial loan companies to branch into 
other States de novo or to expand their checking account 
allowances under the law is a very bad idea, and we support the 
Fed in its proposal that you not take the industrial loan 
companies, which were intended to be small, limited-purpose 
institutions, and allow them to become full-blown banks with a 
full-blown banking system that is just like a bank except that 
the system does not have the same prudential regulatory 
structure above it that the bank holding companies have that 
the Federal Reserve regulates most other parts of the banking 
system. We think it would be extremely dangerous. We understand 
that the House passed an amendment that might prevent Wal-Mart 
from being part of this, but it does not prevent Wall Street 
nor does it prevent General Motors nor many other car companies 
nor other large companies from acquiring or expanding their 
industrial loan operations without the consolidated 
supervision, without the consolidated capital, without the 
extremely significant regulatory oversight that the Federal 
Reserve Board has that neither the FDIC nor the Utah Department 
of Banking or other State Departments of Banking have in order 
to examine or to oversee these institutions. So we support the 
Fed in its position against the expansion of industrial bank 
authority.
    Second, the consumer groups feel very strongly that S. 884, 
Senator Landrieu's proposal to preempt stronger State laws 
regulating predatory rent-to-own stores, should not be 
considered by this Committee, particularly as any kind of a 
reduced regulatory burden. This is an industry that has enacted 
safe harbor legislation in about 45 States that is virtually 
identical to the proposal before the Committee. The other 5 
States choose to protect their consumers from unfair, 
overpriced, rent-to-own stores. Those States should not be 
preempted. The notion that this bill provides consumer 
protections is belied by the fact that there are virtually no 
protections in those States, nor in this bill, that are 
provided at any level comparable to those in the States that 
treat rent-to-own as a type of credit sale. We strongly urge 
you to oppose preempting New Jersey, preempting Wisconsin, 
preempting Minnesota, Vermont, and parts of some other State 
laws that treat rent-to-own as a credit sale provide their 
consumers with stronger protection. It is not just a Federalist 
position. It is a consumer protection position. I do not think 
that the Congress should be taking stronger State laws and 
throwing them out at the behest of an industry that is asking 
consumers to pay $10 a week for the privilege of buying a $200 
television over a 78-week period and the industry does not even 
want to tell them the interest rate, which, by the way, is 
between 100 and 300 percent.
    Our organizations also strongly oppose weakening the 
Community Reinvestment Act. The Community Reinvestment Act is 
an extremely important tool for stimulating bank lending and 
improving access to banking services for the Nation's 
underserved rural and urban communities. There are proposals 
before the regulators and before the Congress that would treat 
many mid-sized banks, in one case banks as large as $1 billion, 
under the streamlined small-bank exceptions that currently 
exist to the Community Reinvestment Act. If this were done, 
virtually thousands of banks would be exempt from the full 
coverage of the CRA. They would no longer have incentives to 
offer deposit services, lifeline banking, and branching into 
low-income and underserved communities. We strongly believe 
that this expansion of the small-bank exception to the CRA not 
be done by the Congress.
    And, finally, I just want to add my concurrence with the 
credit union regulators and the credit union witnesses that the 
consumer groups strongly support Section 307 of the House bill, 
which would allow credit unions to offer check-cashing and 
remittance services to anyone in their field of membership, not 
only to their members. Many consumers, particularly the 
unbanked and underbanked, pay too much for remittance services. 
Billions of dollars is being transferred to large companies 
instead of back home. We think the credit unions could provide 
some needed competition. However, our testimony also points out 
that remittance services, no matter who is providing them, need 
greater regulation.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Mierzwinski.
    Mr. Cheney and Mr. Longbrake, I do not know if you heard 
the bell a minute ago, but we are running up at the end of 
another vote, and so we are going to have to take a recess 
right here, run over and vote, and come back. So you two will 
have to stress a little bit longer over your testimony.
    We will try to make that as quickly as we can, but I am 
guessing it takes about 10 minutes to get over and 10 minutes 
to get back. So we have at least a 20-minute break here, and we 
will be back as quickly as we can.
    Thank you.
    [Recess.]
    Senator Crapo. Okay. We will resume the hearing now, and, 
Mr. Cheney, you are next up. Please proceed.

                    STATEMENT OF BILL CHENEY

         PRESIDENT AND CEO, XEROX FEDERAL CREDIT UNION

                          ON BEHALF OF

       THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

    Mr. Cheney. Thank you. Good afternoon, Senator Crapo and 
Members of the Committee. My name is Bill Cheney. I am the 
President and CEO of Xerox Federal Credit Union, located in El 
Segundo, California. I am here today on behalf of the National 
Association of Federal Credit Unions to express our views on 
the need for regulatory relief and reform for credit unions. 
First, I want to thank you, Senator Crapo, for your leadership 
and for meeting with our staff on these issues.
    As with all credit unions, Xerox Federal Credit Union is a 
not-for-profit financial cooperative governed by a volunteer 
board of directors who are elected by our member owners. 
America's credit unions have always remained true to their 
original mission of promoting thrift and providing a source of 
credit for provident or productive purposes. A 2004 Filene 
Research Institute study entitled ``Who Uses Credit Unions?'' 
found that the average household income of those who hold 
accounts solely at credit unions was $42,664, while the average 
household income for those who only hold accounts at a bank was 
$76,923.
    NAFCU is pleased to report to the Committee that America's 
credit unions today are vibrant and healthy and that membership 
in credit unions continues to grow, with credit unions serving 
over 85 million Americans, more than at any time in history. At 
the same time, it is important to note that while credit union 
membership is growing, over the past 23 years credit unions 
have increased their market share only minimally and, as a 
consequence, provide little competitive threat to other 
financial institutions. In fact, according to data obtained 
from the Federal Reserve Board, during the 23-year period from 
1980 to 2003, the percentage of total household financial 
assets held by credit unions increased from 1.4 percent to only 
1.6 percent.
    Mr. Chairman, as your Committee considers regulatory relief 
issues for credit unions, we hope that you will look at the 
provisions that have been under consideration in the House of 
Representatives. NAFCU believes that the credit union 
provisions in the House-passed Financial Services Regulatory 
Relief Act of 2004 are a positive step in addressing many of 
the regulatory burdens and restrictions on Federal credit 
unions.
    NAFCU is pleased to see the growing support in the House 
for the Credit Union Regulatory Improvements Act, or CURIA. 
This legislation addresses additional key issues for credit 
unions. We hope that the Senate Banking Committee will consider 
provisions from both of these bills as it crafts its own 
regulatory relief bill.
    As outlined in my written testimony, NAFCU supports the 12 
credit union regulatory relief provisions that have been 
included in both bills, and we would urge that they be included 
in any regulatory relief bill that comes out of the Committee.
    There are also additional provisions included in CURIA that 
are not included in the regulatory relief bill as it has passed 
the House that are needed by the credit union community. NAFCU 
urges the Committee to modernize credit union capital 
requirements by redefining the net worth ratio to include risk 
assets. This would result in a new, more appropriate 
measurement to determine the relative risk of a credit union's 
balance sheet and improve the safety and soundness of credit 
unions and our Share Insurance Fund.
    NAFCU also asks the Committee to refine the member business 
loan cap established as part of the Credit Union Membership 
Access Act in 1998, replacing the current formula with a flat 
rate of 20 percent of the total assets of a credit union. We 
support revising the definition of a member business loan by 
giving NCUA authority to exclude loans of $100,000 or less from 
counting against the cap. These provisions would facilitate 
member business lending without jeopardizing the safety and 
soundness of credit unions.
    There is a lot of rhetoric out there on this issue, but I 
must note that a 2001 Treasury Department study entitled 
``Credit Union Member Business Lending'' concluded that, 
``Credit unions' business lending currently has no effect on 
the viability and profitability of other insured depository 
institutions.''
    And finally, we urge the Committee to include language that 
would address the strain that could be placed on merging credit 
unions when the Financial Accounting Standards Board changes 
merger accounting rules from the pooling method of accounting 
for mergers to the purchase method. This can be done through a 
simple modification of the statutory definition of net worth in 
the Federal Credit Union Act to mean equity rather than the 
retained earnings balance of the credit union as determined 
under GAAP. FASB has reviewed this proposed change and stated 
in an April 27, 2004, letter to NAFCU that, ``While our primary 
concerns are not regulatory issues, we do have an interest in 
supporting an expedited resolution of this matter. The attached 
proposed amendment proposes a way to resolve this matter.''
    I have a copy of this letter from FASB with me and would 
ask that a copy of this letter be included in the record with 
my testimony at this time.
    Senator Crapo. Without objection.
    Mr. Cheney. Thank you.
    In conclusion, the state of the credit union community is 
strong and the safety and soundness of credit unions is 
unquestionable. Nevertheless, there is a clear need to ease the 
regulatory burden on credit unions as we move forward in the 
21st century financial services marketplace. NAFCU urges the 
Committee to consider the important credit union provisions we 
have outlined in this testimony for inclusion in any Senate 
regulatory relief bill. We look forward to working with you and 
your staff on this important matter and would welcome your 
comments or questions.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Cheney.
    And finally, Mr. Longbrake.

               STATEMENT OF WILLIAM A. LONGBRAKE

           VICE CHAIR, WASHINGTON MUTUAL INCORPORATED

         ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Longbrake. Thank you very much, Chairman Crapo. My name 
is Bill Longbrake. I am Vice Chair of Washington Mutual, and 
today I am appearing on behalf of the Financial Services 
Roundtable. My career began as a regulator, serving in various 
capacities for the Comptroller of the Currency and the FDIC, 
thus giving me a perspective from both the regulator's 
viewpoint as well as from the banker's viewpoint.
    The Roundtable strongly supports efforts to reduce the 
regulatory burden on financial services firms. The outdated 
laws and regulations increase the cost of financial products 
and services to consumers. It is important for Congress to 
periodically review the laws applicable to the financial 
services industry, and we applaud your efforts in doing so.
    I would like to highlight for the Committee six provisions 
from the House-passed regulatory relief bill that we recommend 
be included in the bill you are drafting. I also urge you to 
use this opportunity to simplify the privacy notice required by 
the Gramm-Leach-Bliley Act.
    It was exactly 10 years ago that Congress enacted the 
landmark Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994. Since then, the public benefits 
anticipated by that Act have been realized. The creation of new 
bank branches has helped to maintain the competitiveness of our 
financial services industry and has improved access to 
financial products in otherwise underserved markets. There is 
one remaining legal barrier to interstate branching which 
should be eliminated. Under the Riegle-Neal Act, a bank cannot 
establish a new so-called de novo interstate branch without the 
affirmative approval of a host State. The Roundtable urges the 
Committee to remove this barrier by incorporating Section 104 
of H.R. 1375 in its version of the regulatory relief bill.
    Another provision related to interstate banking that we 
would recommend to the Committee is Section 616 of H.R. 1375. 
This section clarifies the authority of State banking 
supervisors over interstate branches of State-chartered banks. 
This provision will also help to avoid needless confusion over 
the examination and supervision of interstate branches of State 
banks.
    While the Roundtable supports all the thrift provisions of 
the House bill, I would highlight four of these provisions 
which are particularly important to our members.
    First, Section 202 of H.R. 1375 would establish regulatory 
parity between the securities activities of banks and thrifts. 
Thrift institutions do not enjoy the same regulatory treatment 
as banks under the Exchange Act or the Investment Advisers Act, 
even though Congress has permitted thrifts to engage in the 
same brokerage and investment activities as commercial banks. 
The SEC has attempted to address this issue of regulatory 
disparity, but has not fully resolved the problem. Therefore, 
we urge the Committee to include Section 202 in its version of 
the regulatory relief bill and establish explicit exemptions 
for thrifts in the Exchange Act and the Investment Advisers Act 
that are comparable to the exemptions for commercial banks.
    Second, we recommend including Section 213 of the House 
bill. This section would provide that a Federal savings 
association is a citizen of the State in which it has its home 
office. This change is needed to clarify when an interstate 
thrift can remove a case to Federal court based on diversity 
jurisdiction.
    Third, the Roundtable supports Section 208 of the House 
bill. Current law limits the amount of automobile loans a 
thrift can make to no more than 35 percent of the institution's 
assets. Section 208 would remove this ceiling. This will allow 
thrifts to diversify their portfolios and will increase 
competition in the auto loan business.
    Fourth, the Roundtable supports Section 204 of the House 
bill. This section would replace a mandatory dividend notice 
requirement for thrifts owned by savings and loan holding 
companies. The existing mandatory requirement is no longer 
necessary.
    Finally, the Roundtable member companies have found that 
the privacy notice required by the Gramm-Leach-Bliley Act is 
overly confusing and largely ignored by many consumers. We 
recommend that the Committee use this opportunity to simplify 
the form of the notice required by the Gramm-Leach-Bliley Act. 
There is extensive research in support of simple notices. 
Consumer surveys indicate that approximately 58 percent of 
consumers would prefer a shorter notice than the lengthy 
privacy policy mandated by the Act.
    The Federal banking agencies recently requested comment on 
alternative notices that would be more readable and useful to 
consumers. However, these Federal agencies lack the authority 
to make a simplified notice uniform in every State. We strongly 
recommend that the Committee direct the relevant Federal 
agencies to finalize a simplified Gramm-Leach-Bliley Act 
privacy notice that supercedes State privacy notices. Consumers 
will be better served if they are given a simple, uniform 
explanation of an institution's privacy policy and their 
privacy rights.
    In conclusion, the Roundtable appreciates the efforts of 
the Committee to eliminate laws and regulations that impose 
significant and unnecessary burdens on financial services firms 
or impose unnecessary barriers in serving the marketplace. The 
cost savings that will result from this legislation will 
benefit the consumers of financial products and services.
    We look forward to working with the Committee on this very 
important legislation. Thank you.
    Senator Crapo. Thank you very much, Mr. Longbrake. Before 
we proceed with questions, Senator Santorum was here and had to 
leave and asked that his statement be made a part of the 
record, which it will be, without objection.
    Senator Crapo. I would like to, first of all, thank all the 
witnesses, not only for your patience in a long hearing, but 
also for the very helpful materials that you have provided. I 
do not know if you can see the stacks of materials here, but 
they are about that thick, of written material that have been 
provided by the various witnesses and their groups today. I 
have read much of it. I will finish reading all of it soon, I 
promise.
    As I have gone through this testimony it has become very 
evident to me that a tremendous amount of very thoughtful 
effort has gone into the testimony that was prepared today, 
because of the importance of this issue. I believe that in 
context or another, there are very few Americans who are not 
touched in many different ways by the issues that will be 
before the Committee as we craft this legislation. Your help in 
identifying areas where we can improve the safety and 
soundness, and improve the consumer protection, and reduce the 
regulatory burden, thereby improving the services that are 
provided to the people of this Nation through our financial 
systems, is going to be very helpful.
    One question that I wish I had had more time with the first 
panel to go into a little bit, but one question I want to start 
out with you on, and Mr. Leighty, it is probably one that you 
should jump in on first because you mentioned it in your 
testimony, is the question of the difference between large and 
small banks in the United States. After reviewing the 
testimony, and particularly the charts that have been shown by 
Mr. Reich earlier in his testimony and some of the information 
that you and others have provided, it is very clear that the 
number of community banks is dramatically dropping off and that 
their percentage of the market is dramatically dropping off.
    The question that comes up is, should we consider the 
explicit creation of a two-tiered regulatory system for smaller 
institutions which are particularly vulnerable to the heavy 
regulation which we impose on larger institutions? And if so, 
what proposals would you suggest that we utilize in such a two-
tiered approach? Do you want to start out, Mr. Leighty?
    Mr. Leighty. Sure. I think that the answer would be yes, 
and certainly there are some consumer protection laws that 
apply, whether it is a large institution or a small, so we 
would not advocate that there would be different consumer 
protection for a large versus a small institution.
    However, there are some of the burdens that are harder on 
the smaller institutions relative to their resources. An 
example would be, I think something maybe as benign as call 
reports. The volumes of information that is required to be 
prepared quarterly for a small simple balance sheet 
institution, perhaps that could be something that could be 
streamlined for the smaller institutions at a threshold of size 
to be determined. Maybe all of the schedules that are be 
required to be sent in quarterly just do not make sense for a 
noncomplex institution.
    Another which was mentioned earlier would clearly be the 
streamlined CRA examinations. I think it is important to point 
out that the streamlined CRA examination does not take away the 
requirements of CRA. It simply shifts the burden to the 
regulatory agencies when they are in examining the banks to 
determine if we in fact are meeting our obligations to our 
communities. So, I think it is a distinction that sometimes 
gets lost in these discussions, that with streamlined 
examinations we still are required to meet CRA requirements, 
but the examination process is not as onerous to the smaller 
institutions.
    Senator Crapo. Thank you. Anybody else want to jump in on 
this? Mr. Mierzwinski?
    Mr. Mierzwinski. Just very briefly, I would refer you, 
Senator, to the consumer group testimony. It goes into detail 
about how we would have a difference of opinion with the other 
groups on the importance of the full CRA examination being 
distinctly more important in evaluating whether a bank is 
serving the community. This is particularly important because 
the proposal to increase from $250 million to $500 million for 
the streamlining would exempt another 1,200 institutions. Some 
proposals would go to $1 billion. We are talking mid-size 
banks, not small banks. Under these proposals you would only 
have 600 banks getting the full benefit of the CRA examination.
    Again, the streamlined test only looks at lending. It does 
not look at the service test as adequately. There is a lot more 
to it that we think is very important, particularly in small 
and medium-size communities where these banks have a very large 
presence.
    Mr. Leighty. If I might?
    Senator Crapo. Certainly.
    Mr. Leighty. I think the definition of small bank that the 
Fed uses is $1 billion, so we have a difference of terminology 
on what is a small institution.
    Mr. Longbrake. If I could just add a comment?
    Senator Crapo. Mr. Longbrake.
    Mr. Longbrake. Reducing burden is important, period, just 
for the benefit of consumers and businesses, so that applies to 
all institutions regardless of size and regardless of charter. 
So, I think it is important we not lose sight of that.
    Having said that, in terms of the activities and the 
complexity of those activities, they do differ by type of 
organization and regulation should be suitable for the type of 
activities an institution performs. I would be careful about 
billing it as a two-tier system however.
    Senator Crapo. Good point. Mr. Rock.
    Mr. Rock. Thank you, Senator. Just with respect to the 
streamlined CRA test, I think that my bank is a pretty good 
example of some of the difficulties that exist. My last two CRA 
exams, one was under the streamlined test and then the most 
recent one was under the big bank test, so I have experienced 
both lately.
    The problem for us, we are a 95-year-old community bank. We 
are 96 percent loaned up. We only loan money in our community. 
But our community is a suburban community on the north shore of 
Long Island. It is a fairly homogeneous community, and 
according to the Census Bureau we have no low- to moderate-
income areas in our service area. Yet under the big bank test 
we are required to make loans in low to mod areas. So we have 
gone outside our area to comply with the big bank test, made 
loans in low to mod areas outside our service area. And in the 
most recent exam under the big bank test we were told by our 
regulator, the Federal Reserve Bank, that those loans do not 
qualify because they are outside our area, so they do not meet 
the standard. Yet, if we restrict our lending to our area under 
the big bank test, then we have not met our obligations.
    It is quite a Catch-22. The only reason the Catch-22 exists 
is because the big bank test was designed for banks that are 
spread out over hundreds of branches--my bank has 10 branches, 
all along one strip of about 30 miles of a road called Middle 
Country Road in a suburban area. So when the big bank test is 
applied to community banks like mine there are anomalies and it 
just does not work.
    Senator Crapo. Mr. Macomber.
    Mr. Macomber. We seem to have gotten into CRA as the point 
here, one thing to look at I think is the regulators. The FDIC 
in particular and the other regulators are recommending that a 
larger level be established. That is based, I think, on the 
performance of the small banks, the performance they have seen 
in banks between $250 and $500 million.
    As far as two tiers, I think there are a number of 
regulations in place that do recognize the difference in size 
and so forth, but the level of risk, if it is safety and 
soundness, is certainly a lot less in a $166 million bank like 
mine than it is in Bill Longbrake's bank which is somewhat 
larger. I think there should be some recognition along those 
lines.
    But on the CRA, the $250 million just seems like too low a 
threshold, given the complexity of the banks involved, the fact 
that those banks that are that size are restricted basically by 
their very size to serving the community they are in. There is 
not a banker here that does not want to make a loan that is a 
good loan, in any neighborhood.
    Senator Crapo. Anybody else want to get in on any of the 
aspects of this? Mr. Maloney.
    Mr. Maloney. Senator, my area of expertise with our clients 
is on the asset management side, small bank trust departments 
who service the investment and retirement needs of the 
communities where they reside. I testified before the House 
Financial Services Committee in August 2 years ago in a hearing 
chaired by Spencer Bachus from Alabama. I said, Mr. Bachus, if 
you did not get this functional regulation issue correct, what 
Congress has done is take 2,000 community banks off the board 
as competitors and get them out of serving the financial 
service needs of their communities.
    Last Friday, I chaired a gathering here in Washington, 
coincidentally, of 200 bankers from all over the United States, 
the very largest and the very smallest, on the title to the 
brokerage provisions of Gramm-Leach-Bliley. The Securities and 
Exchange Commission at 2:53 Thursday afternoon issued a 228-
page release interpreting the provisions of Title II. I have 
five $500-an-hour lawyers trying to figure out what they said. 
It will crush the life out of small bank trust departments in 
terms of the compliance burden.
    Senator Crapo. Thank you. Anybody else want to get in on 
this question?
    I appreciate that perspective. One of the things that has 
become very evident to us as we have put this together--Senator 
Sarbanes and I were talking about it as we were walking to the 
vote--is that there are some areas where we are going to find 
ourselves in 
complete agreement, and there are some areas where we will 
understand the issue very well but we will find ourselves in 
disagreement. And there are a lot of other areas where we do 
not understand the implications of proposals or actions that 
might be under consideration, and we want to be sure that we 
narrow that down and make certain that we understand the 
complexities that we are dealing with and make certain that we 
deal with them properly.
    Let me turn to the credit union issue for a minute. Ms. 
James and Mr. Cheney, you may be the two who want to jump in on 
this, but others are certainly welcome to do so. You have 
explained or stated that you believe it is important to amend 
the Federal Credit Union Act to create a risk-based capital 
structure for credit unions. Would you go into that a little 
further and explain why Congress should modify the statutory 
definition of net worth so that it would more focus on equity 
rather than on the retained earnings?
    Mr. Cheney. There are really two issues there. One is the 
statutory definition of net worth now is codified in the 
Federal Credit Union Act. It says that net worth means the 
retained earnings balance of the credit union. That was not a 
problem in 1998 when the Credit Union Membership Access Act was 
passed. But it is an issue today because the Financial 
Accounting Standards Board is about to change the method of 
accounting for mergers of not-for-profit entities from the 
pooling of interest method to the purchase method.
    When that happens, when two credit unions merge, in the old 
method you would take the retained earnings balance of one 
credit union and add it to the retained earnings balance of 
another credit union, so everything was fine. The new entity 
got the benefit of all of the members' equity.
    Under the purchase method, the retained earnings balance of 
the credit union that no longer exists, that is merged into the 
other entity, goes into an account that is called acquired 
equity, which is not recognized by the Federal Credit Union Act 
as net worth for the purposes of prompt corrective action. So 
our proposal was to change the definition in the Federal Credit 
Union Act to say equity instead of retained earnings balance, 
and the Financial Accounting Standards Board said as far as 
they were concerned, that would resolve the issue.
    So it does not change their ruling at all. It just takes 
care of a statutory definition of retained earnings.
    Senator Crapo. Ms. James.
    Ms. James. Senator, my testimony concerned more prompt 
corrective action and relating that to the risk in an 
individual credit union, not necessarily to their retained 
earnings. I just think that there are ways to look at credit 
unions who are very simply operated, are not involved in 
anything risky, that they could have a different level of 
prompt corrective action applied to them. I am not saying that 
they should not have prompt corrective action, only that their 
capital levels be more in relationship to the actual activities 
that they are doing.
    Senator Crapo. Thank you very much. Anybody else want to 
get in on this issue?
    Mr. Cheney. Just to the build a little bit on risk-based 
capital. We agree absolutely with that issue. Right now prompt 
corrective action establishes capital levels, and you just take 
their net worth retained earnings divided by assets and that is 
how you determine the level. We would like to see the assets 
risk-weighted as they are in the banking industry, so that we 
are not providing the same level of capital for cash in vaults, 
for example, as we do for secured lending. Just one example.
    Senator Crapo. Thank you very much. Mr. Rock, were you----
    Mr. Rock. I understand Mr. Cheney's earlier remarks, the 
limited point he was making about pooling and purchase 
accounting and so on. But my understanding is they would like 
to see the leverage ratio eliminated and have only risk-based 
capital. And when he says like the banking industry, we have 
several capital ratios that we have to comply with, three to be 
certain, and that includes a leverage ratio. So if they want 
equality, that does not amount to eliminating the leverage 
ratio. They can have the risk-based capital ratio too, I 
suppose, and that might be wise, but we are not eliminating the 
other ratio.
    Ms. James. We are not asking for that.
    Mr. Cheney. I may have been misunderstood, but we are not 
asking to eliminate it.
    Ms. James. No, not at all.
    Senator Crapo. Good. Let me go to another issue. I am only 
going to have time to hit several issues here, and I apologize 
for that, but believe me, we have so much material here to work 
on that you can be assured that we will be getting back to you 
to discuss this even after the hearing to go through these 
things.
    Mr. Longbrake, you raise the issue of privacy which we did 
not get to last year as we were moving forward, and I would 
like to ask you to just take a minute and make your case about 
what you would like us to do with regard to privacy, and then 
see if there are concerns or comments that anybody else on the 
panel would like to make in the context of that issue.
    Mr. Longbrake. Thank you, Senator. As I referred to in my 
testimony, many consumers when polled do not even realize that 
they received a privacy notice from their bank. What Washington 

Mutual has done is actually prepare a very nice brochure that 
highlights the key aspects of privacy. It is in an easy to read 
and understand form, and we put it in statements. So we get a 
much higher percentage than the one I quoted, of people saying, 
yes, we read the privacy notice.
    Now here is the problem. When the Gramm-Leach-Bliley Act 
was passed it left open the creation of that privacy notice and 
it left to the States the opportunity to amplify in any way 
they saw fit. The result of that has been two-fold. First of 
all, the bank regulatory agencies and the others that have 
jurisdiction, there are about seven different agencies 
altogether, have different forms of the notice requirements, so 
that creates confusion just to begin with.
    The second problem is that then when lawyers get going or 
our companies, they take no risks, so what ends up is being a 
very complex, convoluted, difficult to understand, not very 
user-friendly situation. So what we are encouraging here is 
that the regulatory relief bill include something in it that 
directs the Federal regulatory agencies to craft a standard 
notice that all can use. You can have behind that on kind of a 
stacked basis then, the more complex one that deals with all 
the different things, and you can add into that the State 
activity as well. But what we would like to recommend is that 
there be a standard Federal notice that supersedes the State 
ones that is done in a simple and easy to understand way for 
consumers.
    Senator Crapo. I can agree with your request for 
simplicity, because as a Member of the Committee I read all 
those privacy notices that I get sent from the financial 
institutions that I deal with. I am a Member of the Committee, 
and I am also a lawyer, and those things are tough to read. And 
when you are done reading one and you get the next one, then 
you really do not what you have read. So, I have to agree. I 
think that we have to do something to make it very clear to the 
public what their rights are, and that is another piece of this 
issue. But I do believe we need to get to simplicity.
    Mr. Leighty. If I may?
    Senator Crapo. Sure, Mr. Leighty.
    Mr. Leighty. I think there would be some merit when the 
account is opened the customer would receive that institution's 
privacy policy, and then perhaps it can be streamlined where if 
there are no changes that the institution not have to reprovide 
privacy notices unless they change, and that could be done 
along with a statement stuffer to simplify the process.
    Senator Crapo. Thank you. Mr. Mierzwinski, you wanted to 
say something?
    Mr. Mierzwinski. They are brief, Senator. The consumer 
groups, obviously, we would support improving the privacy 
notices. But to some extent, it is like rearranging deck chairs 
on the Titanic because in fact our view is that the Gramm-
Leach-Bliley privacy protections are minimal at best. It is 
almost like a right without a remedy. Most of the activities 
can occur regardless of your privacy preference.
    Now the FACT Act did add a new opt-out in certain 
circumstances when your information is used for marketing, but 
in general we believe that the Committee should reinstate the 
supremacy of the so-called Sarbanes Amendments to Gramm-Leach-
Bliley and make it clear that the States do have authority to 
enact stronger privacy laws that give consumers real privacy 
protections. In fact, we would support a nutrition label type 
of privacy notice, but it must have room on it for stronger 
State privacy laws.
    Senator Crapo. Anybody else want to get in on the privacy 
issue? Yes, Mr. Macomber.
    Mr. Macomber. Just to repeat, the repetitive nature of 
these, for banks that do not share their information with 
anybody, just does not make any sense at all. My bank does not 
share information with anyone, except just for third parties 
that actually process in the back room. To keep sending these 
out, I would have to compliment you, Senator Crapo, you are the 
only person I have ever heard say that he read every one of 
these he got.
    Senator Crapo. I am a little embarrassed that I admitted 
that.
    Mr. Macomber. But these generally are very much like Truth 
in Savings disclosures, they go in the wastebasket before 
reading.
    Senator Crapo. I can understand that, because I will be 
honest with you, after about four or five of them I could not 
read the rest of them. It just got to the point where it was 
too complicated trying to figure out what everyone was saying, 
knowing they were all working supposedly on the same page.
    Any other comments?
    I apologize that I am going to have to just go into one 
more issue. There are a lot more that we could get into, but 
like I say, I assure you that the Committee is going to be 
working very promptly and aggressively on this to see where we 
can bring together enough common support to move some 
significant reform legislation.
    The last one I wanted to get into is, Mr. Maloney, I wanted 
to get back to you and ask you to just clarify your point with 
regard to interest on business checking, on that issue. Could 
you clarify your position there for me, or maybe explain it to 
me. I do not know if you remember Senator Carper earlier asking 
one of the witnesses to say--if you wanted me to just give the 
really short, concise version of what your point is, what is 
that?
    Mr. Maloney. As I mentioned in my opening remarks, our 
clients banks are our friends and we are opposed to any 
initiative, either regulatory or legislative, which creates a 
climate where our friends can be harmed. Looking at the history 
of interest rate deregulation as a result of the Garn-St. 
Germain Act, it is very easy to conclude that absent a 
reasonable phase-in period to allow an institution to adjust 
the asset liability mix, and absent a cap on the rate of return 
that can be paid on the deposit account, we all run the risk of 
repeating the excesses of the 1980's. That was my point.
    Senator Crapo. Any comments on this issue? Yes, Mr. Pinto.
    Mr. Pinto. I would just like to say two things. One, during 
the 1980's I was actually Chief Credit Officer at Fannie Mae so 
I have a little familiarity with what went on during that 
period, and to my knowledge it had nothing really to do with 
the providing of interest on consumer accounts. It had more to 
do with a large expansion of the rights of thrifts in 
particular to get into areas that they really had no expertise 
in, particular commercial lending. That is where most of the 
losses arose from.
    But two, the issue is that we live in a free-market economy 
and Professor Schumpeter said that capitalism is creative 
destruction, and I think it is time that sweep accounts were 
destroyed because they are really not providing a business 
purpose or an economic purpose, and I think the Federal 
regulator said that early today.
    Mr. Maloney. Maybe if we have a repeat of the 1980's, Mr. 
Pinto can clean up the mess. He goes on record as being in 
favor of it.
    Senator Crapo. Mr. Macomber, did you have something to say?
    Mr. Macomber. This corner is in agreement, in the sense, 
particularly about reflecting back at the 1980's. That was a 
credit issue. Those were bad loans made by people who were not 
qualified to make them, and both in Texas and New England, 
where I come from, a real estate market that got way out of 
whack. But they were not related to what banks were paying on 
interest rates. There are very few banks that have ever had 
real issues as far as safety and soundness related to interest. 
They may have exacerbated credit problems, but it is credit 
problems that generally put banks out of business.
    Senator Crapo. Mr. Maloney, did you want the last word?
    Mr. Maloney. If you are paying 25 percent to induce people 
to put deposits in your bank, presumably you have to find an 
offsetting interest-earning asset that is going to pay you more 
than 25 percent. I was taking a tutorial at the Wharton School 
at the time and at least I absorbed that much from my 
professors. So to argue that it was a credit problem while 
ignoring what people were paying to attract deposits simply 
ignores history.
    Senator Crapo. I know that there could be some back and 
forth on that and I would actually like to hear it, but we are 
running out of time here, so let me again thank all of the 
witnesses. Like I said, I know that you did not get the time to 
go into all of what you would have liked to have said during 
your oral testimony, but believe me, your written testimony is 
going to be very carefully reviewed. We did not get the time to 
go into every question that we wanted today with regard to 
these important issues either in the give and take, but there 
will be a tremendous amount of that.
    I encourage you to continue to do as you have been doing, 
and that is not only prepare such excellent materials but also 
to keep engaged with my office and the offices of the other 
Senators who are involved in putting this together. We intend 
to move expeditiously. You probably would like to know what 
that means. So would I. In the Senate these days, we have a 
short timeframe for the rest of this session and we find 
ourselves only moving ahead when we are able to build some 
solid common ground where we have bipartisan support for 
legislation. I am just thinking off the top of my head right 
here that at this point we are going to be trying to put 
together legislation that has the kind of common support that 
will allow us to move promptly.
    At the same time, I am guessing that a number of these 
issues will take a little bit longer to iron out, and we will 
not lose sight of them. This does not need to be the only stab 
at this that we take, and we will be able to continue to work 
on these issues and move forward with a number of other 
efforts, if necessary. Frankly, we can probably move forward on 
different fronts as well. So, I do not want to confuse things, 
but I just want to make it clear that we want to be thorough in 
this job. We also are going to work our hardest to be sure that 
we are able to move legislation in this session, and that is 
going to require that we build some good, bipartisan support 
for legislation as we move forward.
    Again, I want to thank everybody, particularly the 
witnesses and those of your support staff who worked with you 
to prepare these outstanding materials. Unless there is 
anything else, this hearing will be adjourned. Thank you.
    [Whereupon, at 1:50 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Mr. Chairman. I appreciate that we are having this 
hearing today.
    Let me begin by thanking all of our witnesses for taking time to 
come and testify today. I would like to say a special welcome to 
Senators Landrieu and Lincoln. I am glad that your busy schedules allow 
you to join us today in order to offer your insights.
    And, I would also like to offer a special thank you to Roger 
Little, the State of Michigan's very own Deputy Commissioner at the 
Office of Financial and Insurance Services. He also serves as Credit 
Union Director for Michigan. I know the Committee will benefit from 
having his comments. I am glad that he can be with us to relay his 
firsthand experiences to the Committee.
    Mr. Chairman, regulatory relief is not an easy task, but it is 
appropriate, I believe, to review our Government's regulations from 
time to time and make modifications if we find them to be overly 
burdensome, unrealistic, or outdated.
    Regulations exist to protect the American people and make sure that 
markets do not fail the public interest. I would oppose efforts to 
weaken regulations that act as critical consumer protections, but I do 
support a review of our regulations and I suspect that there are a 
number of revisions upon which this Committee can agree need some 
corrections.
     This will not be an easy or fast process. And, indeed, today's 
hearing is a chance to begin a discussion that I suspect will take us 
well into next year, but I think today will be a very useful 
discussion. And, I am also very grateful for the broad array of 
viewpoints we will hear today. It can only lead to a better, more 
balanced bill when you, Senator Crapo, and others are ready to 
introduce a reform proposal.
                               ----------
               PREPARED STATEMENT OF SENATOR CHUCK HAGEL
    Mr. Chairman, I want to thank you for holding today's hearing. I 
also want to thank Senator Crapo for his leadership in addressing 
regulatory reform. For four Congresses now, I have advocated and 
introduced legislation to repeal the ban on banks paying interest on 
business checking accounts. While this prohibition applies to all banks 
and businesses, it targets and discriminates against small banks and 
small businesses. That is why Senator Snowe, who chairs the Small 
Business and Entrepreneurship Committee, and I introduced the Interest 
On Business Checking Act last year.
    Big banks can currently circumvent the prohibition and offer 
alternative accounts, called sweep accounts. These sweep accounts allow 
big banks to effectively provide their customers with interest-bearing 
checking accounts. Unfortunately, small banks find it hard to offer 
these accounts, because they are costly to provide. Additionally, small 
businesses find it hard to afford these accounts because large banks 
usually require businesses to maintain large balances in the accounts.
     Complicating matters is the growing impact of nonbanking 
institutions that offer deposit-like money accounts to individuals and 
corporations alike. Large brokerage firms have long offered interest on 
deposit accounts they maintain for their customers. This places these 
firms at an advantage over community banks that cannot offer their 
corporate customers interest on their checking accounts. While I 
support business innovation, I do not believe it is fair when any 
business gains a competitive edge over another due to government 
interference through over-regulation.
     Passage of this bill will remove one of the last vestiges of an 
obsolete interest rate control system. Abolishing the statutory 
requirement that prohibits businesses from owning interest bearing 
checking accounts will provide America's small business owners, 
farmers, and farm cooperatives with a funds management tool that is 
long overdue.
     Passage of this bill will ensure America's entrepreneurs can 
compete effectively with larger businesses. My experience as a 
businessman has shown me, firsthand, that it is extremely important for 
anyone trying to maximize profits to be able to invest funds wisely for 
maximum efficiencies.
     Repealing this ban has already passed the House this year and has 
passed the Senate Banking Committee in previous Congresses. 
Unfortunately, there has been some disagreement as to how to address 
this legislation with respect to Industrial Loan Corporations or ILC's. 
Mr. Chairman, the bill which I introduced last year, leaves the 
decision to be determined by the regulator.
     I am pleased to say that repealing the ban has the strong support 
of America's Community Bankers, the National Federation of Independent 
Businesses, and the U.S. Chamber of Commerce. It also has the support 
of many of the banks, thrifts, and small businesses in my home State of 
Nebraska.
     Mr. Chairman, this is a straightforward bill that will do away 
with an unnecessary regulation that burdens American business. It is an 
important tool to strengthen the Nation's engine of job growth--the 
small businesses that are important 
customers for small banks. This legislation also fits into the 
regulatory reform efforts being undertaken by this Committee. Thank 
you.
                               ----------
              PREPARED STATEMENT OF SENATOR RICK SANTORUM
    Mr. Chairman and Members of the Committee, I would like to thank 
the Chairman for holding this hearing regarding regulatory reform for 
our Nation's financial institutions. I am pleased that Mr. Gene 
Maloney, Director, Executive Vice President and Corporate Counsel of 
Federated Investors, Inc. in Pittsburgh, one of the Nation's largest 
investment management organizations, has been invited to testify at 
today's hearing. Mr. Maloney will talk about the proposed revision to 
Regulation Q, to allow banks to pay interest on business checking 
accounts. Gene has extensive industry experience and has previously 
testified before the Senate on matters of fiduciary compensation and 
the deregulation of the financial services industry.
     Mr. Maloney has appeared as a speaker at American Bankers 
Association gatherings and is a frequent speaker at State Bankers 
Association meetings on the following subjects: The Gramm-Leach-Bliley 
Act, the deregulation of the financial services industry, the Uniform 
Prudent Investor Act, and the investment management process it 
contemplates, fiduciary compensation, and asset allocation as a means 
of optimizing return and minimizing risk.
     Gene is a Director of the Foundation for Fiduciary Studies. He is 
an instructor in trust and securities law at Boston University School 
of Law and has been a visiting instructor at the Federal Financial 
Institutions Examination Council and the American Bankers Association's 
National Graduate Trust School at Northwestern University. Mr. Maloney 
has also served as an expert witness in both judicial and legislative 
settings on matters relating to fiduciary compensation, will 
construction, and prudent investing.
     Gene received his B.A. from Holy Cross College in Worcester, 
Massachusetts, and his J.D. from Fordham Law School in New York City. 
He attended the Wharton School of the University of Pennsylvania, 
focusing on the financial management of commercial banks. He was an 
officer in the Army from 1969 to 1972 and served as an infantry officer 
for 1 year in Vietnam.
     I think we all recognize the importance of hearing testimony from 
different sides of an issue, and I thank the Chairman and Members of 
the Committee for their consideration of this witness. I look forward 
to hearing the testimony presented today.
                               ----------
                 PREPARED STATEMENT OF MARY L. LANDRIEU
               A. U.S. Senator from the State of Louisana
                             June 22, 2004
    Good Morning, Mr. Chairman and Members of the Committee. It is my 
pleasure to appear before this Committee today to talk about Federal 
rent-to-own legislation. Let me begin by thanking you, Chairman Shelby, 
for scheduling hearings on regulatory relief in general, including 
legislation that I introduced earlier in this 
Congress, S. 884, which you and many others on this Committee have 
agreed to cosponsor. The bill has broad bipartisan support, including 
several Members of this Committee and I hope that the Committee will 
include my legislation in future regulatory relief legislation.
    S. 884, standing alone or as part of this regulatory relief 
package, proposes to regulate the rent-to-own, or rental-purchase, 
transaction, for the first time at the Federal level. In introducing 
this legislation, I have tried to ensure the interests of the consumers 
are protected while providing a Federal floor of consumer protections.
    Preemption is an important issue for many of us. Those of us who 
have previously served in our respective State legislatures hold our 
colleagues in the State legislatures in high esteem. If enacted, this 
legislation would serve only to establish a floor of regulation of the 
rent-to-own transaction. State legislatures would have full opportunity 
to pass stronger laws and regulations, modify existing statutes, or 
even outlaw the transaction entirely if that is what those bodies 
believed was appropriate. My bill does not preempt any State statute. 
This bill, however, would finally establish a Federal or national 
definition of the term ``rental-purchase,'' consistent with the 
definitions found in these various existing State statutes and within 
the Internal Revenue Code. Just as is the case under other Federal 
consumer protection laws, including TILA and the CLA, States would not 
be permitted to define or ``mischaracterize'' the rent-to-own 
transaction in a manner that would be inconsistent with the definition 
in this bill.
    Now let me turn to what the bill does in terms of providing 
consumer protection and uniformity in terms of a floor of Federal 
consumer protections.
    The rent-to-own, or rental-purchase industry, offers household 
durable goods--appliances, furniture, electronics, computers, and 
musical or band instruments are the primary product lines--for rent on 
a weekly or monthly basis. Customers are never obligated to rent beyond 
the initial term, and can return the rented product at any time without 
penalty or further financial obligation. Of course, customers also have 
the option to continue renting after the initial or any renewal rental 
period, and can do so simply by paying an additional weekly or monthly 
rental payment in advance of the rental period. In addition, rent-to-
own consumers have the option to purchase the property they are 
renting, either by making the required number of renewal payments set 
forth in the agreement, or by exercising an early purchase option, 
paying cash for the item at any time during the rent-to-own 
transaction.
    Rental companies typically provide delivery and set up of the 
merchandise, as well as service and replacement products, throughout 
the rental at no additional cost to the consumer. Rental companies do 
not check the credit of their customers, and do not require 
downpayments or security deposits, nor do they report to credit 
agencies information regarding consumers. Consequently, this is a 
transaction that is very easy to get into and out of, ideal for the 
customer that wants and/or needs financial flexibility that only this 
unique, hybrid rental-and-purchase transaction affords.
    The rent-to-own transaction appeals to a wide variety of customers, 
including parents of children who this week want to learn to play the 
violin, only to find that, 2 weeks later, the child is more adept at--
and interested in--fiddling around. Military personnel who are 
frequently transferred from base-to-base, who want quality furnishings 
for their apartments or homes but who often cannot afford, or do not 
want, to purchase these items, use rent-to-own. College students 
sharing apartments or dorms rent furniture, appliances and electronics 
from rent-to-own companies. The transaction serves the needs of 
campaign offices, summer rentals, Super Bowl and Final Four parties, 
and other similar short-term needs or wants.
    Importantly, however, this transaction is also frequently used by 
individuals and families who are just starting out and have not yet 
established good credit, or who have damaged or bad credit, and whose 
monthly income is insufficient to allow them to save and make major 
purchases with cash. For these consumers, rent-to-own offers an 
opportunity to obtain the immediate use, and eventually ownership if 
they so desire, of things that most of the rest of us take for 
granted--good beds for our children to sleep on, washers and dryers so 
they do not have to spend all weekend at the Laundromat, dropping coins 
into machines that they will never own. Computers so the kids can keep 
up in school, decent furniture to sit on and eat at, and so on. Rent-
to-own gives these working class individuals and families a chance, 
without the burden of debt, and with all the flexibility they need to 
meet their sometimes uncertain economic circumstances. This is 
certainly a more viable alternative than garage sales, flea markets and 
second-hand stores.
    The Internal Revenue Service, as a matter of law, has determined 
that fewer than 50 percent of rent-to-own transactions result in 
purchases and the rent-to-own industry statistics confirm that 
approximately one in four transactions results in the renter electing 
to acquire ownership of the rented goods. In the other 75 percent, 
according to the industry numbers, customers rent for a short period of 
time and then return the goods to the store, typically in just a few 
weeks or months.
    There are roughly 8,000 rent-to-own furniture, appliance and 
electronic stores throughout the country, and in Puerto Rico. 
Additionally, there are several hundred musical instrument stores. The 
majority of companies operating in this business are ``mom-and-pop'' 
family owned businesses, with one or two locations in a particular city 
or town, with less than one-half of these stores being owned by major, 
multistate corporations.
    Over the past 20 years, there has been a healthy and vigorous 
public debate, played out primarily at the State level, and to some 
extent here in Washington as well, about the appropriate method of 
regulating this transaction. Some individuals and groups have argued 
that rent-to-own is most similar to a credit sale, and consequently 
should be regulated as such. However, as you have just heard me 
describe, this transaction differs from consumer credit is a number of 
respects, most importantly in that the rent-to-own customer is never 
obligated to continue renting beyond the initial rental term, and has 
the unilateral right to terminate the agreement and have the products 
picked up at any time, without penalty. This is the critical 
distinction--under traditional credit transactions, the consumer must 
make all of the payments over a predetermined period of time or risk 
default, repossession, deficiency judgments and, in worst cases, 
damaged credit and personal bankruptcy. By way of stark contrast, the 
rent-to-own customer enjoys complete control over his or her use of the 
rented goods, and the terms of the rental transaction itself. To this 
point, the Federal Trade Commission distinguished between the rent-to-
own transaction and a credit-sale transaction in its seminal report on 
the rent-to-own industry in 2000 saying that:

        Unlike a credit sale, rent-to-own customers do not incur any 
        debt, can return the merchandise at any time without obligation 
        for the remaining payments, and do not obtain ownership rights 
        or equity in the merchandise until all payments are completed.

    Every State legislature that has enacted rent-to-own specific 
legislation, beginning with Michigan in 1984, has agreed that this 
unique transaction is not a form of consumer credit, but instead is 
something very different. My bill, S. 884, is consistent with the 
approach taken by all these various State laws. However, as I explained 
earlier, this proposal would set a floor of regulation, beyond which 
States would be free to regulate if the State legislatures saw the need 
to do so in response to local concerns and conditions. And in fact, any 
number of the existing State laws provide greater consumer protections 
than those imbedded in this bill, and those stronger regulatory 
frameworks would remain controlling in those States if this bill were 
to be enacted. One other note: This bill, if enacted, would align 
Federal consumer protection law with Federal tax law, which treats 
rent-to-own transactions as true leases and not as credit sales for 
income reporting and inventory depreciation purposes. In short, no 
State legislature would be precluded from regulating this transaction 
in any way. It would however, no be allowed to redefine this 
transaction as something it is not. This is consistent with how 
Congress has dealt with consumer leases over 4 months in length and 
true credit transactions.
    Finally, this bill enjoys the unanimous support of the rental-
purchase industry, from its largest members to its smallest.
    This bill strikes a balance between the needs for consumer 
protection and the need to establish and maintain a fair and balanced 
competitive marketplace in which businessmen and--woman can survive and 
thrive and continue to provide a financial transaction the consumer 
wants. I believe that it is this balance that has made the bill so 
attractive to such a variety of cosponsors, evenly split between 
Democrats and Republicans.
    The bill does 5 major things:

 One, it defines the transaction in a manner that is consistent 
    with existing State rent-to-own laws, as well as Federal tax 
    provisions. As an aside, this definition is also consistent with 
    the views of both the Federal Reserve Board Staff and the Federal 
    Trade Commission, as expressed in their testimony before the House 
    Financial Services Committee in the 107th Congress.
 Two, it provides for comprehensive disclosure of key financial 
    terms in advertising and on price cards on merchandise displayed in 
    these stores, as well as in the body of the rental contracts 
    themselves. These disclosure requirements were adopted in part from 
    the recommendation of the FTC in its seminal report on the rent-to-
    own industry from 2000. Overall, these requirements exceed the 
    disclosure mandates under Truth in Lending as well as the Federal 
    Consumer Leasing Act.
 Three, the bill establishes a list of prohibited practices in 
    the rent-to-own industry, a list similar in content and substance 
    to the practices prohibited under the Federal Trade Commission Act, 
    and under most State deceptive trade practices statutes. These 
    provisions are unique--neither Truth in Lending nor the Consumer 
    Leasing Act contains similar provisions.
 Four, the bill adopts certain universal substantive 
    regulations shared by all of the existing State rental laws. For 
    example, the bill would mandate that consumers who have terminated 
    their rental transactions and returned the goods to the merchant be 
    provided an extended period of time in which to ``reinstate'' that 
    terminated agreement--that is, to come back to the store and rent 
    the same or similar goods, starting on the new agreement at the 
    same place the customer left off on the previous transaction.
 Finally, the bill adopts the remedies available to aggrieved 
    and injured consumers under the Truth in Lending Act, including a 
    private right of action for consumers.

    In summary, this legislation would go farther in providing 
substantive protections for rent-to-own consumers than does any other 
Federal consumer protection law on the books today. And yet, it enjoys 
the unanimous support of the industry, because it is fundamentally fair 
and balanced.


























































































































































































































































































































































































































































































































































































































































































       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                      FROM DONALD L. KOHN

Q.1. In his testimony, Mr. Maloney, from Federated Investors, 
indicated that repeal of Regulation Q could create conditions 
similar to the 1980's where a competition for ``hot money'' 
caused banks to offer unsustainable rates of interest to 
attract deposits. Yet during the second panel, witnesses from 
each of the regulatory agencies indicated that Reg Q repeal 
would pose no safety and soundness concerns. Would you please 
respond to Mr. Maloney's arguments in detail and provide an 
analysis of his comparison to the 1980's?

A.1. Mr. Maloney is an executive of Federated Investors, one of 
the largest companies that manages mutual funds. In his 
testimony, Mr. Maloney expressed a concern for the community 
banks that Federated includes among its customers and mentioned 
in particular his personal experience when banks were allowed 
to offer a new type of deposit account in 1982.
    The Depository Institutions Deregulatory Committee (DIDC), 
established by the Depository Institutions Deregulation and 
Monetary Control Act of March 31, 1980, authorized a Money 
Market Deposit Account (MMDA) with no interest rate ceiling on 
December 14, 1982, with a required minimum account balance of 
$2,500. This type of account was specifically designed to allow 
banks to compete with money market mutual funds, which had been 
growing rapidly at the expense of bank deposits, largely 
because money market mutual funds were not subject to ceilings 
on the interest rates they could pay, while banks were.
    In order to introduce their new product and begin competing 
with money market mutual funds, like those offered by Federated 
Investors, a number of banks and thrifts offered high initial 
teaser rates. Indeed, the advertisement from 1982 by the First 
National Bank of Atlanta, which Mr. Maloney attached.to his 
testimony, explicitly stated that the 18.65 percent interest 
rate would be paid only for the first month following 
authorization of the deposit. The ad stated that after January 
14, 1983, the interest ``rate will vary, just as it does with 
money market mutual funds. Our rate will be based on current 
market conditions . . .''
    Banks and thrifts were able to attract a substantial volume 
of funds into the new MMDA account in early 1983, in part 
because it did improve their competitive position relative to 
money market mutual funds. Some thrifts priced their deposits 
too aggressively, particularly after they began to get into 
trouble, but the deregulation of interest rates was not the 
main reason for the thrift industry crisis of the 1980's. The 
thrift industry's problems owed much more to a fundamental 
imbalance between assets held primarily in long-term, fixed-
rate mortgages and shorter-term liabilities with interest rates 
that varied more frequently. Thrifts also were subject to a 
high concentration of portfolio risk in the real-estate 
industry, poorly managed ventures into risky construction and 
real estate development activities, and weaknesses in 
regulatory oversight. 
Indeed, banks did not suffer the same experience as the thrift 
industry, despite their pursuit of funding through MMDA's and 
other ceiling-free deposits.
    By April 1986, interest rate ceilings had been removed on 
all types of deposit accounts, except for demand deposits. The 
removal of ceilings on a wide range of bank liabilities has not 
been an impediment to bank profitability. While the banking 
industry did experience softer profitability in the latter half 
of the 1980's, this was largely a result of credit quality 
problems, rather than reduced net interest margins. Bank 
profitability has been quite strong since the early 1990's, and 
has reached record levels in recent years, despite the absence 
of ceilings on most deposit interest rates.
    Nevertheless, as I indicated in my testimony on June 22, 
and as also indicated in previous testimony by myself and by 
Governor Meyer, removal of the prohibition of interest payments 
on demand deposits, for banks, ``likely would increase costs, 
at least in the short-run.'' However, removal of the 
prohibition would not result in a repeat of the ``hot money'' 
problems that occurred among failing thrifts in the 1980's. 
Banks already have many avenues for increasing the funding they 
obtain, such as by offering more attractive 
interest rates on time deposits or MMDA's. Indeed, demand 
deposits--the only remaining liabilities with a regulatory 
interest rate ceiling--currently represent only around 7 
percent of the total liabilities of domestic commercial banks. 
If interest payments were authorized on demand deposits, banks 
would only pay interest on them to the extent they believed 
that demand deposits would remain at least as cheap a source of 
funding as the alternatives. Some banks might choose to pay a 
low rate of interest-on-demand deposits and instead rely more 
heavily on other funding sources.
    Mr. Maloney cited estimates of potential costs to banks of 
removal of the prohibition of interest payments, but he did not 
provide the assumptions behind the estimates, so they are 
difficult to evaluate. Our own analysis of the cost to banks of 
paying interest-on-demand deposits begins by looking at 
interest rates on MMDA's. While banks would probably pay a 
range of interest rates on demand deposits, depending on 
minimum balances and other account features, they are unlikely 
to pay a higher interest rate on demand deposits than on 
MMDA's, because the latter allow only limited check-writing. 
Therefore, the direct cost of interest-on-demand deposits 
should be no higher (and probably would be lower) than what is 
obtained by applying the average MMDA rate to those demand 
deposits on which banks would be likely to incur explicit 
interest costs. At present, bank MMDA's are paying an average 
interest rate of only \1/3\ of 1 percent. Under current 
conditions, then, as detailed further in the attachment, the 
estimated direct effect on bank profits of interest-on-demand 
deposits, before offsets, is only around $400 million, far less 
than the $7 billion to $9 billion figures cited by Mr. Maloney. 
Our estimate represents less than \1/2\ of 1 percent of overall 
bank profits.
    While these direct costs of paying interest-on-demand 
deposits would rise with the general level of interest rates, 
banks would make a number of adjustments over time in the 
entire array of loan and deposit rates, funding patterns, and 
service fees to offset such costs. For example, in order to 
more fully recoup costs, banks would likely reprice services 
that may be underpriced now to attract ``free'' demand 
deposits. In offering interest-earning checking accounts to 
households, banks have learned how to tailor accounts to the 
particular needs of various types of customers while 
maintaining profitability. In addition, if interest payments 
were combined with interest earnings on reserves or the removal 
of reserve requirements, the costs of interest-on-demand 
deposits would be offset both directly, through higher earnings 
on assets, and indirectly, through savings on the costs of 
operating sweep programs that permit banks to pay interest to 
their larger business customers and allow banks to avoid 
reserve requirements.
    As I mentioned in my testimony, one of the largest offsets 
to bank costs from paying interest-on-demand deposits would 
come from the improved ability of banks to compete for funds 
vis-a-vis nonbank institutions, like money market mutual funds. 
The analysis attached to Mr. Maloney's testimony cites the 
possibility of quite large flows of funds going to banks as a 
result of the authorization of interest-on-demand deposits. To 
the extent that the cost of these additional funds are lower 
than the returns banks earn by investing them, bank 
profitability would be thereby strengthened.
    Of course, money market mutual funds could suffer from an 
improved ability of banks to compete. However, our economy is 
stronger when we remove barriers to effective competition. We 
should not lose sight of the fact that business firms will 
benefit from the removal of regulatory restrictions on the 
services banks can offer them. Small businesses, for which 
sweep accounts have not been available, should gain especially 
from interest on their checking accounts. Moreover, our 
financial sector has proved itself to be very resilient in 
recent years even to major unforeseen turbulence. We remain 
convinced that removal of the prohibition of interest-on-demand 
deposits poses no safety and soundness concerns for our 
financial institutions.

   Attachment: Estimate of Possible Direct Costs to Banks of

                  Interest-on-Demand Deposits

    Survey evidence indicates that about 60 percent of demand 
deposits are held by--nonbank businesses (while about 25 
percent are held by households and the remaining 15 percent by 
government institutions, nonprofit organizations, and other 
depository institutions).\1\ Households, government 
institutions, and nonprofit organizations are already allowed 
to earn interest on checking deposits through NOW accounts; 
they likely hold demand deposits either as low-minimum balance 
accounts that would not earn interest even if the prohibition 
were removed or as compensating balances. Compensating balance 
accounts already earn a return in the form of credits that 
defray the cost of bank services. Such accounts are used 
extensively by larger business firms; indeed, about 60 percent 
of the overall demand deposits of businesses are reportedly 
held as compensating balances. The implicit interest rate on 
such balances is a competitive rate typically based on a spread 
under Treasury bill rates. Therefore, as regards compensating 
balances, the removal of the prohibition of interest-on-demand 
deposits would merely involve a switch from implicit to 
explicit interest, implying no significant cost effect for 
banks.
---------------------------------------------------------------------------
    \1\ See, for instance, the Senior Financial Officer Survey of 1998 
(Federal Reserve). Other surveys, over different time periods, provided 
roughly similar results.
---------------------------------------------------------------------------
    To calculate the amount of demand deposits that are not 
compensating balances and that might earn explicit interest, if 
authorized, we begin with the total gross demand deposits of 
commercial banks (including the deposits of individuals, 
partnerships, corporations, nonprofits, governments, other 
depository institutions, and including cash items in process of 
collection from other banks). On average in June 2004, such 
deposits amounted to $477 billion. Of this total, the nonbank 
business portion is estimated to be $286 billion (477  
60 percent), while deposits of other-depository institutions 
amounted to $38 billion. The portion of these bank and nonbank 
business deposits that is not in compensating balance programs 
is estimated to be $130 billion ((38 + 286)  40 
percent).
    As is the case for MMDA's and NOW accounts, banks likely 
would pay a variety of interest rates on such deposits, if 
authorized, depending on the minimum balance maintained in the 
account and other aspects of their relationships with 
accountholders. However, because demand deposits permit 
unlimited checking, while MMDA's allow a maximum of only six 
checks per month, banks would almost surely pay a lower rate of 
interest-on-demand deposits than on MMDA's.
    According to data from Bankrate, Inc., the average interest 
rate on commercial bank MMDA's during June 2004, was 31 basis 
points. NOW accounts paid a lower average rate of 14 basis 
points. Even if banks paid as high as the current MMDA rate on 
all the business demand deposits that were not in compensating 
balance accounts, their annualized interest cost, based on June 
deposit levels, is estimated to be about $403 million ($130 
billion  .0031). Total profits of domestically 
chartered commercial banks in 2003 amounted to $100.4 billion. 
The interest cost computed above would therefore amount to less 
than \1/2\ of 1 percent of bank profits (403/100400).
    While this estimate of direct costs would rise with the 
general level of interest rates, a bank would likely make 
adjustments over time in the whole array of its loan and 
deposit interest rates, funding patterns, and service fees that 
would tend to offset the cost of interest-on-demand deposits. 
Moreover, with the authorization of interest payments, the 
level of demand deposits could eventually be boosted 
substantially, and--to the extent that the cost of these 
additional funds were lower than the return a bank could earn 
on investing them--bank profitability would be thereby 
strengthened.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                       FROM JOHN M. REICH

Q.1. In his testimony, Mr. Maloney, from Federated Investors, 
indicated that repeal of Regulation Q could create conditions 
similar to the 1980's where a competition for ``hot money'' 
caused banks to offer unsustainable rates of interest to 
attract deposits. Yet during the second panel, witnesses from 
each of the regulatory agencies indicated that Reg Q repeal 
would pose no safety and soundness concerns. Would you please 
respond to Mr. Maloney's arguments in detail and provide an 
analysis of his comparison to the 1980's?

A.1. In the 1930's, Congress provided for interest-rate 
ceilings on time and savings deposits and enacted the current 
prohibition against banks paying interest-on-demand deposits. 
At the time, two principal arguments were made for controlling 
the cost of deposits. The first was that deposit competition 
had the potential to destabilize the banking system. The second 
was that money-center banks would draw deposits from rural 
communities and divert funds from productive agrarian uses to 
stock speculation.
    Whatever validity these arguments may have had then, they 
have little today. Congress has removed all the Depression-era 
bank price controls except the prohibition on paying interest-
on-demand deposits. Removing the last of these controls should 
not threaten the stability of the banking system.
    First, banks should be able to manage additional costs that 
might result from this legislative change. Some banks already 
provide nonpecuniary compensation to businesses for demand 
deposits through ``free'' or discounted services or lower 
interest rates on loans for which they hold compensating demand 
deposit balances. Banks that begin paying interest on their 
commercial demand deposits may charge explicitly for services 
they now provide free or at a discount. Banks and their 
customers now spend time and money circumventing the 
prohibition against the payment of interest-on-demand deposits 
by, for instance, setting up interest-bearing sweep accounts. 
Eliminating the prohibition should reduce or eliminate these 
expenses.
    Second, not all demand deposit accounts will necessarily 
pay interest. Many consumers, for a variety of reasons, 
presently choose to hold noninterest-bearing demand deposits 
rather than interest-bearing NOW accounts. Instead of receiving 
interest, customers with these accounts may receive other 
benefits, such as returned canceled checks, lower minimum-
balance requirements, lower service charges, including lower 
per check charges, or a package of other banking services.
    Further, banks already pay interest-on-demand-like deposits 
without threatening the stability of the banking system. 
Interest-bearing sweep accounts, for example, function as 
demand deposits for businesses. Interest-bearing NOW accounts 
function much like demand deposits for consumers, nonprofit 
groups, and governmental units.
    Finally, no worthwhile analogy can be drawn to the 
relaxation of Regulation Q in the early 1980's. The economy, 
the banking industry, and the regulatory environment are very 
different today. The banking industry has been making record 
profits for years and capital levels are high. Banks lack the 
kinds of incentives that existed in the 1980's to take 
excessive risks or offer exorbitantly high rates of interest. 
Statutory changes since the bank and thrift crisis 
significantly curb banks' ability to take excessive risks in 
any event. The regime of prompt corrective action supervisory 
rules and capital requirements, in effect since the early 
1990's, gives regulators a powerful tool to curb excessive risk 
taking financed with insured deposits. Regulators have much 
more sophisticated tools to analyze bank risk-taking. 
Restrictions on brokered deposits prevent weak banks from 
offering above market rates of interest. Risk-based deposit 
insurance premiums, which did not exist in the 1980's, provide 
a significant incentive to institutions to not increase their 
risk profile in ways that impair their capital levels or 
overall soundness.
    For these reasons, I believe that eliminating the 
prohibition against paying interest-on-demand deposits and the 
related prohibition against business NOW accounts would cause 
no safety and soundness problems.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                       FROM JOANN JOHNSON

Q.1. In his testimony, Mr. Maloney, from Federated Investors, 
indicated that repeal of Regulation Q could create conditions 
similar to the 1980's where a competition for ``hot money'' 
caused banks to offer unsustainable rates of interest to 
attract deposits. Yet during the second panel, witnesses from 
each of the regulatory agencies indicated that Reg Q repeal 
would pose no safety and soundness concerns. Would you please 
respond to Mr. Maloney's arguments in detail and provide an 
analysis of his comparison to the 1980's?

A.1. Regulation Q was issued by the Board of Governors of the 
Federal Reserve System to prohibit State-chartered banks that 
are members of the Federal Reserve, all national banks, and 
some other depository institutions from paying interest-on-
demand deposits. Regulation Q does not apply to Federal credit 
unions (FCU's) so its repeal would have no effect on FCU's.
    Additionally, FCU's do not pay interest on their accounts. 
Rather, FCU's pay dividends based on available earnings. There 
are no contractual obligations on FCU's to pay dividends. In 
fact, FCU's are statutorily prohibited from paying dividends 
unless they have sufficient earnings to cover the dividend, 12 
U.S.C. 1757(6), 1763. This significantly reduces any risk 
associated with paying a return on demand deposits. As a result 
of this statutory restriction and other factors, chasing ``hot 
money'' has not been a serious problem for FCU's. Finally, 
under certain circumstances, NCUA's prompt corrective action 
rule restricts or prohibits a credit union from offering rates 
on shares above certain limits. 12 CFR Part 702.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                     FROM JULIE L. WILLIAMS

Q.1. In his testimony, Mr. Maloney, from Federated Investors, 
indicated that repeal of Regulation Q could create conditions 
similar to the 1980's where a competition for ``hot money'' 
caused banks to offer unsustainable rates of interest to 
attract deposits. Yet during the second panel, witnesses from 
each of the regulatory agencies indicated that Reg Q repeal 
would pose no safety and soundness concerns. Would you please 
respond to Mr. Maloney's arguments in detail and provide an 
analysis of his comparison to the 1980's?

A.1. Mr. Maloney expressed concern that the repeal of 
Regulation Q would result in community banks becoming less 
competitive and, therefore, create conditions like those in the 
early 1980's that he believes led to the thrift industry 
crisis. Banks and thrifts were able to attract a substantial 
volume of funds into the new MMDA allowed in 1983. Some thrifts 
did price their deposits too aggressively, particularly after 
they began to experience difficulties after the increase in 
general market interest rates. The thrift industry's problems, 
however, were not caused by the deregulation of interest rates 
payable on deposit accounts. The thrift industry's problems 
were generally caused by its portfolio concentration in long-
term, fixed interest rate mortgages at a time when general 
market interest rates increased dramatically. If interest rate 
ceilings had not been relaxed, depository institutions would 
have experienced further disintermediation and thrifts still 
would have failed.
    The removal of interest rate ceilings on a wide range of 
bank liabilities has not been an impediment to bank 
profitability. While the banking industry did experience weaker 
profitability in the late 1980's, that was due primarily to 
credit quality issues. Bank profitability has been strong since 
the early 1990's and has reached record levels recently, 
despite the absence of a ceiling on most deposit rates.
    While removal of the prohibition on interest payments on 
demand deposits might tend to increase bank costs, that impact 
will be limited by the ability of banks to adjust their funding 
composition. Demand deposits are currently only one source of 
funding for banks. If interest payments were allowed on demand 
deposits, banks would pay that interest only to the extent that 
such deposits were as cheap as the all-in cost of alternative 
sources of funding. With the payment of interest-on-demand 
deposits, some banks would raise the price of services 
associated with those deposits, which they are currently 
underpricing to attract those deposits. Thus, for some banks 
that cost of demand deposits would not increase as much as the 
interest rates paid on those deposits. However, if the cost of 
demand deposits does increase, some banks might rely more 
heavily on other funding sources.
    Based on the foregoing, we do not believe elimination of 
the prohibition on payment of interest-on-demand deposits 
raises safety and soundness concerns.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                      FROM JOHN E. BOWMAN

Q.1. In his testimony, Mr. Maloney, from Federated Investors, 
indicated that repeal of Regulation Q could create conditions 
similar to the 1980's where a competition for ``hot money'' 
caused banks to offer unsustainable rates of interests to 
attract deposits. Yet during the second panel, witnesses from 
each of the regulatory agencies indicated that Reg Q repeal 
would pose no safety and soundness concerns. Would you please 
respond to Mr. Maloney's arguments in detail and provide an 
analysis of his comparison to the 1980's?

A.1. In 1996, the Federal banking agencies reported to Congress 
that the statutory prohibition on paying interest-on-demand 
deposits no longer serves a valid public purpose. The Office of 
Thrift Supervision continues to maintain this position and 
strongly supports the proposed legislation. (See, Joint Report, 
Streamlining of Regulatory Requirements, issued by the Federal 
Reserve, FDIC, OCC, and OTS, 1996.)
    Before the 1980's, Regulation Q prohibited banks from 
paying interest on checking deposits and set a ceiling on 
interest paid on savings accounts. A vestige of Regulation Q 
remains in the prohibition of interest-on-demand deposits held 
by businesses.
    This prohibition is obsolete because a financial 
institution can use sweep accounts to effectively circumvent 
the prohibition. It makes no sense to allow indirect payment of 
interest on business checking accounts without also allowing 
institutions the option of direct payments.
    Removing the Regulation Q prohibition would help smaller 
institutions compete with other financial providers such as 
money market mutual funds that offer liberal check writing, ATM 
access, and similar services through interest-paying 
transaction accounts.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR CRAPO 
                      FROM JOHN E. BOWMAN

Q.1. Mr. Bowman, your testimony talks about eliminating 
disparate treatment of thrifts under the Federal securities 
laws. Didn't the SEC just propose a rule that grants partial 
relief to thrifts from the Investment Advisers Act? Why should 
Congress go further?

A.1. The SEC has issued several recent proposals that will 
continue the inequitable treatment of thrifts (versus banks) 
under the Federal securities laws. These involve the 
application of the Investment Advisers Act of 1940 (IAA) and 
the definition of broker and dealer under the Securities 
Exchange Act of 1934 (1934 Act). Both SEC proposals contain no 
policy justification for this disparate treatment. Under the 
SEC's IAA proposal, most thrifts will continue to be subject to 
an entirely duplicative SEC oversight regime. In the other 
proposal, the SEC indicated it intends to roll back an interim 
rule extending equal treatment to thrifts vis-a-vis banks for 
purposes of the broker-dealer exemption. Clearly, this is not 
heading in the direction of charter neutrality between banks 
and thrifts with respect to the application of the Federal 
securities laws.
    With respect to the IAA issue, of the approximately 130 
thrifts that have applied for and received trust powers from 
the OTS, 45 institutions are currently registered with the SEC 
as investment advisers. Not one of these 45 thrifts would be 
able to deregister as an investment adviser under the SEC's IAA 
proposal based on their current account activity--a fact made 
clear to the SEC Commissioners by the SEC staff during 
deliberations on the proposal during the SEC's April 28, 2004 
meeting. Given that the proposal provides no regulatory burden 
relief to these existing thrifts, it is unclear what is 
accomplished by the proposed rulemaking--the application of the 
IAA remains anything but charter neutral.
    Currently, banks and thrifts may engage in the same types 
of 
activities covered by the investment adviser requirements of 
the Federal securities laws, and are subject to substantially 
similar supervision with respect to these activities. However, 
banks--but not thrifts--are exempt from registration under the 
IAA.
    Treating thrifts and banks the same under the Federal 
securities laws makes sense for a number of reasons. Thrifts 
fill an important niche in the financial services arena by 
focusing their activities primarily on residential, community, 
small business, and consumer lending. The Home Owners' Loan Act 
allows thrifts to provide trust and custody services on the 
same basis as national banks. Not only are the authorized 
activities the same, but also OTS examines those activities in 
the same manner as the other banking agencies.
    While the bank and thrift charters are tailored to provide 
powers focused on different business strategies, in areas where 
powers are similar, the rules should be similar. No legitimate 
public policy rationale is served by imposing additional and 
superfluous administrative costs on thrifts to register as an 
investment adviser when banks are exempt from registration. 
There should be similar treatment for regulated entities in 
similar circumstances. The circumstances here are that:

 First, thrifts--like banks--have a regulator that 
    specifically supervises the types of activities covered by 
    the investment adviser registration requirements.
 Second, thrifts--like banks--are subject to the same 
    functional regulatory scheme endorsed by the Gramm-Leach-
    Bliley Act.
 Third, thrifts--like banks--are subject to 
    substantially similar customer protections with respect to 
    the activities covered by the registration requirements.

    The only difference is that thrifts, unlike banks, are 
subject to an additional--and clearly burdensome--
administrative registration requirement. As best stated, in the 
SEC's own words, from the preamble to their May 2001 interim 
final rule extending broker-dealer parity to thrifts, ``insured 
savings associations are subject to a similar regulatory 
structure and examination standards as banks . . . [E]xtending 
the exemption for banks to savings associations and savings 
banks is necessary or appropriate in the public interest and is 
consistent with the protection of investors.''
    OTS strongly supports legislation similar to that in 
Section 201 of H.R. 1375, the bill passed by the House in March 
of this year, to extend the bank registration exemptions to 
thrifts. Absent this treatment, thrifts are placed at a 
competitive disadvantage that is without merit--and that 
imposes significant regulatory costs and burdens.
    As recently as the GLB Act, Congress affirmed the 
principles underlying the bank registration exemption. We 
believe the best way to resolve this matter for thrifts--with 
certainty and finality--is for Congress to extend, by statute, 
the same exemption to thrifts.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR CRAPO 
                   FROM WILLIAM A. LONGBRAKE

Q.1. I see in your written submission that The Financial 
Services Roundtable supports H.R. 314, The Mortgage Servicing 
Clarification Act, which passed the House last year on 
suspension. Is that something we should consider including in a 
regulatory relief bill?

A.1. The Financial Services Roundtable supports the inclusion 
of H.R. 314 in regulatory relief legislation. H.R. 314 provides 
a narrowly crafted exemption for mortgage servicers from a 
disclosure requirement that is triggered in certain mortgage 
servicing transfers. The Fair Debt Collection Practices Act 
requires third party debt collectors to provide a so-called 
``Miranda'' warning upon initial contact with a debtor. The 
Miranda notice requires the new mortgage servicer to identify 
itself as a ``debt collector'' and to disclose that the contact 
represents an attempt to collect a debt and that any 
information will be used for that purpose. The purpose of these 
warnings is to prevent true debt collectors from using false or 
deceptive tactics (such as a phony sweepstakes winning) to 
trick consumers into divulging private financial information, 
home address, and telephone number. However, in the context of 
a mortgage servicing transfer, the harshly worded Miranda 
notice does not accurately describe the relationship between 
the borrower and the new servicer. In fact, the notice actually 
discourages delinquent borrowers from contacting their new 
servicer out of fear that the new servicer company is a debt 
collector seeking to foreclose.
    While the Miranda warnings are clearly appropriate for true 
third party debt collection activities, they actually put 
borrowers at greater risk in mortgage servicing transfers and 
impair the ability of servicers to establish strong customer 
relationships at a critical juncture. H.R. 314 resolves the 
problem for servicers and borrowers by establishing a very 
narrow exemption from the Miranda notice requirements for 
servicers of first lien mortgages. The bill passed the House 
last year on suspension (424-0) and has broad bipartisan 
support and co-sponsorship by Members of the House Financial 
Services Committee.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR REED 
                       FROM JOANN JOHNSON

Q.1. Chairman Johnson, we have heard testimony from Deputy 
Commissioner Little that NASCUS supports giving privately 
insured State-chartered credit unions access to Federal Home 
Loan Bank System. You noted the NCUA's concern with certain 
components of the House provision, as it relates to the NCUA. 
More 
generally, however--and especially in light of the savings and 
loan debacle that this country has been through and the 
experience my State has had with private insurance--do you 
believe that allowing them to have access to the Federal Home 
Loan Bank is prudent?

A.1. NCUA is neither the regulator nor the insurer of State-
chartered, privately insured credit unions and has previously 
stated it has no official position on the public policy issues 
related to them being able to join the Federal Home Loan Bank 
System. We remain concerned, however, that language in Section 
301 of H.R. 1375 makes it appear that NCUA has oversight 
responsibility over privately insured, State-chartered credit 
unions and certain State-regulated, private share insurance 
companies. NCUA does not have any regulatory or supervisory 
jurisdiction over these institutions and does not seek such 
jurisdiction. As we have previously stated, Section 301 should 
be revised to eliminate any appearance of NCUA responsibility 
for private share insurance.
    This change, and effective implementation of the recent 
amendments to the Federal Deposit Insurance Corporation 
Improvement Act giving the Federal Trade Commission a mandate 
to enforce Federal disclosure requirements on privately insured 
institutions, should reduce any chance of confusion on the part 
of members of privately insured institutions about the nature 
of their insurance coverage.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR REED 
                      FROM JOHN E. BOWMAN

Q.1. Mr. Bowman, can you explain OTS's view of eliminating the 
lending limit restriction on small business loans for savings 
associations while increasing the aggregate lending limit on 
other 
commercial loans to 20 percent? How are small businesses 
defined currently in terms of size and assets?

A.1. Savings associations have proven their ability to make 
commercial and small business loans in a safe and sound manner. 
Commercial and small business loans held by thrifts have 
performed satisfactorily over the past 10 to 15 years. Some 
thrifts are at or near the current statutory limits and unless 
the statutory limits are increased, they must curtail otherwise 
safe and sound business lending programs.
    Eliminating the lending limit on small business loans and 
increasing the aggregate lending limit on other commercial 
loans will promote safety and soundness by giving thrifts 
greater flexibility to diversify. Additional flexibility, 
particularly in small business lending, would provide 
opportunities to counter the undulations of a 
cyclical mortgage market. This would enable thrift managers to 
continue to meet their ongoing customers' mortgage and consumer 
lending needs, while providing additional resources to manage 
their institutions safely and soundly.
    These changes would also assist savings associations in 
meeting the credit needs of their communities by providing 
small businesses more avenues to obtain credit. This would 
increase competition for, and the availability of, small 
business and other commercial loans now and in the future as 
thrifts develop this line of business. In particular, this will 
benefit smaller businesses that have experienced difficulty in 
obtaining relatively small loans from large commercial banks 
that set minimum loan amounts as part of their business 
strategy--a problem that may increase with industry 
consolidation. Finally, the proposal will assist businesses 
that prefer borrowing from entities like thrifts that meet the 
needs of borrowers with greater personal service.
    OTS uses two alternative definitions in this area. A small 
business is defined in accordance with the most recent 
regulations of the Small Business Administration. A small 
business loan is defined as a loan (or group of loans) to one 
borrower that does not exceed $2 million dollars and is for 
commercial, corporate, business, or agricultural purposes.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM MARK E. MACOMBER

Q.1. Why are you concerned with the extension of the interstate 
branching proposal to ILC's? Does this pose a safety and 
soundness risk?

A.1. America's Community Bankers supports the interstate 
branching provision adopted by the House of Representatives in 
the Financial Services Regulatory Relief Act of 2003 (H.R. 
1375). Section 401 prohibits industrial loan companies owned by 
commercial firms (those with at least 15 percent of gross 
revenues from nonfinancial activities) from acquiring or 
establishing a branch outside its home State. Section 401 would 
not apply this restriction to industrial loan companies (ILC's) 
that had been approved for FDIC insurance by October 1, 2003. 
In 1999, policymakers--ignoring the successful history of 
commercial ownership of savings associations--made the judgment 
that commercial firms should not be allowed to charter or 
acquire savings associations and grandfathered unitary thrift 
holding companies, which have the authority to operate on 
interstate basis. We do not oppose the option of commercial 
companies to establish new ILC's, but support consistency in 
policy across charter types that would deny expanded branching 
authority to newly formed ILC's with commercial parents. We 
consider this a parity issue, rather than a safety and 
soundness issue.

Q.2. What would the regulatory landscape look like for a State-
chartered, Federal Reserve member bank branching into a new 
State?

A.2. The Federal Reserve would be the primary Federal banking 
regulator of the branch established in the new State. The home-
State banking regulator of the State-chartered member bank 
would be the primary State bank regulator of the new out-of-
State branch. The State banking regulator of the host State of 
the branch (that is, the new State) would have authority to 
enforce the host State's consumer protection laws with respect 
to the new branch, but only to the extent that those laws apply 
to a branch of an out-of-State national bank.
