[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES REGULATORY RELIEF:
THE REGULATORS' VIEWS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 9, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-36
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24-094 WASHINGTON : 2005
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee
Carolina RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
VITO FOSSELLA, New York STEVE ISRAEL, New York
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina AL GREEN, Texas
KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK,
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina, Vice Chairman CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
TOM FEENEY, Florida STEVE ISRAEL, New York
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey JOE BACA, California
GINNY BROWN-WAITE, Florida AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin
RICK RENZI, Arizona WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 9, 2005................................................. 1
Appendix:
June 9, 2005................................................. 39
WITNESSES
Thursday, June 9, 2005
James, Randall S., Commissioner, Texas Department of Banking, on
behalf of Conference of State Bank Supervisors, Inc............ 14
Johnson, Hon. JoAnn, Chairman, National Credit Union
Administration................................................. 12
Kohn, Donald L., Governor, Board of Governors of the Federal
Reserve System................................................. 6
Latham, George, Deputy Commissioner, Bureau of Financial
Institutions for the State of Virginia, on behalf of National
Association of State Credit Union Supervisors.................. 16
Reich, John M., Vice Chairman, Federal Deposit Insurance
Corporation.................................................... 4
Riccobono, Richard M., Acting Director, Office of Thrift
Supervision.................................................... 10
Williams, Julie L., Acting Comptroller, Office of the Comptroller
of the Currency................................................ 8
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Bachus, Hon. Spencer......................................... 43
Gillmor, Hon. Paul E......................................... 47
Hinojosa, Hon. Ruben (with attachments)...................... 48
Royce, Hon. Edward R......................................... 62
James, Randall S............................................. 63
Johnson, Hon. JoAnn.......................................... 79
Kohn, Donald L............................................... 89
Latham, George............................................... 111
Reich, John M................................................ 121
Riccobono, Richard M......................................... 154
Williams, Julie L............................................ 176
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
The SAR Activity Review, May 2005............................ 224
ABA Recommended Changes in Regulation........................ 230
ICBA Recommended Changes in Regulation....................... 235
Sherman, Hon. Brad:
Inter-Agency Response to ABA Recommendations................. 237
James, Randall S.:
Written response to questions from Hon. Spencer Bachus....... 242
Johnson, Hon. JoAnn:
``Prompt Corrective Action Proposal for Reform,'' National
Credit Union Administration, March 2005.................... 245
Written response to questions from Hon. Spencer Bachus....... 281
Written response to questions from Hon. Brad Sherman......... 283
Latham, George:
Written response to questions from Hon. Spencer Bachus....... 294
``2004 SAR Filings Rose by One-Third, Treasury Unit Says in
Latest Report'', article, June 9, 2005......................... 295
FINANCIAL SERVICES REGULATORY RELIEF:
THE REGULATORS' VIEWS
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Thursday, June 9, 2005
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Kelly, Gillmor, Ryun,
Biggert, Feeney, Hensarling, Pearce, Neugebauer, McHenry, Watt,
Sherman, Carson, Green, Moore of Wisconsin, and Clay.
Chairman Bachus. [Presiding.] Good morning. Today's hearing
is a continuation of our hearings on regulatory relief. We
heard last month from the financial services industry, and of
course today we have a follow-up panel with regulators.
I want to thank Vice Chairman Reich for your work on the
EGRPRA and all the agencies; for I think you have done a
splendid job of coming to a consensus on what needs to be done.
I want to thank Chairman Oxley for his commitment to reg
relief. With the Patriot Act, the Sarbanes-Oxley Bank Secrecy
Act, we have not raised the threshold of SARs reports, and we
continue to create new regulations on the banks. And Chairman
Oxley and this committee are committed to trying to reduce the
regulatory burden.
I know Vice Chairman Reich testified before our committee I
think in May of 2004 when you talked about 12 to 13 percent of
banks' non-interest expenses were as a result of regulation,
which is $36 billion in 2003. Now, a lot of that is necessary
for safety and soundness, but a lot of it is unnecessary. It
duplicates regulation or regulations which are duplicative.
I also want to thank Jim Ryun, who has introduced
regulations for the smaller banking institutions, and Jeb
Hensarling, who has the reg relief bill, and also Mr.
Kanjorski, who is not here. I think he and Mr. Royce have
introduced legislation to ease the burden on our credit unions.
And we are going to be considering all those pieces of
legislation.
Before I introduce the members of our first panel, I would
like to ask if any members of the subcommittee have opening
statements.
All right. Gentlelady from New York, do you have an opening
statement?
Okay.
Mr. Ryun?
Mr. Ryun. Thank you, Mr. Chairman.
I want to keep my comments brief because I am looking
forward to what the panelists have to say. My position on
regulatory relief is well documented, and I do look forward to
hearing what the panel has to say.
I believe the efforts of the committee on regulatory relief
are timely and appropriate, and I think it is especially
important for us to focus on the disproportional regulatory
burden the small community banks shoulder. We have seen a
tragic reduction in the number of small banks serving our small
communities, and I believe this trend is largely due to the
inability to provide the resources necessary for compliance
with all the regulatory responsibilities put upon them.
Community First Act is intended to relieve this burden in
ways that are consistent with the goal of ensuring that the
consumer is protected and properly served. I look forward to
comments from our panelists on the specific areas of CFA that
they believe will be worthwhile as well as any concerns they
might have on language inside the bill.
I look forward to taking the information shared today and
working with my colleagues, Mr. Hensarling and Mr. Moore, to
craft a bill to provide regulatory relief to financial
institutions and ultimately serve the consumers of financial
services throughout this country.
I want to thank you again, Mr. Chairman, and I yield back
the balance of my time.
Chairman Bachus. Thank you.
Are there other members--Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman. I want to thank
you again for your leadership and holding this important
hearing, and helping to do what we can to reduce the regulatory
burden on our nation's financial institutions.
I also want to specifically thank and recognize Chairman
Powell and Vice Chairman Reich of the FDIC for their work in
this area. I have reviewed much of it and found it to be very
thorough, very thoughtful and very helpful.
As we learned last month in our hearing, our financial
institutions are in desperate need of regulatory relief and
without it many Americans may be kept from purchasing their
first home, buying an automobile for work, funding a child's
education or starting a new business that creates new jobs.
I think many of us have concluded that with meaningful
regulatory relief we can free up more capital for these
valuable purposes without undermining safety and soundness.
Along with my colleague, Mr. Ryun and many of us on this
panel, I am especially concerned at the disproportionate impact
that the regulatory burden has on our smaller financial
institutions, particularly our community banks and our small
credit unions, and I hope each of our panelists will address
that in specific.
There are so many areas that we could get in to, but we
need to recognize that corporately bank regulators, our
financial institutional regulators, have now promulgated over
800 regulations in the last 15 years. I do not know how we can
expect our small community-based financial institutions to
adapt and comply with this regulatory change or to keep up with
this pace.
And, again, there are many examples that I know we can
address. Just a couple of examples come to mind. I hope that
some on the panel will address, for example, the annual privacy
notices of Gramm-Leach-Bliley and particularly with respect to
financial institutions that do not share information.
Is there really a pressing need if a bank does not share
information, if they do not change their policies to send out
these documents each and every year to their customers? Last
month we heard where some community banks hire two to three
employees to do nothing, nothing but Bank Secrecy Act
compliance. Now, is anyone actually reading all of these SARs
and CTRs, and is it a meaningful tool for our law enforcement
officials? I think that is something that we need to examine.
Anyway, Mr. Chairman, I am anxious to hear the testimony
and I look forward to working with you, my colleague, Mr.
Moore, and all my other colleagues to see what we can do to get
more resources into the front lines of community lending and
help more families.
And I yield back.
Chairman Bachus. Thank you.
If there are no other opening statements, I would like to
introduce the first panel.
I would like to also comment that we did pass H.R. 1375
last year by an overwhelming margin, and that bill actually had
8 of the 10 recommendations that you all have reached consensus
on. So we continue to look for other areas of regulatory
relief.
I know Mr. Hensarling and I have discussed some of the
proposals on the SARs, on the filings of the SARs, either
eliminate some of your filings by seasons to customers or
things of that nature. But we probably will not take testimony
on that this morning unless you all want to comment on how we
might could reduce the number of those filings, particularly
when there has been widespread publicity that our Government
agencies are not reviewing those.
Our panel consists of Mr. John Reich, vice chairman of the
Federal Deposit Insurance Corporation--and we have already
acknowledged your fine work on this interdisciplinary
commission study; Mr. Don Kohn, governor, Board of Governors in
the Federal Reserve System--welcome you back; Ms. Julie
Williams, acting comptroller, Office of the Comptroller of the
Currency--always good to have you, Ms. Williams; Mr. Riccobono,
acting director, Office of Thrift Supervision.
This is a group of really veteran witnesses today.
The Honorable Joann Johnson, chairman of the National
Credit Union Administration--welcome you, Chairman Johnson; and
Mr. Randall James, commissioner of the Texas Department of
Banking--and you are testifying on behalf of the Conference of
State Banking Supervisors; and Mr. George Latham, deputy
commissioner, Bureau of Financial Institutions from the State
of Virginia and testifying on behalf of the National
Association of State Credit Union Supervisors.
We welcome each of you.
And we will start, Vice Chairman Reich, with your
testimony.
STATEMENT OF JOHN M. REICH, VICE CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Reich. Thank you, Mr. Chairman. I want to thank you as
well as Ranking Member Sanders, Congressman Hensarling,
Congressman Moore and other distinguished members of this
subcommittee for your continuing commitment to pursuing
regulatory relief.
I appreciate this opportunity to testify and update you on
our efforts to reduce the regulatory burden on our nation's
banks.
I am here today as the interagency leader of the regulatory
review process mandated by the Economic Growth and Regulatory
Paperwork Reduction Act, EGRPRA.
In a former life, I was a 23-year community banker in
Sarasota, Florida, the last 10 years of which were as CEO of a
community bank.
When Congress enacted EGRPRA in 1996, it directed the
agencies to work together in an effort to eliminate outdated,
unnecessary and unduly burdensome regulations. I am pleased to
report to you that over the last 2 years the agencies have
worked well together, and I think we are making progress, but
there is still much left to be done.
There are three points that I want to make in my testimony
this morning. My first point is that the banking industry has
been on the receiving end of a substantially increased Federal
regulation in recent years and is suffocating under the weight
of an emulated regulatory burden which threatens, in my view,
the future viability of community banking in particular. We
need to act now to rebalance the scales, so to speak, provide
regulatory relief to offset some of the regulatory load the
industry is carrying.
I think it is important for me to review with you the
changing demographics that are taking place in the industry,
which I think will provide some added context to the discussion
of regulatory burden.
Most people recognize that there has been considerable
consolidation in the banking industry over the past 20 years,
but not everyone fully appreciates the extent to which
community banks have been disappearing from the scene.
As chart one indicates that is before you now, with the red
line, at the end of 1984, 20 years ago, there were 17,139 banks
with less than a billion dollars in assets. By the end of last
year, that number had dwindled to 8,378, a decline of 8,700
institutions or a 51 percent decline over a 20-year period.
Equally dramatically, look at institutions under $100
million in assets. There were 11,700 banks and thrifts at the
end of 1984 and only 4,094 at the end of last year--a 65
percent decline in community banks, small community banks over
the past 20 years.
Let me turn to market share trends for the same-sized
institutions on our second chart. Perhaps more dramatic than
the decline in numbers of institutions has been the decline in
market share. This chart shows that the total market share of
institutions with less than a billion dollars in assets was 33
percent 20 years ago at the end of 1984, and the fair market
share has rather steadily declined to 14 percent at the end of
last year.
For the smallest community banks, those with less than $100
million in assets, the market share has declined from 9 percent
to 2 percent over the past 20 years. All of these numbers have
been adjusted for inflation.
I want to address the matter of industry profitability,
because it is widely reported but little understood, and I
would like to provide some context.
By the end of 2004, there were 8,975 banks in the country,
banks and thrifts, and for the fourth consecutive year there
were record earnings in the industry. Those earnings totaled
$122.9 billion. One point three percent of the total number of
institutions in the country accounted for 73 percent of
industry earnings. Those 1.3 percent were those institutions,
117 institutions, with over $10 billion in assets. So 1.3
percent of the institutions accounted for 73 percent of the
earnings in the industry.
Six-point-seven percent of the total number of institutions
earned $107 billion of the $112.9 billion--87 percent of
industry earnings. Those are all institutions over a billion
dollars in assets. There were 597 of those. Those include those
that are over $10 billion. Those 597 institutions accounted for
87 percent of industry earnings.
In sharp contrast, 93.3 percent of banks and thrifts, 8,378
of the 8,975 that are under a billion dollars in assets, earned
$14 billion, or 12.7 percent of industry earnings. And the 20-
year trend of industry earnings for institutions under a
billion has reflected on chart 3 with the red line.
To break it down one more step, the 4,093 community
institutions have under $100 million in assets, they represent
46 percent of our total banking industry in terms of number of
banks in the country. They accounted for $2.1 billion of the
$122.9 billion in industry earnings. One point seven percent of
industry earnings, reflected by the blue line here, were
represented by the 4,093 institutions, constituting 46 percent
of our total number of institutions.
Chart 4 is an update of the chart you saw last year. It
speaks for itself. It is a listing of 851 final rules which
have been enacted and imposed on the industry since FIRREA was
enacted in 1989, an average of 50 a year over the past 16
years.
And a point that I would like to make to you as you look at
this chart is to please realize that whether it is the
Community National Bank of Brattleboro or JPMorgan Chase, every
institution in the country must be on top of each of these
rules and regulations to determine, one, does it apply to them
and, two, if it does, what do we need to do?
Let me add, Mr. Chairman, that although regulatory burden
has a disproportionate impact on community banks, we are
committed to addressing the problem for every financial
institution. Banks, large and small, labor under the cumulative
impact of regulations that diverts resources and capital away
from economic development, extension of credit and job
creation.
So allow me to repeat my first point, which was and is the
banking industry has been on the receiving end of substantially
increased Federal regulation in recent years, is suffocating
under the weight of that regulation, and it threatens the
future viability of community banks in particular. We need to
act now to rebalance the scales.
My second point is that the industry and the regulators
have reached consensus agreement on 12 recommendations to
Congress for legislative relief. They are outlined in my
written statement. I think they are included in most of our
written statements today. We are providing also today a
separate package which contains the actual legislative
language.
My third and final point is to make you aware that the
people at this table are working together very well, I believe.
We have a longer list of items that we are working on. We have
reached consensus with the trade associations. There are
upwards of 60 additional items in addition to the 12 that are
being presented to you today and that I hope that as our
conversations continue with each other here at this table over
the next few weeks that we will be back with you soon with an
additional list of recommendations.
So in closing, Mr. Chairman, I would say that the degree of
cooperation of the federal banking agencies and the extent of
consensus that exists among the trade associations provides me
with optimism that we are on the threshold of a significant
opportunity this year to reduce regulatory burden.
I look forward to working with you, Mr. Chairman,
Congressman Hensarling and others who have a sincere interest
in reducing regulatory burden on our banking industry.
Thank you very much. I would be happy to take questions.
[The prepared statement of John M. Reich can be found on
page 121 in the appendix.]
Chairman Bachus. Thank you. And I do appreciate you
mentioning Congressman Moore, who was cosponsoring the bill
with Congressman Hensarling. In my opening statement, I
augmented referring to Dennis and Congressman Moore's done
yeoman work in this regard.
Governor Kohn?
STATEMENT OF DONALD L. KOHN, GOVERNOR, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Kohn. Thank you, Mr. Chairman.
Mr. Chairman, members of the subcommittee, thank you for
the opportunity to testify on issues related to regulatory
relief.
The board strongly supports Congress's efforts to review
the federal banking laws to determine whether they can be
streamlined without compromising other public policy
objectives. The board strives to review its own regulations at
least once every 5 years, and we have been an active
participant in the ongoing interagency regulatory review
process being conducted under EGRPRA.
But some types of regulatory relief will require your
action and the appendix to my testimony describes the numerous
legislative relief proposals the board supports.
I am pleased to note that three of the board's most
important regulatory relief suggestions recently were passed by
the committee and the full House as part of H.R. 1224, Business
Checking Freedom Act of 2005.
These amendments would authorize the Federal Reserve to pay
interest on balances held at reserve banks, provide the board
greater flexibility in setting reserve requirements and allow
repository institutions to pay interest-on-demand deposits.
These amendments would improve efficiency in the financial
sector, assist small banks and small businesses and enhance the
Federal Reserve's toolkit for efficiently conducting monetary
policy.
In addition, among the other amendments the board supports
are ones that would remove outdated barriers to interstate
branching by banks, raise the asset threshold below which an
insured institution may qualify for an extended examination
cycle, allow the board in appropriate circumstances to waive a
special shareholding attribution rule in the Bank Holding
Company Act and equalize and liberalize the cross-marketing
restrictions that apply to certain investments made by
financial holding companies.
While the board strongly supports allowing depository
institutions to pay interest-on-demand deposits and branch de
novo across state lines, the board opposes amendments that
would grant these powers to industrial loan companies that
operate outside the regulatory framework established for other
types of insured banks.
Granting these expanded powers to exempt ILCs would permit
them to become the functional equivalent of full service
insured banks. However, these institutions operate under a
special exemption in current law that allows their parent
companies to avoid supervision and regulation under the Bank
Holding Company Act.
As a result, these proposals would create an unlevel
competitive playing field; allow firms to own and control the
functional equivalent of a full service bank without being
subject to consolidated supervision at the holding company
level; and may undermine the framework that Congress has
established and reaffirmed as recently as 1999 to maintain the
separation of banking and commerce.
H.R. 1224 would allow exempt ILCs to offer business NOW
accounts without adequately addressing these concerns. For
example, the bill would allow those commercial and retail firms
that acquired an ILC before October 1, 2003 to transform the
institution into the functional equivalent of a full service
bank. ILCs acquired after that date could also offer business
NOW accounts if their parents are predominantly financial.
Importantly, however, the bill gives the ILC's state supervisor
the authority to make this determination rather than relying on
the process established in the GLB Act.
In addition, the bill fails to address the supervisory
issues related to the potential lack of consolidated
supervision of an ILCs holding company. Consolidated
supervision provides an important protection to the insured
banks that are part of a larger organization because financial
trouble in one part of an organization can spread rapidly to
other parts. For this reason, Congress has established
consolidated supervision as a fundamental component of bank
supervision in the United States.
Let me be clear: The board does not oppose granting ILCs
the ability to offer business NOW accounts or open de novo
branches if the corporate owners of these institutions are
covered by the same supervisory and regulatory framework that
applies to the owners of other full service, insured banks.
Mr. Chairman, I appreciate the opportunity to discuss the
board's legislative priorities concerning regulatory relief.
The board would be pleased to work with the subcommittee, the
full committee and their staffs as well as our regulatory
compatriots as you move forward in developing regulatory relief
legislation.
Thank you.
[The prepared statement of Donald L. Kohn can be found on
page 89 in the appendix.]
Chairman Bachus. Thank you.
Comptroller Williams?
STATEMENT OF JULIE L. WILLIAMS, ACTING COMPTROLLER, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
Ms. Williams. Chairman Bachus, members of the subcommittee,
I appreciate the opportunity to appear before you today to
discuss the challenge of reducing unnecessary regulatory
burdens on our nation's banking institutions. The Office of the
Comptroller of the Currency does welcome your continued efforts
to advance regulatory burden relief legislation. And I also
want to express particular appreciation to Congressman
Hensarling and Congressman Moore for their commitment to this
issue.
My written testimony and the appendices to that testimony
describe a number of burden-reducing initiatives that the OCC
supports. This morning, I would like to touch on just a few key
points from that testimony. And I also want to lay out two
broader themes that I hope will guide our mutual efforts to
reduce unnecessary regulatory burden.
My testimony emphasizes that the regulatory burdens on our
financial institutions arise from several sources. First, we as
federal banking regulators have a responsibility to look
carefully at the regulations we adopt to ensure that they are
no more burdensome than is necessary to protect safety and
soundness, foster the integrity of bank operations and
safeguard the interests of consumers.
In this connection, I must mention and applaud the EGRPRA
regulatory burden reduction initiative that is being led so
ably by John Reich.
As part of this process, the OCC, together with the other
federal banking agencies, has been soliciting and reviewing
public comment on our regulations and participating in banker
and consumer outreach meetings around the country, using the
input that has been gathered during the public comment and
outreach process, the banking agencies are now developing
additional specific recommendations for regulatory as well as
legislative changes.
Second, we also must realize that not all the regulatory
burdens imposed on banks today come from regulations
promulgated by bank regulators. Thus, we welcome the interest
of the subcommittee in issues such as the implementations of
Bank Secrecy Act and anti-money laundering standards and
reporting requirements.
And I would also like to thank you, Mr. Chairman, for your
continuing involvement in an oversight of proposals by the
Securities and Exchange Commission to implement the so-called
push-out provision of the Gramm-Leach-Bliley Act. This
attention has been invaluable in encouraging the development of
rules that we hope that will be faithful to Gramm-Leach-
Bliley's intent and also not so burdensome as to drive
traditional banking functions out of banks.
A third key source of regulatory burden is federal
legislation. Relief from some manifestations of unnecessary
regulatory burden requires action by Congress. My written
testimony contains a number of recommendations for legislative
changes designed to modify or eliminate unnecessary
requirements, provide additional flexibility and make the
overall effect of particular laws less burdensome.
The list includes consensus recommendations developed and
agreed to in our discussions with the other banking agencies
and with the industry.
Before closing, I would just like to briefly highlight two
broader themes that I hope will guide us in our efforts to
tackle unnecessary regulatory burden.
The first involves consumer protection disclosure
requirements and here is an area where we have an opportunity
to reduce regulatory burden and improve the effectiveness of
our regulations. Today, our system imposes massive disclosure
requirements and massive cost on financial institutions but
does not generally produce information that consumers find easy
to understand, and it often lacks the information that
consumers most want to know.
The success of the Food and Drug Administration's nutrition
facts label proves that it is possible to deliver the
information that consumers want and need in a concise and
streamlined form.
Key to this kind of result is using consumer testing. The
Federal banking agencies have broken new ground recently by
employing consumer testing as an essential part of the
interagency project to simplify the Gramm-Leach-Bliley Act
privacy notices, a project that has the potential to produce
more effective and meaningful disclosures for consumers and
reduce burdens on institutions that generate and have to
distribute privacy notices. We need to do more of this.
My second point goes back to the basics. Why do we care
about regulatory burden? Isn't more regulation always better? I
think not. We care because unnecessary regulatory burden saps
the efficiency and competitiveness of American enterprise. And
we particularly care because of the critical impact of
regulatory burden on our nation's community banks.
Community banks thrive on their ability to provide customer
service, but the very size of community banks means that they
have more limited resources available to absorb regulatory
overhead expenses without impacting the quality and delivery of
their services. We need to recognize that the risks presented
by certain activities conducted by a community bank are simply
not commensurate with the risks of that activity conducted on a
much larger scale.
One size fits all may not be a risk-based or sensible
approach to regulation in many areas, and I hope we can do more
to identify those areas where some types of distinction between
banks based on the size and complexity and scope of their
operations makes sense as a regulatory approach.
In conclusion, Mr. Chairman, on behalf of the OCC, thank
you for holding these hearings. The OCC strongly supports
initiatives that will reduce unnecessary regulatory burden on
the banking industry in a responsible, safe and sound manner.
We would be pleased to work with you and your staff to make
that goal a reality.
Thank you.
[The prepared statement of Julie L. Williams can be found
on page 176 in the appendix.]
Chairman Bachus. We thank you for that thoughtful
testimony.
Dr. Riccobono?
STATEMENT OF RICHARD M. RICCOBONO, ACTING DIRECTOR, OFFICE OF
THRIFT SUPERVISION
Mr. Riccobono. Good morning, Chairman Bachus, members of
the subcommittee. Thank you for the opportunity to testify on
regulatory burden relief on behalf of the OTS.
I want to thank you, Mr. Chairman, for your leadership and
focus in this area, and I would also like to recognize the
efforts of FDIC Vice Chairman Reich on the interagency EGRPRA
project.
And, Mr. Chairman, I would have said those nice things
about Vice Chairman Reich even if he was not going to be my
boss.
We look forward to working with the subcommittee on
legislation to address the issues we discuss today. While it is
always important to remove unnecessary regulatory obstacles in
our financial services industry that hinder profitability and
competition and, in turn, hinder job creation and economic
growth, this is a particularly good time to be discussing these
issues given where we are in the economic cycle. Today, we have
an opportunity to explore numerous proposals to eliminate old
laws that, while well intended, no longer serve a useful
purpose.
Before addressing these issues, it is important to note
that there are two areas that I will not be discussing today:
Bank Secrecy Act requirements and the rules under Sarbanes-
Oxley. Virtually all institutions raise these two issues as
regulatory relief priorities. While we recognize the need for
relief in these areas, we are not at a point to be able to make
sound recommendations on where to make reforms without
compromising the underlying purpose of the laws, but we are
working on it.
In my written statement, I describe a number of proposals
that would significantly reduce burden on savings associations.
I ask that the full text of that statement be included for the
record.
Four items that we believe provide the most significant
relief for savings associations are elimination of the
duplicative regulation of savings associations under the
federal securities laws, eliminating the existing arbitrary
limits on savings associations and consumer lending laws,
updating commercial and consumer business lending limits for
savings associations and establishing statutory succession
authority for the position of the OTS director.
Currently, banks and savings associations may engage in the
same types of activities covered by the investment advisor and
broker dealer requirements of the federal securities laws.
These activities are subject to supervision by the banking
agencies that is more rigorous than that imposed by the SEC,
yet savings associations are subject to an additional layer of
regulation and review by the SEC that yields no additional
supervisory benefits.
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
unwarranted administrative costs on a savings association to
register as an investment advisor or as a broker dealer under
the federal securities laws.
OTS strongly supports legislation such as that in section
201 of H.R. 1375 to exempt savings associations from these
duplicative investment advisor and broker dealer registration
requirements.
Another important proposal for OTS is eliminating a
statutory anomaly that subjects the consumer lending authority
of a federal savings association to a 35 percent of assets
limit, but permits unlimited credit card lending. This exists
even though both types of credit may be extended for the same
purpose. Removing the 35 percent cap on consumer lending will
permit savings associations to engage in secured consumer
lending activities to the same extent as unsecured credit card
lending. This makes sense not only from a statutory burden
reduction perspective but also for reasons of safety and
soundness.
We also support updating statutory limits on the ability of
federal savings associations to make small business and other
commercial loans. Currently, federal savings association
lending for commercial purposes is capped at 20 percent of
assets, and commercial loans in excess of 10 percent of assets
must be in small business loans.
Legislation removing the current limit on small business
loans and increasing the cap on other commercial lending will
provide savings associations greater flexibility to promote
safety and soundness through diversification, more
opportunities to counter the cyclical nature of the mortgage
market and additional resources to manage their operations
safely and soundly.
A final but important issue, is statutory succession
authority for the position of OTS director. In many respects,
this issue is more important for the thrift industry than it is
for OTS. We strongly urge consideration of a provision
authorizing the Treasury secretary to appoint a succession of
individuals within OTS to serve as OTS acting director in order
to assure agency continuity. It is equally important to
modernize the existing statutory appointment authority to the
OTS director by providing every appointee a full 5-year term.
Statutory succession authority would avoid relying on the
Vacancies Act to fill any vacancy that occurs during or after
the term of an OTS director or acting director. This is
important given our continuing focus on maintaining the
stability of our financial system in the event of a national
emergency.
OTS is committed to reducing burden whenever it has the
ability to do so consistent with safety and soundness and
consumer protection.
We look forward to working with you, Mr. Chairman, and the
subcommittee to address these and other regulatory burden
reduction items discussed in my written statement. I will be
happy to any answer questions that you may have.
Thank you.
[The prepared statement of Richard M. Riccobono can be
found on page 154 in the appendix.]
Chairman Bachus. Thank you. We appreciate your testimony.
Chairman Johnson, we welcome you, look forward to your
testimony.
And all the witnesses, your entire written testimony will
be submitted in the record, without objection.
STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION
ADMINISTRATION
Ms. Johnson. Good morning, Chairman Bachus and members of
the subcommittee. On behalf of the National Credit Union
Administration, I am pleased to be here today to present our
agency's views on regulatory efficiency and reform initiatives
being considered by Congress.
Enacting this legislation will directly and indirectly
benefit the consumer and the economy by assisting all financial
intermediaries and their regulators perform the role and
functions required of them.
The Subcommittee on Financial Institutions and Consumer
Credit has been taking the lead over the last several years in
many areas of interest to consumers and financial institutions
such as credit unions. Legislation of the type being considered
today epitomizes the real connection between and the benefits
of effective financial institutions efficiently delivering
consumer credit to the public.
It is my strong belief that effective regulation rather
than excessive regulation should be the underlying principle
supporting NCUA's critical mission of ensuring the safety and
soundness of federally insured credit unions.
While we scrutinize one-third of our existing regulations
annually to find ways to simplify or improve any rule that is
outdated or in need of revision, these legislative proposals,
if enacted, will allow credit unions to better serve their
members and improve access to affordable financial services.
Last year, I testified in favor of the credit union
provisions in the Financial Institutions Regulatory Relief Act
of 2004. Approved by the House Financial Services Committee and
passed by the House of Representatives by a vote of 392 to 25,
that legislation was a significant bipartisan achievement that
NCUA greatly appreciated and enthusiastically supported. Those
provisions merited your support in the past and NCUA supports
inclusion of those credit union provisions in any new
legislation that is introduced this year.
The recent introduction of the Credit Union Regulatory
Improvement Act of 2005, CURIA, also includes many of the same
credit union provisions approved in last year's reg relief bill
and addresses some of the most compelling statutory and
consequently regulatory reform issues being discussed within
the credit union industry today.
CURIA of 2003 suggested that NCUA should be authorized to
design and implement a risk-based prompt corrective action
system for federally insured credit unions. In order for policy
makers and credit unions to make an accurate assessment of the
proposal, NCUA has worked to demonstrate how such a system
could be implemented. I have provided the complete plan as an
attachment to this testimony and would like to discuss it
briefly here.
The guiding principle behind PCA, or prompt corrective
action, is to resolve problems in federally insured credit
unions at the least long-term cost to the Share Insurance Fund.
This mandate is good public policy and consistent with NCUA's
fiduciary responsibility to the insurance fund.
While NCUA supports a statutorily mandated PCA system, the
current statutory requirements for credit unions are too
inflexible and establish a structure based primarily on one-
size-fits-all approach, relying largely on a high leverage
requirement of net worth to total assets. This creates
inequities for credit unions with low-risk balance sheets and
limits NCUA's ability to design a meaningful risk-based system.
Credit unions should not be placed at a competitive
disadvantage by being held to higher capital standards when
they are not warranted to protect the insurance fund.
For FDIC-insured institutions, a 5 percent leverage
requirement, coupled with a risk-based system, has provided
adequate protection for their insurance fund. In comparison,
the credit union industry has a relatively low-risk profile, as
evidenced by our low loss history. This is largely due both to
the greater restrictions on the powers of credit unions
relative to other financial institutions and also credit
unions' conservative nature given their member-owned structure.
In addition, the current 7 percent leverage requirement is
excessive for low-risk institutions. A meaningful risk-based
system working in tandem with a lower leverage requirement
provides incentives for financial institutions to manage the
risks they take in relation to their capital levels.
We recognize that achieving comparability between the
federal insurance funds requires us to factor in the Share
Insurance Fund deposit-based funding mechanism. Thus, our
reform proposal incorporates a revised method for calculating
the net worth ration for PCA purposes by adjusting for the
deposit credit unions maintain in this insurance fund.
However, our proposed treatment of the Share Insurance Fund
deposit for purposes of regulatory capital standards in no way
alters its treatment as an asset under generally accepted
accounting principles or our steadfast support of the deposits-
based nature of the Share Insurance Fund.
For the risk-based requirement, our proposal tailors the
risk asset categories and weights of BASEL II's standard
approach as well as related aspects of the FDIC's PCA system to
the operation of all credit unions. It is our intention to
maintain comparability with FDIC's PCA requirements for all
other insured institutions and keep our risk-based requirement
relevant and up to date with emerging trends in credit unions
and the marketplace.
Concerning other provisions in the proposal, as I have
previously testified, an important technical amendment is
needed to the statutory definition of net worth. NCUA
anticipates that the Financial Accounting Standards Board will
act soon to the lift the current deferral of the acquisition
method of accounting for mergers by credit unions, thereby
eliminating the pooling method and requiring the acquisition
method. This change will, in effect, discourage 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 with the post-merger net worth.
This resulting lower net worth ratio has adverse implications
on the statutory prompt corrective action regulations, and it
will discourage voluntary mergers.
On occasion, this will make NCUA-assisted mergers more
difficult and costly to the national Share Insurance Fund.
Without a remedy, an important NCUA tool for reducing costs and
managing the fund in the public interest will be lost. FASB has
indicated it supports a legislative solution and that such a
solution will not impact their standard-setting activities.
There are other provisions within the regulatory reform
that are suggested that NCUA fully supports, including allowing
check cashing, wire transfer and other money transfer services
to be offered, especially in areas where in a field of
membership those who are not members but are eligible for
membership would be able to use these services, particularly
helpful in areas of low income where they are susceptible to
higher rates. It would assist them in becoming familiar and
comfortable working with an insured institution.
We also support improving and lifting the limitations and
restrictions on the 12-year maturity limit that is currently
reducing or limiting loans made on second homes, recreational
vehicles and other conventional maturities that are commonly
accepted in the market today.
Mr. Chairman, we have reviewed all of the additional credit
union provisions not originating from NCUA but included in
previously mentioned bills, and we have no safety and soundness
concerns with these provisions.
Thank you for the opportunity to appear before you today.
On behalf of NCUA and the credit unions and the 84 million
credit union members, I am pleased to respond to any questions
that you may have or be a source of additional information.
[The prepared statement of Hon. JoAnn Johnson can be found
on page 79 in the appendix.]
Chairman Bachus. Thank you, Chairman Johnson.
Let me say this: I think next week it is our intention to
take an amendment to the statutory definition of net worth to
the floor.
Ms. Johnson. That is good news. Thank you.
Chairman Bachus. Probably on suspension. And we hope to do
that.
Commissioner James, we welcome you. Anybody from the State
of Texas is welcome to our committee.
STATEMENT OF RANDALL S. JAMES, COMMISSIONER, TEXAS DEPARTMENT
OF BANKING, ON BEHALF OF CONFERENCE OF STATE BANK SUPERVISORS,
INC.
Mr. James. Thank you, and good morning, Chairman Bachus and
members of the subcommittee.
For the record, my name is Randall James. I am the Texas
banking commissioner, and I am very pleased to be here today on
behalf of the Conference of State Bank Supervisors.
Thank you for inviting CSBS to be here to discuss
strategies for reducing the unnecessary regulatory burden on
all of our nation's banks. We especially appreciate the
opportunity to discuss our views in our capacity as the
chartering authority and primary regulator of the vast majority
of our nation's community banks.
A bank's most important tool against regulatory burden is
its ability to make meaningful choices about its regulatory and
operating structures. The state charter has been and continues
to be the charter of choice for community-based institutions,
because the state-level supervisory environment is locally-
oriented, it is responsive, it is meaningful, and it is
flexible, and that matches the way these banks do business.
Our current regulatory structure and statutory framework
may recognize some differences among financial institutions,
but too often mandates an overarching one-size-fits-all
requirement for any institution that can be described by the
word ``bank.'' These requirements are often unduly burdensome
on smaller and community-based institutions.
My colleagues and I see growing disparity in our nation's
financial services industry. The industry is becoming
increasingly bifurcated between large and small institutions,
and Congress must recognize this reality and the impact this
bifurcation has on our economy.
As Vice Chairman John Reich's testimony clearly points out,
stifling economic incentives for community banks with excessive
statutory burdens slows the economic engine of small business
in the United States. Regulatory burden relief for community
banks would be a booster shot for the nation's economic well-
being.
CSBS endorses approaches such as Congressman Ryun's
Communities First Act but recognize and encourage the benefits
of diversity within our banking system. We ask that Congress
include some type of targeted relief for community banks in any
regulatory relief legislation.
Today, if you will allow me, I would like to highlight a
few specific changes to federal law that would help reduce
regulatory burden on financial institutions. We ask that the
committee include these provisions in any legislation it
approves.
First, CSBS believes that the Federal Reserve should have
the flexibility it needs to allow state chartered member banks
to exercise the powers granted by their charters as long as
these activities pose no significant risk to the deposit
insurance fund. Current law limits the activities of state-
charted fed member banks to those activities allowed for
national banks. This restriction stifles innovation within the
industry and eliminates a key dynamic of the dual banking
system.
Second, CSBS believes that the state banking regulator
should have a vote on the Federal Financial Institutions
Examination Council. The council's State Liaison Committee
includes state bank, credit union and savings bank regulators.
The chairman of this committee has input at council meetings
but is not able to vote on policy that affect the institutions
we charter and supervise. We ask that Congress change the state
position on this council from one of observer to that of a full
voting member.
Finally, we believe that advances in off-site monitoring
techniques and technology and the health of the banking
industry make annual on-site examinations unnecessary for the
vast majority of the healthy financial institutions we have.
Therefore, we do ask Congress to extend the mandatory
federal examination cycle from 12 months to 18 months for
healthy well-managed banks with assets of up to $1 billion.
As you consider additional ways to reduce burden on
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 different size and
specialties to meet the needs of the world's most diverse
economy and society.
While federal intervention may be necessary to reduce
burden, relief measures should allow for further innovation and
coordination at both the State and Federal levels for
institutions of all sizes and especially to recognize the
important role community banks play in our local economies.
State supervisors are sensitive to regulatory burden, and
constantly look for ways to simplify compliance.
Your own efforts in this area, Chairman Bachus, have
greatly reduced unnecessary regulatory burden on financial
institutions. We commend you, Chairman Bachus, Congressman
Hensarling and Moore and members of the subcommittee, for your
efforts in this area.
We thank you for the opportunity, and I will be glad to try
to respond to any questions as you see fit.
Thank you.
[The prepared statement of Randall S. James can be found on
page 63 in the appendix.]
Chairman Bachus. Thank you.
Commissioner Latham, we welcome your testimony.
And, Mr. James, we would welcome your comments I think in
enforcement of what Vice Chairman Reich said about the
difference between the large banks and small banks. So I think
you have it bifurcation is your word?
Mr. James. Yes, sir.
Chairman Bachus. Deputy Commissioner Latham, we welcome
your testimony.
STATEMENT OF GEORGE LATHAM, DEPUTY COMMISSIONER, BUREAU OF
FINANCIAL INSTITUTIONS FOR THE STATE OF VIRGINIA, ON BEHALF OF
NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS
Mr. Latham. Thank you, sir.
Good morning, Chairman Bachus and distinguished members of
the subcommittee. I am George Latham----
Mrs. Kelly. Sir, please pull your microphone to you and
turn it on.
Mr. Latham. Okay. Can you hear me now?
Chairman Bachus. Yes.
Mr. Latham. I am George Latham, deputy commissioner of
financial institutions for the Commonwealth of Virginia. I am
also a past chairman of the Board of NASCUS, the National
Association of State Credit Union Supervisors, who I am
speaking on behalf of here today.
NASCUS's priorities for regulatory relief legislation
focuses on reforms that will strengthen the State system for
credit union supervision and enhance the capabilities of state
chartered credit unions.
Capital reform continues to be a critical concern for the
nation's credit unions. NASCUS strongly urges the subcommittee
to adopt or amend the prompt correction action provision of the
Federal Credit Union Act. This section would require federally
insured credit unions to include all forms of capital when
calculating the required net worth ratio.
Under the Federal statute, credit union net worth is
defined as and is limited to retained earnings. Therefore, the
Federal Credit Union Act needs to be amended. In addition,
amending the definition of that word cures the unintended
consequences for credit unions of the Financial Accounting
Standards Board standard number 141.
As NASCUS testified before this subcommittee in April of
this year, the retained earnings of a merging credit union
would no longer be combined with those of the continuing credit
union. This creates a potential significant dilution of
statutory net worth and an unintended impediment to credit
union mergers.
Mergers are a safety and soundness tool regulators
sometimes use to protect funds deposited by American consumers.
This tool also preserves the vitality of the National Credit
Union Share Insurance Fund.
Chairman Bachus and members of the subcommittee, NASCUS
applauds the introduction of H.R. 1042, the Net Worth Amendment
for Credit Unions Act. Your bill allows the retained earnings
of a merging credit union to be counted with that of a
surviving credit union. We recognize and also appreciate that a
similar provision was introduced into H.R. 2317, the Credit
Union Regulatory Improvement Act.
NASCUS has a long-standing policy supporting risk-based
capital; therefore, NASCUS supports the risk-based capital plan
presented in title one of H.R. 2317.
NASCUS supports capital reform beyond risk-weighted
capital. We believe credit unions should have access to
alternative capital that is complimentary to their proposed
risk-based system.
As a regulator, I believe it makes sound economic sense for
credit unions to access other forms of capital to improve their
safety and soundness. Strengthening the capital base of this
nation's credit unions is a priority.
Strong capital reform requires that State and Federal
regulators work together. In 1998, the Credit Union Membership
Access Act, H.R. 1151, mandated that NCUA consult and cooperate
with state regulators in constructing prompt corrective action
and member business lending regulations. NASCUS stands ready to
meet this mandate.
We firmly believe that the cooperation between regulators
yields better regulation and a safe and sound credit union
system. It is therefore vital that credit union member business
lending is available to consumers. Section 201 of H.R. 2317
raises the statutory limit on credit union member business
loans to 20 percent of total assets. This facilitates member
business lending without jeopardizing credit union safety and
soundness.
And I know from Mr. Riccobono's testimony that they seek
similar limit at 20 percent, and so there is agreement there
between regulators, which is a good thing.
Further, NASCUS supports section 202, which amends the
definition of a member business loan by increasing the current
amount from $50,000 to $100,000. Both of these provisions
provide credit unions with regulatory relief and were included
in H.R. 3579 which was introduced in the 108th Congress.
NASCUS supports section 311 in CURIA that provides
federally insured credit unions the same exemptions as banks
and thrift institutions from Federal Trade Commission pre-
merger notification requirements and fees.
NASCUS also supports 312 of CURIA. Federally insured credit
unions should have parity treatment with commercial banks with
regard to exemptions from Securities and Exchange Commission
registration requirements. Without this parity treatment, the
powers granted to state-chartered credit unions by state
legislatures might be unnecessary preempted by SEC regulation.
The 108th Congress recognized these provisions when they
were included in H.R. 1375. NASCUS firmly believes that non-
federally insured credit unions should be eligible to join the
federal home loan banks. There are 86 insurance companies, none
of which are federally insured that already belong the federal
home loan bank system.
And, finally, recent preemptive actions by federal banking
agencies could have a potentially significant impact on the
dual chartering system for commercial banks. Unless Congress
intervenes, NASCUS has concerns that the federal credit union
regulator could use as precedent to initiate preemptive
actions. Congress should resolve these preemption conflicts
rather than delegate these fundamental issues to federal
regulators.
This concludes my remarks, Chairman Bachus, and NASCUS
appreciates this opportunity to testify today, and we welcome
further participation and dialogue concerning regulatory
relief. I will be happy to respond to any questions that the
subcommittee has.
[The prepared statement of George Latham can be found on
page 111 in the appendix.]
Chairman Bachus. I thank you.
At this time, I would like to introduce into the record the
SARs activity reviewed by the numbers that was just issued by
FinCEN, which again shows a substantial increase in the number
of SARs and I think bolsters some of the testimony we have
heard today, without objection.
At this time, Ms. Kelly, you are recognized for questions.
Mrs. Kelly. Thank you very much, Mr. Chairman.
Ms. Williams, my subcommittee has taken a deep interest in
the situation regarding the Government's actions with regard to
Arab Bank. I certainly respect the limits of what you can say
about the OCC actions in light of its ongoing nature, but I am
wondering if you can share with the committee some of your
thoughts about this situation and what impact it has had on the
operation of the OCC.
Are you able at this time to comment on claims that the
branch was consistently given good grades by regulators in the
years leading up to this action? That is my first question.
My second question is, can you explain to the committee the
timeline of events regarding Arab Bank from the OCC's
perspective? I believe that there are many of us who have been
watching this, and we have developed a strong interest in
making sure this issue is resolved, and I mean fully resolved
with a unified, fair response that will further strengthen
efforts to secure the international financial system.
Ms. Williams. Congresswoman Kelly, we share the concerns
that you expressed in the latter part of your statement. I must
limit my response to your questions about Arab Bank, because
the OCC has an open pending enforcement case against the
federal branch of Arab Bank.
However, I can make the following statement: First, it is
important to recognize that our authorities and jurisdiction
with respect to BSA compliance that national banks and
federally licensed branches of foreign banks is to assess a
bank or branch's BSA systems and controls and to assure that
they meet applicable standards.
Specifically, in the case of the federal branch of Arab
Bank, we supervise the federal branch. We do not supervise Arab
Bank itself.
During the course of a recent BSA examination of the
branch, we determined that the branch did not have adequate
systems and controls in place to monitor international wire
transactions despite the high-risk nature of that activity.
During the course of our work, in order to test that
branch's system, the OCC compiled a list of individuals and
entities with the same or similar names as reputed terrorists
or terrorist organizations using publicly available information
sources, such as criminal indictments, testimony before
congressional committees and media reports.
We ran that list against the branch's system. This process
was extraordinarily challenging given the huge number of wire
transfer transactions processed through the branch on a daily
basis and significant language barriers. Nevertheless, our
review disclosed that the branch had handled hundreds of
suspicious wire transactions involving individuals and entities
with the same or similar names as suspected terrorists and
terrorist organizations and that many of these individuals and
entities were customers of Arab Bank or its affiliates.
Consequently, we issued a cease and desist order that
required termination of this suspicious wire activity because
the branch's systems were obviously insufficient to monitor and
control it. We also required the conversion of the branch into
a federal agency with limited banking powers pending further
OCC evaluation of the branch's overall systems and controls.
The order also required the branch to preserve its assets and
books and records as well as to adopt other remedial measures.
The penalty phase of this matter is currently pending and
the OCC and FinCEN are coordinating. That is why I must limit
my statement to the foregoing.
Mrs. Kelly. I thank you. I look forward to working with you
and learning more about this.
I would like to ask this entire panel, in repeated
testimony before this committee, I have been told that the
freedom to change charters is one of the few options a
financial institution has to impact its regulatory environment.
While the press accounts suggest that the number of charter
changes is increasing, there is also anecdotal evidence that
the regulatory barriers to charter changes are also increasing.
Please tell me what steps your agencies are taking to make
the process of changing charters for financial institutions
less burdensome. And, Mr. Riccobono, in particular, I am
interested in what you have to say here.
I wonder, let me just put it this way, since nobody's
quickly jumping in here and I am running out of time. Mr.
Riccobono, you regulate some of the credit unions that have
converted to savings banks charters, right?
Mr. Riccobono. Yes.
Mrs. Kelly. Okay. And as a supervisor, the converted
institutions have performed within--I assume they have
performed within acceptable ranges?
Mr. Riccobono. Oh, yes, absolutely.
Mrs. Kelly. When you evaluate a credit union application
for a savings association charter, what are the factors that
the OTS considers?
Mr. Riccobono. We treat the conversion of a credit union to
a federal savings bank the same as you would a de novo
application, although one with some history, having been in the
banking business. In other words, an application is filed both
with us as well as the FDIC for deposit insurance, and we
conduct eligibility exams, both the OTS and the FDIC, before
accepting the institution.
Mrs. Kelly. The purpose of this hearing is to discuss
regulatory burdens and how Congress needs to take steps to
lower the burden on financial institutions. From your
standpoint, as a regulator of converted credit unions, what
steps could be taken to make the converting from a credit union
to a savings bank simpler and less burdensome while maintaining
appropriate supervisory oversight?
Chairman Bachus. Actually, time has expired but maybe a
brief answer would be----
Mrs. Kelly. Thank you.
Mr. Riccobono. Can I give my answer?
Chairman Bachus. Absolutely.
Mr. Riccobono. I think the process with respect to banks
becoming savings associations and savings associations becoming
banks has over time been itself very streamlined. When a
thrift, and we have had many of them, decides to convert to a
state commercial bank or national bank, it simply files a
notice with OTS. There will be a vote, the stock institution
shareholder vote, taken once.
If it is a mutual institution, which represent around just
slightly under 40 percent of the institutions that we are
responsible for, they would take a vote of the membership--just
one. And then it would be simply the obligation of the
regulator receiving the charter to do their homework and to
have dialogue with the previous regulator to make sure the
institutions are run in a sound manner and in this case like a
credit union coming over deposit insurance would be necessary.
The current system that exists today is, I would believe,
more burdensome with respect to credit unions becoming mutual
charters simply because of the process of taking a membership
vote.
Chairman Bachus. On that note, Chairman Johnson, if you
want to comment on that.
Ms. Johnson. Thank you, Mr. Chairman. As the regulator of
credit unions, we have been charged by Congress to proceed with
the process when a conversion is to take place and to have
rules for that process, that conversion process. NCUA has taken
action to put forth some rules pertaining to disclosure.
There is a difference in credit unions within the structure
of credit unions with one member, one vote, and the disclosure
gives the credit union member the opportunity to have the
information to be informed to make a good decision of whether
they want to move from that type of a structure, from one
member, one vote, where the equity is actually put on the table
and they give up ownership of that equity.
If the member understands what is going to happen to their
equity, that it will be set aside and basically they lose that
equity, they have the opportunity to understand that and want
to move forward, indeed that is their right to do so, because
it is certainly legal for a credit union to convert to a mutual
savings bank. But putting forth information that the members
should have to make an informed decision, putting it out in the
sunshine is right way to go for consumer protection.
Chairman Bachus. Commissioner Latham, is that----
Mr. Latham. Yes. I would just add that the subcommittee
consider that a conversion from a credit union to a bank or a
savings and loan type of institution is a conversion from a
non-stock type of corporation to a stock corporation, and there
are some inherent structural differences that require due to
corporate governance and laws, State laws, federal laws, that
require the application of getting a stock chartered
corporation underway. So I am not sure how much regulatory
relief can be granted to get around that process, but that
needs to be taken into consideration.
Chairman Bachus. Right.
Mr. Riccobono. Mr. Chairman, just to correct that, we do
have a mutual form of organization at the federal level, and
many states have the same, so you can go from mutual to mutual
or you could go from mutual and then eventually to stock.
Chairman Bachus. All right. Thank you.
The gentleman from Texas, Mr. Green?
Mr. Green. Thank you, Mr. Chairman. And I thank also the
ranking member equally as well. I thank the two of you for
hosting these very important hearings.
I would like to, if I may, ask that the outstanding members
of the panel allow me to proceed en banc, meaning I will ask a
couple of questions and your silence will give consent.
[Laughter.]
And if you differ, we beg that you would speak up.
I am very much concerned about the CRA, Community
Reinvestment Act. And my first question to you is, do you agree
that the CRA has been beneficial in combating invidious
redlining? By the way, all redlining, in my opinion, is
invidious; I say it this way to make my point transpicuously
clear--as well as onerous discrimination. Again, I am being a
bit superfluous. But do you agree that the CRA has been
beneficial in eliminating redlining and discrimination?
I take it from your silence that you all agree?
Do you agree that the CRA will benefit us as we move
forward even in the world of electronic banking?
I take it from your silence that you all agree, although I
read body language quite well, and based upon your body
language--my glasses are not as good as they should be, I
suppose--this is Mr. Randall S. James, is that--no, it is Mr.
Latham.
Mr. Latham, your body language connotes at least an
equivocation.
Mr. Latham. Well, you are asking for my----
Chairman Bachus. We will take a picture of the panel and
include that.
[Laughter.]
Mr. Latham. You are asking my concurrence on the issue of
using computers and so forth, electronic transfer, is that is a
mechanism to get around redlining, and I am----
Mr. Green. Not really.
Mr. Latham. Okay.
Mr. Green. Let me be more specific.
Mr. Latham. Maybe I misunderstood.
Mr. Green. I am asking you in an age wherein we have
Internet banking, national marketing, niche banks, does the CRA
have a place in this age, sir?
Mr. Latham. Sorry, I misunderstood you on your question.
Mr. Green. Quite all right. I sometimes do not communicate
as efficaciously as I should. Given that we agree that the CRA
has been effective, would someone care to tell me how we can
make it even more efficacious, not effective but efficacious?
To be effective means you get the job done. To be efficacious
means that you get it done with a minimum amount of wasted
effort. So I do not want to impose upon you the standard of
being effective but rather being efficacious. How can we make
the CRA more efficacious as we move forward?
You see, you can kill a fly with an atomic bomb, that is
being effective, but if you use a flyswatter, you can be
efficacious. So how can we make it more efficacious as we move
forward? And I would like to ask the first person who would
like to respond to do so as quickly as you can. And if you can
be terse, I would appreciate it.
Ms. Williams. Congressman, I will take a crack at that. I
think we are trying to do that right now in connection with an
open rulemaking proposal that the OCC, the Fed and the FDIC
have on the table right at this time. So we are looking at that
very issue in connection with the application of CRA to banks.
I do not feel comfortable commenting about exactly where we
are with that or the particular issues that we are considering,
because we are in the midst of a rulemaking.
Mr. Green. Let me ask this: At the end of the day, will we
still have a CRA, pursuant to what you are attempting to do,
that will fight redlining and invidious discrimination? That is
important. Do you all agree that we still have discrimination
taking place? If there is anyone who differs, kindly speak up.
Given that we still have discrimination taking place and we
all agree that the CRA has been efficacious, effective as well
as efficacious, I think we all ought to agree that we want a
strong CRA as we go forward, not one that is overwhelming, not
one that is burdensome but one that protects the minority
population that is to this day being discriminated against.
Because we have not eliminated discrimination in lending
practices.
I suspect that everyone agrees that you cannot find a
legitimate study that will show that minorities receive
advantages that majorities do not. There probably is no study.
If you have a study that shows that minorities are receiving
favoritism, I would like to see it. But every study, legitimate
study shows that minorities who are equally as qualified as
majorities, every study shows, not one single study, every
study shows that they still get discriminated when they apply
for loans at lending institutions.
So I am just making an appeal to you to please let's do
what we can to salvage the CRA.
My final CRA question, Mr. Chairman, if I may, is this: Do
you agree that lending institutions performing the same
function, regardless of the style of their name, performing the
same function should have to adhere to the same CRA
requirements? Anyone who differs? Performing the same function,
the same function, no deviation in function, do you agree that
they all should adhere to the same CRA requirements?
Ms. Johnson. Congressman, credit unions perform many of the
same functions as other financial institutions, but Congress
does not see fit to require CRA requirements for credit unions,
that there was no need. As I understand, the CRA requirements
were initiated when there was a deficiency cited in other areas
but not for credit unions, so at this time there has been no
call by Congress for those requirements.
Mr. Green. It is interesting that you would mention this. I
happen to have a study that shows that right now the banks are
outperforming the credit unions when it comes to lending to
blacks, Hispanics, low-to moderate-income borrowers, generally
speaking, to women, low-to moderate-income minorities, low-to
moderate-income women, to minority tracks, low-to medium-income
tracks.
So now right now the empirical data seems to indicate that
we do need to do this.
Chairman Bachus. Mr. Green?
Mr. Green. Yes, sir.
Chairman Bachus. That is all right.
Mr. Green. If I may----
Chairman Bachus. I guess I would just like to say in
fairness I think there are studies that show that credit unions
meet those needs very well. But, I mean, you know, there are
studies--and I do not know who commissioned the study.
Mr. Green. If I may then, let's take studies off the table
and let's just talk about the same function and talk about the
fact that we know that invidious discrimination exists. Do we
only want to require one set of institutions to fight
discrimination or should all institutions performing the same
function?
Chairman Bachus. It is almost 10 minutes, and I know these
are very important. We will have a second round, and I will
allow you to----
Mr. Green. Yes, sir. I yield back. Thank you.
Chairman Bachus. Thank you.
Mr. Ryun? And on the Republican side, we go by who was here
first, and the order is Mr. Ryun, Mr. Hensarling, Mr. Pearce,
Ms. Biggert and Mr. Neugebauer and then Mr. Patrick McHenry.
Mr. Ryun. Mr. Chairman, thank you for your time.
Thank you to the panelists for coming today, and let me
just express my appreciation for what you all do and my
gratefulness for what you are trying to do in terms of
providing additional regulatory relief for financial
institutions.
I have introduced H.R. 2061, the Communities First Act, and
it is aimed at targeting regulatory relief to our community
banks. In fact, I am going to borrow a quote, I think, from Mr.
James who earlier said that our financial institutions are the
engine of economic growth, and that is one of the reasons that
I feel strongly about what we are doing here.
Mr. James, I also appreciate your support and your comments
and your opening statement.
Now, I am going to pose an easier question to you, if I
may, but before I do that, I want to touch on a couple of
statistics that I think will reiterate part of where I am going
and what I would like to do.
As was well pointed out a moment ago with some of the
charts, the last 2 decades have seen a number of community
banks with less than a billion dollars in assets decline from
17,000 in 1984 to just over 8,000 today. And along with that,
the assets shared by these same banks have fallen from 33
percent to 14 percent during this period of time.
With these particular figures in mind, and I know all of
you have had opening comments in which you have given some
support for regulatory relief, what I generally want to do is
to go back one last time and say, are there any other measures
you would like to see as we move forward in terms of providing
regulatory relief, especially in accomplishing these goals and
helping our small institutions move forward in serving our
communities in a better fashion?
So I am going to leave it as a general question to all of
you for any comment you would like to make.
Mr. Reich. I would start, Congressman Ryun, by responding
that there are a number of additional measures that some of us
would like to see added to the current list that we are
submitting. I indicated that out of our EGRPRA sessions we had
a total of about 136 items that came out of the nine outreach
sessions that we have had with the banking industry. We had a
meeting with our interagency task force, with the
representatives of all the bank trade associations and reached
a consensus agreement on approximately 70 of those 136 items
that all of the trade associations would support.
Next, we circulated each of those items to each of the
regulatory agencies and asked how many of those items that they
can support. That work is underway. We have reached agreement
on 12. There is a larger number that most of the agencies
either support or do not object to, but all of our agencies
have not had an opportunity to review all of these
approximately 70 items, and therefore we have chosen not to
make more specific recommendation as a part of our testimony
today. We wanted to present a united front, and I am confident
and optimistic that we will add some significant items to the
12 that we have before you today.
Mr. Ryun. I look forward to those. Anyone else who would
like to comment?
Mr. Chairman, that is the only question I wish to pose, and
I yield back my time to the chair.
Chairman Bachus. Thank you.
At this time, Ms. Moore, do you have questions?
Ms. Moore of Wisconsin. Well, thank you, Chairman Bachus,
and thank this distinguished panel for convening here.
I know the FDIC really has been the lead agency in
developing some recommendations for Congress about regulatory
relief after kind of an exhaustive bit of outreach meetings
with bankers in eight cities in 2003-2004. But I really
appreciate that, and I think that there were efforts to get
community input before you put these recommendations before
Congress. So I really do appreciate it.
I could tell you that I heard it stated earlier in this
meeting that the whole point was to provide regulatory relief,
but I think that we have got to have regulatory relief that
really is balanced with safety and soundness and fiduciary
responsibility. I have not forgotten the difficulty with the
thrift industry earlier, and I will have some questions for the
gentleman from the thrift industry in a moment.
But as I look over the top 10 things that you all came up
with, the HMDA data, CRA, as Congressman Green has indicated,
the truth-in-lending right to rescission, Truth-In-Lending in
Real Estate Procedures Act, flood insurance, I am curious as to
why we as Members of Congress should provide more regulatory
relief.
For example, I will just take one out of the blue, truth-
in-lending right to rescission, your findings were that bankers
say that few if any customers really exercise this right and
that they are frustrated when they have to wait 3 days before
receiving their loan proceeds. But then on the other hand, you
say that they are frustrated with the truth-in-lending in real
estate settlement procedures, they are frustrated by the volume
and complexity of documents they must sign to get a mortgage.
Well, people need kind of a cooling off period to make sure
they are not being a victim of a predatory lender, that they
can read the fine print so that they can go and show a friend.
The last closing, real estate closing that I was at was when I
was selling my property to my daughter, and I was not
frustrated by all of the paperwork. I wanted to see that the
deal was going down the way I wanted it to go down so that my
daughter would have a decent interest rate, so that she would
not be a victim of predatory lending.
And so I am wondering, quite frankly, what your discussions
were other than just relieving yourselves of regulatory burden
how balanced these things are with the examples that I have
given.
What would be wrong with the 3 days and saying to people,
``This 3 days is for a cooling off period. We are sure that we
are giving you the best product possible, and you might want to
call your lawyer or your broker and look over and walk through
one more time before you sign all these papers just so that you
know that there are not balloons in there, that you know.'' So
please share with me what you think would be a balancing act.
And then I do want to reclaim some of my time, because I do
want the gentleman from the thrift industry to explain to us
why he thinks that they should be held to a different standard
for CRA. Thank you.
Mr. Kohn. Congresswoman, the Board of Governors shares some
of your misgivings about removing this right of rescission just
for the reasons that you articulated. These are very complex
document. You are under a good deal of pressure at a closing to
get the closing done.
We think that perhaps Congress could work at structuring
something such that if you were given the material ahead of
time, a definite, say, 3 days ahead of the closing with some
definite commitments by the lenders about what the closing
costs would be and how they would be structured, then you could
have the consultations that you suggested. People would come to
closing and they could get their money at closing.
So I think there may be ways of working around these issues
to give both the immediate access to funds but also the time to
consider them.
Mr. Reich. Let me just say, Congresswoman Moore, two points
to clarify.
One is, I think you are reading from a top 10 list of
issues that have been brought to our attention, the issues of
greatest concern to bankers around the country. The top 10 list
is not the regulatory burden relief recommendations that we are
making today. They are simply a listing by bankers, a
prioritization on their part of regulations that are most
burdensome to them.
With regard to right of rescission, let me say that at
virtually every outreach meeting, we have had bankers stand up
and say, ``I have been in the banking business for 35 years, I
have been lending money that entire time. No one has ever asked
to exercise their right of rescission.''
That has been repeated at all of our outreach meetings
across the country. They are not necessarily saying, ``Let's do
away with the right of rescission,'' but they are suggesting,
``Is there a way that we can perhaps give a customer who does
not want to wait a day or 2 or 3 an opportunity to have his
money by waiving his right of rescission?
Chairman Bachus. Thank you.
Ms. Williams. Congresswoman, I think you raise two really
good points that are closely related, but there are two
different issues. One is the right of rescission and the issue
about access to funds. The other is the volume of information
that you as a seller of a house in a particular type of
transaction were given in connection with that transaction. And
that gets to one of the points that I mentioned in my opening
remarks.
We have got a huge volume of information that is being
provided to consumers in connection with various types of
retail transactions. There must be away to distill down some of
the key information so that you could get that and it would not
take you 3 days to figure out if you have got a problem. I
think that is an area in and of itself that is worth tackling.
Chairman Bachus. Thank you.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman, and I would like
to continue on with this discussion about CRA, and I want to
thank my friend and colleague and fellow Texan for enlightening
me on the nuance of efficacious versus effective.
Let's talk about being efficacious in CRA. A Congressional
Research Service report estimates that a streamlined CRA exam
can save 40 percent of a bank's overall compliance costs. I do
not know their methodology, but that is a very, very
significant number.
The question I have, and anybody on the panel feel free to
speak up, do you have any study, any data points that would
show that banks participating in the streamlined small bank CRA
exam are serving their communities less than those who are
subject to the more expensive, burdensome, larger test? Anybody
who would care to participate?
Mr. Reich?
Mr. Reich. We do not have any studies that I am aware of,
Congressman Hensarling. All I can say is that regardless of the
size of institution, whether it is a streamlined exam or a
complete examination, CRA is the law of the land. Our examiners
look for CRA compliance at every institution that they go in
to, whether it is large or small.
The bankers that are not subject to the streamlined
examination complain about the reporting burdens and the time
it takes. The 40 percent that CRS has suggested, that total
compliance cost might be relieved by 40 percent because of the
burden of CRA, I think sounds highly excessive to me. I do not
think the compliance costs in any organization, in my own view,
would approach 40 percent for CRA compliance.
Mr. Hensarling. But nonetheless, it is still a costly
requirement. I guess to put a fine point on the question, do
any of you all have any data to show that banks who are subject
to the small bank CRA exam discriminate more, less or about the
same as those subject to the larger? If you have no data,
perhaps you can shake your head in the horizontal fashion and
let me know you have no data.
Ms. Williams. Congressman----
Mr. Hensarling. Yes.
Ms. Williams.----we have a tremendous amount of data about
performance by all of the banks and savings institutions under
the CRA. Under the current regulations, the way in which banks
or thrifts of given sizes perform and how they are measured is
different. So they do well across the board in serving the
needs of their communities under the different tests that exist
today in providing that kind of access to credit services but
in different ways based on their different sizes.
Mr. Hensarling. Thank you. Moving on to a different
subject, and certainly continuing to be a very expensive part
of regulatory compliance, BSA. Clearly, we are all on the front
lines of the war on terror, but at the same time, in
conversations I have had with a number of financial
institutions, they certainly cite BSA compliance as one of
their more costly elements of their regulatory regime.
I know that FinCEN is not represented here, but, for
example, if I recall right, BSA was enacted in 1970, you had a
CTR threshold of $10,000. That has never been inflation
adjusted. Do any of you all have an opinion to try to--and this
is all a question of balance, and I know it has to be balanced
with legitimate law enforcement needs. B ut do you have an
opinion on whether or not this committee should explore
indexing for inflation this CTR threshold amount?
Seeing none, I will move on--oh, there is one.
Ms. Williams. I will tackle it. I think the threshold
level, as you point out, has not been addressed in a long time,
and it is probably appropriate to look at that. Exactly how you
adjust it is a question that we have not gotten into the
details of.
Mr. Hensarling. Thank you.
Chairwoman Johnson, a question for you, and I know that you
are aware of this, but Community Credit Union of Plano, Texas,
is in the midst of attempting to convert to a bank.
Your agency on May 13 issued a letter that nullified their
voting procedure, and as I understand it, fairly recently your
agency promulgated new rules that required a certain box
disclosure to go to the members of the credit union, and I
believe it is your language that said it must be prominent and
conspicuous in every mailing. And I believe it is also part of
your regulation that there must be a minimum of three mailings,
I believe, three solicitations of the vote.
And I believe, as I understand it, I am going to have a
two-part question here, that it comes down to a controversy of
whether or not the box disclosure in one of the communications
appeared on the front side or the back side of a piece of
paper. I personally do not know how to judge the front side
from the back side, because I do not see a logo, it does not
say page one or page 2, but as I understand it then, it may
actually come down to your agency holding up a possible $1.4
billion transaction based upon how a piece of paper was folded,
even though the disclosures otherwise meet your requirements
and all members of the credit union will receive a minimum of
three different copies of this particular disclosure.
I have lots of friends in the banking community, and I have
lots of friends in the credit union community. I do not know
why these particular people want to convert. In a free society,
I suppose that is their business.
But my two-part question is this: Number one, do I have my
facts correct, and if I do, then please explain to me and other
members of this committee why we should not conclude that your
agency is simply trying to make conversions more difficult and
more burdensome and more costly.
Ms. Johnson. Thank you, Congressman, and I am happy to
address your question. First of all, no, your information is
not entirely correct. NCUA has put into regulation disclosure
requirements that are required prior to the time when a credit
union, if they choose to convert to a mutual savings bank,
which they are allowed to do, these disclosures must be
presented and they must be presented in a way that the member
has a reasonable opportunity to see those disclosures.
There were many conversations that went on between our
attorneys and the attorneys representing the credit unions, and
this discussion centered on how to make these disclosures
prominent and conspicuous to abide by our rules.
The process that evolved was the agreement that the NCUA
disclosure would be the first piece to meet the eye after the
cover letter to the credit union members. We did not require
the disclosure on the cover letter, the very first piece of
paper, but we did require after the cover letter that the NCUA
disclosure would be the next piece of information.
The attorneys for the credit union lobbied long and hard to
put their rebuttal on the back of our disclosure and we agreed
to that. It was to be their cover letter to the member, our
disclosure, their rebuttal. And, true, they did not number the
pages, which would have been easy thing to do, nor did they put
their disclosure on a separate piece of paper and number the
pages, which would be easy to do.
Upon receiving complaints from a number of credit union
members, we investigated the actual package to the members.
Upon opening the package, the first piece of paper was the
disclosure letter to the member. The second piece, folded the
same way as the letter to the member, was the rebuttal, ``Your
credit union wants you to know the facts.'' You turn the paper
over, and there is the NCUA disclosure.
This is not about how a piece of paper was folded,
Congressman, this is about a disclosure and following an
agreement in the order of that disclosure to go in the package
to the members.
And that is where we are at. We have disavowed the vote
because the first two mailings were sent out in this form with
the letter to the credit union, the rebuttal, flip it over,
NCUA disclosure, and that was not the agreement agreed to by
the attorneys from NCUA and the attorneys representing the
credit union.
Chairman Bachus. Thank you.
Mr. Sherman?
Mr. Sherman. Thank you, Mr. Chairman. Thank you for holding
these important hearings. I am sorry I had to go to
International Relations and I am glad to be back.
We seem to be focused here on the process by which a credit
union would convert to another kind of organization and I will
spare you further questions about how a particular document was
folded and look more at the broader legislative issue of what
kind of quorum is required or what level of participation is
required.
Under present law, can a credit union, following perhaps
its own bylaws written decades ago, convert in some sort of
vote in which less than 10 or less than 20 percent of the
members even cast a vote one way or the other?
Ms. Johnson. Currently, the way the law is, that is
correct, it is only a simple majority of those who vote in the
election that are required to make the conversion. There is no
threshold.
Mr. Sherman. I know how dedicated you are to this issue of
how disclosures are folded. I know everyone on that panel is
involved in detailed analyses of what disclosures should be
given to those of us who are members or customers. I hate to
disabuse you. I am very, very quick in throwing away everything
my bank sends me that is not the checking statement itself and
my canceled checks. I have got free trips to Bermuda in my
trash can in less than 2 seconds.
So one thing we have some expertise on here is voting. As a
matter of fact, they are going to call votes on the floor
pretty soon. And I would advise my colleagues that you would be
surprised how much legislation we could pass if we just did not
have that quorum requirement. Sometimes I stay in town on a
weekend. I can get access to the floor. Mr. Chairman, you do
not want to see the legislation I would pass if I was the only
member on the floor.
And so I would hope legislatively that we would require
that if a credit union is going to do something as big as cease
to be a credit union that we get 50 percent participation.
Trust me, to rename a post office, I need 50 percent
participation in the Congress, and I would hope that we would
take a look at those quorum requirements.
I leave to others the exact details of how the disclosure
should be folded, because as I see this whole debate about the
folding and whatever, it all relates to did the credit union
members get information that they needed and make a decision?
Well, if you get 50 percent of them to vote, then my guess is
that a very large percentage of that 50 percent actually took a
look at the paper and decided which way they wanted to vote. It
is when you send this mailing and you have got 2, 3, 4 percent
response, I do not know what it was in this particular matter,
but you have to start worrying about how things were folded.
I want to shift to another issue, and I guess anybody could
answer this question. We have got the 3-day rescission by
consumers under the truth-in-lending right of rescission. Which
loans does that apply to, what kind of loan? Anybody know?
Mr. Reich. Real estate mortgages. Loans secured by real
estate.
Mr. Sherman. So there is a 3-day delay in the process of
closing that home loan.
Mr. Reich. Correct.
Mr. Sherman. And maybe we would want to explore whether
that was--I see another panelist----
Mr. Riccobono. I believe it is on refinances. It is any
time that you put your house, your existing home, on the line.
Mr. Sherman. Okay.
Mr. Riccobono. So a purchase money mortgage it would not.
If it were a refinance, I believe the original purposes of the
law had to do a lot with the type of home improvement and
purchasing merchandise and putting your home on the line. That
was the cooling off period.
Mr. Sherman. Okay. Let me go back to Ms. Johnson. You are
proposing a level of capital similar to what banks have; that
is to say 5 percent plus a look at a risk-based review of the
individual institution. And since I work for the federal
government and harken back to the 1980s, I am of course worried
about, well, if it is not enough, is the federal government on
the line?
Now, obviously, the insured fund itself has capital, but
correct me if I am wrong, the entire net worth of every insured
credit union in the country stands between a default of the
insurance fund and when the taxpayers have to come in. Is that
correct?
Ms. Johnson. Congressman, what we are looking to do is to
incorporate a risk-based approach to capital and allowing
credit unions to better manage their capital and then in
reducing this leverage ration from 7 percent where it is
currently to 5 percent. Five percent is what the other
federally insured financial institutions have----
Mr. Sherman. I understand all that. I think I understand
all that. Go ahead.
Ms. Johnson. And that is what we are seeking for credit
unions.
Credit unions typically have low loss rates, and the system
that we currently have does not recognize the credit unions'
more conservative approach.
Mr. Sherman. I got that from your testimony. If, God
forbid, there were not only insufficient capital in a
particular credit union but insufficient capital in the
insurance fund itself and there had to be more money to take
care of depositors, would other credit unions around the
country have to chip in from their capital or would this
insufficiency be made up from the U.S. taxpayer?
Ms. Johnson. The question, yes, it would be contributed by
the credit unions. The government does stand back because they
are federally insured, but it would come from credit unions.
Mr. Sherman. Okay. So the first line of defense----
Ms. Johnson. Is the credit union.
Mr. Sherman.----is the credit union's own capital.
Ms. Johnson. Insurance fund, yes.
Mr. Sherman. And that first line is one thing you want to
modify. The second line of defense is the assets in the
insurance fund. The third line of defense is every nickel of
net worth of every insured credit union in the country, and the
federal government is the fourth line of defense. So those on
the third line of defense have much more reason to make sure
that your new system is a good one----
Ms. Johnson. That is correct.
Mr. Sherman.--than the federal government does. And the
very fact that the credit union industry is willing to say that
they are putting their net worth on the line as to the adequacy
of your system is convincing and the chairman's indulgence is
magnanimous.
Ms. Johnson. Might I point out that the system that we are
proposing is not an industry giveaway. In fact, some of the
credit unions, most would remain at their capitalized level
that they currently are. There would be some that would go up
and also some that would go down. So it is not a static.
Mr. Sherman. I realize that, but it is good for you to
point that out.
And I yield back.
Chairman Bachus. Thank you, Mr. Sherman.
Mr. Pearce?
Mr. Pearce. Thank you, Mr. Chairman.
Mr. Reich, you had mentioned that you are on some timetable
receiving comments back, and you have received 12 so far. When
do you think that work will be complete? And, secondly, can you
regulatorily unspool the things where there is great consensus?
Mr. Reich. We have published four requests for comments, we
have two to go. One will come out shortly after the 1st of
July, and the final one will come out early next year. We will
finish this project, my expectation is, in the middle to the
fall of next year, 2006.
Mr. Pearce. And you can do that regulatorily, you do not
need legislation on the items of great consensus?
Mr. Reich. The items that we are dealing with today are
going to require a legislative fix.
Mr. Pearce. Okay. Fine.
Ms. Williams, you indicated that you are ongoingly, in page
6 of your testimony, streamlining your processes. If you were
to estimate the percentage reduction in regulations that you
have streamlined out, give me an estimate?
Ms. Williams. Well, going back to our first major----
Mr. Pearce. All the way back to 1990 when you----
Ms. Williams.----would be in the mid-1990s. Gosh, it is
hard to ballpark it, but in terms of things that we have
eliminated or areas where we have had streamlining initiatives,
I would say between half and----
Mr. Pearce. So we have reduced about 50 percent the
regulations, but if you were to guess the workload that you
have actually reduced, would it be also 50 percent?
Ms. Williams. I think probably not that high.
Mr. Pearce. Yes. So we have taken a lot of the messy ones
loose, but maybe the bulk of the work remains. And I am not
being picky, I am just trying to get an idea. And I do
appreciate that unraveling. As a small business owner, I can
tell you that the burdensome paperwork is one that always lies
heavy, and I appreciate your ongoing efforts.
Mr. Riccobono, I noticed your testimony said you are doing
the same thing. If you were to consider Representative Ryun's
bill, 2061, as I look at those thresholds of $1 billion and $5
billion, as I go back into my district of southern New Mexico
and the largest town is maybe 70,000 to 80,000, that is going
to be almost--it will include a lot of banks across my district
that would then fall under the parameters of the new
legislation.
Mr. Reich and Mr. Kohn, would you all give observations
about that $1 billion and $5 billion threshold in that 2061, if
you have opinions?
Mr. Reich. My own view is that the $1 billion threshold is
a reasonable threshold.
Mr. Pearce. Mr. Kohn?
Mr. Kohn. I am not familiar with the details of the bill,
but I would say I think a lot of our joint recommendations and
a lot of what we are considering is raising various thresholds
for small banks in order to reduce regulatory burden.
Mr. Pearce. And you feel that we can get the transparency
that we need and the oversight that we need, even in--because
it is a measure that I would love to support but I also do not
want to go home and sled through every single community with
people saying, ``Why did you do that,'' too. And I am working
with not enough knowledge and background in the banking
business, and so we are learning our way along.
But I appreciate your indulgence, Mr. Chairman. I
appreciate the concise comments.
Mr. McHenry. [Presiding.] Thank you, Congressman Pearce.
Now I would like to recognize the chairman of the
committee, our good friend from Alabama.
Mr. Chairman, we have a 5-minute time limit.
[Laughter.]
But in terms of me actually holding the gavel for any more
than 2 minutes, I would like to hear whatever you would like to
ask for as long as you would like to ask.
Chairman Bachus. Thank you. And I actually put Mr. McHenry
in the chair because he kept holding up his watch over here.
I am going to focus my questions on one area and one area
alone, one limited focus, and that is the suspicious activity
report. Now, when I have talked to staff, when I have talked to
regulators, when I have talked to industry, the stock answer
that we have so many SARs being filed that we all know it is
clogging our efforts to our money laundering efforts. I mean,
everyone will privately admit that. It is basically shutting
down our money laundering efforts because just the volume of
these reports.
And everyone also agrees privately that a lot of the
reports could be avoided if there is really no good reason for
filing them. But everybody says because of 9/11, because of
antiterrorism efforts, because no one wants to stand up and
say, ``Do not file a certain report,'' because down the line if
we raise the limit, there might be a report that was not filed
and somebody could say that the regulators did not require it
to be filed of thus and such.
But having said that, and there is always that chance, but
right now that is a chance. The reality is there are so many of
these being filed they are not being reviewed, which is a far
worse situation.
So while hypothetically we might if we raise the limit or
exempted certain filings it might result in missing something.
We are doing that right now because FinCEN has complained there
are too many being filed, and our law enforcement says they
cannot get to them, they cannot look at them. We have all heard
those stories.
And with that in mind, and I would hope that we would all
kind of come to an honest understanding and regulators,
industry, law enforcement admit that the present system is not
working because of the horrendous volume of SARs being filed,
many of them unnecessary, to change the system.
And I would just start by asking you about the ABA. They
made some, I think, very good common sense recommendations on
how we can eliminate some of these which law enforcement says
we need to limit the number, regulators have recognized that,
and industry has urged us to do that. But, you know, the banks
are not going to do it, because they are afraid not to file
these things.
But, anyway, the first one, this is to me just good common
sense: Eliminate CTR filings for seasoned customers. Now, when
we talk about terrorists, we are not talking about American
businessmen who have established businesses. That is not what
we are talking about. I do not think there has been one example
of an established business in the United States, particularly
when they filed these all the time. They are not being reviewed
anyway.
A second one is eliminate the identify verification for
monetary instruments conducted by customers. And what they say,
``In view of the passage of the Patriot Act and the regulations
implementing section 326 requiring a customer identification
program, we recommend that the verification requirements be
eliminated since bank customers purchasing these instruments
have already been identified through the institution's CIP
program.'' Now, that is common sense.
A third one, eliminate notification to directors or
designees of SARs. What good does that do? The regulators are
instructing banks whenever it files a SAR, the management of
the bank shall promptly notify its board of directors or a
subcommittee of board of directors or executive officers
designated by the board of directors to receive the notice.
What good does that do?
Another one is, I do not see it here but the serial filing,
eliminate those. It is in here someplace.
And then they also talk about, and I know that FinCEN is
coming out with some more clear directions I think the end of
this month, but two other recommendations are include FFIEC
exam instructions to invoke FinCEN help line and include FFIEC
exam instructions on conducting transaction analysis.
I am not going to ask you to answer these now because I do
not want to be gaveled out, but I do want to submit these
recommendations to you. I want to submit them for the record,
and I would like each of you as regulators to respond in
writing as to whether or not some of these recommendations can
be instituted or something like them.
A recommendation of the ICBA, another organization, is to
increase from 10,000 to 30,000 the threshold, and I would like
you to look at that.
And I ask you to look at in the spirit of knowing this:
That FinCEN has actually said that defensive filings by banks
are clogging their databases. Several law enforcement agencies
have said the sheer number and volume of these SARs are making
their anti-money laundering efforts almost impossible. So given
that.
And, finally, the third one would be that FinCEN has
actually complained that the financial institutions are filing
SARs in doubtful circumstances. They are doing it to avoid
criticism and to avoid enforcement action by the Government and
to enforce sanctions and to avoid fines, because I know of
banks that have done it. They have not done it thinking they
were meeting the guidelines and then some U.S. attorney
someplace has brought action against them and fined them
considerable amounts of money.
And for the sake of defending our country from terrorists,
this is something we need to address.
And I will close by what FDR said, ``The only thing we have
to fear is fear itself.'' And I think that is the only thing
that is stopping us from moving against this. The terrorists
have really achieved their purposes by scaring us into
basically indulging in activity that wastes millions of dollars
every year needlessly.
So with that, I will close. Thank you.
Mr. McHenry. Thank you, Mr. Chairman. Certainly appreciate
it.
And I would be very, very kind to you going forward, and I
will never tap my watch again, because you are making me sit up
here.
Chairman Bachus. I was just kidding you.
I know Mr. Green is----
Mr. McHenry. Yes.
Congressman Green, I do have a question to wrap up the
panel, but I will let you go first, then I will ask the final
set of questions.
Mr. Green. Thank you, Mr. Acting Chairman.
Friends, I will not have another question. I think I will
simply make a comment. In these meetings, we tend to go head-
to-head. My comment hopefully is heart-to-heart.
We have come a long way in this country in fighting
discrimination, segregation. We really have come a long way.
And we now have an opportunity to continue the path forward or
to possibly do something that may turn us around. I am going to
beg that you please keep us moving forward when it comes to
integration in this country.
You have a great opportunity before you. This is your
watch. This is your opportunity to make a difference, and I am
just going to beg that you do what you can to protect the one
need that we have right now when it comes to banking: To keep
us from making a gigantic step backwards.
That CRA is very important to people who do not have power,
who are trying to get their share of the American dream.
Homeownership, borrowing money is a means by which we get this
done. If you want people to pull themselves up by their
bootstraps, provide them bootstraps, provide them the loans
which can afford them the opportunity.
I just thank you for giving me the chance to appeal to your
hearts, not your heads. Do what you can. Thank you.
I yield back the rest, remainder and residue of my time.
Mr. McHenry. Thank you, Congressman Green.
With that note of thinking of our hearts and our heads, the
mind cannot bear what the feet cannot stand, and so with that,
I will try to keep my question very quick, and I just used up 7
seconds there, so I better get fast here.
Chairman Johnson, I wanted to direct my question to you to
follow up with what Congressman Hensarling questioned about the
conversion process of the credit union in Texas. I am not from
Texas, I do not wear big hats or big shoes, none of them are
here to say that or to target me now that I have said that, but
in terms of the conversion process, you have a lot of large
credit unions that have taken on a lot of bank-like functions.
And with the new PCA, capital regime, expanded business lending
and a lot more access to secondary capital markets, a lot of
these credit unions have taken on a lot of bank-like functions.
And part of this discussion today is about regulatory
relief. It certainly seems with your explanation of this
interesting mailing, the front and the back, that it seems like
excessive regulations on that process. That just seems like one
example of excessive regulations, and Congressman Hensarling
explained the front and back and all this stuff. I am not going
to go through that again, and I really do not care to hear any
more details about that in particular, but can we take it to
the larger focus?
Don't you think allowing a more reasonable regulatory
process for conversion is a good thing? Don't you think that
because we allow it, don't you think it should be a streamlined
process so that these large credit unions can continue to
provide the proper function for their communities? Do you think
there is a lot to that or something to that?
Ms. Johnson. Congressman, the providing of an adequate
disclosure to the members is not a burdensome process, and to
do anything less than full disclosure I think is very
shortsighted. Consumer protection is very important.
Mr. McHenry. So there is no regulatory relief that we
should discuss with you about today in this process?
Ms. Johnson. In the process of----
Mr. McHenry. Conversion.
Ms. Johnson. I would be more than happy to visit with you
about our process and the steps that are required, but it is
all centered on providing disclosure to the members and having
the members understand--having the opportunity to understand,
because there is no guarantee that a disclosure is ever read,
we know that. But giving the member at least the opportunity to
understand in order to make an informed decision about the
future direction of their institution and should they convert
or not.
But I would be more than happy to visit with you about our
process. I do not believe that it is a burdensome process, but
it is absolutely necessary for the member to have full
disclosure.
They are making some major decisions. They are changing
from a one member, one vote member-owned institution to an
institution where it is not one member, one vote, it is on the
amount of deposits held within the institution.
Mr. McHenry. Well, not always. I mean, you are talking
about each person having a vote.
Ms. Johnson. In converting to a mutual. In moving to a
mutual.
Mr. McHenry. And they certainly would have a say-so in that
process and would have a vote in that process. And it seems to
me that just judging from this perspective that when you are
talking about the front side versus the back side of a piece of
paper, this goes to the heart of bureaucratic blundering and
overregulation and excessive regulation.
And my follow-up question to this, and, certainly, I would
love to talk to you more about it, but just by your own
testimony, it seems to me obsessive regulation and a little bit
out of control when you are talking about how a piece of paper
is folded. It seems to me to be ri-freakin'-diculous, as some
would say.
Ms. Johnson. Congressman, if I may respond, this is not
about the way a piece of paper is folded. This is about an
agreement that was made between the attorneys on how the
disclosures would be presented. That was not upheld to.
Mr. McHenry. Okay. Front and back pieces of paper.
Ms. Johnson. The order of appearance was in the package to
the members.
Mr. McHenry. Okay. Which the order of appearance is based
on whether or not it is on a front side of a piece of paper or
a back side of a piece of paper.
Ms. Johnson. Our disclosure requires prominent and
conspicuous. The agreement, the agreement that was reached to
was not adhered to.
Mr. McHenry. Okay. And I am almost out of time, and so I
did have a follow-up question because OTS has said that they
would certify the votes of these two converting credit unions
in Texas.
And so I sort of have a follow-up question for Mr.
Riccobono on this process. Is it because of the two separate
regulatory and rulemaking regimes that we have problems here?
Mr. Riccobono. Actually, our authority with respect to the
actual process, the voting of the membership by the credit
union, is given to us by the NCUA's own rules. The Credit Union
Administration has said that once a vote is taken in favor of
conversion, then OTS must certify the vote. And if we believe a
new vote had to be taken, we could order that to be done.
And at this point, it would be too premature to say that
you would, but I can tell you if today that vote was taken with
having given that disclosure three times already to the members
and that vote was taken and it was in favor of converting that
credit union, OTS would verify the vote and allow them to
convert.
This is a very expensive process. It is in excess of a half
a million dollars to conduct the voting, and the thought that
they would have to go out and spend another $500,000 to
$600,000 simply because of what piece of paper the member saw
first, I cannot disagree with the chairwoman that disclosure is
extremely important, it must be clear and conspicuous, that was
all met, I believe, by having that piece of paper in the
envelope regardless of what order it was in, and it was given
to the members three times. And to go back out and require at
that expense another voting three times I just think is
terrible and I have to say that I feel very strongly about
this.
I should disclose I am a member of the Treasury Department
Federal Credit Union, I think there is very little in baking
that is as close to apple pie and motherhood as the credit
union movement, but better than that is the freedom of charter
choice, and I think it is extremely important that we not have
artificial rules and regulators not making good judgment calls
balancing the benefits and costs involved in these processes.
Mr. McHenry. Thank you. Thanks for your testimony and very
happy that we were able to end on a note where we can actually
look for ways to reduce regulation, the burden we are putting
on institutions.
Thank you all so much for your testimony.
Let's see, the Chair notes that some members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
for these witnesses and to place the responses in the record.
Thank you so much for your testimony. Thank you for being
here today. I know it is always exciting and eventful to be
before a congressional committee, even one as sleepy and nice
as ours.
Thanks so much. Have a wonderful day.
And this meeting is adjourned.
[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 9, 2005
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