[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                 FINANCIAL SERVICES REGULATORY RELIEF:
                      PRIVATE SECTOR PERSPECTIVES

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

                                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

                               __________

                              May 19, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-32



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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

                              ----------                              
                                                                   Page
Hearing held on:
    May 19, 2005.................................................     1
Appendix:
    May 19, 2005.................................................    35

                               WITNESSES
                         Thursday, May 19, 2005

Ensweiler, Richard L., President, Texas Credit Union League on 
  behalf of Credit Union National Association....................    16
Jorde, Terry J., President and CEO, CountryBank USA (ND) on 
  behalf of Independent Community Bankers of America.............     9
Keeling, Michael, J. President, The ESOP Association.............    18
Macomber, Mark E., President and CEO, Litchfield Bancorp (CT) on 
  behalf of America's Community Bankers..........................    12
Marquette, Robert, President and CEO, Members 1st Federal Credit 
  Union (PA) on behalf of National Association of Federal Credit 
  Unions.........................................................    14
Rock, Bradley E., President and CEO, Bank of Smithtown (NY) on 
  behalf of American Bankers Association.........................    11

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    36
    Gillmor, Hon. Paul E.........................................    39
    Hensarling, Hon. Jeb.........................................    40
    Hinojosa, Hon. Ruben.........................................    41
    Maloney, Hon. Carolyn B......................................    42
    Moore, Hon. Dennis...........................................    43
    Royce, Hon. Edward R.........................................    46
    Ryun, Hon. Jim...............................................    47
    Sanders, Hon. Bernard........................................    49
    Ensweiler, Richard L.........................................    51
    Jorde, Terry J...............................................    97
    Keeling, Michael, J..........................................   109
    Macomber, Mark E.............................................   122
    Marquette, Robert............................................   208
    Rock, Bradley E..............................................   220

              Additional Material Submitted for the Record

Hinojosa, Hon. Ruben:
    NCRC report, "Credit Unions: True to Their Mission?..........   243
Ensweiler, Richard L.:
    "Claims of NCRC Report Rejected by Large Credit Union Trade 
      Group," news release, CUNA, May 19, 2005...................   295
Jorde, Terry J.:.................................................
    Written response to question from Hon. Ruben Hinojosa........   300

                 FINANCIAL SERVICES REGULATORY RELIEF:
                      PRIVATE SECTOR PERSPECTIVES

                              ----------                              


                         Thursday, May 19, 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, Jones, Royce, Kelly, Ryun, 
Biggert, Hensarling, Brown-Waite, Pearce, Neugebauer, McHenry, 
Sanders, Maloney, Sherman, Moore of Kansas, Carson, Hinojosa, 
Green, Moore of Wisconsin, and Clay.
    Chairman Bachus. [Presiding.] The Subcommittee on Financial 
Institutions and Consumer Credit is meeting here today on 
regulatory relief that will provide representatives of the 
financial services industry with an opportunity to identify 
regulations that they consider outdated or not cost-effective. 
In addition, the witnesses will have a chance to offer their 
recommendations for alleviating the burdens imposed by those 
regulations.
    At this time, I am going to yield to Mr. Royce for an 
opening statement because he is chairing a committee on 
international relations, and I want to let him do that so he 
can appear at that meeting.
    Mr. Royce. Thank you, Mr. Chairman. I thank you for holding 
this hearing to address the issue of regulatory relief for the 
financial services industry, which is a measure that I believe 
is constructive and well reasoned and very long overdue.
    For far too long Congress has burdened our country's 
federally chartered banks and thrifts and credit unions with 
well intentioned, but onerous and often outdated rules and 
regulations preventing them from operating as efficiently and 
competing as effectively as they could. I support the efforts 
of this subcommittee to reduce these unnecessary burdens.
    One week ago, Representative Paul Kanjorski and I 
introduced H.R. 2317, the Credit Union Regulatory Improvements 
Act, or CURIA, which is an updated version of legislation we 
first offered in the 108th Congress. As of this morning, I am 
pleased to announce we already have garnered the support of 27 
cosponsors for this measure from both parties.
    CURIA in the 109th Congress contains significant 
modifications regarding the applicable prompt corrective 
actions, standards and net worth requirements for credit 
unions. The most important changes replace the capital reform 
language contained in Title III of H.R. 3579 with a more 
comprehensive and robust capital provision incorporated into 
Title I of the new CURIA.
    Title I of the new CURIA now contains the PCA capital 
reforms recently recommended by the National Credit Union 
Administration, which oversees federally chartered credit 
unions and administers the National Credit Union Share 
Insurance Fund. The new PCA provisions in CURIA are modeled 
after FDIC capital standards applicable to banks and to 
thrifts.
    I am pleased to see that the testimony of one of our 
witnesses today will lay out more specifics on our legislation, 
so in the interests of time I would just ask that as this 
committee addresses regulatory relief provisions for financial 
institutions. I hope that the chairman and other members 
strongly consider the needed reforms Mr. Kanjorski and I have 
put forward for credit unions.
    I would like to thank you, Mr. Chairman, for the 
opportunity to speak on behalf of my legislation here for a 
minute this morning, and I look forward to the testimony of our 
witnesses today.
    I yield back.
    [The prepared statement of Hon. Edward R. Royce can be 
found on page 46 in the appendix.]
    Chairman Bachus. Thank you.
    I would like to say to our panel of witnesses and to the 
audience that Mr. Royce, Mr. Hensarling, Mr. Ryun, Mr. 
Kanjorski, and Mr. Moore on this side of the aisle all are on 
legislation to give regulatory relief to our financial 
institutions. Most of them are here today, and they are playing 
a leading role in the legislative package.
    At this time, I recognize the ranking member of the 
subcommittee, the gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman, for holding 
this important hearing.
    I am delighted to welcome our witnesses to be with us 
today.
    The focus of this hearing is on providing regulatory relief 
to financial institutions, which this committee has tried on 
several occasions to accomplish.
    Mr. Chairman, let me begin by saying that I do believe 
credit unions are one of the most highly regulated and 
restricted of all depository institutions in this country.
    To ease these regulatory burdens and help credit unions 
succeed in the 21st century, I am pleased to be an original 
cosponsor of the Credit Union Regulatory Improvement Act 
introduced by Congressmen Royce and Kanjorski and the Credit 
Union Net Worth Amendment Act introduced by the chairman.
    Among other things, CURIA will expand credit union 
investments in small businesses and create decent-paying jobs. 
The Credit Union Net Worth Amendment Act will also update 
statutory language to conform to new accounting practices for 
mergers of credit unions. I look forward to working with 
everyone on this committee to advance these bills.
    But, Mr. Chairman, I do not understand why large banks that 
have been making record-breaking profits for the past 5 
consecutive years need further regulatory relief while 
consumers, who are over $2 trillion in debt, also a record, are 
far too often left out of the mix. I think we might want to pay 
attention not only to the needs of large banks, but also to the 
needs of consumers.
    Having said that, Mr. Chairman, I would be pleased to work 
with you on regulatory relief legislation if we can also 
include a provision to expand employee ownership in this 
country, and I think we are going to be hearing from Mr. 
Keeling later on about that issue.
    Let me give you an example of what I am talking about.
    Last night, I introduced the Employee Ownership Opportunity 
Act, a very bipartisan, tripartisan piece of legislation, with 
Representatives Don Manzullo, Carolyn Maloney, Dana Rohrabacher 
and Barbara Lee. This legislation would provide a Community 
Reinvestment Act credit to financial institutions that offer 
assistance to employees to establish employee stock ownership 
plans, ESOPs, or eligible worker-owned cooperatives, EWOCs.
    Mr. Chairman, providing a CRA credit for the expansion of 
employee ownership is, I believe, a win-win. It will be good 
for banks looking for new ways to fulfill their CRA 
requirements, and it will be good for workers who would like to 
own their own businesses.
    In addition, Mr. Chairman, workers who are also owners, and 
one of the important points about worker ownership is that 
people who own their own businesses are not going to be going 
to China; they are not going to be going to Mexico. They are 
going to be reinvesting in decent-paying jobs in their own 
community. They are going to be empowered. Productivity will go 
up, and it is a direction that I would like to see our country 
go.
    Frankly, I think it makes a lot more sense for the Federal 
Government to be helping workers own the places that they work 
in, rather than providing huge amounts of corporate welfare to 
large multinationals that are going to China.
    Mr. Chairman, when we are talking about employee ownership, 
we are talking about protecting and creating decent-paying jobs 
in this country. Broad-based employee ownership has proven to 
increase employment, increase productivity, increase sales, and 
increase wages in the United States. According to a Rutgers 
University study, broad-based employee ownership boosts company 
productivity by 4 percent, shareholder return by 2 percent, and 
profits by 14 percent. Similar studies have shown that ESOP 
companies pay their hourly workers between 5 percent to 12 
percent better than non-ESOP companies.
    Mr. Chairman, last Congress I thought that one of the most 
interesting hearings in our subcommittee, and I thank you very 
much for holding that, and your interest in this issue, dealt 
with the issue of employee ownership. I was delighted that we 
were able to work together on that hearing. Another person who 
remembers that hearing will be here with us today, and we are 
delighted that Mr. Keeling is back again.
    This issue, Mr. Chairman, I think is one that can bring 
conservatives and progressives together. It is absolutely 
nonpartisan. All of us are concerned about lower wages in 
America, the loss of good-paying jobs. We want people to 
participate in their economy. So we look forward to working 
with you and all members of this committee on the issue of 
employee ownership.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Hon. Bernard Sanders can be 
found on page 49 in the appendix.]
    Chairman Bachus. Thank you, Mr. Sanders.
    I will say for the record that employee stock ownership 
plans and eligible worker-owned cooperatives, encouraging 
those, is a win-win situation for America. I know your 
legislation. I believe Dana Rohrabacher and Don Manzullo, who 
is Chairman of the Small Business Committee, have already 
indicated that they will be supporting your legislation.
    Mr. Sanders. That is right.
    Chairman Bachus. I am very supportive of that legislation, 
too.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    Chairman Bachus. Thank you.
    At this time, I recognize Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Thank you for 
holding this important hearing. Thank you for your leadership 
in trying to help us reduce the regulatory burden on our 
Nation's financial institutions.
    When laws are passed and regulations are promulgated, we 
just cannot walk away from them. Not unlike a ship that picks 
up barnacles, it has to be cleaned from time to time. The same 
is true of regulations. Many have costs that are passed on to 
the consumer in one form or fashion. Many outlive their 
purposes. Many have unintended consequences.
    The bottom line is that excessive, redundant, and costly 
regulations can make credit more expensive and less accessible. 
They can keep Americans from purchasing their first home, 
buying a second automobile to go to work, financing their 
child's education, or maybe launching a small business that 
creates new jobs in a small town.
    I believe with thoughtful regulatory relief, we can free up 
more capital for these valuable purposes without undermining 
safety and soundness. I think, Mr. Chairman, we all know that 
the Federal regulatory burden particularly falls 
disproportionately on our smaller banks and credit unions. 
These are institutions that typically have branches that are 
located in rural and more scarcely populated areas.
    Let's look at just banks for a moment. Assuming that $1 
billion in assets is the dividing line between small and 
medium-to-large banks, the total number of small banks has 
declined from roughly 12,000 at year's end in 1993 to a little 
over 8,000 at the end of 2003. In other words, a decline of 
almost one-third in just a decade.
    Now, I am sure there are a number of reasons for the 
mergers and consolidations that led to this decline, but from 
talking to folks in my home State Of Texas, I am convinced that 
the cost and burden of Federal regulation certainly ranks among 
the top reasons and really one of the top challenges to their 
continued profitability and viability.
    This is very worrisome because our smaller financial 
institutions are often the economic lifeblood of these small 
communities. Let me give you one example in my district. First 
State Bank of Athens, Texas, they make almost 100 charitable 
contributions a year to groups like the American Heart 
Association, Meals on Wheels, Disabled Veterans. They have 
funded close to $3 million for a 36-unit low-income housing 
unit for seniors. They fund Texas Ragtime, a key employer with 
90 employees; Nelson's Henderson County Door, Future Matrix 
Medical Devices, creating hundreds of jobs in Henderson County, 
Texas.
    But every dollar they spend on regulatory compliance is a 
dollar they cannot spend on Meals on Wheels or to fund capital 
improvements at Ragtime to create new jobs. The fact is that 
this one bank in Athens, Texas, spends close to $500,000 
annually on BSA compliance, Reg B, Reg E, Reg D, CRA, HMDA, 
HOPA, Reg O, and the list goes on and on and on.
    We must ensure that the banking system, the financial 
system, and the people of Henderson County, Texas, are at least 
receiving $500,000 in value for the regulatory burden. I fear 
this may not be the case.
    For that reason, Mr. Chairman, I applaud you for holding 
this hearing. I thank you for doing it.
    I look forward to working with members of this committee, 
especially my colleague from Kansas, Mr. Moore, to draft a 
comprehensive bill that will put more resources into the hands 
of those on the frontlines of community lending and enable more 
American families to realize their dreams.
    I yield back.
    [The prepared statement of Hon. Jeb Hensarling can be found 
on page 40 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Moore, I know you are joining Mr. Hensarling on 
comprehensive regulatory relief legislation.
    Mr. Moore of Kansas. Yes.
    Chairman Bachus. I commend both you gentlemen.
    Mr. Moore of Kansas. Thank you.
    Mr. Chairman, I would like to thank you for scheduling 
today's hearing, your leadership in calling this hearing on 
regulatory relief measures for depository institutions in our 
country.
    I look forward, as Mr. Hensarling just said, to working 
with him, Congressman Hensarling, in the weeks and months 
ahead, and to hearing suggestions from our witnesses today on 
how we can reduce the regulatory burden on financial 
institutions.
    This subcommittee and the full committee both passed the 
regulatory relief bill by voice vote during the 108th Congress, 
and the House passed it 1 year ago by a wide margin. I think it 
was about 392 to 25. I hope and believe that we will continue 
this broad bipartisan cooperation on this legislation that we 
have enjoyed in the past.
    Regulatory relief should not be about Republicans and 
Democrats. It should be about doing the right thing for the 
lenders in our communities who have played such an important 
role in expanding homeownership and creating opportunities for 
businesses and for consumers.
    Again, Chairman Bachus, thank you very, very much for 
convening this hearing. I look forward to hearing from the 
witnesses.
    [The prepared statement of Hon. Dennis Moore can be found 
on page 43 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Ryun?
    Mr. Ryun. Mr. Chairman, thank you. I appreciate your 
holding this hearing on regulatory relief for our financial 
institutions.
    I believe the institutions across the spectrum of the 
financial services industry do a remarkable job of serving our 
communities and making our financial services infrastructure 
the envy of the world, and we want to keep it that way.
    I believe that virtually all segments of the industry are 
in need of some form of regulatory relief, which is why I am 
pleased to see this effort to move again forward. I am grateful 
to my colleagues on this committee for spearheading the debate, 
specifically Mr. Hensarling and Mr. Moore for making this issue 
a priority.
    I am pleased to make a contribution to this debate by 
sponsoring H.R. 2061, the Communities First Act, which will 
provide targeted regulatory relief for community banks and 
their customers. I wholeheartedly supported H.R. 1375 in the 
last Congress. H.R. 1375 was a comprehensive regulatory relief 
bill and provides us a good starting point as we again begin to 
address this issue.
    However, there are additional measures that should be added 
to this communities bank issue and the service to small towns 
and rural communities of America. The Communities First Act is 
intended to call attention to the needs of the customers who 
use these community banks. Specifically, I believe it is 
important to identify areas where resources can be better used 
for serving customers than with compliance with burdensome and 
unnecessary regulations.
    As this broader regulatory relief effort moves forward, I 
encourage the committee to have a similar focus on serving the 
needs of the customers. I also want to say that my intent in 
introducing H.R. 2061 is to supplement the debate we are going 
to have today. I have some concerns that I believe should be 
addressed and will work with those concerned, including in the 
package a comprehensive package that helps move forward with 
some more relief.
    I am also certainly supportive of the broader effort as I 
believe the comprehensive approach is appropriate and needed. I 
look forward to participating in this debate and helping my 
colleagues craft the best bill possible.
    Today, I look forward to hearing from our distinguished 
panel and have had the opportunity to work with almost all of 
you, all the different organizations represented, and I thank 
each of you for joining us today and providing your advice and 
insight to what we should do as we move forward in this 
process.
    I am confident that we will be able to address many of the 
concerns of each of the organizations, and again I thank you 
for being here.
    Mr. Chairman, I yield back my time.
    [The prepared statement of Hon. Jim Ryun can be found on 
page 47 in the appendix.]
    Chairman Bachus. Thank you.
    Ms. Maloney?
    Mrs. Maloney. Thank you so much, Chairman Bachus, for 
holding this hearing.
    I welcome all of the witnesses. You represent a sector of 
the financial services industry that is extremely important to 
the city that I represent, New York City, and to our Nation as 
a whole. I am glad that we have an opportunity to hear from you 
today about the burdens that regulation and reporting 
requirements impose on our financial institutions, particularly 
those that are not mega-large, huge institutions, but are more 
community based.
    Whenever and wherever I go in my district, institutions 
large and small tell me how hard and very costly it is to 
comply with the requirements of the Bank Secrecy Act, to file 
the currency transaction reports and the suspicious activity 
reports, and to comply with the Patriot Act's know-your-
customer requirements. We have placed tremendous burdens on our 
banks, and they are on the frontlines of combating terrorism 
financing, and they have not shrunk from this incredibly 
important role.
    But we must make sure that they receive the necessary 
support from the regulators, both in terms of examinations and 
guidance, and in terms of regulatory requirements. It makes 
absolutely no sense for banks to spend an incredible amount of 
time and money to file SARs, or the suspicious activity 
reports, at the maximum of the regulatory requirement, when 
Treasury, by the account of its own Inspector General, cannot 
even track properly all of the data that is given to them.
    When regulators interpret regulations so as to require 
compliance at a level that is obviously wasteful because it is 
beyond what has any useful purpose, it undermines the 
legitimacy of the regulation itself. SARs, CTRS, and know-your-
customer all serve a very important purpose, but the 
Administration's inability to set the reporting requirements at 
a level that makes sense in terms of the data's usefulness to 
law enforcement is absolutely counterproductive.
    Not only does the industry suffer the costs for no benefit 
for society, but even worse, terrorist data is more likely to 
go unnoticed in a huge pile of irrelevant and unnecessary 
information. More SARs are not better. We have to figure out 
how to use this information and to streamline it better.
    The burdens are particularly heavy on the smaller 
institutions for which the costs of compliance are a much 
higher proportion of their resources. In light of the failure 
of the Administration to fix this problem, Congress is forced 
to step in.
    In the last Congress, this committee reported regulatory 
reform legislation. The House passed it. It did not move in the 
other body. I expect we will move shortly to advance similar 
reforms again in this House. I look forward to any ideas that 
can make these programs more effective and less burdensome on 
the institutions so that we can really achieve the goal that is 
set forth.
    In that vein, I am proud to be a cosponsor of not only the 
bill that passed last year, but three or four other reform 
bills in the regulatory relief area. So I look forward to your 
testimony, and believe me, I believe both sides of the aisle 
want to work in any way to make the system work better for you 
and for the public.
    [The prepared statement of Hon. Carolyn B. Maloney can be 
found on page 42 in the appendix.]
    Chairman Bachus. I thank the gentlelady.
    Are there any other members who wish to make opening 
statements?
    I reserved my opening statement because Mr. Royce had to 
chair another committee. So at this time, I am going to make a 
brief opening statement simply to say that the annual cost of 
regulations on our financial institutions, on our banks alone, 
is $36 billion.
    While some of those are necessary for safety and soundness, 
to comply with consumer protection laws, to comply with, as Ms. 
Maloney mentioned, the Bank Secrecy Act or the Patriot Act or 
money laundering measures, or financial crimes legislation, 
many of them are not necessary, and many of them, even with the 
Bank Secrecy Act or the Patriot Act, seem to be overly 
burdensome.
    The Chairman of our committee, Chairman Oxley, in 2001 
really because of additional burdens placed on our financial 
institutions when the Patriot Act was passed into law, 
indicated at that time that as a part of the overall 
legislation on the Patriot Act that assurances were made to our 
financial institutions that Congress would make a comprehensive 
review of our bank regulations and try to both offset the cost 
of the Patriot Act to the new costs imposed by the Congress 
because of those regulations and other regulations of that 
nature.
    He also indicated at that time that we would look at the 
Bank Secrecy Act and review that. We continue to get 
indications that the Bank Secrecy Act in some cases is being 
used in ways it was not intended by U.S. attorneys and others 
who simply do not understand the act or its purpose, and in my 
mind, in fact on certain occasions, go against the guidance and 
counsel of the bank regulators.
    Mr. Hensarling and Mr. Moore have taken H.R. 1375, which 
was introduced last year. They have refined that and they have, 
or you are going to introduce in the near future. I think a 
result of this hearing and what you say today will impact that 
legislation. It is their intention, along with others, to 
introduce comprehensive legislation on reg relief.
    Also, we have two other pieces of legislation which have 
already been introduced, one by Mr. Royce and Mr. Kanjorski, 
which is regulatory relief for our credit unions. Mr. Royce has 
mentioned that bill, and Mr. Ryun has legislation to try to 
help our small independent banks.
    Mr. Sanders mentioned that the large banks, he did not note 
the need for relief there, but Mr. Ryun's bill is particular 
targeted at our small community banks. They do pay a 
disproportionate share of their funds and their resources to 
comply with regulatory relief. So after this hearing, we will 
be looking at all those legislations and, hopefully, moving 
legislation very quickly.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 36 in the appendix.]
    Chairman Bachus.At this time, I would like to introduce our 
panel.
    Our first panelist is Ms. Terry Jorde, president and CEO of 
CountryBank USA--that is in North Dakota, is that right?--on 
behalf of the Independent Community Bankers of America; Mr. 
Bradley Rock, chairman, president, and CEO of the Bank of 
Smithtown, New York, on behalf of the American Bankers 
Association; Mr. Mark Macomber, president and CEO of Litchfield 
Bancorp, on behalf of the America's Community Bankers; and Mr. 
Robert Marquette, president and CEO of the Members First 
Federal Credit Union in Pennsylvania.
    Where in Pennsylvania is that located?
    Mr. Marquette. Mechanicsburg.
    Chairman Bachus. Okay. Thank you.
    Mr. Marquette testifies on behalf of the National 
Association of Federal Credit Unions, and Mr. Richard 
Ensweiler, president of the Texas Credit Union League, on 
behalf of the Credit Union National Association; and finally, 
Mr. Michael Keeling, president of the ESOP Association, 
employment stock ownership plans.
    Mr. Sanders mentioned legislation dealing with those and 
the CRA credits, so we welcome you.
    At this time, we will start with Ms. Jorde, with your 
testimony.
    We welcome all of you to the committee and look forward to 
our hearing today.

STATEMENT OF MS. TERRY J. JORDE, PRESIDENT AND CEO, COUNTRYBANK 
USA (ND), ON BEHALF OF INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Ms. Jorde. Thank you.
    Good morning, Mr. Chairman, Ranking Member Sanders, and 
members of the committee. My name is Terry Jorde, president and 
CEO of CountryBank USA. I am also chairman-elect of the 
Independent Community Bankers of America. My bank is located in 
Cando, North Dakota, a town of 1,300 people, where the motto 
is, "You Can Do Better in Cando." CountryBank has 27 employees 
and $39 million in assets.
    ICBA appreciates this opportunity to testify. We are 
especially pleased that the committee is apparently open to 
expand on previous regulatory relief bills, since they included 
very little true relief for community banks. That is one reason 
why the ICBA worked closely with Representative Jim Ryun on his 
Communities First Act. It includes relief critical to community 
banks and their customers.
    Other financial groups that have been working on the 
interagency regulatory burden reduction project led by FDIC 
Vice Chairman John Reich endorse virtually all of the 
regulatory provisions in the bill. ICBA hopes that 
Representative Hensarling will include many of them in the 
broader bill he is developing.
    Recent studies highlighted in my written statement show 
that community banks are losing market share. I agree with FDIC 
Vice Chairman Reich that the disproportionate impact of the 
regulatory burden on community banks is a leading cause of 
consolidation in our industry.
    It is not just smaller community banks like mine that are 
feeling the pain. Larger community banks as well are drowning 
in paperwork and regulatory burden. They are hiring two or 
three full-time employees to do nothing but Bank Secrecy Act 
compliance. They have spent hundreds of thousands of dollars 
for Sarbanes-Oxley Act compliance. In addition, credits unions, 
with their tax-exempt advantages and loose membership rules, 
have made inroads into small banks' market segments. That is 
one reason that ICBA is unalterably opposed to the credit union 
industry's new proposal to increase their charter powers, H.R. 
2317.
    I assure you, community bankers are not crying wolf. If we 
do not get meaningful relief soon, more and more of them will 
throw up their hands and give up their independence. This would 
hurt communities and reduce access to credit by small business, 
the primary job-creating engine of our economy. Banks with less 
than $1 billion in assets make 37 percent of small business 
loans, almost three times their share, 13 percent, of bank 
industry assets. And they account for 64 percent of total bank 
lending to farms.
    Community banks are particularly attuned to the needs of 
their communities and are uniquely equipped to facilitate local 
economic development. For example, I spend many hours each 
month on my local hospital board and our economic development 
corporation working to bring new business to our community. 
Branches of large mega-banks do not provide the same 
commitment.
    While we do not offer legislative changes to the Bank 
Secrecy Act, community bankers do have serious concerns about 
the enforcement. It is topic 1(A) when bankers discuss 
regulatory burden. However, the agencies do have the authority 
to address most of the problems. This committee should continue 
its oversight to ensure that BSA compliance does not impose an 
unproductive burden on the economy and truly achieves its 
important goals.
    The bank regulatory reduction project led by FDIC Vice 
Chairman Reich has done an excellent job in identifying those 
banking regulations that are unnecessarily burdensome. Many of 
them are hard-wired into Federal statute. The Communities First 
Act would make key changes, building on the concept of a tiered 
regulatory and supervision system as recommended by Vice 
Chairman Reich.
    Let me give you a couple of examples that would affect my 
bank. Section 102 of the act would permit strong banks with 
assets of $1 billion or less to file a short call report form 
in 2 quarters of each year. The current call report 
instructions and schedules fill 458 pages. A key employee in my 
bank spends the better part of April, July, October, and 
January working on this report. She never takes a vacation 
during these months and God help us if she would ever get sick 
at those times.
    While expensive and time consuming to produce, these 
quarterly filings by community banks are not essential to the 
agencies. The fact is in banks like mine, the world just does 
not change that dramatically between March 31 and June 30 of 
each year. The FDIC will not lose track of us if we file a 
short form every other quarter and Mr. Greenspan will still be 
able to conduct monetary policy without our real-time data.
    Let me give you another example. One of the most wasteful 
provisions of the Gramm-Leach-Bliley Act has been the 
requirement that financial institutions send annual privacy 
notices. They must be written in impossible-to-understand 
legalese. Fixing the language is daunting. Section 203 of the 
Communities First Act would at least greatly reduce the number 
of notices that must be mailed. It says that if an institution 
does not share information, except for narrow purposes, and has 
not changed its policies, it need not send out the annual 
notices.
    While any size institution could take advantage of this 
provision, community bankers are especially interested in 
having this option. I can tell you that my customers and their 
garbage collectors would also be grateful. These are just two 
examples from the Communities First Act. I am sure other 
community bankers would highlight others.
    ICBA strongly urges this committee to closely examine each 
of the regulatory provisions in the bill and include as many as 
possible in your broader regulatory relief measure.
    We thank you for the opportunity to testify.
    [The prepared statement of Terry J. Jorde can be found on 
page 97 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Rock?

STATEMENT OF BRADLEY E. ROCK, CHAIRMAN, PRESIDENT AND CEO, BANK 
  OF SMITHTOWN (NY), ON BEHALF OF AMERICAN BANKERS ASSOCIATION

    Mr. Rock. Mr. Chairman and members of the subcommittee, my 
name is Brad Rock. I am chairman, president, and CEO of Bank of 
Smithtown, a $750 million community bank founded in 1910, which 
is located on Long Island in Smithtown, New York.
    I would like to make three key points. First, compliance 
costs drain bank resources, taking away from the needs of our 
customers and our communities. Every new law, regulation or 
rule means two things: more expensive bank credit and less of 
it. During the past decade, banks have shouldered the effects 
of some of the most imposing legislation of the past 100 years.
    Compliance costs for banks today are between $35 billion 
and $42 billion per year, and these do not include costs 
associated with the USA Patriot Act, the Sarbanes-Oxley Act, 
the SEC, FASB, and the Public Company Accounting Oversight 
Board. If we were to reduce the regulatory costs by just 20 
percent, the reduction would support additional bank lending of 
up to $84 billion. The impact on our economy would be huge.
    Second, regulatory burden is significant for banks of all 
sizes, but small banks struggle the most. There are more than 
3,200 banks with fewer than 25 employees. Nearly 1,000 banks 
have fewer than 10 employees. These banks simply do not have 
the human resources to implement the thousands of pages of 
regulations, policy statements, and directives they receive 
every year.
    Countless hours are spent on compliance paperwork at all 
levels, from bank directors and CEOs to managers and tellers. 
At my bank, every person has major compliance responsibilities, 
and one person has a full-time job just to coordinate all the 
compliance activities.
    I personally spend about 1.5 days per week on compliance 
issues. Some CEOs tell me that they are now spending nearly 
half their time on regulatory issues. This means that bank CEOs 
spend more than 5 million hours each year on compliance, time 
that could be better spent on ways to improve banking in their 
communities and to meet the changing needs of their customers. 
But the costs do not stop there. My bank pays more than 
$100,000 each year to outside firms to help us to comply with 
regulatory burdens. This one expense alone, if it were used as 
capital, would support additional $1 million of lending in my 
community.
    My third point is this: Only the involvement of Congress 
can result in a reduction of costly regulatory burdens. Bankers 
have seen previous relief efforts come and go without effect, 
while the overall burden has kept rising. In my written 
testimony, I list some of the areas in which ABA is seeking 
reform. Let me briefly describe two which have been 
particularly costly in recent years.
    Under the Bank Secrecy Act, banks fill out more than 13 
million cash transaction reports annually. In my area, many of 
these reports are filed for small businesses like delis, gas 
stations, and flower shops, which have nothing to do with 
potentially criminal activity. The 35-year-old rules related to 
cash transaction reports have lost their usefulness due to 
several developments, including more extensive suspicious 
activity reporting. Consider a small bank that has 25 employees 
or less. Many banks of this size have had to hire an additional 
full-time employee for the sole purpose of completing reports 
related to the Bank Secrecy Act. The cost-benefit analysis does 
not make sense.
    Second, as a result of the Sarbanes-Oxley Act, accountants 
have more than doubled their fees. One community bank in New 
York saw its accounting fees jump from $193,000 in 2003 to more 
than $600,000 in 2004. New accounting standards frequently 
cause almost complete duplication of bank internal audits 
without increasing safety and soundness.
    In conclusion, unnecessary paperwork and regulation erodes 
the ability of banks to serve customers and support the 
economic growth of our communities. We look forward to working 
with you to find ways to bring greater balance to the 
regulatory process.
    Thank you, Mr. Chairman.
    [The prepared statement of Bradley E. Rock can be found on 
page 220 in the appendix.]
    Chairman Bachus. Thank you, Mr. Rock.
    Mr. Macomber?

 STATEMENT OF MARK E. MACOMBER, PRESIDENT AND CEO, LITCHFIELD 
     BANCORP (CT), ON BEHALF OF AMERICA'S COMMUNITY BANKERS

    Mr. Macomber. Good morning, Chairman Bachus, Congressman 
Sanders, and members of the committee. I am Mark Macomber, 
president and CEO of Litchfield Bancorp in Litchfield, 
Connecticut. Litchfield Bancorp is a $175 million State-
chartered community bank, and is part of a two-bank mutual 
holding company that operates as a mutual savings bank. I am 
here this morning representing America's Community Bankers. I 
serve on ACB's board of directors and its executive committee 
and am ACB's second vice chairman.
    I want to thank Chairman Bachus, Congressman Hensarling, 
and Congressman Moore of Kansas for their leadership in 
addressing the impact of outdated and unnecessary regulations 
on community banks and the communities they serve. ACB is 
pleased to discuss ways to reduce the burden of unnecessary 
regulations on community banks.
    Many of ACB's specific recommendations have been included 
in past regulatory relief legislation adopted by the Financial 
Services Committee and the House, including the Financial 
Services Regulatory Relief Act of 2004, H.R. 1375. The House 
adopted H.R. 1375 by an overwhelming bipartisan vote of 392 to 
25. We greatly appreciate the past support of the Financial 
Institutions Subcommittee and the Financial Services Committee, 
and we hope members of the committee will support the 
recommendations that we will discuss today.
    This hearing and this topic are important and timely. Ten 
years ago, there were 12,000 banks in the United States. Today, 
there are only 9,000 of us left. ACB is concerned that 
community banks are significantly hindered in their ability to 
compete because of the costs and burden of unnecessary and 
outdated regulations. We are particularly concerned about how 
laws intended to prevent money laundering and to promote 
corporate governance are being implemented by regulatory 
agencies.
    Community bankers fully support the goals of the laws 
against money laundering, and we are resolute participants in 
the fight against crime and terrorism. Yet we face an 
atmosphere of uncertainty and confusion because regulatory 
staff in the field, region, and in Washington are giving banks 
inconsistent messages. Community bankers also support the 
Sarbanes-Oxley Act.
    However, the implementation of the act by the Securities 
and Exchange Commission and the Public Company Accounting 
Oversight Board, together with the way accounting firms 
interpret the regulations, have led to unintended consequences 
that are costly and burdensome. That is true for all community 
banks, including those that are privately held stock 
institutions and mutual community banks like mine.
    ACB has provided concrete suggestions to the banking 
agencies and other regulators on ways to cut the cost of 
compliance. We commend the banking agency in FinCEN on their 
recent guidance on money services businesses and the SEC and 
the PCAOB on the recent guidance on internal controls. We hope 
these efforts will bring greater certainty and lower compliance 
costs. Yet more needs to be done. ACB will continue to work 
with Government agencies to improve the regulation of our anti-
money laundering and corporate governance laws.
    A new concern that has been raised by our members is that 
the Federal Housing Finance Board may be contemplating imposing 
on the community bank members of the Federal Home Loan Bank 
system a third layer of predatory lending regulations. State 
and Federal banking regulators already oversee the banking 
system for unscrupulous lending practices. However, our members 
see no value in adding another regulator to duplicate what 
others are already doing. This can only lead to conflicting 
requirements and more and higher costs to the system and its 
borrowers.
    Our written statements endorse 31 amendments to current 
laws that will reduce unnecessary regulations on community 
banks. Let me mention three. First, a modest increase in the 
lending limit for savings associations is a high priority for 
ACB members. In recent years, community banks have experienced 
an increased demand for small business loans.
    To meet this demand, ACB wants to eliminate the lending 
limit restriction on small business loans. We would increase 
the lending limit on other commercial loans to 20 percent of 
assets. This expanded authority would enable savings 
associations to make more loans to small-and medium-size 
businesses. That would enhance their role as community-based 
lenders. It would promote community development and contribute 
to economic growth and job creation.
    Second, ACB vigorously believes that savings associations 
should have parity with banks under the Securities Exchange Act 
and the Investment Advisers Act. Savings associations and banks 
should operate under the same basic regulatory requirements 
when engaged in identical trust, brokerage, and other 
activities. As more savings associations engage in trust 
activities, there is no substantive reason to subject them to 
different requirements. They should be subject to the same 
regulations as banks engaged in the same services.
    Third, ACB urges that unnecessary restrictions on the 
ability of national and State banks to engage in interstate 
branching be removed. Currently, national and State banks may 
only engage in de novo interstate banking if State law 
expressly permits. This restriction should be eliminated.
    These recommendations, along with those in our written 
statement, will make it easier and less costly for us to help 
our communities grow and prosper and create new jobs. On behalf 
of America's Community Bankers, I want to thank you for your 
invitation to testify. We look forward to working with you and 
your staff to accomplish this goal.
    I will be happy to answer any questions you may have. Thank 
you.
    [The prepared statement of Mark E. Macomber can be found on 
page 122 in the appendix.]
    Chairman Bachus. Thank you, Mr. Macomber.
    Mr. Marquette?

 STATEMENT OF ROBERT MARQUETTE, PRESIDENT AND CEO, MEMBERS 1ST 
FEDERAL CREDIT UNION (PA), ON BEHALF OF NATIONAL ASSOCIATION OF 
                     FEDERAL CREDIT UNIONS

    Mr. Marquette. Good morning, Mr. Chairman, Ranking Member 
Sanders, and members of the subcommittee. My name is Bob 
Marquette. I am the president and CEO of Members 1st Federal 
Credit Union, located in Mechanicsburg, Pennsylvania. I am here 
today on behalf of the National Association of Federal Credit 
Unions to express our views on the need for regulatory relief 
and reform for credit unions.
    As with all credit unions, Members 1st is a not-for-profit 
financial cooperative governed by a volunteer board of 
directors who are elected by our member-owners. We were founded 
in 1950 by nine members putting $5 in a hat, and from those 
humble beginnings, and solely through the support of our 
member-owners and their funds, we have grown to our current 
size, meeting their everyday financial needs.
    America's credit unions have always remained true to their 
original mission of promoting thrift and providing a source of 
credit for provident or productive purposes. A 2004 Filene 
Research Institute study entitled, "Who Uses Credit Unions?" 
found that the average household income of those who hold 
accounts solely at a credit union was less than $43,000, while 
this average for those who solely hold accounts at a bank was 
almost $77,000.
    Because of our cooperative not-for-profit structure, our 
members find that our product service offerings remain widely 
available to them irrespective of economic or stock market 
conditions. Such dependability means we are not in a particular 
market or product offering today, but out of that area tomorrow 
simply to bolster our net income growth. Such a long-term view 
is only possible because of our not-for-profit mutual ownership 
structure, which benefits not only our members, but also our 
economy and our local businesses as well.
    I am pleased to report to you today that America's credit 
unions are vibrant and healthy and that membership in credit 
unions continues to grow, now serving over 86 million 
Americans. At the same time, according to data obtained from 
the Federal Reserve Board, credit unions have the same market 
share today in terms of financial assets as they did in 1980, 
1.4 percent, and as a consequence provide little competitive 
threat to other financial institutions.
    Mr. Chairman, as your subcommittee considers regulatory 
relief, we hope that you will look at the credit union 
provisions included in last year's House-passed Financial 
Services Regulatory Relief Act. We believe these provisions are 
a positive step in addressing many of the regulatory burdens 
and restrictions on Federal credit unions. The facts confirm 
that credit unions are more heavily regulated than other 
consumer financial services providers.
    We also hope that you will consider including additional 
provisions from the Credit Union Regulatory Improvements Act of 
2005. I would like to thank Congressmen Royce and Kanjorski for 
taking the lead in introducing this vital legislation.
    NAFCU urges the subcommittee to include language in any 
regulatory relief bill to modernize credit union capital 
requirements by redefining the net worth ratio to include risk 
assets as proposed by the NCUA and included in the CURIA bill. 
This would result in a new, more appropriate measurement to 
determine the relative risk of a credit union's balance sheet 
and also improve the safety and soundness of credit unions and 
our share insurance fund.
    NAFCU also asks the subcommittee to refine the member 
business loan cap established as part of the Credit Union 
Membership Access Act in 1998, replacing the current formula 
with a flat rate of 20 percent of the total assets of a credit 
union. We support revising the definition of a member business 
loan by giving NCUA authority to exclude loans of $100,000 or 
less from counting against the cap.
    There is a lot of rhetoric out there on this issue, but I 
must note that a 2001 Treasury Department study entitled 
"Credit Union Member Business Lending" concluded that credit 
unions' business lending currently has no effect on the 
viability and profitability of other insured depository 
institutions.
    Finally, we urge the subcommittee to also include language 
that would address the strain that could be placed on merging 
credit unions when FASB changes merger accounting rules from 
the pooling method to the purchase method. This subcommittee 
held a hearing on April 13 of this year, and legislation to 
address this issue in the form of the Net Worth Amendment for 
Credit Unions Act is moving through the House. We thank you for 
your leadership on this issue, Mr. Chairman, and we hope that 
this issue will also be included in any regulatory relief 
package.
    In conclusion, the state of the credit union community is 
strong, and the safety and soundness of credit unions is 
unquestionable. Nevertheless, there is a clear need to ease the 
regulatory burden on credit unions as we move forward in the 
21st century financial services marketplace. NAFCU urges the 
subcommittee to consider the important credit union provisions 
we have outlined in this testimony for inclusion in any 
regulatory relief bill.
    We look forward to working with you on this important 
matter and would welcome your comments or questions, and we 
appreciate the opportunity to testify at today's hearing.
    Thank you.
    [The prepared statement of Robert Marquette can be found on 
page 208 in the appendix.]
    Chairman Bachus. Thank you, Mr. Marquette.
    Mr. Ensweiler?

  STATEMENT OF RICHARD L. ENSWEILER, PRESIDENT, TEXAS CREDIT 
  UNION LEAGUE, ON BEHALF OF CREDIT UNION NATIONAL ASSOCIATION

    Mr. Ensweiler. Chairman Bachus, Ranking Member Sanders, and 
members of the subcommittee, on behalf of the Credit Union 
National Association, I appreciate this opportunity to express 
the association's view on legislation to help alleviate the 
regulatory burden under which all financial institutions 
operate today. I am Richard Ensweiler, president and CEO of the 
Texas Credit Union League and chairman of the Credit Union 
National Association.
    According to the U.S. Treasury Department, credit unions 
are clearly distinguishable from other depository institutions 
in their structure and operational characteristics and have 
more limited powers than national banks and Federal savings 
associations. Given the limited time available, I will devote 
my statement to describing a few exceptionally important issues 
for these credit unions. Most of these are addressed in the 
recently introduced H.R. 2317, the Credit Union Regulatory 
Improvement Act of 2005, or CURIA.
    We are very grateful to Representatives Royce and 
Kanjorski, as well as Representatives LaTourette, Sanders, 
Maloney, and other cosponsors for reintroducing this important 
bill. As part of our mission, credit unions are devoted to 
providing affordable financial services to all our members, 
including those of modest means. One provision that this 
committee and the House have already passed, thanks to 
Representatives Gerlach and Sherman, would better enable us to 
meet the goal. I am referring to H.R. 749, legislation to 
permit credit unions to provide broader check-cashing and 
remittance services.
    Accomplishing our mission can also be greatly enhanced by 
revisiting two major components of the 1998-passed Credit Union 
Membership Access Act. With 7 years of experience, we have 
learned that what was thought to be good policy at the time has 
actually created new problems that need to be resolved to 
assure that credit unions can continue to meet their mission.
    The first of these is the current cap on member business 
lending. There was no safety or soundness reason to impose 
these limits as the historical record is clear that such loans 
are even safer than other types of credit union loans. In fact, 
public policy argues strongly in favor of eliminating 
altogether or increasing the limits that credit unions can lend 
to their small business members from the current 12.25 percent 
of total assets to the 20 percent suggested in CURIA.
    Small business is the backbone of our economy and is 
responsible for the vast majority of new jobs in America. Yet 
recent SBA and Federal Reserve Bank of Atlanta studies reveal 
that small businesses are having greater difficulty in getting 
loans in areas where bank consolidation has taken hold. The 
1998-passed law severely restricts small business access to 
credit and impedes economic growth in America. Although few 
credit unions are currently bumping up against the cap, in a 
few years that is likely to change.
    Then there is the case of many small credit unions. 
Investing in the expertise required to run a member business 
lending operation is a very expensive proposition. With the 
12.25 percent of assets cap, they could not make up the costs 
necessary to engage in such an operation. Their members want 
the credit union option for this service, too.
    Furthermore, the National Credit Union Administration 
should be given the authority to increase the $50,000 threshold 
as proposed in CURIA to $100,000. This would be especially 
helpful to small credit unions as they would then be able to 
provide the smallest of these loans without the expense of 
setting up a formal program.
    Another critical issue addressed in CURIA is prompt 
corrective action regulations governing credit unions. Credit 
unions have higher statutory capital requirements than banks, 
but credit unions's cooperative structure creates a systemic 
incentive against excessive risk-taking, so since there is no 
profit motive to take excessive risks, there may be actually 
less capital required to meet potential losses than at other 
depository institutions.
    And because of their conservative management style, credit 
unions generally seek to always be classified as well, rather 
than adequately, capitalized. To do so, they must maintain a 
significant cushion above the 7 percent of assets reserve 
level. CUNA believes that the best way to reform PCA would be 
to transform the system in to one that is much more explicitly 
based on risk measurement as outlined in CURIA. It would place 
much greater emphasis on ensuring that adequate net worth in 
relation to risk at a particular credit union as it undertakes 
this operation.
    At the same time, CUNA believes credit union PCA could 
incorporate a meaningful leverage requirement comparable to 
that in effect for other federally insured institutions. CUNA 
strongly supports CURIA's new rigorous safety and soundness 
regulatory regime for credit unions, which is anchored by 
meaningful net worth requirements and are at least comparable 
to bank PCA.
    And credit unions agree that any credit union with net 
worth ratios well below those required to be adequately 
capitalized should be subject to prompt and stringent 
corrective action. There is no desire to shield credit unions 
from PCA. They are indeed the appropriate targets of PCA. 
Because of the cooperative funding structure of the national 
credit union share insurance fund, credit unions are keenly 
aware that it is they who pay when a credit union fails.
    Reforming PCA along these lines would preserve and 
strengthen the fund. It would more closely tie a credit union's 
net worth requirements to its risk exposure. It would also free 
up more capital for making loans to members and putting 
resources into the economy.
    Finally, we thank you, Chairman Bachus and others for 
introducing and moving H.R. 1042 to address a pending issue 
before FASB that would cause undue hardship to credit unions by 
forcing them to change from the pooling method of accounting 
for reserves in the event of mergers.
    In summary, Mr. Chairman, we are grateful to the 
subcommittee for holding this important hearing. We strongly 
urge the subcommittee to act on this very important issue this 
year and to make sure that CURIA is a part of any congressional 
action to provide financial institutions regulatory relief. 
CURIA is our future. Without CURIA, more credit unions will 
feel forced to consider converting to a thrift or a bank, and 
millions of Americans will be deprived of a not-for-profit, 
member-owned financial cooperative, or a credit union, as an 
option to respond to their financial needs.
    Thank you for this opportunity this morning.
    [The prepared statement of Richard L. Ensweiler can be 
found on page 51 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Keeling?

     STATEMENT OF J. MICHAEL KEELING, PRESIDENT, THE ESOP 
                          ASSOCIATION

    Mr. Keeling. Chairman Bachus, Ranking Member Sanders, 
members of the subcommittee, my name is J. Michael Keeling. I 
am president of the ESOP Association. Our primary members are 
U.S. corporations that are owned by their employees through an 
employee stock ownership plan, or ESOP.
    Approximately 97 percent of our 1,400 ESOP company members 
are private, small-to mid-size businesses. Our member 
demographics pretty much represent business as a whole in 
America. I have served as the chief staff officer of the 
Association since April 1991 and first began work with the ESOP 
group in early 1982, shortly after leaving a position as Chief 
of Staff for 10 years with former Congressman J. J. Pickle.
    You may wonder what someone who works for companies that 
are employee-owned through ESOP has to say to you as you 
examine ways to ease and improve the regulation of our nation's 
financial institutions. Before I finish, I would hope that you 
would conclude that discussions of creating employee ownership 
should be before your full committee and your subcommittee more 
so than the tax and labor committees of Congress.
    Let me explain. An ESOP is similar to any other defined 
contribution plan such as a 401(k) plan, except for two 
statutory distinguishing characteristics. Unlike other defined 
contribution plans, an ESOP must be primarily invested in 
employer stock and may borrow money to obtain its asset, the 
stock of the plan sponsor. Attachment A summarizes the research 
that ESOPs are good for America, for the ESOP companies, and 
the employee-owners in the vast majority of instances. Note the 
words I used, "borrow money," which clearly means you should 
have an interest in the approximately 11,000 ESOP companies in 
America.
    But let's dig a little deeper. First, a big picture 
statement as to why your subcommittee should be involved with 
ESOPs as you work with your primary concern, our Nation's 
financial institutions. Ninety percent of ownership is created 
in a free enterprise society by financing. The idea that one 
can work hard and save a few pennies and then start their own 
business and succeed, but never be financed, is a Pollyanna 
pipedream. Entrepreneurs get financed, and as they pay off 
their debts or line of credit, they own more and as what they 
own grows, they become wealthier.
    ESOPs borrow money to enable average-paid persons, the 
employees, to be owners. The ESOP method of financing cuts the 
employees in on the ownership of what makes people truly 
financially secure in a capitalistic system: productive assets. 
The sources of ESOP financing are generally from the 
institutions you oversee. So ESOPs are intertwined with 
financial institutions in economic theory and in practicality.
    Let's climb down from the skies a bit. As Mr. Sanders 
mentioned, yesterday he introduced H.R. 2547 and was joined by 
his colleagues Manzullo, Rohrabacher, Maloney, and Lee. Last 
Congress, Mr. Sanders introduced H.R. 2969, which would have 
established a lending program in the United States Treasury to 
facilitate employees buying their plants under conditions and 
to operate them as ESOP companies or employee-owned 
cooperatives, or EWOCs, as they are called.
    In today's climate of tight budgets, it will take more work 
by the employee ownership community to make the case to you 
that you and your colleagues should move forward the H.R. 2969 
package.
    But as ESOP experts reviewed H.R. 2969, one provision of 
Mr. Sanders's bill jumped off the page as a modest but 
meaningful first step in accomplishing several worthy goals. 
This was the provision that is now H.R. 2547.
    H.R. 2547 provides that the appropriate Federal financial 
supervisory agency assessing a financial institution's record 
of meeting the credit needs of its entire community should also 
include as a factor the institution's capital investment loans 
to support or enable manufacturing employees to establish ESOPs 
or EWOCs that are at least 51 percent owners of the companies 
where they work.
    Please note the language of H.R. 2547 is very modest. It 
does not automatically mean that the agency gives a CRA. The 
loan has to be for employees of a manufacturing facility that 
ends up with at least 51 percent ownership. In the real world, 
we are looking at about 100 to 150 situations like this. In 
2003, Congressman Sanders had hearings on H.R. 2969 and we 
learned of many plants where the union and management, or 
nonunion employees and management could, make a good case that 
the plant could succeed as an employee owned company, but yet 
they did not get financing.
    Still today, too many banks and lending institutions do not 
understand the mechanisms in how employee-owned companies work. 
I think of Mrs. Maloney in the 1980s and the work she was doing 
for her people in the Bronx. Perhaps we would have saved that 
Bronx Brass facility, Mrs. Maloney, if we had had this 
provision in law.
    We come to the win-win situation here. What Mr. Sanders is 
saying is, listen, banks, help expand employee ownership and 
you will get a little easing of your regulatory burden. So it 
is a modest step. Indulge me one thought, and I quote a speech: 
"In America's idea of freedom, citizens find the dignity and 
security of economic independence instead of laboring on the 
edge of subsistence. This is the broader definition of liberty 
that motivated the Homestead Act."
    "To give every American a stake in the promise and future, 
we will build an ownership society. We will widen the ownership 
of homes and businesses, retirement savings and health 
insurance, preparing our people for the challenges of life in a 
free society. By making every citizen an agenda of his or her 
own destiny, we will give our fellow Americans greater freedom 
from want and fear and make our society more prosperous and 
just and equal." President George W. Bush, inauguration speech, 
January 20, 2005.
    Mr. Chairman and subcommittee, there should be legitimate 
debate over the specifics of how to build a more prosperous, 
just, and equal society, but I submit H.R. 2547 can be a small, 
meaningful, reasonable specific step that will move us towards 
an ownership society, while at the same time easing a 
regulatory burden for the financial institutions.
    I appreciate your invitation to be here today.
    [The prepared statement of J. Michael Keeling can be found 
on page 109 in the appendix.]
    Chairman Bachus. I thank you, Mr. Keeling.
    At this time, I am going to yield my time to Mr. Pearce for 
questions.
    Mr. Pearce. Thank you, Mr. Chairman, for that yielding of 
your time.
    Many years ago, I read a statement that I still have yet to 
find fault with that said there are really no Third World 
economies, there are just overregulated economies, and ours 
appears to be moving that way very fast.
    The district that I represent is built of small 
communities, small businesses, and small banks. Some of our 
communities have, Ms. Jorde, as their economic development plan 
the hope to get to the size of the community that you are in, 
maybe the third stage up from where we are. The community I 
grew up in actually had no post office. It did have a 
crossroads. The crossroads are still there and the post office 
is still not. So I am like you, from a very small area. We 
depend on the small banks, so I appreciate the quandary that we 
find ourselves in.
    Mr. Rock, you were pretty definitive on some of your 
regulatory suggestions. Do we run any risk in many of the 
regulations if we back them out first of all? And secondly, is 
there any reason that the regulators just cannot go in and 
begin to take pages of regulations out that no longer mean 
anything? Is it technically possible, even if it is not 
probable?
    Mr. Rock. Well, let me respond to the first part. Certainly 
the purposes of many of these regulations, for example the Bank 
Secrecy Act, they are laudable purposes. Banks want to help 
identify terrorists and any terrorist financing. But we think 
that the way that these are being done by the regulators 
amounts to overreaching. I think that the regulators can make 
some changes and I think we are moving in that direction. We 
have had some discussions with folks from FinCEN. We have had 
discussions with the folks from Treasury, for example, on bank 
secrecy.
    We think that they have communicated through their 
examination process that they have a zero tolerance level. The 
problem is that banks then take on a posture where they are 
trying to defend themselves, and they file defensively. And 
they file then reams of paper in order to not be penalized by 
the regulators. As Mrs. Maloney referred to earlier, it is 
really very counterproductive to the process. I think it not 
only hurt banks, but I think it hurts all of us.
    I have a bank secrecy officer in my bank who has 30 years 
of experience at identifying what suspicious activity is. If 
the regulators weren't to push us so hard to file everything, 
then she would file fewer and she would file not whenever 
anything comes to her attention that might even be remotely at 
risk.
    Mr. Pearce. Do you ever get any follow-up? Do you ever get 
follow-up?
    Mr. Rock. No, we have never.
    Mr. Pearce. So no one ever calls back. You send in the 
reports and no one ever calls back and says, could you call 
that person up and see if they are really valid.
    Mr. Rock. We have never had any follow-up. I will say that 
we have never had any follow-up to situations that we have 
considered serious. We have had to go out of our way to make 
the call to law enforcement to try to have them pull that one 
out of the pile.
    Mr. Pearce. Did anything happen when you made those calls?
    Mr. Rock. Yes. I think after we made that call, law 
enforcement did pull it out of the pile and follow up.
    Mr. Pearce. Which if you were not filing piles of 
paperwork, you probably would have made that call anyway and 
you probably would have gotten the same results.
    Mr. Rock. That is right. I reckon that we would have only 
filed that one suspicious activity report.
    Mr. Pearce. Mr. Keeling, you mention on page five about the 
failure of ESOPs to get financing. Do you think that is 
systemic or do you think that that may reflect risk and 
sometimes lack of management expertise in some of the ESOPs? In 
other words, do you think that ESOPs are targeted or is it a 
risk-reward-type question that the institutions are asking that 
causes some ESOPs not to get funded?
    Mr. Keeling. I think it is 50-50.
    Mr. Pearce. Okay.
    Mr. Keeling. I think that there are examples, and this came 
out in the hearing last year, where you can make a good case 
that the plant, like the one in Baltimore that I refer to in 
the testimony in an attachment where Governor Ehrlich played a 
major role in saving those 300 inner-city jobs and made a very 
strong feasibility case. The state of Maryland had to step in 
to finance it.
    Mr. Pearce. What percent of ESOPs would you say go belly up 
during a period of time?
    Mr. Keeling. About 2 percent, 1 percent. Keep in mind, we 
are dealing with a subset of ESOP companies when we talk about 
the ones that Mr. Sanders is targeting. The vast majority of 
ESOP companies involve an exiting shareholder. Here, we are 
discussing specifically manufacturing plants. And let me say in 
defense of U.S. corporation, many times they slate a business 
or firm for shutdown. It is not because it was not profitable. 
It just did not fit into the picture with that corporation.
    Mr. Pearce. I understand.
    Thank you, Mr. Chairman, my time has expired.
    Mr. Hensarling. [Presiding.] The time of the gentleman has 
expired.
    Clearly, I am not Chairman Bachus. He had to excuse himself 
to deliver a speech, but he wanted to thank each and every one 
of the panelists and share his view that he thought the 
testimony was incredibly valuable.
    At this time, the Chair will recognize the ranking minority 
member, the gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chair.
    Let me mention to all of our guests today that I understand 
all of the issues out there are important, but I would like to 
focus a little bit on the ESOP issue with Mr. Keeling. Mr. 
Keeling, I had a wonderful experience, and I wanted to mention 
it to the members of this committee. Just a few months ago, I 
went to a company in the southern part of the State of Vermont 
in a town called Bellows Falls, which has had some economic 
difficulties.
    There is a company there called Chroma. I do not know, Mr. 
Keeling, if you are familiar with the Chroma Company. It is a 
worker-owned industry. The spirit of the people there was just 
extraordinary. It is a high-tech company. They make lenses for 
microscopes. Wages are high. The whole decision-making process 
is very cooperative. People feel involved. There is almost no 
turnover. People get that job; they do not want to leave. It 
was just an amazing and wonderful thing to see.
    Mr. Keeling, let me ask you this. I know that in Vermont, 
and I expect all over this country, there are a lot of people, 
businessmen who have started companies, worked to see those 
companies grow for 30 years, are fond of their employees, but 
probably do not have the information available or the resources 
available to be able to say to those workers, look, thank you 
for 20 years of work for me; I want to see you and your fellow 
workers own this company, and so forth and so on.
    Do you think that there is a general lack of information 
out there to those types of people? Often we see the headlines, 
companies shut down; workers look to worker-ownership. And 
sometimes, it is too late to move in that direction. But I have 
the feeling that there are probably thousands of businessmen 
out there, if they knew the options, if it was financially 
feasible, would love to see their employees own and control the 
work that they had done. Do you believe that is true?
    Mr. Keeling. I believe that you are generally correct. 
Oddly enough, when you get up in years of experience I have had 
around employee ownership, you start looking at the glass being 
half full when it is half empty. It is so much better than it 
was in the 1970s and the early 1980s. But having said that, we 
still find that the primary advisers to small-and mid-
businesses, which is more often than not someone who is an 
accountant because small businesses need to keep their books, 
the advisor is not familiar with the advantages and the plusses 
of creating employee ownership. And thus that business owner's 
head is often turned in another direction where he or she may 
not hear about this opportunity.
    There are some systematic issues, too, in terms of the 
price that can be paid for ESOP shares that might not be 
attractive to the owner. So I agree with you that the glass, at 
best, is half empty, but, of course, I can say it is half full.
    Mr. Sanders. Might that also be true of a lot of banks who 
simply may not be making those loans, not because they are 
prejudiced, but because simply of it is a new idea. It is a 
concept that they are not familiar with.
    Mr. Keeling. I agree with you, and I particularly agree 
with that with the smaller lending institutions, that would be 
not staffed in a manner to be up to speed on all the different 
methods of financing an exiting shareholder or a company that 
might be viable with an ESOP loan. Keep in mind, no one is 
asking that an unviable economic unit be financed and kept in 
business. They have to meet the underwriting standards.
    Mr. Sanders. I gather that what you are saying is that it 
would be a very positive idea to provide a CRA credit to 
financial institutions which provide assistance to employees in 
order to establish ESOPs or EWOCs.
    Mr. Keeling. I endorse that 100 percent and I am going to 
make one little statement. If you could save 200 jobs, 100 
jobs, and that was the extent of the advantage; if we had saved 
the factory in Mrs. Maloney's city council district, it would 
have made it worthwhile because I do not see the downside for 
the financial institutions.
    Mr. Sanders. Well, I just want to thank, Mr. Bachus is not 
here right now, but he just indicated to me that he wants to 
come on board this bill. We have Mr. Rohrabacher on board and 
Mr. Manzullo, who is chairman of the Small Business Committee. 
We are going to make this a real tripartisan effort and I hope 
that we can move this important legislation this year.
    I want to thank you, Mr. Keeling for your support, and I 
would hope that our other panelists will join in support of 
this concept.
    Thank you very much, Mr. Chair.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
Kansas, Mr. Ryun.
    Mr. Ryun. Mr. Chairman, thank you very much.
    First of all, let me thank all the panelists for coming 
today, and then make a point of personal privilege, if I may. 
Prior to entering office 9 years ago, as a small businessman, 
two things that frustrated me were the ever-increasing taxes 
and the number of unnecessary regulations that it caused in 
terms of compliance. It was one of those things that drove me 
to run for office.
    Having said that, I would like to address a question, if I 
may, to Mr. Rock and Mr. Macomber. I have countless of your 
members in my district who helped in the drafting of H.R. 2061. 
I am not necessarily asking for an endorsement, although that 
would be nice, of my bill, but rather for you to make an 
observation of what provisions in that particular bill that you 
feel you could strongly support.
    Mr. Macomber. Well, certainly elements of it. I am not sure 
of all the details on it, but certainly anything that results 
in regulatory relief for small banks is a very, very positive 
thing. I am not sure that particular act as it is currently 
drafted, while excellently drafted, is the bill we would 
support 100 percent, but there are certainly things in that act 
that I think all the banking agencies, the trade groups would 
support.
    Regulation is crushing banks. Small banks are going out of 
business. They are withdrawing from public ownership. They are 
merging themselves out of existence. In Rhode Island, there is 
a bank that is merging for the main reason being an inability 
to maintain the regulatory burden. One of the primary reasons 
that I formed a holding company with another bank was so we 
could share the costs of regulatory burden, which are 
extraordinary.
    If we had a more reasonable burden of regulations, we feel 
we could probably open another branch or two without spending 
any more. It would certainly enhance the services to the 
communities that depend on us. So anything that would help in 
reducing regulatory burden and in some areas expanding the 
powers of banks is certainly in our best interest.
    Mr. Ryun. Mr. Rock?
    Mr. Rock. Yes. We think that many of the provisions of that 
bill are very worthwhile and would provide significant 
regulatory relief for smaller banks. If the committee would 
like to move in the direction as put forth in that bill, we 
would certainly work with you in that regard.
    Mr. Ryun. If I may, I have a little more time. I want to 
have a little bit of a follow-up question which I could address 
to anyone that is actually willing to respond to it, especially 
regarding the banking industry.
    The record profitability has caused a lot of people to say 
there is not a need for regulatory relief, and yet if I am 
correct at what is called return on assets, small bank 
profitability has lagged significantly behind larger banks, 
which could be possibly attributable to the difficulty that 
small institutions have in handling the sheer volume of 
regulatory mandates.
    Any comment any of you would like to make on that?
    Mr. Rock. Well, I think it is true, Congressman, that 
smaller banks carry a disproportionate burden because of the 
amount of the cost. A larger bank can spread the cost of 
compliance with some of these regulations over a larger income 
base, over a larger asset base. So I think it is true that 
smaller banks carry a disproportionate amount of the regulatory 
burden, and I think that is why it is reflected in those ROA 
numbers that you have quoted.
    Ms. Jorde. I would just add to that and to echo Mr. Rock 
and his comments earlier that a lot of times in a smaller bank 
the most senior level of managers are the ones that are also 
responsible for compliance because of the very large stick that 
lack of compliance carries. So it is not only that it is a 
disproportionate impact, but it also takes the key employees of 
the bank to deal with those issues, and that takes them away 
from their probably more important responsibilities of planning 
for the future, growing the bank, coming up with new customer 
initiatives. All of that affects the bank's ability to grow and 
to return profitability on their assets.
    Mr. Macomber. I would just add that regulatory burden is 
involved in every decision we make in our bank, at my level on 
down to the newest teller we have. The regulations we work 
under have an impact on every individual in that bank, and it 
is a very, very significant burden.
    Mr. Ryun. A final observation, if I may. I know one of the 
charges I have and we have as Members of Congress is to serve 
our constituents, which we do and enjoy that opportunity. One 
of your obligations or one of your purposes is to serve your 
customers. I am hoping that we can continue to push forward 
with good regulatory relief so you will have fewer 
responsibilities and better opportunities to serve.
    I return my balance of time.
    Mr. Hensarling. The Chair now recognizes the gentlelady 
from New York, Ms. Maloney.
    Mrs. Maloney. Thank you.
    And I want to thank all of the panelists for your excellent 
testimony and to give a special welcome to Mr. Keeling with 
whom I have worked in trying to save manufacturing jobs in the 
district I am honored to represent. Truly, if we had gotten 
access to capital, maybe we could have saved those jobs. So I 
am a strong supporter of the bill and any effort to get capital 
into our communities.
    This country lost 2.7 million manufacturing jobs in the 
past four years. That is an astonishing number. Possibly, if we 
had been able to inspire our employees and help them with the 
financing of it, we might have been able to save those 
companies. I agree with Mr. Ryun. Our first priority is to 
serve our constituents. Therefore, I am very sympathetic to 
credit unions.
    I used to represent one of the poorest neighborhoods in the 
entire United States. Literally, it was rated the poorest 
neighborhood on the census tract at East Harlem and South 
Bronx. Many of the financial institutions left. I respect their 
opportunity in a free market system to move, but the credit 
unions stayed and continued to provide services to the people 
in the community. I am very, very appreciative.
    I have a question on the overburden of regulation. I would 
like to address it to Ms. Jorde of the Independent Bankers, Mr. 
Rock of the American Bankers, and Mr. Macomber of the Community 
Bankers, if any of you would like to comment on it. Recently, 
the Public Company Accounting Oversight Board suggested that 
auditors should exercise more discretion in reviewing 
compliance with Sarbanes-Oxley standards. I hear from my 
constituents, small businesses, financial institutions, that 
the standards are just overpowering.
    That is, they can use a "reasonableness" standard that 
considers such things as the size of the entity and other 
factors. Does this help your institutions? And do you think 
auditors will start exercising judgment as the PCAOB has 
advised? Because particularly for smaller institutions, I would 
say for large institutions, the standards have been very heavy. 
Would any of the three of you representing the industry like to 
reply?
    Mr. Rock. Well, I think that the guidance that the PCAOB 
put out on Monday, May 16, I think it is very, very useful. We 
met with them about 30 days ago ourselves, and representatives 
of other groups met with them to try to talk about what we 
thought some of the remedies could be that would not 
necessarily have to be included in legislation. They listened 
to us, and I think that the May 16 guidance is--
    Mrs. Maloney. What were some of those remedies?
    Mr. Rock. For example, the audit standard number two issued 
by the PCAOB said that independent auditors must use primary 
evidence in finding that the internal controls of the company 
are sufficient. The independent auditors tell us that they were 
afraid. What independent auditors would typically do is they 
would selectively test various internal controls and if they 
were satisfied with the selective testing, then they would give 
a clean opinion.
    The auditors said that they were afraid that this standard 
of primary evidence said that they could not selectively test. 
They could not use the work papers of the internal auditors and 
the bank's management testing, that they had to do all of the 
testing all over again themselves. And that is the kind of 
thing that resulted in massive duplication of testing of 
internal controls and hugely increased costs for banks of all 
sizes.
    The PCAOB listened to that. Mr. McDonough, the Chairman of 
the PCAOB, said that that was not the intention and that that 
would be included in guidance and that is one of the items in 
the May 16 guidance that we think will be very helpful for 
independent audit firms and also for banks of all sizes, and 
especially smaller banks.
    Mrs. Maloney. Would anyone else like to comment?
    Mr. Macomber. I think the real concern, and I certainly 
agree that the May 16 statement was very helpful conceptually. 
The issue is the implementation and how audit firms in the 
field will react to it. If you talk to people at the OTS or 
FDIC about some of their regulations, BSA being one of them and 
the Patriot Act, their statements are a lot more reasonable 
than when it is being interpreted in the field. I think that is 
a real danger, that accounting firms themselves will be very 
afraid to go too far with that judgment standard because they 
may be second-guessed down the road. So it is an implementation 
issue.
    Mrs. Maloney. I would like to also go to the CTRs that some 
of you spoke about. How do you think we could change that?
    One of you mentioned that that law went into effect 35 
years ago. It is so broad. No one is looking at it.
    How would you create a standard that would, as you said 
earlier, Mr. Rock, you have an experienced person who can 
really figure out what is going on. It would be helpful to the 
Treasury Department, too, because they are almost overwhelmed 
with all the paper coming at them.
    How do you think the CTR could be more useful in helping 
Treasury find these terrorists and the whole purpose of it, as 
opposed to having absolutely every document? What is it, over 
$5,000 or over $10,000?
    Mr. Rock. Over $10,000.
    Mrs. Maloney. Over $10,000.
    Mr. Rock. But because of the restructuring requirements, 
there are many that are filed for cash transactions under 
$10,000 also.
    Mrs. Maloney. So that is a huge filing.
    Mr. Rock. A huge filing.
    Mrs. Maloney. It is monumental.
    Mr. Rock. For absolutely ordinary businesses like pizza 
parlors in New York, if you do business with pizza parlors, you 
have to file CTRs for them all the time because they deal in 
large amount of cash. I think that the answer would be to 
eliminate the requirement of filing CTRs for seasoned 
customers.
    If you have customers that you have been doing business 
with for a long period of time, in the ordinary course of 
business you should not have to file CTRs for them anymore. I 
would point out that 35 years ago when the CTR requirement was 
adopted, we did not have the extensive SAR reporting, 
suspicious activity reporting, that we have now.
    I think that rather than file reams of paper for absolutely 
ordinary activity by pizza parlors and delis and flower shops, 
I think what we should do is for seasoned customers, the CTR 
requirement should be eliminated and we should focus more upon 
the suspicious activity reporting. I think that that would be a 
large step in the right direction.
    Ms. Jorde. I would maybe add to that that if you were to 
adjust the $10,000 for inflation, that would be $50,000 in 
today's terms. So we have proposed that that threshold level be 
increased to $30,000.
    Mr. Hensarling. The time of the gentlelady has expired.
    The Chair will now recognize himself.
    Recently, Federal banking and financial institution 
regulators have increased the threshold for a streamlined CRA 
exam. I sponsored legislation in the last Congress to raise 
that threshold to $1 billion. It became a moot point once the 
regulators chose to do that on their own. There are those who 
believe, though, that this somehow will imperil future 
community lending.
    My question, first to you, Mr. Jorde, and perhaps your bank 
was not subject to the more extensive CRA exam, but certainly 
some of your members may be. If you were not making loans in 
Cando, North Dakota, and the surrounding area and serving that 
community, would your bank be viable?
    Ms. Jorde. Absolutely not. That was the reason that we were 
chartered by local shareholders within the community is that 
they needed a bank that was going to lend to the community. If 
it were not for our loans to the community, our community would 
not exist and we would not either.
    I would just add to that, although we are under the 
streamlined CRA exam, we have a CRA exam. It is a true exam, 
and we spend the better part of a week with one examiner just 
going through the process of determining our loan-to-deposit 
ratios, our lending in the community, our assessment areas, our 
complaint file, which there weren't any. So it is not that we 
are exempt from CRA and we very much do go through a CRA exam.
    Mr. Hensarling. Mr. Rock, simply because I like your name, 
I would like to ask you the same question. In a slight wrinkle, 
I suppose, and that is can a streamlined CRA actually enhance a 
bank's ability to serve its community?
    Mr. Rock. I think so, and I think my bank is a good example 
of that and a good example of what the problem is. My bank has 
$750 million in assets, so we fall between that $250 million 
number and the $1 billion number. Yet when my bank is examined 
pursuant to the big bank CRA standards, which is what has 
happened for us in the recent past, we get irrational results.
    We have in my community a small builder who is a Native 
American. He builds small homes on small lots that are less 
than one-quarter acre. He then sells those homes at modest 
prices in a low-to moderate-income area. He sells them mostly 
to minority buyers who are mostly black and Hispanic. We are 
the only bank in our area which funds that activity for this 
Native American builder, and yet we get no CRA credit for it 
and we never have. It is because when the big bank rules are 
applied to banks that are my company's size, we get irrational 
results.
    We do not at all want to be exempted from CRA. We just want 
to have a set of rules applied to us that make more sense for 
our circumstances.
    Mr. Hensarling. A follow-up question: I heard you say in 
your testimony, and I guess this is somewhat anecdotal, that a 
number of bank CEOs, I believe you said this, are now spending 
over half of their time on regulatory compliance.
    I find that to be a staggering figure and certainly can 
make a prima facie case that when you are spending more time 
working for the Government than you are yourself, that that is 
a significant loss of freedom.
    You mentioned that the regulatory burden is reduced by only 
20 percent.
    Mr. Rock. Yes.
    Mr. Hensarling. My time is starting to draw to a close, but 
do you have any idea how many new small businesses and jobs 
might be launched with that additional capitalization?
    Mr. Rock. Well, we have never tried to have our economic 
staff count the number of businesses because it would depend 
upon the size of each business, but we think that it would be a 
huge positive impact for the economy if those funds were freed 
up and allowed to be used as capital to support additional 
small business lending.
    Mr. Hensarling. Mr. Ensweiler, let's turn to you. I would 
like the record to show that you, although not a native Texan, 
I know that you got there as soon as you could, and we 
appreciate that.
    [Laughter.]
    In your testimony, you spoke about two recent credit union 
conversions in Texas. I would like for you to elaborate upon 
what you see as the reasons for those conversions. What could 
be done to ensure that financial institutions's consumers 
continue to have the option of credit unions?
    Mr. Ensweiler. The two cases are ones that I am very 
familiar with. They are both located in the Dallas-Fort Worth 
metroplex area. They are both in fast growing communities. In 
both cases, the credit unions have enormous opportunity, 
opportunities that cause them to generate enough business that 
they are outgrowing their capital requirements. With credit 
unions being so heavily capitalized by law, they find that it 
would be much less restrictive if they could convert to a 
mutual savings bank.
    So in our testimony today, we talked about the opportunity 
to make our requirements more risk-rated and more in line with 
other depository financial institutions. If that were the case, 
that would take a big step towards helping credit unions stay 
within their charter.
    One other point that both of these institutions point to is 
the fact that they have an opportunity to serve small 
businesses. They are bumping up against the cap in both cases. 
They are looking for relief so that they can stay credit unions 
and help their members as their members have small business 
needs. So those two provisions would go a long way to keeping 
credit unions within their charter.
    Mr. Hensarling. My time is expired.
    Mr. Keeling, I was going to ask you the question of why I 
do not see a small green lapel pin pickle knowing that you had 
worked for a Texas legend and a great man, but I am sure there 
is a reason that pickle lapel pin is not here today.
    Mr. Keeling. I would have brought several squeaky, but I 
also would let the record show I grew up in Kilgore, Texas, and 
was under Friday night lights many times in Athens, Texas.
    [Laughter.]
    Mr. Hensarling. My time having expired, the Chair now 
recognizes the gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I want to also thank all the members of this distinguished 
panel for your testimony. It has been very informative, and we 
appreciate very much that you would come and share with us your 
thoughts.
    I have a comment to make and then would ask two of today's 
witnesses to respond to a proposal that I am going to mention. 
Mr. Ensweiler, I want to extend a warm welcome to you as a 
fellow Texan. I hope you enjoy your stay here in Washington. As 
you are likely aware, the National Community Reinvestment 
Coalition is releasing a comprehensive study today that appears 
to have found that large mainstream credit unions fail in their 
mission to serve people of modest means. You mentioned some of 
that in your remarks.
    The study finds that credit unions make a lower portion of 
their home loans and more loan denials than banks make to 
minorities, women, and low-and moderate-income borrowers. NCRC 
is now asking that the Community Reinvestment Act be applied to 
these larger credit unions to ensure and to enforce their 
original commitment to serve people of lower means. I would 
like to have your response to that.
    Mr. Ensweiler. Thank you, Congressman.
    We just became aware that they were going to have that 
press conference today to indicate their feelings. We certainly 
disagree with that.
    Credit unions are still member-owned. They only serve the 
people in their community. That is the only opportunity they 
have. They do not send money to money centers in other cities 
and take the money out of a community and use it for 
investments or loans in other communities. Credit unions have 
always only been able to serve their members, so they are 
serving everybody in their own community.
    We also find that some of the methodology to that study 
might be flawed, at least in our view. So I would like to file 
with the committee our response to that report today because we 
do not think that it measures up to what credit unions really 
do.
    Mr. Hinojosa. Could you give us your response in writing?
    Mr. Ensweiler. Yes.
    Mr. Hinojosa. Okay. I would like to have the response by 
the Independent Community Bankers of America representative, 
the President and CEO of CountryBank, Terry Jorde. May I have 
your response?
    Ms. Jorde. Sure, I would be glad to. Obviously the study 
that you have seen, we have seen also and we agree with that. 
In response to Mr. Ensweiler's comment, credit unions continue 
to serve their members because the membership base continues to 
grow. In North Dakota, we have mostly community-based credit 
unions and the one that is in my town covers about a 90-to 100-
mile radius. So as long as the membership base continues to 
grow and the geographic restrictions continue to be lifted, 
then credit unions are going to continue to have more members. 
Obviously, they are serving more members because the pie is 
getting bigger.
    We feel very strongly that small credit unions, people that 
are serving those of modest means, that they should continue to 
be supported and regulatory relief is certainly important for 
them. But we are very much opposed to expanding powers to 
credit unions, multi-billion dollar credit unions that are 
using their tax-favored advantages to grow and to continue to 
grow profits, which increase their capital levels and is part 
of the reason why they have capital issues right now.
    Mr. Hinojosa. I appreciate your response and would ask you 
if you would put that in writing also and let us have it.
    Ms. Jorde. Certainly.
    Mr. Hinojosa. Mr. Chairman, I am going to yield back the 
balance of my time because the vote has already started, and I 
do not want to make anybody late. With that, I yield back.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
North Carolina, Mr. Jones.
    Mr. Jones. Mr. Chairman, thank you.
    Mr. Ensweiler, I think you wanted to respond to that 
previous statement. I will yield you 1 minute of my time 
because I only have 3. So if you want to respond?
    Mr. Ensweiler. Thank you very much, Congressman.
    I just wanted to say that in the information we will file, 
it shows that in 2003, credit unions approved 72.2 percent of 
home mortgage loans to low-income borrowers. By contrast, non-
credit union lenders approved only 47.8 percent. Our denial 
rates were 15.6 percent compared to non-credit union lenders of 
27.7 percent. So we really are reaching out and serving 
mortgage opportunities in low-income areas. Thank you.
    Mr. Jones. Well, I want Ms. Jorde to know I was just being 
fair. I have not made my mind up on this issue yet.
    But, Ms. Jorde, let me ask you, and I am very serious when 
I ask you this question. I first want to say that we are here 
today because we do want to reduce the regulatory burden on you 
so you can better serve the consumers and the customers that 
are in your banks and credit unions and ESOPs.
    I am very serious when I ask you this question. In Cando, 
North Dakota, you have a unique situation, a small community, 
what would you say is the biggest concern of the customers who 
come into your bank? I am not talking just about credit cards. 
What do they tell you they are concerned about in America?
    Ms. Jorde. I would say the biggest concern of my customers 
and people in my community is economic growth, is the viability 
of rural communities and our ability to retain young people who 
are educated in our State and in our communities. We need to 
continue to have ways to bring capital into those communities 
so that we can invest in businesses and offer good paying jobs 
that are competitive with what the larger cities are offering.
    Mr. Jones. I appreciate that.
    Mr. Chairman, I am going to make a statement, then I am 
going to close.
    I am very impressed with this panel. I look forward to 
studying in detail what you have said today so I can be better 
informed and make my decisions.
    This is my last point. I am not sure I want anybody to 
answer, but I am a conservative who is concerned about the debt 
and the deficit of this Nation, which will eventually impact on 
your business. This country right now is over $7.9 trillion in 
debt. You cannot operate in debt. The deficit is about $418 
billion. Foreign governments own 30 percent of the U.S. public 
debt.
    I share that with you because you are so important to the 
economic future of this country. I hope you will watch 
carefully what we are doing here in Washington because you will 
not be able to operate if this country continues to go down the 
road it is going right now.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Hensarling. The Chair would observe that there are 
approximately 10 minutes left in this series of votes that have 
been called. So if members either wish to be brief or submit 
their questions for the record, they certainly have that 
option.
    Otherwise, the Chair will yield to the gentleman from 
Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    Thank you, members of the panel, for coming in.
    Mr. Chairman, I will try to be as pithy and concise as 
possible. I will make every effort to cause the panelists not 
to be superfluous, nor will I try to cause them to be redundant 
in any way, given that we have 10 minutes left.
    Members of the panel, I am concerned about the CRA. While 
there are always reasons to challenge studies, one of the 
things that I have found to be consistent in all of these 
studies is that they all show that when minorities attempt to 
make loans, and this is with testing, this is not a 
circumstance where you have persons who some have higher 
education, some have more money, some are better qualified, but 
when you have capable, competent and qualified minorities who 
apply for loans. You have capable, competent, qualified persons 
who are not minorities to apply, and every single test 
indicates that the minority persons do not get the loans to the 
same extent that the others do.
    Now, this is no disrespect to you. I believe you all to be 
honorable people. But that CRA, the Community Reinvestment Act, 
was put there to give us empirical data so that we could come 
to some intelligent conclusion as to what is happening in the 
business. If we start to limit the CRA for some banks, I am not 
sure where it ends. I have great consternation about changing 
the formula as it relates to reporting these lending patterns 
and habits.
    With that said, I will welcome anyone to give me a terse 
and laconic response.
    Mr. Macomber. No one here is looking to drop CRA. We just 
want to have a more reasonable approach to the regulation. We 
have two banks in our holding company. One is about $270 
million. My bank is about $175 million. We fall under different 
CRA regulations under the FDIC, and yet there is certainly no 
less commitment by my bank to the community on the CRA basis 
than by my sister bank in the holding company.
    CRA is what we do. The CRA exam that we do go through 
reviews all the statistics you are talking about, so that is 
all laid out. And we are concerned about what the burden is on 
smaller companies. Again, two banks, same holding company, two 
different ways of doing CRA.
    Mr. Green. I want to thank you for your response because 
the chairman has indicated that our time is limited.
    Mr. Hensarling. Mr. Green, without objection, the rest of 
the panelists could insert their answers to the record.
    At this time, the Chair would recognize the gentlelady from 
New York, Ms. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman.
    I have questions for this panel. Next week, I am holding a 
panel in my own subcommittee on the effect of the Bank Secrecy 
Act. I would like to have my questions answered by this panel 
as soon as possible, so perhaps they would be of influence in 
what we do with my own hearing next week.
    Thank you very much for holding the hearing, Mr. Chairman.
    Mr. Hensarling. With approximately between 6 and 7 minutes 
left in this vote, the Chair now recognizes the gentlelady from 
Wisconsin, Ms. Moore.
    Ms. Moore of Wisconsin. Thank you, Mr. Chair.
    I will reserve the right to make inquiries of this panel in 
writing, in respect to our time.
    I certainly think that there has got to be a balance 
between regulatory reform and really providing services to the 
community. The home mortgage loan disclosures are extremely 
telling about the persistent lack of opportunity for women and 
minorities in lending.
    Of course, homeownership is one of the most stabilizing 
economic decisions that people can make. In a time when we are 
faced with terrorism and money laundering, I think we have to 
be very careful about how we make those balances.
    I would yield back.
    Mr. Hensarling. The Chair wishes to thank all of the 
panelists for their insightful testimony. We hate to question 
and run, but unfortunately we must.
    The Chair notes that some members may have additional 
questions for the panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and place their responses in the record.
    The hearing is adjourned.
    [Whereupon, at 11:51 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                              May 19, 2005


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