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



 
                        OVERSIGHT OF THE OFFICE


                         OF THRIFT SUPERVISION

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 25, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-96



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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
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California

                 Robert U. Foster, III, Staff Director
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          DENNIS MOORE, Kansas
STEVEN C. LaTOURETTE, Ohio           CAROLYN B. MALONEY, New York
MARK R. KENNEDY, Minnesota           STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   EMANUEL CLEAVER, Missouri
TOM PRICE, Georgia                   DAVID SCOTT, Georgia
MICHAEL G. FITZPATRICK,              DEBBIE WASSERMAN SCHULTZ, Florida
    Pennsylvania                     GWEN MOORE, Wisconsin
GEOFF DAVIS, Kentucky                BARNEY FRANK, Massachusetts
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 25, 2006.................................................     1
Appendix:
    May 25, 2006.................................................    29

                               WITNESSES
                         Thursday, May 25, 2006

Gurzynski, Theodore, Vice President and Chief Credit Officer, 
  Pyramax Bank, on behalf of the Independent Community Bankers of 
  America........................................................    20
Nolan, Michael E., Chairman, President & CEO, Fifth District 
  Savings Bank, on behalf of America's Community Bankers.........    18
Reich, Hon. John M., Director, Office of Thrift Supervision......     5
Smith, Geoff, Project Director, Woodstock Institute..............    22

                                APPENDIX

Prepared statements:
    Gurzynski, Theodore..........................................    30
    Nolan, Michael E.............................................    37
    Reich, Hon. John M...........................................    51
    Smith, Geoff.................................................    96


                        OVERSIGHT OF THE OFFICE



                         OF THRIFT SUPERVISION

                              ----------                              


                         Thursday, May 25, 2006

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
presiding.
    Present: Representatives Garrett, McHenry, Gutierrez, 
Moore, Maloney, Davis of Alabama, Cleaver, and Scott.
    Mr. Garrett. [presiding] Good morning. This hearing of the 
Subcommittee on Oversight and Investigations will now come to 
order. Good morning to everyone. And as we await some late 
arrivals, presumably people who are still partying after 
watching American Idol last night, we will get things in order.
    And I assume you realize that Sue Kelly is not with you 
this morning. Instead, Mrs. Kelly had some pressing business 
elsewhere, other legislative matters, and I am honored to fill 
in, in her place, to handle things this morning.
    This morning the subcommittee will take a look at the 
Office of Thrift Supervision, a very important bureau, 
obviously, within the Department of the Treasury. The OTS, as 
it is referred to generally, was created by an act of Congress 
in 1989 in response to the savings and loan crisis of the late 
1980's.
    The Financial Institutions Reform, Recovery, and 
Enforcement Act, FIRREA, became law in August of 1989. This 
legislation addressed the S&L crisis by abolishing the Federal 
Home Loan Bank Board and creating the OTS to regulate thrift 
institutions, and by giving the deposit insurance function to 
the FDIC. It also created the RTC, the Resolution Trust 
Corporation, to help resolve any of the difficulties that 
existed with the insolvent S&L's.
    In general, the new regulatory framework, as we can see, 
has done an adequate and good job. We have no repetitions of 
the crisis that shook the thrift industries back in the 1980's. 
And the problems that have--there have been no significant 
problems that have cropped up. Those that have come up have 
been dealt with, most likely, efficiently.
    This record of success, however, does not relieve our 
obligation, as Members of Congress on both sides of the aisle, 
to conduct periodic oversight and review of this--or, for that 
matter, any other--Federal agency. It has been pointed out that 
it's been a few years since this committee has looked into the 
OTS in this context.
    One of the broader issues that has occurred since the last 
review has been September 11th. And since September 11th, we 
have seen terrorists, as well as other criminals, use our 
financial system to further their own goals. And so, therefore, 
we are reminded of the importance of vigorous regulatory 
oversight so that we may ensure the stability of our financial 
systems, basically, to make sure that they are not used for 
illicit purposes.
    Regulatory compliance through the Bank Secrecy Act and the 
Office of Foreign Assets Control is an essential bulwark of the 
protections that we look to. We know that money is a fuel of 
terror and crime, and the goal of most criminals.
    So, therefore, this morning we will start by hearing from 
Director John Reich of the OTS. The Director will be followed 
by a panel of three witnesses, whom I will introduce as they 
appear.
    So, I thank Director Reich and all the other panelists we 
will be hearing shortly. And at this point, I now recognize Mr. 
Gutierrez, the subcommittee's ranking minority member.
    Mr. Gutierrez. Good morning, and thank you, Mr. Garrett. I 
am grateful to the chairwoman for calling this hearing. I am 
sorry that she couldn't be here with us today. I am 
particularly pleased that we are joined today by Geoff Smith, 
from the Woodstock Institute in Chicago. Mr. Smith will talk 
about the Community Reinvestment Act.
    Last year, the OTS departed from a tradition of joint CRA 
regulation, and established a separate but weaker standard for 
CRA compliance than other regulatory agencies. There, ``small 
institution exemption'' means that thrifts with $1 billion or 
fewer in assets are no longer required to meet the service or 
investment tests under CRA.
    Moreover, the thrifts with assets in excess of $1 billion 
can meet their CRA obligations without any service or 
investment requirements.
    One of the most vital services that a financial institution 
can provide is low cost basic banking, bringing the 
``unbanked'' out of the lightly regulated, high-cost world of 
check cashers and payday lenders. This is particularly true for 
senders of remittances, many of whom are not native English 
speakers, or who come from a country where banks only serve the 
wealthy.
    Banks that offer low-cost remittance services often serve 
as a gateway to getting those ``unbanked'' into regulated 
financial institutions. Ever since I was elected to Congress I 
have worked to increase disclosure and lower the cost of 
remittance sending.
    Last year, with Mr. Frank and other members of this 
committee, I wrote to the regulators, all of whom agreed to 
grant CRA credit to institutions that provide low-cost 
remittance services. I am glad that the OTS joined with other 
regulators on this point, and included low-cost remittance 
services in its Q&A.
    However, since the OTS CRA regulations eliminated the 
service requirement for small thrifts, and permit large thrifts 
to meet their obligations without a service requirement, the 
potential for a real breakthrough was virtually wasted in the 
world of thrifts, and that is a shame.
    I truly hope that Director Reich will re-evaluate the OTS 
CRA regulations, and that the thrifts will continue to fulfill 
portions of their CRA obligations through service and 
investment, despite their current ability to avoid these 
valuable components of community re-investment all together.
    Director Reich's testimony indicates concerns about certain 
alternative mortgage products, particularly interest only and 
pay option, adjustable rate mortgages that often contain 
negative amortization features.
    I am also troubled by the popularity of these products. 
Some of these pay option mortgages are appropriate for a very 
limited universe, possibly Donald Trump in his immediate pre-
bankruptcy days, but they are being marketed widely. And they 
are so complex that it is difficult, if not impossible, for the 
borrower to understand what he is getting into. I urge you to 
keep this in mind as you work with other regulators on guidance 
surrounding these products.
    Finally, much of our time on the oversight subcommittee is 
spent on issues surrounding terrorists, finance, and Bank 
Secrecy Act, BSA, compliance. Your testimony indicates that 
this is an area posing significant compliance challenges for 
the OTS.
    These are not new challenges. As the Inspector General 
determined in September 2003, the report indicated that the OTS 
examiners found substantive BSA violations at 180, or 18 
percent, of the 986 thrifts examined during the audited period. 
These substantive violations included the lack of a BSA policy 
or systems to ensure compliance. OTS has issued written 
enforcement actions against only 11 thrifts.
    Some of these violations were not fully addressed, even 
though they had been identified by OTS 6 years previously. At 
the appropriate time, I will ask the Director to respond in 
writing, if he prefers.
    If BSA complies continues to be a challenge for the OTS, 
did the Agency not make significant changes in response to the 
Inspector General's report? Thank you, and I yield back the 
balance of my time.
    Mr. Garrett. The gentleman yields back. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman, and good morning, 
Director. How are you this morning?
    I want to thank Chairwoman Kelly and our ranking member, 
Mr. Gutierrez, for holding this hearing to review the Office of 
Thrift Supervision. It's very important.
    Director Reich mentioned in his written testimony that he 
was concerned about the increasing popularity of alternative 
mortgage products, and the future shock many homeowners will 
face when adjustable rate mortgages begin to climb.
    I, too, am concerned with what may be the result of too lax 
of underwriting standards in writing many of these loans. My 
district is in Atlanta. I represent around 13 counties 
surrounding the city of Atlanta, the fastest growing region in 
this Nation. And of those, I represent 7 of the fastest growing 
counties, 7 of the fastest growing counties in the top 50 
counties in this country, especially when you recognize Cobb 
County, Douglas County, Gwinnett County, and Rockdale and 
Newton Counties. I am sure that everyone understands the 
importance of foreclosure rates.
    But my district and metro Atlanta is now second only to 
Indianapolis in foreclosure rates. In the first quarter alone, 
over 20,000 homes were in foreclosure in the Atlanta area. That 
represents one out of every 70 homes in foreclosure. That is 
astounding. In perhaps the fastest growing region in this 
country, one out of every 70 homes is in foreclosure.
    So, you can see how concerned I am about this. And I can 
only imagine what will happen to many of my constituents when 
their adjustable rate mortgages increase.
    So, I would like to hear your thoughts on ensuring that 
mortgage products are written in the best interest of the 
consumer. In addition, I would like to hear from you about the 
OTS Community Reinvestment Act rules, which are not uniform 
with the other banking regulators.
    And I would also like to learn more about the OTS's 
relationship with the Federal home loan banking system, and if 
there are any potential areas of conflicts with the home loan 
bank regulators.
    It's also important for me to hear from your Director on 
the issue of are you concerned with the impact that rising 
interest rates will have on consumers who have adjustable rate 
mortgages, and what are you doing to ensure that lending and 
underwriting standards are strong, and in the best interest of 
the consumer?
    I would also like to know if you've found problems with 
thrifts giving out predatory loans, another huge issue in my 
region that my constituents are facing. And are you concerned 
that consolidation of the thrifts will decrease revenue for the 
OTS? And do you expect any problems maintaining sufficient 
staff levels?
    So, you see, this is a very big issue for me, and I am very 
interested in this testimony. My constituents are very 
interested in this testimony. And also people all across the 
country are interested in this testimony. I yield back the 
balance of my time, and I thank you, Mr. Chairman.
    Mr. Garrett. The gentleman yields back. Mr. Cleaver?
    Mr. Cleaver. Thank you, Mr. Chairman. To Ranking Member 
Gutierrez, I am going to have to leave. This is a very 
important issue to me, as it is to my colleague. We have a 
memorial service for Sonny Montgomery, which I am involved 
with, but I desperately wanted to be here, and I will try to 
get back as quickly as I can, because of the significance of 
this issue. And I would like to thank Chairwoman Kelly and 
Ranking Member Gutierrez for holding this meeting.
    And it seems almost oxymoronic to hold a hearing on 
oversight with a body that has the word supervision in its 
name. But one of the top priorities of the Legislative Branch, 
and perhaps my greatest disappointment, coming from municipal 
government, having served as mayor before arriving here, was my 
disappointment that the Legislative Branch has, for the most 
part, abdicated its responsibilities as an oversight branch of 
our government.
    And one of the top priorities for this subcommittee is 
oversight of institutions that serve the financial needs of our 
citizenry, and to ensure that through the Federal level 
supervisory organizations compliance with existing statutes and 
laws is being enforced and adhered to.
    When statutes and laws are ignored, or top level 
supervisory agencies fail to perform their functions, it tends 
to be the little guy who always gets hurt. And too, in a real 
sense, the institution itself suffers some damage. My role, I 
think, is, one, to protect the little guy. And in this 
instance, we're trying to protect the little guy from predatory 
lenders, financial shysters, greedy bankers, unscrupulous 
captains of industry, and even people who, on the outside, look 
like respectable business people.
    And so, Mr. Reich, we appreciate you being here, and hope 
that we can find out what the OTS has done to--over the course 
of time--to improve or--the worsened financial situation for 
the little guy.
    If we fail to protect the little guy, and it seems to me 
that we are violating the need for having government, or 
violating the need to have the Office of Thrift Supervision, 
the little guy tends to be the one who gets wounded the most, 
people who are unable to stand up for themselves. And in the 
long run, the institution itself is belittled if it does not 
protect the little guy.
    I appreciate you being here. I will leave and come back as 
quickly as I can. Thank you.
    Mr. Garrett. The gentleman yields back. Concluding opening 
statements, we now turn to our first panel and our first 
witness, Director Reich.
    Director Reich has served as Director of the Office of 
Thrift Supervision, the OTS, since August of last year. In that 
capacity, Mr. Reich also continues to serve as a member of the 
board of directors of the FDIC. Prior to joining the OTS, Mr. 
Reich served as Vice Chairman of the Board of Directors of the 
FDIC, starting in November of 2002, and has been a member of 
the FDIC board since January 2001. He also served as Acting 
Chairman of the FDIC from July to August of 2001.
    Prior to coming to Washington, D.C., Mr. Reich spent 23 
years as a community banker in Illinois and Florida, including 
10 years as president and CEO of the National Bank of Sarasota 
in Sarasota, Florida. Mr. Reich also served 12 years on the 
staff of U.S. Senator Connie Mack of Florida before joining the 
FDIC.
    Director Reich holds a BS degree from Southern Illinois 
University, and an MBA from the University of South Florida. He 
is also a graduate of Louisiana State University School of 
Banking of the South.
    I thank the Director for being with us this morning, and it 
was a pleasure meeting you earlier. We also have a copy of your 
testimony delivered to us already. I appreciate the detail that 
it goes into, and would appreciate your comments at this point.

 STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF 
                       THRIFT SUPERVISION

    Mr. Reich. Thank you very much, Acting Chairman Garrett, 
Ranking Member Gutierrez, and members of the committee. It's a 
pleasure to be here today. It's my pleasure to report on an 
agency that is strong, well-staffed, financially sound, and an 
industry that is profitable, growing in asset size, and 
evolving to meet the housing and the retail needs of America's 
communities.
    Since 1989, OTS has developed and continually improved its 
supervision and oversight of the institutions and the holding 
companies that we regulate. We work closely with the industry 
to maintain the profitability, integrity, and vitality of the 
thrift charter. And the industry continues to adapt to the 
evolving financial service businesses and demands of its 
customers.
    While mortgage lending remains the dominant activity, it is 
no longer the exclusive activity of the industry, nor should it 
be. Over-exposure to one part of the economy without 
diversification creates risks that can lead to safety and 
soundness challenges. A favorable interest rate risk 
environment, accompanied, by record mortgage originations and 
sales has produced strong profitability for the industry over 
the last 5 years.
    Equally important to this sustained period of profitability 
are good stewardship by our institutions' managers, earnings 
diversification, and good asset quality.
    We continually work to provide specialized training, 
rigorous accreditation, professional development programs, and 
other supervisory tools to our staff to ensure that we are 
capably equipped to supervise a dynamic and growing industry. 
Our employees are of long tenure, and they are well seasoned, 
with an average of more than 15 years with the Office of Thrift 
Supervision, and more than 23 years of overall bank regulatory 
experience.
    As of March 31st of this year, there were 856 OTS-regulated 
thrifts, holding assets of $1.5 trillion. While consolidation 
has reduced the number of savings institutions, industry asset 
growth remains strong. OTS also regulates 481 holding company 
structures with consolidated assets of approximately $7.5 
trillion.
    Thrifts provide substantial services that encourage home 
ownership and affordable housing, and contribute to economic 
growth. Thrifts hold over $1 trillion in housing-related loans 
and securities, including $847 billion in whole single family 
loans, which comprise 57 percent of thrift assets today.
    Recent earnings and profitability of the industry have been 
strong, with consecutive annual records from 2001 through 2005. 
For 2005, the industry reported record earnings of $16.4 
billion, eclipsing the $14.0 billion of 2004. And the industry 
has posted quarterly earnings exceeding $4 billion in each of 
the last 5 consecutive quarters, including a record $4.3 
billion in the fourth quarter of 2005.
    Asset quality also remains strong, with delinquency rates 
and troubled asset ratios at or near historical lows. Though 
asset quality is strong, OTS is closely monitoring thrift loan 
performance, since recently originated or unseasoned loans now 
comprise a significant portion of thrift loan portfolios.
    Capital measures for the industry are strong, stable, and 
well in excess of minimum requirements. As of March 30th of 
this year, over 99 percent of the industry exceeded well-
capitalized standards, and no thrift was less than adequately 
capitalized.
    And problem thrifts remain low. Currently, out of 856, 
there are 6 problem thrift institutions, with total assets of 
$1.1 billion.
    The thrift charter has unique characteristics that make it 
well suited to retail banking. These include nationwide 
branching under a single charter, a holding company structure 
offering a single regulator for the holding company and its 
institution, and a strong preemption authority. These features 
enable savings associations to follow their customer base from 
coast to coast, with minimal regulatory burden, and seamless 
supervision at all levels of an organization ensures both a 
comprehensive supervisory regime and minimal regulatory 
overlap.
    Notwithstanding these strengths and benefits, there are 
some risks that we continue to monitor in the industry.
    First and foremost is interest rate risk. Given the 
industry's natural concentration in longer term mortgage loans 
generally funded with shorter term deposits and borrowings, 
monitoring interest rate risk is always critical. Clearly, the 
current interest rate environment is extremely challenging for 
all financial institutions. In the past 12 months, interest 
rates have risen considerably, and the yield curve was 
flattened. Despite this environment, OTS believes the thrift 
industry is on sound footing, from an interest rate 
perspective.
    Credit quality is another risk that we carefully monitor. 
The thrift industry's sound financial condition permits it to 
address potential credit quality problems from a position of 
strength. Thrift industry credit risk is primarily driven by 
the performance of residential mortgage loans. As a result of 
the strength of the housing market in most areas of the country 
in recent years, single family residential loan delinquencies 
and charge-offs have remained at low levels.
    However, future deterioration in any of the fundamentals 
that affect housing strength, such as worsening unemployment 
rates, and rising interest rates, could adversely affect thrift 
asset quality.
    Compliance risk is another issue for the industry, and one 
that OTS closely watches. The increased volume of consumer 
transactions and consumer protection and other regulations 
governing these transactions necessitates an active compliance 
management function within institutions and in oversight 
programs within the banking agencies.
    Today, the importance of compliance management is elevated 
by the need to ensure the privacy and security of consumer 
information, as more information is shared and outsourced, and 
the threat of identity theft persists. Also, the need to guard 
against money laundering and terrorist financing activities. 
And finally, the need to stem the tide of abusive lending 
practices, and ensure fair and equal access to credit for all 
Americans.
    An area posing significant compliance challenges for our 
institutions is the Bank Secrecy Act. During the 15 months from 
January 1, 2005, through March 31, 2006, OTS conducted 900 BSA 
examinations. During those reviews, 222 institutions were cited 
for 500 BSA-related violations. Most of these violations were 
remedied during the examination process, but we did initiate 27 
formal and informal enforcement actions during this time.
    The safety and confidentiality of personal information has 
also taken on great importance in the regulatory environment. 
Data security has long been a significant part of the 
supervision and examination process that OTS has performed at 
thrifts and their third-party technology service providers.
    OTS regularly evaluates institution data security programs. 
This includes supervision and examination work at industry 
service providers. Business convergence and continued 
consolidation in the financial services industry have created 
an increasingly competitive environment. This stimulates thrift 
managers to focus on strategies to improve efficiencies and the 
delivery of financial products and services, customized product 
offerings to meet their customers' needs, and ensure quality 
customer service.
    The thrift industry has grown and diversified over the past 
several years, while reporting excellent financial results.
    Mr. Garrett. If the gentleman can--your allotted time of 5 
minutes has expired.
    Mr. Reich. All right.
    Mr. Garrett. And I am just watching your pages there, to 
see if you were coming close to the last page.
    Mr. Reich. I was--
    Mr. Garrett. You can continue your last thought, and bring 
it to a conclusion.
    Mr. Reich. Thrifts continue to play a vital role in 
providing mortgage funding and other retail products. At OTS, 
we will continue to evaluate our policies, our staffing, and 
our infrastructure, to ensure that the Agency is well prepared 
to handle new and emerging risk.
    I appreciate the opportunity to be here today, and I am 
happy to address your questions.
    [The prepared statement of Mr. Reich can be found on page 
51 of the appendix.]
    Mr. Garrett. Thank you, Director Reich. And as I begin, I 
may take up somewhere near where you ended, and also along the 
line that was raised by Mr. Scott, and that is the--along the 
lines of the question of consolidation.
    You gave the exact number, I think, of 856. I thought it 
was just a little over 800, but 856 is where we're at, at this 
point in time. If you can, give us a little bit more of the big 
picture on--both the big picture and down into the weeds a 
little bit on how that all affects you.
    There has been a recent purchase by Wachovia of Golden West 
Financial Corp., and its thrift, World Savings Bank. Things of 
that sort and the overall consolidation, I would assume, would 
eat into the financial base of the OTS. So when that occurs, 
how are you able to maintain what you have, expand, if you need 
to, for your past activities?
    And another question I will get into in a moment, with 
regard to terrorists and other crime aspects, as far as the 
needs in those areas, as well. So, does that hamper or create 
problems for you?
    I realize your agency is also able to enact civil penalties 
for when they are appropriate. Do those civil penalties then 
turn around and, if there is a gap in funding--which is the 
answer to the first question or not--if there is any gaps or 
shortages to the funding now or in the future, do those civil 
penalties work in a way to fill those gaps?
    And then following that question, along those lines, is how 
are you able to do a budgeting appropriately, now and in the 
future, based upon, A, the continued consolidation, B, the use 
of civil penalties, whatever, to fill those gaps for now and 
into the future as well?
    Mr. Reich. Well, let me first address the subject of 
industry consolidation. The entire banking industry is 
consolidating, which affects all charters: State charters, 
national charters, and thrift charters. Twenty years ago, in 
1977, there were over 18,000 financial institutions. Today, at 
the end of December of last year, there were 8,860 financial 
institutions. And the reduction in institutions has affected 
the entire financial services industry.
    With respect to the growth of the thrift industry, even 
though there has been a decline in the number of institutions, 
there has been an increase in overall thrift assets over the 
years, which has had a positive impact on the budget of OTS. 
Our budget 5 years ago was approximately $150 million. Today 
it's approximately $215 million. So, in spite of a 
consolidation and a reduction in the number of institutions, we 
have been able to experience a moderate growth each year in our 
revenue stream.
    Budgeting is a very important activity at OTS. We spend 
many months a year projecting what our needs are going to be 
for the forthcoming year, taking into consideration the size of 
the industry, the number of institutions that we regulate, and 
our anticipated revenue stream.
    With respect to the announcement of Wachovia's purchase of 
Golden West, the owner of World Savings, it's a significant 
customer of OTS. It represents about a little less than 5 
percent of the revenue of OTS, but it is not a number that is 
going to have a material effect on our operations. We don't 
know, ultimately, whether or not Wachovia will retain the 
thrift charter or not. Preliminary indications are that they 
will. But in the long term, that will remain to be seen.
    Mr. Garrett. I think the other question was along those 
lines--
    Mr. Reich. You asked about--
    Mr. Garrett. Civil penalty.
    Mr. Reich.--whether or not civil penalties were a source of 
revenue for the OTS, and the answer to that question is no. 
Those funds usually, I believe, go to either the Justice 
Department or the Treasury Department. They do not go into the 
coffers of the Office of Thrift Supervision.
    Mr. Garrett. One final question, and then--with regard to 
terrorism on the risk finance--terrorism financing and the 
like, an issue that Sue Kelly has handled extensively in this 
committee, I note that your bank examination procedures date 
back to 1999, well before the terrorist attack of 2001.
    Is there any need to readdress them, in light of the 
changing circumstances since 9/11?
    Mr. Reich. Well, last year, in July and August of last 
year, after several months of collaboration, all of the Federal 
banking agencies--the Fed, the FDIC, the OTS, and the OCC--
published a new examination guideline manual for Bank Secrecy 
Act and anti-money laundering activities. All of the agencies 
are now on the same page, following the same examination 
procedures in each of our institutions.
    We held a number of outreach sessions with the industry, to 
let bankers know what they could expect in the examination 
process. We got some feedback from them that assisted us before 
we adopted final procedures. And I think that we have given 
recent attention to the evolving landscape, with respect to BSA 
and anti-money laundering activities.
    And I really think that there is relatively good news to 
report, in the sense that we have seen that financial 
institutions of all charters have taken BSA seriously. They 
have adopted programs. The number of violations are beginning 
to decline that are being found in our institutions, as we see 
that they have improved their programs and made them stronger.
    Mr. Garrett. I thank you. Mr. Gutierrez?
    Mr. Gutierrez. Thank you. Mr. Reich, would you consider 
revising your predecessor's CRA regulations to reemphasize the 
service component and investment component for banks in excess 
of $1 billion? Will you consider conforming your regulations 
for small thrifts with that of other regulators?
    Mr. Reich. The short answer to that, Congressman, is yes. I 
was a--I have been at OTS since last August. Prior to that, I 
was with the FDIC in an active capacity for several years. And 
I was, in a behind-the-scenes capacity, a participant in the 
development of the CRA rule that was adopted by the other three 
agencies.
    When I came to OTS, I came to OTS with a predilection to 
conforming OTS's CRA rule with that of the other agencies. I 
have asked the staff of OTS to justify to me why OTS deserves 
to have a different CRA rule than the other three agencies.
    Essentially, there is a case. It would be up to one's own 
opinion as to how strong the case is. OTS is required by law--
our institutions are required by law--to have--to abide by the 
qualified thrift lender test, which requires that approximately 
65 percent of their assets are invested in housing-related 
assets. That restriction, or that stipulation, does not apply 
to any other Federal banking agency. National bank charters, 
State bank charters are totally unrestricted as to how their 
assets may be apportioned.
    Secondly, the capabilities of thrift institutions to invest 
in commercial loans or small business loans or consumer loans 
is rather limited. Again, there are no limits for the other 
three Federal banking agencies. Most thrift institution 
executives feel that they meet their community needs every day, 
that that's why they're in business, they are retail banking 
charters, they make housing loans and home loans in their 
communities, and how they survive and how they thrive.
    Having said that, philosophically it has been my view for 
some time that on major policy issues, the four Federal 
agencies ought to be on the same page. And so, although we have 
not changed our rule, it is on the table for consideration, and 
we may move in that direction.
    Mr. Gutierrez. I thank you for that consideration. I have 
always said that if this is what they do, it should be 
relatively simple and easy, then, to pass any CRA test. I mean, 
so it seems that the redundancy--we don't need you to ask us to 
do it, because it's what we do--
    Mr. Reich. Right.
    Mr. Gutierrez. So it should be the easiest part of the 
test. They should have the forms already filled out for you and 
say, ``Here, we pass, give us an A-plus, it's what we do.''
    And I can see the difference because of the housing rule. 
And housing isn't the exclusive one, but it is one of the major 
components that we see for it. Let me ask you--thank you very 
much for that answer, and I look forward to--
    Mr. Reich. Can I add one more comment?
    Mr. Gutierrez. Sure, absolutely.
    Mr. Reich. Twenty years ago, when CRA was adopted in 1977, 
there were over 18,000 financial institutions, and there were 
16,000 of which, approximately, had assets of under $1 billion. 
They represented 46 percent, approximately, of the assets of 
the entire industry. Banks under $1 billion 20 years ago, when 
CRA was adopted, represented about 46 percent of total assets.
    Today, there are about 1,000--1,200--institutions under $1 
billion in assets--that's not the right number--there are 8,000 
institutions under $1 billion, and they represent about 12.5 
percent of the total assets in the industry.
    So, I am concerned, I do have concerns that a shrinking 
part of our banking population in the United States is bearing 
a great deal of scrutiny about its CRA when it is representing 
such a small percentage of banking assets in the country.
    Mr. Gutierrez. Thank you. The other question I wanted to 
ask you was do you believe that the exotic mortgage products 
are too widely used? And would you support a ban on negative 
amortization products? The more I see these products, it's so 
easy, it seems. They're making it easier and easier.
    And so, I'm becoming concerned, especially about negative 
amortization. How do you see this trend, and what do you see 
the role of the OTS in this?
    Mr. Reich. Well, we have institutions that have been making 
adjustable rate mortgages for 30 years, payment option 
mortgages for 20 years, payment option mortgages with negative 
amortization for 20 to 25 years, and they have been successful, 
and have been conservatively operated, and have done very well.
    I am concerned about what has taken place in recent years, 
with the proliferation of these types of instruments in 
institutions that have just recently begun to offer them in the 
past 2 or 3 years.
    I am concerned about the quality of disclosures to 
consumers. I am concerned that they may be being sold, offered 
to consumers who don't have a full understanding of the 
potential risks that take place when the interest rates are 
reset.
    So, I think that the activity that is taking place today 
with the four Federal banking agencies, with the proposed 
guidance on alternative mortgages, and on commercial real 
estate guidance, is an activity that will hopefully result in 
better disclosures in the industry and more selective offerings 
of these products in the market.
    I would not support an outright ban on negative 
amortization. Most negative amortization products have caps as 
to the amount of the negative amortization. So it's not as 
though negative amortization can grow to an unlimited level. 
Many institutions have a cap of 110 percent of the original 
loan amount which, in a rising housing market environment, is 
not an unreasonable policy to pursue.
    Mr. Garrett. Thank you, thank you. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman. Let me--let's start out 
with Atlanta. And if you can share with us, what is going on in 
the Atlanta market that is making it a situation where 1 out of 
every 70 homes are in foreclosure?
    And I particularly raise that, because I believe that you 
have an office in Atlanta. Is that correct?
    Mr. Reich. We do.
    Mr. Scott. Have you all taken a look at this? And what are 
the factors involved? Now, from my experience and knowledge 
about this, I know that unemployment plays a role in 
foreclosures.
    However, Atlanta has a relatively low unemployment rate. 
We're very fortunate, because we have such a diversified 
economy--one industry goes down, we're able to make up for it 
in another area--so can we walk through for a moment, and share 
with me what's going on with the Atlanta market that is making 
it where 1 out of every 70 homes are in foreclosure?
    Mr. Reich. Well, quite frankly, I'm surprised by that 
statistic, Congressman. I was unaware that the foreclosure rate 
in Atlanta was at the level that you quoted.
    Mr. Scott. Let me just mention to you, so you will know 
where this information comes from, one of our most highly 
respected newspapers, the Atlanta Business Chronicle, stated 
that Atlanta had the second highest foreclosure rate among the 
Nation's largest metropolitan areas. And it goes on to say 
that, let's see, that this high rate accounts for 1 out of 
every 70 homes. And this appeared in, I believe, Tuesday's--2 
days ago--Atlanta Business Chronicle.
    Mr. Reich. Well, again, I was unaware of that number. I 
have been aware for several years that the Atlanta market has 
been an extremely hot market, in addition to other markets in 
the Sunbelt States. The Atlanta region has been growing 
tremendously; there has been a great deal of commercial real 
estate activity in the Atlanta market.
    And there have been concerns. The Atlanta market was, I 
think, one of the reasons that precipitated studies of 
commercial real estate activities, generally, around the 
country, which led to the recently issued guidance on 
commercial real estate by the four Federal banking agencies--
proposed guidance.
    Congressman, I am at a loss to give you an informed answer 
as to the explanation for the high--relatively high--level of 
foreclosures in the Atlanta market. I will be happy to get back 
to you and submit a written response to you on this subject.
    Mr. Scott. I would appreciate that, and I look forward to 
working with you. Maybe there are some things we can do in the 
market, and maybe there are some activities that we can begin 
to get engaged to. I would certainly like to address that.
    I am the author of our Financial Literacy Act that we are 
moving through this Congress. We are very much concerned with 
that.
    Also added to that, of course, Atlanta is a very prime 
market for predatory lending. And some of this could be a lack 
of financial education, but it would be very, very helpful to 
me if you would--and maybe your operation in Atlanta could take 
a concentrated look at that, and we could come out of this with 
something that could benefit the rest of the country.
    Let me ask you another question, if I may, in terms of the 
adjustable rate mortgages and the rising interest rates with 
those. How impactful would--do you think that--what impact do 
you think that would have on consumers, adjustable rate 
mortgage, and the impact that rising interest rates would have?
    Mr. Reich. Well, it's conceivable, for certain types of 
adjustable rate mortgages, that payments could double. It would 
be a real payment shock, and that could have, depending on the 
extent to which interest rates rise, it could have serious 
ramifications for the thrift industry and for all mortgage 
lenders.
    Mr. Garrett. Thank you. The gentleman's time has concluded. 
Mr. McHenry, do you have a--
    Mr. McHenry. Thank you, Mr. Chairman. I certainly 
appreciate and I thank you, Mr. Reich, for being here today and 
representing OTS.
    In your testimony you said thrifts compete effectively with 
other financial service providers to deliver a wide range of 
products and services to American consumers. A very positive 
statement.
    Some would say, or some have said before this committee, 
that thrifts typically--thrift members typically--experience 
higher loan rates, lower savings rates, and additional fees. Is 
that a true statement, or a misrepresentation?
    Mr. Reich. I would say it's an inaccurate statement. Higher 
loan rates?
    Mr. McHenry. ``Experience higher loan rates, lower savings 
rates, and additional fees.''
    Mr. Reich. I would say that's a misrepresentation, and that 
is it not accurate.
    Mr. McHenry. All right. Also, OTS I know, with this ongoing 
executive compensation that the ranking Democrat of the full 
committee has a large focus on these days--he doesn't talk 
about the high compensation of supporters such as trial lawyers 
of their side of the aisle, but nonetheless, I digress--could 
you address with us today your policies, OTS's policies, on 
executive compensation and/or stock option plans, and that 
sort?
    Mr. Reich. Are you speaking--
    Mr. McHenry. During a conversion process, for instance, in 
particular.
    Mr. Reich. During a conversion process to a--from a credit 
union to a mutual form of organization?
    Mr. McHenry. Well, actually, the conversion process which 
you regulate. I wouldn't ask--I would not subject you to that, 
your Deputy Director did an admirable job before the committee. 
But I wanted to ask that of you, to address executive 
compensation and stock options, for instance, that you, OTS, 
oversee, and the conversion process which you oversee.
    Mr. Reich. Well, addressing stock options first, they are 
not permitted until some period of time after a conversion has 
been completed, a stock option plan cannot be implemented with 
a conversion. There is a period of time that has to take place 
before a stock option plan may be approved.
    And in the case of a mutual--a stock institution, the 
shareholders would have to approve such a plan before it could 
be approved. It could not occur without shareholder approval.
    Mr. McHenry. Okay. So, would it be--in the conversion 
process which you oversee, would it be a fair characterization 
to say, ``Executives of the institution profit by obtaining 
stock far in excess of that available to the institution's 
members?''
    Mr. Reich. I think that is--again, that is an inaccurate 
statement, and a misrepresentation. There are limits on the 
stock that executives of an institution may receive, and there 
are--there is a prohibition on executives gaining control of an 
institution, or a group of executives gaining sufficient shares 
to have control of an institution.
    Mr. McHenry. So it would be a misrepresentation?
    Mr. Reich. Yes.
    Mr. McHenry. So does OTS have regulations on the books 
dealing with executive benefits, compensation, and stock 
options?
    Mr. Reich. We make certain that executive compensation is 
reasonable, compared with similar-sized institutions.
    Mr. McHenry. So, it would be an unfair characterization to 
say that executives profit by obtaining stock far in excess of 
that available to the institution's members?
    Mr. Reich. I think that's correct. Management can purchase 
stock only to the same extent that any other member may 
purchase it.
    Mr. McHenry. Okay. In terms of regulations that you have on 
the books, I know that OTS frequently reviews regulations that 
you put in place, to ensure that they are doing what they are 
intended to do. And I know that's an ongoing fashion.
    In terms of the conversion process, which I think the 
chairman mentioned earlier, in terms of the potential with 
thrifts that are purchased and ongoing conversions in the 
marketplace, how long have you had the regulations on the 
books?
    Mr. Reich. Since the late 1970's.
    Mr. McHenry. And have they been changed recently?
    Mr. Reich. Within the past 7 years.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you for your 
testimony, Mr. Reich.
    Mr. Garrett. Mrs. Maloney?
    Mrs. Maloney. Welcome. And I am glad to see that you 
support the committee action on CTR's. An amendment of mine had 
been accepted in the regulatory relief, and yet it was cut out 
in the Senate. And I support Chairman Bachus's efforts to 
address this issue.
    But I want to look at the OTS enforcement of the Bank 
Secrecy Act, and to hear what you are doing to make sure that 
we don't have another savings and loan scandal of 
mismanagement. I would like to hear steps that you have taken 
in that respect.
    But I have here a report on--from FinCEN and others on the 
BSA enforcement. And in it, it says that in some cases where 
the OTS issued written enforcement actions in response to the 
Bank Secrecy Act violations, the IG found--and I'm quoting--
``in five instances, Bank Secrecy violations continued for 
years, or BSA compliance actually worsened.''
    And it talks about the report from the Inspector General, 
and it notes that they found BSA violations at 180 of the 986 
thrifts examined during that period. And of the 180 thrifts 
with substantive violations, OTS had issued written enforcement 
actions against 11.
    And the OIG reviewed a sample of 68 of the thrifts for 
detailed review, and reported that, ``In all 68 cases, we found 
OTS relied on moral persuasion and thrift management assurances 
to comply with the BSA. And in 21 of the cases, thrift 
management was not responsive, and did not correct its BSA 
violations.'' So, what are your comments on that, if any?
    Mr. Reich. Well, my first comment is a question. Was that a 
2003 IG report?
    Mrs. Maloney. Yes, it was. September 23, 2003.
    Mr. Reich. Okay. I think we have addressed the issues that 
were raised in that report. And as I mentioned a few minutes 
ago, in July and August of last year we worked with the other 
Federal banking agencies to produce a new BSA anti-money 
laundering examination manual that all examiners of all the 
agencies are following.
    And I think that the procedures that we are using are 
thorough; they are detailed. And I mentioned a few moments ago 
that in the last 12, 14 months, we have done 900 BSA 
examinations. We have found 500 violations, and issued a number 
of formal and informal enforcement actions.
    So, I think the quality of our program is strong, is good, 
and the quality of the institution compliance is steadily 
increasing.
    Mrs. Maloney. How many formal actions have you initiated?
    Mr. Reich. There were 27 formal and informal. I don't have 
the exact number of formal actions.
    Mrs. Maloney. If you could, get back to us and--
    Mr. Reich. I would be happy to do that.
    Mrs. Maloney. I look forward to the next IG's report, and 
hope that it is better than the 2003 report. What steps have 
you taken for safety and soundness?
    Mr. Reich. Could you be more specific?
    Mrs. Maloney. Safety and soundness, making sure they are 
well-regulated, well-run, serving the communities like they 
should. I think they perform a tremendous service of community 
banking, but I am still troubled by the S&L scandals. What have 
you done to make sure we don't have those again?
    Mr. Reich. Safety and soundness is the most important part 
of our mission, to make certain that thrift institutions remain 
healthy.
    The training and education of our examiners is a continuing 
process, and we strive to keep our examiners up-to-date with 
changes that are taking place in the financial services 
environment, with continuing programs.
    We have recently employed a new Assistant Managing Director 
of Supervision for Compliance Consumer Protection. We had 
previously disseminated that position, distributed that 
position out to the field. We have centralized it, and we will 
be giving increased importance to compliance, CRA, consumer 
protection, as well as safety and soundness, which is our 
highest priority.
    Mr. Garrett. I thank you very much, and the gentlelady's 
time has expired.
    Mrs. Maloney. Thank you very much. It should be your 
highest priority. I am glad to hear that it is. Thank you.
    Mr. Garrett. Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman. I may not take the 5 
minutes. I wanted to explore one topic that apparently has not 
come up today, and it deals with the question of preemption.
    As you know, in the context of conventional banks, and in 
the context of savings institutions that you regulate, this 
committee has been extremely interested in the question of 
whether or not State laws operate, and are allowed to operate, 
in areas regarding alleged predatory lending.
    Obviously, you are aware of the March 7th decision with the 
chief counsel issue which has caused some consternation, and I 
think you're aware of the parallel controversy involving the 
OCC and a preemption order that it issued several years ago--or 
preemption interpretation it issued several years ago.
    I don't want to necessarily get bogged down with the 
specifics of the Montgomery County, Maryland, code, but I do 
want to raise a general question, and get your reaction to it.
    A lot of us, obviously, in a theoretical world, would be 
perfectly happy to have one regulator for mortgage lending, one 
regulator for the banks, and savings and loans institutions. A 
lot of us, in an ideal world, would be happy to see a strong 
regulator take on that purpose. We don't live in an ideal 
world. We live in a world where, obviously, States' attorneys 
general have been very active and very vigilant, and are, 
frankly, often taking on the brunt of the enforcement 
structure.
    So, let me ask you--and I don't want too long-winded an 
answer--but can you give me some sense of what it is that OTS 
does right now to detect and to police predatory lending 
practices?
    Mr. Reich. It's a part of every examination that we do, 
Congressman, and every institution and every safety and 
soundness examination.
    We have consolidated our safety and soundness and 
compliance function. It is one examination that takes place. We 
have cross-trained our safety and soundness examiners in with 
the compliance function. And ferreting out predatory loans is 
part of every examination that we do.
    Mr. Davis. How often do you find bad actors? How often do 
you find savings institutions engaging in predatory practices?
    Mr. Reich. Frankly, not very often. It is my view that most 
of the predatory lending activity that takes place takes place 
in an--by unregulated entities, rather than the Federal banking 
agencies. It's a high priority for all of us. I think it's 
important for me to say that we--
    Mr. Davis. When you say--just to clarify, when you say 
unregulated entities, you mean the mortgage industry, mortgage 
brokers, that kind of thing?
    Mr. Reich. Right, correct.
    Mr. Davis. Let me actually draw on that for one second, 
because you make an important point. And I know you don't mean 
to wade into too many policy arguments here, but you make a 
point.
    We do have a species of entities who, obviously, engage in 
selling homes and credit to individuals to buy homes that are 
not terribly regulated. Does your experience, which I assume 
you believe has been a successful one, lead you to think that 
we should have stronger regulations in place, with respect to 
those unregulated entities?
    Mr. Reich. Absolutely. At the State level.
    Mr. Davis. And I think I cut you off as you were making--
    Mr. Reich. No, all I wanted to say was that we seek 
opportunities, and are absolutely ready, willing, and able to 
meet with State supervisors and local jurisdictions to address 
consumer complaints.
    Mr. Davis. Now, let me draw back to your previous 
observation. You say that you think there is a strong case to 
be made for greater regulation of the mortgage industry at the 
State level, the conventional mortgage industry at the State 
level. Is it your sense that States are often very well 
equipped to do that kind of regulation, because of their 
existing enforcement powers?
    Mr. Reich. Well, I think that varies from State to State. 
Some States have greater financial resources than others to 
devote to that.
    Mr. Davis. Is it possible that the two can co-exist, that 
we could have a strong Federal regulatory structure, and a 
strong State regulatory structure existing in tandem?
    Mr. Reich. I believe it is.
    Mr. Davis. And I would just simply close on that note, Mr. 
Garrett, because I think it's an important point. A number of 
us agree with Mr. Reich, that it is possible, in the context of 
the conventional mortgage industry, to have a strong State 
regulator, and to have a strong Federal regulator, that the two 
can coexist; they can work in tandem.
    Mr. Reich, I would just close with this observation. I have 
not examined the statistics as closely in the context of what 
you regulate, the savings institutions. I have looked at them 
closely with respect to the conventional mortgage industry and 
the banking industry, and I happen to represent a city that 
ranks near the top of every category, in terms of disparities 
in the subprime lending market, and the disparities across 
income levels, racial disparities that still exist across 
income levels.
    I close by saying that it's a real and significant question 
for this committee, and I look forward to continuing discussion 
on the issue, and I thank you.
    Mr. Garrett. And the gentleman yields back. And Director 
Reich, again, I appreciate your complete testimony, I 
appreciate also the testimony that you submitted, and coming to 
the hearing today and answering the questions.
    I noticed a couple of questions were submitted to you in 
addition, as far as answers that they would like to receive 
back, and we appreciate those, as well. Thank you, Director.
    Mr. Reich. Thank you.
    Mr. Garrett. I would note while we--as the second panel 
finds its way here, we have been notified that we are looking 
at approximately a 12:00 voting schedule on the Floor.
    Thank you, gentlemen. We are joined, in this second panel, 
by three gentlemen.
    Michael ``Mike'' Nolan, serves as chairman, president, and 
CEO of the Fifth District Savings Bank of New Orleans, 
Louisiana. He is also a member of the board of America's 
Community Bankers, and Louisiana Bankers Association. He is, by 
the way, a native of New Orleans, and earned his JD degree from 
Loyola University in 1969.
    He is also joined by Ted Gurzynski, who is vice president 
and chief credit officer for Pyramax Bank, FSB. He has been a 
banker for 39 years, both in the international and commercial 
fields. He is a graduate of the University of Wisconsin, with a 
BA in languages, and also holds a graduate degree in 
international finance from the Thunderbird Graduate School of 
International Management in Glendale, Arizona.
    Finally, we are joined by Geoff Smith. Mr. Smith is a 
project director at Woodstock Institute. He has conducted 
research and written policy of housing and community 
development topics, including mortgage lending policy, bank 
branching, housing market trends, small business finance, 
financial institution regulation, access to banking services, 
and general community reinvestment policy.
    He has also authored and coauthored numerous publications, 
and coauthored research publications published in numerous 
academic journals, as well. Mr. Smith has a BA in geography 
from the University of Illinois at Urbana-Champaign, and an MS 
in geography from the University of Wisconsin, Madison.
    Without objection, your written statements, what you have, 
will be made part of the record.
    And now, you will each be given--recognized for 5 minutes 
for a summary of your testimony. Gentlemen? Mr. Nolan?

STATEMENT OF MICHAEL E. NOLAN, CHAIRMAN, PRESIDENT & CEO, FIFTH 
DISTRICT SAVINGS BANK, ON BEHALF OF AMERICA'S COMMUNITY BANKERS

    Mr. Nolan. Good morning, Chairman Garrett, Ranking Member 
Gutierrez, and members of the committee. I am Michael Nolan, 
chairman, president and CEO of Fifth District Savings Bank in 
New Orleans. We are a mutual savings bank, with approximately 
$400 million in assets and 6 offices in the New Orleans area. 
We have been an OTS-regulated institution since 1989.
    Last year, we converted our charter from a Louisiana 
savings association to an OTS charter, because we believe the 
OTS has a strong commitment to mutual institutions.
    I am testifying today on behalf of America's Community 
Bankers. I am a member of the board of directors of America's 
Community Bankers. Two-thirds of ACB members are OTS-regulated 
savings associations. ACB strongly supports the continued 
operation of OTS as an independent regulator. The efficiency 
and professional regulatory oversight that OTS provides is 
critical to the continued vibrancy of financial institutions 
that have a special focus on home lending, retail banking, and 
a commitment to the communities.
    In the years since its creation, OTS has undergone a 
successful evolution that mirrors that changes in the industry 
it regulates. The Agency supervises a wide range of 
institutions with different operating strategies, business 
needs, sizes, and charters. Over the years, the industry has 
become more complex and diverse, and the OTS has kept pace with 
the change.
    OTS has developed a strong expertise in the business 
conducted by savings associations, mutual institutions, and 
their holding companies. OTS has developed a more risk-focused 
way of looking at supervision, rather than the prescriptive 
regulations of the past.
    For example, OTS uses its examination force efficiently to 
examine savings associations simultaneously for safety and 
soundness and compliance. Although every institution is unique 
and every examination is different, many institutions 
appreciate having examiners in-house at one time, rather than 
having multiple examinations.
    In addition to implementing stringent safety and soundness 
operational flexibility and relief for community banks from our 
increasing regulatory burden--and the Agency has taken a 
leadership role in that regard--we commend Director Reich for 
his efforts in this area, and we urge Congress to pass 
meaningful regulatory relief legislation this year.
    Finally, let me add a brief personal note. As a New Orleans 
banker, I want to acknowledge the OTS's response and assistance 
to the industry after Hurricanes Katrina and Rita. Both 
Washington and in our region, the OTS provided valuable 
assistance to me and to my colleagues and our competitors.
    My written testimony provides the details, but it's 
important to note that within 24 to 36 hours after the flooding 
began in New Orleans, the OTS Midwest regional office in Dallas 
was in touch with me, personally. For a period of time after 
that, I was in almost daily contact with the OTS officials in 
Dallas and in Washington. OTS Director Reich has journeyed to 
New Orleans several times since Katrina, to speak with bankers, 
and to gain firsthand knowledge of the destruction.
    One of the biggest challenges facing financial institutions 
in the hurricane zone was a quality of the pre-hurricane 
assets. OTS worked with each institution, allowing us to use 
our own judgement in helping to determine the quality of these 
assets.
    OTS also recognized that compliance with many regulations, 
when our institutions were under severe stress, would be almost 
impossible. And without flexibility, we would not have been 
able to help our customers when they needed our help the most. 
The lesson that we take away from this disaster is simply this. 
When banks are relieved of unnecessary regulatory burdens, they 
are better able to serve the needs of their customers.
    Mr. Garrett. You just want to briefly close?
    Mr. Nolan. Sure. ACB commends the OTS for balancing strong 
safety and soundness oversight with an understanding and 
appreciation of the businesses and the institution it 
supervises.
    Thank you, sir, and I will be happy to try to answer your 
questions.
    [The prepared statement of Mr. Nolan can be found on page 
37 of the appendix.]
    Mr. Garrett. Thank you, Mr. Nolan. And I realize I failed 
to do something that Ms. Kelly always does when she is here 
running the meetings, and that is for the witnesses to always 
indicate that they are to push the little button for speaking, 
that the little green light comes on when you're okay to speak, 
the yellow is a 1-minute warning, and then the red light is the 
conclusion.
    She always does that; I apologize for not leading off with 
that. Thank you, Mr. Nolan. Mr. Gurzynski?

   STATEMENT OF THEODORE GURZYNSKI, VICE PRESIDENT AND CHIEF 
  CREDIT OFFICER, PYRAMAX BANK, ON BEHALF OF THE INDEPENDENT 
                  COMMUNITY BANKERS OF AMERICA

    Mr. Gurzynski. Mr. Chairman, Ranking Member Gutierrez, and 
members of the subcommittee, my name is Ted Gurzynski, and I am 
vice president and chief credit officer of Pyramax Bank, a 
Federal savings bank located in Greenfield, Wisconsin. It is my 
pleasure to speak to you today about the OTS on behalf of the 
Independent Community Bankers of America, which represent 
approximately 5,000 community banks across the Nation, many of 
whom, like Pyramax, are Federal or State savings associations 
or thrifts, regulated by the OTS.
    Established by Congress as a bureau of the Department of 
the Treasury in August of 1989, the OTS charters, examines, 
supervises, and regulates Federal savings associations, thrifts 
insured by the FDIC.
    With a skilled staff of 900 employees, most of whom work in 
4 regional offices, the OTS has done an excellent job of 
supervising and examining thrifts under HOLA. The ICBA notes 
that, just recently, the OTS announced plans to hire 60 new 
examiners, bolstering its exam staff by 11.5 percent. In 
addition, OTS has stated that it will reestablish at its 
Washington headquarters a centralized direction for compliance, 
Community Reinvestment Act, and consumer protection, a function 
that was formerly delegated to the regional offices.
    ICBA commends the OTS for taking these actions to improve 
its ability to supervise the Nation's savings associations.
    The thrift industry has never been healthier. You have 
already heard the statistics from Director Reich; I need not 
repeat them. ICBA believes that the excellent health of the 
thrift industry and its remarkable recovery since the enactment 
of FIRREA can be attributed to the supervision and regulation 
of the OTS, as well as to the vitality of the thrift charter.
    OTS has fulfilled its mission well, as the Nation's primary 
regulator of thrift institutions, and has the expertise in 
supervising institutions whose business focus is housing 
finance.
    The ICBA opposes eliminating the OTS and merging or 
shifting its duties to another agency. The OTS has done an 
excellent job in supervising the industry and assisting it 
through some very difficult times. As long as the institutions 
it regulates prefer a separate regulator, and support the OTS 
through assessments, the OTS should remain a separate 
regulator.
    Furthermore, having a separate regulator for thrifts can 
help focus that industry on the Nation's housing market and 
housing finance. The ICBA commends OTS Director Reich for his 
efforts to reduce unnecessary regulatory burden on banks and 
thrifts, and the leadership that he has assumed under the 
Economic Growth and Regulatory Paperwork Reduction Act.
    Director Reich's competent leadership of the project, and 
his passionate belief that unnecessary regulation must be 
reduced were critical to achieving the goals of EGRPRA project 
of identifying outdated, unnecessary, or unduly burdensome 
regulatory requirements. The ICBA recommends the OTS, and 
commends them and that--the other banking industries, for their 
support of a comprehensive regulatory relief bill.
    Agency support for H.R. 3505, the Financial Services 
Regulatory Relief Act of 2005, was critical to successful 
passage of that legislation in the House by an overwhelming 
majority. Similarly, Agency support for the Financial Service 
Regulatory Relief Act of 2006, Senate Bill 2856, will be 
critical for the success of that bill in the Senate. Both bills 
include provisions from the ICBA-backed communities bank 
serving their communities first, or Communities First Act.
    ICBA supports the savings association provisions in the 
regulatory relief bills, H.R. 3505 and title 4, Senate Bill 
2856. These include updating the statutory limits on the 
ability of Federal savings associations to make small business 
and other commercial loans, and two, providing parity for 
thrifts with banks under the Securities Exchange Act of 1934, 
and the Investment Advisors Act.
    All of these provisions would provide thrifts with greater 
flexibility to promote safety and soundness through 
diversification, more opportunities to counter the cyclical 
nature of the mortgage market, and additional resources to 
manage their operations safely and soundly.
    ICBA recommends the leadership role taken by the OTS in 
helping to reduce examination burden under the Community 
Reinvestment Act rules. Prior to the OTS taking action on the 
CRA rules, extended discussions among the agencies about 
increasing the asset size limit, for eligibility, for 
streamlined small banks, CRA examinations did not result in 
consensus. With the OTS's action--in part due to their 
definitive action, the other Federal banking agencies were able 
to reach consensus, and also increase the asset limit for 
streamlined examination.
    Recently, the OTS has been asked to support a proposal to 
amend statutory and regulatory requirements applicable to 
mutual holding companies, or MHC's. We understand that a 
request was made of the OTS to alter the corporate governance 
rules for MHC's, in order to promote minority shareholders of 
savings associations to override the interest of a controlling 
majority. This would provide minority shareholders in an MHC 
structure greater control over the underlying depository 
institution, more than the majority and the controlling MHC.
    Mr. Garrett. I'm sorry, sir, if you can just come to a 
conclusion?
    Mr. Gurzynski. Contrary to prevailing law regarding the 
rights of minority shareholders, vis a vis majority 
shareholders in public companies.
    When it comes to--we also applaud the OTS for recent 
testimony as it relates to credit union conversions.
    And at this point, I would just like to say that we believe 
and support the Deputy Director's comments when he said, 
``Minimize regulatory obstacles, reduce burden, and facilitate 
legitimate business decisions regarding charter choice made by 
institutions we regulate.''
    And the credit unions should not be allowed to allow their 
members not to switch. Thank you for the opportunity to 
testify.
    [The prepared statement of Mr. Gurzynski can be found on 
page 30 of the appendix.]
    Mr. Garrett. And I thank you, sir, for your testimony.
    Mr. Smith?

STATEMENT OF GEOFF SMITH, PROJECT DIRECTOR, WOODSTOCK INSTITUTE

    Mr. Smith. Good morning, and thank you for the invitation 
to testify at today's hearing. My name is Geoff Smith, and I am 
project director at the Woodstock Institute. The Woodstock 
Institute is a Chicago-based nonprofit research and policy 
organization that, for over 30 years, has worked locally and 
nationally to promote reinvestment and economic development in 
lower income and minority communities.
    Woodstock Institute also convenes the Chicago CRA 
Coalition, a group of nearly 70 community organizations with a 
mutual interest in increasing access to bank and thrift 
lending, investments, and services in underserved areas in the 
Chicago region and across the State of Illinois. The Woodstock 
Institute is also a member of the National Community 
Reinvestment Coalition.
    My testimony today largely echoes Congressman Gutierrez's 
pointed and very insightful questions on the Office of Thrift 
Supervision, and the Agency's recent actions to potentially 
weaken its regulation of the Community Reinvestment Act.
    CRA was born in 1977 out of grass roots organizing efforts 
that brought to light the devastating impact of redlining on 
inner city urban neighborhoods, and it requires the depository 
financial institutions, monitored for their ability to meet the 
credit needs of the communities in which they do business, 
including low and moderate-income neighborhoods and households.
    In its early years, CRA had limited effectiveness, despite 
some significant advocacy efforts. And it wasn't until the CRA 
regulation was made more rigorous in the late 1980's, 
particularly in the 1990's, that CRA became truly effective in 
meeting its legislative intent.
    One of the most critical changes was instituting a three-
part exam for banks and thrifts with assets over $250 billion. 
This examination evaluated large institutions' CRA performance 
through separate tests that systematically assessed an 
institution's lending, services, and investments to low- and 
moderate-income markets. These changes served to standardize 
the way large banks were examined under CRA, and added 
transparency that made both financial institutions and 
regulators publicly accountable for community reinvestment 
performance.
    Evidence of the effectiveness of CRA can be seen in 
increased mortgage loan levels and CRA-regulated institutions 
to low and moderate-income mortgage markets; the development of 
flexible and affordable deposit accounts for underbanked 
markets; and increased investments in affordable housing, small 
business development, and financial literacy training.
    Despite the effectiveness of CRA in encouraging banks and 
thrifts to have a presence in lower income communities, there 
recently have been a number of regulatory actions that have 
weakened CRA, put forward under the banner of reducing 
regulatory burden for financial institutions.
    The Office of Thrift Supervision was the lead agency in 
enacting the most extreme of these proposals. In many 
instances, the OTS acted unilaterally, breaking away from the 
traditional unity of the bank regulatory agencies, and making 
decisions in the face of very strong public opposition. In the 
summer of 2004, the Office of Thrift Supervision broke away 
from other regulatory agencies, and unilaterally raised the 
asset limit for institutions it considered small under CRA to 
$1 billion.
    This action created an uneven regulatory playing field, and 
significantly reduced the number of thrifts covered by a 
comprehensive, large institution CRA exams who were, therefore, 
subject to review of their provision of community development 
lending, services, and investments, and threatened significant 
development resources in low and moderate income markets 
everywhere, but most significantly in rural communities and 
small cities, who are predominantly served by mid-sized 
institutions.
    The three other regulatory agencies, after extensive review 
and public comment, adopted a more modest revision of the CRA 
regulation, which created an intermediate small bank category 
for institutions between $250 million and $1 billion in assets. 
Unlike thrifts of similar size, intermediate small banks are 
examined under a streamlined two-part CRA exam, which includes 
a community development test that continues to assess an 
institution's provision of community development lending, 
services, and investments.
    In 2005, OTS acted unilaterally again, and against 
overwhelming public opposition, by adopting a proposal that 
dramatically weakened CRA by changing the way that large 
thrifts' CRA ratings are assessed. Other bank regulatory 
agencies continue to require large banks are regularly reviewed 
for their provision of lending, investments, and services. The 
OTS altered this framework by allowing large thrifts to opt out 
of providing services and investments to low and moderate-
income markets.
    The OTS regulations set up a circumstance where a large 
thrift could have a large branch network with few or no 
branches in low and moderate-income communities, offer no 
flexible or affordable services or products, make no investment 
in affordable housing or business development, or refuse to 
make grants or investments to organizations who promote 
economic development in lower-income communities. The thrift 
could make few or no direct loans to low and moderate-income 
communities or borrowers, but purchase these loans from third 
parties.
    Yet, a thrift could still receive an outstanding rating or 
satisfactory rating on a CRA evaluation with virtually no 
direct presence in a low or moderate-income community. In fact, 
an analysis of results of recent OTS large bank exams show 
examples of institutions receiving outstanding CRA ratings with 
no consideration of their provision of services to low and 
moderate-income consumers.
    It was good to hear from Director Reich that the OTS is 
considering changing its CRA regulation to conform with other 
regulatory agencies, and we look forward to working with the 
OTS in this regard. Thank you.
    [The prepared statement of Mr. Smith can be found on page 
96 of the appendix.]
    Mr. Garrett. Thank you very much. And again, I appreciate 
all of your testimony. I just have initial opening questions 
for anyone who wishes to address them.
    It would appear that the general consensus from the 
industry perspective is that OTS is--has performed in an 
admiral fashion, an adequate fashion. And taking into 
consideration the comments that you have made in the testimony 
today, are there any other weak areas that we should be, as a 
committee, looking at OTS and its overall structure?
    One of the comments was made as to how it responds from 
works here, and then back out into the region, and I guess it's 
something of a hub and spoke sort of arrangement. Your 
testimony seems to be that it seems to be working, but is that 
hub and spoke regional aspect with the four regions that it 
has, is that the best mechanization or methodology for setting 
it up? And if there is any changes in that structure, should we 
be looking at it?
    And just one last question, and then you can go into these, 
is would it be helpful to establish an advisory--an OTS 
advisory group, similar to the financial crimes enforcement 
network, for the OTS?
    Mr. Nolan. The experience of our institution is that the 
existing structure of the OTS is effective. And I use, again, 
the example of Hurricane Katrina to point that out most 
emphatically.
    Institutions deal directly with their regional offices, and 
very indirectly with the Washington office. In a circumstance 
that we found ourselves in, in an unprecedented disaster such 
as that, the communication level was open, and positive, and 
swift, and responsive from not only the regional but also the 
national, the Washington, level.
    So, my estimation is that the structure works. The lines of 
communication are accurate and are open. And I see no 
difficulty with its current structure.
    Mr. Gurzynski. I would concur with that. I live by the 
principle that if it isn't broke, don't fix it. And our 
experience with the OTS, management-wise, has been excellent.
    As far as weaknesses, I wouldn't call this a weakness, but 
certainly--and they are working at this--and that is that as 
the thrift industry moves more towards other types of lending, 
commercial lending in particular--and they are doing that, 
strengthening their staff as it relates to commercial lending, 
and they have already done that.
    Mr. Nolan. If I may, just to add an additional comment, 
that the OTS does establish outreach meetings regularly in 
their regions, and so we feel the communication issue and the 
connectivity is very positive.
    I don't think any banker enjoys dealing with regulators. 
But we have a very open and honest dialogue, and they are very 
interested in what is happening with us, and are open to the 
realities that we deal with, and we appreciate that.
    Mr. Garrett. Mr. Smith?
    Mr. Smith. I don't know that I can really add anything on 
that.
    Mr. Garrett. Then I will start with you on the next 
question in the minute I have left--and you have commented on 
this a little bit--with regard to the changing of the--
through--without formal rulemaking, changing from the $250 
million to $1 billion for capitalization that was done in that 
matter--I think I know--if you want to elaborate on that, and 
your opinion on that, and then I would like also the industry's 
perspective, if that is the best procedure to be going through.
    Is it good public policy to move in that direction, or is 
it better to have these changes be made in a formal rulemaking 
process so outside voices can be heard?
    Mr. Smith. In that particular instance, and in many of the 
actions around--at least around CRA that the OTS has taken--or 
has been limited consideration of public comments, during 
public comment periods, the action to raise--to change the way 
large institutions are assessed under the OTS's CRA exam 
received overwhelming public opposition, in fact. Yet the 
action was taken, regardless.
    So, I think the formal rulemaking perhaps would be a more 
effective way to vet that.
    Mr. Garrett. Thank you. Mr. Gurzynski?
    Mr. Gurzynski. We have two branches in areas that heavily 
serve this area, both of them Hispanic areas. And I am going to 
tell you, from my perspective, who determines whether we are 
doing the job as it relates to meeting the needs of our 
community in those areas, and that is the customer.
    And if we're not providing the services that they want, and 
the mortgages, and at the pricing they can afford, then they 
don't bank with us. And that's our main market there, and we 
try to do the best job we can.
    So, I think that structure as proposed, from our 
standpoint, makes a lot of sense. We are already doing that. 
Now, I realize that there was a comment made by one of the 
members here that, ``Well, if you are meeting those rules, then 
you wouldn't mind the regulations.'' If we are following the 
rules, then why do we need to be regulated to the extent that 
we have been?
    So, I think we're doing the job. If we're doing the job, I 
think these new proposed size limitations should not affect 
negatively the markets we serve.
    Mr. Garrett. And if you could just briefly answer that, Mr. 
Nolan.
    Mr. Nolan. Thank you for that. I think ACB's position, and 
certainly that of our own institution, would be to recognize 
and support the existing structure of $1 billion and below 
having a small bank test to be the appropriate level.
    I think the real issue here is that CRA recognizes that 
there is some exemption level, if you will, and I don't mean 
that in the sense that you don't abide by CRA; you do, you're 
subject to it. But at certain asset levels, there are different 
tests for a reason. And the reason is the amount of assets and 
the amount of resources that institutions have to devote to the 
activity.
    The three areas of testing, which are lending, service, and 
development, are all very valid and important areas. However, 
if an institution can focus its resources and pick one of those 
areas--perhaps they're very strong in lending--then it seems 
unreasonable for a smaller institution to divert resources away 
from that which they are very good at meeting the community 
needs into other areas where they don't have any expertise at 
that moment in meeting those needs.
    So, it's really a concentration of the resources, and 
having regulation recognize that if the resources and the 
business plan of the institution is good in certain areas, that 
should be sufficient enough for CRA evaluation.
    Mr. Garrett. Thank you. Mr. Cleaver?
    Mr. Cleaver. Thank you, Mr. Chairman. Mr. Gurzynski, can we 
go back to the regulation issue that you touched on just a 
moment ago?
    Do you think that the thrifts are adequately regulated? Do 
you think that the--or do you think they are under-regulated?
    Mr. Gurzynski. We certainly are not under-regulated.
    Mr. Cleaver. Yes, I didn't think you were going to go 
there.
    [Laughter]
    Mr. Cleaver. Well, do you think that you are over-
regulated?
    Mr. Gurzynski. I actually believe that we are over-
regulated, because our business is to be in, to be active in, 
and to provide services to the community. If we weren't doing 
what the community needs are, we wouldn't be in that community, 
and our customers would tell us that we weren't meeting their 
needs by walking away.
    Mr. Cleaver. The--with all of the issues that poor people 
face, and you're suggesting, I think, that you would do those 
things even if you were not regulated.
    Mr. Gurzynski. We would certainly do them--to the extent, I 
don't know what we would--but we certainly would, because, in 
reality, a community bank exists to provide services that the 
local community that it serves is in.
    We're not a multi-national bank. We are there to meet the 
needs of its community, just as have--for example, if I might 
digress--in our two branches in the Hispanic area, we offer 
products there that we don't offer in other markets, because 
the needs were brought forth by the community, and we provided 
those products to meet those needs.
    Mr. Cleaver. Is there a particular segment of the 
population to whom thrifts direct their service, or from which 
population do you hope to get the greatest response?
    Mr. Gurzynski. We try to get, in our marketplace, and I can 
only speak for ours, we try to really relate to the customers 
who live locally around where our branches are, and who wants 
to build a relationship with an organization that gets to know 
them, and then provides the products to meet their needs.
    We don't mass market, we only go to our local community 
needs. Because, in all honesty, the larger organizations really 
don't meet those needs on a very selective basis. We have 
developed programs in mortgage lending that go way beyond what 
even the CRA would ask us to do, to meet the particular needs 
in a particular location.
    Mr. Cleaver. Of course, you know, the large banks would 
disagree with you. They come into my office, and I'm sure in 
all of our offices, to express their disagreement.
    Mr. Gurzynski. And I can only tell you, sir, what we do in 
our organization.
    Mr. Cleaver. Well, and I tend to be a little closer to 
where you are. But I am just, you know, it--you're dealing with 
people in reality that most of the big banks would turn down, 
anyway.
    Mr. Gurzynski. In many cases, that is correct.
    Mr. Cleaver. And so--but I am--I mean, how do you market? 
Who do you go after?
    Mr. Gurzynski. Well, it depends on our marketplace. But 
let's say, for example--what we go after is we go after the 
local individuals--on a lesser extent, the small businesses--
but basically the individuals, the homeowners, those who want 
to be homeowners, those who want to get loans for their 
children to go to school, via home equity loans, or what have 
you it is.
    And what we do is we hold meetings locally and ask the 
people in the community, ``What kind of products do you want 
from a financial institution? How do you want things 
structured?'' And then, based on the regulations, we try to 
meet those needs as best we can, and at the same time, not to 
get the OTS's wrath, because maybe we have done some things 
that are beyond policy.
    Mr. Cleaver. One final question, and I will go to Mr. 
Nolan. But being down in New Orleans, you are, I mean, at the 
epicenter, I think, for the needs.
    First of all, can you share--if you can do it briefly--the 
problems that you see right now? I don't want to get into 
insurance, but what are the major problems right now in New 
Orleans, with regard to what--I mean, I'm not speaking about 
the universe, I'm speaking more specifically about thrifts.
    Mr. Nolan. Thank you for that. We--that's a topic we could 
speak a lot about. In narrowing it perhaps to our bank and 
thrifts, some of the major issues we are dealing with is a 
community that is anxious about its future, people who are 
uncertain about the stability of the levee system that is under 
the supervision of the United States Corps of Engineers.
    They are uncertain about the speed with which the city can 
recover--70 percent of it was flooded. And as far as banks, I 
think banks are--simply reflect the vision of the community. We 
can do no greater and no less than the citizens wish to do.
    And while our asset quality is fine, I know the insurance 
issues are very important issues in the future, as to whether 
we will have adequate insurance availability for homeowners, as 
well as businesses. So our challenges are bringing our small 
businesses up and running, and keeping our citizens housed and 
employed, so that the recovery can take place in a reasonable 
way.
    Mr. Cleaver. One final--if--I don't think anybody knows it 
at this moment, exactly what kind of insurance will be put in 
place for people who live actually in the flood plain. Do you 
foresee difficulty financing or refinancing any of the families 
in those areas, if we cannot come up with a level of coverage 
that would make lenders at least somewhat comfortable?
    Mr. Nolan. I think you are speaking, Congressman, I 
believe, about the Federal Flood Insurance Program.
    Mr. Cleaver. Yes.
    Mr. Nolan. Yes, the level of insurance is important. It's 
capped at $250,000, is my understanding, at the moment. 
Certainly, many homes exceed that. Even though New Orleans is 
not a very wealthy community, many homes exceed that.
    That's a very important issue for flood insurance. Equally 
as important, it has to be affordable homeowners and casualty 
coverage for businesses, as well as homes. And the current 
circumstance seems to indicate the premiums will be extremely 
high, the coverage will be limited, and I do anticipate that 
will have a negative effect on the ability of people to finance 
the type of mortgage that they would like to have for the type 
of home they would like to live in, because it's simply a 
matter of economics. How much can you afford, then, if the 
insurance has increased to a significant amount?
    Mr. Cleaver. You gave the answer I was hoping you would 
give, but unfortunately I would like for the world to have 
heard your response. Thank you.
    Mr. Nolan. Thank you, sir.
    Mr. Garrett. And of course, his response is in the record, 
so you can disseminate.
    Again, I would like to thank the members of the panel--Mr. 
Nolan, Mr. Gurzynski, and Mr. Smith--for your testimony and 
your time today. The record will remain open for another 30 
days, for members to submit questions to the panels and place 
their response on the record.
    Again, I thank you, and the meeting is adjourned.
    [Whereupon, at 11:50 a.m., the subcommittee was adjourned.]
                            A P P E N D I X



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