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




 
BANKS IN REAL ESTATE: A REVIEW OF THE OFFICE OF THE COMPTROLLER OF THE 
                    CURRENCY'S DECEMBER 2005 RULINGS

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      FINANCE, AND ACCOUNTABILITY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 27, 2006

                               __________

                           Serial No. 109-266

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
BRAIN P. BILBRAY, California

                      David Marin, Staff Director
                Lawrence Halloran, Deputy Staff Director
                      Benjamin Chance, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

   Subcommittee on Government Management, Finance, and Accountability

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina        EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia                  MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota             PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee

                               Ex Officio
                      HENRY A. WAXMAN, California

                     Mike Hettinger, Staff Director
               Tabetha Mueller, Professional Staff Member
                           Seth Lennon, Clerk
            Adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 27, 2006...............................     1
Statement of:
    Stevens, Thomas M., CRB, CRS, GRI, president, National 
      Association of Realtors; Edward L. Yingling, president and 
      CEO, American Bankers Association; and Cynthia C. Shelton, 
      CCIM, CRE, director of investment sales, Colliers Arnold...    35
        Shelton, Cynthia C.......................................    68
        Stevens, Thomas M........................................    35
        Yingling, Edward L.......................................    53
    Williams, Julie L., First Senior Deputy Comptroller and Chief 
      Counsel, Office of the Comptroller of the Currency.........     3
Letters, statements, etc., submitted for the record by:
    Shelton, Cynthia C., CCIM, CRE, director of investment sales, 
      Colliers Arnold, prepared statement of.....................    70
    Stevens, Thomas M., CRB, CRS, GRI, president, National 
      Association of Realtors, prepared statement of.............    37
    Williams, Julie L., First Senior Deputy Comptroller and Chief 
      Counsel, Office of the Comptroller of the Currency, 
      prepared statement of......................................     5
    Yingling, Edward L., president and CEO, American Bankers 
      Association, prepared statement of.........................    55


BANKS IN REAL ESTATE: A REVIEW OF THE OFFICE OF THE COMPTROLLER OF THE 
                    CURRENCY'S DECEMBER 2005 RULINGS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 27, 2006

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts, Towns, Kanjorski, and 
Davis of Virginia.
    Staff present: Mike Hettinger, staff director; Tabatha 
Mueller, professional staff member; Seth Lennon, clerk; Adam 
Bordes, minority professional staff member; and Teresa Coufal, 
minority assistant clerk.
    Mr. Platts. The Subcommittee on Government Management, 
Finance, and Accountability will come to order.
    In December 2005, the Office of the Comptroller of the 
Currency issued three interpretive letters allowing certain 
banks to invest in real estate projects. According to the OCC, 
these rulings are consistent with past precedent and with the 
National Bank Act, which allowed banks to invest in these types 
of projects as long as they are necessary to accommodate the 
bank's business activities. The rulings, however, have sparked 
controversy in and around the real estate industry, which views 
these actions as a significant departure from what has been 
previously permitted.
    Without going into too much detail, the interpretive 
letters were issued to PNC Bank to develop a project involving 
retail, office, a hotel and 32 condominiums on property it owns 
next to its Pittsburgh headquarters, to Bank of America to 
develop a Ritz Carlton hotel adjacent to its headquarters in 
Charlotte, and to Union Bank of California to finance the 
development of a windmill farm and associated real estate.
    At issue today is whether the OCC process that allowed for 
these letters is consistent and transparent as well as whether 
or not the letters themselves represent a departure from past 
precedent and begin to blur the line between banking and 
commerce that Congress has stridently tried to maintain.
    We are pleased to have to panels of distinguished witnesses 
with us today. Our first panel is Ms. Julie Williams, First 
Senior Deputy Comptroller and Chief Counsel with the OCC. Our 
second panel will include Mr. Thomas Stevens, president of the 
National Association of Realtors, Mr. Edward Yingling, 
president and CEO of the American Bankers Association, and Ms. 
Cynthia Shelton, a commercial real estate broker at Colliers 
Arnold of Orlando, FL, representing the Realtors Commercial 
Alliance.
    We certainly thank all of our witnesses for being here 
today and look forward to your testimonies. I now yield to our 
ranking member, the gentleman from New York, Mr. Towns, for the 
purposes of an opening statement.
    Mr. Towns. Thank you very much, Mr. Chairman.
    I am looking forward, first of all, to the testimony coming 
from our witnesses.
    Since the passage of the National Bank Act in 1963, the 
Federal Government has consistently applied laws maintaining a 
firewall between commercial activity and national banks. By 
doing so, we have successfully insulated our banking system 
from past economic recession and shocks that have caused 
significant losses for private industry, particularly within 
the real estate sector. Recent decisions by the OCC, however, 
have created potential loopholes for banks to manage and 
develop real estate holdings. I believe this goes beyond what 
is provided for under current law, and fear that relaxing prior 
standards will expose our financial system and Government 
insurance programs to excessive economic risk.
    In response, I have co-sponsored H.R. 111, the Community 
Choice in Real Estate Act, which would prohibit banks entering 
the real estate brokerage or management market. I am hoping, 
however, that proposed legislation will get the OCC and private 
industry to begin a dialog that will both strengthen current 
limitations and establish specific guidance for where 
exceptions to the rules should be made. I hope today's hearing 
will serve as a basic for that dialog. Hopefully we will be 
able to ascertain some information that will assist us in 
making certain that we are making the appropriate decision.
    Thank you very much, Mr. Chairman, and on that note, I 
yield back.
    Mr. Platts. Thank you, Mr. Towns. We will move to our first 
panel.
    Ms. Williams, thank you very much for being with us. The 
practice of the subcommittee is to swear in all of our 
witnesses. So if I could ask you to stand and raise your right 
hand.
    [Witness sworn.]
    Mr. Platts. Thank you, Ms. Williams. The Clerk will note 
that the witness affirmed the oath.
    We appreciate the written testimony, or as I call it, my 
homework, being provided to us in advance. We look forward to 
your oral testimony. We will give you 5 minutes on the clock. 
If you need to go over some, we understand that. We look 
forward to then a Q&A following your testimony.
    Ms. Williams, the floor is yours.

STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY COMPTROLLER 
  AND CHIEF COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Ms. Williams. Thank you very much, Chairman Platts, and 
Ranking Member Towns. On behalf of the Office of the 
Comptroller of the Currency, I do appreciate the opportunity to 
appear before you today to discuss the three interpretive 
letters issued by the OCC in December 2005.
    As I described in detail in my written statement, the 
decisions reflected in these letters are entirely consistent 
with the National Bank Act, and they are well within the 
principles of existing precedent for national banks' 
activities. The legal framework that is applicable in this area 
is narrow and it is fact-dependent. The conclusions in these 
letters therefore simply cannot pave the way for the sort of 
expanded real estate activities that some have projected.
    The conclusions in the letters are quite specific to the 
activities described and they are limited in scope. They apply 
existing law and precedent to situations that involve some new 
factors. They authorize no more than the specific proposals 
that they describe, and only for the particular banks involved. 
Thus, the letters to not endanger the fundamental separation of 
banking and commerce in this country.
    The letters do not authorize national banks to engage in 
the real estate development or investment business, nor do they 
have anything to do with merchant banking, nor do they have 
anything to do with allowing national banks to conduct a real 
estate brokerage business. They also were carefully evaluated 
by OCC supervisors to assure that the activities would be 
consistent with safe and sound operations of the banks 
involved. Moreover, going forward, the OCC will continue to 
monitor these activities to ensure that they are conducted in a 
safe and sound manner and that they are conducted consistent 
with the representations made to us by each of the banks.
    Two of the letters concern situations where national banks 
seen to enhance the use of property they already own in 
connection with operational needs of their own banking 
business. Each letter permitted only a single building. In each 
case, we found that the bank demonstrated that the proposed 
building was being developed in good faith to address 
legitimate operational needs of the bank's own banking 
business. This connection to a bank's own operational needs is 
essential to its legal authority to conduct these activities, 
and this linkage prevents national banks from conducting a real 
estate investment or development business.
    In one case, the building in question would be a mixed-use 
building with offices, hotel space and upper floor space that 
would be sold off, sold off in the form of condominiums. In 
that case, the bank would occupy a portion of the offices and 
committed to use a percentage of the hotel rooms for bank 
officials and bank visitors.
    In the second case, the building would be used entirely as 
a hotel. The bank represented that visiting bank officials, 
board members, customers and prospective customers and service 
providers would occupy over 37 percent of the rooms which 
constituted over 50 percent of the projected occupied rooms.
    The third letter concluded that a bank could provide 
financing to a wind energy project in the form of payment for 
an equity interest in a limited liability company, in order for 
the bank to be eligible for Federal tax credits and thereby 
lower the cost of funding for the project. It was important to 
us in reaching our conclusion that facilitating such financing 
is precisely Congress' purpose in creating such tax credits.
    A number of specific restrictions and limitations were 
included in the letter to make clear that our approval was 
based on the bank's interest being structured to preserve its 
economic substance as a loan rather than a speculative 
investment.
    This approach was based on decades of judicial and OCC 
precedent which looked to the economic substance of the 
transaction rather than only its form, to determine whether it 
is permissible. Leasing arrangements, found to be permissible 
because they are functionally interchangeable with a secured 
loan, are a long-recognized example of this approach. Let me 
again stress that by statute, national banks have only limited 
authority to make real estate and equity investments. This 
limited authority precludes national banks from engaging in the 
real estate development business or the type of equity 
investment activity that would breach the separation between 
banking and commerce.
    However, this same authority does enable national banks to 
take different types of direct and indirect interest in real 
estate in connection with conducting their own banking 
business. Over the past century, both the courts and the OCC 
have interpreted this limited authority to permit or prohibit 
particular types of activities based on particular facts. This 
limited authority helps to maintain the fundamental separation 
of banking and commerce that distinguishes our Nation's banking 
system.
    Please be assured that the OCC fully recognizes these 
limits of national banks' authority with respect to real estate 
activities and will abide by and apply those standards 
consistently to all national banks.
    I thank you for the opportunity to appear before you today 
and I would be happy to try and answer any questions you may 
have.
    [The prepared statement of Ms. Williams follows:]

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    Mr. Platts. Thank you, Ms. Williams. We appreciate your 
statement.
    We are pleased to have been joined by the full committee 
Chair, Chairman Davis. We will now move to questions, and in 
deference to my chairman, would you like me to go first or 
would you like to kick it off?
    Chairman Davis is recognized for the purposes of 
questioning.
    Chairman Tom Davis. Thank you. Is there a formula that OCC 
uses to determine the cost of real estate assessment?
    Ms. Williams. We have a standard that we apply. It is not a 
formula, it is a standard, it is a uniform standard that is 
derived from Section 29 of the National Bank Act that refers to 
real estate that is necessary in the bank's accommodation in 
the transaction of its business. Generally that standard has 
been articulated by the courts to look to property that is 
acquired in good faith to serve legitimate operational needs of 
a bank's own banking business. And one of the factors that we 
look to in determining whether the property is acquired or 
developed in a way that meets that test will be the extent of 
the bank's own use of that property. So we'll look at the 
percentage of office space or the percentage of lodging space 
or the percentage of the facility that is going to be used by 
the bank.
    Chairman Tom Davis. Have there been any instances that 
banks have violated its good faith agreement?
    Ms. Williams. In the history that I am aware of, there are 
occasional situations where through the supervisory process we 
become aware that a bank's use is not what had been represented 
to us, or the use appears not to be consistent with holding 
that property for legitimate use for bank operations. In those 
circumstances, we have standards in our regulations that treat 
that property as what is called OREO, Other Real Estate Owned. 
That is required to be divested within 5 years with the 
potential for another 5 year extension. So when that holding is 
non-conforming, it will be required to be divested.
    Chairman Tom Davis. Did the process that was used to issue 
the December 2005 letter differ from the normal OCC process?
    Ms. Williams. No. No, sir, it did not.
    Chairman Tom Davis. Also, I read your testimony, you note a 
key factor in allowing the financing of the windmill was so the 
bank could take advantage of energy tax credits. Are banks the 
only ones that can take advantage of that, or is that open to 
everybody?
    Ms. Williams. The tax credits are available where a 
particular entity holds an equity interest in a project. So in 
order for the bank to provide the financing at a lower cost for 
the project, the bank needed to be able to take advantage of 
the tax credits. So those tax credits are not unique to banks.
    Chairman Tom Davis. Let me just ask, because I am trying to 
understand, the simple fact that a letter was issued, does that 
mean that it goes beyond the previous precedent that had been 
established, or is that basically status quo? What does the 
letter mean versus no letter?
    Ms. Williams. We have several standards that we apply in 
determining whether we publish a letter as an interpretive 
letter. One of those standards is where we are applying pre-
existing analysis and precedent, but to a different set of 
facts, a new set of facts. So it doesn't mean that this is a 
new precedent. In this case we determined to publish these 
letters because we were applying existing standards and 
existing precedent, but the facts that were being addressed 
were just different, yes, sir.
    Chairman Tom Davis. When interpretation of a letter is 
made, do you have a notification process that you follow after 
that?
    Ms. Williams. What we do when we issue an interpretive 
letter, those are published, we have a monthly publication and 
they are posted on our Web site.
    Chairman Tom Davis. Thank you.
    Mr. Platts. Let me followup on one of the questions on the 
issue of good faith, which clearly is referred to repeatedly in 
these cases. You said if there is followup and there is a 
finding of, in essence, bad faith, they are not doing what they 
agreed to, the penalty is that they have 5 years and perhaps 10 
years to divest that property?
    Ms. Williams. That is what is provided for in our 
regulations, yes, Mr. Chairman.
    Mr. Platts. So is there any financial penalty to the bank 
for not doing what it said it would do?
    Ms. Williams. The other possibility is, of course, if we 
find that the holding and the circumstances they represented, 
true bad faith, we can take the position that the holding and 
the conduct of the bank represented a violation of law and we 
have the ability to take a variety of enforcement actions 
against the bank based on that, yes, sir.
    Mr. Platts. How is that different than saying it is not 
what they said it would be, and in 5 years, it is something 
more egregious?
    Ms. Williams. You could have a variety of circumstances 
which perhaps are not necessarily reflective of bad faith, but 
would cause a property not to be used in the way that it was 
initially projected to be used, and therefore not to qualify 
any more as bank premises. When it stops qualifying for bank 
premises, that is when at the very least divestiture 
requirements begin to kick in.
    Mr. Platts. Maybe I will back up to kind of get a broader 
approach. I may come back to that same issue. But a couple of 
key issues that are definitions or terms here, one of which is 
bank premises. Is that defined anywhere in the statute or 
regulation, or is it more a case by case decision by the OCC?
    Ms. Williams. It is a legal term, it is referred to in our 
regulation. But it is a legal term that is used to capture a 
type of property holding that is permitted under Section 29 of 
the National Bank Act. And in general, as interpreted by the 
courts and by the OCC, a bank premises constitute property that 
is acquired or that is developed to serve legitimate 
operational needs of the bank's own banking business.
    Mr. Platts. As it applies to specifically the case in 
Charlotte with the hotel, it was decided that the hotel was 
connected sufficiently to the bank because of using what was 
referred to originally as 50 percent of the rooms for bank 
visitors, staff, that would be considered bank premises because 
of that use of the hotel?
    Ms. Williams. Because of the level of projected committed 
use of the hotel by bank officials, bank visitors, current and 
prospective customers.
    Mr. Platts. One specific question, in the chart you 
provided in that cases, it references 37\1/2\ percent versus 
50.
    Ms. Williams. Yes, sir.
    Mr. Platts. Why the discrepancy?
    Ms. Williams. One is based on the projections of what the 
likely rate of occupancy would be. The projections were not 
that every single room in the hotel would be filled every 
night. So based on what the projected occupancy rate was, the 
bank's projection was that they would have bank business 
customers occupying 50 percent of the occupied rooms.
    Mr. Platts. Versus 37 percent of all rooms?
    Ms. Williams. That is correct.
    Mr. Platts. OK. In that chart it seems that the percentage 
of use, whether it be rooms or office space, runs as low as 5 
percent in one of the cases referenced, a 1987 case. Is there a 
formula that gets to, 5 percent is a pretty small fraction 
versus 50 percent of the rooms or even 25, 40 percent?
    Ms. Williams. Five percent would be unusual, and I think 
there is a situation where it might get that low. Usually, and 
this is just a rule of thumb, where the projected use gets 
below 20 percent, that is going to get a very close look from 
us. But it is a very fact-specific sort of analysis in each 
case.
    Mr. Platts. I want to maybe walk through the process in 
this case again with the hotel. The bank comes and says, we 
want to build a hotel right adjacent to our headquarters, and I 
think I am safe in saying the proposal was to build that hotel 
in another State, is it safe to say that would not----
    Ms. Williams. I think that would not have made it off the 
ground, yes, Mr. Chairman.
    Mr. Platts. In this case, it was adjacent. And in the 
belief that half the occupied rooms would be used by banks, it 
was decided it is bank premises and consistent with the bank's 
operation. My understanding is in some of the statutes and 
regulations that the language is that temporary lodging of 
employees, customers, bank officers, where suitable commercial 
lodging is not readily available, is a key factor here.
    Ms. Williams. That is a standard that is set out in our 
rules as an example that we put in the regulations of a 
situation that would be acceptable bank premises. But the 
regulation is not exclusive. And the regulation lists the types 
of uses in the rule as bank premises includes this sort of 
thing. But we were clear when we promulgated the regulation 
that was not intended to be an exclusive list or to eliminate 
situations where we would look at proposed uses on a case by 
cases basis.
    Mr. Platts. So if a bank is looking at a hotel, then, they 
do not have to, there could be a hotel across the street that 
is two-thirds empty and that is not factored into, they don't 
have to take that into consideration whether they can justify 
then building a new hotel of their own?
    Ms. Williams. I think we look at all of the facts and 
circumstances that are presented in the representations about 
how the bank is going to use, in the case of the hotel, use 
that hotel for the particular use of their bank visitors. In 
this case there were representations about in some cases, 
difficulties about finding sufficient accommodations of the 
types that they were looking for for their visitors available 
proximate to the corporate headquarters.
    Mr. Platts. What level of detail is required, 
documentation, as far as occupancy rates, of other hotels, 
proximity, is that required or is that just what they choose to 
submit?
    Ms. Williams. The process in these cases involves, once the 
issue is identified, a very robust back and forth between both 
the legal staff and our supervisory staff and personnel of the 
banks involved to understand exactly what they are proposing to 
do and to make sure that we have thorough support for the 
rationale that they are advancing. We have seen marketing 
studies and marketing analyses and things like that.
    Mr. Platts. I have a list of more questions, but I want to 
give the ranking member a chance to jump in here and we will 
come back after he is done. Mr. Towns.
    Mr. Towns. Thank you, Mr. Chairman.
    Let me begin by, can you explain more about the factors 
that were included in the decision to allow the development of 
32 condominiums, as stated in your interpretive letter 144, is 
it true the bank will not be using these condos for any 
corporate use?
    Ms. Williams. Those floors or portions of floors are 
proposed to be sold off. And here I think it is important to 
recognize what the bank was seeking to do. The bank needed 
office space in the footprint of its corporate headquarters. 
There was property there, currently occupied by some 
dilapidated buildings and stores. In order to have an 
economically viable building with offices for the bank, there 
was a need to build a certain number of offices.
    Market studies indicate that there were limits on the 
likely occupancy of those offices. Additional space for hotel 
lodging was a critical element of the overall economic 
viability of the building. And then the, I think 30 some 
condominiums were to be sold off and the returns from that were 
also a critical piece to the economics of the transaction, why 
it made rational, economic sense for the building in the first 
place, in order to provide the office that the bank was 
seeking.
    Mr. Towns. That wouldn't be considered speculation?
    Ms. Williams. No, sir.
    Mr. Towns. Why not?
    Ms. Williams. Because what the bank is doing there is 
developing, creating a building where the bank is going to be 
using a substantial portion of the offices and has committed to 
use a percentage of the hotel space. This gets to the test of 
looking at what is the motive of the bank here. The motive of 
the bank is to have facilities that the bank can use. The sale 
of the condominium space was an element of the overall 
economics of the transaction. It was something that was 
represented to us as being an important factor in some of the 
local tax incentives and encouragement that was received from 
the city of Pittsburgh in support of the project.
    Mr. Towns. I just find it hard not to see how that is not 
speculation, but maybe I just need more time with you to go in 
and talk about it. But it really appears to be, I want you to 
know that, anyway.
    Aside from the OCC ruling in December on the wind farm, are 
there broader circumstances in which ownership of energy 
projects should be permitted? Doesn't this ruling give banks a 
reason to become creative with their financing and lending 
schemes for projects that are just too risky? Wasn't the energy 
firm able to make a loan payment to structure other finances? 
Would you help me with this?
    Ms. Williams. Certainly. The key here is the availability 
of the particular tax credit, which is keyed to the beneficiary 
or the immediate beneficiary of the tax credit having an equity 
type interest in the project. With the tax credit, the bank was 
able to lower the cost of the financing that it provided to the 
alternative energy project. The bank could have made a loan. It 
would have cost the alternative energy project more. The 
purpose behind these tax credits is to encourage financing and 
development of these alternative energy projects. So this was a 
key consideration for us in looking at the overall structure of 
the transaction.
    We also absolutely insisted that the structure of the 
financing be designed so that it was in all material respects 
economically identical for the bank as if it were making a 
loan.
    Mr. Towns. Thank you, Mr. Chairman. My time is expired. I 
hope we will have another round? Thank you.
    Mr. Platts. The gentleman from Pennsylvania, Mr. Kanjorski, 
is recognized.
    Mr. Kanjorski. How are you, Ms. Williams?
    Ms. Williams. Fine, thank you, Congressman.
    Mr. Kanjorski. I am so happy that we have the opportunity 
to examine this issue, because I am one of those individuals 
that has the pleasure of serving on this committee and also the 
Financial Services Committee. I participated in the original 
drafting of H.R. 10, which we thought had put the issue to bed.
    But listening to your responses to my colleagues, it seems 
to me that OCC is determined to use these mechanisms and create 
other mechanisms to foster investment in energy and do other 
things that can be justified or structured in such a way as to 
meet the interpretive letters that were issued, or to allow for 
further interpretive letters without further consideration or 
statutory law change on the subject. Is that correct?
    Ms. Williams. Congressman, I respectfully disagree. These 
are letters that are very fact-specific, that deal with a very 
narrow set of circumstances, and a very narrow type of 
authority that national banks have to hold certain interests.
    Mr. Kanjorski. Why do you think that what is being 
suggested in Pittsburgh could only be done by the bank? Why 
couldn't a developer or real estate firm or some other entity 
do that?
    Ms. Williams. The situation in Pittsburgh involved property 
that the bank already owned. It was in the footprint of its 
corporate headquarters.
    Mr. Kanjorski. Could they sell the property and then become 
a tenant?
    Ms. Williams. That is a theoretical possibility. But it has 
been recognized by the courts, going back over a century----
    Mr. Kanjorski. They have a right to develop an office 
building. I grant that.
    Ms. Williams [continuing]. In a way that is----
    Mr. Kanjorski. They are putting condos in, and a hotel, and 
because they have visitors or users of the bank, they need 
hotel facilities or employees, that is used as a justification. 
Well, I found out the other day that somebody is coming into 
town to use that hotel, and they left their car in Orlando, FL. 
So they needed to rent a car. So I have a rental company that 
wants the bank to rent cars to the employees. Why isn't that an 
acceptable practice?
    Ms. Williams. The authority that we look to in connection 
with the bank premises letters that we issue is very specific 
to bank premises real property used in connection with the 
bank's own business operations. Not a car rental business.
    Mr. Kanjorski. The prohibitions that we included in H.R. 
10, didn't it strike you that they were there for a purpose, 
and that before a regulator starts making interpretive letters 
that they may have a need to address the intent of Congress, 
maybe talk to some of us that were in that conference that put 
that language together? You are aware of the fact that there 
was a great fight over mixing commerce and banking, and that 
there were a lot of suggestions, I think it was 20-10, 10-5, or 
10-90, all kinds of different, and it came out of that 
conference, there was going to be no mixing of commerce and 
business. If you were in banking, you were 100 percent banking. 
If you wanted to get into business, get into business, but 
don't do it through a bank.
    When did you think that idea of the Congress and their 
intent of legislating changed?
    Ms. Williams. Congressman, we never thought that changed. 
What we have said is that the National Bank Act has very 
limited provisions in it that allows national banks to hold 
real estate in connection with their own banking business 
operations.
    Mr. Kanjorski. Do you think a hotel and apartments, 
construction of apartments is part of the banking business?
    Ms. Williams. What we concluded was a mixed use building 
that had a substantial percentage of office buildings with a 
percentage of those that would be occupied by the bank for 
offices. A hotel and the sale of the sort of excess space, the 
condominiums, where the bank would no longer have any interest 
in that particular portion of the building, that package was 
needed in order for the building project to be economically 
viable. And that the bank demonstrated legitimate business need 
for those offices and the hotel space.
    Mr. Kanjorski. The hotel space? I just, is the hotel space 
going to be sold off to someone else, or is the bank going to 
operate those?
    Ms. Williams. Neither. The hotel space, what was 
represented to us is the hotel space will be operated by an 
independent third-party management.
    Mr. Kanjorski. But owned by the bank?
    Ms. Williams. The building is owned by the bank, yes, sir.
    Mr. Kanjorski. So the hotel will be owned by the bank, is 
that correct?
    Ms. Williams. The hotel premises, the physical building, 
all of that, except what is sold off, will be owned by the 
bank. But the bank is not going to be operating the hotel.
    Mr. Kanjorski. That's a definition of extension of banking 
business.
    Ms. Williams. The bank is not going to be operating the 
hotel.
    Mr. Kanjorski. Anybody who owns a hotel know that you can 
hire an operator. You are still in the hotel business. You have 
just contracted out the operations, that is all. You are in the 
hotel business, you are in a property that is a hotel. It is 
not an office building, it is not a bank. And suddenly you now 
have extended this interpretive language to allow that to 
happen.
    How about if they want to put a Hard Rock Cafe in there, 
they have 40,000 square feet? Is that OK?
    Ms. Williams. Congressman, I think what you see in many, 
many situations in many cities around the country is that banks 
do lease out to other companies that operate restaurants and 
coffee shops, their first floor space.
    Mr. Kanjorski. In their buildings that they justifiably 
have a right to build because they have a need for their 
banking business. And I don't want to be so restrictive as to 
stop that. I just interpreted this and the windmill project as 
going way over the edge, that the regulator had found what they 
considered in interpretive letters a right to start encouraging 
the banking institutions to get into the real estate investment 
business. And that is what they are in.
    Now, the bank, if it wants to do that, all it has to do is 
give back their Federal charter and become a private bank, and 
you can build all the hotels you want to, directly. Why should 
we be underwriting to the full faith and credit of the United 
States the deposit insurance for that bank who is going out and 
not only building office space that they immediately need but 
building condos and hotel space that isn't for their business 
purpose? Why should we subject the liability of the American 
taxpayer to that type of a business venture?
    Ms. Williams. Let me reaffirm that we very much recognize 
the fundamental separation between banking and commerce in this 
country, and that we recognize the limits, the substantial 
limits that apply to the ability of banks to hold interest in 
real estate. We absolutely will abide by those limits in the 
way that we apply them to all national banks. There was no 
intent and no design for these letters to constitute or to 
signal that banks are going to be getting into the real estate 
development or real estate investment business.
    Mr. Kanjorski. We in Congress wouldn't even have known of 
these private interpretive letters except, and I can't even 
tell you how it came to my attention, but it came to my 
attention by chance. Other than that I would have never know 
that a bank is going to build a windmill farm and build a 
hotel. And let me tell you, I am very sympathetic to this 
particular bank. It is in my home State of Pennsylvania. So if 
anyone would want to, and certainly Pittsburgh, and I know 
Pittsburgh needs the redevelopment, I am not opposed to 
redevelopment, I am not opposed to the bank getting involved 
and lending money to developers to build property.
    What I don't like about the idea is I think the OCC has now 
found, through interpretive letters, the ability to expand the 
intent of Congress without coming back to Congress to find out 
whether they are acting in accordance with their mandate under 
the statute. And it just seems to me that the Comptroller had 
the duty that when this question needing an interpretive letter 
comes up, that could merge banking and commerce in some way 
that was not desirable under H.R. 10, that somebody down there 
should have said, you know, maybe we should pass this through 
the proper authorities in Congress who passed this law and give 
us this statutory right to exist instead of what I consider 
amending the law, and doing it in quite a secret manner, which 
is very disappointing. I can't imagine what other interpretive 
letters must be down there, but I will be they are dingers.
    Ms. Williams. If I could address both of those just 
briefly. The interpretive letters are published, they are 
published monthly in a compilation of interpretive letters, and 
they are also posted on our Web site. We have absolutely no 
desire or interest in being secretive about this. In fact, we 
probably bend over backward to publish----
    Mr. Kanjorski. If I may interrupt you, there were several 
interpretive letters in the 1990's that were not published on 
your Web site and were only published after we raised this 
question. Those letters, no one outside your agency knew of 
their existence, except the principal parties involved.
    Ms. Williams. Congressman, respectfully, they were 
available in Lexis-Nexis which is a computer research data 
base.
    Mr. Kanjorski. Well, I check it every night after dinner. I 
mean, I wouldn't go to sleep if I didn't examine every 
interpretive letter that may be on Nexis. [Laughter.]
    Ms. Williams. I think it is very important for me to be 
very clear here that there was absolutely one, no intention of 
doing anything with any secrecy. We published the letters, it 
was our intention to be entirely transparent. And we did not 
view the positions that we took in the letters to be a breach 
in the separation of banking and commerce.
    Mr. Kanjorski. One more question, Mr. Chairman?
    Mr. Platts. One more. As my senior member of my State 
delegation, of course. [Laughter.]
    Mr. Kanjorski. Would you be amenable to requesting a 
hearing before the Financial Services Committee to take this 
particular issue up and have a full hearing on this whole 
issue?
    Ms. Williams. Congressman, I am really not in a position to 
take a position for my agency on that question.
    Mr. Kanjorski. Can you tell me what you would recommend to 
the Comptroller?
    Ms. Williams. I would want to talk to the Comptroller on 
it. I am not in a position to state a position on that.
    Mr. Kanjorski. We are having a hard time getting that 
hearing. We have been requesting it for a number of years over 
there. I can assure you one thing, come November 7th, if there 
is a change, there will be a hearing.
    Mr. Platts. Mr. Kanjorski, thanks for your questions. As 
this hearing shows, you will have to wait until November 7th. 
We are glad to have the hearing today.
    I do want to followup on one of the issues though about the 
publication letters, that they are public. But they are public 
once they are a done deal. They are public that here is the 
decision, and it has already been resolved, that there is no 
publication of it while it is an ongoing matter for the public 
or Members of Congress to have a role in input to that, is that 
a fair statement?
    Ms. Williams. Mr. Chairman, the process that we follow, it 
is the same process that the Federal Reserve, the FDIC, the 
OTS, follows with respect to requests for interpretations of 
existing law. That is that the income requests are not 
published, but the answers, and in our case, if they make new 
precedent, if it is a new precedent or if it applies existing 
precedent to new facts, they absolutely are published at that 
point.
    Mr. Platts. Is there a prohibition from publishing the 
income requests?
    Ms. Williams. There may be issues in connection with some 
of the material that we receive, that it may be confidential 
business proprietary information. There may be issues under, 
for example, the Trade Secrets Act about our ability to make 
them publish.
    Mr. Platts. I very much respect parts of it certainly would 
be proprietary. But given that it is an action that is going to 
in essence rule on what the law means, it seems that we would 
be better to err on the side of public disclosure that there is 
this question of interpretation out there and anyone who would 
want to have input it would seem wise to allow the public to 
have that input.
    But I want to get to a number of other questions, because 
of the time that we have. In talking about the Pittsburgh case, 
you talked about the motive of the bank is what you look at. It 
seems like that is ignoring the motive of the bank is 
appropriate within the requirements of the law, in other words, 
to Mr. Kanjorski's point that separation of commerce and 
banking, the bank could have great motives, this is really 
about us having this facility, but the impact may be on 
commerce, whether their motive is sincere or not.
    I think it is fair to say, using the condominiums, the fact 
that there is going to be 32 condominiums for sale on the 
market, that is going to impact commerce, other condominiums on 
the market in downtown Pittsburgh. Is that a fair statement?
    Ms. Williams. Mr. Chairman, I don't know that I could speak 
to the impact on the condominium markets in Pittsburgh.
    Mr. Platts. You just, you can't tell me whether putting 32 
condos for sale here will impact the price of 32 across the 
street or down the block? I mean, that is a rhetorical question 
almost, really. I think it is a given that those condos are 
going to impact the market in that community.
    Ms. Williams. The key with respect to the condominium piece 
of this particular building was that the ability to sell those 
condominiums to, in this case----
    Mr. Platts. To reduce the cost of the whole structure?
    Ms. Williams [continuing]. Of the overall structure, to get 
the bank out of a role where you might argue that it was even 
more involved in commerce, if it were in charge of leasing 
those out.
    Mr. Platts. But the fact that they are building and then 
selling them certainly is going to impact that market. I will 
answer my question, and say yes, which I will say kind of 
argues that it is commerce. But the premise for allowing it, if 
I understand it, was to, it was an element of the overall 
economics of the project, to bring down the total cost of the 
project?
    Ms. Williams. That is correct.
    Mr. Platts. So do you look at the profit margin of the 
project in reviewing the merits of what all is included in the 
project?
    Ms. Williams. We look at the representations that the bank 
provides us and their studies and their marketing materials 
about what were the components needed to have a viable project 
in this case. And we had information about the levels of office 
use, occupancy, the levels of hotel room occupancy and looking 
sort of cumulatively at the potential uses of the building, the 
overall economics of the building, when you cumulate those 
uses.
    Mr. Platts. So as part of the review, it was that in 
reviewing the merits of the project, you look at, here is the 
package they are putting together they think is viable. The 
alternative is what they really want is office space, 20 
percent or so, and then some hotel rooms, right? You look at 
what would it cost the bank to just build an office building or 
lease office space and to just rent hotel rooms to make that 
comparison? Because that really, if you don't do that, it is 
hard to know the economics, to assess the economics of the 
project.
    Ms. Williams. What we look at is here the bank has a piece 
of property that it already owns. And it is looking at how it 
can use that property to get the uses that it needs. And the 
facts in this particular case were that in order to get the 
uses that the bank wanted to get out of that particular 
property, that the project needed to be this multi-use type of 
building.
    Mr. Platts. That is assuming that in taking this property, 
another option was to sell it to somebody to develop the office 
buildings and hotel, and then they lease back. Is that part of 
the analysis of them getting what they need out of that 
property?
    Ms. Williams. When we look at a situation like that, one of 
the things that guides us is the way that the courts have 
construed the ability of national banks to hold and develop 
property that they own. The bank here didn't go out and buy 
this yesterday. They have held it.
    Mr. Platts. So if they had gone out and bought it 
yesterday, that would have made it different?
    Ms. Williams. We would have, again, looked at the facts and 
circumstances there and evaluated. But here they have property. 
And the question is, or the standard is that they are allowed 
to use it as a rational owner of property would use property in 
order to achieve the desired and permissible use.
    Mr. Platts. For the bank, for its bank operations?
    Ms. Williams. Correct.
    Mr. Platts. But it kind of comes back to where I was 
earlier, in your 1996 rule that talks about real estate, owning 
real estate, and the reference about the temporary lodging with 
the hotel, in Charlotte, where suitable commercial lodging is 
not readily available. If I back up prior in that regulation, 
it says a national bank may invest in real estate that is 
necessary for the transaction of its business.
    So the first question before you can get into what type of 
real estate it is, is this necessary. That is where I think we 
are trying to get to the issue of is it necessary to build your 
own building that requires hotel and condos to be part of it to 
justify the economics of it, or is it OK to just lease space? 
Once you cross that threshold and say, yes, you have to build 
your own building, I think then you get to the danger of the 
statutory prohibition against commerce. I think that is what we 
are really going after.
    Let me give you an example of where would the limit be. 
Under my understanding of the regulations and the law is, it 
could be not just for temporary lodging, but it could be 
housing for bank officers, that if a bank wants to build a home 
for the bank president, that would be permitted under the 
regulations?
    Ms. Williams. I doubt that would be the case, but we would 
have to look at the particular situation, if there was a reason 
why there was a banking business need to do that.
    Mr. Platts. If the banks says, well, we want to provide all 
of our senior management free housing, and so we are going to 
build these four homes, how is that different than saying, we 
want to provide temporary housing for our employees or our 
visitors when they come? I would think you could make that 
argument, so if I can build a hotel, I can build the houses. 
Now if I build the houses, to make it commercially viable to 
build these four, I am actually going to develop 20 homes in 
this development and sell 16 of them, why does that analogy not 
work?
    Ms. Williams. I think because it is missing the kind of 
linkage that we had here to the operational business need of 
the bank to have the particular facility. The bank can 
compensate its executives in such a way that they can go out 
and buy nice, nice homes.
    Mr. Platts. They can reimburse their employees to go rent 
rooms in hotels not owned by the bank. How is that different?
    Ms. Williams. Well, again, here we had a situation where 
the bank had property----
    Mr. Platts. But the issue of having property I don't think 
is the first question. The question is, is there another 
alternative to hotel space then buying or building our own?
    Ms. Williams. And the question that we answer first, guided 
by the way the courts have looked at this statutory standard, 
is not, could they do it another way. But it is whether the 
bank is proposing in good faith a type of development that is 
consistent with the bank's legitimate business needs.
    Mr. Platts. But shouldn't the question be, can they do it 
another way? If I am reading the 1996 rule correctly, it says 
investment in real estate necessary for the transaction of 
business. A national bank may invest in real estate that is 
necessary for the transaction of its business. I think the key 
question is, what is necessary. So that should be the first 
question, not how are they going to do it, but is it necessary 
to do it.
    Ms. Williams. I have been avoiding trying to sound too much 
like a lawyer here and getting into the history of certain 
terminology under the National Bank Act.
    Mr. Platts. That is probably one of the challenges. We are 
all looking at the language differently.
    Ms. Williams. The word necessary has a fairly substantial 
history of how it has been construed and used in the National 
Bank Act context. It has not been construed as meaning 
essential or indispensable. It has been construed as being 
useful, convenient, useful for the conduct of the bank's 
business. And so we are not, when we look at that word 
necessary, for us as OCC lawyers, we are reading it against the 
backdrop of that case law.
    Mr. Platts. If I look up the word necessary in the 
dictionary, off the top of my head I would think it would be 
imperative, critical, I don't have a dictionary here, but it is 
pretty plain English, isn't it? To interpret it that it can be 
subjective in a pretty broad sense is contrary to what it says.
    Ms. Williams. This is a situation where that is not our 
interpretation. It is the interpretation that has been 
developed by the Federal courts over the years.
    Mr. Platts. Since 1996, since that ruling?
    Ms. Williams. Prior to.
    Mr. Platts. But this is a ruling in 1996, a new rule, 
right?
    Ms. Williams. But when we use that term, in the banking 
context, in the context of the National Bank Act, it has a 
meaning the way the courts have construed it in the past.
    Mr. Platts. It has been a while since I was in law school, 
and I haven't practiced in a while. But using one word in a new 
setting doesn't necessarily automatically mean the courts will 
look at that word. Because here it is pretty straightforward, 
it is necessary for the transaction of its business. That seems 
like pretty straightforward English to me.
    But we could probably go back and forth and I appreciate, 
you have been very kind, helping us try and get to the bottom 
of what you believe but how we interpret it.
    Ms. Williams. And if I could just add one other thing 
concerning the particular regulation. The regulation is not 
designed to be an exclusive list of permissible bank premises. 
It speaks in terms of our examples, including those----
    Mr. Platts. Yes, but that first part, that it is necessary 
for the transaction of business, is a mandate. That seems to me 
the way it reads. But I have one more example, and I want to 
allow my colleagues to have their second opportunity. Maybe the 
house was an extreme example. Let's talk about a new branch of 
the bank. We want to be right here in the hub of all the action 
in the community. So we propose, we want to build a new mall 
with the center of the mall being our bank. Are we allowed then 
to develop that mall, because the center of the mall we are 
going to make sure is ours and we are going to sell off the 
rest of the mall once we develop it? Is that within the premise 
of banking premises?
    Ms. Williams. I think not, because the way that we would 
look at that situation, the way you have described it, we would 
look at the relative use of the footprint of the whole property 
that you are describing, how much of that is bank branch, how 
much of that is other.
    Mr. Platts. What if it is just five stores, bank and four 
stores, so percentage, it is 20 percent as in the hotels, or 5 
percent? If it is not 1 percent, but it is our branch and four 
other similar size stores, not big department stores, but are 
we allowed to develop the property? I think that is what goes 
to this whole issue, is our interest in, what is or what is not 
allowed, and when do you get to that commerce?
    So I would see that very much as commerce, developing a 
shopping center, even a small shopping center. And I don't know 
how you separate that from 20 percent of hotel rooms we are 
going to use or 37 percent of hotel rooms. I don't know how you 
separate that. I think that is a concern here. It seems like 
there is no defining line of commerce yes or no, but it is a 
very, very dull shade of gray of what is allowed or not 
allowed.
    Ms. Williams. It is, in many, many respects, as I said, 
these are very fact-specific determinations. In the situation 
that you describe, we would look at the percentage of the 
property that is going to be used for the bank branch. We would 
ask, did you have to buy all of it, if it is an acquisition?
    Mr. Platts. Final question, I promise, before my colleagues 
here, but wouldn't again the first question be, well, can't you 
lease that space from a developer that owns and buys the land 
and develops it and you lease it? Because that is clearly then, 
somebody is taking the risk of the development and getting into 
the commerce of which you are getting the use of that commerce 
through your lease? It seems like that should be the first 
question, given that the Congress has said no commerce. It 
seems like we are skipping that question to say, well, let's 
look at percentages, not, is it commerce or not, which should 
be up front.
    Ms. Williams. And I think the scenario you are posing, 
where the bank is acquiring the property and asking that 
question, really does highlight how fact-dependent these 
situations need to be and because of that, how narrow this sort 
of authority is. It is just not a general authority for banks 
to go out and do real estate investment and development.
    Mr. Platts. I agree it is not an authority, but it 
certainly provides a pretty strong precedent, whether it is 
called that or not, that if you didn't allow others to do it 
they would say, you are treating us unfairly and that is 
unequal treatment under the law. I guess, Mr. Towns, did you 
have other questions?
    Mr. Towns. Yes. It appears to be that you are involved in 
commercial development and paying for your headquarters at the 
same time. That is what it appears to be. So maybe, Mr. 
Chairman, if we could just get a summary of the case law, just 
these three decisions, maybe that would help us some. I would 
like to make a request.
    Mr. Platts. Ms. Williams, if you could provide that to us 
in writing.
    Ms. Williams. Certainly.
    Mr. Platts. We will keep the record open, the case law that 
OCC looked at in reviewing these requests, that is what you are 
asking for, Mr. Towns?
    Ms. Williams. Absolutely. We would be happy to do that.
    Mr. Platts. Thank you.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman. You didn't quite 
answer one question for me. The relationship between the hotel 
and the bank, is that a management contract with some entity to 
manage the hotel?
    Ms. Williams. I believe it is, sir.
    Mr. Kanjorski. Does that entity have a lease on that space 
for a term of years? Does it pay an agreed-upon amount to the 
bank?
    Ms. Williams. Congressman, I would have to back to you on 
the specifics of that.
    Mr. Kanjorski. Well, wouldn't you think that would be 
important as to who has the risk? We are talking about commerce 
and separating it from banking. And commerce is the risk side 
of business. Banking is supposed to be the conservative, safe 
side. But it seems to me that if you went through all these 
machinations, if you really wanted to follow the intent of the 
law, you would have said, well, you have to enter into a lease 
for a term of years with the operating company so that we are 
assured so much money will return and that won't risk our 
depositors.
    If you don't have a lease, they are at-will, able under the 
contract to be dismissed and another one hired, so you can be 
very speculative there for profit purposes. That is commerce. 
That is not banking. Didn't that come to your attention?
    Ms. Williams. One of the challenges here, when you are 
talking about how the particular type of facility that is being 
proposed could be owned and the interests the different parties 
might have in it or the contracts----
    Mr. Kanjorski. They own the building. They are also in the 
hotel business unless they lease out that to someone who has a 
set term with a set amount and they are assured of that 
repayment, they are not involved in the business, they are not 
going to get the upside or the downside, they're just going to 
draw the lease payment.
    Ms. Williams. Depending upon the party that enters into the 
lease with the bank under the hypothetical that you are 
proposing, and depending upon what arrangement that party might 
have with the management company, the risk to the bank as the 
building owner is not necessarily going to be less with the 
variations on how this operation might be structured with the 
different contractual relations.
    Mr. Kanjorski. Would you agree that the bank should be 
allowed to lease it out to the president's brother-in-law, who 
is penniless?
    Ms. Williams. Not the president's brother-in-law, probably. 
But there are different ways that this could be structured.
    Mr. Kanjorski. The fact of the matter is, the examiners 
here have to make an examination as to the soundness of this 
deal, don't they? So they would have to do due diligence, they 
would have to search out who this operator is, what their 
experience is, what kind of assets they have in support of the 
situation, and what are the vital terms of the contract? Is it 
profit sharing with the bank? Do you know whether it is profit 
sharing?
    Ms. Williams. I would again want to get back to you to make 
sure that I gave you a completely accurate answer. But the 
examiners did look at the materials that the bank had.
    Mr. Kanjorski. I assume they did. And that raises the next 
question that I have. Have you put a new drive on to hire 
expertise, entrepreneurs over the OCC? I have never met a bank 
examiner that would be able to tell me what the likelihood of 
success in a windmill farm would be and what the profits could 
be anticipated or expected and what all the foibles are to 
entering into that energy business. It is a highly speculative 
business.
    Ms. Williams. What I noted in my written statement is that 
the particular financing in question has a substantial 
resemblance to certain oil and gas production loans. Also, that 
one of the fundamentals of our issuing the interpretive letter 
was that the financing had to be structured so that it was 
economically functionally equivalent to the situation had the 
bank extended a loan. So yes, we do have examiners that are 
quite knowledgeable in this type of financing.
    Mr. Kanjorski. Why didn't they just extend a loan to the 
windmill operation?
    Ms. Williams. The desire here was to be able to lower the 
cost of financing to the alternative energy project. And----
    Mr. Kanjorski. They have a right to charge a lower rate.
    Ms. Williams. In order to lower the rate from what would be 
their ordinary charge for that type of commercial credit----
    Mr. Kanjorski. They are looking at the profit to justify a 
lower rate, isn't that a fact?
    Ms. Williams. They are looking at their hurdle rate for 
their use of capital.
    Mr. Kanjorski. You don't see that they are getting that 
upside of profit in these deals and that is why they can reduce 
the interest rates, etc? Because they are participants in the 
business, in the commerce.
    Ms. Williams. They are getting payments that are structured 
to resemble payments on a loan.
    Mr. Kanjorski. Well, maybe you should examine some of your 
loans on other regards, I don't know.
    Mr. Platts. Mr. Kanjorski, could I just followup right on 
that to make sure we understand?
    Mr. Kanjorski. Yes.
    Mr. Platts. The reason that the windmill was structured the 
way it was was to get the tax credits. But is it fair to say 
that the bank is saying, well, because we are going to get 
these tax credits, we can therefore offer less expensive, which 
in essence the tax credits became in place of profits from the 
windmill project, right? So we were getting profits over here, 
i.e., tax credits, and therefore we can charge less?
    Ms. Williams. It was in place of a higher financing cost on 
a loan.
    Mr. Platts. But the reason they could charge less is 
because they were getting the tax credits. I think that is Mr. 
Kanjorski's point, is they are getting a profit above the loan, 
the tax credits from the Federal Government, really, is where 
the profit is coming from. That is what allowed the lower rate 
to be charged. I think that is what you are getting at.
    Mr. Kanjorski. Absolutely.
    Mr. Platts. Isn't it----
    Ms. Williams. I guess I would describe it a little bit 
differently, that the bank is looking for a particular rate of 
return on the financing that it extends. When it puts the tax 
credit benefit into the mix, it can get a lower rate of return 
from the particular project. But yet overall get the rate of 
return that it is looking for as an economic matter.
    Mr. Kanjorski. And one other element. They own the 
property. So if it appreciates, they get the profit on 
appreciation.
    Ms. Williams. No, sir, the bank owns an interest in a 
limited liability company. It will have no upside or downside 
in the value of the underlying real estate. We made that very 
clear in the second legal opinion that we issued to make sure 
that everybody understood that very clearly.
    Mr. Platts. Perhaps one or two. We need to get to our 
second panel here.
    Mr. Kanjorski. You have examiners that have all the 
expertise to get into these commercial examinations and do it 
with the expertise of investment houses, is that correct?
    Mr. Platts. We have examiners that understand this type of 
financing arrangement, and that are quit expert in it, yes, 
sir.
    Mr. Kanjorski. You have, there are three interpretive 
letters here. And just to be sure, until we get an opportunity 
to get back to this at some point, can you give me assurances 
that these three letters will not be used as precedents for any 
other requests that are made for widening this hole or this 
crack between banking and commerce? Or is that something you 
can't confirm?
    Ms. Williams. I don't think the letters themselves will be 
used as precedent. We look to the underlying limited statute.
    Mr. Kanjorski. Can I be assured that neither the Office of 
the Comptroller of the Currency will recognize that three other 
instances certain permissions were given and therefore, if 
another request that those instances would be cited has been 
justified as being within banking necessity?
    Ms. Williams. Congressman, I can't tell you that we will 
never put these in a footnote someplace in a legal opinion. 
What I can tell you is that the underlying conclusions that we 
reached go back to the statute.
    Mr. Kanjorski. So what you are telling me is in your 
opinion, as you have acted and the way you have acted and the 
way you have interpreted, that is the way you are going to go 
and continue unless the Congress of the United States calls a 
section up and rewrites it, is that correct?
    Ms. Williams. No, sir, and I am sorry if I gave that 
impression. If we have any subsequent requests, and I must tell 
you that we have not received anything like this since these 
letters were issued, so they have not served as a catalyst for 
any sort of tidal wave of requests to the OCC to take advantage 
of these positions. We will apply the standards in a narrow and 
careful fashion and we will be very, very sensitive to the 
issue of maintaining the separation of banking and commerce.
    Mr. Kanjorski. Do you consider this narrow, this 
interpretation, narrow?
    Ms. Williams. We do.
    Mr. Kanjorski. Wasn't there a request by J.P. Morgan Chase 
of a similar nature that was pulled after this disturbance?
    Ms. Williams. We had a request for an interpretation that 
dealt with something that is referred to as volumetric 
production payments. And it doesn't have anything to do with 
land. It pertained to intangible interests in certain royalty 
payments and a financing connected to those interests. And that 
is a type of financing that, for example, is allowed in bank 
holding companies.
    Mr. Kanjorski. But that was pulled?
    Ms. Williams. They chose not to go ahead with it, yes.
    Mr. Platts. Mr. Kanjorski, thank you. We are going to need 
to move on. Ms. Williams, we appreciate the interaction. I 
think as you saw from all of us, there certainly seems to be a 
lot of uncertainty of what is or isn't. I understand that it is 
very fact specific.
    But I think the law that Mr. Kanjorski certainly played a 
critical role in is pretty clear, fact specific 
notwithstanding, as in no commerce. I hope that OCC will look 
at that as a starting point, that to me, what the law requires 
or actually prohibits regarding commerce as a starting point, 
not the motive of the bank. You start with, is this allowed 
under the issue of commerce/no commerce. And I think the 
example of these all raise some questions about that.
    But the bottom line is there is certainly a lot of 
uncertainty out there. And I think even the order of the 
decisions being made, two on the same day and the third, but 
the bank, hotel, office space being first and selling condos, 
then a freestanding hotel and then a windmill project is kind 
of like we are going further and further down the line.
    So we appreciate your interaction with us and your service 
at the OCC and the information that was requested regarding the 
lease arrangements, the location as well as the case law, you 
and your staff following up with us, we will keep the record 
open for that.
    Ms. Williams. Thank you. And let me just reaffirm our 
sensitivity to this issue and appreciation of your concerns and 
our intent that the letters in question were very narrow in 
focus and scope and intended to be very narrow in their impact.
    Mr. Platts. Thank you, Ms. Williams. We will break for 
about 2 minutes, just as we reset our second panel, and then we 
will continue with the hearing. Thank you.
    [Recess.]
    Mr. Platts. We will reconvene the hearing with our second 
panel. Before we do introductions, if I could ask you to rise 
and we will swear you in together and then proceed to 
introductions.
    [Witnesses sworn.]
    Mr. Platts. Thank you. You may be seated. The Clerk will 
note that all witnesses affirmed the oath.
    We are pleased to have with us three distinguished 
witnesses: Mr. Ed Yingling, President and CEO of the American 
Bankers Association; and Ms. Cynthia Shelton, Commercial Real 
Estate Broker with Colliers Arnold of Orlando, FL. And for our 
third witness, I am going to turn to the chairman of the full 
committee, Mr. Davis, for an introduction.
    Chairman Tom Davis. I am proud to have a friend and 
neighbor of long standing here, and that is Tom Stevens, who 
lives in the 11th District in the town of Vienna with his wife, 
Lindy. He is the President of the National Association of 
Realtors, which is America's largest trade association, 
representing more than a million members. He has been a realtor 
since 1972. He is currently, as I said, the president.
    He is an active member of our community. He has been 
involved in charitable organizations like the Cerebral Palsy 
campaign of the National Capital Area, the American Cancer 
Society, and numerous others. He has been helping our local and 
State Government to improve on transportation. We dealt with 
him early on, when I was chairman of the board, on a number of 
issues affecting realtors. He is active in the chamber out 
there in Fairfax. I am just very proud to have you here today.
    Mr. Platts. Thank you, Mr. Chairman. We are going to move 
to your testimonies. Again, we are going to give you 5 minutes 
on the clock, if you need to go over a little bit.
    What we are going to do, we expect to have to leave 
probably in about 35 minutes for votes. The vote may come up 
earlier and we would have to go over. What we would like to do 
is get your testimonies in and at least have a good dialog with 
you, Q&A before that, so hopefully we don't have to have you 
stay while we are over there voting.
    So with that, Mr. Stevens, we will begin with you.

  STATEMENTS OF THOMAS M. STEVENS, CRB, CRS, GRI, PRESIDENT, 
NATIONAL ASSOCIATION OF REALTORS; EDWARD L. YINGLING, PRESIDENT 
AND CEO, AMERICAN BANKERS ASSOCIATION; AND CYNTHIA C. SHELTON, 
    CCIM, CRE, DIRECTOR OF INVESTMENT SALES, COLLIERS ARNOLD

                 STATEMENT OF THOMAS M. STEVENS

    Mr. Stevens. Thank you, Mr. Chairman. Good afternoon, and 
thank you for having us testify. Thank you to Ranking Member 
Towns and Chairman Davis for that introduction. I appreciate 
it.
    My name is Tom Stevens, and I am the former president and 
owner of Coldwell Banker Stevens, now known as Coldwell Banker 
Residential Brokerage Mid-Atlantic. I am the 2006 President of 
the National Association of Realtors. I appreciate the 
opportunity to present the views of our 1.3 million realtor 
members on the Office of the Comptroller Decision to expand 
national bank authority to engage in real estate development, 
ownership and commercial banking.
    Last December, the OCC expanded the authority of the banks 
to engage in commercial real estate activities through three 
separate rulings. The first decision allows PNC Bank to develop 
a project involving retail space, offices, a hotel and 32 
speculative condominiums. The second decision approves Bank of 
America's request to develop a Ritz Carlton hotel in which less 
than half of the rooms will be used for its own business 
purpose. And the third decision authorizes Union Bank of 
California to own 70 percent of the equity interest in a 
windmill farm.
    Why have NAR and other industry participants urged Congress 
to hold today's oversight hearing? NAR and others are concerned 
that the OCC has inappropriately expanded congressionally 
established bank powers. In essence, they have created new law 
without public participation and without publication in the 
Federal Register.
    Furthermore, NAR believes the OCC's represent a far 
departure from what is permitted by the National Bank Act, 
which elevates our concern that the rulings will inevitably 
lead to an irreparable breach in the laws separating banking 
and commerce. The OCC has repeatedly claimed that the three 
rulings have nothing to do with real estate brokerage. Contrary 
to what you may have heard from the OCC officials and banks, 
NAR has never said that the rulings permit national banks to 
engage in real estate brokerage. What we have stated and still 
firmly believe is that the OCC's actions set in motion a 
process that will result in their authorizing national banks to 
engage in real estate brokerage, which is currently prohibited. 
Such expansion will dramatically increase the risk and exposure 
of national banks and threaten safety and the soundness of the 
Nation's banking system.
    The OCC gave Bank of America the green light for a Ritz 
Carlton hotel project based on their banks premises rule, which 
allows a bank to invest in real estate if the property is used 
for temporary lodging and areas where suitable commercial 
lodging is not readily available. We believe the OCC 
unreasonably stretched its own rule when approving the Ritz 
Carlton project, because our own scan of the immediate area 
reveals a 365 room Omni Hotel already in the Bank of America 
plaza, and a 434 room Marriott directly across the street from 
the bank's headquarters. We would like to know why Omni and 
Marriott, both a stone's throw from the bank's front door, are 
not suitable.
    The PNC Bank approval included another creative 
interpretation by the OCC, specifically the bank's proposal to 
build and sell residential condominiums which were in no way 
related to the business of the bank. PNC asked for this condo 
ruling to make the mixed-use development project economically 
feasible. To us it sounds as if a national bank can virtually 
any type of commercial or residential real estate development 
project, so long as the bank says an activity is needed for the 
economic success of the project.
    And last but certainly not least, the OCC allowed Union 
Bank of California to own 70 percent of a windmill energy 
project. In the ruling, the OCC disregarded its own guidance on 
whether or not the windmill investment was an integral part of 
the business of banking and instead, relied on the economics of 
the deal, the deal being that the transaction is structured as 
an investment, rather than a loan, to take advantage of certain 
tax credits. Interestingly, the OCC is not requiring the 
windmill company to repay the principal. Instead, the bank will 
receive periodic payments based on revenue generated by the 
windmill farm. I hope for Union Bank's depositors that it is 
very windy in California.
    In conclusion, we believe that with these three real estate 
rulings the OCC has opened the door and all but invited in 
national banks to engage in widespread real estate development, 
which breaches the fundamental separation of banking and 
commerce. Accordingly, we ask Congress to urge the Comptroller 
to reconsider the December 2005 rulings, and we ask you to 
direct the OCC not to take any future actions that have the 
intended or unintended result of expanding banking powers to 
engage in real estate development.
    I thank you for the opportunity and would be more than 
happy to answer any questions.
    [The prepared statement of Mr. Stevens follows:]

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    Mr. Platts. Thank you, Mr. Stevens.
    Mr. Yingling.

                STATEMENT OF EDWARD L. YINGLING

    Mr. Yingling. Mr. Chairman, members of the subcommittee, I 
am pleased to present the ABA's views on the three recent 
letter rulings by the OCC.
    There has unfortunately been a lot of misinformation and 
exaggeration spread about these three rulings. Frankly, there 
is very little new here, other than applying longstanding 
policy to today's economy. At the same time, we welcome the 
opportunity to clarify the situation, and I thank the 
subcommittee and its staff for the fairness and openness of 
this hearing process.
    First, it is absolutely clear that the OCC is applying 
longstanding law upheld by the courts. It is worth quoting a 
1902, over 100 years old, opinion upheld by the Supreme Court 
in 1904, and frankly, I think this goes to some of the 
discussion in the previous panel. This is what the court said 
in 1902, and still applies: ``Nor do we,'' that being the 
court, ``perceive any reason why a national bank, when it 
purchases or leases property for the erection of a banking 
house, should be compelled to use it exclusively for banking 
purpose. The National Bank Act permits banking associations to 
act as any prudent person would,'' any prudent person would, 
``in making investment in,'' and they are referring to that 
bank, ``real estate.''
    The windmill farm letter is also firmly based in law, as 
shown by the M&M leasing decision in 1977, 30 years ago.
    Second, the rulings are in fact quite limited. They do not 
serve as precedents for broad real estate development or for 
engaging in commercial activities. Rather, the two rulings 
interpret what a bank can do with its own property and for its 
own business, not broad real estate development.
    The other ruling involves the functional equivalent of a 
loan, not engaging in commerce but extending credit. Thus, it 
is totally inappropriate, we believe, to extrapolate from these 
limited rulings to imply that they allow broad-scale real 
estate development and commercial activities.
    Importantly, banks have been engaged in these very limited 
activities for decades, decades, without any problem 
whatsoever. Last summer, I visited the town in Arkansas where 
my family is from. I had not been there in a number of years, 
and I walked down to the town square. Several years ago, the 
downtown area, like many small towns, was slowly going downhill 
as businesses moved out to the malls on the highway. I was 
pleased to see that the downtown had made a comeback, with law 
office, specialty shops, restaurants and a community theater. 
At the heart of the redevelopment were the office buildings of 
two local banks. These were among the newest and biggest 
buildings, although certainly not very big by city standards.
    One of those bank buildings also served as offices for 
others. Examples could be lawyers, title companies and while I 
don't remember, perhaps even a realtor. These banks were 
fortunately not limited to erecting a building only they could 
use. They built what made the most economic sense. We have 
other examples in the appendix to my written testimony.
    These banks saved their downtowns. The same can be said in 
many towns and cities across the country. If these banks had 
been artificially limited in what they could build, I doubt 
very seriously they would have built downtown, because of the 
expense. Frankly, the primary difference between these examples 
and the letter rulings now under scrutiny is size. The banks 
covered by the letter rulings are much bigger and so are the 
buildings. But that makes no difference under the law or the 
100 years of precedents. These buildings are designed to make 
the best economic use, as the law clearly allows, in their 
downtown city locations. One need only read the OCC's letters 
to see how these fit into longstanding precedents and how 
limited the rulings are.
    We appreciate the opportunity to set the record straight, 
Mr. Chairman.
    [The prepared statement of Mr. Yingling follows:]

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    Mr. Platts. Thank you, Mr. Yingling.
    Ms. Shelton.

                STATEMENT OF CYNTHIA C. SHELTON

    Ms. Shelton. Thank you, Chairman Platts, Ranking Member 
Towns, Chairman Davis and my friend Mr. Kanjorski, for allowing 
me to be here to speak with you today.
    My name is Cynthia Shelton and I am a practitioner and 
commercial real estate broker with the firm of Colliers Arnold 
in Orlando, FL. I have been in the real estate business for 32 
years. Commercial real estate professionals help clients with 
all aspects of commercial real estate needs.
    In the case of real estate development, commercial real 
estate professionals help clients locate properties, work with 
them and a financial institution to create the most suitable 
financing plan available, find tenants that would occupy those 
spaces and many times in helping them sell the projects once 
they are completed.
    Commercial real estate professionals provide these services 
with the knowledge and unique understanding of the economic 
health and sometimes high risk of developing real estate 
projects in local markets. The OCC's decision in expanding the 
authority of banks to develop real estate undermine the ability 
of the commercial real estate professional to work with a 
financial institution on a level playing field and further blur 
the lines that distinguish banking from commerce.
    I have always understood that a key purpose of the national 
policy against mixing banking and commerce is to protect banks 
from the inherent risks posed by a commercial venture. Banks 
strive to maintain soundness and stability by managing their 
risks, keeping sufficient reserves and diversifying their loan 
portfolios. In determining a potential loan, the bank evaluates 
the strengths of the developer's business plan and their 
overall assessments of the risks that the loan would pose.
    There is an implicit acknowledgement that the borrower-
developer assumes the risk of the venture and the venture's 
ultimate failure or success, and the bank must ensure that its 
soundness won't be unduly jeopardized by that risk, or that the 
borrower-developer has personally signed and has sufficient 
assets to cover that risk.
    The OCC's recent rulings complicate that mutual beneficial 
relationship by allowing banks to compete in the business of 
real estate development. Could a bank change its lending 
criteria to favor a potential development deal in which it has 
stake over another one, which it doesn't? What would prevent a 
bank from taking advantage of the business plan of a sound 
commercial real estate venture that applies to that bank for 
financing?
    I can't believe that the OCC envisioned these scenarios, 
but I do not see anything that would present this from 
happening. I am concerned that the OCC may have considered the 
potential impact of these decisions on a bank's ability to act 
as an honest broker of financial services.
    We believe that Congress requires the separation of banking 
and commerce also for the consumer's protection and to enhance 
the safety and soundness of the banking system. I had personal 
experience with these issues when the separation was breached 
during the devastating savings and loan crisis of the 1980's. 
Then many savings and loans were permitted to invest in real 
estate developments and to make commercial real estate loans 
with little regard to sound risk management practices, such as 
the understanding of the local commercial markets and their 
changes.
    Thankfully, because of new laws, strong underwriting 
standards and risk management practices, we believe a repeat of 
the late 1980's and the days of the RTC is highly unlikely. 
Though the commercial real estate markets have been strong as 
of recent on a national level, I remind you that it is like a 
giant quilt made up of local markets that can vary 
significantly and shift fairly easily. When a bank is permitted 
to develop real estate, the bank does so in a localized real 
estate market. And because we are real estate professionals, we 
know first hand how fast the local markets can change. Banks 
should not be permitted to impair their safety and soundness by 
assuming the high risk of a commercial real estate development.
    How many other national banks will engage in these real 
estate development activities tomorrow? How many banks will 
choose to get into the risky commercial real estate ventures in 
the weak local markets because of their easy access to cheap 
capital through federally insured deposits? How far will the 
OCC go in granting this unfair business advantage to the banks? 
Let's hope we don't have to find out.
    In conclusion, we ask Congress to urge the OCC to curb the 
ability of banks to develop commercial real estate, so that the 
distinction between banking and commerce is not diminished 
further, and that the commerce of real estate is not 
undermined.
    Thank you for allowing me to testify, and I am open to any 
questions you may have.
    [The prepared statement of Ms. Shelton follows:]

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    Mr. Platts. Thank you, Ms. Shelton. I would like to 
recognize the chairman of the full committee, Mr. Davis, for 
purposes of questions.
    Chairman Tom Davis. Thank you, Mr. Chairman. I have people 
waiting in my office, so I need to get up there, but I want to 
just ask, do you know how many letters are put out a year on 
this subject? Anybody have any idea? I should have asked the 
previous speaker. These three, I think because of the 
magnitude, and maybe the facts on the ground don't match the 
facts that were perceived in the letter, have generated more 
controversy. Does anybody know how many letters?
    Mr. Yingling. I don't know. We can get you that number. I 
think it is kind of a slow trickle on this subject. There are 
letters, interpretive letters all the time. I think one of the 
disconnects we may have here is that these letters were seen 
within the banking industry as non-events. And I think some 
people to my left and right and some Members of Congress see 
them as big events.
    But to put it in perspective, we have had 800 new 
regulations in the last 15 years. That is one a week. We 
constantly are going to our regulators, formally and 
informally, on an ongoing basis, asking for their feedback. We 
get informal feedback, we get informal letters. So in the broad 
context, from our industry, these were seen as very, very minor 
events that would have buried had they not been brought up.
    Chairman Tom Davis. Even prior to this, there has been some 
controversy in terms of how the OCC may interpret this, 
correct?
    Mr. Yingling. This issue?
    Chairman Tom Davis. Yes.
    Mr. Yingling. No.
    Chairman Tom Davis. You don't think so?
    Mr. Yingling. No, sir.
    Chairman Tom Davis. Do you feel, let me just ask, and I 
will start with you, Mr. Stevens, on the notice requirements, 
when a letter like this comes up, do you think there ought to 
be a broader notice or do you think you just ought to have 
somebody write and kind of have the ex parte communication over 
what the project is and let the decisionmaker make it? How 
should this work and do you feel in this particular case the 
notice provisions weren't adequate?
    Mr. Stevens. I definitely think that the notice, as 
described earlier, that it should be broadened, it should be 
heightened. Because we had a member that I think saw it on the 
Internet somewhere and notified us in January, almost a month 
after the letters were issued. And a news reporter in New York 
brought it to our attention at about the same time.
    So I don't think it is, the exposure or the notification 
process is significant enough when you are talking about the 
possibly of changing Congress, a decision that Congress has 
made. That is why we are involved in this. We think that is an 
important policy question, a serious policy question, that has 
the OCC gone too far. When they are making decisions and you 
can't find the notification of these decisions, that is a 
challenge.
    Chairman Tom Davis. Do you feel better or worse after 
hearing the OCC testify? I guess I would ask everybody that.
    Mr. Stevens. Well, I think it is real clear that there are 
some challenges here, that I still feel that they have 
overstepped their bounds. I think they have gone too far. When 
you start to look at the rationale that they are using to 
approve this real estate development, nowhere in any law that I 
have seen does it allow you to build speculative condominiums. 
Is it really a Ritz Carlton that is going to help fulfill the 
banking needs, a speculative hotel that is going to be used 
very little, truly, by the bank, or its employees or its 
clientele, when you get down to it? It is a challenge.
    Chairman Tom Davis. Mr. Yingling, you think it is a non-
event, basically, is that right?
    Mr. Yingling. Yes. First, back to your first question, I am 
informed that Ms. Williams' testimony says there were 22 
letters in roughly 30 years in this area.
    Chairman Tom Davis. On this subject.
    Mr. Yingling. I will tell you why I think it is a non-
event. Go to any town, any city, any big city in the country, 
and go downtown. Quite often you will see at the heart of the 
downtown bank buildings. Go to the areas in your district that 
are the key areas. You will see major buildings, depending on 
the size, relatively major buildings, with a bank name on them. 
They are bank buildings. By and large they are owned by the 
bank.
    Very, very many of those buildings are not fully used by 
the bank. It has been that way always. They build the 
buildings, they look at what they may need, they play ahead and 
say, we may grow, so we need extra space. Sometimes they say, 
well, in order to build in this position, I need to do some 
other things with that building. And sometimes, frankly, they 
are trying to, very often they are trying to help save a 
downtown or build enough of a critical mass downtown to have a 
good downtown.
    It has gone on for 100 years. It has never been a problem. 
That is why from our perspective, while these were applying old 
law to new facts, we didn't see it as a big deal at all. And 
nobody in the industry has come to me as the president of the 
ABA and said, wow, what a great opportunity this is. Nobody has 
come to us about it, because it is seen as just part of a 
continuum.
    Chairman Tom Davis. Mr. Stevens.
    Mr. Stevens. Can I just respond? I want to make it real 
clear, NAR has no problem with banks building buildings to 
accommodate their business. I don't know if you saw the Metro 
section of the Washington Post this morning, but the lead 
column is where a major developer of a condominium in Bethesda, 
Maryland, has pulled out of that project. And with a market 
changing like this, when you start to deviate from your core 
competency, and I think banking is banking, and commerce is 
commerce, I think when you start to deviate from your core 
competency, you are going to end up in trouble. We have seen 
that before with savings and loans. That is why I think they 
have overstepped their bounds.
    Mr. Yingling. These buildings I am talking about, there are 
a large number of them that you see in every town and city, 
have significant percentage of it that is not used for banking 
purposes. That has been the way they have been built all along. 
They sometimes go and buy old buildings that are falling down, 
refurbish them down in these small towns.
    Chairman Tom Davis. I gather there is no problem with that 
scenario, it is when you get into the larger scenarios----
    Mr. Yingling. No.
    Chairman Tom Davis [continuing]. I guess everybody----
    Mr. Stevens. We support the current statutory authority to 
allow banks to invest in community and economic development. 
That is a whole different issue.
    Chairman Tom Davis. And even a bank building can be used 
for other, is that right? OK, thank you both.
    Mr. Platts. Thank you, Mr. Chairman.
    Mr. Yingling, in your opening you said that this is all 
about mis-information and exaggeration. What are examples of 
the mis-information and exaggeration?
    Mr. Yingling. I think the thing that most concerned us was 
some of the rhetoric that came out early on and is still used 
from time to time. You hear references to the savings and loan 
crisis as thought this somehow or other is going to lead to 
some kind of major crisis in our banking system. We think that 
is completely uncalled for.
    We as an industry are on the record that we don't want to 
be in the real estate development business. There is a 
provision in Gramm-Leach-Bliley that says we can engage in 
financial services and there are two exceptions. One of them is 
explicitly real estate development. We supported that 
provision. We have no desire to be in real estate development. 
But to use language that somehow or other this is going to 
develop into major involvement of banks and real estate 
development we think is just a gross exaggeration. We think it 
is a very limited, targeted provision.
    Mr. Platts. As a lay person looking at the project, and I 
will take the PNC project, which again, as Paul said, we want 
PNC to succeed, they are a very large employer in our State. 
But as a lay person looking at that project, office space, 
hotel, condos, wouldn't a lay person look at that and say, that 
is a great real estate development project?
    Mr. Yingling. I think that is a fair point. I think you 
have to go and look at the history of it and look into what PNC 
is doing there. They have two office towers in downtown 
Pittsburgh that are fully used by them, and they have people 
around the city, their employees, in buildings that are not 
part of their core. Naturally, they want to get them back to 
the core, and these leases are expiring.
    Naturally, they also, this is a very vibrant institution 
that is growing, they need to plan for growth. So it is natural 
for a business to say, I am not just building a building that 
is going to fit me today, I want the opportunity to fit my 
growth into that building. So they are taking a run-down piece 
of property, as I gather, that they own, and they are 
developing it.
    Now, having made that decision, the current law is, and I 
am going to separate that from your view of what it ought to 
be, the current law, and I just read you the relevant court 
case, 100 years old, is quite clear. They are allowed to 
develop that as long as it is basically, at its core, done for 
banking. They are allowed to develop it as anybody else would.
    Mr. Platts. Do you think the Supreme Court justices in 1902 
or 1904, in the opinion, would look at the hotel and say that 
is a banking service?
    Mr. Yingling. That is not the standard.
    Mr. Platts. No, but as you are saying that it s core to 
their banking operation.
    Mr. Yingling. No, that is not the standard. The standard is 
when they are starting the building is, are they building a 
building to have something that is core to their business. Once 
they start that, the rest of the building doesn't have to be 
core to their business. They can develop it as any prudent man. 
That is the standard.
    Mr. Platts. OK, let's not use Pittsburgh as an example. 
Bank of America built a hotel, not office space for the bank, 
built a hotel. How is that banking operation?
    Mr. Yingling. If you go back and look for dozens and dozens 
of years at the precedent, and they are very limited things 
that you can do, one of them is housing your employees.
    Mr. Platts. But the OCC has said, if there are no other 
reasonable options----
    Mr. Yingling. I am sorry, that is not the standard.
    Mr. Platts. Isn't that what the law says?
    Mr. Yingling. No. Julie Williams explained it, and that is 
what was just said in the testimony, she explained it, that was 
one of the included standards. It is not an exclusive standard. 
It says ``including.''
    Mr. Platts. No, but the real estate, for the temporary 
lodging, but the first part of that standard is, let me read 
it: ``A national bank may invest in real estate that is 
necessary for the transaction of business.'' If there are two 
hotels right there, that goes to, the first question is, is it 
necessary. If it is, then it allows, this type of real estate. 
You are looking at the second part of the rule.
    Mr. Yingling. Well, I will get back to you on it, but I 
don't think that is the correct, that you are articulating, 
frankly, the correct standard.
    Mr. Platts. Well, I am reading, I believe, straight from 
the rule, that it says, a national bank may invest in real 
estate that is necessary for the transaction of business. Then 
it goes on to talk about, lists the types of real estate that 
are allowed.
    Mr. Yingling. Right. Then you are going back to the word 
necessary. And I just agree with Julie Williams' discussion 
there on what the word necessary means and the history of it.
    Mr. Platts. Well, let's go back to the court case and where 
you started, I think that is a good place to start. It says, 
``Nor do we perceive any reason why a national bank, when it 
purchases or leases property for the erection of a banking 
house, should be compelled to use it exclusively for banking 
purposes.''
    Mr. Yingling. Right.
    Mr. Platts. Building a hotel is not ``purchasing a property 
for the erection of a banking house.'' So if I am looking to 
distinguish that case, very quick I am saying, they didn't buy 
this building or this property to build a banking house. They 
bought it to build a hotel. Why is that not significantly 
different than that court case?
    Mr. Yingling. Then you get to, when you get there you get 
to the issue of whether the hotel they are building is part of 
the banking business.
    Mr. Platts. Is a banking house?
    Mr. Yingling. Yes, I agree with that. That is different 
from PNC, where you are adding the hotel onto a bank office.
    Mr. Platts. And that is the challenge here. There are a lot 
of issues here. But PNC, I think they make a stronger case. 
Office space for their own bank, they can expand. But when you 
go to the windmill, when you go to the hotel, you look at the 
language of that case, that is the controlling part of that 
opinion, when it purchases property for the erection of a 
banking house, it can use some other part of that same building 
for other purposes.
    Mr. Yingling. Let me address the windmill farm and Bank of 
America. The hotel I think is something that I understand your 
reaction to.
    Mr. Platts. That and the windmill I think really jumped off 
the screen.
    Mr. Yingling. The windmill I think is very different, 
because of the tax credit aspect of it. The hotel, I think you 
have to go back and look at the facts. Bank of America had 
72,000, this is a trillion dollar bank, one of the biggest 
banks in the world, growing very rapidly, they had 72,000, it 
says in the record, nights of employees visiting Charlotte. 
That doesn't include customers and partners and people they are 
doing deals with.
    That averages out, to my calculation, to over 200 every 
single night. And if you assume there are not as many on the 
weekends, it is 300, 400, 500. It seems to me it would be 
understandable, it is a 150 room hotel, which is not a very big 
hotel. That is the minimum they could build to get somebody to 
agree to manage it. It would seem to me understandable that 
they want that in their core campus, if you will, to have 
people in a high-end hotel that can come and go to their 
offices.
    But I wouldn't extrapolate from a hotel because you do have 
this long history, talking about----
    Mr. Platts. Excuse me for a moment.
    Mr. Yingling. Sure.
    Mr. Platts. I apologize for the interruption, Mr. Yingling.
    Mr. Yingling. Sorry if I filibustered. [Laughter.]
    So I think the hotel comes into being based on this series 
of precedents about housing your people. The windmill farm is 
completely different. Just to give you a feel for it, the ABA, 
with a partner, applied to the Treasury Department for new 
market tax credits, and we got some of them, as did some 
individual banks. The idea is we distribute them to community 
banks, who will make the same type of deal with a not-for-
profit. They will have an equity ownership, because that is the 
way you get the tax credit.
    Mr. Platts. The non-profit can't get the credit.
    Mr. Yingling. Right. So these are very limited to those 
deals where there is a tax credit involved. And I think that is 
a very distinguishable event.
    Mr. Platts. I would agree. And I think, of the three cases, 
I think the windmill, the way it is structured, with the tax 
credits and no profit from appreciation of values, is a little 
different, Pittsburgh is a little different. The hotel to me is 
clearly one that seems contrary to commerce.
    But even the other two, especially Pittsburgh, and Ms. 
Shelton's testimony I thought really went to an important part 
of this, the risk assumed in developing these properties is 
that, the intent of the separation of commerce is to protect 
the security of the banks, the stability of the banks. And what 
has transpired since that 1902 case, the stock market crash, 
the bank closures of the 1930's, we have tried to learn from 
those lessons. It is a lesson of risk to banks.
    And Ms. Shelton's comments really go to the risk assumption 
that banks are taking, the bigger the project, the more 
comprehensive the project. I think that is a legitimate issue 
that we need to be worried about, is, are banks getting into 
development projects that even where a part of it is for their 
own use, it involves a substantial risk in that marketplace 
versus somebody else taking the risk that the bank is helping 
to finance with it.
    Mr. Yingling. I understand. I would just say that size is 
relative. A 150 room hotel to a trillion dollar institution 
isn't much. You go into all these cities I was talking about 
around the country, you will find community banks who have 
taken only one story, only needed one story or one and a half 
stories, they have built three stories or acquired an old 
building and rehabbed it with three stories, they have been 
doing it for over 100 years. It hasn't been a problem.
    Mr. Platts. But I think the issue is, that with Bank of 
America that there was a shortage of hotel rooms, and those 
hotels right adjacent, Marriott and Omni, weren't satisfactory. 
The market will fill that risk by developers taking the risk 
and saying, we believe there is a need here for more rooms. We 
will take the risk and build it. Instead, the bank says, we are 
going to build it and take the risk. That goes back to the 
issue of, is that what we want banks doing, is taking the risk 
versus lending money to others who take the risk. That comes 
back to the core issue, especially on the freestanding hotel.
    Ms. Shelton. And Chairman Platts, if I might add, if you 
were in Florida when all the hurricanes came through and you 
owned a hotel, and the occupancy rate dropped to 30 percent, 
the risk is phenomenal. I happen to know the hotels in the 
Charlotte area around the B of A, because I have been involved 
with the real estate investment trust in the past. I can tell 
you, owning a hotel with the occupancy rate that I recently 
looked up in Charlotte is 67 percent in the past quarter. There 
is room there, including B of A had agreements with some of the 
hotels in the surrounding area to guarantee blocks of rooms.
    So now they have put in 150 hotel rooms that will compete 
with the same hotels that went there in the business aspect of 
making a profit and consumer being able to utilize it as well 
as the bank.
    So the last piece I would leave you with is the article Tom 
mentioned was in the business of today is the Canyon Ranch 
abandons Maryland condos. They have issues that a year ago, 
when they gave a business plan, they wouldn't see what was 
going to happen to the condo market. Instead of subsidizing 
their bank, in fact, if they don't sell them for the projected 
rates, will lose money and have to pay for it out of funds from 
the bank over and beyond what a selling spec would have done.
    So I just think there is a lot of business aspects to it 
that weren't looked at.
    Mr. Platts. That again gets to the fairness, the market 
aspects here of, I asked about the condos, putting 32 condos on 
the market, what does that do to others. And it comes to 
Marriott, Omni, they build hotels saying, Bank of America is 
here, so we are going to invest. If then Bank of America is now 
competing with them, the fairness in the marketplace to those 
who took that risk privately, aside from the banks.
    I apologize, because the vote is about to close, which 
means I need to run. But I don't want to hold you guys here, 
because you would be sitting here for a while before we get the 
other votes in and come back. I guess if maybe I can ask one 
final question, and we may followup with written questions to 
you, if that would be OK, if there is something that we haven't 
covered. That might a broad question that kind of follows up 
where we just left off.
    These rulings, Mr. Yingling, you don't see it as precedent-
setting and earth shattering. Mr. Stevens, Ms. Shelton, do you 
see it as kind of opening the door, we are going to see more of 
this type of development, commercial development specifically, 
hotels that are going to compete with other commercial 
development, impact the market and therefore impact commerce?
    Mr. Stevens. I don't think you can allow or approve these 
three types of developments and not have it precedent setting. 
When the question was asked of Julie, can you guarantee that it 
won't, she said, well, I can't say that I won't use it in a 
written example in the future, or law. So yes, I think that 
once it is approved, it is sitting there as a precedent.
    Ms. Shelton. And I will just share, I think it will set 
some impact on the industry. How much, three deals, I agree, in 
the trillions of dollars of real estate that is out there, but 
the reality is, I am not talking about the trillions. I am 
talking about the individual investors who would have invested 
in those projects with small spreads to take the risk, to 
borrow the money from the banks, and pay it back. Now the banks 
are using money that they have gained from federally insured 
deposits that are at a lower rate. With rising interest rates, 
I think it will have an impact and it could open the door.
    Mr. Yingling. I would just say, to some degree we are 
trying to have it both ways here. Because we said, banks ought 
to be able to have mixed-use buildings, but when you listen to 
this, you are saying they can't. I would urge people to go to 
small towns, medium size towns, cities, and look at all those 
buildings that are at the cores of downtowns, and be very 
careful if you are saying, we are worried about the risk to the 
bank, we are worried about the fact that what they are leasing 
takes from the office building across the way. They do, but it 
has been that way for 100 years.
    Mr. Platts. I think, Mr. Yingling, really what we are 
focusing on is, what does the law allow, is the focus. And that 
is what we tried to get at, to get more definitive answers, 
what does the law allow and what does the OCC allow in their 
regulations.
    We are going to need to wrap up here. I very much 
appreciate all three of you trying to help shed light in the 
varying cases here, the three in particular we are looking at. 
We will keep the record open for anything else you want to 
submit, and we may followup with a written question or two to 
you.
    Thanks for your participation. This hearing will stand 
adjourned.
    [Whereupon, at 4:24 p.m., the subcommittee was adjourned.]

                                 
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