[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
U.S. GOVERNMENT PRINTING OFFICE
45-711 PDF WASHINGTON DC: 2008
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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.]