[Senate Hearing 109-937]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-937

 
                          THE CONSIDERATION OF
                      REGULATORY RELIEF PROPOSALS

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

    PROPOSALS TO REDUCE UNNECESSARY REGULATORY BURDEN ON DEPOSITORY 
   INSTITUTIONS INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION

                               __________

                             JUNE 21, 2005

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


                                 ______

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                       Mark F. Oesterle, Counsel

   Gregg Richard, International Trade and Finance Subcommittee Staff 
                                Director

    Mike Nielsen, Financial Institutions Subcommittee Staff Director

              John V. O'Hara, Senior Investigative Counsel

             Martin J. Gruenberg, Democratic Senior Counsel

               Patience R. Singleton, Democratic Counsel

              Stephen R. Kroll, Democratic Special Counsel

            Ellen K. Weis, Democratic Legislative Assistant

                 Dean V. Shahinian, Democratic Counsel

                 Lynsey Graham Rea, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 21, 2005

                                                                   Page

Opening statement of Senator Crapo...............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................    12
    Senator Carper...............................................    17

                               WITNESSES

John M. Reich, Vice Chairman, Federal Deposit Insurance 
  Corporation....................................................     2
    Prepared statement...........................................    55
    Response to written questions of Senator Bunning.............   203
Julie L. Williams, Acting Comptroller of the Currency, Office of 
  the Comptroller of the Currency................................     4
    Prepared statement...........................................    64
    Response to written questions of Senator Bunning.............   206
Mark W. Olson, Member, Board of Governors of the Federal Reserve 
  System.........................................................     6
    Prepared statement...........................................    73
    Response to written questions of Senator Bunning.............   210
Richard M. Riccobono, Acting Director, Office of Thrift 
  Supervision....................................................     7
    Prepared statement...........................................    80
    Response to written questions of Senator Bunning.............   215
JoAnn M. Johnson, Chairman, National Credit Union Administration.     9
    Prepared statement...........................................   106
    Response to written questions of:
        Senator Bunning..........................................   218
        Senator Crapo............................................   220
Eric McClure, Commissioner, Missouri Division of Finance on 
  behalf of the Conference of State Bank Supervisors.............    10
    Prepared statement...........................................   112
    Response to written questions of Senator Crapo...............   224
Steve Bartlett, President and Chief Executive Officer, The 
  Financial Services Roundtable..................................    25
    Prepared statement...........................................   117
Carolyn Carter, Counsel, National Consumer Law Center............    27
    Prepared statement...........................................   125
Arthur R. Connelly, Chairman & CEO, South Shore Savings Bank, 
  South Weymouth, MA and Member, Executive Committee of the Board 
  of Directors America's Community Bankers, Washington, DC.......    28
    Prepared statement...........................................   154
David Hayes, President and CEO, Security Bank, Dyersburg, TN, and 
  Chairman, Independent Community Bankers of America, Washington, 
  DC.............................................................    30
    Prepared statement...........................................   161
Christopher A. Korst, Senior Vice President, Rent-A-Center, Inc..    32
    Prepared statement...........................................   167
Chris Loseth, President & CEO, Potlatch No.1 Federal Credit Union 
  and Chairman, Idaho Credit Union League Government Affairs 
  Committee on behalf of the Credit Union National Association...    34
    Prepared statement...........................................   170
Edward Pinto, President, Courtesy Settlement Services, LLC on 
  behalf of the National Federation of Independent Business......    36
    Prepared statement...........................................   187
Eugene F. Maloney, Executive Vice President, Federated Investors, 
  Inc............................................................    38
    Prepared statement...........................................   188
Travis Plunkett, Legislative Director, Consumer Federation of 
  America........................................................    40
    Prepared statement...........................................   125
Bradley E. Rock, President and Chief Executive Officer, Bank of 
  Smithtown, and Chairman, Government Relations Council, American 
  Bankers Association............................................    41
    Prepared statement...........................................   191
Michael Vadala, President and CEO, The Summit Federal Credit 
  Union on behalf of the National Association of Federal Credit 
  Unions.........................................................    43
    Prepared statement...........................................   195
    Response to written questions of Senator Crapo...............   226


                         THE CONSIDERATION OF 
                      REGULATORY RELIEF PROPOSALS

                              ----------                              


                         TUESDAY, JUNE 21, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Mike Crapo, presiding.

            OPENING STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Good morning, everyone. This is the hearing 
of the Committee on Banking, Housing, and Urban Affairs on the 
consideration of regulatory relief proposals.
    Chairman Shelby is not going to be able to be with us this 
morning, and has asked that I chair this hearing. Because of 
the multitude of things going on this morning, we do not know 
how many of the other Senators are going to make it. We know at 
about 11:30 it is going to be very sparse around here, so we 
will begin proceeding without them, and as other Senators may 
show, we will give them an opportunity to make their opening 
statements.
    Last year, the Banking Committee held a hearing on 
proposals providing regulatory relief for banks, credit unions, 
and thrifts. The hearing covered all points of view and was 
made up of three panels of witnesses, Members of Congress, 
regulators, trade organizations, and consumer groups. The 
witnesses built a strong legislative record by describing the 
cost of regulations and by providing specific recommendations 
to reduce this ever-growing burden without compromising safety 
and soundness.
    The sheer volume of regulatory requirements facing the 
financial services industry today presents a daunting task for 
any institution. Many of the witnesses also noted that this is 
not simply an issue for banks and credit unions. The customer 
feels the impact in the form of higher prices, and in some 
cases, diminished product choice.
    One example that was stressed as an outdated regulation is 
the Depression era provision prohibiting the payment of 
interest on demand deposits, otherwise known as business 
checking accounts. At the end of the hearing, I asked FDIC Vice 
Chairman Reich as the leader of the interagency EGRPRA Task 
Force to review the testimony presented at the hearing and to 
prepare a matrix of all the recommendations and positions for 
the Committee. The result was 136 burden-reduction proposals. 
Since that time the list has grown to 187. That was a huge 
undertaking and I am very appreciative of the hard work and 
cooperation of so many involved, especially Vice Chairman 
Reich.
    As this comprehensive list demonstrates, it is important 
for Congress to periodically review the laws applicable to the 
financial services industry to ensure that compliance and red 
tape does not impose an unreasonable and unproductive burden on 
the economy and truly achieves its important goals.
    Today, we are going to receive testimony from regulators, 
financial services industry groups, consumer groups, and small 
businesses on these proposals. As we proceed we need to make 
sure that we enact enough meaningful reform so that the cost of 
change is not a burden in and of itself.
    The specific recommendations of witnesses today will be of 
great use to me and to other Members of the Senate Banking 
Committee as we create legislation to address the important 
issues of financial services regulatory reform.
    Our first panel today will be the regulators. I believe 
that all of the witnesses have received very clear instructions 
that we want you to be very careful to stay within the time 
limits. We have a very full hearing. As you might see, the 
table has been modified. The second panel is going to be 11 
witnesses, and I have never quite seen how we could accommodate 
the table to fit that many, but it appears that they have done 
so, and we are going to need to have the witnesses stick within 
their 5-minute allotted time period so that we have time for 
interaction and discussion of the issues that are presented.
    Let us start with the first panel composed of John M. 
Reich, Vice Chairman of the Federal Deposit Insurance 
Corporation; Julie Williams, the Acting Comptroller of the 
Office of the Comptroller of the Currency; Mark Olson, Member 
of the Board of Governors of the Federal Reserve System; 
Richard M. Riccobono, the Acting Director of the Office of 
Thrift Supervision; JoAnn Johnson, the Chairman of the Board of 
Directors of the National Credit Union Administration; and Eric 
McClure, Commissioner of the Missouri Division of Finance.
    Ladies and gentlemen, we will proceed in that order, and we 
will begin with you, Mr. Reich.

                   STATEMENT OF JOHN M. REICH

                         VICE CHAIRMAN,

             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Reich. Thank you very much, Mr. Chairman. I appreciate 
very much the opportunity to be here today. I want to thank you 
particularly, Senator Crapo, for your interest, your leadership 
and your commitment to this endeavor.
    After 2 years of work under the EGRPRA mandate we are 
prepared to make our initial recommendations to Congress. We 
have issued many regulations for public comment and received 
nearly 1,000 comment letters in response. We have held 12 
outreach meetings around the country with bankers and community 
and consumer groups.
    My own involvement in this project has increased my 
awareness of the developing fragility of the long tradition of 
community banking in this country. It has intensified my 
commitment to pursue meaningful regulatory relief legislation. 
But as a bank regulator I also know it is important to maintain 
the safety and soundness of the industry and to protect 
consumer rights.
    I am here today as Vice Chairman of the FDIC, but also as 
the nominal leader of the interagency regulatory review project 
mandated by the EGRPRA Act. When Congress enacted EGRPRA in 
1996 it directed the agencies to work together in an effort to 
eliminate outdated, unnecessary, and unduly burdensome 
regulations. I am pleased to report that over the last 2 years 
the agencies represented at this table have worked together 
closely to fulfill the objectives set out in the EGRPRA 
statute. I believe we have made considerable progress, but we 
still have much work to do.
    My written statement indicates a number of substantive 
initiatives the agencies have taken to reduce burden. These 
initiatives include streamlining our examination process, 
proposing amendments to the CRA regulations, working to improve 
the required privacy notices, and providing detailed guidance 
to the industry to assure uniform and consistent examination of 
and compliance with the Bank Secrecy Act and the U.S.A. PATRIOT 
Act.
    Since most of our regulations are, in fact, mandated by 
statute, it is my sincere hope that Congress will agree with 
our premise concerning accumulated regulatory burden and the 
need to do something about it and will accept our 
recommendations to make a number of changes to the underlying 
statutes.
    Last year, this Committee held a regulatory burden hearing 
in which 18 witnesses testified, including myself. At that 
hearing Senator Crapo asked me to review the testimonies, 
extracting all the regulatory burden reduction proposals made 
at that hearing. The result was a matrix containing a total of 
136 burden reduction proposals.
    I called together representatives of all the bank and 
thrift trade groups in a single meeting to review the 
proposals. Out of that meeting came an agreement among the 
trade groups to either jointly support or not oppose 78 of 
those 136 proposals.
    The FDIC subsequently reviewed the 78 industry consensus 
items to determine whether in our judgment there were 
significant safety and soundness, consumer protection, or other 
public policy concerns with the industry proposals. As a result 
of our review we decided to affirmatively support 58 of the 78. 
We took no position on 15 proposals and we opposed 5 of the 
proposals. Since that time we have been working on a consensus 
building process among the Federal bank regulators.
    The next step toward this objective was to share FDIC's 
views with the other regulatory agencies. After considerable 
interagency discussions, the agencies have agreed to jointly 
support 12 of the industry consensus items. They are outlined 
in my written testimony. I refer to them as ``the bankers' 
dozen,'' but I hope that the 12 are only the beginning.
    Included in the matrix are dozens of proposals beyond the 
original 12 which are supported by more than one agency, and 
where no significant safety and soundness, consumer protection, 
or other public policy concerns have been raised. To be fair, 
however, some agencies have indicated they have not had the 
opportunity to fully consider all of the proposals, and have 
therefore taken no official position on them. My hope is that 
at the end of all reviews there will be a significantly greater 
number of consensus provisions that will be recommended to and 
accepted by Congress.
    Mr. Chairman, banks large and small labor under the 
cumulative weight of our regulation. I believe that the EGRPRA 
process created by Congress appropriately addresses the problem 
of accumulated regulatory burden. I have expressed on several 
occasions publicly my concern that if we do not provide relief, 
a vital part of the banking system, namely America's community 
banks, may be in jeopardy.
    Mr. Chairman, I believe the time for action is now. I urge 
the Committee to review our recommendations carefully and hope 
you will accept and incorporate them into a regulatory relief 
bill which will provide real relief for the industry. I look 
forward to working with the Committee toward this end.
    Thank you very much for this opportunity to testify and I 
look forward to the questions.
    Senator Crapo. Thank you very much, Mr. Reich.
    Ms. Williams.

                 STATEMENT OF JULIE L. WILLIAMS

              ACTING COMPTROLLER OF THE CURRENCY,

           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Ms. Williams. Thank you. Mr. Chairman, Senator Bunning, I 
appreciate the opportunity to appear before you today to 
discuss the challenge of reducing unnecessary regulatory burden 
on our Nation's banking institutions. The Office of the 
Comptroller of the Currency welcomes the Committee's effort to 
advance regulatory burden relief legislation. I also want to 
express particular appreciation to you, Mr. Chairman, for your 
commitment and dedication to this issue.
    My written testimony and the appendices to that testimony 
describe a number of burden-reducing initiatives that the OCC 
supports. This morning I also want to touch upon two broader 
themes that I hope will guide our efforts to reduce unnecessary 
regulatory burden.
    My testimony emphasizes that the regulatory burdens on our 
banks arise from several sources. First, we, as Federal bank 
regulators, have a responsibility to look carefully at the 
regulations we adopt to ensure that they are no more burdensome 
than is necessary to protect safety and soundness, foster the 
integrity of bank operations, and safeguard the interests of 
consumers.
    In this connection I must mention the EGRPRA regulatory 
burden reduction initiative that is being led so capably by 
FDIC Vice Chairman John Reich. As part of this process, the 
OCC, together with the other Federal banking agencies has been 
soliciting and reviewing public comment on our regulations and 
participating in banker and consumer outreach meetings around 
the country. Using the input gathered from the public comment 
and outreach process, the banking agencies, as Vice Chairman 
Reich has noted, are now developing specific recommendations 
for regulatory as well as legislative relief.
    Second, we also must recognize that not all the regulatory 
burdens imposed on banks today come from regulations 
promulgated by the bank regulators. Thus, we welcome the 
interest of the Committee in issues such as implementation of 
Bank Secrecy Act and antimoney laundering standards and 
reporting requirements, and in the ongoing efforts by the 
Securities and Exchange Commission to implement the so-called 
``push-out'' provisions of the Gramm-Leach-Bliley Act in a 
manner that is both faithful to GLBA's intent and not so 
burdensome as to drive traditional banking functions out of 
banks.
    A third key source of regulatory burden is Federal 
legislation, and relief from some manifestations of unnecessary 
regulatory burden does require action by Congress. My written 
testimony contains a number of recommendations for legislative 
changes, and this list includes consensus recommendations 
developed and agreed to in our discussions with the other 
banking agencies and with the industry.
    Before closing, I would like to highlight two broader 
themes that I hope will guide us in our efforts to tackle 
unnecessary regulatory burdens. The first involves consumer 
protection disclosure requirements. Here is an area where we 
have an opportunity to reduce regulatory burden and improve the 
effectiveness of disclosures to consumers. Today, our system 
imposes massive disclosure requirements and massive costs on 
financial institutions, but do these requirements effectively 
inform consumers? I firmly believe that it is possible to 
provide the information that consumers need and want in a 
concise, streamlined, and understandable form. The Federal 
banking agencies have broken new ground here by employing 
consumer testing as an essential part of our rulemaking to 
simplify the GLBA privacy notices. This project has the 
potential to produce more effective and meaningful disclosures 
for consumers and reduced burden on institutions that generate 
and distribute private notices. We need to do more of this.
    My second point goes back to basics. Why do we care about 
regulatory burden? We care because unnecessary regulatory 
burden saps the efficiency and competitiveness of American 
enterprise. And, we particularly care because of the critical 
impact of regulatory burden on our Nation's community banks. 
Community banks thrive on their ability to provide customer 
service, but the very size of community banks means that they 
have more limited resources available to absorb regulatory 
overhead expenses.
    We need to recognize that the risks presented by certain 
activities undertaken by a community bank are simply not 
commensurate with the risks of that activity conducted on a 
much larger, complex scale. One-size-fits-all may not be a 
risk-based, or a sensible, approach to regulation in many 
areas. I hope we can do more to identify those areas where 
distinctions between banks based on the size and complexity and 
scope of their operations makes sense as a regulatory approach.
    In conclusion, Mr. Chairman, on behalf of the OCC, thank 
you for holding this hearing. We would be pleased to work with 
you and the staff to make the goal of regulatory burden relief 
a reality. Thank you.
    Senator Crapo. Thank you very much, Ms. Williams.
    Mr. Olson.

              STATEMENT OF MARK W. OLSON, MEMBER,

        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Olson. Thank you very much, Senator Crapo, Members of 
the Committee. Thank you for holding this hearing, and thank 
you for inviting the Federal Reserve to testify.
    The Federal Reserve Board strongly supports efforts to 
streamline laws and regulations without compromising safety and 
soundness. We have taken a number of initiatives in that 
direction. In 2003, the Board responded to a request from 
Senator Shelby to provide legislative proposals consistent with 
that goal. We applaud also the efforts of John Reich and the 
FDIC in taking the leadership role with respect to the EGRPRA 
efforts, and we applaud your efforts, Senator Crapo, in putting 
together the matrix.
    We have provided our specific approval or support for a 
number of legislative regulatory relief proposals. There are 
other initiatives that are in that matrix that we will continue 
to look at in an effort to clarify our position. A significant 
number of them we will probably have no opposition to. I 
suspect, we will support additional proposal, and there will be 
a small number where we probably will have some objection.
    Our complete testimony is included in the written record, 
but let me just highlight three priorities for this morning. 
The first is the ability to pay interest on reserves and 
reserve requirement flexibility. Banks are now required to 
provide reserves on transaction accounts between 8 and 14 
percent, and that reserve requirement gives banks an incentive 
to look for ways to get around the reserve requirements by 
providing sweep arrangements or other initiatives that will 
eliminate the reserve requirement.
    Authorizing the Federal Reserve to pay interest on those 
reserves would simplify that process. It would also be an 
important tool to us in our implementation of monetary policy. 
The payment of interest would perhaps give us an assurance of 
reserve levels with which monetary policy is based in terms of 
monitoring the money supply. It could also potentially reduce 
the need for mandatory reserves, at minimal cost to the 
Treasury because the fact that the vault cash for many 
institutions could provide most of the reserve requirements so 
the impact on the Treasury we suspect would be minimal.
    The second priority is to allow depository institutions to 
pay interest on demand deposits which you have appropriately 
characterized as a Depression-era regulation. We strongly 
support removal of the prohibition of paying interest on demand 
deposits. Again, many institutions provide a fairly complex, 
cumbersome sweep mechanism to allow for the payment of 
interest. That is more easily done by larger banks than by 
smaller banks, and the removal of that prohibition we think 
would certainly constitute regulatory relief.
    The final priority that we would like to mention this 
morning is the small bank examination flexibility. Currently, 
on-site examinations are required for all banks every 12 
months, except an exclusion is granted for banks of under $250 
million in assets, meeting certain capital and managerial 
standards. Our proposal is to raise that limit to $500 million 
which we think would reduce the regulatory burden for perhaps 
as many as 1,100 additional institutions.
    Mr. Chairman, I would be happy to expand on any of those 
remarks in the question and answer period.
    Senator Crapo. Thank you very much, Mr. Olson.
    Mr. Riccobono.

               STATEMENT OF RICHARD M. RICCOBONO

         ACTING DIRECTOR, OFFICE OF THRIFT SUPERVISION

    Mr. Riccobono. Good morning, Senator Crapo and Members of 
the Committee and thank you for the opportunity to testify on 
regulatory burden relief on behalf of the OTS. I want to thank 
the Committee for holding this hearing and I want to thank you 
in particular, Senator Crapo, for your leadership and 
continuing focus in this area.
    I would also like to thank and recognize the efforts of 
FDIC Vice Chairman John Reich on the interagency EGRPRA 
project. And, Senator, I would have said those nice things 
about Vice Chairman Reich even if he was not going to be my 
boss soon.
    [Laughter.]
    We look forward to working with the Committee on 
legislation to address the issues we discussed today.
    While it is always important to remove unnecessary 
regulatory obstacles in our financial services industry that 
hinder profitability, innovation, and competition, and in turn 
job creation and economic growth, this is a particular good 
time to be discussing these issues given where we are in the 
economic cycle. Today, we have an opportunity to explore 
numerous proposals to eliminate old laws, that while originally 
well-intended, no longer serve a useful purpose.
    Before addressing these issues it is important to note that 
there are two areas not addressed in my statement that many of 
our institutions have identified as unduly burdensome, the Bank 
Secrecy Act requirements and the rules under Sarbanes-Oxley. 
Virtually all institutions raise these issues as regulatory 
relief priorities. While we recognize the need for relief in 
these areas, I do not believe we are at a point right now to 
make sound recommendations on effective reforms without 
compromising the underlying purpose of these laws, but we are 
working on it.
    In my written statement I describe a number of proposals 
that would significantly reduce burden on saving associations. 
I ask that the full text of that statement be included in the 
record.
    Senator Crapo. Without objection.
    Mr. Riccobono. Four items that we believe provide the most 
significant relief for savings associations are: Eliminating 
the duplicative regulation of savings associations under the 
Federal securities laws; eliminating the existing arbitrary 
limits on savings association consumer lending activities; 
updating commercial and small business lending limits for 
savings associations; and establishing succession authority for 
the position of the OTS Director.
    Currently banks and savings associations may engage in the 
same types of activities covered by the investment adviser and 
broker/dealer requirements of the Federal securities laws. 
These activities are subject to supervision by the banking 
agencies that is more rigorous than that imposed by the SEC, 
yet savings associations are subject to an additional layer of 
regulation and review by the SEC that yields no additional 
supervisory benefit. While the bank and thrift charters are 
tailored to provide powers focused on different business 
strategies, in areas where powers are similar, the rule should 
be similar. No sound public policy rationale is served by 
imposing additional and unwarranted administrative costs on a 
savings association to register as an investment adviser or as 
a broker/dealer under the Federal securities laws. OTS strongly 
supports legislation to exempt savings associations from these 
duplicative investment adviser and broker/dealer registration 
requirements.
    Another important proposal for OTS is eliminating a 
statutory anomaly that subjects the consumer lending authority 
of Federal savings associations to a 35 percent of assets 
limitation, but permits unlimited credit card lending. This 
exists even though both types of credit may be extended for the 
same purpose. Removing the 35 percent cap on consumer lending 
will permit savings associations to engage in secured consumer 
lending activities to the same extent as unsecured credit card 
lending. This makes sense not only from a regulatory burden 
reduction perspective, but also for reasons of safety and 
soundness.
    We also support updating statutory limits on the ability of 
Federal savings associations to make small business and other 
commercial loans. Currently, Federal savings associations 
lending for commercial purposes is capped at 20 percent of 
assets, and commercial loans in excess of 10 percent must be in 
small business lending.
    Legislation removing the current limit on small business 
lending and increasing the cap on other commercial lending will 
provide savings associations greater flexibility to promote 
safety and soundness through diversification, more 
opportunities to counter the cyclical nature of the mortgage 
market, and additional resources to manage their operation 
safely and soundly.
    A final but important issue is the statutory succession 
authority for the position of OTS Director. In many respects 
this issue is more important for the thrift industry than it is 
for OTS. We strongly urge consideration of a provision 
authorizing the Treasury Secretary to appoint a succession of 
individuals within OTS to serve as OTS Acting Director in order 
to assure agency continuity. It is equally important to 
modernize the existing statutory appointment authority for the 
OTS Director, by providing every appointee a full 5-year term.
    Statutory succession authority would avoid relying on the 
Vacancies Act to fill any vacancy that occurs during or after 
the term of an OTS Director. This is important, given our 
continuing focus on maintaining the stability of our financial 
system in the event of a national emergency.
    OTS is committed to reducing burden whenever it has the 
opportunity to do so consistent with safety and soundness and 
consumer protections. We look forward to working with you, 
Senator Crapo, and the Committee to address these and other 
regulatory burden reduction items we discuss in my written 
statement.
    I will be happy to answer any questions. Thank you.
    Senator Crapo. Thank you very much, Mr. Riccobono.
    Before we move to Ms. Johnson, I should have stated at the 
outset that the written statements of all of the witnesses, not 
just this panel, but all of the witnesses, will be made a part 
of the record.
    Ms. Johnson.

                 STATEMENT OF JOANN M. JOHNSON

                 CHAIRMAN, BOARD OF DIRECTORS,

              NATIONAL CREDIT UNION ADMINISTRATION

    Ms. Johnson. Thank you, Senator Crapo and Members of the 
Committee. On behalf of the National Credit Union 
Administration, I am pleased to be here today to present our 
views on regulatory reform initiatives.
    The reform proposals being considered by Congress will 
benefit consumers and the economy by enabling financial 
institutions and their regulators to better perform the role 
and functions required of them.
    In my oral statement I will briefly address some of the 
proposals that are of the greater importance to NCUA. The first 
is prompt corrective action reform. Prompt corrective action, 
capital requirements for credit unions enacted in 1998 as part 
of the Credit Union Membership Access Act, are an important 
tool for both NCUA and credit unions in managing the safety and 
soundness of the credit union system and protecting the 
interests of the National Credit Union Share Insurance Fund.
    Our 7 years of experience with the current system, however, 
have shown there are significant flaws and need for 
improvement. PCA, in its current form, establishes a one-size-
fits-all approach for credit unions that relies primarily on a 
high-leverage requirement. This system penalizes low-risk 
credit unions and makes it difficult to use PCA as intended, as 
an incentive for credit unions to manage risk in their balance 
sheets.
    NCUA has developed a comprehensive proposal for PCA reform 
that addresses these concerns. NCUA's proposal establishes a 
more reasonable leverage requirement to work in tandem with 
more effective risk-based requirements.
    Our proposal accounts for the 1 percent method of 
capitalizing the Share Insurance Fund and its effect on the 
overall capital in the insurance fund and the credit union 
system. The result is a leverage requirement for credit unions 
that averages 5.7 percent under our proposal, as compared to 5 
percent in the banking system.
    We have submitted our proposal for Congress's consideration 
and it has been included in the new CURIA proposal introduced 
in the House of Representatives. I urge the Senate to include 
our proposal in any financial reform legislation that is 
considered and acted upon this year.
    As I have previously testified, an important technical 
amendment is needed to the statutory definition of ``net 
worth'' for credit unions. FASB has indicated it supports a 
legislative modification to the definition of ``net worth'' and 
that such a solution will not impact their standard setting 
activities. I am encouraged that the House voted just last week 
in support of a legislative solution to this problem, and I 
urge the Senate to give its prompt consideration.
    Federal credit unions are authorized to provide check 
cashing and money transfer services to members. To enable 
credit unions to better reach the unbanked, they should be 
authorized to provide these services to anyone eligible to 
become a member. This is particularly important to furthering 
efforts to serve those of limited means who are forced to pay 
excessive fees.
    The current statutory limitation on member business lending 
by federally insured credit unions, which is 12\1/4\ percent of 
assets for most credit unions, is arbitrary and constrains many 
credit unions in meeting the business loan needs of their 
members. Credit union have an historic and effective record of 
meeting small business loan needs of their members, and this is 
an issue of great importance in the many credit unions that are 
expanding into underserved areas and low-income communities. 
NCUA's strict regulation of member business lending ensures 
that it is carried out on a safe and sound basis.
    With these facts in mind, NCUA strongly supports proposals 
to increase the member business loan limit to 20 percent of 
assets and raise the threshold for covered loans to a level set 
by the NCUA Board, not to exceed $100,000.
    NCUA continues to support other provisions in the 
previously considered regulatory relief bills, such as improved 
voluntary merger authority; relief from SEC registration 
requirements for the limited securities activities in which 
credit unions are involved; lifting certain loan restrictions 
regarding maturity limits; and increasing investments in 
CUSO's.
    Also we have reviewed the other credit union provisions 
included in the previously mentioned bills and in Senator 
Crapo's matrix, and NCUA has no safety and soundness concerns 
with these provisions.
    Thank you, Mr. Chairman, for the opportunity to appear 
before you today on behalf of NCUA to discuss the public 
benefits of regulatory efficiency for NCUA, credit unions and 
84 million credit union members.
    I am pleased to respond to any questions the Committee may 
have or to be a source of additional information if you 
require. Thank you.
    Senator Crapo. Thank you very much, Ms. Johnson.
    Mr. McClure.

                   STATEMENT OF ERIC McCLURE

          COMMISSIONER, MISSOURI DIVISION OF FINANCE,

                          ON BEHALF OF

            THE CONFERENCE OF STATE BANK SUPERVISORS

    Mr. McClure. Good morning, Senator Crapo, Senator Sarbanes, 
Members of the Committee. I am excited and honored to be here 
today. My name is Eric McClure. I am the Banking Commissioner 
in Missouri. I am here on behalf of the Conference of State 
Bank Supervisors, of which I am Chairman. I appreciate you 
inviting CSBS to be here today to discuss strategies for 
reducing regulatory burden on our Nation's banks.
    We especially appreciate this opportunity to discuss these 
issues because we are the chartering authority and primary 
regulator for the vast majority of the Nation's community 
banks. We believe a bank's most important tool against 
regulatory burden is its ability to make meaningful choices 
about both its regulatory and its operating structures.
    The State charter has been and continues to be the charter 
of choice for most community-based institutions because the 
State-level supervisory environment is locally focused, 
accessible, meaningful, and flexible, and that matches just the 
way our banks do business.
    Our State banking industry is a success story. Our banks 
are focused on the success of their communities because they 
share in the success of their communities. While our current 
regulatory structure and statutory framework may recognize some 
differences among financial institutions, too often it mandates 
overarching one-size-fits-all requirements for any institution 
that can be described by the word ``bank.'' These requirements 
are often unduly burdensome on smaller or community-based 
institutions.
    My colleagues and I are seeing growing disparity in our 
Nation's financial services industry. The industry is becoming 
bifurcated between large and small institutions. Congress must 
recognize this reality and the impact this two-tiered system 
has on our economy. Excessive statutory burdens are crushing 
community banks and slowing the economic engine of small 
business in the United States. Regulatory burden relief for 
community banks would be a booster shot in the arm for our 
Nation's economic well-being.
    CSBS does not endorse approaches such as the Communities 
First Act, as introduced in the House by Congressman Ryun from 
Kansas, that recognize and encourage the benefits of diversity 
within our banking system. We ask that Congress include some 
type of targeted relief for community banks in any regulatory 
relief legislation.
    Today, I would like to highlight a few specific changes to 
Federal law that would help reduce regulatory burden on our 
banks. We ask that the Committee include these provisions in 
any legislation it approves.
    First, we ask that Congress extend the mandatory Federal 
examination cycle from 12 months to 18 months for healthy, 
well-managed banks with assets of up to $1 billion, just as has 
been done for many years for banks with less than $250 million 
in assets. We believe this is real regulatory relief and that 
advances in off-site monitoring techniques and technology and 
the health of the banking industry make annual on-site 
examinations unnecessary for the vast majority of our healthy 
financial institutions.
    Second, many of our banks are operating in multiple States. 
CSBS and the State banking departments have developed 
comprehensive protocols that govern coordinated supervision of 
State-chartered banks that operate branches in more than one 
State. To further support these efforts, we strongly support 
including language in a Senate regulatory relief bill that 
reinforces these principles and protocols. We also believe that 
de novo branching across State lines is a good idea whose time 
has come.
    Finally, CSBS believes that a State banking regulator 
should have a vote on the Federal Financial Institutions 
Examination Council. While we have input at council meetings, 
we do not get a vote on policies that affect the institutions 
that we charter and supervise. We ask that Congress change the 
State position on the council from one of observer to that of a 
full voting member.
    As you consider additional ways to reduce these burdens, we 
urge you to remember that the strength of our banking system is 
its diversity. The fact that we have a very large number of 
banks of different sizes and specialties that meet the needs of 
the world's most diverse economy every day is something that we 
celebrate. Regulatory relief measures must allow for further 
innovation and coordination at both the State and Federal 
levels for the benefit of institutions of all sizes. I am a 
career regulator, but I am extremely sensitive to regulatory 
burden, as are my fellow State supervisors, and we must 
constantly look for ways to be smart, focused, and reasonable 
in our regulatory approach.
    Your own efforts, Chairman Shelby's efforts in this area, 
have greatly reduced unnecessary regulatory burden on financial 
institutions. We commend the Chairman and the Members of this 
Committee for their efforts in this area, and we thank you for 
this opportunity to testify and look forward to any questions 
that you or the Committee Members may have.
    Senator Crapo. Thank you very much.
    Before we go to questions of this panel, we have been 
joined by three other Senators: Senator Sarbanes, Senator 
Bunning, and Senator Stabenow, although Senators Bunning and 
Stabenow have already had to leave for other obligations. It is 
going to be a morning like that. This is an incredibly busy 
morning. But I would like to move back and give Senator 
Sarbanes, our Ranking Member, an opportunity for an opening 
statement at this point.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I will 
be very brief.
    First, I want to welcome the representatives of the Federal 
and State financial institution regulatory agencies and also 
the next panel that will follow with the representatives of 
various industry and consumer groups. This is an important 
hearing, and I am pleased to be able to participate in it. I am 
not sure I will be able to stay the whole morning.
    Let me just say at the outset that the term ``regulatory 
reform'' or ``regulatory relief'' is a broad term. A lot of it 
is in the eye of the beholder, and it can encompass virtually 
any change that might be sought to Federal laws governing 
federally insured financial institutions.
    I gather there is a list of 12 proposed legislative changes 
that have been jointly endorsed by the Federal Reserve, the 
Comptroller of the Currency, the FDIC, and the OTS. In 
addition, each of the Federal financial institution regulatory 
agencies has a supplementary set of suggestions to make, as I 
understand it. I believe the Fed includes eight additional 
proposals in its testimony. The OCC has a list of 27. The OTS 
has a list of 11. NCUA has a list of 16. And I think at your 
request, Mr. Chairman--and I want to commend you for the effort 
you have been making in this effort on this issue--the FDIC has 
compiled a matrix of 136 proposals by the regulators, industry, 
and consumer groups based on the hearing held last year in this 
Committee and, furthermore, that an additional 50 proposals 
have been added to the matrix.
    I would just make this observation: Many of these proposals 
are rather complex and far-reaching. There also appears, I 
think, to be a tendency to characterize at least some of these 
proposals as consensus proposals. It is not altogether clear to 
me who constitutes that consensus or who is embraced within the 
parameters when you are developing a consensus proposal. And I 
have a question I will put to Mr. Reich at some point which I 
think underscores that concerns.
    So, Mr. Chairman, as we move ahead, I obviously think that 
we need to exercise some very careful review of each of these 
proposals. There is a whole range of options here, as it were, 
and I think we need to weigh each of them carefully. Some of 
them, you know, virtually everyone says is a good idea; others 
provoke a considerable amount of discussion and dissension.
    Thank you very much.
    Senator Crapo. Thank you very much, Senator Sarbanes.
    I will begin with the questioning, and, frankly, I will 
start out along the same line that Senator Sarbanes has started 
out in his comments. As has been indicated by Senator Sarbanes 
and myself and I think most of the witnesses, there are a 
number of proposals on the table. We have a very extensive 
matrix in front of us, and we have witnesses from many 
different interest groups and perspectives to follow this panel 
of Federal and State regulators, who each have their 
perspective on the different proposals that are before us.
    One of the concerns that I have is that I want to try to 
bring some finality to this process. It is my objective to move 
to a markup as soon as we can, and it is very clear that we are 
not going to include in the markup every single proposal that 
has been put before this Committee. In fact, as Senator 
Sarbanes indicated and as others on the panel have indicated, 
there are some proposals that I oppose, there are some that I 
strongly support. There are some that I support but which I 
believe it may not be the right time for them to be included in 
the legislation or some that are still under consideration.
    Each of these proposals has a different status among 
different perspectives and different interests. But we have 
before us here the regulators who have an opinion or who have 
an expertise on a number of these proposals. It appears to me 
that there has been some hesitation from the regulators to 
comment on the proposals that are outside of their immediate 
jurisdiction. And although that is very understandable, I want 
to make sure that silence or lack of comment on a certain 
position is not construed as opposition or as a concern about 
safety and soundness.
    And so what I would like to do, at least to try to bring 
some finality as to whether there is opposition on some of 
these proposals, is to in a rather prompt way move forward to 
get some finality on the agency evaluation of the proposals 
that are before us in the matrix, and this is what I have in 
mind.
    Since the agencies have had the 136 provisions of the 
matrix before them for several months, at least, and, in fact, 
many of these have been proposed by the agencies themselves, I 
would like to bring this review and comment period to a close 
in a short period of time. It is my idea that if the agency 
does not comment on a particular provision within the next 
short timeframe, I would like us to understand that the 
assumption will be that the agency has no formal objection to 
us evaluating those provisions. In other words, I would like 
you to be able to at least tell us the provisions to which you 
have an objection.
    Mr. Reich, you have been the one who has been coordinating 
this, and I wondered if it would be agreeable to you if I ask 
you to coordinate with the other agencies to identify the 
provisions upon which there is any objection from any of the 
agencies. Is that agreeable to you, Mr. Reich?
    Mr. Reich. Absolutely. I would be happy to do that, Senator 
Crapo.
    Senator Crapo. And do you believe that you could accomplish 
that by about July 1?
    [Laughter.]
    I heard that sigh.
    Mr. Reich. That is an ambitious timetable, but I will be 
happy to work with my fellow regulators at this table to 
accomplish that deadline.
    Senator Crapo. Do you think the rest of you could work with 
him to try to achieve that? Again, I am not asking you to 
comment on every position. I am just asking you to tell us if 
there are proposals to which you have objections, to identify 
those.
    Ms. Williams. Senator, if I could just note that we have 
not seen the text for some of the proposals. We would need to 
be looking at the text rather than just a description of it. 
But we certainly want to cooperate and do so expeditiously.
    Senator Crapo. All right. I appreciate that.
    Yes, Mr. Olson.
    Mr. Olson. Senator, a very similar response from the Fed. 
There are some proposals where we would like to see the full 
text as well, but we certainly endorse the direction that you 
are going, and we will try and work within the timeframe to 
provide a more specific response. There are a few proposals for 
which we have already indicated concerns that we have, and to 
the extent that we have additional concerns, we will express 
those.
    Senator Crapo. I appreciate that.
    Any other comments?
    Mr. Riccobono. I think it is a great idea. It is what is 
needed to wrap this up, and you absolutely have our commitment.
    Senator Crapo. Thank you.
    All right. I see that my time has expired or will in just a 
few seconds here on my first round.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman. 
Actually, your question leads into an issue I want to raise, 
and I have a somewhat different perspective on this matter than 
the one that has just been enunciated by Senator Crapo.
    First, Mr. Reich, let me ask you, you are the head of the 
interagency group reviewing various regulations pursuant to the 
Economic Growth and Regulatory Paperwork Reduction Act. Is that 
correct?
    Mr. Reich. Yes, sir, Senator.
    Senator Sarbanes. Who constitutes the interagency group?
    Mr. Reich. The member agencies of the FFIEC, the OCC, the 
Fed, the OTS, the FDIC, and the NCUA.
    Senator Sarbanes. And how did you become the head of the 
group?
    Mr. Reich. Two years ago, Chairman Donald E. Powell of the 
FDIC was Chairman of the FFIEC. He asked if I would undertake 
as an assignment the leadership of an interagency effort to 
comply with the mandates of EGRPRA.
    Senator Sarbanes. Now, whose views do you think the 
interagency group needs to hear from or consult in the course 
of doing its work?
    Mr. Reich. Well, we, of course, start with the banking 
industry and the views of the industry, and we have sought 
industry comment through two different methods--the public 
comment process as well as interagency meetings around the 
country. We met in Seattle, Orlando, New York, San Francisco, 
and many points in-between. We have accumulated dozens, in 
fact, hundreds of comments. We have also met with community and 
consumer groups in this area, in the Washington metropolitan 
area, Chicago, and San Francisco. We have a consumer and 
community group meeting planned in Boston later this year.
    I have considered it to be important to obtain a consensus 
of the agencies represented at this table under the belief that 
if the recommendations that we come forth with have been vetted 
by each one of our agencies for safety and soundness concerns 
and for consumer protection concerns, that the fact that the 
recommendations have been vetted at each of our agencies and 
that we are able to reach a consensus agreement would hopefully 
supply some confidence to the Congress and to the Senate 
Banking Committee that these have been thoughtfully considered.
    At the FDIC we have a policy committee consisting of broad 
representation of members who have vetted each of the proposals 
for safety and soundness concerns and consumer protection 
concerns. I assume that the other agencies have followed a 
similar process.
    So, I hope that is responsive to your question.
    Senator Sarbanes. Well, that moves me along the path a bit. 
I am concerned that the regulators are not undertaking 
sufficient outreach to the consumer and community groups. And, 
in fact, we have heard complaints from them about the process. 
As I understand it, the agencies have sponsored nine bank 
outreach meetings across the Nation, but only three with 
consumer groups.
    First of all, as I understand it, you do them separately. 
You do not convene an outreach in which you have the banking 
and the consumer groups present and interacting with one 
another, which seems to me you may be losing an important part 
of the process, particularly if you are concerned about 
developing a consensus. Groups have complained about a lack of 
time to adequately present their points. The website of the 
Economic Growth and Regulatory Paperwork Reduction Act contains 
a prominently listed top-ten issues for banks, but there does 
not seem to be a corresponding section containing prominent 
consumer and community group issues.
    I would like you to provide to the Committee detailed 
information on your outreach effort to banks, thrifts, and 
consumers. How are the cities chosen? How are the participants 
chosen? How are entities and individuals informed of the 
outreach meetings? I think it is very important that your 
process be thorough and comprehensive.
    Now, people may differ in the end on the recommendations, 
and that is something we have to deal with, but I do not think 
we want a situation in which people can with legitimacy claim 
that the process did not work fairly to all concerned. And I 
think we need to be very sensitive to that.
    For instance, in your statement this morning, you say that 
you developed this matrix with a total of 136 burden reduction 
proposals. That is in your statement. And you then go on to 
say,

    Thereafter, I convened a meeting of banking industry 
representatives from the American Bankers Association, 
America's Community Bankers, the Independent Community Bankers 
of America, and the Financial Services Roundtable, who together 
reviewed the matrix of 136 proposals in an effort to determine 
which of these proposals they could all support as industry 
consensus items. This process yielded a list of 78 banking 
industry consensus items.

    My first question is: Did you also convene a meeting of 
consumer groups to review the matrix and give you their views?
    Mr. Reich. I did not convene such a meeting, Senator.
    Senator Sarbanes. Why not?
    Mr. Reich. I have been operating under the assumption that 
several consensus undertakings were important in order for us 
to make recommendations to the Congress--first of all, that the 
industry needed to be supportive of the items that were under 
consideration; and, second, the regulators also needed to be 
supportive.
    We have held 3-day-long meetings with consumer groups, and 
as I indicated, a fourth one is planned. We have invited many 
people to these consumer group meetings. Our attendance has 
been somewhat less than we expected. We have received a fair 
amount of input from the consumer groups, and I have felt that 
we have made a reasonable effort to communicate with consumer 
groups and allow them appropriate participation in the process. 
We are not trying to minimize their input or eliminate their 
input.
    One of the reasons that we decided to hold separate 
meetings between the bankers and the consumer groups was to 
stimulate maximum input from each group, with some apprehension 
that if there was a combined meeting that some people would 
feel inhibited from participating fully. And so that was the 
reason that we decided to have separate groups, so that the 
people representing each group would feel free to speak freely.
    Senator Sarbanes. I have to tell you I think there is a 
problem here. I am looking at the agenda for the meetings in 
San Francisco. The bankers meeting went from 9 to 3 o'clock in 
the afternoon. The consumer one went from 9 to noon. The 
consumer groups tell us that they do not feel they are getting 
a fair shake just in terms of being heard, let alone what 
recommendations are made. It seems to me imperative that there 
be a very open and fair hearing process to give us some 
assurance the regulators are reaching a balanced judgment.
    I do not think that developing a matrix by the regulators 
and then meeting with the industry groups and reaching a 
consensus within that circle alone constitutes a genuine 
consensus in terms of moving forward on these issues. Clearly, 
these consumer groups and community groups and so forth have an 
important role to play, and the notion that the regulators and 
the industry groups can get together and strike the bargain, so 
to speak, and then that constitutes the recommendation does not 
seem to me to be developing the kind of credibility and 
legitimacy that we need for these proposals.
    Now, some of these proposals are inherently controversial. 
I mean, they affect important issues, banking and commerce, for 
example, and later I have a question of Mr. Olson on that 
subject, one I have taken a keen interest in consumer 
protection rights and so forth and so on. So if you could get 
that information to me with respect to the outreach efforts, we 
would be very interested in going over it carefully just to see 
how this process has been working, or not working, as the case 
may be.
    Mr. Chairman, I see the red light is on. Thank you.
    Mr. Reich. I will be happy to do that, Senator.
    Senator Sarbanes. Thank you very much.
    Senator Crapo. Thank you very much.
    We have been joined by Senator Carper.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman.
    To our guests, our witnesses this morning, thanks for 
joining us. It is good to see you all. I have a question. 
Initially I thought I would just direct it to Mr. McClure. Are 
you from Missouri?
    Mr. McClure. Yes, sir.
    Senator Carper. Okay. Are you the examiner for the banks 
there?
    Mr. McClure. Yes, sir.
    Senator Carper. State-chartered banks, and you are here 
representing the Conference of State Bank Supervisors?
    Mr. McClure. Yes, sir.
    Senator Carper. I want to ask a question of you, but I 
think I am going to ask the others to respond as well, but I 
will let you be the lead-off hitter, if you would.
    As we all know, in the wake of the corporate scandals of 
the early part of this decade, we passed the historic Sarbanes-
Oxley bill, and in the years since its enactment, we have 
heard--I have heard and my guess is we all have heard from a 
lot of people things they like about it and some things that 
they do not like about it. One of the things we have heard some 
people do not care very much for is Section 404. I think while 
Section 404 is producing benefits, we have also heard from some 
other entities about problems with the implementation. We have 
heard from some how cumbersome it is, from some others how 
expensive it is. And some say that the cost is resulting--it is 
the first year that it has been done, and it is the start-up 
costs. Others say that they see a broader problem.
    I am encouraged that in response to some of the concerns 
that were raised, I think the SEC held, maybe in April, what 
they describe as a roundtable to hear from a lot of different 
people. And I would just ask of you, Mr. McClure, and our other 
witnesses today if you would not mind commenting, just sharing 
with us your views on the implementation of Section 404, the 
cost versus its benefit, realizing we are only a couple of 
years into this, and any suggestions for future Congressional 
or agency action that you might like to present to us.
    Mr. McClure. Okay. Thank you very much for the opportunity 
to answer the question.
    Senator Carper. You bet.
    Mr. McClure. I have to confess, I am not familiar with 
Section 404 per se. What is that regarding?
    Senator Carper. I tell you what, let me just go to our next 
witness.
    Mr. McClure. Okay.
    Senator Carper. That is probably not fair to have picked on 
you, and I do not want to do that. I will just go to Ms. 
Johnson and we will just work our way down. Thank you for your 
candor. You do not hear that every day, from either side of the 
table.
    Ms. Johnson. Thank you, Senator. NCUA has issued a guidance 
letter in regard to Sarbanes-Oxley encouraging many of the 
specific recommendations within that legislation. We are also 
raising the awareness as we have the opportunity to meet with 
different groups, especially in regard to independent auditing 
and other measures within Sarbanes-Oxley. So credit unions do 
not specifically fall under Sarbanes-Oxley, but it is something 
that we have taken very seriously and are encouraging and 
really promoting.
    Senator Carper. All right. Thanks.
    Our next witness, do you pronounce your name Riccobono?
    Mr. Riccobono. Riccobono, yes.
    Senator Carper. Riccobono.
    Mr. Riccobono. Riccobono.
    Senator Carper. All right. People call me Crapo sometimes, 
but it is really Carper. When they call me Crapo, I always say, 
``I have been called worse.''
    [Laughter.]
    Truth be known, sometimes he gets called Carper. I hope he 
responds similarly. Mr. Riccobono.
    Senator Sarbanes. The two of you have a tough time of it, 
don't you?
    Senator Carper. We do.
    [Laughter.]
    Mr. Riccobono. I think we have heard very much the same 
thing from our institutions, and I would say, it is one of 
those things that you are trying to look for a balance. The 
first thing that, personally, I must tell you, my reaction to 
this is we put all this in place because of a lapse in our 
accounting professional in our accounting industry, and now we 
have raised their revenue five-fold by all of this. So 
something just tells me it is not quite right and it needs to 
be fixed.
    With respect to banking, I think many of the reforms that 
were put in place were needed but already existed within the 
banking laws put in place by this Committee and the House as 
well, and existed prior to all of the lapses that took place.
    So, perhaps a relook at that maybe as time goes on and we 
do this cost/benefit analysis, because it has turned out to be 
an incredibly expensive undertaking, and I guess I would ask 
the question of what do we ultimately get out of it with 
respect to an industry already very heavily regulated.
    Senator Carper. All right. Thanks.
    Mr. Olson, with a special focus on 404, if you would, 
Section 404, for our last three witnesses. Thanks.
    Mr. Olson. I have some trepidation speaking as an expert on 
Sarbanes-Oxley when Sarbanes is in the room.
    Senator Carper. We all feel that way.
    Mr. Olson. It appears that the wording in Section 404 is 
very similar to what was in FDICIA 112 that passed in 1991. 
FDICIA 112 required the external auditor to opine on 
management's assertions regarding the adequacy of internal 
controls and financial reporting. All banks over $500 million 
were required to conform to FDICIA 112. So, incrementally, we 
expected there would be minimal additional cost for the banks 
to comply with 404. But the cost was substantial. It was not as 
a result of what was in the legislation, we believe, but the 
additional cost was the difference of interpretations involving 
the SEC, PCAOB, and the accounting industry with respect to the 
extent to which they could rely on the attestations from their 
own internal audit.
    So, I think initially there was some confusion as to the 
extent to which each could rely on the other's work. The 
hearing that you referred to that the SEC held, our sense is 
that that helped relieve the confusion. And so we think that we 
should be able to remove that gap, but that is what we are 
waiting to see.
    Senator Carper. All right. Good. Thanks, Mr. Olson.
    Ms. Williams.
    Ms. Williams. Senator, I agree completely with what 
Governor Olson noted about the FDICIA provisions and Section 
404. What has happened is that the PCAOB's auditing standard 
number 2 is very complicated and requires very extensive work 
by auditors, in their view, to satisfy the requirements of 
Section 404. What you have for a number of depository 
institutions is a perfect storm of the convergence of the 
Section 404 requirements and the FDICIA requirements, which are 
not the same. So you can have some institutions that are 
subject to both, and some institutions that are not subject to 
Section 404 because they are not registered companies, but yet 
are subject to increased costs from their auditors, reacting to 
the potential exposure and additional work that they do under 
Section 404.
    So there is a complex combination of issues that we have 
today as a result of the application of the 404 standards and 
the application of FDICIA standards to depository institutions 
with assets above $500 million, regardless of whether they are 
registered, and then you have a class of institutions that are 
subject to both and the standards are not the same.
    Senator Carper. All right. Thanks.
    Mr. Chairman, my time has expired. Could we hear just 
briefly from Mr. Reich, please?
    Mr. Reich. Senator, I agree with many of the comments 
expressed by Governor Olson and Ms. Williams. Through my 
contacts with bankers over the past 2 years, through outreach 
meetings and through events that we host at the FDIC, we have 
heard many comments from bankers who are subject to Section 404 
and bankers who are not subject to 404 about the impact that 
they have seen on the bills from their external auditing firms.
    My own view is that the internal control process has been a 
critical element of the banking business from day one. Bank 
examiners examine the internal controls of every operation of 
the bank. It is a component of the CAMELS rating: Capital, 
Asset quality, Management, Earnings, and Liquidity. Internal 
controls are integral to the entire operation of the bank, and 
bankers, particularly those that are not subject to 404, are 
experiencing increased audit fees from CPA firms who are taking 
a more diligent approach. Those bankers are feeling that there 
is a great deal of redundant and unnecessary cost without 
benefit.
    Senator Carper. All right. Thank you all.
    Thank you, Mr. Chairman.
    Senator Crapo. Thank you very much.
    Let me begin a second round with a couple more questions of 
my own, and in that context, Mr. Reich, I do not know that it 
needs to have a lot of clarification, but I want to be sure we 
all understand the difference between the EGRPRA process and 
the process of this Committee in terms of the evaluation of 
these proposals. And I would also like your perspective on that 
because you have basically been tasked to be the task force 
leader for the EGRPRA process, and then also in the Committee 
hearing last year agreed to coordinate for me in terms of some 
of the evaluation that was undertaken.
    But a year ago, when we had our hearing on regulatory 
burden relief before this Committee, as we had indicated 
earlier, there were 18 witnesses. A lot of proposals came 
forward in that testimony, and at that time, as you indicated 
in your testimony today, I asked you, since you were already in 
the position of being the interagency EGRPRA task force leader, 
if you would help us to consolidate and develop a matrix on the 
proposals that had come to this Committee. In my mind, those 
are to a certain extent connected, the EGRPRA process and this 
Committee's review, but also to a certain extent different.
    Could you clarify how you view this?
    Mr. Reich. How I view the matrix and the origination of the 
matrix?
    Senator Crapo. Yes.
    Mr. Reich. Well, it is a combination of issues that have 
been raised by bankers around the country and a combination of 
issues that were raised by those who testified at the hearing a 
year ago. It is a combination of recommendations that have 
originated both within the EGRPRA process and external to the 
EGRPRA process.
    Senator Crapo. And then as a result of the request that I 
made of you last year with regard to helping us to put together 
the compilation, which is now called the matrix, of these 
issues that were proposed to us, you have taken further action 
at our request, as well as at, I assume, at your initiative, to 
try to develop consensus and to determine where there is 
opposition and where there is support and the like. I have 
observed that, and I have not observed that I had seen any 
effort to preclude any group from having input. I can certainly 
say to Senator Sarbanes, once we received the 136 proposals, we 
made it very public that this was the parameter with which we 
were operating. We put it on our website. We invited comment 
from anybody who wanted to make comment and have been very open 
to receive comment and input from anybody who wanted to make 
comment and, in fact, have received sufficient comment that we 
have been asked to add another 50 or so recommendations for 
people to evaluate, some of which have come from consumer 
groups who are interested in the issue.
    The point that I want to make is that I guess I do differ a 
little bit with the perspective that there has been any effort 
here to reduce or to inhibit the opportunity for any interest 
group in this country or any individual in this country from 
having the opportunity to give input on this information. In 
fact, we have tried to do everything we can to make it as 
widely spread and to distribute the information as widely as we 
can.
    I would just ask this question of each member of the panel, 
with the exception maybe of Mr. McClure, who has not been a 
part of this process until today, as to whether you believe 
there has been adequate opportunity for the consumer groups to 
give their input on this set of proposals. I will start with 
you, Mr. Reich.
    Mr. Reich. I believe that we have made a serious effort to 
obtain input from community groups and consumer groups.
    Senator Sarbanes. If the consumer groups and the community 
groups feel that they have not had sufficient access, is that a 
matter of concern to you?
    Mr. Reich. Yes, it is, Senator. And I am willing to address 
that by scheduling meetings with them anytime, anywhere.
    Senator Crapo. I do not know that the rest of you need to 
comment unless you would like to. But I view this, to a certain 
extent, that the agencies, the Federal regulators who have 
authority over these issues have authority to evaluate consumer 
interests and a responsibility to make certain that consumer 
interests are evaluated. And I just wanted to know if you felt 
that consumer groups had had an opportunity to provide 
information.
    Mr. Olson. As you know, the Federal Reserve has a Consumer 
Advisory Council. And, as it happens, they are meeting today. I 
can at the next meeting be sure that this issue will be on 
their agenda so we can get additional input from that group.
    Senator Crapo. I can certainly agree with the tenor of 
Senator Sarbanes' last question, and that is, if the consumer 
groups feel that they have not had an opportunity, then 
certainly we should make it clear or I will make it clear right 
now from the Committee's perspective that their input is 
welcome and our doors are open. And I think that each of you 
should be encouraged to make an additional outreach to make 
sure that their input on the proposals before us is received.
    Ms. Johnson. Senator, I would add that the National Credit 
Union Administration has not been a part of those separate 
meetings that have gone around the country. But what we did--
the consumers for credit unions are actually the members, and 
so last fall NCUA actually held a forum--we called it a capital 
summit--to comment especially on the risk-based capital 
proposal to get the input from the members themselves and what 
the benefit might be.
    On the other proposals that are before us today, we have 
made great efforts, as we are out addressing credit unions and 
their conferences, whatever, those are made up of credit union 
members, and so we do bring these proposals before them on a 
regular basis.
    Senator Crapo. We have just been notified--I did not 
realize it, but there is a vote on, and so we are going to have 
to call a quick recess. But we have a couple of minutes left 
before the vote wraps up, and Senator Sarbanes would like to 
have another opportunity for questioning before we break for 
the vote, which we will then do.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman. I want 
to just clarify two points.
    First of all, my concern about the process that has been 
followed by the EGRPRA group is reflected in Mr. Reich's 
statement: We got the matrix.

    Thereafter, I convened a meeting of banking industry 
representatives . . . to determine which of these proposals 
they could all support as industry consensus items. [That] 
yielded 78 banking industry consensus items.
    The FDIC reviewed the 78 banking industry consensus 
proposals for safety and soundness, consumer protection . . . 
other public policy concerns and determined that we could 
affirmatively support 58 of the 78 industry consensus 
proposals. There are others that we have ``no objection'' to . 
. . take ``no position'' on . . . five of [them] that FDIC 
opposes.
    The next step in the consensus building process was to 
share our positions with the other Federal banking agencies in 
an effort to reach interagency consensus.

    Then you say you were able to agree on some of these 
consensus proposals.
    Now, my reading of that is a truncated process, not fully 
inclusive and not fully comprehensive. Now, I have not gone to 
the substance of the proposals. I may be for some, I may be 
against some. I mean, I do not really know at this point. I 
intend to examine them very carefully. But I do have this very 
strong concern about the process, and I just want to 
reemphasize it, and I would appreciate receiving the 
information I asked for.
    Now, Ms. Johnson, if you all did it differently, you were 
not part of this group, if you could submit to us the process 
which the National Credit Union Administration followed, that 
would be very helpful to us.
    Ms. Johnson. I would be glad to do so.
    Senator Sarbanes. Now, before we break, obviously since I 
was in the room when Sarbanes-Oxley was mentioned, all the 
statute requires is two short paragraphs. One paragraph is it 
says you have to have a system of internal controls. Does 
anyone on the panel believe that these companies should not 
have a system of internal controls? Is there anyone who thinks 
that?
    [No response.]
    Senator Sarbanes. I take it no from the response.
    Now, the second paragraph says--again, a very short 
paragraph. It says that ``these systems of internal controls 
have to be certified and attested to so you have some assurance 
that they are a bone fide system of internal controls and not 
simply a fake system of internal controls, which, of course, if 
you had that would vitiate the requirement for a system of 
internal controls.''
    It seems to me, as far as the statute is concerned, there 
is not an arguable other position. Now the question becomes the 
implementation since the statute does not contain the 
implementation, and that was left to the SEC and the PCAOB to 
do.
    They have made very substantial progress, and they are 
trying very hard to address some of the concerns that have been 
raised of a delay of the applicable dates of some of these 
things. The SEC has asked the Council of Sponsoring 
Organizations, who are the authors of the framework of internal 
controls, to provide additional guidance about the way that 
framework should be applied, particularly to smaller companies. 
The SEC has established an advisory committee to look at the 
impact of the Act, again, with a primary focus on smaller 
companies.
    The PCAOB is holding a series of fora on auditing in the 
small business environment. They have held meetings with 
accountants in Denver; Fort Lee, New Jersey; meetings are 
scheduled in Pittsburgh, Orlando, Boston, and so forth. So 
there is an effort here to fine-tune the provision.
    Now, it is quite true that the requirement to some extent 
was taken from the Federal Deposit Insurance Corporation 
Improvement Act. In fact, these requirements had been applied 
to banks. The FDIC has excluded banks of less than $500 million 
from the internal control rules because it felt that 
application of controls to such banks was not necessary to 
protect the bank insurance fund. But the purpose of Sarbanes-
Oxley is different, and that is to protect investors in public 
companies. And I see no reason why banks that choose to sell 
their stock to the public should be treated differently from 
other public companies in terms of the requirements that they 
have to meet.
    So it becomes a question of what is the proper auditing 
process and the proper governance, but the provisions are very 
broad, and the implementations of them have been left to the 
SEC and the PCAOB, and I think both Donaldson and McDonough 
have shown considerable sensitivity to some of the concerns 
that have been raised in terms of trying to fine-tune it.
    We are barely 2 years into this regime, and I think the 
auditors may have been particularly rigid in the early stages. 
They are trying to give them guidance now as to how they 
proceed. But it seems to me if we are going to standards, I see 
no reason why a bank which is a public company and listed on an 
exchange, whose stock can be bought by investors, should not 
meet the same requirements that other public companies have to 
meet.
    I do not think I understood anyone on the panel to argue to 
the contrary. Am I incorrect about that?
    Mr. Olson. That is correct. We did not argue to the 
contrary. The distinction that we noted is the one that you 
referenced. It is the incremental cost of complying with 404 
over and above 112 for whom it applies, that both apply. And I 
agree with your conclusion also that the SEC and PCAOB and 
their respective leadership do appear to be looking at working 
out some of the lack of understanding or confusion on that 
issue.
    Senator Sarbanes. The expectation is that the costs will go 
down in subsequent years, first because there was an overload, 
I think, in the first year, because a lot of people had to meet 
the standards. Second, if you did not have a fully developed 
system of internal controls, you, in effect, had to make what 
may amount to a capital investment in order to get them into 
place. The assumption is in subsequent years the costs for 
applying them will diminish. But, in any event, we ought not to 
lose sight of the basic purpose, which is to get people up to 
standard, and we have had a lot of testimony from various 
companies that the internal controls have significantly 
enhanced their control over their company, their ability to 
know what is going on, and as a consequence, many of them have 
corrected defaults or oversights that existed in their 
processes which they think have served them well.
    Mr. Chairman, I gather that they are going to close the 
vote if we do not----
    Senator Crapo. They have told us we have about 6 minutes to 
get there.
    Senator Sarbanes. All right. I will cease and desist. Thank 
you very much.
    Senator Crapo. Because of this, what I propose to do at 
this point is to recess for about 10 or 15 minutes. I would 
like to have gotten into more with this panel, but we have 
another large panel. If you do not have an objection, I will 
excuse this panel, and when we come back, we will start the 
next panel.
    Senator Sarbanes. I will forego the questions I wanted to 
ask. I wanted to ask Mr. Olson about the----
    Senator Crapo. I had a couple of questions, too. If you 
would like, we can----
    Senator Sarbanes. No, I think we should let the panel go.
    Mr. Olson. I am looking forward to responding, too, so I 
will either do it here or in writing, whichever you prefer.
    Senator Sarbanes. Why don't you send me a response in 
writing about the industrial loan companies, because it has 
been suggested in the testimony of one of the people on the 
next panel that the Fed supports Section 401 of H.R. 1375, and 
that provision has been interpreted to allow industrial loan 
companies to branch de novo interstate. And I understand that 
the Fed is very much opposed----
    Mr. Olson. The Fed does not support applying that provision 
to ILC's. To banks, yes. To ILC's, no.
    Senator Sarbanes. Okay.
    Senator Crapo. All right. Thank you. And I have a few 
questions of my own. I did want to get into some of these other 
issues, and I apologize that we have been stopped from doing 
that by this vote. But I will submit some written questions, 
and I think you may get some other written questions from other 
Members of the Committee as well.
    With that, we thank this panel. We excuse this panel. We 
recess the Committee and hopefully we will reconvene in just a 
few short minutes. Thank you.
    [Recess.]
    This hearing will reconvene, and I appreciate everybody's 
patience with our short delay.
    I have to say, I think we were just talking about whether 
this might be a record. It is the largest panel I have ever 
been in a Committee that has been before us, but perhaps that 
is just an indication of the interest in this issue.
    Let me introduce the panel that we have before us. I would 
like to encourage everybody to remember my instructions to try 
to pay attention this light up here or that one there, if you 
can see it. I do not think very many can see the one on your 
table very well. But it is going to be important to try to 
stick to the time limits. As you probably have noted, your 
testimony is read and reviewed, and your testimony will all be 
a part of the record.
    Our second panel--and this will be the order in which we 
hear you--consists of Mr. Steve Bartlett, President and CEO of 
Financial Services Roundtable; Ms. Carolyn Carter, Counsel for 
the National Consumer Law Center; Mr. Arthur Connelly, Chairman 
and CEO of the South Shore Savings Bank; Mr. David Hayes, 
President and CEO of the Security Bank; Mr. Christopher A. 
Korst, Senior Vice President of Rent-A-Center, Inc.; Mr. Chris 
Loseth, President and CEO of the Potlatch No. 1 Federal Credit 
Union from Idaho; Mr. Ed Pinto, President of Courtesy 
Settlement Services; Mr. Eugene Maloney, Executive Vice 
President of Federated Investors, Inc.; Mr. Travis Plunkett, 
Legislative Director of Consumer Federation of America; Mr. 
Bradley Rock, President and CEO of the Bank of Smithtown; and 
Mr. Michael Vadala, President and CEO of the Summit Federal 
Credit Union.
    Now, did I miss anybody?
    [No response.]
    Good. Now, I do not know if you are sitting in the order in 
which I read your names, but we will go by the order in which I 
read your names, and that means we will start with you, Mr. 
Bartlett.

                  STATEMENT OF STEVE BARTLETT

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

                 FINANCIAL SERVICES ROUNDTABLE

    Mr. Bartlett. Thank you, Mr. Chairman.
    Mr. Chairman, my name is Steve Bartlett and I am testifying 
on behalf of the Financial Services Roundtable. The Roundtable 
represents some 100 of the largest integrated financial 
services companies in America.
    Mr. Chairman, I am here to impress on you and the Members 
of the Committee the urgency of regulatory relief. It has been 
6 years since the passage of Gramm-Leach-Bliley, the last time 
that many of these issues were addressed. Many of those issues, 
in fact, predated Gramm-Leach-Bliley. Since then, though, 
technology, mobility, and consumer demands have accelerated, 
and our companies are increasingly unable to respond to those 
changes. So, I am going to describe in my oral testimony 
several of the ways in which we believe regulatory relief is 
long overdue, and I have submitted a much longer list in my 
written testimony.
    First, Mr. Chairman, one that was not on the list 6 years 
ago is suspicious activity reports. The current system of SAR's 
reporting is simply not working. It is not working for law 
enforcement, and it is not working for consumer access. The 
best evidence of that is the dramatic increase in SAR's 
filings: From 1997, some 81,000 SAR's; this year, we think it 
will hit about 600,000, and it may be a million or more next 
year or the year thereafter.
    This dramatic increase, in fact, stops law enforcement from 
being able to use SAR's, but it also masks an even larger 
problem, and that is that many consumers are simply pushed out 
of the banking market by the requirements of SAR's or the Bank 
Secrecy Act. The failure to file a SAR has become--the reason 
we believe that SAR's have--defensive SAR's have increased so 
dramatically is it has become a criminal issue. That means that 
a financial institution simply cannot afford the risks with the 
failure to file a single SAR's. There are no clear standards 
for when SAR's should be filed, and so the net result is 
defensive filings.
    There are several solutions which I have submitted in 
writing, but the most important is that Congress should give 
financial institutions a safe harbor from prosecution when an 
institution has an isolated incident of failing to file a 
suspicious activity and the institution has a satisfactory 
anti-money laundering program in effect.
    Second, Mr. Chairman, is interstate branching. It has been 
over 10 years ago that Congress enacted the loophole 
legislation of the Riegle-Neal Interstate Banking Efficiency 
Act of 1994. That Act eliminated some of the legal barriers to 
interstate banking, but essentially just set up another type of 
loophole. Consumers now have somewhat better access to products 
and services, and the financial services industry is somewhat 
more competitive. But, frankly, Mr. Chairman, it is still a 
loophole. Riegle-Neal is at best a law that gets around the ban 
on interstate branching. It is time for Congress to eliminate 
that ban and legalize interstate branching, as happens in every 
other industry in the country, and allow customers to follow 
their banks and vice versa.
    Third is the elimination of costly unintended regulatory 
barriers for thrifts. Over the years, Congress has permitted 
thrift institutions to engage in the same type of retail 
brokerage and investment activities as commercial banks so that 
thrifts now look, walk, act, and talk like banks. But for 
reasons which are lost in the muddle of history, Congress has 
not given thrifts the same exemption from Federal securities 
laws that are available to banks. And so thrifts, unlike banks, 
face unnecessary and costly SEC registration requirements for 
no apparent reason of either safety and soundness or consumer 
protection. So we urge the Committee to establish exemptions 
for thrifts that are comparable to exemptions for commercial 
banks.
    Fourth, diversity jurisdiction. For companies other than 
national banks and Federal savings associations, Federal law 
clearly provides that a business corporation will be deemed to 
be a citizen of, one, the State in which it is incorporated 
and, two, the State in which it has its principal place of 
business. But several court decisions have eroded that to where 
now the rule is quite muddy and, in fact, access to Federal 
courts is in many cases being denied.
    Fifth, simplified privacy notices. Like all consumers, 
Roundtable member companies have found that the privacy notices 
required by Gramm-Leach-Bliley are overly confusing and largely 
ignored because of the confusing aspect as well as the size by 
many consumers. We recommend that the Committee use this 
opportunity to simplify the form of notice required by Gramm-
Leach-Bliley. Regulators have tried to do that, but they simply 
do not have the statutory authority.
    And sixth is we believe that the SEC regulation of broker-
dealers, it is time for Congress to act. Title II of Gramm-
Leach-Bliley we believe was clear. It was intended to provide 
for SEC regulation of new securities activities of banks but 
permit banks to continue to engage directly in traditional 
trust and accommodation activities that have long been 
regulated by banking agencies. We think that this Committee 
should restore Congressional intent on that front.
    We do call on Congress to act, or at least this Committee 
to act before Independence Day to give the Nation's consumers 
an independence from these costly regulations.
    Senator Crapo. Thank you, Mr. Bartlett.
    Ms. Carter.

                  STATEMENT OF CAROLYN CARTER

             COUNSEL, NATIONAL CONSUMER LAW CENTER

    Ms. Carter. Thank you, Mr. Chairman, for the opportunity to 
address you today. My name is Carolyn Carter. I am testifying 
on behalf of the low-income clients of the National Consumer 
Law Center and also on behalf of a host of other consumer 
protection organizations. I will address just a few of the 
issues covered in the written testimony we filed jointly with 
Consumer Federation of America. Travis Plunkett of CFA will 
address several other issues. And as the process goes forward, 
consumer groups would very much like greater involvement in 
consensus building and decisionmaking on these important 
issues.
    First, we urge you not to expand diversity jurisdiction for 
national banks. Expanding diversity jurisdiction would move 
thousands of foreclosure cases, thousands and thousands of 
foreclosure cases onto the Federal dockets, even though those 
cases deal primarily with issues of State law, not Federal law. 
Federal courts have enough on their plates and should not be 
turned into foreclosure processing machines. Homeowners facing 
foreclosure should have their cases heard in locally 
accessible, nearby their community courts.
    Another proposal, Senate bill 603, proposes to roll back 
consumer protection requirements for rent-to-own transactions 
in Wisconsin, New Jersey, Vermont, and several other States. If 
this were a consumer protection measure, as it is being termed 
by some industry groups, consumer groups would support it. It 
is not and we urge you to reject it.
    There is also a proposal before you to exempt mortgage 
services from the notice requirements of the Fair Debt 
Collection Practices Act. There have been many abuses involving 
mortgage servicers in recent years. The FTC has undertaken 
massive cases against mortgage servicers because of abuses. The 
notice that would be eliminated is an important notice because 
it alerts consumers of their rights under the Fair Debt 
Collection Practices Act. The exemption is fashioned as a 
narrow exception, but, in fact, it is not. It is a broad 
exception for reasons explained in our written testimony. 
Consumers need more, not less, protection against abusive 
mortgage servicing.
    Another proposal deals with the right of rescission under 
the Truth in Lending Act. A consumer now has 3 days after 
closing to rescind a transaction that places the family home at 
risk. The consumer can review the transaction and back out of 
it if it is abusive, if it is different from what the lender 
promised, or if it is just a bad idea to place the family home 
at risk for an extension of credit. The right of rescission 
deters bait-and-switch tactics because the lender knows that 
the consumer will be able to review those documents after 
closing. And it is critical to preserving homeownership. The 
proposals before you would create three enormous exceptions 
that would completely gut the right of rescission. It would 
give the green light to predatory lending, and we urge you to 
oppose it.
    Finally, let me say a few words about disclosure 
requirements. The Acting Comptroller of the Currency stated 
today that she favors more concise, streamlined, and 
understandable requirements for disclosures. And we agree with 
that, but we strongly disagree with any implication that in the 
name of streamlining, consumers should be deprived of 
information they now receive.
    It is true that most people can absorb only a few bits of 
information when they initially see a disclosure statement or 
another document. But if the information is presented in a 
uniform manner, a uniform format, uniform terminology, the 
consumer can pick out what he or she needs. For example, with 
nutritional labeling, if I am interested in sodium I can pick 
that right out because I know exactly where it is going to be 
on the label. But the person sitting next to me can pick out 
protein content and can disregard everything else. The same is 
true of credit disclosure, and that means that the disclosure 
requirements must be detailed, they must be prescriptive, 
because otherwise the disclosures will not be uniform. And 
prescriptive, detailed requirements actually in my opinion make 
compliance easier because every financial institution then does 
not have to reinvent the wheel.
    It should also be remembered that credit disclosures serve 
not just an immediate function but a long-term function. Unlike 
a nutritional label, which I may read once and then throw away 
when I eat the product, consumers save their financial papers 
and refer to them from time to time throughout the life of the 
transaction, for example, during that 3-day window for 
rescission. So consumer testing, which we strongly support, 
should look not just at what consumers can absorb when they 
first see a disclosure statement, but also what they can absorb 
and use in the long-run.
    Thank you.
    Senator Crapo. Thank you very much, Ms. Carter.
    Mr. Connelly.

                STATEMENT OF ARTHUR R. CONNELLY

             CHAIRMAN AND CHIEF EXECUTIVE OFFICER,

          SOUTH SHORE SAVINGS BANK, SOUTH WEYMOUTH, MA

                          AND MEMBER,

         EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS,

          AMERICA'S COMMUNITY BANKERS, WASHINGTON, DC

    Mr. Connelly. Thank you. Senator Crapo, Senator Sarbanes, 
other Members of the Committee, I am Arthur Connelly, Chairman 
and CEO of the South Shore Savings Bank in South Weymouth, 
Massachusetts. We are a $900 million mutual State-chartered 
savings bank.
    America's Community Bankers is pleased to have this 
opportunity to discuss our recommendations to reduce the 
regulatory burden community banks face and the unnecessary 
costs that we endure as a result.
    These costs take their toll. Ten years ago, there were 
12,000 banks in the United States. Today, only 9,000 of us have 
been left standing. We are particularly concerned about how the 
regulatory agencies are implementing laws intended to prevent 
money laundering and promote corporate governance. Community 
bankers fully support the goals of the laws against money 
laundering. We are resolute participants in the fight against 
crime, and especially terrorism. Yet we face an atmosphere of 
uncertainty and confusion because regulatory staff in the 
field, the region, and in Washington are giving banks 
inconsistent messages. There are also inconsistent regulatory 
messages between bank regulatory and law enforcement agencies.
    Community bankers also support the Sarbanes-Oxley Act. 
However, the implementation of the Act by the SEC as well as 
PCAOB together with the way accounting firms interpret 
regulations have led to unintended consequences that are pretty 
costly and burdensome. This is true for all community banks, 
whether they are publicly traded, privately held, or mutual, 
like my own.
    ACB has provided concrete suggestions to the banking 
agencies and other regulators on ways to cut the costs of 
compliance. ACB wants for the record to thank Senator Sarbanes 
for his assistance in securing the participation of community 
bankers in an SEC roundtable on the implementation of Sarbanes-
Oxley. ACB will continue to work with Government agencies to 
improve the regulation of anti-money laundering and corporate 
governance laws. Congress has an important oversight role to 
ensure that a constructive dialogue between industry and 
regulators continues.
    Our written statement endorses 32 amendments to the current 
laws that will reduce unnecessary regulations on community 
banks. Let me mention just three.
    First, a modest increase in the business lending limit for 
Federal savings associations is a high priority for ACB 
members. Community banks who operate under Federal savings 
association charters are experiencing an increased demand for 
small business loans. To meet this demand, ACB wants to 
eliminate the lending limit restriction on these loans and 
increase the lending limit on other commercial loans by 20 
percent. Savings associations could then make more loans to 
small and medium-sized businesses, enhancing their role as 
community-based lenders. This would clearly promote community 
development, economic growth, and job creation. And, after all, 
that is what it is all about: Community development, economic 
growth, and job creation.
    Second, ACB strongly urges the elimination of required 
annual privacy notices for banks that do not share information 
with nonaffiliated third parties. We should provide customers 
with an initial notice and be allowed to provide subsequent 
notices only when the terms are modified. At my bank, for 
instance, we send out thousands of such notices each year at a 
significant cost, in both dollars and staff time, even though 
our policies and procedures have remained consistent over many 
years. The bottom line is that this redundancy does not enhance 
consumer protection at all. Redundancy really numbers our 
customers with volume.
    The third point, ACB vigorously believes that the truth 
business of savings associations should have parity with banks 
under both the SEC Act as well as the Investment Advisers Act. 
There is no substantive reason to subject savings associations 
to different requirements. Savings associations and banks 
should operate under the same basic regulatory requirement when 
engaged in identical trust, brokerage, and other activities.
    These three recommendations, along with our written 
statement, will make it easier and less costly for us to help 
our communities grow and prosper and create new jobs.
    On behalf of America's Community Bankers, I want to thank 
you for your invitation to testify today, and we look forward 
to working with you and your staff, and I will be happy to 
answer any questions at the appropriate time.
    Senator Crapo. Thank you, Mr. Connelly.
    Mr. Hayes.

                    STATEMENT OF DAVID HAYES

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

          SECURITY BANK, DYERSBURG, TN, AND CHAIRMAN,

            INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Hayes. Thank you, sir. Mr. Chairman, Senator Sarbanes, 
my name is David Hayes, and I am President and CEO of Security 
Bank and the Chairman of the Independent Community Bankers of 
America. My bank is located in Dyersburg, Tennessee, which is a 
town of 19,000, an hour and a half from Memphis, and we have 70 
employees and we have $135 million in assets.
    The ICBA appreciates the opportunity to testify today on 
behalf of our 5,000 member banks throughout this great Nation. 
We are especially pleased with your leadership, Senator Crapo, 
taking a broad approach to drafting regulatory relief for the 
Committee's consideration. It is vital that Congress expand on 
previous regulatory relief bills as they included regulatory 
relief for big banks, thrifts, credit unions, but little for 
our Nation's community banks. We are about reduction of 
regulation, not expansion of powers.
    Community banks are the economic engines of Main Street 
America. There are reasons many of our country's businesses and 
communities continue to thrive. Local banks are particularly 
attuned to the needs of their communities and are uniquely able 
to facilitate local economic development through community and 
small business lending.
    Community bankers are leaders in their communities. They 
spend time on economic development and not-for-profit 
organizations. All their efforts improve their communities. 
Increasingly, unnecessary regulation takes our time away from 
our customers and our communities. Our future depends on our 
community.
    I assure you community bankers are not crying wolf. Recent 
studies highlighted in our written statement show that 
community banks are losing market share. I agree with Vice 
Chairman John Reich that the disproportionate impact of 
regulatory burden on community banks is the leading cause of 
consolidation in our industry. Community bankers are saying, 
``We have had enough.'' Quite simply, community bankers are 
drowning in paperwork. If we do not get meaningful relief soon, 
more and more banks will throw up their hands and give up their 
independence. It is like being caught in quicksand. It has us 
and is pulling us down to death.
    That is the reason the ICBA closely worked with 
Representative Jim Ryun on the Communities First Act. H.R. 2061 
provides relief critical to community banks and their customers 
and would strengthen communities by freeing up resources 
currently being used for unnecessary compliance. We, like other 
financial groups, have been working on the interagency 
regulatory burden reduction project chaired by Vice Chairman 
Reich of the FDIC and endorse virtually all of the regulatory 
provisions.
    The Vice Chairman has done an excellent job in identifying 
unnecessary bank regulations. Many of these are hard-wired in 
Federal statute. The Communities First Act would make key 
statutory changes building on the concept of a tiered 
regulatory and supervision system that recognizes the 
differences between community banks and more complex 
institutions.
    Let me give you a couple of examples that affect my bank. 
Section 102 of the Act would permit strong banks with assets of 
$1 billion or less to file a short form call report in two of 
four quarters in any given year. The current call report 
instructions and schedules fill 458 pages. They are expensive 
and time-consuming to produce. Quarterly filings by community 
banks are not essential to the agencies. In a bank like mine, 
the world just does not change dramatically between March 31 
and June 30 of each year. The FDIC will not lose track of me, 
and I assure you Chairman Greenspan will still be able to 
conduct monetary policy without our real-time data.
    This is especially true today as I look at the retirement 
of my cashier who has been doing this job for many years, and I 
have to go out and try and find that person who will take that 
laborious task.
    One of the most wasteful provisions of Gramm-Leach-Bliley 
has been the requirement that financial institutions send 
annual privacy notices, which most customers do not read. I 
question do we all read them, and I think the answer is no. We 
would recommend that an institution not be required to send an 
annual notice except for those times in which something 
substantial has changed in the method in which they do business 
or provide information to their customers. While any size 
institution could take advantage of this, I can tell you, my 
customers and the trash collectors in our city would greatly 
appreciate that.
    The other item is the truth in lending 3-day right of 
rescission. Many times customers have said, ``David, I signed 
the note. I want my money. Why do I have to wait 3 days?'' So 
there are issues that we deal with in communities eyeball to 
eyeball with our customers, and we really understand the value 
of the customer relationship and the customer understanding the 
financial transaction.
    Thank you very much.
    Senator Crapo. Thank you very much, Mr. Hayes.
    Mr. Korst.

               STATEMENT OF CHRISTOPHER A. KORST

           SENIOR VICE PRESIDENT, RENT-A-CENTER, INC.

    Mr. Korst. Thank you, Mr. Chairman. Good afternoon, Senator 
Sarbanes.
    My name is Chris Korst, and I am Senior Vice President with 
Rent-A-Center, Inc., based in Plano, Texas. I appear today in 
support of S. 603, legislation that would regulate the rental-
purchase or rent-to-own transaction for the first time at the 
Federal level, and in support of its inclusion in the proposed 
regulatory relief legislation. I speak to the Committee on 
behalf of the Coalition for Fair Rental Regulation, which 
includes in its membership roughly 4,300 of the 8,000 rental-
purchase stores operating in the United States. Additionally, 
we are joined in support of this legislation by the Association 
of Progressive Rental Organizations, the national trade 
association representing rental dealers throughout the country.
    S. 603 has been introduced once again in this Congress by 
Senator Mary Landrieu and is cosponsored by a number of other 
Senators, including Senators Shelby, Bunning, and Johnson on 
this Committee. In proposing this legislation, Senator Landrieu 
and her colleagues have successfully struck a balance between 
the interests of the consumers on the one hand and the rental 
merchants on the other.
    By way of background, the rental-purchase industry offers 
household durable goods--appliances, furniture, electronics, 
and computers--along with musical or band instruments for rent 
on a weekly or monthly basis. Customers are never obligated to 
rent beyond the initial term and can return the rented product 
at any time without penalty or without further financial 
obligation. Customers also have the option to continue renting 
after the initial or any renewal period and can do so simply by 
paying an additional weekly or monthly rental payment in 
advance of that rental period. In addition to that, our 
customers also have the option to purchase the property they 
are renting either by making the required number of renewal 
payments set forth in the agreement or by exercising an early 
purchase option, paying cash for the item at any time during 
the transaction.
    This transaction appeals to a wide variety of consumers, 
including parents of children who this week want to learn the 
play the violin, only to find out a few weeks or months later 
their interests in that instrument have lagged. Military 
personnel use our services, as do college students and many 
others including campaign offices, summer rentals, and so 
forth, people who have similar limited or short-term needs or 
wants.
    Importantly, however, because we do not check our 
consumer's credit histories and do not require down payments or 
security deposits, this transaction is also frequently used by 
individuals and families who are just starting out and who have 
not yet established good credit or who have damaged or bad 
credit and whose monthly income is insufficient to allow them 
to save and make major purchases with cash. For these 
consumers, rent-to-own offers an opportunity to obtain the 
immediate use of, and ownership if they so desire, the things 
that we all take for granted--beds for our children to sleep 
on, washers and dryers so that our customers do not spend all 
weekend at the laundromat, computers so that their children can 
keep up in school, decent furniture to sit on and eat at, and 
so on.
    Rent-to-own gives working-class individuals and families a 
choice without the burden of debt and with all the flexibility 
they need to meet their sometimes uncertain economic 
circumstances.
    Specifically, S. 603 does five major things:
    One, it defines the transaction in a manner that is 
consistent with existing State rent-to-own laws, Federal tax 
provisions, and with the views of both the Federal Reserve 
Board staff and the Federal Trade Commission as expressed in 
their testimony before the House Financial Services Committee 
in the 107th Congress.
    Two, it would provide for comprehensive disclosure of key 
financial terms in advertising and on price cards on 
merchandise displayed in our stores, as well as in the body of 
the rental contracts themselves.
    Three, the bill would establish a list of prohibited 
practices, a list similar in content and substance to the 
practices prohibited under the Federal Trade Commission Act.
    Four, the bill adopts certain universal substantive 
regulations shared by all existing State rental laws.
    And, five, the bill adopts the remedies available to 
aggrieved and injured consumers under the Truth in Lending Act.
    In summary, this legislation would go farther in providing 
substantive protections to rent-to-own consumers than does any 
other Federal consumer protection law on the books today.
    I would like to touch briefly on two additional points. 
First, regarding the issue of this legislation and its relation 
to existing State laws, if enacted, this legislation would 
serve only to establish a floor of regulation of the rent-to-
own transaction. State legislatures would have the full 
opportunity to pass stronger laws and regulations, modify 
existing statutes, or even outlaw the transactions entirely if 
that is what those bodies believe was appropriate. Thus, it is 
clear that this bill does not preempt State law. At the same 
time, this bill would finally establish a Federal definition of 
the transaction rental-purchase consistent with the definitions 
found in the existing State statutes and within the Internal 
Revenue Code.
    Importantly, just as is the case under other Federal 
consumer protection laws, including Truth in Lending and the 
Consumer Lease Act, States would not be permitted to define or 
mischaracterize this transaction in a manner that would be 
inconsistent with the definition in this bill.
    Finally, as you may be aware, some groups have called for 
any Federal rental-purchase legislation to include the 
disclosure of an imputed or estimated annual percentage rate in 
these agreements. We believe that this view is misguided for 
several reasons.
    First, in order for a transaction of any kind to include an 
interest component, there must be debt; that is, a consumer 
must owe a sum certain and must be unconditionally obligated to 
repay that sum. That is simply not the case under the typical 
rent-to-own transaction.
    Second, the notion of imputed interest misleads consumers 
and misrepresents the true economics of the rent-to-own 
transaction, which has many benefits, services, and options 
that traditional credit transactions just do not offer, 
including delivery and set-up, maintenance on the merchandise 
throughout the rental, and replacement items if the original 
item cannot be repaired in the customer's home.
    Additionally, as noted previously, rental customers always 
enjoy the absolute right to terminate the transaction and 
return the products without penalty at any time.
    Finally, referring to the Federal Trade Commission's 
seminal report on the rent-to-own industry in the year 2000, I 
would like to quote from that report. First, they state,

    Unlike a credit sale, rent-to-own customers do not incur 
any debt, can return the merchandise at any time without any 
obligation for the remaining payments, and do not obtain 
ownership rights or equity in the merchandise until all 
payments are completed. An APR disclosure requirement for rent-
to-own transactions may be difficult to implement and could 
result in inaccurate disclosures that mislead consumers.

    Thank you, Mr. Chairman.
    Senator Crapo. Thank you, Mr. Korst.
    Mr. Loseth.

                   STATEMENT OF CHRIS LOSETH

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

            POTLATCH NO. 1 FEDERAL CREDIT UNION AND

              CHAIRMAN, IDAHO CREDIT UNION LEAGUE

                 GOVERNMENT AFFAIRS COMMITTEE,

       ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION

    Mr. Loseth. Chairman Crapo, Senator Sarbanes, and Members 
of the Committee, on behalf of the Credit Union National 
Association, I appreciate this opportunity to express CUNA's 
views on the legislation to help alleviate the regulatory 
burden under which many insured financial institutions operate. 
I am Chris Loseth, President and CEO of Potlatch Credit Union 
in Lewiston, Idaho.
    As a cooperative financial institution, credit unions have 
not been shielded from the mounting regulatory responsibilities 
facing insured depositories in this country, but given the 
limited time available, I will devote my statement to 
describing a few exceptionally important issues for credit 
unions.
    As part of our mission, credit unions are devoted to 
providing affordable service to all of our members including 
those of modest means. One provision that has been passed by 
the House and is in legislation introduced by Senator Sarbanes 
would go a long way toward helping credit unions fulfill this 
part of their mission. It would permit credit unions to provide 
check cashing and wire transfer services to nonmembers within 
their field of membership.
    Accomplishing our mission can also be greatly enhanced by 
revisiting two major components of the 1998 passed Credit Union 
Membership Access Act. Perhaps the most critical issue on the 
horizon for credit unions is the need for reforming the prompt 
corrective action regulations governing credit unions. Credit 
unions have higher statutory capital requirements than banks, 
but credit unions' cooperative structure creates a systemic 
incentive against excessive risk taking, so they may actually 
require less capital to meet potential losses than do other 
depository institutions.
    And because of the conservative management style, credit 
unions generally seek to always be classified as well rather 
than adequately capitalized. To do that they must remain 
significantly cushioned above the 7 percent requirement.
    CUNA believes that the best way to reform PCA would be to 
transform the system into one that is much more explicitly 
based on risk measurement, as outlined by the NCUA proposal and 
embodied in a House introduced bill, H.R. 2317 or CURIA. It 
would place much greater emphasis on ensuring that there is 
adequate net worth in relation to the risk a particular credit 
union undertakes. At the same time, CUNA believes credit union 
PCA should incorporate a meaningful leverage requirement, 
comparable to that in effect for other federally insured 
institutions.
    CUNA strongly supports the NCUA's proposed new rigorous 
safety and soundness regulatory regime for credit unions, which 
is anchored by meaningful net worth requirements. And credit 
unions agree that any credit union with net worth ratios well 
below those required to be adequately capitalized should be 
subject to prompt and stringent corrective action. There is no 
desire to shield such credit unions from PCA. They are indeed 
the appropriate targets of PCA. Reforming PCA along these lines 
would preserve and strengthen the fund.
    Also, the Financial Accounting Standards Board is 
finalizing guidance on the new accounting treatment of mergers 
of cooperatives that would create a new component of net worth, 
in addition to retained earnings, after a credit union merger. 
The unintended effect of the FASB rule will be to no longer 
permit a continuing credit union to include the merging credit 
union's net worth in its PCA calculations.
    Senior legal staff at FASB have indicated support for a 
legislative approach to correct this problem, and we urge the 
Committee to likewise support such an effort, well in advance 
of the effective date so credit unions will have certainty 
regarding the accounting treatment of mergers.
    The other issue I would like to address is the current cap 
on member business lending. There was no safety and soundness 
reason to oppose these limits as the historical record is clear 
that such loans are even safer than other types of credit union 
loans.
    In fact, public policy argues strongly in favor of 
eliminating or increasing the limits from the current 12.25 
percent to 20 percent suggested in CURIA. Small business is the 
backbone of our economy, and responsible for the vast majority 
of new jobs in America. Yet, a recent SBA study reveals that 
small businesses are having greater difficulty in getting loans 
in areas where bank consolidation has taken hold. The 1998 
passed law severely restricts small business access to credit 
and impedes economic growth in America.
    Furthermore, the NCUA should be given the authority to 
increase the current $50,000 threshold, as proposed in CURIA, 
up to $100,000. This would be especially helpful to smaller 
credit unions, as they would then be able to provide the 
smallest of these loans without the expense of setting up a 
formal program.
    In summary, Mr. Chairman, we are grateful to the Committee 
for holding this important hearing. We strongly urge the 
Committee to act on this very important issue this year, and to 
make sure that the provisions discussed in my testimony are 
part of any Congressional action taken to provide financial 
institutions regulatory relief.
    The future of credit unions and their 86 million members 
will be determined by our ability to provide relief in these 
important areas.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Loseth.
    Mr. Pinto.

                   STATEMENT OF EDWARD PINTO

         PRESIDENT, COURTESY SETTLEMENT SERVICES, LLC,

                          ON BEHALF OF

        THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS

    Mr. Pinto. I am Ed Pinto, President of Courtesy Settlement 
Services, LLC. Thank you, Chairman Crapo and Ranking Member 
Sarbanes, for the opportunity to testify on behalf of the 
National Federation of Independent Business regarding interest-
bearing checking accounts for small businesses.
    I am pleased to report that 86 percent of NFIB members 
support allowing business owners to earn interest on their 
business checking accounts. I am also pleased to hear the House 
has overwhelmingly voted in favor of H.R. 1224 by a vote of 424 
to 1, indicating a strong bipartisan desire to overturn this 
archaic and Depression-era law that prohibits the payment of 
interest on business checking accounts. I was also pleased to 
hear earlier this morning with the panel of regulators that 
some of the regulators also indicated that they endorsed the 
repeal of this restriction.
    Big banks have consistently opposed repealing this ban on 
interest checking, and at the same time a proposed compromise 
legislation that would delay the implementation of this repeal 
by 3 years. Their efforts to insulate themselves from the free 
market have hurt small businesses in this country, the 
acknowledged job creation engine of this country.
    I view this bill as necessary consumer protection 
legislation, and every day it is delayed is an injustice to the 
over 25 million taxpayers filing business income tax returns 
with the IRS. Let me repeat that number, 25 million business 
income taxpayers in this country. That may seem like small 
potatoes in terms of what they might earn on interest on 
checking, maybe $100 or $200 per year, but multiply that by 25 
million and leverage that job creation power by the ability of 
our Nation's business to create jobs, and the impact would be 
large.
    The House passed bill as currently written has a 2-year 
delay, and that is already a compromise, and NFIB strongly 
urges the Committee to resist efforts to further lengthen the 
phase-in period. Please do not deny this much-needed 
legislation to tens of millions of taxpayers.
    While it had been 16 years since I first started my first 
business, I can still vividly recall to my astonishment at 
being told that a business could not earn interest on a 
checking account. I was further astonished to find that not 
only did it not pay interest, but I would also be charged fees 
for the privilege of having that account. My banker said, ``But 
do not worry,'' and then introduced me to the spellbinding 
concept of compensating balances. Boy, was I in for an 
education, and one that had nothing to do with growing my 
business. I remember thinking that all this seemed quite fine 
and not exactly consumer friendly. I had been earning interest 
for years in my personal checking account, which had a much 
smaller balance. I kept asking, ``Why no interest?'' And I was 
simply told it was against the law.
    Later as my business prospered my banker suggested that I 
set up what she called a ``sweep account,'' which she told me 
did not have the benefit of FDIC insurance, but did pay 
interest, and that is what we did. And it was very complicated. 
First, we analyzed my account history to determine how much to 
keep in the regular account so as to earn enough to avoid the 
fees that I had to pay on that regular account.
    Next, we had to project what would be earned in interest 
and compare that to the additional fees that the compensating 
sweep account would have. Then I had to authorize an amount to 
be swept each night, and here I had a choice. I could either 
call the bank every afternoon to make arrangements, or they 
would do it automatically based on a preset formula. Not being 
a glutton for punishment I selected the automatic option. After 
this exercise I barely remembered why I had started my business 
in the first place, but that was just the beginning.
    As any new business owner will tell you, there are better 
ways to spend your time than calling your banker every day, but 
small business owners, by our nature, break out in hives at the 
thought of money sitting in a noninterest bearing account. What 
I did not know was that a sweep account was really designed for 
a larger company, one with in-house accounting, financial staff 
to keep up with the flow of money on account-to-account 
transactions. For the small business owners with a business to 
run it can be a paperwork nightmare.
    We soon found that the sweep account, while addressing the 
noninterest bearing issue, resulted in a flood of paper from 
the bank. Each day we got a reconciliation statement just to 
let us know the money had been shifted around in the previous 
24 hours, and because this was done via mail, there was always 
a 2- to 3-day delay in the information flow, so we never really 
knew what was going on with the funds. Of course the mail piled 
up unopened at the rate of about 250 letters per year, which we 
then throw out periodically and add to the trash.
    To add insult to injury, my so-called interest earnings 
were paying for all of this paperwork. Do not get me wrong, I 
am not arguing against sweep accounts, but they are a 
bookkeeping hassle for small businesses. Would these misguided 
resources not be better spent on tasks that help grow small 
businesses, rather than generating a flood of paperwork. For 
obvious reasons the make-work nature of the sweep account ended 
up significantly reducing the interest earnings, and that was 
really adding insult to injury.
    We could have been much better off leaving the money in a 
noninterest bearing account, which is what many business owners 
do and what I now do, a fact that restricts much-needed job 
creation capital for those who need it most.
    I know there are simpler alternatives, and that would be to 
allow for the payment of interest. Even banks, it does not make 
sense for banks to continue this prohibition because making a 
change would be very simple. They are already doing it on 
consumer accounts. The Senate has an opportunity to eliminate 
an archaic law that has run headlong into the creativity of the 
free market. The current law saddles America's small businesses 
with an inefficient alternative that costs them billions in 
annual revenue, revenue that could to create jobs.
    Please give banks the choice to offer interest-bearing 
accounts, a choice that takes on greater urgency now that 
interest rates are going up and interest earned on these 
accounts becomes more substantial. Please consider this and 
resist efforts to lengthen the phase-in period, and act now.
    Thank you for the opportunity to express my views.
    Senator Crapo. Thank you, Mr. Pinto.
    Mr. Maloney.

                 STATEMENT OF EUGENE F. MALONEY

      EXECUTIVE VICE PRESIDENT, FEDERATED INVESTORS, INC.

    Mr. Maloney. Senator, I appreciate the opportunity to be 
here this morning. My name is Eugene F. Maloney. I am Executive 
Vice President, Corporate Counsel, and a member of the 
Executive Committee of Federated Investors.
    Federated is a Pittsburgh-based financial services holding 
company whose shares are listed on the New York Stock Exchange. 
Through a family of mutual funds used by or in behalf of 
financial intermediaries and other institutional investors, we 
manage approximately $200 billion. For the past 20 years, I 
have been a member of the faculty of Austin University Law 
School, where I teach a course entitled the Securities 
Activities of Banks. Our mutual funds are used by over 1,000 
community banks, either within their own portfolios or on 
behalf of clients of their trust departments.
    In connection with the proposed removal of Regulation Q, 
thereby permitting banks and thrifts to pay interest on 
business checking, my firm's position is that we are strongly 
in favor of any rule, regulation, or legislation that results 
in our community bank friends becoming more competitive, more 
profitable, or being able to operate their businesses more 
efficiently.
    We are concerned that the current initiative to repeal 
Regulation Q, if not evaluated in a historical context, will 
have the exact opposite result. This conclusion is based on my 
personal experience with the introduction of ceilingless 
deposit accounts in 1982, and the impact that it had on our 
client base. Friends of longstanding lost their jobs, their 
pensions, and their self-esteem because of the failure by 
Government officials and Members of Congress to fully think 
through the economic impact of ceiling deposit accounts on our 
banking system and its profitability. This failure cost every 
man, woman, and child in the United States $1,500.
    When this matter was before Congress last year, the House 
Committee report included a detailed estimate of the 
implications for Federal tax revenues and the budgetary impact 
of paying interest on required reserve balances, but not on the 
impact on earnings or assets of banks.
    During the House Committee hearings, in response to 
questioning as to whether the legislation would weaken any play 
in the market, Governor Meyer of the Federal Reserve Board 
replied, ``No.'' In response to a question as to whether the 
Board had any estimate as to the amount of deposits that are 
lost by banks due to the current prohibition against the 
payment of interest on business checking, Governor Meyer 
replied, ``No, I do not have any numbers to share with you.''
    In anticipation of my appearance before the Committee 
today, we commissioned a study by Treasury Strategies of 
Chicago to provide us with their views on the impact of the 
repeal of Regulation Q. Some key findings that we offer for 
your consideration today are as follows:
    Companies now maintain liquid assets of approximately $5 
trillion. And 57 percent of corporate liquidity is now in 
deposits or investments that mature in 30 days or less. As we 
speak, banks are adjusting their balance sheets to mitigate 
interest rate risk to maintain their spread revenues.
    This is a volatile mix. It becomes obvious that if higher-
than-market interest rates are offered to bank corporate 
customers, we risk a repeat of the 1980's debacle of massive 
amounts of money moving to institutions that are ill-prepared 
to rationally deploy it.
    Treasury Strategies has suggested the following options to 
prevent this from occurring: Do not increase from 6 to 24 the 
number of permissible transfers per month into MMDA accounts; 
Cap the interest rates payable on these deregulated accounts 
during the phase-in period. Their suggestion is 40 percent of 
the 90-day Treasury bill rate; Limit the amount of interest-
bearing demand deposits a bank can hold as a percentage of its 
capital; Limit interest payments to just uninsured deposits; 
Collateralize the deregulated deposits; Implement a phased 
approach;
    Other anticipated fallout we expect to occur should the 
repeal go forward are as follows: Increased credit risk which 
will raise the banks' rate of loan charge-offs; Pressure on 
banks' profitability and subsequent increases in charges for 
discrete services. Some statistics on this point are as 
follows: (a) profit risk of $4 billion; (b) increased interest 
expense of $6 to $7.5 billion per year; and (c) for the banks 
studied by Treasury Strategies, it has been determined that in 
order to break even on their business customer base, banks will 
need to grow deposits or raise service charges as follows: With 
respect to small business, grow deposits by 80 percent or raise 
service charges by 34 percent. With respect to mid-size 
companies, grow deposits by 35 percent or raise service charges 
by 16 percent.
    The reason I am here today is to make a fact-based attempt 
to prevent history from repeating itself. I appreciate being 
given the opportunity to share my thoughts with the Committee.
    Senator Crapo. Thank you very much, Mr. Maloney.
    And at this point we are going to go back to this end of 
the table here to Mr. Plunkett.

                  STATEMENT OF TRAVIS PLUNKETT

                     LEGISLATIVE DIRECTOR,

                 CONSUMER FEDERATION OF AMERICA

    Mr. Plunkett. Thank you, Mr. Chairman and Senator Sarbanes. 
My name is Travis Plunkett. I am the Legislative Director of 
the Consumer Federation of America. I appreciate the 
opportunity to offer the comments of CFA and a broad range of 
other consumer and community groups on regulatory relief 
proposals.
    I will touch on two issues: The efforts to allow industrial 
loan companies to expand, and attempts to weaken reporting 
requirements under the Home Mortgage Disclosure Act.
    A number of bills have been offered in both the House and 
the Senate in recent years that take the very dangerous step of 
allowing industrial loan companies to expand, either by 
offering business checking services or by branching nationwide, 
or both.
    ILC's are State-chartered, FDIC-insured banks that were set 
up at the beginning of the 20th century to make small loans to 
industrial workers. In 1987, Congress granted an exemption to 
the Bank Holding Company Act for ILC's because there were few 
of them, they were only sporadically chartered in a small 
number of States, they held very few assets and they were 
limited in the lending and services they offered.
    Since that time everything about ILC's has grown. As of 
2003, one ILC owned by Merrill Lynch had more than $60 billion 
in assets, while 8 other large ILC's had at least a billion in 
assets, and a collective total of more than $13 billion in 
insured deposits. The five States that are allowed to charter 
ILC's are now aggressively encouraging new ILC's to form. They 
are allowing these institutions to call themselves banks, and 
they are giving them almost all of the powers of State-
chartered commercial banks. They are also promoting the lower 
level of oversight they offer compared to those pesky 
regulators at the Federal Reserve.
    ILC's now constitute what is essentially a shadow banking 
system that puts taxpayer-backed deposits at risk. This 
parallel system also siphons commercial deposits from properly 
regulated bank holding companies. The key problem with ILC 
regulation is that while the Federal Reserve has the power to 
examine the parent of a commercial bank and impose capital 
standards, in an industrial loan company structure, only the 
bank can be examined. Regulators cannot impose capital 
requirements on the parent companies. Holding company 
regulation is also essential to ensuring that financial 
weaknesses, conflicts of interest, malfeasance, or incompetent 
leadership at the parent company will not endanger taxpayer-
insured deposits at the bank.
    Commercial firms and financial firms such as Merrill Lynch, 
American Express, and Morgan Stanley, own ILC's and want to own 
ILC's. We have concerns about ownership of ILC's by both types 
of companies, and the recent corporate scandals show the 
hazards of ILC membership by both types of companies.
    Next, we are concerned about industry proposals to reduce 
the number of financial institutions required to provide 
disclosure under the Home Mortgage Disclosure Act. HMDA 
requires certain mortgage lenders with offices in metropolitan 
areas to collect, report, and disclose annual data about 
applications, originations, home purchases, and refinancings of 
home purchases and home improvement loans. HMDA provides the 
public and banking regulators with crucial data about whether 
lenders are serving the housing needs of the communities in 
which they are located.
    Industry representatives have advocated that HMDA reporting 
thresholds for mortgage lenders be raised from $34 million in 
assets to $250 million in assets. While such an adjustment may 
seem relatively minor, it is not. Raising the threshold to $250 
million would exempt about 25 percent of depository 
institutions and 25 percent of current HMDA filers from 
submitting HMDA reports. In many States, lenders in this size 
category represent the vast majority of all banking 
institutions. The elimination of loan-level HMDA reporting for 
these lenders would hamper enforcement of key laws such as the 
Equal Credit Opportunity Act, the Fair Housing Act, and the 
Community Reinvestment Act.
    Since 1990, over 1,200 institutions with between $34 
million and $250 million in assets received below satisfactory 
CRA ratings.
    It is also important to note that because of technological 
advances, it has never been easier or cheaper to comply with 
HMDA. Software for HMDA reporting is readily available and 
relatively inexpensive. The Federal Financial Institutions 
Examination Council offers free HMDA software on its website 
for any institution that wants to use it.
    For these reasons we urge the Committee not to make changes 
to HMDA reporting thresholds regarding ILC's. We urge the 
Committee not only to not expand ILC powers, but to also look 
at the ILC exemption under the Bank Holding Company Act and to 
plug the ILC loophole. This will prevent ILC's from becoming a 
separate shadow banking system that is inadequately regulated. 
Thank you.
    Senator Crapo. Thank you very much, Mr. Plunkett.
    Now we will come back over to Mr. Rock.

                  STATEMENT OF BRADLEY E. ROCK

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

                BANK OF SMITHTOWN AND CHAIRMAN,

                 GOVERNMENT RELATIONS COUNCIL,

                  AMERICAN BANKERS ASSOCIATION

    Mr. Rock. Thank you, Mr. Chairman. My name is Brad Rock. I 
am Chairman, President and CEO of Bank of Smithtown, a $750 
million community bank founded in 1910, which is located on 
Long Island in Smithtown, New York.
    I would like to make 3 key points. First, compliance costs 
drain bank resources, taking away from the needs of our 
customers and our communities. Every new law, regulation, or 
rule means two things, more expensive bank credit and less of 
it.
    During the past decade banks have shouldered the effects of 
some of the most imposing legislation of the past 100 years. 
Compliance costs for banks today are between $38 and $42 
billion per year, and these do not include costs associated 
with the USA PATRIOT Act, the Sarbanes-Oxley Act, the SEC, 
FASB, and the Public Company Accounting Oversight Board.
    If we were to reduce the regulatory costs by just 20 
percent, the reduction would support additional bank lending of 
up to $84 billion. The impact on our economy would be huge. 
Second, regulatory burden is significant for banks of all 
sizes, but small banks struggle the most. There are more than 
3,200 banks with fewer than 25 employees. Nearly 1,000 banks 
have fewer than 10 employees. These banks simply do not have 
the human resources to implement the thousands of pages of 
regulations, policy statements, and directives they receive 
every year.
    Countless hours are spent on compliance paperwork at all 
levels from bank directors and CEO's to managers and tellers. 
At my bank every person has major compliance responsibilities 
and one person has a full-time job just to coordinate all of 
the compliance activities. I personally spend about 1\1/2\ days 
per week on compliance issues. Some CEO's tell me that they are 
now spending nearly half their time on regulatory issues. This 
means that bank CEO's spend more than 5 million hours each year 
on compliance, time that could be better spent on ways to 
improve banking in their communities and to meet the changing 
needs of their customers.
    The costs do not stop there. My bank pays more than 
$100,000 each year to outside firms to help us to comply with 
regulatory burdens. This one expense alone, if it were used as 
capital, would support an additional $1 million of lending in 
my community.
    My third point is this. Only the involvement of Congress 
can result in a reduction of costly regulatory burdens. Bankers 
have seen previous relief efforts come and go without effect 
while the overall burden has kept rising. In my written 
testimony, I list some of the areas in which ABA is seeking 
reform. Let me briefly describe two which have been 
particularly costly in recent years.
    Under the Bank Secrecy Act banks fill out more than 13 
million cash transaction reports annually. Most of these 
reports are filed for companies that are traded on the public 
exchanges and are well-known by both the bank and the 
Government. These transactions have nothing to do with 
potentially criminal activity. The 35-year-old rules related to 
cash transaction reports have lost their usefulness due to 
several developments, including more comprehensive suspicious 
activity reporting, robust customer identification obligations, 
and mandates to match Government lists to bank accounts.
    Consider a small bank that has 25 employees or less. Many 
banks of this size have had to hire an additional full-time 
employee for the sole purpose of completing reports related to 
the Bank Secrecy Act. The cost benefit analysis does not make 
sense.
    Also, as a result of the Sarbanes-Oxley Act, accountants 
have more than doubled their fees. One community bank in New 
York saw its accounting fees jump from $193,000 in 2003 to more 
than $600,000 in 2004. New accounting standards frequently 
cause almost complete duplication of bank internal audits 
without increasing safety and soundness.
    In conclusion, unnecessary paperwork and regulation erodes 
the ability of banks to serve customers and support the 
economic growth of our communities.
    We look forward to working with you to find ways to bring 
greater balance to the regulatory process. Thank you.
    Senator Crapo. Thank you very much, Mr. Rock.
    And finally Mr. Vadala.

                  STATEMENT OF MICHAEL VADALA

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

                THE SUMMIT FEDERAL CREDIT UNION,

                          ON BEHALF OF

       THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

    Mr. Vadala. Thank you. Good afternoon, Senator Crapo and 
Ranking Member Sarbanes. My name is Mike Vadala. I am the 
President and CEO of The Summit Federal Credit Union located in 
Rochester, New York. I am here today on behalf of the National 
Association of Federal Credit Unions to express our views on 
the need for regulatory relief and reform for credit unions.
    As with all credit unions, The Summit is a not-for-profit 
financial cooperative governed by a volunteer Board of 
Directors who are elected by our member-owners. The Summit was 
founded in 1941 and has 47,000 members and just over $340 
million in assets.
    America's credit unions have always remained true to our 
original mission of promoting thrift and providing a source of 
credit for provident and productive purposes. I am pleased to 
report to you today that America's credit unions are vibrant 
and healthy, and that membership in credit unions continues to 
grow, now serving over 86 million members.
    Yet, according to data obtained from the Federal Reserve 
Board, credit unions have the same market share today as they 
did in 1980, 1.4 percent of financial assets, and as a 
consequence provide little competitive threat to other 
financial institutions.
    While developing a comprehensive regulatory relief package, 
we hope the Committee will include the credit union provisions 
contained in the Financial Services Regulatory Relief Act, 
which passed the House last year, and also consider including 
additional provisions from the Credit Union Regulatory 
Improvements Act of 2005, CURIA, which has been introduced in 
the House.
    NAFCU supports these bills, and I would like to talk about 
a few of the specific provisions in them at this time. NAFCU 
urges the Committee to modify the prompt corrective action 
system, or PCA, for federally insured credit unions to include 
risk assets as proposed by the NCUA and included in Title I of 
the CURIA bill. This would result in a more appropriate 
measurement to determine the relative risk of a credit union's 
balance sheet, and also ensure the safety and soundness of 
credit unions and our share insurance fund.
    It is important to note this proposal would not expand the 
authority for NCUA to authorize secondary capital accounts. 
Rather, we are moving from a model where one-size-fits-all to a 
model that considers the specific risk posed by each individual 
credit union. This proposal reduces the standard net worth or 
leverage ratio requirements for credit unions to a level 
comparable to, but still greater than, what is required of 
FDIC-insured institutions. Strength is gained because this 
proposal introduces a system involving complementary leverage 
and risk-based standards working in tandem.
    NAFCU also asks the Committee to reconsider the member 
business loan cap, which was established as part of the Credit 
Union Membership Access Act in 1998, replacing the current 
formula with a simple and more reasonable rate of 20 percent of 
the total assets of a credit union.
    We support revising the definition of member business 
loans, giving NCUA the authority to exclude loans of $100,000 
or less from counting against the cap.
    A 2001 Treasury Department study entitled ``Credit Union 
Member Business Lending'' concluded that, ``credit unions' 
business lending currently has no effect on the viability and 
profitability of other insured depository institutions.'' That 
same study found that 86 percent of credit union member 
business loans are made for businesses with assets under 
$500,000. Many small business people feel that credit unions 
can fill a need in the marketplace for these loans.
    Finally, we urge the Committee to make a relatively simple 
change that would address what could become a problem for 
merging credit unions when FASB changes merger accounting rules 
from the pooling method to the purchase method. Legislation to 
address this issue in the form of the Net Worth Amendment for 
Credit Unions Act, H.R. 1042, was passed by the House just last 
week. We hope that the language from this bill will also be 
included in any regulatory relief package introduced in the 
Senate.
    To be clear, we are not asking you to legislate accounting 
rules, but rather we are asking you to change a definition so 
that the acquired equity of merging credit unions is properly 
included in total net worth for PCA purposes.
    In conclusion, the cumulative safety and soundness of 
credit unions is unquestionable. Nevertheless, there is a need 
for change in today's financial services marketplace. NAFCU 
urges the Committee to consider the provisions we have outlined 
in this testimony for inclusion in any regulatory relief bill. 
Appropriately designed regulatory relief will ensure continued 
safety and soundness and allow us to better serve the 86 
million members of America's credit unions.
    We would like to thank you, Senator Crapo, for your 
leadership. We look forward to working with the Committee on 
this important matter, and we welcome your comments or 
questions.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Vadala, and I want 
to thank the entire panel.
    Like I said at the outset, this is the largest panel I have 
ever seen. I think that it shows the breadth of interest in 
this kind of an issue and the number of interest groups, 
whether it be credit unions, community banks, independent 
bankers, large banks, consumers, or customers, the interest in 
the financial reform that we are talking about here is broad 
and extensive, and primarily that is because it is so important 
to the American consumers and the impact on the people who rely 
on financial services.
    I just want to make a comment at the outset and then ask a 
couple of questions. The comment is this: As I believe 
everybody knows, we have taken the broad approach to this 
issue. We want to have all of these interests and concerns 
raised to the Committee so that we can evaluate them and 
determine how to achieve as much reform and improvement as we 
can possibly achieve. At the same time we do not want to make 
mistakes or make things worse, as has been indicated by some of 
the witnesses about some of the proposals. I would say the 
proposals, we have tried to get these proposals out there, and 
I think most people have notified us of their concerns about 
areas where they do have concern with the proposals. The 
testimony that we received today, both the oral testimony as 
well as the written testimony, has been very helpful in helping 
us to further identify not only areas where there is support 
and consensus, but also areas where there is concern and 
objection.
    I would just encourage everybody, as soon as possible, to 
make sure you get your comment and concerns in to us to the 
extent they have not already been done in your testimony today, 
and that invitation goes beyond this Committee.
    I was thinking about this, and in fact, Senator Sarbanes 
and I were talking in the hall. As you look at these 
recommendations, there are some of them that are obviously good 
ideas about which to this point we have seen no objection. 
There are some of them which--I will not speak for Senator 
Sarbanes, but which I do not like. I am sure there are some 
that he does not like, and there are some that you do not like. 
There are some that I do not like that may end up getting on 
the bill because everybody else likes them, or the politics of 
the circumstance and the dynamics make it such that they are 
supported well enough to move forward. There are some which I 
do like and which I would like to see in the bill, which the 
circumstances may not justify at this point if we want a bill 
that is going to move, and about which there is a large amount 
of opposition.
    So this is going to be a process that requires an intense 
amount of analysis and work between us here on the Committee, 
and I would encourage you to give us as much input as you can 
as we seek to move forward so that we can identify the areas 
where there is consensus, we can identify the areas where we 
may need to take some further time and move in a separate piece 
of legislation or the like.
    So anyway, I just encourage everybody to continue what you 
have already been doing in giving us your ideas.
    With that, let me just ask a question on one of the areas 
in which I have a lot of interest, but which, frankly, is an 
area where I suspect there may be some controversy, and that is 
the privacy simplification issue. Mr. Bartlett, you raised 
that, and I think, Mr. Hayes, you indicated that you were not 
sure that very many people actually read these privacy notices. 
I have said this before in public forums, but because I serve 
on the Banking Committee and I am involved in a process that is 
evaluating these things, I try to read every one that I 
receive. I am not only convinced, Mr. Hayes, that most people 
do not read them, but I am also not sure that they can. I know 
that it is very difficult for me to read these and to 
understand exactly what rights I am being told that I have.
    Now, I very strongly believe that it is a good idea for the 
protection of the privacy of this information, and I very 
strongly believe that we need to notify people of those rights.
    But I guess I would start out by asking Mr. Bartlett and 
Mr. Hayes if maybe you could suggest what you think a properly 
simplified privacy notice should look like, and then I would be 
glad to let others who might have an opinion on this jump in.
    Mr. Bartlett. Mr. Chairman, we have had 6 years experience 
now, so it is clear that what we are doing now is at best 
nonproductive for the American consumers, and in many cases, 
counterproductive. Number 1 is provide a safe harbor to the 
regulators to draft a short form that institutions can rely on, 
that is the single source, largest source of the complexity is 
that companies have to protect themselves from various kinds of 
allegations they think could be leveled against them, and so 
that is what adds to the complexity.
    Senator Crapo. Are you telling me that lawyers write these 
notices?
    [Laughter.]
    Mr. Bartlett. Of course, because these are legally required 
notices with some detail in Title 5 of Gramm-Leach-Bliley.
    Senator Crapo. I knew that by reading them, but go ahead.
    [Laughter.]
    By the way, I am a lawyer too.
    Mr. Bartlett. So if in fact we want to simplify them, then 
give the regulators the right for a safe harbor to create a 
simplified notice, a safe harbor, and if a company uses that 
then they are safe.
    Second, reduce the number of notices to at a time in which 
there is some kind of a change in the customer relationship. 
You can define that in a lot of different ways. But the idea of 
annual notices seemed like a good idea at the time, 6 years 
ago, but has proved to be a pretty idea in terms of the effect 
of the notices.
    So those are the two big changes that should be made. We 
support notices but they should be made usable for the 
consumers.
    Senator Crapo. Mr. Hayes.
    Mr. Hayes. I would never insinuate that a lawyer writes 
those notices.
    [Laughter.]
    I was talking to Congressman Ford yesterday in Memphis, and 
we got engaged in a broader issue than this dealing with 
financial literacy, but I think it translates over to general 
literacy of a population that we have. And quite honestly, I 
think there is the challenge, is how do we write something that 
a normal, real person can understand? I mean to me it is, ``We 
do not sell your information. We do not give your 
information.'' You know, it has to be very succinct, written as 
newspapers are, on an educational level that people can 
understand. It cannot be written in legalese that people say, 
``I do not understand it,'' and throw it away. I mean I think 
it is important. Privacy of information, no matter who you are, 
is very important. And to be told what happens with your 
information is very important to the individual, but we have to 
make it so that people understand.
    Once we articulate that and provide that, it is really 
somewhat of a nuisance to continually send that out. So, I mean 
I think at the end of the day, we value our customers. That is 
what gives us revenue. That is what drives our business. That 
is what drives our community. I think we are trying to always 
be fair, but let us be real and let us write it to where people 
can understand what we are saying.
    Senator Crapo. Thank you.
    Anybody else want to----
    Mr. Plunkett. Senator.
    Senator Crapo. Yes.
    Mr. Plunkett. Senator, if I could comment on this from a 
consumer point of view. The primary problem with the Gramm-
Leach-Bliley privacy notices is that the notices are provided 
to consumers on an opt-out basis. That is, unless consumers 
respond to a notice that is often buried in an envelope with 
much other information, then they are not able to stop the 
sharing of their private financial information with third 
parties.
    Consumers typically do not respond to opt-outs. Our 
recommendation at the time the Gramm-Leach-Bliley Act was put 
on the books was make it an opt-in. Give consumers the 
affirmative right to stop the sharing of information, include 
both affiliate information--internal sharing among financial 
affiliates--and third-party information. Tell the institutions 
that they cannot share this information unless the consumer 
responds affirmatively.
    These institutions are very good at marketing. They would 
make a strong pitch as to why it is in the consumers' interest 
to allow the banks to share information. But the consumer would 
be in control of that process. That is the primary way to 
improve these privacy notices.
    Now, assuming that Congress does not listen to my advice, 
it is true, it is actually the fault of both the financial 
institutions and the regulators that the privacy notices are 
written so poorly. The institutions themselves are protecting 
themselves from legal liability. The regulators have provided a 
poor starting point, a poor model for understandable privacy 
notices. You do not need a safe harbor to change that. We could 
sit down with consumers, regulators and the industry--once 
again, this is an industry that is extremely good at talking to 
consumers in an understandable fashion when they want to--and 
we could come up with privacy notices that everybody would be 
comfortable with and that you would not need a safe harbor to 
promote.
    Senator Crapo. Mr. Connelly, and then I will have to move 
to Senator Sarbanes.
    Mr. Connelly. Thank you, Senator. At my bank we understand 
that sacred trust between the customer and the bank, and we do 
not share information with any third parties. I would suggest 
that the current privacy notice, we understand what privacy is, 
but it is pretty tough to explain it when you get one of those 
notices. And I think that notice is analogous to the current 
HIPAA notices that you might get when you go to your doctor's 
office or your local pharmacy. Though it is a good law, I am 
told by the receptionist at my doctor's office that I have to 
sign this. I am also told that nobody reads the notice. Maybe 
after the first time you got the notice you might have read it, 
but you sign it, and then for regulatory purposes everybody is 
covered, as they say.
    So that we strongly support maybe a revised disclosure that 
takes care of all circumstances unless there is a major change, 
and in fact, the regulators could be empowered to delineate 
what constitutes a major change. Then you would have to 
renotice the customer.
    Senator Crapo. Thank you very much. I appreciate that. This 
is a very tough issue we have been working on for sometime now, 
but I commit to keep working on it until we get it resolved.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Connelly, I just make the observation if all banks 
followed the practice of your banks, there probably would not 
be any legislation required and we would not have the problem 
of privacy notices.
    This notion that somehow that Congress is looking to do 
these things, we are prompted into them by the derelictions 
that take place in the workings of the marketplace. Let me give 
you an example right now. How many of you think there should be 
legislation on data breaches?
    [Three witnesses raised their hands.]
    Now, why do you think that? You think that because of what 
has happened recently. Had none of this transpired, no one 
would be talking about data breaches and thinking about 
legislation on it.
    On June 17, MasterCard International reported a breach of 
payment card data which potentially exposed more than 40 
million cards of all brands to fraud. Even the FDIC lost some 
records of 6,000 of their employees, current and former. The 
breach was discovered when employees learned that identity 
thieves were taking out signature loans in their names at a 
credit union. We know about CitiFinancial, MCI, Bank of 
Commerce, Bank of America, Commerce Bank, PNC Bank, and 
Wacovia. Bank employees may have stolen financial records of 
700,000 customers of four banks. The bank employees sold the 
financial records to collection agencies. Time-Warner, then 
some of the universities, HSBC.
    We are not looking for these things, but the deficiencies 
in the system which make this possible may require legislation. 
When I took over the chairmanship of this Committee I never 
expected to do Sarbanes-Oxley. We had an entirely different 
agenda. Then Enron collapsed, WorldCom collapsed. We had a 
panic in the markets and so forth.
    Let me ask Mr. Plunkett this question. In your statement, 
you point out that securities firms that own ILC's have taken 
the lead in promoting the ILC expansions. They have not been 
shy about stating that they want to expand ILC powers because 
they do not want to deal with the regulatory oversight they 
would face from the Federal Reserve if they purchased a bank as 
they are allowed to do under Gramm-Leach-Bliley. Instead they 
offer to set up a shadow banking system through the ILC. They 
want to be able to offer the same services and loans as 
commercial banks without the same regulatory oversight. Could 
you develop that point?
    Mr. Plunkett. Yes, sir. To use a bad analogy, we have 
investment firms, all of the big ones, who either own ILC's or 
want to own ILC's, attempting to skirt the requirements of the 
Gramm-Leach-Bliley Act regarding Federal Reserve oversight of 
bank holding companies. They are offering in many cases banking 
services that are indistinguishable from other banks. So they 
are walking like a duck, they are quacking like a duck, but 
they are not regulated like a duck.
    Our concern is that these firms very recently have shown 
themselves vulnerable to conflicts of interest that have hurt 
their investors. One need only have picked up the paper in the 
last 2 weeks to see that major fines by the SEC were handed 
down against Citi and one other large investment bank in the 
Enron case to remind us that this has been the situation. We 
have heard a lot of discussion about ILC's on the House side, a 
great deal of discussion about commercial firms owning ILC's, 
and there are significant reasons why that is a bad idea. But 
one item that seems to have escaped a lot of notice is the 
current ownership of ILC's by investment firms and the hazards 
there.
    I would just like to bring that to the Committee's 
attention and ask that the Committee examine that concern 
equally with the concern about commercial firms owning ILC's.
    Senator Sarbanes. Mr. Bartlett, when you are in favor of 
that House provision for de novo banking, were you reading the 
provision to permit the ILC's to do this, or I mean had you not 
read it that way?
    Mr. Bartlett. Mr. Chairman, I support the entire provision. 
I would answer in two ways. First of all, our organization, 
supports ILC's and have a fundamental disagreement with what 
was said, but there is a disagreement about ILC's. We believe 
that ILC's are duly chartered, and in fact are a depository 
institution regulated both by State banking authorities and by 
the FDIC.
    But more to the point for this bill, we believe that the 
action for this bill, particularly for interstate branching, is 
an issue of banking and of the issues in this bill, and so 
these issues should be dealt with. Interstate branching is an 
issue that needs to be addressed, interstate branching should 
be permitted for banks. The ILC issue becomes one issue that 
needs to be debated, perhaps some middle ground found, some 
kind of a resolution of it, but the core of interstate 
branching is interstate branching from Baltimore to 
Philadelphia, having nothing to do with ILC's.
    Senator Sarbanes. So you disagree with the Federal 
Reserve's position on ILC's; is that correct?
    Mr. Bartlett. I do, but I do believe the whole ILC issue is 
an issue that does requires some additional debate, that can 
find a middle ground, and that we should find a middle ground, 
but it should not be allowed to stop this legislation.
    Senator Sarbanes. Of course the more you load on this 
legislation, the more difficult it is to move it along. I think 
that is pretty obvious.
    Mr. Korst, I wanted to ask you a question. I am not quite 
sure I understood your testimony. Is it your position or is it 
the implications of the position you are taking that no State 
would be preempted with respect to the laws that it has dealing 
with the rent-to-own issue?
    Mr. Korst. Yes, That is correct.
    Senator Sarbanes. I see. So States like New Jersey, 
Wisconsin, and other States like that, which currently have 
some fairly extensive consumer protections, would be able to 
keep them all in place?
    Mr. Korst. I think a point of clarification in a couple of 
those States.
    Senator Sarbanes. That is what I am seeking. That is why I 
am asking the question.
    Mr. Korst. In Minnesota, Wisconsin, and New Jersey, 
Senator, in the absence of any defining State regulation, and 
additionally in the absence of any controlling Federal statute, 
over the past 20 years there has been a considerable amount of 
litigation in both State and Federal Court, and a number of 
conflicting decisions by those courts. What S. 603 would do 
would resolve the issue. And by the way, the issue that has 
been at play there is, are these transactions to be considered 
consumer credit sales under the existing State consumer credit 
sales laws, which by the way, were enacted well before these 
transactions came into existence in the marketplace, or are 
they something different?
    And in the absence of any clear defining regulatory 
standard, litigation has created some murky and difficult legal 
circumstances in those States. S. 603 would resolve that issue 
by placing into the Federal consumer protection statutes a 
Federal definition of what constitutes a rental purchase 
transaction.
    Senator Sarbanes. Would that definition be binding on all 
States?
    Mr. Korst. Yes, sir.
    Senator Sarbanes. So a State whose regulatory framework 
currently depended on a different definition would be 
preempted; is that correct?
    Mr. Korst. States would not be permitted, under S. 603, if 
it were to be enacted, to mischaracterize the transaction as 
something it is not. In that respect I suggest that this 
proposal is consistent with Congress's direction on truth in 
lending and consumer leasing, wherein Congress established 
definitions of credit transaction and consumer lease, provided 
a minimum amount of consumer protections----
    Senator Sarbanes. You would preempt the definition on the 
part of all States; is that correct?
    Mr. Korst. I am sorry, Senator.
    Senator Sarbanes. You would preempt the definition on the 
part of all States. You would require them all to use your 
definition.
    Mr. Korst. That is correct.
    Senator Sarbanes. Even if they are now using a different 
definition.
    Mr. Korst. To the extent there are any States that have----
    Senator Sarbanes. With respect to the definition, I would 
call that preemption.
    Mr. Korst. And I think the view that we have----
    Senator Sarbanes. Do you have a different name for it?
    Mr. Korst. Pardon me.
    Senator Sarbanes. Do you have a different name for it?
    Mr. Korst. No. We believe, however that Congress----
    Senator Sarbanes. Let me ask you this question. What 
percent of the merchandise under rent-to-own eventually become 
purchases?
    Mr. Korst. Just about all of it is purchased at some point 
in the inventory life, Senator. Some percentage of it, just 
under 5 percent, is actually either stolen or returned to us in 
an unrentable or unusable condition. But the balance of the 
merchandise is eventually owned by one of our customers in some 
form or fashion.
    However, the way out transaction works, of course, 
consumers have the option to terminate at any time and to 
return the goods. In fact, most do. Twenty-five percent of our 
transactions result in customers acquiring ownership. The other 
75 percent, the transaction is terminated and the property is 
returned to us. During the life of our inventory, on average it 
is rented by 4\1/2\ different consumers, and so when I say all 
of our merchandise is owned eventually by some consumer, in 
most cases it is after it has been rented by 3 or 4 or 5 or 6 
different consumers, and then the last consumer ultimately 
acquires ownership of that property.
    Senator Sarbanes. I wanted to ask the people at the panel--
and it follows up on a question I put to the previous panel. I 
do not know how many of you were here for that. First of all, 
do you feel that you have been adequately consulted by the 
regulators as they explore the question of what recommendations 
to make for the consideration of the Congress?
    Ms. Carter. Consumer groups would greatly appreciate 
greater involvement in this process, and not just at the 
initial stage when comments are given, but at the consensus 
development stage.
    Senator Sarbanes. Anyone else?
    Mr. Loseth. Yes, Senator Sarbanes. CUNA has worked close 
with the NCUA on different aspects of CURIA, different aspects 
of member business lending, and prompt corrective action, and 
we feel that we are working together well with the 
recommendations that are in the bill.
    Senator Sarbanes. Do any of you--sorry, go ahead.
    Mr. Hayes. I feel like we have been very engaged in the 
process. I mean we are very close to our customers. We are very 
close to our banks that are throughout the country. We travel 
throughout the country, and we are getting that input and that 
input is being exchanged with the regulatory authorities, and I 
think the process has been very good, because we are putting 
things on paper. It is a tough job. As I sat here on this side, 
not on that side, I mean we could spend 5 days together in a 
room, and in some cases we may not be agreeing on every item. 
But I think at the end of the day we have to come to some 
agreement on some items to move forward or we will be sitting 
here 5 years from now talking about the same issues.
    Senator Sarbanes. Mr. Connelly.
    Mr. Hayes. So there is a process that we have to figure out 
how to do it.
    Senator Sarbanes. Mr. Connelly.
    Mr. Connelly. Sir, we have had open and continuing dialogue 
with both the regulator, community and consumer groups, and I 
would suggest that Senator Crapo has been very open about 
inviting consumer groups to provide more input. I think 
Chairman Reich will probably make additional outreaches. And I 
guess the answer is, now is the time. We believe that we have 
very adequately and continually participated with consumer 
groups as it relates to the needs in our community and who----
    Senator Sarbanes. Do you see problems--I am asking the 
industry people now--in the regulators having these 
consultation groups that would encompass both industry and 
consumer representatives, particularly as you are trying to see 
what kind of consensus can be reached?
    I know on the one hand that gives you more of a challenge 
since you will be at a table with the people that are not of 
like mind. But it seems to me it is a setup a little bit if 
everyone at the session is essentially of the same mind when we 
are trying to see if we cannot work through this situation 
toward achieving some consensus which would then have an 
enhanced credibility and an enhanced legitimacy. What is the 
problem with sessions of that sort, other than it is a more 
difficult meeting to presume, may well be a more difficult 
meeting to work through?
    Mr. Rock. Senator, I think that increased input from all 
sides of the issue is always a good thing, but by the same 
token, it does not surprise me that on some issues that are in 
that matrix that there has not been much input from the 
consumer side because some of those issues are very technical 
and very specific to narrow areas of the industry. For example, 
if you were to ask consumer groups or consumers about the 
effectiveness of a 314(a) inquiry, response and inquiry 
practice, I do not think that many consumer groups or consumers 
would be familiar with that and have meaningful input on that.
    So it does not surprise me that perhaps there has not been 
input on some of those items that are in the matrix.
    Senator Sarbanes. I think the question is whether there has 
been input on most or all of the items in the matrix, but I 
will ask the consumer groups to answer to that themselves.
    Mr. Plunkett. Senator, the key idea, which you have hit on, 
is a meaningful dialogue, and a meaningful dialogue--your point 
is well taken, a meeting where the regulators can hear the 
pitch from the financial services people, see if consumer 
groups have followed the issue, have a response, ask industry 
representatives to address consumer concerns, get immediate 
feedback, have a dialogue. That allows the regulators to better 
understand the pros and the cons of various proposals, and it 
gives us, the consumer community, the opportunity to have not 
just input, as Carolyn Carter said, but to have meaningful 
input when it comes to decisionmaking.
    Mr. Vadala. Senator, NCUA did a very good job of getting 
input on PCA in particular. They had a summit meeting which 
brought people together. They got written comments. They had 
witnesses appear at the summit, kept it open for public 
comment, trying to get diverse views on this issue, and have 
talked to other regulatory agencies. So, I really believe that 
they have done a great job on that particular issue and on many 
of the others. We are very happy with what they have done.
    Mr. Loseth. Senator, most of the changes in regulations, as 
they affect credit unions, directly affect the members of the 
credit union who own the credit union. So from what I can tell 
from the provisions in the bill, most all of these changes will 
result in putting money back in the pockets of Americans.
    Mr. Connelly. Senator, I think that today is an example of 
where people from different perspectives come together and 
express their thoughts, and can do it collaboratively and 
collegially, and I would suggest that with Senator Crapo's 
invitation for more openness--I think maybe Chairman Reich got 
that sense--there is still time to be more open to the consumer 
advocacy perspective, and it should certainly be taken into 
consideration by your Committee.
    Senator Sarbanes. Mr. Chairman, I know the hour is late. I 
want to thank this panel for their contribution. I particularly 
want to thank--these are the statements from today's testimony, 
and it is obvious that many people have put a great deal of 
time and effort into preparing these statements. In many 
instance they are quite detailed. I think that is extremely 
helpful to us because on this issue much of the difficulty is 
in the details.
    It is easy enough to lodge a general complaint about some 
requirement that the regulators now have in place. The question 
is, was it put there for a good reason? Does the reason still 
serve a purpose? Is there some way it can be done with some 
less onerous requirements?
    But I do not see how just listening to the general 
complaint one can move to a decision that we just should not 
have this thing. I mean the general complaint reflects a sense 
in the industry that they are overloaded. But as you address 
the overload you have to take each requirement, it seems to me, 
and analyze it very carefully as to the purpose it serves and 
so forth.
    Now, we are getting a lot of complaints about the Bank 
Secrecy Act and so forth, but of course, on the other side, we 
have very important questions about the financing of terrorism, 
the financing of criminal activities, and so forth. So we need 
to look at all of that.
    Actually, some of the people most on the other side on that 
issue are people in the Department of Justice, in FinCEN at the 
Treasury and so forth, who think these requirements are very 
important to their efforts to try to deal with I think what 
most people would concede are serious problems. So how you work 
that out is an important challenge. I think the detail is 
extremely important. It is easy enough to make the generalized 
statements, but then when you come to taking action on it you 
have to come down into the details and take a careful look at 
what the pros and cons and the pluses and minuses are in terms 
of other interests that are involved and other objectives we 
are trying to achieve.
    So it is obvious a lot of work went into these statements, 
and I want to thank the panel members for it.
    Thank you, Mr. Chairman.
    Senator Crapo. Thank you, Senator Sarbanes, and I certainly 
agree with that. The two hearings we have had on this issue 
plus the incredible amount of input that we have received 
outside of the hearings has been very, very helpful in our 
efforts to move forward on the process of trying to go from the 
general complaint and the general objective of getting reform 
to the specifics, and I appreciate the witnesses very much.
    I had a bunch of other questions, but the time has gotten 
away from us, and we are going to have to wrap up the hearing 
at this point. I will submit some written questions, and I 
think you should all expect that you would get some written 
questions from some of the other Senators who did not arrive 
here, and we would appreciate it if you would be willing to 
respond to those questions.
    I again want to thank all of you for your input, encourage 
you to move ahead. I think one of you said that the time is 
now. And the time is now. We want to move ahead very quickly 
now to try to get prepared for a markup, and start into the 
next phase of this process where we will be moving ahead 
aggressively to achieve the objectives of this bill.
    With that, again, I thank all the witnesses, and this 
hearing will be concluded.
    [Whereupon, at 1:22 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]

                 PREPARED STATEMENT OF JOHN M. REICH *
          Vice Chairman, Federal Deposit Insurance Corporation
                             June 21, 2005

    Mr. Chairman, Ranking Member Sarbanes, and Members of the 
Committee, I very much appreciate the opportunity to testify and update 
you on our efforts to reduce unnecessary regulatory burden on 
depository institutions insured by the Federal Deposit Insurance 
Corporation (FDIC). I am here today as the leader of the interagency 
regulatory review process mandated by the Economic Growth and 
Regulatory Paperwork Reduction Act (EGRPRA). In this capacity, and as a 
former community banker with over 23 years of experience, I share your 
commitment to pursue meaningful regulatory relief legislation, while 
maintaining the safety and soundness of the banking industry and 
protecting important consumer rights. This is an important endeavor and 
I think our Nation's financial institutions, particularly America's 
smaller community banks, are counting on us to succeed in our efforts 
to reduce regulatory burden.
---------------------------------------------------------------------------
    * Appendix held in Committee files.
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    My testimony this morning will discuss the importance of balancing 
the relative costs and benefits of regulations, the proliferation of 
regulation in recent years and the high costs on the industry. It will 
also discuss the cumulative effect of regulations on our Nation's bank 
and thrift institutions, particularly smaller community banks. I will 
also outline our interagency efforts to review regulations and address 
the existing regulatory burden, as mandated by EGRPRA. I then will 
describe actions the FDIC has taken to reduce burdens imposed by our 
own regulations and operating procedures. Finally, I will outline a 
dozen specific legislative proposals to reduce regulatory burden that 
all of the Federal bank and thrift regulators have agreed to support, 
as well as many more that are supported by more than one regulatory 
agency.
The Importance of Balancing the Costs and Benefits of Regulation
    Our bank regulatory system has served us quite well, often helping 
to restrain imprudent risk-taking, protect important consumer rights 
and fulfill other vital public policy objectives. Statutes and 
regulations help preserve confidence in the banking industry and in the 
financial markets by ensuring that institutions operate in a safe and 
sound manner, promoting transparency in financial reporting, and 
encouraging fair business practices. However, as more and more laws are 
passed, and new regulations are adopted to implement those laws, it is 
incumbent upon policymakers to ensure that the intended benefits 
justify the considerable costs. We need to take stock periodically of 
the cumulative effect of all regulatory requirements on the industry. 
No one would advocate a system where people spend more time trying to 
figure out how to comply with all the laws than engaging in their 
primary economic activity. As Federal Reserve Board Chairman Alan 
Greenspan said in a speech a few months ago, ``to be effective 
regulators we must also attempt to balance the burdens imposed on banks 
with the regulations' success in obtaining the intended benefits and to 
discover permissible and more efficient ways of doing so.'' I could not 
agree more. It is all about balance, and I am afraid that the scales 
have now tipped too heavily to one side and need to be rebalanced.
The Proliferation and High Cost of Regulation on the Industry
    In my testimony before this Committee last year, I reported that, 
since enactment of the Financial Institutions Reform, Recovery and 
Enforcement Act (FIRREA) in 1989, the Federal bank and thrift 
regulatory agencies promulgated a total of 801 final rules. Since I 
testified in June of last year, the agencies adopted an additional 50 
final rules, which means that there have been a total of 851 final 
rules adopted since FIRREA--an average of about 50 new or amended rules 
promulgated every year. This does not include the rules adopted by the 
Securities and Exchange Commission (SEC), Financial Accounting 
Standards Board (FASB), Public Company Accounting Oversight Board 
(PCAOB), American Institute of Certified Public Accountants (AICPA) and 
a whole host of State regulatory authorities nor regulations that apply 
to companies in general (such as tax and environmental rules).
    It is a challenge for bankers to maintain the capacity to respond 
to the steady stream of new regulations while continuing to comply with 
existing ones. Recently enacted laws reflect important public policy 
choices concerning, for example, the quality of the credit reporting 
system, identity theft, national security and changes in technology. 
However, it is incumbent upon the regulators who write implementing 
regulations, as well as the Congress, to be mindful of the need to 
avoid unnecessarily increasing regulatory burden on the industry as we 
implement new requirements mandated by legislation.
    Rule changes, particularly for smaller community banks with limited 
staff, can be costly since implementation often requires computers to 
be reprogrammed, staff retrained, manuals updated and new forms 
produced. Even if some of the rules do not apply to a particular 
institution, someone has to at least read the rules and make that 
determination. The 4,094 insured institutions with less than $100 
million in assets last year have, on average, fewer than 20 employees 
and the 1,000 smallest community banks and thrifts in the country 
average fewer than 10 employees. It is hard to imagine how those 
institutions can continue to serve their customers' needs and also meet 
myriad new regulatory requirements.
    The cost of all of our regulatory requirements is hard to measure 
because it tends to become indivisible, if not invisible, from a bank's 
other activities. While there are no definitive studies, a survey of 
the evidence by a Federal Reserve Board economist in 1998 found that 
total regulatory costs account for 12 to 13 percent of banks' 
noninterest expense, or about $38 billion in 2004 (The Cost of Bank 
Regulation: A Review of the Evidence,'' Gregory Elliehausen, Federal 
Reserve Bulletin, April 1998). Regulatory burden is an issue for all 
banks, but I believe that the burden falls heaviest on America's 
smaller community banks, as explained in the next section.
The Impact of Regulatory Burden on Community Banks
    New regulations have a greater impact on community banks, 
especially smaller community banks (under $100 million in assets), than 
on larger institutions due to their inability to spread start up and 
implementation costs over a large number of transactions. The magnified 
impact of regulatory burden on small banks is a significant concern to 
me. Community banks play a vital role in the economic well-being of 
countless individuals, neighborhoods, businesses, and organizations 
throughout our country, serving as the very lifeblood of their 
communities. These banks are found in all communities--urban, suburban, 
rural, and small towns. They are a major source of local credit. Data 
from the June 2004 Call Reports indicates that over 90 percent of 
commercial loans at small community banks were made to small 
businesses. In addition, the data indicates that community banks with 
less than $1 billion in assets, which hold only 14 percent of industry 
assets, account for 45 percent of all loans to small businesses and 
farms.
    Community banks generally know personally many small business 
owners and establish lending relationships with these individuals and 
their businesses. These small businesses, in turn, provide the majority 
of new jobs in our economy. Small businesses with fewer than 500 
employees account for approximately three-quarters of all new jobs 
created every year in this country. The loss of community institutions 
can result in losses in civic leadership, charitable contributions, and 
local investment in school and other municipal debt. I have a real 
concern that the volume and complexity of existing banking regulations, 
coupled with new laws and regulations, are increasingly posing a threat 
to the survival of our community banks.
    Over the last 20 years, there has been substantial consolidation in 
the banking industry. This can be seen most dramatically in the numbers 
of small community banks. At the end of 1984, there were 11,705 small 
community banks with assets of less than $100 million in today's 
dollars. At year-end 2004, the number of small community banks dropped 
by 65 percent to just 4,094 (see Chart 1). For institutions with assets 
of $1 billion or less in 2004 dollars, there has been a decline of 
8,761 institutions, or 51 percent over the 20-year period. This chart 
underscores the point that the rate of contraction in the number of 
community banks increases with decreasing asset size. The smaller the 
institutions, the greater the rate of contraction--even when we adjust 
size for inflation.
    The decline in the number of community banks has three main 
components: Mergers; growth out of the community bank category; and 
failures. These factors were only partially offset by the creation of 
more than 2,500 new banks during 1985-2005. (In the above calculations, 
bank asset size is adjusted for inflation. Thus, a bank with $100 
million in assets today is compared with one having about $63 million 
in assets in 1985.) A number of other market forces, such as interstate 
banking and changes to State branching laws impacted the consolidation 
of the banking industry. The bank and thrift crisis of the 1980's and 
the resulting large number of failures and mergers among small 
institutions serving neighboring communities also contributed to the 
decline in the smallest financial institutions. It is probable that 
together those factors were the greatest factors in reducing small bank 
numbers.
    However, I believe regulatory burden plays a significant role in 
shaping the industry, including the number and viability of community 
banks. While many new banks have been chartered in the past two 
decades, I fear that, left unchecked, regulatory burden may eventually 
pose a barrier to the creation of new banks. Keeping barriers to the 
entry of new banks low is critical to ensuring that small business and 
consumer needs are met, especially as bank mergers continue to reduce 
choices in some local markets.
    More dramatic than the decline in numbers of institutions has been 
the decline in market share of community banks. As Chart 2 indicates, 
the asset share of small community banks decreased from 9 percent to 2 
percent in the past 20 years, while the share of institutions with less 
than $1 billion in assets fell from 33 percent to 14 percent. This 
chart understates the real loss of market share for these institutions, 
since it does not reflect the growing importance of asset management 
activities that generate revenues but do not create assets on 
institutions' balance sheets. Chart 3, which presents community banks' 
share of industry earnings, shows a greater loss of share, from 12 
percent to 2 percent for small community banks, and from 44 percent to 
13 percent for institutions with less than $1 billion in assets.
    It may seem a paradox to discuss profitability concerns at a time 
when the banking industry is reporting record earnings. Last year, the 
industry as a whole earned a record $122.9 billion, surpassing the 
previous annual record of $120.5 billion set in 2003. When you look 
behind the numbers, however, you see a considerable disparity in the 
earnings picture between the largest and smallest banks in the country. 
The 117 largest banks in the country (those with assets over $10 
billion), which represent 1.3 percent of the total number of insured 
institutions, earned $89.3 billion or about 73 percent of total 
industry earnings. This is in contrast to the 4,094 banks with assets 
under $100 million, which represent 46 percent of the total number of 
insured institutions and earned about $2.1 billion or only 1.7 percent 
of total industry earnings (see Chart 3). Moreover, when the data is 
examined further, you find that banks with assets over $1 billion had 
an average return on assets (ROA) of 1.31 percent, while those with 
assets under $1 billion had an average ROA of 1.16 percent (see Chart 
4).
    The ROA comparisons understate the actual disparity in performance 
between community banks and their larger counterparts. The 15 basis-
point difference in nominal ROA last year increases to a 43 basis-point 
gap when the data is adjusted for the accounting effects of large-bank 
mergers and different tax treatment of Subchapter S corporations. One 
of the main causes of the growing difference is the greater ability of 
large institutions to spread their overhead costs across a larger and 
more diverse base of revenues. Chart 5 illustrates the growing 
efficiency gap separating large and small institutions. It shows the 
extent to which noninterest expenses absorb operating revenues. 
Throughout the early 1990's, both large and small institutions were 
able to control expense growth and increase revenues so that their 
efficiency ratios improved (declined) in tandem. During the past 6 
years, however, larger institutions have been able to continue to 
improve their efficiency, whereas community banks have not. The 
regressive burden of regulation, which increased considerably during 
this period, contributed to this divergence in performance. Last year, 
more than one out of every 10 small community banks was unprofitable. 
That was more than four times the proportion of larger institutions 
that were unprofitable. These numbers make it clear that community 
banks, while healthy in terms of their supervisory ratings, are 
operating at a lower level of profitability than the largest banks in 
the country. At least part of this disparity in earnings stems from the 
disproportionate impact that regulations and other fixed noninterest 
costs have on community banks.
    Community bankers are increasingly worried that their 
institutions--and all that they mean to their communities--may not be 
able to operate at an acceptable level of profitability for their 
investors for too many more years under what they describe as a 
``never-ending avalanche'' of regulations. As reported in the American 
Banker (May 25, 2004), regulatory burden was an important factor in the 
decision by two community banks to sell their institutions. While we 
have only anecdotal evidence on this point, conversations concerning 
merger or sale of institutions are likely occurring today in many 
community bank boardrooms all over the United States.
    It is not just the total volume of regulatory requirements that 
pose problems for banks, but also the relative distribution of 
regulatory burden across various industries that could hit community 
banks hard in the future. For example, community bankers are 
increasingly subject to more intense competition from credit unions 
that, in many cases, have evolved from small niche players to full-
service retail depository institutions. In the past 10 years, the 
number of credit unions with assets exceeding $1 billion increased 
almost five-fold, from 20 institutions in 1994 to 99 institutions 
today--and the credit union industry continues to grow nationwide. With 
ever-expanding fields of membership and banking products, credit unions 
are now competing head-to-head with banks and thrifts in many 
communities, yet the conditions under which this competition exists 
enable credit unions to operate with a number of advantages over banks 
and thrifts. These advantages include exemption from taxation, not 
being subject to the Community Reinvestment Act, and operation under a 
regulatory framework that has supported and encouraged the growth of 
the credit union movement, including broadening the ``field of 
membership.'' These advantages make for an uneven playing field, a 
condition that Congress should reexamine and seek to resolve.
Interagency Effort to Reduce Regulatory Burden
    In 1996, Congress passed the Economic Growth and Regulatory 
Paperwork Reduction Act (EGRPRA). EGRPRA requires the Federal Financial 
Institutions Examination Council (FFIEC) and each of its member 
agencies to review their regulations at least once every 10 years, in 
an effort to eliminate any regulatory requirements that are outdated, 
unnecessary or unduly burdensome. For the past 2 years, I have been 
leading the interagency effort and am pleased to report that we are 
making progress.
    Under the EGRPRA statute, the agencies are required to categorize 
their regulations by type (such as ``safety and soundness'' or 
``consumer protection'' rules) and then publish each category for 
public comment. The agencies have already jointly published four 
separate requests for comment in the Federal Register. The first 
notice, published on June 16, 2003, sought comment on our overall 
regulatory review plan as well as the initial three categories of 
regulations: Applications and Reporting; Powers and Activities; and 
International Operations. The second interagency notice, published on 
January 20, 2004, sought public comment on the lending-related consumer 
protection regulations, which include Truth-in-Lending (Regulation Z), 
Equal Credit Opportunity Act (ECOA), Home Mortgage Disclosure Act 
(HMDA), Fair Housing, Consumer Leasing, Flood Insurance and Unfair and 
Deceptive Acts and Practices. The third notice, published on July 20, 
2004, sought public comment on remaining consumer protection 
regulations (which relate primarily to deposit 
accounts/relationships). The fourth notice, published on February 3, 
2005, sought public comment on our antimoney laundering, safety and 
soundness and securities regulations.
    These four requests for comments have covered a total of 99 
separate regulations. In response to these requests, the agencies 
received a total of 846 comment letters from bankers, consumer and 
community groups, trade associations and other interested parties. Each 
of the recommendations is being carefully reviewed and 
analyzed by the agency staffs. Based on these reviews, the appropriate 
agency or agencies may bring forward, and request public comment on, 
proposals to change specific regulations.
    Banker, consumer and public insight into these issues is critical 
to the success of our effort. The regulatory agencies have tried to 
make it as easy as possible for all interested parties to be informed 
about the EGRPRA project and to let us know what are the most critical 
regulatory burden issues. The EGRPRA website, which can be found at 
www.egrpra.gov, provides an overview of the EGRPRA review process, with 
direct links to the actual text of each regulation. Comments submitted 
through the website are automatically transmitted to all of the 
financial institution regulatory agencies and posted on the EGRPRA 
website. The website has proven to be a popular source for information 
about the project, with thousands of hits being reported every month.
    While written comments are important to the agencies' efforts to 
reduce regulatory burden, it also is important to have face-to-face 
meetings with bankers and consumer group representatives so they have 
an opportunity to communicate their views on the issues directly. Over 
the past 2 years, the agencies sponsored a total of nine banker 
outreach meetings in different cities around the country to heighten 
industry awareness of the EGRPRA project. Two additional meetings are 
scheduled for tomorrow in New Orleans and September 21 in Boston. The 
meetings provide an opportunity for the agencies to listen to bankers' 
regulatory burden concerns, explore comments and suggestions, and 
identify possible solutions. To date, more than 450 bankers (mostly 
CEO's) and representatives from the national and State trade 
associations participated in these meetings with representatives from 
FDIC, FRB, OCC, OTS, CSBS, and the State regulatory agencies. Summaries 
of the issues raised during the meetings are posted on the EGRPRA 
website.
    We also held three outreach meetings for consumer and community 
groups. Representatives from a number of consumer and community groups 
participated in the meetings, along with representatives from the FDIC, 
FRB, OCC, OTS, NCUA, and CSBS. The meetings provided a useful 
perspective on the effectiveness of many existing regulations. We will 
hold one additional meeting with consumer and community groups on 
September 22 in Boston, Massachusetts, and we are willing to hold 
additional meetings if there is sufficient interest among consumer and 
community groups.
Response by the Regulatory Agencies
    The tremendous regulatory burden that exists was not created 
overnight and unfortunately, from my perspective, cannot be eradicated 
overnight. It is a slow and arduous process, but I believe that we are 
making some headway. In fact, the banking and thrift regulatory 
agencies are working together closely and harmoniously on a number of 
projects to address unnecessary burdens affirmatively. In addition to 
eliminating outdated and unnecessary regulations, the agencies have 
identified more efficient ways of achieving important public policy 
goals of existing statutes. Although we have much work ahead of us, 
there has been significant progress to date. Here are some notable 
examples:
Community Reinvestment Act Regulations
    On February 22, 2005, the FDIC, along with the OCC, issued a 
proposal to amend the Community Reinvestment Act (CRA) regulations. The 
Federal Reserve Board issued a very similar proposal shortly 
thereafter. The agencies' proposal would raise the ``small bank'' 
threshold in the CRA regulations to $1 billion in assets, without 
regard to holding company assets. This would represent a significant 
increase in the small bank threshold from the current level of $250 
million which was established in 1995. Under the proposal, just over 
1,566 additional banks (those with assets between $250 and $1 billion) 
would be subject to small bank reporting and streamlined examination 
standards.
    This proposal does not exempt any institutions from complying with 
CRA--all banks, regardless of size, will be required to be thoroughly 
evaluated within the business context in which they operate. The 
proposal includes a ``community development test'' for banks between 
$250 million and $1 billion in assets which would be separately rated 
in CRA examinations. This community development test would provide 
eligible banks with greater flexibility to meet CRA requirements than 
the large bank test under which they are currently evaluated. Another 
effect of the proposal would be the elimination of certain collection 
and reporting requirements that currently apply to banks between $250 
million and $1 billion in assets.
    These changes to the regulation, if adopted as proposed, would 
result in significant regulatory burden reduction for a number of 
institutions. I recognize that there are many competing interests and 
that community groups, in particular, as well as many Members of 
Congress, generally oppose any increase at all in the threshold level--
and I remain receptive to all points of view. The comment period for 
this proposal closed on May 10, 2005, and the FDIC received 
approximately 3,800 comment letters. It is my hope that, after 
carefully considering all comments, the agencies will agree on a final 
rule before the end of this year.
Privacy Notices
    On December 30, 2003, the Federal bank, thrift and credit union 
regulatory agencies, in conjunction with the Federal Trade Commission, 
SEC, and the Commodity Futures Trading Commission, issued an Advanced 
Notice of Proposed Rulemaking (ANPR), seeking public comment on ways to 
improve the privacy notices required by the Gramm-Leach-Bliley Act. 
Although there are many issues raised in the ANPR, the heart of the 
document solicited comment on how the privacy notices could be improved 
to be more readable and useful to consumers, while reducing the burden 
on banks and other service providers required to distribute the 
notices. In response to the comments received, the agencies are 
conducting consumer research and testing that will be used to develop 
privacy notices that meet these goals. As they do so, it is important 
for the agencies to continue to be mindful that changes to privacy 
notices and the requirements for their distribution may themselves 
create new costs for the banking industry.
Consumer Disclosures
    In recent speeches, Acting Comptroller Julie Williams called for a 
comprehensive review of existing consumer disclosures to make them more 
useful and understandable for consumers as well as less burdensome for 
banks. I applaud her efforts to highlight this issue and agree that we 
should take a careful look at the large number and actual content of 
all consumer disclosures required by law. Consumers may in fact be 
experiencing ``information overload.'' Beginning with the Truth in 
Lending Act 35 years ago, through the privacy provisions of the Gramm-
Leach-Bliley Act and culminating with the recently enacted FACT Act, 
there are now dozens of consumer laws and regulations, any number of 
which might apply, depending on the transaction. Chart 6 graphically 
depicts some of the laws and regulations that a bank must be concerned 
with under different mortgage lending scenarios.
    The sheer number of potential disclosures raises several questions: 
(1) Are the numbers of disclosures too many for banks and consumers to 
deal with effectively; (2) do consumers find the disclosures too 
complicated, conflicting, and duplicative; and (3) are these 
disclosures failing to achieve their designated purpose in helping 
consumers become informed customers of financial services? I think we 
need to look at the whole panoply of disclosures and find ways to 
eliminate the existing overlap, duplication, and confusion. We may have 
reached a point where we have ``nondisclosure by over-disclosure.'' I 
look forward to working with my fellow regulators to improve the 
current situation with respect to consumer disclosures.
BSA and USA PATRIOT Act Guidance
    There is no question that financial institutions and the regulators 
must be extremely vigilant in their efforts to implement the Bank 
Secrecy Act (BSA) in order to thwart terrorist financing efforts and 
money-laundering. Last year, bankers filed over 13 million Currency 
Transaction Reports (CTR's) and over 300,000 Suspicious Activity 
Reports (SAR's) with the Financial Crimes Enforcement Network (FinCEN). 
Although FinCEN is providing more information to bankers than 
previously, bankers still believe they are filing millions of CTR's and 
SAR's that are not utilized for any law enforcement purpose. 
Consequently, bankers believe that a costly burden is being carried by 
the industry which is providing little benefit to anyone. In an effort 
to address this concern and enhance the effectiveness of these 
programs, the financial institution regulatory agencies are working 
together with FinCEN and various law enforcement agencies, through task 
forces of the Bank Secrecy Act Advisory Group, to find ways to 
streamline reporting requirements for CTR's and SAR's and make the 
reports that are filed more useful for law enforcement and to 
communicate with bankers more effectively.
    In the next week or so, the bank and thrift regulatory agencies are 
expected to issue detailed BSA examination procedures that will address 
many of the questions bankers have about BSA compliance. To further 
assist banks, the agencies and FinCEN issued interpretive guidance 
designed to clarify the requirements for appropriately assessing and 
minimizing risks posed when providing banking services to Money 
Services Businesses. Bankers understand the vital importance of knowing 
their customers and thus generally do not object to taking additional 
steps necessary to verify the identity of their customers. However, 
bankers wanted guidance from the regulators on how to establish 
appropriate customer identification requirements under the USA PATRIOT 
Act. In response, the bank and thrift regulatory agencies, the Treasury 
Department and FinCEN issued interpretive guidance to all financial 
institutions to assist them in developing a Customer Identification 
Program (CIP). The interagency guidance answered the most frequently 
asked questions about the requirements of the CIP rule. Finally, with 
respect to the requirements of the Office of Foreign Assets Control 
(OFAC), the agencies are working to develop examination procedures and 
guidance for OFAC compliance.
    I have met on several occasions with FinCEN's Director, William 
Fox, and pledged to work with him to make reporting under the BSA more 
effective and efficient, while still meeting the important crime-
fighting objectives of antiterrorism and antimoney-laundering laws. I 
am convinced that we can find ways to make this system more effective 
for law enforcement, while at the same time make it more cost efficient 
and less burdensome for bankers.
FDIC Efforts to Relieve Regulatory Burden
    In addition to the above-noted interagency efforts to reduce 
regulatory burden, the FDIC, under the leadership of Chairman Powell, 
has undertaken a number of initiatives to improve the efficiency of our 
operations and reduce regulatory burden, without compromising safety 
and soundness or undermining important consumer protections. Over the 
last several years, we have streamlined our examination processes and 
procedures with an eye toward better allocating FDIC resources to areas 
that could ultimately pose greater risks to the insurance funds--such 
as problem banks, large financial institutions, high-risk lending, 
internal controls, and fraud. Some of our initiatives to reduce 
regulatory burden include the following:

(1) Raised the threshold for well-rated, well-capitalized banks to 
    qualify for streamlined safety and soundness examinations under the 
    FDIC MERIT examination program from $250 million to $1 billion so 
    that the FDIC's resources are better focused on managing risk to 
    the insurance funds;
(2) Implemented more risk-focused compliance, trust, and IT specialty 
    examinations, placing greater emphasis on an institution's 
    administration of its compliance and fiduciary responsibilities and 
    less on transaction testing;
(3) Initiated electronic filing of branch applications through ``FDIC 
    Connect'' and began exploring alternatives for further streamlining 
    the deposit insurance application process in connection with new 
    charters and mergers;
(4) Simplified the deposit insurance coverage rules for living trust 
    accounts so that the rules are easier to understand and administer;
(5) Simplified the assessment process by providing institutions with 
    electronic invoices and eliminating most of the paperwork 
    associated with paying assessments;
(6) Amended our international banking regulations to expand the 
    availability of general consent authority for foreign branching and 
    investments in certain circumstances and replaced the fixed asset 
    pledge with a risk-based pledge requirement;
(7) Reviewed existing Financial Institution Letters (FIL's) to 
    eliminate outdated or unnecessary directives and completely changed 
    the basic format of the FIL's to make them easier to read.
(8) Provided greater resources to bank directors, including the 
    establishment of a ``Director's Corner'' on the FDIC website, as a 
    one-stop site for Directors to obtain useful and practical 
    information to in fulfilling their responsibilities, and the 
    sponsorship of many ``Director's Colleges'' around the country;
(9) Made it easier for banks to assist low and moderate-income 
    individuals, and obtain CRA credit for doing so, by developing 
    Money Smart, a financial literacy curriculum and making available 
    the Money Smart Program free-of-charge to all insured institutions;
(10) Implemented an interagency charter and Federal deposit insurance 
    application that eliminates duplicative information requests by 
    consolidating into one uniform document, the different reporting 
    requirements of the three regulatory agencies (FDIC, OCC, and OTS);
(11) Revised our internal delegations of authority to push more 
    decisionmaking out to the field level to expedite decisionmaking 
    and provide institutions with their final Reports of Examination on 
    an expedited basis; and
(12) Provided bankers with a customized version of the FDIC Electronic 
    Deposit Insurance Estimator (EDIE), a CD-ROM, and downloadable 
    version of the web-based EDIE, which allows bankers easier access 
    to information to help determine the extent to which a customer's 
    funds are insured by the FDIC.
(13) Amended the FDIC's securities disclosure regulations for banks 
    subject to the registration and disclosure requirements of the 
    Securities Exchange Act of 1934 so that the reporting requirements 
    remain substantially similar to those required of all publicly 
    traded companies by the Sarbanes-Oxley Act of 2002.
(14) Adopted revised guidelines for supervisory and assessment appeals 
    to provide more transparency and independence in the appeals 
    process.

    The FDIC is aware that regulatory burden does not emanate only from 
statutes and regulations, but often comes from internal processes and 
procedures. Therefore, we continually strive to improve the way we 
conduct our affairs, always looking for more efficient and effective 
ways to meet our responsibilities.
Legislative Proposals to Reduce Regulatory Burden
    Mr. Chairman, I wish to commend you, Senator Crapo, and the other 
distinguished Members of your Committee for your efforts to develop 
legislation to remove unnecessary regulatory burden from the banking 
industry. Since most of our regulations are mandated by statute, I 
believe it is critical that the agencies work hard not only on the 
regulatory front, but also on the legislative front, to alert Congress 
to unnecessary regulatory burden. In fact, the EGRPRA statute requires 
us to identify and address unnecessary regulatory burdens that must be 
addressed by legislative action.
    Almost a year ago, I testified on regulatory burden relief before 
this Committee, along with 18 other witnesses. At the end of the 
hearing, Senator Crapo asked me, as the leader of the interagency 
EGRPRA task force, to review the testimony presented at the hearing and 
extract the various regulatory burden reduction proposals. The result 
was a matrix with a total of 136 burden reduction proposals.
    Thereafter, I convened a meeting of banking industry 
representatives from the American Bankers Association, America's 
Community Bankers, the Independent Community Bankers of America, and 
the Financial Services Roundtable, who together reviewed the matrix of 
136 proposals in an effort to determine which of these proposals they 
could all support as industry consensus items. This process yielded a 
list of 78 banking industry consensus items.
    The FDIC reviewed the 78 banking industry consensus proposals for 
safety and soundness, consumer protection and other public policy 
concerns and determined that we could affirmatively support 58 of the 
78 industry consensus proposals. There are other proposals that, after 
review, the FDIC determined we have ``no objection'' to or we take ``no 
position'' on, since the proposals do not affect either the FDIC or the 
institutions we regulate. There are only five of the banking industry 
consensus proposals that the FDIC opposes.
    The next step in the consensus building process was to share our 
positions with the other Federal banking agencies in an effort to reach 
interagency consensus. After much work, negotiation, and compromise, 
the FRB, OCC, OTS, and the FDIC agreed to support twelve of the banking 
industry consensus proposals. This ``bankers' dozen'' includes the 
following specific proposals for regulatory burden relief, which are 
described in greater detail in the testimony's Appendix:
Authorize the Federal Reserve to Pay Interest on Reserves
    This amendment gives the Federal Reserve express authority to pay 
interest on balances that depository institutions are required to 
maintain at the Federal Reserve Banks. By law, depository institutions 
are required to hold funds against transaction accounts held by 
customers of those institutions. These funds must be held in cash or on 
reserve at Federal Reserve Banks. Over the years, institutions have 
tried to minimize their reserve requirements. Allowing the Federal 
Reserve Banks to pay interest on those reserves should put an end to 
economically wasteful efforts by banks to circumvent the reserve 
requirements. Moreover, it could be helpful in ensuring that the 
Federal Reserve will be able to continue to implement monetary policy 
with its existing procedures.
Increase Flexibility for the Federal Reserve Board to Establish Reserve
Requirements
    This proposal gives the Federal Reserve Board greater discretion in 
setting reserve requirements for transaction accounts below the ranges 
established in the Monetary Control Act of 1980. The provision 
eliminates current statutory minimum reserve requirements for 
transaction accounts, thereby allowing the Board to set lower reserve 
requirements, to the extent such action is consistent with the 
effective implementation of monetary policy.
Repeal Certain Reporting Requirements Relating to Insider Lending
    These amendments repeal certain reporting requirements related to 
insider lending imposed on banks and savings associations, their 
executive officers, and their principal shareholders. The reports 
recommended for elimination are: (1) reports by executive officers to 
the board of directors whenever an executive officer obtains a loan 
from another bank in an amount more than he or she could obtain from 
his or her own bank; (2) quarterly reports from banks regarding any 
loans the bank has made to its executive officers; and (3) annual 
reports from bank executive officers and principal shareholders to the 
bank's board of directors regarding their outstanding loans from a 
correspondent bank.
    Federal banking agencies have found that these particular reports 
do not contribute significantly to the monitoring of insider lending or 
the prevention of insider abuse. Identifying insider lending is part of 
the normal examination and supervision process. The proposed amendments 
would not alter the restrictions on insider loans or limit the 
authority of the Federal banking agencies to take enforcement action 
against a bank or its insiders for violations of those restrictions.
Streamline Depository Institution Merger Application Requirements
    This proposal streamlines merger application requirements by 
eliminating the requirement that each Federal banking agency must 
request a competitive factors report from the other three Federal 
banking agencies, in addition to requesting a 
report from the Attorney General. Instead, the agency reviewing the 
application would be required to request a report only from the 
Attorney General and give notice to the FDIC as insurer.
Shorten Post-Approval Waiting Period on Bank Mergers and Acquisitions 
        Where
There Are No Adverse Effects on Competition
    The proposed amendments to the Banking Holding Company Act and the 
Federal Deposit Insurance Act shortens the current 15-day minimum post-
approval waiting period for certain bank acquisitions and mergers when 
the appropriate Federal banking agency and the Attorney General agree 
that the transaction would not have significant adverse effects on 
competition. Under those circumstances, the waiting period could be 
shortened to 5 days. However, these amendments do not shorten the time 
period for private parties to challenge the transaction under the 
Community Reinvestment Act.
Improve Information Sharing with Foreign Supervisors
    This proposal amends Section 15 of the International Banking Act of 
1978 to add a provision to ensure that the Federal Reserve, OCC, FDIC, 
and OTS cannot be compelled to disclose information obtained from a 
foreign supervisor in certain circumstances. Disclosure could not be 
compelled if public disclosure of the information would be a violation 
of the applicable foreign law and the U.S. banking agency 
obtained the information under an information sharing arrangement or 
other procedure established to administer and enforce the banking laws. 
This amendment provides assurance to foreign supervisors that may 
otherwise be reluctant to enter into information sharing agreements 
with U.S. banking agencies because of concerns that those agencies 
could not keep the information confidential and public disclosure could 
subject the foreign supervisor to a violation of its home country law. 
It also facilitates information sharing necessary to supervise 
institutions operating internationally, lessening duplicative data 
collection by individual national regulators. The banking agency, 
however, cannot use this provision as a basis to withhold information 
from Congress or to refuse to comply with a valid court order in an 
action brought by the United States or the agency.
Provide an Inflation Adjustment for the Small Depository Institution 
        Exception
under the Depository Institution Management Interlocks Act
    This amendment increases the threshold for the small depository 
institution exception under the Depository Institution Management 
Interlocks Act. Under current law, a management official generally may 
not serve as a management official for another nonaffiliated depository 
institution or depository institution holding company if their offices 
are located, or they have an affiliate located, in the same 
metropolitan statistical area (MSA). For institutions with less than 
$20 million in assets, this MSA restriction does not apply. The 
proposal increases the MSA threshold, which dates back to 1978, to $100 
million.
Exempt Merger Transactions Between an Insured Depository Institution 
        and
One or More of its Affiliates from Competitive Factors Review and
Post-Approval Waiting Periods
    This proposal amends the Bank Merger Act (12 U.S.C. 1828(c)) to 
exempt certain merger transactions from both the competitive factors 
review and post-approval waiting periods. It applies only to merger 
transactions between an insured depository institution and one or more 
of its affiliates, as this type of merger is generally considered to 
have no affect on competition.
Increase Flexibility for Flood Insurance
    These amendments make a number of changes to the Flood Disaster 
Protection Act of 1973 to: (1) increase the maximum dollar amount 
qualifying for the ``small loan'' exception to the requirement to 
purchase flood insurance and adjust that maximum loan amount 
periodically based on the Consumer Price Index; (2) eliminate the 15-
day gap between the 30-day grace period during which flood insurance 
coverage continues after policy expiration and the 45-day period 
required after policy expiration before a lender can purchase insurance 
on the borrower's behalf; and (3) replace the current mandatory system 
for imposing civil monetary penalties in 
response to significant violations of the flood insurance requirements 
with a discretionary system for doing so. These amendments would both 
reduce burden on lenders and give the Federal supervisory agencies 
greater discretion to tailor their responses to violations more closely 
to the facts of individual cases.
Enhance Examination Flexibility
    This proposal raises the total asset threshold for small 
institutions to qualify for an 18-month examination cycle from $250 
million to $500 million, thus potentially permitting more institutions 
to qualify for less frequent examinations. The FDI Act requires the 
banking agencies to conduct a full-scale, on-site examination of the 
insured depository institutions under their jurisdiction at least once 
every 12 months. The Act provides an exception for small institutions--
that is, institutions with total assets of less than $250 million--that 
are well-capitalized and well-managed, and meet other criteria. 
Examinations of these qualifying smaller institutions are required at 
least once every 18 months. The proposal would reduce regulatory burden 
on low-risk, smaller institutions and permit the banking agencies to 
focus their resources on the highest-risk institutions.
Call Report Streamlining
    This proposal requires the Federal banking agencies to review 
information and schedules required to be filed in Reports of Condition 
(Call Reports) every 5 years to determine if some of the required 
information and schedules can be eliminated. Preparing the Call Report 
has become a significant burden for many banks. A bank must report a 
substantial amount of financial and statistical information with its 
Call Report schedules that appears to be unnecessary to assessing the 
financial health of the institution and determining the amount of 
insured deposits it holds. This amendment requires the agencies to 
review the real need for information routinely so as to reduce that 
burden.
Authorize Member Bank to Use Pass-Through Reserve Accounts
    This amendment allows banks that are members of the Federal Reserve 
System to count as reserves their deposits in affiliated or 
correspondent banks that are in turn ``passed through'' by those banks 
to the Federal Reserve Banks as required reserve balances. It extends 
to these member banks a privilege that was granted to nonmember 
institutions at the time of the Depository Institutions Deregulation 
and Monetary Control Act of 1980.
Additional Proposals
    The above-noted, industry-backed proposals have the unanimous 
support of all the Federal bank and thrift regulatory agencies. 
However, they are not the only legislative proposals to reduce 
regulatory burden that are supported by one or more of the regulatory 
agencies. In fact, many of the other banking industry consensus items 
have support from multiple Federal banking agencies. In a matrix of 
legislative proposals prepared by Senate staff, there are dozens of 
proposals with multiple agency support, no objection, or no position. 
(It is important to note that the indication of ``no position'' by some 
agencies does not indicate that the agency has decided not to object to 
a particular proposal.) These proposals may yet yield a number of 
industry consensus regulatory burden relief proposals agreeable to all 
of the Federal banking agencies. We are continuing to work toward this 
goal within the context of the Interagency EGRPRA Task Force.
    The EGRPRA process has produced a wealth of proposals. The 
synergism that has resulted from the EGRPRA process makes me believe 
that there is real momentum behind the effort to reduce regulatory 
burden on the industry. I look forward to working with the Committee on 
developing a comprehensive legislative package that provides real 
regulatory relief for the industry. I am certain that this hearing will 
provide valuable input for the comprehensive package.
Conclusion
    Mr. Chairman, as I stated at the outset, the EGRPRA process 
addresses the problem of regulatory burden for every federally insured 
financial institution. Banks and thrifts, both large and small, labor 
under the cumulative weight of our regulations. If we do not do 
something to stem the tide of ever increasing regulation, a vital part 
of the banking system will disappear from many of the communities that 
need it the most. That is why it is incumbent upon all of us--Congress, 
regulators, industry, and consumer groups--to work together to 
eliminate any outdated, unnecessary, or unduly burdensome regulations. 
I remain personally committed to accomplishing that objective, no 
matter how difficult it may be to achieve.
    Now is the time to take action to address the unnecessary 
regulations that face the banking industry every day. There seems to be 
a real consensus building to address this issue. I remain confident 
that, if we all work together, we can find ways to regulate that are 
both more effective and less burdensome, without jeopardizing the 
safety and soundness of the industry or diluting important consumer 
protections.
    Thank you for providing me with this opportunity to testify.

                               ----------

               PREPARED STATEMENT OF JULIE L. WILLIAMS *
                   Acting Comptroller of the Currency
               Office of the Comptroller of the Currency
                             June 21, 2005

Introduction
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, I appreciate this opportunity to appear before you today to 
discuss the challenge of reducing unnecessary regulatory burden on 
America's banks. I also want to take this opportunity to express 
appreciation to Senator Crapo for his commitment and dedication to this 
issue.
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    * Appendix held in Committee files.
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    The Office of the Comptroller of the Currency (OCC) welcomes the 
opportunity to discuss this challenge and to offer suggestions for 
reforms, including some suggestions particularly affecting national 
banks and the national banking system. We appreciate your efforts to 
pursue regulatory burden relief legislation, as evidenced by this 
hearing today.
    Unnecessary burdens are not simply a matter of bank costs. When 
unnecessary regulatory burdens drive up the cost of doing business for 
banks, bank customers feel the impact in the form of higher prices and, 
in some cases, diminished product choice. Unnecessary regulatory burden 
also can become an issue of competitive viability, particularly for our 
Nation's community banks. Over-regulation neither encourages greater 
competition nor improved allocation of resources; to the contrary, it 
can shackle competition and lead to inefficient use of resources.
    The regulatory burdens imposed on our banks arise from several 
sources. One source is regulations promulgated by the Federal banking 
agencies. Thus, when we review the regulations we already have on the 
books and consider new ones, we have a responsibility to ensure that 
our regulations effectively protect safety and soundness, foster the 
integrity of bank operations, and safeguard the interests of consumers, 
and do not impose regulatory burdens that exceed what is necessary to 
achieve those goals, and thereby act as a drag on our banks' efficiency 
and competitiveness.
    We also need to recognize that not all the regulatory burdens 
imposed on banks today come from regulations promulgated by bank 
regulators. Thus, we welcome the interest of the Committee in issues 
such as regulatory implementation of the Bank Secrecy Act and anti-
money laundering standards, and the ongoing efforts by the Securities 
and Exchange Commission (SEC) to implement the so-called ``push-out'' 
provisions of the Gramm-Leach-Bliley Act (GLBA) in a manner that is 
faithful to GLBA's intent and not so burdensome as to drive established 
banking functions out of banks.
    Another source of regulatory burden is mandates of Federal 
legislation. Thus, relief from some manifestations of unnecessary 
regulatory burden requires action by Congress. My testimony contains a 
number of recommendations for legislative changes to reduce unnecessary 
regulatory burden by adding provisions to law to provide new 
flexibilities, modify requirements to be less burdensome, and in some 
cases, eliminate certain requirements currently in the law. This 
hearing today is a crucial stage in that process.
    In summary, my testimony will:

 First, summarize how the Federal banking agencies are working 
    together under the able leadership of Federal Deposit Insurance 
    Corporation (FDIC) Vice Chairman Reich through the process required 
    by the Economic Growth and Regulatory Paperwork Reduction Act of 
    1996 (EGRPRA) to identify unnecessary regulatory burdens;
 Second, summarize some important regulatory initiatives that 
    the OCC is pursuing with the other Federal banking agencies to 
    reduce burden;
 Third, summarize several of the OCC's priority legislative 
    items for regulatory burden relief;
 Fourth, in the area of consumer protection, explain how we can 
    both reduce unnecessary regulatory burden and more effectively use 
    disclosures to provide information to consumers in a more 
    meaningful way;
 Fifth, provide an overview of some other legislative items 
    that the OCC supports that are included in a regulator/industry 
    consensus package; and
 Sixth, provide some additional comments about other 
    legislative proposals.
Regulatory Initiatives to Address Regulatory Burden
EGRPRA Process
    The OCC is an active participant in and supporter of the regulatory 
burden reduction initiative being led by FDIC Vice Chairman Reich. 
Under Vice Chairman Reich's capable and dedicated leadership, the 
Federal banking agencies are working together to conduct the regulatory 
review required under Section 2222 of EGRPRA. Section 2222 requires the 
Federal Financial Institutions Examination Council and each Federal 
banking agency to identify outdated, unnecessary regulatory 
requirements and, in a report to Congress, to address whether such 
regulatory burdens can be changed through regulation or require 
legislative action. The current review period ends in September 2006.
    The Federal banking agencies--the OCC, the Board of Governors of 
the Federal Reserve System (Fed), the FDIC, and the Office of Thrift 
Supervision (OTS)--have divided their regulations into thirteen 
categories for purposes of publishing those regulations for review as 
part of the EGRPRA process. Since the first joint notice was published 
in mid-2003, the agencies have issued a total of four joint notices for 
public comment and are about to put out a fifth. To date, we have 
received over 700 comments on our notices. We anticipate that a sixth 
and final joint notice will be published in the first half of 2006. 
Every comment received will be considered in formulating the agencies' 
recommendations for specific regulatory changes as well as legislative 
recommendations.
    Moreover, in addition to soliciting written comments, the Federal 
banking agencies, in conjunction with the Conference of State Bank 
Supervisors and State regulatory agencies, have held nine banker 
outreach meetings in different cities and 
regions throughout the country to hear firsthand the bankers' concerns 
and suggestions to reduce burden. Additional outreach meetings may be 
scheduled. The agencies also are making every effort to ensure that 
there is ample opportunity for consumers and the industry to 
participate in this process, and we have held three consumer and 
community outreach meetings, including one in the Washington, DC area.
Other Burden Reduction Regulatory Initiatives
    The OCC constantly reviews its regulations to identify 
opportunities to streamline regulations or regulatory processes, while 
ensuring that the goals of protecting safety and soundness, maintaining 
the integrity of bank operations, and safeguarding the interests of 
consumers are met. In the mid-1990's, pursuant to our comprehensive 
``Regulation Review'' project, we went through every regulation in our 
rulebook with that goal in mind. We have since conducted several 
supplemental reviews focused on particular areas where we thought 
further improvements could be made. The following are several 
significant regulatory projects we are pursuing to identify and reduce 
unnecessary regulatory burdens.
    Improving the Value and Reducing the Burden of Privacy Notices. The 
OCC, together with the other Federal banking agencies, the Federal 
Trade Commission, the SEC, and the Commodity Futures Trading 
Commission, have undertaken an unprecedented initiative to simplify the 
privacy notices required under GLBA. Over a year ago, the agencies 
asked for comments on whether to consider amending their respective 
privacy regulations to allow, or require, financial institutions to 
provide alternative types of privacy notices, such as a short-form 
privacy notice, that would be more understandable and useful for 
consumers and less burdensome for banks to provide. The agencies also 
asked commenters to provide sample privacy notices that they believe 
work well for consumers, and to provide the results of any consumer 
testing that has been conducted in this area.
    The OCC and the other agencies then engaged experts in plain 
language disclosures and consumer testing to assist in conducting a 
series of focus groups and consumer interviews to find out what 
information consumers find most meaningful, and the most effective way 
to disclose that information to them. We expect that this consumer 
testing will be completed by the end of the year and will form the 
basis for a proposal to revise the current privacy notice rules. 
Personally, I believe this project has the potential to be a win-win 
for consumers and financial institutions--more effective and meaningful 
disclosures for consumers, and reduced burden on institutions that 
produce and distribute privacy notices.
    Reducing CRA Burden on Small Banks. Recently, the OCC, the Fed, and 
the FDIC proposed amendments to our Community Reinvestment Act (CRA) 
regulations. The comment period closed a little over a month ago--on 
May 10. Current CRA rules define a ``small bank'' as a bank with assets 
of up to $250 million. Banks above that asset threshold are categorized 
as ``large'' banks for CRA purposes and are subject to a three-part 
test that separately assesses their lending, services, and investments 
in their assessment areas.
    The proposal would create a new class of ``intermediate'' small 
banks, namely those with assets between $250 million and $1 billion. 
``Intermediate'' small banks would be subject to the streamlined small 
bank lending test and a flexible new community development test that 
would look to the mix of community development lending, investment, and 
services that a bank provides, particularly in light of the bank's 
resources and capacities, and the needs of the communities it serves. 
``Intermediate'' small banks also would no longer be subject to certain 
data collection and reporting requirements.
    The OCC, the Fed, and the FDIC joined in this proposal, which we 
thought was an effort to carefully balance the goals of reducing 
unnecessary regulatory reporting burdens with achieving the goals of 
the CRA. We are now reviewing the comments we received in response to 
the proposal and hope to conclude the rulemaking process in the near 
future.
OCC Support for Regulatory Burden Relief Legislation
    The OCC also has recommended a package of legislative amendments 
that we believe will help reduce unnecessary regulatory burden on 
national banks and other depository institutions. I am pleased to 
present those items to you today for your consideration. In addition, 
the banking agencies have been discussing jointly recommending certain 
legislative changes to reduce burdens that have been identified as part 
of the EGRPRA process. The consensus items supported by the four 
Federal banking agencies and the industry also are discussed below in 
my testimony.\1\ As the legislative process moves forward, we may 
jointly support additional items.
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    \1\ It is important to point out that, while a particular item 
recommended by the OCC, for example, may not be on the consensus list, 
this does not necessarily mean that a particular trade group or another 
Federal agency would oppose the item. In most cases, it simply means 
that an industry group or a Federal banking agency has not taken a 
position on the item.
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    My testimony highlights some of the important items that the OCC 
believes will reduce regulatory burden on our banking system and 
benefit consumers. We have highlighted other changes that the OCC 
believes will significantly enhance safety and soundness. These and 
other suggestions are discussed in more detail in Appendix #1 to my 
testimony.\2\
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    \2\ Many of the suggested changes that we discuss were included in 
H.R. 1375, the Financial Services Regulatory Relief Act of 2004, as 
passed by the House in the last Congress on March 18, 2004. However, we 
also are recommending some amendments that were not part of the House-
passed bill.
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National Bank-Related Provisions
    Repealing State Opt-In Requirements for De Novo Branching. Repeal 
of the State opt-in requirement that applies to banks that choose to 
expand interstate by establishing branches de novo would remove a 
significant unnecessary burden imposed on both national and State banks 
that seek to establish new interstate branch facilities to enhance 
service to customers. Under the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994, interstate expansion through bank 
mergers 
generally is subject to a State ``opt-out'' that had to be in place by 
June 1, 1997. Interstate bank mergers are now permissible in all 50 
states. De novo branching, however, is permissible only in those 
approximately 23 States that have affirmatively opted-in to allow the 
establishment of new branches in the State. Approximately 17 of these 
23 States impose a reciprocity requirement.
    In many cases, in order to serve customers in multistate 
metropolitan areas or regional markets, banks must structure artificial 
and unnecessarily expensive transactions in order to establish a new 
branch across a State border. Enactment of this recommended amendment 
would relieve these unnecessary and costly burdens on both national and 
State banks.
    Resolving Issues About Federal Court Diversity Jurisdiction. 
Another high priority item is an amendment that would resolve the 
differing interpretations of the State citizenship rule for national 
banks (and Federal thrifts) for purposes of determining Federal court 
diversity jurisdiction. This issue has significant practical 
consequences in terms of unnecessary legal costs and operational 
uncertainties for both national banks and Federal thrifts. We are 
cooperating with the OTS on this issue and we would be pleased to work 
with your staff on a legislative proposal.
    The controversy has taken on increased importance for national 
banks in light of a recent Federal appeals court decision by the Fourth 
Circuit in November 2004 that created a split in the circuits by 
finding that, for purposes of determining diversity jurisdiction, a 
national bank is a citizen of every State in which it has a branch or 
potentially any other type of permanent office.\3\ Under the Fourth 
Circuit's diversity jurisdiction interpretation, federally chartered 
national banks would be denied access to Federal court any time any 
opposing party is a citizen of a State in which the bank has a branch. 
While a national bank with just one interstate branch would be affected 
by this decision, the consequences are most severe for national banks 
that have established interstate branches in multiple States.
---------------------------------------------------------------------------
    \3\ See Wachovia Bank v. Schmidt, 388 F.3d 414 (4th Cir. 2004).
---------------------------------------------------------------------------
    The Fourth Circuit's opinion has created uncertain standards on 
this issue since every other Federal Circuit Court has reached a 
contrary conclusion. In October 2004, the Fifth Circuit held that, in 
determining citizenship for purposes of Federal court diversity 
jurisdiction, a national bank is not located at its interstate branch 
locations.\4\ Similarly, in 2001, the Seventh Circuit found that a 
national bank is a citizen of only the State of its principal place of 
business and the State listed in its organization certificate.\5\ 
Indeed, over 60 years ago, the Ninth Circuit considered this issue and 
concluded that a national bank is a citizen only of the State where it 
maintains its principal place of business.\6\
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    \4\ See Horton v. Bank One, N.A., 387 F.3d 426 (5th Cir. 2004).
    \5\ See Firstar Bank, N.A. v. Faul, 253 F.3d 982 (7th Cir. 2001).
    \6\ See American Surety Co. v. Bank of California, 133 F.2d 160 
(9th Cir. 1943).
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    Although the Supreme Court has recently agreed to review the Fourth 
Circuit's decision, this review does not supplant the need for a 
uniform rule that would apply to national banks and Federal savings 
associations to ensure that all federally chartered depository 
institutions are treated in the same manner with respect to access to 
Federal court in diversity cases.\7\ Providing more certainty on this 
issue would reduce burden on national banks and Federal thrifts, 
including the substantial costs associated with repeatedly litigating 
this issue.
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    \7\ Federal thrifts are subject to similar uncertainty as national 
banks because Federal law does not currently specify their citizenship 
for purposes of diversity jurisdiction. Thus, courts have concluded 
that a Federal thrift generally is not a citizen of any State. See, for 
example, First Nationwide Bank v. Gelt Funding, Inc., No. 92 Civ. 0790, 
1992 U.S. Dist. LEXIS 18278, at 30 (S.D.N.Y. Nov. 30, 1992).
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    Providing Relief for Subchapter S National Banks. Another priority 
item supported by the OCC is an amendment that would allow directors of 
national banks that are organized as Subchapter S corporations to 
purchase subordinated debt instead of capital stock to satisfy the 
directors' qualifying shares requirements in national banking law. As a 
result, the directors purchasing such debt would not be counted as 
shareholders for purposes of the 100-shareholder limit that applies to 
Subchapter S corporations. This relief would make it possible for more 
community banks with national bank charters to organize in Subchapter S 
form while still requiring that such national bank directors retain 
their personal stake in the financial soundness of these banks.
    Simplifying Dividend Calculations for National Banks. Under current 
law, the formula for calculating the amount that a national bank may 
pay in dividends is both complex and antiquated and unnecessary for 
purposes of safety and soundness. The amendment supported by the OCC 
would make it easier for national banks to perform this calculation, 
while retaining safeguards in the current law that provide that 
national banks (and State member banks) \8\ need the approval of the 
Comptroller (or the Fed in the case of State member banks) to pay a 
dividend that exceeds the current year's net income combined with any 
retained net income for the preceding 2 years. The amendment would 
ensure that the OCC (and the Fed for State member banks) would continue 
to have the opportunity to deny any dividend request that may deplete 
the net income of a bank that may be moving toward troubled condition. 
Other safeguards, such as Prompt Corrective Action, which prohibit any 
insured depository institution from paying any dividend if, after that 
payment, the institution would be undercapitalized (see 12 U.S.C. 
Sec. 1831o(d)(1)) would remain in place.
---------------------------------------------------------------------------
    \8\ See 12 U.S.C. Sec. 324 and 12 CFR Sec. 208.5 generally applying 
the national bank dividend approval requirements to state member banks.
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    Modernizing Corporate Governance. The OCC also supports an 
amendment that would eliminate a requirement that precludes a national 
bank from prescribing, in its articles of association, the method for 
election of directors that best suits its business goals and needs. 
Unlike most other companies and State banks, national banks cannot 
choose whether or not to permit cumulative voting in the election of 
their directors. Instead, current law requires a national bank to 
permit its shareholders to vote their shares cumulatively. Providing a 
national bank with the authority to decide for itself whether to permit 
cumulative voting in its articles of association would conform the 
National Bank Act to modern corporate codes and provide a national bank 
with the same corporate flexibility available to most corporations and 
State banks.
    Modernizing Corporate Structure Options. Another amendment 
supported by the OCC is an amendment to national banking law clarifying 
that the OCC may permit a national bank to organize in any business 
form, in addition to a ``body corporate.'' An example of an alternative 
form of organization that may be permissible would be a limited 
liability national association, comparable to a limited liability 
company. The provision also would clarify that the OCC by regulation 
may provide the organizational characteristics of a national bank 
operating in an alternative form, 
consistent with safety and soundness. Except as provided by these 
organizational characteristics, all national banks, notwithstanding 
their form of organization, would have the same rights and privileges 
and be subject to the same restrictions, responsibilities, and 
enforcement authority.
    For example, organization as a limited liability national 
association may be a particularly attractive option for community 
banks. The bank may then be able to take advantage of the pass-through 
tax treatment for comparable entities organized as limited liability 
companies (LLC's) under certain tax laws and eliminate double taxation 
under which the same earnings are taxed both at the corporate level as 
corporate income and at the shareholder level as dividends. Some States 
currently permit State banks to be organized as unincorporated LLC's 
and the FDIC adopted a rule allowing certain state bank LLC's to 
qualify for Federal deposit insurance. This amendment would clarify 
that the OCC can permit national banks to organize in an alternative 
business form, such as an LLC, in the same manner.
    Paying Interest on Demand Deposits. The OCC supports amendments to 
the banking laws to repeal the statutory prohibition that prevents 
banks from paying interest on demand deposits.\9\ The prohibition on 
paying interest on demand deposits was enacted approximately 70 years 
ago for the purpose of deterring large banks from attracting deposits 
away from community banks. The rationale for this provision is no 
longer applicable today and financial product innovations, such as 
sweep services, allow banks and their customers to avoid the statutory 
restrictions. Repealing this prohibition would reduce burden on 
consumers, including small businesses, and reduce costs associated with 
establishing such additional accounts to avoid the restrictions.
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    \9\ This provision was included in H.R. 1224, the Business Checking 
Freedom Act of 2005, as recently reported by the House Financial 
Services Committee and as passed by the House on May 24, 2005.
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    Giving National Banks More Flexibility in Main Office Relocations. 
The OCC supports an amendment to national banking law that will reduce 
unnecessary burdens on a national bank seeking to relocate its main 
office within its home State. The amendment would provide that a 
national bank that is merging or consolidating with another bank in the 
same State pursuant to national banking law, rather than the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-
Neal) which applies only to interstate mergers and consolidations, has 
the same opportunity to retain certain offices that it would have if 
the merger or consolidation were an interstate merger subject to 
Riegle-Neal. The amendment would allow a national bank, with the 
Comptroller's approval, to retain and operate as its main office any 
main office or branch of any bank involved in the transaction in the 
same manner that it could do if this were a Riegle-Neal transaction. 
This would give a national bank more flexibility when making the 
business decision to relocate its main office to a branch location 
within the same State.
    Enhancing National Banks' Community Development Investments. The 
OCC supports an amendment that would increase the maximum amount of a 
national bank's investments that are designed primarily to promote the 
public welfare either directly or by purchasing interests in an entity 
primarily engaged in making these investments, such as a community 
development corporation. We recommend increasing the maximum 
permissible amount of such investments from 10 percent to 15 percent of 
the bank's capital and surplus. The maximum limit only applies if the 
bank is adequately capitalized and only if the OCC determines that this 
higher limit will not pose a significant risk to the deposit insurance 
fund. Today, more than 90 percent of national banks investments under 
this authority are in low-income housing tax credit projects and losses 
associated with such projects are minimal. Allowing certain adequately 
capitalized national banks to modestly increase their community 
development investments subject to the requirements of the statute will 
enable them to expand investments that have been profitable, relatively 
low-risk, and beneficial to their communities.
Federal Branches and Agencies of Foreign Banks
    The OCC also licenses and supervises Federal branches and agencies 
of foreign banks. Federal branches and agencies generally are subject 
to the same rights and privileges, as well as the same duties, 
restrictions, penalties, liabilities, conditions, and limitations and 
laws that apply to national banks. Branches and agencies of foreign 
banks, however, also are subject to other requirements under the 
International Banking Act of 1978 (IBA) that are unique to their 
organizational structure and operations in the United States as an 
office of a foreign bank. In this regard, the OCC is recommending 
amendments to reduce certain unnecessary burdens on Federal branches 
and agencies while preserving national treatment with national banks.
    Implementing Risk-Based Requirements for Federal Branches and 
Agencies. A priority item for the OCC in this regard is an amendment to 
the IBA to allow the OCC to set the capital equivalency deposit (CED) 
for Federal branches and agencies to reflect their risk profile. We 
support an amendment that would allow the OCC, after consultation with 
the Federal Financial Institutions Examination Council, to adopt 
regulations setting the CED on a risk-based institution-by-institution 
basis. This approach would closely resemble the risk-based capital 
framework that applies to both national and State banks.
OCC Operations
    Improving Ability to Obtain Information from Regulated Entities. 
The OCC supports an amendment that would permit all of the Federal 
banking agencies--the OCC, FDIC, OTS, and the Fed--to establish and use 
advisory committees in the same manner. Under current law, only the Fed 
is exempt from the disclosure requirements under the Federal Advisory 
Committee Act (FACA). Yet, all types of 
insured institutions and their regulators have a need to share 
information and to conduct open and frank discussions that may involve 
nonpublic information about the impact of supervisory or policy issues. 
Because of the potentially sensitive nature of this type of 
information, the public meeting and disclosure requirements under FACA 
may inhibit the supervised institutions from providing the agencies 
their candid views. Importantly, this is information that any one bank 
could provide to its regulator and discuss on a confidential basis. It 
is only when several banks simultaneously do so in a collective 
discussion and offer suggestions to regulators that issues are raised 
under FACA. Our amendment would cure this anomaly and enhance the 
dialogue between all depository institutions and their Federal bank 
regulators.
Safety and Soundness
    The OCC also supports a number of amendments that would promote and 
maintain the safety and soundness and facilitate the ability of 
regulators to address and resolve problem bank situations.
    Enforcing Written Agreements and Commitments. The OCC supports an 
amendment that would expressly authorize the Federal banking agencies 
to enforce written agreements and conditions imposed in writing in 
connection with an application or when the agency imposes conditions as 
part of its decision not to disapprove a notice, for example, a Change 
in Bank Control Act (CBCA) notice.
    This amendment would rectify the results of certain Federal court 
decisions that conditioned the agencies' authority to enforce such 
conditions or agreements with respect to a nonbank party to the 
agreement on a showing that the nonbank party was ``unjustly 
enriched.'' We believe that this amendment will enhance the safety and 
soundness of depository institutions and protect the deposit insurance 
funds from unnecessary losses.
    Barring Convicted Felons From Participating in the Affairs of 
Depository Institutions. The OCC also supports an amendment to the 
banking laws that would give the Federal banking agencies the authority 
to prohibit a person convicted of a crime involving dishonesty, breach 
of trust, or money laundering from participating in the affairs of an 
uninsured national or State bank or uninsured branch or agency of a 
foreign bank without the consent of the agency. Under current law, the 
ability to keep these ``bad actors'' out of depository institutions 
applies only to insured depository institutions. Thus, for example, it 
would be harder to prevent an individual convicted of such crimes from 
serving as an official of an uninsured trust bank whose operations are 
subject to the highest fiduciary standards, then to keep that 
individual from an administrative position at an insured bank.
    Strengthening the Supervision of ``Stripped-Charter'' Institutions. 
The OCC supports an amendment to the CBCA to address issues that have 
arisen when a stripped-charter institution (that is, an insured bank 
that has no ongoing business operations because, for example, all of 
the business operations have been transferred to another institution) 
is the subject of a change-in-control notice. The agencies' primary 
concern with such CBCA notices is that the CBCA is sometimes used as a 
route to acquire a bank with deposit insurance without submitting an 
application for a de novo charter and an application for deposit 
insurance, even though the risks presented by the two transactions may 
be substantively identical. In general, the scope of review of a de 
novo charter application or deposit insurance application is more 
comprehensive than the current statutory grounds for denial of a notice 
under the CBCA. There also are significant differences between the 
application and notice procedures. In the case of an application, the 
banking agency must affirmatively approve the request before a 
transaction can be consummated. Under the CBCA, if the Federal banking 
agency does not act to disapprove a notice within certain time frames, 
the acquiring person may consummate the transaction. To address these 
concerns, the OCC supports an amendment that (1) would expand the 
criteria in the CBCA that allow a Federal banking agency to extend the 
time period to consider a CBCA notice so that the agency may consider 
business plan information, and (2) would allow the agency to use that 
information in determining whether to disapprove the notice.
Reducing Burdens and Enhancing Effectiveness of Consumer Compliance
Disclosures
    Many of the areas that are often identified as prospects for 
regulatory burden reduction involve requirements designed for the 
protection of consumers. Over the years, those requirements--mandated 
by Congress and initiated by regulators--have accreted, and in the 
disclosure area, in particular, consumers today receive disclosures so 
voluminous and so technical that many simply do not read them--or when 
they do, do not understand them.
    No matter how well-intentioned, the current disclosures being 
provided to consumers in many respects are not delivering the 
information that consumers need to make informed decisions about their 
rights and responsibilities, but they are imposing significant costs on 
the industry and consuming precious resources.
    In recent years, bank regulators and Congress have mandated that 
more and more information be provided to consumers in the financial 
services area. New disclosures have been added on top of old ones. The 
result today is a mass of disclosure requirements that generally do not 
effectively communicate to consumers, and impose excessive burden on 
the institutions required to provide those disclosures.
    There are two arenas--legislative and regulatory--in which we can 
make changes to produce better, more effective, and less burdensome 
approaches to consumer disclosures.
    With respect to legislation to improve disclosures, we can learn 
much from the experience of the Food and Drug Administration (FDA) in 
developing the ``Nutrition Facts'' label. This well-recognized--and 
easily understood disclosure is on virtually every food product we buy.
    The effort that led to the FDA's nutrition labeling began with a 
clear statement from Congress that the FDA was directed to accomplish 
certain objectives. While Congress specified that certain nutrition 
facts were to be disclosed, it gave the FDA the flexibility to delete 
or add to these requirements in the interest of assisting consumers in 
``maintaining healthy dietary practices.'' The current disclosure is 
the result of several years of hard work and extensive input from 
consumers. The ``Nutrition Facts'' box disclosure was developed based 
on goals set out by Congress and then extensive research and consumer 
testing was used to determine what really worked to achieve those 
goals.
    This experience teaches important lessons that we need to apply to 
information provided to consumers about financial services products:

 First, financial services legislation should articulate the 
    goals to be achieved through a particular consumer protection 
    disclosure regime, rather than directing the precise content or 
    wording of the disclosure.
 Second, the legislation should provide adequate time for the 
    bank regulators to include consumer testing as part of their 
    rulemaking processes.
 Third, Congress should require that the regulators must 
    consider both the burden associated with implementing any new 
    standards, as well as the effectiveness of the disclosures.

    With respect to the regulatory efforts to improve disclosures, as 
discussed above, we are today using consumer testing--through focus 
groups and consumer interviews--to identify the content and format of 
privacy notices that consumers find the most helpful and easy to 
comprehend. We are hopeful that this initiative will pave the way for 
better integration of consumer testing as a standard element of 
developing consumer disclosure regulations.
    On another front, the OCC also took the unusual step several months 
ago of submitting a comment letter to the Federal Reserve Board on its 
Advance Notice of 
Proposed Rulemaking related to credit card disclosures, discussing both 
the development of the FDA's ``Nutrition Facts'' label and the efforts 
of the Financial Services Authority (FSA) in the United Kingdom to 
develop revised disclosures for a variety of financial products. Our 
comments highlighted some of the lessons learned from the FDA's and 
FSA's efforts and urged the Fed to take guidance from this experience:

 Focus on key information that is central to the consumer's 
    decisionmaking (provide supplementary information separately in a 
    fair and clear manner);
 Ensure that key information is highlighted in such a way that 
    consumers will notice it and understand its significance;
 Employ a standardized disclosure format that consumers can 
    readily navigate; and
 Use simple language and an otherwise user-friendly manner of 
    disclosure.
Banking Agency and Industry Consensus Items
    As a result of the dialogue between the Federal banking agencies--
the OCC, the Fed, the FDIC, and the OTS--and the banking industry \10\ 
as part of the EGRPRA process and other discussions over the last 
several years on regulatory burden relief legislation, it has become 
apparent that there are a number of items that we all support. These 
consensus items are discussed in more detail in Appendix #2. Several of 
the items on the consensus list also were included in H.R. 1375 as 
passed by the House in the last Congress.
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    \10\ Banking industry groups participating include the American 
Bankers Association, America's Community Bankers, the Independent 
Community Bankers of America, and the Financial Services Roundtable.
---------------------------------------------------------------------------
    In brief, the banking industry groups and the four Federal banking 
agencies all support amendments to Federal law that would:

 Authorize the Fed to pay interest on reserve accounts under 
    the Federal Reserve Act (FRA); \11\
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    \11\ This amendment was included in H.R. 1224, the Business 
Checking Freedom Act of 2005, as recently reported by the House 
Financial Services Committee and as passed by the House on May 24, 
2005.
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 Provide that member banks may satisfy the reserve requirements 
    under the FRA through pass-through deposits;
 Provide the Fed with more flexibility to set reserve 
    requirements under the FRA;
 Repeal certain reporting requirements relating to insider 
    lending under the FRA;
 Streamline depository institutions' requirements under the 
    Bank Merger Act (BMA) to eliminate the requirement that the agency 
    acting on the application must request competitive factor reports 
    from all of the other Federal banking agencies;
 Shorten the post-approval waiting period under the BMA in 
    cases where there is no adverse effect on competition;
 Exempt mergers between depository institutions and affiliates 
    from the competitive factors review and post-approval waiting 
    periods under the BMA;
 Improve information sharing with foreign supervisors under the 
    IBA;
 Provide an inflation adjustment for the small depository 
    institution exception under the Depository Institution Management 
    Interlocks Act;
 Amend the Flood Disaster Protection Act of 1973 to:

  (1) increase the ``small loan'' exception from the flood insurance 
        requirements from $5,000 to $20,000 and allow for future 
        increases based on the Consumer Price Index;
  (2) allow lenders to force-place new flood insurance coverage if a 
        borrower's coverage lapses or is inadequate so that the new 
        coverage is effective at approximately the same time that the 
        30-day grace period expires on the lapsed policy; and
  (3) repeal the rigid requirement that the Federal supervisor of a 
        lending institution must impose civil money penalties if the 
        institution has a pattern or practice of committing certain 
        violations and give the supervisor more flexibility to take 
        other appropriate actions;

 Enhance examination flexibility under the Federal Deposit 
    Insurance Act (FDIA) by increasing the small bank threshold from 
    $250 million to $500 million so that more small banks may qualify 
    to be examined on an 18-month rather than an annual cycle; \12\ and
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    \12\ A's discussed in Appendix #1, the OCC also supports enhancing 
examination flexibility under the FDIA by giving the Federal banking 
agencies the discretion to adjust the examination cycle for an insured 
depository institution (for a period of time not to exceed 6 months) if 
necessary for safety and soundness and the effective examination and 
supervision of insured depository institutions.

 Provide that the Federal banking agencies will review the 
    requirements for banks' reports of condition under the FDIA every 5 
    years and reduce or eliminate any requirements that are no longer 
    necessary or appropriate.
Comments on other Legislative Proposals
    We would like to take this opportunity to also make you aware of 
our views on some other legislative proposals that we understand may be 
under consideration.
    Maintaining Parity Between Permissible Securities and Stock 
Investments of National Banks and State Member Banks. The OCC 
understands that it has been suggested that the Federal Reserve Act (12 
U.S.C. Sec. 335) \13\ be amended in a way that would undo the long-
standing parity between national banks' and State member banks' 
permissible direct and indirect investments. This parity dates back to 
the 1933 Glass-Steagall Act and was carefully maintained when GLBA was 
enacted in 1999. The OCC would oppose any changes to Sec. 335 that 
remove restrictions on State member banks' investments unless 
corresponding changes are made for national banks. National banks are 
also member banks. If Congress determines that such restrictions are no 
longer necessary for the safety and soundness of State member banks, 
then, as a matter of competitive equity and reducing unnecessary 
regulatory burden, these restrictions should no longer be applied to 
national banks.
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    \13\ 12 U.S.C. Sec. 335 states:

    ``State member banks shall be subject to the same limitations and 
conditions with respect to the purchasing, selling, underwriting, and 
holding of investment securities and stock as are applicable in the 
case of national banks under paragraph `Seventh' of Section 5136 of the 
Revised Statutes, as amended [12 U.S.C. Sec. 24(Seventh)]. This 
paragraph shall not apply to an interest held by a State member bank in 
accordance with section 5136A of the Revised Statutes of the United 
States [12 U.S.C. Sec. 24a] and subject to the same conditions and 
limitations provided in such section.''
---------------------------------------------------------------------------
    The second sentence in Sec. 335 was enacted in 1999 as part of the 
GLBA compromise relating to financial subsidiary activities. Consistent 
with the parity framework, this sentence provides that the restrictions 
in the first sentence do not apply to any interest held by a State 
member bank in accordance with the amendments made by GLBA that permit 
national banks to have financial subsidiaries, subject to the same 
conditions and limitations that apply to national banks. Thus, State 
member banks' financial subsidiaries are subject to the same 
limitations and prudential safeguards that apply to national banks' 
financial subsidiaries. This sentence was the result of a carefully 
crafted compromise to ensure that parallel firewalls, safeguards, and 
rules were applied to financial subsidiaries of national and State 
member banks.
    Enhancing Investments in Bank and Thrift Service Companies. The OCC 
generally supports proposals that would permit banks to invest in 
thrift service companies and would permit savings associations to 
invest in bank service companies. Moreover, the OCC would not object to 
removing the geographic restrictions on the operations of thrift 
service corporations as long as the Bank Service Company Act is 
similarly amended to remove the geographic restrictions on bank service 
companies.
Conclusion
    Mr. Chairman, on behalf of the OCC, I thank you for your leadership 
in holding these hearings. The OCC strongly supports initiatives that 
will reduce unnecessary burden on the industry in a responsible, safe 
and sound manner. We would be pleased to work with you and your staff 
to make that goal a reality.
    I would be happy to answer any questions you may have.

                               ----------

                 PREPARED STATEMENT OF MARK W. OLSON *
        Member, Board of Governors of the Federal Reserve System
                             June 21, 2005

    Chairman Shelby, Senator Sarbanes, and Members of the Committee, 
thank you for the opportunity to testify on issues related to 
regulatory relief. The Board is aware of the current and growing 
regulatory burden that is imposed on this Nation's banking 
organizations. Often this burden falls particularly hard on small 
institutions, which have fewer resources than their larger brethren. 
The Board strongly supports the efforts of Congress to review 
periodically the Federal banking laws to determine whether they can be 
streamlined without compromising the safety and soundness of banking 
organizations, consumer protections, or other important objectives that 
Congress has established for the financial system. In 2003, at Chairman 
Shelby's request, the Board provided the Committee with a number of 
legislative proposals that we believe are consistent with this goal. 
Since then, the Board has continued to work with the other Federal 
banking agencies and your staffs on regulatory relief matters and the 
Board recently agreed to support several additional regulatory relief 
proposals. A summary of the proposals supported by the Board is 
included in the appendix to my testimony.
---------------------------------------------------------------------------
    * Appendix held in Committee files.
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    In my remarks, I will highlight the Board's three highest priority 
proposals. These three proposals would allow the Federal Reserve to pay 
interest on balances held by depository institutions at Reserve Banks, 
provide the Board greater flexibility in setting reserve requirements, 
and permit depository institutions to pay interest on demand deposits. 
These amendments would improve efficiency in the financial sector, 
assist small banks and small businesses, and enhance the Federal 
Reserve's toolkit for efficiently conducting monetary policy. I also 
will mention a few additional proposals that the Board supports and 
that would provide meaningful regulatory relief to banking 
organizations. The Board looks forward to working with Congress, our 
fellow banking agencies, and other interested parties in developing and 
analyzing other potential regulatory relief proposals as the 
legislative process moves forward.
    For its part, the Board strives to review each of our regulations 
at least once every 5 years to identify those provisions that are out 
of date or otherwise unnecessary. The Board also has been an active 
participant in the ongoing regulatory 
review process being conducted by the Federal banking agencies pursuant 
to the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). 
EGRPRA requires the Federal banking agencies, at least once every 10 
years, to review and seek public comment on the burden associated with 
the full range of the agencies' regulations that affect insured 
depository institutions. The Board and the other banking agencies are 
in the midst of the first 10-year review cycle, and I am pleased to 
report that we are on track to complete this process by the 2006 
deadline. The agencies already have solicited comments on four broad 
categories of regulations--including those governing applications, 
activities, money laundering, and consumer protection in lending 
transactions--and have conducted outreach meetings throughout the 
country to encourage public participation in the EGRPRA process. In 
response to these efforts, the agencies have received comments from 
more than 1,000 entities and individuals on ways to reduce the 
regulatory burden on banking organizations. The Board will consider and 
incorporate the comments relevant to our regulations as we move forward 
with our own regulation review efforts.
    While the banking agencies can achieve some burden reductions 
through administrative action, Congress plays a critical role in the 
regulatory relief process. Many proposals to reduce regulatory burden 
require Congressional action to implement. Moreover, the Congress has 
ultimate responsibility for establishing the overall regulatory 
framework for banking organizations, and through its actions Congress 
can ensure that regulatory relief is consistent with the framework it 
has established to maintain the safety and soundness of banking 
organizations and promote other important public policy goals.
Interest on Reserves and Reserve Requirement Flexibility
    For the purpose of implementing monetary policy, the Board is 
obliged by law to establish reserve requirements on certain deposits 
held at depository institutions. By law, the Board currently must set 
the ratio of required reserves on transaction deposits above a certain 
threshold at between 8 and 14 percent. Because the Federal Reserve does 
not pay interest on the balances held at Reserve Banks to meet reserve 
requirements, depositories have an incentive to reduce their reserve 
balances to a minimum. To do so, they engage in a variety of reserve 
avoidance activities, including sweep arrangements that move funds from 
deposits that are subject to reserve requirements to deposits and money 
market investments that are not. These sweep programs and similar 
activities absorb real resources and therefore diminish the efficiency 
of our banking system. The Board's proposed amendment would authorize 
the Federal Reserve to pay depository institutions interest on their 
required reserve balances. Paying interest on these required reserve 
balances would remove a substantial portion of the incentive for 
depositories to engage in reserve avoidance measures, and the resulting 
improvements in efficiency should eventually be passed through to bank 
borrowers and depositors.
    Besides required reserve balances, depository institutions also 
voluntarily hold two other types of balances in their Reserve Bank 
accounts--contractual clearing balances and excess reserve balances. A 
depository institution holds contractual clearing balances when it 
needs a higher level of balances than its required reserve balances in 
order to pay checks or make wire transfers out of its account at the 
Federal Reserve without incurring overnight overdrafts. Currently, such 
clearing balances do not earn explicit interest, but they do earn 
implicit interest in the form of credits that may be used to pay for 
Federal Reserve services, such as check clearing. Excess reserve 
balances are funds held by depository institutions in their accounts at 
Reserve Banks in excess of their required reserve and contractual 
clearing balances. Excess reserve balances currently do not earn 
explicit or implicit interest.
    The Board's proposed amendment would authorize the Federal Reserve 
to pay explicit interest on contractual clearing balances and excess 
reserve balances, as well as required reserve balances. This authority 
would enhance the Federal Reserve's ability to efficiently conduct 
monetary policy, and would complement another of the Board's proposed 
amendments, which would give the Board greater flexibility in setting 
reserve requirements for depository institutions.
    In order for the Federal Open Market Committee (FOMC) to conduct 
monetary policy effectively, it is important that a sufficient and 
predictable demand for balances at the Reserve Banks exist so that the 
System knows the volume of reserves to supply (or remove) through open 
market operations to achieve the FOMC's target Federal funds rate. 
Authorizing the Federal Reserve to pay explicit interest on contractual 
clearing balances and excess reserve balances, in addition to required 
reserve balances, could potentially provide a demand for voluntary 
balances that would be stable enough for monetary policy to be 
implemented effectively through existing procedures without the need 
for required reserve balances. In these circumstances, the Board, if 
authorized, could consider reducing--or even eliminating--reserve 
requirements, thereby reducing a regulatory burden for all depository 
institutions, without adversely affecting the Federal Reserve's ability 
to conduct monetary policy.
    Having the authority to pay interest on excess reserves also could 
help mitigate potential volatility in overnight interest rates. If the 
Federal Reserve was authorized to pay interest on excess reserves, and 
did so, the rate paid would act as a minimum for overnight interest 
rates, because banks would not generally lend to other banks at a lower 
rate than they could earn by keeping their excess funds at a Reserve 
Bank. Although the Board sees no need to pay interest on excess 
reserves in the near future, and any movement in this direction would 
need further study, the ability to do so would be a potentially useful 
addition to the monetary toolkit of the Federal Reserve.
    The payment of interest on required reserve balances, or reductions 
in reserve requirements, would lower the revenues received by the 
Treasury from the Federal Reserve. The extent of the potential revenue 
loss, however, has fallen over the last decade as banks have 
increasingly implemented reserve-avoidance techniques. Paying interest 
on contractual clearing balances would primarily involve a switch to 
explicit interest from the implicit interest currently paid in the form 
of credits, and therefore would have essentially no net cost to the 
Treasury.
Interest on Demand Deposits
    The Board also strongly supports repealing the statutory 
restrictions that currently prohibit depository institutions from 
paying interest on demand deposits. The Board's proposed amendment 
would allow all depository institutions that have the legal authority 
to offer demand deposits to pay interest on those deposits. As I will 
explain a little later, however, the Board opposes amendments that 
would separately authorize industrial loan companies that operate 
outside the supervisory and regulatory framework established for other 
insured banks to offer, for the first time, interest bearing 
transaction accounts to business customers.
    Repealing the prohibition of interest on demand deposits would 
improve the overall efficiency of our financial sector and, in 
particular, should assist small banks in attracting and retaining 
business deposits. To compete for the liquid assets of businesses, 
banks have been compelled to set up complicated procedures to pay 
implicit interest on compensating balance accounts and they spend 
resources--and charge fees--for sweeping the excess demand deposits of 
businesses into money market investments on a nightly basis. Small 
banks, however, often do not have the resources to develop the sweep or 
other programs that are needed to compete for the deposits of business 
customers. Moreover, from the standpoint of the overall economy, the 
expenses incurred by institutions of all sizes to implement these 
programs are a waste of resources and would be unnecessary if 
institutions were permitted to pay interest on demand deposits 
directly.
    The costs incurred by banks in operating these programs are passed 
on, directly or indirectly, to their large and small business 
customers. Authorizing banks to pay interest on demand deposits would 
eliminate the need for these customers to pay for more costly sweep and 
compensating balance arrangements to earn a return on their demand 
deposits. The payment of interest on demand deposits would have no 
direct effect on Federal revenues, as interest payments would be 
deductible for banks but taxable for the firms that received them.
    Some proposals, such as H.R. 1224--the Business Checking Freedom 
Act of 2005--which recently passed the House, would delay the 
effectiveness of the authorization of interest on demand deposits for 2 
years. The Board believes that a short implementation delay of 1 year, 
or even less, would be in the best interest of the public and the 
efficiency of our financial sector. A separate provision of H.R. 1224 
would, in effect, allow implicit interest to be paid on demand deposits 
without any delay through a new type of sweep arrangement, but this 
provision would not promote efficiency. It would allow banks to offer a 
reservable money market deposit account (MMDA) from which twenty-four 
transfers a month could be made to other accounts of the same 
depositor. Banks would be able to sweep balances from demand deposits 
into these MMDA's each night, pay interest on them, and then sweep them 
back into demand deposits the next day. This type of account would 
likely permit banks to pay interest on demand deposits more selectively 
than with direct 
interest payments. The twenty-four-transfer MMDA, which would be useful 
only during the transition period before direct interest payments were 
allowed, could be implemented at lower cost by banks already having 
sweep programs. However, other banks would face a competitive 
disadvantage and pressures to incur the cost of setting up this new 
program during the transition for the 1 year interim period. Moreover, 
some businesses would not benefit from this MMDA. Hence, the Board does 
not advocate this twenty-four-transfer account.
Small Bank Examination Flexibility
    The Board also supports an amendment that would expand the number 
of small institutions that qualify for an extended examination cycle. 
Federal law currently mandates that the appropriate Federal banking 
agency conduct an on-site examination of each insured depository 
institution at least once every 12 months. The statute, however, 
permits institutions that have $250 million or less in assets and that 
meet certain capital, managerial, and other criteria to be examined on 
an 18-month cycle. As the primary Federal supervisors for State-
chartered banks, the Board and Federal Deposit Insurance Corporation 
(FDIC) may alternate responsibility for conducting these examinations 
with the appropriate State supervisory authority if the Board or FDIC 
determines that the State examination carries out the purposes of the 
statute.
    The $250 million asset cutoff for an 18-month examination cycle has 
not been raised since 1994. The Board's proposed amendment would raise 
this asset cap from $250 million to $500 million, thus potentially 
allowing approximately an additional 1,100 insured depository 
institutions to qualify for an 18-month examination cycle.
    The proposed amendment would provide meaningful relief to small 
institutions without jeopardizing the safety and soundness of insured 
depository institutions. Under the proposed amendment, an institution 
with less than $500 million in assets would qualify for the 18-month 
examination cycle only if the institution was well-capitalized, well-
managed, and met the other criteria established by Congress in the 
Federal Deposit Insurance Corporation Improvement Act of 1991. The 
amendment also would continue to require that all insured depository 
institutions undergo a full-scope, on-site examination at least once 
every 12 or 18 months. Importantly, the agencies would continue to have 
the ability to examine any institution more frequently and at any time 
if the agency determines an examination is necessary or appropriate.
    Despite advances in off-site monitoring, the Board continues to 
believe that regular on-site examinations play a critical role in 
helping bank supervisors detect and correct asset, risk-management, or 
internal control problems at an institution before these problems 
result in claims on the deposit insurance funds. The mandatory 12- or 
18-month on-site examination cycle imposes important discipline on the 
Federal banking agencies, ensures that insured depository institutions 
do not go unexamined for extended periods, and has contributed 
significantly to the safety and soundness of insured depository 
institutions. For these reasons, the Board opposes alternative 
amendments that would allow an agency to indefinitely lengthen the exam 
cycle for any institution in order to allocate and conserve the 
agency's examination resources.
Permit the Board to Grant Exceptions to Attribution Rule
    The Board has proposed another amendment that we believe will help 
banking organizations maintain attractive benefits programs for their 
employees. The Bank Holding Company Act (BHC Act) generally prohibits a 
bank holding company from owning, in the aggregate, more than 5 percent 
of the voting shares of any company without the Board's approval. The 
BHC Act also provides that any shares held by a trust for the benefit 
of a bank holding company's shareholders or employees are deemed to be 
controlled by the bank holding company itself. This attribution rule 
was intended to prevent a bank holding company from using a trust 
established for the benefit of its management, shareholders, or 
employees to evade the BHC Act's restrictions on the acquisition of 
shares of banks and nonbanking companies.
    While this attribution rule has proved to be a useful tool in 
preventing evasions of the BHC Act, it does not always provide an 
appropriate result. For example, it may not be appropriate to apply the 
attribution rule when the shares in question are acquired by a 401(k) 
plan that is widely held by, and operated for the benefit of, the 
employees of the bank holding company. In these situations, the bank 
holding company may not have the ability to influence the purchase or 
sale decisions of the employees or otherwise control the shares that 
are held by the plan in trust for its employees. The suggested 
amendment would allow the Board to address these situations by 
authorizing the Board to grant exceptions from the attribution rule 
where appropriate.
Reduce Cross-Marketing Restrictions
    Another amendment proposed by the Board would modify the cross-
marketing restrictions imposed by the Gramm-Leach-Bliley Act (GLB Act) 
on the merchant banking and insurance company investments of financial 
holding companies. The GLB Act generally prohibits a depository 
institution controlled by a financial holding company from engaging in 
cross-marketing activities with a nonfinancial company that is owned by 
the same financial holding company under the GLB Act's merchant banking 
or insurance company investment authorities. However, the GLB Act 
currently permits a depository institution subsidiary of a financial 
holding company, with Board approval, to engage in limited cross-
marketing activities through statement stuffers and Internet websites 
with nonfinancial companies that are held under the Act's insurance 
company investment authority (but not the act's merchant banking 
authority).
    The Board's proposed amendment would allow depository institutions 
controlled by a financial holding company to engage in cross-marketing 
activities with companies held under the merchant banking authority to 
the same extent, and subject to the same restrictions, as companies 
held under the insurance company investment authority. We believe that 
this parity of treatment is appropriate, and see no reason to treat the 
merchant banking and insurance investments of financial holding 
companies differently for purposes of the cross-marketing restrictions 
of the GLB Act.
    A second aspect of the amendment would liberalize the cross-
marketing restrictions that apply to both merchant banking and 
insurance company investments. This aspect of the amendment would 
permit a depository institution subsidiary of a financial holding 
company to engage in cross-marketing activities with a nonfinancial 
company held under either the merchant banking or insurance company 
investment authority if the nonfinancial company is not controlled by 
the financial holding company. When a financial holding company does 
not control a portfolio company, cross-marketing activities are 
unlikely to materially undermine the separation between the 
nonfinancial portfolio company and the financial holding company's 
depository institution subsidiaries.
Industrial Loan Companies
    As I noted earlier, the Board strongly supports allowing depository 
institutions to pay interest on demand deposits. The Board, however, 
opposes proposals that would allow industrial loan companies (ILC's) to 
offer interest-bearing, negotiable order of withdrawal (NOW) accounts 
to business customers if the corporate owner of the ILC takes advantage 
of the special exemption in current law that allows the owner to 
operate outside the prudential framework that Congress has established 
for the corporate owners of other types of insured banks.
    ILC's are State-chartered, FDIC-insured banks that were first 
established early in the 20th century to make small loans to industrial 
workers. As insured banks, ILC's are supervised by the FDIC as well as 
by the chartering State. However, under a special exemption in current 
law, any type of company, including a commercial or retail firm, may 
acquire an ILC in a handful of States--principally Utah, California, 
and Nevada--and avoid the activity restrictions and supervisory 
requirements imposed on bank holding companies under the Federal BHC 
Act.
    When the special exemption for ILC's was initially granted in 1987, 
ILC's were mostly small, local institutions that did not offer demand 
deposits or other types of checking accounts. In light of these facts, 
Congress conditioned the exemption on a requirement that any ILC's 
chartered after 1987 remain small (below $100 million in assets) or 
refrain from offering demand deposits that are withdrawable by check or 
similar means.
    This special exemption has been aggressively exploited since 1987. 
Some grandfathered States have allowed their ILC's to exercise many of 
the same powers as commercial banks and have begun to charter new 
ILC's. Today, several ILC's are owned by large, internationally active 
financial or commercial firms. In addition, a number of ILC's 
themselves have grown large, with one holding more than $50 billion in 
deposits and an additional six holding more than $1 billion in 
deposits.
    Affirmatively granting ILC's the ability to offer business NOW 
accounts would permit ILC's to become the functional equivalent of 
full-service insured banks. This result would be inconsistent with both 
the historical functions of ILC's and the terms of their special 
exemption in current law.
    Because the parent companies of exempt ILC's are not subject to the 
BHC Act, authorizing ILC's to operate essentially as full-service banks 
would create an unlevel competitive playing field among banking 
organizations and undermine the framework Congress has established for 
the corporate owners of full-service banks. It would allow firms that 
are not subject to the consolidated supervisory framework of the BHC 
Act--including consolidated capital, examination, and reporting 
requirements--to own and control the functional equivalent of a full-
service bank. It also would allow a foreign bank to acquire control of 
the equivalent of a full-service insured bank without meeting the 
requirement under the BHC Act that the foreign bank be subject to 
comprehensive supervision on a consolidated basis in its home country. 
In addition, it would allow financial firms to acquire the equivalent 
of a full-service bank without complying with the capital, managerial, 
and Community Reinvestment Act (CRA) requirements established by 
Congress in the GLB Act.
    Congress has established consolidated supervision as a fundamental 
component of bank supervision in the United States because consolidated 
supervision provides important protection to the insured banks that are 
part of a larger organization and to the Federal safety net that 
supports those banks. Financial trouble in one part of an organization 
can spread rapidly to other parts. To protect an insured bank that is 
part of a larger organization, a supervisor needs to have the authority 
and tools to understand the risks that exist within the parent 
organization and its affiliates and, if necessary, address any 
significant capital, managerial, or other deficiencies before they pose 
a danger to the bank. This is particularly true today, as holding 
companies increasingly manage their operations--and the risks that 
arise from these operations--in a centralized manner that cuts across 
legal entities. Risks that cross legal entities and that are managed on 
a consolidated basis simply cannot be monitored properly through 
supervision directed at one, or even several, of the legal entities 
within the overall organization. For these reasons, Congress since 1956 
has required that the parent companies of full-service insured banks be 
subject to consolidated supervision under the BHC Act. In addition, 
following the collapse of Bank of Commerce and Credit International 
(BCCI), Congress has required that foreign banks seeking to acquire 
control of a U.S. bank under the BHC Act be subject to comprehensive 
supervision on a consolidated basis in the foreign bank's home country.
    Authorizing exempt ILC's to operate as essentially full-service 
banks also would undermine the framework that Congress has 
established--and recently reaffirmed in the GLB Act--to limit the 
affiliation of banks and commercial entities. This is because any type 
of company, including a commercial firm, may own an exempt ILC without 
regard to the activity restrictions in the BHC Act that are designed to 
maintain the separation of banking and commerce.
    H.R. 1224 attempts to address the banking and commerce concerns 
raised by allowing ILC's to offer business NOW accounts by placing 
certain limits on the types of ILC's that may engage in these new 
activities. However, as Governor Kohn recently testified in the House 
on behalf of the Board, the limits contained in H.R. 1224 do not 
adequately address these concerns. Moreover, H.R. 1224 fails to address 
the supervisory issues associated with allowing domestic firms and 
foreign banks that are not subject to consolidated supervision to 
control the functional equivalent of a full-service insured bank.
    Let me be clear. The Board does not oppose granting ILC's the 
ability to offer business NOW accounts if the corporate owners of ILC's 
engaged in these expanded activities are covered by the same 
supervisory and regulatory framework that applies to the owners of 
other full-service insured banks. Stated simply, if ILC's want to 
benefit from expanded powers and become functionally indistinguishable 
from other insured banks, then they and their corporate parents should 
be subject to the same rules that apply to the owners of other full-
service insured banks. For the same reasons discussed above, the Board 
opposes amendments that would allow exempt ILC's to open de novo 
branches throughout the United States.
    Affirmatively granting exempt ILC's the authority to offer business 
NOW accounts also is not necessary to ensure or provide parity among 
insured banks. The Board's proposed amendment would allow all 
depository institutions that have the authority to offer demand 
deposits the ability to pay interest on those deposits. Thus, the 
Board's proposed amendment would treat all depository institutions 
equally. Separately granting exempt ILC's the ability to offer the 
functional equivalent of a corporate demand deposit, on the other hand, 
would grant new and expanded powers to institutions that already 
benefit from a special exemption in current law. Far from promoting 
competitive equity, these proposals would promote competitive 
inequality in the financial marketplace.
    The Board believes that important principles governing the 
structure of the Nation's banking system--such as consolidated 
supervision, the separation of banking and commerce, and the 
maintenance of a level playing field for all competitors in the 
financial services marketplace--should not be abandoned without careful 
consideration by the Congress. In the Board's view, legislation 
concerning the payment of interest on demand deposits is unlikely to 
provide an appropriate vehicle for the thorough consideration of the 
consequences of altering these key principles.
Conclusion
    I appreciate the opportunity to discuss the Board's legislative 
suggestions and priorities concerning regulatory relief. The Board 
would be pleased to work with the Committee and your staffs as you seek 
to develop and advance meaningful regulatory relief legislation that is 
consistent with the Nation's public policy objectives.




                PREPARED STATEMENT OF JOANN M. JOHNSON *
             Chairman, National Credit Union Administration
                             June 21, 2005

    Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, and 
Members of the Committee, on behalf of the National Credit Union 
Administration (NCUA) I am pleased to be here today to present our 
agency's views on regulatory efficiency and reform initiatives being 
considered by Congress. Enacting legislation that will directly and 
indirectly benefit the consumer and the economy by assisting all 
financial intermediaries and their regulators perform the role and 
functions required of them is prudent.
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    * Appendix held in Committee files.
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Regulatory Relief and Efficiency
    In June 2004, I testified before this Committee and presented 
several legislative proposals NCUA recommended for your consideration. 
NCUA continues to recommend these provisions as desirable components of 
regulatory reform:

 Permit Federal credit unions to cash checks and money transfer 
    services for individuals in their field of membership but not yet 
    members. This is 
    particularly important to Federal credit unions in furthering their 
    efforts to serve those of limited income or means in their field of 
    membership. These individuals, in many instances, do not have 
    mainstream financial services available to them and are often 
    forced to pay excessive fees for check cashing, wire transfer, and 
    other services. The House of Representatives has taken this up as 
    H.R. 749, amended it to include international remittances and 
    passed the bill. Section 3 of S. 31, introduced by Senator Sarbanes 
    and other Members of the Committee includes a similar provision;
 Increase the allowable maturity on Federal credit union loans 
    from 12 to 15 years. Federal credit unions should be able to make 
    loans for second homes, recreational vehicles, and other purposes 
    in accordance with conventional maturities that are commonly 
    accepted in the market today;
 Increase the investment limit in credit union service 
    organizations (CUSO's) from 1 percent to 3 percent. The 1 percent 
    aggregate investment limit is unrealistically low and forces credit 
    unions to either bring services in-house, thus potentially 
    increasing risk to the credit union and the NCUSIF, or turn to 
    outside providers and lose control;
 Safely increase options for credit unions to invest their 
    funds by expanding authority beyond loans, government securities, 
    deposits in other financial institutions and certain other very 
    limited investments. The recommendation is to permit additional 
    investments in corporate debt securities (as opposed to equity) and 
    further establish specific percentage limitations and investment 
    grade standards;
 Alleviate NCUA from the process now required that it consider 
    a spin-off of any group of over 3,000 members in the merging credit 
    union when two credit unions merge voluntarily. A spin-off would 
    most likely undermine financial services to the affected group and 
    may create safety and soundness concerns;
 Provide relief for credit unions from a requirement that they 
    register with the SEC as broker-dealers when engaging in certain de 
    minimums securities activities. The principle established by the 
    present bank exemption, and a similar exemption sought by thrifts, 
    is that securities activities of an incidental nature to the 
    financial institutions do not have to be placed into a separate 
    affiliate;
 Make needed technical corrections to the Federal Credit Union 
    Act.

    These NCUA recommendations are more fully described on the 
following pages.
    NCUA has also reviewed the following additional credit union 
provisions included in the matrix circulated by Senator Crapo in 
anticipation of this hearing. We have carefully examined each and have 
determined that these provisions present no safety and soundness 
concerns for the credit unions we regulate and/or ensure: Leases of 
land on Federal facilities for credit unions; exclusion of member 
business loans to nonprofit religious organizations; criteria for 
continued membership of certain member groups in community charter 
conversions; credit union governance provisions; providing NCUA with 
greater flexibility to adjust the Federal usury ceiling for Federal 
credit unions; and an exemption from the premerger notification 
requirements of the Clayton Act.
Preserving the Net Worth of Credit Unions in Mergers
    NCUA anticipates that the Financial Accounting Standards Board 
(FASB) will act in 2005 or 2006 to lift the current deferral of the 
acquisition method of accounting for mergers by credit unions thereby 
eliminating the pooling method and requiring the acquisition method 
beginning in 2007.\1\ When this change to accounting rules is 
implemented it will require that, in a merger, the net assets on a fair 
value basis of the merging credit union as a whole, rather than 
retained earnings, be carried over as ``acquired equity,'' a term not 
recognized by the ``Federal Credit Union Act'' (FCUA).
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    \1\ Statement of Financial Accounting Standard (SFAS) No. 141, 
Business Combinations, requiring the acquisition method for business 
combinations and effectively eliminating the pooling method. The 
pooling method has typically been used by credit unions to account for 
credit union mergers. The standards became effective for combinations 
initiated after June 30, 2001. Paragraph 60 of the standard deferred 
the effective date for mutual enterprises (that is, credit unions) 
until the FASB could develop purchase method procedures for those 
combinations. In the interim, credit unions have continued to account 
for mergers as poolings (simple combination of financial statement 
components).
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    This FASB policy has been in place since mid-2001 for most business 
combinations and the delay by FASB in implementing it for credit unions 
has allowed all of us to explore how credit unions could conform to the 
new financial reporting standards.
    Without the changes to the ``Federal Credit Union Act,'' only 
``retained earnings'' of the continuing credit union will count as net 
worth after a merger. This result would seriously reduce the post-
merger net worth ratio of a fFederally insured credit union, because 
this ratio is the retained earnings of only the continuing credit union 
stated as a percentage of the combined assets of the two institutions. 
A lower net worth ratio has adverse implications under the statutory 
``prompt corrective action'' (PCA) regulation. This result will 
discourage voluntary mergers and on occasion make NCUA assisted mergers 
more difficult and costly to the National Credit Union Share Insurance 
Fund (NCUSIF). Without a remedy, an important NCUA tool for reducing 
costs and managing the fund in the public interest will be lost.
    NCUA encourages this Committee to include language in legislation 
to allow NCUA to continue to recognize the ``net worth'' of the merging 
credit union for purposes of prompt corrective action. A solution has 
been referred to this Committee as H.R. 1042, the ``Net Worth Amendment 
for Credit Unions Act.''
Reform of Prompt Corrective Action System for Federally Insured Credit
Unions
    The guiding principle behind PCA is to resolve problems in 
federally insured credit unions at the least long-term cost to the 
NCUSIF. This mandate is good public policy and consistent with NCUA's 
fiduciary responsibility to the insurance fund. While NCUA supports a 
statutorily mandated PCA system, the current statutory requirements for 
credit unions are too inflexible and establish a structure based 
primarily on a ``one-size-fits all'' approach, relying largely on a 
high leverage requirement of net worth to total assets. This creates 
inequities for credit unions with low-risk balance sheets and limits 
NCUA's ability to design a meaningful risk-based system.
    Reform of capital standards is vital for credit unions as the other 
Federal banking regulators explore implementation of BASEL II and other 
capital reforms for banks in the United States. While maintaining a 
leverage ratio, NCUA's PCA reform proposal incorporates a more risk-
based approach to credit union capital standards consistent with BASEL 
I and II. In recognition of the inherent limitations in any risk-based 
capital system, our proposal incorporates leverage and risk-based 
standards working in tandem. The risk-based portion of the proposed 
tandem system uses risk portfolios and weights based on the BASEL II 
standard approach.
    For the leverage requirement, NCUA supports a reduction in the 
standard net worth (that is, leverage) ratio requirement for credit 
unions to a level comparable to what is required of FDIC insured 
institutions. The minimum leverage ratio for a well-capitalized credit 
union is currently set by statute at 7 percent, compared to the 
threshold of 5 percent for FDIC-insured institutions. Our proposed new 
leverage requirement, while comparable, accounts for the 1 percent 
method of capitalizing the NCUSIF, and its effect on the overall 
capital in the Insurance Fund and the credit union system. The result 
is a leverage requirement for credit unions that averages 5.7 percent 
under our proposal, as compared to the 5 percent requirement in the 
banking system. There are important reasons why the leverage ratio for 
credit unions ratio should be lowered to work in tandem with a risk-
based requirement.
    First, credit unions should not be placed at a competitive 
disadvantage by being held to higher capital standards when they are 
not warranted to protect the insurance fund. For FDIC insured 
institutions, a 5 percent leverage requirement coupled with a risk-
based system has provided adequate protection for their insurance fund. 
In comparison, the credit union industry has a relatively low-risk 
profile, as evidenced by our low loss history. This is largely due both 
to the greater restrictions on powers of credit unions relative to 
other financial institutions and credit unions' conservative nature 
given their member-owned structure. In fact, our experience has shown 
that given economic needs and their conservative nature, the vast 
majority of credit unions will operate with net worth levels well above 
whatever is established as the regulatory minimum.
    In addition, the current 7 percent leverage requirement is 
excessive for low risk institutions and overshadows any risk-based 
system we design, especially if you consider that under BASEL the risk-
based capital requirement is 8 percent of risk assets. A meaningful 
risk-based system working in tandem with a lower leverage requirement 
provides incentives for financial institutions to manage the risk they 
take in relation to their capital levels, and gives them the ability to 
do so by reflecting the composition of their balance sheets in their 
risk-based PCA requirements. The current high leverage requirement 
provides no such ability or incentive and, in fact, it can be argued 
could actually contribute to riskier behavior to meet these levels 
given the extra risk isn't factored into the dominant leverage 
requirement.
    As mentioned above, we recognize that achieving comparability 
between the Federal insurance funds does require us to factor in the 
NCUSIF's deposit-based funding mechanism. Thus, our reform proposal 
incorporates a revised method for calculating the net worth ratio for 
PCA purposes by adjusting for the deposit credit unions maintain in the 
share insurance fund. However, our proposed treatment of the NCUSIF 
deposit for purposes of regulatory capital standards in no way alters 
its treatment as an asset under generally accepted accounting 
principles, or NCUA's steadfast support of the mutual, deposit-based 
nature of the NCUSIF.
    As for capitalization investments in corporate credit unions, these 
are not uniformly held by all credit unions. Indeed, not all credit 
unions even belong to a corporate credit union. Thus, these investments 
are appropriately addressed under the risk-based portion of PCA. Our 
reform proposal addresses capitalization investments in corporate 
credit unions consistent with BASEL and the FDIC's rules applicable to 
capital investments in other financial institutions.
    For the risk-based requirement, our proposal tailors the risk-asset 
categories and weights of BASEL II's standard approach, as well as 
related aspects of the FDIC's PCA system, to the operation of credit 
unions. The internal ratings-based approach of BASEL II for the largest 
internationally active banks is not applicable to credit unions. 
However, it is our intention to maintain comparability with FDIC's PCA 
requirements for all other insured institutions and keep our risk based 
requirement relevant and up-to-date with emerging trends in credit 
unions and the marketplace.
    As there are limitations in any regulatory capital scheme, NCUA's 
reform proposal also includes recommendations to address these other 
forms of risk under the second pillar of the supervisory framework, a 
robust supervisory review process. Through our examination and 
supervision process, NCUA will continue to analyze each credit union's 
capital position in relation to the overall risk of the institution, 
which may at times reflect a need for capital levels higher than 
regulatory minimums.
    I would also point out that our reform proposal addresses an 
important technical amendment needed to the statutory definition of net 
worth. As mentioned earlier, NCUA anticipates that the Financial 
Accounting Standards Board (FASB) will act soon to lift the current 
deferral of the acquisition method of accounting for mergers by credit 
unions, thereby eliminating the pooling method and requiring the 
acquisition method. NCUA's PCA proposal includes a legislative solution 
to this problem, but if the issue is considered separately in Senate 
regulatory relief legislation before the expected FASB implementation 
date, that is a favorable outcome.
    Enabling NCUA to adopt a PCA system that remains relevant and up-
to-date with emerging trends in credit unions and the marketplace 
provides safety, efficiency, and benefits to the credit union consumer. 
I believe our reform proposal achieves a much needed balance between 
enabling credit unions to utilize capital more efficiently to better 
serve their members while maintaining safety and soundness and 
protecting the share insurance fund. A well-designed risk based system 
would alleviate regulatory concerns by not penalizing low-risk 
activities and by providing credit union management with the ability to 
manage their compliance through adjustments to their assets and 
activities. A PCA system that is more fully risk-based would better 
achieve the objectives of PCA and is consistent with sound risk 
management principles.


    As the above table illustrates, the PCA category for the vast 
majority of credit unions, reflecting their already strong net worth 
levels, would remain unchanged. However, 107 credit unions would 
improve into a higher PCA category given their relatively low-risk 
profiles. At the same time 41 credit unions would experience a 
reduction in their net worth category, thus accelerating corrective 
action for these inadequately capitalized credit unions. In fact, 
almost all of the 29 downgrades from well or adequately capitalized to 
undercapitalized under the new system are due to the proposed new risk-
based requirement, indicating the new system is better recognizing risk 
in relation to net worth levels. I would also point out that the 
proposed new tandem system is rigorous in respect to thinly capitalized 
credit unions as no significantly or critically undercapitalized credit 
unions are upgraded under the proposed system, and the overall level of 
critically, significantly, and undercapitalized credit unions 
increases.
Explanation of NCUA Recommended Provisions for Consideration by the
Committee on Banking, Housing, and Urban Affairs
Check Cashing and Money Transfer Services Offered within the Field of
Membership of the Credit Union
Current Law
    Section 107 of the Federal Credit Union Act authorizes Federal 
credit unions to provide check cashing and money transfer services to 
members.
Proposed Amendment
    This amendment permits Federal credit unions to offer these same 
services to persons eligible to be members of the credit union, defined 
as those that fall within the field of membership of the credit union.
Reasons for Change
 Congress and the Administration are asking financial 
    institutions to do more to reach the ``unbanked.''
 Credit unions are constrained from extending the most basic 
    financial transaction (check cashing) to those who have avoided 
    traditional financial institutions.
 Expanding check cashing, wire transfer, and similar services 
    to nonmembers within a credit union's field of membership would 
    provide an introduction to reliable low-cost financial services 
    which can provide a viable alternative to less savory practices 
    while at the same time increase confidence in traditional financial 
    organizations.
 With more and more credit unions adopting underserved areas, 
    these services become especially important in reaching out to the 
    underserved.
Eliminate the 12-year Limit on Term of Federal Credit Union Loans
Current Law
    The Federal Credit Union Act imposes a 12-year loan maturity limit 
on most credit union loans. Principal residence loans have maturities 
up to 30 years, and principal mobile home loans have maturities of 15 
years.
Proposed Amendment
    The proposed amendment permits the NCUA Board to provide for 
maturity limits up to 15 years, or longer, as the NCUA Board may allow 
by regulation.
Reasons for Change
 The current restriction placed on Federal credit unions is 
    outdated and unnecessarily restricts a credit union's lending terms 
    to its members.
 Members of Federal credit unions should be able to obtain 
    loans for second homes, recreational vehicles, and other purposes 
    in accordance with conventional maturities that are commonly 
    accepted in the market today.
Increase in 1 percent Investment Limit in CUSO's
Current Law
    The Federal Credit Union Act permits Federal credit unions to 
invest in Credit Union Service Organizations (CUSO's)--organizations 
providing services to credit unions and credit union members. An 
individual credit union, however, may invest in aggregate no more than 
1 percent of its shares and undivided earning in these organizations.
Proposed Amendment
    The provision increases the permissible credit union investment in 
CUSO's from 1 percent to 3 percent of its shares and undivided 
earnings.
Reasons for Change
 CUSO's are frequently established by several credit unions to 
    provide important services to credit unions, such as check clearing 
    and data processing, which can be done more efficiently for a 
    group.
 When these services are provided through a CUSO, any financial 
    risks are isolated from the credit union while allowing the credit 
    unions to retain quality control over the services offered and the 
    prices paid by the credit unions or their members.
 An increase in the CUSO investment to 3 percent allows the 
    CUSO to continue servicing its credit union members without having 
    to bring services back in-house or engage outside providers. This 
    controls risk and expense to the credit union.
 The 1 percent limit has not been updated since its inception 
    in 1977.
Investments in Securities by Federal Credit Unions
Current Law
    The Federal Credit Union Act authorizes Federal credit unions to 
invest in loans, obligations of the United States, or securities fully 
guaranteed as to principal and interest by the U.S. Government, 
deposits in other financial institutions, and certain other limited 
investments, such as obligations of Federal Home Loan Banks, wholly 
owned government corporations, or in obligations, participations or 
other instruments issued by, or fully guaranteed by FNMA, GNMA, or 
FHLMC.
Proposed Amendment
    This amendment would provide authority for Federal credit unions to 
purchase and hold for their own account ``investment securities'' if 
they are in one of the four highest investment rating categories--
subject to further definition and qualification by NCUA rulemaking.
    The amendment limits Federal credit unions' investments in 
investment securities in two ways. First, a statutory ``single 
obligor'' percentage limitation is established, such that the total 
amount of investment securities of any single obligor or maker held by 
the Federal credit union for the credit union's own account cannot 
exceed 10 percent of the net worth of the credit union. Second, the 
aggregate amount of investments held by the Federal credit union for 
its own account cannot exceed 10 percent of the assets of the credit 
union.
Reasons for Change
 A number of private debt instruments such as highly rated 
    commercial paper, corporate notes, and asset-backed securities 
    would be appropriate investments for Federal credit unions.
 Other federally regulated and State regulated financial 
    institutions have a proven track record with these limited 
    investments.
 Allowing such investments would give credit unions more asset 
    liability management options.
 NCUA implementing regulations will further address appropriate 
    investment gradings, possible minimum credit union net worth 
    requirements, and other safety and soundness requirements.
 With a percentage limitation of 10 percent of net worth per 
    single obligor, this modest increase in investment flexibility will 
    not subject credit unions to undue risk.
 The 10 percent limitation language parallels the limitation 
    applicable to national banks when applied to the ``net worth'' 
    measurement for credit unions.
 The prohibition against investment in equity securities is 
    maintained.
Voluntary Merger Authority
Current Law
    Section 109 of the Federal Credit Union Act requires NCUA to engage 
in an analysis of every voluntary merger of healthy Federal credit 
unions to determine whether a spin-off of any select employee group 
(SEG) of over 3,000 members in the merging credit union can be 
effectively accomplished.
Proposed Amendment
    The recommendation is to eliminate the requirement that NCUA engage 
in an analysis of every voluntary merger to determine whether a select 
employee group over 3,000 can be spun-off into a separate credit union.
Reasons for Change
 Requiring NCUA to engage in an analysis of every voluntary 
    merger of healthy Federal credit unions to consider a spin-off from 
    the merging credit union of any select employee group (SEG) of over 
    3,000 is cumbersome and provides little practical benefit or 
    purpose. There are about 300 a year.
 When two healthy multiple bond credit unions pursue a merger, 
    it increases their financial strength and member service is 
    enhanced, as well as their long-term safety and soundness.
 Member employee (or other) groups over 3,000 are already 
    included in a multiple group credit union in accordance with 
    statutory standards.
Treatment of Credit Unions as Depository Institutions Under Securities
Laws
Current Law
    Section 201 and 202 of the Gramm-Leach-Bliley Act, enacted in 1999, 
created specific exemptions from broker-dealer registration 
requirements of the Bank Exchange Act of 1934 for certain bank 
securities activities. Banks are also exempt from the registration and 
other requirements of the Investment Advisors Act of 1940. The 
principle established in these laws is that securities activities of an 
incidental nature to the bank do not have to be placed into a separate 
affiliate and functionally regulated.
Proposed Amendment
    This provision would provide a statutory exemption for credit 
unions similar to that already provided banks and allow credit unions, 
like banks, to avoid complicated filings with the Securities and 
Exchange Commission for incidental activities.
Reasons for Change
 Federal credit unions are empowered to engage in specific 
    activities enumerated in the FCUA and any other activities 
    incidental to the enumerated activities. Among the specific broker-
    related activities currently authorized are third-party brokerage 
    arrangements, sweep accounts, safekeeping and custodial activities. 
    Among the dealer-related activities are the purchase and sale of 
    particular securities, including but not limited to municipal 
    securities and ``Identified Banking Products'' for the credit 
    union's own account.
 These incidental activities might trigger SEC registration if 
    not exempted by law.
 This important regulatory relief and efficiency provision 
    would reduce the cost and complication to credit unions having to 
    approach the SEC on a case-by-case basis or through regulation--the 
    only avenues now available to them for relief.
 While a Federal or State chartered credit union might be 
    granted authority to engage in otherwise lawful activities, the 
    credit union might have to abandon the activity or outsource it to 
    a third party at increased expense if this exemption is not 
    provided.
 This exemption would not expand the types of securities 
    activities that credit unions are authorized to engage in. It 
    simply serves to provide parity with banks and thrifts regarding an 
    exemption from SEC registration for the limited securities 
    activities credit unions are authorized to engage in.
Technical Corrections to the Federal Credit Union Act
Explanation of Proposed Amendment
    Twenty-eight purely technical and clerical corrections to the 
Federal Credit Union Act have been identified as needed.
Reasons for Change
    To make the Federal Credit Union Act accurate and correct.
Conclusion
    Thank you, Mr. Chairman, Senator Sarbanes, and Senator Crapo for 
the opportunity to appear before you today on behalf of NCUA to discuss 
the public benefits of regulatory efficiency for NCUA, credit unions 
and 84 million credit union members. I am pleased to respond to any 
questions the Committee may have or to be a source of any additional 
information you may require.

                               ----------

                   PREPARED STATEMENT OF ERIC McCLURE
               Commissioner, Missouri Division of Finance
                            on behalf of the
                  Conference of State Bank Supervisors
                             June 21, 2005

    Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. I am Eric McClure, Commissioner of the Missouri 
Division of Finance, and I am pleased to be here today on behalf of the 
Conference of State Bank Supervisors (CSBS). Thank you for inviting 
CSBS to be here today to discuss strategies for reducing unnecessary 
regulatory burden on our Nation's financial institutions.
    CSBS is the professional association of State officials who 
charter, regulate, and supervise the Nation's approximately 6,240 
State-chartered commercial banks and savings institutions, and nearly 
400 State-licensed foreign banking offices nationwide.
    As current chairman of CSBS, I am pleased to represent my 
colleagues in all 50 States and the U.S. territories.
    CSBS gives State bank supervisors a national forum to coordinate, 
communicate, advocate, and educate on behalf of the state banking 
system. We especially appreciate this opportunity to discuss our views 
in our capacity as the chartering authority and primary regulator of 
the vast majority of our Nation's community banks.
    Chairman Shelby, we applaud your longstanding commitment to 
ensuring that regulation serves the public interest without imposing 
unnecessary or duplicative compliance burdens on financial 
institutions. At the State level, we are constantly balancing the need 
for oversight and consumer protections with the need to encourage 
competition and entrepreneurship. We believe that a diverse, healthy 
financial services system serves the public best.
    CSBS and the State banking departments have been working closely 
with the Federal banking agencies, through the Federal Financial 
Institutions Examination Council, to implement the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996. While this legislation made 
necessary and beneficial changes, we see continuing opportunities for 
Congress to streamline and rationalize regulatory burden, especially 
for community banks.
Principles for Regulatory Burden Relief
    The Conference of State Bank Supervisors has developed a set of 
principles to guide a comprehensive approach to regulatory burden 
relief, and we ask Congress to consider each proposal carefully against 
these principles.
    First, a bank's most important tool against regulatory burden is 
its ability to make meaningful choices about its regulatory and 
operating structures. The State charter has been and continues to be 
the charter of choice for community-based 
institutions because the State-level supervisory environment--locally 
oriented, relevant, responsive, meaningful, and flexible--matches the 
way these banks do business.
    A bank's ability to choose its charter encourages regulators to 
operate more efficiently, more effectively, and in a more measured 
fashion. A monolithic regulatory regime would have no incentive for 
efficiency. The emergence of a nationwide financial market made it 
necessary to create a Federal regulatory structure, but the State 
system remains as a structural balance to curb potentially excessive 
Federal regulatory measures, and as a means of promoting a wide 
diversity of financial institutions.
    Second, our current regulatory structure and statutory framework 
may recognize some differences between financial institutions, but too 
often mandate overarching ``one-size-its-all'' requirements for any 
financial institution that can be described by the word ``bank.'' These 
requirements are often unduly burdensome on smaller or community-based 
institutions.
    Regulatory burden always falls hardest on smaller institutions. 
Although 48 of the Nation's 100 largest banks hold State charters, 
State charters make up the vast majority of these smaller institutions. 
We see this impact on earnings every day among the institutions we 
supervise. In a May 27 letter to American Banker, FDIC Vice Chairman 
John Reich noted the disproportionate impact of compliance costs on 
institutions with less than $1 billion in assets. Community banks 
represent a shrinking percentage of the assets of our Nation's banking 
system, and we cannot doubt that compliance costs are in part driving 
mergers. Even where laws officially exempt small, privately held banks, 
as in the case of Sarbanes-Oxley, the principles behind these laws hold 
all institutions to increasingly more expensive compliance standards.
    This is a crucial time for Congress to take the next step in 
reviewing the impact that these Federal statutes have had on the 
economy of this great country. My colleagues and I see growing 
disparity in our Nation's financial services industry. The industry is 
bifurcated, and becoming more so. A line exists--although it is not a 
clear line at this time--that divides our country's banking industry 
into larger and smaller institutions. Congress must recognize this 
reality, and the impact this bifurcation has on our economy.
    The Nation's community banking industry is the fuel for the 
economic engine of small business in the United States. Although I 
speak as a State bank supervisor, I recognize that federally chartered 
community banks are also important to small business.
    Small business is a critical component of the U.S. economy. 
According to the Small Business Administration, small business in the 
United States accounts for 99 percent of all employers, produces 13 
times more patents per employee than large firms, generates 60 to 80 
percent of new jobs, and employs 50 percent of the private sector. 
Small businesses must be served, and community banks are the primary 
source of that service. They can often more readily provide customized 
products that fit the unique needs of small businesses. Regulatory 
burden relief will help community banks provide the service that fuels 
this economic engine.
    Stifling economic incentives for community banks with excessive 
statutory burdens slows this economic engine of small business in the 
United States. Regulatory burden relief for community banks would be a 
booster shot for the nation's economic well-being.
    We suggest that Congress and the regulatory agencies seek creative 
ways to tailor regulatory requirements for institutions that focus not 
only on size, but also on a wider range of factors that might include 
geographic location, structure, management performance and lines of 
business. As the largest banks are pushing for a purely national set of 
rules for their evolving multistate and increasingly retail operations, 
keep in mind that this regulatory scheme will also impose new 
requirements on State-chartered banks operating in the majority of 
States that do not already have similar rules in place.
    Third, while technology continues to be an invaluable tool of 
regulatory burden relief, it is not a panacea.
    Technology has helped reduce regulatory burden in countless ways. 
State banking departments, like their Federal counterparts, now collect 
information from their financial institutions electronically as well as 
through on-site examinations. Most State banking departments now accept 
a wide range of forms online, and allow institutions to pay their 
supervisory fees online as well. Many state banking departments allow 
institutions online access to maintain their own structural 
information, such as addresses, branch locations, and key officer 
changes.
    At least 25 State banking agencies allow banks to file data and/or 
applications electronically, through secure areas of the agencies' 
websites. Nearly all of the States have adopted or are in the process 
of accepting an interagency Federal application that allows would-be 
bankers to apply simultaneously for a State charter and for Federal 
deposit insurance.
    Shared technology allows the State and Federal banking agencies to 
work together constantly to improve the examination process, while 
making the process less intrusive for financial institutions. 
Technology helps examiners target their examinations through better 
analysis, makes their time in financial institutions more effective, 
and expedites the creation of examination reports.
    The fact that technology makes it so much easier to gather 
information, however, should not keep us from asking whether it is 
necessary to gather all of this information, or what we intend to do 
with this information once we have it. Information-gathering is not 
cost-free.
    Our Bankers Advisory Board members have expressed particular 
concern about Bank Secrecy Act requirements, Currency Transaction 
Reports, and Suspicious Activity Reports. These collection requirements 
have become far more extensive in the past 3 years, representing the 
new importance of financial information to our national security. 
Industry representatives, however, estimate that CTR's cost banks at 
least $25 per filing. Although they understood the importance of 
gathering this data, our Bankers Advisory Board members reported 
widespread frustration at the perception that law enforcement agencies 
do little, if anything, with this costly information. CSBS has worked 
diligently with FinCEN and the Federal banking agencies to develop 
clear, risk-based BSA examination procedures. We hope these procedures 
will alleviate some of the financial industry's concerns in this area. 
Federal law enforcement agencies need to work with State and Federal 
regulators to ensure clear guidance is provided to the industry with 
regard to prosecution. We also urge Congress, FinCEN, and the Federal 
banking regulators to simplify the BSA reporting forms and look 
carefully at potential changes to threshold levels.
    Finally, although regulators constantly review regulations for 
their continued relevance and usefulness, many regulations and 
supervisory procedures still endure past the time that anyone remembers 
their original purpose.
    Many regulations implement laws that were passed to address a 
specific issue; these regulations often stay on the books after the 
crisis that spurred new legislation has passed. Recognizing this, many 
State banking statutes include automatic sunset provisions. These 
sunset provisions require legislators and regulators to review their 
laws at regular intervals to determine whether they are still necessary 
or meaningful.
    We could hardly do that with the entire Federal banking code, but 
the passage of the Fair Credit Reporting Act amendments showed how 
valuable this review process can be. We urge Congress to apply this 
approach to as wide a range of banking statutes as possible.
    The Conference of State Bank Supervisors endorses approaches, such 
as the Communities First Act (H.R. 2061 introduced in the House of 
Representatives by Congressman Jim Ryun (R-KS)), that recognize and 
encourage the benefits of diversity within our banking system. CSBS 
supports the great majority of regulatory burden reductions proposed in 
the Communities First Act, believing that they will alleviate the 
burden on community banks without sacrificing either safety and 
soundness or community responsiveness and responsibility. Our dual 
banking system exists because one size is not appropriate for every 
customer, and one system is not appropriate for every institution. We 
ask that Congress include some type of targeted relief for community 
banks in any regulatory relief legislation.
    Through extensive discussions among ourselves and with State-
chartered banks, and in addition to the concepts and ideas expressed in 
the Communities First Act, we recommend seven specific changes to 
Federal law that will help reduce regulatory burden on financial 
institutions, without undue risk to safety and soundness. We ask that 
the Committee include these provisions in any legislation it approves.
Extended Examination Cycles for Well-Managed Banks under $1 Billion
    We believe that advances in off-site monitoring techniques and 
technology, and the health of the banking industry, make annual on-site 
examinations unnecessary for the vast majority of healthy financial 
institutions. Therefore, we ask that Congress extend the mandatory 
Federal examination cycle from 12 months to 18 months for healthy, 
well-managed banks with assets of up to $1 billion.
Coordination of State Examination Authority
    CSBS and the State banking departments have developed comprehensive 
protocols that govern coordinated supervision of State chartered banks 
that operate branches in more then one State. Through the CSBS 
Nationwide State Federal Cooperative Agreements, States that charter 
and regulate State banks work closely with either the FDIC or Federal 
Reserve and bank commissioners in host States where their bank operates 
branches to provide quality, risk-focused supervision.
    To further support these efforts we strongly support including 
language in a Senate regulatory relief bill that reinforces these 
principles and protocols that have been in place since 1996.
    CSBS supports a provision that was included in the House passed 
version of a regulatory relief bill in the 108th Congress (H.R. 1375 
section 616) intended to improve the State system for multistate State-
chartered banks by codifying how state-chartered institutions with 
branches in more than one State are examined. While giving primacy of 
supervision to the chartering or home State, this provision, as 
slightly modified, requires both the home and host State bank 
supervisor to abide by any written cooperative agreement relating to 
coordination of exams and joint participation in exams.
    In addition, the House bill provides that, unless otherwise 
permitted by a cooperative agreement, only the home State supervisor 
may charge State supervisory fees on multistate banks. Under this 
provision, however, the host State supervisor may, with written notice 
to the home State supervisor, examine the branch for compliance with 
host State consumer protection laws.
    If permitted by a cooperative agreement, or if the out-of-State 
bank is in a troubled condition, the host State supervisor could 
participate in the examination of the bank by the home State supervisor 
to ascertain that branch activities are not conducted in an unsafe or 
unsound manner. If the host State supervisor determines that a branch 
is violating host State consumer protection laws, the supervisor may, 
with written notice to the home State supervisor, undertake enforcement 
actions. This provision would not limit in any way the authority of 
Federal banking regulators and does not affect State taxation 
authority.
Regulatory Flexibility for the Federal Reserve
    CSBS also favors a provision that would give the Federal Reserve 
the necessary flexibility to allow State-chartered member banks to 
exercise the powers granted by their charters, as long as these 
activities pose no significant risk to the deposit insurance fund.
    A major benefit of our dual banking system has always been the 
ability of each State to authorize new products, services, and 
activities for their State-chartered banks. Current law limits the 
activities of State-chartered, Fed member banks to those activities 
allowed for national banks. This restriction stifles innovation within 
the industry, and eliminates a key dynamic of the dual banking system.
    We endorse an amendment to remove this unnecessary limitation on 
State member banks as it has no basis in promoting safety and 
soundness. Congress has consistently reaffirmed State authority to 
design banking charters that fit their unique market needs. FDICIA, in 
1991, allowed States to continue to authorize powers beyond those of 
national banks. Removing this restriction on State member banks would 
be a welcome regulatory relief.
Limited Liability Corporations
    States have been the traditional source of innovations and new 
structures within our banking system, and CSBS promotes initiatives 
that offer new opportunities for banks and their customers without 
jeopardizing safety and soundness.
    In this tradition, CSBS strongly supports an FDIC proposal to make 
Federal deposit insurance available to State-chartered banks that 
organize as limited liability corporations (LLC's). An LLC is a 
business entity that combines the limited liability of a corporation 
with the pass-through tax treatment of a partnership.
    The FDIC has determined that State banks organized as LLC's are 
eligible for Federal deposit insurance if they meet established 
criteria designed to insure safety and soundness and limit risk to the 
deposit insurance fund.
    Only a handful of States now allow banks to organize as LLC's, 
including Maine, Nevada, Texas, Vermont, and, most recently, Utah. More 
States may consider this option, however, because the structure offers 
the same tax advantages as Subchapter S corporations but with greater 
flexibility. Unlike Subchapter S corporations, LLC's are not subject to 
limits on the number and type of shareholders.
    It is not clear, however, that Federal law allows pass-through 
taxation status for State banks organized as LLC's. An Internal Revenue 
Service regulation currently blocks pass-through tax treatment for 
State-chartered banks. We ask the Committee to encourage the IRS to 
reconsider its interpretation of the tax treatment of State-chartered 
LLC's.
Federal Financial Institutions Examination Council
    CSBS believes that a State banking regulator should have a vote on 
the Federal Financial Institutions Examination Council (FFIEC), the 
coordinating body of Federal banking agencies.
    The FFIEC's State Liaison Committee includes State bank, credit 
union, and 
savings bank regulators. The chairman of this Committee has input at 
FFIEC meetings, but is not able to vote on policy or examination 
procedures that affect the institutions we charter and supervise.
    Improving coordination and communication among regulators is one of 
the most important regulatory burden relief initiatives. To that end, 
we recommend that Congress change the State position in FFIEC from one 
of observer to that of full voting member.
    State bank supervisors are the primary regulators of approximately 
74 percent of the Nation's banks, and thus are vitally concerned with 
changes in Federal regulatory policy and procedures.
De Novo Interstate Branching
    CSBS seeks changes to Federal law that would allow all banks to 
cross State lines by opening new branches. While Riegle-Neal intended 
to leave this decision in the hands of the States, inconsistencies in 
Federal law have created a patchwork of contradictory rules about how 
financial institutions can branch across State lines.
    These contradictions affect State-chartered banks 
disproportionately. Federally chartered savings institutions are not 
subject to de novo interstate branching restrictions, and creative 
interpretations from the Comptroller of the Currency have exempted most 
national banks, as well.
    Therefore, we ask Congress to restore competitive equity by 
allowing de novo interstate branching for all federally insured 
depository institutions.
Deposit Insurance for Branches of International Banks Licensed to do
Business in the United States
    Finally, CSBS urges the Committee to review the statutory 
prohibition on the establishment of additional FDIC-insured branches of 
international banks.
    Since Congress enacted this prohibition in 1991, cooperation and 
information sharing between the United States and home country 
regulators have improved substantially. An international bank wishing 
to establish a branch in the United States must obtain approval from 
the Federal Reserve as well as from the licensing authority, and the 
Federal Reserve must find the bank to be subject to comprehensive 
supervision or regulation on a consolidated basis by its home country 
supervisor. These supervisory changes eliminate many of the concerns 
about establishing additional FDIC-insured branches that led to the 
statutory prohibition.
    International banks operating in the United States benefit the U.S. 
economy through job creation, operating expenditures, capital 
investments, and taxes. The vast majority of international bank 
branches are licensed by the States, and are assets to the states' 
economies. The Committee should review and remove this prohibition, and 
allow international banks the option of offering insured accounts.
Challenges to Regulatory Burden Relief
    The current trend toward greater, more sweeping Federal preemption 
of State banking laws threatens all of the regulatory burden relief 
issues described above.
    Federal preemption can be appropriate, even necessary, when 
genuinely required for consumer protection and competitive opportunity. 
The extension of the Fair Credit Reporting Act amendments met this high 
standard.
    We appreciate that the largest financial services providers want 
more coordinated regulation that helps them create a nationwide 
financial marketplace. We share these goals, but not at the expense of 
distorting our marketplace, denying our citizens the protection of 
State law and the opportunity to seek redress close to home, or 
eliminating the diversity that makes our financial system great. The 
Comptroller's regulations may reduce burden for our largest, federally 
chartered institutions and their minority-owned operating subsidiaries, 
but they do so at the cost of laying a disproportionate burden on 
State-chartered institutions and even on smaller national banks.
    We ask the Committee and Congress to review the disparity in the 
application of State laws to State and nationally chartered banks and 
their subsidiaries. Because expansive interpretations of Federal law 
created this issue, a Federal solution is necessary in order to 
preserve the viability of the State banking system.
Conclusion
    Mr. Chairman, Members of the Committee, the regulatory environment 
for our Nation's banks has improved significantly over the past 10 
years, in large part because of your vigilance.
    As you consider additional ways to reduce burden on our financial 
institutions, we urge you to remember that the strength of our banking 
system is its diversity--the fact that we have enough financial 
institutions, of enough different sizes and specialties, to meet the 
needs of the world's most diverse economy and society. While some 
Federal intervention may be necessary to reduce burden, relief measures 
should allow for further innovation and coordination at both the State 
and Federal levels, and among community-based institutions as well as 
among the largest providers.
    Diversity in our financial system is not inevitable. Community 
banking is not inevitable. This diversity is the product of a 
consciously developed State-Federal system, and any initiative to 
relieve regulatory burden must recognize this system's value. A 
responsive and innovative State banking system that encourages 
community banking is essential to creating diverse local economic 
opportunities.
    State bank examiners are often the first to identify and address 
economic problems, including cases of consumer abuse. We are the first 
responders to almost any problem in the financial system, from 
downturns in local industry or real estate markets to the emergence of 
scams that prey on senior citizens and other consumers. We can and do 
respond to these problems much more quickly than the Federal 
Government, often bringing these issues to the attention of our Federal 
counterparts and acting in concert with them.
    State supervisors are sensitive to regulatory burden, and 
constantly look for ways to simplify and streamline compliance. We 
believe in, and strive for, smart, focused, and reasonable regulation. 
Your own efforts in this area, Chairman Shelby, have greatly reduced 
unnecessary regulatory burden on financial institutions regardless of 
their charter.
    The industry's record earnings levels suggest that whatever 
regulatory burdens remain, they are not interfering with larger 
institutions' ability to do business profitably. The growing gap 
between large and small institutions, however, suggests a trend that is 
not healthy for the industry or for the economy.
    The continuing effort to streamline our regulatory process while 
preserving the safety and soundness of our Nation's financial system is 
critical to our economic well-being, as well as to the health of our 
financial institutions. State bank supervisors continue to work with 
each other, with our legislators and with our Federal counterparts to 
balance the public benefits of regulatory actions against their direct 
and indirect costs.
    We commend you, Mr. Chairman, Senator Crapo, and the Members of 
this Committee for your efforts in this area. We thank you for this 
opportunity to testify, and look forward to any questions that you and 
the Members of the Committee might have.

                               ----------

                 PREPARED STATEMENT OF STEVE BARTLETT *
                 President and Chief Executive Officer
                   The Financial Services Roundtable
                             June 21, 2005

Introduction
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, my name is Steve Bartlett and I am President & CEO of The 
Financial Services Roundtable.
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    * Appendix held in Committee files.
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    The Roundtable represents 100 of the Nation's largest integrated 
financial services companies. Our members provide banking, insurance, 
and investment products and services to millions of American consumers. 
Roundtable member companies account for $17.1 trillion in managed 
assets, $888 billion in revenue, and 2 million jobs.
    The Roundtable appreciates the opportunity to share its views on 
the topic of regulatory relief for financial services firms. We 
strongly support efforts to reduce the regulatory burden confronting 
the financial services industry. Outdated laws and regulations impose 
significant, and unnecessary, burdens on financial services firms, and 
these burdens not only make our firms less efficient, but also increase 
the cost of financial products and services to consumers.
    I recognize that in some respects I am ``preaching to the choir'' 
when I cite the burdens of regulation on financial services firms. This 
Committee, and Senator Crapo in particular, have been in the forefront 
of efforts to eliminate unnecessary and overly burdensome laws and 
regulations applicable to financial services firms. The Roundtable 
appreciates these efforts, and hopes that they will be fully realized 
with the enactment of a regulatory burden relief bill in this Congress.
    Recently, the Roundtable has undertaken its own initiative aimed at 
regulatory burden relief. Based upon input from our members, we have 
identified four major regulatory problems in need of reform. We have 
undertaken a dialogue with the appropriate Federal financial regulatory 
agencies about these problems, and, in some instances, have recommended 
specific remedies. I will begin by addressing these four key issues. I 
also have highlighted a number of other regulatory reforms sought by 
the Roundtable, many of which were incorporated in H.R. 1375, the 
Financial Services Regulatory Relief Act, which was approved by the 
House of Representatives in the last Congress. Please find attached to 
my testimony an addendum of regulatory relief proposals offered for 
consideration by The Financial Services Roundtable.*
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    * Held in Committee files.
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The Roundtable's Regulatory Oversight Coalition
    Recently, The Roundtable initiated its own effort to reduce 
excessive regulation. This effort is focused on four regulatory problem 
areas:

 Suspicious Activity Report (SAR) filing requirements;
 SEC enforcement policies and practices;
 The confidentiality of information that is shared with Federal 
    financial regulators; and
 Compliance with Section 404 of the Sarbanes-Oxley Act.
SAR's
    Roundtable member companies strongly support the Government's 
efforts to combat money laundering and terrorist financing. However, we 
believe that the current system of reporting suspicious activities is 
not working properly. The best evidence of this is the dramatic 
increase in SAR filings in recent years. For example, since 1996, 
national SAR reporting has increased 453 percent. Similarly, FinCEN 
reported 81,197 filings in 1997 versus 288,343 filings in 2003. As of 
October 28, 2004, depository institutions had filed a total of 297,753 
SAR's, and the total number of SAR filings is projected to double this 
year.
    There are several reasons for this dramatic increase in SAR 
filings. First, the failure to file SAR's has become a criminal issue. 
The U.S. Justice Department has aggressively pursued actions against 
financial institutions for failing to file SAR's. This criminalization 
of the filing process has created a huge reputational risk for 
financial institutions, and has caused institutions to file an 
increasing number of SAR's in order to avoid any potential for 
prosecution. Second, there are no clear standards for when SAR's should 
be filed. Although guidelines are in place, examiners neither clearly 
nor consistently apply them. In addition, financial institutions do not 
receive feedback from law enforcement on the type of information that 
should be included in the SAR. Third, Roundtable member companies have 
encountered a ``zero tolerance'' policy among the Federal financial 
regulatory agencies. Under this policy, institutions are held 
accountable for every single transaction.
    Finally, there is a lack of coordination among the various agencies 
and examiners responsible for SAR filings. This lack of coordination 
often results in duplicate requests and multiple filings.
    To address these problems, The Roundtable has urged the Federal 
financial regulatory agencies to take the following actions:

 Develop clear, simple guidelines on SAR's, which include safe 
    harbor protections for institutions and individuals who file the 
    SAR;
 Draft regulations and/or guidelines that focus on an 
    institution's anti-money laundering program and policies, not 
    individual transactions;
 Coordinate with each other on all examination procedures, and 
    provide consistent interpretations of the Bank Secrecy Act;
 Consider raising the Currency Transaction Report (CTR) 
    threshold above the current $10,000.00 level; and
 Provide additional guidance on Customer Identification 
    Programs, including tailoring the regulations to individual 
    businesses versus a one-size-fits-all approach.

    Additionally, the Roundtable recommends that any decision to pursue 
a criminal charge against a financial institution for failure to file a 
SAR, or other report required by the Bank Secrecy Act, should be made 
by the main Justice Department, not a field office, and that such 
decisions be made in consultation with the appropriate Federal 
financial regulator for the institution.
SEC Enforcement
    Roundtable member companies are increasingly concerned about the 
enforcement policies and practices of the Securities and Exchange 
Commission (SEC). Just as the Roundtable supports compliance with 
Federal anti-money laundering laws and regulations, the Roundtable 
supports compliance with our Nation's securities laws. Nonetheless, we 
believe that compliance is being hindered by certain SEC enforcement 
policies and practices.
    Specifically, the Roundtable believes that there should be a 
``firewall'' between the SEC's examination staff and the Division of 
Enforcement. A firewall would give institutions a chance to more freely 
discuss compliance issues and other practices outside of a potential 
enforcement context. This is the model that has been successfully 
followed by the Federal banking agencies, and we believe that it would 
enhance, not reduce, compliance with securities laws.
    Second, we believe that the SEC should provide a notice to 
institutions when an investigation is complete. Currently, no such 
notices are provided, and this practice can have an unnecessary 
chilling effect on business operations.
    Third, as discussed further below, we believe the SEC should drop 
its policy of ``forcing'' companies to waive attorney-client privilege 
in the course of an investigation. This policy is impairing the 
attorney-client privilege, and this threatens to undermine internal 
discussion and investigations.
    Finally, we believe the SEC should give financial institutions 
adequate time to respond to broad document requests.
    The SEC has said that it will not tolerate unreasonable delays in 
response to inquiries. The Roundtable does not endorse unreasonable 
delays, but has found that the SEC's definition of what constitutes an 
unreasonable delay is often very limited. This has created problems for 
institutions that are trying to determine what information is relevant 
and what is protected by the attorney-client privilege.
Confidentiality of Information Shared with Regulators
    Financial institutions are required to share an increasing amount 
of information with Federal financial regulators. Reporting and filing 
requirements imposed by Federal law and regulators are a major source 
of this burden. For example, since the enactment of the Financial 
Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989, 
Federal banking and thrift regulators have promulgated over 801 final 
rules, most of which impose various types of reporting and filing 
requirements. Additionally, financial institutions are asked to provide 
a wide-range of documents and information to regulators in the course 
of examinations and investigations.
    Unfortunately, this information sharing is threatened by two 
developments. First, there is the potential for confidential 
information that is shared with a Federal financial regulator to become 
accessible by third parties. Needless to say, this potential can have 
significant chilling effects on the nature and type of information an 
institution is willing to share with its regulator.
    Second, the Justice Department, the SEC, and the other Federal 
financial regulators have adopted policies that effectively undermine 
the attorney-client privilege. Under these policies, the wavier of the 
attorney-client privilege is a condition for being deemed 
``cooperative'' with the agency, and the failure to waive the privilege 
can adversely affect the nature of the charges that may be brought in 
an enforcement case or the size of any civil money penalty that may be 
assessed against an institution. Such policies can have significant 
unintended consequences:

 They have a chilling effect on the communications between 
    management, boards of directors, and their attorneys because of the 
    uncertainty over what conversations and work-product is protected:
 They discourage internal investigations. The current 
    regulatory environment, including reforms brought about by the 
    Sarbanes-Oxley Act, encourages companies to conduct thorough 
    internal investigations and, to the extent necessary, communicate 
    the results of those investigations to the appropriate Federal 
    regulators. Yet, the likelihood that such communications will 
    result in a waiver of the attorney-client privilege creates a 
    disincentive to conducting investigations. Thus, the current waiver 
    policy is directly counter to the goals of Sarbanes-Oxley and 
    similar regulatory reforms. Furthermore, the policies place 
    employees in a difficult position during the course of 
    investigations. If employees cooperate in an investigation, their 
    statements may have to be provided to the investigation agency. If 
    an employee decided not to cooperate and withholds information, the 
    employee risks termination or other action against them.

    To protect the confidentiality of information given to a Federal 
financial regulator, the Roundtable urges the enactment of legislation 
similar to The Financial Services Antifraud Network Act of 2001 (also 
known as the Bank Examination Report Privilege Act or BERPA), which was 
proposed in the 107th Congress,\1\ and the Securities Fraud Deterrence 
and Investor Restitution Act, which was proposed in the 108th 
Congress.\2\ These proposals would protect the integrity and 
effectiveness of the information shared with Federal financial 
regulators. For example, BERPA would clarify that information 
voluntarily disclosed to an examining agency continues to be protected 
by the institution's own privileges. BERPA also would codify and 
strengthen the bank supervisory privilege by defining confidential 
supervisory information, affirming that such information is the 
property of the agency that created or requested it, and protecting 
this information from unwarranted disclosure to third parties. 
Furthermore, BERPA would reaffirm the agencies' powers to establish 
procedures governing the production of confidential supervisory 
information to third parties.
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    \1\ H.R. 1408, Financial Services Antifraud Network Act of 2001, 
U.S. House of Representatives, 107th Congress (November 7, 2001).
    \2\ H.R. 2179, Securities Fraud Deterrence and Investor Restitution 
Act, U.S. House of Representatives, 108th Congress (May 21, 2003).
---------------------------------------------------------------------------
    The Roundtable also recommends that such legislation be expanded to 
cover information shared with an institution's auditors. The Sarbanes-
Oxley Act protects privileged documents provided to the Public Company 
Accounting Oversight Board (PCAOB) in connection with the inspections 
and investigations of registered audit firms.
    This protection, however, does not extend to information obtained 
by the auditors themselves. Ensuring that information shared with 
auditors can remain subject to confidentiality will help to ensure the 
flow of information between an institution and its auditors.
    With respect to the governmental policies that have the effect of 
undermining the attorney-client privilege, The Roundtable recommends 
that Congress make it clear to the Justice Department and the Federal 
financial regulators that the waiver of the privilege should not be a 
matter of policy in all investigations.
Section 404 of the Sarbanes-Oxley Act
    Section 404 of the Sarbanes-Oxley Act requires SEC-reporting firms 
to conduct annual assessments of the effectiveness of their internal 
controls, and to have their auditors independently attest to and report 
on this assessment. The Roundtable supports the goals of this section. 
Strong corporate governance and transparency of management structure 
and internal controls are important. Nonetheless, the Roundtable has 
identified a certain substantial concern with the implementation of 
Section 404.
    Most notably, Section 404 has changed the role of auditors. It has 
made auditors hesitant to provide advice to clients, caused auditors to 
impose excessive testing and documentation requirements on clients, and 
significantly increased the cost of outside audits.
    Additionally, Section 404 has imposed significant initial and on-
going costs on companies. A recent survey by Financial Executives 
International found that the total cost of compliance per company is 
approximately $4.36 million. These costs include large increases in 
external costs for consulting, software and other vendors, additional 
personnel, and, as noted above, additional fees by external auditors.
    Furthermore, Roundtable members have encountered confusion over the 
standards in Section 404. For example, we find a need for clarity on 
the meaning of terms such as ``material weakness'' and ``significant 
controls.''
Other Needed Regulatory Reforms
    There are a number of other needed regulatory reforms that the 
Roundtable urges the Committee to consider as it crafts regulatory 
relief legislation. I will start by highlighting provisions from H.R. 
1375, and then list some other recommended changes to Federal law.
Interstate Banking
    It was exactly 10 years ago that Congress enacted the landmark 
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. 
Since then, the public benefits anticipated by that Act have been 
realized.
    The creation of new bank branches has helped to maintain the 
competitiveness of our financial services industry, and has improved 
access to financial products in otherwise underserved markets. Branch 
entry into new markets has enhanced competition in many markets, and 
this, in turn, has resulted not only in a better array of financial 
products and services for households and small businesses, but also in 
competitive prices for such products and services. There is, however, 
one remaining legal barrier to interstate branching, which should be 
eliminated.
    Under the Riegle-Neal Act, a bank cannot establish a new or so-
called ``de novo'' interstate branch without the affirmative approval 
of a host State. Since 1994, only 17 states have given that approval; 
33 States have not. The time has come to remove this barrier to 
interstate branching. The Roundtable urges the Committee to do so by 
incorporating Section 401 from H.R. 1375 in its version of regulatory 
relief legislation.
    Section 401 eliminates the provision in the Riegle-Neal Act that 
requires State approval for de novo branching. In other words, the 
enactment of Section 401 would allow a bank to establish new branches 
in any State, without limitations.
    Section 401 is supported by the Federal Reserve Board, the Office 
of the Comptroller of the Currency, and the Conference of State Bank 
Supervisors. These Federal and State regulators recognize the public 
benefits associated with expanding 
access to banking offices. They also realize that current law has 
created some competitive disparities between different types of 
institutions.
    Section 401 also makes other useful modifications to interstate 
operations. It removes a minimum requirement on the age of a bank that 
is acquired by an out-of-state bank. It allows State bank supervisors 
to permit State banks to engage in interstate trust activities similar 
to the trust activities permissible for national banks. It facilitates 
mergers and consolidations between insured banks and uninsured banks 
with different home States. All of these changes facilitate the 
provision of banking products and services to consumers.
Coordination of State Exams
    A second provision related to interstate banking that we would urge 
the Committee to incorporate in its version of regulatory relief 
legislation is Section 616 of H.R. 1375. Section 616 of H.R. 1375 
clarifies the authority of State banking supervisors over interstate 
branches of State chartered banks. It provides that the banking 
supervisor of the State in which a bank is chartered (a ``home'' State 
supervisor) is responsible for the examination and supervision of 
branches located in other States, and that only a home State supervisor 
may impose supervisory fees on interstate branches. Section 616 also 
encourages State banking supervisors to enter into cooperative 
supervisory agreements related to the examination and supervision of 
State banks with interstate operations. Such an agreement could provide 
for joint examinations, and even the assessment of joint supervisory 
fees. Furthermore, Section 616 acknowledges the authority of a ``host'' 
State banking supervisor to examine the interstate branches of State 
banks for compliance with host State law.
    The addition of this provision will help to avoid needless 
confusion, and potential conflict, over the examination and supervision 
of the interstate branches of State banks.
Regulation of Thrift Institutions
    While The Roundtable supports all of the thrift provisions in H.R. 
1375, I would highlight three of those provisions, which are 
particularly important to our members.
Parity for Thrifts Under the Federal Securities Laws
    Section 201 of H.R. 1375 would establish regulatory parity between 
the securities activities of banks and thrifts. For years, the 
brokerage and investment activities of commercial banks have enjoyed 
exemptions under Federal securities laws.\3\ As a result, the 
securities activities of banks have been subject to regulation by 
banking regulators, not the Securities and Exchange Commission. Thrift 
institutions, on the other hand, have not enjoyed similar exemptions 
under the Exchange Act or the Investment Advisors Act, even though 
Congress has, over time, permitted thrifts to engage in the same 
brokerage and investment activities as commercial banks.\4\ As a 
result, the securities activities of thrifts have been subject to 
regulation by both the Securities and Exchange Commission (SEC) and the 
Office of Thrift Supervision (OTS).
---------------------------------------------------------------------------
    \3\ The scope of this exemption was narrowed in the Gramm-Leach-
Bliley Act.
    \4\ In 1999, Congress did amend the Investment Company Act to treat 
thrifts the same as banks.
---------------------------------------------------------------------------
    Using its rulemaking powers, the SEC has attempted to address this 
regulatory disparity, first by granting thrifts a regulatory exemption 
under the Exchange Act, and, most recently, by proposing a limited 
exemption for thrifts under the Investment Advisors Act. Unfortunately, 
those actions by the SEC do not fully resolve the disparity between the 
regulation of banks and thrifts. Therefore, we urge the Committee to 
include Section 201 in its version of regulatory relief legislation.
    Section 201 would establish an explicit exemption for thrifts in 
the Exchange Act that is comparable to the exemption for commercial 
banks. This statutory change would remove any doubt about the 
permanence of the existing regulatory exemption adopted by the SEC.
    Section 201 also would make the exemption for thrifts under the 
Investment Advisors Act parallel to the current exemption for banks. 
The regulation recently proposed by the SEC grants thrifts an exemption 
from SEC regulation only when they are engaged in investment advisory 
activities in connection with trust activities. It would not apply to 
other investment advisory services, such as retail planning services. 
Section 201 draws no such distinction. It would give thrifts the same 
exemption as commercial banks.
    The OTS examines the securities-related activities of thrifts, just 
as the OCC and other banking agencies examine the securities-related 
activities of commercial banks. Thus, the exemptions proposed in 
Section 201 do not leave a regulatory void. They simply place thrifts 
on regulatory par with commercial banks, by eliminating the costs 
associated with registration with the SEC.
Auto Loans
    The Roundtable urges the Committee to incorporate Section 208 of 
H.R. 1375 in its version of regulatory relief legislation. Current law 
limits the amount of automobile loans by a thrift to no more than 35 
percent of the institution's assets. Section 208 would remove this 
ceiling. Congress has previously determined that credit card loans and 
education loans by thrifts should not be subject to any asset 
limitation. Automobile loans should be placed in this same category. 
Doing so will allow thrifts to further diversify their portfolios and 
enhance their balance sheets. Also, this provision would increase 
competition in the auto loan business, to the benefit of consumers.
Dividends
    The Roundtable supports Section 204 of H.R. 1375. Section 204 would 
replace a mandatory dividend notice requirement for thrifts owned by 
savings and loan holding companies with an optional requirement under 
the control of the Director of OTS. The existing mandatory requirement 
is no longer necessary. Other existing Federal statutes and regulations 
give the OTS the authority to ensure that thrifts held by holding 
companies pay dividends only in appropriate circumstances. Moreover, 
the current mandatory requirement applies only to thrifts owned by 
savings and loan holding companies, not to those owned by other 
companies or banks. Thus, Section 204 removes a disparity in regulation 
that need not exist.
Cross Marketing
    Presently, an insurance affiliate of a financial holding company 
may engage in cross-marketing with a company in which the insurance 
affiliate has made an investment if (1) the cross-marketing takes place 
only through statement inserts and Internet websites; (2) the cross-
marketing activity is conducted in accordance with the antitying 
restrictions of the Bank Holding Company Act (BHCA); and (3) the Board 
determines that the proposed arrangement is in the public interest, 
does not undermine the separation of banking and commerce, and is 
consistent with the safety and soundness of depository institutions. 
Under current law, however, a merchant banking affiliate of a financial 
holding company may not engage in such 
limited cross-marketing activities with the companies in which it makes 
investments. The Roundtable urges the Committee to amend the BHCA and 
establish parity of treatment between financial holding companies that 
own insurance affiliates and those that own merchant banking 
affiliates.
    We also urge that the Committee permit a depository institution 
subsidiary of a financial holding company to engage in cross-marketing 
activities with a nonfinancial company held by a merchant banking 
affiliate if the nonfinancial company is not controlled by the 
financial holding company. When a financial holding company does not 
control a portfolio company, cross-marketing activities are unlikely to 
materially undermine the separation between banking and commerce.
    In these noncontrol situations, the separation of banking and 
commerce is maintained by the other restrictions contained in the BHCA 
that limit the holding period of the investment and restrictions that 
limit the financial holding company's ability to manage and operate the 
portfolio company.
    These proposed modifications to the BHCA were incorporated in 
Section 501 of H.R. 1375.
SEC Regulation of Broker-Dealers
    Sections 201 and 202 of the Gramm-Leach-Bliley Act were intended to 
provide for SEC regulation of certain new securities activities, but 
permit banks to continue to engage directly in traditional trust and 
accommodation activities, that have long been regulated by the banking 
agencies. The Gramm-Leach-Bliley Act never envisioned that banks would 
be forced to ``push out'' traditional trust activities into SEC 
regulated companies. Despite this clear Congressional intent, the SEC 
has issued proposed regulations that would do exactly that--it would 
force banks to divest historic business lines and push them out to 
registered broker-dealers. The Federal Reserve and the OCC have 
objected to these proposed regulations, and their comment letter to the 
SEC emphasizes the importance of issuing a regulation that conforms to 
Congressional intent.
    Nevertheless, the SEC appears adamant in going forward with a far-
reaching regulation that would effectively require banks to cease 
engaging in many traditional banking activities. The Committee should 
amend the Gramm-Leach-Bliley Act to strike Sections 201 and 202 to 
ensure that banks may continue to engage in traditional banking 
functions without the threat of having to push these activities out 
into a nonbanking company.
Diversity Jurisdiction
    Under the law, citizens of two different States may avail 
themselves of the Federal courts if certain jurisdictional thresholds 
are met. Every corporation is deemed to be a citizen of two States: (1) 
the State of incorporation; and (2) the State in which it has its 
principal place of business, if different. Thus a company with offices 
in every State will still be able to use the Federal courts, as long as 
the other party is not a citizen of the company's ``home'' State.
    National banks and Federal savings associations are treated 
differently. The statute provides that a national bank is a citizen in 
the State in which it is located, and at least one court has held that 
this means every State in which the bank has a branch. For Federal 
savings associations, there is no provision governing their 
citizenship, and this issue has to be litigated over and over.
    We urge the Committee to amend the law to clarify that both a 
national bank and a Federal savings association are citizens of the 
State in which the institution's main or home office is located and the 
State in which they maintain their principal place of business, if 
different. This would put national banks and Federal thrift 
associations under the same rules that apply to every other corporation 
in America.
Anti-Tying
    We urge the Committee to repeal the price variance feature of the 
existing antitying rule so that a banking institution can give a price 
break to commercial customers if that commercial customer decides to 
purchase other products and services from the institution. Banks should 
have the ability to offer a commercial customer a price break on a 
product or service if the commercial customer decides to buy another 
product or service. This change would not encourage antitrust 
activities. Unlike the classic tying case, the customer could not be 
forced into buying a product. If the customer thinks the price break is 
good enough, he or she can buy the product. If the customer does not 
think the price break is good enough, he or she is under no obligation 
to buy the product. Furthermore, our proposed change would apply only 
to commercial customers, not individuals or small businesses.
Simplified Privacy Notice
    Like many consumers, the Roundtable member companies have found 
that the privacy notice required by the GLBA is overly confusing, and 
largely ignored by many consumers.
    Accordingly, we recommend that the Committee use this opportunity 
to simplify the form of the notice required by GLBA.
    There is extensive research in support of simple notices. That 
research indicates that consumers have difficulty processing notices 
that contain more than seven elements, and require the reader to 
translate vocabulary used in the notice into concepts they understand. 
Consumer surveys also indicate that over 60 percent of consumers would 
prefer a shorter notice than the lengthy privacy policy mandated by 
GLBA.
    Recognizing the problem created by the existing GLBA privacy 
notice, the Federal banking agencies, the FTC, NCUA, CFTC, and SEC 
recently requested comment on alternative notices that would be more 
readable and useful to consumers. These Federal agencies, however, lack 
the authority to make a simplified notice truly consumer-friendly 
because they cannot address conflicting and overlapping State privacy 
laws. Section 507 of GLBA permits individual States to adopt privacy 
protections that are ``greater'' than those established by GLBA. This 
provision allows States to adopt their own privacy notices, and this 
simply adds to consumer confusion and frustration.
    We strongly recommend that the Committee include a provision in its 
version of regulatory relief legislation that directs the relevant 
Federal agencies to finalize a simplified privacy notice for purposes 
of GLBA, and provides that such a notice supersede State privacy 
notices. As the research has indicated, consumers will be better served 
if they are given a simple, uniform explanation of an institution's 
privacy policy and their privacy rights.
Real Estate Brokerage
    The Financial Services Roundtable strongly supports the 
authorization of financial services holding companies to engage in real 
estate brokerage activities. We believe that the Gramm-Leach-Bliley Act 
of 1999 clearly contemplated this would be a permissible ``financial 
activity'' for financial services holding companies, and thus can be 
authorized by a joint rulemaking of the Treasury Department and the 
Federal Reserve Board. We also strongly support legislation, such as 
H.R. 2660 sponsored by Chairman Oxley and Ranking Member Frank in the 
House, that would define this activity as ``financial'' without the 
need for a rulemaking proceeding.
Conclusion
    In conclusion, the Roundtable appreciates the efforts of the 
Committee to eliminate laws and regulations that impose significant, 
and unnecessary, burdens on financial services firms. The costs savings 
that will result from this regulatory relief legislation will benefit 
the consumers of financial products and services. We look forward to 
working with the Committee on this important legislation.




               PREPARED STATEMENT OF ARTHUR R. CONNELLY *
                Chairman & CEO, South Shore Savings Bank
                   South Weymouth, Massachusetts and
         Member, Executive Committee of the Board of Directors
              America's Community Bankers, Washington, DC
                             June 21, 2005

    Chairman Shelby, Senator Sarbanes, and Members of the Committee, I 
am Arthur Connelly, President and CEO of South Shore Savings Bank, 
South Weymouth, Massachusetts. South Shore Savings Bank is a $900 
million State-chartered savings bank owned by South Shore Bancorp, a 
mutual holding company.
---------------------------------------------------------------------------
    * Appendix held in Committee files.
---------------------------------------------------------------------------
    I am here this morning representing America's Community Bankers. I 
am a member of the Executive Committee of ACB's Board of Directors and 
Chairman of ACB's Government Affairs Steering Committee. I want to 
thank Chairman Shelby for calling this hearing and thank him and 
Senator Crapo for their leadership in crafting legislation to address 
the impact of outdated and unnecessary regulations on community banks 
and the communities they serve.
    ACB is pleased to have this opportunity to discuss recommendations 
to reduce the regulatory burden placed on community banks. When 
unnecessary and costly regulations are eliminated or simplified, 
community banks will be able to better serve consumers and small 
businesses in their local markets. ACB has a long-standing position in 
support of meaningful reduction of regulatory burden.
    This hearing and this topic are important and timely. Community 
banks operate under a regulatory scheme that becomes more and more 
burdensome every year. Ten years ago, there were 12,000 banks in the 
United States. Today, there are only 9,000 left. ACB is concerned that 
community banks are becoming less and less able to compete with 
financial services conglomerates and unregulated companies that offer 
similar products and services without the same degree of regulation and 
oversight. Community banks also bear a greater relative burden of 
regulatory costs compare to large banks. Community banks stand at the 
heart of cities and towns everywhere, and to lose that segment of the 
industry because of over regulation would be debilitating to those 
communities.
    Community banks today are subject to a host of laws, some over a 
half-century old that originally were enacted to address concerns that 
no longer exist. These laws stifle innovation in the banking industry 
and put up needless roadblocks to competition without contributing to 
the safety and soundness of the banking system. Further, every new law 
that impacts community banks brings with it additional 
requirements and burdens. This results in layer upon layer of 
regulation promulgated by the agencies frequently without regard to the 
requirements already in existence.
    The burden of these laws results in lost business opportunities for 
community banks. But, consumers and businesses also suffer because 
their choices among financial institutions and financial products are 
more limited as a result of these laws, and, in the end, less 
competition means consumers and businesses pay more for these services.
    Community banks must also comply with an array of consumer 
compliance regulations. As a community banker, I understand the 
importance of reasonable consumer protection regulations. As a 
community banker, I also see how much it costs, both financially and in 
numbers of staff hours for my small mutual community bank to comply 
with the often-unreasonable application of these laws. As a community 
banker, I see projects that will not be funded, products not offered 
and consumers not served because I have had to make a large resource 
commitment to comply with the same regulations with which banks 
hundreds of times larger must comply.
    Bankers are not the only ones concerned about the impact of the 
increasing layers of regulation on community banks. According to FDIC 
Vice Chairman John Reich, the bank and savings association regulatory 
agencies have promulgated over 800 regulations since 1989. In the 
opinion of the Vice Chairman, although most of the rule changes were 
put in place for good, sound reasons, over 800 changes in 15 years are 
a lot for banks to digest, particularly smaller community banks with 
limited staff. Vice Chairman Reich believes that regulatory burden will 
play an increasingly significant role in the viability of community 
banks in the future. I agree.
    The most egregious form of regulatory burden results from arbitrary 
actions by government agencies. ACB wants to alert the Committee to 
recent arbitrary actions by the National Credit Union Administration 
that appear to us to be a textbook case of agency overreaching. 
Although Congress has clearly granted credit unions the freedom to 
choose the form of organization that best meets their strategic and 
market objectives, the NCUA seems incapable of applying an evenhanded 
approach to conversion matters. The agency recently invalidated the 
conversion attempts of Community Credit Union and Omni American Credit 
Union in Texas before the member votes were even tabulated. The NCUA 
said that the credit unions violated the agency's conversion 
regulations because required disclosure documents that were mailed to 
all credit union members was not properly folded. Both the Texas Credit 
Union Commissioner and the Director of the OTS have determined that the 
way the notice was folded is not reason to start the 90-day conversion 
voting process over. The NCUA's actions could prevent these credit 
unions from exercising their right to determine their institutions' 
charter or cost the two credit unions hundreds of thousand of dollars 
to begin the process over again.
    Before turning to specific recommendations for legislative changes, 
I would like to discuss two areas where the implementation of laws by 
the regulators has been carried out in a fashion that creates 
unnecessary uncertainty and burden on community banks, namely, anti-
money laundering, and corporate governance.
    Community bankers fully support the goals of the anti-money 
laundering laws, and we are prepared to do our part in the fight 
against crime and terrorism. As laudable as these goals are, there 
currently exists an atmosphere of uncertainly and confusion about what 
is required of banks. This results from inconsistent messages being 
given by regulatory staff in the field, the region, and Washington. For 
example, Washington officials repeatedly assure the banking industry 
that the banking agencies do not have a ``zero-tolerance'' policy, 
where every minor discrepancy is treated as a significant failure to 
comply with the law. Nevertheless, regional offices and individual 
examiners continue to articulate a ``zero-tolerance policy'' when 
conducting BSA examinations and when making presentations during 
industry conferences. In another example of inconsistent policy, FinCEN 
has admonished banks not to file ``defensive suspicious activity 
reports,'' but as recent enforcement actions taken by the banking 
agencies and prosecutions by the Department of Justice demonstrate, it 
is safer for banks to file SAR's, when in doubt.
    The opportunity costs of BSA compliance go beyond hampering an 
institution's ability to expand and hire new employees. In some cases, 
fear of regulatory criticism has led some institutions to sever ties 
with existing banking customers or forego the opportunity to develop 
banking relationships with new customers.
    ACB and other industry representatives have been working with 
FinCEN and the banking regulators to improve the regulation of our 
anti-money laundering efforts. Among the many reform proposals 
suggested by ACB, we have proposed modernizing the cash transaction 
reporting regulations. FinCEN and law enforcement report that the Cash 
Transaction Report (CTR) database is littered with unhelpful CTR's. We 
believe that this attributable to the $10,000 threshold set in 1970 and 
a well-intentioned, but unhelpful exemption system that many community 
banks find to be more burdensome than simply filing a CTR. Adjusted for 
inflation since 1970, the threshold would be $48,000. ACB has suggested 
that the $10,000 threshold be increased for business customers as many 
businesses of all sizes routinely conduct transactions over $10,000. 
The 30-year old regulations need to be updated to reflect today's 
economic reality. We believe that updating the threshold for business 
customers would help, not hinder law enforcement. An increase in the 
threshold would help meet a 1994 Congressional mandate to reduce CTR 
filings by 30 
percent and provide law enforcement a cleaner, more efficient CTR 
database. We have also suggested that banks be allowed more flexibility 
in exempting business customers from CTR requirements by modifying or 
eliminating the current 12-month waiting period for new customer 
exemptions.
    We have made some progress in clarifying bank responsibilities 
under other anti-money laundering and terrorist financing regulations. 
As a result of a dialogue among industry, FinCEN and the banking 
agencies, FinCEN and the agencies recently issued joint guidance to 
banks on what level of scrutiny they should use with respect to the 
accounts of money service businesses. ACB commends the agencies for 
providing this needed clarification of bank responsibilities. ACB will 
continue to work with government agencies to provide further 
clarification of the responsibilities of banks under the Nation's anti-
money laundering laws. We look forward to the release of additional 
guidance in this area and are pleased that the agencies have planned 
training sessions for examiners and bankers so that a consistent 
message can be given to everyone at the same time.
    The Sarbanes-Oxley Act contained much needed reforms, restoring 
investor confidence in the financial markets that were in turmoil as a 
result of the major corporate scandals at the beginning of this decade. 
Community bankers support that Act and other laws, like the Federal 
Deposit Insurance Corporation Improvement Act, that improve corporate 
governance, enhance investor protection, and promote the safety and 
soundness of the banking system. However, the implementation of the 
Sarbanes-Oxley Act by the Securities and Exchange Commission and the 
Public Company Accounting Oversight Board and the interpretation of 
those regulatory requirements by accounting firms have resulted in 
costly and burdensome unintended consequences for community banks, 
including, even, privately held stock institutions and mutual 
institutions.
    For example, the PCAOB requires the external auditor to audit the 
internal controls of a company, rather than audit the CEO's attestation 
with respect to the internal controls--which was the practice generally 
permitted by the banking agencies for compliance with FDICIA's internal 
control requirements. ACB believes that this change in practice is a 
significant cause of a dramatic increase in bank audit fees. Many 
publicly traded banks are reporting an increase in audit fees of 75 
percent over the prior year. Some banks are reporting audit fees equal 
to 20 percent of net income. Privately held and mutual banks also are 
experiencing significant increases in auditing fees because the 
external auditors are applying the same PCAOB standards to these 
nonpublic banks.
    ACB has provided concrete suggestions to the banking regulators, 
the SEC, and the PCAOB on ways to reduce the cost of compliance with 
internal controls and other requirements, while still achieving the 
important goal of improved corporate governance and transparency. We 
appreciate the separate guidance on internal control reporting and 
attestation requirements issued concurrently by the SEC and the PCAOB, 
and are hopeful that it might provide some relief to the escalating 
audit fees.
    ACB appreciates the willingness of the staffs of Chairman Shelby, 
Senator Sarbanes, and other Senators to discuss the views and 
experiences of community banks in relation to the implementation of 
Section 404, and want to thank Senator Sarbanes for his assistance in 
securing the participation of one of our members in the SEC Roundtable 
on the Implementation of Sarbanes-Oxley Internal Control Provisions.
    (We have attached a letter, which ACB recently submitted to the 
banking regulators, detailing these suggestions and also suggestions 
for improving antimoney laundering regulation.)
    While ACB is not currently recommending statutory changes to anti-
money laundering and corporate governance laws, we believe that 
Congress has an important oversight role to play to ensure that 
meaningful regulatory efforts to reduce burden continue, and to step in 
and change laws, when that becomes necessary.
Legislative Recommendations
    ACB has a number of recommendations to reduce regulations 
applicable to community banks that will help make doing business easier 
and less costly, further enabling community banks to help their 
communities prosper and create jobs. ACB's specific legislative 
proposals are attached in an appendix.
Priority Issues
Expanded Business Lending
    A high priority for ACB is a modest increase in the business-
lending limit for savings associations. In 1996, Congress liberalized 
the commercial lending authority for federally chartered savings 
associations by adding a 10 percent ``bucket'' for small business loans 
to the 10 percent limit on commercial loans. Today, savings 
associations are increasingly important providers of small business 
credit in communities throughout the country. As a result, even the 
``10 plus 10'' limit poses a constraint for an ever-increasing number 
of institutions. Expanded authority would enable savings associations 
to make more loans to small- and medium-sized businesses, thereby 
enhancing their role as community-based lenders. An increase in 
commercial lending authority would help increase small business access 
to credit, particularly in smaller communities where the number of 
financial institutions is limited. To accommodate this need, ACB 
supports eliminating the lending limit restriction on small business 
loans while increasing the aggregate lending limit on other commercial 
loans to 20 percent. Under ACB's proposal, these changes would be made 
without altering the requirement that 65 percent of an association's 
assets be maintained in assets required by the qualified thrift lender 
test.
Unnecessary and Redundant Privacy Notices
    ACB strongly urges the elimination of required annual privacy 
notices for banks that do not share information with nonaffiliated 
third parties. Banks with limited information sharing practices should 
be allowed to provide customers with an initial notice, and provide 
subsequent notices only when terms are modified. I am sure you are all 
inundated by privacy statements each fall. I am equally confident that 
most or all of them remain unread. At my bank we send out thousands of 
such notices each year at significant cost, in both dollars and staff 
time, even though our policies and procedures have remained consistent 
over many years. Redundancy in this case does not enhance consumer 
protection; rather it serves to numb our customers with volume.
    Others share information only under very controlled circumstances 
when certain operational functions are outsourced to a vendor. The 
requirement to send notices should be amended when circumstances have 
not changed or when we are only reiterating that no customer 
information is ever shared. We do agree a notice should be sent, but it 
becomes an expensive burden to send it multiple times when once will 
more than suffice.
Parity Under the Securities Exchange Act and Investment Advisers Act
    ACB vigorously supports providing parity for savings associations 
with banks under the Securities Exchange Act and Investment Advisers 
Act. Statutory parity will ensure that savings associations and banks 
are under the same basic regulatory requirements when they are engaged 
in identical trust, brokerage, and other activities that are permitted 
by law. As more savings associations engage in trust activities, there 
is no substantive reason to subject them to different requirements. 
They should be subject to the same regulatory conditions as banks 
engaged in the same services.
    In proposed regulations, the SEC has offered to remove some aspects 
of the disparity in treatment for broker-dealer registration and the 
IAA, but still has not 
offered full parity. Dual regulation by the OTS and the SEC makes 
savings associations subject to significant additional cost and 
regulatory burden. Eliminating this regulatory burden could free up 
tremendous resources for local communities. ACB supports a legislative 
change. Such a change will ensure that savings associations will have 
the same flexibility as banks to develop future products and offer 
services that meet customers' needs.
Easing Restrictions on Interstate Banking and Branching
    ACB strongly supports removing unnecessary restrictions on the 
ability of national and State banks to engage in interstate branching. 
Currently, national and State banks may only engage in de novo 
interstate branching if State law expressly permits. ACB recommends 
eliminating this restriction. The law also should clearly provide that 
State-chartered Federal Reserve member banks might establish de novo 
interstate branches under the same terms and conditions applicable to 
national banks. ACB recommends that Congress eliminate States' 
authority to prohibit an out-of-state bank or bank holding company from 
acquiring an in-state bank that has not existed for at least 5 years. 
The new branching rights should not be available to newly acquired or 
chartered industrial loan companies with commercial parents (those that 
derive more than 15 percent of revenues from nonfinancial activities).
Other Important Issues
Interest on Business Checking
    Prohibiting banks from paying interest on business checking 
accounts is long outdated, unnecessary and anticompetitive. 
Restrictions on these accounts make community banks less competitive in 
their ability to serve the financial needs of many business customers. 
Permitting banks and savings institutions to pay interest directly on 
demand accounts would be simpler. Institutions would benefit by not 
having to spend time and resources trying to get around the existing 
prohibition. This would benefit many community depository institutions 
that cannot currently afford to set up complex sweep operations for 
their--mostly small--business customers.
Eliminating Unnecessary Branch Applications
    A logical counterpart to proposals to streamline branching and 
merger procedures would be to eliminate unnecessary paperwork for well-
capitalized banks seeking to open new branches. National banks, State-
chartered banks, and savings associations are each required to apply 
and await regulatory approval before opening new branches. This process 
unnecessarily delays institutions' plans to increase competitive 
options and increase services to consumers, while serving no important 
public policy goal. In fact, these requirements are an outdated 
holdover from the times when regulatory agencies spent unnecessary time 
and effort to determine whether a new branch would serve the 
``convenience and needs'' of the community.
Coordination of State Examination Authority
    ACB supports the adoption of legislation clarifying the examination 
authority over State-chartered banks operating on an interstate basis. 
ACB recommends that Congress clarify home- and host-state authority for 
State-chartered banks operating on an interstate basis. This would 
reduce the regulatory burden on those banks by making clear that a 
chartering State bank supervisor is the principal State point of 
contact for safety and soundness supervision and how supervisory fees 
may be assessed. These reforms will reduce regulatory costs for smaller 
institutions.
Limits on Commercial Real Estate Loans
    ACB recommends increasing the limit on commercial real estate 
loans, which applies to savings associations, from 400 to 500 percent 
of capital, and giving the OTS flexibility to increase that limit. 
Institutions with expertise in nonresidential real property lending and 
which have the ability to operate in a safe and sound manner should be 
granted increased flexibility. Congress could direct the OTS to 
establish practical guidelines for nonresidential real property lending 
that exceeds 500 percent of capital.
Loans to One Borrower
    ACB recommends eliminating the $500,000-per-unit limit in the 
residential housing development provision in the loans-to-one-borrower 
section of the Home Owners' Loan Act. This limit frustrates the goal of 
advancing residential development within the statute's overall limit--
the lesser of $30 million or 30 percent of capital. This overall limit 
is sufficient to prevent concentrated lending to one borrower/housing 
developer. The per-unit limit is an excessive regulatory detail that 
creates an artificial market restriction in high-cost areas.
Home Office Citizenship
    ACB recommends that Congress amend the Home Owners' Loan Act to 
provide that for purposes of jurisdiction in Federal courts, a Federal 
savings association is deemed to be a citizen of the State in which it 
has its home office. For purposes of obtaining diversity jurisdiction 
in Federal court, the courts have found that a Federal savings 
association is considered a citizen of the State in which it is located 
only if the association's business is localized in one State. If a 
Federal savings association has interstate operations, a court may find 
that the federally chartered corporation is not a citizen of any State, 
and therefore no diversity of citizenship can exist. The amendment 
would provide certainty in designating the State of their citizenship.
    A recent court decision has cast doubt on national banks' ability 
to access the Federal courts on the basis of diversity jurisdiction. 
Regulatory relief legislation should also clarify that national banks 
are citizens of their home States for diversity jurisdiction purposes.
Interstate Acquisitions
    ACB supports the adoption of legislation to permit multiple savings 
and loan holding companies to acquire associations in other States 
under the same rules that apply to bank holding companies under the 
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. 
This would eliminate restrictions in current law that prohibit (with 
certain exceptions) a savings and loan holding company from acquiring a 
savings association if that would cause the holding company to become a 
multiple savings and loan holding company controlling savings 
associations in more than one state.
Application of QTL to Multi-State Operations
    ACB supports legislation to eliminate state-by-state application of 
the QTL test. This better reflects the business operations of savings 
associations operating in more than one State.
Applying International Lending Supervision Act to OTS
    ACB recommends that the ILSA be amended to clarify that the ILSA 
covers savings associations. Such a provision would benefit OTS-
regulated savings associations operating in foreign countries by 
assisting the OTS in becoming recognized as a consolidated supervisor, 
and it would promote consistency among the Federal banking regulators 
in supervising the foreign activities of insured depository 
institutions.
OTS Representation on Basel Committee on Banking Supervision
    ACB recommends another amendment to the ILSA that would add OTS to 
the multiagency committee that represents the United States before the 
Basel Committee on Banking Supervision. Savings associations and other 
housing lenders would benefit by having the perspective of the OTS 
represented during the Basel Committee's deliberation.
Parity for Savings Associations Acting as Agents for Affiliated 
        Depository Institutions
    ACB recommends that the Federal Deposit Insurance Act be amended to 
give savings associations parity with banks to act as agents for 
affiliated depository institutions. This change will allow more 
consumers to access banking services when they are away from home.
Inflation Adjustment under the Depository Institution Management 
        Interlocks Act
    ACB supports increasing the exemption for small depository 
institutions under the DIMA from $20 million to $100 million. This will 
make it easier for smaller institutions to recruit high quality 
directors. The original $20 million level was set a number of years ago 
and is overdue for an adjustment.
Reducing Debt Collection Burden
    Under the Fair Debt Collection Practices Act, a debtor has 30 days 
in which to dispute a debt. ACB supports legislation that makes clear 
that a debt collector need not stop collection efforts for that 30-day 
period while the debtor decides whether or not to dispute the debt. 
This removes an ambiguity that has come up in some instances. If a 
collector has to cease action for 30 days, valuable assets, which may 
be sufficient to satisfy the debt, may vanish during the 30-day period.
Mortgage Servicing Clarification
    The FDCPA requires a debt collector to issue a ``mini-Miranda'' 
warning (that the debt collector is attempting to collect a debt and 
any information obtained will be used for that purpose) when the debt 
collector begins to attempt to collect a debt. This alerts the borrower 
that his debt has been turned over to a debt collector. However, the 
requirement also applies in cases where a mortgage servicer purchases a 
pool of mortgages that include delinquent loans. While the mini-Miranda 
warnings are clearly appropriate for true third party debt collection 
activities, they are not appropriate for mortgage servicers who will 
have an ongoing relationship with the borrower.
    ACB urges the adoption of legislation to exempt mortgage servicers 
from the mini-Miranda requirements. The proposed exemption (based on 
H.R. 314, the Mortgage Servicing Clarification Act) is narrowly drawn 
and would apply only to first lien mortgages acquired by a mortgage 
servicer for whom the collection of delinquent debts is incidental to 
its primary function of servicing current mortgages. The exemption is 
narrower than one recommended by the FTC for mortgage servicers. The 
amendment would not exempt mortgage servicers from any other 
requirement of the FDCPA.
Repealing Overlapping Rules for Purchased Mortgage Servicing Rights
    ACB supports eliminating the 90-percent-of-fair-value cap on 
valuation of purchased mortgage servicing rights. ACB's proposal would 
permit insured depository institutions to value purchased mortgage 
servicing rights, for purposes of certain capital and leverage 
requirements, at more than 90 percent of fair market value--up to 100 
percent--if the Federal banking agencies jointly find that doing so 
would not have an adverse effect on the insurance funds or the safety 
and soundness of insured institutions.
Loans to Executive Officers
    ACB recommends legislation that eliminates the special regulatory 
$100,000 lending limit on loans to executive officers. The limit 
applies only to executive officers for ``other purpose'' loans, that 
is, those other than housing, education, and certain secured loans. 
This would conform the law to the current requirement for all other 
officers, that is, directors and principal shareholders, who are simply 
subject to the loans-to-one-borrower limit. ACB believes that this 
limit is sufficient to maintain safety and soundness.
Decriminalizing RESPA
    ACB recommends striking the imprisonment sanction for violations of 
RESPA. It is highly unusual for consumer protection statutes of this 
type to carry the possibility of imprisonment. Under the ACB's 
proposal, the possibility of a $10,000 fine would remain in the law, 
which would provide adequate deterrence.
Bank Service Company Investments
    Present Federal law stands as a barrier to a savings association 
customer of a Bank Service Company from becoming an investor in that 
BSC. A savings association cannot participate in the BSC on an equal 
footing with banks who are both customers and owners of the BSC. 
Likewise, present law blocks a bank customer of a savings association's 
service corporation from investing in the savings association service 
corporation.
    ACB proposes legislation that would provide parallel investment 
ability for banks and savings associations to participate in both BSC's 
and savings association service corporations. ACB's proposal preserves 
existing activity limits and maximum investment rules and makes no 
change in the roles of the Federal regulatory agencies with respect to 
subsidiary activities of the institutions under their primary 
jurisdiction. Federal savings associations thus would need to apply 
only to OTS to invest.
Eliminating Savings Association Service Company Geographic Restrictions
    Currently, savings associations may only invest in savings 
association service companies in their home State. ACB supports 
legislation that would permit savings associations to invest in those 
companies without regard to the current geographic restrictions.
Streamlining Subsidiary Notifications
    ACB recommends that Congress eliminate the unnecessary requirement 
that a State savings association notify the FDIC before establishing or 
acquiring a subsidiary or engaging in a new activity through a 
subsidiary. Under ACB's proposal, a savings association would still be 
required to notify the OTS, providing sufficient regulatory oversight.
Authorizing Additional Community Development Activities
    Federal savings associations cannot now invest directly in 
community development corporations, and must do so through a service 
corporation. National banks and State member banks are permitted to 
make these investments directly. Because many savings associations do 
not have a service corporation and choose for other business reasons 
not to establish one, they are not able to invest in CDC's. ACB 
supports legislation to extend CDC investment authority to Federal 
savings associations under the same terms as currently apply to 
national banks.
Eliminating Dividend Notice Requirement
    Current law requires a savings association subsidiary of a savings 
and loan holding company to give the OTS 30 days' advance notice of the 
declaration of any dividend. ACB supports the elimination of the 
requirement for well-capitalized associations that would remain well-
capitalized after they pay the dividend. Under this 
approach, these institutions could conduct routine business without 
regularly conferring with the OTS. Those institutions that are not well 
capitalized would be required to prenotify the OTS of dividend 
payments.
Reimbursement for the Production of Records
    ACB's members have long supported the ability of law enforcement 
officials to obtain bank records for legitimate law enforcement 
purposes. In the Right to Financial Privacy Act of 1978, Congress 
recognized that it is appropriate for the government to reimburse 
financial institutions for the cost of producing those records. 
However, that Act provided for reimbursement only for producing records 
of individuals and partnerships of five or fewer individuals. Given the 
increased demand for corporate records, such as records of 
organizations that are allegedly fronts for terrorist financing, ACB 
recommends that Congress broaden the RFPA reimbursement language to 
cover corporate and other organization records.
    ACB also recommends that Congress clarify that the RFPA 
reimbursement system applies to records provided under the 
International Money Laundering Abatement and Anti-Terrorist Financing 
Act of 2001 (Title III of the USA PATRIOT Act). Because financial 
institutions will be providing additional records under the authority 
of this new act, it is important to clarify this issue.
Extending Divestiture Period
    ACB recommends that unitary savings and loan holding companies that 
become multiple savings and loan holding companies be provided 10 years 
to divest nonconforming activities, rather than the current 2-year 
period. This would be consistent with the time granted to new financial 
services holding companies for similar divestiture under the Gramm-
Leach-Bliley Act. The longer time gives these companies time to conform 
to the law without forcing a firesale divestiture.
Restrictions on Auto Loan Investments
    Federal savings associations are currently limited in making auto 
loans to 35 percent of total assets. ACB recommends eliminating this 
restriction. Removing this limitation will expand consumer choice by 
allowing savings associations to allocate additional capacity to this 
important segment of the lending market.
Streamlined CRA Examinations
    ACB strongly supports amending the Community Reinvestment Act to 
define banks with less than $1 billion dollars in assets as small banks 
and therefore permit them to be examined with the streamlined small 
institution examination. According to a report by the Congressional 
Research Service, a community bank participating in the streamlined CRA 
exam can save 40 percent in compliance costs. Expanding the small 
institution exam program will free up capital and other resources for 
almost 1,700 community banks across our Nation that are in the $250 
million to $1 billion asset-size range, allowing them to invest even 
more into their local communities.
Credit Card Savings Associations
    Under current law, a savings and loan holding company cannot own a 
credit card savings association and still be exempt from the activity 
restrictions imposed on companies that control multiple savings 
associations. However, a savings and loan holding company could charter 
a credit card institution as a national or State bank and still be 
exempt from the activity restrictions imposed on multiple savings and 
loan holding companies. ACB proposes that the Home Owners' Loan Act be 
amended to permit a savings and loan holding company to charter a 
credit card savings association and still maintain its exempt status. 
Under this proposal, a company could take advantage of the efficiencies 
of having its regulator be the same as the credit card institution's 
regulator.
Protection of Information Provided to Banking Agencies
    Recent court decisions have created ambiguity about the privileged 
status of information provided by depository institutions to bank 
supervisors. ACB recommends the adoption of legislation that makes 
clear that when a depository institution 
submits information to a bank regulator as part of the supervisory 
process, the depository institution has not waived any privilege it may 
claim with respect to that information. Such legislation would 
facilitate the free flow of information between banking regulators and 
depository institutions that is needed to maintain the safety and 
soundness of our banking system.
Conclusion
    I wish to again express ACB's appreciation for your invitation to 
testify on the importance of reducing regulatory burdens and costs for 
community banks. We strongly support the Committee's efforts in 
providing regulatory relief, and look forward to working with you and 
your staff in crafting legislation to accomplish this goal.

                               ----------

                   PREPARED STATEMENT OF DAVID HAYES
           President and CEO, Security Bank Dyersburg, TN and
   Chairman, Independent Community Bankers of America, Washington, DC
                             June 21, 2005

    Mr. Chairman, Ranking Member Sarbanes, and Members of the 
Committee, my name is David Hayes, Chairman of the Independent 
Community Bankers of America (ICBA) \1\ and President and CEO of 
Security Bank; a 135 million community bank in Dyersburg, Tennessee. I 
am pleased to appear today on behalf of ICBA and its nearly 5,000 
members to testify on proposals to reduce the regulatory burden on 
banks, thrifts, and credit unions.
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    \1\ The Independent Community Bankers of America represents the 
largest constituency of community banks of all sizes and charter types 
in the Nation, and is dedicated exclusively to representing the 
interests of the community banking industry. ICBA aggregates the power 
of its members to provide a voice for community banking interests in 
Washington, resources to enhance community bank education and 
marketability, and profitability options to help community banks 
compete in an ever-changing marketplace. For more information, visit 
ICBA's website at www.icba.org.
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    We are especially pleased by the leadership of Senator Crapo, who 
is drafting legislation for the Committee. Senator Crapo has taken a 
comprehensive look at all of the regulatory relief ideas that were 
recommended to this Committee last year. The matrix that Senator Crapo 
developed after that hearing is a useful compendium of these ideas. 
This broad approach is essential because other efforts, such as the 
bill the House passed last year (H.R. 1375) included little true relief 
for community banks.
    To add impetus to the effort to broaden the scope of regulatory 
relief, ICBA worked closely with Representative Jim Ryun on his 
Community Banks Serving Their Communities First Act. The Communities 
First Act (H.R. 2061) includes regulatory and tax relief that is 
critical to community banks and their customers. It includes additional 
provisions that apply to all banks and bank customers. Virtually all of 
the regulatory provisions in the bill are included in Senator Crapo's 
matrix. All but one are items that the other financial groups have 
agreed to include on a list of 78 consensus items agreed to as part of 
the regulatory burden reduction project being led by FDIC Vice Chairman 
John Reich. ICBA hopes that Senator Crapo will include many items from 
H.R. 2061 in the bill he is developing for this Committee.\2\
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    \2\ In a similar vein, ICBA plans to work with the Senate Finance 
and House Ways and Means Committees on the tax relief components of 
H.R. 2061.
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    Our testimony will focus on the specific proposals in the 
Communities First Act and explain why they should be included in this 
Committee's new regulatory relief bill. Before that, I will briefly 
explain why regulatory relief is so important to community banks, their 
customers, and the communities they serve.
Community Banks Need Regulatory Relief
    Since 1992, the market share of community banks with less than $1 
billion in assets has dropped from about 20 percent of banking assets 
to 13 percent. And the market share of large banks with more than $25 
billion in assets has grown from about 50 percent to 70 percent. 
Community bank profitability also lags large banks. Obviously part of 
the reason is due to economies of scale that community banks have 
always accepted as a fact of life. However, in recent years, the 
disproportionate impact of the ever-mounting regulatory burden is 
significantly impacting community bank profitability. I agree with Vice 
Chairman Reich that it is a leading cause of consolidation in our 
industry.
    At the same time credit unions, with their unfair tax-exempt 
advantages and favorable legislation loosening membership restrictions, 
have made inroads into small banks' market segments. Credit union 
assets have more than tripled since 1984, from $194 billion to $611 
billion, whereas total small bank assets (less than $1 billion) have 
decreased.
    An analysis of these trends conducted by two economists at the 
Federal Reserve Bank of Dallas concluded that the competitive position 
and future viability of small banks is questionable.\3\ The authors 
suggest that the regulatory environment has evolved to the point of 
placing small banks at an artificial disadvantage to the detriment of 
their primary customers--small business, consumers, and the 
agricultural community.
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    \3\ Gunther and Moore, ``Small Banks' Competitors Loom Large,'' 
Southwest Economy, Federal Reserve Bank of Dallas, Jan./Feb. 2004.
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    While larger banks have hundreds or thousands of employees to throw 
into the regulatory breach, a community bank with $100 million in 
assets typically has just 30 full time employees, a $200 million bank 
about 60 employees. If my bank is faced with a new regulation, we must 
train one or more of our current employees to comply, and complying 
with the new regulation will take time away from customer service. 
Unlike larger institutions, we cannot just add a new person and pass 
the costs on to our customers.
    It's not just smaller community banks that are feeling the pain. 
Larger community banks as well are drowning in paperwork and regulatory 
burden. They are hiring 2 or 3 full-time employees to do nothing but 
Bank Secrecy Act compliance. They have had to expend hundreds of 
thousands of dollars for Sarbanes-Oxley Act compliance.
    This is not just about numbers and costs. I assure you we are not 
crying ``wolf.'' If we do not get meaningful relief soon, more and more 
community banks will throw up their hands, and give up their 
independence.
    Why should policymakers care about community banks? First, 
community banks play a strong role in consumer financing and an 
especially vital role in small 
business lending. Commercial banks are the leading suppliers of credit 
to small business, and community banks account for a disproportionate 
share of total bank lending to small business, the primary job-creating 
engine of our economy. Banks with less than $1 billion in assets make 
37 percent of bank small business loans, nearly three times their share 
(13 percent) of bank industry assets. And they account for 64 percent 
of total bank lending to farms.
    Second, community banks that fund local businesses are particularly 
attuned to the needs of their communities and are uniquely equipped to 
facilitate the local economic development process, which can be time-
consuming and resource intensive. Community bankers provide tremendous 
leadership in their communities, which is critical to economic 
development and community revitalization.
    Community bankers serve on hospital boards, attend economic 
development corporation meetings, and engage in similar activities. You 
could argue that this is not an efficient and cost-effective way to 
spend our time, but for most community banks, our survival depends on 
the economic vitality of our communities. Branches of large megabanks 
do not provide this same commitment to the community.
Bank Secrecy Act Compliance
    While our testimony today does not include legislative 
recommendations for changes in the Bank Secrecy Act, this certainly 
does not mean that community bankers do not have serious concerns about 
how the Act is being enforced. In fact, it is topic 1A when bankers 
discuss the regulatory burden. However, we believe the agencies have 
authority to address most of the problems. These center around whether 
or not there is a ``zero tolerance'' examination climate, as well as 
uncertainty about what the agencies expect from banks.
    ICBA recently filed a comment letter with the banking agencies 
under the EGRPRA process with a number of recommendations regarding BSA 
compliance, including:

 Bank Secrecy Act Administration. Issue additional guidelines 
    and provide reference tools for compliance so that bankers and 
    examiners know what is expected. (The anticipated June 30, 2005 
    revised examination procedures and outreach programs for bankers 
    and examiners should help, but balance is clearly needed.)
 BSA Currency Transaction Reporting. Increase the filing 
    threshold from $10,000 to $30,000 to eliminate unnecessary filing. 
    Improve the CTR exemption process so banks use it.
 Suspicious Activity Reporting. Simplify the filing process and 
    issue easily accessible guidance on when banks should report.

    At this point, ICBA strongly urges this Committee to engage in 
thorough oversight to ensure that BSA compliance does not impose an 
unreasonable and unproductive burden on the economy and truly achieves 
its important goals.
The Credit Union Bill is Not Like the Communities First Act
    Several weeks ago the credit union industry had introduced what it 
is calling a regulatory relief bill. Some representatives of that 
industry compared their bill (H.R. 2317) with the Communities First 
Act. The bills are not at all comparable. The credit union bill is a 
powers enhancement proposal, while the Communities First Act includes 
no new powers for anyone. CFA is strictly designed to lift the 
regulatory and tax burden for community banks and help level the 
playing field. In contrast, the credit union bill would, among other 
things substantially increase the ability of credit unions to make 
loans to businesses. Therefore, ICBA is unalterably opposed to H.R. 
2317. Congress should eliminate the credit unions' unfair tax and 
regulatory advantages over community banks, not give them even more new 
powers.
    There is one area that we believe credit unions very much need 
regulatory burden relief. Their regulator, the National Credit Union 
Administration, is undermining credit unions' ability to choose to 
convert to a mutual thrift charter. Recently, NCUA invalidated a vote 
by a Texas credit union's members to convert solely because of the way 
the required disclosure was folded. This is just the latest example of 
NCUA's efforts to unreasonably block credit union conversions. We urge 
Congress to exercise its oversight role and, if necessary, act to 
require the NCUA to adhere to the statutory requirement to allow credit 
unions to convert their charters.
Industrial Loan Companies
    Industrial loan companies (ILC's) are hybrid financial charters 
that are exempt from the Bank Holding Company Act (BHCA). This 
exemption gives ILC's certain preferential authorities over other 
financial charters, including the authority to be owned by commercial 
firms. This violates the long-standing principle of maintaining the 
separation of banking and commerce, most recently reaffirmed by the 
Gramm-Leach-Bliley Act. ICBA believes that the best way to deal with 
and eliminate the mixing of banking and commerce made possible by the 
ILC loophole is to close it by bringing ILC's under the BHCA.
    Given that ILC's already enjoy extraordinary authorities due to 
their BHCA 
exemption, we do not believe these authorities should be expanded. In 
recent testimony before the House Financial Services Committee, Federal 
Reserve Board Governor Donald Kohn reiterated the Fed's long-standing 
support for this position. ``Stated simply, if ILC's want to benefit 
from expanded powers and become functionally indistinguishable from 
other insured banks, then they and their corporate parents should be 
subject to the same rules that apply to the owners of other full-
service banks.'' \4\ We strongly support this position.
---------------------------------------------------------------------------
    \4\ Statement of Donald L. Kohn, Member, Board of Governors of the 
Federal Reserve System, June 9, 2005.
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Specific Legislative Recommendations
    ICBA strongly supports the bank regulatory reduction project 
mandated by the Economic Growth and Paperwork Reduction Act of 1996 
(EGRPRA) and commends the EGRPRA task force, led by FDIC Vice Chairman 
Reich, for the excellent job it has done to identify those banking 
regulations that are outdated, unnecessary, or unduly burdensome. 
Through the public comment process, banker outreach meetings, and the 
EGRPRA website, the project has generated a large number of 
recommendations for reducing the regulatory burden on banks. While the 
bank regulators have been working hard to identify burdens they can 
reduce on their own, they report to us that there are severe limits on 
what they can do without help from Congress. Many burdensome and 
outdated regulatory requirements are hard-wired into Federal statute.
    The Communities First Act includes a variety of legislative 
proposals to reduce the burden of regulation on community banks. Many 
of the following legislative changes from H.R. 2061 build on the 
concept of a tiered regulatory and supervision system recommended by 
Vice Chairman Reich by targeting relief to institutions based on their 
size. Others are of special concern to community banks, but would apply 
to all banks, regardless of size. All would go a long way toward 
improving community banks' ability to compete and serve local 
communities.
Home Mortgage Disclosure Act
    The Communities First Act would make several changes to the Home 
Mortgage Disclosure Act. Section 101 would increase two reporting 
exemption levels from $30 million and $34 million \5\ in assets to $250 
million. While this may appear to be a substantial increase, the vast 
majority of industry assets would remain covered. In fact, the FDIC 
reports that as of March 31, 2004, banks and thrifts with $250 million 
or less in assets held only 6.7 percent of industry assets. The 
amendment would index the $250 million level using the existing 
procedure in HMDA.
---------------------------------------------------------------------------
    \5\ The $34 million began as a $10 million exemption, but has been 
increased by statute and by the Federal Reserve using an inflation-
based index.
---------------------------------------------------------------------------
    Title II of H.R. 2061 makes several additional changes in HMDA that 
could apply to a bank of any size, depending on its activity or 
location. Section 202 would exempt banks with fewer than 100 reportable 
loan applications per year per category. This would lift the burden 
from banks for which mortgage lending is not a major business line.
    Banks that operate outside Metropolitan Statistical Areas are 
exempt from HMDA. Section 202 would also allow the Federal Reserve to 
develop a definition of Metropolitan Statistical Area for HMDA 
purposes, instead of using Census Bureau definition created for 
entirely different reasons. Current law requires the use of the Census 
Bureau definition, so certain areas that are truly rural are included 
in metropolitan statistical areas. This may serve the purposes of the 
Census Bureau, but the Federal Reserve should have the flexibility to 
modify these definitions when determining which areas must be covered 
by HMDA. This would avoid unnecessarily covering certain rural banks 
that are relatively close to metropolitan areas.
    Finally, Section 202 would benefit all banks that must continue to 
report HMDA data by requiring the Federal Reserve to review and 
streamline the data collection and reporting requirements every 5 
years.
    It is important to note that the banking industry has included each 
of these HMDA provisions on its list of consensus items for inclusion 
in a regulatory relief bill in its response to Senator Crapo.
Reports of Condition (Call Reports) & BHC Policy Statement
    Section 102 of the Communities First Act would permit highly rated, 
well-capitalized banks with assets of $1 billion or less to file a 
short call report form in two quarters of each year. This would reduce 
the reporting burden for these banks, while still providing the banking 
agencies with the data they need.
    Section 204 would benefit all banks by directing the agencies to 
reduce or eliminate filings that are not outweighed by the benefits to 
safety and soundness or the ability of the FDIC and other regulators to 
accurately determine the financial condition and operations of the 
reporting institutions. ICBA believes that this Congressional directive 
would reverse the repeated increases in the reporting burden 
imposed when agency economists and financial analysts seek to add 
``just one more'' item to the call reports. While many of these items 
provide interesting information, we question whether private 
companies--banks--should have to provide nonessential information under 
threat of government sanction.
    The current call report instructions and schedules consist of 458 
pages. While extensive and time consuming to produce, these quarterly 
filings by community banks are not essential to the agencies. The fact 
is that in most community banks, the world just does not change that 
dramatically between March 31 and June 30 of each year. The FDIC will 
not lose track of us if every other quarter we file a short form 
instead of the extensive report and Chairman Greenspan will still be 
able to conduct monetary policy without our real time data. On the 
other hand, this would significantly reduce the reporting burden for 
banks like mine, while still providing the banking agencies with the 
data they need.
    Section 104 of the Communities First Act would direct the Federal 
Reserve to make bank holding companies with assets up to $1 billion 
eligible for the Small Bank Holding Company Policy Statement on 
Assessment of Financial and Managerial Factors. To qualify, the holding 
company must also (1) not be engaged in any nonbanking activities 
involving significant leverage, and (2) not have a significant amount 
of outstanding debt that is held by the general public. This change 
would reduce the paperwork burden on these small, noncomplex, holding 
companies, while maintaining the Federal Reserve's ability to obtain 
holding company information for larger institutions.
    Again, the banking industry has included each of these 
recommendations as consensus items on the list for Senator Crapo.
Sarbanes-Oxley Act, Section 404
    Section 404 of Sarbanes-Oxley imposes tremendous unexpected costs 
on virtually all companies. A recent ICBA survey showed that--including 
outside audit fees, consulting fees, software costs, and vendor costs--
the average community bank will spend more than $200,000 and devote 
over 2,000 internal staff hours to comply with the internal control 
attestation requirements of Section 404. Section103 of the Communities 
First Act recognizes that these added costs are unnecessary for 
community banks. First, unlike other companies, banks have been under 
similar requirements for years, though with an exemption for banks 
under $500 million in assets. Congress imposed these requirements on 
banks after the crises of the 1980's. So, Section 404 is redundant when 
imposed on the banking sector. Second, unlike other companies, banks 
are closely supervised and examined by Federal officials on a regular 
basis and the adequacy of their internal controls is assessed by bank 
examiners. Companies like Enron and WorldCom were not regulated the 
same way. Not only is this burden redundant and unnecessary for 
community banks, it is a key factor in undermining their ability to 
remain independent.
    The banking industry has also agreed that this proposal is a 
consensus item on the list for Senator Crapo.
Director Interlocks and Loans to Officers
    Section 105 of the Communities First Act increases the size of bank 
eligible for an exemption from interlocking director prohibitions from 
$20 million to $500 million. It has always been a challenge for the 
smallest institutions to find qualified directors. Now that directors' 
responsibilities have increased under the Sarbanes-Oxley Act and other 
requirements, this has become a challenge even for larger community 
banks.
    Section 108 of the Communities First Act allows banks with less 
than $1 billion in total assets to make loans to executive officers, in 
the aggregate, up to two times capital. The current asset size limit is 
$100 million in deposits. This is not a tenfold increase, because a 
bank with $1 billion in assets could have considerably less than that 
in deposit liabilities.
    Section 205 would help all banks by increasing the special 
regulatory lending limit on loans to executive officers for loans other 
than those for housing, education, and certain secured loans to 
$250,000.\6\ This limit has not been adjusted for over 10 years, so 
this amendment simply makes an appropriate adjustment for inflation.
---------------------------------------------------------------------------
    \6\ Executive officers would remain subject to the same limit on 
directors and principal shareholders, the loans-to-one-borrower limit, 
and to the requirement that loans to insiders not be on preferential 
terms.
---------------------------------------------------------------------------
    These adjustments are all included in the banking industry's 
consensus recommendations to Senator Crapo.
Protection for Community Banks Under SIPC
    The Securities Investor Protection Act does not provide immediate 
protection to community banks that suffer losses when a securities firm 
fails. Current law exempts commercial banks from SIPC coverage and 
assumes that all commercial banks are in a position to fend for 
themselves in such cases. This may be true for large commercial banks, 
but it is less so for community banks.
    Section 106 of the Communities First Act would provide banks with 
assets up to $5 billion the same protection afforded other investors 
and other depository institutions for their brokerage account assets 
under the SIPA.
    This is included in the banking industry's consensus 
recommendations to Senator Crapo.
Examination Schedules
    Section 107 of the Communities First Act would give Federal 
regulators flexibility to determine the examination interval for well-
rated, well-capitalized banks with up to $1 billion in assets. This 
would replace the current 18-month exam schedule for banks with less 
than $250 million in assets. The banking industry supported this as a 
consensus recommendation.
    Section 110 would increase CRA examination intervals for banks up 
to $1 billion.\7\
---------------------------------------------------------------------------
    \7\ It is important to note that this examination interval is a 
separate issue from the question of examination procedures for banks 
under $1 billion in assets. The regulatory agencies have already 
adopted, or have proposed adopting those streamlined procedures.
---------------------------------------------------------------------------
    Both of these changes would help strong, well-run community banks 
focus on service to their communities rather than responding to 
unnecessarily frequent examinations.
Truth in Lending Right of Rescission
    Section 201 of the Communities First Act calls for several changes 
that would expedite consumers' access to their funds without 
undermining the protection that the 3-day right of rescission provides. 
They would apply without regard to the size of the institution 
involved.
    Subsection (a) directs the Federal Reserve to provide exemptions 
when the lender is a federally insured depository institution. The 
right of rescission was imposed to protect consumers against high-
pressure loan sellers often connected with illicit home improvement 
operations or similar schemes. The loan programs of federally insured 
institutions are, obviously, run on a far different basis and are 
subject to regular scrutiny by banking regulators. Our customers know 
exactly what they have applied for and are receiving. They are 
frequently annoyed when they hear they have to wait an additional 3 
days for their funds.
    Subsection (b) addresses another source of annoyance for consumers, 
the fact that borrowers have to wait 3 days to get the benefit of a 
refinancing transaction even if they are not taking any cash out of the 
deal. It makes no sense to insist that a consumer wait to begin taking 
advantage of a lower interest rate or different term, which are the 
typical purposes of these kinds of transactions.
    Finally, Subsection (c) eliminates the right of rescission when a 
borrower is opening up an open-ended line of credit. The very design of 
the product grants consumers a perpetual right of rescission if that is 
what they want. The consumer can simply refrain from drawing on the 
account for 3 days or longer. On the other hand, consumers who need 
immediate access to their line of credit should have it.
    The banking industry has included the provisions of Section 201 in 
its consensus recommendations.
Privacy Notices
    One of the most wasteful provisions of the Gramm-Leach-Bliley Act 
has been the requirement that financial institutions send annual 
privacy notices to their customers. The law requires them to be written 
in impossible-to-understand legalese. The industry and agencies have 
been working on ways to simplify this language, but the task is 
daunting. However, Section 203 of the Communities First Act offers a 
measure that would greatly reduce the number of these notices that must 
be mailed. It simply says that if an institution does not share 
information (except for narrow purposes, such as providing information 
to an outside data processing firm) and has not changed its policies, 
it need not send out the annual notices. While any size institution 
could take advantage of this provision, community bankers are 
especially interested in having this option. I can tell you that my 
customers and their trash collectors would also be grateful.
    Like virtually all of the regulatory provisions of the Communities 
First Act, this section is a banking industry consensus item.
Impact of New Regulations on Community Banks
    Neither we--nor you--can anticipate all of the potential new 
burdens that future laws and regulations may impose on community banks. 
Therefore, Section 109 of the Communities First Act directs the banking 
agencies to take into account the effect any new regulation, 
requirement, or guideline would have on community banks. This sends a 
clear message from Congress to the agencies that the public policy of 
the United States is firmly committed to maintaining a strong, vibrant, 
community bank sector for our economy.
Conclusion
    ICBA greatly appreciates this opportunity to testify on this 
important issue. In a major way, the future of community banking 
depends on what you do. The banking industry is united on the need for 
regulatory burden relief. Indeed, virtually all the proposals in 
Representative Ryun's Communities First Act are included in the 
industry's recommendations to Senator Crapo. The bill simply highlights 
those provisions that are important to community banks. We strongly 
urge Senator Crapo to include them in his regulatory relief bill. That 
would provide real benefits to community banks and the communities and 
customers that they serve.

                               ----------

               PREPARED STATEMENT OF CHRISTOPHER A. KORST
               Senior Vice President, Rent-A-Center, Inc.
                             June 21, 2005

    The following written statement is submitted in support of S. 603, 
the Consumer Rental-Purchase Agreement Act, on behalf of the Coalition 
for Fair Rental Regulation.
    S. 603 has been introduced once again in this Congress by Senator 
Mary Landrieu, and cosponsored by a number of other Senators, 
Republican and Democrat alike, including Senators Shelby and Johnson of 
this Committee. That legislation, standing alone or as part of an 
overall regulatory relief package, proposes to regulate the rent-to-
own, or rental-purchase, transaction, for the first time at the Federal 
level. In introducing this legislation, Senator Landrieu and her 
colleagues have successfully struck a balance between the interests of 
the consumers on the one hand and the rental merchants on the other.
    For the record, it should be noted that this Committee first passed 
rental-purchase legislation in 1984. That bill, sponsored by Senators 
Hawkins and Gorton, would have required just a few disclosures in 
rental-purchase contracts, and would have provided only a minimum of 
other consumer protections. By way of contrast, S. 603 would mandate 10 
contract disclosures, would require the disclosure of key financial and 
other information in advertisements and on price tags in store 
locations, in addition to the many substantive consumer protections the 
bill would 
establish. In this regard, it is fair to say that if enacted, this 
legislation would represent one of the most comprehensive, substantive 
Federal consumer protection laws ever enacted.
Introduction to the RTO Industry and S. 603
    The rent-to-own, or rental-purchase industry, offers household 
durable goods--appliances, furniture, electronics, computers, and 
musical or band instruments are our primary product lines--for rent on 
a weekly or monthly basis. Customers are never obligated to rent beyond 
the initial term, and can return the rented product at any time without 
penalty or further financial obligation. Of course, customers also have 
the option to continue renting after the initial or any renewal rental 
period, and can do so simply by paying an additional weekly or monthly 
rental payment in advance of the rental period. In addition, rent-to-
own consumers have the option to purchase the property they are 
renting, either by making the required number of renewal payments set 
forth in the agreement, or by exercising an early purchase option, 
paying cash for the item at any time during the rent-to-own 
transaction.
    Our companies offering household durables typically provide 
delivery and set up of the merchandise, as well as service and 
replacement products, throughout the rental period. We do not check the 
credit of our customers, and do not require down payments or security 
deposits. Consequently, this is a transaction that is very easy to get 
into and out of, ideal for the customer that wants and/or needs 
financial flexibility that only this unique, hybrid rental-and-purchase 
transaction affords.
    The rent-to-own transaction appeals to a wide variety of customers, 
including parents of children who this week want to learn to play the 
violin, only to find that, 2 weeks later, the child is more adept at--
and interested in--fiddling around. Military personnel who are 
frequently transferred from base to base, who want nice things for 
their apartments or homes but who often cannot afford, or do not want, 
to purchase these items, use rent-to-own. College students sharing 
apartments or dorms rent furniture, appliances, and electronics from 
rent-to-own companies. The transaction serves the needs of campaign 
offices, summer rentals, Super Bowl and Final Four parties, and other 
similar short-term needs or wants.
    Importantly, however, this transaction is also frequently used by 
individuals and families who are just starting out and have not yet 
established good credit, or who have damaged or bad credit, and whose 
monthly income is insufficient to allow them to save and make major 
purchases with cash. For these consumers, rent-to-own offers an 
opportunity to obtain the immediate use of, and eventually ownership if 
they so desire, of things that most of the rest of us take for 
granted--good beds for our children to sleep on, washers and dryers so 
they do not have to spend all weekend at the Laundromat, dropping coins 
into machines that they will never own. Computers so the kids can keep 
up in school, decent furniture to sit on and eat at, and so on. Rent-
to-own gives these working class individuals and families a chance, 
without the burden of debt, and with all the flexibility they need to 
meet their sometimes uncertain economic circumstances. This is 
certainly a more viable alternative than garage sales, flea markets, 
and second-hand stores.
    Rent-to-own industry statistics indicate that approximately one in 
four transactions results in the renter electing to acquire ownership 
of the rented goods. In the other 75 percent, according to the industry 
numbers, customers rent for a short period of time and then return the 
goods to the store, typically in just a few weeks or months.
    There are approximately 8,000 rent-to-own furniture, appliance, and 
electronic stores throughout the country, and in Puerto Rico. 
Additionally, there are 5,000 or so musical instrument stores. The 
majority of companies operating in this business are ``mom-and-pop'' 
family owned businesses, with one or two locations in a particular city 
or town, although slightly less than one-half of all stores are owned 
by major, multistate corporations.
    Over the past 20 years, there has been a healthy and vigorous 
public debate, played out primarily at the State level, and to some 
extent here in Washington as well, about the appropriate method of 
regulating this transaction. Some individuals and groups have argued 
that rent-to-own is most similar to a credit sale, and consequently 
should be regulated as such. However, as you have just heard me 
describe, this transaction differs from consumer credit in a number of 
significant 
respects, most importantly in that the rent-to-own customer is never 
obligated to continue renting beyond the initial rental term, and has 
the unilateral right to terminate the agreement and have the products 
picked up at any time, without penalty. This is the critical 
distinction--under traditional credit transactions, the consumer must 
make all of the payments or risk default, repossession, deficiency 
judgments and, in worst cases, damaged credit and personal bankruptcy. 
By way of stark contrast, the rent-to-own customer enjoys complete 
control over his or her use of the rented goods, and the terms of the 
rental transaction itself.
    Forty-seven State legislatures have enacted rent-to-own specific 
legislation, beginning with Michigan in 1984. All of these legislative 
bodies concluded that this unique transaction is not a form of consumer 
credit, but instead is something very different. S. 603 is consistent 
with the approach taken by these various State laws. However, this 
proposal would set a floor of regulation, beyond which States would be 
free to regulate if the State legislatures saw the need to do so in 
response to local concerns and conditions. And in fact, any number of 
the existing State laws provide greater consumer protections than those 
imbedded in this bill, and those stronger regulatory frameworks would 
remain controlling in those States if this bill were to be enacted. 
Finally, if enacted, this legislation would align Federal consumer 
protection law with Federal tax law, which treats rent-to-own 
transactions as true leases and not as credit sales for income 
reporting and inventory depreciation purposes.
Summary of Bill Contents
    This bill strikes a balance between the needs of consumers for 
protection from overreaching and unscrupulous merchants, and the need 
to establish and maintain a fair and balanced competitive marketplace 
in which honest businessmen and--women can survive and thrive.
    The bill does 5 major things:

 One, it defines the transaction in a manner that is consistent 
    with existing State rent-to-own laws, as well as Federal tax 
    provisions. As an aside, this definition is also consistent with 
    the views of both the Federal Reserve Board Staff and the Federal 
    Trade Commission, as expressed in their testimony before the House 
    Financial Services Committee in the 107th Congress.
 Two, it provides for comprehensive disclosure of key financial 
    terms in advertising and on price cards on merchandise displayed in 
    these stores, as well as in the body of the rental contracts 
    themselves. These disclosure requirements were adopted in part from 
    the recommendation of the FTC in its seminal report on the rent-to-
    own industry from 2000. Overall, these requirements significantly 
    exceed the disclosure mandates under Truth-in-Lending as well as 
    the Federal Consumer Lease Act.
 Three, the bill establishes a list of prohibited practices in 
    the rent-to-own industry, a list similar in content and substance 
    to the practices prohibited under the Federal Trade Commission Act, 
    and under most State deceptive trade practices statutes. These 
    provisions are unique--neither the Truth-in-Lending Act (TILA) nor 
    the Consumer Lease Act (CLA) contains similar provisions.
 Four, the bill adopts certain universal substantive 
    regulations shared by all of the existing State rental laws. For 
    example, the bill would mandate that consumers who have terminated 
    their rental transactions and returned the goods to the merchant be 
    provided an extended period of time in which to ``reinstate'' that 
    terminated agreement--that is, to come back to the store and rent 
    the same or similar goods, starting on the new agreement at the 
    same place the customer left off on the previous transaction.
 Finally, the bill adopts the remedies available to aggrieved 
    and injured consumers under the Truth-in-Lending Act.
    In summary, this legislation would go farther in providing 
substantive protections for rent-to-own consumers than does any other 
Federal consumer protection law on the books today.
Preemption
    If enacted, this legislation would serve only to establish a floor 
of regulation of the rent-to-own transaction. State legislatures would 
have full opportunity to pass stronger laws and regulations, modify 
existing statutes, or even outlaw the transaction entirely if that is 
what those bodies believed was appropriate. In this respect, it must be 
clear that this bill does not preempt State law. However, it should 
also be recognized and understood that this bill would finally 
establish a Federal or national definition of the term ``rental-
purchase,'' consistent with the definitions found in these various 
existing State statutes and within the Internal Revenue Code. Just as 
is the case under other Federal consumer protection laws, including 
TILA and the CLA, States would not be permitted to define or 
``mischaracterize'' the rent-to-own transaction in a manner that would 
be inconsistent with the definition in this bill.
The Argument Against APR Disclosures
    Some groups have called for any Federal rental-purchase legislation 
to include the disclosure of some ``imputed annual percentage rate'' in 
these agreements. The industry believes that this view is misguided, 
for several reasons. First, in order for a transaction of any kind to 
include an interest component, there must be debt--that is, the 
consumer must owe a sum certain, and must be unconditionally obligated 
to repay that sum. That is simply not the case under the typical rent-
to-own transaction. Second, the notion of ``imputed interest'' misleads 
as to the true economics of the RTO transaction, which has many 
benefits, services, and options that traditional credit transactions 
just do not offer. For example, in addition to the immediate use of the 
rented merchandise, delivery and set up are included in the price, as 
is maintenance on the merchandise throughout the rental. If the item 
cannot be repaired at the customers' homes, then replacement products 
are delivered for use while the original rental item is being repaired. 
Additionally, as noted several times, rental customers always enjoy the 
unfettered right to terminate the transaction and return the products 
without penalty, as well as the right to reinstate such terminated 
agreements.
    All of these additional benefits, services and options have value 
to the consumer. As the Federal Trade Commission noted in its seminal 
report on the rent-to-own industry in 2000:

        Unlike a credit sale, rent-to-own customers do not incur any 
        debt, can return the merchandise at any time without obligation 
        for the remaining payments, and do not obtain ownership rights 
        or equity in the merchandise until all payments are completed.
        There are . . . some practical considerations that suggest that 
        an APR disclosure requirement for rent-to-own transactions may 
        be difficult to implement, and could result in inaccurate 
        disclosures that mislead consumers.
        In addition to the cash price of the merchandise itself, the 
        calculation of the APR also would have to take into account the 
        additional consumer services and options bundled with the 
        merchandise. Rent-to-own dealers typically include delivery, 
        pickup, repair, loaner, and other services in the basic rent-
        to-own rental rate. Many traditional retailers charge extra 
        fees for these services, reflecting the value to the consumer 
        and the cost to the seller. The return option provided with 
        rent-to-own transactions also provides value to consumers and 
        imposes costs on dealers, including the cost of retrieving, 
        refurbishing, restocking, and rerenting the returned 
        merchandise. In a traditional retail credit sale, additional 
        fees for these services and options, over and above the cash 
        price of the merchandise itself, would be considered part of 
        the amount financed, not part of the service charge. Similarly, 
        additional fees for these services and options should be 
        considered part of the amount financed for rent-to-own 
        transactions.''

    Two things are clear from the FTC Report. One, an imputed APR is an 
inappropriate and misleading disclosure in rental-purchase transactions 
because there is simply no debt involved in this transaction. Two, 
studies by the National Consumer Law Center and the U.S. Public 
Interest Research Group, purporting to show ``interest rates'' in rent-
to-own transactions, fail to take into account the totality of the 
transaction and its benefits and services, and consequently must be 
considered misleading at best.
    In conclusion, S. 603 is strongly supported by the rental-purchase 
merchants throughout the country because it represents fair and 
balanced regulation of the rent-to-own transaction at the Federal 
level. This legislation is necessary so that a uniform public and 
economic policy is established where these transactions are concerned. 
States should and would have the ability to enact more stringent 
regulation of the transaction in response to local concerns and 
conditions if the need arises. However, by defining this transaction 
under Federal consumer protection law, this Congress extends its 
traditional role in consumer regulation, as first established with the 
passage of the Truth-in-Lending Act nearly 40 years ago.

                               ----------

                  PREPARED STATEMENT OF CHRIS LOSETH *
        President & CEO, Potlatch No.1 Federal Credit Union and
    Chairman, Idaho Credit Union League Government Affairs Committee
           on behalf of the Credit Union National Association
                             June 21, 2005

    Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, and other 
Members of the Committee, on behalf of the Credit Union National 
Association (CUNA), I appreciate this opportunity to come before you 
and express the association's views on legislation to help alleviate 
the regulatory burden under which all insured financial institutions 
operate today.
---------------------------------------------------------------------------
    * Appendix held in Committee files.
---------------------------------------------------------------------------
    CUNA is the largest credit union advocacy organization, 
representing over 90 percent of our Nation's approximately 9,000 State 
and Federal credit unions and their 86 million members.
    I am Chris Loseth, President & CEO of Potlatch No.1 Federal Credit 
Union and Chairman of the Idaho Credit Union League's Government 
Affairs Committee. Potlatch No.1 Federal Credit Union is a low-income 
community chartered credit union, serving a total of thirteen 
counties--eleven in Idaho and two in Washington. Five of these counties 
are included in our low-income community charter, while the other eight 
counties were added through the Underserved Community designation.
    The average unemployment rate in the counties we serve (through 
March 2005) is 8.1 percent (with the high being 14.6 percent). We are 
very aware of these circumstances and offer several programs to assist 
our members when they need us most. For example, we offer checking 
accounts that have no minimum balance requirement, no monthly fees or 
transactional fees. We also offer debit cards with no monthly fees or 
transactional fees. Our ATM's charge no fees to our members. According 
to Callahan and Associates, a national rating service, we rank in the 
93rd percentile for checking account penetration, and in the 92nd 
percentile for checking accounts outstanding among credit unions in the 
United States for March 2005.
    Our lending services also have no loan set up fees, no application 
fees, no annual fees, and are priced competitively in the marketplace 
for the benefit of our members. We rank in the 94th percentile for 
loans outstanding and in the 90th percentile for our loan to share 
ratio among credit unions in the United States (Callahan and 
Associates, March 2005).
    Potlatch No.1 Federal Credit Union offers members free financial 
counseling through our trained staff, financial literacy classes on a 
range of topics for our members, and provides volunteers to teach in 
the local elementary, junior and senior high schools and local colleges 
to help further financial literacy education. We offer free AD&D 
insurance to our members, free life savings insurance, free notary 
services, and low balance certificates of deposit. We also do not have 
fees for low balance savings accounts, check cashing, and a many other 
common nuisance fees that many financial institutions charge.
    Our credit union's ability to continue serving the financial needs 
of our current members and our potential members who need access to our 
services in Northern Idaho and Eastern Washington will be significantly 
reduced without the regulatory relief this Committee is addressing.
    CUNA is pleased that the Committee is moving forward with its 
efforts to provide regulatory relief of unneeded and costly burdens. 
Some might suggest that the Credit Union Membership Access of 1998 \1\ 
(CUMAA) was the credit union version of regulatory relief. While that 
law did provide relief from an onerous Supreme Court 
decision, it also imposed several new, stringent regulations on credit 
unions, which, in spite of assertions to the contrary, are the most 
stringently regulated of insured financial institutions.
---------------------------------------------------------------------------
    \1\ Pub. L. No. 105-219 Sec. 401; 112 Stat. 913 (1998); 12 U.S.C. 
1752a note and 1757a note.
---------------------------------------------------------------------------
Credit Unions Are Distinct Financial Institutions
    Among its numerous provisions, the CUMAA required the U.S. 
Department of the Treasury to evaluate the differences between credit 
unions and other types of federally insured financial institutions, 
including any differences in the regulation of credit unions and banks.
    The study, ``Comparing Credit Unions with Other Depository 
Institutions,'' found that while ``credit unions have certain 
characteristics in common with banks and thrifts, (for example, the 
intermediation function), they are clearly distinguishable from these 
other depository institutions in their structure and operational 
characteristics.''
    These qualities, catalogued by the U.S. Treasury in its 2001 study, 
had been previously incorporated into the Congressional findings of the 
Federal Credit Union Act \2\ when CUMAA was adopted in 1998.
---------------------------------------------------------------------------
    \2\ P. L. 105-219, Sec. 2, 112 Stat. 913.
---------------------------------------------------------------------------
    Recognition and appreciation of such attributes is critical to the 
understanding of credit unions, as Congress made it clear when it 
amended the Federal Credit Union Act in 1998 that it is these 
characteristics that form the foundation on which the Federal tax 
exemption for credit unions rests. As Congress determined when it 
passed CUMAA:

    ``Credit unions, unlike many other participants in the financial 
services market, are exempt from Federal and most State taxes because 
they are:

 member-owned,
 democratically operated,
 not-for profit organizations,
 generally managed by volunteer boards of directors, and
 because they have the specified mission of meeting the credit 
    and savings needs of consumers, especially persons of modest 
    means.''

    While other institutions, such as mutual thrifts, may meet one or 
two of these standards or display some of these differences, other 
credit union distinctions listed here do not necessarily apply. As 
Treasury noted in its study, ``Many banks or thrifts exhibit one or 
more of . . . (these) characteristics, but only credit unions exhibit 
all five together.'' \3\
---------------------------------------------------------------------------
    \3\ U.S. Dept. of the Treasury, Comparing Credit Unions with Other 
Depository Institutions, (Wash. DC: 2001).
---------------------------------------------------------------------------
    Other 1998 Congressional findings in CUMAA also emphasize the 
unique nature of credit unions:

(1) ``The American credit union movement began as a cooperative effort 
    to serve the productive and provident credit needs of individuals 
    of modest means.''
(2) ``Credit unions continue to fulfill this public purpose and current 
    members and membership groups should not face divestiture from the 
    financial services institution of their choice as a result of 
    recent court action.''

    Since their inception, credit unions continue to share these unique 
attributes, separating them from other depository institutions. Despite 
the frequent attempts of detractors to present credit unions in a false 
light and label them as other types of institutions, the distinct 
characteristics of credit unions have been recognized in statute and in 
analytical reports from the U.S. Treasury and others. Further, despite 
repeated attempts, legal challenges brought by banking groups against 
the National Credit Union Administration's (NCUA) field of membership 
policies under CUMAA have not proved fruitful.
    As unique institutions, credit unions today stand distinctly in 
need of regulatory relief.
Credit Unions' Regulatory Burden Is Real And Relief Is Imperative
    As cooperative financial institutions, credit unions have not been 
shielded from the mounting regulatory responsibilities facing insured 
depositories in this country.
    Last year, Federal Deposit Insurance Corporation (FDIC) Vice 
Chairman John M. Reich said in testimony before the House Subcommittee 
on Financial Institutions and Consumer Credit, ``regulatory burden is a 
problem for all banks.'' His statement is accurate as far as it goes.
    Regulatory burden is an issue for all financial institutions 
generally, and credit unions in particular. Indeed, credit unions are 
the most heavily regulated of all financial institutions. This dubious 
distinction is the result of several factors, which include:

 Credit unions operate under virtually the same consumer 
    protection rules, such as Truth-Lending, Equal Credit Opportunity, 
    Home Mortgage Disclosure, Real Estate Settlement Procedures Act, 
    Truth-in-Savings, Expedited Funds Availability Act, USA PATRIOT 
    Act, Bank Secrecy, safety and soundness including prompt corrective 
    action (PCA) regulations reviewed by Treasury, and other rules that 
    apply to banks. Credit unions will also have to comply with 
    developing rules under the Fair and Accurate Credit Transactions 
    (FACT) Act and the Check 21 statutory requirements. A list of the 
    137 rules that Federal credit unions must follow is attached.

    In addition:

(1) Credit unions are the only type of financial institution that have 
    restrictions on whom they may serve;
(2) Credit unions are the only group of financial institutions that 
    must comply with a Federal usury ceiling;
(3) Credit unions may not raise capital in the marketplace but must 
    rely on retained earnings to build equity;
(4) Credit unions are the only group of financial institutions that 
    must meet statutory net worth requirements;
(5) Credit unions face severe limitations on member business lending;
(6) Credit unions have limitations on loan maturities;
(7) Credit unions have stringent limitations on investments;
(8) Credit unions have not been granted new statutory powers, as banks 
    have under Gramm-Leach-Bliley; and
(9) Credit unions' operations and governance are inflexible because 
    many aspects are fixed in statute.

    Most importantly for credit unions, time and other resources spent 
on meeting regulatory requirements are resources that would otherwise 
be devoted to serving their members--which is, after all, their primary 
objective.
With Few Exceptions, Credit Unions Must Comply with Virtually All Bank
Rules
    Despite unfounded banker charges to the contrary, federally insured 
credit unions bear an extraordinary regulatory burden that is 
comparable to that of banks in most areas and much more restrictive in 
others.
    As the Treasury's 2001 study comparing credit unions with other 
institutions concluded, ``Significant differences (in the general 
safety and soundness regulation of banks and credit unions, parenthesis 
added) have existed in the past, but have been gradually 
disappearing.'' The Treasury study cited PCA and net worth requirements 
for credit unions as a major regulatory difference that was removed in 
1998.
    Treasury further noted that their ``relative small size and 
restricted fields of membership'' notwithstanding, ``Federally insured 
credit unions operate under bank statutes and rules virtually identical 
to those applicable to banks and thrifts.''
Credit Unions Must Comply With Substantial Requirements Banks Don't
Have to Follow
    In addition to following rules applicable to the banking industry, 
credit unions operate under considerable statutory and regulatory 
requirements that do not apply to other types of financial 
institutions.
    As Treasury's study pointed out, credit union statutory net worth 
requirements direct federally insured credit unions to maintain a 
minimum of 6 percent net worth to total assets in order to meet the 
definition of an adequately capitalized credit union. Well-capitalized 
credit unions must meet a 7 percent net worth ratio. ``(T)his exceeds 
the 4 percent Tier 1 level ratio applicable for banks and thrifts (and 
is statutory as opposed to regulatory),'' Treasury stated. Complex 
credit unions have additional net worth requirements.
    Treasury's analysis also pointed to the fact that ``Federal credit 
unions have more limited powers than national banks and Federal saving 
associations. Most notably, Federal credit unions face stricter 
limitations on their (member business) . . . lending and securities 
activities. In addition, a usury ceiling prevents them from charging 
more than 18 percent on any loan, and the term of many types of loans 
may not extend beyond 12 years.''
    Credit unions also have statutory and regulatory restrictions as to 
whom they may serve. Federal credit unions' fields of membership must 
meet the common bond requirements that apply to an associational, 
occupational, multigroup or community credit union. Thus, unlike banks 
and thrifts, which may serve anyone regardless of where they live or 
work, a credit union may only offer its services to individuals within 
its field of membership.
    Credit unions operate under heavily constrained investment 
authority as well. A Federal credit union may invest in government 
securities and other investments only as provided under the Federal 
Credit Union Act and authorized by NCUA.
    Credit unions also must comply with limitations on lending, 
including member business lending. A Federal credit unions' member 
business loan (MBL) may not exceed the lesser of 1.75 times its net 
worth or 12.25 percent of total assets, unless the credit union is 
chartered to make such loans, has a history of making such loans or has 
been designated as a community development credit union. By comparison, 
banks have no specific limits on commercial lending and thrifts may 
place up to 20 percent of their total assets in commercial loans.
    It is useful to note that there are other limitations on credit 
unions' member business lending that do not apply to commercial banks. 
A credit union's MBL's must generally meet 12-year maturity limits and 
can only be made to members. Credit union MBL's have significant 
collateral and while not required, often carry the personal guarantee 
of the borrower.
    Commercial banks have a variety of mechanisms through which they 
can raise funds, including through deposit-taking or borrowing funds in 
the capital markets. In marked contrast, credit unions may only build 
equity by retaining earnings. A credit union's retained earnings are 
collectively owned by all of the credit unions' members, as opposed to 
a bank that is owned by a limited number of stockholders or in some 
cases, by a finite number of individuals or family members.
    Thus, a major distinction between credit unions and commercial 
banks is that credit unions operate under a number of specific, 
operational regulations that do not apply to banks. Bank trade 
associations attempt to mislead Congress when they erroneously argue 
that credit unions have evolved into banks. The restrictions on credit 
union operations and the limitations on their activities drive a stake 
into the heart of that argument.
Unlike Banks, Credit Unions Have Not Received New Statutory Powers
    Not only have credit unions not received new statutory powers as 
banks have, severe regulatory constraints on member business lending 
and under PCA have been imposed on credit unions for the last several 
years.
    An important study regarding the regulation of credit unions was 
published in 2003 under the auspices of the Filene Research Institute 
and addresses the regulatory advantages banks have over credit unions.
    Authored by Associate Professor of Economics William E. Jackson, 
III, Kenan-Flagler Business School, University of North Carolina at 
Chapel Hill and entitled, ``The Future of Credit Unions: Public Policy 
Issues,''\4\ the study looked at the efforts of Congress over the last 
two decades to provide regulatory relief for traditional depository 
institutions and whether more relief for credit unions is reasonable 
and appropriate.
---------------------------------------------------------------------------
    \4\ Jackson, III, William E., University of North Carolina-Chapel 
Hill. The Future of Credit Unions: Public Policy Issues, 2003.
---------------------------------------------------------------------------
    The study reviewed sources of funding, investments, and the 
ownership structure of banks, thrifts, and credit unions and found that 
the operational differences among these types of institutions are 
``distinctive.'' It observed that since 1980, Congress has enacted a 
number of statutory provisions that have noticeably changed the 
regulatory environment in which banks and thrifts conduct business, 
such as by deregulating liabilities; removing restrictions on 
interstate branching; and expanding the list of activities permissible 
for financial holding companies.
    For example, the Gramm-Leach-Bliley Act of 1999 expanded the 
statutory definition of the kinds of products and services in which 
banks may engage. Under the Act, banking institutions may engage in 
activities that are merely ``financial in nature'' as opposed to those 
that are ``closely related to banking.'' The bank regulators have the 
authority to determine what is permissible as ``financial in nature.'' 
Credit unions were not included in this sweeping, statutory expansion 
of bank powers. However, while they received neither benefits nor new 
powers under the Gramm-Leach-Bliley Act, credit unions were included in 
the substantial requirements under the Act regarding privacy, including 
requirements to communicate their member privacy protection policies to 
members on an annual basis.
    The credit union study noted, ``Credit unions face stricter 
limitations on their lending and investing activities'' than other 
institutions bear. ``In general, credit unions have received less 
deregulation than either banks or thrifts,'' the study concluded.
Pending Credit Union Regulatory Improvements Legislation That CUNA
Supports
    CUNA strongly supports H.R. 2317, the Credit Union Regulatory 
Improvements Act (CURIA), which was recently introduced by 
Representatives Royce and Kanjorski in the House of Representatives. In 
the 108th Congress, CUNA had also endorsed the House-passed Regulatory 
Relief Act, which was approved by the House of Representatives on March 
18, 2004, by a vote of 392-25.
    In our view, these bills provide an excellent starting point for 
the Senate Banking, Housing, and Urban Affairs Committee as it 
considers real reforms that will provide regulatory relief to credit 
unions and other institutions.
    While CUNA also supports other statutory changes, we first want to 
focus on amendments to the Federal Credit Union Act--all of which CUNA 
has endorsed--that are contained in the newly introduced H.R. 2317.
H.R. 2317--The Credit Union Regulatory Improvements Act
    Although this legislation goes beyond what was included in the 
Regulatory Relief measure that passed the House last year, it 
nevertheless provides a sound foundation for this Committee's 
consideration of some fundamental problems facing credit unions today 
and we ask you to take a close look at these proposed changes as 
incorporated in CURIA. This portion of my testimony will describe the 
different sections of CURIA, followed by an explanation of why CUNA 
strongly supports the proposed and necessary changes.
H.R. 2317, The Credit Union Regulatory Improvements Act of 2005--
Section-by-Section Description
Title I: Capital Reform
    CUNA strongly supports this title, which reforms the system of PCA 
for credit unions by establishing a dual ratio requirement: A pure 
leverage ratio and a net worth to risk-asset ratio. The resulting 
system would be comparable to the system of PCA in effect for FDIC 
insured institutions while taking into account the unique operating 
characteristics of cooperative credit unions.
Section 101. Amendments to Net Worth Categories
    The Federal Credit Union Act specifies net worth ratios that, along 
with a risk-based net worth requirement, determine a credit union's net 
worth category. This section would continue to specify net worth 
requirements, but at levels more appropriate for credit unions and 
comparable to those currently in effect for banking institutions.
Section 102. Amendments Relating to Risk-Based Net Worth Categories
    Currently, federally insured credit unions that are considered 
``complex'' must meet a risk-based net worth requirement. This section 
would require all credit unions to meet a risk-based net worth 
requirement, and directs the NCUA Board to design the risk-based 
requirement appropriate to credit unions in a manner more comparable to 
risk standards for FDIC-insured institutions.
Section 103. Treatment Based on Other Criteria
    Current risk-based net worth requirements for credit unions 
incorporate measures of interest-rate risk as well as credit risk. The 
comparable standards for risk-based capital requirements for FDIC 
insured institutions of Section 102 deal only with credit risk. This 
section would permit delegation to NCUA's regional directors the 
authority to lower by one level a credit union's net worth category for 
reasons of interest rate risk only that is not captured in the risk-
based ratios.
Section 104. Definitions Relating to Net Worth
    Net worth, for purposes of PCA, is currently defined as a credit 
union's retained earnings balance under generally accepted accounting 
principles. The Financial Accounting Standards Board (FASB) is 
finalizing guidance on the accounting treatment of mergers of 
cooperatives that would create a new component of net worth, in 
addition to retained earnings, after a credit union merger. The 
unintended effect of the FASB rule will be to no longer permit a 
continuing credit union to include the merging credit union's net worth 
in its PCA calculations. This section addresses that anomaly and 
defines net worth for purposes of PCA to include the new component for 
post-merger credit unions.
    It was our understanding that FASB intended to apply the standard 
to credit unions beginning in early 2006, following a comment period, 
but now may be putting application of the standard off until the 
beginning of 2007. Such a change, we believe, will have the unintended 
consequence of discouraging, if not eliminating, voluntary mergers 
that, absent FASB's policy, would be advantageous to credit union 
members involved. In addition, FASB's application of its proposal to 
credit unions will mean that a credit union's net worth would typically 
be understated by the amount of the fair value of the merging credit 
union's retained earnings.
    This result is not in the public interest. That is why CUNA, along 
with the NCUA and others, supports a technical correction that would 
amend the Federal Credit Union Act to make it clear that net worth 
equity, including acquired earnings of a merged credit union as 
determined under GAAP, and as authorized by the NCUA Board, would be 
acceptable. Senior legal staff at FASB have indicated support for a 
legislative approach, and we urge the Committee to likewise support 
such an effort, well in advance of the effective date so credit unions 
will have certainty regarding the accounting treatment of mergers.
    Legislation was introduced by Representative Bachus to address this 
issue in H.R. 1042, the ``Net Worth Amendment of Credit Unions Act,'' 
which passed the House of Representatives on June 13, 2005 by voice 
vote. The language to correct this issue is identical in H.R. 1042 and 
H.R. 2317.
    Also in this section, the definition of secondary capital for low-
income credit unions is expanded to include certain limitations on its 
use by those credit unions. The definition of the net worth ratio is 
modified to exclude a credit union's share insurance fund deposit from 
the numerator and denominator of the ratio, and the ratio of net worth 
to risk-assets is defined, also to exclude a credit union's share 
insurance fund deposit from the numerator.
Section 105. Amendments Relating to Net Worth Restoration Plans
    Section 105 would provide the NCUA Board with the authority to 
permit a marginally undercapitalized credit union to operate without a 
net-worth restoration plan if the Board determines that the situation 
is growth-related and likely to be short term.
    This section would also modify the required actions of the Board in 
the case of critically undercapitalized credit unions in several ways. 
First, it would authorize the Board to issue an order to a critically 
undercapitalized credit union. Second, the timing of the period before 
appointment of a liquidating agent could be shortened. Third, the 
section would clarify the coordination requirement with State officials 
in the case of State-chartered credit unions.
    The following is a detailed discussion of the need for and logic of 
PCA reform.
History of Credit Union PCA
    The PCA section of CUMAA established for the first time ``capital'' 
or ``net worth'' requirements for credit unions. Prior to that time, 
credit unions were subject to a requirement to add to their regular 
reserves, depending on the ratio of those reserves to ``risk-assets'' 
(then defined as loans and long-term investments). The purpose of 
Section 1790d (PCA) of the Act is ``to resolve the problems of insured 
credit unions at the least possible long-term loss to the Fund.'' The 
CUMAA instructs the NCUA to implement regulations that establish a 
system of PCA for credit unions that is consistent with the PCA regime 
for banks and thrifts under the Federal Deposit Insurance Corporation 
Improvement Act (FDICIA) but that takes into account the unique 
cooperative nature of credit unions.
    There are, however, a number of ways that credit union PCA under 
CUMAA differs from PCA as it applies to banks and thrifts under FDICIA. 
Chief among these is that the net worth levels that determine a credit 
union's net worth classification are specified in the Act rather than 
being established by regulation as is the case for banks and thrifts. 
Further, the levels of the net worth ratio for a credit union to be 
classified ``well'' or ``adequately'' capitalized are 2 percentage 
points (200 basis points) above those currently in place for banks and 
thrifts, even though credit unions' activities are far more 
circumscribed that those of banks. In addition, the system of risk-
based net worth requirements for credit unions is structured very 
differently from the Basel-based system in place for banks and thrifts. 
For example, the Basel system is credit-risk based while credit union 
risk-based net worth requirements explicitly account for the difficult-
to-quantify interest rate risk. In PCA as implemented under FDICIA, 
interest rate risk is instead dealt with through examination and 
supervision.
Need for Reform of Credit Union PCA
    Net worth requirements were not the original purpose of the CUMAA. 
The genesis of the Act was the Supreme Court's field of membership 
decision of 1998 that prohibited NCUA from approving credit union 
fields of membership comprising more than one group. Since its adoption 
7 years ago, NCUA and credit unions have had sufficient time to 
experience PCA requirements. Therefore, it is not surprising that there 
should be a need for some modifications to PCA now that the NCUA and 
the credit union movement have been operating under PCA for several 
years.
    There are two basic problems with the current PCA system.

 High Basic Credit Union Capital Requirements. Credit unions 
    have significantly higher capital requirements than do banks, even 
    though the credit union National Credit Union Share Insurance Fund 
    (NCUSIF) has an enviable record compared to other Federal deposit 
    insurance funds. Indeed, because credit unions' cooperative 
    structure creates a systemic incentive against excessive risk 
    taking, it has been argued that credit unions actually require less 
    capital to meet potential losses than do other depository 
    institutions.
 Risk Based System is Imprecise. The current system of risk-
    based net worth requirements for credit unions provides an 
    imprecise treatment of risk. It is only when a portfolio reaches a 
    relatively high concentration of assets that it signals greater 
    risk and the need for additional net worth. This unartful system 
    weakens the measurement of the NCUSIF's exposure to risk, and 
    provides blurred incentives to credit unions on how to arrange 
    their balance sheets so as to minimize risk. A Basel-type method of 
    applying different weights to asset types based on the asset's risk 
    profile would permit a more precise accounting for risk than does 
    the current credit union system, thus improving the flow of 
    actionable information regarding net worth adequacy to both 
    regulators and credit unions.

    Taken together, these problems have created an unnecessary 
constraint on healthy, well-managed credit unions. Credit unions agree 
that any credit union with net worth ratios well below those required 
to be adequately capitalized should be subject to prompt and stringent 
corrective action. There is no desire to shield such credit unions from 
PCA; they are indeed the appropriate targets of PCA. Because credit 
unions themselves fund the NCUSIF, they are keenly aware that they are 
the ones that pay when a credit union fails. Therefore, CUNA strongly 
supports a rigorous safety and soundness regulatory regime for credit 
unions that is anchored by meaningful and appropriate net worth 
requirements that drive the credit union system's PCA requirements.
    Under the current system of PCA, there are many credit unions that 
have more than enough capital to operate in a safe and sound manner, 
but that feel constrained in serving their members because potential 
reductions in their net worth category can result from growth in member 
deposits, even when uninduced by the credit union. The current law 
stipulates that a credit union with a 6 percent net worth ratio is 
``adequately'' capitalized. Considering the risk exposure of the vast 
majority of credit unions and the history of their Federal share 
insurance fund, 6 percent is more than adequate net worth. However, as 
a result of the effect of potential growth on a credit union's net 
worth ratio under the present system of PCA, a very well run, very 
healthy, very safe and sound credit union feels regulatory constraints 
operating with a 6 percent net worth ratio. Without access to external 
capital markets, credit unions may only rely on retained earnings to 
build net worth. Thus, a spurt of growth brought on by members' desire 
to save more at their credit union can quickly lower a credit union's 
net worth ratio, even if the credit union maintains a healthy net 
income rate.
    We are not here describing credit unions that aggressively and 
imprudently go after growth, just for growth's sake. Rather, any credit 
union can be hit with sharp and unexpected increases in member 
deposits, which are the primary source of asset growth for credit 
unions. This can happen whenever credit union members face rising 
concerns either about their own economic or employment outlook (as in a 
recession) or about the safety of other financial investments they may 
hold (as when the stock market falls). The resulting cautionary deposit 
building or flight to safely translates into large swings in deposit 
inflows without any additional effort by the credit union to attract 
deposits. As an example, total credit union savings growth rose from 6 
percent in 2000 to over 15 percent in 2001 despite the fact that credit 
unions lowered deposit interest rates sharply throughout the year. The 
year 2001 produced both a recession and falling stock market, and was 
topped off with the consumer confidence weakening effects of September 
11.
    Credit union concern about the impact of uninduced growth on net 
worth ratios goes far beyond those credit unions that are close to the 
6 percent cutoff for being considered adequately capitalized. Again, 
because of the conservative management style that is the product of 
their cooperative structure, most credit unions wish always to be 
classified as ``well'' rather than ``adequately'' capitalized. In order 
to do that, they must maintain a significant cushion above the 7 
percent level required to be ``well'' capitalized so as not to fall 
below 7 percent after a period of rapid growth. A typical target is to 
have a 200 basis point cushion above the 7 percent standard. Thus, in 
effect, the PCA regulation, which was intended to ensure that credit 
unions maintain a 6 percent adequately capitalized ratio, has created 
powerful incentives to induce credit unions to hold net worth ratios 
roughly 50 percent higher than that level, far in excess of the risk in 
their portfolios. The PCA regulation in its present form thus drives 
credit unions to operate at ``overcapitalized'' levels, reducing their 
ability to provide benefits to their members, and forcing them instead 
to earn unnecessarily high levels of net income to build and maintain 
net worth.
    There are two ways to resolve these problems with the current 
system of PCA. One would be to permit credit unions to issue some form 
of secondary capital in a way that both provides additional protection 
to the NCUSIF and does not upset the unique cooperative ownership 
structure of credit unions. CUNA believes that credit unions should 
have greater access to such secondary capital. However, this bill does 
not provide access to secondary capital.
    The other solution is reform of PCA requirements themselves. Reform 
of PCA should have two primary goals. First, CUNA believes any reform 
should preserve the requirement that regulators must take prompt and 
forceful supervisory actions against credit unions that become 
seriously undercapitalized, maintaining the very strong incentives for 
credit unions to avoid becoming undercapitalized. This is essential to 
achieving the purpose of minimizing losses to the NCUSIF. Second, a 
reformed PCA should not force well-capitalized credit unions to feel 
the need to establish a large buffer over minimum net worth 
requirements so that they become overcapitalized.
    H.R. 2317 would reform PCA in a manner consistent with these two 
requirements by transforming the system into one with net worth 
requirements comparable to those in effect for FDIC insured 
institutions, and that is much more explicitly based on risk 
measurement by incorporating a Basel-type risk structure.
    Under H.R. 2317, a credit union's PCA capitalization classification 
would be determined on the basis of two ratios: The net worth ratio and 
the ratio of net worth to risk assets. The net worth ratio would be 
defined as net worth less the credit union's deposit in the NCUSIF, 
divided by total assets less the NCUSIF deposit. The ratio of net worth 
to risk assets would be defined as net worth minus the NCUSIF deposit 
divided by risk assets, where risk assets would be designed in a manner 
comparable to the Basel system in effect for banks of similar size to 
credit unions. The tables below show the ratio cutoff points for the 
various net worth classifications. A credit union would have to meet 
both ratio classifications, and if different, the lower of the two 
classifications would apply. For example, a credit union classified as 
``well capitalized'' by its net worth ratio, but ``undercapitalized'' 
by its ratio of net worth to risk assets would be considered 
undercapitalized.


    The net worth cutoff points specified in H.R. 2317 are 
substantially similar to those currently in effect for FDIC insured 
institutions, yet, the ratios would have the effect of being more 
stringent on credit unions for two reasons. First, not all of an 
individual credit union's net worth is included in the numerator of the 
ratio; the NCUSIF deposit is first subtracted. Second, a portion of 
banks' net worth can be met by secondary or Tier II capital. All but 
low-income credit unions have no access to secondary capital, so all 
credit union net worth is equivalent to banks' Tier I capital, which 
has more characteristics of pure capital than does Tier II.
    H.R. 2317 would require NCUA to design a risk-based net worth 
requirement based on comparable standards applied to FDIC insured 
institutions. The outlook for those standards as they will apply to 
banks is currently under review by the Federal banking regulators. 
Federal banking regulators have indicated that when Basel II takes 
affect for the very largest U.S. banks (approximately 25 banks and 
thrifts), some modifications to Basel I for all other U.S. banks will 
be implemented.
    The exact nature of the changes to Basel I for the vast bulk of 
U.S. banks and thrifts is as yet unclear, although U.S. banking 
regulators have stated they do not intend to permit smaller U.S. banks 
to be disadvantaged compared to the largest banks when Basel II lowers 
net worth requirements for the very large institutions. Thus, it will 
be the modified version of Basel I in place for smaller banks that will 
be the standard under which NCUA will construct a risk weighting system 
for credit unions. Since it will be Basel based, it will focus on 
credit risk, leaving the treatment of interest rate risk to the 
supervisory process. The new credit union risk-based system will 
provide a much more precise measure of balance sheet risk than the 
current risk-based net worth requirement.
    H.R. 2317 will improve the risk-based components of PCA and place 
greater emphasis on the risk-based measures, while lowering to the same 
level in effect for banks, the pure net worth ratio requirements for a 
credit union to be classified as adequately capitalized. CUNA believes 
that in addition to relying on improved risk measurements, a reduction 
of the pure net worth levels to be classified as well- or adequately 
capitalized is justified for the following reasons:

 One of the original justifications for higher credit union PCA 
    net worth requirements (higher than for banks) was the 1 percent 
    NCUSIF deposit. While FASB and NCUA have both affirmed that the 1 
    percent NCUSIF deposit is an asset and thus part of net worth, as a 
    result of the unique funding mechanism of the NCUSIF (it has been 
    funded solely by credit unions), the 1 percent deposit appears on 
    the books of both the NCUSIF and insured credit unions. H.R. 2317 
    has addressed this issue by defining the net worth ratio as net 
    worth less the 1 percent NCUSIF deposit divided by assets less the 
    1 percent deposit. Thus, to be adequately capitalized, a credit 
    union must hold net worth equal to about 5.7 percent (on average) 
    of its assets to meet the 5 percent net worth requirement. This 
    means that the discretionary and mandatory supervisory actions of 
    PCA will be applied at higher levels of individual credit union 
    capitalization than for similarly situated banks and thrifts.
 Another reason given for credit unions' higher net worth 
    requirements is their lack of access to capital markets. Credit 
    unions' only source of net worth is the retention of earnings, 
    which is a time consuming process. The idea was that since credit 
    unions cannot access capital markets, they should hold more capital 
    to begin with so that they have it available in time of need. There 
    is some merit to this notion, but a problem with this logic is that 
    is suggests that a poorly capitalized bank can easily access the 
    capital markets. However, if a bank's capital ratio falls 
    substantially due to losses, investors are likely to be wary of 
    providing additional capital to it. Other institutions similarly 
    have limited access to capital markets when they have experienced 
    substantial losses. Thus, the lack of effective access to outside 
    capital in times of financial stress might not really distinguish 
    credit unions from banks or other depository institutions as much 
    as it might appear.
 The other reason that a credit union's net worth ratio might 
    fall--rapid asset growth--does not require higher net worth 
    requirements for credit unions either. Asset growth (which comes 
    from savings deposits) can be substantially influenced by a credit 
    union's dividend policies. Under the current PCA system, lowering 
    dividend rates creates the dual effects of retarding growth and 
    boosting net income, both of which raise net worth ratios which 
    would not occur had dividend rates been lowered. H.R. 2317 would 
    permit a credit union to protect a reasonable net worth ratio with 
    appropriate dividend rate cutting rather than being required to 
    hold additional net worth.

    There is substantial evidence that credit unions actually require 
less net worth than do for-profit financial institutions in order to 
provide protection to the deposit insurance system.\5\ Credit unions, 
because of their very cooperative nature, take on less risk than do 
for-profit financial institutions. Because credit union boards and 
management are not enticed to act by stock ownership and options, the 
moral hazard problem of deposit insurance has much less room for play 
in credit unions than in other insured depository institutions. 
Evidence of the effects of this conservative financial management by 
credit unions is found in the fact that average credit union ratios for 
net worth, net income, and credit quality have shown dramatically less 
volatility over that past two decades than comparable statistics for 
banks and thrifts. Similarly, the equity ratio of the NCUSIF has been 
remarkably stable, between 1.2 percent and 1.3 percent, of insured 
shares while other Federal deposit funds have seen huge swings, and 
even insolvency. This is hardly evidence supporting the need of more 
capital in credit unions than in banks and thrifts.
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    \5\ See ``The Federal Deposit Insurance Fund that Didn't Put a Bite 
on U.S. Taxpayers,'' Edward J. Kane and Robert Hendershott, Journal of 
Banking and Finance, Volume 20, September 1996, pp.1305-1327. Kane and 
Hendershott summarize their paper as ``the paper analyzes how 
differences in incentive structure constrain the attractiveness of 
interest-rate speculation and other risk-taking opportunities to 
managers and regulators of credit unions.'' See also Differences in 
Bank and Credit Union Capital Needs, David M. Smith and Stephen A. 
Woodbury (Filene Research Institute, Madison, WI. 2001) Smith and 
Woodbury find that credit unions have lower loan delinquencies and net-
charge off rates than do banks, and that charge-offs at credit unions 
are only two-thirds as sensitive to macroeconomic shocks as they are at 
banks. They also explain that because of the governance structure in 
credit unions ``economic theory predicts that credit unions would take 
less risk than banks.'' (p. 5).
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    Reforming PCA as provided in H.R. 2317 would preserve and 
strengthen the essential share-insurance fund protection of PCA and 
would more closely tie a credit union's net worth requirements to its 
exposure to risk--the reason for holding net worth in the first place. 
It would also permit adequately and well-capitalized credit unions to 
operate in a manner devoted more to member service and less to the 
unnecessary accumulation of net worth.
Title II: Economic Growth
Section 201. Limits on Member Business Loans
    This section eliminates the current asset limit on MBL's at a 
credit union from the lesser of 1.75 times actual net worth or 1.75 
percent times net worth required for a well-capitalized credit union 
and replaces it with a flat rate of 20 percent of the total assets of a 
credit union. This provision therefore facilitates member business 
lending without jeopardizing safety and soundness at participating 
credit unions.
Section 202. Definition of Member Business Loans
    This section would amend the current definition of a MBL to 
facilitate such loans by giving the NCUA the authority to exclude loans 
of $100,000 or less as de minimus, rather than the current limit of 
$50,000.
Section 203. Restrictions on Member Business Loans
    This section would modify language in the Federal Credit Union Act 
that currently prohibits a credit union from making any new MBL's if 
its net worth falls below 6 percent. This change will permit the NCUA 
to determine if such a policy is appropriate and to oversee all MBL's 
granted by an undercapitalized institution.
Section 204. Member Business Loan Exclusion for Loans to Nonprofit 
        Religious
Organizations
    This section excludes loans or loan participations by Federal 
credit unions to nonprofit religious organizations from the MBL limit 
contained in the Federal Credit Union Act, which is 12.25 percent of 
the credit union's total assets. This amendment would offer some relief 
in this area by allowing Federal credit unions to make MBL's to 
religious-based organizations without concern about the statutory limit 
that now covers such loans. While the limit would be eliminated, such 
loans would still be subject to other regulatory requirements, such as 
those relating to safety and soundness.
    We believe that this is really a technical amendment designed to 
correct an oversight during passage of CUMAA. The law currently 
provides exceptions to the MBL caps for credit unions with a history of 
primarily making such loans. Congress simply overlooked other credit 
unions that purchase parts of these loans, or participate in them. This 
provision would clarify that oversight and ensure that these 
organizations can continue meeting the needs of their members and the 
greater community at large and ensuring that loans are available for 
religious buildings as well as their relief efforts.
Section 205. Credit Unions Authorized to Lease Space in Buildings with 
        Credit
Union Offices in Underserved Areas
    This section enhances the ability of credit unions to assist 
distressed communities with their economic revitalization efforts. It 
would allow a credit union to lease space in a building or on property 
in an underserved area on which it maintains a physical presence to 
other parties on a more permanent basis. It would permit a Federal 
credit union to acquire, construct, or refurbish a building in an 
underserved community, then lease out excess space in that building.
    Having described briefly how CURIA would address credit union 
member business lending concerns, I would like to provide the 
Subcommittee with a detailed rationale for these needed changes.
Helping Small Business
    Title II, Section 203 of CUMAA established limits on credit union 
MBL activity. There were no statutory limits on credit union member 
business lending prior to 1998. The CUMAA-imposed limits are expressed 
as a 1.75 multiple of net worth, but only net worth up to the amount 
required to be classified as well-capitalized (that is, 7 percent) can 
be counted. Hence the limit is (1.75 x .07) or 12.25 percent of assets.
Need for Reform of Credit Union MBL Limits
    Small businesses are the engine of economic growth--accounting for 
about one-half of private nonfarm economic activity in the United 
States annually. Their ability to access capital is paramount. But this 
access is seriously constrained by the double-whammy of banking 
industry consolidation and the CUMAA-imposed limitations on credit 
union MBL's. Recent research published by the Small Business 
Administration reveals that small businesses receive less credit on 
average in regions with a large share of deposits held by the largest 
banks. FDIC statistics show that the largest 100 banking institutions 
now control nearly two-thirds of banking industry assets nationally. In 
1992, the largest 100 banking institutions held just 45 percent of 
banking industry assets. Thus, CUMAA severely restricts small business 
access to credit outside the banking industry at a time when small 
firms are finding increasing difficulty in accessing credit within the 
banking industry.
    Basic problems with the current MBL limits are:

 The Limits are Arbitrary and Unnecessarily Restrictive. 
    Insured commercial banks have no comparable business lending 
    portfolio concentration limitations. Other financial institutions, 
    savings and loans, for example, have portfolio concentration 
    limitations, but those limitations are substantially less 
    restrictive than the limits placed on credit unions in CUMAA.
 The 12.25 Percent Limit Discourages Entry into the MBL 
    Business. Even though very few credit unions are approaching the 
    12.25 percent ceiling, the very existence of that ceiling 
    discourages credit unions from entering the field of member 
    business lending. Credit unions must meet strict regulatory 
    requirements before implementing an MBL program, including the 
    addition of experienced staff. Many are concerned that the costs of 
    meeting these requirements cannot be recovered with a limit of only 
    12.25 percent of assets. For example, in today's market, a typical 
    experienced mid-level commercial loan officer would receive total 
    compensation of approximately $100,000. The substantial costs 
    associated with hiring an experienced lender, combined with funding 
    costs and overhead and startup costs (for example, data processing 
    systems, furniture and equipment, printing, postage, telephone, 
    occupancy, credit reports, and other operating expenses) make 
    member business lending unviable at most credit unions given the 
    current 12.25 percent limitation. In fact, assuming credit unions 
    could carry salary expense of 2 percent of portfolio, 76 percent of 
    CU's couldn't afford to be active member business lenders even if 
    they had portfolios that were equal in size to the current 12.25 
    percent of asset maximum. Alternatively, assuming credit unions 
    could carry salary expense of 4 percent of portfolio, 63 percent of 
    CU's could not afford to be active member business lenders even if 
    they had portfolios that were equal in size to the current 12.25 
    percent of asset maximum.
 The Limits are not Based on Safety and Soundenss 
    Considerations. There is no safety and soundness reason that net 
    worth above 7 percent cannot also support business lending. If all 
    net worth could be counted, the actual limit would average between 
    18 percent and 19 percent of total assets rather than 12.25 percent 
    of total assets.
 The MBL Definitions Create Disincentives that Hurt Small 
    Businesses. The current $50,000 cutoff for defining an MBL is too 
    low and creates a disincentive for credit unions to make loans to 
    smaller businesses. Permitting the cutoff to rise to $100,000 would 
    open up a significant source of credit to small businesses. These 
    ``small'' business purpose loans are so small as to be unattractive 
    to many larger lenders. Simply inflation adjusting the $50,000 
    cutoff, which was initially established in 1993 and has not been 
    adjusted since that time, would result in an approximate 33 percent 
    increase in the cutoff to over $65,000.

    While some bankers call credit union member business lending 
``mission creep'' this is simply a preposterous fiction. Credit union 
member business lending is not new--since their inception credit unions 
have offered business-related loans to their members. Moreover, credit 
union member business lending shows a record of safety. According to a 
U.S. Treasury Department study, credit union business lending is more 
regulated than commercial lending at other financial institutions. In 
addition, the Treasury found that ``member business loans are generally 
less risky than commercial loans made by banks and thrifts because they 
generally require the personal guarantee of the borrower and the loans 
generally must be fully collateralized. Ongoing delinquencies--for 
credit unions, loans more than 60 days past due, and for banks and 
thrifts, loans more than 90 days past due--are lower for credit unions 
than for banks and thrifts. Credit unions' mid-year 2000 loan charge-
off rate of 0.03 percent was much lower than that for either commercial 
banks (0.60 percent) or savings institutions (0.58 percent).''
    Not surprisingly, the Treasury also concluded that member business 
lending ``does not pose material risk to the'' National Credit Union 
Share Insurance Fund.
    Updated statistics from full-year 2000 through 2003 indicate that 
the favorable relative performance of MBL's reported in the Treasury 
study has continued in recent years. Credit union MBL net chargeoffs 
have averaged just 0.08 percent over the 4-year period since the 
Treasury study, while the comparable average net chargeoff rate at 
commercial banks was 1.28 percent and at savings institutions it was 
1.11 percent. MBL's have even lower loss rates than other types of 
credit union lending, which themselves have relatively low loss 
experience.
    Credit union member business lending represents a small fraction of 
total commercial loan activity in the United States. At mid-year 2004, 
the dollar amount of MBL's was less than one-half of 1 percent of the 
total commercial loans held by U.S. depositories. Credit union MBL's 
represent just 3.1 percent of the total of credit union loans 
outstanding and only 17.9 percent of U.S. credit unions offer MBL's. 
According to credit union call report data collected by the NCUA, the 
median size of credit union MBL's granted in the first 6 months of 2004 
was $140,641.
    Currently, only 11 credit unions in Idaho, out of a total of 68 
(only 16 percent), offer MBL's to their members. The average size MBL 
is $91,653. The total amount of business lending by credit unions in 
Idaho is $17.3 million, while banking institutions in Idaho make $4.3 
billion in business loans. In Idaho, credit unions represent 0.4 
percent of the market share for business lending, while banking 
institutions represent 99.6 percent; and, while credit union business 
loans represent only 0.66 percent of credit union assets, banking 
institutions' business loans represent 78.98 percent of bank assets.
    Adjusting credit union MBL limits from 12.25 percent to 20 percent 
of assets, which is the equivalent to the business lending limit for 
savings institutions, would not cause these numbers to change 
dramatically.
    This adjustment would help small business. As noted earlier, small 
businesses are the backbone of the U.S. economy. The vast majority of 
employment growth occurs at small businesses. And small businesses 
account for roughly half of private nonfarm gross domestic product in 
the United States each year.
    Small businesses are in need of loans of all sizes, including those 
of less than $100,000, which many have said banks are less willing to 
make.
    Moreover, large banks tend to devote a smaller portion of their 
assets to loans to small businesses. The continuing consolidation of 
the banking industry is leaving fewer smaller banks in many markets. In 
fact, the largest 100 banking institutions accounted for 42 percent of 
banking industry assets in 1992. By year-end 2003, the largest 100 
banking institutions accounted for 65 percent of banking industry 
assets--a 23-percentage point increase in market share in just 11 
years.
    This trend and its implications for small business credit 
availability are detailed in a recently released Small Business 
Administration paper. The findings reveal ``credit access has been 
significantly reduced by banking consolidation . . . we believe this 
suggests that small businesses, especially those to which relationship 
lending is important, have a lower likelihood of using banks as a 
source of credit.''
    In reforming credit union MBL limits, Congress will help to ensure 
a greater number of available sources of credit to small business. This 
will make it easier for small businesses to secure credit at lower 
prices, in turn making it easier for them to survive and thrive.
Title III: Regulatory Modernization
Section 301. Leases of Land on Federal Facilities for Credit Unions
    This provision would permit military and civilian authorities 
responsible for buildings on Federal property the discretion to extend 
to credit unions that finance the construction of credit union 
facilities on Federal land real estate leases at minimal charge. Credit 
unions provide important financial benefits to military and civilian 
personnel, including those who live or work on Federal property. This 
amendment would authorize an affected credit union, with the approval 
of the appropriate authorities, to structure lease arrangements to 
enable the credit union to channel more funds into lending programs and 
favorable savings rates for its members.
Section 302. Investments in Securities by Federal Credit Unions
    The Federal Credit Union Act limitations on the investment 
authority of Federal credit unions are anachronistic and curtail the 
ability of a credit union to respond to the needs of its members. The 
amendment provides additional investment authority to purchase for the 
credit union's own account certain investment securities. The total 
amount of the investment securities of any one obligor or maker could 
not exceed 10 percent of the credit union's unimpaired capital and 
surplus. The NCUA Board would have the authority to define appropriate 
investments under this provision, thus ensuring that new investment 
vehicles would meet high standards of safety and soundness and be 
consistent with credit union activities.
Section 303. Increase in General 12-Year Limitation of Term of Federal 
        Credit Union
Loans
    Currently, Federal credit unions are authorized to make loans to 
members, to other credit unions, and to credit union service 
organizations. The Federal Credit Union Act imposes various 
restrictions on these authorities, including a 12-year maturity limit 
that is subject to limited exceptions. This section would allow loan 
maturities up to 15 years, or longer terms as permitted by the NCUA 
Board.
    All Federal credit unions must comply with this limitation. We are 
very concerned that credit union members seeking to purchase certain 
consumer items, such as a mobile home, may seek financing elsewhere in 
which they could repay the loan over a longer period of time than 12 
years. While we would prefer for NCUA to have authority to determine 
the maturity on loans, consistent with safety and soundness, a 15-year 
maturity is preferable to the current limit. Such an increase in the 
loan limit would help lower monthly payments for credit union borrowers 
and benefit credit unions as well as their members.
Section 304. Increase in 1 Percent Investment Limit in Credit Union 
        Service
Organizations
    The Federal Credit Union Act authorizes Federal credit unions to 
invest in organizations providing services to credit unions and credit 
union members. An individual Federal credit union, however, may invest 
in aggregate no more than 1 
percent of its shares and undivided earnings in these organizations, 
commonly known as credit union service organizations or CUSO's. The 
amendment raises the limit to 3 percent .
    CUSO's provide a range of services to credit unions and allow them 
to offer products to their members that they might not otherwise be 
able to do, such as check clearing, financial planning, and retirement 
planning. Utilizing services provided through a CUSO reduces risk to a 
credit union and allows it to take advantage of economies of scale and 
other efficiencies that help contain costs to the credit union's 
members. Further, as Federal credit union participation in CUSO's is 
fully regulated by NCUA, the agency has access to the books and records 
of the CUSO in addition to its extensive supervisory role over credit 
unions.
    The current limit on CUSO investments by Federal credit unions is 
out-dated and limits the ability of credit unions to participate with 
these organizations to meet the range of members' needs for financial 
services. It requires credit unions to arbitrarily forego certain 
activities that would benefit members or use outside vendors in which 
the credit union has no institutional stake. While we feel the 1 
percent limit should be eliminated or set by NCUA through the 
regulatory process, we appreciate that the increase to 3 percent will 
provide credit unions more options to investment in CUSO's to enhance 
their ability to serve their members.
    CUNA also would support raising the borrowing limitation that 
currently restricts loans from credit unions to CUSO's to 1 percent. We 
believe the limit should be on par with the investment limit, which 
under this bill would be raised to 3 percent.
Section 305. Check-Cashing and Money-Transfer Services Offered within 
        the Field of
Membership
    Federal credit unions are currently authorized to provide check-
cashing services to members and have limited authority to provide wire 
transfer services to individuals in the field of membership under 
certain conditions. The amendment would allow Federal credit unions to 
provide check-cashing services to anyone eligible to become a member.
    This amendment is fully consistent with President Bush's and 
Congressional initiatives to reach out to other underserved communities 
in this country, such as some Hispanic neighborhoods. Many of these 
individuals live from paycheck to paycheck and do not have established 
accounts, for a variety of reasons, including the fact that they do not 
have extra money to keep on deposit. We know of members who join one 
day, deposit their necessary share balance and come in the very next 
day and withdraw because they need the money. This is not mismanagement 
on their part. They just do not have another source of funds. And 
sometimes, a $5.00 withdrawal means the difference between eating or 
not.
    If we are able to cash checks and sell negotiable checks such as 
travelers checks, we could accomplish two things: Save our staff time 
and effort opening new accounts for short-term cash purposes which are 
soon closed and gain the loyalty and respect of the potential member so 
that when they are financially capable of establishing an account, they 
will look to the credit union, which will also provide financial 
education and other support services. Take the example of one of our 
credit unions in Pueblo, which attracts migrant workers who live in 
that area for several months each year, many who return year after 
year. It is well-known that this particular group is taken advantage of 
because of the language barrier. The Pueblo credit union has developed 
a group of bilingual members who are willing to act as translators when 
needed and several successful membership relationships have resulted.
    Legislation that includes similar provisions is pending in both the 
House and Senate on this issue: The International Consumer Protection 
Act, introduced in the House (H.R. 928) by Representative Gutierrez and 
in the Senate (S. 31) by Senator Sarbanes. Additionally, the Expanded 
Access to Financial Services Act (H.R. 749), introduced by 
Representatives Gerlach and Sherman, contains identical language to 
this provision, and passed the House of Representatives on April 26, 
2005, by voice vote. CUNA strongly supports all legislative efforts to 
pursue this provision and is grateful to Ranking Member Sarbanes for 
the introduction of his bill.
Section 306. Voluntary Mergers Involving Multiple Common Bond Credit 
        Unions
    In voluntary mergers of multiple bond credit unions, NCUA has 
determined that the Federal Credit Union Act requires it to consider 
whether any employee group of over 3,000 in the merging credit union 
could sustain a separate credit union. This provision is unreasonable 
and arbitrarily limits the ability of two healthy multiple common bond 
Federal credit unions from honing their financial resources to serve 
their members better.
    The amendment is a big step forward in facilitating voluntary 
mergers, as other financial institutions are permitted to do. It 
provides that the numerical limitation does not apply in voluntary 
mergers.
Section 307. Conversions Involving Common Bond Credit Unions
    This section allows a multiple common bond credit union converting 
to or merging with a community charter credit union to retain all 
groups in its membership field prior to the conversion or merger. 
Currently, when a multiple group credit union converts to or merges 
with a community charter, a limited number of groups previously served 
may be outside of the boundaries set for the community credit union. 
Thus, new members within those groups would be ineligible for service 
from that credit union. The amendment would allow the new or continuing 
community credit union to provide service to all members of groups 
previously served.
Section 308. Credit Union Governance
    This section gives Federal credit union boards flexibility to expel 
a member who is disruptive to the operations of the credit union, 
including harassing personnel and creating safety concerns, without the 
need for a two-thirds vote of the membership present at a special 
meeting as required by current law. Federal credit unions are 
authorized to limit the length of service of their boards of directors 
to ensure broader representation from the membership. Finally, this 
section allows Federal credit unions to reimburse board of director 
volunteers for wages they would otherwise forfeit by participating in 
credit union affairs.
    There has been more than one occasion when some credit unions would 
have liked to have had the ability to expel a member for just cause. It 
is relatively rare that things occur that would cause credit unions to 
use such a provision. However, the safety of credit union personnel may 
be at stake. One instance I know of involved a credit union member who 
seemed to have a fixation on an employee and had made inappropriate 
comments. Another involved an older member who refused to take no for 
an answer from a young teller whom he persistently asked to date. We 
have heard of an example at another credit union when one member 
actually told one of the tellers he would punch her if he ever saw her 
out in public. Most cases are not quite that extreme; however, we have 
had other reports from credit unions of unruly members who seem to 
enjoy causing a ruckus.
    Credit unions should have the right to limit the length of service 
of their boards of directors as a means to ensure broader 
representation from the membership. Credit unions, rather than the 
Federal Government, should determine term limits for board members. 
Providing credit unions with this right does not raise supervisory 
concerns and should not, therefore, be denied by the Federal 
Government.
    Credit unions are directed and operated by committed volunteers. 
Given the pressures of today's economy on many workers and the legal 
liability attendant to governing positions at credit unions, it is 
increasingly difficult to attract and maintain such individuals. Rather 
than needlessly discourage volunteer participation through artificial 
constraints, the Federal Credit Union Act should encourage such 
involvement by allowing volunteers to recoup wages they would otherwise 
forfeit by participating in credit union affairs.
    Whether or not a volunteer attends a training session or conference 
is sometimes determined by whether or not that volunteer will have to 
miss work and not be paid.
Section 309. Providing NCUA with Greater Flexibility in Responding to 
        Market
Conditions
    Under this section, in determining whether to lift the usury 
ceiling for Federal credit unions, NCUA will consider rising interest 
rates or whether prevailing interest rate levels threaten the safety 
and soundness of individual credit unions.
Section 310. Credit Union Conversion Voting Requirements
    This section would change the Federal Credit Union Act from 
permitting conversions after only a majority of those members voting 
approve a conversion, to requiring a majority vote of at least 20 
percent of the membership to approve a conversion.
    Time and time again, Congress has made clear its support for credit 
unions, in order to assure consumers have viable choices in the 
financial marketplace. Yet, banking trade groups and other credit union 
detractors have indicated they would like to encourage credit union 
conversions, particularly those involving larger credit unions, in 
order that they may control the market, thereby limiting consumers' 
financial options.
    Last year, the NCUA adopted new regulatory provisions to require 
credit unions seeking to change their ownership structure to provide 
additional disclosures to their members to ensure they are adequately 
informed regarding the potential change and are fully aware of the 
consequences of such action. CUNA strongly supported this action 
because we feel members should know that their rights and ownership 
interests would change, particularly if the institution converts to a 
bank. In such a situation the institution would ``morph'' from one in 
which the members own and control its operations to an institution 
owned by a limited number of stockholders.
    CUNA likewise supports the agency's ongoing efforts to ensure 
members are provided sufficient disclosures and opportunities to 
present opposing views in relation to a possible conversion.
    Congress addressed conversions in CUMAA and reinforced that a 
credit union board which desires to convert must allow its members to 
vote on its conversion plan. CURIA would require a minimum level of 
participation in the vote--at least 20 percent of the members--for a 
conversion election to be valid. Currently, there is a requirement that 
only a majority of those voting approve the conversion. The legislation 
would prevent situations in which only a very small number of an 
institution's membership could successfully authorize such a 
conversion.
    Recently, CUNA's Board adopted a set of principles related to 
credit union conversions, and we want to share its provisions with the 
Committee.
Principles Regarding Credit Union Conversions
 We support the right of member/owners to exercise their 
    democratic control of their credit unions.
 The credit union charter currently provides the best vehicle 
    for serving the financial needs of consumers.
 CUNA encourages credit unions that are considering conversions 
    to make their decisions based solely on the best interests of their 
    members.
 Full, plain language, disclosures are essential to furthering 
    the democratic process.
 Credit union directors and managers have a fiduciary 
    responsibility to present objective and honest information as well 
    as reasonable business alternatives (for example mergers, 
    liquidations.)
 We believe that the net worth of the credit union belongs to 
    the members and should remain with them. There should be no unjust 
    enrichment to Directors and senior management upon later conversion 
    to a bank.
 CUNA supports NCUA and State regulators in the full use of 
    their current authority to ensure members understand the conversion 
    process and that fiduciary duties of credit union boards are fully 
    enforced.
Section 311. Exemption from Premerger Notification Requirement of the 
        Clayton Act
    This section gives all federally insured credit unions the same 
exemption as banks and thrift institutions already have from premerger 
notification requirements and fees of the Federal Trade Commission.
Section 312. Treatment of Credit Unions as Depository Institutions 
        under Securities
Laws
    This section gives federally insured credit unions exceptions, 
similar to those provided to banks, from broker-dealer and investment 
adviser registration requirements.
108th Congress: H.R. 1375--Financial Services Regulatory Relief Act 
        (Credit Union
Provisions)
    Most of the provisions of H.R. 2317, as outlined above, were also 
included in last Congress's H.R. 1375. The single exception is the 
following section.
Section 301. Privately Insured Credit Unions Authorized to become 
        Members of a
Federal Home Loan Bank
    CUNA supports this section which permits privately insured credit 
unions to apply to become members of a Federal Home Loan Bank. 
Currently, only federally insured credit unions may become members. The 
State regulator of a privately insured credit union applying for 
Federal Home Loan Bank membership would have to certify that the credit 
union meets the eligibility requirements for Federal deposit insurance 
before it would qualify for membership in the Federal Home Loan Bank 
system.
Additional Legislative Amendments CUNA Supports
    None of the following provisions have been included in CURIA, nor 
past versions of regulatory relief legislation, yet represent 
legitimate burdens faced by credit unions that are deserving of relief. 
We encourage the Committee to consider including them in any future 
legislation.

 Allow community credit unions to continue adding members from 
    groups that were part of the field of membership (FOM) before the 
    credit union converted to a community charter but are now outside 
    the community.

    Prior to the adoption of amendments to the Federal Credit Union Act 
in 1998, community credit unions were able to add new members from 
groups that they had previously served but are outside of the community 
area the credit union serves. Currently, the credit union may serve 
members of record but not include additional members from those groups. 
CUNA supports legislation that would restore that capacity to credit 
unions.

 Allow credit unions to serve underserved areas with an ATM.

    The legislative history to the CUMAA indicates that Federal credit 
unions should establish a brick and mortar branch or other facility 
rather than establishing an ATM to serve an underserved area. This 
directive makes it far less affordable for a number of credit unions to 
reach out even more to underserved areas. While credit unions serving 
underserved areas through an ATM should be as committed to the area as 
a credit union with another type of facility, this change would 
facilitate increased service to underserved areas.

 Eliminate the requirement that only one NCUA Board member can 
    have credit union experience.

    Currently, only one member of the NCUA Board may have credit union 
experience. Such a limit does not apply to any of the other Federal 
regulatory agencies and denies the NCUA Board and credit unions the 
experience that can greatly enhance their regulation. At a minimum, the 
law should be changed to permit at least one person with credit union 
experience on the NCUA Board.

 Accounting Treatment of Loan Participations as Sales.

    Many of our members currently engage in loan participations, either 
as the originating institution or as an investor, and FASB's project to 
review FASB Statement (FAS) No. 140, Accounting for Transfers and 
Servicing of Financial Assets and Extinguishments of Liabilities, is of 
great concern to us. Other financial institution groups, as well as 
Federal financial regulators, have likewise raised serious questions 
about the need for and advisability of the proposed guidance.
    For a variety of reasons, participations can be important financial 
and asset liability management tools. They are used increasingly by 
credit unions, as well as by other institutions, to control interest 
rate risk, credit risk, balance sheet growth, and maintain net worth 
ratios. Participations enable credit unions to utilize assets to make 
more credit available to their membership than they would be able to do 
without the use of loan participations.
    FASB states that it is concerned that in a loan participation in 
which the borrower has shares or deposits at the originating 
institution, if that institution is 
liquidated, the participating institution would not be able to recover 
its pro rata portion of the members' shares/deposits within the 
originating institution that are ``claimed'' by the originating 
institution to setoff the portion of the debt owed to it. This outcome 
is highly unlikely and we are not aware that it has ever occurred in a 
credit union.
    Nonetheless, FASB is considering amendments to Statement of 
Financial Accounting Standard 140 that would expressly state that 
because the right of setoff between the originating institution and the 
member/depositor/borrower exists (setting up the potential that the 
participating institution would not have any claim against the member/
depositors' funds in the originating institution) the loan transaction 
does not meet the isolation requirements of FAS 140. Because of this 
concern, instead of transferring the portion of the loan participated 
off of its books as a sale, it is our understanding that the 
transaction would be reflected on the originating credit union's 
financial statements and records as a secured borrowing.
    In order for participations to continue being treated as sales for 
accounting purposes, the amendments would further change the existing 
accounting standards by requiring an institution to transfer 
participations through a qualified special purpose entity (QSPE), if 
the transaction did not meet ``True-Sale-At-Law'' test. This is a 
needless and costly expense that would make it difficult for credit 
unions to use participation loans as a management tool. Further, it 
would drastically limit the ability of credit unions to provide low-
cost, economical financing for their membership through loan 
participations.
    There are sufficient safeguards already in place that address 
FASB's concerns about isolating the loan participation asset from the 
reach of the originating credit union and its creditors in liquidation, 
without the need for changes to FAS 140 of the nature FASB is 
contemplating.
Conclusion
    In summary, Mr. Chairman, we are grateful to the Committee for 
holding this important hearing. The Potlatch No.1 Federal Credit 
Union's ability to continue serving the financial needs of our current 
members and our potential members who need access to our services in 
Northern Idaho and Eastern Washington will be significantly reduced 
without the regulatory relief this Committee is addressing. We strongly 
urge the Committee to act on this very important issue this year. And, 
we strongly urge the Committee to make sure that the provisions in 
CURIA are a part of any Congressional action to provide financial 
institutions regulatory relief. We strongly believe that our future 
will be determined by our ability to provide relief in these important 
areas. Without this relief, many credit unions will be unable to 
respond to the financial needs of millions of Americans.

                               ----------
                   PREPARED STATEMENT OF EDWARD PINTO
              President, Courtesy Settlement Services, LLC
      on behalf of The National Federation of Independent Business
                             June 21, 2005

    Good Morning. I am Ed Pinto, President of Courtesy Settlement 
Services LLC in Sarasota, FL. Thank you, Chairman Shelby and Ranking 
Member Sarbanes, for giving me the opportunity to testify on behalf of 
the National Federation of Independent Business (NFIB) regarding 
interest bearing checking accounts for small businesses. Eighty-six 
percent of NFIB members support allowing business owners to earn 
interest on their business checking account balances.
    I commend the Committee for conducting this hearing on Regulatory 
Relief. I am also pleased that the House has overwhelmingly voted in 
favor of H.R. 1224 by a vote of 424-1, to overturn this archaic law 
that prohibits interest on business checking accounts.
    The big banks have consistently opposed repealing the ban on 
interest checking, and have proposed compromise legislation, a 
compromise that would delay the implementation of the repeal by 3 or 
more years. Their efforts to insulate themselves from free-market 
competition have hurt small businesses, the acknowledged job creation 
engines of this country. This bill is necessary consumer protection 
legislation, and every day it is delayed is an injustice to the more 
than 25 million taxpayers filing business income tax returns with the 
IRS!
    Let me repeat that number--there are over 25 million business 
income taxpayers! \1\ This issue may seem like small potatoes--perhaps 
only an average of $100 or $200 per year per small business--but 
multiply it by 25 million and consider the job creation power of our 
Nation's small businesses, and the impact will be large. The House-
passed bill, as currently written with a 2-year delay, is already a 
compromise, and NFIB strongly urges the Committee to resist efforts to 
further lengthen the phase-in period. I urge you not to deny this much 
needed legislation to these millions of taxpayers.
---------------------------------------------------------------------------
    \1\ ``The Small Business Economy-A Report to the President,'' U.S. 
Small Business Administration, Office of Advocacy, (2004).
---------------------------------------------------------------------------
    While it has been 16 years since I started my first business, I can 
still vividly recall my astonishment at being told that a business 
could not earn interest on a checking account. I was further astonished 
to find that my business account not only did not pay interest, it came 
with a plethora of fees! My banker said not to worry, and introduced me 
to the spellbinding concept of compensating balances. Boy, was I in for 
an education, and one that had nothing to do with growing my business. 
I remember thinking that all of this seemed quite foreign and not 
exactly consumer-friendly. I had been earning interest for years on my 
personal checking account, which had a much smaller balance. I recall 
asking my banker, ``Why no interest?'' I was told simply that it was 
against the law.
    Later, as the business prospered, my banker suggested that I set up 
what she called a ``sweep account''--which, she told me, did not have 
the benefit of FDIC insurance, but did pay interest. And so, that's 
what we did. Boy, was it complicated. First, we analyzed my account 
history to determine how much to keep in my regular account so as to 
``earn'' enough to avoid incurring fees on my regular checking account, 
my second encounter with compensating balances. Next, we had to project 
what would be earned in interest and compare that to the additional 
fees incurred to administer my new sweep account. Then I had to 
authorize an amount to be swept each night. Here I had a choice: I 
could either call each afternoon to authorize the transfer or I could 
set a floor amount and automatically sweep all funds in excess of that 
amount. Not being a glutton for punishment, I selected the automatic 
option. After this exercise, I barely remembered what business I was 
in. But that was just the beginning.
    As any new business owner will tell you, there are better ways to 
spend your time than calling your banker everyday. But small-business 
owners, by our nature, break out in hives at the thought of money 
sitting in a banking account not earning interest.
    What I did not know was that a sweep account is really designed for 
a larger company, one with an in-house accounting and financial staff 
to keep up with the flow of money from account-to-account. For the 
small-business owner with a business to run, it can be a paperwork 
nightmare. We soon found that the sweep account, while addressing the 
noninterest bearing account issue, resulted in a flood of paper from 
the bank. Each day we would receive a reconciliation statement to let 
us know how the money had been shifted around in the past 24 hours. And 
because this is done via the mail, there was always a 2-to-3 day delay 
in the information flow so we never had an accurate, up-to-the minute 
view of the flow of funds among our banking accounts. Of course, the 
mail piled up unopened at the rate of 250 letters per year. To add 
insult to injury, my sweep account fees were paying for all of this 
paperwork.
    Don't get me wrong. I am not arguing against sweep accounts. But 
they are a bookkeeping hassle for a small business. Wouldn't these 
misguided resources be better spent on tasks that help grow the 
business, rather than keeping up with a flood of paperwork?
    For obvious reasons, the make-work nature of the sweep account 
ended up significantly reducing our interest earnings. And if you 
consider the allocation of staff time to handling the paperwork and the 
lack of oversight caused by the sweep solution, I could argue that we 
would have been much better off leaving the funds in a noninterest-
bearing account--which is what all too many small-business owners do--a 
fact that restricts much-needed job creation capital from those who 
need it most.
    I know that there are many simpler nonbank alternatives to this 
crazy system, but is that Congress' intent? And so, while I have 
continued to work with a traditional banking institution (without a 
sweep account I might add), it makes even less sense today why this 
prohibition is continued. I don't even believe that it makes sense for 
banks. Creating by legal fiat a restriction that can be sidestepped 
with sweep accounts (even if in an inefficient manner) or does not 
apply to competitors of banks, in the long-run will only hurt the banks 
themselves. I challenge anyone to present a justification for a result 
that can only be cited as a textbook example of the law of unintended 
consequences run amok.
    The Senate has an opportunity to eliminate an archaic law that has 
run headlong into the creativity of the free-market. The current law 
saddles America's small businesses with an inefficient alternative that 
costs small businesses billions in annual revenue that could be used to 
grow these businesses and the jobs that go along with them.
    I support giving banks at least the choice to offer interest-
bearing accounts to small-business owners. I urge this Committee to 
consider this bipartisan effort and to resist efforts to further 
lengthen the phase-in period of this important legislation. The time is 
now for the Senate to act. Thank you for allowing me to express my 
views before the Committee.

                               ----------
               PREPARED STATEMENT OF EUGENE F. MALONEY *
          Executive Vice President, Federated Investors, Inc.
                             June 21, 2005

    My name is Eugene F. Maloney. I am Executive Vice President, 
Corporate Counsel and a member of the Executive Committee of Federated 
Investors, Inc. Federated is a Pittsburgh-based financial services 
holding company whose shares are listed on the New York Stock Exchange. 
Through a family of mutual funds used by or in behalf of financial 
intermediaries and other institutional investors, we manage 
approximately $200 billion. For the past 20 years, I have been a member 
of the faculty of Boston University School of Law where I teach a 
course entitled Securities Activities of Banks. Our mutual funds are 
used by over 1,000 community banks either within their own portfolios 
or in behalf of clients of their trust departments. These institutions 
are not our customers--they are our friends.
---------------------------------------------------------------------------
    * Appendix held in Committee files.
---------------------------------------------------------------------------
    In connection with the proposed removal of Regulation Q, thereby 
permitting banks and thrifts to pay interest on business checking, my 
firm's position is that we are strongly in favor of any rule, 
regulation or legislation that results in our community bank friends 
becoming more competitive, more profitable or being able to operate 
their businesses more efficiently. We are concerned that the current 
initiative to repeal Regulation Q, if not evaluated in an historical 
context, will result in the exact opposite. This conclusion is based on 
my personal experience with the introduction of ceilingless deposit 
accounts in 1982 and the impact it had on our client base. Friends of 
long standing lost their jobs, their pensions and their self esteem 
because of the failure by governmental officials and Members of 
Congress to fully think through the economic impact of ceilingless 
deposit accounts to our banking system and its profitability. This 
failure cost every man, woman, and child in the United States $1,500.
    In researching the history of ceilingless deposit accounts, which 
were to be ``competitive with and equivalent to money market mutual 
funds,'' we found some fascinating information. At the meeting chaired 
by the Secretary of the Treasury to consider the features of the new 
account, the members were advised that if they set the minimum account 
size below $5,000, massive internal disintermediation would occur, and 
it would result in pure cost to the banks. The account size was set at 
$2,500. We have been to the national archives and declassified the 
minutes of subsequent meetings, and they make for astonishing reading. 
The members were fully briefed on the excesses committed by banks and 
thrifts and elected to do nothing to stop them. I brought some examples 
with me (see Exhibits A-1, A-2).
    We have seen nothing in the present record to suggest that any 
effort has been made to prevent a repeat of the past mistakes.
    The legislative record indicates that only slight attention has 
been given to the banks' costs when paying interest on business 
checking accounts or the resulting impact on banks' earnings. The 
record does not include the type of detailed analysis that was 
performed by the staff of the Depository Institutions Deregulation 
Committee (DIDC) during the DIDC's deliberations on whether to allow 
the payment of interest on business checking accounts in the early 
1980's. The record also does not indicate that any significant 
attention has been given to the relationship between interest rate 
deregulation in the early 1980's and the subsequent thrift crisis.
    When this matter was before Congress last year, the House Committee 
report included a detailed estimate of the implications for Federal tax 
revenues and the budgetary impact of paying interest on required 
reserve balances,\1\ but not of the impact on the earnings or assets of 
banks.
---------------------------------------------------------------------------
    \1\ H. Rep. No. 107-38 at 10-18 (Congressional Budget Office 
report).
---------------------------------------------------------------------------
    During the House Committee hearings, in response to questioning as 
to whether the legislation would ``weaken any player in the market,'' 
Governor Meyer of the Federal Reserve Board replied, ``No.'' \2\ In 
response to a question as to whether the Board had any estimate as to 
the amount of deposits that are lost by banks due to the current 
prohibition against the payment of interest on business checking 
accounts, Governor Meyer replied, ``No, I don't have any numbers to 
share with you.'' \3\
---------------------------------------------------------------------------
    \2\ ``Proposals to Permit Payment of Interest on Business Checking 
Accounts and Sterile Reserves Maintained at Federal Reserve Banks,'' 
Hearing before the Subcommittee on Financial Institutions and Consumer 
Credit of the Committee on Financial Services, 107th Cong., 1st Sess. 
(March 13, 2001) (House Hearing) at 18 (Testimony of Laurence H. Meyer, 
Member, Board of Governors of the Federal Reserve System).
    \3\ Id. at 24.
---------------------------------------------------------------------------
    In anticipation of my appearance before the committee today, we 
commissioned a study by Treasury Strategies of Chicago to provide us 
with their views on the impact of the repeal of Regulation Q (see 
Exhibit B).
    Some of the key findings that we offer for your consideration are 
as follows:

 Companies now maintain liquid assets of approximately $5 
    trillion.
 Fifty-seven percent (57 percent) of corporate liquidity is now 
    in deposits or investments that mature in 30 days or less.
 As we speak, banks are adjusting their balance sheets to 
    mitigate interest rate risk to maintain their spread revenues.

    This is a volatile mix. It becomes obvious that if higher-than-
market interest rates are offered by banks to corporate customers, we 
risk a repeat of the 1980's debacle of massive movement of money to 
institutions that are ill-equipped to rationally deploy it.
    Treasury Strategies (see Exhibit B) has suggested the following 
options to prevent this from occurring:
Do not Increase from 6 to 24 the Number of Permissible Transfers per
Month into MMDA Accounts
    The House version calls for this increase. However, since MMDA 
accounts currently enjoy lower reserve requirements and are not limited 
in the rates they may pay, this would become the surviving vehicle. In 
effect, this would be tantamount to full repeal on day one without any 
phase-in period or risk management safeguards.
Cap the Interest Rates Payable on these Deregulated Accounts during the
Phase-In Period
    Our elasticity studies show that medium-sized and small business 
begin to adjust their deposit/investment behavior when rate offerings 
reach 40 percent of the 90-day Treasury bill rate and complete their 
adjustments when rates reach 80 percent. By contrast, larger companies 
begin their adjustment process at the 80 percent point and will move 
virtually all of their short-term investments if rate offerings reach 
110 percent of the Treasury bill rate.
    Therefore, an approach to an orderly transition would be to 
initially allow payment of interest at up to 40 percent of the 90-day 
Treasury bill rate. Then, this could rise 10 percent every 6 months and 
be phased out after 3 years.
Limit the Amount of Interest-Bearing Business Demand Deposits a Bank
can Hold as a Percentage of its Capital
    Bank capital is an excellent protection against risk. As corporate 
cash moves from other investments and into banks, banks will have to 
deploy that cash in the form of more loans and investments. This could 
lead to excesses or dislocations if unchecked. Limits on the amount of 
deregulated deposits that a bank can initially take in to a specific 
percentage of its capital would provide an appropriate safeguard.
    One approach in this regard might be to limit deposits in this 
deregulated account initially to an aggregate of XX percent of a bank's 
total capital. This limit could be raised by YY percent every 6 months 
and eliminated altogether after 3 years.
Limit Interest Payments to Just Uninsured Deposits
    Bank depositors enjoy the benefit of insurance on the first 
$100,000 of their deposit. Investors in mutual funds or direct money 
market instruments do not have the same protections. If the market for 
``business cash'' is deregulated, the playing field for this cash 
should be leveled. This would not only allow for effective and 
transparent rate competition, but also induce banks to insure that they 
pursue safe and sound policies.
    There are two possible approaches to implementing this safeguard. 
One is to allow for payment of interest on only the uninsured portion 
of a company's deposit. The other is to establish a distinct, uninsured 
account type that could pay interest on the entire deposit. A phase-in 
period for the latter option is appropriate.
Collateralize the Deregulated Deposits
    Banks are currently required to post collateral to safeguard public 
sector deposits. In many cases, banks must set aside U.S. Government 
securities equal to 100 percent or more of each deposit.
    Requiring banks to collateralize these deregulated deposits would 
ensure their safe deployment. At the same time, banks could still earn 
a spread on the rates paid versus their earnings on the collateral 
itself.
    Money market mutual funds are in fact backed by a specific 
portfolio of marketable securities. Collateralization of interest-
bearing demand deposits is analogous.
    An approach to implementing this could be to begin with the 
requirement that each bank back these deposits, in the aggregate, 100 
percent with U.S. Government and agency obligations. This figure could 
be reduced by 10 percent every 6 months and phased out after 3 years.
Implement a Phased Approach
    Record levels of short-term liquidity relative to bank deposits, 
the volatility of the flow of funds among investment instruments, and 
the balance sheet readjustment that banks are navigating due to the 
rising rate environment combine to make this a less than ideal time to 
repeal Regulation Q. We would recommend deferring implementation to a 
more stable environment, perhaps 6 to 12 months following enactment.
    Once implemented, some combination of the buffers cited above 
should be put into place and phased out over an additional 3-year 
period. This would allow for a smooth transition and avert serious 
market dislocations.
    Other anticipated fallout we expect to occur should the repeal go 
forward are:

1. Increased credit risk that will raise the banks' rate of loan charge 
    offs; and
2. Pressure on banks' profitability and subsequent increases in charges 
    for discrete services. Some statistics on this point are: (a) 
    profit risk of $4 billion; (b) increased interest expense of $6 to 
    $7.5 billion per year; and (c) for the banks studied by Treasury 
    Strategies, it has been determined that in order to break even on 
    their business customer base, banks will need to grow deposits or 
    raise service charges by the following:
With Respect to Small Business:
 grow deposits by 80 percent; or
 raise service charges by 34 percent.
With Respect to Mid-size Companies:
 grow deposits by 35 percent; or
 raise service charges by 16 percent.

    The reason I am here today is to make a fact-based attempt to 
prevent history from repeating itself.
    I appreciate being given the opportunity to share my thoughts with 
the Committee. I would be pleased to take questions.

                               ----------

                PREPARED STATEMENT OF BRADLEY E. ROCK *
                 President and Chief Executive Officer,
     Bank of Smithtown, and Chairman, Government Relations Council,
                      American Bankers Association
                             June 21, 2005
---------------------------------------------------------------------------
    * Appendix held in Committee files.
---------------------------------------------------------------------------
    Mr. Chairman and Members of the Committee, my name is Bradley Rock. 
I am Chairman, President and CEO of Bank of Smithtown, a $750 million 
community bank located in Smithtown, New York founded in 1910. I am 
also Chairman of the Government Relations Council of the American 
Bankers Association (ABA). ABA, on behalf of the more than two million 
men and women who work in the Nation's banks, brings together all 
categories of banking institutions to best represent the interests of 
this rapidly changing industry. Its membership--which includes 
community, regional and money center banks, and holding companies, as 
well as savings associations, trust companies, and savings banks--makes 
ABA the largest banking trade association in the country.
    I am glad to be here today to present the views of the ABA on the 
need to reduce or eliminate unnecessary, redundant, or inefficient 
regulatory burdens that increase costs not only for banks, but also for 
the customers and businesses that use banks--and that is nearly 
everyone.
    In my testimony, I would like to make three key points:

 Excessive regulatory burden is not just a problem for banks--
    it has a significant impact on bank customers and local economies.
 The regulatory burden is significant for banks of all sizes, 
    but pound for pound, small banks carry the heaviest regulatory 
    load. The community bank, which has been the cornerstone of 
    economic growth in this country, is in great danger of being 
    regulated right out of business.
 The ongoing review of regulatory costs by the Federal bank 
    regulators is very positive; results are what counts, however, and 
    many bankers are skeptical that significant relief from the 
    regulators is possible without congressional action.

    The Federal banking agencies, which are now in the fourth phase of 
the 10-year regulatory review required by the Economic Growth and 
Regulatory Paperwork Reduction Act (EGRPRA), are evaluating ways to 
reduce unduly burdensome regulations. EGRPRA, which became law in 1996, 
is the last comprehensive regulatory 
relief bill enacted by Congress. In the decade following EGRPRA's 
enactment, banks have struggled to shoulder the effects of some of the 
most imposing legislation of the past 100 years. Much of it was 
prompted by renewed focus on accounting practices and heightened 
security in the aftermath of September 11. While the impetus behind the 
compliance obligations imposed by the USA PATRIOT Act, the Sarbanes-
Oxley Act, and the privacy provisions of the Gramm-Leach-Bliley Act 
(GLBA) are reasonable, too often their enforcement and practical 
effects are not.
    When the cumbersome layering of additional rules, issued by the 
Securities and Exchange Commission (SEC), the Financial Accounting 
Standards Board (FASB), the Public Company Accounting Oversight Board 
(PCAOB), and the American Institute of Certified Public Accountants 
(AICPA) are also taken into account, it is abundantly clear that bank 
resources are being stretched too thin. Obviously, this is not in the 
interest of banks, but it also means that banks have fewer resources 
available to meet the stated policy goals of lawmakers and regulators.
    We have submitted comments to regulators recommending changes that 
involve the Bank Secrecy Act (BSA), including discontinuing currency 
transaction reports (CTR's) for seasoned customers, eliminating the 
verification requirement for customers purchasing monetary instruments, 
and establishing a standard for suspending repetitive SAR filings on 
continuing activities in which law enforcement has no interest. Other 
suggested changes involve such issues as appraisal standards, real 
estate lending standards, and annual audit and reporting requirements.
    We have long since reached a point where only the active 
involvement of Congress can result in a comprehensive reduction of 
outdated, inefficient, and costly regulatory burdens. A more detailed 
explanation of some of the areas in which ABA is seeking reform is 
found at the end of this testimony in the appendix.
Regulatory Burden Has an Impact on Bank Customers and Local
Economies
    Reviewing regulations and their impact on our businesses and 
communities should be an ongoing process, as the marketplace continues 
to change rapidly. Outdated laws and regulations only squander scarce 
resources of banks that could otherwise be used to provide financial 
services demanded by our customers. New laws, however well-intentioned, 
have added yet more layers of responsibilities on businesses like ours. 
While no single regulation by itself is overwhelming to most 
businesses, the cumulative weight of all the requirements is 
overwhelming. It is like boxing outside of one's weight class. Even the 
best moves will not, in the end, overcome the disadvantages of being 
dwarfed by the size of your challenger. New laws add heft to the 
regulatory burden. Banks are against the ropes.
    The burden of regulation has a significant impact on bank customers 
and local economies. Compliance costs are a significant drain on bank 
resources, taking precious resources away from meeting the needs of our 
customers. And every new law, regulation or rule added means two 
things: More expensive bank credit and less of it. This is likely to 
hurt small businesses the most, as they cannot go directly to the 
capital markets, yet need low-cost financing. The result is slower 
economic growth.
    During the past 25 years, the compliance burden has grown so large 
and is so pervasive throughout all levels of bank management that it is 
extremely difficult to measure. Research done by the ABA and the 
Federal Reserve \1\ indicates that the total cost of compliance today 
for banks would range from $34 billion to $42 billion per year and this 
does not include compliance costs due to legislation enacted in the 
last 5 years, such as the USA PATRIOT Act and Sarbanes-Oxley. 
Compliance costs are expected to grow at an even faster pace in the 
coming years.
---------------------------------------------------------------------------
    \1\ ``Survey of Regulatory Burden,'' American Bankers Association, 
June 1992; Elliehausen, ``The Cost of Banking Regulation: A Review of 
the Evidence,'' Staff Study, Board of Governors of the Federal Reserve 
System, April 1998.
---------------------------------------------------------------------------
    Certainly, some of the regulatory cost is appropriate for safety 
and soundness reasons. But consider the direct impact on bank lending 
and economic growth if this burden could be reduced by 20 percent and 
redirected to bank capital; it would support additional bank lending of 
$69 billion to $84 billion. This would clearly have a big impact on our 
economies. In fact, it represents nearly 10 percent of all consumer 
loans or 11 percent of all small business loans.
Community Banks Are In Danger of Being Regulated Right Out of Business
    Regulatory costs are significant for banks of all sizes, but pound 
for pound, small banks carry the heaviest regulatory load. For the 
typical small bank, about one out of every four dollars of operating 
expense goes to pay the costs of government regulation. For large banks 
as a group, total compliance costs run into the billions of dollars 
annually.
    The cumulative effect of new rules and regulations will ultimately 
force many community banks to look for merger partners to help spread 
the costs; some will go out of business altogether or consolidate with 
larger banks. Our members routinely mention regulatory burden as the 
first or second critical factor threatening the viability of his or her 
community bank. I can tell you, Mr. Chairman, the pressures to comply 
with all the regulations and still meet the demands of our customers 
are enormous. We feel that we must grow the bank rapidly to generate 
more revenues simply to pay for the ever-increasing regulatory cost. 
The sad part is that too much time and effort is now devoted to 
compliance and not to serving our customers.
    Bankers at all levels, from bank directors and CEO's to compliance 
managers and tellers, spend endless hours on compliance paperwork. Much 
of this work falls heavily on tellers. For example, they fill out the 
more than 13 million CTR's filed annually. Yet the 35-year-old rules 
related to CTR's have become redundant and lost their usefulness due to 
several developments, including formalized customer identification 
programs; more robust suspicious activity reporting; and, government 
use of inquiry and response processes.
    At Bank of Smithtown, every person in every department has major 
compliance responsibilities. Because of the complexities involved, my 
bank pays more than $100,000 each year to outside firms to help us with 
the big compliance issues. On top of this, one person on my staff has a 
full-time job just to coordinate all the activities throughout the bank 
related to regulatory compliance.
    I personally spend about one-and-a-half days per week just on 
compliance issues. Some CEO's tell me that they are now spending nearly 
half of their time on regulatory issues. This means that for banking 
alone, CEO's spend over 5.5 million hours per year on compliance--time 
that could have been better spent on ways to expanding their businesses 
and to meet the changing needs of their customers.
    Of course, labor costs are a small part of the entire cost required 
to meet all the compliance obligations that we have. In addition, banks 
spend billions annually on compliance training, outside compliance 
support (including accounting firms, consultants and attorneys), 
compliance related hardware and software, printing, postage, and 
telephone connections.


    Banks that can least afford increasing compliance costs are hit the 
hardest. Consider a small bank, which can have as few as 20 employees 
or less. In order to fulfill their compliance obligations, banks of 
this size often are forced to hire an additional full-time employee 
just to complete reports related to BSA. Not only is this a huge 
expenditure of time and money, but bankers wonder if these reports are 
even being read. The cost versus benefit analysis fails to make the 
case for many of the rules and regulations banks must follow, and the 
reports that we generate.
    In fact, there are more than 3,200 banks and thrifts with fewer 
than 25 employees; nearly 1,000 banks and thrifts have fewer than 10 
employees. These banks, which serve primarily small communities in 
nonurban areas, simply do not have the human resources to run the bank 
and to read, understand and implement the thousands of pages of new and 
revised regulations, policy statements, directives, and reporting 
modifications they receive every year. According to the Small Business 
Administration's Office of Advocacy, the total cost of regulation is 60 
percent higher per employee for firms with fewer than 20 employees 
compared to firms with more than 500 employees due to the fixed costs 
associated with regulations.\2\
---------------------------------------------------------------------------
    \2\ Crain and Hopkins, ``Impact of Regulatory Costs for Small 
Firms,'' Small Business Administration, Office of Advocacy, 2001.
---------------------------------------------------------------------------
    Banks that are regulated by more than one bank regulatory agency 
have a particular challenge, in that opinions about what is correct or 
adequate with regard to certain regulatory requirements differ between 
agencies. Such banks currently lack one definitive answer about what is 
required and necessary to comply with any specific aspect of a 
regulation. Another challenge facing institutions is the fact that 
compliance regulations can come from a variety of sources such as the 
SEC, FASB, PCAOB, and AICPA. The system lacks monitoring of the overall 
increasing regulatory and reporting burden on financial institutions. 
Just over the last few years, numerous accounting changes have been 
issued and have cost the industry an enormous amount of valuable staff 
time and money to implement. A few of the most recognizable rules 
include: Fair value disclosures, accounting for derivatives, accounting 
for guarantees, accounting for loan loss reserves, accounting for 
special purpose entities, and accounting for purchased loans. These 
rules are being issued at a very rapid speed with an extraordinarily 
short amount of time given to implement them; this presents a 
significant challenge to all banking institutions. Moreover, we are 
concerned that a significant amount of time, effort and expense has 
been directed to rules that have not been demanded by investors and 
will not be used or even understood by them.
    While we recognize there have been positive benefits of the 
Sarbanes-Oxley Act, banks have experienced inordinately large increases 
in annual auditing fees as a result of it and new rules developed by 
the PCAOB. Even nonpublicly traded banks have been impacted. Many 
community banks' accounting fees have more than doubled. One community 
bank in New York saw its accounting fees jump from $193,000 in 2003 to 
more than $600,000 in 2004.
    Not only have outside auditing fees increased tremendously, but so 
too have attorneys' fees and insurance costs. Many publicly traded 
community banks are exploring whether to de-register under the 
Securities Exchange Act of 1934 because the huge regulatory expenses 
and the doubling--and even tripling--of accounting and legal costs that 
result directly from Section 404, Management Assessment Of Internal 
Controls, and other provisions of the Sarbanes-Oxley Act. We urge that 
the Committee look at the costs versus benefits in the application of 
some of the Act's provisions to community banks. We have also asked the 
SEC to increase the 500 shareholder registration threshold.
    The bottom line is that too much time and too many resources are 
consumed by compliance paperwork, leaving too little time and resources 
for providing actual banking services. I'm sure I speak for all bankers 
when I say that I would much rather be spending my time talking with 
our customers about their financial needs and how my bank will fulfill 
them than poring over piles of government regulations. The losers in 
this scenario are bank customers and the communities that banks serve.
Congressional Support for Burden Reduction is Critical
    The agencies have made considerable progress in the last several 
years in improving some of their regulations. Nonetheless, not all of 
the agencies' regulations have been so revised, although we certainly 
recognize that, in many cases, the agencies are constrained by the 
language of statutes in reducing the burdens in a meaningful fashion.
    We are hopeful that the current review of bank regulations, 
required under EGRPRA, will provide meaningful relief. We applaud the 
openness of the banking regulators to the concerns of the industry as 
they conduct this review. Doubt exists as to whether this effort will 
be--or even can be--successful in achieving a meaningful reduction in 
the burden unless Congress becomes an active partner. Most bankers have 
seen previous regulatory relief efforts come and go without noticeable 
effect, while the overall level of regulatory burden has kept rising. 
Results are what matters.
    There is a dilemma here: At the same time that the regulatory 
agencies are undertaking a review of all regulations with an eye toward 
reducing the overall compliance burden, they must promulgate new rules 
for the new laws that Congress has enacted. Simply put, any reduction 
in existing compliance obligations is likely to be obliterated by 
compliance requirements of new regulations implementing new laws.
    It should be noted that even when Congress has acted to reduce a 
burden, the agencies have at times not followed through. For example, 
in 1996, Congress amended RESPA so as to reduce the amount of 
information that must be provided to mortgage customers relating to a 
lender's sale, transfer or retention of mortgage loan servicing. This 
change eliminated the requirement that lenders provide historical data 
on the likelihood of this transfer and that customers acknowledge 
receipt of this information in writing. HUD has never implemented this 
statutory change to RESPA. Thus, since 1996 HUD's regulation continues 
to require language in the disclosure form, which Congress struck from 
the statute. This creates an unnecessary burden on banks. ABA pointed 
this out to Congress years ago and HUD has still not implemented this 
1996 statutory change.
    Bankers continue to be concerned about ``the uneven playing field'' 
in compliance between depository institutions and other financial 
institutions. While bankers spend increasing amounts of time and money 
dealing with regulatory red tape, nonbank competitors, including money 
market funds and mutual funds, are selling savings and investment 
products to bank customers. The same is true of credit unions and the 
Farm Credit System, both of which are free from much of the red tape 
and expenses imposed on banks. Even when the regulatory requirement is 
the same on paper, such as the case with the Truth in Lending 
requirements, nonbank competitors are not subject to the frequent, in-
depth, on-site examination that banks are subject to. The result is 
slower growth for banks, leaving fewer community resources available 
for meeting local credit needs.
    Bankers know that their loans will be examined for consumer 
compliance at least once every 2 years. They also know that nonbank 
lenders will not have their loans examined, probably ever, because the 
Federal Trade Commission (FTC) and the State agencies that have 
jurisdiction over them do not have the examination and supervision 
infrastructure to do so. One solution is to fund, by assessment of the 
nonbank lenders, if necessary, a real supervisory examination program 
to stop some of the consumer abuse and predatory lending that we hear 
about constantly. Congress should ensure that the FTC has the resources 
to actually enforce against nonbank lenders the consumer protection 
laws currently in effect.
    Importantly, the EGRPRA mandate encompasses more than just 
regulatory action: It calls for the agencies to advise the Congress on 
unnecessary burdens imposed by statute, which the agencies cannot 
change but the Congress can. As noted, in many cases, meaningful 
compliance burden reduction cannot be achieved absent statutory 
changes. Mr. Chairman, we hope this Committee will seriously consider 
the recommendations made under this effort.
Conclusion
    In conclusion, the cost of unnecessary paperwork and red tape is a 
serious long-term problem that will continue to erode the ability of 
banks to serve our customers and support the economic growth of our 
communities. We thank you for continuing to look for ways to reduce the 
regulatory burden on banks and thrifts, and to restore balance to the 
regulatory process. Mr. Chairman, the ABA is committed to working with 
you and the members of this Committee to achieve this goal.
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