[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PRESERVING AND EXPANDING MINORITY BANKS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
----------
OCTOBER 30, 2007
----------
Printed for the use of the Committee on Financial Services
Serial No. 110-78
PRESERVING AND EXPANDING MINORITY BANKS
U.S. GOVERNMENT PRINTING OFFICE
39-916 WASHINGTON : 2008
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PRESERVING AND EXPANDING MINORITY BANKS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-78
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire TOM PRICE, Georgia
KEITH ELLISON, Minnesota GEOFF DAVIS, Kentucky
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida JOHN CAMPBELL, California
CHARLES A. WILSON, Ohio ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana KENNY MARCHANT, Texas
ROBERT WEXLER, Florida THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia KEVIN McCARTHY, California
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
MELVIN L. WATT, North Carolina, Chairman
LUIS V. GUTIERREZ, Illinois GARY G. MILLER, California
MAXINE WATERS, California PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts STEVEN C. LaTOURETTE, Ohio
CAROLYN McCARTHY, New York J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida PETER J. ROSKAM, Illinois
KEVIN McCARTHY, California
C O N T E N T S
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Page
Hearing held on:
October 30, 2007............................................. 1
Appendix:
October 30, 2007............................................. 47
WITNESSES
Tuesday, October 30, 2007
Braunstein, Sandra F., Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve
System......................................................... 12
Cooper, Robert P., Senior Counsel, OneUnited Bank, on behalf of
the National Bankers Association............................... 16
Saunders, Kim D., President and CEO, Mechanics & Farmers Bank.... 19
Scott, George A., Director, Financial Markets and Community
Investment, U.S. Government Accountability Office (GAO)........ 7
Thompson, Sandra L., Director, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation
(FDIC)......................................................... 9
Walsh, John G., Chief of Staff and Public Affairs, Office of the
Comptroller of the Currency (OCC).............................. 14
Yakimov, Montrice Godard, Managing Director, Compliance and
Consumer Protection, Office of Thrift Supervision (OTS)........ 10
APPENDIX
Prepared statements:
Watt, Hon. Melvin L.......................................... 48
Braunstein, Sandra F......................................... 53
Cooper, Robert P............................................. 62
Saunders, Kim D.............................................. 74
Scott, George A.............................................. 85
Thompson, Sandra L........................................... 113
Walsh, John G................................................ 136
Yakimov, Montrice Godard..................................... 153
Additional Material Submitted for the Record
Watt, Hon. Melvin L.:
GAO Report to Congressional Requesters, dated October 2006,
``Minority Banks, Regulators Need to Better Assess
Effectiveness of Support Efforts''......................... 210
GAO Report to the Chairman, Committee on Government
Operations, House of Representatives, dated November 1993,
``Minority-Owned Financial Institutions, Status of Federal
Efforts to Preserve Minority Ownership''................... 259
Responses to questions submitted to Sandra F. Braunstein..... 303
Response to question submitted to George A. Scott............ 319
Waters, Hon. Maxine:
Disclosure submitted for the record.......................... 320
PRESERVING AND EXPANDING
MINORITY BANKS
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Tuesday, October 30, 2007
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt
[chairman of the subcommittee] presiding.
Members present: Representatives Watt, Waters, Lynch,
McCarthy, Klein; and Miller.
Also present: Representative Meeks.
Chairman Watt. The Subcommittee on Oversight and
Investigations will come to order.
Without objection, all members' opening statements will be
made a part of the record. I will now recognize myself for an
opening statement.
Minority and women-owned banks serve an important but often
overlooked role in the U.S. economy. For too long in the
Nation's history, women and racial and ethnic minorities were
shut out of this Nation's banking systems. Minority and women-
owned banks stepped into the breach and today provide critical
banking services and financial products to distressed or
traditionally underserved communities throughout the United
States.
Today's hearing is designed to highlight the role of
minority- and women-owned banks in the economy and to examine
how Federal regulators and Congress can work together to
support these important financial institutions.
The Federal Deposit Insurance Corporation (FDIC) and the
Office of Thrift Supervision (OTS) are charged under Section
308 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 to ``preserve and promote'' minority
banks. This includes preserving the number of minority banks,
preserving these institutions' minority character in mergers
and acquisitions, and providing technical assistance to the
institutions.
In 1993, the GAO issued a report entitled, ``Minority-Owned
Financial Instructions: Status of Federal Efforts to Preserve
Minority Ownership.'' The report found that while the Federal
banking regulators had taken some steps to preserve minority
ownership, they had not assessed whether these steps were
effective. The GAO therefore recommended that the Secretary of
the Treasury consult with the FDIC and the OTS to
systematically assess the effectiveness of their minority bank
support efforts, including surveying minority institutions to
gain their insight.
Thirteen years later, unfortunately, the regulators still
have not implemented the major recommendations from the 1993
GAO report. The October 2006 GAO report entitled, ``Minority
Banks: Regulators Need to Better Assess Effectiveness of
Support Efforts,'' might just as well have been a reprint of
the 1993 report. The report again examined Federal regulators'
efforts to comply with Section 308 of FIRREA to preserve and
promote minority banks, and raised many of the same issues
raised in 1993.
This hearing will expose and shed light on the key
findings, ask why regulators still have not implemented the
1993 GAO recommendations, and focus attention on what more can
and must be done to preserve, support, and expand these banks.
I ask unanimous consent to insert into the record both the
1993 and the 2006 GAO reports. Without objection, it is so
ordered.
The 2006 GAO report suggests mixed results by the Federal
Government in supporting minority banks. On one hand, some
Federal banking regulators have developed initiatives training
and outreach events for minority banks. For example, the FDIC
and the OTS apparently have national and regional coordinators
to interface with minority banks and to provide technical
assistance.
On the other hand, the GAO report indicated that neither
the OCC nor the Federal Reserve have developed specific
minority banking initiatives. While neither of these regulators
is covered under Section 308 of FIRREA, both the OCC and the
Federal Reserve have issued policy statements in the last
several years expressing support for minority banks, and both
have indicated that they plan to develop programs and
initiatives to support and advance these policy statements.
We would like to hear about the OCC and the Federal
Reserve's progress in fulfilling the rhetorical objectives set
out in their policy statements. Apparently the Federal Reserve
has stated that they will merely consider implementing the
GAO's recommendation. We would like to find out whether the
Federal Reserve will indeed implement the GAO regulations or,
alternatively, whether the Fed might prefer to be directed to
do so by being included under Section 308 of FIRREA.
The GAO report suggests that many minority banks operate in
unique environments, often serving distressed and underserved
areas, and consequently must retain higher reserves for loan
losses and have higher overhead costs because they spend more
time training their staff and provide extensive customer
service. Yet the GAO report also reveals that less than 30
percent of minority banks actually utilize the technical
assistance offered by the Federal regulators.
We want to explore why that is so. The GAO reported that
several minority bank officials suggested that Federal
regulators should consider undergoing additional training to
gain sensitivity to the unique challenged faced by minority
banks. I would like to hear more about those challenges and
what would be appropriate to respond to them.
We must remain vigilant in fulfilling Section 308's mandate
to preserve and promote minority banks. I look forward to
hearing from these regulators and minority-owned banks about
best practices for preserving and expanding this important
segment of the financial services industry.
I will now recognize Ranking Member Gary Miller, from
California.
Mr. Miller. Thank you, Mr. Chairman. Well, I want to
welcome our distinguished panel. It is good to have you here
this early morning. And I thank Chairman Watt for holding this
hearing. It is rather informative when we discuss issues like
this.
It is important to examine the important role banks have in
serving the financial needs of underserved communities and
minorities. Like most community banks, minority banks may also
confront challenges because of their smaller size. Recognizing
the important role of minority banks, in 1989 Congress called
on the banking regulators to establish goals to help promote
and preserve minority banks. In response to these objectives,
the OTS and the FDIC created staffing structures, resources,
events, technical assistance, and outreach programs to assist
minority banks.
While ensuring the safety and soundness of financial
institutions is their first responsibility, the regulators have
also hosted and continue to host a variety of educational
events such as conferences, roundtables, and workshops which
bring minority banks and their regulators together to give the
banks a chance to share their concerns regarding compliance
examinations, community development, deposit insurance, and
other issues facing the banks.
Last year the Government Accountability Office, GAO, found
that the profitability of most large minority banks--that is,
with assets greater then $100 million--was nearly equal to that
of similar size banks. However, small minority banks and
African American banks of all sizes tend to be less profitable
than they appear despite the efforts of the regulators.
The study shows that these differences were due to
relatively higher loan loss reserves and operating expenses,
and from competition from larger banks. The GAO also reported
that while banking regulators have adopted many different
approaches to support minority banks, they have not regularly
assessed the effectiveness of these efforts.
While the banking regulators have been criticized for not
assessing their efforts to promote minority banks, the GAO
found that not even half of the minority banks attended the
FDIC roundtables and conferences designed to assist them. The
bank officials that did attend these events found the events
extremely useful. Furthermore, only half of the banks actively
participate in their regulators' training and educational
activities. The GAO found that most banks that participated in
these activities reported favorably on these events.
The FDIC and the OTS emphasize technical assistance
services as key components of their efforts to assist minority
banks, but less than 30 percent of the minority banks utilized
such assistance. The GAO found that the banks that do use
technical assistance offered by the regulators rated the
assistance as extremely or very useful.
In 2004, in response to the FDIC corporate performance
objectives, the FDIC completed review of its minority bank
outreach efforts; only 7 of the 20 banks that were surveyed
responded. Additionally, in 2005 the FDIC requested feedback on
several proposals to better serve their institutions, and 25
minority banks responded.
The GAO reported that only about one-third of the survey
respondents rated regulators' efforts as very good or good.
Since so few minority banks are participating in the
regulators' efforts, perhaps the one-third figure represents
the banks that are participating in the events, while the banks
that rated their agencies' efforts as poor have not
participated in programs at all.
The GAO reports that the banks not participating in such
efforts may be missing opportunities to address the problems
that limited their opportunities or financial performances,
assistance and availability. But it is the bank officials'
responsibility to take advantage of these programs to ensure
that their banks succeeded. The regulators cannot force banks
to participate in these programs.
Regardless of these findings, positive news regarding the
minority banks has been more recently documented. Last month,
Creative Investment Research, Inc., a Washington consulting
firm that focuses on minority banks, reported that assets of
minority-owned banks are on the pace to increase by an average
of about 18 percent this year, compared to the overall industry
average of only 6 percent.
The report stated that a dozen banks have opened since the
end of 2005 targeting Hispanics. The report also showed that
while the return on assets of these banks has dropped off
dramatically in the last 18 months, this was attributed to an
increase in the startup targeting minorities. Mr. Cunningham,
president of Creative Investment Research, Inc., said that he
expects when minority startups mature, the returns will move
closer to the industry rate.
Additionally, Evelyn Smalls, president and CEO of the $72.3
million asset United Bank of Philadelphia, an African-American-
owned bank, has stated that interest in economic development
has increased. Evelyn stated that the bank has been contacted
by numerous people expressing interest in working with the bank
and bringing business to the bank. She expects her bank will
increase in assets to about $100 million over the next few
years.
While I believe that the success of these banks is
obviously important, as it is in the success of any bank, it
seems to me that the most important part of the discussion is
missing here, to consumers, that we need to focus on them. If
the intent of Section 308 of FIRREA was to promote the economic
viability of minorities in underserved communities, instead of
focusing on who owns a bank, we should be discussing whether
banks are successfully serving minorities in underserved
communities. That is the overarching goal of the law.
Additionally, we must consider the value of the opportunity
that the thousands of banks, big and small, in this country
have offered traditionally underserved communities, which has
ultimately increased competition and consumers' choice.
I look forward to hearing from our panel today. Thank you.
Chairman Watt. I thank the gentleman for his opening
statement, and we certainly want to focus on the part of his
statement regarding service to the community and customers in
underserved areas. That is an important focus. And we are
likely to be having some hearings on that aspect of this issue,
too.
Mr. Lynch, would you care to be recognized for an opening
statement?
Mr. Lynch. Thank you.
Chairman Watt. The gentleman from Massachusetts is
recognized.
Mr. Lynch. Thank you, Mr. Chairman. As is the custom here
in Washington, I am required this morning to be in three
separate hearings all occurring at the same time, so I must beg
the Chair's indulgence. I am going to have to jump over to
those other two committees during the course of the morning.
But I would like to thank you and Ranking Member Miller for
convening this hearing on the importance in the future of
minority banks. We have a copy of the GAO report this morning
on the effort to promote and preserve minority-owned community
financial institutions, which report confirms the critical
nature of minority banks in historically underserved areas.
But it also points out that it was difficult for regulators
to best assess the effectiveness of support efforts to these
institutions, in the report which is entitled, ``Minority
Banks: Regulators Need to Better Assess Effectiveness of
Support Efforts.'' As a result of this 72-page report, I
believe it is vital that we are here today to use our oversight
capacity on this committee to ensure that these critical
minority institutions' needs are best met.
On a Federal policy level, especially in regards to Federal
bank examination, competitive advantages or disadvantages that
might exist in particular areas, I am particularly pleased to
see that a friend and constituent of mine, Bob Cooper, is here
this morning. He is the chief legal strategist and architect
for OneUnited, which just happens to be the largest African-
American-owned bank in the country.
And I know that since he joined OneUnited's management
team, it has acquired and turned around at least three troubled
banks that I know of, and it has grown from $56 million to
about $650 million in assets, making it the fastest-growing
African-American-owned bank in the Nation. Mr. Cooper has also
been instrumental in the bank received CDFI bank expertise
awards over the past 4 years for its lending in distressed
communities, particularly in my district.
Mr. Cooper is testifying today in his capacity as the
chairman of the National Bankers Association, and his expertise
is particularly valuable, I believe today, as we address the
issues faced by minority depository institutions around the
country. I am particularly interested in his testimony
regarding CRA. As we all know, over the years, the
responsibility of the volume of mortgages underwritten by the
banks has reduced, banks covered by CRA has been reduced, and
yet mortgage companies and mortgage brokers not covered by the
CRA have seen a dramatic increase.
And so I am eager to receive Mr. Cooper's testimony, just
as I am all the panelists who have been willing to come forward
this morning to help this committee with its work.
With that, Mr. Chairman, I yield back.
Chairman Watt. I thank the gentleman for his opening
statement. And I would just say to Mr. Cooper that
Representative Waters and Representative Lynch were lobbying to
introduce you. So--
Mr. Lynch. And Mr. Capuano, I might add.
Chairman Watt. That must mean you are doing something
right. I will make my own personal statement about my banker a
little bit later.
Other members obviously will be in and out. There are a lot
of hearings going on this morning. In fact, I am supposed to be
in three right now in various committees, so you can anticipate
that members will be in and out.
I just spoke of Ms. Waters. I am getting ready to introduce
the witnesses, but if you would care to make an opening
statement, I would be delighted to recognize you before I do
that.
Ms. Waters. Thank you very much, Mr. Chairman. It is very
kind of you. And I do appreciate this hearing that you are
holding today. This is a very, very important subject, and one
of those areas that has not gotten much attention in the
Congress in the years that I have been here.
But as we know, there has always been an effort to truly be
a part of the American business and economic community in this
country. It has been very difficult, and we have talked a lot
about access to capital. We have talked a lot about
entrepreneurship, a lot about involvement of minority
communities in financial institutions, and the desire for
ownership by minorities. We talk about it a lot, but there has
not been a lot of support for minority institutions, many of
whom have struggled in order to stay in business and provide
services, services for the minority communities that oftentimes
are not being provided by anybody else.
I am reminded of the disaster in the Gulf Coast with
Hurricanes Katrina and Rita and the impact that they had on
some of our minority banks. While I know there was some
assistance, it was not enough. We do very little to preserve
and/or expand minority banks. And even though I think we can
find somewhere in our laws that it is intended that we should
try and preserve and expand minority banks, when we have
attempted to use that instruction and law, we have not been
able to execute anything in a real way.
This hearing today will help us to understand better what
is going on out there and how perhaps we can be of assistance
and get this Congress on record for our desire to preserve and
expand minority banks. So I thank you Mr. Chairman.
And while I am doing that, I would like to make a
disclosure--because I think it is absolutely necessary--that my
husband is a director of a minority bank. So I want that on the
record, and I will submit my disclosure in writing.
Chairman Watt. All right. For a change, we have to make
disclosures. So that is a good thing.
Without objection, other members' opening statements will
be made a part of the record, and they will have some
additional time to submit them for the record.
I am now going to introduce the panelists briefly. Without
objection, each of your written statements in their entirety
will be made a part of the record. And each witness will be
recognized for 5 minutes, although--we try to stay close to
that, but I am a little bit more lenient on that than most
Chairs are.
We will start with Mr. George Scott, who is the Director of
the Financial Markets and Community Investment team of the GAO,
where he helps lead the GAO's work assessing the ability of the
financial services industry and its regulators to help maintain
a stable, well-functioning financial system. He is responsible
for leading the GAO's work related to higher education issues,
including Federal student loan and grant programs also.
Mr. Scott, you are recognized for 5 minutes.
STATEMENT OF GEORGE A. SCOTT, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
(GAO)
Mr. Scott. Thank you, Chairman Watt, Ranking Member Miller,
and members of the subcommittee. I am pleased to be here today
to discuss the efforts of Federal bank regulators to support
minority banks.
Minority banks are a small community within the banking
industry, accounting for 2 percent of all financial
institutions and total industry assets. Despite their small
numbers, these banks can play an important role in serving the
financial needs of historically underserved communities such as
African Americans, and growing populations of minorities such
as Hispanic and Asian Americans.
Federal regulators are to work to preserve and promote
minority banks. For example, the Federal Deposit Insurance
Corporation and the Office of Thrift Supervision are required
to provide minority banks with technical assistance, training,
and educational programs. They must also work to preserve the
character of minority banks in cases involving mergers or
acquisitions or these institutions.
My testimony today summarizes the key findings of our 2006
report, which discussed the profitability of minority banks,
regulators' efforts to support such banks, and the view of
minority banks on these efforts.
In summary, our analysis showed that the profitability of
most minority banks with assets greater than $100 million
nearly equaled that of their peers. However, the profitability
of smaller minority banks and African American banks of all
sizes did not meet their peers' size and profitability.
Many small minority banks had return on assets that were
substantially lower than those peer groups. Moreover, African
American banks of all sizes had return on assets that were
significantly lower than those of their peers.
Our analysis identified some possible explanations for the
low profitability of some minority banks, such as higher
reserves for potential loan losses, higher administrative
expenses, and competition from larger banks. Nevertheless, the
majority of officials from minority banks were positive about
their bank's rational outlook, and many saw their minority
status as an advantage in serving their communities.
In terms of fellow efforts to support these banks, we found
that bank regulators have adopted different approaches. The
FDIC, which supervises more than half of all minority banks,
had the most comprehensive program to support minority banks
and led an inter-agency group that coordinates such efforts.
Among other things, the FDIC designated officials to be
responsible for minority bank efforts, held periodic
conferences for banks, and established formal policies for
annual outreach.
The OTS also designated staff to be responsible for the
agency's efforts to support minority banks, developed outreach
procedures, and focused on providing technical assistance.
The OCC and the Federal Reserve, while not required to do
so, also undertook some efforts to support minority banks.
Despite these initiatives, at the time of our review, no agency
had regularly assessed the effectiveness of its efforts or
established outcome-oriented performance measures for their
programs. Consequently, regulators were not well-positioned to
assess the results of their efforts or identify areas for
improvement.
Some minority banks identify potential limitations in the
regulators' support efforts. About one-third of survey
respondents rated their regulators' efforts for minority banks
as very good or good, while 26 percent rated the efforts as
fair, and 13 percent as poor or very poor.
FDIC-regulated banks were more positive about their
agency's efforts than banks regulated by other agencies.
However, only about half of the FDIC-regulated banks and about
quarter of the banks regulated by other agencies rated their
agency's efforts as very good or good. Furthermore, although
regulators emphasize providing technical assistance to minority
banks, less than 30 percent of such institutions said they had
used this assistance within the last 3 years.
Some minority bank officials also said that regulators did
not always understand the challenges minority banks face in
providing services in their communities. They suggested that
examiners needed to undergo more training to improve their
understanding of minority banks and the customers they serve.
In conclusion, regulators are now taking steps to better
assess their support efforts. For example, all the regulators
are in the process of consulting with minority banks to obtain
feedback on their efforts. Some regulators also plan to provide
additional training to their examiners on minority bank
issuers.
While the regulators' recent efforts are encouraging, it is
too soon to assess their effectiveness. As they undertake these
initiatives, we encourage regulators to ensure that they
collect and analyze relevant data and take steps to continue to
enhance their minority bank support efforts.
Mr. Chairman, this concludes my prepared statement, and I
would be happy to answer any questions you or other members of
the subcommittee may have at this time. Thank you.
[The prepared statement of Mr. Scott can be found on page
85 of the appendix.]
Chairman Watt. I can certainly tell that this gentleman has
testified here before. He hit 5 minutes on the head, and
followed the purpose for our being here, which is to evaluate
and talk about the GAO's report.
Our second witness is Ms. Sandra L. Thompson from the FDIC.
She is the Director of FDIC's Division of Supervision and
Consumer Protection, where she directs risk management and
consumer protection examination activities relating to
approximately 5,200 FDIC-supervised institutions. She
previously served as the FDIC's Deputy to the Vice Chairman and
led the FDIC's Bank Secrecy Act and anti-money laundering and
financial crimes supervisory activities.
She holds a degree in finance from Howard University. And
Ms. Thompson, we would love to hear from your for 5 minutes,
approximately.
STATEMENT OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF
SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC)
Ms. Thompson. Thank you. Chairman Watt, Ranking Member
Miller, and members of the subcommittee, I appreciate the
opportunity to testify on behalf of the FDIC regarding our role
in preserving and expanding opportunities for minority
institutions. Historically, these institutions play a vital
role in their communities. They serve as a key source of credit
and other banking services that are essential to economic
growth and business development in areas that are often
underserved by traditional institutions.
My written testimony details the FDIC's efforts to preserve
and encourage minority ownership of depository institutions, as
well as our actions to respond to the recommendations in the
October 2006 GAO report.
As for the overall health of the 205 minority institutions
in the banking system, while most are profitable, their
financial performance as a group lags behind non-minority
institutions. The capital levels of minority institutions are
roughly comparable to that of the industry. However, the
average return on assets for these institutions in the first
half of this year was .69 percent compared to an industry
average of about 1.21 percent.
The difference in profitability can result from many
factors. Minority banks, like most community banks, often must
compete with larger financial institutions for both business
and staff. In addition, some minority institutions are
challenged by operating in economically distressed areas. The
disparities in profitability and other key measures between
minority banks and other financial institutions demonstrate the
continued importance of the FDIC's goals to encourage and
preserve these institutions.
In order to achieve these goals, the FDIC operates under a
policy statement that was adopted by our Board of Directors.
This statement provides the framework for the training and
technical assistance we offer to banks under our minority bank
program. The FDIC has staff dedicated to the minority bank
program nationwide.
At its core, the FDIC's minority bank program focuses on
two key elements. First, our program is designed to provide
technical assistance and training to minority banks. We use a
number of methods. They range from assistance to individual
banks to national and regional conferences and forums that
focus specifically on minority bank issues.
The second element of our minority bank program is to train
our examiners. The FDIC has specific programs in place to
educate bank examiners and sensitize them to the unique issues
often found in minority institutions. Traditional measures of
success for the industry as a whole may not apply to minority
institutions, so examiners have been advised not to place undue
emphasis on peer analysis when evaluating minority
institutions. We also invite minority bankers to speak at all
major FDIC examiner training conferences to share their
experiences and perspectives.
The FDIC's minority bank program receives attention at the
highest level in the agency. The national minority bank
coordinator submits a quarterly report of all minority bank
activities to our Chairman, and we also highlight elements of
the program in our annual report.
In response to the GAO's recommendations, the FDIC has
developed an annual survey that will be sent to all minority
banks at the end of this year. The banks will be able to rate
the effectiveness of FDIC assistance programs. We also
implemented the recommendation to develop and track specific
outcome-oriented performance measures for our minority bank
program.
In summary, minority institutions face many challenges. The
FDIC recognizes the vital role that these institutions play in
the economic development of communities throughout the United
States, and we are dedicated to the goals of preserving,
promoting, and encouraging the creation of minority depository
institutions.
This concludes my statement, and I will be happy to answer
questions.
[The prepared statement of Ms. Thompson can be found on
page 113 of the appendix.]
Chairman Watt. Thank you so much, Ms. Thompson.
Our third witness is Ms. Montrice Yakimov of the Office of
Thrift Supervision. Ms. Yakimov joined the Office of Thrift
Supervision in June of 2006, and is responsible for the
development, implementation, and evaluation of examination
programs for compliance with Federal consumer protection laws,
including fair lending, the Community Reinvestment Act, and the
BSA anti-money laundering requirements. She also heads up
compliance policy, and is responsible for the consumer
complaint function and the agency's community affairs program.
Ms. Yakimov received her undergraduate degree in broadcast
management from Howard University, and received her MBA from
George Washington University. Welcome, Ms. Yakimov, and you are
now recognized.
STATEMENT OF MONTRICE GODARD YAKIMOV, MANAGING DIRECTOR,
COMPLIANCE AND CONSUMER PROTECTION, OFFICE OF THRIFT
SUPERVISION (OTS)
Ms. Yakimov. Thank you. Good morning, Chairman Watt,
Ranking Member Miller, and members of the subcommittee. Thank
you for the opportunity to discuss the Office of Thrift
Supervision's program on preserving and expanding minority
ownership of savings associations, Federal savings
associations.
The OTS recognizes and supports the critical mission, the
legacy, and the role that minority institutions have played in
the United States. Since the 1970's, before there was a
legislative requirement to do so, the OTS, through its
predecessor, has provided technical assistance and other forms
of support to the minority institutions we supervise.
You have asked about our efforts to address GAO
recommendations to improve our minority institutions program.
These actions are detailed in my written statement, but I will
highlight today some of the initiatives that the OTS has
recently undertaken under the leadership of our Director, John
Reich.
The OTS minority institution program provides technical
assistance and various forms of support to 22 minority thrifts,
many of which primarily serve minority and lower income
communities. We have more than 30 staff members, including
senior management and directors, who directly provide various
forms of assistance such as providing regular input and
guidance on strengthening various compliance risk management
systems; conducting training for boards of directors on various
issues such as corporate governance, capital credit, and
accounting policy; and occasionally assisting institutions in
identifing and hiring new senior management and directors.
Although the coverage ratio of OTS staff to minority
institutions enables frequent contact with the management and
leadership of those institutions, the GAO report recommended
that the banking agencies institute a survey to see how we
could do more to ensure that our minority institution program
is delivering the forms of assistance most valued and desired
by the institutions we supervise. OTS agreed, and has
implemented this recommendation. We will use the results of
this survey to continue to enhance our program.
Our survey supplements an annual questionnaire entitled,
``The Thrift Satisfaction Survey,'' which we are also tailoring
in order to solicit ongoing information from the minority
institutions we regulate.
In order to proactively seek input on our program, we have
also increased our contact with executives from minority
institutions. For example, OTS Director Reich recently hosted a
meeting of thrift institution executives at the 2007 Inter-
Agency Minority Institution Conference in Miami. The Director
also spoke at the National Bankers Association conference this
fall, as he did last year, seeking advice and input on what the
OTS could do to improve our minority institution program.
We have received excellent suggestions at these meetings,
and will be incorporating them into the 2008 strategic plan for
our minority institutions program. Our strategic plan will be
finalized by year end, and it is consistent with the GAO
recommendation to develop outcome-oriented performance measures
to assess the progress of our efforts in relationship to the
minority institution program goals.
Additionally, consistent with one of the principles
contained in FIRREA regarding minority institution support
programs, next month the OTS will pilot more training for our
examiners on our minority institution program during an
advanced examiner school here in Washington. Also with the
objective to support the creation of new minority institutions,
the OTS has proactively participated in conferences widely
attended by minority bankers, entrepreneurs, and other
interested parties across the country. Through our booth, we
have participated in events such as the Congressional Black
Caucus conference, the National Council of La Raza's annual
conference, and the Multicultural Business Symposium sponsored
by the Black Business Professionals and Entrepreneurs.
The OTS, along with the other agencies, is considering how
supervisory guidance can support minority institutions. For
example, last year the OTS realigned our CRA regulations with
that of the other agencies and joined the agencies in proposing
guidance to permit non-minority-owned institutions to receive
favorable CRA consideration for investing in minority-owned
institutions.
Notwithstanding all these efforts, we believe we can do
more. Development of a minority institution strategic plan is
underway as we look to the future and additional steps we can
take to further strengthen our program.
Thank you, Mr. Chairman, for highlighting this important
issue. We look forward to working with you, Ranking Member
Miller, the members of the subcommittee, and our fellow banking
regulators to help support a bright future for minority-owned
financial institutions. Thank you.
[The prepared statement of Ms. Yakimov can be found on page
153 of the appendix.]
Chairman Watt. Thank you, Ms. Yakimov. Our witnesses are
doing great staying in the time limit, but that is not to put
pressure on the last two witnesses. They don't have the
experience at doing this that the regulators do, so don't feel
intimidated by that.
Our next witness is Ms. Sandra Braunstein. Ms. Braunstein
is the Director of the Federal Reserve Board's Division of
Consumer and Community Affairs. As Director, she is principally
responsible for the development and administration of Federal
Reserve policies related to consumer financial services and
consumer protection. Ms. Braunstein also administers outreach
efforts to the financial services industry, State, local, and
Federal Government officials, and consumer and community
organizations.
Ms. Braunstein, you are recognized for your statement.
STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Ms. Braunstein. Thank you, Mr. Chairman. Chairman Watt,
Ranking Member Miller, and members of the subcommittee, I
appreciate this opportunity to discuss the Federal Reserve's
longstanding commitment to, and work in support of, minority-
owned depository institutions.
Nationally, there are about 200 minority-owned depository
institutions serving a broad range of communities and
populations. The Federal Reserve System supervises 19 minority-
owned State member banks that are geographically dispersed
across 8 of the system's 12 districts. They are diverse in
terms of their minority ownership, including African American,
Native American, Asian, and Hispanic-owned institutions.
Some of these banks are quite profitable and operate in
higher income markets, while others serve lower income
communities and in some cases are challenged to achieve
earnings commensurate with their peers. Their issues are
similar to those faced by many other banks--controlling
overhead expenses, difficulty in retaining qualified
management, and meeting competition from larger institutions in
their markets.
Through our regulatory, supervisory, and community
development functions, we consistently provide assistance that
addresses the unique challenges and needs of minority-owned
banks while at the same time holding these institutions to the
same supervisory standards that we apply to all insured banks.
To enhance our support for minority-owned institutions, the
Federal Reserve has developed an innovative and comprehensive
training and technical assistance program. This program will be
fully operational in 2008.
In developing the program, Federal Reserve staff met with a
number of minority-owned and new banking organizations across
the country, as well as trade groups, bank consultants, the
Conference of State Bank Supervisors, and other State and
Federal banking agencies to learn about the challenges that
institutions confront in raising capital, and in growing and
attracting talent. These meetings provided valuable information
about the special needs of minority-owned banks, and also
enhanced our understanding of the various issues that new and
smaller institutions face.
The resulting training program consists of three modules
that focus on issues that are most relevant at a particular
point in a bank's life cycle. The modules have value for
potential entrance to the industry as well as those that have
been in the market for many years. They draw on data and
experience from experts in the fields of economics, accounting,
finance, compliance, and may focus on the particular challenges
of establishing and sustaining robust and vibrant minority-
owned depository institutions.
Given that our minority-owned institutions are
geographically dispersed and serve different types of
communities, a great deal of flexibility is being built into
the curriculum so that modules can be tailored to address
institution-specific concerns or issues. The program also
includes a way to obtain continuous feedback on the usefulness
of the course materials. The Federal Reserve is committed to
respond to changes in the training needs of minority
institutions by reviewing and adapting the curriculum as
needed.
Concurrently, efforts are underway to incorporate material
from the new training modules into the Federal Reserve examiner
training programs. Relevant training will be provided for both
safety and soundness and consumer compliance examiners.
In addition to this new program, the Federal Reserve has
had other ongoing efforts that specifically provide support to
minority-owned institutions. We joined the other banking
agencies in 2006 and 2007 in hosting national conferences for
federally insured minority-owned institutions.
System staff have also participated in regional events. Our
ongoing commitment is further demonstrated through coaching and
mentoring minority-owned banks that have struggled to manage
growth while remaining profitable. We have also assisted
institutions through the acquisitions process, including branch
acquisitions.
On the regulatory front, the banking agencies recently
issued for comment some clarifications regarding the Community
Reinvestment Act. One of the proposed questions and answers
indicates that non-minority banks' investments in minority-
owned banks receive favorable consideration under the
investment test even if the minority-owned institution is not
located in and the activities do not benefit the assessment
areas of the investing institution.
I would like to reiterate the Federal Reserve's commitment
to promoting vibrant, competitive, and diverse banking markets.
We are dedicated to using our roles as supervisors, regulators,
community development facilitators, and consumer educators to
support minority-owned institutions and the consumers who
contribute to our robust financial services system.
Thank you.
[The prepared statement of Ms. Braunstein can be found on
page 53 of the appendix.]
Chairman Watt. I thank you for your statement. Our next
witness is Mr. John Walsh of the OCC. Mr. Walsh is the Chief of
Staff and Public Affairs for the OCC, serving as the
Comptroller's senior advisor on all matters. He represents the
Comptroller in internal and external meetings and events, and
provides expert policy advice. He also oversees the Agency's
public affairs, congressional liaison, banking relations,
program analysis and leadership learning, and workplace
fairness functions.
Mr. Walsh holds a masters in public policy from the Harvard
Kennedy School of Government. Mr. Walsh, you are recognized for
your statement.
STATEMENT OF JOHN G. WALSH, CHIEF OF STAFF AND PUBLIC AFFAIRS,
OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Walsh. Thank you, Chairman Watt, Ranking Member Miller,
and members of the subcommittee. I am John Walsh, Chief of
Staff and Public Affairs at the Office of the Comptroller of
the Currency.
I am pleased to appear before you today to discuss the
GAO's October 2006 report, ``Minority Banks: Regulators Need to
Better Assess Effectiveness of Support Efforts,'' and the
actions that the OCC has taken to address the recommendations
of that report.
The OCC recognizes that minority-owned banks are important
community and national assets. Minority banks have long
performed a vital role in the American financial system by
serving the market needs of their local communities, and the
OCC is committed to encouraging their continued success. While
the OCC is not subject to Section 308 of FIRREA, it has
voluntarily taken the initiative to support minority banks in
keeping with that legislation.
The OCC issued a policy statement on minority-owned
national banks in 2001 to further the ability of minority banks
to prosper and meet the needs of their communities. Let me
review a few of the actions we have taken to implement this
policy.
First, the OCC created a senior advisor position in 2004 to
serve as the agency's focal point for minority banking issues.
Second, the OCC formalized its longstanding practice of making
experts available in each of the OCC's districts to provide
guidance on a range of supervisory issues of importance to
minority-owned institutions. Third, we have issued guidance,
distributed publications, and conducted information sessions
regarding the provision of capital and other resources to
minority-owned banks, including majority bank investments in
many institutions.
As you know, the 2006 GAO report recommended that we
consider serving minority institutions or undertaking other
measures to determine how minority banks view our support
efforts and related activities, and to assess the progress in
meeting our goals. Building on our minority bank policy
statement, we have undertaken additional efforts to increase
the effectiveness of our supervisory services and outreach to
our minority banks, as recommended in the GAO report.
Our initial step, now completed, was to conduct an internal
survey of the assistant deputy comptrollers and portfolio
managers who directly supervise minority national banks.
The second phase of our review began in August 2007, when
we distributed a survey directly to our minority-owned national
banks. The minority national banks survey is very focused on
how we can make our education, outreach, and technical
assistance efforts more useful and effective to these banks.
The survey also provides minority bankers the opportunity
to comment on the OCC's supervisory policies and guidance and
to state whether they believe our examiners have the training
and guidance necessary to effectively supervise their banks.
I can report that the early returns from these surveys
underscore the importance of specialized supervision for
minority-owned banks. These results encourage us to place even
greater emphasis on how to improve the effectiveness of our
supervisory policies and guidance, and the ongoing training
needs of both our examiners and our minority institutions.
As I describe further in my written testimony, the OCC is
also implementing several additional initiatives to further the
ability of minority banks to prosper and meet the needs of
their communities. These include improving communications with
organizing groups interested in entering the national banking
system, expanded participation in outreach meetings and
conferences throughout the country to discuss supervisory and
industry issues, and the expanded use of the internet to
support minority institutions.
The OCC created an external outreach and minority affairs
page on the OCC's public Web site, and a special informational
page for bankers on OCC's National BankNet site is under
development. New BankNet features will include comparative bank
performance metrics, discussion of legislative and regulatory
issues, upcoming training opportunities, and other information
of interest to minority bankers.
In conclusion, let me restate the OCC's commitment to work
with minority-owned national banks and to provide effective
technical assistance and supervisory services. As I mentioned,
the OCC has voluntarily taken the initiative to support and
reach out to minority banks under FIRREA's Section 308
provisions, and we would have no objection to that being made
explicit by the Congress.
Thank you, Mr. Chairman. I would be pleased to answer your
questions.
[The prepared statement of Mr. Walsh can be found on page
136 of the appendix.]
Chairman Watt. Thank you, Mr. Walsh.
Sometimes when you are in the middle of these hearings, you
have a flashback to an earlier time in your life. And I just
had one because--and Ms. Waters is going to get me out of the
problem. I had two guys in my high school class. One of them
was named ``Cooper'' and one of them was named ``Cooper''--
spelled exactly the same way. So I have had this dilemma in my
whole life, and I don't have to answer that today because I am
going to recognize Ms. Waters to make the introduction of our
next witness, whatever his name is.
Ms. Waters. Thank you very much for putting me on the spot,
Mr. Chairman.
There may be two ways to pronounce this gentleman's name,
but I have always referred to him as Mr. ``Cooper.'' Mr. Bob
Cooper, the chief legal strategist for OneUnited, the largest
African American-owned bank in the country. Mr. Cooper is
typical of the young, brilliant minds that have been amassed at
OneUnited Bank by Mr. Kevin Cohee.
Since Mr. Cooper joined OneUnited, it has acquired and
turned around three troubled banks, and grown from $56 million
to $650 million in assets, making it the fastest-growing
African American-owned bank in the Nation. Mr. Cooper is here
today as the current chairman-elect of the National Bankers
Association, the nation's oldest and largest trade association
representing minority- and women-owned banks and thrifts.
Thank you, Mr. Chairman.
Chairman Watt. And I will recognize Mr. ``Cooper,'' or Mr.
``Cooper,'' for his remarks.
STATEMENT OF ROBERT P. COOPER, SENIOR COUNSEL, ONEUNITED BANK,
ON BEHALF OF THE NATIONAL BANKERS ASSOCIATION
Mr. Cooper. Good morning, Chairman Watt, Ranking Member
Miller, and members of the subcommittee. My name is Robert
Patrick Cooper, and I am providing this testimony on behalf of
the National Bankers Association, the NBA, and its national
constituency of minority- and women-owned banking institutions.
First of all, we would like to thank you for taking the
time to hold this hearing regarding the concerns of minority
banks. We are confident you recognize the importance of
minority banks in this country, particularly to our inner
cities, where they not only provide critical financial services
but also, as importantly, serve as a beacon of hope to
underserved minority residents. These remarks seek to initiate
a dialogue with you and your congressional colleagues to
rectify certain problems minority banks face, and thereby avoid
further crises for these institutions.
Regulators thus far have steadfastly refused to focus on
the benefits and changes they are uniquely empowered to
provide, instead emphasizing the straightforward FIRREA mandate
regarding technical assistance. FIRREA was about more than
technical assistance. It was a recognition of the unique
challenges of minority banks and a promise to rectify them, a
promise that thus far has been unfulfilled.
Let me briefly provide some context. The assessment of the
GAO report accurately can be described as no less than
alarming. For example, African-American banks, which are at the
very heart of many large U.S. cities, have ROAs that
significantly lag that of their peers, in some cases by as much
as 75 percent. Unfortunately, the regulatory response to this
crisis has fallen far short of congressional mandates as
outlined in FIRREA.
As a result, we are well beyond the point where nebulous
promises of future assistance are sufficient. Having failed to
see expected benefits in the 18 years since FIRREA's passage,
the NBA strongly believes that more forceful congressional
action and oversight is now required.
Accordingly, the NBA is requesting specific, prompt,
forceful action at the legislative, regulatory, policy, and
procedural level to change the environment in which minority
banks operate. We would very much appreciate the committee
leading this effort and forcing the banking agencies to appear
before you in formal hearings in which we can also participate
on no less than an annual basis to explain their performance on
a ``outcome-oriented'' basis recommended by the GAO.
Now, as a road map of certain objectives, we suggest the
following. On the legislative front, we would ask respectfully
that Congress amend FIRREA to expressly make it apply to all
four Federal banking agencies, and to make it a mechanism of
change. In my written remarks, I have prepared specific
language for the committee's consideration.
To emphasize, however, while we believe amending FIRREA is
important unto itself, it is far from sufficient. Our
fundamental dissatisfaction is not with Congress. As a result,
we wanted to provide a non-exhaustive list that the banking
agencies can target to begin to improve the standing of
minority banks.
First, the current capital rules are not designed to
address the particular experience of minority banking
institutions, and thereby to enable them to become prominent by
asset size as well as role, and members of the financial
services marketplace.
The avenue of raising capital commonly used by majority
banks, broad public offerings of common stock, is not
practically available to minority banks. The general concern is
that by raising such funds, the shareholder base of the bank
will change in a way that is adverse to its status and role as
a minority bank.
We thus submit, and wish the banking agencies to recognize,
that: one, nonvoting preferred stock held by institutional
investors is a stable, safe, and sound form of capital; and
two, it would not be an unsafe or unsound banking practice to
amend the capital rules to permit minority banks to have a high
percentage of capital consisting of such nonvoting preferred
stock.
As a second specific area for change, despite certain
recent and appreciated regulatory initiatives, the current CRA
rules still do not address the particular environment in which
minority banks operate, for example, with respect to
encouraging majority banks to support them through investments,
loans, or deposits.
Majority banks should receive CRA credit for funding
minority- and women-owned banks, which are often community
development financial institutions, or CDFIs. By modifying the
CRA framework to make it expressly clear that such funding is
wholly consistent with the purposes of CRA, minority banks can
materially increase the funding they receive from bank
institutional investors.
We are aware of Q&As designed to address this issue.
Nevertheless, we strongly believe that the banking agencies
should amend the CRA regulations to more expressly grant CRA
credit to majority banks for providing funding to minority- and
women-owned banks in CDFIs.
As a third specific area for change, banking agencies
should consider the particular challenges faced by minority
institutions when making broad policy statements. Such
statements tend to address sweeping topics of current relevance
to financial services, often in untailored terms. Consequently,
minority banks face the prospect of examinations and criticisms
not appropriate given their role in the industry.
We would suggest each banking agency either create a
blanket policy addressing minority banks or amend their
existing policies to expressly provide that regulators and
examiners thoughtfully consider the unique circumstances of
minority institutions in applying such policies.
Going forward, we would further suggest that each time
regulators propose a policy statement, they strongly consider
whether minority banks should be separately addressed in the
statement, and specifically discuss their reasoning and
conclusion in this regard in the preamble to the proposed
policy.
In conclusion, we look forward to working with you and the
regulators to address the foregoing challenges facing our
institutions. We appreciate your attention to this important
matter, and I would be pleased to answer any questions you may
have. Thank you.
[The prepared statement of Mr. Cooper can be found on page
62 of the appendix.]
Chairman Watt. Thank you, Mr. Cooper, for your testimony.
And I will now make my disclaimers so that I get them on
the record. Most people recognize my congressional district as
being the second largest financial center in the country in
Charlotte, North Carolina. And they recognize Bank of America
and Wachovia.
But it should be clear that my bank account has always
been, throughout my entire banking history, at Mechanics &
Farmers Bank, a minority institution in our great State. And I
should also disclose, although it is a matter of public record,
that I am a shareholder in Mechanics & Farmers Bank--not on the
board; I don't have any close connections like that.
But I wanted to get that out of the way before I introduced
our next witness, Kim D. Saunders, who has served as president
and CEO of M&F Bancorp, Inc. and M&F Bank, Mechanics & Farmers
Bank, since February of 2007, and before that held the same
title at Consolidated Bank & Trust Company. She was the second
female president and CEO in Consolidated Bank's history, a
distinction she also holds at Mechanics & Farmers Bank.
Ms. Saunders has a B.S. degree in economics from the
Wharton School of Finance at the University of Pennsylvania,
and an honorary Doctorate of Humane Letters from Shaw
University in Raleigh, North Carolina. We welcome you today. To
the extent that there is such a thing as a personal banker, Ms.
Saunders might be it, although she is way--150 miles away from
where I am in Charlotte.
So we recognize you for your statement.
STATEMENT OF KIM D. SAUNDERS, PRESIDENT AND CEO, MECHANICS &
FARMERS BANK
Ms. Saunders. Good morning, and thank you. Mr. Chairman,
Ranking Member Miller, and other distinguished members of the
subcommittee. Again, my name is Kim D. Saunders and I am
president and CEO of M&F Bancorp, Inc., and Mechanics & Farmers
Bank. On behalf of the boards of directors of M&F Bancorp,
Inc., and Mechanics & Farmers Bank, I am honored to provide you
with comments on this very important subject of preserving and
expanding minority banks.
M&F is a $223 million community bank that conducts business
in four of North Carolina's largest markets. The bank is
celebrating its 100th anniversary throughout 2007 and 2008, and
our parent company currently is anticipating approval of a
merger agreement that should elevate Mechanics & Farmers Bank
into the top five largest African-American-owned banks in the
United States.
In deference to this committee's time, I would like to
focus on the specific areas that I believe offer the potential
of substantive assistance for minority banks. They are how
regulators may increase utilization of technical assistance
among minority banks, and specifically legislative steps that
should be taken to assist minority banks to raise capital and
to operate efficiently.
In August 2006, the FDIC's Vice Chairman, Martin Gruenberg,
identified some of the challenges to minority banks operating
in a highly profitable manner: the relatively higher cost of
doing business in communities with incomes below market
average; high immigrant populations; smaller deposit base; and
a preference for in-person service.
To assist minority banks in addressing these unique
challenges as well as facilitating capital investments in these
institutions, I recommend the Committee on Financial Services
consider legislation to ensure that bank regulators provide the
necessary notification regarding the array of technical
assistance services that are available, and to amend regulatory
peer group benchmarking and examination evaluations to
recognize the differences between minority banks and the UBPR-
designated peer groups.
Finally, although I recognize that the Federal tax
legislation is outside the purview of this committee, the
ability of minority banks to raise capital would be enhanced if
the CDFI fund guidelines were modified to allow tax credits for
investments specifically in those institutions, more
specifically with respect to increasing the use of technical
assistance by minority banks.
Banking regulators should correspond at least semi-annually
with the CEOs of the minority banks they oversee to apprise
them of the forms of technical assistance that may be available
and to provide the appropriate contact information for future
reference. They should also utilize this opportunity to
determine what other pertinent forms of technical assistance
could be provided.
Regulators should be proactive in communicating with
minority banks, especially those deemed to be low-performing.
Our overall relationship with regulators has been positive, but
there is room for improvement.
In terms of specific legislative steps to assist minority
banks to raise capital and operate efficiently, let me state
clearly that my bank and the other minority banks share the
regulators' goal of ensuring the safety and soundness of the
banking system.
The GAO report clearly highlights the traditional and
universal difference in performance between minority and
majority banks. However, regulatory benchmarks by which
minority banks' performance is graded always compares these
institutions with the UPBR-designated peer groups such that a
truly equitable comparison of performance factors is not
considered nor possible.
The Financial Services Committee should consider
legislation so that regulatory peer group benchmarking and
examination evaluations are tailored to recognize these
differences. Just as there exist today certain examination
differences for money center banks versus smaller community
banks, regulators should modify the grading process utilized in
bank examinations by comparing minority banks to a peer group
of other minority banks, and within the context of this peer
group structure, apply the factors of safety and soundness.
Finally, and as aforementioned, while the Financial
Services Committee does not have jurisdiction over taxes, which
is the purview of the Ways and Means Committee, there is a
palpable role for incentives. The market places such a
significant discount on the value of minority banks that we are
at a significant disadvantage regardless of our stature of
profitability in our abilities to raise capital. Therefore, the
CDFI fund guidelines should be modified to include tax credits
for investments specifically in minority banks.
It is the sincere wish of the boards of directors of M&F
Bancorp and Mechanics & Farmers Bank that this committee will
consider the recommendations made today and take the necessary
actions to truly preserve and expand minority banks.
Again, I am honored and appreciative of this opportunity to
testify, and I am available for questions and comments from
this distinguished panel of committee members. Thank you.
[The prepared statement of Ms. Saunders can be found on
page 74 of the appendix.]
Chairman Watt. Thank you so much for your testimony. She
said she was a little nervous, but she did fine--wonderful.
Thank you.
We welcome Representative Greg Meeks, who is not a member
of our subcommittee, but is a member of the full Financial
Services Committee. I understand that he may wish to make an
opening statement. If so, I would ask unanimous consent to
allow him to do that.
Mr. Miller. Who is wanting to speak? I want to know before
I grant unanimous consent. Oh, Mr. Meeks. Okay.
Chairman Watt. He is reserving the right to object. I think
he is giving you a hard time this morning.
Mr. Meeks. He always does. I will get him in the gym
tomorrow.
Thank you, Mr. Chairman. I am very thankful to you, Mr.
Chairman, for holding this hearing. Coming from the City of New
York, and listening to you as you talked about Ms. Saunders, I
want to say that in New York we have one bank, Carver Savings
Bank, where we have an individual whom Ms. Saunders reminds me
of, Debbie Wright, who is the president of that bank.
I want the record to reflect that my account is at Carver
Savings Bank, and that every--even my campaign's account, every
dollar goes through Carver Savings Bank in New York. And we
then try to advocate for all of the electeds that are in New
York to try to put whatever--not only their personal money, but
whatever political money they raise, if you are going to keep
it at a bank, keep it at Carver Savings Bank because it is
tremendously important to us and it is tremendously important
to the development, the economic development, of our
communities.
And so it is tremendously important--this hearing is
tremendously important for me and important for communities
throughout America because the banks, they are responsible for
and help revitalize our communities. And when we are talking
about individuals needing loans, whether it is for a home,
whether it is for a business, whether it is, you know, in
having someone that you can go in to and trust and you are
talking about truly a neighborhood type situation of
understanding the community in a way that no one else can, it
is the minority banks that we have.
And there is a desperate need, I believe, all across this
Nation to make sure those that we have, that we cherish, and
that we make sure that that playing field is leveled and equal
for them, and that they are evaluated in the appropriate way.
And so I am thankful to be here at this hearing.
I am also thankful to be sitting in the Financial Services
hearing room, Mr. Chairman, and seeing so many people of color
testifying. Too often, that is not the case here in this
hearing room. And I look forward to the individuals who are
testifying to be also testifying very shortly because I know
that they are going to be the heads of many of their regulatory
agencies in particular. And so I look forward to the government
reflecting America, and having them as heads of some of the
regulatory agencies, and testifying before the full committee
representing their agency in that capacity.
I yield back the balance of my time.
Chairman Watt. I thank the gentleman for being here, and I
am personally aware of his longstanding commitment in this area
and his predecessor's longstanding commitment in this area.
Representative Floyd Flake, who formally chaired this
subcommittee, was in office before Representative Meeks, so we
know that congressional district has a long, longstanding
commitment.
Now, I have to chair this subcommittee, so I am going to be
here, but I know some of the other members have commitments
that may require them to leave. I have a bunch of questions, as
you can probably imagine, but I am going to defer my right to
go first and would recognize Ms. Waters for 5 minutes for
questions.
Ms. Waters. Thank you very much, Mr. Chairman. I would ask
unanimous consent to submit for the record my disclosure
statement, which includes my husband's service on the board as
a director. He is also a shareholder in OneUnited Bank.
Chairman Watt. Without objection.
Is that required?
Ms. Waters. I beg your pardon?
Chairman Watt. Maybe I need to do that, too. Is that
required?
Ms. Waters. Well, I think we should always--
Chairman Watt. Okay. We will put it in the record.
Ms. Waters. --put it in the record. And while we are doing
that, let me just explain for those who are wondering about why
so many of us have personal involvement with minority banks.
In the African-American community, the test of your
commitment to economic expansion and development and support
for business is whether or not you put your money where your
mouth is. And so for people who may be in the audience who
don't understand all that you are hearing, you will find that
most black professionals belong to, participate with, their
minority banks in their community. It is expected of us. We
should do it. And it is a true test of our commitment. So I
want that on the record also for those people who don't
understand our relationship to minority banks.
Having said that, let me just say to our agencies that
testified today that the report on minority banks, the
regulators' assessments of the effectiveness of their support
efforts, have been limited. The statement by Mr. Scott is
really kind of an indictment on your ineffectiveness.
We are not here to beat up on you this morning. But while I
appreciate your testimony about the conferences you have
attended, we really want to get to the core of what your
assistance is really all about.
Have any of you been involved in assisting minority banks
with capital formation or access to capital so that they would
be able to provide better services? I see Ms. Thompson is
saying ``yes.'' Would you tell me in as short a period of time
as you possibly can, what have you done to assist with capital
formation? Is it Ms. Thompson or Ms.--Yarrow, is that it?
Ms. Yakimov. Montrice Yakimov.
Ms. Waters. Yes.
Ms. Yakimov. Our agency at the regional level, at the
highest levels in our regional offices, has worked with a
number of our institutions, and is reaching out to potential
investors and supporting their efforts to raise capital.
Ms. Waters. Who have you been successful with?
Ms. Yakimov. I think we have some positive stories to
share. There is one effort that is difficult to talk about
right now because we are early in the process.
Ms. Waters. You don't have to name names. Just tell us,
there has been a particular effort that you have made that
helped to identify and assist in getting ``X'' number of
dollars for capital for a minority bank.
Ms. Yakimov. Yes.
Ms. Waters. How much?
Ms. Yakimov. You know, I would be happy to submit that for
the record. I don't have the specific dollar amount. But I do
know that there have been a number--
Ms. Waters. All right. We will get back to you on that.
Ms. Yakimov. Sure.
Ms. Waters. Because this is what we are really interested
in, not the conferences and the generic outreach. We want to
really talk about, for example, who was involved in saving a
minority bank that may have been taken over by a majority bank
in a merger? Has anybody been involved in that kind of
activity?
Ms. Thompson. The FDIC regularly gets involved in--
Ms. Waters. I am sorry. I didn't hear you, Ms. Thompson.
Ms. Thompson. Sorry. The FDIC regularly gets involved in
troubled institutions.
Ms. Waters. Give me an example of a minority bank that you
have helped to save.
Ms. Thompson. I can't talk about open institutions. But I
can tell you and assure you that there have been near-failures
in minority institutions where we have put together bid lists
that comprise specifically--
Ms. Waters. Are you familiar with Independence Bank?
Ms. Thompson. Yes, I am.
Ms. Waters. Do you know that was a minority bank that was
owned by a minority family for many years in this area that was
taken over by one singularly dedicated white male, who has
ended up with 51 percent ownership of the bank? Were you
involved in that?
Ms. Yakimov. That is--
Ms. Waters. Oh, you were involved in that?
Ms. Yakimov. I am sure Ms. Thompson is happy to pass that
one on to me. Independence is supervised by the Office of
Thrift Supervision. Representative Waters, I appreciate your
point. I can share with you that the OTS did reach out to
potential partners to retain the minority ownership of the
institution. It is difficult to talk about all of that. Some of
it has been publicized in the media.
Ms. Waters. Okay. I am not going to let you go on. I just
bring this up as a point of reference to let you know that we
know about these things, and I am very much involved. I kept up
with this effort with Ms. Carolyn Jordan, who was the first
African American to serve in the Congress of the United States
on the Banking Committee many years ago, a brilliant woman who
worked very hard to try to save that bank.
I just bring that to your attention to let you know that we
are serious about what is supposed to be law and supposed to be
your attempts to honor Section 308 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 that
established goals toward which Federal regulators must work to
preserve and promote such institutions.
And I want you to know that I was involved in reaching out
to the FDIC in particular when there was another bank that was
about to be acquired by a major white bank out of Illinois. And
basically, I was told that there was nothing that could be
done.
Now, let me be clear. We are all interested in making sure
that our banks are sound, that they are operating properly, and
that they are following the rules and the laws. So I don't want
anybody to think that we are trying to get something for
minority banks that they don't deserve.
But let me just say to you that we do not believe that our
agencies who are charged with this responsibility--and it is
pretty much documented in this report--are doing enough. I
appreciate some of the recent efforts to organize after this
report was in process. This is very important to African
American and minority communities, and we are going to do
everything that we can to assist you.
We like the recommendations that are coming forward today
about what we can do. And I particularly want to know about the
peer review more, and I want to know about the capital, the
reserves that are required for so-called at-risk institutions,
so that we can see what we can do legislatively to assist our
minority banks.
Having said that, let me wrap up because I am over my time.
Do any of you have any suggestions for legislation that would
help you, as we have coming from our minority institutions?
What would you suggest we do that could be helpful to you?
Chairman Watt. All of them are swallowing hard. So maybe we
should ask them to think about that and come back with written
recommendations, if they have any. And maybe you can do it in
consultation with others in your regulatory structure.
Ms. Waters. Thank you very much, Mr. Chairman. I yield
back.
Chairman Watt. We unfortunately heard the bells and
whistles going off, which means that we have a series of three
votes. The first is a 15-minute vote, followed by two 5-minute
votes.
We have time to get in one additional question.
Mr. Miller. Maybe two.
Chairman Watt. If there is somebody who will not be able to
come back--
Mr. Miller. Well, now, the minority side has some rights
over here.
Chairman Watt. You have the right to go.
Mr. Miller. Nobody wants me to buy bank stock, but, I mean,
I want to speak.
Chairman Watt. You have to come back.
Mr. Miller. I am going to be back.
Chairman Watt. No, that is fine. I was going to go to
somebody who might not be able to come back.
Mr. Miller. Well, for the record--
Chairman Watt. In that case, I will recognize the gentleman
for 5 minutes. I would have given him the right to do that
anyway.
Mr. Miller. For the record, I bought quite a bit of bank
stock yesterday from my perspective. But nobody is here that I
bought--there are some great deals out there in the banking
industry, I hate to say it, as you all know.
This has been a very good panel. I am just amazed that
everything stayed--probably the first time ever that many
stayed within the 5-minute timeframe. And it is really good to
see.
Mr. Scott, let's start with you on this side. Can you
please describe the technical assistance that you are providing
to minority banks that you think is of benefit to them, and how
many banks utilize the assistance available?
Mr. Scott. Mr. Miller, as GAO, we actually are not involved
in providing technical assistance to the financial
institutions. The work we did focused on the efforts by the
regulators--
Mr. Miller. But you did a study on it? Yes.
Mr. Scott. We just reviewed their efforts. Yes, sir. So I
would defer to the regulators to describe their technical
assistance effort.
Mr. Miller. Okay. And the GAO study in 1993 on minority
banks, has there been significant growth in minority banks
since that study was done, from your perspective?
Mr. Scott. Most recently, I believe the number we have in
our report is around 195. I think the regulators are saying
over 205 now. So there continues to be some growth in those
numbers. Yes, sir.
Mr. Miller. Mr. Cooper--Cooper, excuse me. I will get it
right. I don't want to be wrong--I really enjoyed your
testimony. Is there a reason that you couldn't sell common
stock to maintain minority management in that same process? And
wouldn't this balance both concerns, having adequate capital
and accessing capital like other banks, but maintaining
minority leadership roles within the bank?
Mr. Cooper. The short answer to that is no. But first I
would like to echo Congresswoman Waters, that in no way are we
advocating compromising any of the standards of safety and
soundness, nor are we requesting that this committee
contemplate any measure--
Mr. Miller. But to my question, why couldn't you sell
common stock?
Mr. Cooper. Well, we could sell common stock. The concern
there is that you actually dilute your shareholder base, and
that minority banks are at a competitive disadvantage in that,
for the majority, if you go out and have a public offering, you
are still a majority institution. As a minority bank, if you go
out and engage in that same activity, then you risk losing your
minority character either in the initial public offering or in
sort of a secondary offering.
Mr. Miller. But how do individuals who believe in minority
banks--let's say I believed in minority banks and I wanted to
invest in a minority bank to assist you in what you are doing
in an area. That seems counterproductive that the bank couldn't
allow that because it increases your assets and available funds
to serve the community.
Mr. Cooper. Well, as we know, there are individuals who can
invest in institutions, but the resources of most individuals
are relatively small. The access that or the advantage that
minority banks actually have is their access to large
institutional investors, such as large media conglomerates,
insurance companies, oil companies, and the like, and that they
are willing to invest money in preferred shareholdings which
have no voting rights.
Mr. Miller. So you are afraid that common stock sales would
create a situation where a different group could take over the
bank rather than the minorities?
Mr. Cooper. Correct. And then by definition, you wouldn't
have a minority bank.
Mr. Miller. It is sad to say, but that is counterproductive
to everything we are trying to do in society to integrate
groups in and create opportunity in a fashion. I mean, it
really is, but it is sad.
Mr. Cooper. I would respectfully disagree with those
remarks, that it is sad. Minority banks, particularly African
American--
Mr. Miller. I mean, it is sad that the others can't be
involved in the process.
Mr. Cooper. No. Others certainly can be involved, and any
of our banks welcome capital that is provided to our
institutions. So we are actually not refusing capital from
these different sources. I guess what I would suggest to you is
that those amounts of capital can be found in limited amounts
as opposed to the larger amounts of capital that banks need to
survive and prosper and grow.
Mr. Miller. Ms. Thompson, is there a limit with what
regulators can do with respect to balancing safety and
soundness concerns and helping minority institutions at the
same time?
Ms. Thompson. Well, that is a priority for our
organizations.
Mr. Miller. Microphone?
Ms. Thompson. I am sorry. Yes. Safety and soundness of
financial institutions is a priority for our organizations. I
would say that capital is important because capital really is
used to absorb unexpected losses, and it promotes public
confidence. And when people see that FDIC seal, it ought to
stand for something.
Capital is critical in terms of the institution. And we
have taken a look at some of the suggestions that have been
made by Mr. Cooper, with regard to preferred stock. These
instruments are kind of a hybrid. They have some
characteristics that look like equity, and they also have
characteristics that look like debt.
And when you are talking about capital, we want pure
capital. We want to make sure that there is money available to
absorb losses. Preferred stock represents a debt obligation for
the institution because you have to pay dividends, which is
effectively interest. So we want to make sure that when we are
talking about capital, that it is there and it is available to
absorb losses.
Mr. Miller. Do minority institutions face different
challenges in respect to sound management than other
institutions would?
Ms. Thompson. Well, I don't know that they face different
challenges with regard to sound management. I would venture to
say that I am familiar with many of the management of these
organizations, and I think that they are as sound as any other
in their peer groups.
I would say that there are some challenges that are
specific to minority institutions. They often operate in
economically distressed areas. Many times they operate in urban
areas. And they often have a high reserve for losses. They have
high expenses. They have a high touch operation where they have
to deal directly face-to-face with their customers. So there
are some challenges that are unique to minority institutions.
Mr. Miller. Well, I am in a situation, Mr. Watt, of too
many questions and too little time. Thank you.
Chairman Watt. Well, we will recognize you again on the
next round of questioning, but right now we have about 5
minutes to get to the Floor. So we will recess, and we should
be back immediately following the series of votes. That should
be probably 20, 25, or 30 minutes at the most, so you all be at
ease, and we shall return.
[Recess]
Chairman Watt. We will reconvene. Mrs. McCarthy,
unfortunately, had another meeting she had to go to, but she
said she would get back, hopefully, before we finished up. The
ranking member, I think, is on the way back from the Floor. And
it is my turn to ask questions, anyway.
And since I have so many, maybe I should get on with it so
as not to hold up either the panel or members who come in.
There are a number of areas here that I would like to explore.
Perhaps I should start with Mr. Scott, to ask a general
question.
It seems to me that the regulators in most of the areas
over which they have regulatory authority and which they
consider important, either because they themselves understand
that it is an imperative for them to deal in a certain way, or
because the Congress has made it absolutely clear to them that
we have an expectation.
We will create a set of outcome-oriented performance
measures. I am just thinking about some of those areas. There
are some specific criteria that define whether you are safe and
sound. There are some specific criteria, although the
regulators didn't start out thinking that maybe this was all
that important, there are some specific criteria that define
success or failure to meet CRA.
I don't see anything in this area where that has occurred.
Mr. Scott, your agency--I guess you weren't there in 1993--
defined this as something that might have been desirable in
1993. You identified again in the 2006 report that none of
these agencies, none of these regulators, have established
outcome-oriented performance measures, is the way you described
it.
So I guess my first question, Mr. Scott, and then I would
like to hear from the regulators in this general context, is
many of the same recommendations you made, the GAO made, in
1993, you made again in 2006. In your consultation with the
regulators, have they provided reasons for not implementing the
1993 recommendations, first of all?
And can the GAO offer any suggestions for banking
regulators in this whole context of establishing outcome-
oriented performance measures, or is that something that they
should be taking the initiative on? What kinds of things might
be considered an outcome-oriented performance measure?
Let's start with Mr. Scott on that. And this is not
designed to be unfair to the regulators or to beat up on you.
That has never been my intent. My objective is to be
constructive here. But I would like to hear from all of you in
that context.
Mr. Scott. Thank you, Mr. Chairman. In terms of the
progress the agencies made or did not make between our 1993
report and our 2006 report, I would respectfully defer to them
to explain to you what was going on in the intervening years.
In terms of--
Chairman Watt. But did they say anything to you about--I
mean, did you ask the question? You seem to be finding a lot of
the same things.
Mr. Scott. We had discussions with each of the regulators.
I think some of what we saw was that they were taking some
steps. But the point we made in our most recent report was that
it should be a comprehensive approach--it should be on a more
routine, regular basis, so you have ongoing feedback that can
be provided to the regulators so that they will know realtime
that the actions they are taking--the technical assistance, the
outreach meetings, the conferences--are they really making a
difference?
So rather than doing things on an ad hoc basis, what we are
really focusing in on is trying to encourage them to do these
surveys and other outreach efforts on a more routine basis that
allows them to gather feedback, analyze the data, and then
where necessary, make changes to their outreach programs or
activities. That is really the goal of our recommendations, to
get more realtime data so that the agency is in a better
position to be more responsive to the institutions.
In terms of outcome-oriented performance measures, I mean,
clearly there is a range of opportunities there for the
agencies to implement those. The bottom line is that for any
action the agencies take, we want to make sure that the actions
make a difference. If you are going to do a conference, you
want to know not only that people are attending, but the
material they are receiving, the information being shared is
making a difference in their operations and the financial
stability of the institution.
For example, your examinations, how are they impacting
these institutions? One outcome-oriented performance measure
could be--you know, if you examine a bank and find some
deficiencies, what steps are the institution taking to correct
those deficiencies? If you hold a conference, not only how many
people attend the conference, but did it make a difference in
terms of their knowledge base growing?
So those are the sorts of things we are saying the agencies
may want to consider in terms of outcome-oriented performance
measures. Is what you are doing making a difference? And right
now it is sort of tough to tell exactly what kind of difference
some of the activities are having at the end of the day.
Chairman Watt. Ms. Thompson, Ms. Yakimov, Ms. Braunstein,
Mr. Walsh, I would love to hear from you about this whole
concept of outcome-oriented performance measures. Failure to
have outcome-oriented performance measures, as I said in my
lead-up to the question, may suggest less of a feeling of
importance to the outcomes.
The banks, for example, complained for years that CRA was a
process-oriented thing. We get graded on how many times we meet
with a community group as opposed to whether anything comes out
of that meeting, no performance-oriented, outcome-oriented
result. And just about everything I have heard you all talk
about is process--very little about outcome. I don't want to be
unfair.
But talk to me about this whole concept of outcome-oriented
performance measures.
Ms. Braunstein. Congressman, yes, I just want it clear for
the record that the 1993 GAO report that you are talking about
only focused on the agencies that are covered by FIRREA. We
were not included in that report, so I can't speak to us not
doing something that we weren't part of.
Chairman Watt. Well, maybe I should just hear from Ms.
Thompson and Ms.--
Ms. Braunstein. But I do want to address the outcome-
oriented.
Chairman Watt. All right.
Ms. Braunstein. We have been doing a lot of activities with
minority-owned institutions for many, many years, and I will
admit that our outcome measures have been done on a very
informal basis up till now. We have close relationships with
all the banks we supervise, and we have held discussions with
them about their needs and the effect of our exams and our
technical assistance. But it had not been formalized up till
now.
As part of the program, the new program that we have
developed, the training and technical assistance program, we
have built into that a feedback mechanism so that we can get
information not just through surveys, but some of that feedback
mechanism is actually face-to-face interactions with the
institutions that undergo the training and go to the classroom
training to find out, was it responsive to their needs? Was it
helpful to the issues that they are facing in their
institutions? And if not, what could we do to improve that?
And we will continue--we built in this flexibility so we
can continue to tweak the materials and the sessions to make
them responsive and to make sure that they have good outcomes
for the institutions.
Chairman Watt. Let me go to Mr. Walsh next, and then we
will get to the two people who were actually covered by the
1993 report. Even before you say it, Ms. Braunstein has
acknowledged that you all were not specifically directed or
encouraged to do anything in the 1993 report. So I have that as
a background. Do you want to respond on the outcome-oriented
performance measures part of the question?
Mr. Walsh. Yes, Mr. Chairman. With that as a given, I would
echo some of the things that Ms. Braunstein said in that we
have focused recently on a much more specific and intensive
process of interaction with both our staff that supervise
minority institutions and the institutions themselves to
understand better what can be done better in the processes of
supervision to support the institutions and to get feedback
from the institutions themselves about how that is working.
But even that is somewhat process-oriented in that it is
reviewing the nature of these interactions. I would say that
the supervisory process is in fundamental ways very
performance-oriented in that we look at the performance of the
banks as to capital assets management, etc., and then their
actual financial performance.
So that is the basis on which we are reviewing them, and we
have made more of an effort to look at minority banks within
their peer group to see how they are doing and how that
performance compares to the wider range of institutions that we
supervise.
Ms. Thompson. With the FDIC, we have been very intentional
about our outreach and outcome performance measures. I will
give you some specific examples.
We talk regularly with minority institutions. We host
conferences and forums around the country to find out what the
issues are with the institutions we supervise and those that we
insure. We have six regional offices, two area offices, and
every year they are required to have outreach meetings.
As a result, we try to find out the topics that are of
interest to minority institutions. Specifically, at our
national conference we heard throughout the regions and
throughout the country that capital was important. So we made
sure that we had people at the conference to address some of
the capital issues, specifically for minority institutions.
We heard from our institutions that they had concerns about
the BSA examination process, so we held forums to talk and
specifically go over the BSA examination process so that they
would better understand some of the issues they were faced
with.
We heard from our institutions that they were concerned
about Information Technology (IT), so we brought IT examiners
in to talk about the IT examination process, electronic
banking, and some of the nuances that were associated with
these matters. We also heard from them that they were having
concerns about accounting, so we brought our chief accountant
to address the minority banks so that they could find out what
the new accounting rules were and how they would be applied to
their specific institutions.
In addition to the conferences and things that we do on a
regular basis, one of the things that we require our examiners
to do is 90 to 120 days after an examination of a minority
institution, they are to contact that institution to review the
exam report and to make sure that the institution understands
any issues or concerns that we have highlighted in the report.
And we can help them. We provide technical assistance through
the pre-application process, through the branch application
process, and we also take ad hoc calls.
One of the other things that we have done that is pretty
outcome-oriented is in response to many people who said they
can't find their policies. So we redrafted our Web page and
made our policies that were specific to minority institutions
available on the FDIC's public Web site so that there wouldn't
be any confusion about what our requirements were.
Ms. Yakimov. In response to the 1994 GAO report, the OTS
conducted a survey of its institutions to get a better sense of
what more we could do, and the number one recommendation was to
provide additional technical assistance, so we embarked upon a
program to expand our efforts.
In some sense, it is all about performance and outcome--
pardon me, I am fighting a cold--in the sense that we tailor
our outreach and our one-on-one contact with minority
institutions, specifically on issues that they have raised or
issues that have come up during the course of examinations,
where there may be operating challenges or struggles. So it is
all about tailoring a program that meets the specific need of
each minority institution.
In addition to that, I think going forward, as part of our
strategic plan, FIRREA requires--it calls for the agencies to
promote the creation of new minority institutions. One of the
reasons I mentioned our outreach to different conferences where
there are people of color who may be interested in starting an
institution is it is very easy to measure the success of your
outreach on that count alone. Was our outreach to various
groups successful that were interested in starting a financial
institution? That is one that is clear, that is not subjective.
But I think it is important to note that there is not a
one-size-fits-all approach to the minority institutions in this
country. There are different strategies, core competencies,
strengths, and we have tailored our program to really be
specific to what those individual needs and requests have been.
Chairman Watt. All right. I may be missing something here,
but I guess my outcome-oriented performance measures get a
little bit more basic than that. But I will pursue that with
you.
We are going to kind of go back and forth here for a little
bit. I want to go to Mr. Miller, and then to Mr. Meeks for
questions.
Mr. Miller. Thank you very much. This end of the dais this
time. We have started at that end. Ms. Saunders, I really
enjoyed your testimony, and I am trying to figure out what we
can do to help. I notice in your testimony, you said that you
recommend the Committee on Financial Services consider
legislation to assure that bank regulators provide the
necessary notifications regarding the array of technical
assistance services that are available. And I appreciate that.
I had my staff go online to see what was available, and
under the FDIC minority depository institution Web site, there
was an array of information with eight regional coordinators,
including phone numbers and Web sites. How better do you think
we can get the information out there and encourage minority
bankers to glean this information when we are putting it on
site and the agencies have it?
Ms. Saunders. As I indicated in my statement, my suggestion
is that there be semiannual contact with each CEO. The
population of minority banks is a discrete number that is--
Mr. Miller. To discuss things other than what is on the Web
site?
Ms. Saunders. Yes, sir. Because as was mentioned, the
technical assistance that one institution may need may vary
from another institution.
Mr. Miller. Can you give us a list of what you think that
information might be? Is that possible?
Ms. Saunders. What the services might be?
Mr. Miller. Yes. What information the institutions might
need that isn't readily available today.
Ms. Saunders. As I mentioned, it would actually be tailored
specifically to that institution. To give you a specific
example, we are in the midst of a merger and acquisition, as I
mentioned. For us, it might be specific assistance relating to
the filing of that application--the obtaining of capital to
support that acquisition.
Another institution I was formerly CEO of, Consolidated
Bank, was a troubled institution. Its needs were different than
ours. We are in a growth mode.
So as I mentioned, just a semiannual contact from that
regional coordinator directly with the CEO of each respective
minority institution might facilitate the outcomes of that
institution from a performance perspective.
Mr. Miller. But within the industry, it seems like there
needs to be more outreach on the part of the industry, too. It
seems like--and I will go to Mr. Scott because I think you in
your testimony found that only 30 percent of minority
businesses, banks, are taking advantage of the training,
education, technical assistance that is there.
Is that a correct number?
Mr. Scott. Yes. Of those we surveyed, yes.
Mr. Miller. And you found that the nonparticipant banks may
be missing very important opportunities. Is that also a factual
statement?
Mr. Scott. That is correct.
Mr. Miller. Overall--and it was part of an opening
statement--did you review whether the overall minority
community and underserved community is being adequately served
today by minority banks and non-minority banks? Is there any
disparity, where larger banks aren't reaching out to provide
assistance and opportunity? Is that a factor? Are they being
served today?
Mr. Scott. I would defer that to the regulators. That was
not part of the scope of our review.
Mr. Miller. Yes. Regulators, I will let you answer that
one.
Ms. Thompson. We are hopeful that all communities are being
served in a safe and sound manner by financial institutions
that are supervised by the regulators on this panel.
Mr. Miller. Yes. I know the bank I deal with, and I used to
deal with them as a builder. And they were very proactive
because of the mandates placed on them to make sure that they
were reaching out to underserved communities. Because what used
to be considered redlining, they were very, very cautious, and
that can never be challenged with that argument because of the
concern.
Are banks still reaching out as they have in the past?
Ms. Thompson. Banks are very covetous of their CRA rating.
In fact, most of the institutions that are FDIC-insured are
rated satisfactory or outstanding throughout the banking
community.
Mr. Miller. Mr. Cooper, you are--I am sorry. Go ahead.
Ms. Yakimov. Well, I was just going to mention of the 22
minority institutions, savings associations, a little more than
half are rated outstanding in terms of meeting the credit
needs, the financial services needs of the communities they
serve. Just under half are rated satisfactory.
Mr. Miller. Mr. Cooper, is the National Banking
Association--I know you are very involved with the National
Banking Association--are they reaching out to minority banks
and trying to educate them on the different information and
opportunities available to them, and encouraging them to
participate more than they have in the past?
Mr. Cooper. Absolutely.
Mr. Miller. What result are you getting? If we are only
getting a response from about 30 percent, do you see it
increasing in the future?
Mr. Cooper. I do see it increasing in the future. But
again, you actually have to ask the reasons why aren't these
banks--why aren't our banks taking advantage of the technical
assistance? And again, we have heard some remarks from the
regulators. I can give you just some anecdotal evidence of what
is going on.
Mr. Miller. But you as an association are trying to
proactively reach out to get them more involved?
Mr. Cooper. Absolutely. Yes. As the oldest and largest
trade association for minority- and women-owned banks, that is
part of our mission.
Mr. Miller. Ms. Yakimov, do you believe that currently
FIRREA is basically--are they meeting the goals that have been
set before you? Do you believe that is being accomplished today
or not?
Ms. Yakimov. Do I believe that we are living up to the
goals and the standards that FIRREA sets out?
Mr. Miller. Yes.
Ms. Yakimov. I think we have a good track record in living
up to those responsibilities. Could we do more? I think yes, we
can. And part of the strategic plan that we are putting
together will be to carry it forward.
But I think dating back to the 1970's, we have tailored
technical assistance programs to meet the needs of our
institutions. We are going to do more with respect to
education. We think that--we have done counseling, to the
extent that is education and guidance, sending examiners onsite
in some cases, working alongside our institutions. So we have
done some training.
But we are planning to expand on that and to do more with
that. But yes, I think the OTS has worked very hard through our
regional offices and in Washington to try to meet the needs of
our minority institutions, and we are looking forward to doing
more.
Mr. Miller. Well, I have more questions, but I will wait
till the next round. Thank you very much.
Chairman Watt. Mr. Meeks, you are recognized for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
I just have a few questions. Ms. Thompson, let me ask, I
believe in your testimony you mentioned that minority
depository institutions had much lower levels of non-interest
income than the rest of the industry. I think you said
something about 19\1/2\ percent as opposed to 42.7 percent,
respectively.
I am just curious: What are the primary sources of non-
interest income? And then whether or not there was a
correlation between that kind of income and the general
population that MDIs represent.
Ms. Thompson. Well, fee-based income would be a source. And
the minority institutions don't charge the high fees like many
other institutions because, again, they are dealing with
demographics that can be in economically challenged areas.
So some minority institutions have higher operating
expenses. They have to spend more on training; they have to
spend more on this high-touch operation--they are well above
the expenses for other institutions that are non-minority
because they really believe in this face-to-face contact, and
it requires people. And there is just a lot of overhead expense
that is associated with minority institutions.
Mr. Meeks. So there is more of a personalized service, more
hand to hand?
Ms. Thompson. Yes, sir.
Mr. Meeks. In that regard, maybe less? Well, does it have
anything also to do with activities like, for example, fewer
individuals within the community may be involved in certain
trust funds or something of that nature, so therefore there is
less business there, and therefore you are not getting any fees
from those areas?
Ms. Thompson. Well, many of the communities that minority
institutions serve are underserved or unbanked. If you look at
minority neighborhoods, there is a lot of financial services
that are unregulated, so people in the communities have options
that are outside of the financial institution that is insured.
You will find in most--in many minority communities high-
cost financial service products and providers, whether it is a
payday lender or a car title loan or just alternatives because
many people in the communities are underserved. They may have
banking accounts, but it is one of the things that the FDIC is
working on, is trying to bring unbanked and underserved people
into the financial sector so that they know their money is safe
and it is covered through regulation and through FDIC
supervision.
We are very intentional about this program that we have
underway in eight areas--actually, nine areas around the
country to bring unbanked and underserved people into the
banking sector. And it is particularly focused in low/moderate
income and minority communities.
Mr. Meeks. Ms. Saunders, let me just ask you the same
thing. Could you add anything? What is your experience as head
of Mechanics & Farmers Bank, and is there anything that you
could recommend that we look at as a committee that might try
to help minority institutions so that they can be more
efficient with reference to banking, and don't have to depend
on payday loans and other--is there anything that you think
that we can do in that aspect?
Ms. Saunders. Thank you for your question. As was
mentioned, our cost structure is higher because we do offer
more personalized service. And as I mentioned in my testimony,
understanding again that it is outside the purview of this
committee, I do think there is an opportunity for tax credits
and various incentives to be provided--when we bring the
unbanked into the banking system, through the technical
assistance that we provide. The institutions that we represent
serve a critical role in terms of education and financial
literacy in the communities that we serve. And certainly that
benefits our country, and it could be recognized, I think,
through certain financial incentives to these institutions such
as Mechanics & Farmers Bank.
Mr. Meeks. And I would assume that you, Mr. Cooper, would
have the same response, or similar?
Mr. Cooper. I have a similar response. In my written
testimony, I actually did discuss two programs that have been
very beneficial to minority banks that are administered by the
CDFI fund. One of those programs, the BEA program, is a
program--and there is a competitive application process--but it
is a program that has allowed particularly minority banks to
receive stable capital.
There is another program called the New Markets Tax Credits
program which last year provided $3.9 billion in tax credits.
This was a program designed to provide income streams to banks
that operate in these low- to moderate-income communities.
Unfortunately, last year only one minority bank was the
recipient of New Markets tax program. And therefore, it is our
recommendation that there be some general preferences that are
given to CDFIs and minority- and women-owned banks so that our
banks can better impact and empower the communities they serve.
Mr. Meeks. Let me ask both of you, Mr. Cooper and Ms.
Saunders, again. Not too long after I got here, we had the
passage of Gramm-Leach-Bliley. I was wondering, has there been
any move or any benefit to your banks as a result of the
association with insurance companies and security firms? Have
you seen--has there been any connection with any of them that
would enhance your business, thereby stabilizing your
institutions and growing at all?
Ms. Saunders. Not at this point.
Mr. Meeks. Nothing?
Mr. Cooper. By and large, you will find that the
institutions in this sector are very small and haven't been
able to avail themselves of the lowering of the--you know, the
breakdown in the barriers. There are a couple of banks that
have brokerage arms, insurance arms. But in terms of the fees
that--the profit streams that have been received, they are
pretty insignificant at this point.
Mr. Meeks. Lastly, let me ask this question because I have
been very concerned about the participation of minorities in
the financial services industry. And I know that having
competent staff is important, etc.
Where or how do you generally recruit for individuals that
you need in your banks? I have been an advocate--in fact, in
one of the GSE bills, I had an amendment saying that the new
regulator needed to make efforts towards diversity there
because it has been my opinion that when you have a government
agency, and some of the regulatory agencies in particular, if
they hire minorities in there, then the experience that they
get from there, they now can go out and be employed by
individuals like yourselves and in other institutions.
So I am just wondering, how do you find that, and the
training, and would you say we need to--how could we improve
the diversity within the financial services industry?
Mr. Cooper. Let me take a stab at it. There is certainly
cross-pollination as between regulatory agencies, regulators
who will go to the private sector and become members of our
institutions and vice versa. There are also numerous training
programs, both private and those conducted by the regulators as
well.
Ms. Saunders. We have been very successful in working with
young people as early as high school through various nonprofits
in employing them in internships. We also currently are working
with local universities, of which there are a number in North
Carolina, to employ part-time students to allow them to get
exposure to the banking industry, many of whom have gone on to
pursue careers in either the regulatory agencies or other
banks.
In terms of recruiting additional talent from other
institutions, we have been successful, I think, in selling the
opportunity to see the banking business in its entirety. When
you are a small shop, you do provide, I think, a unique career
opportunity for someone who has an entrepreneurial spirit but
also wants to obtain a comprehensive understanding of our
industry.
So I would say to continue to support efforts by nonprofits
and others, even for-profit corporations. My own career started
with a minority internship program out of Chase of New York,
which trained many minority bankers back in the 1980's. And I
do think that those types of programs are necessary in order
for us to continue to train now the Hispanic community and
other minority groups to be successful in our career.
Mr. Meeks. Thank you.
Mr. Cooper. I might just quickly add that success breeds
success, and that these institutions aren't just providers of
financial products and services. They truly are beacons of hope
for the community. So to the extent you have strong, vibrant
for-profit institutions, then you will be able to attract
individuals to our companies.
But certainly we see many challenges that we face, so I
would again hearken to the fact that to the extent we can
strengthen these institutions, you will see more minorities
coming to work for us.
Mr. Meeks. Thank you. Thank you, Mr. Chairman.
Chairman Watt. Thank you for your questions. I have been
trying to kind of let this go on without interruption as much
as possible, so let me recognize myself again for a couple of
questions.
They really follow up to one part of what Representative
Meeks has raised here, the interplay between the Community
Development Financial Institutions fund, CDFI, the Bank
Enterprise awards, and the New Market tax credit. It was
Representative Meeks' predecessor who was instrumental in at
least two out of three of those, and Representative Rangel who
was instrumental, probably, as much as anybody in the rest of
them.
Mr. Cooper, Ms. Saunders, what is the process for minority
banks to become certified under CDFI, and what benefits does
that give you once you are certified? I want to deal only with
CDFI now because I think there are three components here that I
am not sure are playing themselves out in the way that they
were perceived to play themselves out. But let's talk about the
cost and process and the benefits.
Mr. Cooper. Sure. In terms of the certification process,
essentially the bank needs to prove that 60 percent of its
activities are engaged in low- to moderate-income communities.
So it needs to show that 60 percent of its lending activities,
where it is housed, where it gathers its deposits, where it
provides its banking products, are in not just low- to
moderate-income areas, but specific areas down to the census
track. So that is with respect to certification.
In terms of the benefits, there is certainly a marketing
benefit. It is a United States Department of Treasury
certification, so to the extent the institution is out in the
community and trying to raise capital or deposits, it actually
has a certification by the U.S. Department of the Treasury that
it engages in this do-good activity, if you will.
In terms of other benefits, there are several programs
administered by the fund. There is a core award program. There
is an FA, financial assistance, program. There is a BEA
program. The program that--as well as New Market tax credits.
The two programs that have been most beneficial to minority
banks have been the BEA program because they provide equity
awards to banks based on their lending in the most distressed
communities, to the census track level; as well as--and the
other program is New Markets tax credits, and as you are
probably aware, these tax credits are very highly sought after.
And both of these programs were designed to put money in
these low- to moderate-income communities, but also designed to
provide capital, in the case of BEA, in minority banks that are
primarily housed in these communities, and further income
streams for these banks with respect to the New Markets tax
credits program.
Chairman Watt. How much money is there in the BEA program?
Mr. Cooper. In the BEA program currently--well, at least
last year--$11.6 million was allocated.
Chairman Watt. Compared to the New Markets tax credits,
which is about--
Mr. Cooper. They are two different animals. But let me say
with respect to BEA--
Chairman Watt. I understand they are two different animals.
I think that is exactly the point I am trying to make.
Mr. Cooper. I am sorry.
Chairman Watt. Does an institution have to be CDFI-
certified to be eligible for New Markets tax credits?
Mr. Cooper. No. You have to actually be what is called a
CDE. You don't have to be a CDFI. And it is our recommendation
that CDFIs who are actually engaged in the activities in these
communities be given a general preference so that they can take
advantage of this $3.9 billion tax credit program.
Chairman Watt. Ms. Thompson, you seem anxious to say
something on this issue, so I want to give you that
opportunity.
Ms. Thompson. Yes. We had a conference this year in August,
and it was all the Federal regulators. The issue that came up
from the persons who participated--there were lots of questions
about the CDFI. We had the CDFI representative come to the
conference and conduct presentations. But even after she left,
there were lots of questions.
So I directed the FDIC's national coordinator to go to the
Treasury Department and find out more about the process of
having minority institutions being designated as CDFIs. And we
have put together a program, working with the Treasury
Department, where they will participate in our regional
conferences, our outreach sessions, and our minority
roundtables, so that they can walk through the process with
applicants to achieve the CDFI designation.
Chairman Watt. Okay. But CDFI is a gateway to the Bank
Enterprise award. CDFI doesn't seem to lead in the same way to
New Markets tax credits. Am I wrong or am I right on that?
Ms. Thompson. Well, it is in both. The CDFI program is
responsible for--they will get financial assistance, technical
assistance. There are some other initiatives. The Bank
Enterprise Award is also part of the community development
entities and the New Markets tax credit. Once you get the
designation, there are a lot of opportunities that relate to
capital and other initiatives that are opened up to the
institution.
Chairman Watt. But it doesn't seem to be working. You have,
what, $9.8 billion, something like that, in New Markets tax
credits. Only one minority bank received a New Markets tax
credit, and you are saying that it is working?
Ms. Thompson. No. We are saying that there are questions
with regard to the process. And we are willing to provide as
much help as we can--
Chairman Watt. On the process, but not on the result, which
gets back to the--
Ms. Thompson. To get the designation. And I think getting
the designation will open the door. And to the extent we can
provide any assistance to get these banks the designation, I
think that is a huge step forward to getting to the next step.
Chairman Watt. Ms. Saunders?
Ms. Saunders. Many of the minority institutions already
hold this designation. So I think it really speaks to what Mr.
Cooper mentioned earlier, which is that out of the $16 million,
only one institution received New Markets tax credit dollars.
Mr. Cooper. In 2007. And that was a billion with a ``B'',
not--
Ms. Saunders. Oh, billion.
Chairman Watt. $16 billion?
Ms. Saunders. $16 billion?
Mr. Cooper. No. That is how much the New Markets tax credit
have been awarded over the last 5 years. Last year's allocation
was for $3.9 billion.
Chairman Watt. $3.9 billion. Okay. But that is--see, there
is a lot of difference between $3.9 billion in a New Markets
tax credit that only one out of all of these institutions are
getting access to, and what is the BEA? BEA is how much money?
Mr. Cooper. $11.6 million.
Chairman Watt. $11.6 million, as opposed to $3.9 billion.
That is the point I am driving at here. And it seems to me that
maybe the regulators might find that might be something that--I
mean, that is concrete. That is a result. That isn't a process.
And that was the point I was trying to get down to a little
bit earlier. Representative Waters asked all of you if you had
any suggestions to make to us, and those are the kinds of
things that I am looking for because we are trying to make this
work.
We can have as many meetings, we can go through as many
processes as we can go through, if at the end of the day you
are ending up 13 years later with fewer and less vibrant and
less sound minority institutions than you were 13 years ago. Go
figure. Nice to have a meeting. Had a good time. It is the
results-oriented thing that I am looking for.
My time is expired on this round. I recognize Ms. Waters
for 5 minutes.
Ms. Waters. Oh, thank you very much, Mr. Chairman.
The New Markets initiative, tax initiative, is extremely
important to discuss here. I was just in Houston yesterday
holding a hearing and talking with some of the business people
there, where I discovered that Wachovia and Capital One have
designations, have had them, and they are doing very well with
them.
I don't know what is going on, but minority institutions do
not appear to be given a fair opportunity to participate in
these initiatives that many of us helped to develop under the
Clinton Administration. It seems to me there are still
questions remaining about CDFI, and certainly big questions
about the New Markets initiative.
So I was hoping, and I would really hope, that those who
are supposed to assist minority institutions maintain and
expand, etc., would help us with some ideas on legislation that
would get at these initiatives that have been developed that
supposedly would be supportive, would help not only the
minority banks, but we have to depend on these minority banks
to provide opportunities for minorities where they operate.
Many--
Chairman Watt. Will the gentlelady yield just for a second?
Ms. Waters. Yes.
Chairman Watt. Not to let them off the hook on our
expectation that they will do that, but just to point out to
them that the New Markets tax credits are up for
reauthorization in the Ways and Means Committee. And one of the
things that Representative Meeks and I were talking about
yesterday was that it might be advisable to try to see if we
could have a joint hearing with the Ways and Means Committee,
the subcommittee that has jurisdiction over that program--
Ms. Waters. That would be a great idea.
Chairman Watt. --to try to impact that program in a way
that is doing more in this area. Wachovia is one of the
institutions that is in my congressional district, so I support
their efforts to get New Markets tax credits. But I think we
need to do more to make sure that minority institutions get
more New Markets tax credits, too. And there may be some things
that we can do to help.
I appreciate the gentlelady's yielding. But I am going to
try to seek to have a joint hearing.
Ms. Waters. That would be great. That is an opportunity
that we really do need to try and take advantage of.
On this how minority institutions are judged, and you have
spoken about it in bank terms in terms of peer review, Mr.
Scott, what did you discover? Are they judging minority
institutions based on their overall review of other minority
institutions--peer review, I guess that would be--or are they
holding them to the same kind of standards of major
institutions? How is that working?
Mr. Scott. For the work we conducted, we weren't looking at
how they were judging the institutions. We were looking at the
return on assets in comparison to peer groups for broader
context about how these minority banks were doing overall.
And so we weren't really looking at whether the regulators
were using different standards and how they were judging them.
It was more just context to point out overall how these
institutions are doing on one key measure, that being return on
assets, one measure of profitability. That was the purpose of
our citing those numbers.
Ms. Waters. I see. And what were the regulators talking
about when you said that was one of your charges, Ms. Thompson?
Ms. Thompson. We have a regional director memorandum, which
is in effect the policy that our examiners use to examine
institutions. And in that memorandum, it specifically states
that when examining minority institutions in particular, that
examiners have the flexibility to define a custom peer group,
not look at peer group just based on asset size. A custom peer
group can be defined as a similarly situated institution, which
could mean another minority institution.
Ms. Waters. So have they been doing that?
Ms. Thompson. I hope they have. That is what I have
instructed--
Ms. Waters. No. We can't hope, now. We have to know.
Ms. Braunstein. At the Federal Reserve, we do provide
onsite to our minority-owned institutions customized peer
statistics that are different than the uniform bank performance
report.
Ms. Waters. Could you, Mr. Chairman, see that we get a copy
of how that is working? I understand there is not a lot of
follow-up; even though some of you may be attempting some
things, you really don't know how it is working because you
don't have built into your systems any real follow-up. And that
is one of the things that we may have to legislate, Mr.
Chairman, to take a look at.
Now, one last thing, and that is reserve capital
requirements. Tell me how that works, and tell me whether or
not minority institutions for some reason are being asked to
have higher reserves than maybe other institutions. Because
there appears to be some risk factor that is above and beyond
the norm. Would someone help me with that?
Ms. Braunstein. The capital rules are mainly the Federal
Reserve's in terms of holding companies. We have done a couple
of things to address the concerns that have been raised by the
other panelists over the last year, and we are still working at
this, and it is not to say that we can't do more. But--
Ms. Waters. How does it work now?
Ms. Braunstein. Well, the way it works now is that for Tier
1 capital, a significant amount of the Tier 1 capital needs to
be voting stock. And so we do--we require at this point common
stockholders' voting stock to be the dominant element within
Tier 1.
Ms. Waters. Well, I thought--I don't know if we are talking
about the same thing or not.
Ms. Braunstein. So one of the things that we have--
Ms. Waters. I really want to understand reserves because to
me, reserves means an amount that you hold aside to be there to
pay for whatever--losses, lawsuits, what have you. That is what
I am talking about. I am not talking about the--
Ms. Braunstein. Control?
Ms. Waters. Yes. I want to know about the reserve. Are
minority banks required to hold in reserve a disproportionate
amount of capital or money, compared to other institutions?
Ms. Yakimov. Representative Waters, if you are referring to
loan loss reserves, we would expect institutions to reserve in
a manner that was consistent with their experience--not to
overly--not to manipulate that, but to have in reserve for loan
loss and leases an amount that has been consistent with their
experience and what they can generally anticipate.
Ms. Waters. I expect that, too. We have said over and over
again that we believe in safety and soundness and all of that
good stuff. We don't want anybody to think we are trying to--I
want to know, is there something in the formulation of reserves
of what is required that makes it seem as if minority
institutions are asked to do more in holding these reserves
than others? That is what I am trying to find out.
Ms. Braunstein. The reserves would depend on the kinds of
loans that are made, the risk assessments, and the bank
performance. And so depending on those factors, there could be
an appearance of that. But that is--but the same rule is
applied to every--
Ms. Waters. Mr. Scott--excuse me. Mr. Scott, did you take a
look at this at all in the GAO's report in terms of reserves?
Mr. Scott. No. We didn't take a look at it other than
pointing out the fact that having those higher loan loss
reserves may be necessary for safe and sound operation of
banks.
Ms. Waters. Well, you know, I don't know. But Mr. Chairman,
and I am going to finish this, if experience is one of the
criteria that is used to determine how much money you have to
hold in reserve, that is going to put us at a great
disadvantage.
Now, if there are a combination of things, we need to
understand what that combination of things is and whether or
not it adds up to minority institutions being disadvantaged
because they haven't been in business as long. They are lending
to poorer people. Yes, they have had maybe more losses or
foreclosures; I don't know what the makeup is.
And if I take a look at it, I can see. I can tell you right
away. And I guess we will have to do that. But I was trying to
understand what you understand about it because I wanted to ask
you, do you think it is fair or do you think it should be
fixed?
Ms. Thompson. The losses are typically based on the quality
of the assets. And to the extent that an institution holds
assets that are delinquent--and I will use a mortgage loan as
example--if an institution has a high level of delinquencies
and they are expected to go to foreclosure, we require the
institution to hold loss reserves to offset any potential
losses.
So the more delinquent your mortgage portfolio is, or your
commercial loan portfolio, the more reserves you will be
required to hold to offset--
Ms. Waters. Mr. Cooper, is that how it works?
Mr. Cooper. Actually, Chairman Frank has spoken out on the
subject. And I think you were referring to the recent policy
statement on commercial and real estate that just--that
actually came out maybe a little over a year ago. And it
creates very specific thresholds for construction loans, 100
percent of capital, and multi-family and other loans of 300
percent of capital.
But because of the nature of our operations, where we
operate, we are disproportionately impacted. So this is again a
one-size-fits-all policy statement. And because of the
statement, the examiners will come in and scrutinize our banks
and criticize our banks in a way they would not criticize other
institutions.
So again, it is a one-size-fits-all policy that really--
there really was no consultation or thought given to what the
specific impact would be on institutions that actually operate
in the inner city.
Ms. Waters. Thank you, Mr. Chairman. I yield back. I could
ask 101 more questions, but you have been very generous. Thank
you.
Chairman Watt. Mr. Miller.
Mr. Miller. I have a question for the regulators.
Safety and soundness has to be paramount in any lending
institution. Don't all small and community banks have to meet
the same basic capital standards, whether it is a minority-
owned bank or it is not? Aren't they applicable to everybody?
Ms. Thompson. Yes.
Mr. Miller. Is there any that are more stringent upon the
minority-owned bank than there would be a small community bank?
Ms. Thompson. No.
Mr. Miller. Okay. So the problem I have is if we are
dealing with basic safety and soundness issues, they have to be
consistent and they have to be applied on a broad perspective
to all individuals who place their money within a lender, a
bank who is going to be lending them money. They have to be
guaranteed that their money is being safeguarded and there is
proper oversight.
It seems to me, from the testimony that I heard, that we
have to reach out to minority banks to get them to participate
in programs that are available. If only 30 percent are
participating, we can legislate and regulate anything in the
world, but if we don't get participation, it is a problem.
And Mr. Cooper, it is a long question, and I hate to ask
this of you, but I have been listening to the testimony and
reading everybody's testimony. You recommend that each banking
agency amend their existing policies to provide that the
regulators and examiners will thoughtfully apply any existing
policies to the unique circumstances of a minority institution.
Yet Mr. Walsh from the OCC discusses how a portfolio
manager is assigned to each bank and has ongoing
responsibilities for understanding the banks unique
characteristics and circumstances.
Ms. Thompson, of the FDIC, discusses how the FDIC has
specific programs in place to educate bank examiners and
sensitize them to the unique issues often found within MDIs.
Ms. Braunstein, with the Fed, has described how through
their regulatory, supervisory, and community development
functions, they consistently provide assistance to address the
unique challenges and needs of the minority-owned banks.
Ms. Yakimov of the OTS discusses the development of
training measures that the OTS has taken to ensure that
examiners fully understand the operating environment and
challenges that minority institutions face in serving their
communities.
Mr. Cooper, in addition to what the OCC, the FDIC, the Fed,
and the OTS are currently doing, what do you suggest the
regulators do?
Mr. Cooper. I think we might be talking about two different
things.
Mr. Miller. No. My question was on one thing.
Mr. Cooper. I just answered a question in connection with a
recent policy statement. And I guess we didn't hear the
regulators talk about the impact of that policy statement, even
today, on minority banks. There are other policy statements--
Mr. Miller. I mean, it appears that all the agencies are
doing everything in their power to reach out and to make sure
that these minority institutions are successful, and that they
have information provided to them, and that when regulators go
out, they are trying to deal with the unique circumstances and
situations that these institutions are in.
And I am not trying to be a bad guy here. I am really not.
Chairman Watt and I have talked about how we get more
participation. We can mandate and mandate and mandate it, but
if nobody is going to participate, it is not going to make a
difference. But what can you see that we can do that they are
not already trying to do?
Mr. Cooper. Like I said, their technical assistance is just
one action that can be taken. But we really have to think
outside of technical assistance. FIRREA was about a lot more
than just that. And we have actually provided some
recommendations as to how these institutions can grow.
So it is one thing to say, hey, we are facing some
particular challenges, and here is how you may or may not want
to deal with the issue. But let me frame it this way for you.
Mr. Miller. Well, I think they have a unique situation as
far as growth when you can't sell common stock. So that makes
it very difficult. I understand that.
Mr. Cooper. Okay. But let me frame it this way. What I
believe we have it this way is more direct engagement, I think.
Thirteen years ago we didn't have any engagement. We have more
direct engagement. But what we need is really truly full
engagement with the banking regulatory agencies.
Mr. Miller. But don't you have to have participation to
have full engagement?
Mr. Cooper. You absolutely have to have--
Mr. Miller. And if we are only getting 30 percent of the
banks participating, we are going to have 30 percent of full
participation at best if it--
Mr. Cooper. But then you have to ask yourself, why isn't
there the participation?
Mr. Miller. And that is why I asked you--
Mr. Cooper. And yes--
Mr. Miller. --the National Bankers need to be reaching out
to encourage these banks to participate.
Mr. Cooper. Again, I think you need to have full
engagement. And I think what you have, at least on the
congressional level, is a mandate on the regulators. And
certainly we are reaching out. And it is very nice, and we
absolutely appreciate having the heads of the regulatory
agencies visit us at our conventions, where we had Mr. Walsh
and the directors of the other agencies. And that is a once-a-
year event.
But again, coming to conferences, hosting an inter-agency
conference where there are 500 people in the room is a very
different situation than actually drilling down and having the
type of dialogue that you need to have very substantive
progress, and what I think we would all admit are very complex
issues.
Mr. Miller. All right. I have a limited amount of time, and
I am going to run out. Ms. Braunstein, is there a limit to what
regulators can do in respect of balancing safety and soundness
and those concerns, and helping minority institutions? Are you
somewhat hamstrung when there is only so far you can go? Is it
not a fact?
Ms. Braunstein. Well, I don't know that I would phrase it
as a limit. I think that we try to work very diligently with
our minority-owned institutions, the State member banks we
supervise, to make sure that they are safe and sound because
that is of paramount importance, but at the same time
recognizing some of the unique characteristics and trying to
exercise some flexibility in our standards and in our rules.
And we will continue to do so.
Mr. Miller. And in closing, Mr. Cooper and Ms. Saunders,
could you both send me something in writing, some
recommendations, something to enlighten me on the situation
that we can--what you think we can do in the future to create a
better situation than currently exists? Because I don't want
you to think I am being argumentative. I am not. I just listen
to the testimony and look at the numbers. I see, number one, a
lack of participation. That has to be overcome somehow.
I would like to have some input from you on what you think
we can do to make a better situation. I really appreciate your
testimony, and if any of my comments were perceived as
negative, they weren't meant to be. I just read the documents,
have gone through the paperwork, and I am a little--you know,
safety and soundness has to be top priority, number one.
I understand growth is a concern with the industry. I know
you would like to grow it. And I know there are limitations
based on some responses I have received to questions. But if
you can help me with some information, I would appreciate that.
I yield back.
Chairman Watt. All right.
Ms. Waters. Mr. Chairman, if I may?
Chairman Watt. I am happy to--
Ms. Waters. Please let the record show that we have
insisted that we support safety and soundness on more than
several occasions here today, that we all believe that safety
and soundness must be first. And we have said that--
Mr. Miller. And I never meant to imply that, if you thought
I did. I didn't mean to imply that there was not a concern. I
was speaking for myself.
Ms. Waters. I know. But let me tell you why it is important
to place it in the record. As we struggle with these issues as
public policymakers, we have to always educate. Because when
people speak about minority institutions, whether we are
talking about affirmative action, whatever, people will say,
``I support, except...'' I support qualified people doing this.
I support safety and soundness.
We do, too. It is extremely important to us. We have said
it over and over again. And I want everybody to know that is
the prevailing thought and thinking in the African-American
community, particularly with minority institutions. They know
that they have to comply with safety and soundness laws, and
they do. And we support that.
Chairman Watt. Now that we got that out of the way, we
could go on and on here. But we have to close this out. I do
want to make sure that I get on the record a specific response
about the coverage of Section 308 of FIRREA. This applies
currently to the FDIC and the OTS. It does not apply
specifically, although you all say you seem to be supporting
the spirit of it, to the OCC and the Fed.
Mr. Walsh, I think, covered in his testimony that he has no
objection to 308 being applied to FIRREA--of FIRREA being
applied to your agency. What about the Fed?
Ms. Braunstein. Yes. In my written testimony, I state that
we would not object if we were covered.
Chairman Watt. That is less than a ringing endorsement. But
should I--
Ms. Braunstein. Well, we feel that we are in compliance
with the spirit of the law. And if Congress chooses to put us
under the law, we would not object to that.
Chairman Watt. And what about an annual reporting
requirement of efforts to implement Section 308? There is no
written requirement now that any of you report to Congress.
Mr. Scott. Except for the OTS.
Chairman Watt. Oh, is there? Okay. The OTS reports to
Congress. What about applying that to all four of the
regulators here?
Ms. Thompson. Well, the FDIC has an annual report that we
issue, and we do include our activities on minority
institutions. But we would not object to a separate annual
report to Congress.
Chairman Watt. The Fed?
Ms. Braunstein. We would not object.
Mr. Walsh. Likewise. We include that information in our
annual report at present.
Chairman Watt. All right. Unless you all want to go another
round--I mean, I will be right here. But in the absence of
that, the Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
So I want to thank the witnesses for being here. I think it
has been a constructive and helpful hearing. We hope to hear
back from you all on some of the things that have come up today
in the verbal questions. And of course, we would love to hear
back from you in response to any written questions that get
submitted.
We thank you all so much for being here, and with that, the
hearing is adjourned.
[Whereupon, at 1:20 p.m., the hearing was adjourned.]
A P P E N D I X
October 30, 2007
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