[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                       SEEKING SOLUTIONS: FINDING 
                     CREDIT FOR SMALL AND MID-SIZED 
                      BUSINESSES IN MASSACHUSETTS 

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

                             FIELD HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 23, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-19

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 23, 2009...............................................     1
Appendix:
    March 23, 2009...............................................    55

                               WITNESSES
                         Monday, March 23, 2009

Antonakes, Steven L., Commissioner of Banks, Division of Banks, 
  Commonwealth of Massachusetts..................................    16
Baker, Robert, President, Smaller Business Association of New 
  England........................................................    29
Bland, Toney M., Deputy Comptroller, Northeastern District, 
  Office of the Comptroller of the Currency......................    11
Clancy, Mary Ann, Senior Vice President and General Counsel, 
  Massachusetts Credit Union League..............................    38
Finn, Michael, Northeast Regional Director, Office of Thrift 
  Supervision....................................................    13
Forry, Hon. Linda Dorcena, House Chairman, Committee on Community 
  Development and Small Business.................................    28
Geller, Scott, President, Middle Market Banking, Northeast 
  Region, JPMorgan Chase & Co....................................    43
Koutoujian, Hon. Peter, House Chairman, Joint Committee on 
  Financial Services.............................................    14
Mitropoulis, Iris A., President, Ventura Industries, LLC.........    40
Oddleifson, Christopher, President and Chief Executive Officer, 
  Rockland Trust Company, and Vice Chairman, Massachusetts 
  Bankers Association............................................    31
Pelos, Perry, Executive Vice President, Wells Fargo Commercial 
  Banking, Wells Fargo...........................................    39
Rosengren, Eric S., President and Chief Executive Officer, 
  Federal Reserve Bank of Boston.................................     5
Shea, Edwin T., Jr., President, Central Massachusetts Market, 
  Bank of America................................................    44
Sloane, Barry R., President and Chief Executive Officer, Century 
  Bank...........................................................    35
Slutz, David N., President and Chief Executive Officer, Precix...    33
Thompson, Sandra L., Director, Division of Supervision and 
  Consumer Protection, Federal Deposit Insurance Corporation.....    10

                                APPENDIX

Prepared statements:
    Antonakes, Steven L..........................................    56
    Bland, Toney M...............................................    69
    Finn, Michael................................................    78
    Geller, Scott................................................    84
    Oddleifson, Christopher......................................    88
    Pelos, Perry.................................................    94
    Rosengren, Eric S............................................    97
    Shea, Edwin T., Jr...........................................   121
    Sloane, Barry R..............................................   129
    Slutz, David N...............................................   133
    Thompson, Sandra L...........................................   138

              Additional Material Submitted for the Record

    Additional information supplied by Toney M. Bland............   149


                       SEEKING SOLUTIONS: FINDING
                     CREDIT FOR SMALL AND MID-SIZED
                      BUSINESSES IN MASSACHUSETTS

                              ----------                              


                         Monday, March 23, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
Gardner Auditorium, Massachusetts State House, Boston, 
Massachusetts, Hon. Barney Frank [chairman of the committee] 
presiding.
    Members present: Representatives Frank; Capuano and Lynch.
    Also present: Representatives Delahunt and Tierney.
    The Chairman. If people will take their seats, we'll begin. 
This is actually a step forward for me in my career. I have 
been chairing the Financial Services Committee for 2\1/2\ 
years. My Republican friends have tried to claim that I 
actually was running the committee for 12 years. But this is 
the first time I have actually chaired a hearing in the 
Gardner, so I'm moving up. When I was in the State House under 
Speaker McGee, I never quite made the chairmanship. So getting 
to chair a hearing here in the Gardner is the next step in my 
career.
    This hearing has been called in response to complaints that 
we have heard, those of us who are here, my congressional 
colleagues, and our State legislative colleagues who are 
represented here as well, from businesses in our districts, 
particularly small businesses, about their inability to get 
loans. Obviously, we do not get out of the economic crisis we 
face without businesses, particularly small businesses, being 
able to function. They cannot function without credit. Indeed, 
one of the points I have tried to make is, and I know one of 
the things that people wonder is, why we appear to be doing 
things that are to the benefit of financial institutions, and 
the second thing is that our country cannot function without 
healthy financial institutions providing credit.
    The technical word for what they do is intermediation. The 
role of the financial institutions is to gather up large 
amounts of money from many people in small amounts and 
agglomerate it into large amounts so it can then be available 
in larger amounts to a few people who can use it 
constructively. This is a central function of our economy. And 
what we are trying to do is to restore the capacity of the 
financial institutions to do that. Their capacity has been 
impaired. Some of that impairment is their own fault--not 
entirely. Some have been damaged by the bad judgments of 
others. There has been a problem in that there has been absence 
of rules in the system that has contributed to this.
    But the point that we continue to make is that those who 
take the attitude that anybody who made a mistake should be 
allowed to suffer its consequences without help are condemning 
the whole society to suffer those consequences as well. We 
cannot get out of the economic problems we are now in without a 
healthy credit system, and we cannot get a healthy credit 
system without working with the people who are in the system.
    We have tried, members here and others, to, at the same 
time that we offer the help, put some restrictions on that 
help. Indeed, while there have been some recent discussions 
about bonuses to AIG--and by the way, AIG was given a loan by 
the Federal Reserve System last September with no congressional 
input. The $700 billion TARP program as it's called, the 
Troubled Asset Relief Program, came after that. The Federal 
Reserve has power under a statute dating from 1932, signed by 
Herbert Hoover--so its radicalism can't be blamed for this--
which gives it the power to make loans. On the whole, they have 
exercised that power in a very constructive way. I think they 
made a mistake when they were new at it in September in not 
putting some constraints on AIG when they made the decision.
    Subsequent to that, Congress got involved, and from the 
beginning of those discussions we, and particularly those of us 
here, have fought hard to put some restraints on the 
compensation that is paid, on the luxury entertaining, and we 
have also pushed for greater loans. That's the business that we 
are in today, talking about how do we increase the flow of 
loans from these institutions. But I did want to set it in that 
context.
    We have two panels. We have a panel of regulators, and then 
we have a panel of lenders and borrowers. As is often the case, 
when those of us who hear the complaints about a lack of loans 
inquire as to why we don't get more loans, to some extent the 
banks will say it's the regulators' fault and the regulators 
say its the banks' fault, and then everybody says it's awful. 
So the purpose isn't to lay the blame. It is to do away with 
any kind of obstacle.
    So we are going to ask the regulators and we are going to 
ask the lenders to talk about how we can get them to work 
together so that we get a maximum flow of loans, and that's the 
purpose of this hearing.
    I am joined by some of my congressional colleagues, two of 
whom serve on the Financial Services Committee, Mr. Capuano and 
Mr. Lynch. We also have Mr. Tierney and Mr. Delahunt.
    So let me ask if any of my colleagues wish to make a 
statement, and I will go in order of seniority, which I think 
means Mr. Delahunt. That means how long he has served in 
Congress, not how old he is.
    Mr. Delahunt. It is both, obviously. As I look to my left 
and I see Chairman Frank and I look to my right and I see Mr. 
Segel, your special counsel--
    Mr. Frank. He didn't get to be chairman, either.
    Mr. Delahunt. That's true.
    I have this sense of deja vu, because both Barney and Jim 
Segel and myself were members of the class of--well, we were 
elected in 1972 to the House of Representatives, and it's 
rather interesting to be here.
    Let me just thank the chairman. I don't have an opening 
statement. I want to thank the chairman. I think this is a good 
hearing. I'm receiving, as I'm sure my colleagues are, a number 
of inquiries from particularly small businesses that have 
profound concerns about their inability to secure credit. It's 
my intention after this hearing to convene the stakeholders in 
my district and have a specific discussion in terms of what I 
can do, along with State and local officials, as well as the 
lenders and the appropriate regulators, to see if we can move 
things along. And Barney, thank you for the great work you do 
for the State and for the country. I will yield back.
    The Chairman. My colleague, John Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. First of all, thank 
you for expanding your hearing out to include members who 
aren't on your committee. You're right in assuming that a 
number of people in our respective districts have made this 
point very clear, that they're small businesses and they're 
having an incredibly difficult time expanding, those who are 
lucky enough to have stayed in business, and some of them are 
barely staying alive despite having good collateral, and 
they're having a difficult time working with some of the 
financial institutions.
    Mr. Chairman, I have been in this building before as a 
janitor in the 1970's cleaning up. The room doesn't look much 
different now than it did then.
    But I'm not going to have a big long opening statement, 
other than to thank you for this hearing. I hope this gets us 
closer to finding out how it is we can free up some of those 
resources so people can keep the economy going. We'll take this 
information back with us as well. Thank you.
    The Chairman. Next, we have two members of the committee. 
First, someone who is also familiar with the State House, 
Representative Capuano.
    Mr. Capuano. Mr. Chairman, the only thing I can add is that 
usually every other time I have been in Gardner Auditorium, 
there have been people here with pitchforks and knives. I don't 
see any pitchforks. Any knives out there are hidden at the 
moment. I'm actually looking forward to a hearing that is 
educational and enlightening, and hopefully we'll be able to 
make things better for some of our small businesses here in 
Massachusetts.
    The Chairman. Finally, another very diligent member of our 
committee, Mr. Lynch, from Boston.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank you for 
holding this hearing today, and I also want to thank our 
panelists for offering their assistance, especially 
Representative Tierney, Peter Koutoujian, who chairs the 
Banking Committee here in the House, as well as Linda Dorcena 
Forry, who also is here, and also an old hand, Senator Paul 
White, former Senator, also here today as well. Thank you for 
coming.
    Mr. Chairman, just to give a snapshot of this situation: I 
have a small company in my district, New England Door. They 
only employ about 45 people, but they're a very profitable 
business in Canton, Massachusetts. They manufacture and sell 
garage doors. They have a great business there. They had their 
line of credit terminated at the close of business on January 
30, 2009, laid off all 45 employees. The business was forced to 
close because of the canceling of the line of credit. They're a 
very profitable company, and I think they offer sort of a 
snapshot of what's going on here in the State and across the 
country with the inability of good companies, solid companies, 
reputable, experienced companies, to access lines of credit.
    I know the banks that cut that line of credit were fearful 
on their own account, and they didn't do it out of malice, they 
did it out of fear--and I must say, not necessarily irrational 
fear, given the economic climate. But this type of 
inflexibility and constriction in lending practices is just one 
example of many that my office has dealt with over the past 6 
months.
    And so we need to focus on getting that money that has been 
given to major lenders out into the community, out into these 
smaller businesses.
    One of the troubling numbers that we have seen is that 
despite all of the money that has gone out to these banks, 
these larger banks, commercial and industrial lenders, the 
actual lending was down 7.3 percent from October through 
December of last year. And that's a troublesome aspect of this.
    I'm very interested in hearing the testimony of the 
panelists today. I have to confess that I have to leave at 
11:00; we have some bills on the Floor that I will have to 
manage down in Washington, so I'll be on the 12:00 shuttle. But 
I do want to again thank you all for participating in this, 
especially our panel of witnesses. I yield back the balance of 
my time.
    The Chairman. All of us will be voting in Washington at 
6:30 today, so we're going to move this along. But we did want 
to accommodate in Massachusetts this particular hearing. Let me 
echo what my colleague said: We are joined by two chairs from 
the House, Representative Koutoujian, who is chair of the House 
Banking Committee, and Representative Linda Dorcena Forry, who 
has the community development side. We have been working 
closely with them and will continue to do that.
    I will say, while Mr. Lynch referred to our former 
colleague, Paul White, as a Senator, he was also, in fact, a 
member of the House of Representatives class of 1972. So we 
will claim prior association with Mr. White.
    With that, we will begin the testimony. What we have here 
are the bank regulators. There are a lot of bank regulators, 
Federal and State. Probably, if you were starting from scratch 
in creating a regulatory system, we wouldn't have so many. But 
we do, and we have spent a lot of our time urging them to work 
together, and I'm pleased to say that they do work together 
well, and they have been cooperative in this. So we are glad to 
have them, as well, of course, as our State bank commissioner, 
because there is what we call the dual banking system in the 
United States, which has both State and Federal regulators.
    We will begin with a little longer statement from Eric 
Rosengren, who as president of the Boston Division of the 
Federal Reserve has a multiple set of responsibilities here, 
both as a regulator and as an economic policymaker. Mr. 
Rosengren.

 STATEMENT OF ERIC S. ROSENGREN, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, FEDERAL RESERVE BANK OF BOSTON

    Mr. Rosengren. Thank you very much, Chairman Frank, and 
thank you to the members of the committee and members of the 
Massachusetts delegation.
    I'm going to be talking from a PowerPoint presentation, 
which is at the back of my testimony, so I'm going to be going 
through a series of charts rather than reading testimony. I 
think it will be helpful if you have the charts in front of 
you. The first chart will be Figure 1. It should be a blue 
chart, Federal funds effective rate, if everybody is with me.
    First, I'm going to discuss some of the national programs 
that the Federal Reserve has been doing to try to improve 
business finance. And then I'm going to very briefly discuss 
the situation in New England.
    As we're all aware, since August of 2007, financial markets 
have been severely disrupted. At the outset of this crisis, I 
and many members of the FOMC were quite concerned about how the 
financial crisis would spill over--
    The Chairman. FOMC.
    Mr. Rosengren. Federal Open Market Committee.
    The Chairman. That sets the targets for interest rates? 
Just so people understand: That's the entity that sets the 
targets for interest rates.
    Mr. Rosengren. That's correct. Since the outset of this 
crisis, we have been worried about how things would spill over 
to business finance. Obviously, it started in the subprime 
market, but spilled over to a much larger set of institutions 
and a larger set of problems.
    Over the course of the last year-and-a-half it has been 
clear that the situation has gotten worse. If you look at the 
senior loan officer survey that the Fed conducts, it highlights 
the fact that it has gotten more difficult to get financing, 
and that got appreciably worse as we got into the fall of last 
year.
    As we looked at the problems before getting financing, our 
first tool for the Federal Reserve is to move the Federal funds 
rate. And the chart that you have in front of you, the 
effective Fed funds rates, shows you how quickly the Fed funds 
rate went down between August of 2007 until December of last 
year.
    I would highlight a couple of things with this chart. One 
is, when we bring down the Federal funds rates, it's not just 
to bring the rates down for banks. It's to bring short-term 
credit rates down that affect businesses. So the goal is that 
the prime rate, the LIBOR rate and other rates tied to the Fed 
funds rate will follow suit, not, clearly, in lockstep, but 
will come down as well. While they have come down, they 
obviously have not come down to the same degree as the Federal 
funds rate.
    The second thing I would note is that currently the Fed 
funds rate is between 0 and 25 basis points. Effectively we're 
at zero. So our conventional way of conducting monetary policy 
can't be done because we have hit the bottom. The short-term 
rates have also come down along with the Fed funds rates. And I 
would note one thing in terms of Federal Reserve policy using 
conventional policy, and that is last year you will recollect 
that oil prices were quite high, that commodity prices were 
quite high, and the Federal Reserve was widely criticized 
actually for bringing rates down as quickly as it did bring 
them down. I think it was a good policy that we brought the 
rates down as quickly as we did. We obviously didn't prevent 
the kind of problems that we have had, but I do think it has 
helped mitigate the problems to bring the rates down. I would 
say that many other central banks did not move with the same 
alacrity as the Federal Reserve.
    As I have mentioned, if you turn to Figure 2, as we have 
gotten the Federal funds rate down to zero, we would have to 
move to less conventional policies. What Figure 2 does is 
provides the balance sheet of the Federal Reserve. This is 
normally something people don't spend much time on, but I think 
it's very important because during the course of doing the 
unconventional policy our balance sheet has expanded very 
substantially. I would highlight just a couple of the programs. 
We have a whole variety of programs I don't have the time to go 
over in any detail.
    But if you look at two of the programs, if you look at the 
discount window lending and if you look at the central bank 
liquidity swaps, so it's the blue and the green, those are two 
of the areas that we have expanded the most. Now, what is the 
purpose of those two programs? The purpose of those two 
programs is to help with interbank lending. So one way of 
looking at those is they are ways of auctioning dollars to 
banks in the United States and dollars to foreign banks abroad 
that are active in the interbank rate, and the goal is to try 
to bring the interbank rate down. In particular, a rate called 
LIBOR, the London Interbank Offered Rate, is a rate that banks 
trade between each other. And so the purpose of these two 
programs was to bring that rate down.
    And if you turn to Figure 3, which compares the LIBOR rate 
to the Federal funds rate, you can see that the LIBOR rate has 
come down quite substantially. It was very, very elevated 
during the end of the third quarter. It's now trading much 
closer to the Fed funds rate. This is a very important rate for 
businesses. The LIBOR rate is used as a base rate for a variety 
of lenders. LIBOR is used for a base rate when you have a 
subprime mortgage and you have a reset. LIBOR is used in many 
credit cards. In fact, my credit cards are tied to LIBOR. And 
many business loans are tied to LIBOR. So when you're bringing 
the LIBOR rate down, you're reducing the cost of funding for 
many of our businesses. So the purpose of these programs, while 
it was directed to the interbank rate, was really to get 
borrowing costs down for a wide variety of businesses, in that 
small, medium, and large businesses are all frequently 
borrowing at the LIBOR rate.
    If you turn to Figure 4, as well as the interbank rate, we 
have had a variety of programs that have been designed to 
impact the general market conditions. General market conditions 
have been seriously impacted, particularly as we got into the 
fall. This just highlights two of those programs. One is the 
commercial paper funding facility, which provides an ability of 
organizations that are having trouble issuing commercial paper 
into the general market to issue it directly to the Federal 
Reserve. And the other is the AMLF program conducted out of the 
Federal Reserve Bank of Boston, which was intended to provide 
stability to asset-backed commercial paper and to money market 
funds. I will describe that a little bit more in a minute.
    For large businesses, large businesses frequently do borrow 
in the commercial paper market. It's an important source of 
short-term financing. But it's not just large businesses that 
benefit from commercial paper. Organizations like GE and many 
other organizations fund themselves in the commercial paper 
market and then lend to small and medium-sized businesses. So 
everything from inventories to floor plan financing to other 
types of financing are indirectly financed by organizations 
like a company like GE getting access to the commercial paper 
market. The commercial paper market and money market funds were 
badly disrupted. We created these programs to provide funding 
in the commercial paper market to try to make up for the fact 
that it was very difficult for issuers to issue directly into 
the market at that time.
    You can see in the next chart, which looks at the asset-
backed commercial paper, that, as with the LIBOR rate, the 
asset-backed commercial paper rates have come down quite 
dramatically, as have commercial paper rates more generally. So 
both those types of rates are now trading much closer to where 
the Fed funds rate is currently trading. This has an impact on 
businesses both directly and indirectly to the extent that 
they're dependent on the commercial paper market.
    So again, these are programs to stabilize more general 
financial markets, but the purpose really is to get the cost of 
financing down to businesses small, medium and large.
    If you turn to Figure 6, it highlights what was happening 
with our money market funds at the end of the third quarter of 
last year. Money market funds were very badly disrupted. Why do 
we care about money market funds? We care about money market 
funds because--most people think of money market funds on the 
deposit side, where they're finding their own funds. But on the 
other side of their balance sheet is a variety of short-term 
financing. In particular, they're buying a lot of the 
commercial paper market issued by firms. So if money market 
funds are stabilized, it helps to stabilize the commercial 
paper market.
    The purpose of our AMLF program was to try to stabilize the 
money market funds. There were other programs that went into 
place as well, like the insurance fund. You can see that while 
there were very dramatic declines in money market funds in 
terms of funds flowing out of the money market funds in the 
third quarter, over the last 4 or 5 months, it has been quite 
stable. That's good news for commercial paper. It is good news 
for CD's. It is good news for the types of assets that these 
types of organizations are participating in.
    Just this last week we started a new program, the term 
asset-backed securities loan facility, it's just in the process 
of starting up. It's intended to help with the securitization 
market. There has been virtually no securitization going on 
since the fall of last year. The securitization market is 
important because a lot of short-term credit was actually 
financed through issuing securities more generally. If you 
can't issue those securities, there is not an easy way for 
financial institutions to unload some of the short-term credit 
that they're getting. That affects student loans. That affects 
small business loans. That affects credit card loans. So a wide 
variety of loans are impacted if we're not able to get the 
securitization market back up and running. So this program is 
designed to do that.
    I think it's a little preliminary to know exactly how well 
that's going to work out. I'm optimistic it will work out and 
that it will be a successful program, but we're just at the 
initial stages. That's one reason I don't have a chart on it. 
It was just this last week.
    Figure 7 highlights what has been happening in the mortgage 
market. Last week we had an FOMC meeting, and there was a very 
substantial announcement come out of that FOMC meeting. At the 
Federal Open Market Committee meeting, we agreed to purchase an 
additional $750 billion in mortgage-backed securities on top of 
the $500 billion that we had already purchased. We announced 
$500 billion in November of last year. You can see that prior 
to that announcement, mortgage rates were trading around 6 
percent. Since that announcement, they have been trading much 
closer to 5 percent. The hope is with this announcement that 
mortgage rates will fall even further.
    Now, that not only helps homeowners who are able to 
refinance, it also helps small businesses. The reason for that 
is many small businesses actually depend on their home equity 
lines, on their regular mortgage loans. And so to the extent 
that people are able to refinance or get financing through 
their home, to the extent that we're able to stabilize housing 
markets, that's good news for many small businesses, because 
that's usually the first place that people turn when they're 
starting from scratch to start a business. The reason for that 
is financing costs on your home are usually much lower than 
costs from other types of sources. So while it's primarily 
focused on housing, it does have collateral benefits that are 
very important for small businesses.
    Turning to Figure 8, getting more to the banking system: 
What this chart shows is, it separates out organizations 
nationally that are CAMELS Rating 1 and 2, the strongest 
institutions, from institutions that are CAMELS 3, 4, and 5, 
those institutions are weakest. It breaks up into four 
categories: Total assets; total loans; commercial/ industrial 
loans; and commercial and real estate loans.
    What you can see is those institutions that are healthiest 
have tended to continue to expand lending. Those institutions 
that are most troubled have tended to decrease lending. It 
highlights the importance of trying to get our banking system 
restored to health 6. Yes, Chairman Frank?
    The Chairman. Just to reinforce the reason we're here, if 
people look at that chart, the largest drop has been in 
commercial and industrial loans. That's just a reinforcement of 
the point that has brought us here, that is, people trying to 
do business who--the decrease in commercial and industrial 
loans is by far the greatest. And that, of course, really 
underlines the need for this hearing. Please go ahead.
    Mr. Rosengren. It highlights the importance of trying to 
get our banking system as well as our securitization system--
    The Chairman. But it also, there is a disproportionate hit 
here on commercial and industrial loans, businesses, small 
businesses. There is no point in trying to sugarcoat this. 
Commercial real estate, not as bad. Total loans, not as bad. 
The heaviest hit here are the commercial and industrial loans, 
and that is why we have to address this issue.
    Mr. Rosengren. And just turning to the last chart, Figure 
8: What this provides is the CAMELS 3, 4, and 5 nationally and 
in New England. So you can see nationally over the last year 
there has been a dramatic increase in our most troubled banks. 
It has gone from roughly 6.3 percent to over 13 percent, our 
CAMELS 3, 4, and 5 nationally. You can see in New England it's 
roughly 5 percent.
    The Chairman. Have you explained what CAMELS means to 
people who are not in the banking business?
    Mr. Rosengren. It's a way of measuring the financial 
strength of banking institutions, so it's Capital, Asset 
Quality, Management, Earnings, Liquidity, and Sensitivity to 
interest rates.
    The Chairman. CAMELS is an acronym for these things?
    Mr. Rosengren. It's an acronym for how we rate banks.
    You can see that in New England, we don't have as many 
troubled institutions as other parts of the country. This is 
one time where New England hasn't been as badly impacted in a 
recession as some other regions. Obviously, places like Miami, 
San Diego, Arizona, and Las Vegas are areas where they had many 
more construction loans and many more problems as a result in 
their banking system. While we have more healthy banks, 
obviously we have some banks that are having difficulty, and 
obviously if the economy gets worse, it's going to be a problem 
for even some of the institutions that are currently healthy.
    So in conclusion, I would just highlight a couple of 
things. Initially, the Federal Reserve used conventional 
monetary policy to lower interest rates. The purpose of that is 
to lower interest rates not only for households and other types 
of financing, but also for small, medium, and large businesses. 
As we got to the floor on the Federal funds rate, we have had 
to turn to alternative policies. Those alternative policies 
have looked at a variety of different ways that we can bring 
interest rate spreads down. Most of those programs are designed 
to try to provide financing that will be important for 
businesses. Most of these programs will hopefully help the 
situation in terms of reducing the cost to businesses and 
hopefully providing greater availability than we would have in 
the absence of those programs. Thank you.
    [The prepared statement of Mr. Rosengren can be found on 
page 97 of the appendix.]
    The Chairman. Thank you. We will get to questions. But I do 
want to emphasize: Having interest rates go down is a good 
thing, but not to people who can't get loans. And that figure 
you gave showed the commercial/industrial loans have been hurt 
most; there has been the biggest drop. That's the focal point 
of this hearing. We need to figure out how we can allow these 
job-generating businesses to get the advantage of these lower 
interest rates.
    Next, and I appreciate her coming here, because we were on 
the same plane yesterday, is Sandra Thompson, who is the 
Director of the Division of Supervision and Consumer Protection 
of the Federal Deposit Insurance Corporation.

    STATEMENT OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF 
SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Ms. Thompson. Chairman Frank and members of the committee, 
I appreciate the opportunity to testify on behalf of the FDIC 
regarding the availability of credit to small and medium-sized 
businesses in Massachusetts.
    The FDIC is acutely aware of the--
    The Chairman. Ms. Thompson, can you move the microphone?.
    Ms. Thompson. The FDIC is clearly aware of the challenges 
faced by banks and their customers during these difficult 
economic times. Liquidity in the marketplace has been adversely 
affected since the credit disruption began in mid-2007. Lack of 
liquidity and the slowing economy are having a profound effect 
on the availability of loans nationwide for both businesses and 
consumers.
    The focus again is on the ability of borrowers to repay 
their loans, which means determining that loans are affordable 
and sustainable over the long term. Few would argue that we 
should return to the loose lending standards of recent years 
that have resulted in so much damage to the financial system.
    While prudent underwriting may mean that some borrowers who 
received credit in past years will have more difficulty 
receiving it going forward, it should not mean that 
creditworthy borrowers are negatively impacted.
    Unfortunately, in returning back to basic lending 
standards, there is a risk that some lenders will become overly 
risk-averse. As bank supervisors, we have a responsibility to 
assure our institutions, regularly and clearly, that 
appropriately underwritten loans are encouraged. The financial 
data for banks in Massachusetts and the Northeast in general 
reflect a lower risk profile, fewer delinquencies, and nominal 
asset losses, in large part due to more prudent underwriting 
standards. The institutions here that did not take undue risks 
have nonetheless been affected by the national credit 
disruption as liquidity has become scarce.
    With regard to the supervisory role, in the period leading 
up to the credit market disruption, regulators should have been 
more aggressive in their supervisory approach to certain 
concentrations of credit risk that put us where we are today. 
The FDIC understands the critical role that credit availability 
plays as the lifeblood of the national economy, especially for 
small businesses. A number of discussions have taken place with 
the FDIC supervisory management team to underscore the FDIC's 
proper role and to raise sensitivity to issues of credit 
availability. FDIC senior management has reiterated that 
examiners should be encouraging banks to continue making good 
loans and work with customers who are facing financial 
difficulties. Prudent, responsible lending is good business, 
and it benefits everyone.
    Community banks are uniquely equipped to meet the credit 
needs of their local markets. They have a proven tradition of 
doing so through good times and bad. And most community banks 
here in Massachusetts have largely avoided the undue 
concentrations and reckless lending practices that led to the 
present issues in the financial sector.
    Massachusetts community institutions continued to grow 
their loan portfolios in 2008, although at a slower pace than 
at the peak of the expansion. Surveys of small businesses were 
conducted by the National Federation of Independent Businesses 
last fall and early this year. Most of them reported that 
finance and interest rates were not the problem, that the 
economy and poor sales were the biggest problem. Most of the 
institutions here in Massachusetts have a solid capital and 
solid funding base, and they will be in a good position to help 
finance the recovery. The FDIC believes that banks should be 
encouraged to make good loans, lenders should work with 
borrowers who are experiencing difficulties during this 
challenging period whenever possible, they should avoid 
unnecessary foreclosures, and they should continue to ensure 
that the credit needs of their communities are fulfilled.
    Thank you for the opportunity to testify today, and I would 
be happy to answer any questions.
    [The prepared statement of Ms. Thompson can be found on 
page 138 of the appendix.]
    The Chairman. Thank you, Ms. Thompson. Next, we have Toney 
Bland, the Deputy Comptroller for the Northeast District of the 
Office of the Comptroller of the Currency.

 STATEMENT OF TONEY M. BLAND, DEPUTY COMPTROLLER, NORTHEASTERN 
      DISTRICT, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Bland. Chairman Frank, members of the committee, and 
members of the Massachusetts delegation: Thank you for this 
opportunity to talk to you today about the OCC's role in 
ensuring availability of credit for small and mid-sized 
businesses in Massachusetts. I have been a national bank 
examiner for 28 years, and I have served in a variety of 
positions in the field and in our Washington, D.C., 
headquarters before taking my current responsibility as Deputy 
for the OCC's Northeastern District. In that capacity, I am 
responsible for the oversight of nationally chartered community 
banks in the District of Columbia and 14 States, including the 
Commonwealth of Massachusetts. The OCC has long recognized the 
importance of small and mid-sized businesses to the overall 
health and vitality of our economy, and we believe the 
Administration's small business and community lending 
initiative will have a positive impact on the ability and 
willingness of commercial banks to lend to that important 
sector.
    Like much of the United States, Massachusetts is coping 
with serious economic challenges. Consumer-loan delinquency 
rates are rising as home prices and labor markets decline, and 
commercial real estate is also suffering. Many Massachusetts 
firms have responded to the downturn by scaling back their 
operations. The vast majority of these small businesses are 
still fully viable. They continue to produce goods and 
services, and they still need access to credit.
    As bank regulators we recognize the important role that 
credit availability plays in the viability of these companies, 
and we have encouraged banks on an interagency basis to meet 
the credit needs of their small and mid-sized business 
customers. Yet in times of recession, bankers may be more 
cautious about the level of credit risk they assume and more 
selective in the loans they choose to make, especially if they 
find their capital or access to funding constrained. This is 
one reason why we stress the need for strong risk-management 
systems, capital and liquidity planning.
    Fortunately, most banks have such systems in place and 
remain well-positioned to meet their customers' demand for 
credit. Indeed, our examiners indicate that most community 
national banks in Massachusetts expect to see modest growth in 
their small business loan portfolios this year. Various Federal 
and State programs, including the Small Business Administration 
loan-guarantee program, can be especially valuable in this 
environment in helping bankers meet the credit needs of small 
and mid-sized businesses.
    In evaluating the underwriting and quality of small 
business loans, the OCC views government guarantees or support 
provided to these programs as effective mitigants of credit 
risk. In fact, our guide to examiners specifically states that 
those portions of credit having a government guarantee should 
usually be accorded a pass rate. National banks with strong 
encouragement of the OCC are active participants in these 
programs. The OCC also encourages lending to small and mid-
sized businesses through our evaluation of the bank performance 
under the Community Reinvestment Act, or CRA, our extensive 
community affairs activities, and our formal outreach programs.
    I know that some people believe that CRA contributed to the 
current credit problems. We at the OCC disagree. CRA encourages 
each insured financial institution to help meet the credit 
needs of the community in which it operates, but it does not 
ask banks to make bad loans. In fact, CRA lending has been a 
profitable business for most banks and a business that has had 
very significant benefits for communities across the country. 
The OCC's CRA examination process ensures that a national 
bank's lending to small and mid-sized businesses is carefully 
assessed and subject to public scrutiny and that these 
activities have a direct influence on the institution's CRA 
rating. This creates an additional incentive for banks to lend 
to creditworthy small business borrowers.
    The OCC's community affairs department provides important 
information and resources to examiners, bankers, industry 
associations, and community groups. Ten OCC community affairs 
offices are located in major metropolitan areas across the 
country, including Boston, and these individuals actively 
promote existing programs and innovative ideas for advancing 
small business lending.
    We also have a number of activities and publications 
specifically aimed at increasing awareness of programs that 
promote lending to small businesses. For example, the OCC and 
other bank regulatory agencies regularly convene seminars for 
Massachusetts financial institutions, focusing on prudent 
lending and promoting bank involvement in Community 
Reinvestment Act activities, including small business lending. 
My written testimony contains more information on these and 
many other OCC efforts to advance small and mid-sized business 
lending.
    Let me close by emphasizing that the OCC will continue to 
support and encourage lending to small and mid-sized businesses 
in Massachusetts and throughout the country. Thank you. I look 
forward to your questions.
    [The prepared statement of Mr. Bland can be found on page 
69 of the appendix.]
    The Chairman. Next, Mr. Michael Finn, who is the Northeast 
Regional Director for the Office of Thrift Supervision.

STATEMENT OF MICHAEL FINN, NORTHEAST REGIONAL DIRECTOR, OFFICE 
                     OF THRIFT SUPERVISION

    Mr. Finn. Good morning, Chairman Frank, and members of the 
committee. I appreciate the opportunity to appear on behalf of 
the OTS this morning to discuss ways to expand credit to small 
and medium-sized businesses in Massachusetts and throughout the 
country.
    I would like to begin today by thanking you, Mr. Chairman, 
for your leadership during the House passage of bills supported 
by OTS in two consecutive Congresses that allowed thrifts to 
expand lending to small business, which is fully consistent 
with the thrift charter and consumer and community lending. We 
stand ready to work with you again this year and to see these 
important changes enacted into law.
    OTS supervises 19 savings institutions with home offices in 
the State of Massachusetts. They range in size from $25 million 
in total assets to $2.5 billion. At the end of 2008, these 
institutions collectively held about $10.5 billion in assets.
    For OTS-regulated thrifts, total loan originations and 
purchases declined 11 percent from 2007 to 2008. However, in 
several categories of loans, including small business loans, 
the numbers actually increased during that period from 2007 to 
2008.
    Nevertheless, the current law limits the ability of thrift 
institutions to extend credit to small businesses, and many 
thrifts are unable to achieve efficiencies of scale that might 
make small business lending profitable.
    The Home Owner's Loan Act, which places a cap on commercial 
loans at 20 percent of the savings institution's assets, states 
any commercial loans beyond 10 percent must be in small 
business. The legislative proposal that OTS supports would lift 
the cap on small business loans entirely and increase the cap 
on other commercial lending from 10 percent to 20 percent.
    We are also working on a new proposal within OTS to provide 
additional flexibility for savings institutions by redefining 
small business loans to replace the current dollar limit, which 
is set at $2 million, with a standard that will reflect more 
changes in economic conditions, either based on geography or 
institution size. OTS will also propose a change that would 
increase the permissible community development investments for 
OTS-sponsored institutions.
    These changes would be consistent with the spirit of the 
thrift charter as a consumer and community lender and would 
make credit available to more neighborhoods and businesses. The 
changes would also diversify the thrift business model to make 
institutions more resilient when a slump hits one single sector 
of the economy, such as we have seen in the housing market.
    Thank you again, Mr. Chairman, for inviting me here today. 
I look forward to responding to your questions.
    [The prepared statement of Mr. Finn can be found on page 78 
of the appendix.]
    The Chairman. Next our colleague in government, the House 
Chair of the Banking Committee, Peter Koutoujian.

 STATEMENT OF THE HONORABLE PETER KOUTOUJIAN, HOUSE CHAIRMAN, 
             JOINT COMMITTEE ON FINANCIAL SERVICES

    Mr. Koutoujian. I was hoping my testimony would start with 
a bang, but--
    Chairman Frank, Congressman Capuano, and Congressman Lynch, 
and a special thanks as well to Congressmen Tierney and 
Delahunt, who are not even a part of the committee but care 
enough to learn what is going on, especially here in 
Massachusetts, thank you very much.
    I'm going to speak and the overarching arc of my speech 
will be regarding the strength and soundness of Massachusetts 
State-charted banks, the challenge of finding ways to help 
small businesses obtain loans, and some closing comments and 
approaches as well.
    I have sort of derived this information through myself and 
my staff's investigation of not only statistical information 
bearing on Massachusetts but also in speaking with the banking 
and the business community as well.
    Topic 1, strengthen soundness of Massachusetts State-
chartered banks: The banking industry facing economic 
challenges is due in part to these issues surrounding subprime 
mortgage loans. Though in Massachusetts we are not immune from 
the ailments encountered, these State-chartered institutions 
are faring better than their counterparts in other States. The 
reasons? There was a limited involvement in some of the 
subprime market. There was an exercise of due diligence and 
safety and soundness procedures in issuing loans that in some 
cases might have been greater than in other places.
    As of September of 2008, the Massachusetts bank outstanding 
loans were approximately at $173.8 billion, and as of December 
of 2008, State-chartered institutions' reserves to noncurrent 
loans and loans in arrears and leases was 96.45 percent and the 
United States was at about 68 percent. I think this shows that 
we have a strong and stable reserve system here in 
Massachusetts. Also, the noncurrent loans and leases to total 
loans and leases was .97 percent and the United States was 2.64 
percent, almost 3 times as much.
    And then the State-chartered institutions' net charge-offs 
to loans and leases or losses was .16 percent and the United 
States was 1.1 percent--again, a significant difference.
    The results of these statistics show that Massachusetts 
State-chartered institutions fare better than the U.S. average; 
and also in speaking with local representatives of some of the 
banks, we are hearing that most State-chartered community 
institutions have few if any foreclosures, as some have 
indicated.
    With regard to savings, we know that much of our sort of 
economic concerns are as a result of people saving more. 
Massachusetts State-chartered banks have seen an increase in 
savings deposits due in part to consumers moving money from 
riskier investments to more stable investments, such as money 
market and CD accounts, possibly--no hard statistical data--
possibly as much as 6 percent. While FDIC covers deposits up to 
$250,000, State-chartered banks and credit union deposits are 
covered in full, which could also be a reason that people are 
pulling their money out of other institutions and placing it 
into the State-chartered, bringing that number up to 6 percent.
    Finding a way to help small business obtain credit is part 
of, I think, our greater challenge here. There is a desire by 
banks to resume lending to business, but current economics make 
credit decisions more difficult and complex for commercial 
lenders. There is a key factor--a key factor in a lender's 
decision is the borrower's ability to pay back the loan. Such 
determination is made by evaluating the strengths of the 
borrower's business plan as well as the overall market for the 
product. In this economy, where markets are contracting and 
consumer spending is down, the complexity of this determination 
becomes more difficult. Another factor affecting credit 
availability for small to mid-sized businesses in Massachusetts 
is the decline in value of real estate or capital equipment, 
which may prevent a business from accessing a lower cost of 
debt for refinance. Current economic conditions have forced a 
lot of nonbank lenders as well to pull out, a major source of 
credit for business in the last decade. And larger banks, a 
major source of funding to mid-market companies, have curtailed 
lending to address bankwide risk concerns. Some other feedback 
from the business community is that they have said that they 
have been receiving feedback--excuse me, that they had been 
receiving feedback of businesses being denied loans, as well as 
a feeling among some businesses that applying for a loan is 
simply not worth it due to the belief in a lack of loan 
availability, based on many media reports. Another business 
community representative recognizes that lending has been 
tough, especially in certain sectors such as construction, but 
is receiving some feedback that there has been a small increase 
in lending in the last few weeks and is hoping that the trend 
will continue.
    According to the Associated Industries of Massachusetts, 
the business confidence index fell to an all-time low in 
February, to 33.3 points, 3 points below December's previous 
record. It's also AIM's, or Associated Industries of 
Massachusetts's, feeling that many companies are simply not 
applying for loans. Companies are in a pullback mode, trying to 
preserve their resources and ride out what they perceive to be 
an economic downturn. This is much like consumers who are now 
also contracting their own spending and enhancing their own 
savings.
    I think also the fact that the most recent data in 
Massachusetts shows the jobless rate climbing to 7.8 percent, 
creating more unemployment, perhaps less opportunities for 
companies to market and sell services and wares, is also 
something of great concern to them.
    I think that, as I close my testimony, there are items that 
our committee is willing to work and desirous to work with the 
banking community and the business community to identify if 
there is anything legislatively and, something we're hoping to 
learn today, if there is anything legislatively hindering what 
they're hoping to do, restrictive statutes or regulation.
    I also think, Mr. Chairman, that we have to be 
considerate--and I don't know what the answer is to this yet, 
but I'm interested in exploring this. We need to be careful, I 
think, with regard to Federal banking regulation and the fact 
that the State has no say whatsoever in that. So while we may 
be hindering by too much regulation on one side, perhaps we're 
not helping by having some say in what's going on with regard 
to Federal banks.
    I think also we can silo--I hate this new word--information 
that we need to expand. It's not just about banking. It's sort 
of like ``shovel-ready.'' For me, it is a new word we have to 
use too much now. But we need to be thinking about business 
banking and many other markets and opportunities. I think that 
we need to work together, as Congressman Frank said recently, 
the Federal, the State, and the regulators, all working 
together to help all the industries here in Massachusetts. 
Thank you very much.
    The Chairman. Thank you. Commissioner Antonakes.

   STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF BANKS, 
        DIVISION OF BANKS, COMMONWEALTH OF MASSACHUSETTS

    Mr. Antonakes. Good morning, Chairman Frank, and 
Congressmen Lynch, Capuano, Delahunt, and Tierney. My name is 
Stephen Antonakes, and I serve as the commissioner of banks for 
the Commonwealth of Massachusetts. I commend you, Mr. Chairman, 
for scheduling this timely hearing on the credit needs of small 
and mid-sized businesses. The ongoing success of our businesses 
and their access to credit is critically important to both the 
Massachusetts and our national economy.
    The two primary points of my testimony are that local 
financial institutions continue to lend and that the Patrick 
Administration is working to encourage public/private 
collaboration to assist businesses during these times. 
Certainly the well-chronicled difficulties being experienced by 
some of our large nationwide money-center banks have resulted 
in the restriction of credit.
    However, the experience of community banks and credit 
unions has been strikingly different. I have just completed a 
series of roundtable discussions across the Commonwealth and 
have heard from hundreds of bank and credit union officers on 
their perspectives of what is happening on Main Street. Many 
Massachusetts State-chartered institutions report increased 
lending as a result of reduced competition from some of their 
largest bank competitors. This is yet another example of how 
our diversified and decentralized system of banking continues 
to serve our Nation well.
    This contention is supported by our analysis of FDIC call 
report data, which shows that Massachusetts State-chartered 
community banks' balances for commercial real estate loans and 
commercial/industrial loans increased 14\1/2\ percent from 2007 
to 2008 and nearly 26.9 percent from 2006 to 2008. The 
Massachusetts community banking system and credit union 
movement remain fundamentally sound and continue to serve as 
sources of strength.
    I also note that the opportunity for the U.S. Treasury to 
provide TARP funds to Massachusetts banks has been 
significantly restricted. More than 5 months after the largest 
banks were provided TARP funds, no term sheet has been released 
for mutual banks. Massachusetts has the largest percentage of 
mutual banks in the country. Accordingly, TARP funds are still 
not an option for the majority of community banks operating in 
the Commonwealth. This has had the effect of unnecessarily 
restricting increased lending opportunities that might 
otherwise be available through the use of TARP funds.
    Finally, events beyond the control of community banks have 
and will continue to affect their ability to lend in the 
future. The conservatorship of Fannie Mae and Freddie Mac as 
well as proposed significant deposit insurance assessment 
increases will significantly impact the earnings of State-
chartered community banks and in the case of the ongoing issues 
in the corporate credit union system State-chartered credit 
unions as well. It is important to note that these actions will 
not threaten the capital base of any Massachusetts State-
chartered bank or credit union. However, the availability of 
credit to consumers and businesses alike will be reduced 
across-the-board as a result of these increased operating 
costs.
    In sum, the ability of local institutions to continue to 
lend will not be impacted by their bad acts but by the bad acts 
and aggressive risk-taking of others.
    Massachusetts has also had a proud history of attempting to 
leverage partnerships to increase opportunities for small 
businesses to flourish. The Massachusetts Small Business 
Capital Access Program, or CAP program, involved an initial $5 
million State appropriation in the early 1990's to provide a 
cash collateral guarantee or credit enhancement to small 
business loans. Today, over 100 banks participate in the CAP 
program.
    Since the banks utilize their own underwriting criteria and 
directly provide the funding, the loans are simpler to 
originate than loans made through SBA. Participating banks also 
receive credit under the Massachusetts Community Reinvestment 
Act. In 15 years, a total of $10 million in State funding has 
been leveraged into $241 million in loans to over 3,800 small 
businesses, with an average loan amount of $51,000 and loans as 
small as $1,000. CAP program loans have helped create or retain 
26,000 Massachusetts jobs and brought in over $100 million in 
payroll taxes to the Commonwealth.
    The Massachusetts Banking Partners small business loan 
program provides greater access to reasonably priced credit and 
banking services to small businesses as well as access to vital 
business assistance. The program recognizes that many startup 
and small business owners need help with recordkeeping, general 
management, and preparing a business plan and financial 
statements. The Banking Partners program matches small business 
owners receiving technical assistance and training with small 
business assistance providers with participating banks.
    In addition, the Patrick Administration is currently 
working to develop additional programs to further assist small 
and mid-sized businesses having difficulty accessing credit. As 
we continue to work our way through the current economic 
downturn, small and medium-sized businesses will face 
increasing challenges. I thank you for the opportunity to 
testify today. I would be happy to answer any of the 
committee's questions. Thank you.
    [The prepared statement of Mr. Antonakes can be found on 
page 56 of the appendix.]
    The Chairman. To begin, Mr. Antonakes, two of the issues 
that you mentioned that are relevant: First, we are working 
closely with the FDIC and the Chair, Sheila Bair, to reduce 
that increased assessment. If the legislation passes the House 
and, suitably amended, passes the Senate, and the lending 
authority of the FDIC is sufficiently increased, that increased 
assessment will be cut by two thirds. Instead of going from 6.3 
percent to 20 percent, it will go from 6.3 percent to 10 
percent. And we have the Chairwoman's word on that. That's 
pending. We are very optimistic that will happen. So that is 
going to happen.
    Secondly, your mentioning the problem of Massachusetts 
suffering disproportionately when there is not a means of 
getting Federal TARP money to mutual banks: A letter will be on 
the Secretary of the Treasury's desk tomorrow signed, I 
believe, by all the members of the Massachusetts delegation, 
including those of us on the committee, insisting that be done 
very promptly. Apparently, I'm informed by my staff that--we 
have expressed an interest in this--they are having 
difficulties finding what type of collateral to take since 
mutual banks don't have stock. We will find something. I will 
be talking to the Secretary of the Treasury today. I guarantee 
we will get very prompt action and the funds will be made 
available to the mutual banks.
    Now let me ask you--I apologize, I should have structured 
this differently. I should have begun with the businesses, 
because here's the problem, frankly: When we get to you, then 
we wonder why we're here, because everything is good. But 
everything isn't good. It doesn't mean people are bad, but 
there are problems. We hear from a lot of businesses that they 
are not able to get loans. I have a business in the New Bedford 
area, a very important functioning business, that is having 
problems getting their credit extended. So we know there are 
problems here.
    What I should have done is had the businesses come first 
and hear their complaints, and then the banks would explain in 
the second panel what they're trying to do but, and then you 
would have come last, because you would have heard businesses 
complaining, and the banks, frankly, saying that, yes, part of 
the problem is the regulators. And you have a dual mandate. You 
have as members of the Federal Government the mandate of 
getting the economy going, but you also have the safety and 
soundness mandate. People sometimes overlearn lessons.
    So I'm going to ask the bank regulators, the three Federal 
bank regulators, less so the Federal Reserve--and this does 
come from both the large banks and the community banks--I want 
you to respond to the charge we get that while you are for 
lending in general, some of the people who work for you are 
sometimes not for lending in particular. We can't make loans in 
general. I mean, we do have those numbers that Mr. Rosengren 
showed us that commercial and industrial loans have been 
disproportionately hit, and we have people who come and show us 
balance sheets--we're not experts--that seem to us to justify 
loans. So what are you doing to make sure that your examiners 
don't err on the side of safety and toughen up too much? Ms. 
Thompson, let's begin with you.
    Ms. Thompson. I would admit that we do hear complaints all 
the time about this very issue. The FDIC as insurer, we insure 
the deposits of over 8,300 institutions. But we are the primary 
Federal regulator for just over 5,000 institutions, and most of 
the institutions we supervise are community banks. What we're 
finding, and particularly in Massachusetts, is that as some of 
the larger banks are pulling out, some of the community banks, 
especially the ones here in the Commonwealth, are regaining 
access to borrowers that they may have lost for competitive 
reasons prior to the credit issues in the economy.
    Two things: One, we supervise over 133 institutions here in 
Massachusetts, and we have noted that their lending has 
increased. And we have specifically told our examiners that 
they are to strike a balance. We want to encourage institutions 
to make loans, to make responsible loans. There are 30 
institutions in Massachusetts that have applied for TARP funds. 
As mentioned before, 18 of them are mutual, three are C corp., 
and 9 are public. And it's interesting to note that when the 
TARP was first implemented in October, it was for the publicly 
held companies, and we have been working diligently with the 
OTS to try to come up with a term sheet to help get the mutuals 
in play for the TARP money.
    There have been some allocations--I think there have been 
12--10 that have been given, 10 awarded to--
    The Chairman. Ms. Thompson, two things: First, I want to 
see that term sheet. It doesn't have to be perfect. The term 
sheet people can understand the terms under which mutual banks 
will be able to get TARP funding. The Secretary is going to be 
coming back for some more help. I don't know how he would 
expect myself, Mr. Capuano, Mr. Lynch on the committee and the 
others to be responding to requests for more authority if a 
significant chunk of the banks in our State can't get it. So 
please understand that is not now a nice thing to happen; it's 
a prerequisite for further cooperation.
    Secondly, let me ask you, and I'll ask all the others as 
well: We get complaints from banks, I will get a complaint from 
a constituent--it's delegated. I'm not a lending officer. I 
don't want to be. But I have a responsibility to ask: I was 
told, ``Yes, we would like to do that, but we're worried about 
the regulator.'' I want from you and staff a way I can get 
those complaints with sufficient anonymity. Because you 
understand a banker doesn't want to sign his name to a 
complaint about a regulator, human nature being what it is. But 
we really need a complaint process. I appreciate you're trying. 
You have a lot of people under you.
    Here's the deal: I think a lot of people--and it's not 
their fault--who work for you figure they are more likely to 
get in trouble if they approved a loan that went bad than if 
they denied a loan that didn't happen and that should have 
happened. I appreciate that. I do want to move on. Do you have 
anything further to say?
    Ms. Thompson. I offer our ombudsman, to the extent people 
want to work out a complaint--
    The Chairman. Ms. Thompson, we have heard--as I look at the 
complaints, many of them have been from the larger 
institutions, where the Fed obviously would have a role. What 
is the Federal Reserve doing to see that there is not 
overrestriction, in our concern for safety and soundness.
    Mr. Rosengren. I would agree with your observation that I 
think a disproportionate number of the problems are at our 
larger institutions. As the chart that I showed for New 
England, we have a lot of community banks that are actually 
well capitalized and are able to provide lending, but they can 
only do it up to the capacity of their capital. So for many 
small businesses, I think there is access to our community 
banks. And in terms of the advisory councils that I--
    The Chairman. Don't tell me the good stuff. Talk about the 
bad stuff.
    Mr. Rosengren. In terms of the bad stuff, for the larger 
institutions, they do have more capital issues than our smaller 
institutions. Some of the issue has to be that we have to get 
them restored to health. That's part of the purpose of some of 
the TARP funding. We also need to get some of their bad assets 
off their balance sheets. Secretary Geithner was talking about 
that this morning, on ways to try to remove bad assets. I think 
both of those are critical to getting the large banks in a 
position where they feel comfortable lending to medium and 
large businesses.
    The Chairman. If in fact the plan the Secretary is 
announcing, with getting private capital and public capital 
together to try and bail the banks out with some of the things 
that went bad, but in a way that promises that there will be 
some public return if things get better--if that were to work 
in a couple of months, could we look for an increase in 
lending? I think these people need to know that if in fact 
there is this program of buying the toxic assets--which is a 
very bad term. I think the opposite of a toxic asset is a 
nurturing liability, if we're inventing terms. But if we are 
able to help the banks divest of some of the bad decisions that 
are weighing on them or the bad results, could we count on that 
leading in part to increased lending?
    Mr. Rosengren. I think it will improve the situation. It 
won't happen overnight. It takes time for both the bad assets 
and it takes time for the good bank that's left to start 
thinking about future prospects of the problems in the 
portfolio.
    The Chairman. Please advise the good banks that will be 
left that they should start thinking about it now. Seriously. 
If it is sequential, it's going to be a problem. They know 
what's coming. They should start looking at these things now, 
start the conversations now, because I will tell you, if in 
fact we go ahead with this--and as I understand it, the 
Secretary is not asking for further congressional help to 
implement this--but if this goes forward, and I think it is 
necessary--but if it doesn't pretty soon start to produce some 
results, then the anger is going to be such that we're going to 
lose some capacity to do these things. Mr. Bland.
    Mr. Bland. Chairman Frank, back to your original question 
about our examiners. As Ms. Thompson said, it is a balancing 
act. One of the things we have to do is periodically check in 
with our examiners and make sure that they understand the 
environment we're in and what are the right calls to make. We 
do that constantly, with meetings and also instructions that go 
out to them. We realize that, from the past, we make sure that 
we're making calls that are consistent not only within 
Massachusetts but around the country. And that is one of the 
big things we learned especially from the 1980's that is very 
important, to have some oversight and some quality control 
around decisions that we make.
    The other thing I want to mention is, in terms of 
improvement, I think the Administration's proposal on small 
business lending will be very important. I think we should see 
some traction starting fairly soon. On June 30th, the 
regulatory agencies will start tracking the Small Business 
Administration's small lending activity. That should be 
important.
    The Chairman. The reason being that if the banks then make 
loans that qualify there, they get a guarantee that should make 
it easier for them--
    Mr. Bland. Up to 90 percent. My last point is, in terms of 
customers who would like to anonymously lodge complaints or 
inquiries into situations with their banks, we have a customer 
assistance group that allows them to call in--
    The Chairman. By ``customer,'' you mean the banks you 
regulate?
    Mr. Bland. Banks we regulate, but also a customer of a 
bank.
    The Chairman. I appreciate it. Mr. Finn.
    Mr. Finn. Chairman Frank, I appreciate your attention on 
mutual institutions. As you know, OTS has a very large mutual 
bank population, and it has been a difficult issue.
    But beyond that, in talking about our approach towards 
supervision, just this past week, I was up here in Boston 
meeting with my Boston staff and on Friday with the rest of our 
regional staff. We're trying to send clear, steady messages to 
staff to be prudent regulators, to identify concentrations in 
risk early, so that institutions can deal with them in a 
capable way. If you wait too long, it becomes a problem where 
you need very severe actions to bring about the right change.
    So we are closely looking at risk. But we also talked about 
the availability for creditworthy borrowers. The Agency put out 
a statement back in, I think it was November of 2008, and while 
that didn't have binding rules, it's a message that needs to be 
reinforced to regulators.
    The Chairman. The regulators together, we have heard some 
acronyms here. You've been spared one of the most unpleasant-
sounding ones, I think, which is what these people when they 
get together call the FFIEC, the Federal Financial Institutions 
Examination Council. We have most of the members of the FFIEC 
here today.
    But there have been some statements. Let me say this, and 
then I'm going to move on to my colleagues: We're part of the 
problem, we the politicians. We tend to be somewhat too harsh 
and go after the mistakes. As an example, AIG, a lot of 
problems with the bonuses they should not have been granted, 
and the retention bonuses I think were frankly a form of 
extortion--although I do want to say, the people who got those, 
we're not talking about Madoffs here, we're not talking about 
criminals. I think some of the vitriol needs to be toned down. 
Bad policy doesn't mean they are horrible people. We need to be 
able to control the policy.
    But in fairness to the Federal Reserve and Secretary 
Paulson, who was there under the Bush Administration as well, 
some of the people who have been very critical of the decision 
to deal with the debtors of AIG were equally critical of the 
decision not to deal with the debtors of Lehman Brothers. 
Lehman Brothers was allowed to go under and the debtors got no 
help. AIG, the debtors got help. There were people equally 
critical of both. What we need to do is get a system so we can 
avoid both of those extremes.
    I want to say this: Please convey to your examiners, all of 
you who have examiners--I am chairman of the committee. I talk 
to all of the members of this committee. I know in the past 
they have been afraid that if there were failures they would be 
attacked for laxity. I will work very hard to say, look, we are 
asking for there to be more balance. I understand, if there is 
more balance, that means more good loans being made and 
inevitably it means more bad loans being made. There is no way 
I can tell you to have your people approve only good loans. We 
hope to get the percentage fairly high.
    I will tell you that I will urge my colleagues to 
understand that. We urge you to take a little bit of a risk now 
on the side of more loans because we think credit is too tight. 
As you get it more relaxed, yes, we won't get it perfect. But I 
think that is what we need to do. And I will tell you that to 
the extent that we in Congress are involved, our reactions will 
reflect that.
    Let me go next to my colleagues on the committee. Mr. 
Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. I would like to 
start, because it was a new issue to me, with what Commissioner 
Antonakes mentioned on the mutuals. I hadn't heard that before. 
And Mr. Frank's comment that they have no stock is an issue. Do 
you have any suggestions? I'm not trying to put you on the 
spot. If you want to do it later, or just let me or the 
chairman know, suggesting items for collateral that we might be 
able to support.
    Mr. Antonakes. I would be happy to follow up with you, 
Congressman. But I think, as the chairman indicated, there is 
always a way to get it done. We would favor different ways of 
looking at things, be it subordinated debt through the holding 
company. Some kind of a deposit at the mutual bank has been 
discussed as well. And even, you know, perhaps rather than a 
cash infusion and perhaps, you know, as the Secretary of the 
Treasury's statement today, we'll work on it, the means of 
moving some troubled assets off of bank balance sheets, not 
just the five largest banks in the country, but even a few 
community banks. There are a very small number that are 
struggling. The ability to move just one or two bad loans off 
the balance sheet could immediately restore them.
    The Chairman. The lack of a means for applying for TARP 
funds doesn't carry over with the assets.
    Mr. Antonakes. Correct.
    The Chairman. The fact that they're not eligible for the 
funds yet would not intrude--wouldn't mean they couldn't 
participate in that other program.
    Mr. Antonakes. Yes, Mr. Chairman. I'm just hoping the 
program on--that allows us to move the assets out is flexible 
enough to deal with small asset issues versus large asset 
issues.
    Mr. Capuano. Mr. Commissioner, I'm happy to look at the 
suggestions, but you have to understand you're talking to 
someone who hates what is about to happen this week. I think 
what the Federal Reserve and the Treasury are doing this week 
is horrendous. I think it is incredibly dangerous to take 
almost all the risk and put it on the taxpayers' backs. Why do 
you think the market is going up today? Because the market sees 
a killing. I don't blame them. I would be doing the same thing. 
They see a killing, a massive shift of taxpayer money to 
private enterprise. I hate it. I will take it up with both 
Secretary Geithner and Chairman Bernanke this week as they come 
before the committee. I know I am a voice crying in the 
wilderness. I get it. But I respectfully disagree with taking 
those assets off. I also know that I'm in the minority.
    I do believe there are other ways to do it. I think there 
are plenty of ways to leave those assets on the books of the 
people who took the bad gambles, which for the most part are 
not our community banks. Very few community banks took these 
humongously bad gambles. Most of them were made by the big 
guys, and everything is rolling downhill. I think there is a 
way to do it, to leave the risks on the back of the people who 
took that risk, as opposed to taxpayers. That's a different 
issue. We'll be dealing with that next week.
    I guess I do want to follow up on what the Chairman had to 
say, what Chairman Koutoujian had to say: I agree that a lot of 
it has been people backing off. It has also been exactly what 
Chairman Frank said, which is everybody in the whole system, 
both the regulators and the bankers and community bankers, are 
afraid to make not a bad loan but anything other than a 
perfectly excellent loan to a guaranteed payer. Again, I really 
think that the most important thing is to comment to the 
regulators that you have to talk to your own people. Again, I 
understand there is a balance. I understand that. I think it's 
perfectly fine if the instruction goes out to loosen it up 
again, to make sure that Congress knows that, you know, there 
is a little bit of extra risk.
    I can only analogize it to 2004, when the convention was 
here in Boston. It was a couple of years after the 9/11 attack. 
Every single security agency in Washington was up here trying 
to protect us. I understand that. Every one of them wanted to 
close down every road for 14 square miles. And we had no--
because nobody wanted to be the guy who said, ``Open up Route 
93,'' in case, God forbid, there was a problem. I understand 
that. I respect that. It's exactly what's going on in the 
banking industry right now.
    The balance is, when you make these commentaries, when you 
enlighten your regulators, that you also document it and let us 
know. I think the chairman is 100 percent right: We understand 
that if things open up a little bit better, that some 
additional loans might go bad. That is better for the economy. 
It is better for everybody if one or two go bad. Nobody wants 
to go back to the bad old days of just throw it out the door. 
But there is some balance. And I am not trying to ask you to 
put your own reputations or your people's reputations on the 
line. If it's done in an open and transparent way and a 
thoughtful way, I think that there will be plenty of Members of 
Congress who will stand up and do the right thing.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    The Chairman. Mr. Delahunt.
    Mr. Delahunt. I'm going to ask Mr. Bland to focus on the 
Community Reinvestment Act, and if you have data that would 
indicate delinquencies and defaults from institutions that 
operate under the--operate within the Community Reinvestment 
Act. Because I think there is a perception out there that the 
CRA in no small measure is responsible. And my understanding of 
the data is that is entirely inaccurate. I think it's important 
that we lay out for the record once and for all the impact of 
the CRA. So reflect on that for a minute, but let me just take 
another minute to reflect on I think what you're hearing from 
the chairman as well as Mr. Capuano. I just think it's very 
natural for people to err on the side of caution when there is 
a crisis like the one that we have now. I remember vividly back 
in the late 1980's or actually in the early 1990's the term 
``performing/nonperforming loans,'' and actually institutions 
that I believe--lending institutions, banks, that could have 
survived did not because of fear of lack of discretion maybe, 
lack of flexibility.
    And I think the message that you're hearing from members of 
the panel is to go back to your personnel and tell them to 
exercise judgment. Don't become so concerned that what we have 
is the ability to lend but a reluctance to lend because of the 
mood of the moment. That is really defeating in terms of what 
we as an institution, in terms of Congress, and the 
Administration is attempting to do. Exercise judgment. Don't be 
too reluctant.
    Now is a good time to be in the market. There are a lot of 
good buys out there. One only has to see what the Chinese are 
doing worldwide. I read recently a quote from one of the 
Chinese leadership that said this is a once-in-a-century 
opportunity, so therefore the Chinese, who I believe have in 
excess of a trillion dollars, are all over the globe now 
buying. Again, I'm not suggesting that we all run out and be 
rash, but at the same time, let's strike that balance. It's 
important that we do. Mr. Bland, will you speak to the issue of 
the CRA?
    Mr. Bland. Representative Delahunt, I don't have the 
specific numbers in front of me, but I would be happy to get 
those for you. But I can safely say with all confidence that 
the CRA loans, the loans made under CRA, have not fared worse 
than loans outside of CRA.
    Mr. Delahunt. Say that again, and say it a little more 
loudly so everybody can hear.
    Mr. Bland. I can say with 100 percent confidence that loans 
under CRA have not performed any worse than loans outside of 
the CRA.
    Mr. Delahunt. Let me suggest to you, from what I have been 
able to gather, is that in fact they're doing better than loans 
outside of the CRA. So I would like you to get that information 
and provide it to me and start to focus your public comments, 
or whoever you report to, on the realities that exist out in 
the marketplace. With that I yield back.
    The Chairman. And to make the question complete: What we're 
looking for is a comparison not just of CRA loans versus non-
CRA loans in the banking system, but CRA loans versus all 
loans--because I believe statistics are pretty clear that the 
great majority of loans that got us in trouble were made out of 
the banks, not credit unions, that the credit unions and banks 
were not making these loans. We need to remind people CRA only 
covers the banks. So it's loans made by mortgage finance 
companies and others where I think there is a disproportionate 
part of the problem. That's the comparison we could get, not 
just in the banking system and CRA, but in the banking system 
and other loans, many of which were outside the system. Mr. 
Tierney.
    Mr. Tierney. I don't want to recover a lot of ground we 
have already covered. I think the questions were right on 
point. But am I correct in saying that all of your 
organizations have authority to step in and take some sort of 
corrective action if in fact people are having bad lending 
practices? But if they're not lending enough, if they fall down 
on the balance, where you don't think they're lending enough, 
there is not much more than jawboning that you can do? Is that 
a fair assessment? Is there something else you can do where you 
see a bank making decisions that are somewhat on the side of so 
overly cautious that it belies reasonable judgment? Mr. Finn?
    Mr. Finn. Yes, Mr. Tierney. We do have the CRA Act, which 
if they're not doing enough lending within their designated 
community, they would get rated either less than satisfactory 
or needs to improve. And we can require certain corrective 
actions when they receive an adverse rating like that.
    It also impacts their ability to get approval on certain 
applications as well. So it does come with a cost. There is 
some mechanism when institutions are not out lending in the 
community--
    Mr. Tierney. And you are monitoring that?
    Mr. Finn. We do monitor that.
    Mr. Tierney. You have found nobody on the other side of 
that so far?
    Mr. Finn. We do occasionally have institutions that obtain 
that rating. Typically in the thrift industry, and I think 
across much of the banking system, we have a large portfolio of 
small institutions, typically the only loans that they make are 
in the community. So it's not an issue. But from time to time 
we do come across institutions that don't make loans, and 
again, we would rate them adversely.
    Mr. Tierney. Any other tools? Ms. Thompson.
    Ms. Thompson. The CRA is a good tool. In fact, we just 
recently--
    Mr. Tierney. Would you say that again?
    Ms. Thompson. CRA is the best tool that we have to monitor 
the banks' lending efforts and initiatives. I would like to 
mention that on behalf of the FDIC--
    Mr. Tierney. Can you speak right into the microphone?
    Ms. Thompson. On behalf of the FDIC, you do have my 
commitment and also the Chairman's that we are telling our 
examiners to make sure that they strike a balance, that banks 
are--we're going to encourage banks to make good loans, and we 
are encouraging them to modify loans and work with borrowers to 
avoid unnecessary foreclosures. This is a good time where 
judgment comes into play. Many of the people who work for us 
have been through the 1980's and the 1990's, so they are 
capable of making good judgments about financial institutions 
and lending. As we go back to basics, we want to make sure that 
the fundamentals of lending are still in play.
    The Chairman. Mr. Capuano has a question or further 
comment.
    Mr. Capuano. Thank you, Mr. Chairman. Number one, the CRA 
is an annual rating. You don't get to do it every month or a 
couple of days. It's a tool, but it's a weak tool at best. 
Number two is that actually some of the things we had hoped, 
many of us had hoped that would happen through the TARP 
legislation, is that as we're giving taxpayer dollars to some 
of these institutions, that they would then be required to put 
some of it out in loans. In my opinion, most of that has 
failed.
    There are two other comments I wanted to make. Again 
following up on Chairman Koutoujian's comments--yes, I think 
there has been some retrenchment on some loans, but I think a 
lot of that is tied to a lot of smaller businesses actually 
supply larger businesses. If the larger business can't get a 
loan to do something, then the smaller business can't get a 
loan either, either because their potential or the purchaser of 
whatever it is they make isn't there, or they don't have the 
stability that the loan is perfect.
    And the last comment I wanted to make is, for, again, 
particularly for the smaller, more community-oriented or 
statewide banks: One of the problems I'm hearing is from the 
FDIC. Right now they're struggling to deal with the increased 
fees to get the FDIC to pay for something they didn't do. I 
understand fully well the FDIC has certain capitalization 
requirements of their own. I get it. You know that we're 
working on trying to increase access to capital.
    But I want to make sure that if that--actually under any 
circumstances would be nice, but particularly if Congress is 
able to increase the access to capital for the FDIC, that you 
then go back and either repeal or reduce or reverse or even 
rebate some of these fees going on, and only because it is 
exactly the opposite of what should be happening. The banks 
that have been the least guilty of engaging in risky behavior 
are now paying to stabilize the FDIC, for understandable 
reasons, in order to support the activity by the most risky 
behavers. It's completely the wrong way to go.
    I understand it's the only tool you have at the moment. I 
get it. But I also think it's critically important. That's 
millions of dollars on the books of some of our more local 
banks that would then have it available to loan out.
    The Chairman. Mr. Tierney.
    Mr. Tierney. Thank you. Just closing on that, I think the 
next time that anybody contemplates waiving those fees for any 
lengthy period of time, maybe we would rethink that and 
understand that that is an assurance against the day, it might 
be something like the experience we're experiencing today.
    My last question would be: I hear stories over and over 
again that regardless of the SBA's programs, banks continue to 
not be anxious to lend utilizing the SBA. Are you hearing the 
same thing and making those observations? If you are, what 
needs to be done either through legislation or through 
regulation by the SBA or in some other way, so that more banks 
utilize the resources of the SBA and then be able to pass that 
on to borrowers?
    Ms. Thompson. I think the announcement by the President 
last week of increasing the guarantee from 80 percent to 90 
percent for an SBA loan and also the Treasury's purchase of 
assets backed by the SBA, will do a lot to increase SBA 
lending.
    Mr. Rosengren. I agree with her observation. SBA lending is 
not very substantial in New England. It's much more substantial 
in other parts of the country. We have had meetings with 
community bankers to try to encourage them. I'm a little 
skeptical that it's the amount of the guarantee. I think it's 
the paperwork. It's viewed as a very onerous system, both by 
the borrower and the bank.
    The Chairman. Let me note, because we do have the vendors 
of the Small Business Association on the next panel along with 
the bankers.
    Mr. Tierney. I'm hearing what it is--is that it on that? 
These are things I want to ask the next panel.
    Mr. Rosengren. I think it is a good thing to ask the next 
panel. But we have had the same observation, that many banks 
have been reluctant to do the program. I don't know that the 
staffing of the program has been as great as the funding for 
providing the loans. So I think it may be an opportunity to 
look at whether they have enough staff to push it out to 
financial organizations and also ask--I know they have tried to 
streamline the programs. I know they have made improvements in 
the program. But what we talk to bankers, there are probably 
more improvements that need to be done to really make it a 
streamlined program that they're actively using.
    Mr. Koutoujian. If I may add, Congressman, you may want to 
ask some later panels. The SBA typically guarantees about $20 
billion in loans annually, and new lending this year is on 
track to fall below $10 billion at this point.
    The Chairman. We will have on the next panel the president 
of the Smaller Business Association, and representatives of the 
borrowers. We will hear directly from them and from some 
community bankers.
    I thank the panel. We hope to be able to follow up on the 
supervision, and we will be pursuing the mutual term sheet.
    The next panel will come forward. As they do, let me note 
that, through my error, we forgot to add the credit unions, who 
will be represented, as well as State Representative Linda 
Dorcena Forry, who is the chair of the Community Development 
Committee in the House. We will take 2 minutes to change.
    [Discussion off the record]
    The Chairman. Our next panel includes both representatives 
of the banking industry and of the borrowers. We are going to 
resume the hearing, if people will please either take a seat or 
leave. If you want to stand up, it's okay as long as you don't 
talk.
    We'll begin with Representative Dorcena Forry. 
Representative? I know you guys get criticized for excess, but 
spring for a couple of microphones here.

STATEMENT OF THE HONORABLE LINDA DORCENA FORRY, HOUSE CHAIRMAN, 
     COMMITTEE ON COMMUNITY DEVELOPMENT AND SMALL BUSINESS

    Ms. Dorcena Forry. The press would probably kill us for 
that. I want to thank you, Chairman Frank, and Congressmen 
Capuano, Delahunt, and Tierney for holding this hearing today. 
My name is Linda Dorcena Forry. I'm a State Representative for 
the 12th District, newly named chair for community and small 
business. I think it's great that we have the two panels this 
morning. To hear the panel of regulators and how they are going 
to try to ensure the adequate extension of credit to small 
businesses is very important. I look forward to hearing from 
the lenders and borrowers as well. I'm here with two staff 
members, John and Lou, who are each analysts. I cannot stay for 
the whole thing, but they will be here taking notes.
    As we have heard this morning, small businesses are the 
economic engines in our communities, not just in Massachusetts, 
but throughout this country. It is important and really a 
timely discussion that we're having today on how are we going 
to help these businesses on Main Street remain viable. 
Expanding credit to small businesses and mid-sized businesses 
is what's going to help us move out of this economic situation, 
this economic meltdown.
    In the wake of the crisis, our banks have become risk-
averse. However, despite the lack of available credit, our 
local businesses cannot afford risk-aversion. They have 
invested everything into keeping their businesses afloat, at 
times tapping into their home equity to make capital 
investments, purchase new inventory, or even to make payroll.
    And even businesses that have not been as actively affected 
have found themselves losing their lines of credit. I'm not 
speaking merely about average business owners. I'm referring to 
colleagues, my colleagues, in State Government, in the 
Legislature, who are still investing in their businesses. I 
have a colleague who had a line of credit, a $50,000 line of 
credit, for several years, always paid on time, never used it, 
paid the rate that you need to pay every month to make sure he 
sustained his credit. Recently, he received a letter from his 
lender telling him that the line of credit is no longer 
available to him. This is the time, you know, that he may need 
to have access to that line of credit even more.
    So I think that it is important that we are here, and this 
is a good thing. But we have to ensure that the TARP funds 
trickle through the banking system and into our communities. 
Stimulus money should not only go to purchase bad loans from 
failing institutions while letting them tighten their 
underwriting criteria to the other extreme. If we are going to 
bail out the banks, then they need to continue to support small 
businesses with access to credit. I say this recognizing that 
this can be done while still making their underwriting criteria 
more reasonable than it has been in the past. They can be 
reasonable lenders without abandoning our small businesses. I 
think that's why this discussion is important today. I thank 
you all for holding this hearing.
    The Chairman. Thank you, Representative Forry. You and 
Representative Koutoujian, being here at the State level, you 
hear even more than we do the complaints from regular people. 
We want you to get together so we can work together to resolve 
them. I'm going to go next to Mr. Robert Baker, who is 
president of the Smaller Business Association. Obviously, there 
is a great deal of interest in this.

    STATEMENT OF ROBERT BAKER, PRESIDENT, SMALLER BUSINESS 
                   ASSOCIATION OF NEW ENGLAND

    Mr. Baker. Mr. Chairman, I'm president of the Smaller 
Business Association of New England. We have about 700 
businesses. We represent about 700 businesses, small 
businesses, including banks, accounting firms, but mostly 
manufacturing and high-tech companies throughout New England. I 
was a banker for 8 years. I also ran a quasi-public loan fund 
for the Commonwealth called the Economic Stabilization Trust. 
So I have a pretty good perspective about what happens in a 
credit committee and how public money can play a role to 
supplement, enhance, and help companies on the margin receive 
financing.
    As a trade association, one of our core competencies is to 
actively aggressively seek capital for small businesses' 
sustainability and growth through bank and nonbank services. In 
Massachusetts, we are blessed. We have a number of quasi-public 
entities, private entities that have public purposes, the 
Massachusetts Community Development Corporation, the Economic 
Stabilization Trust, the Property and Casualty Initiative, the 
Business Development Corporation of New England, the 
Massachusetts Capital Resource Company. They are numerous, 
which makes a big difference to us in Massachusetts, as opposed 
to other States.
    So at any one time, I'm engaged in identifying 
comprehensive capital solutions for probably 8 to 12 companies. 
My observations are really grounded on my transactional 
experience with these companies. You know, a great deal of 
conversation has been generated, and I'm probably a better 
public lender than I was a private lender. Understand that I 
think intervention in credit markets is good, and I think the 
banks are pretty supportive of that. We haven't found any 
resistance. You know, it's not a straight up-or-down decision, 
but when you bring to them a collateral enhancement or an 
infusion of new money from a quasi-public lender, they're 
pretty receptive in this State. So I will say that.
    However, you know, small businesses, the banks are driven 
somewhat by the economic performance of these companies. 
Unfortunately, I think our high-tech sector is doing pretty 
well, but our traditional manufacturing has been doing, you 
know, more poorly than it has in the past. And I think this has 
somewhat contributed to poor earnings. And when you have poor 
earnings, the regulators do come in and classify those loans as 
nonperforming loans.
    The question is, how do the banks deal with that? What we 
found is the banks have been very patient about dealing with 
those small, middle-market credits and giving them an 
opportunity to identify additional financing rather than 
forcing them to liquidate.
    The options to the businesses which they're utilizing right 
now, rather than risk of closing, is they're seeking--there are 
a fair amount of out-of-State factoring companies, finance 
companies, not regulated by the banking sector. But businesses 
have to pay a premium because the risk profile is greater, I 
would say 18 to 24 percent. I think that's minimizing it. So 
what happens, if a company loses money and they come to us and 
we look at a factor that looks at the receivables and inventory 
and we finance the balance sheet rather than the performance of 
an operating company.
    You know, I think that's a better alternative than the 
company going out of business. We had a company, let's say, a 
knife-sharpening company in Medford. Two years ago they lost 
money. They were asked to leave the bank or move over to the 
managed asset portfolio. That bank exercised a fair amount of 
patience. In sequential order what we did for this company was 
the following: We found them a finance company, and yes, they 
charged 18 to 24 percent, since March or June of 2007. However, 
the company, that has 50 to 60 jobs, did stay in business. 
Sequentially we found the Massachusetts Community Development 
Corporation to pay out another of the bank's loans. And this 
week the company will return to private banking, thus paying 
off finally the real estate loan of that bank and paying off 
the expensive line of credit.
    Those situations I don't think are unusual, of what's 
happening day to day. I think the biggest challenge is 
overcoming the stigma of losing money, and then it's very 
difficult to regain your footing without a couple of years of 
earnings to get back into traditional banking. I think that's 
the hurdle that people are facing today.
    I was appointed by Governor Patrick to the Economic 
Stabilization Trust. There are only five of us. We make working 
capital available to manufacturers both on the upside and the 
downside. Companies may have had a bad year but have 3 months 
of break-even or profitability. We make loans between $100,000 
and $750,000. You know, unfortunately, the two quasi-public 
corporations that do the most risk lending in Massachusetts are 
probably the least capitalized. So I think that's something we 
would like to propose to the State Legislature in terms of 
going forward.
    The Chairman. But you're not before the Legislature. 
Federal issues would be--
    Mr. Baker. Excuse me. I know. Anyway, the SBA package I 
think would be helpful. It gives the banks a chance to--it 
incents them by raising the guarantee from 75 to 90 percent. It 
drops all the fees. A pretty interesting component: it makes 
business stabilization loans, so that a company can get $35,000 
from a bank to defer principal and interest payments for about 
6 months, if it lasts that long, so they won't go on the 
nonperforming list. So I think that's--
    Finally, there is a 504 modification, so if you bought a 
piece of real estate 10 years ago, you had a million-dollar 
loan, the bank's share was 50 percent of that, you've paid down 
your balance to $250,000, you could actually recast that now, 
probably get a lower interest rate, and put the money back in 
the company. So there are some tools. Thank you very much.
    The Chairman. Thank you. Next, Christopher Oddleifson is 
the president and CEO of Rockland Trust, and someone I know 
from experience has been a very creative participant in some of 
the Federal programs we have had planned out with the community 
agencies. Mr. Oddleifson, let's get you the microphone.

   STATEMENT OF CHRISTOPHER ODDLEIFSON, PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, ROCKLAND TRUST COMPANY, AND VICE CHAIRMAN, 
               MASSACHUSETTS BANKERS ASSOCIATION

    Mr. Oddleifson. Good morning, Chairman Frank, and 
Congressmen Delahunt, Capuano, and Tierney. I'm Chris 
Oddleifson, President and CEO of Rockland Trust Company. I'm 
also the vice chairman of the Massachusetts Bankers 
Association, on whose behalf I'm testifying. I appreciate being 
here. Thank you.
    As we have heard this morning, community banks in 
Massachusetts are in fact lending to creditworthy businesses. 
In fact, one of the ironies of this environment is that it has 
turned out to be a tremendous opportunity for community banks 
because of the retreat of a lot of these other lenders, the 
finance companies, the institutional investors, insurance 
companies, and larger out-of-State lenders. There is a breach 
that has been opened, and community banks have stepped in. 
We're seeing a sharp increase in demand, and we're seeing an 
increase in our portfolios. I'll share some statistics in a 
moment.
    As you've heard this morning, Massachusetts banks are well-
capitalized. We're well-positioned to lend. We didn't get into 
any of that crazy stuff that got all the smart guys in trouble. 
And we don't have significant foreclosure problems. We on the 
whole have managed our risk well, which as you also have heard 
this morning includes sometimes saying no to businesses we have 
less confidence in their ability to repay the loan. Loan-loss 
reserves are far more than the national average, almost twice 
the percentage on hand that we had in the last massive crisis, 
in the late 1980's and early 1990's.
    As evidence that the local banks are lending, looking at 
sort of the community banks, commercial loan balances in 
Massachusetts have increased from $5 billion in the end of 2007 
to $5.7 billion in 2008. I have heard from my colleagues 
throughout the State that in fact they're seeing unprecedented 
demand. That is good news for us. I mean, it helps our 
business. But it's in the context of bad news overall.
    Let me give you sort of a specific anecdotal example of how 
community banks are provided credit by just citing a couple of 
statistics from the bank I lead, Rockland Trust Company. We 
have $3.6 billion in assets. We have offices and locations 
throughout eastern Massachusetts and Cape Cod. A year-to-year 
comparison between 2007 and 2008: In 2007, we originated $318 
million of commercial loans. In 2008, we originated just over 
$400 million. That is a 26 percent increase. As I say, many of 
those opportunities were as a result of lenders leaving, and 
allowed us to actually build some fine relationships with great 
local companies in our trade area. I would say that while our 
first quarter numbers aren't public, we are seeing in 2009 
good, continuing, robust lending activity.
    The Massachusetts Bankers Association would like to 
encourage the community--I think we have talked about this this 
morning--to help responsible lenders expand their capacity and 
be careful not to make it too loose, where we have some of the 
egregious practices sort of come back on in. But the balance 
that we have talked about this morning I think is very, very 
important.
    To further revitalize the commercial credit market here in 
Massachusetts, the Massachusetts Bankers Association, along 
with our member institutions, have been working with the 
Patrick Administration over the last several months on 
initiatives such as Soft Second, which has a little bit of a 
guarantee to a commercial loan to incent the commercial lender 
to extend credit. In addition, the Association is hosting a 
commercial lending summit that will bring together bankers and 
Federal and State government officials and academics to discuss 
the State's climate and look for ways to work this issue.
    I would like to take the opportunity to make a couple of 
comments on related topics. First, the issue of perception: 
Quite simply, a better distinction needs to be made between the 
banks that caused this problem and the banks that are part of 
the solution, the traditional local banking community; and the 
Massachusetts Bankers Association is certainly working hard on 
this, and we appreciate the chairman's comments on this issue. 
But the misperception continues that all banks are having 
problems; and especially those banks that took Capital Asset 
Program funds, part of the TARP funds, those banks are 
especially problematic. There are a number of banks which took 
those funds from an offensive point of view, to expand credit, 
not from a defensive point of view, and that is completely lost 
on many. To the extent we can solve that, we'll increase public 
confidence, we'll make consumers believe that the loans are 
available, and I think it will assist the overall economic 
recovery.
    The second point I would like to sort of mention is, we 
certainly applaud the committee's work on mark-to-market 
accounting issues. As you know, many of the losses suffered by 
local banks are largely accounting rules, and inflexible rules 
have led to a loss in earnings and capital, which inhibits 
their ability to loan. This is sort of the performing/
nonperforming loan all over again and performing/ nonperforming 
securities. One great example is the Federal Home Loan Bank of 
Boston, which is a critical partner to local lenders, extending 
credit to the communities, had to take a $340 million 
writedown, and their economic loss is only anticipated to be 
$22 million. Take out $340 million of capital but you only 
expect to lose $22 million. That is astounding. I think it's 
the performing/nonperforming issue.
    The current proposals released by FASB are a good first 
step, but they don't go far enough to really sort of addressing 
this issue.
    The Chairman. By FASB, we have a Federal Accounting 
Standards Board, which we are talking to about changing this 
form of accounting.
    Mr. Oddleifson. In conclusion, Massachusetts community 
banks are currently experiencing good loan demand. We're 
actually growing our balance sheet. We're doing it in prudent 
and responsible ways. We want to be a part of the solution and 
solve the problems that we believe for the most part others 
created.
    [The prepared statement of Mr. Oddleifson can be found on 
page 88 of the appendix.]
    The Chairman. Thank you, Mr. Oddleifson. I very confidently 
misidentified the FASB, which is the Financial Accounting 
Standards Board, not the Federal. Next time I explain 
something, I'll try to get it right.
    Next I want to call Mr. David Slutz, who is the president 
and chief executive officer of the Precix Corporation, which I 
should note is active in the district I represent. We have had 
conversations, and I am troubled that we haven't been able to 
make more progress. This is an example, in my judgment, of 
where we have a business suffering unduly because of this. Mr. 
Slutz.

  STATEMENT OF DAVID N. SLUTZ, PRESIDENT AND CHIEF EXECUTIVE 
                        OFFICER, PRECIX

    Mr. Slutz. Thank you, Chairman Frank, and members of the 
committees, for providing me the opportunity to speak this 
morning. What I would like to do this morning is actually talk 
about our company briefly--we are a small manufacturer based in 
New Bedford--to provide an overview of our borrowing situation 
with our current lender and offer some recommendations that we 
think would help the situation, many of which have already been 
mentioned before, but from my perspective, I'll mention those 
again.
    My name is actually David ``Slutz.'' My wife prefers 
``Sloots'' over ``Sluts,'' but that's okay. I have been called 
that for many, many years now. I'm the president and CEO of 
Acushnet Rubber Company. We're doing business as Precix. We 
were part of that golf ball company that was the Acushnet 
Rubber Company until 1994.
    One of my key roles in my position is lender relations, and 
over the past years, I have dealt with lenders of various sizes 
and negotiated the day-to-day relationships. Acushnet in New 
Bedford has been around since 1910. We are a manufacturer of o-
rings and custom seals for customers within the automotive, 
aerospace, and chemical processing industries. The automotive 
piece is primarily why I'm here today, because, as we know, the 
build rates have gone from $16 million to less than $8 million, 
and with those build rates, our sales levels have gone down 
accordingly.
    In New Bedford, we have 225 associates. Our average tenure 
is 24.8 years. I have worked for three elastomer companies, and 
I can honestly say that we have some of the best, if not the 
best, work force with whom I have ever worked. Our products go 
in every car manufactured in North America, every aircraft, 
over half of the automobiles and aircraft built in Europe, and 
25 percent in Asia. Twenty percent of our business goes 
overseas. For a small company in New Bedford, we touch an awful 
lot of vehicles.
    Like most in the supply chain in automotive, the last 6 to 
9 months have been, for lack of a better phrase, just plain 
miserable. Our sales have dropped by half, through no fault of 
our own. We have taken $4.2 million in operating expense out of 
the business. Our work force is down by 25 percent. Those of us 
who remain, including myself and my senior staff, are all going 
through rolling layoffs. We actually get paid for a week and 
then are off for a week. So we're trying to preserve as much 
employment as we possibly can. They can't write a textbook for 
what we're going through at this point in time.
    All of our stakeholders have had a hand in getting us 
through this difficult time. Our employees have sacrificed pay 
and reduced hours this year. Our equity sponsor is accepting 
zero return, and our venders have are allowing us to stretch 
payables. The only stakeholder not really participating has 
been our senior secured lender.
    Our relationship with our current bank began in late 2007. 
Our loan is pretty simple. It's a long-term debt, also a short-
term revolver. Since inception, we have paid down the long-term 
debt by more than $625,000. We have made all our payments on 
time and had clean audits. Quite frankly, we're a good and 
boring customer.
    In November of 2008, we saw the downturn getting worse, and 
we notified our lender of our tightening credit situation. 
Built into our current loan is a 350 holdback, $350,000. We're 
not talking about a large sum of money. We simply asked the 
bank to allow us access to the pre-existing 350 holdback, and 
at that point, they flatly said no. On top of that, they have 
actually been imposing additional restrictions and making our 
lives more miserable.
    It's important to understand that my company is not one 
that was going through a leveraged buyout. We're not overly 
leveraged by any means. We're simply caught up in the revenue 
decline because of automotive. We have provided the bank with a 
reasonable business plan and recovery scenario going forward, 
because the good news on automotive is what comes down will 
eventually come back up. And the good news is over the past 
couple of weeks, we had started to see our business slowly 
start to increase, so we're slightly optimistic.
    Despite being over-secured by over $3 million in excess 
collateral, the bank denied our request and now is seeking to 
reduce my borrowing availability and raise my operating costs 
through increased interest rates and the imposition of 
consultants and additional reporting requirements, the 
specifics of which are located in my written testimony.
    From our vantage point, they're not helping us, by any 
means. Rather they're working to push us under. They're living 
to the letter of the law of our 2007 loan agreement. That was 
written when the world was a different place. This is an 
institution which I will not be naming specifically, but is a 
TARP recipient.
    So in summary, I would like to point out, our Nation's 
economy has gone through some very difficult and challenging 
times. Our employees via downsizing, rolling layoffs, vendors 
taking extended payment terms, management deferring payments, 
and the owners forgoing dividends, have all contributed to the 
cause. The only stakeholder not working with us to get to the 
other side is our lender, who without Federal aid probably 
would not be here today. Our note then and now has been fully 
collateralized, yet they will not release the $350,000 holdback 
or work with us in any way. Instead of helping us, it seems 
like they're trying to push us under and put 225 people out of 
work.
    So my message to the committee is this: It's imperative 
that if the banks that are recipients of the TARP funds truly 
want to support economic stabilization and recovery with more 
than just words, they should be willing to provide reasonable 
and prudent assistance to companies such as ours; companies 
that are not overleveraged. We have strong collateral support; 
we're simply going through a tight cash time. They should be 
ready, willing, and able to provide temporary working capital 
and credit availability in situations where: (A) there is 
tangible collateral support; (B) there is a reasonable, 
detailed operating forecast showing the amount and duration of 
the temporary financing need; and (C) the needed incremental 
credit availability is small relative to the current loan 
balance, like in our case; leverage is not at excessive levels; 
and there are domestic jobs with good benefits at risk.
    So instead of quoting loan agreements that were crafted in 
a world that has changed since 2007, the lenders should be 
businesspeople first and, to quote a major banking executive 
who testified in Washington, D.C., ``Americans first and 
bankers second.''
    I am certain there are other small to medium-sized 
manufacturers like us that are experiencing a similar set of 
circumstances. So if economic stabilization and recovery is to 
occur, it is imperative that banks take a more measured and 
reasonable approach to providing temporary support to companies 
like Precix using the guidelines I have suggested.
    Thank you for your time and the opportunity to speak to you 
to inform you about this aspect of business lending for medium-
sized companies.
    [The prepared statement of Mr. Slutz can be found on page 
133 of the appendix.]
    The Chairman. Thank you. Next, we're going to call on Mr. 
Barry Sloane, who is the president and chief executive officer 
of Century Bank, not the lender in question.

  STATEMENT OF BARRY R. SLOANE, PRESIDENT AND CHIEF EXECUTIVE 
                     OFFICER, CENTURY BANK

    Mr. Sloane. Right, Mr. Chairman. Thank you. Good morning. 
Thanks for the privilege of appearing before your committee, 
gentlemen. I would like to share our perspectives on the 
current state of the credit crisis. I am joined today by my 
three sons, Marshall, Jack, and Charles, who I think, after 2 
hours of a congressional hearing, can't wait to go back to 
school.
    Just a word of note on Century Bank: Century was founded 40 
years ago by my father, Marshall, on a corner of Mystic Avenue 
in Somerville in a temporary office trailer. He is today our 
chairman, and as we approach our May 1st anniversary, we are 
proud to be the largest family-controlled bank in New England.
    My brother Jonathan and I are the co-CEO's of an 
institution with $2 billion of assets, 22 branches in 
Massachusetts, 400 employees, and now a member of an exclusive 
club, an increasingly exclusive club, those community banks who 
are increasingly profitable. Our earnings were up 15 percent 
last year, with growing local deposits of 12 percent, and we 
did not need, nor accept, the TARP capital from the Treasury.
    Century was founded under the concept in 1969 that there 
was a powerful case for a community-based lender to business, a 
premise that is remarkably even more compelling today. We 
proudly service over 6,000 business clients, and since 2004, we 
have made over 1,500 small business loans, many in partnership 
with the SBA. Our total loan portfolio is over $900 million and 
has grown in an upward slope since the early 1990's, increasing 
15 percent last year. We are safe, we are sound, and with 
abundant liquidity to expand our loan portfolio. We are ready 
and able to lend to the business community.
    Why have we done well and others have not? In our view, 
there are three simple reasons: First, we have a culture based 
on risk management. We are lenders. We live and breathe our 
loan portfolio through a highly centralized process. Second, we 
lend only in our local market. Market intelligence is critical 
to a successful loan policy. And third, we seek and nurture 
long-term relationships with all of our borrowers. A single 
transaction without relationship continuity is discouraged.
    So how can we make a contribution to today's dialogue to 
seek solutions to enhanced business credit availability? In our 
view, there are two pathways: One, to make the banks stronger 
so they can make more loans; and two, to make the small 
business community healthier so they can become stronger 
borrowers. Let's take a look at the banks first.
    In our view, far too much emphasis has been placed on bank 
capital, and not enough on earnings. The TARP program provided 
capital to banks with marginal or adequate capital ratios but 
at a high price. It became an instant drag on net earnings, or 
profits. Net profits build branches, hire lenders, feed the 
loan-loss reserve, and expand the capabilities of the 
institution in its local market.
    How could the Congress help the profitability of the 
independent banks, improve their efficiency and their relative 
competitiveness? Here is our five-point agenda: First, simplify 
the regulatory structure. It's obvious from the previous panel, 
with all due respect to the professionalism and dedication of 
the regulators presenting, that this is the opportunity to 
reform and merge the five bank safety-and-soundness regulators 
into one Federal system. We at Century are regulated by three 
agencies. It is an inefficient structure. And please, do not 
burden the independent banks of the United States with the 
proposed systemic risk regulator. We always thought there was 
such a thing, and it was called the Secretary of the Treasury. 
We are worried about a proposal that, based on my recent 
reading, takes some 300 pages to just explain the question.
    Second, please change the FDIC premium structure. Convert 
the premium charge from a bank expense to a user fee that is 
disclosed, transparent, and much more economically efficient. 
The pending 2009 FDIC special assessment will have a 
significant negative earnings impact on the independent banks. 
Why should the banks that practiced sound lending have their 
earnings negatively impacted by the irresponsible behavior of 
others? The 2009 assessment will effect a contraction of the 
lending of sound banks through the shrinkage of earnings. The 
FDIC premium should be paid by the depositor as a discrete tax 
paid on the health of the fund and not a charge to individual 
banks.
    Third, reinstate the Glass-Steagall barriers between 
commercial and investment banking. Admit the failure of that 
experiment and acknowledge that commercial bankers are risk-
based asset managers and investment bankers are fee-based 
originators. They are two very different genetic animals and 
are poisonous together. The short-term high fees of the broker/ 
trader will devour the good judgment of the banker/ lender. Get 
the brokers out of the banking business, and please stop this 
wild proliferation of bank charters to institutions that 
neither have the temperament, geographic focus, nor long-term 
relationship culture to be known as a bank. Level the 
competitive landscape so that once again community banks can 
make loans at fair prices to their local customers and stop 
losing business to the ``Street.'' You in Congress control the 
competitive equation. Put the emphasis back on community 
connectedness and away from globalism.
    Now let's talk a little bit about the health of the small 
and medium-sized business community. These entrepreneurs are 
experiencing two reinforcing negative impacts: The dramatic 
fall in real asset values; and the staggering collapse of their 
cash flows from double-digit sales declines. This vortex has 
especially impacted the firms that are in the automotive, 
housing, and consumer discretionary sectors, where sales have 
fallen 20 to 50 percent. There is no way for a small business 
to survive a market cycle with such a severe fall in cash flow 
if they have any meaningful level of debt.
    The SBA does a fine job. Few people realize that the SBA 
has until recently recouped all of its loan defaults from the 
guarantee fees charged borrowers. There was no subsidy from the 
taxpayers. We are a so-called preferred lender and use the SBA 
credit enhancement frequently. The recent changes in the 7a 
program, especially increasing the guarantee to 90 percent, is 
a good thing for small business, as is the elimination of new 
guarantee fees. However, you must keep in mind that a loan we 
don't like at a 75 percent guarantee, we won't like any better 
at 90 percent. It probably fails due to inadequate asset 
valuations and/or cash flow. We're not inclined to make a loan 
because we lose less money. It's either a good credit or not. 
Higher 7a guarantees do not transform a marginal applicant into 
a good credit.
    The combination of this recession and the credit crisis 
have been a tsunami for small business. Frequently, I sit 
through urgent meetings with business owners of, in many cases, 
multi-generational family businesses that are floundering on 
the shoals of this crisis. This is the Hurricane Katrina for 
small business. They don't need more debt. That's the last 
thing they need. They need equity. They need help, and they 
need it soon. This is figuratively more a challenge for FEMA 
than it is for the SBA. Lifetimes of resourcefulness and 
initiative in small business are melting away with each GDP 
contraction.
    In summary, if this government has the capital to keep Bank 
of America's planes in the air, Citi's corporate retreat 
staffed to serve lunch, and even pay the AIG bonuses, then it 
must find the capital to help mitigate so many of the family 
business tragedies playing out every day in bank conference 
rooms across the Nation. I don't have to tell all of you in 
Congress of the importance of small and mid-sized businesses in 
the economy and the employment health of the Nation. They need 
their own TARP program. Let the banks administer it. Make it an 
equity investment. Take the pressure off these business owners 
who are watching their dreams evaporate day by day. My dad, my 
brother, my sister, and I, sincerely hope to see it. Thank you.
    [The prepared statement of Mr. Sloane can be found on page 
129 of the appendix.]
    The Chairman. Thank you. Mary Ann Clancy, from the Credit 
Union League.

STATEMENT OF MARY ANN CLANCY, SENIOR VICE PRESIDENT AND GENERAL 
           COUNSEL, MASSACHUSETTS CREDIT UNION LEAGUE

    Ms. Clancy. Thank you, Mr. Chairman. Mr. Chairman, 
Congressman Capuano, Congressman Delahunt, Congressman Tierney, 
for the record, my name is Mary Ann Clancy. I serve as senior 
vice president and general counsel of the Massachusetts Credit 
Union League, our State trade association, serving just over 
200 State and federally chartered credit unions, about 2.4 
million consumers as credit union members.
    I am very humbled and honored to be included on this panel 
today and with the opportunity to provide some assistance. I 
have a few oral comments and would like the Chair and the 
committee's permission to submit a written statement at the 
conclusion of this.
    The Chairman. Certainly.
    Ms. Clancy. As you all know, the credit union model is a 
not-for-profit financial cooperative model for the delivery of 
financial services to both consumers in Massachusetts and 
across the country. There is no other like it. We provide 
access to credit and savings services to all of our members, 
including small businesses. We celebrate our 100th anniversary 
of credit unions in the birthplace of credit unions here in 
Massachusetts this year, and in light of the current economic 
challenges, we believe that this is an important model, with 
built-in ethical and member service standards that's important 
to preserve.
    Credit unions are healthy, but they are not immune to the 
current challenges in the financial services arena. We do, 
however, throughout this time, remain focused on providing 
access to credit at every opportunity. From a historical 
perspective, small business lending, or member business 
lending, as we call it in Massachusetts, is not new. It started 
in 1926, with a loan to a variety store in Fall River and a 
cemetery in Dorchester. Our history underscores the hallmark of 
this lending. We loan where others have vacated or are 
unwilling to loan, and we loan based on the capacity to repay 
over time. Over time, credit unions have become an increasing 
resource for member businesses as well as consumers. The 
average size of a member business loan in Massachusetts is 
about $250,000. Nationally, it is about $213,000. We are 
slightly higher because of the commonality of multi-family 
properties that are investment properties, that many consumers 
come to us to buy the old home in the neighborhood, so to 
speak.
    Most recently and due to changes in the marketplace, we are 
seeing requests for about $500,000 up to $1 million. We are 
regulated by the Division of Banks and the National Credit 
Union Administration in this area for State-chartered credit 
unions and by the National Credit Union Administration for 
federally chartered credit unions. However, regardless of our 
charter, we do face a cap of 12.25 percent of assets. That was 
in place over 10 years ago, and many of our credit unions are 
approaching that limit.
    About one third of the credit unions offer member business 
loans. It's about 6 percent of our total loans outstanding. It 
is a growing part of our portfolio. And we keep a majority of 
our loans in the portfolio, which allows us to stay in the game 
during these tough economic times. Our loan charge-off rates 
for member business loans is about .32 percent.
    The heart of our lending is for sole proprietors and small 
businesses. We don't do big commercial loans or dealer floor 
plan financing. But we do estimate based on a national 
perspective that about $10 billion in new funds for member 
business loans without an impact to the Federal or State 
government would result if we were able to eliminate the 12.25 
percent cap. We view this as an important economic boost. We 
also view it, particularly as the labor markets continue to 
deteriorate, other people try to jump in and start their own 
small businesses, as a way to try to reach these people and to 
serve them.
    Thank you for the opportunity to provide these comments 
today, and also in particular to bring this focus, to bring 
this light here in Massachusetts, and keep us on the forefront 
perhaps of possible solutions.
    The Chairman. Thank you. Next, Mr. Pelos is the executive 
vice-president of Wells Fargo Commercial Banking.

STATEMENT OF PERRY PELOS, EXECUTIVE VICE PRESIDENT, WELLS FARGO 
                COMMERCIAL BANKING, WELLS FARGO

    Mr. Pelos. Thank you very much. For a guy from Minnesota, I 
appreciate you guys ordering the weather particularly for me. 
It feels like home. Chairman Frank and members of the 
committee, my name is Perry Pelos. I'm an executive vice 
president and group head of Wells Fargo's commercial banking 
group, and it is an honor for me to be here to speak to all of 
you today. I worked for almost a quarter of a century at Wells 
Fargo, the entire time in either commercial or corporate 
banking.
    First, allow me to describe our commercial banking 
customers. We serve middle-market businesses with annual sales 
of between $20- and $750 million. We serve over 12,000 of these 
businesses around the country. In New England we have full-
service relationships, including loans and lines of credit, 
with companies in energy, agriculture, manufacturing, 
transportation, and high tech, and although our market share at 
the moment is smaller, much smaller, in Massachusetts relative 
to our industry peers, we view the State and this region as a 
big opportunity for growth for us.
    Wells Fargo has remained open for business while many other 
banks have pulled back or exited from commercial lending. Now, 
as always, we want to do what's right for our customers, and we 
have never stopped lending. We have been able to increase our 
lending to creditworthy customers over the past year-and-a-
half. That is partly because we were building capital and 
actually shrinking our balance sheet in 2005 and 2006, when 
credit spreads were unrealistically low and not priced for 
underlying risk.
    Here's how we have increased our loans specifically: In the 
last 18 months, we have made $63 billion in commercial loans 
and commercial real estate loans. Our middle market portfolio 
in the Northeast grew 11 percent from year end 2007 to year end 
2008. I would add that our middle-market portfolio in my 
business in commercial banking grew 55 percent in Massachusetts 
last year. Our commitments to government and education in 
Massachusetts and five other Northeast States are $543 million, 
and in 2008, we achieved double-digit growth in asset-based 
middle-market commercial real estate and specialized financial 
services, which includes capital markets and relationships with 
Fortune 500 companies. At the end of the fourth quarter of 
2008, we had $68 billion in commercial real estate and 
construction loans, up 6 percent from the third quarter.
    To address the committee's question about the effect of 
Federal laws and regulations on credit availability, we urge an 
approach more consistent with past economic downturns. We 
believe the chairman's efforts with respect to mark-to-market 
accounting will allow the entire financial-services industry to 
continue supporting the credit needs of our customers more 
effectively. In January of this year, we made $14 billion in 
commitments to commercial banking customers, and half of these 
dollar commitments were to new commercial banking customers. 
Overall, we extended $51 billion in loan commitments in 
January, and that brings the total credit extended to our 
customers to $144 billion in the last 4 months. That is nearly 
6 times the $25 billion capital investment made by the U.S. 
Treasury in the fall of last year. Our integration of Wachovia 
into Wells Fargo is proceeding better than expected. In New 
England Wachovia's commercial banking portfolio is about $6 
billion in loan commitments, including government and 
education, in year end 2008. We're committed to the financial 
success of all of these New England companies and institutions, 
and we look forward to long-term relationships with all of 
them.
    After the Wachovia acquisition, we stepped into open lines 
of credit for some businesses whose access had been shut down, 
especially cities and not-for-profit hospitals, which until 
very recently have been part of my group. When the debt markets 
for these borrowers were compromised last fall, Wells Fargo 
substantially increased its support and level of commitment to 
this area. As we continue to integrate the Wachovia businesses 
and manage through a very difficult economic time, we'll 
continue to work with our customers. Mr. Chairman and members 
of the committee, thanks for listening and I'm pleased to 
answer any questions you have.
    [The prepared statement of Mr. Pelos can be found on page 
94 of the appendix.]
    The Chairman. Next, another borrower, Ms. Iris Mitropoulis, 
who is president of Ventura Industries.

     STATEMENT OF IRIS A. MITROPOULIS, PRESIDENT, VENTURA 
                        INDUSTRIES, LLC

    Ms. Mitropoulis. Thank you for holding this hearing today 
and for giving me the opportunity to be here and participate. 
My name is Iris Mitropoulis. I am president of Ventura 
Industries, a Massachusetts company I formed in 1996 to acquire 
manufacturers of custom machinery. In 1998, I purchased 
Kingsbury Corporation, located in Keene, New Hampshire, with 
funds provided by BankBoston and CIT Group Equipment Financing. 
For the last 5 years, Ventura Industries has been in the top 
100 women-led businesses in Massachusetts. I also serve on the 
government relations committee of AMT, the Association for 
Manufacturing Technology. AMT is a trade association whose 
membership, mostly small businesses, represents more than 400 
manufacturing technology providers located throughout the 
United States, almost the entire universe of machine tool 
builders who manufacture in our country. We are the companies 
who build machines that make things. Seventeen of AMT's members 
are located in Massachusetts.
    My industry is really the foundation upon which all other 
American manufacturing rests. We provide the manufacturing 
technology essential to a wide array of industries, from 
cutting, grinding, forming, and assembly machines to inspection 
and measuring machines and automated manufacturing systems. 
There can be no cars, airplanes, washing machines, air 
conditioners, or medical devices without our member companies. 
There can be no green initiatives without companies like ours, 
which design the machines and systems needed to produce the 
parts that go into green engines. Furthermore, our member 
companies are a critical part of our defense industrial base.
    As crucial and necessary a part of our American 
manufacturing sector as we are, however, our credit needs are 
not presently addressed in the stimulus and aid packages. We 
are not surviving the current economic chaos, in significant 
part because lack of credit is endangering the continued 
existence of virtually all of our member companies.
    The recent meltdown in the financial services sector has 
basically frozen credit to companies like mine. For the last 20 
years, I have been the CEO or owner of small businesses that 
belong to the AMT. I have raised over $100 million for these 
businesses, and I have never seen a time when it is more 
difficult to raise credit.
    My company does not produce commodity machines. My company 
is an engineering firm that designs and manufactures custom 
machines to solve the customers' manufacturing needs. New 
programs and productivity improvement are the two drivers. 
Recent customers, for example, are United Defense, now part of 
BAE, for machines to manufacturer tank track links.
    My company has been on a 2-week shutdown because all new 
programs evaporated last fall and we have been unable to obtain 
a loan even though we have a history of profitability until 
recently and collateral to offer. We actually were unable to 
send a serviceman to Precix because of that. Today, I think one 
of our service people is there.
    The shutdown we are currently on is jeopardizing the launch 
of a major new transmission program for one of the Big Three. 
We are making assembly machines that will assemble a key 
component to that transmission.
    Two weeks ago, I met with the director of the New Hampshire 
Business Finance Authority and the New Hampshire District 
Director of the Small Business Administration to see if they 
had any programs that could assist my company during this 
credit market turmoil. The Business Finance Authority already 
had a 90 percent guarantee program, and the SBA district 
director was anticipating that certain SBA programs would see 
their guarantee increased to 90 percent. Even with 90 percent 
guarantees, I was most discouraged to hear both say that they 
do not expect to see an increase in lending anytime soon. The 
only loans they saw closing were loans to prom queens. 
Unfortunately, given the extreme downturn in the economy and 
business, most small businesses will not in the near term be 
able to meet normal credit standards. We do not qualify at 
present as prom queens.
    I also met last week with staff of the New Hampshire 
Economic Development Authority. While sympathetic to our 
plight, they were frustrated that even with funds coming into 
the State from the Financial Stability Act, there were no 
programs available to them to assist companies such as 
Kingsbury, a company founded in 1894 that employs 100 highly 
skilled engineers, machinists, and electrical and assembly 
technicians and is one of the few remaining U.S. custom 
builders of highly engineered mid- to high-production metal 
cutting and assembly systems, a company that purchased over $15 
million of goods from New England suppliers in the last 5 
years, $7 million of that in Massachusetts.
    I appreciate that this is a hugely complex issue 
legislators are dealing with, and I do not presume to know the 
correct answer. As a small business owner who has run up 
against obstacles recently to obtain financing, I see two areas 
that may help critically needed funds flow to AMT members and 
others. With respect to funds going to States under the 
Financial Stability Act, if the States were allowed to 
reallocate and create new uses for some portion of those funds, 
they may be able to use their discretion to save companies and 
jobs that are vital to their State economy. In the case of the 
SBA, since the SBA's programs are intended to lend to small 
businesses that can't otherwise get credit, I suggest that SBA 
preferred lenders be allowed to make loans without regard to 
traditional evaluation of repayment ability if a loan is needed 
in order to save jobs and other credit considerations have been 
met. Even if this modification were allowed until September 30, 
2009, it would be a tremendous boost for small businesses.
    In closing, I would like to point out that AMT used to be 
known as the National Machine Tool Builders Association--that 
is, until there were too few of us left to support an 
association. Membership has broadened to include manufacturers 
of other forms of manufacturing technology. Since the economic 
crisis began last fall, two to three AMT members per month have 
failed. There is no evidence that this number is abating, and 
very well may increase if something is not done.
    Due to the financial pressures of my company, I did not 
attend the last AMT government relations committee meeting in 
February. When I called the committee chair a few days later to 
ask about the meeting, he responded, ``It was the scariest 
meeting I have ever attended in my entire life. You are all in 
the same boat. You all need credit, and it's not available.''
    As I stated earlier, I do not pretend to know the answers. 
I have a green crystal ball on my desk but I can't see through 
it to predict the future. All I know is that our industry needs 
access to credit yesterday. America cannot afford to lose the 
few remaining machine tool companies in the United States today 
and still be a world leader. Thank you for allowing us to 
testify.
    The Chairman. Thank you. Mr. Scott Geller, from JPMorgan 
Chase.

 STATEMENT OF SCOTT GELLER, PRESIDENT, MIDDLE MARKET BANKING, 
             NORTHEAST REGION, JPMORGAN CHASE & CO.

    Mr. Geller. Good afternoon, Mr. Chairman, and members of 
the committee. My name is Scott Geller, and I am the president 
of Middle Market Banking for the Northeast Region of JPMorgan 
Chase, and I'm also responsible for our Financial Institutions 
Group nationwide within our commercial bank.
    I'm pleased to represent our company at today's field 
hearing. We at JPMorgan Chase are working hard to restore 
confidence in the U.S. financial system. Although the economic 
environment continues to be difficult, we have endeavored to 
responsibly deploy the TARP funds as Congress intended: To 
restore stability and provide liquidity to the financial 
system; to ensure credit flows to businesses and consumers; and 
to stabilize the housing sector by modifying as many mortgages 
as possible.
    Each month, JPMorgan Chase provides to the Treasury 
Department a snapshot of the intermediation activity in which 
we have engaged as a result of our participation in TARP. 
Although we have seen an increase in mortgage originations as a 
result of lower interest rates, demand for credit in most other 
areas remains low. It's important to note that during a 
recession, it is normal to see generally flat to lower 
applications for loans across-the-board. However, we are open 
for lending. During January we extended almost $50 billion of 
new lines of credit and loans. We have also committed to extend 
an incremental $5 billion in lending to government and the not-
for-profit sector over the next year.
    JPMorgan Chase also continues to implement our mortgage 
modification plan to keep as many homeowners in their homes as 
possible. This effort covers more than $1.4 trillion of 
mortgages, having been expanded to include not only loans that 
we own ourselves, but also investor-owned mortgages that we 
service. To date, we have modified over 330,000 mortgages, and 
we plan to double this number by the end of 2010. I'm proud to 
say that the re-default rates we are seeing are significantly 
better than some of the numbers that have been published by the 
regulators.
    In addition to the numbers we have provided detailing our 
lending activities, I would like to talk about New England 
specifically. As you are aware, branches are important to our 
middle-market clients, and we would generally not expect a bank 
to do much business in areas where it doesn't have a footprint. 
Although our commercial bank has an office in Boston, we do not 
have any branches in Massachusetts or in New England. As a 
result, our focus has been on larger commercial and industrial 
clients, governments, nonprofits, health-care, and other 
companies that are less branch-dependent. Keeping this in mind, 
let me address some of the issues we are facing and some of the 
successes we're seeing in Massachusetts and nearby.
    Overall, demand for commercial lending is down across the 
United States, as small and mid-sized companies are rationally 
responding to the difficult economy by carefully managing their 
liquidity and spending less. The impact of the recession is 
being felt as businesses across-the-board see lower sales and 
are therefore reluctant to take on additional debt. The reduced 
pace of business activity has resulted in less demand for both 
working capital loans and fixed asset spending.
    Although small, our business in New England actually grew 
by approximately 14 percent year over year, primarily because 
of health care and higher education. We have $140 million in 
new or increased business in our pipeline, including a major 
transaction with a hospital here in Massachusetts. We have 
lending relationships with 108 New England companies, and 16 of 
these relationships were added in the past year, an increase of 
more than 10 percent. We also serve as a correspondent bank for 
12 other financial institutions in New England.
    Banks are a vital part of the overall lending picture, but 
it's important to note that the capital markets are very 
different today than they have been historically. Going into 
the current recession, banks accounted for only 20 percent of 
the lending activity that took place in our economy. Fifty 
years ago, this number was closer to 60 percent. The difference 
is made up by money market funds, securitizations, and bond 
funds, just to name a few. The erosion of this nonbank lending 
will continue to be a factor in the recovery almost regardless 
of what traditional banks can do on their own.
    Lending is our business, but it comes with a duty to lend 
responsibly. All of us at JPMorgan Chase are trying to meet the 
needs of creditworthy borrowers in a safe way, and we look 
forward to continuing to work with this committee to find 
solutions to get our financial services industry and our 
economy back on track. Thank you again for the opportunity to 
appear today, and I'll be happy to answer any questions.
    [The prepared statement of Mr. Geller can be found on page 
84 of the appendix.]
    The Chairman. And finally, Mr. Edwin Shea, who is the 
Central Massachusetts market president of Bank of America.

      STATEMENT OF EDWIN T. SHEA, JR., PRESIDENT, CENTRAL 
             MASSACHUSETTS MARKET, BANK OF AMERICA

    Mr. Shea. Most importantly, I run our business banking 
group from Boston out through central Massachusetts for Bank of 
America.
    Good afternoon, Chairman Frank, Representative Capuano, and 
Representative Tierney. I appreciate the opportunity to share 
our views on the current state of lending to small and medium-
sized businesses. For over 200 years, Bank of America has been 
serving business clients and weathered many economic cycles 
with them. Today we have relationships with more than 4\1/2\ 
million businesses across the country and serve these clients 
with a wide range of products and services. Our testimony today 
will focus on small and medium-sized businesses, with annual 
revenues up to approximately $20 million.
    In my daily interactions with clients, I hear about their 
declining sales, difficulty collecting receivables, and more 
stringent terms from suppliers. Consequently, the bank itself 
is feeling this downturn in our small-business loan portfolio, 
with a steady rise in delinquencies and companies reporting a 
weaker financial condition. We also see that the recession is 
having a disproportionate impact on businesses at the smaller 
end of the spectrum, those with revenues less than $500,000. 
Larger, more established businesses are faring better but are 
also responding to the slower economic climate by lowering 
capital expenditures, reducing inventories, and laying off 
employees.
    In light of these challenges, we continue to take actions 
to help small business. We are actively marketing our full 
suite of services and credit products, and we are working more 
intensely than ever to restructure loans for distressed clients 
wherever possible. For our small business customers, we have 
increased the use of our fixed payment programs, where we 
significantly reduce the interest rate and monthly payments.
    For example, in 2008, we assisted over 40,000 of these 
customers, representing $550 million, by modifying payment 
structures to improve their cash flow. Another way we are 
helping small business is through our commitment to community 
development financial institutions. These organizations play 
important roles as conduits to provide credit to small 
businesses and community organizations. We are a leading 
financial-service investor in CDFIs, with more than $450 
million in direct lending investments in 2008.
    In Massachusetts, we have built strong relationships with a 
number of CFDIs, such as Boston Community Capital and ACCION 
USA. In 2009 we do expect to see a decrease in new loan 
commitments to the smaller businesses in the segment. This is 
due to several factors. The first is a decreased demand for 
loans overall. Applications for new loans have been declining 
for well over a year. The primary reason for this trend appears 
to be an overall reluctance of business owners to take on new 
debt during a time of economic weakness.
    The second factor is that more loan applicants are 
experiencing deteriorating financial conditions. We have seen a 
noticeable increase in applications from clients that have hit 
a time of serious financial stress in their business and 
personal finances. In these circumstances, we may not be able 
to approve them within our prudent lending guidelines.
    The third factor is underwriting standards. During the 
period of 2005 to 2007, Bank of America expanded its focus on 
small business lending, particularly for the smallest 
businesses as a segment. Our underwriting guidelines at the 
time reflected a positive economic outlook as well as the 
experience of prior years, generally a period of economic 
strength, with relatively low delinquency and loss levels for 
very small firms.
    As we began approving and booking more loans, however, we 
started to see a deterioration in these small businesses' 
ability to pay us back. The economic downturn has exacerbated 
this problem and has led us to return to more prudent, 
sustainable underwriting standards to ensure acceptable credit 
quality for new loans.
    From our perspectives, these three factors are creating a 
contraction in new credit that we are seeing in our own client 
base. Given this current outlook, government assistance and 
loan programs have made a difference to our clients. Bank of 
America received a $45 billion preferred stock investment 
through the TARP program, and we are lending significantly more 
with that investment than we would be without it. Also, the 
recent actions by the Obama Administration will create new 
opportunities for lending to new businesses, through reducing 
fees and increasing guarantees on SBA loans. Bank of America is 
a longtime participant in SBA loan programs. We are currently 
the No. 1 lender in loan volume in the 504 program and actively 
participate in the 7a express program.
    In summary, Bank of America remains committed to small and 
medium-sized businesses. We continue to market our services, 
including credit products, to this segment, while adjusting our 
business model to meet the needs of our clients during this 
economic downturn. We are making every effort to approve as 
many clients as we can during this time within prudent lending 
guidelines, and we will continue to extend credit to this very 
important segment. Thank you for the opportunity today.
    [The prepared statement of Mr. Shea can be found on page 
121 of the appendix.]
    The Chairman. Let me begin. There are six representatives, 
six bankers, on the panel. One of our concerns was whether or 
not regulators were exerting pressure for standards that might 
deter some of your activity. I would ask each of you, have you 
encountered that? Is that a factor? Have you made fewer loans 
than you might otherwise have made in any number because of the 
regulators? Mr. Pelos?
    Mr. Pelos. Are they still in the room? I guess there are 
two ways to answer that. The first is, I don't think that 
anything the regulators have done specifically has caused us to 
lend less. Those are the things that are already being done.
    But I do think, with this whole stress-test concept that's 
out there, it's causing a lot of stress in a lot of places. 
Because part of it is that none of us has the answers to that. 
So if you set a standard that will allow the financial services 
industry to get through a very, very severe recession as your 
standard for the stress test, you might cause that to happen by 
causing people to hoard capital to get them through a really, 
really bad recession, and it may be a self-fulfilling prophecy.
    The Chairman. You have not encountered that yet in specific 
issues with regulators, but you are concerned that the stress 
test would have an impact?
    Mr. Pelos. Yes, but we don't know--
    The Chairman. Let me say this: The regulators understand 
that we have a certain role here to play. I'm not suggesting 
that anyone would be penalized by anything they said here. I 
know we're joshing. But that's not going to happen. We need to 
get honest answers. That's a relevant point to us. We have to 
make sure the stress test doesn't become a source of that. Mr. 
Sloane?
    Mr. Sloane. Mr. Chairman, I would not blame the regulators 
for the condition we're in.
    The Chairman. I didn't ask you to blame them. I asked a 
much different question. Have they in your experience been too 
tough either in general or in specific cases?
    Mr. Sloane. No. I think they are expecting us to live up to 
the loan policy of the institution. If valuations have fallen 
and cash flows have collapsed, the loans will become less 
attractive to all concerned.
    The Chairman. You said you have a 300-page proposal on 
systemic risk. I'm not aware of one.
    Mr. Sloane. It's the one from the Congress.
    The Chairman. We haven't put out any 300-page proposal.
    Mr. Sloane. There are three proposals. Congressman Capuano 
sent them out for his roundtable. There is one from the 
Treasury Department.
    The Chairman. Is that Mr. Paulson's from a year ago? Don't 
worry about that one.
    Mr. Sloane. There is a third which is about 200 pages long. 
And isn't there a congressional task force on the systemic risk 
regulation? Which one is it?
    The Chairman. Oh, that's the TARP oversight panel. Let me 
say, Mr. Paulson's plan, which had the credit unions and the 
State-chartered banks and everybody in an uproar, don't pay 
attention to that. Mr. Paulson did some good work, but there is 
no 300-page or other page--you got a proposal from the 
congressional oversight panel, which is useful to look at. But 
those are private citizens. Mr. Oddleifson?
    Mr. Oddleifson. The short answer is no, but I would add 
that our last exam was a year ago, and they have in the past 
had very, very thorough, very granular looks at a number of 
specific loans very carefully, down to the utmost detail. Their 
focus is on ability to repay. I suspect with the deteriorating 
environment around us, that threshold will be tougher to 
overcome.
    The Chairman. Mr. Shea.
    Mr. Shea. That isn't my area of expertise. My area is 
business banking space in Boston out to central Massachusetts. 
I can tell you that in our space, we're trying to make every 
good loan we can.
    The Chairman. And you're not running into any resistance 
from the regulators?
    Mr. Shea. Not from my experience, my area of expertise, no. 
We are trying to make every good loan and win every new client 
relationship we can.
    The Chairman. Mr. Geller?
    Mr. Geller. Chairman Frank, nothing specifically. The 
regulators continue to scrutinize us. They always have. But 
they haven't really changed anything, nor have I noticed 
anything.
    The Chairman. I think the thing about the stress test is a 
relevant one. Let me ask Mr. Shea--I was struggling--I didn't 
expect you to tell us that Bank of America expects to increase 
the loan limit. There were two issues, one was the lack of 
demand, and obviously no one's expecting you to subpoena 
borrowers, so we realize that.
    But there were two others that sort of have an overlap 
which troubles me. One is the weakness of the individual 
potential borrower. But the second, which is the troubling one, 
is the weakness in the economic climate, which would appear 
logically to have to mean other than the individual borrower. 
That's Mr. Slutz's problem. You get dinged if you are in 
trouble yourself, but you get dinged if you're not in trouble 
because the economy is. That is the part about self-fulfilling 
prophecies that I worry about. If you enumerate those two 
separate issues, it seems to me we're getting to Mr. Slutz's 
issues, which is a question of, I'm okay and I can show you 
that I'm okay, but a loan, a credit that I was supposed to have 
access to a couple of years ago, I can't get now because there 
is trouble in the economy generally. How do we deal with that?
    Mr. Shea. A couple of things. First, I stated there were 
three major contributing factors.
    The Chairman. Right. One was the lack of demand. I 
understand that.
    Mr. Shea. Lack of demand, deteriorating financial 
condition, and we're taking a harder look from an underwriting 
perspective.
    The Chairman. Two and three were, it seemed to me, the 
individual borrower, but then the general economic atmosphere. 
The underwriting standards--in other words, you're being 
tougher. Even if the borrower is in the same condition as the 
borrower was in a couple of years ago, it will be harder for 
that borrower to get a loan.
    Mr. Shea. One of the things we look at in lending credit is 
the conditions you're lending into. The current environment has 
changed. We're in a recession. There are more delinquencies. 
It's a greater risk profile to lend into, and we need to be 
more prudent when we make credit decisions.
    The Chairman. That's what troubles me. We're saying, again, 
that a company--to some extent, the frustration for the company 
is, how do they deal with that? How do they show you they're in 
good shape? This notion that the environment as a whole--
    I guess the question is: You said that the $45 billion in 
advance in the TARP--and we should be clear: In fairness to 
Bank of America, part of that was because Bank of America, at 
the urging of the Federal Treasury and the Federal Reserve, 
agreed to take Merrill Lynch--I'm not asking you to take on--
when I think Bank of America would have been just as happy to 
kiss it good-bye. But they were urged strongly not to do that, 
and the TARP money--and in fairness, that ought to be taken 
into account.
    But you say that the $45 billion is helping you lend more, 
and I think it has. But that doesn't affect the underwriting 
standards. I guess the question is, without the $45 billion, 
would you have been up against some limitation given your 
capital? How has the $45 billion helped you to lend more? Has 
it affected or not affected the underwriting standards? So is 
it you have more capital and you can lend more?
    Mr. Shea. I'm not prepared to discuss the impacts of TARP.
    The Chairman. But you said that the $45 billion helps you 
lend more.
    Mr. Shea. It shores up the bank's capital, and we can 
therefore make more loans. My area of expertise is the business 
banking space, companies that generally--
    The Chairman. I understand, but I need to know how--I don't 
think it's an unfair question--how does the fact that the $45 
billion is available help you to make more loans? Is it that 
you have more capital, you were against a limitation? If you 
can't, I'm going to ask somebody in the bank to explain that, 
because that's obviously a very critical question. But it 
doesn't help us with the tightening of underwriting standards.
    Mr. Shea. I can get back to you with a better answer, 
Congressman.
    The Chairman. Mr. Pelos, let me ask you, and then also Mr. 
Geller: It is the larger banks that we are talking about. Have 
your underwriting standards tightened? Is that part of the 
reason why an individual institution which would be in the same 
economic position, a business, that it was in a couple of years 
ago--would they find it harder to get a loan today?
    Mr. Pelos. I would provide this: Everything we do is 
custom-made, so there aren't many programs in the commercial 
banking space. So I think in general I would say that our 
underwriting standards have remained the same for all this 
crisis. That's why we're getting more loans, even though 
commercial lending--
    The Chairman. So a business that had some arrangement with 
you a couple years ago shouldn't find any difference?
    Mr. Pelos. No, to me, let's say we have a company that we 
have an agreement with, and we say, ``As long as you don't lose 
money, the agreement stands.'' That would probably be the same 
agreement we have today. The problem is, that company may be 
losing money today. So the risk profile of the borrower is 
different. We would underwrite the way we would have 
underwritten a--
    The Chairman. If the company wasn't losing money and there 
was no significant deterioration of the company, the prior 
agreement should still be available for them.
    Mr. Pelos. If the company's financial characteristics were 
the same 2 years ago as they are today, we would probably 
underwrite it the same way. If the financial characteristics of 
the company were different, we would underwrite it the same.
    The Chairman. Let me ask Mr. Geller.
    Mr. Geller. I think each company needs to stand on its own 
merits. To the extent that a company continues to make money 
and is in the same financial condition that it was in 2 years 
ago, then we would look to lend to that company. To the extent 
that the financial condition has deteriorated, obviously you 
have to relook at that and underwrite it accordingly.
    The Chairman. So with you, it would be the focus on the 
company, the underwriting standards would not have tightened.
    Mr. Geller. Again, each individual borrower needs to stand 
on its own.
    The Chairman. There does appear to be a distinction, Mr. 
Shea said, that in addition--it seemed to me that both of you 
were citing one factor where they were citing two, and that is 
something I'm going to want to pursue further. Mr. Pelos?
    Mr. Pelos. Again, we have 12,000 customers, and every deal 
we do is custom-made. I'm sure within that band of 12,000, you 
are going to find a couple hundred where that may not 
necessarily be the case. But in general, our underwriting 
standards are simple.
    The Chairman. Because this is our problem. The Federal 
Government--some of this TARP money is being advanced. We don't 
want the banks getting into serious trouble. But I think it is 
reasonable to say, recipients of TARP money, it ought to make 
some difference in your own risk profile, that people ought to 
be a little bit less risk-averse after taking TARP money than 
before; and I'm not sure that has always been the case, and 
that is what we need to pursue. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. It's like two 
different worlds. I'm hearing from all the bankers that, 
``Everything is fine, we're comfortable.'' I'm hearing from all 
the businesses, ``We can't get any money.'' I understand that 
we all come from different positions. But there has to be 
something in the middle. Are you not hearing each other? Did 
you not just hear what the other side said? Have you not 
witnessed it? Have you not had businesses come to you and say, 
``We cannot get a loan.''
    It just seems like we're in this vortex of, ``Well, we have 
to tighten up our standards. Okay, but we're not doing it 
because we're being told to by regulators.'' Okay. So are you 
just doing it because you want to? And, ``We're doing it 
because businesses aren't selling.'' Why aren't businesses 
selling? Every business, every economist I have talked to says 
the major problem with this economy is the lack of availability 
of credit--every single one of them, no exceptions. They may 
have differences of opinion on how to settle it. But the 
problem has been identified by everybody as the same problem. 
We have some businesses here--I can't imagine you haven't heard 
it from others--``We don't have access to credit.'' Yet 
everybody is telling me, ``Fine, we have credit.'' Ms. 
Mitropoulis, how much do you need?
    Ms. Mitropoulis. $2 million.
    Mr. Capuano. Who has $2 million? A million-and-a-half? Mr. 
Slutz, how much do you want?
    Mr. Slutz. I'll take $700,000.
    Mr. Capuano. Half of what she wanted. Do you see the 
problem?
    The Chairman. It's actually a third.
    Mr. Capuano. Well, she went down. Do you see the problem? 
There is some disconnect here. Now for me personally, I voted 
for TARP, and I still support the concept of it, because I'm 
trying to bridge that disconnect. The truth is, I don't really 
care if a few banks go down. I don't like it, I don't want it, 
but that's not why I voted for TARP. I did not vote for TARP to 
strengthen your bank or your bank or anybody else's bank. I 
voted for it and I still support it because I want to take that 
money and give it to the businesses so they can get back to 
buying and making things and getting this economy going. I 
don't mean to be disrespectful. It's not the banks that keep 
the economy going. You're just the grease. We tried to provide 
some additional grease, and yet you're not doing it.
    I know that not everybody can. I know all that. I 
understand different people have different roles in the 
economy. I get it. But you're telling me there is not a single 
bank in Massachusetts of any level of any size that can provide 
capital to one of our best companies in the State, an 
internationally known company?
    Do you understand the disconnect I'm having? I don't quite 
get it. What are we supposed to do? How do we get you together? 
If it's not the regulators who are tightening it up, who is it? 
Do I have to talk to you to say, ``Look, talk to your loan 
officers and calm them down.'' I understand your standards have 
to go up. Do they have to go up all the way? Is there no middle 
ground? Because if not, then everything we have done thus far, 
everything we might do, is a waste of time. We are dooming 
ourselves unless everybody, not just the regulators--apparently 
not the regulators at all, according to this panel--takes a 
half a step back and reopens their wallet. Who has an idea for 
me. What am I supposed to do? What else can Congress do to 
loosen this up, to get money back into the economy--I'm not 
asking you to throw money away--into good manufacturing 
businesses that actually produce things or build things? What 
can I do? Anybody?
    The Chairman. Let me parse the question, to the extent that 
I have heard suggestions: We are working hard to get the FDIC's 
assessment cut very substantially below what it had been, and 
we are working hard to get the mark-to-market rule made much 
more flexible and the consequences more flexible. I think we 
will be successful in both of those. Those are two of the 
suggestions we are working on.
    Mr. Baker. Take the current situation over here. It may be 
at what cost. There may be other options for some companies 
that have failed in the bank's mind to meet standards, so they 
may have to pay a premium, or then they'd have to ask for 
supplementary capital. That's available in Massachusetts. Every 
situation is different. But, I mean, there are situations 
where, as I have talked about, near your backyard, Medford, 
where companies slip out of favor with a bank.
    The other issue is how patient is the bank going to be, how 
flexible? Is it going to be a liquidation situation, or is it 
going to be, ``Let's work through it; let's rehab this credit; 
let's give the company time?'' This gentleman has taken out 
$4\1/2\ million in cost. If he's cash-flow-neutral or cash-
flow-positive, there may be another way to go about it than a 
strict vanilla situation from a conventional lender.
    Mr. Capuano. That's a fair answer.
    Mr. Baker. It is customized. It's a case-by-case situation, 
because all loans are risk-rated at institutions. You know, 
when it's a criticized asset, you sometimes have to deal with 
it.
    The Chairman. Here's the point we're trying to get to: With 
$350-plus billion in TARP funds already advanced and more 
coming and some other flexibility, has that had an effect on 
the risk profile the banks are willing to take, or not? That is 
one of our key questions we have going forward. If the answer 
is no, it's not conducive to further congressional support.
    If I could, Mr. Slutz, you gave--are you cash-positive now? 
Are you making money?
    Mr. Slutz. Over the past several months, no.
    The Chairman. What is your projection?
    Mr. Slutz. The projection is the build rates in automotive, 
basically you get above 12 million vehicles per year, we all 
get healthier.
    The Chairman. Your collateral hasn't deteriorated?
    Mr. Slutz. Not at all.
    Mr. Capuano. One of the things we heard a week or two ago, 
maybe 2 weeks ago now, we had all the major banks in, and they 
were complaining about some of the regulations, some of the 
requirements both on the TARP money and additional requirements 
that people like me would like to put on. When asked, ``Why 
don't you give it back,'' they said, ``We can't.'' ``What do 
you mean, you can't?'' You can't because if you do, you then 
have to fill that hole with your own capital. So you can, but 
you choose not to. It's similar to this.
    So they can look at each individual circumstance and 
understand that this is a long-term, good business that has 
actual assets--I understand fully well, I want to make it very 
clear, I'm not asking any bank ever to invest or to loan a 
penny to naked, vacant paper. That's how we got into the 
problem we have. We're talking manufacturing here. We're 
talking, not here, but in other places, housing. We're talking 
things that have real, hard assets. To not be able to look at 
those individually and understand that, you know what? Your 
loans, your economy? Where do you think the banks are going to 
go if there is nobody left to loan to? How does this work? You 
have to make loans to substantial businesses.
    And if there is any way you could find to suggest to me how 
we could help encourage that--and again, I'm not looking to 
throw money away, as has been done. It was a horrendous thing 
that was done through business--which, again, to me is where 
Government comes in. How do we help you get to the point where 
you make thoughtful loans to substantial businesses that have 
hard, fixed assets?
    If you have any ideas, please let us know, because I for 
one am struggling how to get this done. If not today, tomorrow 
is fine, next week's fine. I'm not trying to put anybody on the 
spot. I'm trying to emphasize where my problem is, trying to 
get this money loose.
    The Chairman. Mr. Oddleifson.
    Mr. Oddleifson. Mr. Sloane and I will sort of put ourselves 
out there first. One thing, one program that we're involved 
with that actually has--we have some money out in more recent 
situations is a program which encourages lending in what's 
called hot zones, economically distressed areas. We have 
extended the kind of allocations from the Department of 
Treasury, and that's worked quite well.
    I will tell you that they are more risky, because we are 
working out a couple of them right now. We did put ourselves 
out there for a tax benefit, but they were getting a chunk of 
it back through credit loans. And I believe in the stimulus 
package there is some additional allocation above and beyond 
what was there originally.
    Mr. Sloane. I would just add, Congressman, that it would be 
my pleasure to review both of these situations. We don't know 
either client. But on behalf of our loan committee, I would be 
happy to review them both to see if there is anything we can 
add.
    Mr. Capuano. Swap business cards. I want to add, there is 
no finder's fee.
    Mr. Sloane. But to your earlier point: It's not so much 
that conditions tightened or loan conditions tightened. It's 
the gravity of the depth of a business cycle will make that 
happen automatically, so that the valuation of real property, 
the value of receivables--imagine being in the automotive 
industry, being a tertiary player there, and having the Big 
Three receivables or even their parts manufacturers. There are 
a whole series of automatic discounts that happen in cases like 
this, and that oftentimes is how you evolve a situation here.
    The Chairman. Mr. Tierney.
    Mr. Tierney. I appreciate that offer, Mr. Sloane, and I 
suspect that it goes back to a point where it used to be that 
as part of assessing the loan, you had the character of the 
borrowers. We hear all the time the too-big-to-fail thing. Some 
of our banks are too big to deal with their borrowers. They 
don't know them under circumstances intimately enough to add 
that to the mix. That certainly is a part of this, and it may 
be why one of your bank or banks would be able to look at this. 
You can look at the situation. You know the local situations.
    I'm stunned that nobody wants to go beyond what the line 
says. It's easy to run the formula down and kick somebody out 
the door. That has to be part of that. I'm talking about small 
businesses in particular, it has to be part of assessing the 
character, the community, the situation you're in--looking for 
other things, as Mr. Baker said, but also making a judgment 
call as to whether or not the outside situation may be getting 
worse, whether this particular borrower is going to be good for 
it, is going to at least try as hard as you could expect to 
make it. I think that might be part of the answer. That might 
work. I think it does.
    The only other thing I would add: Mr. Sloane, you've made 
the comment during the course of your remarks that got my 
attention on that. I think you said that you thought the 
deposit fees on guarantees for deposits ought to be paid by the 
depositor. I have a real adverse reaction to that. My 
understanding is the purpose of those guarantees is so that 
lenders--so banks, rather, will be able to entice borrowers to 
have confidence and put money in their bank. It's for the 
benefit of the bank. Why do you want to tag consumers with yet 
another fee? They have to pay to go to the ATM, which is 
supposed to save us money. It's not saying us a dime. They have 
to pay everything all the way down. This is something uniquely 
for the health of the banks and for the banks to get deposits, 
and yet you want to turn it around.
    Mr. Sloane. Sure. That is a very thoughtful analysis. I 
appreciate that, Congressman. I think my view here is that 
there is an inequality that is evolving between those 
institutions with a high-quality balance sheet and those with a 
low-quality balance sheet, and that the premiums necessary to 
fund the entire deposit insurance process are being placed 
across the whole industry. My view is that the FDIC premium 
ought not to penalize the successful institution and its 
earnings, and it ought to be clearly assessed as a user fee, 
because it ultimately gets passed through to the depositor in 
one form or another. It is an expense of our business. The way 
it is functioning now, you have a large percentage of 
institutions that have done poorly, and those premiums 
necessary to restock the fund are falling on everybody's 
balance sheet.
    Mr. Tierney. Maybe we should make some differentiation.
    The Chairman. May I say, there is an effort to require you 
to be more risk-based, and the FDIC is doing that. But the 
point is this, you couldn't do that if it was an individual 
charge. You can only do that through institutions. That is, the 
FDIC can allocate that institutionally, and in addition to 
lowering it in general, we have asked them to look at making it 
somewhat more risk-based. That does so.
    Mr. Tierney. Thank you, Mr. Chairman.
    The Chairman. I thank the witnesses. We are going to be 
pursuing this. Again, I appreciate the fact that to get the 
economy fully functioning--I think we're making some progress. 
Things are better than they would have been, although that's 
not encouraging to people when they're still in a negative 
situation. But the kinds of efforts going forward that we 
continue to need require a good deal of public support. One of 
the things I would urge on the banks is this: The programs we 
are talking about are, A, trying to improve the whole economy. 
But the institutions you represent are inevitably the direct 
beneficiaries. And you benefit both in that way and you benefit 
from the whole going forward.
    We are at risk of that kind of activity stopping, and when 
we ask you to think about your lending standards, factor that 
in. It's not simply your own bottom line, but your interest as 
an institution in this economy, in our being able to go 
forward. And if we aren't able to get a better response out of 
the larger banks in particular, I think you are going to find 
that when we talk to you and you urge us to do this or that or 
when you complain about restrictions on your compensation or 
your travel--Mr. Sloane, you referred to, oh, we can afford 
this or that. In fact, we have been putting some very tough 
restrictions on that, to the point where both the New York 
Times and the Washington Post in the last couple of weeks, 
there were complaints from the banks saying we're not doing 
this, that we're being too tough on them.
    But I do have to say to bankers: If I were there and if I 
believed that it was important that this government has the 
capacity to continue to do the kinds of things that we need to 
get the credit system functioning again, I would factor it into 
my lending decisions, because continued tightness, a drop in 
loans going forward because of underwriting standards 
tightening up, that will have negative consequences in the 
ability of the government to respond in ways that you'd like us 
to.
    The hearing is adjourned.
    [Whereupon, the hearing was adjourned.]










                            A P P E N D I X



                             March 23, 2009

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