[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
IMPROVING RESPONSIBLE LENDING
TO SMALL BUSINESSES
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 30, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-90
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 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
Subcommittee on Oversight and Investigations
DENNIS MOORE, Kansas, Chairman
STEPHEN F. LYNCH, Massachusetts JUDY BIGGERT, Illinois
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California RON PAUL, Texas
GWEN MOORE, Wisconsin MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida
C O N T E N T S
----------
Page
Hearing held on:
November 30, 2009............................................ 1
Appendix:
November 30, 2009............................................ 47
WITNESSES
Monday, November 30, 2009
Adams, Dave, Chief Executive Officer, Michigan Credit Union
League......................................................... 26
Anderson, Thomas E., Ph.D., MBA, Senior Director, Automation
Alley.......................................................... 10
Andrea, Dave, Vice President, Industry Analysis & Economics,
Original Equipment Suppliers Association....................... 8
Carnrike, Tammy, Chief Operating Officer, Detroit Regional
Chamber........................................................ 6
Chaffin, H. Douglas, President & Chief Executive Officer, Monroe
Bank & Trust; and Immediate Past President, Michigan Bankers
Association.................................................... 24
Dingell, Hon. John D., a Representative in Congress from the
State of Michigan.............................................. 4
Greenlee, Jon D., Associate Director, Division of Banking
Supervision and Regulation, Board of Governors of the Federal
Reserve System................................................. 35
Johnson, Arthur C., Chairman & CEO, United Bank of Michigan; and
Chairman, American Bankers Association (ABA)................... 22
Kus, Michael A., Kus, Ryan & Associates, PLLC; and Legal Counsel,
Michigan Association of Community Bankers...................... 25
Lowe, M. Anthony, Director, Chicago Region Office, Federal
Deposit Insurance Corporation (FDIC)........................... 36
Otto, Bert A., District Deputy Comptroller, Office of the
Comptroller of the Currency (OCC).............................. 37
Peters, Hon. Gary C., a Representative in Congress from the State
of Michigan.................................................... 3
Ross, Ken, Commissioner, Office of Financial and Insurance
Regulation, State of Michigan.................................. 39
Schauer, Hon. Mark H., a Representative in Congress from the
State of Michigan.............................................. 5
Staebler, Ned, Vice President, Capital Access and Business
Acceleration, Michigan Economic Development Corporation........ 11
Trute, Herbert W., President & CEO, T & W Tool & Die Corporation;
and Chairman, Tooling, Manufacturing & Technologies Association
(TMTA)......................................................... 13
APPENDIX
Prepared statements:
Moore, Hon, Dennis........................................... 48
Adams, Dave.................................................. 49
Anderson, Thomas E........................................... 62
Andrea, Dave................................................. 68
Carnrike, Tammy.............................................. 191
Chaffin, H. Douglas.......................................... 195
Greenlee, Jon D.............................................. 201
Johnson, Arthur C............................................ 215
Kus, Michael A............................................... 226
Lowe, M. Anthony............................................. 231
Otto, Bert A................................................. 244
Ross, Ken.................................................... 258
Staebler, Ned................................................ 276
Trute, Herbert W............................................. 283
Additional Material Submitted for the Record
Moore, Hon. Dennis:
Letter from the National Association of Federal Credit Unions
(NAFCU), dated November 25, 2009........................... 290
Dingell, Hon. John D.:
Written responses to questions submitted to Anthony Lowe..... 292
Written responses to questions submitted to Bert Otto........ 296
IMPROVING RESPONSIBLE LENDING
TO SMALL BUSINESSES
----------
Monday, November 30, 2009
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 11 a.m., at
Lawrence Technological University, 21000 West 10 Mile Road,
Southfield, Michigan, Hon. Dennis Moore, [chairman of the
subcommittee] presiding.
Members present: Representative Moore.
Also present: Representatives Peters, Dingell, and Schauer.
Chairman Moore of Kansas. This hearing of the Subcommittee
on Oversight and Investigations of the House Financial Services
Committee will come to order.
Our field hearing today is entitled, ``Improving
Responsible Lending to Small Businesses,'' and I would
encourage everybody, if you have a cell phone on you, please
turn it off or a Blackberry or whatever you have, please turn
it off so we can have this hearing.
I want to--this is our 8th Oversight and Investigations
Subcommittee hearing this year and our 2nd field hearing. Our
field hearing today is entitled, ``Improving Responsible
Lending to Small Businesses,'' which I think is of great
concern to everybody in this room. Field hearings allow us to
get out of Washington, D.C., and see and hear for ourselves the
economic conditions that confront business owners in our
country, the banks, and the credit unions.
Before we get started, I want to thank Congressman Gary
Peters for inviting our subcommittee to the Detroit area for
today's hearing. I also want to thank his staff for their hard
work, and President Lewis Walker, the president of the
Technological University, for hosting us today. Thanks, also,
to Congressman John Dingell, a wonderful, long-term serving
Member of Congress, and to Mark Schauer, Congressman Schauer,
for being here today, as well.
We will begin with members' opening statements, and then we
will hear testimony from our first panel of witnesses. Members
will have up to 5 minutes to question our witnesses. We will
repeat this for our other panels. The Chair advises members
that I will be keeping everyone, including myself, to 5
minutes, as we want to keep things moving so we can wrap up no
later than 1:50 this afternoon.
Keep in mind that unanswered or partially answered
questions can also be followed up in writing for the record. We
will get you information about that later. Also, if you don't
have time to give all the information you want to, we would
encourage you to make a written submission later. Without
objection, all members' opening statements will be made a part
of the record, and I now recognize myself for up to 5 minutes
for an opening statement.
Just last week, we learned from the FDIC that lending by
U.S. banks plunged by 3 percent in the third quarter, the
largest drop since at least 1984 when this kind of information
was first collected. This represents the 5th consecutive
quarter in which banks have reduced lending. According to the
report, banks reduced the amount of money extended to their
customers by $210 billion between July and September, cutting
back in almost every category from mortgage lending to business
lending.
What is most frustrating, I think, to a lot of us about
this report is that the largest banks, the ones that received
tens of billions of taxpayer dollars, were responsible for a
disproportionate amount, nearly 75 percent of the lending
decline, and this is happening in a quarter when banks posted
an aggregate profit of $2.8 billion. More than any other time,
the banking industry needs to be reinvesting those profits in
communities and local businesses in the Detroit area and
throughout our country so we can turn around this economic
decline.
Economists say small businesses account for up to 60
percent of new jobs. It's time to put people back to work and
invest in the small businesses that can be an engine of
economic growth. I look forward to hearing from the business
community here in Michigan so we can have a better
understanding of the obstacles small and mid-sized firms
continue to face in finding credit.
We will also hear testimony from banks and credit unions on
the challenges they face, and I know they face challenges, as
well, in increasing prudent lending while remaining safe and
sound. Finally, we will hear from regulators responsible for
supervising these firms as they work hard to curb the rise in
bank failures.
Improving responsible lending to small businesses, which is
the title of today's hearing, is not an easy thing to do in the
current economic environment, but I am hopeful this hearing
will help Congress better appreciate the challenges and allow
us to consider new ideas and solutions to address this problem.
In a joint statement released over a year ago, bank
regulators warned, ``If underwriting standards tighten
excessively or banking organizations retreat from making sound
credit decisions, it would lead to slower growth and potential
damage to the economy.''
FDIC Chairman Sheila Bair said recently, ``We need to see
banks making more loans to their business customers.'' I
completely agree, and I hope this hearing will drive home a
clear message to all stakeholders, banks, credit unions,
regulators, and the business community. We are all in this
together, and until we see more responsible lending out the
door, I fear the economic recovery that we all want and our
country desperately needs will take too long to happen. I look
forward to taking the lessons we learn from today's hearing
back to Washington, D.C., this afternoon and working with
Republicans and Democrats on thoughtful, bipartisan solutions
to this significant challenge. I yield back my time.
I now recognize, for an opening statement, Congressman Gary
Peters for 5 minutes.
STATEMENT OF THE HONORABLE GARY C. PETERS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Peters. Thank you, Chairman Moore, and thank you for
traveling today to Michigan for this important hearing. I know
all too well how little time you get to spend back home in
Kansas with your family and with your constituents, and so I
appreciate you traveling here this morning to hold the
Oversight Subcommittee hearing here.
I would also like to thank two of my colleagues from
Michigan, Chairman Dingell, and Mr. Schauer--my colleague from
the west side of the State--for coming over here to join us in
this very important hearing talking about the challenges of
businesses here in our State. We deal with these issues on a
global basis in Washington. It's important for us to focus on
the unique challenges for us here in Michigan.
I would also like to thank our witnesses for taking time to
testify to bring that first-person perspective to the
challenges that we are facing, but I would also like to thank
our host, Lawrence Technological University, for allowing us to
use these facilities and for your hospitality.
It has now been a year since we entered the greatest
economic decline since the Great Depression. Last fall, as the
stock market rapidly deteriorated and the health of our entire
financial sector was called into question, some institutions
were deemed ``too-big-to-fail,'' and the government acted very
quickly to save them. Many of these large financial
institutions have now returned to profitability and are
repaying the TARP funds that have kept them solvent during this
crisis; however, lending has continued to decline.
In fact, as Chairman Moore indicated in his comments, the
FDIC recently reported that lending by U.S. banks declined by
$210 billion in the third quarter of this year. This represents
the largest drop in lending since 1984 and the 5th consecutive
quarter in which banks have reduced lending.
While the largest banks are, again, posting profits and
paying record bonuses, there have been 124 bank failures so far
this year, and hundreds more banks around the country are at a
high risk of insolvency. While there is no doubt that some of
these institutions are paying the price for poor management and
risky investments, many well-run banks are fighting to survive
because of the economic environment. Nowhere is that more
evident than right here in the State of Michigan.
Many banks in our State are struggling due to declining
property values caused by the huge numbers of job losses that
we have suffered, and as the unemployment rate in the City of
Pontiac, in my district, has gone from 6.4 percent in 2000 to a
staggering 35 percent today, the median home price has dropped
from $104,000 to just $10,000.
For small banks operating under these economic conditions,
new sources of capital are very hard to come by. While the
worst of this economic crisis may now be behind us, American
businesses across the country continue to struggle with
unemployment, and businesses continue to suffer from a lack of
lending. Real recovery will not come until job creation is back
on track, and having a strong network of lenders in our
communities is critical to achieving that.
I believe this hearing represents an important opportunity
for businesses, financial institutions, and regulators to begin
a dialogue and hopefully come up with a new solution to this
intractable problem. I look forward to hearing today from our
witnesses about their ideas to help promote business lending
and increase capital assistance to these financial
institutions.
Mr. Chairman, I yield back the balance of my time.
Chairman Moore of Kansas. Thank you, sir, and the Chair now
recognizes the Honorable John Dingell, Congressman John
Dingell.
STATEMENT OF THE HONORABLE JOHN D. DINGELL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Dingell. Mr. Chairman, I thank you for your courtesy,
and I thank you very much for bringing the subcommittee here
today. Your efforts in this regard are deeply appreciated by
all of us here in Michigan, and I want to pay tribute to my
colleague, Mr. Peters, for his leadership in arranging that
this should occur today, and we're very proud of him and his
service, and I want to thank my good friend, Mark Schauer, an
outstanding Member, for being here today and to say how proud I
am to have these two fine Members as my neighbors.
I want to also thank Lawrence Tech for making this
opportunity available to us by hosting us in their fine
facilities. It's a great educational institution, Mr. Chairman,
and we're very proud of them and their leadership in keeping
Michigan a great and strong industrial State.
Mr. Chairman, thanks again for convening this hearing. It's
very, very important to our small businesses, particularly
around Michigan. The present recession, which erupted last year
nationwide and worldwide, has created enormously difficult
conditions for Michigan, some of which were caused by
irresponsible lending practices, irresponsible risk-taking by
members of the financial industry.
In 1999 and for decades before, I fought to keep the Glass-
Steagall Act in place and to prevent the kind of rascality that
contributed so heavily to the misfortunes of the country today.
Unfortunately, due to the repeal of that protection, we face
now a situation where failed banks and other banks are creating
a virtual credit market freeze.
There now exists no mean degree of hesitation among banks
to continue lending, especially due to tight credit markets and
ever growing public scrutiny of their activities, but this
hesitation must not be allowed to persist as a hindrance to
broader national recovery, and particularly to our people here
in Michigan. I hear regularly from small businesses in my
district not far from here in Southfield, as I'm sure you do
and my other two colleagues here do, that cannot get access to
credit to keep their doors open and their employees on the
payroll.
Responsible lending is a vital component in our efforts to
facilitate the economic recovery of the Nation and must be
encouraged while, at the same time, Congress must impose
adequate and fair oversight mechanisms to ensure that the
rascality that caused us the current financial crisis never
again occurs, and that's one of the reasons that your presence
here, Mr. Chairman, is so important. I hope our discussion
today will prompt the development and implementation of the
policy initiatives, it will help deserving small businesses get
the loans that they so desperately need to provide jobs and
opportunities to our people, and I look forward to the
witnesses who are here today and thank them for their presence.
Your presence here, gentlemen and ladies, is extremely
important to the recovery of our State and the Nation, and I
thank you for your being here today.
Chairman Moore of Kansas. Thank you, Congressman Dingell.
And the Chair next recognizes Congressman Mark Schauer for
5 minutes.
STATEMENT OF THE HONORABLE MARK H. SCHAUER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Schauer. Thank you, Chairman Moore, Representative
Peters, thank you for hosting us for all of you coming to
testify today, and certainly to our host, Lawrence Tech. I
serve as--well, first of all, I live in Battle Creek. I
represent seven counties that extend as far east to the
Washtenaw/Wayne County line.
The story of businesses in my district is the story of
businesses in Michigan and certainly in the industrial Midwest.
I serve on the Transportation and Infrastructure Committee and
the Agriculture Committee. It's an honor, Mr. Chairman, to be
able to participate in this subcommittee hearing today. I'm
here because we face in Michigan the deepest economic crisis of
any State in our country, and I have counties in my district
with unemployment rates close to 20 percent.
Quite candidly, we have an intractable problem here in
Michigan that needs to be solved. Whether we use terms like
red-lining or not, we are seeing industries in this State that
absolutely cannot get credit. Mr. Chairman, I actually told the
President directly that our recovery in Michigan has one hand
tied behind its back. We have industries throughout this State
that have survived that are attempting to diversify from
automotive to military to clean energy jobs to automotive,
aviation, aerospace.
These are stories I hear within my district from businesses
every day, and the common theme is these businesses are being
starved for credit, and it is unsatisfactory to me to hear
anyone else suggest that we need to continue to winnow within
this economy. In Michigan, we have winnowed enough. It is time
to start rebuilding, not just our industrial sector but
rebuilding small business.
While I appreciate the opportunity to be here today, I will
not be satisfied, Mr. Chairman, unless we collectively leave
here today with answers and leave here with real solutions.
This is a problem that we can solve, and it is a problem that
we must solve. No State more than Michigan knows the hardship
of this recession, but no State is better positioned to create
jobs and grow jobs simply by solving this problem. Thank you
for the opportunity, and I reserve the balance of my time.
Chairman Moore of Kansas. Thank you, Congressman.
And I am now pleased to introduce our first panel of
witnesses. First, we will hear from Ms. Tammy Carnrike, chief
operating officer for the Detroit Regional Chamber of Commerce.
Next, will be Mr. Dave Andrea, vice president of industry
analysis and economics for the Original Equipment Suppliers
Association, testifying on behalf of the Motor and Equipment
Manufacturers Association.
Third, we will hear from testimony from Mr. Thomas
Anderson, senior director for Automation Alley. After him, will
be Mr. Ned Staebler, vice president of capital access and
business acceleration for the Michigan Economic Development
Corporation. Finally, we have Mr. Herbert Trute, president of T
& W Tool & Die Corporation, who is also the chairman of the
Tooling Manufacturing & Technologies Association. Without
objection, your written statements will be made a part of the
record.
Ms. Carnrike, you are recognized for 5 minutes to provide a
summary of your statement, and again, I thank all of our
witnesses for coming today. Ms. Carnrike?
STATEMENT OF TAMMY CARNRIKE, CHIEF OPERATING OFFICER, DETROIT
REGIONAL CHAMBER
Ms. Carnrike. Thank you very much, and I would like to take
the opportunity, Chairman Moore, to say thank you--
Chairman Moore of Kansas. Sure.
Ms. Carnrike. --and welcome to Michigan on behalf of all of
us in the room--
Chairman Moore of Kansas. Thank you. I am glad to be here.
Ms. Carnrike. --and to thank Congressman Peters for
arranging this. This is a very critical and timely issue for
discussion, and I'm also recognizing that Lawrence Tech is more
than just a fine educational institution; it is a partner in
entrepreneurship and small business development. So thank you
very much, Mr. Chairman, members of the committee, and our
honorable Members of the Michigan delegation for the
opportunity to testify regarding the concerns of small business
today and getting access to capital. I am Tammy Carnrike, the
chief operating officer of the Detroit Regional Chamber.
With over 20,000 members, the Detroit Regional Chamber is
the largest Chamber of Commerce in the country. The Chamber's
mission is to power the economy of southeast Michigan, and it's
carried out through business attraction efforts, advocacy,
strategic partnerships, and valuable benefits and services to
our members.
Our members range in size and scope and sector, and they
contribute significantly to the vitality of our region.
Approximately 75 percent of our member firms are small
businesses with 50 employees or less. Recognizing the impact of
staying connected with that small business sector and its
needs, we maintain a small business advisory committee made up
of members who volunteer their time to make sure we're kept
abreast of the issues impacting small business.
We have received a very clear message through focus groups,
small business representatives who have shared their
experiences that the credit crunch and cash flow challenges
have placed increased stress on their daily operations. Access
to capital has been a strategy on our small business agenda for
over 5 years. This has been a long-standing issue, and it has
been compounded by the financial crisis that struck the State
of Michigan and the entire Nation over the past year.
Without question, the economic crisis we are in is
stunning. Increased availability of capital to small business
can support retaining jobs and also provide opportunity for job
growth, as well as expansion.
Our country is in the midst of the largest entrepreneurial
surge ever witnessed. Considering the Small Business
Administration projections of more than 1.3 million new
companies with employers started in just the last 2 years, this
represents one of the largest growth rates in our history, even
outpacing the height of the dot-com craze.
When it comes to the vitality and economic prosperity of
our country, there is nothing small about small business. The
pace of change in the banking industry is being matched by the
unprecedented growth of small business, and we find ourselves
in a situation that requires attention.
As of August, there were 80 bank closures nationally, and
analysts are predicting more than 300 bank failures over the
next couple of years. Yet, we believe that this crisis does
present an opportunity.
Today we're here to discuss southeast Michigan's small
business community and their need for access to capital, but we
also want to recognize that there are many supportive lending
institutions that contribute regularly to small business
success in this region. Besides their programs and services,
these institutions also provide support and resources to our
small business programs. They serve on committees, boards,
they're engaged in economic and community development
activities and focus on our region's needs for the appropriate
diversification of the automotive supplier industry. We need
both our small business sector, as well as our banking
industry, to be successful in order to strengthen our economy
and to create jobs, create an opportunity for solid working
relationships between both sectors, and organizations like ours
to commit to be there to provide similar end connection to
resources.
The Detroit region is more economically stressed than many
other areas of the Nation. Just look at our high unemployment
rates and the staggering loss of jobs. Regardless of where the
job loss occurs, it ultimately impacts our small business
community. Michigan lost more private sector jobs just since
the year 2000 than any other State, nearly half of all private
sector jobs lost in the United States during this time.
The Detroit Regional Chamber, along with many other
business organizations, are focused on a need for
transformation of our economy, and this will happen through new
targeted sectors for growth and for helping small businesses to
diversify their business and support these new sectors.
Additional resources for supplier diversification would have a
significant impact and help expedite economic transformation
efforts. Small businesses can and will create jobs with
available resources.
We recently reached out to a targeted segment of our
leadership. Based on sur--
Chairman Moore of Kansas. I'm sorry, but I'm going to have
to ask you to wind up. We have kind of a set time here. If you
would wind up--
Ms. Carnrike. Sure.
Chairman Moore of Kansas. --and I would remind each of the
witnesses, as well, that your written statements will be made a
part of the record. So if you would, please, Ms. Carnrike,
thank you.
Ms. Carnrike. Probably importantly from the survey is that
over 70 percent of these small businesses will be accessing and
will need capital and credit in the coming 12 months. It's very
important, and so at this time, we must say that this is where
it becomes very important for America and Detroit, and it has
always been a time of crisis and challenge, this is one of
them, but it offers us an opportunity for change, innovation,
and to ultimately make a difference. Thank you.
[The prepared statement of Ms. Carnrike can be found on
page 191 of the appendix.]
Chairman Moore of Kansas. Thank you very, very much for
your testimony.
Mr. Andrea, you are recognized, sir, for 5 minutes.
Mr. Andrea. Good morning, Mr. Chairman.
Chairman Moore of Kansas. Good morning, sir.
STATEMENT OF DAVE ANDREA, VICE PRESIDENT, INDUSTRY ANALYSIS &
ECONOMICS, ORIGINAL EQUIPMENT SUPPLIERS ASSOCIATION
Mr. Andrea. Thank you for the opportunity to testify in
front of the subcommittee. My name is Dave Andrea, and I am the
vice president of Industry Analysis and Economics for the
Original Equipment Suppliers Association, an affiliate of the
Motor and Equipment Manufacturers Association, and I'm
testifying today on behalf of each association.
Motor vehicle parts suppliers are the Nation's largest
manufacturing sector, directly employing over 685,000 workers
and contributing to over 3.2 million jobs across the country.
Suppliers are responsible for over two-thirds of the value of
the vehicle today and nearly 30 percent of the $16.6 billion in
automotive research and development investment. Over the past
year, unprecedented government and industry actions prevented a
collapse of the U.S. auto industry, a collapse that would have
affected all vehicle manufacturers and suppliers and all
related capital equipment and service providers. Without a
doubt, the actions taken in the General Motors, Chrysler and
numerous supplier bankruptcies, the selective restoration of
credit, and the improving economy have stabilized the industry.
However, continued progress to restore credit availability
and to incentivize technology and development throughout the
entire supply chain is essential to ensure the financial
viability and economic contribution the suppliers--of the
supplier sector, as well as commercialization of advanced fuel
economy and emission control technologies. To weather the
production volume reductions of 40 to 60 percent this year, a
majority of our members instituted mandatory shutdowns,
furloughs, and reduction in work weeks, as well as reduced
salaries and--and reduced employer matches of 401(k)
contributions.
In addition, OESA has identified 48 U.S. suppliers that
have filed for bankruptcy in 2009; although, we know that there
are hundreds of other suppliers who have filed but were not
reported in the press, were simply liquidated saving the cost
of going through bankruptcy. It appears that credit is
selectively becoming available to suppliers. However, I want to
emphasize it is selectively becoming available. Credit
availability, terms, and costs remain a significant and serious
issue, particularly for smaller suppliers.
According to the OESA September Automotive Supplier
Barometer Survey, smaller suppliers have actually experienced
tighter lending terms, and conversations as current as last
week with members indicate difficulty in securing capital to
invest in new tooling for new vehicle programs. Simply put, the
auto supply base continues to face significant headwinds as it
ramps up for higher production levels and launches essential
new products and technologies. The supply base needs collective
action that will deepen the industry's human, financial, and
intellectual capital base.
Governmental efforts to date from the U.S. Treasury
Supplier Support Program to the U.S. Department of Energy
Advanced Technology Vehicle Manufacturing Loan Program have
primarily focused on the vehicle manufacturers and the largest
suppliers. We encourage Congress and the Administration to
broaden their attention through the entire supply chain,
particularly with the smaller suppliers who have shown greater
uncertainty over their ability to finance plant and equipment
investment, merger and acquisitions for industry
rationalization, and program consolidation actions.
Smaller suppliers--and given the scale that the industry
operates on, we define small as being under $250 million in
revenue--remain a critical source of new technology and cost
competitive components for the industry, so MEMA and OESA
recommends that the Congress and the Administration focus on
two different issues.
First, for smaller suppliers, given the industry's
significant capital requirements and the general mismatch of
funding, a steady access to lines of capital and asset-backed
loans is essential for the survival of the supply base, and
second--and MEMA and OESA fully support the recent
announcements by the Administration to expand existing SBA
programs, and second, in technology funding, the supplier
industry is working with customers to develop a wide range of
new technologies that promote increased safety and improved
fuel economy.
So here MEMA and OESA support additional programs such as
S. 1617 and the IMPACT Act to help additional investment in the
industry. Thank you.
[The prepared statement of Mr. Andrea can be found on page
68 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Andrea, and again,
your remarks will be received in the record, your written
remarks.
Mr. Anderson, you are recognized for 5 minutes.
STATEMENT OF THOMAS E. ANDERSON, Ph.D., MBA, SENIOR DIRECTOR,
AUTOMATION ALLEY
Mr. Anderson. Thank you, Mr. Chairman. My name is Tom
Anderson, and I am senior director and director of
entrepreneurism at Automation Alley.
I want to express my sincere thanks to Congressman Peters
for arranging this morning to talk about the severe issue of
credit for small and emerging technology companies. Automation
Alley acts as a catalyst to enhance the image and growth in
southeast Michigan's technology driven economy, and since our
founding in 1999, our membership has expanded to include over
1,000 businesses, educational institutions, and government
entities from the City of Detroit and the surrounding eight
counties. We promote regional prosperity through
entrepreneurial and exporting assistance, workforce
development, and technology commercialization assistance.
It's a pleasure to offer testimony this morning
specifically focusing on our business accelerator and seed
investment program. To date, we have made 25 investments from
our 3 seed investment funds totaling just under $5 million. In
addition, those companies have attracted venture capital and
other private investment exceeding $38 million, and employment
is just over 150 currently.
We are an active investor. We stay in touch with our
companies. I serve on the board of several of those companies
and other members of our investment committee are on the board.
We also have a small business technology development centers
counselor at our facility who works with those companies, and
occasionally, we engage with those companies with repurposing
discussions on strategy and approach to market because things
don't always go as you originally plan. I have profiled a
number of those companies in the written testimony, and I want
to highlight just a few that target today's question, access to
capital.
ElectroJet is a small company based in Brighton that has
received funding from the MEDC's 21st Century Jobs Fund, as
well as from our seed fund, and they have successfully taken a
product to market and developed customers in China for an
export product.
The problem has been finding funds to fulfill those
purchase orders, getting the working capital they need to build
the product to deliver it in a timely fashion. As a result,
they have had to go to the capital markets to raise those funds
rather than the banks, selling a portion of the company in the
process.
Limo-Reid Technologies has developed a novel hydraulic
hybrid technology for the drive train of medium-duty and heavy-
duty trucks. They have received funding from us and they have
also received funding from the 21st Century Jobs Fund and from
private venture capital. They are currently well-funded as they
move through the development phase, but they are moving to a
stage where they will need to begin to manufacture product and
could anticipate difficulty in funding.
Ventech is a third company that has developed a novel
heating technology approach for school buses. They have in hand
over 40,000-unit purchase orders and are having a difficult
time finding funding for the working capital to buy the raw
materials to manufacture the heaters to sell them to the
industry.
So there's a theme, and the theme is that it's particularly
difficult for companies that are manufacturing a product to
find the working capital for work in progress in order to
fulfill purchase orders that they can achieve. Automation Alley
supports the Obama Administration's proposal to support further
economic recovery and job creation by ensuring that credit is
available for small businesses, and of particular interest are
the measures that would raise lending limits on the SBA 7(a)
and 504 programs from $2 million to $5 million, raise the
manufacturing company limit to $5.5 million, and raise the
lending limits on the microloan program from $35,000 to
$50,000.
For companies that are looking to diversify, the value of
the existing plant and equipment has fallen, and is often
inadequate to support the credit lines needed to move into new
markets. Supplier diversification funding from the Federal
Government has enabled a way to guarantee that gap, and move
funds to those companies. Many new economy companies also need
some support of that gap, and I would suggest that perhaps an
expansion of that loan guarantee to include startup technology
companies might be helpful, as well. The capital needed to move
from seed stage to venture capital or bootstrap capable funding
is scarce, and perhaps a subordinated debt fund would also meet
that gap.
In conclusion, we find for our companies, the largest gap
is in the funding continuum moving from seed stage to venture
funds or to operating the business. The State has done an
admirable job of expanding the pool of pre-seed capital and of
venture capital, but it's that gap in between, the $500,000 to
a $1.5 million that is really difficult to obtain. Companies
that are beginning to generate revenue but are not yet
profitable and who may never be a good candidate for venture
capital because they're a good solid $500,000 to a $1.5 million
business.
In conclusion, we're very appreciative of the attention
received by Congress and Federal agencies during this time and
in our State and believe that a continuum of local funding and
support for technology entrepreneurs is a vital piece in the
economic development puzzle. Thank you.
[The prepared statement of Mr. Anderson can be found on
page 62 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Anderson.
And the Chair next recognizes Mr. Staebler for 5 minutes,
sir.
STATEMENT OF NED STAEBLER, VICE PRESIDENT, CAPITAL ACCESS AND
BUSINESS ACCELERATION, MICHIGAN ECONOMIC DEVELOPMENT
CORPORATION
Mr. Staebler. Good morning, Mr. Chairman, and distinguished
Members of Congress. My name is Ned Staebler, and I am the vice
president of capital access and business acceleration at the
Michigan Economic Development Corporation, the State's economic
development agency. I sincerely appreciate the opportunity to
testify today on this important subject. Thank you very much
for coming here. This is really a critical juncture in our
State and also in our Nation.
Manufacturers in the United States face considerable
uncertainty. While some firms are cautiously optimistic about
the overall economic recovery, the persistent lag in credit
markets continues to pose a serious and permanent threat to
manufacturers and to our country's industrial capacity as a
whole. While there was an uptick reported in manufacturing
output over the summer months, recent data has shown that this
has largely disappeared in September and October, and while
conditions are somewhat improved from the lows seen in the
first quarter of 2009, U.S. manufacturing output is still very
weak compared to historical levels, and utilized capacity
remains at or very near all-time lows. And the corollary, of
course, is that excess capacity is at or very near all-time
highs.
In Michigan, and from our view at the MEDC, the State of
the market is clear. Unemployment in the State is over 15
percent. A recent University of Michigan report projected the
State will have lost nearly a million jobs by the time we reach
bottom. Over half of those losses are coming in the
manufacturing sector alone. A.T. Kearney estimates that 50
percent of tier 1 automotive suppliers are still at risk of
bankruptcy. Perhaps most troubling is that the automotive
industry has one of the largest economic multipliers of any
sector in the U.S. economy, a reminder that other non-auto jobs
are tightly linked to the success or failure in manufacturing.
Even with the interventions of TARP, which was designed to
improve the health of the banking sector and, thereby, increase
available capital to businesses, commercial and industrial
lending across the United States has fallen 15.4 percent year
over year in the last 12 months. Clearly, the recovery plan has
not done enough to increase the flow of credit from private
lenders.
This juncture is critical for three reasons: One,
manufacturers need capital to reorganize and consolidate
efficiently and in an orderly fashion; two, those manufacturers
who have right-sized and are now seeking to fill new orders are
finding that with their reduced borrowing bases, it is
difficult to access capital to scale back up; and three, those
manufacturers seeking to utilize their core competencies in
other non-traditional verticals like wind, solar, medical
device, or homeland defense are increasingly unable to finance
this transition. We applaud many of the efforts of Congress and
the Obama Administration to address these issues. Increasing
access to, cost of, and timeliness for capital to manufacturers
will be an essential part of our Nation's economic recovery.
Increasing SBA guarantee levels, reducing fees, and
reducing administrative hurdles and bureaucracy should continue
to be congressional and Administration goals. We urge this
committee to continue to support them. However, we feel that
these measures overlook the deep interdependence between the
health of banks and the health of borrowers.
TARP and many of the SBA adjustments I have discussed fail
to fully address the problem; they only focus on the health of
banks. We agree that banks need to be healthier, and access to
cheaper capital certainly helps, but to grow our deflated
manufacturing sector, borrowers must be made healthier, as
well. We're not suggesting that underwriting standards be
lowered at all, quite the contrary.
Rather, the best way to widen the scope of lenders to
include manufacturers and other historically healthy firms in
this difficult environment is to enhance borrowers' financial
qualifications from a commercial loan underwriter's
perspective. This requires mechanisms targeted specifically at
borrowers' shortcomings, namely, cash flow and collateral.
In recognition of this fact, the MEDC created the Michigan
Supplier Diversification Fund, which has been very successful
in inducing new loans that were otherwise unqualified from the
bank's perspective, many of which provided funds for
diversification into emerging green technologies. Crucial is
that this program targets the support of both banks and the
borrowers at the individual loan request level. This ensures
that projects move forward at the time of the deployment of
funds. In essence, the program self-regulates by ensuring that
the lending activity happens right away in contrast with TARP,
where following lending has severely lagged.
MSDF, or the Michigan Supplier Diversification Fund
leverages the market expertise, prudent risk management
practices, and financial capacity of private lenders who
source, underwrite, lead, and service the deals while injecting
public--targeted public dollars at the level of individual loan
requests. So far, every $1 in public funds has leveraged more
than $3 in private funds and helped create more than 2,000
jobs.
As evidenced by the 15 percent unemployment rate in
Michigan, the transition of the American manufacturing base
from traditional sectors to new high-tech verticals is a
challenging one. However, the speed of this transition is
crucial to the retention of an advanced manufacturing cluster
in the United States. We urge this committee to continue to
seek new models like the proposed National Manufacturing
Diversification Fund and act expeditiously to get this money
into the hands of those who need it the most, American
businesses.
[The prepared statement of Mr. Staebler can be found on
page 276 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Staebler.
Mr. Trute, you are recognized for 5 minutes, sir.
STATEMENT OF HERBERT W. TRUTE, PRESIDENT & CEO, T & W TOOL &
DIE CORPORATION; AND CHAIRMAN, TOOLING, MANUFACTURING &
TECHNOLOGIES ASSOCIATION (TMTA)
Mr. Trute. Thank you, Chairman Moore, and thank you,
Congressman Peters, for hosting this important hearing on an
issue so vital to small and mid-sized manufacturing. My name is
Herb Trute, and I am the president of T & W Tool & Die
Corporation of Oak Park, Michigan. I am also the chairman of
the board of directors of the Tooling & Manufacturing
Technologies Association. I am a 32-year veteran of the auto
supply business, and I am surviving today with absolutely no
thanks to the banking industry.
In my capacity as chairman of the TMTA, I have traveled to
Washington, and I have had meetings with Senator Stabenow,
Michigan Governor Granholm, and other Members of Congress
during the automotive hearings. I was there for that. I was
subsequently asked and also served as an adviser to the Obama
transition team with respect to manufacturing, and I was very
proud to do that.
I know the focus of this hearing is primarily on the
banking industry and the ability of manufacturing to receive
financing, but a business or an industry, for that matter, that
is in crisis does not arrive at that point in a vacuum. There
are always reasons. And very briefly, the main reason is that
the American auto industry has outsourced the supply base
virtually to the point of oblivion. This past year, faced with
a dramatic slowdown, I did what everyone suggested, I right-
sized, downsized, leaned, cut wages and benefits, and
reorganized the business in such a way that we could survive. I
was able to garner a fair amount of business, a sizable package
on today's open market competing globally.
I have a 15-year relationship with Comerica Bank where I
went to obtain financing for this work in process. The package
that they offered me was inadequate, did not rely on adequate
work-in-process financing. The guarantees and collateral
requirements were such that the amount of money they offered
me, I would never have been able to borrow. Faced with the
prospect of having to turn the work back and close my business,
I approached my customer, one of the Big Three.
They recognized the need that it was vital for American
manufacturing to have a supply base locally. So in exchange for
a discount, I received progressive payment terms from them.
Another one of my customers chose to go the other route and
continues to funnel American taxpayer money overseas for
tooling. I would like to know where the outrage is in that.
That should not be happening.
The question should not be, ``Where was it purchased?'' but
``Where was it built?'' The current bank crisis has provided a
convenient reason for large multinationals to continue sourcing
overseas. Now they're using it as a reason, as an excuse. These
are American taxpayer dollars. My belief is that the
outsourcing, coupled with other countries' predatory trading
practices, have precipitated this. The unfair international
playing field has exacerbated the situation making it almost
impossible for small business to compete globally. Yes, credit
is almost impossible to get, and yes, readily available credit
will help, but if the Big Three and other large American
corporations will not even try to buy American, there will be
no recovery, and we will have lost our ability to manufacture
anything.
The banks are unwilling to assume any risk with respect to
lending to small manufacturers. We were offered a loan package
totally inadequate to finance the large amount of work we have
been awarded. The interest rates were steep, collateral
requirements outrageous, and the amount offered would not have
been enough. There's definite need, but that is not part of the
equation for the banks. They will assume no risk.
My own belief is that the needs along with the benefits far
outweigh the risks in lending to small businesses. Small
business provides a shot in the arm to any local community. We
found it possible to survive with little or no credit, but if
financing were readily available, we would easily be able to
double our employment. This would be even more dramatic for a
business that has had to close due to lack of financing. Most
small businesses create jobs in the local communities
surrounding them.
The direct result would be reduction in unemployment and
injection of dollars into local economies and, thereby, helping
other businesses. Thank you very much for your time.
[The prepared statement of Mr. Trute can be found on page
283 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Trute.
I want to thank all of the witnesses for their testimony. I
now recognize myself for 5 minutes for questions.
I am interested in exploring the challenges we have seen in
the automobile industry during the past year or two and how
that relates to this lending crisis. I represent Kansas City,
Kansas, in my district where we have a GM plant that produces
the Chevy Malibu and employs about 3,000 of my constituents. We
also have a number of auto suppliers in my district supporting
the auto plant. I worry about suppliers and other small
businesses having their access to affordable credit cut off.
Mr. Andrea, is it more difficult to find credit if you own
a business that's part of the auto industry? Do banks that
might make a loan to any small business decide not to if the
firm is related to the auto industry?
Mr. Andrea. Currently, that's the case because--twofold.
One is with production volumes so dramatically low and
uncertain going into 2010, that adds systemic risk with the
bankers. The other is just the low value of automotive assets
to back up any of the loans. And we have a--and I can follow up
with additional responses for you.
Chairman Moore of Kansas. Thank you. Ms. Carnrike, what do
you think?
Ms. Carnrike. I can speak directly to an example of a small
business who is diversifying from the automotive industry, 7
years ago, 100 percent automotive reliant, now today, 10
percent reliant. Access to capital is critical to this growth.
It will create hundreds of jobs over the next 3 years, and
their main source they're looking at right now is an SBA 504
loan. It's very important to help companies diversify from the
automotive industry to be successful in this region.
Chairman Moore of Kansas. Thank you. Ms. Carnrike, what are
you hearing from Detroit businesses that are having their lines
of credit decreased or eliminated altogether? Do you have any
sense whether banks are overly cautious on their own about
making loans, particularly to any auto-related firm, or do you
think these banks want to make the loans, but they're under
pressure not to from the regulators?
Ms. Carnrike. I don't have specific examples of it being
related directly to the automotive industry. We do have
feedback from small business customers about their barriers to
accessing capital. I can tell you that over half of a surveyed
pool tells us that banks not lending is the biggest barrier to
assess to capital, 56 percent, and that 38 percent have trouble
getting nontraditional business models approved for financing.
Chairman Moore of Kansas. Mr. Trute, do you have any
thoughts about this?
Mr. Trute. Well, it would definitely help. We have been
forced to turn business away due to inadequate financing. The
business that we have kept is largely in part of our customer's
recognition that we are vital to them.
Chairman Moore of Kansas. Any other--thank you. Do any
other witnesses care to comment on this question? Yes, sir, Mr.
Andrea?
Mr. Andrea. In the survey work that we have done of our
members, approximately 20 percent of our members do say that
you--describing their banking relationship with their banker
that their banks are actively exiting the industry overall or
particularly with their relationship.
Chairman Moore of Kansas. Any other comments?
Mr. Staebler, as we consider various solutions at the
Federal level, including the proposal put forward by the Obama
Administration last month, what are States like Michigan doing
to turn the local economy around? Are there ways that the
Federal Government can partner up with States like Michigan to
seek solutions to an economic downturn, and is the key to an
economic recovery increasing lending to small and mid-sized
businesses?
Mr. Staebler. I certainly think that's going to be a huge
driver in our economic recovery, that is, small and mid-sized
businesses have been the main engine for job growth in this
country over the last 25 to 30 years, so I think that would be
critical. In terms of ways that the Federal Government can
partner with State government, we have put a proposal in place
and in front of the Administration on a way to create a
national version of our supplier diversification program, not
just for auto suppliers, but for all manufacturers wishing to
use their core competencies in new emerging technology sectors.
We think it's one that maintains the fiduciary responsibility
of banks but also provides access to credit for those small and
mid-sized businesses that are so crucial.
Chairman Moore of Kansas. Mr. Anderson, any comment?
Mr. Anderson. As I mentioned before, I would urge that a
national fund such as Ned suggested for supplier
diversification could well be expanded to also include startup
businesses and technology space who have similar challenges in
gaining access to capital, and that slight risk reduction might
enable them to be a viable investment candidate--or loan
candidate for a bank.
Chairman Moore of Kansas. Thank you, sir. The Chair's time
has expired.
Congressman Gary Peters, you are recognized for 5 minutes,
sir.
Mr. Peters. Thank you, Mr. Chairman.
Thank you for all of your testimony here. As you know, the
hearing is organized in three ways. We have businesses talking
about the difficulties, and we're going to hear from the
bankers as to how they're trying to achieve and bring that
money to you, and then regulators, and I know the banks have
some concerns about what the regulators are doing, so it's
about a dialogue together. But one thing I thought was
interesting, and I want to get your response to, is that I have
looked at some of the testimony that's going to come later from
the bankers, as well as from regulators, and in the testimony,
both of them quote the National Federation of Independent
Businesses that talk about the fact that although credit is
tight, it's really not the leading reasons why a lot of
businesses are experiencing some difficulties.
Now I have heard something different from all of you
through your discussions here and your testimony. Let me just
read--this is, I think, from the FDIC or the bankers:
``The NFIB reports that in spite of the difficult economic
environment, 33 percent of businesses reported regular
borrowing in October, and that's compared to 9 percent of the
reported problems that they had before. They noted that only 4
percent of business owners reported financing as their number
one business problem, and this is extremely low compared to
other recessions.''
So some of the folks in the banking community think this is
different than other--actually better than other recessions or
that the credit isn't that big of a problem. How would you
respond? Because we're going to have these other panelists who
may be saying that later. How would you respond with your
experience in business, particularly here in Michigan? And
that's why I wanted to bring this field hearing here is because
I think we have a whole different situation than the NFIB may
on a national basis.
Would anybody like to start? Ms. Carnrike?
Ms. Carnrike. I can respond from our survey data that half
of our respondents had applied for financing in the last 12
months. It goes from 41 percent, I'm saying about half, but 41
percent, to 70 percent anticipating needing financing in the
coming 12 months. So that indicates there will be a rise for an
increase in need of capital, and we also were able to secure
from them that in looking at the sources for the future, they
actually will look to increase their interest in SBA loan
programs from 29 percent--to 29 percent from 14 percent in the
past.
Mr. Peters. Mr. Andrea?
Mr. Andrea. My only suggestion would be to cut the data by
size of company and by sector and to see if at the national
level those national numbers hold up when you look at large to
small and by industry sector. I think you'll find a difference.
Mr. Peters. Okay.
Mr. Anderson. And in my experience, both with our startup
companies and with some of our small businesses, it may well
turn out because what I see is that their number one problem
many times is getting purchase orders. So although funding and
loans may still be an issue, if you're not getting purchase
orders, that becomes your number one problem, so perhaps it's
best to look at the top three issues of small businesses.
Mr. Peters. They're all interrelated?
Mr. Anderson. They are interrelated.
Mr. Peters. Right, right.
Mr. Staebler. Through the second quarter of 2009, the FDIC
reported that commercial lending nationally was down 8.5
percent. At the end of the third quarter, it's down 15.4
percent. And it wasn't like the third quarter of 2008 was a
banner time for commercial lending. So I think it's clear that
things are not necessarily on the upswing, and I think Tom's
right that they are interconnected, that demand certainly
reduces the amount of borrowing, but certainly the availability
of capital also reduces the amount of lending that's happening,
so--
Mr. Trute. I would agree with Mr. Anderson. The problems
began in the manufacturing sector, not through lack of
financing, but lack of financing is definitely hampering any
type of recovery.
Mr. Peters. Yes, as your businesses that you represent are
going out and trying to get credit, and particularly small
businesses, small businesses, as I think was mentioned, rely
primarily on bank financing, or if they try to go to the
capital markets, there are others, but it's bank financing,
what differences have your members experienced by going to the
large, multi--or the large money-centered banks that aren't
headquartered here in Michigan versus community banks, or are
there similar challenges, different challenges.
How would you respond to where your businesses are going to
get money? We can start with anybody. Mr. Anderson?
Mr. Anderson. With my startup businesses, they have
encountered, basically, the same problem at many institutions,
and they have talked to pretty much anyone they can find, and
the problem is providing sufficient mortgageable assets to
support the loan.
Take the case of ElectroJet. Kyle benefited substantially
by the devaluation of assets. He was able to purchase equipment
for his shop at 10 to 20 cents on the dollar. It worked great
during the startup phase. Now as he needs to get financing for
working capital to build product, those same assets are still
valued at 10 cents on the dollar, so it's not going to support
the kind of loan value that he needs in order to fulfill the
orders.
Chairman Moore of Kansas. Thank you, sir.
Congressman Dingell, you're recognized, sir, for 5 minutes.
Mr. Dingell. Mr. Chairman, with your permission, I would
like to defer to Mr. Schauer.
Chairman Moore of Kansas. Certainly.
Mr. Schauer. Thank you, Mr. Dingell.
Mr. Trute, thank you. I think you're providing us a reality
check here today. I could have lined up this entire room with
small businesses, particularly small manufacturers, that tell
the exact same story. So you're representing Main Street here
today. I appreciate that. And what I hope that we avoid today
is--and this is sort of what I see, it's sort of like the
scarecrow on the Wizard of Oz, everybody pointing different
directions or pointing at each other, and we're not solving the
problem. I look forward to hearing from the banks later today
with a reduction in loan volume, that's--doesn't seem to me to
be a sustainable trend for that industry, and we continue this
downward spiral.
I'm going to ask some quick questions, and since I have
about 4 minutes, ask for relatively brief answers. Mr.
Staebler, I'm very familiar with the Michigan Supplier
Diversity Fund. Thank you for that and the influence you're
having on a national program. How can we help make that happen?
Mr. Staebler. We worked with some of my colleagues here on
trying to figure out what demand there might be for this
program, and in the State of Michigan alone, we anticipate that
number over the next 2 to 3 years to be close to $2 billion.
Nationally, we looked at it as close--at least $10 billion that
would help small businesses transfer into new verticals. We
managed to have about $13 million, with an ``m,'' available at
the State level to help that transition along, so obviously,
creating a national program to allow manufacturers all over the
country to access--
Mr. Schauer. How much money does that national fund need?
Mr. Staebler. I would say at least $10 billion.
Mr. Schauer. $10 billion? Has the focus been on TARP money
to help capitalize that?
Mr. Staebler. Certainly, repayments to TARP, non--portions
of TARP that haven't been expended yet, any avenue, really--
Mr. Schauer. And $10 billion will help create how many
jobs?
Mr. Staebler. That number is in the $200,000 to $300,000
range. I have some data--
Mr. Schauer. Okay.
Mr. Staebler. --if you would like to see it later.
Mr. Schauer. Thank you. I think, Mr. Anderson, you talked--
or maybe it was Mr. Andrea, about--at least my impression was
you're talking about $5 billion from TARP that went to the Big
Three autos, intended to go to tier 1 suppliers, and that was
supposed to trickle down, and that really didn't happen, if I'm
hearing you correctly, and only a portion of that was used. Is
that part of a solution to use those dollars to get to smaller
suppliers?
Mr. Andrea. Without a doubt, the program served its purpose
to stabilize the industry, but from the perspective of moving
forward, an ongoing investment in plant and equipment from
mergers and acquisitions to consolidate the industry, that's
the capital that ran short, and it was not available through
any public, private--
Mr. Schauer. If we would figure out how to loosen that up,
that would be part of the solution; is that correct?
Mr. Andrea. Absolutely, and MEMA and OESA have been very
strong supporters of the MEDC program.
Mr. Schauer. My final question to the panel, I think it's
my final one, is to talk a little bit more about SBA programs.
We have, all of us here on this panel, have worked to increase
limits on some of those, increase guarantees, including through
the stimulus program and beyond that. Are lenders
participating? My experience is no, not really. What will it
take for lenders to participate in these enhanced SBA programs
which I have heard a number of you suggest would be part of the
solution? Any or all of you.
Mr. Staebler. I would say that, as I mentioned before,
that's certainly a part of it. And I think there are--I hate to
overgeneralize it, but there certainly are some lenders that
are doing more SBA lending now than they were a year ago. Of
course, many of them were lending to companies that a year ago
didn't need to take an SBA loan, and now they are. But I still
think that even with expanded SBA guarantees and reduced fees,
you're not addressing the core issue, which is that the
collateral and cash flow of the borrowers, themselves, is so
damaged. As Tom talked about, when you have your assets valued
at 10 or 20 cents on the dollar, it's very difficult to
collateralize a loan, even with the SBA programs. It's just--it
won't be bankable.
Mr. Anderson. I would agree and expand on that in many
cases with our startup entrepreneurs, they have already
mortgaged their house, mortgaged their 401(k) to put into the
business to get started, so the ability to collateralize an SBA
loan is severely impacted.
Mr. Andrea. And then as we have surveyed our members, just
the limits, the loan limits that hamper auto suppliers, even
the smallest auto suppliers that you're talking about, a $100
million or $125 million supplier--
Mr. Schauer. The limits need to be--
Mr. Andrea. --participating. When we did our survey work,
it was $5 million would be a minimum limit, which is what has
been proposed to move those up to in the 7(a) loan program to
be of value.
Mr. Schauer. Okay, thank you, Mr. Chairman.
Chairman Moore of Kansas. Thank you, sir, and Congressman
Dingell, you're recognized, sir, for 5 minutes.
Mr. Dingell. Mr. Chairman, to follow up quickly on the
question just raised by Mr. Schauer, Mr. Andrea, Mr. Anderson,
Mr. Trute, we just saw that one of the major auto manufacturers
turned back a significant amount of money that had been
earmarked to go down to the suppliers. I'm curious. Is that a
problem? Are those funds being flowed through to the suppliers
in the proper fashion, particularly with regard to not only
tier 1, but 2 and 3?
Mr. Andrea. My understanding of the situation right now for
distressed supplier funding is that amount within each of the
vehicle manufacturers is going down. To answer your specific
question, though, sir, in terms of is that money--by returning
that money, is that going to harm the suppliers, I can't answer
that specifically.
Mr. Dingell. Well, it would be pretty clear it's not going
to help them.
Mr. Andrea. No.
Mr. Dingell. Mr. Anderson?
Mr. Anderson. To be perfectly honest, with 25 start-up
businesses that I'm engaged with, I don't have enough specific
experience with the suppliers you're referencing to be able to
answer that.
Mr. Dingell. Mr. Trute?
Mr. Trute. Certainly, as you say, it can't be helping the
suppliers. I only have personal evidence to the extent that one
of the automakers is actively embracing keeping the local
supply base alive, and one of them is not.
Mr. Dingell. Ms. Carnrike, are depository institutions
contributing or in a position to help turn around the local
economy? And then why or why not, if you please.
Ms. Carnrike. Depository institutions are a very important
part of turning around our local economy, and they contribute
to that every day. We're talking specifically today about
lending practices, but we also have to remember that those
institutions are very important to supporting other community
and economic development programs. We need the strength of
their continued contribution. They will be very strong partners
in our economic turnaround and transformation.
Mr. Dingell. Mr. Andrea, as you're aware, and we have
discussed some of those things at an earlier meeting that you
and I had, the Administration recently increased the capital in
Small Business Administration 7(a) and 504 loans. Is this going
to help suppliers? How many of them will take advantage of it?
And further, is raising the capital on these loans sufficient
to address the capital needs of the suppliers?
Mr. Andrea. I think from our survey, we're looking at the
minimum amount was $5 million would bring in significantly more
suppliers. Now we have to work--so I don't know the specific
number that would pull in. We also, though, have to work on the
lending side to make that capital available. My only anecdote
for you there is I know speaking with the Michigan Small
Business Administration office, it's continually difficult for
him to place loans through the--automotive loans through the
SBA programs here.
Mr. Dingell. Thank you. Now to all of our witnesses, Mr.
Art Johnson of the American Banker's Association implies that
the Department of the Treasury should increase the cap of banks
participating in the Administration's small business lending
initiatives from $1 billion to $5 billion. Do you agree with
that assessment, and what would your comments be? Ms. Carnrike,
starting with you.
Ms. Carnrike. There is a need for increased capacity,
whether it be the SBA existing loan programs, as well as many
other programs. There's not enough capacity and enough
available resources currently to help our small business
community.
Mr. Dingell. Mr. Andrea?
Mr. Andrea. That would help the supply side, yes.
Mr. Dingell. Mr. Anderson?
Mr. Anderson. I would absolutely agree.
Mr. Dingell. Mr. Staebler?
Mr. Staebler. I couldn't agree more.
Mr. Dingell. Whose family are old friends of mine. And you,
Mr. Trute, please.
Mr. Trute. Absolutely, as well.
Mr. Dingell. Now, in August of this year, I met with the
banks and auto suppliers, as many of you will recall, to
discuss methods by which to increase lending to suppliers. One
question discussed during that meeting was the national
adoption of the supplier diversification program which it is
currently operating successfully in Michigan. This program
would decrease an individual bank's risk in lending to
suppliers by ensuring up-front deposits of loan principal by
the Federal Government or its designee, and the risks buoyed
across financial institutions participating in the program.
Do you believe that such a program would benefit banks and
increase small business lending across the country? And how
could we see to it that it's expanded here in Michigan? Ms.
Carnrike?
Ms. Carnrike. A national supplier diversification program
would certainly be very helpful to our overall efforts for
suppliers across the Nation, but I would like to talk
specifically to this area and this State and suggest that we
look at other opportunities to shore up our State program and
would ask that, perhaps, you consider is there flexibility
within the SBA? We have been talking about existing SBA
programs. Is there an opportunity to be flexible to create new
programs with SBA resources that respond to timely economic
situations? Especially for economic disadvantaged areas like
Detroit right now.
Mr. Dingell. Thank you, Mr. Chairman.
Chairman Moore of Kansas. Thank you, sir, and thanks to the
witnesses for their testimony. I thank our first panel for your
testimony. We are going to have to move along here. The first
panel is excused, and I would like to invite the next panel to
the witness table, please, and thanks to all the witnesses who
have testified here today.
And while the next panel is being seated, we're going to
make one minor adjustment, too, instead of--
[Discussion off the record.]
Chairman Moore of Kansas. We will now hear from Mr. Art
Johnson, chairman and CEO of the United Bank of Michigan and
United Community Financial Corp, as well as the chairman of the
American Bankers' Association.
Next, will be Mr. Doug Chaffin, president and CEO of Monroe
Bank & Trust and the immediate past president of the Michigan
Bankers' Association. After him, we will hear from Mr. Michael
Kus, who is with Kus, Ryan & Associates, and serves as legal
counsel to the Michigan Association of Community Bankers, and
concluding this panel will be Mr. Dave Adams, CEO for the
Michigan Credit Union League.
Without objection, your written statements will be made a
part of the record. I say this to each of the witnesses.
Mr. Johnson, sir, you are recognized. We are going to have
to change this--I apologize for this, but we're kind of on a
tight schedule here--to 3 minutes for witness statements, if
you would, please, and your statements will be received into
the record, though, and each member will then have 5 minutes to
conduct and ask questions.
Mr. Johnson. Very good. I will do my best.
Chairman Moore of Kansas. Thank you, sir. And I will let
you know when the time is up.
Mr. Johnson. Good, thank you.
STATEMENT OF ARTHUR C. JOHNSON, CHAIRMAN & CEO, UNITED BANK OF
MICHIGAN; AND CHAIRMAN, AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Johnson. My bank has been serving the banking needs of
west Michigan communities for more than 120 years. And for our
bank to prosper and endure, we must create long-term value for
our customers, our communities, our employees, and our
investors. Each of these groups is very interdependent so that
to fail with one group means failing them all.
For this reason, our bank has clung to the core values of
honesty and fairness in all of our dealings, mutual respect for
others, and a thirst for excellence in our individual
performance and professionalism. As chairman of the American
Bankers' Association, I'm pleased to share the banking's
industry's perspective on ways to promote capital assistance
and improve business lending in this distressed economy.
This recession is certainly one of the worst we have ever
faced. While the statisticians will say that the recession has
ended, that's little comfort to areas in Michigan and elsewhere
in the United States that still suffer from very high levels of
unemployment and business failures. The impact of the downturn
is being felt by all businesses, banks included. The cumulative
impact nationally of seven straight quarters of job losses and
many more than that in Michigan is placing enormous financial
stress on some individuals. With the jobs lost, work hours cut,
it does not take long for the financial pressure to become
overwhelming. This, in turn, has increased losses and reduced
the capital of banks.
This is not, of course, the first recession faced by banks,
and certainly not the first in Michigan. Most banks like mine
have served their communities for decades and expect to serve
them for many more. In fact, one of every three banks in the
United States has been in business for more than 100 years, and
these numbers tell a dramatic story about the staying power of
the banks and their commitment to the communities they serve.
In the face of a still weak and struggling economy, bankers
are working very hard every day to ensure that the credit needs
of our communities are met. My bank, as most community banks,
entered this recession with strong capital levels, and that is
the foundation of bank lending. Without adequate capital, which
our regulators are demanding, it becomes extremely difficult to
make new loans.
As this subcommittee is aware, in some areas of the
country, including southeast Michigan, it's impossible for
banks to raise new capital--new private capital. Without new
sources of capital, banks will end up shrinking in order to
keep regulatory capital asset ratios in acceptable ranges.
We believe that there are some comparatively small steps
the government can take now that would make a huge difference
in keeping credit available to our customers and our
communities. In a letter to Treasury Secretary Geithner this
past September, I laid out specific recommendations to assist
well-managed, viable community banks so that they would have
the capital necessary to more easily meet the credit needs in
their communities.
We proposed the Treasury invest up to $5 billion in
community banks with an expectation that this investment be
matched dollar for dollar by private capital. However, in some
areas of the country, Michigan included, capital markets have
become completely dysfunctional. In these areas, either no
private capital matching or a lesser requirement should be
considered.
On a related note, we believe the President's new small
business lending initiative has the potential to improve access
to credit for small businesses by providing lower-cost capital
to community banks that submit a plan to increase small
business lending. We have urged the Treasury to increase the
cap size so that more community banks will be able to
participate, which, in turn, increases the potential capital
available for small businesses.
Chairman Moore of Kansas. Mr. Johnson--
Mr. Johnson. In conclusion--
Chairman Moore of Kansas. Thank you.
Mr. Johnson. --the success of many local economies, in
Michigan and throughout the Nation, depends in large part on
the success of the community banks. We must work together to
get through these difficult times.
Chairman Moore of Kansas. Thank you, sir.
[The prepared statement of Mr. Johnson can be found on page
215 of the appendix.]
Chairman Moore of Kansas. Mr. Chaffin, you are recognized,
sir, for 3 minutes.
STATEMENT OF H. DOUGLAS CHAFFIN, PRESIDENT & CHIEF EXECUTIVE
OFFICER, MONROE BANK & TRUST; AND IMMEDIATE PAST PRESIDENT,
MICHIGAN BANKERS ASSOCIATION
Mr. Chaffin. Thank you, Chairman Moore. I would also like
to thank Congressman Peters for arranging this today and to
recognize Representative Schauer and my own Congressman, John
Dingell. Thank you for attending, gentlemen.
Thank you for the opportunity to discuss the critical issue
of improving lending to small business in Michigan and the
needs of traditional banks to do so. I'm Doug Chaffin,
president and CEO of Monroe Bank & Trust. We are a $1.4 billion
traditional community bank with locations in Monroe and Wayne
Counties, obviously, in the epicenter of our current financial
crisis. Our bank has been in existence for over 150 years. We
did not engage in the type of irresponsible lending behavior
that created this crisis, and our intent is to continue for the
next 150 years and beyond.
I'm also proud to represent at this hearing the 169 members
of the Michigan Bankers' Association as its immediate past
chairman. The MBA represents 93 percent of all commercial banks
doing business in our great State. Our members employ
approximately 40,000 Michigan residents and have provided more
than $200 billion in loans to both consumers and businesses.
Unemployment in Michigan is currently the highest in the
Nation, exceeding 15 percent, and this has been well documented
in some areas exceeding greater than 20 percent in the State of
Michigan. During this recession, 75 percent of all auto-related
jobs have been lost with 1 out of 5 in all jobs in Michigan
lost since the year 2000.
Banks in Michigan have continued to lend throughout this
crisis, while at understandably lower levels compared to our
national peers. In fact, loans to businesses and individuals by
Michigan banks have grown throughout this decade with the first
9 months of 2009 representing the only actual decline in loans
outstanding within any current banker's memory. However, the
high levels of unemployment has brought about increased
delinquencies, loan defaults, and resulting losses for over 40
percent of Michigan banks.
This has had a direct effect on depleting capital. While
the demand for loans has declined dramatically as few of our
customers are willing to take risks in this environment, many
of our banks in Michigan lack the capital to serve the needs of
the few businesses that are managing to find growth
opportunities.
Further complicating this issue is the fact that
traditional local sources for capital have been stressed by the
economy, and outside investors lack the confidence to invest in
Michigan due to our economic woes. Over the past 2 years, the
Michigan Bankers' Association has explored a number of
potential private and public solutions to provide capital for
viable banks. This has included a collaborative effort with the
Michigan Economic Development Corporation that resulted in the
establishment of the Michigan Supplier Diversification Fund,
which was mentioned previously. This fund was intended to
provide both needed startup capital and cash flow support for
manufacturers attempting to diversify in other industries.
Sadly, the budgetary challenges within our fair State leave
this initiative woefully underfunded. Efforts by State
leadership to seek Federal funding for these programs have thus
far proved unsuccessful. It's important to note that lending
does not lead an economic recovery. In fact, increased lending
traditionally follows increased employment and new business
opportunities resulting from improvements in the economy.
Michigan banks are anxious to do their part in any recovery
effort, but many lack the capital that will allow them to do
so. The only answer for many of our banks in Michigan is to
look for governmental support to supply the capital necessary
to allow them to lend to viable companies.
Thank you for the opportunity to discuss this critical
issue for our local businesses and communities. We are
confident that capital support to Michigan banks will pay huge
benefits and will provide the necessary boost to employment as
Michigan recovers.
[The prepared statement of Mr. Chaffin can be found on page
195 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Chaffin.
Mr. Kus, you're recognized for 3 minutes, sir.
STATEMENT OF MICHAEL A. KUS, KUS, RYAN & ASSOCIATES, PLLC; AND
LEGAL COUNSEL, MICHIGAN ASSOCIATION OF COMMUNITY BANKERS
Mr. Kus. Thank you, Chairman Moore. Thank you, Congressman
Peters, for arranging this meeting, and also thank you
Congressman Schauer and Congressman Dingell for being here
today. It's important that we understand that Michigan is in a
very unique position.
I represent the Michigan Association of Community Bankers.
I am their spokesperson and their counsel. I am also a
practicing attorney representing numerous community banks in
the State of Michigan.
Small business represents 99 percent of all employer firms
and employs approximately 50 percent of all private sector
workers in the United States. The majority of new job creation
in the past 10 years has been the result of the 26 million
small businesses in America. It is clear that for any
meaningful recovery to occur in America, it's important that
small businesses start hiring people again.
And small businesses rely heavily on community banks for
the credit they need to operate their businesses. Even though
community banks represent only about 12 percent of all bank
deposits in the United States, they make up 31 percent of the
dollar amount of all small business loans that are less than $1
million and 50 percent of all small business loans under
$100,000.
While the majority of community banks have money to lend,
some Federal regulatory agencies have taken an aggressive
stance towards community banks, forcing the banks to write down
their assets which were largely secured by commercial real
estate at an unprecedented pace, thereby destroying capital and
severely curtailing community banks' ability to fulfill their
vital role in making loans to small businesses.
The recent joint policy statement on prudent commercial
real estate loan workouts issued on October 30th by the Federal
bank regulators is a step in the right direction. It is also in
keeping with the type of suggestions that the MACB has made in
the past to various Members of Congress and the State
Legislature. More initiatives like this one are important, and
we need to continue to look to Washington for such guidance.
However, as community bankers in Michigan who have recently
been examined can tell you, instead of working with community
bankers to help both banks and their customers overcome current
economic stress, some examiners have become extremely harsh in
their assessment of the values of commercial real estate loans.
The President recognizes the need to support economic
recovery and job creation by improving access to credit for
small businesses, and on October 21st, announced further
initiative towards that goal. The MAC supports that effort and
particularly looks to the support given to--or suggestions be
provided to banks under a billion dollars in assets. However,
we have serious concerns about the onerous conditions that may
be placed on it, and it's important that these conditions
placed on the lending of that money to small--to community
banks be not as onerous as the cap program was.
Another concept that Congress should be considering is the
creation of programs where community banks could obtain long-
term stock loans from the Federal Reserve under a program for
the Small Business Administration. Banks are comfortable
borrowing from the Federal Reserve, and the Federal Reserve is
familiar with the banks.
Another consideration is allowing a larger portion that
allows for loan loss reserves to be used towards capital.
Currently, it's at 1.25 percent only. Allow banks to include as
part of their capital the face amount rather than market price
of government-sponsored enterprise securities that are held to
maturity in their investment. We currently do support the Small
Business Administration programs and its suggested increases.
It's important, however, that the programs be allowed to be
used at a higher level by small banks. Again, we appreciate the
opportunity to speak today. Thank you.
[The prepared statement of Mr. Kus can be found on page 226
of the appendix.]
Chairman Moore of Kansas. Thank you, and I will remind each
of the witnesses that your testimony will be received into the
record.
Mr. Adams, you are recognized, sir, for 3 minutes.
STATEMENT OF DAVE ADAMS, CHIEF EXECUTIVE OFFICER, MICHIGAN
CREDIT UNION LEAGUE
Mr. Adams. Thank you, Mr. Chairman, and a special thanks to
Congressmen Peters, Dingell, and Schauer. I appreciate on
behalf of credit unions the way that you demonstrate balance
and the way that you approach legislation, and what I wanted to
say at the beginning is what we're talking about with the SBA
proposal and small business lending, it really can't be looked
at in isolation, but rather, when you look at the financial
services industry, a $60 trillion industry of which credit
unions are a very small piece, I would urge you Congressmen
present here today and your colleagues to help us, as I know
that you're already doing, help us understand the importance of
balance because we want to protect consumers' interests with
regard to foreclosure, we want to protect small business'
interests, but what credit unions and the banking sector are
experiencing right now in terms of increased loan losses and
loan charge-offs, whether it be small business loans or
mortgage loans or consumer loans, it's unprecedented.
So with that caveat--and I'm talking about overdraft fee
legislation, interchange fee legislation, extending the
Community Reinvestment Act to credit unions, whatever it might
be, the CFPA proposal, we need to be able to make sure that
small lenders are not faced with increased burden, because that
plays into their willingness and their ability to lend to small
businesses and to other sectors.
Three points that I would like to make that are contained
in my written comments: One, credit unions are lending in this
environment. The credit union sector of the financial services
industry saw small business loans increase by 17 percent from
June 30, 2008, to June 30, 2009. Small business lending with
not-for-profit credit unions increased by over 100 percent in
Michigan during the past 3 years. So credit unions are lending.
Our Invest in America program where we partnered with GM and
Chrysler has resulted in over 200,000 car and truck sales for
GM and Chrysler. I received a note from GM's V.P. of Marketing
and Sales recently saying, ``Thank you, Mr. Adams, for
believing in us when no one else would.'' I will never forget
that. Credit unions are lending in all sectors, including small
business lending.
Point number two, we support the SBA proposals
wholeheartedly. However, as the loan caps are raised, we
encourage that the guarantees continue, as well, because the 90
percent guarantee level is absolutely critical.
The third and most important point, credit unions are
lending in the area of small business loans, but we are
restricted with an arbitrary and, really, ridiculous cap on our
small business lending that is restricted at 12 percent of
assets. Representative Paul Kanjorski has sponsored H.R. 3380,
it has 30 cosponsors, and quite simply, it would raise the
small business loan cap on credit unions from the 12 percent
level to 25 percent, and provides some other provisions that
will simply allow credit unions to make more small business
loans. We encourage your support for that legislation. That is
the single piece of input I could give you. Our national
association has estimated that it would immediately infuse $10
billion of capital for small business loans, and would create
over 100,000 jobs.
So I appreciate your allowing me to testify, and we share
the real interest in addressing this very serious problem.
Thank you very much.
Chairman Moore of Kansas. Thank you, sir.
[The prepared statement of Mr. Adams can be found on page
49 of the appendix.]
Chairman Moore of Kansas. I now recognize myself for 5
minutes for questions, and I would like to ask all four of you
the first question: Is the decline we saw in lending in the
last quarter due to banks and credit unions being more cautious
about making loans on their own initiative, or is it pressure
from regulators and examiners to stop making business loans?
Mr. Johnson, if you would like to start, sir.
Mr. Johnson. I'm inclined to think that it's a combination
of those two and some other factors. It's not surprising that
credit standards at banks have become a little more harsh today
than they were 3 years ago, which most people would recognize
that maybe it was a little looser than it should have been
then. So that's not surprising.
It is also not particularly surprising that in this kind of
an environment, regulators are being harsh during examinations.
We can argue about whether the degree is appropriate, but that
shouldn't be surprising.
Chairman Moore of Kansas. Thank you, sir. Mr. Chaffin?
Mr. Chaffin. I would agree with that. I would also like to
add that we're also finding, frankly, decreased demand,
particularly in southeast Michigan, for small business lending
and medium-sized business lending. In our own case, we have
seen the backlog of loan applications for business lending to
go down to less than 10 percent of what it was a year ago, and
I think banks across the State and, in fact, across the country
are experiencing something similar, so in addition to Art's
comments, it is partly a demand issue.
Chairman Moore of Kansas. Thank you. Mr. Kus?
Mr. Kus. I would agree. I think one of the things that
we're finding with banks in southeast Michigan, they're in
capital preservation mode. They're afraid to make additional
new loans, concerned with whether or not they're going to get
additional criticism from the regulators, at the same time,
they're unable to find often sufficient collateral, bankable
collateral to be used as collateral for those loans.
Chairman Moore of Kansas. Thank you, sir. Mr. Adams?
Mr. Adams. Yes, I would like to see more public focus or
more congressional focus on the plight of financial
institutions as opposed to consumer interests. We represent the
consumer sector of the financial services industry. We are
consumer cooperatives, but there's a very delicate balance that
needs to be maintained here, as I mentioned in my comments. I
think it is a combination. Regulators are really clamping down
on lenders of all types, they should do that, they have to do
that in a tough economy, but as I mentioned earlier, despite
that, credit unions have been able to increase their loan
volumes in all sectors during this period that we're talking
about.
So the lending can be done, but it has to be done very
carefully in a tough economic environment like we're in right
now.
Chairman Moore of Kansas. Thank you. Mr. Johnson, what
unique challenges do Michigan banks face in lending to local
small and mid-sized businesses in addition to regular business
loans? I worry about the state of the commercial real estate
market and the reluctance or inability for banks to make those
kinds of loans to small or mid-sized businesses. How does the
status of the auto industry fit into calculating how risky a
loan may be if there's an auto supplier at the other end of the
loan?
Mr. Johnson. Let me give as brief an answer as I can.
Chairman Moore of Kansas. Thank you.
Mr. Johnson. One of the biggest factors is simply the value
of collateral. Virtually every asset on the books of every
small business and certainly of most banks is worth less today
than it has been in the past, and in many instances,
considerably less, and at the same that banks are requiring
lower loan-to-value ratios in their loan approvals, the value
has gone down, and frankly, it's kind of a double whammy.
Chairman Moore of Kansas. Thank you, sir. Do any other
witnesses care to comment on that?
Mr. Chaffin. Maybe I could just add some anecdotal support
to the property value issue. In Monroe County, Michigan, and
Wayne County, Michigan, we have seen residential property
values decline over the last 3 years at the rate of 1 percent
per month, which means today, those properties are worth,
roughly, a third of what they were 2 or 3 years ago. That
extends to commercial property values, as well. It's a very
similar statistic, and as Art commented earlier, it is partly a
fact of the availability of the collateral.
Chairman Moore of Kansas. Thank you. My time is about to
expire, and go ahead and start, and if it does expire, I would
ask the other witnesses if you have comments to please submit
those in writing for the record. Okay, Mr. Kus?
Mr. Kus. The only comment that I would make is that not
only have real estate values fallen, but concentration levels
that the regulators are demanding, they want them to decrease,
so unfortunately in some segments, they're unable to lend into
those segments because they have reached their concentration
level.
Chairman Moore of Kansas. Thank you. The Chair next
recognizes Mr. Peters for 5 minutes for questions, sir.
Mr. Peters. Thank you, Mr. Chairman. Thank you again for
all of our testimony. Let me get back to a question that I
asked of the other panelists, the difference between the large,
money-center banks, the community banks, and our credit unions
that are here in Michigan, and what we have noticed,
particularly with the new information with the decline in
loans, it was interesting that the largest decline of loans to
small businesses and loans generally were from the very large
banks, the big, money-center banks, which are also the prime
beneficiaries of significant TARP money and significant
assistance from the Federal Government, and we have seen those
banks turn--it looks like they have turned course, are
profitable now, and yet, they're not loaning out to Main Street
and to our small businesses.
Mr. Johnson, you represent the American Bankers'
Association, you have banks from every size available, and I
just wanted your reaction to that, as well as the other
panelists to that. And when I was before a Financial Services
Committee hearing and I had the executives from the leading
five banks in the country, they, more or less, mentioned to me
that Michigan is being red-lined, in a sense. They didn't use
that term, obviously, but they could not find loans in
Michigan, and they did all acknowledge that they're loaning
less in Michigan than they are in other States.
What do we have to do to get these money-center banks
loaning? Where is the problem? What's your reaction to the fact
that the folks who have most of the deposits and the money are
simply pulling back?
Mr. Johnson. Well, I'm inclined to think that the solution
for money-center banks and community banks is not terrifically
different. If we can get regulatory agencies to look at capital
ratios a little more creatively, if they can look at not
requiring write-down of assets quite as rapidly as we have, the
problem is essentially the same for everybody. It's capital
ratios, and in banks, that capital means something a little bit
different than it does more generally. It's the actual amount
of equity in the business, and we are--banks of every size are
really being required to move toward higher equity capital
levels in their bank, and there's really only two ways to do
that. One is to raise more capital from some source, and the
other is to shrink the balance sheet, and in the largest
companies, they are shrinking the balance sheet, and I think
that has a huge impact.
Mr. Peters. Mr. Chaffin mentioned the TARP funds to some
community banks. One way to help that balance sheet is the TARP
funds bringing in some Federal resources, and, yet, community
banks are reluctant to accept TARP funds. Do you want to
elaborate on that, what we need to do, maybe, to make it so
community banks are willing to accept it?
Mr. Chaffin. First of all, the application process for the
capital purchase program for the TARP program has expired for
community banks, I believe it expired at the end of November,
and there may be some today that if that was available, they
certainly would reconsider that. At the time the applications
were taking place, our economic woes were not as severe as they
are today.
In our own case, our own bank declined to participate in
that, and that application process was over a year ago. At the
time, we were concerned about some of the what we'll call
onerous requirements that were part of that program. We were
concerned about some of the unknown requirements that might
become a part of that program at a later date, and I think if
those type of restrictions are lifted from some future program,
you would see more community banks taking part in it.
Mr. Peters. Community banks would take--so we can have
outlined at a future time exactly what needs to be done if we
open that up. Mr. Kus, I just also want it mentioned the
forbearance that you talked about in your testimony, at least
the written testimony, with the pressure that the regulators
have, you made the comparison of Michigan being very similar to
what happened in the farm crisis with banks there and the
forbearance. Now we have approached the regulators, we'll ask
them again when they're here before us, they have said that's
not something they're willing to pursue, and they think that
only postpones the problems for the banks. How would you
respond? You understand the reluctance from the regulators. How
should I respond to them when they give me those responses?
Mr. Kus. I understand their reluctance, but we need to do
something to assist. We have what I call almost a systemic risk
problem of the banking industry in the State of Michigan. If we
don't do something to help shore up the banks of southeast
Michigan, we're going to have more fail, and the question is
what can we do to help shore it up.
The proposed cap program is not a bad idea that's coming
out to support banks under $1 billion, but many of the banks
that need the TARP money aren't able to get it because of the
restriction that if you're at low CAMEL 3 composite rated or 4
or 5, you're not going to get the money. So are there other
programs that could be made available? And some of the ideas
are to somehow limit the amount of charge-off that has to occur
over a longer period of time as opposed to in that quarter, so
again, some of those suggestions are in that paper.
Chairman Moore of Kansas. Thank you, and the Chair next
recognizes Congressman Dingell for 5 minutes, sir.
Mr. Dingell. Mr. Chairman, with your permission, I would
like to yield to Mr. Schauer.
Chairman Moore of Kansas. Absolutely.
Mr. Schauer. Thank you, Mr. Dingell.
Thank you all for being here. I think I will ask Mr.
Johnson, you represent banks of all sizes. I think Mr. Trute
alluded to this earlier, of businesses that have had 20-plus-
year relationships with their large bank--I will use the term
that has been used here, money-centered banks, and those banks
literally are calling those loans. These are customers that
have the demonstrated cash flow, they are still in business,
they have not been winnowed out, and they're diversifying.
Why is that happening? How can that be good for that bank's
balance sheet or for their future balance sheet if they have a
customer that's demonstrated that it's risk worthy, that it's
viable? That's an example that I can give you of how our
recovery is being hindered, and it's a story that probably
every community can tell you.
Mr. Johnson. Well, excuse me, first of all, while I do
represent all the members of the American Bankers' Association,
I am a community banker.
Mr. Schauer. And I appreciate that.
Mr. Johnson. And have never worked at--
Mr. Schauer. You have a tough job.
Mr. Johnson. I work at the largest bank I have ever worked
at right now, it's the only bank I have ever worked at, and
it's only $435 million, with an ``m,'' and so I think, as I
mentioned before, and some of the other panelists have
mentioned, there are a number of factors. Exposure to certain
industries with what economists are saying about the
restructuring of the auto industry. It's--if you have the
ability to be diversified across many States, many communities,
you are able to pick and choose what industries you want to
have your assets invested in.
If, however, you were located in one community, and you can
only do, as community banks are, you can only do what's going
on in that community, that's what you have to do. You don't
really have that diversification ability. And so it's not
surprising that they're making the very tough but, perhaps,
rational decision that they don't want quite as much exposure
to particular industries as they have.
Mr. Schauer. And I appreciate that is probably the best
answer you can give. The frustration is that these are
businesses that have demonstrated that history of cash flow and
demonstrated that relationship for a generation. So is the
answer that you--community banks and credit unions, up to the
ability that you can, refinance these loans? And will the
President's 3 percent interest rate help you do that, your $5
billion proposal give you the ability to do that? Because
candidly, in my community, that's what we're sort of left with,
we're going to you, including credit unions, to say, how can
you take out this other lender to help this business stay in
business or help this business diversify and grow.
Mr. Johnson. I think those are all great ideas. If I might,
I had a thought while I was sitting back listening to the
previous panelists about an observation that I have. Between
the mid-1980's and mid-1990's, our bank in Grand Rapids was the
largest originator of SBA 7(a) loans in the State of Michigan
for 9 years in a row, and so we are very familiar with SBA
programs.
During that period of time, the SBA was relatively
decentralized, and we made semiannual trips down to the Detroit
office and the McNamara Building to meet with SBA officials,
talk to them about what was going on, and talk about what was
going on in our loan portfolio. That's not the case anymore.
The SBA has been very centralized, and we're now dealing with
offices in California and Virginia, and from an organizational
perspective, I would say that if district offices of the SBA
had a lot more authority to deal with their lenders on local
issues, there could be some on-the-street improvement.
Mr. Schauer. I appreciate that recommendation. Mr. Adams,
you wanted to comment?
Mr. Adams. Congressman, in your district, one credit union,
Consumers' Credit Union's CEO Kit Snyder, you may know him--
Mr. Schauer. Yes.
Mr. Adams. --is an example of many credit unions in
Michigan that have reached this arbitrary statutory 12 percent
cap that I talked about. The single thing that can be done
without a single taxpayer dollar to help infuse more money for
small businesses would be to raise that cap that is currently
placed on credit unions for small business lending. The only
reason it's in place is that the banking industry lobbied for
that back in 1998. They're the only ones who benefit from it,
and yet, it's a clear example of how small businesses could
benefit from additional capital.
Mr. Schauer. My time is up. Mr. Chairman, if I could ask
for written follow-up from you, Mr. Adams, on that point in
terms of, I know the bill that has been introduced would allow
you to take that cap up to 25 percent--
Mr. Adams. Right.
Mr. Schauer. --but if you could give me some evaluation
on--of how many jobs could be created, how many loans could be
made for different increments, if you could go to 15 percent,
20 percent, 25 percent--
Mr. Adams. I would be happy to do that.
Mr. Schauer. --I think that would be very helpful.
Chairman Moore of Kansas. Thank you.
Congressman Dingell, you're recognized, sir, for 5 minutes.
Mr. Dingell. Thank you, Mr. Chairman. In his testimony,
gentlemen, which you heard, Mr. Andrea observed that about 60
percent of the supply base may be indiscriminately cut off from
necessary access to capital. He further stated the group of
OESA's chief purchasing officer concluded that predicting the
failure of a supplier has more to do with their banking
relationships than it does with their operational efficiency or
revenue outlook.
Do you agree that the banks are indiscriminately denying
automotive suppliers to credit they desperately need to remain
in business? Mr. Johnson? Mr. Chaffin? Mr. Kus?
Mr. Johnson. I can only speak firsthand from what's going
on in my own bank, and that's certainly not the case there. I
would think that if that phenomenon is occurring, it is very
isolated, it--I doubt that it's widespread.
Mr. Dingell. Mr. Chaffin?
Mr. Chaffin. I could relay some comments, I think, and also
following up on Congressman Shauer's question. There is, in
fact, a challenge with a lot of auto manufacturers, simply
because they do not demonstrate the ability to service debt,
whether it's recent history or whether it's collateral. The
supplemental programs that we have talked about in the past
that the State has tried to initiate would counteract that.
What we find in our own case when a larger institution has
denied credit or actually denied renewing the credit and we
receive an application, probably 9 times out of 10, it's with
merit, it's with the fact that there is insufficient collateral
or insufficient cash flow, so these--
Mr. Dingell. I want to make it clear I know nothing about
that with regard to the community banks, and you, Mr. Chaffin,
run a very fine institution.
Mr. Chaffin. Thank you.
Mr. Dingell. I do observe with some distress I have had
small business people, particularly suppliers, come into my
office and observe that they have been informed that their bank
was not going to loan anymore in the auto industry, and this is
a matter of no small concern to me, as you might well know. Mr.
Kus?
Mr. Kus. I don't think it's indiscriminate, but I think
Doug hit the nail on the head in that. The problem is when
these people come back for loans today, when these companies
come in, the value of their equipment has gone down
significantly, the value of their commercial real estate has
gone down, they have absolutely no assets, per se, they become
very hard to bank.
And so unfortunately, if the bank was to make this loan,
they would be under severe criticism from the regulators who
would likely have to classify the asset almost immediately, so
unfortunately, we're kind of in a Catch-22.
Mr. Dingell. Now one of the suggestions made during that
meeting was the national adoption of the supplier
diversification program, one which is successfully working in
Michigan. This program would decrease individual banks' risks
in lending to suppliers' banks by ensuring follow-up deposit--
by ensuring upfront deposits of principal by the suppliers by
ensuring upfront deposits by the Federal Government or its
designee in risk pooling. Would that be of assistance in the
problem we're discussing?
Mr. Chaffin. Absolutely.
Mr. Dingell. Mr. Johnson?
Mr. Johnson. I'm not a great believer in a single, silver-
bullet approach here.
Mr. Dingell. Oh.
Mr. Johnson. I think a lot of programs should be thrown out
there and tried.
Mr. Dingell. I thoroughly agree. Mr. Kus?
Mr. Kus. I would agree with that, and I--
Mr. Dingell. Gentlemen, there's one issue--my time's about
out--but there's one issue that we have heard everywhere this
morning amongst all of our panelists, and that is the way
assets are being rated down because of the loss of value.
That's causing, as you have observed, a severe constriction on
banks' ability to loan money and upon the requirements that are
imposed on them to maintain a hard capital structure.
We have two problems that this relates to, the first of
which is the problem that you have in making loans, but the
other is the fact that we have some folks who are ``too-big-to-
fail,'' and we have to watch to see that--that we terminate
that risk to our society. What do we do about this, gentlemen?
And if my time runs out, submit that to us in writing so that
we can get that in the record, please.
Mr. Johnson. Well, I think there are really two related
issues there, and the ABA has a position on creating a systemic
regulator, which we think is important, and importantly, the
resolution--the difficult part of that is what is the proposed
resolution process for a bank, or an institution? Not just
banks but a systemically important financial institution, what
do we do once we have determined that they should fail, and how
do we--without inducing chaos, how do we run that business
down? How do we solve that problem?
Mr. Dingell. It's probably too long for us to address this
morning.
Mr. Johnson. Well, it's another whole hearing, I'm sure.
Mr. Dingell. Thank you, Mr. Chairman.
Chairman Moore of Kansas. Thank you, and Mr. Chairman here
to my left has been a chairman for many, many years in
Congress, so I appreciate his understanding, as well.
We are at this time going to take--I want to thank the
second panel for your testimony. You are excused, and before we
hear from the third panel, we're going to take a short break
for a little lunch break, I guess, and resume here at 1:15. If
everybody would be back then and be seated and ready to go. We
all have to get back to D.C.--I think, we have planes to catch
later, so we do want to start at 1:15, and I do appreciate the
understanding of our members. We will see you back here in just
a few minutes.
[luncheon recess]
Chairman Moore of Kansas. The hearing will come to order.
We're going to convene your final group of panelists and have a
chance to hear their testimony and ask questions.
I ask unanimous consent to enter into the hearing record
several statements from Members of Congress, Congressman Sandy
Levin, he was unable to attend, but has a written statement,
and also a statement from the National Association of Federal
Credit Unions, and a letter from the Building Industry
Association of Southeastern Michigan.
Is there any objection?
Mr. Dingell. No.
Chairman Moore of Kansas. Without objection, it is so
ordered. These will be received in the record.
I also welcome our final group, Panel Three.
First, we will hear from Mr. Jon Greenlee, Associate
Director of the Division of Banking Supervision and Regulation
for the Board of Governors of the Federal Reserve system. Next,
will be Mr. Anthony Lowe, Director of the Chicago Region Office
for the FDIC. Third, will be Mr. Bert Otto, District Deputy
Comptroller for the OCC, and finally, we will hear from Mr. Ken
Ross, Commissioner for the Office of Financial and Insurance
Regulation for the State of Michigan.
Without objection, your written statements will be received
and made a part of the record.
Mr. Greenlee, you are recognized, sir, for 5 minutes--
excuse me, for 3 minutes. We have cut down here. We are trying
to get out of here by about 2:00--some of us are heading on to
a place called Washington, D.C. So please understand, and we
are not trying to cut you short. All of your statements will be
received into the record.
Mr. Greenlee, sir?
STATEMENT OF JON D. GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF
BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Greenlee. Thank you. Chairman Moore, Congressman
Peters, Congressman Dingell, I appreciate the opportunity to
appear here before you today to examine several issues related
to the condition of the banking industry.
Although conditions and sentiment in financial markets have
improved, the overall business environment is very challenging
for both large and small businesses as unemployment has
continued to rise. Borrowing from businesses and households
remains weak, and overall, the banking system continues to face
significant challenges as the economic downturn and weaknesses
in real estate markets has resulted in significant loan quality
problems and losses at a number of banking organizations, many
of which are also facing questions about capital adequacy.
In Michigan, Indiana, and Ohio, the performance of banking
organizations has also deteriorated because of weaknesses in
the overall economic environment. In particular, banks in
Michigan have seen asset quality indicators continue to
deteriorate, further pressuring the institutions' profitability
and capital adequacy.
Against this backdrop, four banks have failed in Michigan
in recent months. The Federal Reserve has been focused on the
important role banks play in meeting the needs of their
community, and along with the other Federal Bank regulatory
agencies, issued a press release in November of 2008
encouraging banks to make sound loans to creditworthy
borrowers, including small businesses.
More recently, on October 30, 2009, the Federal and State
bank regulatory agencies issued additional interagency guidance
on CRE loan restructurings and workouts. This guidance, the
development of which was led by the Federal Reserve, is
designed to address concerns that examiners may not always take
a balanced approach to the assessment of CRE credits.
This statement is especially relevant to small businesses
because owner-occupied CRE often serves as collateral for many
small business loans. Given the importance of this issue, the
Federal Reserve has already held initial training for its
examiners, and on November 20th, participated with the other
Federal banking agencies in a teleconference with the industry
to discuss this guidance.
Finally, the TALF program, which the Federal Reserve
established in November of 2008 to facilitate the extension of
credit to households and small businesses, has been successful
in helping restart securitization markets. To date, the TALF
program has helped finance 2\1/2\ million auto loans, 750,000
student loans, more than 100 million credit card accounts,
480,000 loans to small businesses, and 100,000 loans to larger
businesses. Included among those business loans are 4,700 loans
to auto dealers to help finance their inventories.
Perhaps even more encouraging, a substantial fraction of
asset-backed securities is now being purchased by investors
that do not seek TALF financing, and ABS issuers have begun to
bring non-TALF eligible deals to market. Further, on November
16th, the availability of TALF financing also facilitated the
first issuance of CMBS's backed by newly originated mortgages
in almost 18 months.
In summary, it will take some time for the financial
markets to fully recover. The Federal Reserve is committed to
working with the other banking agencies and the Congress on
these important matters that will promote the concurrent goals
of fostering credit availability in local communities across
the country and promoting a safe and sound banking system.
Accordingly, we thank you for holding this hearing. I look
forward your questions.
[The prepared statement of Mr. Greenlee can be found on
page 201 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Greenlee.
Mr. Lowe, you are recognized, and your statement will be
received into the record, as well.
STATEMENT OF M. ANTHONY LOWE, DIRECTOR, CHICAGO REGION OFFICE,
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Lowe. Thank you. Chairman Moore, Congressmen Peters and
Dingell, I appreciate the opportunity to testify on behalf of
the FDIC regarding the availability of credit to small and
medium-sized businesses. FDIC-insured institutions are a major
source of financing for small businesses, supplying over 60
percent of the credit used by small businesses to run and grow
their businesses. Most of these institutions are community
banks. We share your concerns about ensuring the availability
of credit to Main Street businesses in Michigan and across the
country.
The number of problem institutions and bank failures has
risen steadily as the effects of this recession, which began in
the financial markets, have taken hold in many parts of the
country. As a result, credit availability has suffered, and
this is due not only to more conservative credit standards by
lenders but also due to erosion of collateral values and the
financial condition of borrowers. At the same time, bank
supervisors are encouraging FDIC-insured lenders to deal with
problem loans and recognize losses where necessary, while also
encouraging loan workouts where they're appropriate.
Financial data from Michigan and the industrial Midwest in
general reflect the ongoing struggle of the U.S. manufacturing
sector which contracted during this decade, and like employment
growth among other sectors, job growth in the manufacturing
sector did not rebound after the 2001 recession even while
overall U.S. economic growth was strong. This led Michigan to
experience a sharp increase in joblessness since the start of
the national recession in 2007, and the State's unemployment
rate has more than doubled from 7.3 percent to 15.1 percent.
With respect to small business lending, available data do
not clearly distinguish recent trends in availability of small
business credit in Michigan. However, recent surveys by the
NFIB show that while small business loans have clearly become
more difficult to obtain, deteriorating business conditions
appear to represent an even larger problem.
We understand the critical role that credit availability
plays as the lifeblood of the national economy, especially for
small businesses, and we also recognize the tight credit
conditions in the market and continue to identify strategies
for improving the current situation. Last year, along with the
other regulators, we issued a statement reinforcing our view
that continued origination and refinancing of loans to
creditworthy borrowers is essential to the vitality of our
domestic economy. We all have a mutual interest in seeing
community banks thrive and continue to support their local
communities. Community-based lenders can be a stabilizing force
by providing credit for consumers and small businesses.
Thank you for the opportunity to testify, and I'll be happy
to take questions.
[The prepared statement of Mr. Lowe can be found on page
231 of the appendix.]
Chairman Moore of Kansas. Thank you, sir.
Mr. Otto, sir, you are recognized for 3 minutes.
Mr. Otto. Thank you.
STATEMENT OF BERT A. OTTO, DISTRICT DEPUTY COMPTROLLER, OFFICE
OF THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Otto. Chairman Moore and members of the subcommittee, I
appreciate the opportunity to discuss ways to improve
responsible lending to small businesses in Michigan and other
parts of the country. The OCC recognizes the important roles
that credit availability and prudent lending play in our
Nation's economy. Our goal is to ensure that national banks
meet the credit needs of their communities and customers while
remaining safe and sound.
During this economic cycle, we are extremely mindful of the
need to maintain a balanced approach to our supervision of
national banks. Our message to bankers has been
straightforward: bankers should continue to make loans to
creditworthy borrowers; they should not make loans that they
believe are unlikely to be repaid in full; and they should
continue to work constructively with troubled borrowers but
recognize repayment problems in loans when they see them.
Just as critical, we strive to ensure that our examiners
maintain that balance in their bank examinations and oversight.
Examiners should not dictate loan terms, but will ensure that
bank management realistically identifies and addresses problems
as they emerge, even as they work with struggling borrowers.
As bank regulators, we share the goal of ensuring banks
meet the credit needs of their small and mid-sized business
customers and have taken steps to see that this happens. The
OCC is also helping to educate examiners and bankers about
programs that can reduce credit risk in loans to small and mid-
sized businesses. Federal and State programs designed to make
credit more accessible while reducing lenders' credit exposure
can be effective in promoting lending to creditworthy borrowers
while limiting the risks lenders face in the economic cycle.
National banks actively participate in government guarantee
programs for small business lending: 5 of the 18 nationally
chartered banks in Michigan are SBA preferred or express
lenders offering SBA guaranteed loans, and the 10 large
national banks doing business in Michigan are also designated
as SBA-preferred or express lenders. The OCC fully supports the
Administration's initiatives to expand credit availability and
begin the process of financial recovery.
Beyond our safety and soundness examination activities, OCC
encourages lending to small and mid-sized businesses in a
variety of other ways. Among these are our evaluation of the
national banks' performance under the Community Reinvestment
Act, our extensive community affairs activities, and our formal
outreach programs. The OCC's community affairs activities and
publications are specifically developed to increase examiner,
banker, and community group awareness of programs that promote
lending to small businesses that support communities throughout
the country. Recent banker roundtables, newsletters,
information, and informational publications have highlighted
various aspects of small business lending opportunities and
incentives.
In conclusion, credit availability and prudent lending to
small businesses play an important role in our Nation's
economy. The OCC shares the committee's goal of ensuring banks
continue to meet the credit needs of their customers in a safe
and sound manner. We also recognize that banks are operating in
an economic environment that continues to pose challenges to
them and their customers.
We have and will continue to support and encourage prudent
lending to small and mid-sized businesses in Michigan and
across the country through our supervisory activities, guidance
to bankers, and CRA process, small business related programs,
publications, and ongoing outreach efforts. Thank you for this
opportunity to testify and present our views.
[The prepared statement of Mr. Otto can be found on page
244 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Otto.
Mr. Ross, you are recognized, sir, for 3 minutes.
STATEMENT OF KEN ROSS, COMMISSIONER, OFFICE OF FINANCIAL AND
INSURANCE REGULATION, STATE OF MICHIGAN
Mr. Ross. Thank you, Mr. Chairman, and Representatives
Peters and Dingell. My name is Ken Ross and I am commissioner
of the Michigan Office of Financial and Insurance Regulation. I
thank you for the opportunity to testify today. I have taken a
red pen aggressively to my oral testimony and I will try to
talk fast.
My agency supervises 118 of Michigan's 147 federally
insured commercial and savings institutions which collectively
hold approximately $50 billion in combined assets. I also
regulate over 200 credit unions which have just over $20
billion in assets. Historically, Michigan has averaged 1 bank
closure roughly every 5 years over the last several decades. In
the last 13 months, 4 Michigan banks and 1 credit union have
been closed.
Given time, I believe that many Michigan banks would be
able to work their way through the challenges associated with
historic job losses in the auto industry, but unfortunately,
some will not be able to weather the additional stress
associated with the huge devaluation of real property that we
have seen across the State. Michigan is not alone in that, but
we have seen somewhere between 30 and 40 percent on average
across the State in real estate devaluation.
Community bankers who weren't, by and large, involved in
subprime lending and weren't reaping fortunes from the national
securitization machine, however, are paying the ultimate price
for those who benefited from the fundamental causes of the
underlying financial crisis that we have been going through,
and while much of the national focus has been on buttressing
systemically important information, our attention in Michigan
has been working with community banks struggling with the
myriad of challenges facing them in this environment.
Federal policy hasn't treated the challenges faced by
community banks with the same expediency or creativity that
they have accorded to their systemically important brethren.
Over the last year, nearly 300 community banks nationwide have
failed or merged out of existence, while their large
counterparts have only gotten bigger. Additional capital, both
public and private, must be the building block for success
ultimately for community and regional banks.
While TARP has provided a source of capital for some of
these institutions, I have--as I'm sure you have heard--been
told many times that the process is both cumbersome and
expensive for community banks, and is an opaque process, as
well. While there have been some positive signs in the outlook
nationally where capital flows have been coming into the
system, unfortunately, Michigan banks have been largely shut
out of capital markets.
We have heard, as you have heard many times, that Michigan
is being red-lined. With that, I will just stop because I know
the time has run out, and I will be glad to answer any
questions.
[The prepared statement of Mr. Ross can be found on page
258 of the appendix.]
Chairman Moore of Kansas. Thank you to our panelists for
their testimony, and again, your statements are part of the
record.
I would like to direct my first question to Mr. Greenlee. I
know one of the areas of the economy the Fed has been
particularly focused on is commercial real estate. How does
that particular type of lending play into the larger challenge
to make credit available to small and mid-sized businesses? Do
you have a comment on that, sir?
Mr. Greenlee. Yes, as I mentioned in my oral statement, we
have focused a lot on commercial real estate lending for two
reasons. There are a lot of banks with commercial real estate
concentrations. The second piece of this is really the owner-
occupied commercial real estate portfolio where small
businesses will pledge their building or property to secure a
loan, and so we have tried to fix on that as a key priority to
make sure that our examiners are taking a balanced approach to
that, particularly on the owner-occupied commercial real estate
properties, so we look at a borrower's ability to repay, not
necessarily just the value of the property.
Chairman Moore of Kansas. Thank you. Do any other witnesses
care to comment on this question?
Okay, next question. If there is one message that you as
examiners and regulators of depository institutions would like
to send to banks here in Michigan that are unsure if they
should make small business loans to small businesses desperate
for that credit, what would that message be? What message would
you like to send to small businesses here in this area? Mr.
Greenlee, again, I will start with you, sir.
Mr. Greenlee. I think the Federal Reserve's view on credit
availability, again, is that we want banks to make prudent
loans to creditworthy borrowers. I think our main message to
the banks is that it is in everybody's best interests to do
that. That was consistent with what we put out in the November
2008 statement and that we want banks to look at the borrower's
ability to repay the loan under reasonable terms, and that
really should be the driving force here.
Chairman Moore of Kansas. Do any other witnesses care to
comment? Yes, sir, Mr. Lowe?
Mr. Lowe. Yes, dovetailing on that exact same comment, from
the FDIC standpoint, we look at collateral as a secondary
source of repayment. So as long as we see that a loan is
performing--there is sustainment for repayment over the loan
term--that type of credit generally will not be criticized. The
collateral is only one aspect that we're looking at when we're
analyzing credits.
Chairman Moore of Kansas. Mr. Otto?
Mr. Otto. Yes. We have talked to banks about this, and if a
business has a sound plan, I think we definitely encourage them
to make those loans. We have some community affairs officers--
one of whom is here today listening to this hearing--in
Michigan who meet with bankers and community organizations and
others to try to put people together in supporting small
business loans and all lending.
Chairman Moore of Kansas. Thank you. Mr. Ross?
Mr. Ross. Yes, only insofar as earlier on in the crisis, I
think we had some bankers who were overly optimistic and
weren't--in my estimation, they had some rose-colored glasses
on in terms of the overall ability of the local economy to
bounce back.
I think today we're in a much different place, and I think
bankers are much more aggressively looking at credits and doing
extensive evaluations looking at the entire picture, all
sources of possible support for the loans, so I think we're in
a much different place today than we were a year-and-a-half
ago.
Chairman Moore of Kansas. Thank you. Congressman Peters, if
you would like to ask your questions now, sir.
Mr. Peters. Thank you, Mr. Chairman. Generally, to kind of
distill what I have been hearing here today is we have two
problems here in Michigan: First, we have to get the big banks,
the big-money-center banks who have already been the
beneficiaries of significant amount of taxpayer and Federal
Reserve intervention from the Treasury, from the Federal
Reserve, to get them to loan in Michigan, which they aren't
doing, and the statistics certainly bear that out.
The second is to give our community banks who are here,
community banks and credit unions who are in our communities
the tools that they need in order to continue to make those
loans in the communities in which they operate and which they
continue to express their frustration with regulators as
putting on the squeeze on them, asking them to take fire sale
markdowns on assets, putting them in a real untenable position,
so let me just put out one of the--seem to make some sense in
the community bankers, put out three conditions or three
changes that they thought would make sense, particularly in a
place like Michigan, which I think does have a lot of
similarities to the farm crisis in the 1980's, which we talked
about earlier, and some forbearance may make some sense in
order to keep these banks functioning. They suggest that we
allow banks to include in their capital all or a significantly
higher portion of the 1.25 percent that's currently allowed to
be carried in their allowances for loan and lease losses. They
also believe we should allow banks to include as part of their
capital the face amount rather than the market price, so GSEs,
Government-Sponsored Enterprises, that they intend to hold to
maturity, and three, allow banks to amortize losses over a 7-
to-10-year period instead of the loss in the quarter in which
it is experienced.
Give me your reaction to those. Do those conditions seem to
make some common sense, particularly in the situation here in
Michigan? Mr. Lowe, maybe from the FDIC's perspective first?
Mr. Lowe. I will definitely address the part about
amortizing loans over 7 to 10 years and the forbearance. We did
have the forbearance program back in the 1980's for the
agriculture crisis. We had 200 to 300 banks that participated.
FDIC has always been an advocate for open and honest
transparency with regard to financial reportings, so at this
point in time, we would not be supporting a forbearance
program. But I would say again with the guidance on meeting the
needs of creditworthy borrowers that we issued in 2008, and the
guidance on workouts issued just last month, we are continuing
to encourage all of our institutions to lend, continue lending,
and continue refinancing credits as long as it is done in a
prudent and reasonable manner. We are not going to be looking
to criticize credits just because the collateral value has
declined. We will continue to stress that bankers analysis of
the repayment capacity of the borrower.
Mr. Peters. My understanding is, in the 1980's, the
forbearance program was successful, was reasonably successful,
that it prevented banks from going under; is that an accurate
assessment or not?
Mr. Lowe. Of the 200 to 300 banks that participated, the
majority of them did survive. There were a very small number
that did end up failing, so you could couch that as a success,
but again, a difference at that point in time was that there
were some very stringent guidelines for banks to be able to
participate. One of those criterion was that the institution
had to have been well-managed and well-run throughout all its
history. That is not saying institutions here in Michigan or
across the country are not, but there were some very stringent
guidelines for banks to be participants.
Mr. Peters. If we reinstituted some of those guidelines and
did something similar to what we did in the 1980's, would that
be something--maybe Mr. Otto and Mr. Greenlee could get
involved, as well--Mr. Lowe, is that something that you would
be open to if we moved in that direction similar to what we did
in the 1980's, which was--it seems to me it's cheaper,
especially from the FDIC's perspective, as well, to keep these
banks operating as opposed to coming in and having to finance
that?
Mr. Lowe. We would have to take a close look at forbearance
because, again, we do advocate for transparency with regard to
the financial statements.
Mr. Otto. I agree with Anthony. I think that it's something
that you could look at, but I was in central Illinois in the
Peoria office, and most of my banks that I supervised there
were agriculture banks, and while they did participate in the
forbearance program, there was a lot of pain involved in that,
and I think we would have to be very specific as to people
getting in and how they come out of the forbearance program
because a lot of the banks that I had were bought by another
bank rather than fail.
So I think that we have to be careful about how that is
structured. And I agree on the amortization of loss, that was
one other point that you had made, I think that's a slippery
slope if you amortize losses over, what did you say, a 1- to 7-
year period?
Mr. Peters. A 7- to 10-year period.
Mr. Otto. Yes, 7, that would be just forgoing or pushing
out the problems as opposed to dealing with them right away.
Mr. Peters. I get a little disconcerted--one more question.
Chairman Moore of Kansas. One more question, certainly.
Mr. Peters. Okay, the question regarding that--the other is
the capital, and it was brought up with the American Bankers'
Association that the FDIC's failure resolution policies, it's
difficult to raise capital here in Michigan given the--where
the economy is and the auto industry, but your resolution
policies actually create incentives for investors to wait until
the bank has failed as opposed to investing earlier.
Why is that the case? Why can't we change that? We want to
keep these banks before they fail, before it starts costing
money. Why is that policy in place, and can we change it?
Mr. Lowe. We don't have a policy where we're trying to have
that disincentive--of forcing banks to fail.
Mr. Peters. Well, it's FDIC-guaranteed financing for
winning bidders of failed banks or loss-sharing agreements. So
you have that guaranteed financing where, obviously, that
doesn't exist before a bank fails.
Mr. Lowe. Before a bank fails, when we do have a problem
institution, we're working with the institution and advocating
that they go out into the market and try to look at finding a
merger partner or someone that can buy them. We definitely
would rather have the assets of the bank stay in private hands
versus coming onto the FDIC's balance sheet. That is something
that we do advocate before an institution fails, something that
may not be public, but we are all the time working with
institutions, working with the regulatory agencies, working
with the commissioners for the State-chartered banks trying to
arrange and to act to some degree as a broker to find means for
an institution to be taken over while it is still open and
operating.
Mr. Peters. Thank you. Thank you for your indulgence, Mr.
Chairman.
Chairman Moore of Kansas. Certainly. The Chair next
recognizes the Honorable John Dingell. Congressman Dingell?
Mr. Dingell. Mr. Chairman, I hope this won't be charged
against my time, but I want to say thank you for being here,
tell you how much we appreciate your assistance and kindness to
listen to our constituents, and tell you how much, Mr.
Chairman, we're going to miss you when you leave Congress.
Chairman Moore of Kansas. Thank you.
Mr. Dingell. Mr. Moore is leaving the Congress, and I think
it's a prodigious loss to the body and, frankly, to our
country.
Chairman Moore of Kansas. Thank you.
Mr. Dingell. Now, if I could begin my time?
Chairman Moore of Kansas. Yes, sir. Now his time starts.
Mr. Dingell. I have had on two separate occasions
constituents in the supplier business come in and talk to me,
and they told me that they have been told clearly that loans
were not going to be made in Michigan or loans were not going
to be made into the auto industry or to suppliers. Does that,
as a matter of policy, does that kind of red-lining have the
approval of your respective agencies, Mr. Greenlee, Mr. Lowe,
and Mr. Otto?
Mr. Lowe. I can tell you from an FDIC standpoint, we have
not indicated to our examiners or anyone on our staff that any
specific type of lending should not be done. Again, we're
encouraging lending as long as it is prudent and reasonable.
Mr. Dingell. Apparently, these banks were not hearing it.
Do you approve of this, Mr. Greenlee?
Mr. Greenlee. Absolutely not, sir.
Mr. Dingell. How about you, Mr. Otto?
Mr. Otto. No, absolutely not.
Mr. Dingell. What should we do about it?
Mr. Otto. I think--
Mr. Dingell. If one of my constituents comes in, can I call
you up and say, Mr. Greenlee, Mr. Lowe, Mr. Otto, these
scoundrels are not giving my people money because they're in
the auto business? And if I did, what would you do about it?
Mr. Greenlee. Sir, I have heard these concerns voiced in
Washington from Members--
Mr. Dingell. As my old daddy used to say, ``A few good
public hangings would help the situation considerably,'' but
I'm going to ask that you give us a response for the record,
each of you, if you would, please.
Now, gentlemen, I have--the question has been raised here
about focusing on small automobile suppliers, and to do so by
creating a public/private capital partnership to lower the risk
of lending to the industry. Such proposals have been discussed
by me and by bankers and others, it's known as the National
Manufacturing Diversification Fund, NMDF. Do you and your
agencies favor this legislation or not? Mr. Greenlee? Mr. Lowe?
Mr. Otto?
Mr. Greenlee. Congressman, I will have to look into that
and get back to you with a written response.
Mr. Dingell. Would you respond for the record, please.
Mr. Greenlee. Yes.
Mr. Dingell. Mr. Lowe?
Mr. Lowe. I will do the same.
Mr. Dingell. And you, Mr. Otto?
Mr. Otto. I will do the same.
Mr. Ross. I will do the same.
Mr. Dingell. If I could count on you to deliver that to us,
because this is important information.
Now, gentlemen, if--in 25 words or less--if you had the
opportunity to tell the Congress what it is we ought to do to
increase lending, and whether you have enough authority or
appropriations to see to it that we could have an enforceable,
workable policy to get money to the community banks, which are
really hurting, so that they can get it to the suppliers and
small businesses, what would your advice be? Mr. Greenlee?
Mr. Greenlee. I can speak to what we have done broadly at
the Fed along these lines--
Mr. Dingell. I want to hear what we're going to do in the
future, though, since, ``What's past is prologue''--
Mr. Greenlee. And we are continuing to work hard and look
closely at--
Mr. Dingell. But what would you suggest to us that we do?
Mr. Greenlee. I think alternatives to look at capital for
small businesses, different programs are options, and we--
Mr. Dingell. Could you give us--could you submit for the
record, make a clear statement of what you and your agency
would suggest to us? That would be immensely helpful, because
I'm not satisfied what's happening is doing us enough good.
Mr. Lowe, would you tell us, do you have enough statutory
authority, and do you have enough funds, and what should the
Congress do about these matters?
Mr. Lowe. Something to consider if we go forward with
additional TARP or capital purchase programs--I know that is
being proposed by the Administration--is to include some
additional incentives for the CDFI's for minority institutions
and for institutions that have purchased other failing banks if
perhaps there would be some way to build in some incentives in
that regard for those institutions to get some lower-cost
capital.
Mr. Dingell. Thank you. Mr. Otto?
Mr. Otto. I can give you something later for the record,
but I do think it does follow in on the capital piece. I think
if there are ways we can get capital and make it an incentive
for banks to lend, as you're saying, that would be positive.
But I can get something more specific for you if that's all
right.
Mr. Dingell. It would be appreciated.
Mr. Ross, do you have any comments?
Mr. Ross. Yes, just following up on what Tony indicated, I
think reopening the TARP program but tweaking it a bit would
help by instead of doing a pre-viability, a post-viability
standard. So if the bank, with the injection, provided they can
come up with some coupling capital, be viable, and they have
strong management, I think it has been the hurdle here in
Michigan--in many cases because we were at the front end of the
recession--many of our banks were in a worse off position to
begin with so they couldn't even get into--
Mr. Dingell. You also are in good part dependent on what is
done at the Federal level.
Mr. Ross. We are.
Mr. Dingell. And what do you suggest we should do about
that?
Mr. Ross. Well, I think we have a pretty good working
relationship, quite frankly, but we at the State level at our
agency, try to stake out a very independent position in the
sense that if we don't agree with a finding on a joint
examination, we won't put our name to it. So we try to maintain
our independence, although, we work very closely with our
Federal counterparts.
Mr. Dingell. Gentlemen of the panel, I thank you for your
courtesy. I hope I have not offended any of you.
Chairman Moore of Kansas. I think that brings us to the end
of our hearing today, and I certainly appreciate the panelists
being with us. I want to thank, again, Congressman Gary Peters
for inviting our subcommittee to Michigan for this field
hearing; and I certainly want to thank my good friend,
Congressman Dingell, for participating in this hearing, as well
as Mr. Schauer, for being here. He had to leave for another
engagement, but he did really contribute a lot to our hearing
here today.
I want to thank our witnesses, this panel, and the other
panels, for their testimony today. I believe today's hearing
gives us a better understanding of the challenges facing small
and mid-sized businesses, the urgent need for increased,
prudent lending while keeping depository institutions safe and
sound. I look forward to working with Congressman Peters,
Congressman Dingell, and Congressman Schauer and other Members
of Congress to address these difficult challenges.
The Chair notes that some members may have additional
questions for our witnesses which they may wish to submit in
writing, and if they do, I would ask that the witnesses
respond. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
I think this has been a very productive, educational
experience, this hearing today, a chance to ask some questions
of people who are in a position to give us really good answers,
and I think all of us will think about these things when we go
back to Congress and relate some of what has happened today and
the testimony we have heard from our witnesses today to our
colleagues in Congress.
And I hope that our country moves forward and moves out of
this horrible fiscal economic situation which has hurt not only
our country but our people.
But we are on the mend. I just hope it happens sooner
rather than later because a lot of people are still hurting out
there right now.
Thanks to everybody here today, and we will at this time
adjourn the hearing.
[Whereupon, at 1:50 p.m., the hearing was adjourned.]
A P P E N D I X
November 30, 2009
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