[Senate Hearing 111-260]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-260


THE EFFECTS OF THE ECONOMIC CRISIS ON COMMUNITY BANKS AND CREDIT UNIONS 
                          IN RURAL COMMUNITIES

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         FINANCIAL INSTITUTIONS

                                 of the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING THE EFFECTS OF THE ECONOMIC CRISIS ON COMMUNITY BANKS AND 
                   CREDIT UNIONS IN RURAL COMMUNITIES

                               __________

                              JULY 8, 2009

                               __________

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


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





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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                 Subcommittee on Financial Institutions

                  TIM JOHNSON, South Dakota, Chairman

              MIKE CRAPO, Idaho, Ranking Republican Member

JACK REED, Rhode Island
CHARLES E. SCHUMER, New York         ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   KAY BAILEY HUTCHISON, Texas
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MEL MARTINEZ, Florida
JON TESTER, Montana                  BOB CORKER, Tennessee
HERB KOHL, Wisconsin                 JIM DeMINT, South Carolina
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

               Laura Swanson, Subcommittee Staff Director

         Gregg Richard, Republican Subcommittee Staff Director

                 Charles Yi, Senior Advisor and Counsel

                 Jason Rosenberg, Legislative Assistant

                      Matthew Green, FDIC Detailee

                                  (ii)





                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 8, 2009

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    25

Opening statements, comments, or prepared statements of:
    Senator Crapo
        Prepared statement.......................................    25

                               WITNESSES

Jack Hopkins, President and Chief Executive Officer, CorTrust 
  Bank National Association, Sioux Falls, South Dakota, on behalf 
  of the Independent Community Bankers of America................     2
    Prepared statement...........................................    25
    Responses to written questions of:
        Chairman Johnson.........................................    55
        Senator Kohl.............................................    55
        Senator Crapo............................................    55
Frank Michael, President and Chief Executive Officer, Allied 
  Credit Union, Stockton, California, on behalf of the Credit 
  Union National Association.....................................     3
    Prepared statement...........................................    33
    Responses to written questions of:
        Senator Kohl.............................................    55
        Senator Crapo............................................    57
Arthur C. Johnson, Chairman and Chief Executive Officer, United 
  Bank of Michigan, Grand Rapids, Michigan, on behalf of the 
  American Bankers Association...................................     5
    Prepared statement...........................................    39
    Responses to written questions of:
        Chairman Johnson.........................................    57
        Senator Kohl.............................................    58
        Senator Crapo............................................    59
Ed Templeton, President and Chief Executive Officer, SRP Federal 
  Credit Union, North Augusta, South Carolina, on behalf of the 
  National Association of Federal Credit Unions..................     7
    Prepared statement...........................................    47
    Responses to written questions of:
        Senator Kohl.............................................    60
        Senator Crapo............................................    60
Peter Skillern, Executive Director, Community Reinvestment 
  Association of North Carolina..................................     9
    Prepared statement...........................................    51
    Responses to written questions of:
        Senator Crapo............................................    61

                                 (iii)

 
THE EFFECTS OF THE ECONOMIC CRISIS ON COMMUNITY BANKS AND CREDIT UNIONS 
                          IN RURAL COMMUNITIES

                              ----------                              


                        WEDNESDAY, JULY 8, 2009

                                       U.S. Senate,
            Subcommittee on Financial Institutions,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:38 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Tim Johnson (Chairman of the 
Subcommittee) presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. We had a slight delay in timing of this, 
and I will forego my opening statement in the interest of time. 
I encourage the others to be brief.
    Senator Crapo.
    Senator Crapo. Thank you very much, Chairman. I have an 
opening statement that I can submit for the record as well, so 
following your lead, I will forego my opening statement and 
just thank you for holding this important hearing.
    Chairman Johnson. Senator Tester.
    Senator Tester. Well, since you guys did not have opening 
statements, I will take three times as much time.
    [Laughter.]
    Senator Tester. No. I will also forego my time and look 
forward to see what the panelists say, and I look forward to 
the questions and answers afterwards. Thank you all for being 
here.
    Chairman Johnson. I would like to welcome our witnesses to 
today's hearing. Our first witness is Jack Hopkins on behalf of 
the Independent Community Bankers of America.
    Our second witness is Mr. Frank Michael, President and CEO 
of Allied Credit Union located in Stockton, California, on 
behalf of the Credit Union National Association.
    Our third witness is Mr. Arthur Johnson, Chairman and CEO 
of United Bank of Michigan, from Grand Rapids, Michigan, on 
behalf of the American Bankers Association.
    The next witness is Mr. Ed Templeton, President and Chief 
Executive Officer of SRP Federal Credit Union, in North 
Augusta, South Carolina, testifying on behalf of the National 
Association of Federal Credit Unions.
    Our last witness is Peter Skillern, Executive Director of 
the Community Reinvestment Association of North Carolina.
    I will ask the witnesses please limit your testimony to 5 
minutes. Your full statements and any additional materials you 
may have will be entered into the record.
    Mr. Hopkins, please begin.

   STATEMENT OF JACK HOPKINS, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, CORTRUST BANK NATIONAL ASSOCIATION, SIOUX FALLS, SOUTH 
   DAKOTA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 
                            AMERICA

    Mr. Hopkins. Chairman Johnson, Ranking Member Crapo, and 
Members of the Subcommittee, thank you very much for the 
opportunity to provide you with the community bank perspective 
on the impact of the credit crisis in rural areas. My name is 
Jack Hopkins, and I am President and CEO of CorTrust Bank in 
Sioux Falls, South Dakota. I am testifying on behalf of the 
Independent Community Bankers of America, and I serve on the 
ICBA's Executive Committee. I am a past President of the 
Independent Community Bankers of South Dakota and have been a 
banker in South Dakota for 25 years.
    CorTrust Bank is a national bank with 24 locations in 16 
South Dakota communities and assets of $550 million. Eleven of 
the communities we serve have fewer than 2,000 people. In seven 
of those communities, we are the only financial institution. 
The smallest community has a population of 122 people. 
Approximately 20 percent of our loan portfolio is agricultural 
lending to businesses that rely heavily on the agricultural 
economy. CorTrust Bank is also one of the leading South Dakota 
lenders for the USDA's Rural Housing Service home loan program.
    Mr. Chairman, as we have often stated before this 
Committee, community banks played no part in causing the 
financial crisis fueled by exotic lending products, subprime 
loans, and complex and highly leveraged investments. However, 
rural areas have not been immune from rising unemployment, 
tightening credit markets, and the decline in home prices. We 
believe that, although the current financial crisis is 
impacting all financial institutions, most community banks are 
well positioned to overcome new challenges, take advantage of 
new opportunities, and reclaim some of the deposits lost to 
larger institutions over the last decade.
    A recent Aite study shows that even though some community 
banks are faced with new lending challenges, they are still 
lending, especially when compared to larger banks. In fact, 
while the largest banks saw a 3.23-percent decrease in 2008 net 
loans and leases, institutions with less than $1 billion in 
assets experienced a 5.53-percent growth.
    Mr. Chairman, small businesses are the lifeblood of rural 
communities. We believe small businesses will help lead us out 
of the recession and boost needed job growth. Therefore, it is 
vitally important to focus on the policy needs of the small 
business sector during this economic downturn.
    As I mentioned earlier, most of my commercial lending is to 
small businesses dependent on agriculture. The Small Business 
Administration programs are an important component of community 
bank lending. SBA must remain a viable and robust tool in 
supplying small business credit.
    The frozen secondary market for small business loans 
continues to impede the flow of credit to small business. 
Although several programs have been launched to help unfreeze 
the frozen secondary market for pools of SBA-guaranteed loans, 
including the new Term Asset-Backed Securities Loan Facility--
TALF and a new SBA secondary market facility, they have yet to 
be successful due to the program design flaws and unworkable 
fees. ICBA recommends expanding these programs to allow their 
full and considerable potential.
    Several of my colleagues have told us about the mixed 
messages they received from bank examiners and from policy 
makers regarding lending. Field examiners have created a very 
harsh environment that is killing lending as examiners 
criticize and require banks to write down existing loans, 
resulting in capital losses. Yet policy makers are encouraging 
lending from every corner.
    Some bankers are concerned that regulators will second-
guess their desire to make additional loans, and others are 
under pressure from their regulators to decrease their loan-to-
deposit ratios and increase capital levels. Generally, the 
bankers' conclusions are that ample credit is available for 
creditworthy borrowers. They would like to make more loans, and 
they are concerned about the heavy-handedness from the 
regulators.
    Finally, Mr. Chairman, community bankers are looking 
closely at the regulatory reform proposals. ICBA supports the 
administration's proposal to prevent too-big-to-fail banks or 
nonbanks from ever threatening the collapse of the financial 
system again. Community banks support the dual system of State 
and Federal bank charters to provide checks and balances which 
promote consumer choice and a diverse and competitive financial 
system sensitive to the financial institutions of various 
complexity and size. Washington should allow community banks to 
work with borrowers in troubled times without adding to the 
costs and complexity of working with customers.
    Mr. Chairman, ICBA stands ready to work with you and the 
Senate Banking Committee on all of the challenges facing the 
financial system and how we may correct those issues gone awry 
and buttress those activities that continue to fuel the 
economies in rural areas. I am pleased to answer any questions 
you may have.
    Chairman Johnson. Thanks, Jack.
    Mr. Michael.

   STATEMENT OF FRANK MICHAEL, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, ALLIED CREDIT UNION, STOCKTON, CALIFORNIA, ON BEHALF 
            OF THE CREDIT UNION NATIONAL ASSOCIATION

    Mr. Michael. Chairman Johnson, Ranking Member Crapo, and 
Members of the Subcommittee, thank you very much for the 
opportunity to testify at today's hearing on behalf of the 
Credit Union National Association.
    My name is Frank Michael, and I am President and CEO of 
Allied Credit Union in Stockton, California. Allied is a small 
institution with $20 million in assets and approximately 2,600 
member owners.
    Credit unions--rural, urban, large, and small--did not 
contribute to the subprime meltdown or the subsequent credit 
market crisis.
    Credit unions are careful lenders. As not-for-profit 
cooperatives, our objective is to maximize member service. 
Incentives at credit unions are aligned in a way that ensures 
little or no harm is done to our member owners.
    Rural credit unions are unique in many respects. There are 
nearly 1,500 U.S. credit unions with a total of $60 billion in 
assets headquartered in rural areas.
    Rural credit unions tend to be small--even by credit union 
standards. Over half of the rural credit unions are staffed by 
five or fewer full-time equivalent employees.
    Even in good times, rural credit unions tend to face 
challenges in a way that larger institutions do not. 
Competitive pressures from large multistate banks and 
nontraditional financial services providers, greater regulatory 
burdens, growing member sophistication, and loss of sponsors 
loom large for most of the Nation's small credit unions.
    A bad economy can make things even worse. Small credit 
unions come under tremendous pressure as they attempt to 
advise, consult with, and lend to their members.
    In addition, all credit unions have suffered as a result of 
the effects of the financial crisis of corporate credit unions. 
Despite these substantial hurdles, rural credit unions are 
posting comparatively strong results, and they continue to 
lend. Loans grew by 7 percent in the 12 months ending in March 
compared to a 3-percent decline at all banks.
    There are several concerns raised by small credit unions, 
and rural credit unions in particular, that deserve mention. 
The credit union movement has seen small institutions merge 
into larger credit unions at an alarming pace. And by far, the 
largest contributor to this consolidation is the smothering 
effect of the current regulatory environment.
    Small credit union leaders believe that the regulatory 
scrutiny they face is inconsistent with both their exemplary 
behavior and their nearly imperceptible financial exposure they 
represent. A large community of credit unions, free of 
unnecessary regulatory burden, would benefit the public at 
large and especially our rural communities.
    As the Subcommittee considers regulatory restructuring 
proposals, we strongly urge you to continue to keep these 
concerns in the forefront of your decision making. Moreover, we 
implore you to look for opportunities to provide exemptions 
from the most costly and time-consuming initiatives to 
cooperatives and other small institutions.
    As noted above, credit unions have generally continued to 
lend while many other lenders have pulled back. This is 
certainly true in the business lending arena. Currently, 26 
percent of all rural credit unions offer member business loans 
to their members. These loans represent over 9 percent of the 
total loans in rural credit union portfolios. In contrast, 
member business loans account for less than 6 percent of all 
total loans in the movement as a whole. Total member business 
loans at rural credit unions grew by over 20 percent in the 
year ending March 2009, with agricultural loans increasing by 
over 12 percent. Agricultural loans at rural credit unions now 
account for over one-third of the total member business loans. 
This is strong evidence that rural credit unions remain ``in 
the game'' during these trying times. But more could be done.
    And more should be done. A chorus of small business owners 
complains that they cannot get access to credit. Federal 
Reserve surveys show that the Nation's large banks tightened 
underwriting standards for the better part of the past year, 
and SBA research shows that large bank consolidation is making 
it more difficult for small businesses to obtain loans.
    The chief obstacle for credit union business lending is the 
statutory limits imposed by Congress in 1998 under which credit 
unions are restricted from member business lending in excess of 
12.25 percent of their total assets. This arbitrary cap has no 
basis in either actual credit union business lending or safety 
and soundness considerations. Indeed, a report by the U.S. 
Treasury Department found that delinquencies and charge-offs 
for credit union business loans were much lower than those of 
banks.
    While we support strong regulatory oversight of how credit 
unions make member business loans, there is no safety and 
soundness rationale for the current law which restricts the 
amount of credit union business lending. There is, however, a 
significant economic reason to permit credit unions to lend 
without statutory restriction, as they were able to do prior to 
1998.
    A growing list of small business and public policy groups 
agree that now is the time to eliminate the statutory credit 
union business lending cap. We urge Congress to eliminate the 
cap and provide NCUA with the authority to permit a credit 
union to engage in business lending above 20 percent of assets 
if safety and soundness considerations are met. If the cap were 
removed, credit unions could safely and soundly provide as much 
as $10 billion in new loans for small businesses within the 
first year. This is an economic stimulus that would truly help 
small business and not cost the taxpayers a dime.
    In conclusion, Chairman Johnson and Ranking Member Crapo, 
and all the Members of the Subcommittee, we appreciate your 
review of these issues today.
    Chairman Johnson. Thank you, Mr. Michael.
    Mr. Johnson.

 STATEMENT OF ARTHUR C. JOHNSON, CHAIRMAN AND CHIEF EXECUTIVE 
 OFFICER, UNITED BANK OF MICHIGAN, GRAND RAPIDS, MICHIGAN, ON 
           BEHALF OF THE AMERICAN BANKERS ASSOCIATION

    Mr. Johnson. Chairman Johnson, Ranking Member Crapo, and 
Members of the Subcommittee, my name is Art, and I am the 
Chairman and CEO of United Bank of Michigan, and I am the 
Chairman-Elect of the American Bankers Association. I am 
pleased to share the banking industry's perspective on banking 
and the economy in rural America.
    Community banks continue to be one of the most important 
resources supporting the economic health of rural communities. 
Not surprisingly, the banks that serve our Nation's small towns 
also tend to be small community banks. Less well known is that 
over 3,500 banks--41 percent of the banking industry--have 
fewer than 30 employees. These banks understand fully the needs 
of their customers and their community.
    This is not the first recession faced by banks. Most banks 
have been in their communities for decades and intend to be 
there for many decades to come. My bank was chartered in 1903. 
We have survived the Great Depression and many other ups and 
downs for over a century. And we are not alone. Over 2,500 
banks--nearly one-third of the industry--have been in been in 
business for more than a century. These numbers tell a dramatic 
story about the staying power of community banks and their 
commitment to their communities. We cannot be successful unless 
we develop and maintain long-term relationships and treat our 
customers fairly.
    In spite of the downturn, community banks in rural 
communities expanded lending by 7 percent since the recession 
began. Loans made by banks that focus on farmers and ranchers 
also increased by 9 percent.
    Considerable challenges remain, of course. In my home State 
of Michigan, for example, we are facing our eighth consecutive 
year of job losses. Other rural areas with manufacturing 
employment bases are also suffering similar problems. In this 
environment, businesses are reevaluating their credit needs 
and, as a result, loan demand is declining. Banks, too, are 
being prudent in underwriting, and our regulators demand it. 
Accordingly, it is unlikely that loan volumes will increase 
this year.
    With the recession, credit quality has suffered and losses 
have increased. Fortunately, community banks entered this 
recession with strong capital levels. However, it is very 
difficult to raise new capital today. Without access to 
capital, maintaining the flow of credit in rural communities 
will be increasingly difficult.
    We believe the Government can take action to help viable 
community banks weather the current downturn. The success of 
local economies depends on the success of these banks. 
Comparatively small steps now can make a huge difference to 
these banks, their customers, and their communities--keeping 
capital and resources focused where they are needed most.
    Importantly, the amount of capital required to provide an 
additional cushion for all community banks--which had nothing 
to do with the current crisis--is tiny compared to the $182 
billion provided to AIG. In fact, the additional capital needed 
is less than $3 billion for all smaller banks to be well 
capitalized, even under a baseline stress test. Simply put, 
capital availability means credit availability.
    In addition to providing avenues for new capital for 
community banks, we believe there are three key policy issues 
that deserve congressional action: one, creating a systemic 
regulator; two, providing a strong mechanism for resolving 
troubled systemically important firms; and, three, filling gaps 
in the regulation of the shadow banking industry.
    The critical issue in this regard is ``too-big-to-fail.'' 
This concept has profound moral hazard implications and 
competitive effects that need to be addressed. In an ideal 
world, no institution would be ``too-big-to-fail,'' and that is 
ABA's goal.
    While recent events have shown how difficult that is to 
accomplish, whatever is done on the systemic regulator and on a 
resolution system should narrow dramatically the range of 
circumstances that might be expected to prompt Government 
action. These actions would address the causes of the financial 
crisis and constitute major reform. We believe there is a broad 
consensus in addressing these issues.
    I would be happy to answer any questions that you may have.
    Chairman Johnson. Thank you, Mr. Johnson.
    Mr. Templeton.

   STATEMENT OF ED TEMPLETON, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, SRP FEDERAL CREDIT UNION, NORTH AUGUSTA, SOUTH 
  CAROLINA, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL 
                         CREDIT UNIONS

    Mr. Templeton. Good afternoon, Chairman Johnson, Ranking 
Member Crapo, and Members of the Subcommittee. My name is Ed 
Templeton, and I am here testifying today on behalf of the 
National Association of Federal Credit Unions. I am President 
of SRP Federal Credit Union in North Augusta, South Carolina.
    NAFCU and the entire credit union community appreciate the 
opportunity to participate in this discussion regarding how the 
economic crisis has impacted America's credit unions serving in 
rural communities.
    While credit unions have fared better than most financial 
institutions in these turbulent times, many have been impacted, 
through no fault of their own, by the current economic 
environment. Credit unions were not the cause of the current 
economic downturn, but we believe we can be an important part 
of the solution. Surveys of NAFCU member credit unions have 
shown that many are seeing increased demand for mortgage and 
auto loans as other lenders leave the markets. Credit unions 
have seen small businesses that have lost credit from other 
lenders turning to credit unions for the capital that they 
need.
    Credit unions are meeting those needs specifically in rural 
areas. NCUA data shows that credit unions have seen a growth in 
the percentage of the total amount of credit union farm loans 
for the last nine consecutive quarters. Additionally, the most 
recent HMDA data shows that credit union mortgage loans to 
Native Americans increased over the previous year and that 
credit unions had a higher percentage of approved loans--75.3 
percent--than any other type of financial institution.
    Throughout the country, small credit union roundtables have 
emerged and engaged in discussions about operations with like 
institutions. Larger credit unions also serve as partners for 
the smaller ones and perform functions from shared branching to 
back-office operations.
    Credit unions are the most regulated of all financial 
institutions, facing restrictions on who they can serve and 
their ability to raise capital, among a host of other 
limitations. There are small statutory steps Congress can take 
to enhance the ability of credit unions to serve their members, 
such as:
    First, removal of the arbitrary credit union member lending 
cap. The Credit Union Membership Access Act established an 
arbitrary cap on credit union member business lending of 12.25 
percent in 1998. Many credit unions have available capital that 
other lenders do not have in this environment, but are hampered 
by this arbitrary limitation. We are pleased that Senator 
Schumer has indicated that he plans to introduce legislation to 
remove this arbitrary cap, and we urge the Subcommittee to 
support these efforts.
    Second, underserved areas. As the Subcommittee may be 
aware, many rural areas are also underserved. Credit unions can 
play an important role in these communities. The 1998 Credit 
Union Membership Access Act gave the NCUA the authority to 
allow Federal credit unions to add underserved areas to their 
fields of membership; however, the language was unclear as to 
what types of charters can add underserved areas. NCUA believes 
that addressing this issue through legislation would clear up 
this ambiguity, allowing all Federal credit unions to add 
underserved areas to their fields of membership.
    Before wrapping up, I would like to make a few comments on 
the issue of regulatory reform. As not-for-profit member-owned 
cooperatives, credit unions are unique institutions in the 
financial services arena. We believe that the NCUA should 
remain an independent regulator of credit unions and are 
pleased to see that the administration's proposal would 
maintain the Federal credit union charter and an independent 
NCUA.
    NAFCU supports the creation of a Consumer Financial 
Protection Agency that would have authority over nonregulated 
institutions that operate in the financial services 
marketplace. However, we do not support extending that 
authority to federally insured credit unions, given that the 
CFPA has authority to regulate, examine--or would have 
authority to regulate, examine, and supervise credit unions 
that are already regulated by the NCUA, which would add an 
additional burden and cost to credit unions.
    Recognizing that more should be done to help consumers, we 
propose that each functional regulator establish or strengthen 
a new office on consumer protection. We believe that such an 
approach would strengthen consumer protection while not adding 
unnecessary regulatory burdens on our Nation's credit unions. 
We are pleased to see that NCUA Board Chairman Mr. Michael 
Fryzel recently announced the creation of such an office at 
NCUA.
    In conclusion, the current economic crisis is having an 
impact on credit unions in rural areas, but we are continuing 
to serve our members well. As an illustration, we at SRP 
Federal Credit Union are actually expanding at this time into 
one of the most rural areas within our field of membership. We 
are about to break ground on a new branch in Allendale County, 
South Carolina. The county has a population of 10,477 and an 
unemployment rate of 22.1 percent.
    We urge the Subcommittee to support efforts to remove the 
credit union member business lending cap and to clarify the 
ability of credit unions of all charter types to add 
underserved areas. Finally, while there are positive aspects to 
consumer protection in regulatory reform, we believe that 
Federal credit unions continue to warrant an independent 
regulator that handles both safety and soundness and consumer 
protection matters.
    I thank you for the opportunity to appear before you today 
on behalf of NAFCU and our country's credit unions, and I would 
welcome any questions you may have.
    Chairman Johnson. Thank you, Mr. Templeton.
    Mr. Skillern.

  STATEMENT OF PETER SKILLERN, EXECUTIVE DIRECTOR, COMMUNITY 
           REINVESTMENT ASSOCIATION OF NORTH CAROLINA

    Mr. Skillern. Thank you, Senator Johnson, for the 
opportunity to testify today on lenders, consumers, and the 
economy in rural areas. I am Peter Skillern, Executive Director 
of the Community Reinvestment Association of North Carolina. We 
are a nonprofit community advocacy and development agency.
    North Carolina has strong rural and banking sectors. 
Eighty-five of our 100 counties are rural and 50 percent of our 
population live in them. We have 106 credit unions and 106 
banks, ranging from the largest in the country, Bank of 
America, down to Mount Gilead Savings and Loan at $9.8 million.
    The current economic stresses for our rural communities and 
small financial institutions are significant, and they are best 
understood in the context of two long-term trends: one is a 
decline in the rural economy, and two is the consolidation of 
the financial sector. And our policy recommendations focus on 
two issues: one is the financial regulatory reform to provide 
greater consumer protections and stability; and two is the 
investment needed in our rural communities for recovery and 
growth--in particular, through the Neighborhood Stabilization 
Program.
    Rural Economies are in long-term decline. In North 
Carolina, the unemployment rate is the fifth highest in the 
country, but our rural communities are taking it even harder. 
The rates in 19 counties range between 14 and 17 percent. But 
these rates are years in the making. Rural North Carolina did 
not recover from the 2001 recession. From 2002 to 2008, rural 
counties lost more than 100,000 jobs in the manufacturing 
sector of textiles, apparel, furniture, and automobiles. 
Changes in tobacco and the agricultural sector have reduced the 
number of small farms. Tobacco farms have dropped by 70 percent 
since 2002. Forty of our rural counties lost population. These 
long-term trends, in combination with the credit crisis and 
recession, have contributed to an estimate 31,000 foreclosures 
in rural North Carolina. That is more than in the urban areas.
    Small banks also face challenges in the consolidation of 
the financial sector. During this crisis, a number of small 
banks across the Nation have failed, but far more have been 
lost through consolidation. Nationally, the number of banks 
with under $100 million in assets dropped by more than 5,000 
from 1992 to 2008. In North Carolina, rural counties hold 50 
percent of the population and 50 percent of bank branches, and 
only 16 percent of the deposit base. Nationally, approximately 
4,000 small banks accounted for less than 2 percent of the 
national mortgage activity.
    By contrast, the consolidation of assets and market share 
of megabanks has increased. In 1995, the top five banks had 11 
percent of the deposit share; today, they have nearly 40 
percent. In the first quarter of 2009, 56 percent of mortgage 
activity was conducted by just four lenders.
    Small banks are at a competitive disadvantage in terms of 
efficiencies, pricing products, and geographical service areas, 
and consolidation will continue in the foreseeable future. This 
is a problem.
    As a rule, small banks and credit unions avoided subprime 
credit and provided stability and diversification in the 
financial sector. Without smaller institutions, many areas 
would go completely unserved. Banking policy and regulatory 
oversight should proactively support small banks and credit 
unions as essential to the local economic ecology of credit and 
commerce.
    Financial reform will help consumers, lenders, and the 
rural communities. Consumers in rural and urban areas face 
similar lending abuses. Rural areas had a higher percentage of 
subprime high-cost loans than urban areas. Rural areas have a 
high rate of refund anticipation loans, and payday lenders are 
prevalent in the rural areas of the 35 States that allow this 
usurious type of lending. Consumers need better protections 
from unsound and unscrupulous lending practices, and if so 
provided, our economy would be safer as well. Our financial 
sector would be better.
    Our agency is supportive of President Obama's 
recommendation for the Consumer Financial Protection Agency 
Act. We support the CRA Modernization Act, H.B. 1492. And faced 
with a rising tide of foreclosures and insufficient loan 
modification programs, we ask the Senate to reconsider and 
favorably pass a loan judicial modification bill. We support 
reforms for greater oversight and capital requirements to 
mitigate the risk of megabanks.
    Finally, please invest in our rural communities. Although 
the problems created by the financial crisis and recession are 
felt by every community and the solutions needed are national 
in scope, it would be a mistake to assume that urban and rural 
communities will shake off the recession with the same speed. 
The long-term challenges for small banks and rural communities 
are systemic as well as cyclical. Unless we invest in 
rebuilding these communities, no banks of any size will thrive.
    Please expand the Neighborhood Stabilization Program both 
in scale of funding and in scope to include rural areas. NSP 
funds are to revitalize foreclosed properties and to rebuild 
distressed communities. But no rural areas receive NSP funds 
because the needs test emphasizes concentration. Yet in 23 
States, such as North Carolina, in the aggregate there are more 
foreclosures in rural area than urban areas. More funding is 
needed given the need in both urban and rural areas.
    The future for rural communities and banks is brighter if 
we recognize and act on the need for financial regulatory 
reform and investment in our communities. Thank you very much 
for your attention.
    Chairman Johnson. Thank you, Mr. Skillern.
    A question for Mr. Hopkins and Mr. Johnson. In May, the 
FDIC decided to place a special assessment to rebuild the 
Deposit Insurance Fund on assets instead of deposits, largely 
because of concerns raised by small banks that they were being 
unfairly affected by the irresponsible behavior of larger 
banks.
    Is the FDIC's change a good thing for your institutions? Do 
you have any concerns about this change? Mr. Hopkins.
    Mr. Hopkins. Obviously, we were very supportive of the 
change. We have long held that it is the assets of a bank that 
create the risk, and not the deposits. And, therefore, the 
risks should be associated with the assets of the bank. It is 
giving credit for the higher capital levels, so from the 
standpoint of a community bank where its assets are on the 
books and its liabilities are primarily core deposits and not 
other sources of liquidity, be it commercial paper or other 
borrowings, we think it was appropriate, and it has been very 
positive for community banks.
    Chairman Johnson. Do you have any concerns?
    Mr. Hopkins. Do I have any concerns?
    Chairman Johnson. Yes.
    Mr. Hopkins. I would ask that they consider using that base 
for the deposit insurance premium going forward.
    Chairman Johnson. Mr. Johnson.
    Mr. Johnson. I do have some concerns. It seems to me that 
this is a change that has the potential to have a rather 
profound public policy impact going forward and should be 
something that is considered very carefully. And I think it 
should be considered in the context of the solutions that the 
Congress is seeking for the ``too-big-to-fail'' issue and the 
systemically important institutions, these systemically 
important institutions are--some of whom are depository 
institutions, and some of which are not. And as you consider 
what you are going to do with them, what is going to be the 
resolution for future problems with systemically important 
firms, both depositories and nondepositories, presumably there 
will be a consideration of how the cost of that resolution is 
going to be considered and solved. And I think to tackle the 
assessment base and the FDIC fund prior to dealing with the 
solution to the funding of resolution of systemically important 
firms, both depositories and nondepositories, would be 
premature.
    Chairman Johnson. Thank you.
    A question for Mr. Hopkins, Mr. Michael, Mr. Johnson, and 
Mr. Templeton. Mr. Skillern's testimony said that in North 
Carolina there is a higher percentage of subprime mortgages in 
rural areas than urban areas although the actual volume is 
lower. Do you find that this is true in the areas your 
institutions serve? Are you finding that those homeowners with 
subprime mortgages in your areas are underwater? Are existing 
loan modification programs useful to you in helping these 
homeowners? Mr. Hopkins.
    Mr. Hopkins. I would say that we do not have the issues 
with the subprime mortgages in South Dakota and, in general, 
most of the rural areas of the Midwest. I think it was more of 
a conservative lending philosophy, and we did not have a lot of 
the mortgage brokers in our areas. Those that we have had have 
come in to us, and we did not have the rapid increases in the 
home valuations as seen in some of the more urban areas of 
California, Nevada, Florida, Michigan, and some of those 
areas--Michigan, I take that back, has not had the rapid rise. 
But some of these other areas that have had the rapid rise, 
therefore, they have been easier to refinance into conventional 
mortgages when they have come in. And we have used the loan 
modification program for those that have come in and have found 
it to be successful to this point.
    Chairman Johnson. Mr. Michael.
    Mr. Michael. Well, I am from Stockton, California. Home 
values in Stockton are down 63 percent from the peak. They are 
down 37 percent in the last 12 months, and they are still 
declining. Yes, subprime mortgages, 0 percent down mortgages, 
clearly contributed significantly to our problems.
    We are finding, as I work with my members, that many--the 
credit unions did not originate these loans. We did not--we 
always, as lenders, have been originating generally for our own 
portfolios, which means the ones that were really originating 
these loans were those that were originating to sell and 
looking for the fee income that came with that. Credit unions 
generally portfolio their own loans as part of the process, so 
I am dealing with members who are coming to me today trying to 
deal with other lenders in this process and other servicing 
companies.
    We are finding in my conversations with my particular 
members that the lenders are slow on the modification process. 
I am hearing from those that are working in the real estate 
industry working with individuals and doing modifications, and 
even short sales, that those institutions trying to process 
modifications are not geared up at this time to processes 
effectively, and the delays are substantial and the results are 
generally not positive.
    Chairman Johnson. Mr. Johnson.
    Mr. Johnson. In our bank, we are having some elevated 
levels of delinquency and foreclosures within our bank, but 
they are all driven by employment issues rather than by product 
issues. We did not make any subprime or high-risk mortgages.
    We have 11 offices, and eight of them are in rural 
communities, and it would be my observation that--well, the 
administration has stated that 94 percent of high-risk 
mortgages were made by nondepository institutions, and my rough 
observation of what is going on in our marketplace, including 
our rural offices, is that that percentage is even higher than 
that because the community banks in our area simply were not 
making those types of mortgages.
    I can tell you that in our office with our own customers, 
we are working very diligently with them to keep those families 
in their homes wherever it is remotely possible to do so and 
are having a fair amount of success with that.
    We are having our customers who opted within the last few 
years to obtain a mortgage from one of the many mortgage 
brokers, mortgage originators that are in our entire 
marketplace, simply to have a lower monthly payment, they are 
now coming in to us and seeing whether or not they can get a 
solution to keep themselves in their home. And we are 
successful in about 20 percent of those cases to be able to get 
them refinanced into a conventional mortgage product. 
Unfortunately, I do not always know what happens to the other 
80 percent.
    Chairman Johnson. Mr. Templeton.
    Mr. Templeton. We have seen some of the things more similar 
to what the gentleman from South Dakota was saying. We just did 
not see a big inflow into our marketplace of lenders who were 
offering loans that just didn't make good sense, and I think 
primarily because we didn't see extreme home value rises over 
the past 2 or 3 years in our marketplace. It was a more 
reasonable rise, which I think led to people searching for more 
reasonable loans.
    Now, that said, we have certainly had foreclosures. We have 
had modifications that we have done. But I am not sure that I 
am--I am not aware of any loan that specifically was a result 
of some type of egregious act, where somebody put somebody in 
an interest-only loan or something like that. All we have been 
seeing is the normal re-fis that people are going through 
because of the market that we are in.
    Like the gentleman from South Dakota, we did not originate 
the sales, so every loan we made through last year is currently 
in a portfolio. This year, we are originating some for sale, 
but they are what everybody would call a conforming, main-
stream type of loan.
    I would go one step further to say one thing as concerns 
the rural areas. In our market, anyway, those brokers weren't 
interested in the rural areas because those homes were not 
homes that they could sell as a package to anybody. There was 
no appreciation in values. They were--before we invented the 
phrase subprime mortgage, you go back 4 or 5 years ago, if you 
think about what you would call a subprime home or subprime 
mortgage, it was an inexpensive home on a dirt street that 
needed painting and that is what a lot of the homes in our 
rural communities are and we lend to a lot of those people. So 
that is what we call internally our subprime, because nobody 
else will touch a home like that, but that is what we do and 
that is what we are about.
    And consequently, we are not suffering in our community 
from a serious issue with egregious lending. Maybe some are 
there, I am just not aware of it, but I stay pretty close with 
the community. Thank you very much.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, and I 
want to commend all of our witnesses for very capably 
explaining the important role that community banks play in our 
rural communities as well as throughout our economy.
    I am going to use my time today to focus on the 
administration's Consumer Financial Protection Agency, and Mr. 
Johnson, I will focus on you, but I welcome comments or 
responses to my question from anybody else on the panel. The 
issue I have is that I think in our effort to find the right 
balance between protecting consumers from abusive products and 
practices while promoting responsible lending to spur economic 
growth to help get our economy moving again, we need to get it 
right with regard to consumer protection. And to me, at least, 
the case has not been adequately made that we should bifurcate 
consumer protection from safety and soundness regulation.
    I know there are some recent articles that have come out 
with regard to Fannie Mae and Freddie Mac with some of those 
who are very prominent in the current management of them who 
indicated that the bifurcation of consumer protection and 
safety and soundness regulation with our GSEs was, in fact, one 
of the problems that helped us get into trouble with regard to 
Fannie Mae and Freddie Mac. The administration's proposal would 
have sole rulemaking authority for consumer financial 
protection statutes, as well as the ability to fill gaps 
through rulemaking, placed in this one single new agency to be 
created.
    I guess the question I would like to toss out, really to 
the whole panel but start with you, Mr. Johnson, is has the 
case been made that bifurcating the protections from prudential 
supervision is the best option to protect consumers from 
abusive practices and products?
    Mr. Johnson. Well, I think that it has not been made, and 
at least in my mind, it will be very difficult to make that. I 
think in addition to the commentators about Freddie Mac and 
Fannie Mae, I believe that Sheila Bair has made similar 
comments that for the FDIC, that it would be a mistake to 
divide prudential regulation from consumer protection and 
compliance into more than one agency.
    It strikes me that knowing something--that there are two 
elements here, and for each element to do their job correctly, 
they need to know something about what is going on in the other 
piece and that would be, it strikes me, it would be very 
difficult to accomplish when it is two completely different 
agencies that have two completely different missions.
    It seems to me, as I mentioned before, that the fact of the 
matter is that 94 percent of the high-risk lending that has 
gotten us into much of what our current problem is occurred in 
nondepository institutions. Clearly, we need to focus on the 6 
percent, but probably we don't need to overhaul the entire 
system to deal with 6 percent. But we shouldn't forget about 
dealing with the 94 percent, and that is what I am afraid we 
are doing here.
    My bank is a State-chartered nonmember bank, and what that 
means is that we are regulated by our State regulator, the 
Office of Financial and Insurance Regulation, and a Federal 
regulator, the FDIC. These are both very strong, competent 
regulatory agencies. Each of them takes their responsibilities 
for regulating us and all the other State banks in Michigan, 
regulating both our compliance, consumer protection, and our 
safety and soundness operations, they take it very seriously 
and it is a system that works very well.
    I think, in fact, it is a model that should be strongly 
considered when we deal with the 94 percent, a strong, 
competent, well-funded State regulator as well as a strong, 
competent, well-funded Federal regulator. And I might add that 
when I talk about funding in both of those instances, in our 
case in Michigan, it is our industry that funds that through 
either FDIC premiums or examination fees for a State regulator.
    Senator Crapo. Thank you. Let us just start over here, if 
any of the other members of the panel want to speak. We just 
have a couple more minutes in my timeframe, so please try to be 
as succinct as you can. But if you would like to make a 
comment, please do.
    Mr. Hopkins. Thank you. I would just echo that I would 
agree with Mr. Johnson. The one thing to keep in mind, also, is 
that the examiners are coming in from--and I have had an OCC 
examined bank and FDIC--they are very well trained. They are 
certified. They have to take a lot of testing. They take it 
very serious, and I can tell you, after 25 years of banking, 
when they come in, they are very prepared to make examinations 
and they can be harsh if you don't follow the rules to the 
letter of the law.
    So I would agree that that 6 percent that is unregulated 
needs to find a place to be regulated, whether that is an 
additional arm through this new agency or through the FTC. I 
think there is opportunity there. But I think that the banking 
regulators do an adequate job.
    Senator Crapo. Mr. Michael.
    Mr. Michael. I generally concur with the statements that 
were made. Clearly, there are consumers that need protection 
that are not receiving it right now and there is a need to 
extend protection to those individuals and we need to find a 
way to do it. But we are very heavily regulated as it is right 
now and adding an additional layer of regulation would be very 
problematic. As an example, it would lead to dual examinations 
for my credit union from both Consumer Protection Agency and my 
prudential regulator. I would recommend that we look at using 
the current prudential regulators to provide that type of 
examination and supervision.
    Senator Crapo. Thank you. Mr. Templeton.
    Mr. Templeton. Thank you, sir. Actually, our Federal 
regulator, the NCUA, has already put the first foot forward. 
They have already created that office internal to our 
regulator, so we are moving toward consumer protection within 
the prudential regulator. And as the gentleman said, I think 
when you are talking about federally insured depository 
institutions, the regulators are in place to take care of 
safety and soundness and also financial consumer protection 
within that. They know the businesses. It is one more element. 
It will be very cost effective. You are not going to have a big 
education curve. You are not going to have a training curve. 
But more importantly, you are not going to have one hand 
saying, do something, and another hand over here saying, do 
something different, which could very easily be in contrast 
with each other. The nondepository institutions, I think that 
is a whole another ballgame, though. Thank you.
    Senator Crapo. Thank you. Mr. Skillern.
    Mr. Skillern. I would concur with the bankers that, in 
general, the small banks are well regulated by both their State 
and primary regulators. I would also disagree, though, that the 
Federal regulators have done their job well currently. 
Countrywide, Washington Mutual are both regulated by the OTS. 
Their subprime predatory lending harmed consumers and collapsed 
their banks. Wachovia, a national bank regulated by the OCC, 
crashed itself on exotic mortgage lending. The Federal Reserve 
has failed to enforce its rules. I am currently in a fight with 
the OCC to enforce the rules on Santa Barbara Bank and Trust 
around their refund anticipation loan loss. It is just not 
happening.
    So the Federal regulators have lost credibility on their 
willingness and ability to enforce the existing consumer laws. 
I do believe that a separate agency with that focus brings 
standardization of how those rules are applied, can expand it 
to those agencies that are not covered, and hopefully try to 
reduce the seemingly conflict of interest that the existing 
Federal regulators have of enforcing consumer laws.
    Senator Crapo. Thank you. My time is up. Thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. Thank you very 
much for holding this hearing. It is very timely, at least from 
my perspective, coming from Colorado, where we have had a bank 
failure in rural Colorado, in Weld County that I wanted to talk 
to you about a little bit. I want to thank everybody here for 
your testimony. I think it is a very good reminder that we need 
to be very careful about how we think about our financial 
institutions in this country because they are not all the same 
and not all of them contributed to the situation that we now 
find ourselves in.
    With respect to ``too-big-to-fail,'' which people have 
talked about, from the point of view of the people living in 
Northeast Colorado who lost what to many people would seem was 
a very small bank, that bank was too big to fail for them. It 
has affected the entire region, because commodity prices are 
where they are, in this case particularly dairy prices. It has 
become incredibly hard to find replacement credit for the 
farmers and for the ranchers that are there.
    I wonder--we have asked the people administering the TARP 
whether or not they are taking into account those sorts of 
circumstances as they think about the distribution of the TARP 
money, and I wonder if any of you have a perspective on how 
well or how poorly TARP is being administered when it comes to 
small banks, to rural banks, community banks. The application 
process is an onerous one. The requirements for deposits are 
tough. I am just curious whether you think we are getting done 
what we need to get done with respect to TARP.
    Mr. Johnson. Why don't you go ahead?
    Mr. Hopkins. Thank you. In my opinion, the TARP has helped 
to pick winners and losers. The big banks, particularly the 
largest 19, have all been chosen as winners in this game, 
because even though they were technically broke, they have been 
bailed out. The smaller community banks, if you were not a one 
or two rated with a CAMELS rating in the bank, you cannot 
qualify for the funds, and that does make that kind of an 
unfair advantage of being to the large banks.
    So I do know of a couple of banks that have had some 
financial difficulties around the country because of the areas 
they are located in and they have applied for the funds and 
been denied because the credit quality in that area is 
difficult. And obviously raising private capital in today's 
market is difficult.
    Senator Bennet. Mr. Johnson.
    Mr. Johnson. To some degree, we are kind of guessing about 
what the criteria are and how the process goes because it has 
never been made public exactly what the criteria is to 
determine at Treasury and at the agencies in terms of their 
recommendation to Treasury and then Treasury's decision about 
who is going to be approved for CPP money under the TARP 
program and who isn't. So that is problematic to begin with.
    But beyond that, it is our contention that there--like 
there are many, many viable homeowners that we should take 
action to save them and keep them in their homes and banks are 
working with small businesses and with farmers to determine who 
are those viable small businesses and who are the viable 
farmers so that we can do whatever we can to keep them in 
business, so should the Treasury and the Federal regulators of 
depository institutions work very hard at determining who are 
the viable banks and make sure that they have access to capital 
so that we close no more banks than we need to.
    Now, clearly, there are going to be banks that fail and 
there will be others that will fail. But only the ones that 
deserve to fail should be the ones that fail, and if there are 
viable banks that are not being, through accounting treatment 
and through regulatory fiat that was designed in a different 
time and place and isn't as applicable in today's world as it 
should be, the regulators have the capability, I believe, of 
making management assessments and determining who are the 
viable banks and I believe that they should have access to that 
capital.
    Senator Bennet. Does anybody else have a comment? Mr. 
Michael.
    Mr. Michael. Senator Bennet, just a reminder. The credit 
unions have never had access to the TARP funds, although there 
have been some credit unions that expressed a need to have 
access. But we have been locked out of that opportunity. So we 
can't comment on the process, other than the fact that we are 
outside looking in.
    Senator Bennet. It would seem to me--that is an interesting 
point, Mr. Johnson, on the criteria question, because one of 
the questions that I have had for the administration is 
shouldn't we take into account the fact that you may have a 
financial institution--with respect to TARP, a financial 
institution failing in a region and there simply not being any 
credit available as part of the way we approach this question, 
because there is simply no place for anybody to go, at least in 
that part of my State.
    I want to ask you about modifications. You talked earlier 
about home mortgage loan modifications. Are you seeing--these 
are people that are still paying on their loans but may not 
have the income that they had before because they are 
unemployed. Is that the issue, rather than their home value 
falling in these regions below what it once was worth?
    Mr. Johnson. Well, we don't have--we have home values that 
are falling, but we never had big run-ups in values in the 
past. So that is--there are some areas of the country where 
perhaps if a loan is seasoned 5 or 7 years, it may have dropped 
20 percent. But it probably went up more than that over that 
period of time. So if they didn't releverage that home, they 
are probably in a position where they could refinance, and that 
is a problem in Michigan, because we never had that big run-up 
and yet we have still had the big run-down.
    We basically have two types of mortgages. We do originate 
mortgages that we sell to Freddie Mac, although we retain 
servicing on all of those mortgages, so the point of contact 
for our customer is still us. Now, we have to follow the 
Freddie Mac guidelines when we are dealing with delinquencies, 
nonpayment in that portfolio and that is precisely what we do. 
We are working very hard to figure out what those guidelines 
are and are following them and have done a good number of 
modifications that are now moving into the second, third month 
of that program and I think we are going to be saving quite a 
few of those folks.
    But we also have portfolio loans, where we were making 
loans that did not, for one reason or another, fit in a box 
with Freddie Mac. And frankly, our approach on those is a 
rather tried and true one that has worked for us, for our bank, 
for all the time that I have been there, which is some 40 
years, and that is if this home is going to be foreclosed upon, 
we are then going to have to go through a fairly expensive 
phase where we get an appraisal. We have to get the folks out 
of the house. They have some recourse to extend that period of 
time. But ultimately, we then get possession of the home. We 
have the problem where the folks have probably not been taking 
very good care of it for the past several months since they are 
going to leave, so the value of the home further goes down. We 
have an unoccupied home in a market that is filled with 
unoccupied homes at that point.
    So very often, the best thing for us to do is essentially 
sell that house back to the people that already live there. The 
house is worth what it is worth, and if that means that we take 
a loss, then we take a loss. We are going to take a loss if we 
sell it to somebody else, so we might just as well recognize 
what the value of that home is, and if that family can make a 
payment based upon that new valuation, then that is the way we 
proceed.
    Everybody wins. The value of the house is higher than it 
would have been if it had been vacant for 6 months and we keep 
the folks in the home and we keep a customer on our books.
    Senator Bennet. Thank you, Mr. Chairman. Thank you very 
much for your testimony.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I want to 
thank all of you for very good testimony and would reiterate 
what everyone has said. I think having people like you here 
that represent the type of banks that most of us know well 
throughout the country is a very good thing, and again, your 
testimony has been outstanding.
    Mr. Johnson, I want to say that as head of the ABA, I very 
much appreciated your comments about the administration's 
proposal on too big to fail and I certainly hope that you all 
will weigh in. It is pretty evident to me that what they have 
laid out is they want to continue business as it has been over 
the last year and basically codifying TARP so that they can 
decide on an ad hoc basis which firms will succeed and which 
will not, and I certainly hope you all will weigh in and 
certainly appreciate the comments you made in that regard.
    I want to change tracks just a little bit, because I think 
our fellow colleagues here have asked some wonderful questions 
and you all have highlighted numbers of things. We have not had 
a hearing here on Fannie and Freddie in a year. It is pretty 
amazing, actually. One of the organizations doesn't have a CEO. 
The trillions of dollars of assets, I mean, it is just an 
amazing thing that this Banking Committee has not had a hearing 
there.
    The former Treasury Secretary had some thoughts about what 
ought to happen to Fannie and Freddie, and again in this 
regulation proposal, Fannie and Freddie aren't even addressed, 
OK. There are some people in the country that would like to see 
Fannie and Freddie go away and think for the Federal Government 
to be in this kind of business is not a good thing.
    I see that you guys have these core deposits that are very 
important to you, and yet the residential industry is basically 
almost off limits because we have these huge GSEs that 
basically everybody funnels 30-year mortgages into. I am 
wondering, in your own communities, and I will ask Mr. Hopkins 
first, what would be--if these entities did not exist, how 
would community bankers feel about that? Would that be a huge 
opportunity for you, instead of having to go to commercial 
loans for profit making purposes that are very cyclical? Would 
that be an opportunity or would that be detrimental to you?
    Mr. Hopkins. For our institution, it would be very 
detrimental because we originate approximately--this year, we 
are on track, with all the mortgage brokers that have gone out 
of business, to originate $250 million worth of mortgage loans, 
and I don't know how we could sustain that on a going-forward 
basis with the capital that we have and being only a $550 
million bank as it is. So it is important for us to have access 
to secondary market funds. It is critical that we have that 
access because the housing market is a very concentrated 
industry, and without it, we could not compete with the Bank of 
Americas and the Wells Fargos and those and I think the market 
would become a lot more concentrated.
    We do service those mortgages. Those customers, for all 
intents and purposes, don't know that we don't hold the dollars 
on our books because everything comes out in our name. We are 
the point of contact.
    Senator Corker. So the fee income in originating those is 
far more important to you than holding portfolio loans like you 
do with the commercial real estate?
    Mr. Hopkins. It gets down to the interest risk that you 
would be taking on by putting on 30-year mortgages versus 
short-term deposits.
    Senator Corker. And is there a way--and I figured that 
might be your response, so is there a way for the Federal 
Government to be involved in hedging that risk for you and yet 
not taking ownership through these GSEs of the portfolios 
themselves? Is there a solution there that might make sense 
without us taking on the risk of credit in the portfolios 
itself?
    Mr. Hopkins. Well, again, I think it becomes an allocation 
of capital. We are required to have certain levels of capital 
and we would eat up our capital very quick. If we were to do 2 
years' worth of mortgages, we might be done because our capital 
ratios would be required, particularly your leverage ratio.
    Senator Corker. And I see, Mr. Hopkins, you are shaking 
your head in agreement with what he is----
    Mr. Hopkins. Yes. It is really very true. It is one of the 
few points of access to the capital markets that community 
banks have, the securitization of residential mortgages, and we 
get paid--you mentioned fee income, and it is important to note 
that actually our up-front fee for selling a loan with 
servicing retained, which is what our bank does and what I 
understand yours is doing, as well, is really much lower than 
if we sold the loan with servicing released, which means some 
other servicer would be doing it.
    So because we are in the relationship business, we want to 
maintain that contact with our customers and are willing to 
take, frankly, a lower up-front fee for doing that in terms of 
what we get paid when we sell the loan. But it gives us 
tremendous access to the capital markets that we wouldn't have 
otherwise and we are still able to maintain that relationship 
but have it off our balance sheets.
    Senator Corker. So in seeking a solution to the Fannie-
Freddie dilemma that all of us find ourselves in, because if it 
were actually truly shown on our country's balance sheet, we 
would have some tough issues to deal with here, we need to 
figure out a way to deal still, though, with creating liquidity 
for you to keep this constant access to capital.
    Mr. Johnson. I think you have hit the nail on the head, is 
whose balance sheet is it going to be on, and it really can't 
be on ours, either, because of the capital concerns.
    Senator Corker. So let me go back to the community 
bankers--and thank you for those answers--back to the community 
bankers. What relationship change has occurred at all over the 
last year with correspondent banks, the folks that you deal 
with that are sort of one tier up that are your correspondent 
lenders? Has there been much of a change there?
    Mr. Hopkins. Yes, there has. Access to the secondary 
market, selling to them, has dried up. In most cases, they have 
canceled contracts, et cetera. So Fannie Mae and Freddie Mac 
right now are about the only game in town if you are a 
community bank trying to get access to the secondary markets.
    Senator Corker. So the regionals upstream from you that 
typically would have provided liquidity--and I could name 
names, but I won't--those folks who we are up here constantly 
talking to about making loans and they are constantly telling 
us that they are making more loans than they made in the past, 
those folks, as far as their correspondent relationship, from 
your perspective, that has gone away for you?
    Mr. Hopkins. Well, that has gone away in that respect and 
also in the second respect, is I really don't want to turn my 
best customers over to them and give them the primary 
relationship. If I send the mortgage to one of the large banks, 
I have lost that relationship because the only way I can do it 
is selling that service released, which means they have the 
contact with the customer.
    Senator Corker. Since you represent all of these folks, do 
you have any comments there?
    Mr. Johnson. Well, I guess the only experience I have is 
really within my own bank directly that I can speak with a 
great deal of authority on. We continue to have a Fed funds 
line, which is an overnight borrowing facility which we have 
for liquidity purposes, but we very, very rarely use. We used 
to have those lines with two correspondent banks and now we 
have them with one.
    Senator Corker. On a scale of one to ten, I mean, is that a 
major issue with each of you individually or is that a minor 
issue? Is that an issue for us to pay attention to here or is 
that an issue that there are bigger fish to fry?
    Mr. Johnson. Well, to be perfectly honest, most banks fail 
in an immediate sense because of liquidity rather than because 
of asset quality problems. Maybe I am getting a little far 
afield here, but liquidity is always a very important 
discussion when we have our regulators into our banks, but it 
is even more so in a time of stress to the industry like this. 
The availability of--you really have to deal with on-balance 
sheet liquidity and off-balance sheet liquidity and lines from 
other banks are a critical component of that off-balance sheet 
liquidity. It is deserving of some attention.
    Senator Corker. Mr. Chairman, I thank you. My time is up. I 
apologize to the other witnesses. There are a number of 
things--I would like to just reiterate what I think Mr. Hopkins 
said earlier, and that is I think the regulators--and we have 
had them into our office numbers of times--I think they are 
helping, as they always do, create self-fulfilling prophecy by 
virtue of the way they are dealing with our institutions. We 
have talked to them. I know that you all have probably talked 
to them. But I just hope that all of us will keep in mind that 
I think what Mr. Hopkins said was--the regulators are clamping 
down and helping make this recession more severe than it 
otherwise would have been. But anyway, thank you very much. I 
wish I had more time. I appreciate it.
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman.
    I would agree with that assessment, Senator Corker. I think 
the regulators are a bit paranoid at this point in time and 
they don't want to have any failure on their watch. I think 
that is probably human nature, but I think we need to put 
pressure on them to make sure they use common sense in their 
regulation.
    A couple of questions. I will just start with you, Mr. 
Hopkins. It deals with agriculture. It deals with agriculture 
operating loans specifically, on the ground. What has been the 
impact of the economic downturn on your availability of dollars 
for ag-operating loans?
    Mr. Hopkins. We have adequate dollars available for ag-
operating loans, and for the most part, most of our ag 
producers have done quite well. We are in a heavy crop area and 
the corn and soybean prices have been quite good.
    The problem we are seeing with some of our operators is the 
input costs over the last 12 to 24 months have increased 
dramatically. We feel at some point the commodity prices will 
come down more. We are seeing some real pressure on our 
livestock producers. Those are the people that I think we are 
seeing some real pressure on right now and I think it will be 
more so going forward over the next 12 to 24 months.
    Senator Tester. Do you have much dairy in your region?
    Mr. Hopkins. We don't have a lot of dairy in our region 
anymore. We did at one time, but we do not have a lot in our 
area.
    Senator Tester. OK. How about land acquisition? I don't 
know if you give any loans out for land purchase or not, but 
how are the dollars for that?
    Mr. Hopkins. We have adequate dollars available for lending 
for land acquisition also. Probably the concern there is that 
we have had a rapid spike in land prices over the last 5 
years----
    Senator Tester. Yes.
    Mr. Hopkins. ----and so that does concern us.
    Senator Tester. OK. Commercial real estate, and I am sorry 
I missed your testimony. I got called to the floor, so I 
apologize for that. I wish I could have heard it all. So I will 
just kind of go by your titles about what I think you know, and 
if somebody wants to jump in, they can.
    This is for Mr. Johnson. I really heard from many of the 
bankers back in Montana that there is a concern about the 
commercial real estate sector and actually heard some of it 
back here, too. They are predicting that may be the next domino 
in the credit crisis and could impact the Rocky Mountain West 
in a very negative way. Do you have any perspective or thoughts 
on that, on the commercial markets and where they are at and 
where they are headed?
    Mr. Johnson. Yes. I think it is probably a fair 
observation. Exactly how bad it gets and how long it lasts is 
sort of the unknown there. My perspective from Michigan is, you 
know, the one thing about high unemployment is that its effects 
are fairly predictable and its effects are very, very broad and 
very deep. We are, to some degree, a fairly active commercial 
real estate lender. We show up on the radar screen of our 
regulators for additional scrutiny in that regard, which we 
have so far successfully satisfied them.
    But when people don't have jobs anymore or they don't have 
as much income in the family as they had before and they are 
not shopping as much, that begins to affect retail and the 
impact, you know, you go by shopping centers and once the 
vacancy rate starts getting above 10 percent, you know that 
there is going to be stress on the value of those properties.
    Really, you have to approach that from a bank perspective--
first of all, you have to hope that you are well capitalized, 
and if, in fact, you are well capitalized, then you are going 
to be able to work with those businesses and essentially keep 
those commercial real estate enterprises open the same way that 
you would work with a homeowner or a small business person. 
Just sort of dig your nails into the ledge and hold on as long 
as you can.
    Senator Tester. And this is directed to both of you, Mr. 
Johnson and Mr. Michael. From your perspective, is the economic 
downturn as it applies to commercial or even private 
residences, homeowners, are rural areas being more impacted 
than urban areas, or is it about the same, or is it being less 
impacted?
    Mr. Michael. Well, I would probably comment that probably 
the areas that are most heavily impacted are those that sit 
between rural and urban, the exurbs, and that is what I would 
define Stockton as being, and that is the area--the one that 
sits on the fringe is the one that is really getting trashed 
right now.
    Senator Tester. OK. Regulators--and I don't want to spend a 
lot of time on this. Senator Corker talked about it a little 
bit. There has been some talk about combining OCC and OTS and 
FDIC and portions of the Fed and maybe coming up with a 
regulator that is more inclusive, less gaps. What are your 
thoughts on that? I will just ask Mr. Hopkins for your 
perspective on that, if we were to do something like that.
    Mr. Hopkins. We believe in a strong dual banking system, so 
we do believe that the competition amongst the regulators, just 
as it does with competition amongst banks, does make for 
stronger banks and stronger regulators.
    Senator Tester. We are going to maintain the dual charters?
    Mr. Hopkins. Maintain the dual charters.
    Senator Tester. But we will combine the ones at the Fed 
level?
    Mr. Hopkins. If they combine the ones at the Fed level, we 
ask that they consider keeping a separate division to help with 
the OTS, because those institutions do focus on home lending 
and that is still their charter and mission.
    Senator Tester. OK. And this can go to either one. There 
was a point in time not too many years ago--I know for a fact 
two-and-a-half years ago--interest-only loans were very, very 
common. Low down payments, no down payments, were reasonably 
common. Has that changed?
    Mr. Hopkins. From the banking perspective, I am not sure 
they were available. That really came from the unregulated 
financial institutions that were selling into the secondary 
market.
    Senator Tester. Well----
    Mr. Hopkins. So that has changed because those lenders are 
no longer around.
    Senator Tester. OK. I actually was, in fact, from a bank 
offered an interest only, no down loan to buy a house in 
Washington, DC. Could I still get that loan?
    Mr. Johnson. Not from my bank.
    Mr. Hopkins. Not from my bank.
    Senator Tester. You know my balance sheet.
    [Laughter.]
    Senator Tester. What about down payments? Down payments, 
have they gone up, and by how much have they gone up? I am 
talking about a requirement. It used to be, it seems like, in 
the good old days--if they were, in fact, good old days--a down 
payment was pretty substantial on a home. Where is it at now?
    Mr. Johnson. Well, generally speaking, in our bank, it 
hasn't changed all that much----
    Senator Tester. What were your requirements?
    Mr. Johnson. Generally 20 percent. We had some programs 
that we participated in that were very, very focused that were 
able to have lower down payments, but it did not combine 
everything. It wasn't a low down payment and a negative 
amortization and this and that.
    Senator Tester. All right.
    Mr. Hopkins. We have--the programs typically are the 20 
percent down, but we do have the FHA programs which are 3.5 
percent down, but they are very strictly underwritten----
    Senator Tester. OK.
    Mr. Hopkins. ----as to income and credit.
    Senator Tester. One last question and then I will go, and 
thank you, Mr. Chairman, for the latitude. Oftentimes, 
particularly young couples that went in, they have been looking 
to buy their first home. This is a few years back--3, 4, 5 
years back--and they needed, $100,000, $150,000. We are talking 
Montana here, so you know what I mean. It is probably similar 
to where you are at, Mr. Hopkins, where that is a decent home. 
And they would come in for the loan and the bank would say, you 
are eligible for $200,000. Is that still going on, or did it 
ever go on in your neck of the woods?
    Mr. Hopkins. Not to my knowledge. It didn't happen at our 
bank.
    Senator Tester. OK.
    Mr. Johnson. It didn't happen at our bank, but that did 
happen in our market from nondepositories, and those are some 
of the loans that we are--I mean, those people are now coming 
in and talking to us and we are not able to save all of them.
    Senator Tester. Yes. Well, I certainly appreciate your 
perspective on the programs. I am sorry I didn't ask a whole 
bunch of questions to the other witnesses. It doesn't mean you 
are not very, very important.
    I once again apologize for not being here for the 
testimony, because this is very important. You guys are 
critically important, and I will tell you what I tell my 
community bankers. You need to be regulated, but you are not 
the ones that caused the problem. The same thing with the 
credit unions, too, I might add. You are not the ones that 
caused the problem. The Wall Street people were the ones, and 
quite honestly, the ``too-big-to-fail'' is something that I 
personally have a great disdain for, whether it is in banking 
or whether it is in agriculture or whether it is in energy or 
whether it is in food, whatever. We need to rethink some of 
these operating systems we have in this country. Thank you for 
the work you do.
    Chairman Johnson. I want to thank the witnesses once again 
for traveling so far to be here today.
    I look forward to working with the Members of the Banking 
Committee in the coming weeks as we continue to consider 
measures to capitalize the banking sector and our economy as a 
whole.
    This hearing is now adjourned.
    [Whereupon, at 3:49 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    It is no exaggeration to say that our economy is currently 
experiencing extraordinary stress and volatility. As Congress and the 
Administration look at corrective policy changes, I am pleased to hold 
this hearing today to take a closer look at the role smaller financial 
institutions, specifically community banks and credit unions, play in 
our economy, especially in many rural communities. Throughout our 
Nation's economic crisis there has often been too little distinction 
made between troubled banks and the many banks that have been 
responsible lenders.
    There are many community banks and credit unions that did not 
contribute to the current crisis--many rural housing markets that 
didn't experience the boom that other parts of the country did, and 
community lending institutions didn't sell as many exotic loan products 
as other lenders sold. Nonetheless, small lending institutions in rural 
communities and their customers are feeling the effects of the subprime 
mortgage crisis and the subsequent crisis in credit markets. Jobs are 
disappearing, ag loans are being called, small businesses can't get the 
lines of credit they need to continue operation, and homeowners are 
struggling to refinance.
    Smaller banks play a crucial role in our economy and in communities 
throughout our Nation; we need to be mindful that some institutions are 
now paying the price for the risky strategies employed by some larger 
financial institutions.
    In coming weeks, the Banking Committee will continue its review of 
the current structure of our financial system and develop legislation 
to create the kind of transparency, accountability, and consumer 
protection that is now lacking. As this process moves forward, it will 
be important to consider the unique needs of smaller financial 
institutions and to preserve their viability as we come up with good, 
effective regulations that balance consumer protection and allow for 
sustainable economic growth.
    I would like to welcome our panel of witnesses, and thank them for 
their time and for their thoughtful testimony on how small lending 
institutions in rural communities have been affected by our troubled 
economy. I would also like to thank Senator Kohl for his interest in 
today's hearing topic. I will now turn to Senator Crapo, the 
Subcommittee's Ranking Member, for his opening statement.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR MIKE CRAPO
    Many community banks and credit unions have tried to fill the 
lending gap in rural communities caused by the credit crisis. Even with 
these efforts, it is apparent that many consumers and businesses are 
not receiving the lending they need to refinance their home loan, 
extend their business line of credit, or receive capital for new 
business opportunities. Today's hearing will assist us in identifying 
these obstacles.
    As we began to explore options to modernize our financial 
regulatory structure, we need to make sure our new structure allows 
financial institutions to play an essential role in the U.S. economy by 
providing a means for consumers and businesses to save for the future, 
to protect and hedge against risk, and promote lending opportunities. 
These institutions and the markets in which they act support economic 
activity through the intermediation of funds between providers and 
users of capital.
    One of the more difficult challenges will be to find the right 
balance between protecting consumers from abusive products and 
practices while promoting responsible lending to spur economic growth 
and help get our economy moving again. Although it is clear that more 
must be done to protect consumers, it is not clear that bifurcating 
consumer protection from the safety and soundness oversight is the best 
option. If that is not the best option, what is and why? It is my 
intention to explore this topic in more detail with our witnesses. 
Again, I thank the Chairman for holding this hearing and I look forward 
to working with him on these and other issues.
                                 ______
                                 

                   PREPARED STATEMENT OF JACK HOPKINS
                 President and Chief Executive Officer,
     CorTrust Bank National Association, Sioux Falls, South Dakota,
       On Behalf of the Independent Community Bankers of America
                              July 8, 2009
Introduction
    Mr. Chairman and Members of the Subcommittee, thank you very much 
for the opportunity to testify today on the state of community banks in 
rural America.
    My name is Jack Hopkins and I am the President and CEO of CorTrust 
National Bank Association in Sioux Falls, SD. I am testifying on behalf 
of the Independent Community Bankers of America (ICBA) and I serve on 
ICBA's \1\ Executive Committee. I am a past President of the 
Independent Community Bankers of South Dakota and have been a banker in 
South Dakota for 25 years. I am pleased to present ICBA's views on the 
state of credit conditions in rural America.
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     \1\ ICBA represents 5,000 community banks throughout the country. 
Community banks are typically independently owned and operated and are 
characterized by personal attention to customer service and are proud 
to support their local communities and the Nation's economic growth by 
supplying capital to farmers and ranchers, small businesses, and 
consumers.
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    CorTrust is a National Bank with 24 locations in 16 South Dakota 
Communities and assets of $550 million. Eleven of the communities have 
less than 2,000 people. In seven of those communities, we are the only 
financial institution. The smallest community has a population of 122 
people. CorTrust Bank is currently one of six authorized servicers in 
the State of South Dakota for the first-time homebuyers program and one 
of the leading South Dakota lenders for the U.S. Department of 
Agriculture (USDA) Rural Housing Service home loan program.
    Today's testimony will briefly provide the community bank 
perspective on credit conditions in rural America and offer 
recommendations for the Members of this Subcommittee to consider to 
ensure the availability of vital credit to our rural communities.
The Financial Crisis
    As the financial crisis spread and deepened last fall many people 
wondered what the impact of the worst economic recession since the 
Great Depression would be on rural America. At the outset, it is 
important to note, community banks played no part in causing the 
financial crisis and have watched as taxpayer dollars have been used to 
bail out Wall Street investment firms and our Nation's largest banks 
considered ``too-big-to-fail.'' During this same time period, dozens of 
community banks have been allowed to fail while the largest and most 
interconnected banks have been spared the same fate due to government 
intervention.
    Mr. Chairman, community banks did not cause the current financial 
crisis, fueled by exotic lending products, subprime loans, and complex 
and highly leveraged investments. The sharp decline in the U.S. housing 
markets and the distressed credit markets triggered a ripple effect 
throughout the entire economy and that continues to strain households 
and businesses.
Community Banks' Role in the Rural Economy
    Community banks play an important role in the Nation's economy. 
There are approximately 8,000 community banks in the U.S. and the vast 
majority of these are located in communities of 50,000 or fewer 
residents. Thousands of community banks are in small rural communities.
    According to the SBA Office of Advocacy, insured institutions with 
less than $1 billion in assets make 31.3 percent of the total dollar 
amount of small business loans of less than $1 million, even though 
they hold only 11.5 percent of industry assets. This is important since 
small businesses represent 99 percent of all employer firms and employ 
one-half of the private sector workforce. Small businesses are 
significant in rural America since many farmers and/or their spouses 
have off-farm jobs. In addition, the more than 26 million small 
businesses in the U.S. have created 70 percent of the net new jobs over 
the past decade. Community banks are small businesses themselves and 
specialize in small business relationship lending.
    Commercial banks extend approximately 53 percent of non-real-estate 
loans to the farm sector and 38 percent of the real estate credit. 
Community banks under $1 billion in assets make over 60 percent of all 
agricultural loans extended by the commercial banking sector. Worthy of 
note, community banks under $500 million in assets extend over 50 
percent of all agricultural credit from the banking sector.
Aite Study
    The Aite Group LLC released a study, \2\ conducted with the 
assistance of the ICBA, in March 2009, on the impact of the financial 
crisis on community banks. The study drew several conclusions regarding 
the ability of community banks to continue serving their customers 
during the financial crisis.
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     \2\ Impact of the Financial Crisis on U.S. Community Banks, New 
Opportunities in Difficult Times, March 2009, Christine Barry and Judy 
Fishman, Aite Group LLC, Boston, MA. 773 community banks were surveyed 
in February, 2009, for this study.
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    Although the current financial crisis is impacting all financial 
institutions, most community banks are well-positioned to overcome new 
challenges, take advantage of new opportunities, and reclaim some of 
the deposits lost to larger institutions over the last decade.
    Despite most community banks' lack of participation in subprime 
lending, the implications of larger bank activities have had an impact. 
Of the 773 community banks surveyed, 73 percent stated they have seen 
an increase in their traditionally low loan delinquencies and charge-
offs since the start of the crisis. The significant growth in quarterly 
net charge-offs for the industry is being driven primarily by the 
largest banks.
    Fifty-five percent of bankers stated they have seen an increase in 
deposits as a result of new customer acquisition. Only 17 percent are 
challenged by customers withdrawing deposits from their institutions.
    Community banks are still lending and 40 percent have seen an 
increase in loan origination volumes over the last year, while 11 
percent believe the financial crisis has ``significantly curtailed'' 
their lending ability. In several cases, decreases in community bank 
lending activity, when it has occurred, is not the result of a lack of 
funds or financial instability, but rather part of a reaction to mixed 
messages coming from the U.S. government. While these banks are told by 
policy makers to lend money, they also feel the agencies are dissuading 
them from lending by putting them through overzealous regulatory exams. 
Moreover, an economic contraction, by definition, means fewer loans 
will be originated.
    Even though some community banks are faced with new lending 
challenges, they are still lending, especially when compared to larger 
banks. In fact, while the largest banks saw a 3.23 percent decrease in 
2008 net loans and leases, institutions with less than $1 billion in 
assets experienced a 5.53 percent growth.
    The financial crisis and new documentation requirements are also 
causing some banks to change processes and reexamine their credit 
evaluation practices. While most community banks have not strayed from 
traditional prudent lending and underwriting practices, 81 percent have 
tightened their credit standards since the start of the crisis. Of 
banks surveyed, 20 percent described this tightening as significant. 
Banks with more than $100 million in assets have been the most likely 
to tighten their credit standards, while only 15 percent of banks with 
less than $100 million in assets have done so. In most cases, tighter 
standards often means focusing greater attention on risk management and 
requiring more borrower information prior to making lending decisions.
Small Business Lending
    The prolonged recession, turmoil in the financial markets, and 
procyclical bank regulatory policies continue to jeopardize credit 
availability for many small businesses in urban and rural areas. 
Community banks are well-positioned and willing to lend to small 
businesses especially during these challenging economic circumstances. 
ICBA strongly supports President Obama's and Congress' recent 
initiatives to bolster small businesses loan programs included in the 
American Recovery and Reinvestment Act of 2009. Small businesses will 
help lead us out of the recession and boost needed job growth. 
Therefore, it is important to focus on the policy needs of the small 
business sector during this economic slowdown. SBA lending must remain 
a viable and robust tool in supplying small business credit.
    The frozen secondary market for small business loans continues to 
impede the flow of credit to small business. Several programs have been 
launched to help unfreeze the frozen secondary market for pools of 
Small Business Administration (SBA) guaranteed loans, including the 
Term Asset-Backed Securities Loan Facility (TALF) and a new SBA 
secondary market facility. The TALF, implemented by the Federal Reserve 
and U.S. Treasury, was intended to extend billions in nonrecourse loans 
to holders of high-quality asset-backed securities (ABS) backed by 
consumer and small business loans in a bid to free up the frozen ABS 
market.
    Specifically, the TALF program for SBA secondary market loan pools 
is very close to success. Unfortunately, one program obstacle requiring 
third-party direct competitor primary dealers to be middlemen has 
completely stalled the program. SBA loan poolers will not turn over 
their customers to their direct competitors nor have the primary 
dealers engaged in the program to date. ICBA recommends either 
eliminating the primary dealer middlemen in the process or allowing the 
Federal Reserve Bank of New York to work as the intermediary with the 
existing SBA loan poolers.
    Similarly, the new SBA secondary market program is close to success 
but the debate over potential additional fees to operate the program 
has stalled its launch. ICBA recommends using the enacted substantial 
funded budget authority to run the program in combination with user 
fees so as not to undermine the program with unworkable double fees.
    ICBA believes with these minor adjustments, these targeted SBA 
secondary market programs will keep money flowing to consumers and 
small businesses providing the intended value and results. In addition, 
government sponsored enterprises and U.S. government loan programs 
should not reject a loan for the sole reason the property is in a 
declining market.
The Agricultural Sector--Farm Income
    Many rural lenders have been quite concerned that a global 
recession would lead to fewer exports of U.S. agricultural products, 
thereby reducing markets and income for American farmers, and causing a 
ripple effect up and down Main Street. The agricultural sector was 
fortunate that at the outset of this severe recession, in which 
unemployment figures continue to march toward double digit levels, U.S. 
net farm income had reached a record high of nearly $90 billion for 
2008.
    This followed the $87 billion level reached in 2007 and a 10-year 
average (1999-2008) of $65 billion. However, production expenses also 
increased dramatically during the past 2 years, and although expenses 
are projected to be approximately 9 percent lower this year, net cash 
income is also projected to fall to $71 billion. While still above the 
10-year average, 2009 net farm income will be 18 percent less than last 
year's record level, according to USDA's Economic Research Service.
Perspective on Agricultural Credit
    ICBA agrees with various economists who have noted there is an 
ample amount of credit available to the agricultural sector for credit 
worthy borrowers. However, there are several problem areas of concern 
that warrant continued monitoring. For example, the dairy industry has 
been hard hit by lower prices and high feed costs which have also 
impacted the livestock sector. In addition, there are several States 
where farmers have been impacted by drought conditions that will 
threaten yields and farm income.
    In recent testimony before the House Agriculture Committee, the 
Federal Reserve Bank of Kansas City stated that despite some increasing 
risks in agriculture, ample credit appears available at historically 
low interest rates. \3\ In addition, recent data from the FDIC 
indicates farm loans (non-real-estate) and farm real estate loans 
increased collectively by $8 billion for the period ending March 31, 
2009, compared to March 31, 2008.
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     \3\ Jason Henderson, Federal Reserve Bank of Kansas City before 
the Subcommittee on General Farm Commodities and Risk Management, April 
1, 2009, page 2.
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ICBA's Agriculture-Rural America Committee Input
    ICBA conducted a conference call last month with its Agriculture-
Rural America Committee to further assess credit conditions. This 
committee consists of 25 agricultural bankers from every region of the 
U.S. representing virtually every agricultural commodity grown in the 
country.
    A number of these bankers stated they had no classified 
agricultural loans. This is in part due to several areas of the country 
having excellent crops during the past 2 years, allowing farmers to 
increase their cash reserves or pay down their lines of credit. Some 
bankers have seen a significant increase in agricultural loans and have 
seen little deterioration in their agricultural portfolios but are 
concerned higher input costs will reduce farm income. Some community 
banks have picked up agricultural loans as larger banks have cut back 
their lines of credit. Land values have remained steady for highly 
productive farm land although sales have slowed considerably.
    Land values for less productive farmland have fallen 5 to 10 
percent in some areas. Some banks have tightened underwriting 
standards, including taking a stronger collateral position, slightly 
shortening loan maturities, or requiring greater documentation from 
borrowers. The dairy, cattle feeding, and cow-calf sectors are areas 
experiencing stress.
    Several bankers stated they are concerned with the potential for 
their regulators to second-guess their desire to make additional loans 
and some bankers are under pressure from their regulators to decrease 
their loan-to-deposit ratios. In addition, several bankers stated their 
regulators do not want them to use Federal Home Loan Bank (FHLB) 
advances as a means of funding their loans. The regulators are 
suggesting FHLB advances are not as ``stable'' as core deposits. 
Bankers disagree, noting it is quite easy for depositors to withdraw 
funds in search of higher yields in the stock market, which has risen 
rapidly in recent months, or in shopping for higher rate Certificates 
of Deposit (CD) at other institutions.
    The real issue, bankers believe, is that regulators do not want to 
be in a secondary security position behind the FHLB if there are 
widespread bank failures. FHLB advances have become an important source 
of funding for community banks that must be allowed to continue.
    A number of bankers also complain about a very harsh examination 
environment from field examiners and believe there is a ``disconnect'' 
between the public statements from policy makers in Washington and the 
treatment of local banks during examinations. This bolsters the 
findings of the Aite study.
    At least one banker relayed to other committee members when he 
called the regulator to inquire about receiving TARP funds he was 
questioned as to why he needed the money. When he explained he wanted 
to supplement his capital position and also make more loans, the 
regulator told him the agency didn't want banks making more loans in 
this environment. This attitude has led many community banks to 
conclude there is reluctance to extending TARP money to community banks 
and that the program was primarily designed to assist large, troubled 
banks. Community banks in danger of failing would not be eligible for 
TARP funds.
    In addition, many banks have concluded TARP funds are an expensive 
source of capital both in terms of the dividend cost as well as the 
administrative costs. \4\ There is also the risk requirements will be 
changed after banks receive funding and new conditions will be imposed.
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     \4\ The cost of TARP funds includes a 5 percent dividend payment 
for the first 5 years increasing to 9 percent after 5 years. On an 
after tax basis, ICBA estimates the cost would be 7.5 percent the first 
5 years and 13.5 percent after the first 5 years.
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    Generally, the bankers' conclusions are that ample credit is 
available for creditworthy borrowers; they would like to make more 
loans; and they're concerned about heavy-handedness from their 
regulators going forward. It is important to repeat: community banks 
remain very well-capitalized and are in a good position to assist with 
new borrowing needs as the economy strengthens. While, there are some 
sectors of agriculture that are struggling; the agricultural portfolios 
at many rural banks strongly contribute to each bank's overall income 
and stability.
    One limiting issue is that regulators recently required community 
banks to increase their capital levels. Previously, regulators 
increased community bank capital levels from 8 percent to 10 percent. 
Now the regulator requires a 12 percent capital level for all banks 
that have commercial real estate loan volumes three times their level 
of capital (e.g., $30 million in commercial loans and $10 million of 
capital). Obviously, the regulators believe commercial real estate 
loans are more vulnerable in the current economic climate. For example, 
many banks in northern Colorado exceed this threshold due to the 
region's fast growth in recent years. However, since capital is 
leveraged approximately 10 times for new lending, a $2 million increase 
in capital reduces the amount of lending the bank is able to provide by 
$20 million. Many rural bankers believe this new requirement is 
unnecessarily restrictive.
Federal Reserve Bank Agricultural Surveys
    Several of the Federal Reserve District banks (Kansas City, Dallas, 
Chicago, Minnesota, and Richmond) conduct quarterly agricultural 
surveys of bankers in their regions. A summary of these surveys 
follows.
    The Federal Reserve Bank of Kansas City \5\ notes the average 
return on assets (ROA) and equity (ROE) at agricultural banks steadily 
declined in 2008. ROE at ag banks last September declined to 7.6 
percent and ROA declined to 0.8 percent. Yet, these returns were much 
stronger than returns at other commercial banks. Contributing to the 
decline in ag bank profits were lower interest rates which have dropped 
significantly below 2006 levels. At smaller banks, delinquency rates on 
agricultural loans actually declined. Delinquency rates and net charge-
offs on agricultural loans remain well below other types of loans and 
help explain the relative strength of agricultural banks. The 
delinquency rate on all types of loans and leases in the third quarter 
of 2008 was almost triple the rate of agricultural loans. Ag banks 
report ample funds for operating loans.
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     \5\ The Kansas City region, the Tenth Federal Reserve District, 
includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern 
half of New Mexico and the western third of Missouri.
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    Banks have tightened lending standards to preserve capital and 
manage risk arising from the economic downturn. Collateral requirements 
rose almost 20 percent above year-ago levels but this increase does not 
appear to have severely restricted loan activity as farm real estate 
accounted for approximately 17 percent of the collateral used for the 
Nation's farm operating loans. Bankers report deteriorating loan 
quality as livestock profits were elusive and margins declined for the 
crop sector. Carry-over debt appears to be rising as more ag banks 
report an increase in operating loan renewals and extensions during the 
fourth quarter. In response to rising risks, banks reduced the length 
of operating loans to approximately 12 months.
    Rising job losses from the recession pose a risk to deposit growth 
because people could lose their income stream and tap savings for 
household needs. Ag banks are increasing their use of USDA guaranteed 
farm loans. Continued deterioration in the agricultural economy could 
further erode the creditworthiness of borrowers. Farmland values edged 
down in the fourth quarter.
    The Federal Reserve Bank of Minneapolis \6\ reports farm income, 
capital expenditures, and household spending decreased in the first 
quarter. Loan demand was flat and collateral requirements increased. 
Banks reported no shortage of funds and interest rates decreased from 
the fourth quarter of 2008. Survey respondents expect decreases in 
income and capital expenditures during the second quarter. Dairy 
producers are hard hit as the price of milk has fallen to below 
breakeven levels. Most respondents from Wisconsin report below average 
income for their borrowers. One quarter of Minnesota respondents 
reported above average income, but 49 percent reported below average 
income. Producers are responding to lower spending by reducing capital 
equipment spending. Approximately 25 percent of respondents reported 
lower levels of loan repayments and 19 percent reported higher levels. 
Twenty-five percent saw higher renewals or extensions and only 8 
percent saw lower levels.
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     \6\ The Minneapolis Federal Reserve serves the six States of the 
Ninth District: Minnesota, Montana, North and South Dakota, 26 counties 
in northwestern Wisconsin, and the Upper Peninsula of Michigan.
---------------------------------------------------------------------------
    The Federal Reserve Bank of Dallas \7\ includes the States of Texas 
and portions of New Mexico and Louisiana, a region impacted by a severe 
drought. Many ranchers are unable to reach a breakeven point, forcing 
livestock liquidations. The dairy industry is suffering from large 
losses. The outlook for crop production, due to the lack of moisture, 
remains bleak. Eighty-four percent of bankers report loan demand 
remains unchanged or has decreased compared to last quarter.
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     \7\ The Federal Reserve Bank of Dallas covers the Eleventh Federal 
Reserve District, which includes Texas, northern Louisiana, and 
southern New Mexico.
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    The Federal Reserve Bank of Chicago \8\ reports sale of farms were 
below the levels of the prior year. Bankers anticipate declines in land 
values during the second quarter. For the second quarter of 2009, 
respondents expect higher loan demand for operating loans and USDA 
guaranteed loans. As of April 1, District interest rates had reached 
historically low levels with the level for operating loans at the 
lowest since the early 1970s. The average loan-to deposit ratio was 76 
percent, or 4 percent below the desired level. As land values have 
stalled, cash rental rates for farmland increased 7 percent for 2009. 
Twenty-one percent of bankers reported more funds for lending were 
available than a year ago and 9 percent reported fewer funds were 
available.
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     \8\ The Chicago Fed serves the Seventh Federal Reserve District, a 
region that includes all of Iowa and most of Illinois, Indiana, 
Michigan, and Wisconsin.
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    Bankers expect the volume of non-real-estate farm loans to grow 
during the second quarter compared to year ago levels and expect higher 
FSA guaranteed loan demand. They expect farm machinery, grain storage 
construction, feeder cattle, and dairy loan volumes to decrease.
    The Federal Reserve Bank of Richmond's \9\ fourth quarter 2008 
survey reported the demand for farm loans was little changed from its 
sharp drop off in the third quarter, which bankers attributed to 
variations in commodity prices and production costs. Lenders expressed 
concern about escalated feed costs which had reduced profits for 
livestock production. Requests for loan renewals or extensions 
increased at a quicker pace. Agricultural lenders reported that farm 
loan availability turned positive, and collateral requirements eased 
slightly from third quarter levels. Reports also indicated interest 
rates for agricultural loans moved lower across all categories. 
Compared to third quarter levels, rates for intermediate-term loans 
decreased 34 basis points and rates for operating loans moved down 28 
basis points. In other categories, interest rates for long-term real 
estate loans fell 19 basis points (bp), and interest rates for feeder 
cattle loans dropped 10 bp.
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     \9\ The Federal Reserve Bank of Richmond, (Fifth district) 
comprises Maryland, the District of Columbia, Virginia, North Carolina, 
South Carolina, and most of West Virginia.
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    In the fourth quarter, 75 percent of lenders reported that they had 
actively sought new farm loans, up slightly from last quarter's reading 
of 73 percent. Fourth quarter land prices were slightly below the 
previous quarter and considerably lower than year ago levels. Bankers 
expected farm loan volumes in the first quarter of 2009 to continue a 
downward trend led by further weakness in the demand for dairy and 
feeder cattle loans.
National Agriculture Risk Education Library Survey
    In an effort to better understand what is happening in the 
agricultural economy, a survey \10\ was conducted in January 2009 by 
the Extension Risk Management Education Regional Centers and the Center 
for Farm Financial Management at the University of Minnesota, funded 
through the USDA CSREES Risk Management Education Program. Twenty-three 
hundred agricultural professionals responded to the survey, whose 
respondents represented various agricultural disciplines: Lenders: 21 
percent; educators: 43 percent; crop insurance representatives: 7 
percent; consultants: 6 percent--elevators, cooperatives, marketing 
brokers, and nonprofits: 22.5 percent.
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     \10\ This survey can be accessed at: http://www.agrisk.umn.edu/
Library/Display.aspx?RecID=3971.
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    Currently, 63 percent of respondents stated that 10 percent or less 
of the producers they work with are experiencing financial stress, with 
15 percent indicating that less than 2 percent of the producers they 
work with are currently experiencing financial stress.
    In the next 3 years, however, more than 28 percent of respondents 
expect at least 30 percent of their agricultural clients will 
experience financial stress. Seventy-five percent of respondents expect 
11 percent or more of producers will experience financial stress in the 
next 3 years.
    Twenty-six percent of lenders think the probability is very high 
that producers will experience financial stress in the next 3 years. 
Fifty-four percent of lenders expect the probability of financial 
stress to be ``high.''
    It is particularly interesting to note the reasons stated for 
expected financial stress in agriculture over the next 3 years. The 
first five reasons given were: Price/input cost margins; price 
volatility; negative cash flows; inadequate business planning; and lack 
of financial planning skills. Tightening credit availability was sixth 
on the list of thirteen reasons and was cited as having ``moderate'' 
impact. The lowest rated factors expected to have an impact on farm 
financial stress were rising interest rates and declining land values.
Farm Credit System Considerations
    The Farm Credit System (FCS) is a government sponsored enterprise 
(GSE) that, unlike other GSEs, competes with private sector lenders at 
the retail level. The financial crisis has proven that not only do GSEs 
have the implicit backing of the Federal Government; they also have the 
explicit backing of the Federal Government. Just like the Nation's 
largest banks, they would not be allowed to fail in times of financial 
difficulty. The FCS, as a competitor with community banks, also has 
unique advantages--it can typically raise funds cheaply in the 
government debt markets and FCS institutions have numerous tax 
advantages enabling them to offer lower rates than commercial banks.
    This has led to FCS entities ``cherry picking'' prime farm loans 
from community banks as FCS institutions seek the very best customers 
from bank portfolios. Allowing this practice, unintended by Congress, 
can discourage community bank involvement in the agricultural sector, 
reducing the amount of resources and institutions available to farmers.
    The performance numbers of the FCS indicates this as well. Compared 
to commercial ag banks' ROE of 7.6 percent and ROA of 0.8 percent for 
September 2008, FCS associations' ROE for the same time period was 
10.85 percent and associations' ROA was 1.70 percent.
    Community banks serving agriculture should receive the same tax 
benefits as FCS associations. In this century, it no longer makes sense 
to provide billion-dollar and multibillion dollar FCS institutions tax 
advantages over much smaller commercial lenders to compete for the same 
customers. The benefit of equalizing the playing field will accrue to 
the end-user--the farmers and ranchers.
Administration's Regulatory Reform Proposals
    ICBA supports the administration's goals of making the overall 
financial system more resilient and less vulnerable to ``too-big-to-
fail'' institutions that were a key factor in the recent financial 
turmoil. The administration's proposal offers community banks both 
constructive measures ICBA will support and those ICBA will oppose.
    The proposal addresses a longtime ICBA priority by dealing with the 
risks created by ``too-big-to-fail'' institutions. It is a good, strong 
step in the right direction but Congress needs to go further. ICBA is 
pleased the administration decided to maintain the dual banking system. 
This will allow the maintenance of Federal and State bank charters and 
allow the concerns of community banks to be heard, rather than to be 
drowned out by the larger and more complex financial institutions.
ICBA Recommendations to Congress
    While it is difficult to predict accurately what will happen in the 
economy in the next two or three quarters, we believe Congress can have 
a positive influence by making a number of key policy choices. ICBA 
recommends:

  1.  Provide additional funding for USDA direct and guaranteed farm 
        loans. Prior to the July congressional recess, Congress passed 
        and the President signed the supplemental appropriations bill 
        which added $400 million of direct operating loans, $360 
        million in direct ownership loans and $50 million in guaranteed 
        operating loans. There may be a need even more for guaranteed 
        operating loans and Congress should closely monitor loan demand 
        in these important programs. These programs assist borrowers 
        who cannot obtain credit elsewhere and are an important 
        backstop for farmers who need temporary assistance until they 
        are able to graduate to commercial credit.

  2.  Enhance USDA's Business and Industry (B & I) loan program. 
        Congress added significant new money for USDA's rural 
        development efforts as part of the recently enacted economic 
        stimulus package (P.L. 111-5). The new funding would allow an 
        additional $3 billion of business and industry loans in 
        addition to $1 billion of loans provided as part of USDA's 
        regular budget. However, the funds to provide $3 billion in new 
        B & I loans will expire October 1, 2010. It will be important 
        for USDA to aggressively market the program to lenders and 
        provide adequate information in order to utilize these new 
        funds.

     Even more importantly, the B & I program needs to be enhanced (at 
        least for the new funding) by: (A) implementing no more than a 
        one percent origination fee; (B) increasing guarantees on loans 
        under $5 million from the current 80 percent level to 90 
        percent--perhaps even 95 percent on smaller loans; and (C) not 
        eliminating the low document application as USDA appears to be 
        on the verge of doing for smaller loans. These changes would 
        help ensure the program is attractive for lenders and their 
        customers and will ensure Main Street rural America has the 
        resources necessary to ride out any storms on the horizon that 
        could result from stress in the agricultural sector.

  3.  Ensure that the FCA does not proceed with its Rural Community 
        Investments Proposal. This proposal poses significant new risks 
        to the FCS and its borrowers and should not be adopted. The 
        proposal appears to be illegal and was never considered or 
        authorized by Congress. It allows FCS to extend credit, 
        mislabeled ``investments,'' for a vast array of purposes never 
        intended by Congress. These purposes include extending credit 
        for nonfarm business financing, apartment complexes, 
        construction projects and virtually any other purpose. This 
        wide nonfarm reach of FCS institutions will move FCS lenders 
        further away from serving farmers and ranchers--the specific 
        reason it was created and granted GSE tax and funding 
        privileges.

  4.  Ensure the regulators not unduly restrict lending by community 
        banks. Regulators can have a major impact on the ability of 
        lenders to extend credit particularly if they engage in unduly 
        harsh examinations at the local level. Many community banks 
        believe this is occurring. Members of Congress should interact 
        with regulatory agencies and stress the need to allow the 
        banking sector to work with rural customers during difficult 
        financial times that may lie ahead. Such regulatory flexibility 
        allowed many farmers and small businesses to survive the 
        turbulent times of the 1980s farm crisis but was the result of 
        clear and strong messages sent by Congress.

  5.  Avoid unintended consequences resulting from imposing new 
        requirements on the banking sector. In recent months there have 
        been various proposals aimed at bank recipients of TARP funds 
        that would impose unnecessary costs and regulatory burdens on 
        banks. Such proposals have included requiring commercial banks 
        to write down principal and interest on troubled loans as the 
        first option to consider when restructuring loans. Bankers 
        already work with their customers and utilize a wide variety of 
        options to keep customers in business. Washington should allow 
        community banks to work with borrowers in troubled times 
        without adding to the costs and complexity of working with 
        customers.

  6.  Support the Administration's proposals on systemic risk and dual 
        banking charters. It is important to prevent ``too-big-too-
        fail'' banks or nonbanks from ever threatening the collapse of 
        the financial system again. Community banks support the dual 
        system of State and Federal bank charters to provide checks and 
        balances, which promote consumer choice, and a diverse and 
        competitive financial system that is sensitive to financial 
        institutions of various complexity and size
Conclusion
    Thank you, Mr. Chairman, for the opportunity to testify today. As 
stated several times in the written testimony, community banks 
continued conservative and prudent lending practices during the last 
several years and have worked with borrowers and even increased lending 
during this latest period of economic contraction. In addition, 
thousands of community banks are providing loans to farmers, ranchers, 
and small businesses at historically low interest rates. ICBA urges the 
Banking Committee to consider the recommendations provided in the 
testimony to enable the community banking sector to do even more to 
serve our rural communities. ICBA looks forward to working with the 
Senate Banking Committee as these proposals move through Congress.
                                 ______
                                 

                  PREPARED STATEMENT OF FRANK MICHAEL
                 President and Chief Executive Officer,
               Allied Credit Union, Stockton, California,
           On Behalf of the Credit Union National Association
                              July 8, 2009
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Financial Institutions Subcommittee, thank you very much for the 
opportunity to testify at today's hearing on ``The Effects of the 
Economic Crisis on Community Banks and Credit Unions in Rural 
Communities'' on behalf of the Credit Union National Association 
(CUNA). CUNA is the Nation's largest credit union advocacy 
organization, representing over 90 percent of our Nation's 
approximately 8,000 State and Federal credit unions, their State credit 
union leagues, and their 92 million members.
    My name is Frank Michael, and I am President and CEO of Allied 
Credit Union in Stockton, California. Allied Credit Union is a small 
institution with $20 million in assets and approximately 2,600 member-
owners.
    Originally my credit union's field of membership was limited to 
Greyhound bus drivers but it has grown to include employees served by a 
variety of labor union locals, those who live, work, worship, or attend 
school in the incorporated and unincorporated areas of Stockton, 
California, and employees of a number of companies outside of Stockton 
proper.
    I also serve as Chair of CUNA's Small Credit Union Committee--which 
is charged with monitoring issues affecting small credit unions that 
operate in both urban and rural settings.
    I am honored to be here to speak to you about the present state of 
small credit unions in rural communities, the obstacles these 
institutions are encountering, and the effects of recent legislation on 
these institutions.
Credit Unions Stand Apart From Other Financial Institutions
    I would like to emphasize that while I am here to represent the 
views of ``small'' credit unions, credit unions are generally very 
small by banking industry standards: The average credit union has 
roughly $110 million in total assets whereas the average banking 
institution is 15 times larger with $1.7 billion in total assets. \1\ 
(The median size credit union has just $15 million in total assets and 
the median size bank is about 10 times larger with $146 million in 
total assets).
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     \1\ Financial data is as of March 2009. Credit union data is from 
the NCUA, bank data is from the FDIC.
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    It is also important to stress that credit unions--rural, urban, 
large, and small--did not contribute to the subprime meltdown or the 
subsequent credit market crisis.
    Credit unions are careful lenders. And, as not-for-profit 
membership cooperatives the overriding operating objective at credit 
unions is to maximize member service. Incentives at credit unions are 
aligned in a way that ensures little or no harm is done to the member-
owners. As we have seen, the incentives outside of the credit union 
sector are aligned in a way that can (and often does) cause harm to 
consumers. In the case of toxic mortgages such as subprime mortgages, 
entities operating outside of the cooperative sector focused on 
maximizing loan originations (specifically fee income from those 
originations) even though many of the loans originated were not in the 
borrower's best interest.
    Further, credit unions hold most of their loans in portfolio. In 
recent years, 70 percent of credit union mortgage originations have 
been held in portfolio--only 30 percent have been sold into the 
secondary market. In the broader credit union loan portfolio the 
percentage held is even higher. The maintenance of this ownership 
interest means that credit unions care deeply about what ultimately 
happens to the loans they originate--they care if the loans are paid 
back. The subprime crisis, in contrast, has been closely linked to 
lenders who adopted the originate-to-sell model. These lenders cared 
little about repayments because the quality of the loans they sold 
became someone else's problem.
    In the end these structural and operational differences translated 
into high asset quality at credit unions. \2\ Annualized first quarter 
2009 net charge-offs at credit unions were equal to 1.11 percent of 
average loans outstanding. In the same period, banking industry net 
charge-offs were 1.94 percent.
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     \2\ High credit union asset quality is doubly impressive given the 
exemplary record of credit union success in serving those of modest 
means. For example, credit union mortgage loan delinquency and 
chargeoff rates are very low compared to other lenders. At the same 
time Home Mortgage Disclosure Act (HMDA) statistics consistently show 
that lower income and minority borrowers in the market for mortgages 
are substantially more likely to be approved for a loan at a credit 
union. HMDA data also shows that compared to other lenders, a greater 
percentage of total credit union home loans are granted to low/moderate 
income consumers.
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    Delinquency rates--a forward-looking indicator of credit quality 
also highlights the credit union difference. As of March 2009, 60+ day 
dollar delinquency rates on credit union loans were 1.44 percent. In 
contrast the banking industry's 90+ day dollar delinquency rate was 
3.88 percent--over two-and-one-half times higher than the credit union 
norm despite an additional 30 days of collection efforts. High asset 
quality helped to keep credit union capital ratios near record levels. 
At the end of March 2009 the aggregate credit union net worth ratio was 
10 percent--substantially higher than the 7 percent regulatory standard 
that institutions need to be considered ``well capitalized.''
    Strong asset quality and high capital kept most credit unions ``in 
the game'' while the other lenders pulled back and significantly 
tightened loan underwriting standards. Overall, loan growth rates at 
credit unions have remained comparatively high. In the year ending 
March 2009, credit union loans grew by 6 percent--a rate of increase 
that is well above the 2 percent to 3 percent growth credit unions 
usually see in consumer-led recessions and a stark contrast to the 3 
percent decline in bank loans over the same timeframe.
    Real estate loans at credit unions grew by nearly 9 percent in the 
year ending March 2009, while banking industry real estate loans 
declined by approximately 2 percent. Business loans at credit unions 
grew by nearly 16 percent in the year ending March 2009, whereas 
commercial loans at banking institutions declined by 3 percent.
    Importantly, credit union pricing continues to reflect a strong, 
long-standing consumer-friendly orientation. According to Datatrac, a 
national financial institution market research company, credit union 
average loan rates have remained far lower than those in the banking 
arena and credit union average yields on savings accounts have remained 
far higher than those in the banking arena. The pricing advantage to 
credit union members is evident on nearly every account that Datatrac 
measures. In the aggregate, CUNA economists estimate that the credit 
union pricing advantage saved credit union members $9.25 billion in 
2008 alone. \3\ This makes a significant difference to tens of millions 
of financially stressed consumers throughout the Nation.
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     \3\ This estimate does not include the procompetitive effects 
credit union pricing has on banking institutions. Several recent 
studies indicate that the credit union presence causes other 
institutions to price in a more consumer-friendly fashion, saving 
consumers several billions of dollars annually. See Feinberg (2004) and 
Tokel (2005).
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    While credit unions have generally fared well, they are not immune 
from the effects of the financial crisis. Of course, the ``too-big-to-
fail'' issue roils many small credit unions, including those operating 
in rural areas. In addition, there are some natural person credit 
unions, especially in States such as California, Florida, Arizona, 
Nevada, and Michigan that are experiencing serious financial stresses, 
including net worth strains, primarily as a result of the collateral 
effects of their local economic environments.
    Within the credit union system, the corporate credit union network 
has been particularly hard hit as credit market dislocations saddled 
several of these institutions with accounting losses on mortgage-backed 
and asset-backed securities.
    There are currently 28 corporate credit unions, which are owned by 
their natural person credit union members. Corporate credit unions are 
wholesale financial institutions that provide settlement, payment, 
liquidity, and investment services to their members. The powers of 
corporate credit unions differ from natural person credit unions. For 
example, the mortgage backed and asset backed securities that are 
permissible investments for corporate credit unions and not generally 
permissible for natural person credit unions.
    For the most part, the problematic securities were tripled-A rated 
at the time the corporate credit unions purchased them. However, as a 
result of the impact of the economy on the securities, and the 
mortgages and other assets underlying the securities, the National 
Credit Union Administration (NCUA) has projected substantial credit 
losses relating to these securities.
    The recently enacted, ``Helping Families Save Their Homes Act of 
2009'' gave NCUA additional tools with which to assist credit unions in 
dealing with costs related to Corporate Credit Union stabilization 
actions. We applaud the Banking Committee's leadership on that issue, 
and thank Congress for acting expeditiously to address these concerns. 
These stabilization efforts permit credit unions to continue to provide 
high levels of membership service while reducing the immediate 
financial impact on credit unions and ensuring the maintenance of a 
safe and strong Nation Credit Union Share Insurance Fund.
Rural Credit Unions Are Playing a Vital Role in the Economic Recovery
    Rural credit unions are unique in many respects. \4\ There are 
nearly 1,500 U.S. credit unions with a total of $60 billion in assets 
headquartered in rural areas. These institutions represent 19 percent 
of total credit unions and 7 percent of total U.S. credit union assets.
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     \4\ For purposes of this analysis ``rural'' areas are defined as 
non-MSA counties, consistent with OMB definitions. This definition 
includes 64 percent of U.S. counties and 16 percent of the total U.S. 
population. Of course, many credit unions that are headquartered in 
urban areas have branches in rural areas. These institutions are not 
included in our analysis because financial results are not available at 
the branch level.
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    Rural credit unions tend to be small--even by credit union 
standards. On average, rural credit unions have just $39 million in 
total assets (making them about one-third the size of the average U.S. 
credit union and one-fortieth the size of the average U.S. banking 
institution.)
    In addition, nearly one-quarter (23 percent) of rural credit unions 
operate with one or fewer full-time equivalent employee. Over half (54 
percent) of rural credit unions are staffed by five or fewer full-time 
equivalent employees.
    These differences mean that even in good times, rural credit unions 
tend to face challenges in a way that larger credit unions do not. 
Pressures on the leaders of these small credit unions are great because 
they must be intimately involved in all aspects of credit union 
operations. Their small size, without the benefits of economies of 
scale, magnifies the challenges they face. Competitive pressures from 
large multistate banks and nontraditional financial services providers 
each increasingly provide substantial challenges. Greater regulatory 
burdens, growing member sophistication, loss of sponsors, and 
difficulties in obtaining training and education also loom large for 
most of the Nation's small credit unions.
    A bad economy can make things even worse. Small credit unions have 
very close relationships with their members. And member needs increase 
dramatically during recessions: They experience more personal financial 
difficulty; job losses mount; retirement funds dwindle; debt loads 
balloon; divorce rates rise. Small institutions come under tremendous 
pressure as they attempt to advise, consult with, and lend to these 
members.
    Despite these substantial hurdles rural credit unions are posting 
comparatively strong results: Their loan and savings growth rates are 
nearly identical to the national credit union norms. Their delinquency 
rates are nearly identical to the national average and their net 
chargeoff rates are about one-half the national credit union norm. They 
posted earnings declines, but also reflected stronger earnings results 
and report higher net worth ratios than the national credit union 
averages.
Rural Credit Unions Face Growing Concerns
    Although small, rural credit unions are relatively healthy and 
continue to play a vital role in the Nation's economic recovery, that 
role is being threatened. There are several concerns raised by small 
credit unions--and rural credit unions in particular--that deserve 
mention.
Regulatory Burden and Reregulation.
    The credit union movement is losing small institutions at a furious 
pace--about one per day. Many of these are rural credit unions. The 
rate of decline does not seem to be slowing and most observers expect 
the pace to accelerate. The declines do NOT reflect failures but arise 
from voluntary mergers of small institutions into larger institutions. 
If you ask small institutions, they will tell you that one of the 
larger contributors to this consolidation is the smothering effect of 
the current regulatory environment.
    Small credit union operators believe that the regulatory scrutiny 
they face is inconsistent with both their exemplary behavior in the 
marketplace and with the nearly imperceptible financial exposure they 
represent. A large community of small credit unions, free of 
unnecessary regulatory burden, benefits the credit union movement, the 
public at large and especially our rural communities. As the 
Subcommittee considers regulatory restructuring proposals, we strongly 
urge you to continue to keep these concerns in the forefront of your 
decision making. Moreover, we implore you to look for opportunities to 
provide exemptions from the most costly and time-consuming initiatives 
to cooperatives and other small institutions.
    Both the volume of rules and regulations as well as the rate of 
change in those rules and regulations are overwhelming--especially so 
at small institutions with limited staff resources. Additionally, rural 
credit unions, like all credit unions, play ``by the rules.'' Yet, they 
correctly worry that they will be forced to pay for the sins of others 
and that they will be saddled with heavy additional burdens as efforts 
to reregulate intensify.
    Nevertheless, while others in the financial services community call 
for the Administration to back down on plans to create a separate 
Consumer Financial Protection Agency (CFPA), CUNA President and CEO Dan 
Mica met with Treasury Secretary Geithner last week to discuss the 
administration's financial regulatory overhaul legislation. In that 
meeting, Mr. Mica signaled our willingness to work with the 
administration and Congress, to maintain a seat at the table and to 
continue the conversation to obtain workable solutions. Credit union 
member-ownership translates to a strong proconsumer stance but that 
stance must be delicately balanced with the need keep our member-owned 
institutions an effective alternative in the marketplace.
    Of course, any new legislation and regulation comes with 
possibility of unintended consequences, and credit unions are 
particularly sensitive to the unintended consequences of otherwise 
well-intentioned legislation, especially given an issue that has arisen 
with respect to the Credit Card Accountability Responsibility and 
Disclosure Act (CARD Act).
Credit Card Accountability, Responsibility and Disclosure Act
    CUNA supports the intent of the CARD Act to eliminate predatory 
credit card practices. Although it will require some adjustments in 
credit card programs in the next 6 weeks to provide a change-in-terms 
notice 45 days in advance and to require periodic statements to be 
mailed at least 21 days in advance before a late charge can be 
assessed, CUNA supports these provisions and credit unions are 
diligently working with their data processors to effectuate these 
changes by the August 20, 2009, effective date.
    However, Section 106 of the CARD Act also requires, effective 
August 20, 2009, that the periodic statements for all open-end loans--
not just credit card accounts--be provided at least 21 days before a 
late charge can be assessed. This means that a creditor must provide 
periodic statements at least 21 days in advance of the payment due date 
in order to charge a late fee. Open-end loans include not only credit 
cards, but also lines of credit tied to share/checking accounts, 
signature loans, home equity lines of credit, and other types of loans 
where open-end disclosures are permitted under Regulation Z, the 
implementing regulations for the Truth in Lending Act. We believe 
extending the requirements of this provision beyond credit cards was 
unintended, and ask Congress to encourage the Federal Reserve Board to 
postpone the effective date of this provision.
    If this provision is not postponed and considered further, the 
implementation of this provision will impose a tremendous hardship on 
credit unions. Simply put, we do not think credit unions can dismantle 
and restructure open-end lending programs they have used for decades in 
order to meet the August 20th deadline.
    By way of background, this provision appeared for the first time in 
the Senate manager's amendment to H.R. 627. The House-passed bill only 
applied the 21-day requirement to credit cards and was to be effective 
in 2010. During the Senate's consideration of this issue, the 21-day 
requirement was described as applying only to credit cards. \5\ In the 
weeks since enactment, many began to notice that the provision was not 
limited to credit card accounts and wondered if it was a drafting 
error. The confusion over this provision continues, as evidenced by the 
fact that as recently as June 25, the Office of Thrift Supervision 
released a summary of the CARD Act which states that the 21-day rule 
only applies to credit cards. \6\
---------------------------------------------------------------------------
     \5\ Remarks of Senator Dodd during consideration of S. Amdt. 1058 
to H.R. 627. Congressional Record. May 11, 2009, S5314.
     \6\ http://files.ots.gslsolutions.com/25308.pdf.
---------------------------------------------------------------------------
    There is a great deal of uncertainty about this particular 
provision, which makes it quite understandable that creditors may not 
even know about the ramifications of this new provision and the changes 
they need to have in place in 6 weeks.
    This provision creates unique issues for credit unions because of 
their membership structure; as you know, credit unions serve people 
within their fields of membership who choose to become members. Because 
of this membership relationship, most credit unions provide monthly 
membership statements which combine information on a member's savings, 
checking and loan accounts other than for credit cards. For almost 40 
years--since the implementation of Regulation Z--credit unions have 
been authorized to use multifeatured open-end lending programs that 
allow credit unions to combine an array of loan products and provide 
open-end disclosures for compliance purposes. Today, almost half of the 
Nation's credit unions--about 3,500 credit unions--use these types of 
open-end programs, which can include as open-end lending products loans 
secured by automobiles, boats, etc.
    CUNA is still trying to determine the full impact of the new law if 
credit unions will have to provide a 21-day period before the payment 
due date of all open-end loan products. Here are some preliminary 
compliance problems we have identified:

  1.  Credit unions will need to consider discontinuing the use of 
        consolidated statements, something they cannot possibly do in 
        the next 6 weeks, because different loans on the statements 
        often have different due dates.

  2.  In order to comply with the 21-day mailing period, credit union 
        members will no longer be able to select what day of the month 
        they want designate as their due date for their automobile 
        payments, a practice often allowed by credit unions, and no 
        longer may be able to have biweekly payments to match 
        repayments with biweekly pay checks, which helps members to 
        budget.

  3.  Credit unions may have to discontinue many existing automated 
        payment plans that will fail to comply with the 21-day 
        requirement and work with members to individually work out new 
        plans in order to comply with the law.

  4.  The 21-day requirement as it applies to home equity lines of 
        credit (HELOCs) may raise contractual problems that cannot be 
        easily resolved.

    These complicated changes simply cannot be executed within the next 
6 weeks, and CUNA requests that Congress urge Federal Reserve Board to 
limit the August 20 effective date to the two credit card provisions in 
Section 106, at least for credit unions.
Credit Union Lending to Small Businesses
    As noted above, credit unions have been able to ``stay in the 
game'' while other lenders have pulled back. The credit crisis that 
many small businesses face is exacerbated by the fact that credit 
unions are subject to a statutory cap on the amount of business lending 
they can do. This cap--which is effectively 12.25 percent of a credit 
union's total assets--was imposed in 1998, after 90 years of credit 
unions offering these types of loans to their members will no 
significant safety and soundness issues. CUNA believes that the greater 
the number of available sources of credit to small business, the more 
likely a small business can secure funding and contribute to the 
Nation's economic livelihood.
    Currently, 26 percent of all rural credit unions offer member 
business loans to their members. These loans represent over 9 percent 
of total loans in rural credit union portfolios. In contrast member 
business loans account for less than 6 percent of total loans in the 
movement as a whole. Total member business loans at rural credit unions 
grew by over 20 percent in the year ending March 2009, with 
agricultural MBLs increasing by over 12 percent and Non-Ag MBLs 
increasing 26 percent in the 12 month period. This is strong evidence 
that rural credit unions remain ``in the game'' during these trying 
times. But more could be done.
    And more should be done. A chorus of small business owners 
complains that they can't get access to credit. Federal Reserve surveys 
show that the Nation's large banks tightened underwriting standards for 
the better part of the past year. In 2005, an SBA research publication 
noted that large bank consolidation is making it more difficult for 
small businesses to obtain loans. \7\ Given the fact that the average 
size of a credit union member business loan is approximately $216,000 
this is a market that credit unions are well suited to serve. And this 
is a market that credit unions are eager to serve.
---------------------------------------------------------------------------
     \7\ Small Business Administration. The Effects of Mergers and 
Acquisitions on Small Business Lending by Large Banks. March 2005.
---------------------------------------------------------------------------
    Chairman Johnson, you undoubtedly hear a lot of rhetoric 
surrounding credit union member business lending. However, please allow 
me to paint a more complete picture of the member business loan (MBL) 
activity of credit unions.
    Member business loans that credit unions provide their members are 
relatively small loans. Nationally, credit union business lending 
represents just over one percent (1.06 percent) of the depository 
institution business lending market; credit unions have about $33 
billion in outstanding business loans, compared to $3.1 trillion for 
banking institutions. \8\ In general, credit unions are not financing 
skyscrapers or sports arenas; credit unions are making loans to credit 
union members who own and operate small businesses.
---------------------------------------------------------------------------
     \8\ All financial data is March 2009. Credit union data is from 
NCUA; Bank data is from FDIC.
---------------------------------------------------------------------------
    Despite the financial crisis, the chief obstacle for credit union 
business lending is not the availability of capital--credit unions are, 
in general, well capitalized. Rather, the chief obstacle for credit 
unions is the arbitrary statutory limits imposed by Congress in 1998. 
Under current law, credit unions are restricted from member business 
lending in excess of 12.25 percent of their total assets. This 
arbitrary cap has no basis in either actual credit union business 
lending or safety and soundness considerations. Indeed, a subsequent 
report by the U.S. Treasury Department found that business lending 
credit unions were more regulated than other financial institutions, 
and that delinquencies and charge-offs for credit union business loans 
were ``much lower'' than that for either banks or thrift institutions. 
\9\
---------------------------------------------------------------------------
     \9\ United States Department of Treasury, ``Credit Union Member 
Business Lending.'' January 2001.
---------------------------------------------------------------------------
    The statutory cap on credit union member business lending restricts 
the ability of credit unions offering MBLs from helping their members 
even more, and discourages other credit unions from engaging in 
business lending. The cap is a real barrier to some credit unions 
establishing an MBL program at all because it is costly to create an 
MBL program and it is easy to reach the cap in fairly short order--this 
is especially true for small rural institutions. The cap effectively 
limits entry into the business lending arena on the part of small- and 
medium-sized credit unions because the startup costs and requirements, 
including the need to hire and retain staff with business lending 
experience, exceed the ability of many credit unions with small 
portfolios to cover these costs. For example, the average rural credit 
union that does not now engage in business lending has $17 million in 
average assets. At the institution level, that translates to roughly $2 
million in MBL authority which, in turn translates to an average of 
only nine loans.
    The cap is overly restrictive and undermines public policy to 
support America's small businesses. It severely restricts the ability 
of credit unions to provide loans to small businesses at a time when 
small businesses are finding it increasingly difficult to obtain credit 
from other types of financial institutions, especially larger banks.
    Today, only one in four credit unions have MBL programs and 
aggregate credit union member business loans represent only a fraction 
of the commercial loan market. Eliminating or expanding the limit on 
credit union member business lending would allow more credit unions to 
generate the level of income needed to support compliance with NCUA's 
regulatory requirements and would expand business lending access to 
many credit union members, thus helping local communities and the 
economy.
    While we support strong regulatory oversight of how credit unions 
make member business loans, there is no safety and soundness rationale 
for the current law which restricts the amount of credit union business 
lending. There is, however, a significant economic reason to permit 
credit unions to lend without statutory restriction, as they were able 
to do prior to 1998: America's small businesses need the access to 
credit. As the financial crisis has worsened, it has become more 
difficult for small businesses to get loans from banks, or maintain the 
lines of credit they have had with their bank for many years.
    A growing list of small business and public policy groups agree 
that now is the time to eliminate the statutory credit union business 
lending cap, including the Americans for Tax Reform, the Competitive 
Enterprise Institute, the Ford Motor Minority Dealer Association, the 
League of United Latin American Citizens, the Manufactured Housing 
Institute, the National Association for the Self Employed, the National 
Association of Mortgage Brokers, the National Cooperative Business 
Association, the National Cooperative Grocers Association, the National 
Farmers Union, the National Small Business Association, the NCB Capital 
Impact, and the National Association of Professional Insurance Agents.
    We hope that Congress will eliminate the statutory business lending 
cap entirely, and provide NCUA with authority to permit a CU to engage 
in business lending above 20 percent of assets if safety and soundness 
considerations are met. We estimate that if the cap on credit union 
business lending were removed, credit unions could--safely and 
soundly--provide as much as $10 billion in new loans for small 
businesses within the first year. This is economic stimulus that would 
not cost the taxpayers a dime, and would not increase the size of 
government.
Conclusion
    In closing, Chairman Johnson, Ranking Member Crapo, and all the 
Members of this Subcommittee, we appreciate your review of these issues 
today. Every day, credit unions reinforce their commitment to workers, 
small business owners, and a host of others in rural communities 
seeking to better their quality of life by providing loans on terms 
they can afford and savings rates that are favorable. We look forward 
to working with you to ensure the credit union system continues to be 
an important bulwark for the 92 million individuals and small 
businesses that look to their credit union for financial strength and 
support.
                                 ______
                                 

                PREPARED STATEMENT OF ARTHUR C. JOHNSON
                 Chairman and Chief Executive Officer,
            United Bank of Michigan, Grand Rapids, Michigan,
             On Behalf of the American Bankers Association
                              July 8, 2009
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Subcommittee, my name is Arthur C. Johnson. I am Chairman and Chief 
Executive Officer of United Bank of Michigan, headquartered in Grand 
Rapids, Michigan. I serve as Chairman-Elect of the American Bankers 
Association (ABA), and I chair the ABA Community Bank Solutions Task 
Force, a committee dedicated to finding ways to address problems most 
acutely affecting community banking during this economic downturn. I am 
pleased to be here today representing ABA. ABA brings together banks of 
all sizes and charters into one association. ABA works to enhance the 
competitiveness of the Nation's banking industry and strengthen 
America's economy and communities. Its members--the majority of which 
are banks with less than $125 million in assets--represent over 95 
percent of the industry's $13.5 trillion in assets and employ over 2 
million men and women.
    We are pleased to share the banking industry's perspective on the 
current economic situation in rural America and the effects the 
recession is having on rural community banks. We strongly believe that 
community banks are one of the most important resources supporting the 
economic health of rural communities. Not surprisingly, the banks that 
serve our Nation's small towns also tend to be small community banks. 
Less well known is that over 3,500 banks--41 percent of the banking 
industry--have fewer than 30 employees.
    This is not the first recession faced by banks; they have been in 
their communities for decades and intend to be there for many decades 
to come. My bank, United Bank of Michigan, was chartered in 1903. We 
have survived the Great Depression and all the other ups and downs for 
over a century. We are not alone, however. In fact, there are 2,556 
other banks--31 percent of the banking industry--that have been in 
business for more than a century; 62 percent (5,090) of banks have been 
in existence for more than half a century. These numbers tell a 
dramatic story about the staying power of community banks and their 
commitment to the communities they serve. My bank's focus, and those of 
my fellow bankers throughout the country, is on developing and 
maintaining long-term relationships with customers. We cannot be 
successful without such a philosophy and without treating our customers 
fairly.
    In spite of the severe recession, community banks located in rural 
communities have expanded lending. In fact, during 2008--the first year 
of the recession--loans from banks headquartered outside of 
metropolitan statistical areas \1\ increased by $17 billion, or 7 
percent. Loan growth last year was also reflected in a smaller subset 
of community banks: farm banks. Lending for these banks expanded by 
$4.7 billion, or 9.2 percent, in 2008.
---------------------------------------------------------------------------
     \1\ Metropolitan statistical areas are defined as areas that have 
at least one town over 50,000 inhabitants.
---------------------------------------------------------------------------
    Considerable challenges remain, of course and these trends are not 
likely to be sustained. While many areas of our country have benefited 
from strong exports which have helped agricultural exports in 
particular, other rural areas of the country have not been as lucky. 
The downturn has continued to impose hardships on small businesses and 
manufacturers. In my home State of Michigan, we are facing our eighth 
consecutive year of job losses. The necessary--but painful--
restructuring of the auto industry will likely cause this job erosion 
to continue for some time, leading to a long recovery in these areas. 
Other rural areas with a manufacturing employment base are also 
suffering similar problems.
    In this environment, it is only natural for businesses and 
individuals to be more cautious. Individuals are saving more and 
borrowing less. Businesses are reevaluating their credit needs and, as 
a result, loan demand is also declining. Banks, too, are being prudent 
in underwriting, and our regulators demand it. Accordingly, it is 
unlikely that loan volumes will increase this year, and in fact, the 
total loans in rural areas declined slightly in the first quarter.
    With the economic downturn, credit quality has suffered and losses 
have increased for banks. Fortunately, community banks entered this 
recession with strong capital levels. As this Committee is aware, 
however, it is extremely difficult to raise new capital in this 
financial climate. Without access to capital, maintaining the flow of 
credit in rural communities will be increasingly difficult.
    We believe there are actions the government can take to assist 
viable community banks to weather the current downturn. The success of 
many local economies--and, by extension, the success of the broader 
national economy--depends in large part on the success of these banks. 
Comparatively small steps taken by the government now can make a huge 
difference to these banks, their customers, and their communities--
keeping capital and resources focused where they are needed most.
    Importantly, the amount of capital required to provide an 
additional cushion for all community banks--which had nothing to do 
with the current crisis--is tiny compared to the $182 billion provided 
to AIG. In fact, it takes only about $500 million in new capital today 
to bring all banks under $10 billion in assets above the well-
capitalized levels for Tier 1 capital. Even under a baseline stress 
test, the additional capital needed is less than $3 billion for all 
these smaller banks to be well-capitalized. Without new capital, banks 
under $10 billion in assets would have to shed nearly $9 billion in 
loans to achieve the same capital-to-assets ratio. Simply put, capital 
availability means credit availability. A small investment in community 
banks is likely to save billions of dollars of loans in local 
communities.
    Before discussing these points in more detail, I did want to thank 
Members of the Subcommittee for their tireless support of S. 896, the 
Helping Families Save Their Homes Act of 2009, legislation that 
expanded the insurance limits for deposits to $250,000 for 4 years and 
expanded FDIC's line of credit with the Treasury from $30 billion to 
$100 billion. Expanding the deposit insurance limit provided additional 
protection to small businesses, retirees, and other bank depositors 
that need to protect their payrolls or life-savings. Expanding the 
FDIC's line of credit helped to reduce banks' expenses, thus preserving 
resources in communities across this Nation. Without this expanded 
line, the FDIC would have imposed a special assessment on the banking 
industry totaling more than $15 billion dollars. By enacting this 
expanded line of credit, the FDIC has an additional cushion to rely 
upon--particularly for working capital purposes necessary to resolve 
bank failures quickly and to ensure that depositors have immediate 
access to their money. This increase in borrowing authority enabled the 
FDIC to make good on its promise to cut the special assessment in half.
    The original special assessment would have devastated the earnings 
of banks, particularly community banks, just at the time funds are 
needed most in their communities. Of course, the industry still bears a 
considerable financial burden from both the regular quarterly premiums 
and the final special assessment. The vast majority of banks that will 
bear this cost are well capitalized and had nothing to do with the 
subprime mortgages that led to our financial and economic problems. Yet 
these banks bear much of the costs of cleaning up the problems created. 
We will continue to work with you to find ways to reduce the costs 
imposed on healthy banks and to build a strong base to support new 
lending as our economy emerges from this recession.
    In my statement, I would like to focus on the following points:

    Banks in rural communities continue to lend in this 
        difficult economic environment, but the broadening economic 
        problems will make this more difficult in the future.

    New and expanded programs directed at community banks can 
        help rural America cope with the current downturn, including 
        broadening capital programs to enable participation by a 
        broader cross section of viable but struggling banks. Moreover, 
        regulators should ensure that their regulatory and supervisory 
        responses are commensurate to the risks they are seeing in 
        banks, and that they avoid inappropriate, procyclical responses 
        that make bad situations worse.

    ABA believes that it is critical for this Subcommittee and 
        Congress to focus on creating a systemic regulator, providing a 
        strong mechanism for resolving troubled systemically important 
        firms and filling gaps in the regulation of the shadow banking 
        industry. Such significant legislation would address the 
        principal causes of the financial crisis and constitute major 
        reform. We believe there is a broad consensus in the need to 
        address these issues.

    I will address each of these points in turn.
I. Banks in rural communities continue to lend in this difficult 
        economic environment, but the broadening economic problems will 
        make this more difficult in the future.
    Rural America has been bolstered in recent years by an agriculture 
sector that experienced one of the longest periods of financial 
prosperity in history. In 2007 and 2008, American farmers and ranchers 
in the aggregate enjoyed some of their most profitable years ever. The 
balance sheet for U.S. agriculture at the end of 2008 (according to 
USDA) was the strongest it has ever been, with a debt to asset ratio of 
less than 10 percent. USDA projects that, at year end 2009, farm and 
ranch net worth will be $2.171 trillion. This unprecedented high net 
worth is due in part to a robust increase in farm asset values (mainly 
farm real estate)--values which have not suffered the dramatic 
fluctuation as in some sectors during this time of crisis--but the high 
net worth is equally due to solid earned net worth as farmers used 
their excess cash profits to retire debt.
    However, while the past 10 years may be looked back upon by 
historians as an era of farm prosperity, not all sectors of the farm 
economy are doing well in 2009. Pressured by increases in the price of 
grain, the livestock sector is under considerable financial pressure. 
Dairy prices have dropped to below break-even levels for many 
producers, as demand has declined and dairy production continues to 
increase. The cattle feeding business has lost money for over 24 
months. Poultry producers have been hurt by lower prices and by the 
collapse of the largest poultry integrator in the country in 2008. The 
hog industry, which was poised to recover from low prices in 2008, has 
been badly hurt by misguided fears of the H1N1 virus and the subsequent 
closure of some key export markets.
    Fortunately, rural America was well positioned at the beginning of 
2009 to face the trying times they have encountered as a result of the 
economic crisis and other world events. In this environment, we 
sometimes hear that banks are not lending money. This is simply not 
true. As the charts on the next page show, bank lending in rural 
America has risen steadily over the last half-dozen years, and even 
during the first year of the recession, bank lending in rural areas has 
increased. As noted above, maintaining an expanding volume of credit 
will be a considerable challenge this year as the economy continues to 
weaken.
    While overall banks have continued to lend throughout this 
recession, that does not mean much to an individual borrower having 
difficulty obtaining financing. In many of these individual cases, 
however, upon further investigation, it appears that the primary reason 
for not receiving funding was either that the borrower's financial 
condition was vulnerable (perhaps weakened by local economic 
conditions), or the borrower expected to borrow money at prerecession 
terms when the risk of lending was considerably lower and funds 
available for lending were more accessible. Of course, every loan 
application is unique and must be evaluated that way. One thing that 
has clearly appened is that banks are looking carefully at the risk of 
a loan and reevaluating the proper pricing of that risk. This is a 
prudent business practice and one expected by our bank regulators.
    Against the backdrop of a very weak economy and in light of the 
troubles in the agricultural sector, it is only reasonable and prudent 
that all businesses--including banks and farms--exercise caution in 
taking on new financial obligations. In fact, farmers and ranchers have 
been very conscious of this financial cycle, and wisely used their 
excess cash profits to retire debt and to acquire new plant and 
equipment during the boom years. Both banks and their regulators are 
understandably more cautious in today's environment. Bankers are asking 
more questions of their borrowers, and regulators are asking more 
questions of the banks they examine. This means that some higher-risk 
projects that might have been funded when the economy was stronger may 
not find funding today.


II. New and expanded programs directed at community banks can help 
        rural America cope with the current downturn.
    The vast majority of community banks had absolutely nothing to do 
with the current crisis, yet as their communities have suffered, so 
have they. In spite of the strong agricultural economy which has helped 
to shield many parts of this Nation from the recession, the economic 
decline--and its global impact--will surely be felt over the course of 
the next several years. There has never been a more important time to 
put in place solutions that will help all community banks as they 
manage through this downturn.
    The many programs that have been initiated to calm the markets and 
provide capital for lending have helped to stabilize financial markets. 
As an example, the announcement of the Capital Purchase Program on 
October 14 caused risk spreads to decline from their pinnacle of 457 
basis points on October 10 to 249 basis points on October 22, a drop of 
45 percent. Clearly, the program to inject capital in healthy banks had 
a dramatic and immediate impact, and the trends begun then continue to 
narrow margins even further--back nearly to precrisis spreads. (See the 
charts on the following page.)
    However, the focus of the CPP and other stimulus programs has been 
on the largest banks and was only slowly made available to smaller 
banks. The changing nature of this program and the restrictive 
selection process has meant that banks that could have benefited from 
the program were unable to do so. As a result, to maintain reasonable 
capital levels, these banks have been forced to limit, or even reduce, 
their lending.
    As I emphasized at the outset, the amount of capital required to 
provide an additional cushion for all community banks is small. To 
reiterate, it takes only about $500 million in new capital today to 
bring all banks under $10 billion in assets above the well-capitalized 
levels for Tier 1 capital. Even under a baseline stress test to assess 
future needs, the additional capital needed is less than $3 billion for 
all banks to be well-capitalized. Without new capital, banks under $10 
billion in assets would have to shed nearly $9 billion in loans to 
achieve the same capital-to-assets ratio. Thus, a small injection of 
capital goes a long way to keeping credit flowing in rural communities.


    Given the continued weakness in this economy and the challenges we 
will face in the next 18 months, it is a critical time to focus on 
strategies for helping community banks. ABA recommends that new 
programs be developed--and existing programs be expanded--to help banks 
in rural America. Several key changes that are needed include:

    Broadening capital programs to enable participation by a 
        broader cross section of banks.

    Revising the risk-based capital rules to more accurately 
        reflect the risks presented by these investments.

    Avoiding appraising banks into insolvency by using 
        inappropriately conservative asset valuations and underwriting 
        standards.
Broaden capital programs to enable participation by a broader cross 
        section of banks
    The Capital Purchase Program (CPP) has been implemented in a way 
that ignores community banks that are viable but that are experiencing 
significant--yet temporary--problems. The Capital Assistance Program 
has not yet been implemented for community banks, but reportedly will 
apply the same eligibility criteria that have been used with the CPP. 
The Legacy Loans Program has the potential to help, but the FDIC 
recently announced a delay in implementing the Legacy Loans Program 
that calls into serious question its viability outside the possible use 
in failed bank situations. The Legacy Securities Program is still 
struggling to get off the ground as well. Program after program either 
has failed to meet the needs of viable community banks or has 
languished.
    ABA believes that this problem can be solved through several 
modifications:

  1.  Permit banks with up to $1 billion in total assets to participate 
        in the expanded CPP.

  2.  Publish the eligibility criteria for participating in the CPP and 
        CAP.

  3.  Provide funding to viable banks that have significant--yet 
        manageable--issues.

  4.  Revive the Legacy Loans Program and implement the Legacy 
        Securities programs in a way that expands the universe of 
        eligible assets to include trust preferred securities, ``real 
        estate owned,'' and other real estate-related loans. The 
        programs also should be implemented in a way that avoids 
        effectively shutting small banks out (for example, minimum 
        sizes on asset pools that no community bank could meet).

    The comparatively small sums of money that would be invested in 
these struggling but viable banks would pay big returns for the 
communities they serve.
Revise the risk-based capital rules to more accurately reflect the 
        risks presented by banks' investments
    Congress should use its oversight powers to assure that the 
regulators have rules and regulations that accurately reflect the risks 
that banks face. For example, banks' investment in mortgage backed 
securities and collateralized debt obligations are being severely 
downgraded by ratings agencies, largely due to liquidity issues (not 
credit or repayment risk). When the investments are downgraded below 
investment grade, an inappropriately conservative capital charge 
applies that can cause a risk weighting to go from 100 percent to 1,250 
percent, regardless of the performance of the security and regardless 
of the amount of subordinate positions that will absorb loss before a 
given bank's position. Mortgage-backed securities (MBSs) and 
collateralized debt obligations (CDOs) are securities whose performance 
depends on multiple obligors; the default by one borrower is not likely 
to impact the performance of other borrowers whose debt has been 
bundled in the security. Despite this--because ratings are based 
primarily on the probability of loss of the first dollar--any loss in 
an MBS or CDO adversely affects the rating of the security. This, in 
turn, can trigger higher capital requirements for banks, regardless of 
the likelihood that a holder of an interest in the security may be 
repaid at 100 cents on the dollar. Moreover, the current application of 
the Uniform Agreement on the Classification of Assets and Appraisal of 
Securities causes the entire face amount of a debt security with some 
degree of impairment to be classified, rather than requiring 
classification only of the portion of the security that reflects 
potential loss to the banking organization.
    ABA believes that two changes will help this situation 
considerably:

  1.  Revise the risk-based capital rules to more accurately reflect 
        the risks presented by these investments.

  2.  Classify only that portion of the security that represents the 
        credit risk-related expected loss on the exposures underlying 
        the security, adjusted for any credit enhancements and further 
        adjusted for recoveries and expected loss severity.

    An additional problem related to bank capital is that the risk 
weighting of debt issued by Fannie Mae and Freddie Mac is too high. 
Prior to those institutions being placed into conservatorship, the debt 
was risk-weighted at 20 percent. Given the stated intent of the United 
States government to support these GSEs, a lower risk weight is 
appropriate and would help offset to a small degree the adverse impact 
that the conservatorships had on those banks that invested in Fannie 
and Freddie stock. The risk weight of GSE debt should be reduced to 
below 20 percent. The agencies proposed to lower the risk weight of 
Fannie and Freddie debt to 10 percent, but this rulemaking has been 
pending since October of last year.
    A third issue related to capital concerns is the extent to which a 
bank's allowance for loan and lease losses (ALLL) is included in the 
bank's capital. The agencies' capital rules permit a bank's ALLL to 
count as Tier 2 capital, but only up to 1.25 percent of a bank's risk-
weighted assets. This fails to adequately recognize the loss-absorbing 
abilities of the entire allowance and creates a disincentive to banks 
reserving more. Both the ALLL and ``core'' capital are available to 
absorb losses. The Comptroller of the Currency recently acknowledged 
this, stating, ``loan loss reserves are a front line of defense for 
absorbing credit losses before capital must do so. . . . Given their 
primary, capital-like loss-absorbing function, loan loss reserves 
should get greater recognition in regulatory capital rules, a result 
that would help remove disincentives for banks to hold higher levels of 
reserves.'' \2\
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     \2\ Remarks by John C. Dugan, Comptroller of the Currency, Before 
the Institute for International Bankers, March 2, 2009.
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    These changes suggested in response to these three issues would 
result in a more accurate reflection of the health of institutions. ABA 
fully supports the system of risk-based regulation and supervision, but 
when the rules no longer reflect risk, the system breaks down. Our 
suggestions are intended to address instances where a bank's risk of 
loss is not fairly reflected in the rules. In the case of downgraded 
debt securities, the rules can, in extreme cases, threaten the 
viability of institutions that are directed to raise significant 
additional capital in a short period of time. It is bad policy to 
require a bank to raise capital to address the appearance of a 
shortfall but not the reality of one. When a rule requires more capital 
than the actual risk to the bank would suggest, the rule should be 
changed.
Avoid appraising banks into insolvency by using inappropriately 
        conservative asset valuations and underwriting standards
    In my role as Chairman-Elect and as chairman of the ABA Community 
Bank Solutions Task Force, I have heard numerous stories from bankers 
about issues that are coming up in exams. Banks are being told to write 
down the value of assets based on the sales prices of assets being 
dumped on the market at distressed prices. Appraisals of property that 
are based on comparable sales are particularly problematic when the 
sales do not involve a willing buyer and a willing seller. Valuations 
by a banker acting reasonably and in good faith are likely to be more 
accurate than appraisals in those situations. ABA frequently hears that 
examiners either are not using FASB-compliant valuation methods or are 
using ``personal formulas'' to downgrade or reevaluate portfolio 
values, even when stated values are supported by timely appraisals. We 
also hear that examiners are applying new, unpublished, and seemingly 
arbitrary ``rules of thumb'' for how much a bank must put in its 
allowance for loan and lease losses (ALLL). For example, in some cases 
examiners require 25 percent of every substandard asset; 75 percent of 
nonperforming assets; etc.
    ABA believes there are several steps that the regulators should be 
taking to remedy this situation and we urge this Subcommittee to use 
its oversight authority to encourage them:

  1.  Issue written guidance affirming that banks should not use 
        distressed sales values when analyzing ``comparables.'' 
        Guidance should address proper appraisal documentation, 
        particularly where foreclosures or auction sales comprise a 
        majority of the comparable transactions. Moreover, this 
        guidance should state that banks may rely, in appropriate 
        situations, on bank management's judgment about the value of a 
        property.

  2.  Allow institutions that have rented properties at market rates to 
        exclude them from ``nonperforming loans.''

  3.  Apply clear and consistent standards to the maintenance of the 
        ALLL that reflect a realistic assessment of the assets' likely 
        performance.

    These changes are necessary to confront the natural inclination of 
examiners to be conservative in order to avoid the inevitable second-
guessing that would arise if a bank were to fail on their watch. We are 
not suggesting that examiners use forbearance or otherwise relax their 
examination standards; rather, we are suggesting that the examiners not 
be harder on banks than circumstances warrant. The regulators can make 
things worse in their efforts to make things better. Insisting upon 
punitive, procyclical steps at a time when a bank is working through 
issues can push an otherwise viable bank over the edge.
    There are many more actions that could be taken to help banks 
throughout this period. ABA would be happy to discuss this further with 
the Committee.
III. Creating a systemic risk regulator, providing a mechanism for 
        resolving troubled systemically important institutions, and 
        filling gaps in the regulation of the shadow banking industry 
        should be the focus of Congressional action.
    One of the most critical needs today is a regulator with explicit 
systemic risk responsibility. ABA strongly supports having such a 
regulator. There are many aspects to consider related to the authority 
of this regulator, including the ability to mitigate risk-taking from 
systemically important institutions, authority over how accounting 
rules are developed and applied, and the protections needed to maintain 
the integrity of the payments system.
    ABA believes that systemic risk oversight should utilize existing 
regulatory structures to the maximum extent possible and involve a 
limited number of market participants, both bank and nonbank. Safety 
and soundness implications, financial risk, consumer protection, and 
other relevant issues need to be considered together by the regulator 
of each institution.
    To be effective, the systemic risk regulator must have some 
authority over the development and implementation of accounting rules. 
No systemic risk regulator can do its job if it cannot have some input 
into accounting standards--standards that have the potential to 
undermine any action taken by a systemic regulator. Thus, a new system 
for the establishment of accounting rules--one that considers the real-
world effects of accounting rules--needs to be created in recognition 
of the critical importance of accounting rules to systemic risk and 
economic activity.
    Moreover, there must be a mechanism for the orderly resolution of 
systemically important nonbank firms. Our regulatory bodies should 
never again be in the position of making up a solution on the fly to a 
Bear Stearns or AIG, of not being able to solve a Lehman Brothers. The 
inability to deal with those situations in a predetermined way greatly 
exacerbated the crisis.
    A critical issue in this regard is ``too-big-to-fail.'' Whatever is 
done on the systemic regulator and on a resolution system will set the 
parameters of ``too-big-to-fail.'' In an ideal world, no institution 
would be ``too-big-to-fail,'' and that is ABA's goal; but we all know 
how difficult that is to accomplish, particularly with the events of 
the last few months. This ``too-big-to-fail'' concept has profound 
moral hazard implications and competitive effects that are very 
important to address. We note Chairman Bernanke's statement: ``Improved 
resolution procedures . . . would help reduce the ``too-big-to-fail'' 
problem by narrowing the range of circumstances that might be expected 
to prompt government action. . . . '' \3\
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     \3\ Ben Bernanke, speech to the Council on Foreign Relations, 
Washington, DC, March 10, 2009.
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    Finally, a major cause of our current problems is the regulatory 
gaps that allowed some entities to completely escape effective 
regulation. It is now apparent to everyone that a critical gap occurred 
with respect to the lack of regulation of independent mortgage brokers. 
Questions are also being raised with respect to credit derivatives, 
hedge funds, and others.
    As these gaps are being addressed, Congress should be careful not 
to impose new, unnecessary regulations on the traditional banking 
sector, which was not the source of the crisis and continues to provide 
credit. Thousands of banks of all sizes, in communities across the 
country, are scared to death that their already-crushing regulatory 
burdens will be increased dramatically by regulations aimed primarily 
at their less-regulated or unregulated competitors. Even worse, the new 
regulations will be lightly applied to nonbanks while they will be 
rigorously applied--down to the last comma--to banks.
Conclusion
    I want to thank you, Mr. Chairman, for the opportunity to present 
the views of the ABA on the challenges ahead for rural communities and 
the banks that serve them. These are difficult times and the challenges 
are significant. In the face of a severe recession, however, bankers 
are working hard every day to assure that the credit needs of our 
communities are met. As you contemplate major changes in regulation--
and change is needed--ABA would urge you to ask this simple question: 
how will this change impact those thousands of banks that make the 
loans needed to get our economy moving again? Addressing these issues 
will provide the most constructive avenue to assure that rural 
communities throughout this Nation will continue to have access to 
credit by local financial institutions. We look forward to working with 
Congress to address needed changes in a timely fashion, while 
maintaining the critical role of our Nation's banks.

                   PREPARED STATEMENT OF ED TEMPLETON
                 President and Chief Executive Officer,
        SRP Federal Credit Union, North Augusta, South Carolina,
     On Behalf of the National Association of Federal Credit Unions
                              July 8, 2009
Introduction
    Good afternoon, Chairman Johnson, Ranking Member Crapo, and Members 
of the Subcommittee. My name is Ed Templeton and I am testifying today 
on behalf of the National Association of Federal Credit Unions (NAFCU). 
I serve as the President and CEO of SRP Federal Credit Union, 
headquartered in North Augusta, South Carolina. I have been President 
and CEO of SRP FCU for the last 22 years. SRP FCU is a community credit 
union serving over 92,000 members in several counties in South Carolina 
along the Georgia border. Our membership includes Allendale and 
Barnwell counties which are some of the most rural in South Carolina. 
They are also some of the poorest, with over 20 percent of the 
population in Barnwell and over 35 percent of the population in 
Allendale living below the poverty level. SRP FCU has a strong presence 
in these counties, with over 20 percent of the adult population in 
Allendale and over 50 percent of the adult population in Barnwell being 
members of SRP FCU.
    I currently serve as the Secretary of NAFCU's Board of Directors. I 
formerly served on the NAFCU Education Committee and was President of 
the Columbia Chapter of Credit Unions. I received my BBA from Augusta 
College, graduated from the Georgia School of Banking and the BAI 
School of Bank Administration at the University of Wisconsin.
    NAFCU is the only national organization exclusively representing 
the interests of the Nation's federally chartered credit unions. NAFCU-
member credit unions collectively account for approximately 63.9 
percent of the assets of all federally chartered credit unions. NAFCU 
and the entire credit union community appreciate the opportunity to 
participate in this discussion regarding how the current economic 
crisis has impacted America's credit unions serving those in rural 
communities.
    Historically, credit unions have served a unique function in the 
delivery of necessary financial services to Americans. Established by 
an act of Congress in 1934, the Federal credit union system was 
created, and has been recognized, as a way to promote thrift and to 
make financial services available to all Americans, many of whom would 
otherwise have limited access to financial services. Congress 
established credit unions as an alternative to banks and to meet a 
precise public need--a niche that credit unions fill today for nearly 
90 million Americans. Every credit union is a cooperative institution 
organized ``for the purpose of promoting thrift among its members and 
creating a source of credit for provident or productive purposes.'' (12 
USC 1752(1)). While over 75 years have passed since the Federal Credit 
Union Act (FCUA) was signed into law, two fundamental principles 
regarding the operation of credit unions remain every bit as important 
today as in 1934:

    credit unions remain totally committed to providing their 
        members with efficient, low-cost, personal financial service; 
        and,

    credit unions continue to emphasize traditional cooperative 
        values such as democracy and volunteerism.

    Credit unions are not banks. The Nation's approximately 7,800 
federally insured credit unions serve a different purpose and have a 
fundamentally different structure than banks. Credit unions exist 
solely for the purpose of providing financial services to their 
members, while banks aim to make a profit for a limited number of 
shareholders. As owners of cooperative financial institutions united by 
a common bond, all credit union members have an equal say in the 
operation of their credit union--``one member, one vote''--regardless 
of the dollar amount they have on account. These singular rights extend 
all the way from making basic operating decisions, to electing the 
board of directors--something unheard of among for-profit, stock-owned 
banks. Unlike their counterparts at banks and thrifts, Federal credit 
union directors generally serve without remuneration--a fact 
epitomizing the true ``volunteer spirit'' permeating the credit union 
community.
    Credit unions have grown steadily in membership and assets, but in 
relative terms, they make up a small portion of the financial services 
marketplace. Federally insured credit unions have approximately $856.4 
billion in assets as of March 2009. By contrast, Federal Deposit 
Insurance Corporation (FDIC) insured institutions have $13.6 trillion 
in assets. The average size of a Federal credit union is $97.6 million 
compared to $1.647 billion for banks. Almost 3,200 credit unions have 
less than $10 million in assets. The credit union share of total 
household financial assets is also relatively small, at only 1.5 
percent as of March 2009.
    Size has no bearing on a credit union's structure or adherence to 
the credit union philosophy of service to members and the community. 
While credit unions may have grown, their relative size is still small 
compared with banks. Even the world's largest credit union, with $38.7 
billion in assets, is dwarfed by the Nation's biggest banks who hold 
trillions of dollars in assets.
    America's credit unions have always remained true to their original 
mission of ``promoting thrift'' and providing ``a source of credit for 
provident or productive purposes.'' In fact, Congress acknowledged this 
point when it adopted the Credit Union Membership Access Act (CUMAA--
P.L. 105-219) a decade ago. In the ``findings'' section of that law, 
Congress declared that, ``The American credit union movement began as a 
cooperative effort to serve the productive and provident credit needs 
of individuals of modest means . . . [and it] continue[s] to fulfill 
this public purpose.''
    Credit unions continue to play a very important role in the lives 
of millions of Americans from all walks of life. As consolidation of 
the commercial banking sector has progressed, with the resulting 
depersonalization in the delivery of financial services by banks, the 
emphasis in consumers' minds has begun to shift not only to services 
provided but also--more importantly--to quality and cost. Credit unions 
are second to none in providing their members with quality personal 
financial service at the lowest possible cost.
    While the lending practices of many other financial institutions 
led to the Nation's subprime mortgage debacle, data collected under the 
Home Mortgage Disclosure Act (HMDA) illustrates the value of credit 
unions to their communities. The difference between credit unions and 
banks is highlighted when one examines the 2007 HMDA data for loans to 
minority applicants with household incomes under $40,000. According to 
the 2007 HMDA data, banks have a significantly higher percentage of 
mortgage purchase loans (20.8 percent), charging at least 3 percent 
higher than the comparable Treasury yield for minority applicants with 
household income under $40,000. Credit unions, on the other hand, had 
only 4.4 percent of their loans in that category.
Credit Unions in the Current Economic Environment
    While credit unions have fared better than most financial 
institutions in these turbulent economic times, many have been 
impacted, through no fault of their own, by the current economic 
environment. Many credit unions, including smaller ones, have seen an 
increase in delinquencies and charge-offs in recent quarters. Some of 
this impact has been regional, depending on local economic conditions.
    In particular, the corporate credit union system has felt the 
biggest impact, and the National Credit Union Administration (NCUA) 
placed the two largest corporate credit unions, U.S. Central Federal 
Credit Union and Western Corporate Federal Credit Union, into 
receivership earlier this year. The passage and enactment of S. 896, 
The Helping Families Save Their Homes Act of 2009, and the temporary 
corporate credit union stabilization fund that it created provided 
important relief to natural-person credit unions in these challenging 
times. We thank you for work on this matter.
    It is also widely recognized by leaders on Capitol Hill and in the 
Administration that credit unions were not cause of the current 
economic downturn, but we believe we can be an important part of the 
solution. As credit unions have fared well in the current environment, 
there are many that have capital available. Surveys of NAFCU member 
credit unions have shown that many are seeing increased demand for 
mortgage loans and auto loans as other lenders leave the market. A 
number of credit unions are also seeing local small businesses, who 
have lost lines of credit from other lenders, turn to them for the 
capital they need.
    Credit unions are helping meet those needs in rural areas. Despite 
the economic downtown, an analysis of NCUA Form 5300 Call Report data 
shows that credit unions have seen a growth in the percentage of total 
amount of credit union farm loans to members for the last nine 
consecutive quarters during the current recession. Additionally, on 
examination of 2007 HMDA data (the last year that is available) shows 
that credit union mortgage loans to American Indians grew at an annual 
rate of 9.23 percent over the previous year and that credit unions had 
a higher percentage of approved loans to American Indians (75.31 
percent) than other types of financial institutions.
    The NCUA has been working to assist small credit unions as well. In 
April, the NCUA Board finalized actions to centralize NCUA's chartering 
within the Headquarters' Office of Small Credit Union Initiatives 
(OSCUI), thereby creating a national chartering program to reduce 
regulatory burden on credit union charter applicants. The revisions 
delegate OSCUI authority to approve and reject new charters, and 
require OSCUI's concurrence to revoke new charters. This new process 
should assist individuals in understanding the process of chartering a 
new institution and help keep new growth in the credit union industry.
    Additionally, many smaller credit unions rely on other credit 
unions for support and to provide effective service to their respective 
memberships. Throughout the country small credit union roundtables have 
emerged for credit unions to discuss operational concerns with like 
institutions. Larger credit unions also serve as partners for smaller 
institutions, and perform functions ranging from shared branching to 
back office operations.
    We at SRP FCU are actually expanding at this time in some of the 
most rural areas of our field of membership, and we are about to break 
ground on a new credit union branch in Allendale County.
Current Challenges
    Credit unions are the most highly regulated of all financial 
institutions, facing restrictions on who they can serve and their 
ability to raise capital, among a host of other limitations. There are 
other statutory limitations on credit unions that hamper their ability 
to serve their members, including those in rural areas. These include:
    Credit Union Member Business Lending Cap. The Credit Union 
Membership Access Act (CUMAA) established an arbitrary cap on credit 
union member business lending of 12.25 percent of assets in 1998. CUMAA 
also directed the Treasury Department to study the need for such a cap. 
In 2001, the Treasury Department released its study entitled ``Credit 
Union Member Business Lending'' in which it concluded that ``credit 
unions' business lending currently has no effect on the viability and 
profitability of other insured depository institutions.'' That same 
study also found that over 50 percent of credit union loans were made 
to businesses with assets under $100,000, and 45 percent of credit 
union business loans go to individuals with household incomes of less 
than $50,000. The current economic crisis has demonstrated the need to 
have capital available to help our Nation's small businesses, 
especially in troubling times. Many credit unions have the capital that 
other lenders do not in this environment, but are hamstrung by such an 
arbitrary limitation. We are pleased that Senator Schumer has indicated 
that he plans to introduce legislation to remove this arbitrary cap, 
and we urge the Subcommittee to support and advance those efforts.
    Underserved Areas. As the Subcommittee is aware, many rural areas 
are also underserved. Credit unions play an important role in helping 
those on whom other financial institutions have turned their backs and 
left behind. The 1998 Credit Union Membership Access Act (CUMAA) gave 
the NCUA the authority to allow Federal credit unions to add 
underserved areas to their field of membership; however, the language 
was unclear as to what types of charters were permitted to add 
underserved areas. For an area to be ``underserved,'' CUMAA requires 
the NCUA Board to determine that a local community, neighborhood or 
rural district is an ``investment area'' as defined in the Community 
Development Banking and Financial Institutions Act of 1994, and also 
that it is ``underserved by other depository institutions.'' 2 U.S.C. 
1759(c)(2)(A).
    NAFCU supports making a necessary clarification to the CUMAA that 
credit unions are able to add underserved areas to their fields of 
membership, regardless of charter type. In 2005, the American Bankers 
Association brought litigation against NCUA, arguing that under the 
plain language of CUMAA (American Bankers Association, et al., v. NCUA, 
No. 2:05-cv-000904 (D. Utah, filed Nov. 1, 2006)), only multiple-
common-bond credit unions could add underserved areas to their fields 
of membership. Up to that point, NCUA had permitted all types of credit 
unions to add underserved areas to their field of membership. Even 
though there was legislative history supporting the NCUA 
interpretation, the case settled out of court, and as a result, NCUA 
modified its rules to prohibit community and single-sponsor Federal 
credit unions from adding underserved areas to their field of 
membership. NAFCU and the credit union community believe that 
addressing this issue through legislation would clear up the ambiguity 
surrounding the ability of Federal credit unions to add underserved 
areas to their fields of membership.
    NCUA's current rules do not address how a rural district should be 
defined for the purposes of adding underserved areas. Recognizing that 
there was a need to streamline the process for credit unions in rural 
areas to add underserved areas to their fields of membership, NCUA 
proposed an amendment to their Chartering and Field of Membership 
Manual in 2008. NAFCU provided feedback from many of our rural members 
during the notice and comment period, and we look forward to Congress 
clarifying this issue and seeing NCUA continue its work to provide 
streamlined guidelines.
Regulatory Reform
    While credit unions have generally performed well in the current 
economic crisis, we remain concerned that well-intentioned efforts at 
regulatory reform could ultimately have a negative impact on credit 
unions and their members. As not-for-profit member-owned cooperatives, 
credit unions are unique institutions in the financial services arena. 
We believe that the NCUA should remain an independent regulator of 
credit unions and are pleased to see that the Administration's proposal 
would maintain the Federal credit union charter and an independent 
National Credit Union Administration (NCUA).
    NAFCU does support the creation of a Consumer Financial Protection 
Agency (CFPA), which would have authority over nonregulated 
institutions that operate in the financial services marketplace. 
However, we do not believe such an agency should have authority over 
regulated federally insured depository institutions, and do not support 
extending that authority to federally insured credit unions. Giving the 
CFPA such authority to regulate, examine and supervise credit unions 
that already are regulated by the NCUA would add an additional 
regulatory burden and cost. Additionally, it could lead to situations 
in which institutions regulated by one agency for safety and soundness 
find their guidance in conflict with their regulator for consumer 
issues. Such a conflict and burden will surely increase compliance 
costs to credit unions, leading to diminished services to their 
members. Credit unions already fund the budget for NCUA. Under the 
Administration's proposal for the CFPA, it also appears that the agency 
would be funded by the industry, meaning an additional cost burden to 
credit unions and their 90 million members.
    Recognizing that more should be done to help consumers, we would 
propose that, rather than extending the CFPA to federally insured 
depository institutions, each functional regulator of federally insured 
depository institutions strengthen or establish a new office on 
consumer affairs. Such an office should report directly to the 
Presidential appointees at the regulator and be responsible for 
ensuring that the regulator is looking out for consumer concerns in 
writing rules, supervising and examining institutional compliance, and 
administratively enforcing violations. Consumer protection offices at 
the functional regulators will ensure that those regulating consumer 
issues at financial institutions have knowledge of the institutions 
they are examining and can provide expertise and guidance on consumer 
protection. This is particularly important to credit unions, as they 
are regulated and structured differently than others in financial 
services. We believe that it is imperative that any regulator examining 
credit unions should understand their unique nature. This approach 
would strengthen consumer protection while not adding unnecessary 
regulatory burdens on our Nation's financial institutions. We are 
pleased to see that NCUA Board Chairman Michael Fryzel recently 
announced the creation of such an office at NCUA.
    Finally, some have advocated expanding the Community Reinvestment 
Act (CRA) as part of the regulatory reform effort. NAFCU opposes 
extending CRA to Federal credit unions. Federal credit unions are 
already examples of CRA in action. Furthermore, analysis of 2007 HMDA 
data shows that despite banks and thrifts being subject to CRA 
requirements, credit unions regularly outperform them in terms of 
lending to low-income and minority populations. Adding a CRA 
requirement to Federal credit unions would be a solution in search of a 
problem.
Conclusion
    In conclusion, the current economic crisis is having an impact on 
credit unions in rural areas, but many are continuing the serve their 
members well. The enactment of legislation earlier this year, such as 
S. 896 and the temporary corporate credit union stabilization fund it 
created, are providing relief, but additional statutory challenges 
remain. We urge the Subcommittee to support efforts to remove the 
credit union member business lending cap and to clarify that ability of 
credit unions of all charter types to add underserved areas. Finally, 
while there are positive aspects to consumer protection in regulatory 
reform, we believe that Federal credit unions continue to warrant an 
independent regulator that handles both safety and soundness and 
consumer protection matters.
    I thank you for the opportunity to appear before you today on 
behalf of NAFCU and would welcome any questions that you may have.

                  PREPARED STATEMENT OF PETER SKILLERN
                          Executive Director,
          Community Reinvestment Association of North Carolina
                              July 8, 2009
    Thank you, Senator Johnson, for the opportunity to testify today on 
lenders, consumers, and the economy in rural areas. I am Peter 
Skillern, Executive Director of the Community Reinvestment Association 
of North Carolina, a nonprofit community advocacy and development 
agency. \1\
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     \1\ For a fuller description, please visit www.cra-nc.org.
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    North Carolina has strong rural and banking sectors. Eighty-five of 
our one hundred counties are rural and 50 percent of the population 
lives there. \2\ North Carolina has 106 credit unions and 106 banks 
ranging from the largest bank in the country, Bank of America at $2.4 
trillion in assets, to Mount Gilead Savings and Loan at $9.8 million. 
\3\
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     \2\ North Carolina Rural Center Data Center, http://
www.ncruralcenter.org/databank/.
     \3\ FDIC Institutional Data http://www2.fdic.gov/idasp/main.asp.
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    The current economic stresses for our rural communities and small 
financial institutions are significant. They are best understood in the 
context of two long-term trends: (1) a decline in the rural economy, 
and (2) the consolidation of the financial sector. Our policy 
recommendations are (1) to reform the broader regulatory financial 
system for stability, and (2) to invest in rural communities for 
recovery and growth.
Rural Economies Are in Long-Term Decline
    The economic crisis facing the Nation impacts North Carolina hard, 
with the fifth highest unemployment rate in the country at 11.4 
percent. \4\ It hurts our rural counties harder with 19 counties--such 
as Scotland, McDowell, and Edgecombe--experiencing unemployment from 14 
percent-17 percent. \5\ These unemployment rates are years in the 
making.
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     \4\ United States Department of Labor, http://www.bls.gov/web/
laumstrk.htm.
     \5\ Bureau of Labor Statistics, http://data.bls.gov/PDQ/
outside.jsp?survey=la.
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    Rural North Carolina did not recover from the 2001 recession. 
Between 2002 and 2005 the manufacturing sectors of textile, apparel and 
furniture lost more than 88,000 jobs. In the past year more than 22,000 
factory jobs were lost, particularly in the factories producing parts 
for the auto industry. \6\ North Carolina still produces more tobacco 
than any other State, but changes for tobacco and the agricultural 
sector are dramatically reducing the number of small family farmers. 
\7\ While rural counties in the scenic mountains and coast and the 
exurbs of our cities have enjoyed net in-migration, 40 rural counties 
lost population in the past decade. The North Carolina rural population 
is more likely to be older, poorer and have lower educational 
attainment. Median rural household incomes are 25 percent lower than in 
urban areas and poverty rates are 36 percent higher. \8\ Due to low 
wages, rural residents face a housing affordability gap even though 
home prices on average are lower. As a result, 24 percent of the 
housing stock in rural areas is manufactured homes compared to 8 
percent in urban areas. \9\ New home construction often consists of 
second homes for retirees in the Blue Ridge Mountains and Outer Banks. 
The foreclosure rate for rural areas has jumped correspondingly with 
the credit crisis and the increase in unemployment. This recession 
intensifies a long-term restructuring of the economy in rural 
communities.
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     \6\ North Carolina Rural Center, http://www.ncruralcenter.org/
databank/trendpage--Employment.asp.
     \7\ North Carolina Rural Center, http://www.ncruralcenter.org/
databank/trendpage--Agriculture.asp.
     \8\ North Carolina Rural Center, http://www.ncruralcenter.org/
databank/trendpage--Income.asp.
     \9\ U.S. Census 2000, Units in Structure, Summary File 3, Table 
H30.
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Small Financial Institutions Are Declining as the Financial Sector 
        Consolidates
    During the economic crisis a number of small banks across the 
Nation have failed--two in North Carolina in 2009--but far more have 
been lost through consolidation over time. Nationally, the number of 
banks with under $100 million in assets dropped by 5,410 from 1992 to 
2008. \10\ In North Carolina, rural counties hold 50 percent of the 
population and 50 percent of bank branches. Yet rural bank branches 
hold only 15.7 percent of deposit assets (down from 27 percent in 
1996.) \11\ Nationally, approximately 4,000 small banks made 100 or 
fewer mortgages in 2007. \12\ In all, these smaller lenders account for 
1.8 percent of all national mortgage activity. North Carolina CDFI 
credit unions are facing declining deposits, higher delinquencies and 
adverse regulatory pressure to curtail lending. The result could be 
closures. Small banks are at a competitive disadvantage in terms of 
pricing, products and geographical service area. Small banks in rural 
communities are facing a long-term restructuring in the economy and a 
correspondingly declining share of deposit assets and lending 
activities.
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     \10\ It Takes More Than a Village: The Decline of the Community 
Bank, Celent, http://reports.celent.com/PressReleases/200901293/
VillageBank.asp.
     \11\ FDIC Institutional Data http://www2.fdic.gov/idasp/main.asp.
     \12\ FFIEC, HMDA Analysis by CRA-NC.
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    By contrast, the consolidation of assets and market share of 
megabanks has increased. In 1995, the top 5 banks had 11 percent 
deposit share; today, they have nearly 40 percent. \13\ In the first 
quarter, 56 percent of mortgage activity was conducted by four lenders. 
\14\ The consolidation of Country Wide and Merrill Lynch into Bank of 
America, Washington Mutual into JPMorgan Chase, and Wachovia Bank into 
Wells Fargo has further consolidated the financial services sector, 
making institutions that are ``too-big-to-fail'' even bigger. 
Ironically, these institutions contributed in part to the credit crisis 
through unethical, irresponsible business and lending practices.
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     \13\ It Takes More Than a Village: The Decline of the Community 
Bank, Celent, http://reports.celent.com/PressReleases/200901293/
VillageBank.asp.
     \14\ Mortgage Daily, http://www.mortgagedaily.com/
PressRelease051109.asp.
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    The collapse of North Carolina's homegrown Wachovia Bank through 
exotic mortgage lending and the troubles of Bank of America in Wall 
Street deals contrast sharply with the stability small banks have 
provided. As a rule, small banks and credit unions avoided subprime 
credit and managed their resources well. These local institutions 
provide stability and diversification in the financial sector. They 
offer leadership to local civic engagements and credit to small 
businesses for job creation, mortgages for homeownership, small farm 
loans for agriculture, affordable deposit and checking services to 
consumers. The attached map compares bank branch coverage by the seven 
largest banks compared to all bank branches. \15\ Without smaller 
institutions, many areas would go unserved. By definition these 
financial institutions are small, but are fundamental economic building 
blocks to our rural economy. Banking policy and regulatory oversight 
should support small banks and credit unions as essential to the local 
ecology of credit and commerce.
---------------------------------------------------------------------------
     \15\ Finpro, USA Branches, Bank Branch Ownership 03/16/2009 
www.finpronj.com.
---------------------------------------------------------------------------
Financial Reform Will Help Consumers, Lenders, and Rural Communities
    Consumers in rural and urban areas face similar lending abuses. 
Rural areas had a higher percentage of subprime high-cost loans than 
urban areas (17.4 percent compared to 15.5 percent in 2004), although 
the actual volume is significantly lower. \16\ Rural areas have a high 
rate of Refund Anticipation Loans, which correspond to higher levels of 
poverty and uptake of the Federal Earned Income Tax Credit. Payday 
lenders are prevalent in the rural areas of the 35 States that allow 
this usurious lending. Consumers need better protections from unsound 
and unscrupulous lending practices.
---------------------------------------------------------------------------
     \16\ Carsey Institute, Policy Brief Number 4, Fall 2006. http://
www.carseyinstitute.unh.edu/publications/PB--predatorylending.pdf.
---------------------------------------------------------------------------
    Harmed by the lack of financial regulatory oversight of other 
lending institutions, small banks and rural communities will benefit 
from the needed financial regulatory reform of our system as a whole. 
Attached to my written testimony are full descriptions of five 
principles for reform: responsibility, accountability, transparency, 
equal access and avoidance of conflict of interest. Also included is a 
discussion of how these six principles apply both to lenders and to the 
regulatory system. \17\ Based on the principles, the Community 
Reinvestment Association of North Carolina in particular is supportive 
of the CRA Modernization Act HB 1492 and President Obama's 
recommendation for the Financial Product Safety Commission as part of 
broader reform initiatives. Faced with a rising tide of foreclosures 
and insufficient loan modification programs, we ask the United States 
Senate to pass judicial loan modification to manage foreclosure losses 
for lenders, borrowers, and taxpayers.
---------------------------------------------------------------------------
     \17\ Developed by the Woodstock Institute, California Reinvestment 
Coalition, Neighborhood Economic Development Advocacy Project, 
Community Reinvestment Association of North Carolina.
---------------------------------------------------------------------------
    Although the problems created by the financial crisis and recession 
are felt by every community and the solutions needed are national in 
scope, it would be a mistake to assume that urban and rural communities 
will shake off the recession with equal speed. The data in my testimony 
indicates that long-term challenges for small banks and rural 
communities are systemic as well as cyclical. North Carolina's economic 
recovery of the 2001 recession through technology, commerce, and 
finance masked the lack of recovery in the rural areas. Unless we 
invest in rebuilding these communities, no banks of any size will 
thrive.
Invest in Rural Communities
    My concluding recommendation to Congress is to expand the 
Neighborhood Stabilization Program (NSP) both in scale of funding and 
in scope to include rural areas. NSP funds are to help deal with the 
consequences of the foreclosure crisis in revitalizing abandoned and 
foreclosed properties and rebuilding distressed communities. Six 
billion dollars was committed to NSP for communities. By comparison, 
$700 billion was authorized for TARP funding for banks. Please increase 
the amount of funding for NSP.
    NSP rules favor urban areas and exclude rural needs. Nationally 70 
percent of foreclosures are in urban areas and 30 percent in rural. In 
North Carolina no rural area met the NSP needs test due to a lack of 
concentration. Yet in the aggregate, there are more foreclosures in 
rural counties than urban counties. This pattern is found in 23 other 
States such as Georgia, Indiana, New Hampshire, New Mexico. \18\ 
Increased funding and rural inclusion will allow banks to move REOs off 
their balance sheets in partnership with nonprofits and local 
governments to rehabilitate the housing stock and rebuild their 
communities. The future for rural communities and banks is brighter if 
we recognize and act on the need for financial regulatory reform and 
investment in our communities through initiatives such as the 
Neighborhood Stabilization Program.
---------------------------------------------------------------------------
     \18\ CRA-NC analysis of Table 1: Foreclosure Needs Scores within 
States by CDBG Jurisdiction--October 28, 2008, Source: Analysis by the 
Local Initiative Support Corporation provided by the Foreclosure 
Response project.
---------------------------------------------------------------------------
    Thank you very much for your attention.

    
    
Principles for Financial and Regulatory Reform
    1. Responsibility: Financial Institutions must offer financial 
products and services that are appropriate and suitable to the needs 
and abilities of the consumers. Regulators must regulate financial 
institutions so as to ensure that they are providing access to 
responsible and fair credit and loans.
    2. Accountability: Financial institutions must refrain from, and be 
held accountable for, offering harmful financial products and services 
and engaging in practices that harm individuals and communities. 
Regulators must be held to high standards for their regulation and 
oversight of financial institutions and accurately report to the public 
on a regular basis. Laws and regulations must provide strong 
enforcement mechanisms to ensure accountability and provide meaningful 
redress to those harmed by irresponsible actions of financial 
instructions. Regulators must vigorously enforce these laws and rules. 
Federal regulations must establish a minimum floor for consumer 
protections that may be exceeded by States and localities.
    3. Transparency: Financial institutions must fully, fairly, and 
clearly disclose all costs, terms and risks of financial products and 
services and avoid or disclose any conflicts of interests with other 
financial institutions, actors, or regulators. Regulators must demand 
transparency from regulated institutions and be transparent about their 
role in regulating financial institutions.
    4. Avoid conflicts of interest: Financial institutions must avoid 
all conflicts of interest with other financial players and regulators. 
Where potential conflicts are allowed, financial institutions must 
fully, fairly and clearly disclose the conflict to consumers and 
regulators. Regulators must be objective in their regulation and 
oversight of financial institutions, act in the public interest (not 
the interest of the financial institutions they regulate), and prohibit 
financial institutions from engaging in conflicts of interest. 
Regulatory policies and financial practices that create an inherent 
conflict of interest that could harm consumers or the economy must be 
prohibited or, at a minimum, closely regulated.
    5. Avoid systemic risk: Financial institutions must not engage in 
practices that create unreasonable risk to the financial system. 
Regulators must provide comprehensive and effective regulation and 
oversight of financial institutions and activities that create systemic 
risk to individuals, communities and the economy. Policymakers and 
regulators must implement changes in their oversight policies based on 
the reality that financial institutions that are ``too-big-to-fail'' 
are too big to exist.
    6. Equal access: Financial institutions must offer appropriate and 
suitable financial products and services to all persons and communities 
without regard to race, color, national origin, religion, gender, 
familial status, disability, or sexual orientation. Regulators must 
monitor whether all persons and communities have equal access to 
mainstream financial products and services and hold financial 
institutions accountable by vigorously enforcing nondiscrimination laws 
and rules.
       RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                       FROM JACK HOPKINS

Q.1. Mr. Hopkins and Mr. Johnson, both of your institutions are 
members of the Federal Home Loan Bank system. How do you use 
the Federal Home Loan Bank to support your bank's lending in 
your market? Has the current economic crisis and the liquidity 
crisis affected your use of the Federal Home Loan Banks? Last 
year, HERA expanded the number of community banks that can use 
collateral to borrow from the FHLBanks. Has your institution's 
ability to pledge this collateral been helpful?

A.1. Answer not received by time of publication.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
                       FROM JACK HOPKINS

Q.1. Many of my constituents in Wisconsin are expressing 
frustration in getting a loan from their bank. The complaints 
have the same theme: they have been banking with the 
institution for a long time, and they have good credit and 
financial standing. Yet they still cannot refinance their loan 
or get a new line of credit. Can you please explain to the 
committee how the ICBA is working with their member banks to 
remedy this problem?
    Every weekend the FDIC is closing the doors of banks across 
the country at a record pace. I am concerned about the failure 
of small rural banks in areas where there is not another bank. 
The customers in the area might be left unbanked if a larger 
institution buys the deposits without opening a branch in the 
community. What are the options for these customers, and how 
are your members working to keep rural customers connected to 
the banking system?

A.1. Answer not received by time of publication.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM JACK HOPKINS

Q.1. Some have suggested that the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers. The 
problem is that this authority has not been used in a material 
fashion prior to the credit card rule. Rather than bifurcating 
consumer protection from safety and soundness, should Congress 
consider ways to improve the UDAP authority? If so, what 
options do you recommend?

A.1. Answer not received by time of publication.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
                       FROM FRANK MICHAEL

Q.1. I have heard from many small businesses struggling to find 
lines of credit and keep their doors open. How has the member 
business lending cap affected the ability of credit unions to 
make small business loans to their members? Does your 
organization have any data showing that more small businesses 
would be served if the member business lending cap was 
increased by loan size and volume? In the current credit 
crisis, do you believe that credit unions are able to provide 
more loans to small businesses and should the cap be raised?

A.1. The member business lending cap has affected the ability 
of credit unions to make small business loans to their members 
in two ways. First, many of the roughly one quarter of credit 
unions that offer business loans are getting sufficiently close 
to the cap for it to affect their behavior. Long before a 
credit union actually reaches the arbitrary 12.25 percent cap 
it must begin to moderate its business lending in order to stay 
below the cap. Considering the vast majority of credit unions 
that were not originally grandfathered from the cap, fully 38 
percent of credit union business loans outstanding are in 
credit unions with more than 10 percent of assets in business 
loans. That means that almost 40 percent of the market is 
essentially frozen. Another 21 percent of the business loans 
outstanding in credit unions that are not grandfathered is in 
credit unions with business loans between 7.5 percent and 10 
percent of assets. These credit unions are approaching the 
territory at which they will need to moderate business lending 
growth. A total of almost 60 percent of nongrandfathered credit 
union business loans is in credit unions at or near the cap.
    Second, the cap not only restricts the credit unions that 
are engaging in business lending and approaching their limit, 
but also discourages credit unions who would like to enter the 
business lending market. The cap effectively limits entry into 
the business lending arena on the part of small- and medium-
sized credit unions--the vast majority of all credit unions--
because the startup costs and requirements, including the need 
to hire and retain staff with business lending experience, 
exceed the ability of many credit unions with small portfolios 
to cover these costs. Today, only one in four credit unions 
have MBL programs and aggregate credit union member business 
loans represent only a fraction of the commercial loan market. 
Eliminating or expanding the limit on credit union member 
business lending would allow more credit unions to generate the 
level of income needed to support compliance with NCUA's 
regulatory requirements and would expand business lending 
access to many credit union members, thus helping local 
communities and the economy.
    CUNA has produced an estimate of how much additional 
business lending could be provided by credit unions if the cap 
were raised to 25 percent of assets. We assume that all current 
business lending credit unions will hold business loans in the 
same proportion to the new cap that they currently do to the 
existing cap, and that they will use one half of the new 
authority in the first year. Further, we assume that on average 
credit unions that currently make no business loans will as a 
group add business loans equal to 1 percent of their assets. 
Applying these assumptions to second quarter NCUA Call Report 
data indicates an additional $12.5 billion in business loans 
for America's small businesses. Based on this analysis, we 
conservatively project that credit unions could provide up to 
an additional $10 billion of business loans in the first year 
after the raising of the cap.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM FRANK MICHAEL

Q.1. Some have suggested that the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers. The 
problem is that this authority has not been used in a material 
fashion prior to the credit card rule. Rather than bifurcating 
consumer protection from safety and soundness, should Congress 
consider ways to improve the UDAP authority? If so, what 
options do you recommend?

A.1. While credit unions want to minimize their regulatory 
burdens, they are also very concerned that consumers are not 
adequately protected in the financial marketplace. As the 
question indicates, authority to regulate unfair and deceptive 
practices is quite broad, but some contend that the consistent 
failure to use that authority in the past is a major impetus 
now for the proposed Consumer Financial Protection Agency.
    Regarding the separation of the regulation of consumer 
protection from safety and soundness supervision, CUNA 
recognizes that there are legitimate concerns. These include 
financial intuitions being subjected to dual examinations for 
safety ands soundness and for compliance with consumer 
protection laws. However, we believe those concerns can be 
addressed by allowing prudential credit union regulators to 
enforce and examine credit unions for compliance with consumer 
protection laws, as well as for safety and soundness. The new 
agency would have rulemaking authority over consumer protection 
issues. We also believe there should be meaningful coordination 
among the financial regulatory agencies and the CFPA.
                                ------                                


       RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                     FROM ARTHUR C. JOHNSON

Q.1. Mr. Hopkins and Mr. Johnson, both of your institutions are 
members of the Federal Home Loan Bank system. How do you use 
the Federal Home Loan Bank to support your bank's lending in 
your market? Has the current economic crisis and the liquidity 
crisis affected your use of the Federal Home Loan Banks? Last 
year, HERA expanded the number of community banks that can use 
collateral to borrow from the FHLBanks. Has your institution's 
ability to pledge this collateral been helpful?

A.1. The FHLBanks have delivered innovation and service to the 
U.S. housing market for 76 years, and currently have more than 
8,100 members in all 50 States and the District of Columbia, 
American Samoa, Guam, Puerto Rico, and the Northern Mariana and 
U.S. Virgin Islands. The Federal Home Loan Bank System 
(FHLBanks) remains viable and strong, despite losses at a 
number of the Home Loan Banks similar to those incurred by most 
of the financial services industry due to the economic 
downturn.
    Indeed, without the ability by banks and other lenders to 
borrow from the Federal Home Loan Banks, the credit crisis of 
the last year would have been significantly worse. From the 
outset of the credit crisis, the Federal Home Loan Banks have 
engaged to ensure liquidity to the financial system. Advances 
to FHLB Member Banks increased from $640,681 billon at year end 
2006 to $928,638 billion at year end 2008. This increase of 
nearly $300 billion in liquidity went, in large part, to 
community bank members of the Federal Home Loan Banks. Many 
small banks rely on the System for term advances to meet day to 
day liquidity demands. Because the System is a cooperative, 
members have a vested interest in the prudent lending and 
operations of the Banks. The result is a liquidity source which 
is transparent and self monitored. Additionally, the recent GSE 
reform legislation which combined the regulation of Fannie Mae, 
Freddie Mac, and the Federal Home Loan Banks has led to a more 
sophisticated, detailed and experienced regulatory regime for 
the System and its members.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
                     FROM ARTHUR C. JOHNSON

Q.1. Every weekend the FDIC is closing the doors of banks 
across the country at a record pace. I am concerned about the 
failure of small rural banks in areas where there is not 
another bank. The customers in the area might be left unbanked 
if a larger institution buys the deposits without opening a 
branch in the community. What are the options for these 
customers, and how are your members working to keep rural 
customers connected to the banking system?

A.1. I share your concerns about the consequences of bank 
failures, regardless of location, but particularly in rural 
areas. Typically, the failures involve a healthy bank acquiring 
the deposits and many of the assets of the failed bank. In 
those situations, the healthy bank is looking to maintain a 
relationship with the customers--in fact, this is what is 
attractive to the acquiring bank and the basis for the premium 
paid to the FDIC for the right to acquire the bank. This 
financial incentive helps ensure that customers of the failed 
bank have a stable relationship with the new bank. Moreover, it 
is typically the case that when branches are closed following 
an acquisition it is because there is another branch of the 
acquiring bank nearby that will serve those customers.
    In situations where there are fewer branches available to 
serve customers, advances in technology have significantly 
helped make this transition smooth. Remote deposit capture, for 
example, is something that more and more banks are offering to 
their small business and farm customers. This option has proven 
especially popular in rural America. Small business customers 
are able to immediately deposit checks in their accounts from 
their places of business. As improvements in the technology 
have driven down costs, banks are able to offer it to smaller 
and smaller businesses and farms. Of course, there is also the 
availability of Internet banking which has been widely adopted 
by rural banks. Finally, electronic filing of financial 
statements by small businesses and farms is another way that 
banks can perform financial analysis for loan making purposes 
over great distances.
    ABA works closely with many State and Federal agencies to 
ensure that credit is available in rural areas, including the 
United States Department of Agriculture, the Small Business 
Administration, the Bureau of Indian Affairs, government 
sponsored enterprises, and all State-sponsored agricultural and 
rural credit making agencies to encourage outreach to our 
members and their customers.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM ARTHUR C. JOHNSON

Q.1. Some have suggested that the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers. The 
problem is that this authority has not been used in a material 
fashion prior to the credit card rule. Rather than bifurcating 
consumer protection from safety and soundness, should Congress 
consider ways to improve the UDAP authority? If so, what 
options do you recommend?

A.1. Yes, we believe that there are other, more direct ways to 
improve the consumer protection for financial customers rather 
than by splitting consumer protection from safety and soundness 
and creating separate agencies. We support enhancing the 
consumer protection mission of the current banking agencies, 
and providing UDAP rulemaking authority which would be jointly 
exercised. Better enforcement of existing consumer protection 
laws in the nonbank sector and greater accountability for 
consumer protection in the mission of all functional regulators 
is the most effective path to a level playing field and should 
be pursued before any consideration of new powers is undertaken 
as part of regulatory restructuring.
    If UDAP rulemaking authority is going to be an effective 
part of consumer protection reform, we need to ensure that its 
application reaches across all financial institutions 
uniformly--and, indeed, across all providers of financial 
products, banks and nonbanks. We recommend the following two 
steps:

  1.  First, we support vesting all of the Federal banking 
        agencies with UDAP rulewriting authority to be 
        exercised jointly. Only by a grant of joint authority 
        can we maintain uniformity in any formal regulatory 
        action to impose specific UDAP standards on the 
        different components of the banking system.

  2.  Second, to avoid inconsistent treatment of consumers by 
        financial institutions outside the jurisdiction of the 
        FFIEC agencies, ABA proposes that the banking agencies' 
        joint UDAP rulemaking be made effective for all nonbank 
        entities providing financial products and services, 
        just as TILA rules reach all nonbank creditors. Also as 
        with TILA, nonbank functional regulators would possess 
        the authority to enforce these rules against those in 
        their respective jurisdictions.

    Banks are the cornerstone of reputable financial product 
and service delivery in their communities. Accordingly, 
uniformity of regulation and supervision should be based on 
extending the regulatory standards and supervisory regime 
covering banks to the underregulated and largely unsupervised 
nonbank sector.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
                       FROM ED TEMPLETON

Q.1. I have heard from many small businesses struggling to find 
lines of credit and keep their doors open. How has the member 
business lending cap affected the ability of credit unions to 
make small business loans to their members? Does your 
organization have any data showing that more small businesses 
would be served if the member business lending cap was 
increased by loan size and volume? In the current credit 
crisis, do you believe that credit unions are able to provide 
more loans to small businesses and should the cap be raised?

A.1. When Congress passed the Credit Union Membership Access 
Act (CUMAA) (P.L. 105-219) in 1998, they put in place 
restrictions on the ability of credit unions to offer member 
business loans. Congress codified the definition of a member 
business loan and limited a credit union's member business 
lending to the lesser of either 1.75 times the net worth or 
12.25 percent of total assets. Also pursuant to section 203 of 
CUMAA Congress mandated that the Treasury Department study the 
issue of credit unions and member business lending.

    In January 2001, the Treasury Department released the 
study, ``Credit Union Member Business Lending'' that found, 
among other things:

        Overall, credit unions are not a threat to the viability and 
        profitability of other insured depository institutions. In 
        certain instances, however, credit unions that engage in member 
        business lending may be an important source of competition for 
        small banks and thrifts operation in the same geographic areas.

    Congress has not revisited this issue since the study came 
out. The arbitrary member business lending cap placed on credit 
unions is a detriment to credit unions ability to serve their 
members and America's small businesses. A number of credit 
unions are at or near the MBL cap, and a significant number shy 
away from business lending programs altogether because of the 
arbitrary cap and the restrictions it places on the ability to 
operate a business loan program.

    Additionally, the definition of a member business loan has 
not been updated for inflation in over a decade, meaning the 
$50,000 minimum level set in 1998 needs to be updated. Credit 
union economists have estimated that removing the member 
business lending cap could help credit unions provide $10 
billion in new small business loans in the first year alone. 
Removing the credit union member business lending cap would 
help provide economic stimulus without costing the taxpayer a 
dime.

    Senator Schumer has indicated his interest in introducing 
legislation to remove this cap and we would urge the Committee 
to support him in these efforts.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM ED TEMPLETON

Q.1. Some have suggested that the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers. The 
problem is that this authority has not been used in a material 
fashion prior to the credit card rule. Rather than bifurcating 
consumer protection from safety and soundness, should Congress 
consider ways to improve UDAP authority? If so, what options do 
you recommend?

A.1. We have concerns about bifurcating consumer protection 
from safety and soundness as has been proposed with the new 
Consumer Financial Protection Agency (CFPA). We believe 
consumer protection can be enhanced in the current system by 
strengthening UDAP authority and creating consumer protection 
offices at the functional regulators. One way UDAP could be 
improved would be to give the FTC more efficient rulemaking 
authority over nonfederal entities, as their process is 
currently inefficient and hampers their rulemaking.
    We would support a CFPA that would have authority over 
nonregulated institutions that operate in the financial 
services marketplace, including supplanting the FTC on these 
matters. However, we do not believe such an agency should have 
authority over regulated federally insured depository 
institutions and would oppose extending that authority to 
Federal credit unions. Giving the CFPA such authority to 
regulate, examine and supervise credit unions that already are 
regulated by the NCUA would add an additional regulatory burden 
and cost to credit unions. Additionally, it could lead to 
situations where institutions regulated by one agency for 
safety and soundness find their guidance in conflict with their 
regulator for consumer issues. Such a conflict and burden will 
surely increase compliance costs to credit unions, leading to 
diminished services to their members.
    Recognizing that more should be done to help consumers, we 
would propose that, rather than extending the CFPA to Federal 
depository institutions, each functional regulator of Federal 
depository institutions have a new or strengthened office on 
consumer affairs established. We are pleased that NCUA Chairman 
Michael Fryzel has proposed such an office for NCUA.
    This is particularly important to credit unions, as they 
are regulated and structured differently than others in 
financial services, and we believe that it is important that 
any regulator examining credit unions should understand their 
unique nature. We believe that such approach would strengthen 
consumer protection while not adding unnecessary regulatory 
burdens on our Nation's financial institutions.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM PETER SKILLERN

Q.1. Some have suggested that the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers. The 
problem is that this authority has not been used in a material 
fashion prior to the credit card rule. Rather than bifurcating 
consumer protection from safety and soundness, should Congress 
consider ways to improve the UDAP authority? If so, what 
options do you recommend?

A.1. As the question states, ``the Federal Reserve Board's 
unfair and deceptive practices (UDAP) authority is very broad 
and could be used to successfully protect consumers.'' And 
``this authority has not been used in a material fashion prior 
to the credit card rule.'' The problem is that the Federal 
Reserve failed to utilize its authority to issue rules or to 
enforce existing ones to protect consumers. Changing the UDAP 
authority will not improve consumer protections as it does not 
address the underlying and fundamental problem of the Federal 
Reserve's regulatory failure to protect consumers.
    The Federal Reserve should have greater accountability to 
Congress and the public in its financial accounting, its 
policies and programs and the enforcement of consumer 
protections. Changing the UDAP will not address these needs. 
Governor Duke suggested in Congressional testimony that the 
Federal Reserve be required to give a biannual update on 
consumer protections to Congress. This is a selfdisclosure 
approach that does not hold the agency accountable. Reform of 
the UDAP will not resolve the problem of the Federal Reserve 
failure of will to protect consumers.
    The Community Reinvestment Association of North Carolina 
strongly supports the creation of the Consumer Financial 
Protection Agency (CFPA) to address the deficiencies of the 
current regulatory structure in protecting consumers.

A Single Agency Is More Effective Than Current Fragmented System

    There are currently 12 Federal agencies responsible for 
consumer protections in the financial sector. The patchwork of 
regulatory coverage of differing financial institutions and 
different types of authority and differing agency objectives 
and capacity make the current system inefficient and 
ineffective. Among Federal institutions that charter banks, 
financial institutions may change regulator if they believe 
another regulator has a lower enforcement threshold. Because 
Federal charter agencies receive payment from the firms they 
regulate, agencies lose revenue if firms switch regulators. 
Regulators have a disincentive to enforce regulations at the 
risk of revenue loss. A single agency that has a single purpose 
with the authority of rule writing and enforcement across all 
financial institutions and products is a significant 
improvement of the current structure that has multiple 
enforcement agencies that regulate by the type of lender not 
the product.

Bifurcation Places Consumer Protections on Equal Basis With Safety and 
        Soundness

    The two objectives of consumer protection and safety and 
soundness are complimentary and supportive of each other, but 
that does not mean that under the current system they are 
treated equally. Current regulators evaluate products based on 
safety and soundness, i.e., profitability before evaluation of 
products for consumer protections. Enforcement actions by the 
OCC and the FDIC on banks providing payday loans in partnership 
with payday lenders were conducted based on the lack of 
oversight of the agents of the bank, not on any ruling that the 
product at 400 percent interest rate and repeat transactions on 
a debt trap were harmful to consumers. Regulators have 
repeatedly stated that safety and soundness is their primary 
responsibility and has demonstrated that by a lack of material 
enforcement actions protecting consumers.
    An example of this is the Office of the Comptroller's lack 
of enforcement action against Pacific Capital Bank despite the 
bank's violation of the OCC's publicized guidelines on its 
supervised bank agencies that conduct refund anticipation 
loans. Jackson Hewitt prepares taxes and makes refund 
anticipation loans with Santa Barbara Bank and Trust (SBBT), 
Pacific Capital's subsidiary. Jackson Hewitt was found guilty 
of tax fraud through a number of its franchises. Refund 
Anticipation Loans made by SBBT were used to facilitate the 
fraud. Recently, another bank partner Liberty Tax Services was 
found guilty in a jury trial of violations of the Federal Trade 
Act, Truth in Lending Act and Cross Debt Collection practices 
in marketing and originating Refund Anticipation Loans. Yet the 
OCC has not issued any regulatory actions regarding the bank's 
operations. Instead, the Office of the Comptroller of the 
Currency recommended the bank for TARP funding and the bank 
received $180.6 million dollars which was used as 
capitalization for its operations including Refund Anticipation 
Loans. Unfortunately, Pacific Capital Bank stock has fallen by 
90 percent and lost $7.70 a share including one-time writedowns 
in the last quarter. This is one example of how Federal 
regulators have lost credibility that they have the will to 
protect consumers. This is an example of regulators 
subordinating profitability over both consumer protection and 
safety and soundness.
    The Community Reinvestment Association of North Carolina 
asks that the United States Banking, Housing, and Urban Affairs 
Committee investigate the oversight of Pacific Capital Bank by 
the OCC and the use of TARP funds to make Refund Anticipation 
Loans.
    By bifurcating consumer protection and safety and 
soundness, agencies can better achieve both objectives that 
have been at cross purposes under the current regulatory 
structure.

The Consumer Financial Protection Agency Will Strengthen Dual Agency 
        Enforcement

    The current regulatory system has Federal and State 
regulatory components. Historically Federal agencies did not 
enforce unfair and deceptive trade practices or provide 
consumer protections as this was a primarily a State 
prerogative through the State attorney general of financial 
regulator. Federal preemption of State regulations through 
national bank powers allowed institutions operating in States 
with few consumer protections to operate under jurisdiction of 
that State rather than the State the borrower lived in. This 
effectively removed many State consumer protections without 
putting into place Federal consumer protections or enforcement 
mechanisms. As an example, North Carolina's usury cap of 36 
percent interest rate loans is preempted by any national bank 
operating in a State with a higher cap, or State chartered 
banks operating under parity. Thus refund anticipation lenders 
can make triple digit interest rate loans by partnering with 
Out-of-State banks.
    The CFPA will create national standards that create a 
baseline of Federal consumer protections. The legislation also 
allows State agencies to regulate financial institutions acting 
within their borders. State laws that are stronger are not 
preempted. Consumer enforcement capacity is increased by 
enabling State regulators to enforce Federal standards.
    This is a vast improvement over the current turf battle in 
which Federal regulators prevent State regulators from 
enforcement of either State or Federal laws, yet which they do 
not enforce themselves. The OCC sued the New York Attorney 
General to stop his enforcement of State fair lending laws 
against national banks. This action was overruled by the recent 
Supreme Court decision in Cuomo v. The ClearingHouse 
Association. The OCC claims to support fair housing laws, but 
can not demonstrate that it has enforced fair housing laws 
against national banks in any public action. The OCC most 
public action is the lawsuit to stop State enforcement of fair 
lending laws. The creation of the CFPA will allow for Federal 
preemption of State law, but not will empower enforcement of 
consumer protections.

Fair Lending Laws Will Be Better Served by Consumer Financial 
        Protection Agency

    The GAO July 2009 report Fair Lending Data Limitations and 
the Fragmented U.S. Financial Regulatory Structure Challenge 
Federal Oversight and Enforcement Efforts documents that the 
fragmented system of multiple agencies, lack of trained staff, 
and poor data collection have stymied fair lending enforcement. 
Only eight fair lending cases by Federal regulators have 
occurred since 2005. Again existing Federal agencies have 
failed consumers. The CFPA will have trained dedicated staff, 
systemic data collection and single purpose to be more 
effective.

Conclusion--Support the Consumer Financial Protection Agency

    The Community Reinvestment Association of North Carolina 
supports the creation of the Consumer Financial Protection 
Agency and rejects the argument that amending the Federal 
Reserve's authority under the unfair and deceptive trade 
practices will improve consumer protection.
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