[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.
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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\
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\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.
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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.
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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\
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\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.
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\15\ Finpro, USA Branches, Bank Branch Ownership 03/16/2009
www.finpronj.com.
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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.
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\16\ Carsey Institute, Policy Brief Number 4, Fall 2006. http://
www.carseyinstitute.unh.edu/publications/PB--predatorylending.pdf.
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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.
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\17\ Developed by the Woodstock Institute, California Reinvestment
Coalition, Neighborhood Economic Development Advocacy Project,
Community Reinvestment Association of North Carolina.
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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.
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\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.
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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.