    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                      H.R. 1697, THE COMMUNITIES FIRST ACT

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

                                 JOINT HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                              AND CONSUMER CREDIT

                                    AND THE

                      SUBCOMMITTEE ON CAPITAL MARKETS AND

                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                               NOVEMBER 16, 2011

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-85

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                       SPENCER BACHUS, Alabama, Chairman

    JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts,
        Chairman                             Ranking Member
    PETER T. KING, New York              MAXINE WATERS, California
    EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JUDY BIGGERT, Illinois               BRAD SHERMAN, California
    GARY G. MILLER, California           GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            JOE BACA, California
    MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
    THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
    KEVIN McCARTHY, California           DAVID SCOTT, Georgia
    STEVAN PEARCE, New Mexico            AL GREEN, Texas
    BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
    MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
        Pennsylvania                     KEITH ELLISON, Minnesota
    LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
    BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
    BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
    JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
    ROBERT HURT, Virginia
    ROBERT J. DOLD, Illinois
    DAVID SCHWEIKERT, Arizona
    MICHAEL G. GRIMM, New York
    FRANCISCO ``QUICO'' CANSECO, Texas
    STEVE STIVERS, Ohio
    STEPHEN LEE FINCHER, Tennessee

                       Larry C. Lavender, Chief of Staff
           Subcommittee on Financial Institutions and Consumer Credit

                 SHELLEY MOORE CAPITO, West Virginia, Chairman

    JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    THADDEUS G. McCOTTER, Michigan       JOE BACA, California
    KEVIN McCARTHY, California           BRAD MILLER, North Carolina
    STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
    BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
    FRANCISCO ``QUICO'' CANSECO, Texas
    MICHAEL G. GRIMM, New York
    STEPHEN LEE FINCHER, Tennessee
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking
        Chairman                             Member
    PETER T. KING, New York              GARY L. ACKERMAN, New York
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
    DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
    JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
    JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
    RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
    JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
    THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
    KEVIN McCARTHY, California           ANDRE CARSON, Indiana
    STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
    BILL POSEY, Florida                  GARY C. PETERS, Michigan
    MICHAEL G. FITZPATRICK,              AL GREEN, Texas
        Pennsylvania                     KEITH ELLISON, Minnesota
    NAN A. S. HAYWORTH, New York
    ROBERT HURT, Virginia
    MICHAEL G. GRIMM, New York
    STEVE STIVERS, Ohio
    ROBERT J. DOLD, Illinois

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        November 16, 2011............................................     1
    Appendix:
        November 16, 2011............................................    53

                                   WITNESSES
                          Wednesday, November 16, 2011

    Becker, Fred R., Jr., President and Chief Executive Officer,
      National Association of Federal Credit Unions (NAFCU)..........    15
    Cheney, O. William, President and Chief Executive Officer, Credit
      Union National Association (CUNA)..............................    11
    Klebba, John A., Chairman, President, and General Counsel,
      Legends Bank, on behalf of the Missouri Bankers Association
      (MBA)..........................................................    13
    Levitin, Adam J., Professor of Law, Georgetown University Law
      Center.........................................................    20
    Marranca, Salvatore, Director, President, and Chief Executive
      Officer, Cattaraugus County Bank, on behalf of the Independent
      Community Bankers of America (ICBA)............................    10
    Silvers, Damon A., Director of Policy and Special Counsel,
      American Federation of Labor and Congress of Industrial
      Organizations (AFL-CIO)........................................    18
    Wilmarth, Arthur E., Jr., Professor of Law, George Washington
      University Law School..........................................    17

                                    APPENDIX

    Prepared statements:
        Becker, Fred R., Jr..........................................    54
        Cheney, O. William...........................................    70
        Klebba, John A...............................................    90
        Levitin, Adam J..............................................    98
        Marranca, Salvatore..........................................   106
        Silvers, Damon A.............................................   113
        Wilmarth, Arthur E., Jr......................................   118

                  Additional Material Submitted for the Record

    Hinojosa, Hon. Ruben:
        Community Bankers letter dated October 27, 2011..............   129
    Luetkemeyer, Hon. Blaine:
        Letter to Chairwoman Capito and Ranking Member Maloney from
          the Missouri Independent Bankers Association, dated
          November 14, 2011..........................................   131
    Cheney, Bill:
        Response to a question posed during the hearing by
          Representative Stivers.....................................   134
        Response to a question posed during the hearing by
          Representative Westmoreland................................   135

                      H.R. 1697, THE COMMUNITIES FIRST ACT

                                  ----------

                          Wednesday, November 16, 2011

                 U.S. House of Representatives,
                 Subcommittee on Financial Institutions
                               and Consumer Credit, and
                    Subcommittee on Capital Markets and
                      Government Sponsored Enterprises,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittees met, pursuant to notice, at 2 p.m., in
    room 2128, Rayburn House Office Building, Hon. Shelley Moore
    Capito [chairwoman of the Subcommittee on Financial
    Institutions and Consumer Credit] presiding.
        Members present from the Subcommittee on Financial
    Institutions and Consumer Credit: Representatives Capito,
    Renacci, Royce, Pearce, Westmoreland, Luetkemeyer, Huizenga,
    Duffy, Canseco, Grimm; Maloney, Watt, Hinojosa, Baca, Scott,
    and Carney.
        Members present from the Subcommittee on Capital Markets
    and Government Sponsored Enterprises: Representatives Garrett,
    Schweikert, Royce, Neugebauer, Pearce, Posey, Fitzpatrick,
    Hayworth, Hurt, Grimm, Stivers, Dold; Waters, Sherman,
    Hinojosa, Perlmutter, Donnelly, Carson, and Green.
        Ex officio present: Representative Bachus.
        Also present: Representative Fincher.
        Chairwoman Capito. This hearing will come to order.
        And I would like to alert Members that we are expecting a
    series of votes around 5:00. I am not certain we will be here
    that long, but it is my intent to finish the hearing before we
    go for votes. If that is not possible, we will have to resume
    this hearing after the last vote, but I think we can manage
    this.
        H.R. 1697 is a large bill. It has been referred to not only
    the Financial Services Committee but also the Ways and Means
    Committee and the Agriculture Committee. Today's hearing will
    focus on the sections of the bill that are relevant to the
    Financial Services Committee.
        I would like to thank Chairman Garrett for co-hosting this
    hearing with me. He is the chairman of the Capital Markets and
    Government Sponsored Enterprises Subcommittee, and this bill
    has been referred to his subcommittee as well. I would also
    like to particularly thank Mr. Luetkemeyer for offering the
    bill before the subcommittee today.
        The Communities First Act is a thoughtful attempt to reduce
    regulatory paperwork and tax burdens on small financial
    institutions across this country.
        Mr. Luetkemeyer has been a terrific advocate for his
    constituents with his service on the Financial Institutions and
    Consumer Credit Subcommittee. And his experience as both a
    banker and a bank regulator before becoming a Member of
    Congress allows him to provide critical insight into matters
    before the subcommittee, and I value his insight. I commend him
    on the good work he has done in drafting this legislation and
    for tackling the issue of regulatory relief for small financial
    institutions.
        Over the last 10 months, this subcommittee has heard
    testimony and anecdotal comments from community bankers from
    across the country, and one constant theme has been the
    increased regulatory burden on our community banks. The recent
    financial crisis did not emanate from small financial
    institutions, yet these same institutions are having to devote
    more and more resources to comply with the ever-growing
    regulatory burden facing small financial institutions.
        During the first hearing of the Financial Services
    Committee this year, a community banker from West Virginia
    raised this question: ``How can I be out in my community
    helping individuals improve their quality of life or helping
    small businesses grow if all I end up doing is dealing with the
    aftermath of problems that I did not create?''
        This raises an important question. In order for our
    community to get back on track, we need to have small financial
    institutions lending to small businesses in our communities.
    However, if small financial institutions are forced to devote
    more and more resources to comply--which they say they are--
    with Federal regulations, then they have fewer resources to
    devote to lending in their home communities.
        The bill before the committee today raises a number of
    issues that are facing small financial institutions across the
    country, and I look forward to hearing from our witnesses to
    learn more about their thoughts or concerns on the Communities
    First Act.
        At this point, I would like to recognize Mrs. Maloney, the
    ranking member of the Financial Institutions and Consumer
    Credit Subcommittee, for the purpose of making an opening
    statement.
        Mrs. Maloney. I thank Chairwoman Capito and Chairman
    Garrett and also Ranking Member Waters for working on this
    hearing. And I certainly welcome all of the witnesses and look
    forward to your testimony.
        I certainly understand that small institutions are
    concerned about regulatory burden and their ability to comply
    with regulations while still being able to provide their
    customers with a wide range of services, most importantly
    lending. We know how important small bank lending is to small
    communities or to any community, to businesses and to helping
    businesses grow and create jobs.
        And there are some things in this bill that I can support.
    For example, the bill strikes annual privacy notices and would
    only require them when a bank shares consumer information. I
    think that is something we can all agree would reduce paperwork
    burdens on small banks.
        However, many of the provisions in this bill are provisions
    that were enacted in the wake of financial accounting scandals
    such as Enron, and in the wake of certainly the worst economic
    crisis in my lifetime. Provisions such as the Sarbanes-Oxley
    404(b) exemption increase, the shareholder threshold for banks
    that trigger SEC registration, the SEC cost-benefit analysis
    provision, and the Financial Stability Oversight Council (FSOC)
    review standard provision are all things that the Financial
    Services Committee is examining separately in separate bills.
        I certainly would oppose, as I have on the Floor and in
    this committee previously, the provision that would lower the
    threshold for the FSOC to veto a Consumer Financial Protection
    Bureau (CFPB) rule. The Consumer Financial Protection Bureau is
    the only regulatory entity whose rules are subject to review in
    this matter, and the threshold should be high for that review.
        I am also concerned, as is the FDIC, about Sections 205 and
    206, both of which would have the effect of allowing smaller
    institutions to hold less capital and to delay the ability of
    the FDIC to work with these institutions before the situation
    becomes more difficult. They see this as a possible threat to
    their power to prevent economic downturns and to preserve the
    safety and soundness of our financial institutions.
        I believe that these provisions, in some cases, fly in the
    face of our efforts to make our markets more transparent and
    accountable to the public and to secure our financial
    institutions and to strengthen their capital reserves. Many say
    that we had this downturn because we did not have strong
    capital reserves, that we did not have strong transparency and
    oversight. I understand that both of these provisions are
    written as studies in the Senate version of the bill, and I
    think that is probably a wise direction to move in.
        I know that these two sections are top concerns for the
    FDIC, and there are a number of other provisions in the bill
    that I hope we can explore today that I am concerned with. So I
    also look forward to the witnesses' testimony.
        I yield back the balance of my time and I thank you for
    what you are doing every day to help our financial institutions
    to get capital out to people who need it and to grow our
    economy.
        Thank you.
        Chairwoman Capito. Thank you.
        I would like to recognize Chairman Garrett for 2 minutes
    for the purpose of making an opening statement.
        Chairman Garrett. I thank the gentlelady. And I thank the
    gentlelady for her leadership on this issue, as well.
        I thank all the members of the panel that we are about to
    hear from shortly.
        I also would like to turn my attention to Congressman
    Luetkemeyer and thank him, as well, for his efforts on this
    legislation and for being here today.
        He has been an outstanding addition to our committee and to
    this Congress, as well. We are blessed to have him because of
    the experience that he brings in a couple of different fronts,
    both in the banking industry per se and on the regulator front,
    as well. So you might say that he is uniquely positioned, I
    guess, to be leading the charge in putting together this
    important legislation that we are dealing with. And that is, as
    we say, dealing with perhaps the overregulation of our
    financial services industry, particularly the smaller,
    community-based institutions, those who are particularly ill-
    affected by the legislation that has come recently.
        Whenever Congress has an opportunity to review ways to
    reduce the regulatory burden on financial institutions
    specifically or businesses in general on Main Street, I think
    that is a good thing. It is an even better day if we are also
    looking at ways to facilitate small business capital formation,
    which is another way of saying, trying to create jobs.
        So, again, I congratulate the Congressman for his
    legislation, for this bill, and I look forward to what will
    probably be a lively discussion in the area of financial
    institution regulation.
        I yield back.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Carson for 1 minute for the
    purpose of making an opening statement.
        Mr. Carson. Thank you, Madam Chairwoman.
        During the recess last week, I had the opportunity to meet
    with my local community bankers in Indianapolis. We discussed
    how economic conditions are still very weak, with few positive
    trends in the residential housing recovery and employment
    growth. While low interest rates and an unprecedented Federal
    stimulus has had some positive impact, it has not resulted in
    anticipated economy growth. I am interested in how H.R. 1697,
    the Communities First Act, will help community banks foster
    economic growth and better serve their communities.
        However, I believe missing from this discussion is the
    commercial real estate crisis on the horizon. This is an
    incredibly difficult challenge, with many negative consequences
    on communities, small businesses, and individuals. Many
    commercial real estate loans are underwater, vacancy rates are
    up, and rents are down, further driving down the value of these
    properties.
        If there is a collapse in the market, our community banks
    will be particularly vulnerable. As we discuss helping our
    community banks lend again, let us not forget that there are
    still challenges on the horizon that pose tremendous risks to
    the financial system and the public.
        Thank you, Madam Chairwoman. I yield back the balance of my
    time.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Westmoreland for 1 minute for
    the purpose of making an opening statement.
        Mr. Westmoreland. Thank you, Chairwoman Capito and Chairman
    Garrett. And I also want to thank Mr. Luetkemeyer for his
    efforts.
        The burden on small banks and credit unions is growing
    larger every day. The cost of complying with regulation is a
    thorn in the side of small banks. Small banks need to focus on
    two things: lending and deposits. Instead, they have to focus
    half of their time and money on compliance. We need to get rid
    of some of these wasteful regulations so businesses can get
    back to work.
        Georgia leads the Nation in bank failures, with 73. This
    bill won't bring back those failed banks, but it will throw a
    lifeline to those struggling to survive. And I urge all my
    colleagues to join me and help pass H.R. 1697.
        I yield back the balance of my time.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Scott for 3 minutes for the
    purpose of making an opening statement.
        Mr. Scott. Thank you, Madam Chairwoman. And I certainly
    want to congratulate you and our ranking member for holding
    this hearing. It is very important.
        Our banking community has just gone through a devastating
    period. I don't think--not since the Great Depression have we
    had so many bank failures, and we have had a tremendous
    problem. And nowhere has that been greater than in my own home
    State of Georgia, as my colleague, Congressman Westmoreland,
    has just mentioned. We lead the Nation in bank failures, and a
    lot of this is due to the housing bubble and the overleveraging
    of the portfolios into real estate.
        But we can learn from this that we must move very quickly
    to address this area. Our community banks and our credit
    unions, quite honestly both of these, are at the front lines.
    They are the ground troops; they are in the pits there. They
    are the ones that we have to make sure are equipped to do the
    job of helping to bring our struggling economy around and our
    community banks around.
        This legislation we have under discussion today will
    provide regulatory relief for community banks, and we need
    that. The bill would reduce certain reporting and paperwork
    requirements for many of these smaller institutions, and we
    definitely need that. In the current economic climate,
    community banks have struggled. They have struggled to comply
    with very stringent regulatory and accounting requirements that
    need to be addressed, and we need to find relief for them.
        And as I mentioned, in my home State of Georgia we have
    just had, just this year alone, our 23rd bank was closed this
    year. Nationwide, 88 banks have failed this year alone, making
    it apparent that Georgia's community banks have suffered
    disproportionately when compared to the national scale.
        It is for this reason I work with my colleague. Mr.
    Westmoreland and I have put forward House Resolution 2056,
    which this House passed, which instructs the FDIC to study this
    problem and make recommendations and find ways we can get help
    down to our community banks. And I take this opportunity to
    urge the Senate to move forthrightly and get this badly needed
    piece of legislation promptly passed.
        However, the legislation at hand today would provide relief
    for smaller banks, many of whom resemble the very institutions
    that have recently been forced to close under tremendous
    financial strain. I agree that Congress should act to provide
    targeted relief to small banks that will prevent further
    failure. And I will be interested today to find out how this
    measure will benefit the institutions; what effects, if any,
    that this legislation could have on customers, many of whom are
    part of the over 10 percent of the population of Georgia who
    are unemployed and rely on these banks, many businesses who
    rely on being able to get small loans from this business.
        So it is a very important hearing. I look forward to it.
    And thank you very much, Madam Chairwoman.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Luetkemeyer for 2 minutes for
    the purpose of making an opening statement.
        Mr. Luetkemeyer. Thank you, Chairwoman Capito, and thank
    you, Chairman Garrett, for holding this hearing and for your
    very kind remarks leading into the hearing here.
        Every day, community banks help Americans realize their
    dreams. That mission is becoming more and more difficult for
    our Nation's smaller financial institutions. Regulatory
    requirements disproportionately burden community banks that do
    not have the resources necessary to comply.
        I introduced the Communities First Act to help community
    banks and other financial services entities foster economic
    growth and serve their communities by giving targeted relief to
    these institutions and their customers. Some are concerned that
    this legislation is too broad and tries to do too much. The
    simple truth of the matter is that the legislation must be
    broader in order to save our community banks.
        Across the Nation, community banks are consolidating or
    closing, not based solely on the weak assets or balance sheets,
    but because they simply cannot afford to operate in the current
    regulatory environment. The number of provisions put in this
    bill is a reflection of the amount of regulation that has been
    piled on community banks.
        Despite the fact that community banks were not part of the
    financial crisis, they have been dragged in as part of the
    solution. The regulations that have come out of Congress and
    this Administration are crushing small businesses, including
    banks.
        I am proud to have more than 50 of my colleagues on both
    sides of the aisle, 13 of whom sit on this committee, as co-
    sponsors of H.R. 1697. This legislation is supported by the
    Independent Community Bankers of America and the National
    Bankers Association. The bill also has the support of more than
    35 State banking groups, including both the Missouri Bankers
    Association, represented here today by Mr. John Klebba, as well
    as the Missouri Independent Bankers Association.
        Madam Chairwoman, I seek unanimous consent to enter into
    the record a letter of support from the Missouri Independent
    Bankers Association.
        Chairwoman Capito. Without objection, it is so ordered.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman.
        It is essential that our community banks continue to have
    the ability to attract capital, support the credit needs of
    their customers, and contribute to the local economies. Instead
    of inhibiting their ability to operate, it is time for
    Washington to work with community banks.
        Thank you, Madam Chairwoman, and I yield back.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Royce for 1 minute for the
    purpose of making an opening statement.
        Mr. Royce. Thank you, Madam Chairwoman.
        Recent projections, as we look forward to 2020, show that
    we are going to have half the current number of community
    banks. And I guess we would all expect some consolidation if
    you are going through a recession, if you are going through an
    economic downturn. But many of the problems faced by these
    institutions are, frankly, induced here in Washington, D.C.,
    because it was Washington that gave them the hundreds of new
    regulations in Dodd-Frank; it was Washington that decided to
    enact price controls on interchange fees and limit a critical
    revenue source for these smaller firms; it was Washington that
    propped up their too-big-to-fail competitors, thus expanding
    the competitive advantage that those larger firms hold in the
    market.
        And, as a result, smaller institutions are spending more
    time and more money trying to stay afloat. I recently heard a
    community banker note that for every 1.2 employees focused on
    compliance, he has 1 focused on banking. Now, this number is
    only going to grow as the implementation of Dodd-Frank
    continues. One step in the right direction is the Communities
    First Act.
        I would also mention, with Mr. Cheney and Mr. Becker here,
    it is worth noting that H.R. 1418 would help in the effort of
    shifting the focus from Washington to Main Street. It would
    free up much needed capital for small businesses by raising the
    cap on member business loans for those credit unions that meet
    that set of criteria.
        I yield back, Madam Chairwoman.
        Chairwoman Capito. Thank you.
        I would like to recognize the chairman of the full
    committee, Chairman Bachus, for 1 minute for the purpose of
    making an opening statement.
        Chairman Bachus. Thank you.
        I thank Chairwoman Capito and Chairman Garrett for holding
    this hearing. And I commend Blaine Luetkemeyer, our colleague
    from Missouri, for bringing forth what I consider to be a very
    reasonable approach to reducing regulatory paperwork and tax
    burdens on small banks and credit unions. This bill has gained
    the support of nearly 50 co-sponsors to date, and I am proud to
    be one of them.
        So many small financial institutions have shared their
    concerns with us about the enormous cost of complying with the
    complicated regulations, especially the hundreds of new rules
    resulting from Dodd-Frank, which--we are 30 percent through
    that process, and it fills two Bankers Boxes.
        While job creation is at a near standstill, the Bureau of
    Labor Statistics reports that there will be employment growth
    from financial examiners and compliance officers due to
    increased financial regulations. That is not the kind of jobs
    we are interested in creating.
        How can we expect small financial institutions to absorb
    those increased compliance costs? The reality is they have to
    pass them on to their customers.
        Mr. Luetkemeyer's bill addresses many of the concerns by
    cutting paperwork and reporting requirements and ensuring that
    accounting principles are appropriate for small banks. As we
    hear the testimony today from a number of community lenders, I
    am eager to learn from them how this bill will help community
    banks and credit unions to create jobs, foster economic growth,
    and serve their communities.
        Again, I am pleased to support this legislation, and be a
    co-sponsor, and I commend Mr. Luetkemeyer and my colleagues on
    both sides of the aisle for tackling these issues.
        Thank you.
        Chairwoman Capito. Thank you.
        Mr. Dold is recognized for 2 minutes for the purpose of
    making an opening statement.
        Mr. Dold. I certainly want to thank Chairwoman Capito and
    Chairman Garrett for holding this important joint hearing.
        And I want to thank our witnesses for your time and
    testimony today.
        This is an important hearing because functional and healthy
    credit markets are essential for job creation, for business
    growth, and for economic prosperity. Certainly, our credit
    markets and financial institutions must be regulated, but those
    regulations must be sensible and balanced and must account for
    meaningful differences amongst our broad and diverse array of
    financial institutions.
        Unfortunately, in many respects, our regulatory environment
    doesn't currently meet these reasonable standards. Instead, our
    current regulatory environment is actually hurting the
    functionality and health of our credit markets and, by
    extension, also hurting job creation, business growth, and
    economic prosperity.
        The regulatory burden is particularly acute for our small
    financial institutions because they must necessarily devote a
    far larger percentage of their resources to the enormous costs
    of reviewing, analyzing, and complying with an avalanche of
    regulatory burdens. Meanwhile, small financial institutions are
    essential to financing our small businesses, which are
    responsible for over two-thirds of net new jobs in our country
    but which are also struggling in this economy.
        Especially with our current economic challenges, all of us
    in Congress are obligated, in my opinion, to create a legal and
    regulatory environment that strongly promotes job creation,
    business growth, and general economic prosperity. And a very
    important step in creating that kind of improved regulatory
    environment is helping our small financial institutions get
    some relief from overly burdensome regulations.
        The Communities First Act moves us toward that objective of
    improving the regulatory environment for small financial
    institutions. And we can make these positive changes without
    diminishing safety and soundness and without diminishing
    depositor and investor protections. For these reasons, I am
    happy to co-sponsor this legislation, along with many of my
    Republican and Democratic colleagues. The American people
    expect and deserve these kinds of smart, bipartisan solutions
    to our job-creation challenges.
        I would like to thank my colleague from Missouri, Mr.
    Luetkemeyer, for introducing this helpful legislation, and I
    look forward to continuing to work on this legislation with him
    and my colleagues on both sides of the aisle after we hear from
    our witnesses today.
        I yield back.
        Chairwoman Capito. Thank you.
        I would like to recognize Ms. Waters for 1 minute for the
    purpose of making an opening statement.
        Ms. Waters. Thank you very much, Madam Chairwoman, for
    convening today's hearing. As I have said consistently,
    community banks are vital to bolstering America's neighborhoods
    because these banks provide credit in communities throughout
    the Nation, create jobs, and encourage individual and family
    savings.
        The practices of our community banks had little to do with
    causing our financial crisis. Therefore, while I believe that
    we should take a smart approach toward the regulation of small
    banks in order to spur economic activity and produce jobs, I
    believe the regulation is necessary to ensure that consumers
    and banks are protected from harmful practices.
        While I am open to looking at the regulatory challenges
    facing small banks, I do not want to see their compliance
    challenges used as an excuse to weaken regulation or weaken
    Dodd-Frank legislation reforms intended for large banks. To
    this end, I am concerned about provisions that amend the Dodd-
    Frank Act to restore bank reliance on external credit ratings.
    We know that reliance on external credit ratings was a key
    contributor to our current economic troubles.
        I know that I have just a few seconds here.
        We cannot solve the problems of today with the failed
    approaches of yesterday. I am also concerned about changes to
    the Sarbanes-Oxley accounting requirements for community banks.
    I hope that today's hearing will begin a constructive dialogue
    that leads us to the approach that is most appropriate for
    accelerating economic recovery.
        To all of the witnesses today, thank you for taking time
    out of your busy schedules to appear before us. I look forward
    to hearing your testimony.
        Thank you. And I yield back the balance of my time.
        Chairwoman Capito. Thank you.
        And for a final 1-minute opening statement, Mr. Canseco.
        Mr. Canseco. Thank you, Madam Chairwoman, Chairman Garrett,
    and my colleague, Mr. Luetkemeyer, for bringing this very
    important Communities First Act to a hearing today.
        I represent the 23rd District of Texas, which is home to
    many small towns which are engaged in farming and ranching.
    Community banks are sometimes the only source of capital
    available to these rural areas. In the past year, ranchers and
    farmers and small businesses and families in my district have
    had to deal with wildfires and a record drought, and the
    economic impact has been devastating.
        Compounding the problem is the tremendous burden community
    banks are now facing in serving these affected communities. A
    great amount of uncertainty and overregulation in the wake of
    Dodd-Frank has frozen credit in a number of small towns, and
    the consequences are palpable as you speak with residents and
    business owners in these areas.
        The provisions of the Communities First Act go a long way
    towards lifting the burden off the shoulders of America's
    community banks, and I look forward to hearing from our
    witnesses on this very important topic.
        And, again, my thanks to the chairman of this committee,
    and also Mr. Luetkemeyer for bringing this bill.
        Chairwoman Capito. Thank you.
        I think that concludes our opening statements, so I would
    like to now introduce our panel of witnesses for the purpose of
    giving a 5-minute opening statement.
        Our first witness is Mr. Salvatore Marranca, president and
    chief executive officer, Cattaraugus County Bank, on behalf of
    the Independent Community Bankers of America.
        Welcome.

    STATEMENT OF SALVATORE MARRANCA, DIRECTOR, PRESIDENT, AND CHIEF
     EXECUTIVE OFFICER, CATTARAUGUS COUNTY BANK, ON BEHALF OF THE
            INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

        Mr. Marranca. Thank you, Chairwoman Capito, Chairman
    Garrett, Ranking Member Maloney, Ranking Member Waters, and
    members of the subcommittees.
        I am Sal Marranca, director, president, and CEO of
    Cattaraugus County Bank, a $180 million community bank in
    Little Valley, New York. I am pleased to be here today to
    represent the nearly 5,000 members of the Independent Community
    Bankers of America.
        Thank you for convening this hearing on the Communities
    First Act, or CFA. This legislation is a top priority for ICBA
    and community banks nationwide. We are grateful to Congressman
    Luetkemeyer for introducing CFA and to the more than 50 Members
    from both parties who have co-sponsored it. Thirty-seven State
    banking associations have also endorsed the bill.
        CFA would provide carefully crafted regulatory and tax
    relief that would allow community banks to do what we do best:
    lend locally in our communities and help boost the economy. I
    would also note that credit unions would benefit from a number
    of CFA provisions.
        Rather than a top-down approach, CFA was crafted from the
    bottom up, with input from community bankers who know what will
    work on Main Street. Most community banks are closely held
    institutions whose viability is directly tied to the economic
    life of the communities we serve. Our business is built on
    long-term relationships with customers who are also our
    neighbors.
        My bank, like many community banks, has been in business
    for over a century and survived the Great Depression. Our
    longevity is a testament to conservative risk management.
    Because we are low-risk institutions, our regulations should be
    distinct from that of large complex banks and Wall Street
    firms. CFA provides appropriate tiering of regulation and
    relief for smaller, low-risk institutions so we can better
    serve our communities.
        The steady accretion of regulation over many decades has
    become a serious and growing threat to community banks. While
    some of these regulations are sensible and necessary, others
    are overly prescriptive, redundant, and unduly burdensome. To
    community banks like mine, regulation is a disproportionate
    expense, burden, and a real opportunity cost. My compliance
    staff is half as large as my lending staff. This is out of
    proportion to our primary business: lending in our communities
    to support the local economy.
        CFA contains 26 provisions. It is broad and diverse because
    there are some 7,000 community banks of different charter
    types, ownership, and lending specializations. While no one
    provision of CFA is a silver bullet, combined they will have a
    real impact for community banks and their customers. I would
    like to highlight just a few.
        For example, highly capitalized and well-rated community
    banks would be permitted to file a short-form call report in
    two quarters a year. This change would allow regulators to
    focus on high-risk institutions and would reduce the burden on
    qualified community banks without compromising safety and
    soundness.
        Another provision would exempt certain mortgages held in
    portfolio by community banks from escrow requirements. Many
    rural community banks don't have the resources to establish
    escrow accounts in-house, and outsourcing is a significant
    expense. Lenders have every incentive to protect the collateral
    of loans held in portfolio. This provision would help keep
    community banks in the business of making commonsense
    mortgages.
        Another provision would amend the annual privacy notice
    requirement. I always want to ensure that my customers are
    informed of my privacy policies. That said, when no change in
    policy has occurred, the annual notice provides no useful
    information to customers and is an unproductive expense for my
    bank.
        To summarize, the increasing burden of regulation will lead
    to further industry consolidation. The sensible regulatory
    reforms embodied in the CFA will help preserve the community
    banking business model and the diverse financial system that
    supports our Nation's economy.
        I encourage you to reach out to the community bankers in
    your district. Ask them whether the reforms of the CFA would
    help them to serve your communities. I am confident they will
    say yes.
        Thank you again for the opportunity to testify today and to
    offer ICBA's perspective on the important reforms of the
    Communities First Act.
        [The prepared statement of Mr. Marranca can be found on
    page 106 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. O. William Cheney, president and
    chief executive officer of the Credit Union National
    Association.
        Welcome.

     STATEMENT OF O. WILLIAM CHENEY, PRESIDENT AND CHIEF EXECUTIVE
           OFFICER, CREDIT UNION NATIONAL ASSOCIATION (CUNA)

        Mr. Cheney. Thank you.
        Chairmen Capito and Garrett, Ranking Members Maloney and
    Waters, thank you very much for the opportunity to testify on
    behalf of America's 7,400 not-for-profit credit unions, which
    now serve 94 million Americans.
        These credit unions and community banks operate side-by-
    side to meet the financial services needs of consumers and
    small businesses. In recent months, there has been a resurgence
    in consumer interest in local financial institutions. Community
    banks and credit unions have welcomed the opportunity to serve
    those frustrated by the ever-increasing fees charged by the
    largest banks.
        One example took place in Santa Cruz, California, where in
    the lead-up to the recent Bank Transfer Day, credit unions and
    community banks worked together to make sure consumers in their
    area knew they had choices other than the largest banks. This
    represents credit unions and community banks at their best.
        Another area where credit unions and community banks should
    agree and work together is in the pursuit of regulatory relief
    legislation. Community-based institutions need to be able to
    spend more time and resources serving their members or
    customers and less time complying with burdensome regulations
    brought about by the financial crisis.
        We did not cause the crisis, but the regulatory response
    has imposed disproportionate burdens on smaller institutions.
    The Communities First Act would provide significant regulatory
    relief to America's community banks. Several of the provisions
    of this bill would also apply to credit unions. Our analysis of
    the provisions relevant to credit unions is included in my
    written testimony.
        While we support several provisions of this bill, I would
    like to make two points.
        First, this legislation would significantly expand the
    shareholder threshold for Subchapter S banks. We do not oppose
    this change, but note the irony of the banks' lobbying to
    expand the Subchapter S tax preference while aggressively
    lobbying to impose additional taxes on credit unions. They
    argue that the credit union tax status provides a competitive
    advantage and that imposing additional taxes on credit unions
    would level the playing field, but this is not the case. The
    market share data show that credit unions only have 6 percent
    of the combined assets and only 5 percent of the small business
    loans at depository institutions.
        If, indeed, the credit union tax status was such an
    advantage, we would see Subchapter S banks using their tax
    preference to reduce fees and rates to benefit consumers. This
    is simply not happening. Our analysis of bank call report data
    over the last 18 months indicates that, compared to similarly
    sized C-Corp banks, Subchapter S banks charge higher fees to
    consumers, have higher return on assets, and pay higher
    dividends to share their shareholders. In other words, these
    banks do not use their preferential tax treatment to better
    compete with credit unions.
        Second, we strongly believe that the legislation providing
    regulatory relief should be balanced. Credit unions and
    community banks should both see benefits in terms of their
    ability to serve members or their customers. As part of well-
    balanced relief legislation, credit unions would expect the
    inclusion of language, as Representatives Royce and McCarthy
    have proposed, to raise the statutory member business lending
    cap for well-capitalized credit unions with ample business
    lending experience that are operating near the cap.
        Additional business lending helps everyone in the
    community--small businesses, credit unions, and banks. Allowing
    qualifying credit unions to lend more to small businesses would
    provide much-needed assistance and relief to the struggling
    small business sector. It would help create 140,000 jobs in the
    first year, at no cost to taxpayers.
        The combination of these two bills should be embraced by
    all who serve businesses on Main Street. Unfortunately, we know
    what the bankers think about credit union regulatory relief.
    They oppose it every time we propose it. The banks' opposition
    to credit union legislation has meant that hundreds of
    thousands of jobs that could have been created through
    additional credit union business lending have gone uncreated.
        Their opposition in Congress and in courts to permitting
    more credit unions to serve underserved areas has meant that
    potentially millions of Americans have gone with without access
    to convenient and affordable financial services. Their
    opposition to legislation modernizing credit union capital
    standards has restricted credit unions' ability to grow and
    better serve their members. When banks oppose credit union
    legislation, their shareholders may win, but consumers and
    small businesses lose.
        Credit unions support regulatory relief for all financial
    institutions, but it must be balanced. In its current form,
    H.R. 1697 is not. To achieve balance, we urge Congress to
    combine this legislation with H.R. 1418, the Small Business
    Lending Enhancement Act, and include the other modifications we
    have urged in our written testimony.
        Credit unions across the country firmly believe that this
    legislation, or the provisions contained therein, must not move
    through Congress without similarly effective regulatory relief
    legislation for credit unions. This is a key issue for
    America's credit unions.
        Thank you for the opportunity to testify at today's
    hearing.
        [The prepared statement of Mr. Cheney can be found on page
    70 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. John A. Klebba, president and chief
    executive officer, Legends Bank, on behalf of the Missouri
    Bankers Association.
        Welcome.

     STATEMENT OF JOHN A. KLEBBA, CHAIRMAN, PRESIDENT, AND GENERAL
       COUNSEL, LEGENDS BANK, ON BEHALF OF THE MISSOURI BANKERS
                           ASSOCIATION (MBA)

        Mr. Klebba. Thank you.
        Chairwoman Capito and Chairman Garrett, Ranking Member
    Maloney and Ranking Member Waters, and members of the
    subcommittees, my name is John Klebba, and I am the chairman,
    president, and general counsel of Legends Bank in Linn,
    Missouri. I also occasionally sweep the floors and shovel the
    snow whenever that is necessary.
        Thank you for the opportunity to testify today. I would
    also like to thank my Congressman, Congressman Luetkemeyer, a
    fellow Missourian, for his work on this bill.
        The title of the bill pretty much says it all, the
    ``Communities First Act.'' Legends Bank is a small community
    bank by any national standard, with 10 locations and 83
    employees, serving rural Missouri. Our headquarters is in a
    town of 1,450 people, and we have locations in towns as small
    as 300, which is not much bigger than this room, probably,
    right now.
        We are proud of the fact that we have been in business for
    almost 100 years. When I was a boy, I listened to my
    grandfather, one of the bank's co-founders, tell stories of the
    hardships of taking the bank through the Great Depression. We
    were, in fact, one of the few banks in our county to survive.
        One of the things about Legends Bank that has not changed
    from the time of his leadership to my dad's leadership to my
    own is that our bread and butter is our commitment to the
    communities we serve. To put it simply, if our communities and
    our customers are not successful, then our bank is not
    successful. Thus, our fates are inextricably linked.
        We know from experience that there is a cost and increased
    expense to the bank when we have to deal with more regulations.
    And when there is an increased cost to us, there is an
    increased cost to our customers. The more expense for the bank,
    the less that is available to loan to our primary customer
    base, which is small businesses, farmers, and folks who are
    just trying to get by in these difficult economic times.
        Several provisions of this legislation will provide the
    kind of regulatory relief my bank and other small banks need to
    continue to serve our communities. For example, Section 201
    deals with escrow accounts for mortgage loans. This section
    would require the Federal Reserve Board to exempt all banks
    with assets of $10 billion or less from the escrow account
    requirement.
        In the small towns we serve, many customers don't want
    escrow accounts, and, in fact, we have served our customers
    quite well for over 97 years without offering them. Our
    customers are used to paying their insurance and tax bills
    directly to the insurance companies and county collectors.
    Think about how much easier it is to change insurance companies
    or change coverages without the involvement of a third party,
    in this case the bank.
        Requiring a service our customers don't want doesn't make
    any sense. It only adds a significant cost to the bank and
    increases the cost to our customers in the form of higher fees
    or less attractive interest rates. Many of these loans are
    small loans. For example, on a mobile home loan, the monthly
    escrow account payment can be very small, in some cases less
    than $20 per month.
        Another area of the bill I would like to highlight is tax
    relief for banks, which will allow us to exclude from gross
    income the interest on loans secured by agricultural real
    property. This mirrors the exclusion already available to one
    of our competitors, the Farm Credit Services.
        When I was in law school, one of the courses I took dealt
    with tax policy and whether, in setting tax policy, it was
    either fair or just for the government in a free-market society
    to be picking winners and losers. Community banks are having a
    harder and harder time competing with tax-advantaged entities
    such as farm credit systems and credit unions. When the
    government picks winners and losers at the expense of other
    industries, in this case community banks, our communities
    suffer the consequences.
        Many of the rural areas in this country are struggling.
    Demographically, their population is getting older, especially
    with respect to individuals who own and operate family farms.
    In my experience, one of the main reasons for this is the fact
    that it is very difficult for younger people to be able to
    afford the land and equipment necessary to get them started as
    farmers. Their proposed tax relief for qualified ag lenders
    would certainly help level the playing field that we operate on
    and give a boost to our ag borrowers.
        I am concerned about the long-term viability of community
    banking, and unjust tax policy is one of the main reasons.
        Thank you for the opportunity to present my views on behalf
    of the Missouri Bankers Association. And after this is over, I
    would be happy to answer any questions you might have,
    especially with respect to Subchapter S status.
        [The prepared statement of Mr. Klebba can be found on page
    90 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. Fred Becker, Jr., president and
    chief executive officer, National Association of Federal Credit
    Unions.
        Welcome.

    STATEMENT OF FRED R. BECKER, JR., PRESIDENT AND CHIEF EXECUTIVE
     OFFICER, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)

        Mr. Becker. Thank you, Madam Chairwoman.
        Good afternoon, Chairmen Capito and Garrett, Ranking
    Members Maloney and Waters, and members of the subcommittees.
    My name is Fred Becker. I am testifying today on behalf of
    NAFCU, where I have served as the president and CEO since
    January of 2000. I very much appreciate the opportunity to
    share our views on H.R. 1697 and the need for regulatory relief
    for all community financial institutions.
        While credit unions did not create the financial crisis,
    credit unions have nevertheless been adversely impacted by the
    ongoing economic upheaval and ensuing legislation and
    regulation. Credit union failures have, however, been
    relatively minimal as compared to other financial depository
    institutions.
        We recognize the leadership and effort of Representative
    Luetkemeyer to bring relief to community-based financial
    institutions. Many of the provisions in the Communities First
    Act provide regulatory and tax relief to community banks.
        In particular, we would like to note our support of Section
    107, which includes language that will lower the threshold
    needed for the Financial Stability Oversight Council to
    override rules issued by the Consumer Financial Protection
    Bureau. We are pleased that such a provision has already passed
    the House.
        We also believe that Section 201 of the bill, which would
    amend the Dodd-Frank Act to provide loans held in portfolio by
    banks under $10 billion in assets, is, in principle, a good
    idea. Such an exemption should, however, be made for all credit
    unions. In addition, we are disappointed that the legislation
    continues to adopt a $10 billion dividing line in many of its
    provisions.
        While the Communities First Act focuses on relief to
    community banks, credit unions remain among the most heavily
    regulated of all financial institutions, with a number of
    outdated statutory limits on their abilities and powers.
    Passage of new financial reforms in recent years has only
    increased the regulatory burden on credit unions. Every
    additional dollar spent on compliance, whether stemming from a
    new law or an outdated regulation, is a dollar that could have
    been used to reduce costs or provide additional services to a
    member.
        With that in mind, there are a number of areas where we
    would like to see relief--relief that would enhance credit
    unions' service to their 94 million members. These include:
    raising the arbitrary member business lending cap; allowing
    credit unions access to supplemental capital; providing the
    ability for all types of credit unions to add underserved
    areas; allowing credit unions that convert to community
    charters to retain their employee groups; permitting voluntary
    mergers of multiple group credit unions without limitation; and
    allowing NCUA to establish longer maturities for certain credit
    union loans.
        Combining these provisions with those sought by community
    banks would strengthen the legislation and provide relief to
    both, in addition to helping create jobs and aiding in the
    economic recovery.
        Many of these credit union proposals have already received
    broad bipartisan support. For example, the Small Business
    Lending Enhancement Act, introduced by Representatives Royce
    and McCarthy, has over 100 bipartisan co-sponsors. We believe
    this legislation to raise the member business lending cap would
    help spur over $13 billion in small business lending and create
    over 100,000 new jobs in the first year alone. The demand is
    out there from small business, and credit unions are ready to
    meet it.
        In conclusion, with the recent influx of new laws and
    regulations, our community financial institutions, and in
    particular credit unions, are in need of regulatory relief. As
    our Nation continues to strive to recover from the ``Great
    Recession,'' we believe it is imperative that every effort be
    made to strengthen the access and improve the availability of
    low-cost financial services to all Americans.
        In keeping with that spirit and intent, we believe that the
    Communities First Act can be strengthened by adding the
    provisions to provide regulatory relief to credit unions, as
    outlined earlier in my testimony. Such an approach would create
    a comprehensive reform bill that would create more jobs, help
    communities, and garner further bipartisan support.
        We thank you for your time and for the opportunity to
    testify before you here today on these important issues to
    credit unions and to our Nation's economy. I would welcome any
    questions that you may have.
        [The prepared statement of Mr. Becker can be found on page
    54 of the appendix.]
        Chairwoman Capito. Thank you, Mr. Becker.
        Our next witness is Mr. Arthur E. Wilmarth, Jr., professor
    of law, George Washington University, executive director,
    Center for Law, Economics, and Finance.
        Welcome, Professor.

    STATEMENT OF ARTHUR E. WILMARTH, JR., PROFESSOR OF LAW, GEORGE
                    WASHINGTON UNIVERSITY LAW SCHOOL

        Mr. Wilmarth. Thank you, and good afternoon. Chairwoman
    Capito, Chairman Garrett, Ranking Member Maloney, Ranking
    Member Waters, and members of the subcommittee, thank you for
    allowing me to participate in this hearing.
        Community banks play a crucial role in providing credit and
    other financial services to consumers and small and medium-
    sized enterprises, which I will refer to as SMEs. Community
    banks have long served as a leading source of outside credit
    for SMEs. By doing so, community banks promote economic growth
    in the United States. SMEs produce half of the total private
    sector output, employ a majority of the private sector
    workforce, and account for two-thirds of net new jobs and more
    than a third of all private sector innovations.
        However, the revival of the community banking sector and
    its ability to continue serving the needs of consumers and SMEs
    cannot be taken for granted. Many community banks disappeared
    in the thousands of bank mergers that occurred between 1990 and
    2005. During that time period, the percentage of banking assets
    held by the 10 largest U.S. banks rose from 25 percent to 55
    percent.
        This consolidation trend intensified during the financial
    crisis, as regulators arranged several emergency mergers
    between very large banks that produced even bigger banks. As a
    result of those mega-mergers, the 4 largest U.S. banks
    controlled 56 percent of domestic banking assets at the end of
    2009, up from only 35 percent in 2000, and the 10 largest banks
    controlled 75 percent of such assets.
        Community banks suffered disproportionate harm during the
    current financial crisis, in large part because of the
    preferential treatment given by the Federal Government to too-
    big-to-fail mega-banks. The Federal Government provided massive
    amounts of financial assistance to mega-banks during the
    financial crisis but gave very limited help to smaller banks.
        The 19 largest U.S. banks, each with more than $100 billion
    of assets, received $220 billion of capital assistance from
    TARP, and those banks issued $235 billion of FDIC-guaranteed
    debt. In contrast, smaller banks received only $40 billion of
    TARP assistance and issued only $10 billion of FDIC-guaranteed
    debt.
        The Federal Reserve provided $1.2 trillion of emergency
    credit assistance, mostly to large domestic and foreign banks.
    More than half of this assistance went to the 10 largest U.S.
    commercial and investment banks.
        Most importantly, the Federal Government explicitly
    guaranteed that none of the 19 largest banks would be allowed
    to fail. When the stress tests were announced in early 2009,
    regulators declared that the Treasury Department would provide
    any additional capital needed to ensure the survival of the top
    19 banks. They also said that they would not impose any
    regulatory sanctions on the top 19 banks under the ``prompt
    corrective action'' regime established in 1991. In stark
    contrast, Federal regulators imposed PCA orders and other
    public enforcement sanctions on hundreds of community banks and
    allowed more than 300 of those institutions to fail.
        In view of the massive too-big-to-fail bailout that the
    Federal Government provided to our largest banks, it is not
    surprising that those banks enjoy a decisive advantage in
    funding costs over smaller banks. FDIC Chairman Sheila Bair
    recently pointed out that in the fourth quarter of 2010, the
    average funding costs for banks with more than $100 billion of
    assets was about half the average funding costs for community
    banks with less than $1 billion in assets.
        The past 2 decades have also made clear that community
    banks and mega-banks follow very different business models.
    Community banks provide high-touch, relationship-based lending
    and cash management services to SMEs, as well as personalized
    banking services, including wealth management, to consumers. In
    contrast, mega-banks provide impersonal, highly automated
    lending and deposit programs to SMEs and consumers, and mega-
    banks also focus on complex, higher-risk transactions in the
    capital markets. Congress should reject a one-size-fits-all
    regulatory policy and instead, Congress should adopt a tailored
    policy that gives due attention to the special requirements of
    community banks.
        At the present time, community banks face particularly
    difficult challenges in raising new capital and dealing with
    troubled commercial real estate loans. Several provisions of
    H.R. 1697 have the potential to help community banks in these
    areas. I would be pleased to answer your questions about those
    provisions, which are discussed in my written testimony.
        Thank you again for allowing me to participate.
        [The prepared statement of Professor Wilmarth can be found
    on page 118 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. Damon Silvers, director of policy
    and special counsel for the AFL-CIO.
        Welcome, Mr. Silvers.

     STATEMENT OF DAMON A. SILVERS, DIRECTOR OF POLICY AND SPECIAL
         COUNSEL, AMERICAN FEDERATION OF LABOR AND CONGRESS OF
                   INDUSTRIAL ORGANIZATIONS (AFL-CIO)

        Mr. Silvers. Thank you. Good afternoon, Chairwoman Capito
    and Chairman Garrett, and Ranking Members Maloney and Waters.
        In addition to the introduction I just received, I should
    note that I served as Deputy Chair of the Congressional
    Oversight Panel for TARP. I am testifying today both on behalf
    of both the AFL-CIO and the Americans for Financial Reform, a
    coalition of more than 250 organizations representing more than
    50 million Americans.
        In listening to the testimony of my fellow witnesses, I am
    reminded of our experience in the Congressional Oversight Panel
    holding field hearings with community bankers in Atlanta, in
    Milwaukee, in Phoenix, and in northeast Colorado, where we
    focused on agricultural lending, looking at small business
    lending in particular and at the problems of commercial real
    estate, particularly in the State of Georgia.
        As a result of the things we learned through that
    experience, the Congressional Oversight Panel warned on
    multiple occasions that if steps were not taken to both address
    weaknesses in large banks and to aid smaller banks more
    aggressively, the United States was in serious danger of
    repeating the Japanese experience of the 1990s, where a
    financial system dominated by weak, large banks protected by
    regulatory and accounting forbearance simply failed to function
    in the most basic way. In other words, our financial system was
    in danger of failing to provide credit to operating businesses.
        Today, we appear to be living in that world--a world of
    weak, large banks, constrained credit to small and medium-sized
    enterprises, overleveraged households, persistent high
    unemployment, mass foreclosures, and growth so sluggish that
    there is no sign of job creation on the horizon.
        This situation cries out for aggressive policy responses:
    to end the double standard in bank regulatory policy; to
    recapitalize weak, large banks; to rebuild business lending;
    and to restructure home mortgage loans so households are no
    longer trapped in a downward spiral.
        Instead, however, we are at a hearing addressing a bill,
    H.R. 1697, that has many, many provisions in it, which, as a
    whole, seek to extend the bad practices of regulatory
    forbearance from the big banks that Mr. Wilmarth just described
    to the small banks, rather than asking big banks to live up to
    the same standards we rightfully ask small banks to live by.
        Now, that is not to say that there are not ways in which
    the bank regulatory system could be intelligently and wisely
    crafted to address the differences in business models Mr.
    Wilmarth addressed, which I absolutely concur with. And the
    testimony that we heard from Mr. Marranca listed a series of
    provisions embedded within this bill that seem to me to be
    quite commonsensical.
        But that is not all this bill does. This bill allows banks
    to hide the very real losses that accompany foreclosing on
    American families, effectively creating a regulatory subsidy
    for throwing people out of their homes and driving down housing
    prices.
        The bill undoes the fundamental principle that has
    underpinned our financial accounting system since the 1930s,
    the principle of the independence of the Financial Accounting
    Standards Board, by effectively requiring the SEC to only
    approve financial accounting rules that report good news about
    small banks rather than having rules that tell the truth about
    small banks.
        The bill exempts banks with assets up to $1 billion from
    the internal controls requirements of the Sarbanes-Oxley Act,
    effectively increasing the risk that such banks would pose to
    the FDIC and overturning the basic proposition that has been in
    place since the beginning of Federal bank regulation in the
    1870s: that banks must have accurate internal controls that are
    at least adequate to ensure the accuracy of their financial
    statements.
        Most troublingly, H.R. 1697 broadly, for all banks: weakens
    consumer privacy protections for all banking customers;
    undermines the integrity of real estate appraisals--and,
    certainly, we should have learned something about this by now--
    ;seeks to suborn the protection of the American public to the
    interests of the banks by broadly weakening the authority of
    the Consumer Financial Protection Bureau; fundamentally
    undermines the securities laws by allowing public offerings to
    up to 2,000 people without requiring basic disclosures through
    registration with the Securities and Exchange Commission; and,
    most bizarrely puzzling, seeks to make banks more reliant on
    credit rating agencies.
        Over time, I have been impressed with the capacity of some
    Members of Congress to name bills in ways that are
    fundamentally dishonest. Now, this grab bag of regulatory
    subsidies gratuitously appended to the commonsense provisions
    that my fellow witnesses rightfully seek for their small banks,
    many of which are, in fact, for the benefit of big banks, no
    more deserves the name of the ``Communities First Act'' than
    did TARP itself.
        I have tried to think of a more accurate name for this bill
    and thought the ``Potemkin Village Act'' or the ``Let's Make
    Believe Act'' sounded pretty good. But as I thought about how
    much of this Act is really about helping big banks, about
    helping Wall Street, I concluded that the best title for it, in
    its current form, would be the ``Help the 1 Percent and Hurt
    the 99 Percent Act of 2011.''
        Thank you.
        [The prepared statement of Mr. Silvers can be found on page
    113 of the appendix.]
        Chairwoman Capito. Thank you.
        Our final witness is Mr. Adam J. Levitin--whom we have had
    before the panel before--associate professor of law, Georgetown
    University Law Center.
        Thank you.

      STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN
                         UNIVERSITY LAW CENTER

        Mr. Levitin. Good afternoon, Chairmen Capito and Garrett,
    Ranking Members Maloney and Waters, and members of the
    subcommittees. My name is Adam Levitin and I am a professor of
    law at Georgetown University.
        As you have heard from the testimony of the other
    witnesses, there is a palpable sense that the way U.S.
    financial regulation has proceeded over the past few years is
    fundamentally unfair. Large financial institutions, many of
    which behaved irresponsibly during the housing bubble, were
    bailed out. Small institutions, on the other hand, which were
    generally much more prudent lenders, were left to sink or swim
    on their own.
        Moreover, increased regulation in the wake of the financial
    crisis imposes a relatively heavier burden on small
    institutions because they lack the economies of scale of the
    large institutions. In short, small banks and credit unions are
    paying for the problems that large banks created. Small banks
    and credit unions have really become second-class citizens in
    the financial world. Unfortunately, the Communities First Act
    is the wrong solution to this problem.
        The bill contains some provisions that are quite
    reasonable. For example, little is accomplished by Gramm-Leach-
    Bliley privacy notices in general. They don't tell consumers
    much of anything. They tell them that you don't have any
    privacy. But even less is accomplished by requiring their
    annual reissuance when privacy policies have not changed.
    Reducing this regulatory burden is quite sensible.
        The problem here is that there are several extremely
    troubling provisions buried in the bill that do much more harm
    to communities and the economy than they do to help community
    banks and credit unions. First, Sections 205 and 206 of the
    bill would change the accounting treatment for loss recognition
    in foreclosure and of impaired real estate loans. The bill
    would enable banks to delay loss recognition and carry impaired
    loans at inflated values. Not only do these provisions
    encourage voodoo accounting, they encourage foreclosures at the
    expense of loan modifications.
        If there is one point you take away from my testimony, this
    is it: The Communities First Act will result in families being
    thrown out of their homes. This bill encourages foreclosures,
    it affirmatively hurts American families and communities, and
    it will result in your constituents losing their homes. If you
    are going to pass this bill, you need to take out Sections 205
    and 206.
        Second, Section 105 of the bill would require the SEC to
    conduct a cost-benefit analysis of any changes to accounting
    rules proposed by the independent Financial Accounting
    Standards Board. This provision would cover not just small
    banks but also large ones, and indeed all public companies,
    banks and nonbanks. The requirement would functionally destroy
    GAAP accounting by petrifying accounting standards. It will
    scare away capital from U.S. markets and render American firms
    less competitive in obtaining financing.
        Cost-benefit analysis in general is one of the wishiest-
    washiest pseudo-scientific things ever. There is no way to
    scientifically calculate the cost and benefits from the change
    in accounting treatment of, say, variable interest entities or
    the treatment of financial leases. These things just aren't
    quantifiable, and therefore you can't do a cost-benefit
    analysis. Accounting rules provide their benefits not on a one-
    off basis, but as a complete information ecosystem, by making
    information transparent to markets. You can't pick and choose
    on financial transparency. Destroying GAAP accounting by
    imposing cost-benefit analysis doesn't reduce the costs of
    auditing for banks. It just raises their costs of capital. And
    what does that mean? It means less lending to small and medium-
    sized businesses and higher rates for those loans that are
    made.
        Finally, Section 107 of the bill would lower the standard
    needed for the Financial Stability Oversight Council to veto
    rulemakings by the Consumer Financial Protection Bureau. Let's
    call this provision for what it is--an attack on the American
    family. The CFPB was created to be a bulwark to protect
    American families from unfair, deceptive, and abusive financial
    practices. We certainly have seen enough of those over the last
    few years.
        The FSOC veto was designed to be a rarely if ever used
    provision to avoid unintended systemic risk consequences from
    CFPB action. The standard proposed by the Communities First
    Act, however, would enable the FSOC to veto CFPB rulemakings
    whenever they harm the safety and soundness of a subset of
    banks.
        Let's be clear about what safety and soundness means. It is
    a phrase that means bank profitability. It is axiomatic that a
    bank that is not profitable is not safe and sound. We need our
    banks to be profitable, but there is absolutely no public
    policy interest in the level of bank profitability. But that is
    what the bill would do. It would elevate bank profitability
    over the protection of the American family. Community banks and
    credit unions have become second-class citizens in U.S.
    financial regulation, and that is wrong. They are important
    institutions that provide real value to our financial system,
    but the Communities First Act is not the solution. It bundles
    some small-bore, reasonable regulatory changes with some
    seriously disruptive provisions. It will not fix the problem of
    small banks being treated as second-class citizens.
        I urge the committee that if it wants to fix the problem of
    two-tiered bank regulation to tackle that problem directly
    rather than approach it through a misnamed bill like the
    Communities First Act that puts banks' interests ahead of
    communities. Thank you.
        [The prepared statement of Professor Levitin can be found
    on page 98 of the appendix.]
        Chairwoman Capito. Thank you.
        That concludes testimony from the panel, and I am going to
    begin with the questions.
        I would like to ask Mr. Marranca and Mr. Klebba on one of
    the areas of the bill that talks about appraisal values
    particularly for--I think it is for commercial real estate, and
    it talks about--we are having a lot of problems with this,
    certainly this is a problem in Georgia and across the country
    that has been hardest hit on how do you reasonably appraise
    properties when nothing has sold in the region, there are no
    comps. And the suggestion here is that you do an appraisal
    value over 5 years where you drop out the high, you drop out
    the low, and then you get an average, which gives you the
    average--would give you an appraisal value for that piece of
    property. Do you have any opinion on that, Mr. Marranca?
        Mr. Marranca. I do. Again, the proposal as stated is a 5-
    year rolling average, and the purpose of that, of course, is to
    eliminate the immediate up or the immediate down that troubles
    so many banks when the regulators come in and then force, if
    you will, a writedown which does affect your capital and does
    affect your business plan, it does affect your ability to serve
    your community.
        When an appraisal is written down immediately, it is taken
    off the books as far as the value on your asset. Those loan
    losses affect your capital. In other words, that directly
    affects your ability, again, to lend in your community. I don't
    see a safety and soundness issue there. Again, this is for
    regulatory purposes only. This is something that we are willing
    to work with, willing to discuss. It is an issue with many,
    many community banks, especially in very specific parts of the
    country.
        Chairwoman Capito. Have you had an issue with this in your
    bank in New York?
        Mr. Marranca. In rural western New York where my bank
    operates out of three counties, we have never had any type of
    real estate boom, we did not have a bust, so appraisals are not
    at issue.
        Chairwoman Capito. That is my entire State. Mr. Klebba, do
    you have an opinion on that?
        Mr. Klebba. In terms of appraisals, there are some issues,
    I know, out there. We haven't had a lot in our area because,
    like Sal, we are luckily in an area where we haven't had booms
    and busts, but an appraisal is one person's opinion, on one
    particular day, of what the value of a piece of property is.
    And I think the overall objective should be that we are coming
    up with values in terms of long-term values. I think the real
    issue is when we go through a real estate bubble and a real
    estate decline like we have now, what is the real value of that
    property? Is it what it was worth last year, is it what it is
    worth today, or is it what we project it to be worth a year
    from now?
        So I think it has been in some situations very unfair for
    banks to be writing down. I know if you look at our securities
    portfolio, if we have large gains in our portfolio and we have
    those particular securities on a hold to maturity, we don't
    write those up. I think there is an argument that the same
    should be held, should be put forth in terms of real estate. If
    you are holding these real estate loans to maturity and
    everything else is looking pretty good on them, is it really
    fair to the bank to write those down immediately or should you
    have some sort of standardized or normalized, I should say,
    real estate values for your particular area?
        Chairwoman Capito. Thank you.
        Mr. Wilmarth, you touched on a subject that I am extremely
    interested in. You said that the largest banks are now holding
    75 percent of assets, and that is up from what?
        Mr. Wilmarth. Historically, it was 25 percent in 1990, 55
    percent in 2005, and at least by one report, 75 percent in
    2009. There may have been a little bit of runoff since 2009
    since there have been minor divestitures, but I think it is
    certainly north of 70 percent.
        Chairwoman Capito. The reason I want to focus in on this,
    and I think Mr. Marranca mentioned consolidation, bank
    consolidation. We have just been through ``too-big-to-fail,''
    and our bigger banks are getting bigger. We could argue, and we
    have argued ostensibly as to whether ``too-big-to-fail'' has
    been ended. I personally don't think so, but we will leave that
    for another day.
        My concern here is that we look at regulatory burdens that
    are being heaped by Dodd-Frank and others without scraping out
    the old regulations that may not be useful anymore, that are no
    longer serving their purposes, which is not being done. Even
    Secretary Geithner testified to that in this committee when I
    asked him.
        Is further consolidation going to occur because of this
    inability of the smaller institutions to really cope with what
    they are going to have to cope with in the regulatory
    environment? I would like to have your opinion on that.
        Mr. Wilmarth. I think you have a problem of funding costs
    and you have a problem of operating costs, and the funding
    costs I think are driven by the perceived too-big-to-fail
    subsidy, that people will put more of their money in the
    largest banks at lower rates if they think that the government
    absolutely will not let those banks fail. At least in my
    opinion, if you look at the bailout of Dexia in Europe
    recently, and you also look at the Federal regulators approving
    the transfer of derivatives portfolio from Merrill Lynch to
    Bank of America, those are signals indicating that on both
    sides of the Atlantic, big banks are going to be supported at
    all costs, so that drives the funding cost disparity I
    mentioned where essentially the large banks have about half the
    funding costs of small banks under $1 billion.
        The other side is operating costs. So I think certainly it
    would be appropriate for Congress to urge regulators to
    actually start adopting a two-tiered regulatory approach. I
    understand that Governor Tarullo of the Federal Reserve Board
    recently mentioned that the Fed was interested in doing that. I
    think what you are hearing from the witnesses is that it hasn't
    much happened so far, but that would be certainly a good
    initiative to start.
        Chairwoman Capito. Thank you. I overstayed my time there.
    Mrs. Maloney for 5 minutes.
        Mrs. Maloney. First of all, I want to thank all of you for
    your excellent testimony. And I was struck when you talked, Mr.
    Klebba, about how your bank stayed open during the Great
    Depression when most of them closed, and all the stories I
    heard for all the banks that were closed. How did your bank
    survive? Did you have more capital? How did you survive when so
    many closed during that period--or your father's bank, I guess?
        Mr. Klebba. They were very, very conservative. No, they
    were very, very, very, very conservative. Good old German
    Catholics. They did have a lot of capital, and they were very
    careful. It was a family-owned bank, and it was their money
    that they were lending out; it wasn't somebody else's money.
    And so, I think there was a self-interest in that. I remember
    him talking about going around on Sundays with his loan list in
    his pocket and calling on these families and just seeing how
    they were doing, and so it wasn't just a banking relationship,
    it was a personal relationship.
        I remember him saying how people would come in with
    basically the deeds to their farm saying, ``I can't do this
    anymore,'' and he would say, ``No, you need to stay on that
    farm because you can feed your family. And as long as you can
    eke out enough to pay a little bit of interest, we can stay
    with you. But once you move off, then what are you going to
    do?'' So it was really compelling stories that he had. He was
    really an interesting guy. I could go on for hours telling you
    about his background.
        Mrs. Maloney. Thank you for sharing that.
        And, really, when we did Dodd-Frank, one of the things we
    tried to do was go back to traditional banking, that you have
    skin in the game, that you are accountable, that you hand out
    loans and you make sure those people can pay them back, and
    that you work with them in the traditional way that your father
    did.
        In your statement of trying to help people keep their
    farms, one of the things we are concerned about is helping
    people keep their homes. The loan amortization and loan
    appraisal sections, I want to really ask Mr. Wilmarth, and I
    think you gave a beautiful description of the role that
    community banks played during this period. They were really the
    rock on which most communities turned during this ``Great
    Recession.'' The stories I hear from across my State, really
    across the country, are that the only place anyone could get
    any help or response was from community banks. So one of the
    criticisms of this section has been that being able to amortize
    these over a long period of time could incentivize banks to
    pursue foreclosure rather than modification.
        Obviously, there is a social policy to want modification,
    and I would like to ask you, since you spoke on it and others,
    do you agree or disagree with that statement? Mr. Silvers, I
    believe you also spoke on this, as did you, Mr. Levitin, and
    from the great State of New York, if you could comment on that
    particular section.
        Mr. Wilmarth. Yes, thank you. I suggested that these two
    provisions, 205 and 206, could be viewed in the context of the
    forbearance program that was established for agriculture and
    energy banks in the late 1980s, and that was only extended to
    well-managed, prudently managed banks. It was carefully
    overseen by regulators. About four-fifths of the banks that
    entered that program either survived or emerged without
    assistance, so it was a successful program.
        Certainly, you could build safeguards into 205, you could
    limit it to well-managed banks, you could certainly give
    regulators discretion as to whether the appraisal or
    amortization process was being abused. I think that you could
    exclude residential real estate if you think that residential
    real estate is particularly threatened by this.
        I certainly think that 206 should probably be limited to
    smaller banks because I don't think that larger banks have the
    same need for this, and many of their properties are in larger
    areas where there are more opportunities for refinancing. I
    think 205 and 206 should be viewed as provisions that are
    needed in smaller, frozen markets where there simply is no new
    credit coming in to refinance properties, and this would give
    community banks a chance to work with their customers in the
    way that Mr. Klebba has explained. I think you could build in
    safeguards to prevent abuses.
        Mrs. Maloney. But others have said that it might mask,
    really, the difficulty for regulators to see the challenges
    there and to come in and work with trying to address it. Would
    anyone else like to comment on this?
        Mr. Marranca. If I may?
        Mrs. Maloney. Yes.
        Mr. Marranca. As a community banker for over 30 years, I
    categorically deny that it would in any way encourage
    foreclosures. That is not the business we are in. It would, in
    fact, do the opposite. It allows time for me as a banker,
    without regulatory pressure, to work with that borrower and
    find a solution to their financial problem or the economic
    problem in our area, and this was proven, again, in the
    agricultural crisis in the 1980s. Again, I need to point out or
    would respectfully point out that this only affects regulatory
    capital. This does not affect the books of the bank, it does
    not affect my investors looking at the bank, it does not affect
    my call reports and so forth, and it only applies to highly
    rated banks. So we are in no way justifying or jeopardizing
    safety and soundness. It helps out the consumer who needs the
    help at that time, and it helps the bank who needs the help at
    that time. We are in it for the long run. My bank celebrates
    its 110th anniversary in January. We need long-term solutions.
    We don't look for the next quarter or the next two quarters.
        Chairwoman Capito. The gentlelady's time has expired. Mr.
    Garrett?
        Chairman Garrett. I thank the Chair. So let's start off at
    that point. I had some other questions, but let's go back to
    Sections 205 and 206 and where the testimony was that section
    is in the bill to allow for, to facilitate for the banks to, as
    they put it, throw people out of their homes. So in the
    situation where a bank or credit union has someone who is not
    paying, is not up to date, what is better for that bank or
    credit union to do? To try to facilitate a workout with them or
    is it better to go through the foreclosure process from a
    bottom-line perspective?
        Mr. Marranca. Chairman Garrett, the last thing in the
    world--again, my main office is in a town of 800 people. I live
    with these people, they are my neighbors. I am not in the
    business of taking people out of their homes. The last thing in
    the world I want to do is take somebody's car or take
    somebody's house, and that is why we have clear, commonsense
    underwriting standards so that we never get to that point. But
    if there is an issue, whether it be medical, divorce, or
    economic, the first thing we do is sit down and talk with that
    person or family and try to find a solution. In my State of New
    York, unfortunately, it takes almost 16 to 18 months to
    foreclose on somebody. A lot of things happen. The last thing I
    want is somebody's house. We would do anything to stop that.
        Chairman Garrett. And actually, doesn't that cause other
    community problems when a number of homes in a community are in
    foreclosure or moving through foreclosure, that period of time
    for the uncertainty in the marketplace, not only uncertainty
    for the marketplace but also for the community itself to have
    that number of homes in foreclosure and not take a final
    decision?
        Mr. Marranca. There is no question, nobody wants a home
    that is abandoned, and that is the case in most cases. When
    there is a situation and we do end up foreclosing--and I am
    talking about 2 to 3 loans in the last 2 to 3 years, I am not
    talking significant numbers--that house is abandoned, it has
    problems, it is a blight on the community.
        Chairman Garrett. Going to another point. Overall, what we
    are trying to do with this legislation, I think, is trying to
    get rid of outdated regulation and try to improve on that. That
    is the same thing, come to think of it, that Secretary Geithner
    was talking about, that he said he wanted to do through FSOC
    and what have you.
        Mr. Klebba, maybe through your association, have you
    engaged there? Do you see this as something, are you
    optimistic--and maybe it is hard for you to say this--that this
    is actually going to occur through FSOC and the Secretary as
    far as getting rid of outdated, unnecessary, unduly burdensome
    regulations?
        Mr. Klebba. In terms of through the Consumer Financial
    Protection Bureau or--
        Chairman Garrett. Through FSOC.
        Mr. Klebba. Through FSOC?
        Chairman Garrett. Yes.
        Mr. Klebba. Am I optimistic? No.
        Chairman Garrett. You are not on the record here.
        Mr. Klebba. I am trying to be realistic about this.
    Basically, what I found coming out of Washington, at least in
    the 20 years I have been in the banking business, is more
    regulation, not less. I would hope that it would happen, but--
        Chairman Garrett. Okay, thank you.
        And going to the FASB aspect, this one I may disagree with
    you all, but let me ask you the question on it. So if FASB was
    sitting here, they would say we are just creating the rules to
    have a uniform system of accounting here, and if there is a
    problem for financial institutions with the interpretation of
    those rules or if there is a problem for the financial
    institutions as to how the regulators apply the rules, that is
    a problem that we should be taking up with the regulators and
    not having an impediment for FASB, as it does in the bill, to
    have to go through the SEC, and SEC, hey, don't give us any bad
    accounting standards under FASB. So isn't the really
    appropriate response to this not to put a constraint on FASB
    but to look to how it is interpreted and also how the regulator
    applies those rules?
        Mr. Klebba. I think that uniformity for uniformity's sake
    is a nonplus. That is not where we should be. We should be
    where you have rules that make sense and are just and actually
    are reflective of reality, and I think that is where--
        Chairman Garrett. That is what they would argue that they
    are trying to do here with their regulations, and that the
    reality for the big is the same as for the small, but that how
    the regulators--for example, how this may impact upon your
    capital requirements for your institution may be onerous; but
    then that is up to the banking, your particular type of banking
    regulator to step in and say, well, we are going to apply this
    particular accounting standard to you, and as far as how we are
    going to maybe change your capital requirements because of
    that. But as far as an investor is concerned to your
    institution, they can still open your books and say the
    standards are the same, but this is how the regulator is going
    to apply it to your institutions. Does that make sense?
        Mr. Klebba. Yes, I understand where you are coming from
    there, and again this is not a reflection on what you are
    publicly reporting. All banks, even those of us who are
    privately held, are obviously public reporting on a quarterly
    basis, but it has to do with how the regulators are dealing
    with you and dealing with your capital.
        Chairman Garrett. I see my time is up. Thanks.
        Chairwoman Capito. The gentlewoman from California, Ms.
    Waters.
        Ms. Waters. Thank you very much. To our presenters here
    today, I am very pleased that you are here, and I want very
    badly to cooperate with the opposite side of the aisle to do
    something for small community banks and credit unions. And I
    think we may be almost on the right track here.
        I hope Mr. Posey will talk a little bit about capital
    requirements. I am supporting his legislation. But I want to
    make sure that we are not inadvertently somehow doing something
    that is going to protect the too-big-to-fail banks, and I want
    to make sure that we are working strictly on behalf of our
    credit unions and our community banks. So let me ask just a few
    questions.
        I know that many community banks are having challenges
    raising capital. Now, the Treasury Department had, was supposed
    to support lending at financial institutions that have trouble
    meeting capital requirements. Did any of your members, were you
    able to use this program before it closed? From the Treasury
    Department?
        Mr. Klebba. We did not. We are sitting on about 15 percent
    capital. We have more capital.
        Ms. Waters. I can't hear you.
        Mr. Klebba. We are sitting on about 15 percent capital, so
    we have more capital than we know what to do with right now, so
    that was not a program that was--
        Ms. Waters. So that is not a problem at this time. I
    understand that currently, for Mr. Becker, there are
    restrictions on member business lending for credit unions, and
    I am very much involved in this issue. How will this--
    specifically, how will this relax the cap and help to increase
    loans to businesses?
        Mr. Becker. It will relax the cap by raising the cap under
    a very well-crafted piece of legislation that doesn't allow
    credit unions to immediately go wild in member business
    lending, but slowly increase it. There are requirements such as
    they have to be doing it for 5 years; there are requirements
    that they have to be well-capitalized, etc.; there are studies
    that show that credit unions would be able to increase their
    member business lending as a result of that cap increase. In
    addition, there are credit unions that are constrained from or
    worried about getting into the business because of their size
    and the existence of the cap.
        Ms. Waters. I understand. I just want to know if the
    community banks and the credit unions have worked this out and
    you are together on how this is to happen.
        Mr. Marranca. We have not worked this out.
        Mr. Becker. No.
        Ms. Waters. No, it is not happening.
        Mr. Marranca. If I may add, I think we are talking about
    two different things here. In my opinion, we are talking about
    apples and oranges.
        Ms. Waters. It would be great if you could mix the apples
    and oranges and come out with some good fruit so that we could
    all be behind what you are trying to do. We get caught up in
    this disagreement between the community banks and the credit
    unions. We support both of you, but I am not going to say
    anymore. I just hope that as you work on this, you can work
    something out.
        Quickly, I need you, Mr. Silvers, to elaborate on how
    exempting banks from the internal controls requirements of the
    Sarbanes-Oxley Act will increase FDIC risk.
        Mr. Silvers. Section 404 of the Sarbanes-Oxley Act requires
    that public companies attest that they have adequate internal
    controls and that independent auditors find that to be a true
    statement. Adequate internal controls ensure that the financial
    statements are actually what they purport to be and that
    everything from line employees walking out the door with
    depositors' cash, to chief financial officers rewriting the
    books to make them as they wish them to be.
        Ms. Waters. Okay, I get that. Let me ask the community
    banks: If you were exempted, how would you ensure that there
    are internal controls? Who would like to answer that?
        Mr. Marranca. If I may, we strongly support internal
    controls for banks. We strongly oppose internal controls
    attestation for small banks. We are already regulated by the
    FDIC.
        Ms. Waters. Just tell me how you do it. What is your
    system?
        Mr. Marranca. What is my system?
        Ms. Waters. For internal controls. That is the real issue.
        Mr. Marranca. Let me start at the top with the board of
    directors who have a fiduciary responsibility. Then it comes
    down to me, the CEO, who has a fiduciary responsibility for
    internal controls. We have an internal control auditor, we have
    an independent CPA third party, unqualified audit, we have a
    full safety and soundness audit by the FDIC with already--
        Ms. Waters. Okay, I hear you, I hear you. I don't want to
    cut you off, but that is a problem that needs to be worked out.
        Mr. Levitin, you note that Section 205 of this bill, which
    permits banks to stretch out losses, will lead families to be
    kicked out of their homes. Can you explain how the bill would
    hurt homeowners?
        Mr. Levitin. Sure. If you look at Section 205, Section
    205(a)(2) covers loan modifications. It would allow, if a bank
    chooses to do a principal writedown, that writedown could be
    amortized over time. That is a good thing. But Section
    205(a)(1) refers to OREO, other real estate owned. Those are
    foreclosure properties and nothing else. So it is allowing
    losses on foreclosures to be amortized over time. If you take
    out Section 206 (a)(1), Section 205 is fine, it is actually a
    good thing. With 205(a)(1) in there, it encourages
    foreclosures.
        Ms. Waters. You are talking about the REOs?
        Mr. Levitin. Yes, when loss recognition, when the property
    becomes REO after a foreclosure sale, that is a loss
    recognition event. At that point, normal accounting rules say
    the bank has to recognize the entire loss at that point. What
    205(a)(1) would do would let the bank stretch that out over 10
    years. That makes the foreclosure less painful.
        Ms. Waters. Thank you very much, Madam Chairwoman, for this
    hearing. Again, I would like to say to our friends in community
    banks and credit unions, I think we are onto something here,
    but I think we need to work out a few things. I hope that we
    can, because I want to make sure that community banks are able
    to operate and provide the services, and I am tired of what we
    have gone through with the too-big-to-fail banks. So please
    work all of this out. Thank you.
        Chairwoman Capito. Thank you. Mr. Renacci for 5 minutes for
    questions.
        Mr. Renacci. Thank you, Madam Chairwoman.
        I also believe our community banks and credit unions are
    really the lifeblood for entrepreneurs and business owners who
    will create a majority of our jobs, so we need to make sure
    that they are able to get loans out. And in saying that, I have
    listened to all the witnesses and all the sections here, it
    appears that some of you all agree there are some sections. I
    think there is only one witness who said he pretty much doesn't
    agree with any of these sections. Otherwise, even--Mr. Levitin,
    you are shaking your head, but I think you did agree with a
    couple. I think Mr. Silvers did as well.
        Mr. Levitin. I very much agree with many of the provisions.
        Mr. Silvers. I agree with several.
        Mr. Renacci. That is good to hear. What I am trying to get
    at is there are a couple provisions that I am trying to get my
    hands around, and a couple of my colleagues have already
    touched on, first Mr. Garrett, when he talked about 104 and
    105. When you do have an outside entity who is bringing a
    standard to the table, why would we want somebody else to
    interject into that standard? I am confused as to why you would
    even want that. It confuses. You now have another party.
    Keeping everything uniform is good to be able to evaluate
    things.
        So I would like to hear from the bank, well, anyone on this
    side, who can tell me why you would not want uniformity.
        Mr. Marranca. If I may, regarding Section 104, what comes
    to my mind is mark-to-market issues, and mark-to-market issues
    for a small community bank are just a different business model
    than mark-to-market issues for a trillion-dollar Citibank or
    whoever it may be. Community banks such as mine and thousands
    of others hold our securities to maturity for the most part. We
    hold our mortgages to maturity. It would be very, very
    difficult to mark-to-market on the asset side of my ledger, my
    loan portfolio. How do you mark-to-market a one-to-four-family
    home in rural western New York? How do you mark-to-market--
        Mr. Renacci. Not to interrupt you, because I only have so
    much time, but isn't that up to an explanation of how you would
    judge market value versus--you are saying that your bank would
    be different because you hold your assets for a longer period
    of time, and there probably isn't a good market comparison, so
    I am concerned about saying that is something other than
    uniformity. That is what is confusing here.
        Mr. Marranca. What I don't want to happen is what is forced
    on a megabank that is a trillion dollars in size is forced on
    my bank; that is, it doesn't work the same way.
        Mr. Cheney. If I might offer a perspective?
        Mr. Renacci. Sure.
        Mr. Cheney. Credit unions are fundamentally different than
    any bank because of their ownership structure. Credit unions
    are not-for-profit cooperatives, as you know. They are owned by
    their members; they have no shareholders. For a not-for-profit
    credit union to follow the same principle, one-size-fits-all
    across-the-board, actually makes it more difficult for a credit
    union member to understand the financial condition of the
    credit union.
        For example, for a performing loan to have to be mark-to-
    market, as has been proposed in the past, it doesn't make it
    easier. It makes it more difficult. If that loan is performing
    and it is going to pay to maturity, it makes no sense to write
    it down partway through the process. Certainly not at a
    cooperative. And, quite frankly, I do agree that it doesn't
    make sense to apply the same rules to smaller institutions in
    all cases as it does to larger institutions.
        Mr. Renacci. But you would agree it does take the
    consistency out of it when you are comparing from one bank to,
    one asset to--
        Mr. Cheney. I agree with that. But when they are different
    types of entities, I think one-size-fits-all creates more
    difficulties than it solves, in my opinion.
        Mr. Renacci. I want to move on to Section 102, also,
    because I do have a little bit of a problem with this section,
    and I want your help to try and help me out with it. I am a big
    believer in internal controls, I am a CPA, I have audited
    banks, I understand that internal controls are important no
    matter what size your bank is.
        So the question is, the internal control problem you have
    today is that the costs are too high. And when the costs are
    too high in getting these internal control procedures taken
    care of--that is my assumption; you would like to eliminate
    those maybe up to the $1 billion mark that is in this piece of
    legislation. My question would be: If it is the cost that is
    the issue, maybe we should have a tiering mechanism, because
    just to pick a random number of $1 billion, you could have
    internal control problems less than a billion dollars that
    could be very damaging to the safety and soundness of those--
    the investors or the owners of the bank. Wouldn't you agree
    with that?
        Mr. Klebba. I would agree with that. I think in terms of
    banking, though, one of the things you need to understand is
    that no one gets looked at more than we do. I don't think there
    is any industry--in the sense that we have the FDIC and our
    State regulator and then, of course, we have our own internal
    auditors and we have outside auditors, so we have lots and lots
    of people who are looking.
        Mr. Renacci. I don't mean to interrupt you, and I do
    understand that. But internal controls are something that as an
    auditor, I can tell you that many times I would rather see an
    internal control audit than a full audit, because if I can make
    sure your internal controls are in place, the audit is not as
    important to me. So it is really coming from my perspective,
    but thank you. Thank you all for your testimony.
        Chairwoman Capito. Thank you. Mr. Hinojosa?
        Mr. Hinojosa. Thank you, Chairwoman Capito. I ask unanimous
    consent to submit into today's hearing record a letter from the
    State Community Banks Association expressing their strong
    support for the Communities First Act.
        Chairwoman Capito. Without objection, it is so ordered.
        Mr. Hinojosa. Thank you. I want to thank all of you on the
    panel for your testimony on the Communities First Act. The
    bill's stated goal is laudable. It is time to enhance the
    ability of community banks to foster economic growth and serve
    their communities to boost small businesses and increase
    individual savings. My understanding is that this legislation
    is not intended to give community banks an advantage over other
    financial institutions. It simply increases the ceiling on the
    asset size for community banks to be exempt from various
    provisions of existing laws and regulations.
        Recently, we held a congressional hearing on legislation to
    increase commercial lending limit for credit unions. Arguments
    were made that the current limits are too low, that credit
    unions are approaching those ceilings quickly and many soon
    will surpass their levels or those levels. I was not convinced
    by the testimony I read and the responses received after
    questioning the interested parties on the legislation. I want
    all those present to know that I remain committed to requiring
    credit unions to be subject to Federal taxation if they want to
    increase their commercial lending limit. Seeking an increase
    without providing data proving it is merited is not good public
    policy in my opinion.
        I recognize the important role credit unions play in our
    financial services sector. The credit unions are doing a good
    job at what they do best, and also helped out considerably
    during the economic crisis, providing added liquidity to that
    provided by the community banks, and it was an excellent
    synergy. However, I am not certain that the performance of
    credit unions suggests they will be able to manage an increase
    in commercial loans or even close to surpassing the 12\1/2\
    percent threshold.
        So with that, I want to ask my first question of Mr.
    Salvatore Marranca. How will this legislation, H.R. 1697,
    benefit my constituents economically, and will it increase
    jobs?
        Mr. Marranca. The answer is ``yes'' to both. You mentioned
    about the business lending proposed legislation. That is an
    expansion of powers legislation. CFA, or Communities First Act,
    is a regulatory burden relief act. It will allow me and
    thousands of community banks to do our job better.
        We have had a snowflake effect of regulations. I have been
    in the bank over 30 years. Prior to that, I was a bank examiner
    for 10 years. The snowflake of regulations has never stopped in
    4 decades. It is a cumulative effect, and it is about ready to
    cave in that roof with the cumulative snowfall.
        Over 10 percent of my budget right now is on compliance
    issues. That could be allocated toward serving my customers
    better, whether it be a deposit product or whether it be a loan
    product. I mentioned I have one-half of my staff on compliance
    that I have on lending, to meet all the current regulations.
    There is an opportunity cost to this, there is a real cost to
    this. Let us do our business. We know how to lend in community
    banks. We know how to lend conservatively, and we know how to
    lend to our people that we trust and we know.
        So it will create jobs. We are there to serve the small
    businesses; 100 percent of my commercial loan portfolio is to
    small businesses, meaning mothers, fathers, family, and so
    forth. Not one loan do I have to a stock-owned operation,
    publicly owned and so forth. Small business is my bread and
    butter. Let me do my job, and we will grow jobs.
        Mr. Cheney. Mr. Hinojosa, might I comment as well?
        Before I started working at a trade association, I worked
    for 10 years at a credit union in south Texas, so I am familiar
    certainly with your district, and I think there is some
    misunderstanding about how H.R. 1418 can help small businesses,
    including small businesses in south Texas.
        People like to say that somehow credit unions making small
    business loans is different than our original mission, but the
    earliest credit unions in this country in the early 1900s made
    business loans. When the Federal Credit Union Act was passed in
    the 1930s, credit unions were tasked with promoting thrift and
    making loans for provident purposes. I can't think of anything
    more provident than a business loan. The restrictions were not
    placed on credit unions until 1998, and it is constraining
    credit union business lending, and it is costing jobs all over
    this country, including south Texas. So I respect your opinion
    by all means, but I just ask you to think about how we might be
    able to help create jobs in south Texas as well. Thank you.
        Mr. Hinojosa. My time has expired, and I yield back.
        Chairwoman Capito. Thank you. Mr. Schweikert, for 5
    minutes.
        Mr. Schweikert. Thank you, Madam Chairwoman.
        First, I wanted to ask, and this is for whomever has an
    expertise on this: My understanding with Dodd-Frank is that
    when certain things happen, you have to actually set up a
    budget mortgage, is what we used to call them--I don't know if
    anyone still calls them that--but set up the impound accounts.
    Can anyone on the panel educate me on what happens to cause
    that? Because I think it was actually--
        Mr. Marranca. I am not familiar with that, sir.
        Mr. Klebba. I am not sure I understand your question.
        Mr. Schweikert. Current law requires creditors to establish
    escrow accounts for the collection of taxes and insurance in
    connection with higher-priced mortgage loans.
        Mr. Klebba. Correct.
        Mr. Schweikert. That would be a budget mortgage from the
    old way we understood it where you have collection.
        Mr. Klebba. Under Dodd-Frank, there is now what is called a
    higher-priced mortgage, and if you fall into the higher-priced
    mortgage, then certain requirements come into effect, one of
    which is that you must escrow for that particular account.
        Mr. Schweikert. What is the mechanic to decide it is a
    higher-priced mortgage?
        Mr. Klebba. Basically rate.
        Mr. Schweikert. Creditworthiness?
        Mr. Marranca. No, sir.
        Mr. Klebba. It is just rate.
        Mr. Marranca. I may be wrong on this, but I believe it is 1
    to 1\1/2\ percent over the current Fannie Mae and Freddie Mac
    rates, so the ``high-priced mortgage'' in today's environment
    would be under 6 percent.
        Mr. Schweikert. Okay. So if I had a 6 percent loan, in that
    particular case you would not allow me to pay my own insurance,
    my own taxes?
        Mr. Klebba. We would not have the option to do that, no; we
    would have to do it ourselves.
        Mr. Schweikert. And are credit unions and small community
    banks set up to provide that type of impound service? Are you
    contracting it out? How do you do that?
        Mr. Cheney. Escrow accounts are a compliance burden, and I
    think, again, one-size-fits-all does sometimes create
    unintended consequences. And this is another area where I agree
    that having flexibility would help smaller institutions and
    ultimately would allow more resources to be devoted to serving
    the community versus complying with regulations.
        Mr. Levitin. Congressman, I think it is important to note
    that currently Dodd-Frank allows the Federal Reserve to make
    exemptions to the escrow rule. What is being proposed here
    would be to require an exemption.
        Mr. Schweikert. Professor, do you know if any of the
    exemptions have been--
        Mr. Levitin. I am not aware of the Federal Reserve having
    even done a rule.
        Mr. Klebba. I don't think they have issued those rules yet,
    but under the restrictions it is going to be a minute number of
    institutions and loans that are going to be subject to that
    exemption.
        Mr. Schweikert. One of my reasons is that I used to be a
    large county treasurer, and when you have a million-and-a-half
    taxpayers, just the clutter of collecting the bills
    electronically, what if you are on multiple parcels? You would
    be amazed how often we would have trouble with small lenders
    where you have a loan, credit lines, other things, but there
    are multiple parcels, and you are paying all the taxes on,
    except for one, and a couple of years later, I am as obligated
    to the county treasurer selling tax liens on it, who ends up
    carrying the liability? It is that old shifting of
    responsibility and often has an unintended consequence, and I
    don't know, does it truly make the loan that much safer and
    better?
        Mr. Klebba. I can tell you, as I testified, we went 97
    years and never had escrows, never provided escrows even to
    those few individuals who may have expressed an interest in
    them, and our foreclosure rates were virtually zero.
        Mr. Schweikert. Okay, I spent twice as much time on that
    one as I wanted to. Can I throw a quick scenario at you, and
    you tell me if my friend who is involved in a community bank in
    Arizona is completely--if this scenario makes sense. He is
    telling me he has a client that they have had a loan with for a
    very long time. It is a small strip center that has quite
    creditworthy tenants, and they are paying--has a terrific cap
    rate, and they have a very consistent payment history. But a
    strip center almost across the street went through foreclosure
    and sold at a fairly dramatic discount, and he apparently has
    had to do a capital call to the owners of the performing strip
    center, even though they are creditworthy tenants, have never
    missed a payment, have a great payment history, but the
    regulator is saying no, because of our market example across
    the street. Rational scenario? Is that something you are
    finding from the regulators?
        Mr. Marranca. I am hearing this across the country in
    various scenarios, and I would not--it has never happened to my
    bank and I would not want it to happen to my bank. If I have a
    relationship with an individual for many, many years, I
    understand the property, the cash flow, and it is before me.
    Why do I need to write that down? That is a forced writedown
    that does not accomplish anything, either investment-wise or
    safety- and soundness-wise.
        Mr. Schweikert. In my last 6 seconds, how often were you
    working with your regulators and they were looking at that
    mark-to-market, the value of that piece of real estate, they
    are either looking at the creditworthiness of the tenancy or
    the cap rate and using a cap rate mechanic to ultimately say,
    here is the true value of this piece of property the way it is
    performing?
        Mr. Klebba. How often is that happening? It depends on how
    healthy your bank is and how big your bank is as to how often
    they are in. It can be anywhere from 18 months at the outside
    to--if you are a troubled bank, they can virtually be living
    with you. And on these commercial real estate loans, because
    that is such a huge problem around the country, they are going
    to look at anything of any size every time they are in.
        Mr. Schweikert. I am over my time. Thank you for your
    tolerance, Madam Chairwoman.
        Chairwoman Capito. I am going to go to Mr. Green for 5
    minutes.
        Mr. Green. Thank you, Madam Chairwoman. Mr. Schweikert, if
    you need an additional moment, I will give you an additional
    minute.
        Mr. Schweikert. I am fine.
        Mr. Green. You are fine? Okay.
        Thank you, witnesses, for appearing. Mr. Schweikert was
    engaged in something that I found quite interesting. Let me ask
    you about these escrow accounts. Do you agree that there are
    some people who benefit from the escrow accounts and that they
    genuinely--I hate to use the term ``need,'' but they benefit to
    the extent that they find themselves in better shape at the end
    of the year than they would be if they did not have the escrow
    account? Do you agree that there are some people who benefit?
        Mr. Klebba. I would agree with that assertion, but the
    question here is whether we are required to provide escrows.
    And under the Dodd-Frank Act, now we are. If it is a higher-
    priced mortgage, we are required to provide that. But, yes, I
    think that there are some individuals who have a hard time
    budgeting. Basically, though, if you are in a one-to-four-
    family house and you are having a hard time budgeting, that
    becomes an underwriting issue. Are those people qualified to
    get into a home if they can't even budget enough for their
    insurance and their taxes? But, no, I think that I do agree
    with you that there are some people who really do need escrows.
        Mr. Green. If we adhere to the request and change the rule,
    would you have available escrow systems or an escrow system for
    those who would opt to have you do it?
        Mr. Marranca. Congressman--
        Mr. Klebba. Go ahead.
        Mr. Marranca. Congressman, if it was an, I will use the
    word ``option'' for a bank, not a requirement, and keeping in
    mind this is only for the high-priced loans, I think many banks
    would perhaps evolve to that. It would be a choice. It would be
    a management choice, a board-driven choice, an internal control
    choice. But setting up an escrow account is not easy. It is
    expensive, it is difficult, and you need expertise. I cannot go
    to a bank tomorrow and say, ``I want to set one up.'' You need
    the right people, and it is expensive. It has to fit your
    business model. It should be a decision for the individual
    bank.
        Mr. Green. How would you help your client who says, ``I
    really do need the escrow account, and I don't have the system
    to do it myself?'' How would you help the client if you are a
    bank that has opted not to do this?
        Mr. Marranca. It is simple, and I have done it before. You
    simply say, let's put an automatic deduction from ``X,'' from a
    deposit, an automatic deduction every month into a savings
    account, into a checking account. That money will be there,
    then, and we are going to make sure that money is there for
    when that tax bill comes due. So we can work with the borrower
    on an individual level and customize that mortgage for that
    borrower.
        Also, if I may, keep in mind that this loan is being held
    in my portfolio. It is in my best interests, I have skin in the
    game, I want that loan to work.
        Mr. Green. Do you find this system of having the automatic
    deduction less difficult, is that what you are saying, than if
    you have a system for escrow accounts?
        Mr. Marranca. Again, it would depend upon the size of the
    bank. We have community banks in our association that would
    make two mortgages a month. We have small banks, community
    banks in very rural parts that just don't have the volume to
    set up an escrow account. They will work with the individuals,
    and I am going to use the word again, ``customize'' it to make
    sure that we can fulfill the dream of that person to get into
    their house and not in any way hurt them in the future.
        Mr. Green. Would you be amenable to something being written
    into the law that would provide for the person who falls into
    the circumstance that we have just discussed, something that
    would encourage the bank to work with the person? I believe you
    are right, I believe the bank will work with people; but there
    are times when some people find it difficult to get things
    done, so if the bank would have some means by which you could
    have what seems to be an informal escrow account that you are
    setting up, would that help?
        Mr. Marranca. I am sure any banker would work with Congress
    for the right written procedures. I just only hesitate when you
    say another piece of legislation.
        Mr. Green. Yes, I would like to not have any legislation at
    all. Unfortunately, that might lead back to something that we
    just went through, so legislation is not a bad thing. We are
    trying to do as best as we can and balance this. And in
    balancing it, we want to do what is good for the consumer as
    well as the banks.
        I tend to have a lot of consumers who visit with me, and
    they make a difference, too, you know. So let's try to look at
    this from both points of view.
        Thank you very much, Madam Chairwoman.
        Chairwoman Capito. Thank you. Mr. Luetkemeyer for 5
    minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
    all of you for your great testimony today. You are doing a good
    job.
        Very quickly, there were some statements made a while ago,
    or made something to the effect that the legislation
    jeopardizes the safety and soundness of our banking
    institutions. Gentlemen, would you like to address that just
    for a second? Do you feel that it does or does not?
        Mr. Marranca. Totally disagree, sir.
        Mr. Luetkemeyer. Totally disagree.
        6 here Mr. Klebba. Totally disagree.
        Mr. Luetkemeyer. Totally disagree. They made some remark to
    the effect that it jeopardizes our ability to service our
    customers, and customers are in danger of being foreclosed on
    more often. Do you believe that is the case with what is going
    on here?
        Mr. Marranca. Totally disagree, sir.
        Mr. Klebba. I think quite to the contrary. I think that it
    permits us to work with our customers even more so than we have
    in the past.
        Mr. Luetkemeyer. I think that leads into a couple of the
    different discussions we have had already with regards to loan
    amortization as well as loan appraisals. I think sometimes that
    we are getting some of the context of accounting versus
    regulatory stuff mixed up here. There is a big, big difference
    here, and from the standpoint of the regulators, I would
    certainly like your input on this from the standpoint of when
    they come in and they analyze your loans and they look at your
    files, if they only have--the appraisals, for instance, on the
    5-year rolling average on Section 206, if that is all they have
    to look at is the current market, which is in the doldrums
    here, there are no recent sales, all you have is the foreclosed
    homes, how does that impact your loan portfolio?
        Mr. Klebba. First of all, the FDIC fund is fully funded by
    banks, and so for those of us who are surviving, the last thing
    we want to do is see a dead bank continue to go on, because the
    losses just continue to appreciate, and we have to pay that
    bill. But what we don't want are banks that are viable banks
    that get closed prematurely, and I think that can happen
    sometimes when markets temporarily decline if you have to,
    ``mark-to-market'' on some of those loans or you have to write
    down loans to appraised value at that time.
        Mr. Luetkemeyer. At the same time, these appraisals that
    they look at and they look at the loan and all the other things
    that are in there, it is a very arbitrary, very subjective way
    of looking at something. I am sure you don't agree with
    everything the examiners look at when they analyze your bank,
    you don't agree with everything they come up with, I am sure.
        Mr. Klebba. I haven't had an experience yet where I have
    agreed 100 percent with anything they say.
        Mr. Luetkemeyer. So obviously, if it is arbitrary, then I
    think the case can be made that for a 5-year rolling average,
    it gives a more fair assessment of what the risk would really
    be in that particular line that you are looking at. Would you
    agree with that statement?
        Mr. Klebba. Yes. I think we need to get back to normalized
    values, not the deflated values that we are seeing today,
    because I believe--
        Mr. Luetkemeyer. If you look at the cyclical nature of real
    estate, it goes up and down like this, and with a provision
    like this, it sort of takes the highs and lows off of it, so I
    think it puts a little more consistency in there. Would you
    think that would be a good thing to help stabilize things for
    you and your bank?
        Mr. Marranca. I think it will, sir.
        Mr. Klebba. Yes.
        Mr. Levitin. Congressman, there is an important point that
    needs to be made about this, which is this provision, Section
    206, applies to impaired loans. Impaired loans may not be held
    to maturity. They may be liquidated within a year, and in a
    depressed market, using a 5-year average that includes the
    heights of the bubble in 2006 right now, means that we are
    going to have banks that are carrying assets at grossly
    inflated values as a result. It is arbitrary--
        Mr. Luetkemeyer. Reclaiming my time here, with regards to
    that, I would remind you that this still is an arbitrary figure
    that is discussed between the banker and the FDIC or the Fed or
    the Comptroller, or whoever is doing the examination, as to
    what the true loss is that is involved in this. So I think that
    there is still some discussion, some arbitrary decisions to be
    made here. And that is the point I am trying to get at is that
    this isn't a finite, definite way of looking at things. It is
    very arbitrary, and I think we need to recognize that fact.
        With regards to--I know Mr. Renacci had a couple of
    questions with regards to the attestation. It is interesting
    that we are looking here at a billion dollars of assets
    whenever the Dodd-Frank bill has a capitalization of $75
    million for all companies. And, again, we are comparing apples
    to apples. We are looking at the assets versus the
    capitalization, which the average bank in this case with 75, it
    may be a 7\1/2\, it may be a billion-dollar bank, capitalized
    7\1/2\ percent, so I really don't see quite the concern there.
    Do you guys see something that I am missing in that? No? Good.
        I think also--well, I see my time is up, so I will yield
    back. Thank you, Madam Chairwoman.
        Chairwoman Capito. Thank you. Mr. Scott?
        Mr. Scott. Thank you, Madam Chairwoman.
        As I mentioned in my opening statements, I represent
    Georgia. Our primary concern there is how we can help these
    struggling banks and how we can try to prevent bank failures.
    Let me just ask, I guess, the banking individuals, do you feel
    this legislation will be effective in any way in aiding
    struggling small banks and preventing banks from closing?
        Mr. Klebba. I think there are a lot of provisions in here,
    most provisions if not all, that would assist small banks,
    especially those that are struggling from failure.
        Mr. Scott. Could you tell me how, please?
        Mr. Klebba. First of all, you would have less regulatory
    costs, and the regulatory costs are overwhelming in our
    industry right now. We have had to hire additional personnel.
    And worse, I think, than hiring additional personnel on that is
    the fact that virtually everyone in our bank now is involved to
    some extent or another in complying with regulations, and so it
    has taken away from their ability and their resources to both
    work with our existing customers and also to go out and solicit
    new customers, helping other people get businesses off the
    ground. So the compliance burden is huge, and I think that this
    bill would significantly reduce it.
        And then, secondly, as I testified before, the tax burden
    on us relative to several of our competitors and farm credit
    services and credit unions is a huge burden for us and makes it
    very difficult for us to compete, especially with respect to
    very attractive loans, that we just can't compete on the rate
    side because our cost structure is different.
        Mr. Scott. That is very good to have established that it
    will help and be effective in aiding struggling small banks and
    preventing them from closure.
        The other point is, will it help the banks be able to lend?
    That is another problem, getting the banks to lend the money to
    small businesses. Will it help in that area?
        Mr. Klebba. I can tell you both from our perspective and
    from the perspective of virtually every bank in Missouri--I am
    the immediate past chairman of the Missouri Bankers
    Association, and I had an opportunity in the past 12 months,
    from last June, to travel throughout the State and talk to many
    banks. And other than those few who are very troubled and are
    having capital issues and so need to shrink, every bank has
    excess liquidity right now that they are trying to lend. And it
    is not a question of turning down loans. It is a question of
    getting both consumer and business appetite for taking on new
    loans.
        Mr. Scott. So in the two critical areas, then, we can
    safely say that this legislation will help prevent struggling
    banks from closing, and it will also help them to be able to
    lend to small businesses.
        Now, let me ask, let's see, the representatives of the
    credit unions, I believe that is Mr. Becker and Mr. Cheney. How
    will this legislation affect credit unions?
        Mr. Becker. Primarily, it will not affect credit unions.
    There are a few small provisions that will affect credit
    unions, and we think a more balanced approach would be to add
    other items that we--
        Mr. Scott. So you basically are a supporter of this
    legislation; is that correct?
        Mr. Becker. What we would like to do is see an all-
    encompassing bill that would help not only banks but credit
    unions as well.
        If I might, too, my colleague John here next to me, I would
    invite him to join the two other banks that converted to credit
    unions, if he would like to do so. And I would be glad to help
    him, and I am sure Bill Cheney would be glad to join me in
    helping them.
        Mr. Scott. But you are not actively opposing this
    legislation; is that correct?
        Mr. Becker. Again, Congressman, we would like to see
    regulatory relief added for credit unions. I believe
    Congressman Luetkemeyer said the purpose of this, if I might
    say, is to help all Americans realize their dreams; that they
    weren't part of the problem, but part of the solution. That
    sounded like credit unions to me, sir, as well.
        Mr. Scott. Okay, I will take that for a sort of you are
    okay with the legislation.
        Mr. Cheney. If I might comment briefly, too, there has been
    a lot of discussion at this hearing and others about demand,
    and a lot of talk about that there is not demand. That may be
    true in some communities, but we have seen demand for credit
    unions, small business lending, we have seen credit unions make
    loans that banks either haven't made or aren't able to make.
        I am aware of one small community--I was in the Northwest
    not long ago--where there are four community banks and one
    credit union in the market. One of the community banks is in
    the process of being acquired and is not currently making
    business loans. The other three are under regulatory
    restrictions and are not able to make business loans. The
    credit union is approaching its cap.
        How do we tell the small businesses in that community that
    it is good policy not to the raise the cap when they are about
    to run out of any capital to operate their small businesses
    from local financial institutions?
        There is demand, maybe not in every community. Recessions
    do limit the demand, but the only way out of the recession is
    to create jobs. And this is a way to create jobs, H.R. 1418,
    without costing the taxpayers.
        So we would like to see a balanced approach, as Mr. Becker
    said, to aid community banks and credit unions.
        Mr. Klebba. I don't know if you have time, but--
        Chairwoman Capito. Thank you.
        Mr. Klebba. --do I have time to respond to any of that?
        Chairwoman Capito. I think we need to go to the next
    questioner, because we are pushing up against votes here.
        Mr. Canseco?
        Mr. Canseco. Thank you, Madam Chairwoman.
        Mr. Marranca, you mentioned something in your testimony
    that caught my eye. You state that ``rural borrowers, in
    particular, would be hurt by industry consolidation because
    large banks don't comprehensively serve rural areas.''
        Now, I represent a large portion of west Texas, and, as I
    said in my opening statement, a lot of small towns in my
    district depend heavily on local community banks.
        Could you provide us a little more color on the effect of
    consolidation on rural communities, given the conversations you
    have had with some of these bankers?
        Mr. Marranca. Yes, sir. Both personally and in my role as
    chairman of the ICBA this year, I have said over and over and
    over again, when you are gone, you are gone. Whether it is
    regulatory effect, the cumulative effect of the regulations,
    the accounting effect, or the economy, when you are gone, you
    are gone.
        My 110-year-old bank serves three counties, including a
    large Amish population. I actually have a branch on a Seneca
    Indian reservation. This is not a--the population density of my
    county is 67 people per square mile. This is not an area that
    Bank of America is interested in.
        If I ever had to sell or merge or consolidate my bank, my
    customers lose, because of the personal service, the
    relationships, and the ability that we have had, for 110 years,
    to meet the credit needs of our community.
        It is very important across Main Street and across America
    that Main Street community banks continue to do what they have
    done for generations. We are the only country in the world that
    has a foundation of 7,000 community banks. There is no other
    country in the world that has that. And we can't lose that,
    sir.
        Mr. Canseco. Thank you, sir.
        Mr. Klebba?
        Mr. Wilmarth. Congressman, may I add something to that?
        On page 2 of my written testimony, I point out how
    different Canada and the United Kingdom are from the United
    States in terms of their banking systems. And there is abundant
    evidence that in those countries, which are dominated by very
    large banks and have very few community banks, consumers and
    SMEs are not well served.
        The Vickers report that just came out from the Independent
    Commission on Banking in England in September advocated a more
    aggressive breakup of the big banks because they concluded that
    the big banks are not providing adequate services for local
    communities, consumers, and small businesses in England.
        Mr. Canseco. Thank you.
        Mr. Klebba, if you were to prioritize some of the
    provisions of the Communities First Act, which ones do you feel
    are the most important to community banks and should take
    precedence?
        Mr. Klebba. I can't choose one. I would choose two, and I--
        Mr. Canseco. Go ahead, give us the two.
        Mr. Klebba. The first is, I think, the tax provisions to
    try and put us back on a level playing field with respect to--
    or a more level playing field; it doesn't get us anywhere near
    to being all the way there--but with respect to both Farm
    Credit Services and having the same exemptions from income from
    taxability on farm loans, certain farm loans, and residential
    loans in very small communities, I think, is very, very
    important to us. It also allows us to get a little bit closer
    to credit unions, in terms of taxability.
        A family of four, an average family of four in this country
    pays more in Federal taxes than a credit union does. So, their
    tax burden in that respect is zero. Ours is significant. We
    paid close to a million dollars in total taxes last year. So it
    is a significant cost differential for us.
        And the second is the regulatory burden and the fact that
    this would recognize that for smaller banks like ours who are
    in smaller communities, the fact that we live with our
    customers, we go to church with our customers, we see those
    people on a day-to-day basis. And I don't think there is near
    the regulatory concern, or should not be, for our size banks as
    there are for other banks. And it is just getting to be a
    tremendous and overwhelming cost for us.
        Mr. Canseco. Mr. Marranca, do you want to add anything to
    that?
        Mr. Marranca. Congressman, I think if you asked a thousand
    bankers, you would probably get a thousand different answers of
    priority. But the overregulation, yes. The tax provisions make
    a real difference to my bottom line. In the last, I believe it
    is 9 years, I have paid over $2 million in Federal and State
    taxes, and I could have put that money to capital and to
    lending. So the tax provision is important.
        The small business, I am going to call it, potential new
    regulation, the small business reporting is a concern of mine
    for another regulation that would burden my bank and my people.
        And then you get into things that are just, in fact, a
    waste of energy and time: the privacy notice; the four-times-a-
    year call report.
        So, if I may, sir, I want them all.
        Mr. Canseco. Let me just add this, because I have 15
    seconds left. I hear the same, same priorities from every
    single one of my community banks. And I represent a huge
    district of Texas, from San Antonio to El Paso, and you are
    voicing from Missouri to--New York?
        Mr. Marranca. New York, sir.
        Mr. Canseco. New York. You are voicing the same thing that
    I hear in my district. I thank you very much and I yield back.
        Chairwoman Capito. Thank you.
        Mr. Perlmutter?
        Mr. Perlmutter. Thanks, Madam Chairwoman.
        I appreciate everybody's testimony today.
        And I will state that I have a bias in this. We passed a
    bill out of the House into the Senate last year which allowed
    for amortizing losses so that you didn't have to have an
    immediate capital infusion, which some banks couldn't come up
    with, which then led to their closure. And in Colorado, we have
    had a number of banks close.
        And so I have to look at some basic principles: more
    competition, not less, that is what I want to see; help the
    innocent or the less guilty, less culpable; I guess I am more
    for workouts, not liquidations or foreclosures if they can be
    avoided; and hold for the long term, not just the short term.
    So, based on those principles, there is a lot I like in the
    sponsor's bill. There are some things that are problematic,
    from my point of view.
        So, having said that, Mr. Levitin, I would--and you and Mr.
    Silvers were sort of the most aggressive against the bill. Mr.
    Wilmarth, I will have some questions for you, too.
        But let's take that shopette that Mr. Schweikert was
    talking about. So one shopette is paying as agreed. The other
    shopette across the street is in foreclosure. They had lousy
    management, who knows what it was. Now we have an accounting
    issue. Do you mark that down to the foreclosure price across
    the street, or do you allow the income to establish what the
    market price is?
        Mr. Luetkemeyer's bill has an accounting component to it.
    And, Mr. Silvers, you were--sort of, the mark-to-market piece
    of this--you were concerned about that. That is number one.
    Okay, maybe I am misspeaking.
        The other piece is, let's say I write that shopette down.
    My feeling is that the small banks, the credit unions didn't
    cause the mess that we are facing today. Okay? So I want to
    give them a chance to work their way out of this thing, along
    with their customers. My people in Colorado say, nobody's
    lending, not enough anyway.
        So, if you have a reaction, first Professor Levitin and
    then Professor Wilmarth and then Mr. Silvers?
        Mr. Levitin. Currently as drafted, Section 206 applies to
    all real estate. It is not just a commercial-real-estate
    provision. If you narrowed it to commercial real estate, I
    think it is much less problematic. And if you narrowed it to
    commercial real estate, it really kind of brings some focus to
    what the CRE problem is.
        Commercial real estate and the CRE values aren't going to
    come back until consumer spending comes back. There is really
    no way to fix the commercial real estate problem and asset
    prices there without fixing consumer spending. And that brings
    you, then, to consumer mortgages.
        Mr. Perlmutter. The need for jobs. We need to have jobs.
        Mr. Levitin. It is jobs, but it is also de-leveraging
    consumers.
        Mr. Perlmutter. Okay.
        Mr. Levitin. You need to get rid of the $700 billion in
    negative equity that roughly 11 million consumers have.
        Mr. Perlmutter. Okay.
        Professor Wilmarth?
        Mr. Wilmarth. I agree. As I mentioned in my written
    testimony, Section 206 is most applicable to commercial real
    estate. I think you could also limit it to smaller banks, not
    the huge ones. And I think you could include some regulatory
    safeguards in Section 206, for example, by limiting that
    section to well-managed banks. I think you could look back at
    the 1980s forbearance program for agricultural banks and get
    some pointers from that experience.
        I agree that the goal should be what you have identified,
    that where markets are frozen and there really is no reliable
    market value available but the properties are still performing,
    can support the loans, it doesn't make sense to force a drastic
    write-down in those situations.
        Mr. Perlmutter. Or, if you do, to at least give the bank a
    chance, or a credit union. I think these things apply across
    the financial strata there. It doesn't have to be the big
    banks. We already infused capital. We did it the other way. We
    didn't let them have time to work it out; we gave them the
    money. Work it out. They did, thank goodness. They obviously
    have a major role to play here. But now, what about the little
    guys? And I want that competition.
        Mr. Silvers, what is your reaction?
        Mr. Silvers. An observation about mark-to-market--
    generally, historically, we have asked firms and all kinds of
    institutions to mark assets to market when they are readily
    tradeable, there is a price you can get, and there is some
    possibility that they might be sold, right?
        Mr. Perlmutter. Right.
        Mr. Silvers. And this has been important in relation to
    banking because banks, big or small, have demand deposits so
    that there is a possibility that people could want their money
    back, right?
        Mr. Perlmutter. Right.
        Mr. Silvers. And so, there has been something of a bias
    around banking toward marking to market.
        Now, it is interesting, the extent of folks' unhappiness
    with that regime in banking, because pension funds, who don't
    have demand deposits, with fixed obligations, very long-term
    fixed obligations, have been asked to mark everything to market
    now, and particularly have been asked by some of your
    colleagues on the other side of the aisle to mark everything to
    market.
        Mr. Perlmutter. Okay, but I am going to stop you then. I
    know my time has expired.
        Mr. Silvers. Sir, can I just--in response to your
    question--
        Mr. Carney. I will yield--
        Chairwoman Capito. Hold on just a minute.
        Mr. Silvers. Sorry.
        Chairwoman Capito. Mr. Carney has generously offered to
    yield you time, Mr. Perlmutter.
        Mr. Carney. I will yield the gentleman time, whatever time
    he needs.
        Chairwoman Capito. All right. Go ahead.
        Mr. Silvers. In response to your question, what troubles me
    particularly about the provisions in this bill in relation to
    mark-to-market is not realizing the loss that occurs in a
    foreclosure when the loan has turned into a bad asset, not just
    a bad loan but a piece of property.
        Mr. Perlmutter. Thanks, Madam Chairwoman.
        Chairwoman Capito. Sure.
        Mr. Stivers?
        Mr. Stivers. Thank you, Madam Chairwoman.
        I appreciate all the witnesses' testimony. And I certainly
    sympathize with the plight of our community banks and credit
    unions who are trying to comply with laws that were intended to
    fix the crisis that you guys had nothing to do with. And I know
    it is increasing your costs.
        There have been a couple of bogus claims I want to address
    and ask some questions about, and then I do have a couple of
    concerns I would like to dig into a little bit.
        My first question is for Mr. Marranca and Mr. Cheney and
    Mr. Klebba. Is there any way for a bank or a credit union to
    profit from foreclosures? Just a ``yes'' or ``no.''
        Mr. Marranca. I would love to find a way, sir. No. No. It
    hurts the community, it hurts the banker, both--
        Mr. Stivers. I am just talking--don't talk about the
    community. I am asking, this is a ``yes or no'' question.
        Mr. Marranca. No.
        Mr. Stivers. Thank you.
        Mr. Cheney. No. We agree.
        Mr. Stivers. Thank you.
        And can you tell me, on average, about how much, each of
    you again, foreclosures cost you for each foreclosure? I know
    it is a range, but on your average mortgage.
        Mr. Marranca. Average size of my mortgage--and, again, I am
    in a very rural, poor market--average size mortgage in my
    market is approximately $75,000. When it gets down to
    foreclosure, we probably write down at least two-thirds of
    that, so let's bring it down to approximately a $25,000 loss.
    We have had approximately 6 foreclosures in the last 2 years--
    relatively small.
        Mr. Stivers. Okay.
        Mr. Cheney. I don't have the numbers with me for credit
    unions, but we can certainly get that for you.
        Mr. Stivers. No, that is fine.
        Mr. Klebba. I would have to answer two ways. One, for
    commercial foreclosures, it is all over the place, depending on
    how--
        Mr. Stivers. Let's talk about residences. The claim was
    that people were going to be thrown out of their homes into the
    streets, so let's talk about residences.
        Mr. Klebba. I think we have had two or three residential
    foreclosures in the last couple of years.
        Mr. Stivers. And they have cost about how much, in round
    numbers?
        Mr. Klebba. Probably $5,000 to $10,000 apiece.
        Mr. Stivers. Great. Okay. So if these small banks that we
    are talking about, and credit unions, can amortize that loss
    over 5 years, won't it really result in those banks having more
    money to lend, and won't it also result in keeping them, as Mr.
    Perlmutter said, from having to raise capital at exactly the
    worst time?
        Mr. Marranca. Yes, sir.
        Mr. Cheney. I agree.
        Mr. Stivers. Great. Thank you.
        And I do want to get to appraisals, but before I do--
    because I did have a question for Mr. Levitin because he talked
    about the cost-benefit analysis.
        Mr. Levitin, do you have a Ph.D. in economics?
        Mr. Levitin. I am not.
        Mr. Stivers. Do you have an accounting Ph.D., maybe, or
    statistics or mathematics?
        Mr. Levitin. I do not, but I do--
        Mr. Stivers. Do you have a background--
        Mr. Levitin. I do, however--
        Mr. Stivers. Do you have a background as a business
    analyst?
        Mr. Levitin. I do not.
        Mr. Stivers. So I understand why you can't do the cost-
    benefit analysis, but I guess--so have you consulted with
    economists, accountants, statisticians, mathematicians, or
    business analysts about whether they can do these cost-benefit
    analyses?
        Mr. Levitin. In fact, I have. And I can speak to you,
    actually, about specifically what the people at the SEC, who
    have J.D.s and Ph.D.s in economics think about the difficulties
    in doing cost-benefit analyses, and I am happy to have that
    conversation with you.
        I do want to point out there is something about
    foreclosures which I think you have misunderstood. The issue is
    not whether banks lose money on foreclosures. Of course they
    do. The problem is that banks have a choice. They make a choice
    between trying to restructure the loan and foreclosure. And it
    is which choice is more attractive to them, where are they
    going to lose less money. It is not where they profit; it is
    where they lose less.
        By allowing the loss amortization over 10 years, you are
    making foreclosure the relatively more attractive option. I
    don't need an economics Ph.D. to understand that.
        Mr. Stivers. Yes, but do you feel like these community
    banks just make every decision on the bottom-line dollar and
    they don't ever look at the community, the lender, the
    relationship with the borrower? Is that what you are saying?
        Mr. Levitin. The relationship is part of the bottom line.
    However, they do owe a duty to their shareholders to try and
    maximize the value. And if that means kicking someone out of
    their house, that is what they should do for their
    shareholders.
        Mr. Marranca. Sir, that is not true.
        Mr. Stivers. So, Mr. Levitin, do you understand that Dodd-
    Frank already requires cost-benefit analysis?
        Mr. Levitin. I am sorry, for?
        Mr. Stivers. A lot of things, including dealing with any
    rulemaking.
        Mr. Levitin. I understand that--and it is not just Dodd-
    Frank. Cost-benefit analysis--
        Mr. Stivers. Great. I need to move on to another subject.
        Mr. Levitin. --is a general problem. This is not just
    banking; this is--
        Mr. Stivers. Thank you. I am reclaiming my time. Thank you
    so much.
        I do want to quickly deal with appraisals. Have any of
    your--I know that that subject has come up already, but I have
    heard from a lot of Ohio banks that they have been forced to
    not just make a capital call but actually write down their
    loans based on appraisals of performing loans, and that results
    in them having less money to lend.
        Have any of the bankers heard of that? And I am out of
    time.
        Mr. Marranca. I have heard of that consistently across the
    country, yes.
        Mr. Klebba. And I have heard a number of stories to the
    same effect.
        Chairwoman Capito. Thank you.
        We have a vote coming at about 4:15. I want to ask Mr.
    Carney, do you want your other 4 minutes, your remaining 4
    minutes, for questions?
        Mr. Carney. Sure.
        Chairwoman Capito. Mr. Carney, for 4 minutes.
        Mr. Carney. Thank you very much, Chairwoman Capito. I
    appreciate very much you having this hearing today.
        Like others on the panel today, I am sympathetic about some
    of your concerns with respect to the cumulative effect of
    regulations. We have heard that often--outdated regulations. So
    this represents a compilation of those regulations that are
    troublesome for community bankers, is that fair to say?
        Mr. Marranca. It is a start, sir.
        Mr. Carney. It is a start. Are there others?
        Mr. Marranca. Given time, I am sure there are many, many,
    many others.
        Mr. Carney. The reason I ask is because I ask this question
    of small business people, mostly in my State of Delaware, all
    the time, not as much of banks, because it is something I hear
    all the time, complaints about regulations that get in the way,
    whether environmental or otherwise. And often, they are caught
    not being able to respond directly, and they will say, ``Let me
    get back to you on this.''
        The reason I ask is because this is the forum for doing
    that. And so, I appreciate you bringing this forward. We have
    heard--do the credit union organizations have a similar list
    that we ought to be considering, as well?
        Mr. Becker. It is in my written statement, sir.
        Mr. Carney. Okay. I will take a look at that.
        We have heard a lot of differences of opinion--I want to go
    to that--on the amortization question, Sections 205 and 206,
    and I think Section 102, as well, with respect to accounting
    standards. Like my good friend from Ohio, Mr. Renacci, I am a
    stickler for standards, as well. And I guess I need to
    understand how a change there is really important to the
    business that you do.
        So, the three folks at the end here who come with a little
    bit more objective, I guess, point of view here, could you
    explain to me your objection to Sections 205 and 206, expand on
    the conversations that we have had with Mr. Perlmutter and Mr.
    Stivers and others?
        Mr. Levitin. If I may, Congressman--
        Mr. Carney. Yours, I think, is more with respect to
    residential.
        Mr. Levitin. In particular. I think that is where it is the
    most problematic. There are two problems with it.
        One is simply a general accounting principles problem.
    Congress should not be encouraging voodoo accounting.
        Mr. Carney. Right. I agree with that.
        Mr. Levitin. And that is what this is doing. It is trying
    to have exceptions to accounting rules--
        Mr. Carney. Is it really voodoo accounting or is it really
    trying to find a way to address a particular kind of business
    model here on the banking side?
        Does anybody have--Mr. Wilmarth is shaking his head. Do you
    have a different view of that?
        Mr. Wilmarth. That is why I suggested that this approach
    could be tailored to the kind of commercial real estate
    situations we have been hearing about.
        Mr. Carney. So I guess that is the question: Is it tailored
    enough?
        Mr. Wilmarth. I would have--
        Mr. Carney. Mr. Silvers is shaking his head ``no.''
        Mr. Silvers, could you explain why you don't think it is
    tailored enough?
        Mr. Silvers. I think you have--let me just again reiterate
    Professor Levitin's comments. This is really focused on
    residential real--
        Mr. Carney. Right.
        Mr. Silvers. This isn't meant for residential real estate.
    There are some--
        Mr. Carney. So you don't have similar concerns, serious
    concerns with the commercial application, is that accurate?
        Mr. Silvers. I have less serious concerns. And I think
    there are still problems that relate to, sort of, the basic
    integrity of the accounting system.
        Mr. Carney. Gotcha.
        Mr. Silvers. But when it comes down to what kind of
    behavior we are going to be incentivizing and what the
    implications of that for our economy are going to be, it is
    more in the residential area that the concerns lie.
        Now, how might one tailor it? As Professor Levitin has
    pointed out, if you confined the loan amortization provisions
    to an impaired loan and to losses that might result from that,
    it creates less of an incentive issue. It also does less
    violence to the accounting regime, because an impaired loan is
    not a realization event in the way that a foreclosure is. Those
    types of considerations could get you to something more
    reasonable.
        There is something else, also--
        Mr. Carney. I only have 5 seconds left, so let me ask one
    more question.
        Do you three agree with the other provisions of the bill?
    Do you think that they are reasonable changes?
        Mr. Silvers. If I might just quickly say that there are a
    number of provisions in the bill. The three that were listed in
    the oral testimony of Mr. Marranca are reasonable provisions.
    But the bill is laced with extremely dangerous things. And an
    effort could be made to separate--
        Mr. Carney. Is that in your statement? Because my time is
    up.
        Chairwoman Capito. Yes, I am going to have to call it,
    because we have been called for votes and I have a few more
    folks.
        Mr. Posey?
        Mr. Posey. Thank you very much, Madam Chairwoman.
        Mr. Silvers, do you think there is any such thing as
    overregulation?
        Mr. Silvers. Oh, sure, there is. As I just said in response
    to Mr. Carney's question, I think the three items that Mr.
    Marranca emphasized in his opening testimony are items which,
    on the surface, would appear to be reasonable changes that
    Congress should take a look at--
        Mr. Posey. But do you think there is such a thing as
    overregulation? Just kind of a ``yes or no'' would save us both
    a lot of time, and I am running out of time.
        Mr. Silvers. I think I just said ``yes.''
        Mr. Posey. Well, ``yes'' sounds a whole lot better than,
    ``I think I just said `yes','' but thank you very much.
        Mr. Levitin, do you think there is such a thing as
    overregulation?
        Mr. Levitin. Yes, but I think the critical thing is not the
    amount of regulation; it is whether they are good regulations
    or bad regulations.
        Mr. Posey. Give me an example of bad overregulation.
        Mr. Levitin. It is not bad overregulation, it is bad
    regulation. The question is not the number of regulations, it
    is whether they are smart regulations.
        Mr. Posey. So you don't think there is such a thing as bad
    overregulation?
        Mr. Levitin. There is bad regulation, and if you have too
    much of that, that is bad overregulation.
        Mr. Posey. So that is a ``yes.''
        Mr. Levitin. If I understand the--for what I think you are
    asking me--I am not trying to play with semantics here. I am
    really trying to actually make a point that the problem is
    whether these are good regulations or not, not the sheer number
    of regulations--
        Mr. Posey. Reclaiming my time, I just want to qualify your
    comments. We have had people come in here to talk about
    overregulation and never acknowledged in their written or oral
    testimony that there was such a thing as overregulation. They
    always just talked about what happens if there is
    underregulation. But I think every member of this committee has
    been convinced over the past couple of years of testimony that
    there is significant overregulation.
        And I can assure you, despite your inference to the
    contrary, there is not a single Member on either side of this
    aisle in this committee, ever, who wants to harm American
    families. I think every Member here wants the same thing. They
    want the American dream to be available for everybody in this
    country. We do have differences over how to get there
    occasionally, but nobody is trying to harm the American family,
    I can assure you.
        As to handling--
        Mr. Levitin. I am glad to hear that, but--
        Mr. Posey. It is my time.
        Mr. Levitin. --that is what this bill will do.
        Mr. Posey. Excuse me. Excuse me. You are out of order.
        As to the handling of loans, my local community banker,
    where I bank, had to fail to renew a loan for a businessman
    because regulators said, if you renew this loan, modify this
    loan, it automatically goes on non-accrual. So he couldn't do
    that, which would cause his bank significant losses. So of
    course, the guy became delinquent in his home loan, and just
    came in and put the keys on the bank president's desk and said,
    ``It is yours. I can't do it.'' And the bank president said,
    ``No, no, no. No, you don't. No.'' They didn't want a house
    back that is empty. They didn't want to ruin the neighborhood
    values. He hung in there with the guy until he got a REALTOR
    to sell it for him and did the best possible thing in that
    instance.
        And I beg to differ with some of the other opinions
    expressed that big banks have a greater ability to do this.
    They are less willing to do it. The community banks, obviously,
    are much more inclined to give that personal attention to
    individual homeowners or individual businesspeople.
        With the exception of the Veterans Administration, which
    has a loss ratio of about 2\1/2\ percent, enviable for any
    lender anywhere--and I understand that is attributable to the
    fact that they qualify their people. And when there are
    problems--and people are inevitably going to have some
    problems--they spend the time to work it out with them. They
    are not handicapped by a bunch of monolithic bureaucrats or
    bureaucratic written regulations, and that gives the VA the
    ability to have such a low loss ratio.
        So, I see my time is running out. I would ask any of the
    other members, the other four that I haven't asked questions to
    you yet, you have 36 seconds if any of you want to weigh in or
    comment on that.
        Mr. Marranca. Congressman, I would invite the academics at
    the other end of the table to come to my bank, and I will show
    them overregulation.
        Chairwoman Capito. If we could, I am going to go to to Mr.
    Sherman for 3 minutes, and then Mr. Westmoreland for 3 minutes,
    and then, I think that will conclude the hearing.
        I am going to go vote. Thank you all very much.
        Mr. Sherman. I will stipulate for the gentleman that there
    is such a thing as overregulation. There is also
    underregulation. There is smart regulation. There is dumb
    regulation. And, hopefully, government will get it right
    someday.
        When I talk to everybody in my district, they want jobs,
    small businesses want capital. If any of you have some extra
    loans to make to small businesses in the San Fernando Valley,
    see me. I will miss votes to talk to you.
        Now, I want to support this bill so that small banks and
    community banks in my district will have the capital to make
    loans. And, at the same time, there are credit unions that
    aren't able to make loans because we prohibit them, in effect,
    or limit what they do.
        Mr. Klebba, the credit union witnesses have suggested that
    we go with this bill but also allow member business lending
    from credit unions.
        Is there a reason why I should tell people in my district,
    ``Well, try to get a loan from a community bank, and if they
    say no, don't go to a credit union because Congress is going to
    prevent them from making the loan?'' Or should we be trying to
    help both kinds of institutions make small business loans?
        Mr. Klebba. A couple of facts--99.5 percent of the credit
    unions in this country are nowhere near their business lending
    cap. So--
        Mr. Sherman. Many of them haven't gone into business
    lending because they can't gear up to do it. Their small
    business lending cap might be a million dollars, and so they go
    with zero because they can't hire a loan officer to make a
    million dollars' worth of small business loans.
        We want to have all credit unions making small business
    loans in the San Fernando Valley. But is there some reason why
    we should just help you and not help them?
        Mr. Klebba. What I am saying, I guess, is that there is a
    relatively easy way for them to make as many business loans as
    they want: Convert to a bank. It is not that hard. And then,
    they become a tax-paying entity.
        Mr. Sherman. I am waiting for my Republican colleagues to
    convert to Democrats. It is not that hard.
        And, Mr. Marranca, small banks would like to be able to be
    Subchapter S and have preferred stock. I see your need for new
    kinds of capital. Would you oppose having alternative capital
    for credit unions along with that?
        Mr. Marranca. Sir, first, the issue of Subchapter S, I just
    have to clarify that a little bit. Subchapter S banks, their
    stockholders pay taxes. They pay it at a 35 percent level. So
    it is a piece of misinformation that Subchapter S do not pay
    taxes.
        Mr. Sherman. I didn't say anything about that. I understand
    Subchapter S rather well.
        Mr. Marranca. Okay. I would be open to discuss--
        Mr. Sherman. You want to be able to have more flexibility
    for your members to raise capital. The guy next to you wants
    more flexibility for his members to raise capital. Can you join
    hands, the way I joined hands with my Republican colleagues?
        Mr. Marranca. Capital is important for both credit unions
    and small banks, and we certainly are not opposed to any ways
    to find more capital to go into those banks.
        Mr. Sherman. That is a great answer. Thank you.
        Chairman Garrett [presiding]. If the gentleman yields back?
        Mr. Sherman. Yes.
        Chairman Garrett. Mr. Westmoreland is recognized for 3
    minutes.
        Mr. Westmoreland. Thank you, sir.
        Mr. Silvers, quick question. This is a math question. You
    say you represent 250 organizations representing more than 50
    million people.
        Mr. Silvers. Yes.
        Mr. Westmoreland. That is one-sixth of the American
    population. That is an average of 200,000 people per
    organization. Are those numbers correct?
        Mr. Silvers. I think they are mathematically correct, but
    they are not very--they don't really explain the--it is not 250
    organizations each with a couple hundred thousand members. Some
    have small numbers; some have big numbers. Organizations like
    the AARP have lots of members.
        Mr. Westmoreland. Okay. But you represent--one-sixth of the
    American people are represented by you. That is a pretty big
    job.
        Mr. Levitin, in your statement, you said, ``The Communities
    First Act will actually destroy communities by encouraging
    mortgage foreclosures that hurt families, neighboring property
    owners, and local government.''
        You were part--or served as Special Counsel to the TARP
    program; is that correct?
        Mr. Levitin. To the Congressional Oversight Panel
    supervising the TARP.
        Mr. Westmoreland. Okay. Now, let me explain to you what
    TARP did. It destroyed communities, it cut neighboring property
    owners, and it really hurt local governments.
        So let me tell you how it did it. When you gave the money
    to the big banks, or whoever did--or you were the oversight--
    let me tell you what happened. They started holding companies,
    and then they straightened out the books of these big banks,
    and then they came into our communities and they had absolute
    auctions on these houses--absolute auctions. Somebody may have
    bought a house a month before, 2 months before, 3 months
    before, and then you had a builder building next-door, and all
    of a sudden he can't sell his stuff for 40 cents on the dollar
    because the government didn't give him any money.
        Now, because of these goofy mark-to-market accounting
    principles that you try to uphold, these community banks had to
    write down some of these loans, even some loans that were
    performing, because of these fire sales that TARP enabled
    people to do. So now, you have this first round of banks that
    have to close, not really because they don't have the money,
    but for paper losses.
        Next, they go in, these loss-share-agreement acquiring
    banks come in, destroying neighborhoods, lowering the value,
    because you know what? They don't have any incentive to work
    out these loans, because when they do, they come out from under
    the loss-share agreement. So there is no incentive.
        So what do they do? They foreclose, they fire-sale the
    property. And then what happens? More community banks close
    because of the mark-to-market. They have plenty of liquidity,
    but they can't raise capital and they can't get rid of 20
    percent of their real estate portfolio in the market it is.
        And so, if you want to talk about destroying neighborhoods
    and you want to talk about something that sucks the wealth out
    of a community, you let a community bank close.
        And these community banks are being closed, and they have
    no legal recourse against the FDIC to try to find out why they
    were closed when they were paper losses and they had liquidity.
    Now, to me, that is just not right.
        And so I guess, that is more than a question, I have a
    statement. And my statement is that some of this stuff in here,
    if you were associated with TARP, you took part in destroying
    some of these communities. As a result, probably unintended
    consequences--I am sure you didn't mean to do it--
        Mr. Levitin. I need to interrupt because I think it is
    actually critical that you understand. The Congressional
    Oversight Panel did not create TARP, it did not administer
    TARP, it was incredibly critical of TARP from the get-go--
        Mr. Westmoreland. Okay. That is great.
        Mr. Levitin. --and that I am in no way responsible for TARP
    and--
        Mr. Westmoreland. Okay. That is what TARP did. And, as a
    result of the mark-to-market--you did defend the accounting.
        Mr. Levitin. Mark-to-market accounting should be defended.
    That is a different issue than TARP.
        Mr. Westmoreland. I understand, but--
        Mr. Levitin. That is market transparency.
        Mr. Westmoreland. But, as a result, that accounting
    practice put a lot of these businesses out.
        And, Mr. Cheney, you said that some of the communities--
    that credit unions go into underserved communities.
        Mr. Cheney. Yes.
        Mr. Westmoreland. What is your definition of an underserved
    community? One that doesn't have a bank?
        Mr. Cheney. I don't have a statutory definition with me.
    There is, within statute, rules--
        Mr. Westmoreland. Could you get that to me?
        Mr. Cheney. --for underserved communities. But, yes, sir, I
    will.
        Mr. Westmoreland. All right.
        And then, Mr. Becker, you said that 13 million people, I
    think, are needing to get commercial loans. Why can't the banks
    loan them money?
        Mr. Becker. I think the demand fluctuates back and forth.
    And at various times in various regions of the--
        Mr. Westmoreland. But why can't a bank make those people
    loans?
        Mr. Becker. I think they won't. In fact, there is a
    report--
        Mr. Westmoreland. Won't or can't?
        Mr. Becker. I would say ``c: all of the above'' is the
    answer to that question, depending on the particular
    circumstances. There is a report by the SBA that I would be
    willing to share with you that goes into this in quite some
    detail.
        Mr. Westmoreland. I would like to see it, because
    underserved credit unions--and, look, I used to be a member of
    a credit union, some of my family are members of a credit
    union. But when you go to a corner, and you have four corners
    and you have a bank on three of them and a credit union on the
    fourth one, that is not really underserved. Is that not true?
        Mr. Becker. There is a statutory definition we will get
    you--
        Mr. Westmoreland. Okay. And I would love to see that.
        And, with that, Mr. Chairman, I will yield back, and thank
    you for the extra time.
        Chairman Garrett. The gentleman yields back. Thank you for
    yielding back.
        And, with that, I thank the panel.
        The Chair notes that some Members may have additional
    questions for these witnesses--despite all the questions they
    have already had--which they may wish to submit in writing.
    Without objection, the hearing record will remain open for 30
    days for Members to submit written questions to these witnesses
    and to place their responses in the record.
        With that, I again thank the panel. This hearing is
    adjourned.
        [Whereupon, at 4:35 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               November 16, 2011
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