[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
U.S. GOVERNMENT PRINTING OFFICE
72-626 WASHINGTON : 2012
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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
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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
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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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