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



 
                  H.R. 1697, THE COMMUNITIES FIRST ACT

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



                             JOINT HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                AND THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-85




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

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

             SHELLEY MOORE CAPITO, West Virginia, Chairman

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

                  SCOTT GARRETT, New Jersey, Chairman

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


                            C O N T E N T S

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

                               WITNESSES
                      Wednesday, November 16, 2011

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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


                  H.R. 1697, THE COMMUNITIES FIRST ACT

                              ----------                              


                      Wednesday, November 16, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



                            A P P E N D I X



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