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

                     H.R. 3461: THE FINANCIAL INSTITUTIONS
                      EXAMINATION FAIRNESS AND REFORM ACT

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

                                    HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                              AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                FEBRUARY 1, 2012

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-97

                                   ----------
                             U.S. GOVERNMENT PRINTING OFFICE

    75-069 PDF                       WASHINGTON : 2012

    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
    DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
    Washington, DC 20402-0001

                     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

               James H. Clinger, Staff Director and Chief Counsel
           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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 1, 2012.............................................     1
    Appendix:
        February 1, 2012.............................................    63

                                   WITNESSES
                          Wednesday, February 1, 2012

    Bertsch, Kevin M., Associate Director, Division of Banking
      Supervision and Regulation, Board of Governors of the Federal
      Reserve System.................................................     8
    Kelly, Albert C., Jr., Chairman and CEO, SpiritBank, and
      Chairman, the American Bankers Association (ABA)...............    42
    Kelly, Jennifer, Senior Deputy Comptroller for Midsize and
      Community Bank Supervision, Office of the Comptroller of the
      Currency (OCC).................................................    13
    Kucey, Jeanne, President and CEO, JetStream Federal Credit Union,
      on behalf of the National Association of Federal Credit Unions
      (NAFCU)........................................................    47
    Ludwig, Hon. Eugene A., Founder and Chief Executive Officer,
      Promontory Financial Group, LLC................................    49
    Marquis, David M., Executive Director, National Credit Union
      Administration (NCUA)..........................................    11
    Thompson, Sandra L., Director, Division of Risk Management
      Supervision, Federal Deposit Insurance Corporation (FDIC)......    10
    Watts, Kenneth, President and CEO, West Virginia Credit Union
      League, on behalf of the Credit Union National Association
      (CUNA).........................................................    44
    Wilcox, Noah, President and CEO, Grand Rapids State Bank, on
      behalf of the Independent Community Bankers of America (ICBA)..    45

                                    APPENDIX

    Prepared statements:
        Bertsch, Kevin M.............................................    64
        Kelly, Albert C., Jr.........................................    75
        Kelly, Jennifer..............................................    86
        Kucey, Jeanne................................................   104
        Ludwig, Eugene A.............................................   117
        Marquis, David M.............................................   121
        Thompson, Sandra L...........................................   140
        Watts, Kenneth...............................................   147
        Wilcox, Noah.................................................   163

                  Additional Material Submitted for the Record

    Capito, Hon. Shelley Moore:
        Written statement of the Appraisal Institute and the American
          Society of Farm Managers and Rural Appraisers..............   170
        Written statement of BancVue, Ltd............................   172
    McCarthy, Hon. Carolyn:
        Written responses to questions submitted to Kevin M. Bertsch.   177
        Written responses to questions submitted to Jennifer Kelly...   178
        Written responses to questions submitted to David M. Marquis.   181
    Renacci, Hon. James B.:
        Written statement of David Baris, Executive Director,
          American Association of Bank Directors.....................   184
    Westmoreland, Hon. Lynn A.:
        Written responses to questions submitted to Kevin M. Bertsch.   188
        Written responses to questions submitted to Jennifer Kelly...   190
        Written responses to questions submitted to David M. Marquis.   191
    Kucey, Jeanne:
        ``Managing Examinations in Challenging Times,'' published
          September 2010.............................................   192

                            H.R. 3461: THE FINANCIAL
                            INSTITUTIONS EXAMINATION
                            FAIRNESS AND REFORM ACT

                                  ----------

                          Wednesday, February 1, 2012

                 U.S. House of Representatives,
                 Subcommittee on Financial Institutions
                                   and Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:01 p.m., in
    room 2128, Rayburn House Office Building, Hon. Shelley Moore
    Capito [chairwoman of the subcommittee] presiding.
        Members present: Representatives Capito, Renacci, Royce,
    Manzullo, Hensarling, McCotter, Pearce, Westmoreland,
    Luetkemeyer, Huizenga, Canseco, Grimm, Fincher; Maloney, Watt,
    Hinojosa, McCarthy of New York, Scott, Lynch, and Carney.
        Also present: Representative Green.
        Chairwoman Capito. This hearing will come to order. I would
    like to inform Members and also the witnesses that we expect a
    series of votes at 5 o'clock. It is my intention to complete
    this hearing before the votes, if possible. And so, I would ask
    Members, as I do every single time, to abide by the 5-minute
    rule, and the witnesses as well.
        Over the last year, the Financial Institutions and Consumer
    Credit Subcommittee has heard testimony from community banks
    and credit unions from across the country about the challenges
    they face in the post-financial crisis world.
        We actually did two field hearings as well: one in
    Wisconsin; and one in Georgia. Throughout these conversations,
    one common theme has emerged: There is a perceived disconnect
    between what is said in Washington by Federal regulatory
    agencies and what is carried out in the field by the Federal
    institution examiners. It is not limited to one geographic
    region. We were in, as I think I mentioned, Georgia and
    Wisconsin. There is a growing chorus of concern about the
    consistency in the application of examination standards across
    the country.
        The product of these conversations is the legislation that
    is in front of us today. Ranking Member Maloney and I have
    crafted H.R. 3461, the Financial Institutions Examination
    Fairness and Reform Act, to elevate the conversation about
    potential solutions to three common concerns that have been
    raised: the time limits of examination reports from the
    agencies; the independence of the appeals process for
    institutions; and the issue of Federal agency guidance that is
    not being followed by examiners. This legislation has garnered
    strong bipartisan support, due in large part to the growing
    chorus of concerned Members who are hearing from their
    constituents.
        In order to address these concerns, our legislation
    proposes to ensure timely responses from agencies, codifies the
    guidance from the Federal Financial Institutions Examination
    Council (FFIEC), and creates a new independent examinations
    ombudsman at the Federal Financial Institutions Examination
    Council. We have been working with the Federal regulatory
    agencies on this legislation, and I understand that they have
    concerns about it, and they are before us today to discuss
    those concerns. And I am very appreciative of that. I know they
    are aware of the seriousness of this issue to many of the
    members of our subcommittee on both sides of the aisle.
        And so, we have put forward this legislation as a good
    faith effort to address many of the concerns that have been
    raised by Members on behalf of their constituents. Now is the
    time for all parties to come together to work towards a
    consensus solution to provide greater clarity in the
    examination process and a more independent avenue of appeal for
    financial institutions in case there are legitimate disputes,
    which there always are, we know, about the outcome of an
    examination.
        It is important for all parties to understand that the
    frustration we hear from our constituents on these issues is
    very real. It is small businesses, it is individuals, it is
    long-time customers, it is new customers, and it is financial
    institutions that feel--paralyzed is maybe too strong a word,
    but at least tied with one hand behind their back in certain
    instances. This legislation will hopefully provide more clarity
    to the system so institutions have a better idea of how certain
    issues will be viewed by regulators in the future.
        I would like to thank our witnesses for joining us here
    today. Their input on the merits of H.R. 3461 is invaluable and
    will assist us as we move through to continue to try to develop
    solutions to these problems.
        At this time, I would like to yield to my good friend and
    lead cosponsor on the bill, the ranking member of the
    subcommittee, Mrs. Maloney, for the purposes of making an
    opening statement.
        Mrs. Maloney. Thank you. I would like to thank the
    chairwoman for her leadership and for calling this important
    hearing.
        I first want to make it very clear that I support fair,
    understandable, consistent, and transparent regulation. It is
    important to protect the public and the overall economy. I
    wholeheartedly support the regulators being able to do their
    job by identifying troubled institutions and helping to
    strengthen their safety and soundness through requirements like
    regulatory capital and governance changes.
        But along with the chairwoman and many members of this
    committee, I have heard repeatedly from community bankers in
    the district I am honored to represent, and other community
    bankers, about the burden they have felt during the crisis and
    their concerns about examination fairness, particularly as it
    pertains to commercial loans. They, in many cases, have faced
    the threat of literally being closed down. And in some cases,
    they felt that they did not have a fair, independent appeals
    process. And I believe these are concerns we should address.
        Now, we have had numerous hearings in this area. But this
    good faith work document that we have put forward has generated
    a lot of concern. It is almost like you have to put a bill in
    to have people listen to what you are trying to say. And this
    bill has several important components, one concerning the exam
    reports and standards; that they match the guidance, that they
    be consistent. And a loan's classification needs to reflect the
    true risk of the loan and be consistent with the agency's
    guidance.
        And we are also looking at creating an appeals process, and
    no one disputes that we need a fair and independent process. We
    certainly need a route for people to raise concerns and raise
    their concerns about exam determination, about regulation. And
    certainly, a transparent process could highlight the areas that
    need to be improved. In most cases, the current process is an
    internal appeal directly back to the agency that made the
    decision in the first place. And in some cases, some
    institutions fear retaliation.
        They do not feel that the process would be fair. They feel
    that they don't even want to go forward, even if they feel that
    it was wrongly decided.
        And I do want to compliment the work of a former
    Comptroller of the Currency, Eugene Ludwig, who will be
    testifying on the second panel today. He literally created an
    appeals process within the OCC back in 1993, and he told me
    that they resolved well over 110 appeals that were filed
    between 1993 and 1996.
        And yet in 2010, when we were in a much worse financial
    situation, there were only 11. So I am interested in hearing
    from the regulators why they think there has been this kind of
    decline and why the number of appeals over time has been
    relatively small in other agencies.
        And they call us, but they shouldn't have to call us. They
    should be able to go back to the regulators and go through a
    process they feel treats them fairly. I feel that it may be
    that just the mere existence of an external appeal process
    which, of course, would be under this FFIEC Unit which the
    chairwoman described. The bill that we have introduced is very
    much a starting point, and I am open to any suggestions of ways
    to make it better.
        I am sure that all the members of the subcommittee want to
    address the concerns of community bankers. The community
    bankers were real stars in this financial crisis and their
    response to communities. I welcome the concerns of the
    panelists today, and I look forward to your testimony.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Royce from California for
    1\1/2\ minutes for an opening statement.
        Mr. Royce. Thank you. One of the great traits of the
    banking system that we have here in the United States as
    opposed to the one in most developed countries around the world
    is that our system is literally comprised of thousands and
    thousands of financial institutions and credit unions. And if
    you contrast that to the system in Europe, or in most developed
    countries, you have a few massive institutions.
        Our system, though, is at risk of devolving into sort of
    the European model, largely because of the actions of
    Washington that are stacking the deck against smaller
    institutions. It was really Washington, D.C., that bailed out
    and propped up the too-big-to-fail institutions, and in so
    doing--really by lowering their cost of borrowing, by giving
    them nearly 100 basis points advantage because of the
    perception of the market of them being too-big-to-fail--it has
    led to a situation where they can out-compete and sort of
    gobble up their smaller competitors.
        And it was Washington, D.C., that gave the Dodd-Frank Act
    the wherewithal here, with these new rules on top of the old
    ones, to disproportionately burden smaller financial
    institutions. An additional problem faced by smaller firms is
    the disconnect between the regulatory community in Washington
    and the examiners on the ground and what that has meant.
        So, I want to just take a minute here and commend
    Chairwoman Capito for this proposed legislation which I have
    cosponsored, because I think it goes a long way toward
    recalibrating the examination process to better allow bankers
    to be bankers. And it is one of the first in a number of steps
    we really need to take to level this playing field.
        I yield back. Thank you.
        Chairwoman Capito. Thank you.
        I recognize Mr. Scott for 3 minutes for an opening
    statement.
        Mr. Scott. Thank you, Madam Chairwoman. Let me thank you
    and the ranking member for holding this hearing today
    concerning the Financial Institutions Examination Fairness and
    Reform Act. This is a very important hearing. Our financial
    institutions are quite honestly in a crisis in terms of the
    relationship between them and the examiners.
        This bill, of which I might add I am proud to be a
    cosponsor, will establish a new standard of examinations of
    financial institutions as well as create a new process for
    institutions to appeal the regulatory decisions. And I think
    that if there is one area we need to perhaps spend a little
    time on today making sure we get it right, is this appeals
    process that we have.
        We want to make sure that it does not cause any delay. And
    there are some concerns within the infrastructure, that the
    appeals process as outlined in the bill might cause some delay.
    So I would be interested to make sure that we get this right.
        The bill calls for the establishment of an independent
    office responsible for investigating concerns about regulatory
    examiners that have been brought up by these institutions. And,
    of course, another problem in this is--I represent Georgia and
    we are the epicenter of bank failures. We realize that a part
    of that reason was, many of our banks in Georgia did
    overleverage their portfolios into the real estate lending
    area.
        But there have been some major concerns. We recently had a
    hearing down in Georgia, in Newnan, Georgia, where one of the
    major concerns was the level of inconsistency between what the
    actual examiners were doing out in the field on the ground not
    following accurately what was coming out of Washington. And so,
    that is another area we have to get clear, to make sure those
    who are on the ground are following the guidance that is coming
    out of Washington in a consistent manner.
        In 2011, we had--just this last year we had 92 bank
    failures. Twenty-three of them--23 of them, that is over 25
    percent--were in one State, my State of Georgia. These
    financial institutions, especially the smaller ones, the
    community banks, continue to struggle just to stay afloat. And
    just 2 weeks ago, the FDIC seized Stockbridge-based First State
    Bank, right in the heart of my congressional district. Another
    one sort of bites the dust, shall we say.
        But H.R. 3461 will ease regulatory burdens on community
    banks like First State Bank as well as other financial
    institutions, as the legislation is not limited by asset size.
    The watchdog created by this bill will have jurisdiction over
    regulators, and they will hold quarterly meetings to review
    examination practices. And additionally, the legislation will
    permit financial institutions to appeal any determinations
    found by an examiner within 60 days.
        Now, these provisions would ease costly regulatory burdens
    that were put on already-struggling banks--and not only our
    banks, but our credit unions as well--and will help make sure
    that our banks and our credit unions--and help ensure their
    sustainability in the future.
        So it is a good bill, it is a good foundation. I look
    forward to this hearing.
        And thank you again, Madam Chairwoman, for hosting it.
        Chairwoman Capito. Thank you.
        Mr. Hensarling for 1\1/2\ minutes for an opening statement.
        Mr. Hensarling. Thank you, Madam Chairwoman.
        We all know that too many of our financial institutions are
    fighting an uphill battle: the struggling economy; a monetary
    policy which is squeezing their profit margins; clearly, Dodd-
    Frank compliance; the Durbin language, which imposed price
    controls on their interchange fees; and the new credit
    allocation czar.
        By its own estimate, the Consumer Financial Protection
    Bureau's (CFPB's) first rule will now require 7.7 million
    employee hours to implement, and comply with the new rule, as
    the gentleman from California pointed out, the serial bailouts
    of their larger competitors. If we are not careful, Madam
    Chairwoman, we are going to wake up and see more failures and
    more consolidations of these community financial institutions.
    That clearly leads to less competition and fewer choices.
        We know that our regulators must protect the health of
    individual institutions, the system as a whole and, certainly,
    taxpayer-backed deposits. But our community financial
    institutions are critical--critical to our small businesses,
    the job engine of America, and we have to do more to wring out
    some of the uncertainty in this system.
        So, Madam Chairwoman, I applaud you and the ranking member
    for attempting to take us in that direction. I have heard from
    way too many financial institutions in my district about months
    and months of waiting to get a final report on their exams,
    being tied up and stymied waiting for these reports, and then,
    finally, there being no change.
        So I am looking forward to hearing the testimony of our
    witnesses because I believe the provisions of H.R. 3461 can
    indeed be helpful.
        I thank you, and I yield back.
        Chairwoman Capito. Thank you.
        I recognize Mr. Westmoreland for 1 minute for the purpose
    of an opening statement.
        Mr. Westmoreland. Thank you, Madam Chairwoman. And I want
    to thank you and the ranking member for introducing H.R. 3461.
    Here we are, another year and another bank failure in my
    district. I, along with Congressman Scott, represent Georgia.
    And as you know, Georgia has more bank failures than any other
    State.
        And it is a shame because these banks have been part of the
    FDIC system. They pay fees. They pay the insurance. And the
    FDIC should look at them as someone that they need to be a
    partner with, not somebody that can put them out of business.
    And I understand that you have been trying to make sure that
    your policies are implemented consistently across-the-board.
        But trust me, that is not the case. I suggest that you get
    out of Washington and that you go into some of these States and
    that you talk to some of these people. Because as Congressman
    Hensarling said, the reviews that they have on exit interviews
    orally, and then what they get in writing, are sometimes
    totally different.
        And so, we have to do something to help these community
    banks. Because I cannot tell you the heartache and the
    financial disaster it causes some of these small communities.
    So I hope you will quit fighting this bill, embrace it, and
    show us a way that we can help you use some common-sense things
    to regulate these banks in our communities.
        With that, I yield back.
        Chairwoman Capito. Thank you.
        Mr. Luetkemeyer for 1 minute?
        Mr. Luetkemeyer. Thank you, Madam Chairwoman. And thanks to
    you and the ranking member for addressing major issues that,
    despite our repeated calls for action, continue to pose
    problems for financial institutions.
        Even with the passage of this bill and other bills aimed at
    helping relieve unnecessary regulatory pressure, banks and
    other institutions will still be subject to rigorous
    examination procedures and heavy regulation. Regulatory burdens
    cost banks and credit unions thousands of manhours and millions
    of dollars each year and divert them from conducting their
    actual business, which is lending to customers, helping to move
    our economy forward.
        This is an industry that is and should be closely examined,
    but it is absurd to create an environment that is so rigorous
    that banks are no longer able to properly serve their
    customers. It is time to restore certainty to the exam
    environment and to restore practicality to the way we regulate
    these institutions. I look forward to a robust conversation
    today, and I yield back the balance of my time.
        Thank you, Madam Chairwoman.
        Chairwoman Capito. Thank you.
        I would like to recognize Mr. Lynch for 2 minutes for an
    opening statement.
        Mr. Lynch. Thank you, Madam Chairwoman. I also want to
    thank the witnesses for coming before us today.
        First of all, just to begin, I would like to say that I
    have enormous respect for the sponsors of this legislation. I
    have worked with both the chairwoman and the ranking member on
    a lot of legislation since coming here to Congress. This bill
    will not be one of them, however.
        I have grave, grave concerns about a number of the sections
    in this bill, too many to get into in the short time that I
    have right now, but I will get into it during the hearing. I do
    want to associate myself--I had a chance to read all the
    testimony--with Ms. Kelly's testimony. I think she raised a lot
    of the concerns that I have. And then I have a few of my own.
        But look, I understand the need here for a fair regulatory
    process that doesn't impinge unfairly upon our banks and
    financial institutions. The fact of the matter is, however,
    that we are coming through a very difficult time. We have a lot
    of banks that are still hurting on their balance sheets and
    have some very weak assets.
        And the answer is not to reduce the standards to protect
    those banks that are weak. It is to help them regain strength.
    But it is not to cover this up, and not to paper it over. This
    is the same argument we had on mark-to-market a couple of years
    ago, when institutions did not want to have their assets marked
    down. But we will get into it a little later.
        Madam Chairwoman, thank you for the great courtesy that you
    have afforded me, and I yield back the balance of my time.
        Chairwoman Capito. Thank you.
        Mr. Canseco for 1 minute for an opening statement.
        Mr. Canseco. Thank you, Madam Chairwoman. And thank you,
    Ranking Member Maloney.
        There are several numbers that are very important to keep
    in mind today, and some of them are these: 30 years ago, there
    were over 14,000 community banks in the United States, and
    today there are less than 7,000. The Sarbanes-Oxley Act was
    projected to cost companies less than $100,000 per year to
    comply with it. In reality, that figure is over $2 million. And
    according to the CBO, it will take companies a total of 10.2
    manhours per year to comply with Dodd-Frank. Doing simple math,
    and assuming a minimum wage rate of $7.25 per hour, that is a
    cost of almost $74 million per year in compliance wages.
        Undoubtedly, the greatest burden falls on community banks,
    and this problem is often compounded by an oftentimes
    disjointed or unpredictable bank examination process. H.R. 3461
    goes a long way towards fixing the process our regulators use
    to conduct examinations. And I commend the chairwoman and the
    ranking member for introducing this bill. It is a small but
    very important step to ensuring that community-oriented banking
    remains a central part of our economic landscape.
        Thank you, and I yield back.
        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. Kenneth M. Bertsch, Associate
    Director of the Division of Banking Supervision and Regulation,
    Board of Governors of the Federal Reserve System. I would also
    like to mention that Mr. Bertsch was kind enough to testify for
    the Federal Reserve at our hearing in Newnan Georgia. So I
    appreciate your traveling to Washington to make this testimony.
        Mr. Bertsch?

    STATEMENT OF KEVIN M. BERTSCH, ASSOCIATE DIRECTOR, DIVISION OF
     BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM

        Mr. Bertsch. Chairwoman Capito, Ranking Member Maloney, and
    members of the subcommittee, I appreciate the opportunity to
    discuss the Federal Reserve's views on the Financial
    Institutions Examination Fairness and Reform Act. The Federal
    Reserve shares the subcommittee's interest in ensuring fair
    examinations, and providing banks with a robust and transparent
    process for appealing supervisory determinations.
        Accordingly, the Federal Reserve has taken a number of
    steps to ensure that examination findings are well-grounded in
    supervisory policy, fully supported, and give due consideration
    to all relevant information provided by bankers.
        We also encourage bankers to discuss with reserve bank
    supervision management any concerns they may have with the
    examination process. If bankers still have concerns after
    talking with supervisory staff, they are encouraged to contact
    the Federal Reserve's ombudsman and consider filing a formal
    appeal.
        While we support efforts to ensure a fair examination
    process, some provisions of the proposed legislation appear to
    limit the ability of examiners to use judgment and may impede,
    rather than further, the ability of examiners to ensure the
    safe and sound operation of banking organizations. For example,
    the proposed bill could be interpreted to prevent an examiner
    from requiring a new appraisal on a performing commercial loan
    unless new funds are being advanced.
        In some cases, the absence of an updated appraisal would
    make it difficult for banks to appropriately assess their risk
    of loss and take actions to protect their financial interests.
    Similarly, the proposed bill could be read to prohibit
    examiners from recommending the placement of certain loans on
    non-accrual status, raising the potential that income could be
    overstated at some banks.
        Some might also interpret the bill as requiring that a loan
    be returned to accrual status if it is making payments
    according to its terms, regardless of whether those terms would
    assure the ultimate collection of the entire principal and
    interest due. This type of strategy is inconsistent with
    Generally Accepted Accounting Principles (GAAP), and past
    supervisory experience suggests it is often unsuccessful and
    can increase the cost of resolution in the event a bank fails.
        The proposed bill also appears to prohibit examiners from
    requiring a bank that meets the regulatory threshold for being
    well-capitalized from adding to its capital base. These
    provisions conflict with the expectations set forth in the
    recently enacted Dodd-Frank Wall Street Reform and Consumer
    Protection Act.
        They also fail to recognize that the regulatory definitions
    for the various capital thresholds do not take into account the
    idiosyncratic risks at individual organizations or the
    potential effects on a bank's capital position, of risk
    management deficiencies, or concentrations in problem assets.
        A key purpose of the proposed legislation appears to be to
    ensure a strong appeals process and independent ombudsman
    function for the resolution of bankers' concerns. The Federal
    Reserve has in place a robust appeals process and an
    independent ombudsman function designed to provide institutions
    with a fair and fulsome review of complaints.
        We also maintain a strong anti-retaliation policy to
    protect any person who uses the appeals process or who contacts
    the ombudsman with concerns. Moreover, the Federal Reserve
    continues to evaluate methods for improving its ombudsman
    function and appeals process.
        We recognize the concerns expressed by bankers about the
    supervisory process and are taking steps to respond to them. In
    2009, the Board established a subcommittee to focus on
    supervisory approaches to community and regional banks. This
    subcommittee is led by Board Governors Elizabeth Duke and Sarah
    Bloom Raskin.
        A primary goal of the subcommittee is to ensure that the
    development of supervisory guidance is informed by an
    understanding of the unique characteristics of community and
    regional banks, and consideration of the potential of excessive
    burden and adverse effects on lending. In addition, in 2010 the
    Board established the Community Depository Institutions
    Depository Advisory Council to provide input on the economy,
    lending conditions, and other issues of interest to community
    banks.
        Feedback from community bankers has persistently pointed to
    increasing regulatory burden as a concern. Last year, the
    Board's Subcommittee on Community and Regional Banks asked that
    a series of initiatives be developed to clarify regulatory
    expectations, alleviate regulatory burdens where possible, and
    reduce the potential that regulatory actions could curtail
    lending.
        In response, Federal Reserve staff initiated a number of
    projects to enhance provision practices for community banks and
    alleviate some of the burdens that have been of most immediate
    concern. Overall, these efforts are intended to ensure a
    rigorous but balanced approach to safety and soundness
    supervision that fosters a stable, sound, and vigorous
    community bank population.
        In summary, the Federal Reserve supports efforts to ensure
    that the examination process is fair, balanced, and consistent,
    and strives to consistently improve its examination processes.
        Indeed, we have already initiated a number of changes to
    improve and clarify our supervisory policies and practices and,
    where possible, constrain burden. It is, however, important
    that the agencies not be impeded in taking steps to ensure the
    safe and sound operation of banking firms.
        We appreciate the subcommittee's invitation to share our
    views, hope that our comments have been helpful, and would be
    happy to continue a dialogue on these very important issues.
        Thank you.
        [The prepared statement of Mr. Bertsch can be found on page
    64 of the appendix.]
        Chairwoman Capito. Thank you. Our second witness is Ms.
    Sandra L. Thompson, Director of the Division of Risk Management
    Supervision, the Federal Deposit Insurance Corporation.
        Welcome.

      STATEMENT OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF RISK
     MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION
                                 (FDIC)

        Ms. Thompson. Thank you. Chairwoman Capito, Ranking Member
    Maloney, and members of the subcommittee, I appreciate the
    opportunity to testify on behalf of the FDIC about the
    Financial Institutions Examination Fairness and Reform Act.
        The FDIC shares the subcommittee's goal of having a strong
    banking industry that serves as a source of credit to our
    Nation's communities. At the same time, we share the
    responsibility with our fellow regulators of making certain
    that insured institutions remain safe and sound, and that their
    financial reporting accurately portrays their condition.
        This is a challenging time for financial institutions, and
    examination findings reflect a difficult economic environment.
    These difficulties, particularly as they affect real estate,
    have led to credit quality weaknesses that have increased the
    volume of classified and non-accrual loans. Where these credit
    quality issues are found, corrective action is necessary to
    help ensure that institutions remain solvent and risks to the
    Deposit Insurance Fund are mitigated.
        We also recognize that banks are working very hard to
    navigate the downturn. They have had to increase efforts to
    work with borrowers who are having difficulty making payments,
    address earnings compression, and deal with the credit
    availability needs in their respective communities.
        The stated purpose of H.R. 3461 is to improve the
    examination of depository institutions, another goal we share.
    The FDIC continually seeks to improve the bank examination
    process, and we are committed to ensuring that banks understand
    our examination findings. Importantly, this includes the
    opportunity to discuss and question and appeal those findings
    if they disagree, both formally and informally.
        The bank examination process in the United States has
    evolved over many decades and has been shaped by our collective
    experience in both good and bad times. Recent experience has
    reconfirmed an essential lesson of past crises. Namely, ongoing
    robust examination and early supervisory intervention are key
    to containing problems as they develop.
        We believe the current supervisory regime helps to promote
    public confidence by providing for the effective supervision of
    our Nation's banks while protecting depositors. The bill
    proposes changes to important supervisory standards and limits
    our ability to consider all of the facts necessary to assess
    the credit quality of loans.
        The effect of these changes is that banks will no longer be
    required to recognize troubled assets in an accurate and timely
    manner. And our examiners will be prevented from considering
    material risk factors that have long been regarded as essential
    to assessing the credit risk in a bank's loan portfolio. We are
    concerned that this could mask problems at insured depository
    institutions and block our ability to require weak institutions
    to take corrective action, potentially resulting in higher
    losses to the insurance fund.
        We are also concerned that this will lead to inaccurate
    financial reporting in banks' regulatory reports since income
    and capital would be overstated. As a consequence, we would no
    longer be able to properly determine the institution's
    condition, the adequacy of its capital and reserves, the
    performance of management, and the overall risk the institution
    may pose to the insurance fund.
        Under the proposed new appeals process, the Office of
    Examination Ombudsman within the FFIEC would have the authority
    to overturn determinations reached by the independent banking
    agencies. This would give the new ombudsman great authority,
    but no responsibility for the oversight of the bank or whether
    the bank survives or fails.
        Further, rather than shortening the examination process as
    the bill proposes, this process could have the opposite effect.
    My written statement summarizes the benefits of the current
    classification of loans, accurate financial reporting, and the
    current appeals process at the FDIC. We believe this approach
    provides for the timely recognition of problems, allows
    regulators and bankers to work together to solve problems, and
    helps avoid losses to the Deposit Insurance Fund.
        I would be happy to answer your questions. Thank you.
        [The prepared statement of Ms. Thompson can be found on
    page 140 of the appendix.]
        Chairwoman Capito. Thank you. Our next witness is Mr. David
    M. Marquis, Executive Director, National Credit Union
    Administration.
        Welcome.

      STATEMENT OF DAVID M. MARQUIS, EXECUTIVE DIRECTOR, NATIONAL
                   CREDIT UNION ADMINISTRATION (NCUA)

        Mr. Marquis. Thank you, Chairwoman Capito, Ranking Member
    Maloney, and members of the subcommittee.
        The National Credit Union Administration appreciates the
    invitation to testify on H.R. 3461, the Financial Institutions
    Examination Fairness and Reform Act. In difficult economic
    times, depository institutions encounter additional threats to
    their safety and soundness. As a result, regulators like NCUA
    must take prompt action to address the identified problems and
    mitigate emerging risk.
        We take these actions in order to maintain the safety and
    soundness of credit unions, safeguard the National Credit Union
    Share Insurance Fund, and protect consumer deposits and ensure
    that taxpayers do not experience a loss. When regulatory
    actions increase, complaints against the regulator typically
    arise. NCUA, however, actively works to minimize complaints by
    comprehensively training our examiners and by encouraging
    stakeholders to communicate with us.
        We have found that an effective exam program requires an
    ongoing two-way conversation. Direct communication between
    examiners and credit unions often resolves problems and
    misunderstandings. When such interactions fail to produce a
    consensus for resolutions, credit unions have other avenues to
    voice concerns. Specifically, NCUA has an open-door,
    multilayered appeals process that provides reconsideration of
    regulatory decisions.
        After appealing to supervisory examiners and regional
    directors, a credit union may request a reevaluation by our
    supervisory review committee, an independent interagency
    appeals panel. Consistent with H.R. 3461, NCUA has already
    adopted a zero tolerance policy to prevent retaliation against
    appealing credit unions. Every exam report contains a cover
    page that explains a credit union's appeal rights and
    references NCUA's policy on appeals and non-retaliation. This
    is also available on our Web site.
        Further, in accordance with the bill, we have prioritized
    the timely delivery of findings so that exams are properly
    completed and credit unions may quickly address smaller issues
    before they grow into big ones. In short, NCUA already meets
    several of the standards found in the bill, and we are firmly
    committed to fairly applying current law in order to protect
    the safety and soundness and to limit insurance fund losses.
        To address the problems the subcommittee has identified,
    H.R. 3461 would institute new exam procedures, modify
    accounting practices, and create new appeal venues. Although
    well-intentioned, the bill could produce at least three
    unintended consequences.
        First, the bill would greatly increase NCUA's costs. The
    documentation changes, for example, would increase the time
    spent on exams. The new appeals procedures would add more
    regulatory layers that would increase costs, without any
    assurance of greater effectiveness.
        To validate individual exam findings for administrative law
    judges, NCUA would need to write more detailed rules to clarify
    safety and soundness principles. Moreover, the bill's changes
    to operations and funding for the Federal Financial
    Institutions Examination Council would significantly increase
    NCUA outlays. Ultimately, credit unions have to pay for these
    increased regulatory expenses.
        Second, in its present form, the bill could greatly
    increase risk to the Share Insurance Fund. For example, an
    administrative law judge's decision to overturn safety and
    soundness action due to a lack of knowledge of financial
    institution operational risk on a forward basis might result in
    greater insurance fund losses in the future.
        Further, the bill's modified exam procedures and expanded
    appeals rights would delay resolution of safety and soundness
    issues and allow problems to escalate. The increased time to
    settle issues runs counter to GAO's recent recommendations that
    NCUA require early and forceful regulatory action well before
    capital deterioration triggers prompt corrective action
    tripwires.
        In addition, the commercial loan accounting changes could
    mask problems, and extend the time before we could take
    necessary action to mitigate losses in a distressed portfolio.
    Such accounting changes would also conflict, at times, with
    financial institutions' reporting requirements under generally
    accepted accounting principles.
        Third, the bill would result in a one-size-fits-all
    examination system. NCUA currently customizes its reviews based
    on size, scale and scope of each credit union. The largest bank
    holding company has more than $1 trillion in assets, yet nearly
    70 percent of credit unions have $50 million or less in assets.
    The requirement to establish consistent exam standards across a
    wide range of financial institutions would decrease regulatory
    flexibility and add considerable cost.
        In sum, NCUA recognizes that financial services regulators
    must conduct exams fairly and consistently, and we strive to
    achieve this standard. NCUA is committed to addressing
    legitimate concerns about the present exam process, minimizing
    regulatory conflicts, promoting procedural fairness, and
    advancing exam consistency.
        Later this year, for example, NCUA will adopt a national
    supervisory policy manual to reinforce greater consistency
    amongst our exams and regions. We are also committed to working
    with Congress to explore other ways to address exam concerns.
        I look forward to answering any of your questions.
        [The prepared statement of Mr. Marquis can be found on page
    121 of the appendix.]
        Chairwoman Capito. Thank you. And our final witness on this
    panel--I would like to welcome her back; she has been before
    the committee before, and I appreciate her being here--is Ms.
    Jennifer Kelly, Senior Deputy Comptroller for Midsize and
    Community Bank Supervision, Office of the Comptroller of the
    Currency.
        Welcome.

      STATEMENT OF JENNIFER KELLY, SENIOR DEPUTY COMPTROLLER FOR
         MIDSIZE AND COMMUNITY BANK SUPERVISION, OFFICE OF THE
                   COMPTROLLER OF THE CURRENCY (OCC)

        Ms. Jennifer Kelly. Thank you. Chairwoman Capito, Ranking
    Member Maloney, and members of the subcommittee, I appreciate
    the opportunity to appear before you to discuss the OCC's
    perspective on H.R. 3461.
        As the Senior Deputy Comptroller for Midsize and Community
    Bank Supervision, I serve as the senior OCC official
    responsible for the supervision of approximately 1,700 national
    banks and Federal savings associations with assets under $1
    billion. These community-focused institutions play a crucial
    role in providing essential financial services to consumers and
    small businesses in communities across the Nation, as well as
    supplying the credit that is critical to economic growth and
    job creation.
        The bill contains measures directed at three basic
    concerns: first, assuring that banks have access to a fair and
    independent appeals process if they disagree with a regulator's
    supervisory determination; second, clarifying or revising
    standards for classification of loans and placing loans in non-
    accrual status; and third, achieving timely communication of
    examination results.
        My managers and I hold numerous outreach sessions and
    meetings with bankers to listen, and respond, to their concerns
    and questions. And we have heard many of the same concerns that
    you have about the challenges that bankers are facing. We seek
    to ensure that the OCC's examinations are fair and timely, and
    that the OCC is fulfilling its mission of ensuring the safety
    and soundness of national banks and Federal thrifts by
    identifying problems at the earliest possible stage and holding
    institutions accountable for taking timely and effective
    corrective actions.
        While we understand and support the broader objectives of
    the bill, we believe it could impede our ability to deal with
    troubled institutions on a timely basis, and would undermine
    Congress' clear direction that bank regulators identify and
    promptly address unsafe and unsound practices and that insured
    depository institutions report their financial condition in
    accordance with Generally Accepted Accounting Principles,
    commonly known as GAAP.
        The OCC fully supports providing bankers with a fair and
    independent process for appealing supervisory determinations,
    and we believe our current appeals process, run by our
    ombudsman, does just that. The bill's approach to accomplishing
    that objective would involve creating a new Federal bureaucracy
    at the FFIEC, and risk disrupting appropriate and necessary
    supervisory activities by bank regulators.
        We believe there are better alternatives without those
    downsides that would accomplish the objectives of H.R. 3461. We
    would be happy to work with the subcommittee to frame out an
    alternative approach.
        We also have significant concerns that the standards for
    non-accrual loans in the bill could result in revenue
    recognition that is inconsistent with GAAP. FDICIA established
    that banks must follow GAAP, or standards that are no less
    stringent than GAAP, in reporting their financial condition.
        Congress put this requirement in place in response to the
    savings and loan crisis, where non-GAAP regulatory accounting
    masked the deteriorating financial condition of institutions
    until it became so serious that a massive bailout was needed.
    The bill would weaken this important standard.
        As I have previously testified before this subcommittee,
    the integrity of financial reporting and regulatory capital is
    vital to identifying and correcting weaknesses before they
    threaten a bank's ability to continue to meet the needs of its
    customers and the communities it serves.
        As we have seen during the most recent crisis, it is also
    essential that supervisors have the ability to direct banks to
    hold capital commensurate with their risk profile. The bill
    would, in certain instances, tie the hands of regulators when
    they believe a bank's risk profile requires more capital.
        Finally, we agree that completing and communicating our
    examination findings on a timely basis is essential. Clarifying
    those expectations can be a positive step. But flexibility is
    needed when an exam may not be finished or results communicated
    for good reasons, such as when a significant policy issue needs
    further deliberation before a conclusion is reached.
        My written testimony discusses the OCC's perspectives and
    concerns with the proposed legislation in greater detail. I
    would be pleased to respond to any questions you have about my
    testimony or other matters relating to H.R. 3461. As I
    conclude, I would like to reiterate the OCC's willingness to
    work with the subcommittee to explore alternative approaches
    that would achieve the goals we share without raising the types
    of concerns I have identified.
        Thank you.
        [The prepared statement of Ms. Kelly can be found on page
    86 of the appendix.]
        Chairwoman Capito. Thank you, thank you all. And I would
    like to begin my 5 minutes of questions.
        Listening to the testimony from the four of you, I am kind
    of wondering if we are in a little bit of an alternative
    universe here.
        From what we are hearing from our constituents and the
    resultant effect of inability to lend to small businesses and,
    consequently, inability to create jobs, tightening in
    inconsistent standards--with the exception of, basically, Mr.
    Bertsch did say that the Fed had developed a council or a
    committee to try to respond to community bankers and concerns
    that they were having--it doesn't seem like--and you mentioned,
    as well, that some adjustments had been made, although you
    didn't get specific with what those might be.
        But you were at the hearing in Georgia and I think that
    those who testified on, I believe it was, the second panel
    after you testified, had conflicting statements as to what they
    were hearing on the ground and what was the resulting written
    report, or what the resulting actions were.
        So I guess what I am wondering here is we feel--and I think
    you have heard everybody in their opening statements feel and
    our constituents feel--that there is a problem here. And I
    don't really get the impression, with the exception of Ms.
    Kelly did say that she is willing to work, but without
    specificity. Is there a big disconnect here?
        You kept going back to the safety and soundness argument.
    That is a logical and great argument. Because, certainly, the
    safety and soundness of financial institutions is the core of
    what we believe and what we all want across-the-board in a
    consistent way on all parties. Because it is not only good for
    the country, it is good for the institutions, it is good for
    the constituents, it is good for the small businesses and mom-
    and-pops that are working with these institutions.
        So I guess I would ask Ms. Thompson if you have--are you
    hearing the same things? You have been before this committee,
    the FDIC has been before the committee several times and heard
    the same repeating theme from us as Members of Congress.
        Is this a consistent disconnect between what we are seeing
    on the ground and what you all are seeing going forward?
        Ms. Thompson. Chairwoman Capito, thank you for the
    opportunity to respond.
        I would say that the FDIC, as the primary Federal regulator
    for over 4,600 institutions, has heard these comments regularly
    from bankers and we have really taken steps to try to address
    some of the things that we have heard. We have heard about
    inconsistencies between Washington and the field, we have heard
    about mixed messages.
        And one of the things that we have done is to reinforce our
    policies with our examiners. I personally have nationwide phone
    calls with my examination workforce. I personally visit all of
    the regional offices and go to the specific territories, and
    require our regional directors and our field management to do
    the same.
        We also meet with bankers regularly and we encourage them
    to address these issues with us specifically. In fact, last
    year, in March, the FDIC issued a Financial Institution Letter
    reminding institutions about the appeals process and reminding
    institutions about our ombudsman. Also, we established a direct
    e-mail box to me personally, directly to me, for bankers who
    had specific concerns before, during, or after an examination.
        And we are very concerned about the perception. We want to
    make sure that our examiners are following the instructions
    that we have given in Washington. And we would like--if you
    have specific instances, we would be happy to address those
    instances.
        Chairwoman Capito. I think, in our bill, we did go to the
    three instances--the timeliness of the reports; the looking at
    the commercial real estate assets on a regular-paying customer;
    even though the assets have fallen in value, how do you treat
    that on your books? And then, of course, the objectivity of the
    ombudsman has been an issue.
        We heard this in Georgia, that there was a feeling of
    retaliation. Somebody addressed that in their opening
    statement, about how they have tried to separate some kind of
    retaliatory measures.
        How are we going to bridge this gap? Ms. Kelly said you are
    willing to work. Do you have any suggestions on how we are
    going to close this gap between what you are saying and what we
    are hearing?
        Ms. Jennifer Kelly. I believe that ongoing communication is
    the key to this. And going into the economic downturn, that was
    something we have emphasized with our examiners, I have
    emphasized with my managers. And we certainly have stepped up
    our outreach efforts in terms of meeting with bankers. I did a
    quick count. We had over 50 meetings just in 2011 with bankers
    about--
        Chairwoman Capito. But you are hearing the same thing we
    are hearing?
        Ms. Jennifer Kelly. Yes, we hear complaints. Certainly,
    there are many more banks that are having problems now, given
    the economic environment we are in. The examiners are having
    more critical findings of those institutions.
        And if bankers don't agree with the examiner's finding,
    they raise concerns about that. That is why we get out there,
    we talk to them, we certainly encourage them. If they feel that
    the examiner has not laid out the rationale for the conclusion
    they have reached adequately, then not only do we have our
    formal appeals process through the ombudsman, but we also have
    an informal appeal process through the supervisory chain.
        And often, many of these issues are resolved just by having
    further conversations about it, getting higher levels of
    management in the district involved. I would go back to Mrs.
    Maloney's comment about--
        Chairwoman Capito. I am going to stop you there, because I
    went over my time.
        And I am going to let Mrs. Maloney go ahead and begin her
    questioning.
        Mrs. Maloney. First of all, I would like to thank all the
    panelists for your public service and for your fine testimony
    and for raising legitimate concerns.
        It certainly is not my intention, in any way, shape or
    form, to undercut the GAAP accounting principles. We are in an
    international banking system now and have to have international
    ways to regulate. And that is one of the reasons we are having
    Basel I, II, and III. And we certainly don't want to in any
    way, at least I don't want to, undercut that.
        You have raised many concerns that I look forward to
    working with you on. But I would like to go to the appeal
    process, and first ask Mr. Bertsch from the Fed, you testified
    that you have a very robust appeal process. You already have an
    ombudsman in place. How many appeals, formal appeals, have been
    lodged with the Fed since the crisis in 2008 to now? Were any
    any formal complaints lodged?
        And also you testified, as did others, that you were
    concerned that an external appeals process would undercut your
    supervisory function. Can you think of modifications to the
    section that would allow some level of independent review but
    address your particular concern for supervisory function?
    First, Mr. Bertsch, and then I just want to go down the line.
        Mr. Bertsch. We have had an increase in the number of
    appeals that we have gotten since 2007. I think we typically
    had gotten about 5 formal appeals a year, and in 2011, there
    were 10 appeals.
        We believe that the appeals process that we have in place
    at the Fed is effective in considering appeals. We have a
    three-level appeals process, as we described in the testimony.
    And we believe that it results in a satisfactory airing of
    facts and objective determinations on those appeals.
        Mrs. Maloney. Any comments on Section 1015 and supervisory
    function?
        Mr. Bertsch. I don't believe that I specifically commented
    on that in my testimony.
        Mrs. Maloney. Okay.
        Ms. Thompson, how many appeals to the FDIC? You were really
    involved deeply in responding, I believe in many ways, very
    appropriately to the crisis. Anyway--
        Ms. Thompson. As stated before, the FDIC has an informal
    and a formal appeals process.
        Mrs. Maloney. Just the formal one.
        Ms. Thompson. Through the formal appeals process, since
    2008, the FDIC has had 33 formal appeals. Our appeals process
    goes to our regional office. And if the bank does not agree
    with that appeal, it would go to the Division Director, me. But
    the final ability to overturn a supervisory appeal is a
    committee that is established by our Board of Directors, it is
    chaired by a Board Member, and it contains persons who are not
    involved in the supervisory process.
        So to the extent an institution has an appeal, they are
    appealing to the very highest levels of our organization.
        Mrs. Maloney. Would you feel more comfortable with the
    legislation if the final word was the organization and not
    totally independent under the FFIEC?
        Ms. Thompson. I believe our organizations are responsible
    for the safety and soundness of the banking system. The FDIC is
    also responsible for insuring deposits. And people work very
    hard to put their money in a financial institution, and we take
    that responsibility very seriously.
        I think the head of our agency, who is appointed by the
    President, serves as Chairman of our Board--
        Mrs. Maloney. And we raised that to $250,000 in Dodd-Frank,
    which is very helpful for community banks.
        Ms. Thompson. That is exactly correct. But our Board
    consists of members of the other Federal banking agencies, and
    they have decided to establish a committee to look at
    supervisory appeals. And we think that is the appropriate
    level.
        Mrs. Maloney. Mr. Marquis, I know from my district that the
    credit unions were not really involved in the crisis. They were
    not closed. They provided service, and continued functioning
    through it in a fine and excellent way. So, congratulations.
    But on the appeals process, do you have appeals?
        Mr. Marquis. We do a supervisory review committee for
    formal appeals. We had three last year, and most of them get
    resolved at the regional director's level. We have had, of
    course, some strains with industry this year because of the
    tough economic climate.
        If you had asked me how many failures I thought we were
    going to have a year ago, I thought we would be at a much
    greater number. But through a lot of hard work between our
    examiners and CEOs that sometimes push back at each other, they
    eventually get to resolving the issue. One of the issues on
    terms of timeliness to go into the outside appeals process, as
    presented, was the 60 days it takes to file an appeal, 60 days
    to get to review it, and 60 days to issue a final
    determination.
        And some of our more troubled credit unions, Code 4s, by
    that time we have already done two additional supervision
    contacts to make sure that the ball has moved down the field
    and issues that are of great concern are actually being
    addressed. So that delay could potentially delay actions in
    moving credit unions to safety.
        Mrs. Maloney. My time has expired, but if I could have 10
    seconds to respond to one point he made, that the economy
    appears to be improving somewhat. Certainly, the number of
    complaints on commercial real estate loans and appeals has
    diminished, at least in my office, and probably many others.
        Thank you all for your testimony
        Chairwoman Capito. Thank you.
        Mr. Renacci, 5 minutes for questions.
        Mr. Renacci. Thank you, Madam Chairwoman. I want to thank
    the witnesses for being here.
        I am going to follow up with what the chairwoman was
    saying. There really does seem to be some inconsistency. And I
    am going to give you three examples from my district. Three
    businesses--one of them employed 50 people, one of them
    employed 35 people, and one of them employed 25 people--and all
    of them had loans that were put on non-accrual basis. So all of
    them had issues that some regulator told the bank these were
    problem loans.
        This was done in late 2009, early 2010. This was before I
    was in Congress. I was a CPA, so I definitely knew those
    businesses and what was going on. Today, two of those business
    are not non-accrual anymore because they found another bank to
    refinance with. One of them is gone.
        The one business that is gone cost 25 jobs, yet that
    property sold for about 85 percent of the loan. So when we talk
    about the inconsistencies, I would look back to the jobs, the
    small business owner. Those are the ones who are having the
    issues.
        And we talk about the banks and the appeal process. I think
    there is a concern with some banks, when I talked to the banks,
    that they are concerned with the current appeal process.
    Because they think if they do those things, there will be
    retribution. And I think that is an issue too, from what I
    hear.
        So I am just telling you what I am hearing from back in my
    district. But I think it is an interesting story, when you talk
    about three specific businesses, when you tie it down in my
    district--and where one of them is gone, 25 jobs are gone, are
    never coming back, and the other two businesses, the way they
    were able to survive was by refinancing.
        Now, I want to move forward onto this. We have been
    throwing GAAP out, Generally Accepted Accounting Principles.
    And as an auditor, as a CPA, somebody who has done certified
    statements, I understand GAAP. I understand Generally Accepted
    Accounting Principles. I understand that many times, when I did
    a financial statement or when my company did a financial
    statement, you would have a going concern.
        But most of the times, those going concerns were because
    the bank would say the loan was not a collectible loan. Those
    are the questions I have. Who makes that judgment? How do we
    make that judgment? How specific are we on that judgment? And
    those are opinions. Somebody can say that loan will be paid,
    some will say it won't.
        I just gave you three examples where two of them are doing
    very well right now and employing people. Now, just think if I
    was doing, or you all were doing, certified audits of those two
    businesses who were put on non-accrual, you would probably give
    them, I would give them, a going concern which means I doubt
    they can stay in business, and the problems that would occur.
    So tell me a little bit about why you feel this bill is
    inconsistent.
        I will start with you, Ms. Kelly, because I know you were
    talking about GAAP. Tell me why you feel it would inconsistent
    with GAAP. Because remember, GAAP is an opinion. And it can be
    your opinion versus somebody else's opinion.
        Ms. Jennifer Kelly. I would agree with that. GAAP is
    Generally Accepted Accounting Principles. It is principles-
    based. And then what the banking agencies have done is, in the
    call report instructions, we have taken those principles and
    better defined what we see as the standard for determining
    income recognition, what is appropriate, and whether a loan
    should be on an accrual basis or a non-accrual basis.
        In the instances that you cited, we would have to look at
    each situation specifically, and look at the facts and
    circumstances that are unique to that loan, to decide whether
    it was an appropriate determination or not. But it is important
    to understand that what examiners are doing is outlined in the
    call report instructions. The call reports, which are the
    quarterly financial reports, are prepared by the banks.
        And so when our examiners go in, they are looking at the
    determinations that the bankers are making about those loans
    and whether they should be on non-accrual or not, in accordance
    with the call report instructions. So the examiners are looking
    at the documentation and discussing the loan with the banker to
    understand their rationale for keeping it on accrual, and
    determining whether they feel there is a sound basis for that.
        So that is what the examiners are doing. And if they tell
    the bank that they believe the loan should be on non-accrual,
    it relates to the income recognition by the bank.
        Mr. Renacci. In these three instances, all three of these
    loans were making their payments, they were never behind, they
    were 100 percent on time. So again, the inconsistency would be
    when I talk to the bank. And in the day, I did talk to the bank
    and say, ``Why are you putting these on non-accrual?'' They are
    saying, ``Because the regulators are forcing us to put us on
    non-accrual.''
        Ms. Jennifer Kelly. You mentioned the word
    ``collectability,'' when you were framing up the question
    initially. And that is the key piece here. It is not only are
    the payments current, but it is an assessment of whether there
    is reason to believe that full principal and interest are going
    to be collectible on that loan.
        Mr. Renacci. I know my time is running out, but just think
    of those two instances. That is why I bring out specifics. On
    those instances, they went--on those two out of three
    instances, they went non-accrual. And yet they are good loans,
    100 percent collectible with another bank right now.
        Thank you very much.
        Chairwoman Capito. Thank you.
        Mr. Watt for 5 minutes.
        Mr. Watt. Thank you, Madam Chairwoman. And let me make a
    couple of comments. First of all, I am hearing the same
    complaints that everybody else has described. Second, I don't
    agree that this bill is the solution to those complaints, nor
    will it minimize or reduce the complaints. And it will create
    some additional complaints, even for the things that it would
    resolve.
        I don't think we can micromanage examinations in this
    committee, and when we try to do that, I think we do ourselves
    a disservice. So having said that, there is a lot of
    arbitrariness going on, and one of those sets of arbitrariness
    I want to direct to Mr. Marquis because something I think is
    arbitrary is going on in North Carolina.
        I don't know if you are familiar with it or not, but the
    NCUA has announced that it will examine all 52 North Carolina
    chartered credit unions, completely separate from the North
    Carolina Credit Union Division, obviously, as a result of the
    North Carolina Credit Union Division's decision to allow the
    North Carolina State Employees Credit Union to release estate
    CAMEL ratings. There is no rule against that.
        This is a North Carolina-regulated entity. And your
    reaction to it is that we are going to go out and make the life
    of 51 other businesses, credit unions, miserable because we
    don't like what the North Carolina Credit Union Division has
    done with its own member. That seems to me to be arbitrary, and
    it is the kind of thing that results in the kinds of reactions
    that you are hearing here. Because arbitrariness doesn't seem
    to make anybody happy.
        So maybe you can explain to me why you think the NCUA has
    the authority, with a State-chartered credit union, to go on
    this kind of witch hunt. Because I am really concerned about
    where we are on this.
        Mr. Marquis. When we work with our State regulators, we
    accept their examination to the fullest extent possible.
    Sometimes, we do joint exams, and sometimes, we do separate
    insurance reviews. We also have an insurance agreement that
    every credit union agrees to, which is not to release
    information that is in our records that has to do with an exam
    report--
        Mr. Watt. There is something in your rules that says this
    State-chartered entity--
        Mr. Marquis. Yes, sir.
        Mr. Watt. They can't release this CAMEL rating?
        Mr. Marquis. They can't release it--
        Mr. Watt. Either there is or there isn't, Mr. Marquis. Is
    there something in your rules that prohibits this?
        Mr. Marquis. Yes, there is.
        Mr. Watt. Okay. All right. You are going to send that to
    me, I am sure.
        Mr. Marquis. Yes, sir.
        Mr. Watt. Okay. Go ahead.
        Mr. Marquis. And what that does is, when a State uploads an
    exam report in our system, it is a record available to our use.
        Mr. Watt. Okay, but let me accept that. So for the sin of
    one credit union, you are going to go and subject 51 other
    credit unions to an extensive examination. That is what you are
    telling me, and that is rational to you?
        Mr. Marquis. What we are saying is we can't accept that
    exam report being uploaded on a system. If they want to release
    the CAMEL code, States' rights, we don't care. But we can't
    have that record in our system. And then, we don't have to take
    exception with that particular union or all of those credit
    unions.
        We do have a concern with CAMEL code release because the
    other credit unions aren't releasing their CAMEL code. So what
    does that speak of about the financial condition of those
    credit unions, since only one of them has been allowed to
    release that CAMEL code?
        Mr. Watt. So you are going to subject every State-chartered
    credit union in North Carolina to an examination just because
    one credit union released this CAMEL rating; with the
    authority, mind you, of the State telling them that they could
    do that.
        Mr. Marquis. That is correct.
        Mr. Watt. Somebody needs to come and talk to me. Because
    even though I don't like this bill, we might need to add
    something to it when it gets marked up that says you can't take
    that kind of arbitrary action. I think you are way beyond the
    authority that you have at the Federal level to do this.
        Chairwoman Capito. Thank you. The gentleman's time has
    expired.
        Mr. Westmoreland for 5 minutes?
        Mr. Westmoreland. Thank you, Madam Chairwoman, for
    yielding.
        How many times have each one of you all testified at
    congressional hearings or inquiries? All of you.
        Mr. Bertsch. This is my second time.
        Mr. Westmoreland. Second time.
        Ms. Thompson. At least 10 times.
        Mr. Westmoreland. How many?
        Ms. Thompson. At least 10 times. Senate and House?
        Mr. Westmoreland. Yes.
        Ms. Thompson. A lot.
        Mr. Westmoreland. Would you say more than 20?
        Ms. Thompson. No, I would not say that.
        Mr. Westmoreland. Okay.
        Mr. Marquis. Three times.
        Mr. Westmoreland. Thank you. This bill that the chairwoman
    and the ranking member have come up with has, I think, been a
    direct result of us hearing from our constituents. And I know,
    Mr. Bertsch, you have been down to my district. I think you
    were at the field hearing that we had.
        So, this is a direct result of that, and us trying to keep
    our community banks from inconsistent regulations and hearing
    one thing from the regulators up here and then hearing
    something else from our constituents. And no disrespect, but we
    tend to believe our constituents, especially when the evidence
    is on their side.
        So do you think we can screw up this more than you all
    have? It is a simple question. We are trying to fix it, you all
    have not tried to fix it, and it just keeps perpetuating on
    itself. So do you really think that we can mess it up and cause
    more bank failures than what has happened so far?
        Any one of you? Go ahead.
        Ms. Jennifer Kelly. Sir, as I said before, we work hard. We
    are out there talking to bankers all the time trying to
    understand where they feel there are inconsistencies, talk to
    them about our expectations, whatever actions we need to take
    to clarify things. So we are continuing to work this issue very
    aggressively. These are difficult times.
        Mr. Westmoreland. Do you think that banks need to have the
    ability to sue the FDIC, in the fact that any complaints that
    they have? And I will have to tell you, all my bankers, board
    of directors, and all of them have told me that they are afraid
    to come forward because of the possible retaliation. Because
    any complaint about the FDIC is actually handled within the
    FDIC, or the Board of Governors or wherever it is.
        Do you think that is fair, that their day in court, so to
    speak, is with the same people they are complaining against?
        Ms. Jennifer Kelly. At the OCC, I do believe it is fair.
    Our ombudsman operates entirely outside the supervision
    process, he reports directly to the Comptroller, and he has the
    power to overturn supervisory decisions. And he does do that on
    occasion--
        Mr. Westmoreland. How many times would you say he has done
    that?
        Ms. Jennifer Kelly. In the last year, I think there were
    five decisions. And two went for the bank and three went for
    the OCC. The year before--
        Mr. Westmoreland. Okay. I would like to see some of those.
        Ms. Jennifer Kelly. Yes, sir. They are all posted on our
    Web site.
        Mr. Westmoreland. Okay, great.
        Ms. Jennifer Kelly. The decisions include a summary that
    does not identify the bank, but it identifies the issue. It is
    about a page long, describing the exact situation and what the
    decision was.
        Mr. Westmoreland. Ms. Thompson, how many times would you
    say regulators have been disciplined from the FDIC, FDIC
    regulators being disciplined because of a complaint that was
    filed by a lending institution?
        Ms. Thompson. First, I don't have the specific answer to
    your question. But the FDIC takes its responsibilities very
    seriously, Congressman, and we really want a fair, open, and
    transparent process. Retaliation is prohibited at the FDIC. And
    to the extent that a banker would bring that to our attention,
    I would be dealing with those particular problems and
    situations.
        I really think that our examiners and our staff are
    professional, and I do believe that they understand that there
    are difficult circumstances. The economy was horrible. But I do
    think that the FDIC--
        Mr. Westmoreland. Ma'am, I am not trying to cut you off.
    But my question was, how many regulators have been disciplined
    as a result of complaints filed by banks with the FDIC?
        Ms. Thompson. I don't know the answer to that, Congressman,
    I am sorry.
        Mr. Westmoreland. Could you find that out for me?
        Ms. Thompson. Yes, sir. I will.
        Mr. Westmoreland. Because didn't you just say that
    retaliation was against the FDIC rules?
        Ms. Thompson. That is correct.
        Mr. Westmoreland. That is like your dog having his teeth
    into your neighbor's leg, and you telling your neighbor, ``I
    don't allow him to bite.'' But thank you very much, and my time
    has expired.
        And I want to thank the chairwoman.
        Chairwoman Capito. Thank you.
        Mr. Hinojosa?
        Mr. Hinojosa. Thank you. Thank you, Chairwoman Capito. I
    believe this bill represents an accomplishment in
    bipartisanship. And I thank you, and Ranking Member Maloney,
    for both of your efforts on behalf of this legislation.
        The financial crisis pulled back the curtain on the bank
    examination process, and it is obvious to me that reform was
    needed. However, the regulation should not overburden our
    financial institutions during a time of economic uncertainty,
    when loans to creditworthy small businesses can spur job
    creation.
        I am especially concerned about overburdensome regs for
    community banks and credit unions in particular. They were not
    the cause of the financial crisis, and I don't believe they
    should be stymied by overzealous regulation agencies. I believe
    that we will find common ground today, and I believe we can
    find a regulatory balance to ensure an institution's fiscal
    health while allowing for enough flexibility to encourage
    economic growth.
        I have two short questions. And I would ask Ms. Sandra
    Thompson, Director of the Division of Risk Management, FDIC, if
    she can please give me an answer to these two questions, as
    well as Ms. Jennifer Kelly, Deputy Comptroller for Mid Size and
    Community Banks.
        I have heard concerns from community banks in my district
    about the current internal appeals process, specifically, that
    they have limited options to contest the questionable decision.
    And we have all brought that up. Additionally, they fear the
    retribution because they must appeal to the very agency that
    regulates them.
        The question is, what are your objections to the outside
    appeals process outlined in this bill? And the second part of
    the question, assuming the creation of an outside appeals
    process, an ombudsman office, what would be your
    recommendations?
        Ms. Thompson?
        Ms. Thompson. With regard to your first question, the
    supervisory appeals take place at the highest level within our
    agency. We have both a formal and informal process. Our agency
    is run by a board, and the board established a committee that
    is chaired by a board member.
        The participants on that committee, who have the authority
    to overturn a supervisory decision, are independent of the
    supervisory process. So from the highest levels of our
    organization, they have the authority and the ability to
    overturn a supervisory decision.
        And we believe that because the head of our agency has been
    entrusted with the safety and soundness of the banking system,
    and also the deposit insurance responsibilities, that is
    something we, as an agency, take very seriously. Under the
    bill, the outside ombudsman will be overturning a decision made
    at the very highest levels of our agency.
        If the bill does go forward, with regard to the ombudsman,
    that would be located within the FFIEC. It would be very
    difficult to understand how this entity would have the ability
    to overturn, but no responsibility for the insured deposits or
    the people who put their deposits in financial institutions, or
    the safety and soundness of the institution. Those are tenets
    of what we do at the FDIC. That is part of our mission.
        It is just hard to understand how that would work, how you
    would have an entity with authority, but with no accountability
    or responsibility for the health of that institution.
        Mr. Hinojosa. I would like to ask Ms. Jennifer Kelly if she
    would respond?
        Ms. Jennifer Kelly. Certainly. As I was explaining earlier,
    our ombudsman operates entirely independently of our
    supervision line. We feel that provides sufficient
    independence. We also would share Ms. Thompson's view of we are
    responsible--supervision of these institutions and the
    accountability for doing--that needs to stay with the head of
    our agency in terms of making those decisions.
        We also have concerns about the timing. Right now, our
    ombudsman is committed to resolving and making a decision on
    any appeals within 45 days. And that is very important because
    often, in these situations, we are dealing with an institution
    that has problems and there needs to be supervisory action
    taken.
        So we believe that looking at the way the FFIEC process is
    laid out, best we can figure it is going to take at least 6
    months from filing the appeal to a resolution with a decision
    by the FFIEC ombudsman. And 6 months in a critically challenged
    bank, that is a really precious period of time in terms of
    getting problems resolved.
        I would also say on the retaliation point, our examiners
    believe in the appeal process. They share the information with
    bankers. Everybody respects the appeal process. In addition,
    our ombudsman, once he renders a decision, 6 months after that
    decision is rendered, he contacts the bank personally to talk
    to them and ask whether they have experienced any retaliation.
        And then he makes a second contact 6 months after the first
    examination activity after the appeal has been decided. So not
    only do we encourage the bank to come back to us if they have
    any concerns about retaliation, but he reaches out to them to
    specifically inquire whether they have any concerns in that
    area.
        Chairwoman Capito. The gentleman's time has expired.
        Mr. Hinojosa. Thank you for your response.
        Chairwoman Capito. Thank you.
        Mr. Luetkemeyer for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman. As we go
    through this process, it is pretty obvious what is happening
    here. We had a situation 2 years ago where financial
    institutions had some problems and we as a Congress ran in
    there, threw some regulations out there, and thought we were
    going to solve the problem.
        And now, the pendulum has swung the other way. Now, we have
    a situation where we are overregulating. We are stymieing the
    economic growth of our communities, and as a result, are
    running some of our banks out of business one way by being too
    loosely regulated, now they are being too closely regulated.
        We have to find that balance in the middle. And to date, I
    have yet to hear any of you make that comment, that you
    recognize that the pendulum is over here on the far left, and
    it has to fall back to the middle. Do any of you recognize
    that, or you all think we need to still be way out here?
        Raise your hand. Anybody believe we are--too much? Okay.
    That is why we have the hearing today, and that is why you see
    the bill in front of us. Because you guys are ready to keep
    coming down heavy-handedly on all the institutions that you
    make our small communities the places where people want to go
    and start their businesses. That is what is happening.
        Here I have an example from a local bankers association in
    Missouri. Director Thomas Curry was given data that showed that
    one in four banks was being criticized for their HMDA
    procedures, which is what the rate is for the FDIC. But that is
    twice the rate of the OCC and the Fed.
        Why, Ms. Thompson?
        Ms. Thompson. Sir, respectfully, we have 4,400
    institutions. We have probably 2 or 3 times as many banks. But
    I do understand that we have been in touch with your office to
    talk about the HMDA process, which is very important because it
    involves fair lending issues. And we certainly are open to any
    discussions you would want to have.
        Mr. Luetkemeyer. Okay. My question is, why is it twice as
    many of the FDIC exams show problems with HMDA than the other
    ones? There is none. It is inconsistency of examinations. It is
    an example right there.
        You asked about the FDIC forcing banks to scrub their HMDA
    accounts. It is ridiculous. They come in and they brag about
    how many times that they are forcing banks to scrub their HMDA
    accounts, their book of business. That has to stop. Any
    response?
        Ms. Thompson. Sir, we value the dual banking system. We
    firmly believe in the viability of community banks. The FDIC
    has established a community bank advisory committee where we
    hear from community bankers directly. And we are getting ready
    to launch a huge initiative on community banking.
        Mr. Luetkemeyer. Ms. Thompson, with all due respect, I have
    been here 3 years. I have a banking background, a regulatory
    background, so the bankers come to me all the time with their
    problems and concerns. And I bring them to you, all of you up
    there.
        I have brought issue after issue after issue, and you have
    never listened to a single thing I have said. Not once have you
    responded to some of the individual items that we have talked
    to you about, never. So in 3 years, when we have a bill like
    this come before us, this is our response to you because you
    don't respond to us.
        How many consumers, Ms. Thompson, do you think read the
    HMDA forms that are in front of them? Do you have any studies
    on that to see how many of them actually read those things?
        Ms. Thompson. No, sir.
        Mr. Luetkemeyer. Don't you think that would be worthwhile?
        Ms. Thompson. I will forward that to our head of the
    Division of Depositor and Consumer Protection.
        Mr. Luetkemeyer. Okay. Because it is not a safety and
    soundness issue, is it?
        Ms. Thompson. Consumer protection and safety--
        Mr. Luetkemeyer. It is not a safety and soundness issue, is
    it?
        Ms. Thompson. They are two sides of the same coin, sir.
        Mr. Luetkemeyer. Ms. Thompson, we have, I think, a lot of
    concerns with a lot of the banks with the way they are
    examining and enforcing. I have another situation--I have
    another minute to go--with regard to home builders. The FDIC
    and a number of banking regulators are forcing a lot of banks,
    once they hit 100 percent capital threshold with a particular
    line of credit--whether it is real estate or real estate
    development--once they hit that threshold, whether it is good
    loans or not, they are saying you can't loan anymore.
        I have a quote for you right here from Ms. Sheila Bair. I
    am sure you remember who she is.
        Ms. Thompson. Yes, sir.
        Mr. Luetkemeyer. Back on May 26th, in response to my
    question about how the collateral should affect the
    classification, said, ``If the loan's performing, it's a good
    loan.'' Those are her words. So when you sit here and tell me--
    and we see over and over that we have situations where the
    capital is used as a threshold, rather than the quality of the
    loans, I think we have a huge problem.
        Do you agree?
        Ms. Thompson. Yes, sir. I agree. And I do think we are
    looking at that one component. But we also need to look at the
    borrower's ability to repay the loan as a part of that, as
    well.
        Mr. Luetkemeyer. Ms. Bair says if it is performing, it is a
    good loan. Therefore, they have the ability to repay, don't
    they?
        Ms. Thompson. That is correct, sir.
        Mr. Luetkemeyer. Okay. And if they have the ability to
    repay, why do we have to have a threshold? If 100 percent of
    those loans are good loans, and they are paying, should we have
    a cap?
        Ms. Thompson. We need to assess their ability to continue
    to pay, sir.
        Mr. Luetkemeyer. If they paid through this environment,
    don't you think they will continue to pay down the road?
        Ms. Thompson. Yes, to the extent that their loan has not
    been restructured with a below-market interest rate.
        Mr. Luetkemeyer. Ma'am, I just said they are performing
    loans.
        Ms. Thompson. Generally speaking, if it is a performing
    loan, we don't classify that loan.
        Mr. Luetkemeyer. I am not talking about classification. I
    am talking about putting caps on banks to be able to loan to
    certain groups of people, industry groups.
        We are putting those artificial caps. There is nothing in
    the FDIC rules about it. That is an artificial cap that you are
    imposing, is it not? There is no cap on the FDIC rules about
    developments, is there.
        Chairwoman Capito. The gentleman's time has expired. Yes,
    if the witness has a follow-up answer?
        Mr. Luetkemeyer. Thank you. Thank you, Madam Chairwoman.
        Chairwoman Capito. Mrs. McCarthy for 5 minutes?
        Mrs. McCarthy of New York. Thank you. And thank you for
    calling this hearing so we can all, hopefully, figure out how
    we are going to, certainly, represent our small community
    banks, our credit unions.
        Listening to all of you, and listening to the members of
    this committee, there seem to be some issues. But I am one of
    those--this morning, we had a hearing and we had two Governors
    here. One was a Republican, and one was a Democrat. And both of
    them were actually on the same page, where we all sit down
    together, work together and try to come up with solutions.
        Because no one is, here, I don't believe on what you are
    trying to do--and I also don't believe anyone here on this
    committee is trying to make problems. We are actually trying to
    solve problems. And so, that means working together and I think
    that is important.
        This particular piece of legislation requires that
    regulatory agencies develop and apply uniform definitions and
    recording requirements for non-performing loans. We understand
    that, mainly because we have just gone through some terrible
    times and we want to make sure that they are doing the right
    thing.
        Ensuring that standards work for the smallest and the
    largest financial institutions, and allowing the flexibility to
    address the unique situations certainly of the smaller
    institutions, is important. You have your large institutions,
    you have your small institutions. You have the same thing with
    our credit unions. Each one of them has different, unique
    issues.
        And they do. We have seen that over the last couple of
    years. So do you feel that uniform standards for non-performing
    loans are achievable? Or is there an alternative way to bring
    consistency to the loan classification process?
        One of the things that I heard from my colleagues,
    especially with the examiners--and it didn't seem to matter
    where across-the-board--are they getting enough training,
    really, on what to look for so they can be working with the
    banks instead of causing problems? And I will throw that up to
    everybody.
        Mr. Bertsch. We spend a lot of time training our examiners
    on how to classify loans. And it is something that takes a lot
    of time. It is something that we devote weeks of formal
    training to and a lot of on-the-job training, as well as
    providing specific guidance to the examiners on how to approach
    specific situations.
        It is very hard to boil down the judgments that examiners
    need to make and the different circumstances that they
    encounter into a very short statement of guidance that says,
    this is how you are going to do it consistently. And I think
    when we look at the bill, where we think there could be some
    clarification is making sure that we recognize that there are
    nuances in terms of how loans are classified and how they need
    to be thought of from an accounting perspective.
        One thing that I would commend to the attention of the
    subcommittee is the interagency guidance that was issued on
    prudent commercial real estate workouts. In that guidance,
    which was 33 pages, we went through very specific examples of
    how we would approach fact situations for loans. You can see
    from looking at those 33 pages that the same types of loan can
    have very many nuances in them.
        So what we are concerned about when we talk about the
    difficulties in taking judgment away from examiners is that
    there are a myriad of situations that you can encounter. And
    bankers do the same thing. Bankers, I imagine, would tell you
    they go through the same process when they evaluate their
    loans. And that if you ask them to summarize their process in
    one sentence, they might tell you that is quite difficult to
    do.
        So my point is, we train our examiners very hard. We teach
    them through in-the-field training. We provide very detailed
    guidance where we can, such as the prudent workout guidance. We
    provide extensive information in the CALL Report instructions
    on how to report and account for loans.
        If an examiner needs to know the nuances of non-accrual
    designation, there are three pages of glossary items specific
    to non-accrual that address specific items that we have seen
    over the years. The point overall is that we do believe very
    strongly that there can be consistency and we do believe very
    strongly that there should be consistency.
        We also recognize--because this is our business, we do it
    every day--that the circumstances we encounter and the loans
    that we encounter are very hard to boil down to simple
    statements or sentences. That is where we would like to work
    with the subcommittee to try to explain where those concerns
    come from, and perhaps explain a little bit more about how we
    train our examiners and how we ensure consistency.
        Mrs. McCarthy of New York. Just quickly, because my time is
    over already, unfortunately. If the rest of you could--it
    doesn't have to be a long--listen, this is a very technical
    bill. If you could send me your answers, I would appreciate it,
    so that we can certainly work with you and try and come to some
    conclusion on how we can work together so that you are doing
    your job. And certainly, our banks and credit unions can work
    together.
        Thank you.
        Chairwoman Capito. Thank you.
        Mr. Canseco, 5 minutes?
        Mr. Canseco. Thank you, Madam Chairwoman.
        Good afternoon, ladies and gentlemen of the panel. This is
    for all of you. On average, how long does it take each of your
    agencies to complete examinations and report the results back
    to the financial institutions?
        Mr. Bertsch?
        Mr. Bertsch. For a community bank, it takes us an average
    of 75 days from the start of the exam to the finish. We have a
    60-day guideline that we provide our reserve banks from the
    time of the exit meeting to provide the exam report to the
    institution. We try very hard to meet that deadline. We hit it
    in about 85 to 90 percent of the cases.
        Mr. Canseco. All right.
        Ms. Thompson?
        Ms. Thompson. For the FDIC, it is 45 days for risk
    management, start date to finish. And for compliance only, it
    is 90 days. Compliance and CRA, it is 120 days.
        Mr. Canseco. Mr. Marquis?
        Mr. Marquis. All of our exams have to be done, start to
    finish, within 60 days. And that is mostly accomplished all of
    the time. Most of them get done in less than 30 days, including
    issuing the exam report to the credit union.
        Mr. Canseco. And Ms. Kelly?
        Ms. Jennifer Kelly. We try to have the exam report back
    within 60 days. But as I said in my testimony, there certainly
    are circumstances where it takes longer than that. And we are
    not going to rush to issue a report if there is further work
    that needs to be done.
        Mr. Canseco. So how often would you say your agencies
    received complaints from financial institutions about delays in
    the examination procedures? And again, we will start with Ms.
    Kelly.
        Ms. Jennifer Kelly. I couldn't give you an exact number. We
    do receive complaints. And in those cases, the appropriate
    managers follow up directly with the institution.
        The other thing I would stress is that we encourage our
    examiners to have ongoing communication with the bank
    throughout the exam process so they clearly understand what our
    findings are, where we are in the process, and what the
    timeline looks like.
        Mr. Canseco. Mr. Marquis?
        Mr. Marquis. I can't recall any. But some may have been
    issued to the regional director, who addressed those issues
    very quickly.
        Mr. Canseco. Thank you.
        Ms. Thompson. We receive some complaints. And I don't have
    the numbers in front of me, but there usually are complex
    circumstances or an exchange of information in those
    circumstances.
        Mr. Bertsch. We are aware of complaints on that issue. I
    can't give you the exact number, but it is an issue that we
    look at as part of our oversight of the Federal Reserve Banks
    when they do the exams. We actually are planning this year to
    do a specific review looking at the processing of exams to
    respond to information that we are getting that there are some
    concerns about this.
        Mr. Canseco. And finally to the array, do you all agree
    that delaying examination reports can have an adverse effect on
    the industry? And do they cause greater uncertainty, especially
    for smaller institutions?
        Mr. Bertsch. The timing can be an issue in getting
    information back to institutions. However, it is very
    important, in some complex and problematic institutions, to
    take the time to get the message right and to get the message
    documented appropriately.
        As the subcommittee has impressed upon us today, it is very
    important that we communicate very carefully and we support
    very carefully our conclusions. Therefore, there are some
    instances in which we think it is appropriate to go beyond
    those deadlines.
        Ms. Thompson. I would agree with that. I think it is
    important to get the final report of examination for the
    record, for the financial condition of the bank, right. And I
    do think that there are extenuating circumstances where
    information needs to be exchanged, but I think it is critical
    to get that final ROE right.
        Mr. Marquis. Same with us. Timely delivery of an exam
    report is very critical if you identify problems that need to
    be corrected. We even do a post-internal control review, as
    opposed to one before an exam is issued, so that exam report
    gets in the hands of officials very promptly.
        Ms. Jennifer Kelly. I would agree with the comments of the
    previous folks. And I would just add that we do have ongoing
    communication with the bank throughout the process. So it is
    not that they don't know what we are thinking and what we are
    working on. They are aware of any issues that we have
    identified. It is just making sure that the final product that
    is issued is fully supported.
        Mr. Canseco. Thank you very much.
        And now, Ms. Kelly, in your testimony you stated that the
    OCC's ombudsman does an adequate enough job. So if this is the
    case, why do the witnesses on our second panel support the
    creation of an interagency ombudsman, in your opinion?
        Ms. Jennifer Kelly. I believe the--I read the ABA's
    testimony, Mr. Kelly's testimony. And he actually singled out
    the OCC ombudsman as saying it was different than the other
    agencies. So I can't really speak--I think it is better for
    them to speak to why they--
        Mr. Canseco. But I am just asking you if you have an
    opinion with regards to that.
        Ms. Jennifer Kelly. Why they are recommending--
        Mr. Canseco. Right, yes.
        Ms. Jennifer Kelly. Obviously, they believe there would be
    greater independence if it was an interagency process.
        Mr. Canseco. Ms. Thompson, much of the banking industry
    considers the OCC's interagency process to be the most
    effective. They attribute this to the fact that the OCC's
    ombudsman is independent of the supervisory authority. So how
    does this differ from the FDIC's interagency review process?
        Ms. Thompson. Our supervisory appeals review committee is
    established by our Board of Directors. The FDIC, again, is run
    by a Board and the Board established this committee that is
    empowered to overturn supervisory decisions.
        They are independent and composed of individuals from the
    highest level. A member of our Board sits on this committee,
    and no one from the supervision process participates on the
    committee at all. So the highest level of our agencies can
    overturn supervisory--
        Mr. Canseco. My time is up, but if I may just follow up
    here. So what you are saying is that your ombudsman is also
    independent?
        Ms. Thompson. Our ombudsman is a mediator between the bank
    and our agency. The Supervisory Appeals Committee is a
    committee that is established by--
        Mr. Canseco. I understand that.
        Ms. Thompson. --the FDIC Board of Directors.
        Mr. Canseco. I understand that. So you are saying that it
    doesn't differ from the OCC's ombudsman facility?
        Ms. Thompson. The OCC has a single person. The ombudsman
    can overturn supervisory appeals with the concurrence of the
    Comptroller, I believe. And our supervisory appeals committee
    can overturn supervisory decisions, as well.
        Mr. Canseco. Thank you very much. My time is way up, and I
    apologize for that.
        Thank you.
        Chairwoman Capito. Thank you.
        Mr. Scott, for 5 minutes.
        Mr. Scott. Thank you, Madam Chairwoman.
        I would like to address my questioning on two points as a
    result of listening to this discussion. One, of course, is the
    inconsistency that I brought up between what the policies are,
    we are trying to do here in Washington, and the banks feel that
    that these examiners on the ground are walking in another
    direction.
        And I would like to get, first of all, your opinions on
    that. Is that true, Ms. Thompson?
        Ms. Thompson. We have heard this, and in direct response to
    this, I know last year we did issue a Financial Institution
    Letter that we sent to all FDIC-supervised institutions
    explaining what our appeals process was, and explaining the
    ombudsman's role. We meet with bankers regularly. Our Regional
    Directors meet with them and we meet with our field staff
    regularly because this is of concern to us. We--
        Mr. Scott. So you have been getting those same complaints?
        Ms. Thompson. That is correct.
        Mr. Scott. Okay. Is that true across-the-board for the rest
    of your regulators?
        Ms. Jennifer Kelly. I would say we hear those general
    comments. But, obviously, our response to that is, please come
    to us with specific examples so that we can look into it and
    figure out where the disconnect occurred. And that is one value
    of our appeals process; it is an opportunity for the bank to
    come to us when they feel something is happening locally that
    isn't consistent.
        Mr. Scott. And so now we are addressing that in Section
    1013 in the bill, and you all are pretty happy with that? Are
    we moving in the right direction with what we are doing there?
    You have no problems with Section 1013? I gather that you
    don't, then. That is very good.
        Now, let me ask you about the other issue. And that is this
    issue that we are trying to resolve in Section 1015, which is
    this appeals process. And this issue of retaliation, is that a
    fact? How many complaints do you get on that? And is this a
    very, very real issue? And what do our bankers, when they come
    to us and tell us that they fear retaliation--what are you
    doing to them that gets them into that angst? How are you
    retaliating against them? And for what?
        Ms. Jennifer Kelly. Speaking for the OCC, I don't believe
    we are retaliating against them. And as I indicated before, we
    have processes in place to make sure that bankers have a venue
    that they can come back to us and indicate if they feel they
    have been retaliated against. But unless they come and talk to
    us--
        Mr. Scott. But, you see, unless we can get to the truth of
    this retaliation, we really are not putting enough water on the
    fire. So would you all agree that there is a culture of
    retaliation, that this is not a figment of these bankers'
    imaginations? That maybe there is? Because if you all don't say
    there is, then we can't even get to the solution to the
    problem.
        If they say there is retaliation and there are fearful of
    it, you have only had 11--let us see, you have had 11 formal
    appeals in 2010 at the OCC, and other agencies among you had
    low numbers, as well. Is that indicative of the fact you have
    so low numbers that the reason why they are so low is that
    these bankers are afraid of retaliation? I would like to really
    get on the record, do we have retaliation going on or don't we?
        Mr. Bertsch. We do not tolerate retaliation from our
    examiners, and we have a process whereby our ombudsman would be
    in contact with the bankers who file appeals. Or if they want
    to discuss something confidentially, they can.
        Mr. Scott. So you are saying that you direct them not to
    retaliate. My question is, is there retaliation? Not that you
    all retaliate, but I am simply asking is there evidence that
    there has been retaliation?
        Mr. Bertsch. I am not aware of a specific--
        Mr. Scott. Are there none?
        Mr. Bertsch. --retaliation that would cause bankers to fear
    bringing issues to the attention of the regulators. I do want
    to point out that a lot of these follow-ups are handled
    confidentially. They are handled in a separate unit from the
    supervision function at the Federal Reserve. And the ombudsman
    has the power to follow up on any concerns of retaliation and
    bring that directly to a committee of the Federal Reserve Board
    of Governors for resolution.
        I imagine my colleagues have similar setups in their
    agencies. We hear what you are hearing, that bankers say they
    are concerned about retaliation. We have safeguards in place to
    make sure that retaliation doesn't happen. And I think one
    observation I would make, and that I think my colleagues have
    been making all day, is that the examination process, in and of
    itself, is a constant process of comparing what we think our
    findings are with what the banker's view is and coming to a
    consensus view on what those issues are.
        A lot of these processes are differences of opinion or
    differences of view. By the nature of the examination process,
    they are aired during the examination process and then can get
    aired at several points along the way in exit meetings or
    through the issuance of reports which may get discussed with
    the district management, or with us.
        So there is a lot of opportunity to resolve differences
    before a bank goes to the formal appeals process. We believe
    that what works most effectively is to handle differences in an
    informal process. It is more timely. It can be more efficient
    to get to the issue.
        And quite honestly, I have worked with examiners for 20
    years. They are very concerned about getting things right,
    about making sure they support their findings, and about doing
    the right thing. They are very attentive to their--
        Chairwoman Capito. The gentleman's time has expired.
        Mr. Bertsch. --responsibilities.
        Chairwoman Capito. Thank you.
        Mr. Pearce?
        Mr. Pearce. Thank you, Madam Chairwoman.
        Ms. Thompson, if I understood your answer to Mr.
    Luetkemeyer, that retaliation is prohibited in the FDIC
    internal regulation, is that correct?
        Ms. Thompson. Yes, sir. It is.
        Mr. Pearce. Does that mean that you believe that it is not
    occurring, then? It is against the rules.
        Ms. Thompson. I believe that our examiners are highly
    dedicated and very professional. I believe that differences can
    and have been worked out, not always to everyone's
    satisfaction.
        Mr. Pearce. And you just don't believe people would break
    the rule?
        Ms. Thompson. I would ask that those instances be brought
    to my attention, and I would handle those--
        Mr. Pearce. Did you know that there are 185 people in your
    department who don't pay their taxes--$3,155,313, 185 people?
    That doesn't give me a great deal of reassurance that the FDIC
    is sitting out there following all its internal rules, when
    they are not following the basics of paying taxes, which is
    part of the 99 percent's responsibility, I guess.
        And maybe you understand the suspicion with which we regard
    the reassurances that our constituents are not being nailed up
    on a wall when we see documents like that. The Federal Reserve
    Board, by the way, is only 91 people, and $1.2 million, don't
    pay their taxes in your department.
        Ms. Kelly, you had mentioned on page 13 that you are
    concerned about Section 1013(a)-1. And when I look at the bill,
    that section is about commercial loans shall not be placed in
    non-accrual status solely because the collateral for such loan
    has deteriorated in value. And you are concerned about that
    provision. Does that mean that occasionally collateral
    writedowns occur?
        Ms. Jennifer Kelly. I am sorry, could you--you are asking
    me do writedowns on the loan--
        Mr. Pearce. Do collateral writedowns occur?
        Ms. Jennifer Kelly. The loan balance being written down, or
    the--
        Mr. Pearce. No, not the loan balance. Are loans classified
    because of the collateral value?
        Ms. Jennifer Kelly. Yes.
        Mr. Pearce. Yes.
        Ms. Jennifer Kelly. If it is a collateral--
        Mr. Pearce. Ms. Thompson, does that occur at the FDIC?
        Ms. Thompson. Yes.
        Mr. Pearce. Yes. Yes? Could you state that more clearly?
    Yes?
        Ms. Thompson. A loan will not be put into non-accrual just
    because of the deterioration of the collateral value. I think
    that if there is a deterioration in the collateral value, that
    deterioration is written off as a loss.
        Mr. Pearce. It could cause a classification?
        Ms. Thompson. And the rest is a substandard loan, the
    remaining loan.
        Mr. Pearce. And substandard would be described how?
        Ms. Thompson. A classified loan.
        Mr. Pearce. Substandard. What if a loan has never missed a
    payment? Would that be substandard?
        Ms. Thompson. That would be performing, and it wouldn't
    be--
        Mr. Pearce. It is a performing loan, and you are saying
    that those loans would not be written down?
        Ms. Thompson. Generally speaking, performing loans--
        Mr. Pearce. Just based on collateral?
        Ms. Thompson. Generally speaking, yes.
        Mr. Pearce. Generally speaking, yes, they would be? Or yes,
    they would not be?
        Ms. Thompson. Generally speaking, a performing--
        Mr. Pearce. Ms. Kelly has said that occasionally it will
    occur because the asset basis underneath, the collateral basis
    underneath, is being written down.
        Ms. Thompson. Sir, if it is a collateral-dependent loan, if
    the borrower has no ability to repay and the bank--
        Mr. Pearce. Okay. Because in New Mexico, I had a meeting
    with Indian-American hotel owners who came from Colorado,
    Texas, Arizona, and New Mexico who had never missed one
    payment, a whole group of them, who are being asked to provide
    more cash because the collateral was now being valued at less.
        Because, nationwide, hotels were not performing, so as a
    category they were just simply written down. And you are
    telling me that does or does not occur?
        Ms. Thompson. Generally speaking, it should not occur.
        Mr. Pearce. It should not occur.
        Ms. Thompson. Correct.
        Mr. Pearce. And yet, it does occur. You have just heard Ms.
    Kelly say that it does occur. So you all have an internal rule
    that is different than the OCC? Is that right?
        Ms. Thompson. No we don't, sir. If a loan--
        Mr. Pearce. Because I am seeing it happen, and you are
    hearing other people up here talk about it happening and you
    want us to just go away from this hearing that it doesn't
    happen?
        Ms. Thompson. Sir, every loan has facts and circumstances
    that are different. And to the extent that you have a loan and
    the collateral has depreciated, and there is no ability of the
    borrower to repay the loan other than the collateral, you
    classify the deficiency as a loss and the remaining loan is
    classified as substandard.
        Mr. Pearce. But these loans had never missed a payment.
        Ms. Thompson. Generally speaking, a performing loan is not
    classified. But we do have to look at the ability of the
    borrower to repay the loan.
        Mr. Pearce. If the collateral goes down and you are
    suspicious that it might not--Mr. French and I had a very
    engaging conversation, energized conversation, about this very
    matter is the reason I am trying to get it clear. Because your
    testimony still widely diverges from what our constituents tell
    us.
        Someday, I might invite you to New Mexico to come sit in on
    some of these meetings with boards, these stabilizing community
    banks and thrifts, that I see in Ms. Kelly's testimony. Because
    we are not seeing that stabilizing occurring that you are
    talking about.
        I yield back.
        Chairwoman Capito. Thank you.
        Mr. Lynch?
        Mr. Lynch. Thank you, Madam Chairwoman. Let me begin by
    thanking each of you. I think you have done an excellent job in
    explaining why you insist upon the policies that you do. And
    let me also thank you for protecting the American taxpayer.
    That is a lot of what this is about, to make sure that the
    deposits guaranteed by the FDIC and supported by the good faith
    in creditor of the American tax payer are not put in jeopardy.
        I also want to thank you for your restraint when the
    gentleman from Georgia asked you whether you thought Congress
    could mess this up worse than the regulators. Much appreciated.
    There has been talk here about a pendulum and regulatory
    enforcement. And look, I am just like everybody else. I get
    some complaints from my constituents about the way they are
    being treated.
        But I have to admit--I came into Congress in 2001, and I
    received very few complaints until about late 2007, 2008, when
    real estate values, commercial and residential, plummeted. And
    so, the underlying value in some of these projects went in the
    toilet, so to speak. And so the regulators, in trying to assess
    the creditworthiness of those borrowers, did a reassessment.
        It wasn't the pendulum of enforcement that changed; it was
    the value of the real estate. Some parts of my district in New
    England and across the country dropped 35 percent, 45 percent,
    55 percent. And so, there was a whole new analysis that had to
    be done on these commercial loans. So I don't think that the
    regulatory environment changed. I think that the world around
    us changed.
        And let me say also that in terms of the appeal process,
    this bill creates a huge new bureaucracy. I know that the bill,
    in part, creates what they call a new ombudsman. Now I have
    practiced a fair bit of administrative law in my prior
    practice, and an ombudsman is someone who is a mediator. They
    are not allowed to create new law. They are not allowed to
    enforce the law.
        Their decisions are not final and non-reviewable. In this
    case, under this bill, it should be the supreme examiner, not
    the ombudsman. Because this ombudsman can set aside--first of
    all, has a de novo hearing. It receives all the evidence that
    the court below did. It makes a new decision. It can set aside
    the agency decisions completely.
        And then their decision is final. The ombudsman's decision
    is final and unreviewable. That is unbelievable. So at least
    the Supreme Court of the United States, on occasion, remands
    back for more details. In this case, the ombudsman gets to make
    the final decision and basically upends all the agency work
    before him.
        We could just get rid of all the agencies and just have
    this one ombudsman make all the decisions. And by the way, this
    bill has no resources, no new resources. You are cutting--the
    Republican budget is cutting the resources for all these
    agencies. So I don't know where this new ombudsman and this new
    bureaucracy is going to get the money to do its work. That
    concerns me greatly.
        And I guess I don't have a--I think you have suffered
    enough with questions today, so I won't ask you a new one. I
    just want to thank you for your work. I think you are right on.
    I think, look, you could do your job better, like we all can.
        And I am sure there are those cases where our regulators
    are having a bad day and they overreach, but nowhere near the
    amount of overreach that is being exhibited here in this bill.
    So I want to thank you for your patience today. I want to thank
    you for your good work on behalf of the American taxpayer.
        And I yield back the balance of my time.
        Chairwoman Capito. Thank you.
        Mr. Huizenga?
        Mr. Huizenga. Thank you, Madam Chairwoman. And I, too, know
    you have been sitting here for a long, long time and I want to
    move on to this next panel, as well. I am somewhat pleased to
    hear the outrage from my colleague across the aisle at
    centralized power in bureaucracies.
        I am wondering if we can maybe direct a little of that
    towards the sort of appointed head of the CFPB and the
    centralized power that we have put in place there. But that is
    for another discussions. And I have been stepping in and out; I
    had a couple of phone calls and other things. I just want to
    make sure that I understand. Do any one of the four of you
    support this bill?
        Ms. Jennifer Kelly. No.
        Mr. Huizenga. No? Okay.
        Mr. Marquis? Ms. Thompson? I am assuming your silence means
    ``no.''
        Mr. Marquis. Not in its current form, because it has some
    very unique unintended consequences that could play out.
        Mr. Huizenga. Do you concur, both of you? So as we are
    looking at summaries of this and what sort of the points are,
    headings such as timely examination reports, you all believe
    that all of your reports are timely? Yes, I am seeing heads
    nod?
        Mr. Bertsch.We think they are timely. But as the gentleman
    just pointed out, we can always keep working on doing our job
    better.
        Mr. Huizenga. Okay.
        Mr. Bertsch. --so we can--opportunities.
        Mr. Huizenga. Okay. And that there are clear exam
    standards? You all believe that there are clear exam standards,
    that they are all consistent? Yes?
        Ms. Jennifer Kelly. Yes, I believe there are. But there is
    a lot of judgment involved in bank examination. It is something
    the agencies work together to continue to make sure they are as
    clear as possible.
        Mr. Huizenga. I think that is what my friend from New
    Mexico was trying to point out because I hear very similar
    stories like that. So therefore, there really is not a need to
    establish an office of an examination ombudsman or to expedite
    those appeals? You all believe that that is unnecessary?
        Ms. Jennifer Kelly. Yes, OCC does.
        Mr. Huizenga. Okay. I appreciate your candor. Those don't
    sound like huge problems to me, short of maybe the ombudsman
    creation. But I am looking at this and I think, as Mr.
    Luetkemeyer was saying, there is a sense of frustration
    oftentimes that what we are hearing from our constituents and
    try to express is not responded to. And I can tell you, owning
    a small sand and gravel pit where I have to deal with mine
    safety and health, MSHA, I talk to other smaller operators who
    have significant issues.
        My inspector is always great. Just ask me. Unless you
    really want my opinion. There is that exact same sense, and I
    am seeing some of our friends who are regulated sort of making
    that exact same face that I would have. They will tell you
    until the cows come home that everything is fine. They will
    then tell us that things are not fine, because they are very
    much afraid of what is going to happen, rules or no rules, of
    retaliation.
        Human nature dictates that there are going to be times--if
    they are raising a ruckus about the work that someone has done,
    one of your examiners has done--there, in all likelihood, is
    going to be a problem for them on the back end. And whether it
    is those writedown rules--now, I am coming from Michigan, and
    we have had a decade of challenges--and I am coming out of the
    construction industry in Michigan, real estate background,
    construction background.
        It is a very difficult environment. And I have my banks,
    and especially those smaller community banks, saying, ``Hey,
    Huizengas, we know that you are good for it. We have been doing
    business with you for 60, 70 years as a family. But guess what?
    Our examiner doesn't want us to have a brand new loader on our
    books because construction isn't going well in Michigan.''
        I am betting that you are not laying that out as a
    prescriptive. That is the judgment part you were talking about,
    I am assuming. And I guess what the frustration is, and why I
    believe that why you are seeing it in this particular
    legislation, is that people are not feeling hurt. They are
    looking for openness and genuineness, and they don't feel like
    they are getting that.
        So my time is going to be up. I don't know if anybody has a
    quick response before my time is up, but I want to make sure
    that we are able to get to this panel. So thank you. And thank
    you for, hopefully, hearing what we are saying up here.
        Chairwoman Capito. Thank you.
        Mr. Carney for 5 minutes?
        Mr. Carney. Thank you, Madam Chairwoman.
        I yield to my friend from Massachusetts for 1 second.
        Mr. Lynch. I thank the gentleman. Madam Chairwoman, I have
    here a report by the Americans for Financial Reform, and I
    would ask that through unanimous consent, it be entered into
    the record.
        Chairwoman Capito. Without objection, it is so ordered.
        Mr. Lynch. Thank you.
        Mr. Carney. Thank you, Mr. Lynch. And thank you to the
    chairwoman and the ranking member for having this hearing
    today, and for putting forth and sponsoring this legislation,
    which I frankly think is a fairly common-sense approach by the
    Members on both sides of the aisle here in this committee to
    address frankly the concerns that we have heard from our
    constituents.
        And I am glad that Mr. Huizenga took us through section by
    section of the bill. Because as I look at it, it is pretty
    straightforward, pretty simple. And it doesn't, in my view,
    violate the accounting standards or other things that, frankly,
    some of the other legislation that has been brought to us by
    banking institutions, by other interest groups, to address
    really what is a very difficult problem. And that is the
    disconnect between the regulators, the agencies at your level
    and the field examiners.
        We had a very interesting and long conversation with Sheila
    Bair, the former Chairman of the FDIC, when she was here a few
    months ago. And again, she heard from us, Democrats and
    Republicans, the same thing. Basically, we were talking about
    situations, specific situations, that we have been hearing from
    the institutions in our districts, and it reflected what you
    heard today.
        So we came up with this piece of legislation, which does
    really pretty simple things that--reports in Section 2,
    examination standards. I would like to come back to that, the
    ombudsman and the appeal process. As I heard all of you, you
    said you didn't like the ombudsman because you had it, and you
    didn't like the appeal process because you have that, and there
    is no responsibility that goes with that.
        And I understand that and appreciate that concern. So to
    me, the big issue, I think, is the examination standards;
    which, as I said, are not at all like some of the things that
    have been brought to us in pieces of legislation. In fact they
    are your standards, are they not?
        And I heard you say judgment and flexibility. But why is it
    unacceptable for us to put these standards in here, in the way
    that it has, to try to bridge the gap that we are hearing from
    people at your level and from the field examiners and the
    people that they examine.
        So why don't we start on this end. Ms. Kelly?
        Ms. Jennifer Kelly. I will start with that. You are correct
    that, to a certain extent, there is an alignment with our
    standards. I have referred before to the call report
    instructions, but there are many more aspects that have to be
    considered in terms of the decision about whether to put a loan
    on non-accrual or leave it in accruing basis.
        And that--
        Mr. Carney. So is it your view that this would not allow
    you to do that, this legislation?
        Ms. Jennifer Kelly. This ties it to whether payments are
    being made.
        Mr. Carney. Right.
        Ms. Jennifer Kelly. And as I discussed earlier, there is
    also the issue of collectability and whether it is reasonable
    to believe that full principal and interest is going to be
    collected.
        Mr. Carney. I would like to skip over you for a second
    because you are limited in terms of the commercial lending you
    can do.
        Ms. Thompson. Can I use an example concerning prohibiting
    regulators from requiring more capital for institutions that
    are well-capitalized? To the extent an institution has a risky,
    troubled loan portfolio, the proposed bill would prohibit us
    from requiring additional capital if the institution was well-
    capitalized.
        To the extent that the institution was to enter into, let
    us say, a risky business line, and the bill would not allow us
    to require additional capital. It would really limit us using
    our judgment and prior experiences to make sure that the
    institution was conducting its activities in a safe and sound
    manner and that they had sufficient capital to cover any
    losses.
        Mr. Carney. Right. So thinking through that, it is a
    question of additional judgment, I guess, or judgment that
    would take in other factors. Is there a way that we could
    address that and maybe cure some aspects of this legislation?
    There are certain things that you are not going to, I guess,
    like, which is the independence of the ombudsman in Section 4
    and the appeal process in Section 5. And I can understand that.
        But I really wanted to hone in on the examination
    standards. I know my friend, Mr. Renacci, wouldn't want to
    change accounting standards, as a practicing accountant
    himself. And we have attempted to try not to do that kind of
    thing. Is there a way that we can cure this?
        Ms. Thompson. We are happy to work with the committee on
    anything that would improve the examination process. But again,
    we really want to make sure that the flexibility that the
    examiners have is preserved in terms of dealing with the
    individual facts and circumstances surrounding institutions and
    loans. There are 7,000 institutions in this country. Every one
    of them is different. Every loan is different.
        Mr. Carney. My time has run out. Thank you for your
    willingness to do that. And I hope you understand the tension
    that we are feeling from those in our banking institutions that
    we represent, and the disconnect between the field examiners
    and the advice that you have given.
        Thank you, Madam Chairwoman.
        Chairwoman Capito. Mr. Manzullo is recognized for 5
    minutes.
        Mr. Manzullo. Thank you. How many on this panel are going
    to stick around to hear the next panel? Would you do that? I
    know you are busy. It is important because the victims are
    behind you, and they should have an opportunity to speak and
    have you listen to them.
        But I want to share with you where, in the testimony by Mr.
    Marquis, there is I think one of the most outrageous and
    arrogant statements I have seen in my entire life before this
    committee. Go to page 9, please, and I am going to read it for
    you. ``H.R. 3461 would greatly raise NCUA's administrative
    costs.''
        It talks about how ``the legislators' expansion of the
    existing definition of material supervisory determination would
    make virtually all examiner findings, recommendations, and
    action plans subject to formal appeal.'' Listen to this, what
    you said: ``In response, NCUA examiners would need to document
    each and every finding with specific references to NCUA rules
    and regulations.''
        You tell me what is wrong with that. The Sixth Amendment,
    sir, requires--says that ``an accused shall be informed of the
    nature and cause of the accusation.'' Anybody who is charged by
    your organization has an absolute obligation to tell the bank
    or credit union exactly, according to the rules and
    regulations, what they have done wrong.
        Why did you put that in your testimony?
        Mr. Marquis. Yes, sir. We do reference all of our rules and
    regulations for violations and safety and soundness issues
    where there are statutory violations. There are a lot of issues
    that we issue through guidance or examination procedures that
    deal with internal or operational risk of a credit union. All
    of the operational risk issues of a credit union are not
    documented in a regulation.
        Mr. Manzullo. Then, they should be. Because you are saying
    they are doing something wrong. Then why shouldn't you cite
    chapter and verse as to exactly why they are doing it wrong? Is
    that asking for too much?
        Mr. Marquis. But if we had a rule and regulation for every
    operational issue we encounter under safety and soundness, we
    would have an awful lot of regulations.
        Mr. Manzullo. Now you know what the banks feel and the
    savings & loans. Let me just read to you some of the testimony,
    which I hope you stick around and listen to. Ken Watts, on
    CUNA, he says, ``Twenty-seven percent of the respondents
    reported dissatisfaction with the recent exam because the
    examiners would offer their best practices rather than legal
    and regulatory requirements.''
        Eugene Ludwig of Promontory says, ``Regulations grow like
    barnacles on a ship.'' No one knows what is going on. The
    examiners can't tell them what they are doing wrong. They ask
    for something in writing, nobody quotes chapter and verse on
    it.
        Take a look at the ABA, Albert Kelly: ``To ensure a fair
    hearing, the ALJ's decision is based upon an independent review
    of the agency's action and by the relevant statutes,
    regulations and appropriate guidance.''
        If you look at the testimony coming up of NAFCU, she says
    that ``notwithstanding changes of regulations, the standards by
    which a credit union is evaluated, examinations should not
    change from exam to exam.'' The big problem here is the fact
    that they don't know what to do.
        If somebody does something wrong, you have an obligation,
    sir, in writing, to let them know exactly what they are doing
    wrong. And you are not doing that, and that is what the bill
    says. If they are doing something wrong, then you tell us which
    regulation and which law they are violating. Is that asking for
    too much?
        Mr. Marquis. We do discuss with them what the elements of
    risk are.
        Mr. Manzullo. No. Would you answer my question, please?
        Mr. Marquis. Do we tell them what regulation they are
    violating? We don't have--
        Mr. Manzullo. Yes.
        Mr. Marquis. We do not have a regulation for every
    operational risk issue in a financial--
        Mr. Manzullo. Then that becomes the independent judgment of
    the regulators that floats from regulator to regulator? You
    don't have any standards?
        Mr. Marquis. We do have exam standards, sir.
        Mr. Manzullo. Those might be exam standards. But you are
    complaining because NCUA examiners would need to document each
    and every finding with specific references to NCUA rules and
    regulations. Is that asking for too much? Yes or no?
        Mr. Marquis. Yes, it is, when we talk about regulations
    that pertain to operational risk issues that are not actually
    contained in a regulation, per se. And they are generally done
    under the judgment of the risk--
        Mr. Manzullo. Under the judgment of the risk.
        Mr. Marquis. --on a balance sheet that is--
        Mr. Manzullo. On a balance sheet.
        Mr. Marquis. --very different based on management's
    capabilities, and the size and scope of the institution.
        Mr. Manzullo. But that would be--then it would violate a
    rule and regulation. Isn't that correct?
        Mr. Marquis. Not necessarily.
        Mr. Manzullo. Oh.
        Mr. Marquis. We don't have a regulation that says that you
    want to write loans in a concentrated level, all to substandard
    borrowers. That is a--
        Mr. Manzullo. No, I can--
        Mr. Marquis. --a concentration risk that exists that
    becomes a problem.
        Mr. Manzullo. I can understand. But the purpose of
    legislation is so these people know why they are being written
    up. I had a ridiculous situation occur with a community bank, a
    partnership. Two brothers, 30 years at the same bank, were
    denied a line of credit. You know why? The regulator said, you
    didn't have any surplus left in your Sub-S corporation. It had
    all been spun out to the brothers.
        That is the type of stuff we hear over and over again. But
    I would challenge you. This is why they are upset. And I would
    also ask you to stay here and listen to the people who are
    going to testify. Are you willing to do that, the four of you?
    Is anybody here wiling to listen to them?
        Ms. Thompson?
        Ms. Thompson. Yes, I will.
        Mr. Manzullo. Mr. Bertsch?
        Mr. Marquis?
        Mr. Marquis. Sure.
        Mr. Manzullo. Ms. Kelly? All right. So let the record show
    that the panel, the first panel, will be present for the entire
    testimony of the second panel. Thank you.
        Chairwoman Capito. Should I take attendance?
        Mr. Manzullo. Yes.
        [laughter]
        Chairwoman Capito. Thank you. I want to thank the
    witnesses. It has been lengthy. And I appreciate your
    willingness to hang in with us and answer what I think are very
    important questions.
        So I am going to dismiss the first panel and ask the second
    panel to come up. And I will be back in a few minutes.
        [Recess.]
        Chairwoman Capito. Back to order please. I would now like
    to welcome the second panel. I would like to introduce them
    individually for the purpose of making a 5-minute opening
    statement. Our first witness is Mr. Albert C. Kelly, Jr.,
    chairman and CEO, SpiritBank, on behalf of the American Bankers
    Association.
        Welcome.

         STATEMENT OF ALBERT C. KELLY, JR., CHAIRMAN AND CEO,
      SPIRITBANK, AND CHAIRMAN, THE AMERICAN BANKERS ASSOCIATION
                                 (ABA)

        Mr. Albert Kelly. Thank you very much, Chairwoman Capito,
    and Ranking Member Maloney. My name is Albert Kelly, and I am
    president and CEO of SpiritBank in Bristow, Oklahoma, and this
    year's chairman of the American Bankers Association.
        The ABA strongly supports H.R. 3461, and appreciates the
    leadership of Chairwoman Capito and Ranking Member Maloney in
    seeking changes that make an enormous difference in banks'
    ability to meet the needs of their communities in a safe and
    sound manner.
        The banking industry and bank regulators share the same
    goal, to have a strong banking system that meets the needs of
    customers in a safe and sound manner. How that is accomplished,
    however, makes an enormous difference. Because the banking
    system is vital to the economic health of our Nation, the
    manner in which it is regulated has a direct impact on the
    country's economic growth and vitality.
        There is no question that the regulatory pendulum has swung
    too far in reaction to the financial crisis. Overly
    conservative examinations translate into less credit in local
    communities, and that means businesses grow more slowly and
    create fewer jobs.
        H.R. 3461 takes a major step toward a more balanced
    approach. It is rooted in the fundamental principles of
    accountability, transparency, and quality assurance regarding
    how and on what basis decisions are made by the regulatory
    agencies in the examination process. Let me touch on a few of
    the many key provisions in this important bill.
        One way to foster fair exams is to ensure there is a
    meaningful avenue to appeal exam findings when a bank disagrees
    with its examiner. H.R. 3461 addresses this by establishing an
    independent ombudsman's office as part of the FFIEC, which is
    made up of the bank agency heads.
        The FFIEC's congressional mandate is to provide for the
    uniform application of interagency examination standards. We
    believe that a timely and independent appeal process, which
    includes the opportunity to have a hearing before an
    administrative law judge, will hold the banking agencies
    accountable to this mandate.
        The bill does not change any agency's existing appeals
    process. Instead, it adds an alternative route for banks to
    deal with an independent entity set up to address exam issues
    quickly, fairly, and consistent with interagency standards. It
    is the opportunity to take an appeal, not the frequency of
    appeals, that makes the process an effective check and balance.
        ABA is confident that the vast majority of supervisory
    matters would continue to be resolved without resorting to a
    formal process, as is the case today. H.R. 3461 also helps
    improve consistency in the application of interagency
    guidelines. Over the last several years, it was not uncommon to
    hear about inconsistent and unnecessary requirements by
    examiners.
        For example, banks have reported that examiners have
    required them to treat many performing commercial loans, where
    the borrower is making payments as promised, as non-accruals
    solely because of decline in collateral value. Such a treatment
    is not consistent with regulatory guidance or the definition of
    a non-accrual.
        We all want fair treatment of what is truly a troubled
    loan. However, the problem is bigger than the question of non-
    accruals. There are many related issues. How loans are
    classified as problem loans for regulatory purposes, how those
    loans are required to be valued, including those loans subject
    to modification characterized as troubled debt restructurings,
    how capital is calculated as a result of these classifications,
    these are all major issues.
        The consequences are broadly felt. Even profitable
    community banks with capital ratios at or above those of their
    peers, and above regulatory guidelines, are being told their
    capital is inadequate and to increase it. This inevitably
    impacts banks' ability to meet the credit needs of their
    communities.
        In conclusion, community bankers like me work every day to
    serve the needs of our customers and your constituents. H.R.
    3461 would make an enormous difference in banks' ability to
    meet the needs of all of our communities. We strongly support
    the legislation and urge its enactment.
        I am happy to answer any questions. Thank you.
        [The prepared statement of Mr. Kelly can be found on page
    75 of the appendix.]
        Chairwoman Capito. Thank you. Our next witness is from my
    native West Virginia, and he does a great job of representing
    the West Virginia Credit League. So I would like to welcome Mr.
    Kenneth Watts, president and CEO, West Virginia Credit Union
    League, on behalf of the Credit Union National Association.
        Welcome, Ken.

     STATEMENT OF KENNETH WATTS, PRESIDENT AND CEO, WEST VIRGINIA
      CREDIT UNION LEAGUE, ON BEHALF OF THE CREDIT UNION NATIONAL
                           ASSOCIATION (CUNA)

        Mr. Watts. Thank you. Chairwoman Capito, Ranking Member
    Maloney, and members of the subcommittee, thank you very much
    for the opportunity to testify in support of H.R. 3461.
        On the whole, the exam process appears to work fairly well
    for many credit unions. However, steps must be taken to address
    real problems that some credit unions have with examinations.
    CUNA has been raising these concerns with NCUA for years.
        Attached to our testimony are principles that CUNA
    developed over a year ago which address real problems that
    credit unions have had with their examiners. This demonstrates
    there is a disconnect between NCUA board policies and examiner
    practices. While no piece of legislation is perfect, H.R. 3461
    is a firm step in connecting board policies to examiner
    practices.
        The bill would grant credit unions access to the
    information used in the examination decisions. It would codify
    certain examination policy guidance. It would establish an
    ombudsman at the Federal Financial Institutions Examination
    Council to which financial institutions could raise concerns
    regarding their examination. And finally, the legislation would
    establish an appeals process before an independent
    administrative law judge.
        We are particularly pleased with the proposed Office of
    Examination Ombudsman, as well as the independent examination
    appeals process. These two steps could go a long way toward
    improving dispute resolution and alleviating some, but not all,
    of the concern regarding retaliation and prospects for success
    in the appeals process.
        While we are very supportive of this legislation, we have
    several recommendations designed to strengthen it. First, the
    legislation proposes deadlines for exit interviews in
    examination reports. Currently, NCUA generally meets or exceeds
    these deadlines. We hope the subcommittee will modify the bill
    to ensure that these deadlines do not become standard practice
    for regulators with a history of completing exit interviews and
    exam reports in less time than proposed.
        Next, the legislation will make available, upon the request
    of the credit union, information relied upon by examiners when
    making material supervisory determinations. In our view, this
    is information that credit unions should not have to ask for.
    It should be available to them as a matter of course. We
    encourage the subcommittee to remove the requirement that a
    credit union must ask for this information.
        With respect to the provisions for examination standards in
    Section 3, we encourage Congress to carefully consider
    potential unintended consequences resulting from the
    prescriptive nature of this language. In this regard, the
    provision requiring the regulators to develop and apply
    identical definitions and reporting requirements for non-
    accrual loans concerns us.
        We believe this language should be modified to allow NCUA
    to take into consideration the unique structural
    characteristics of credit unions. While we are very supportive
    of the creation of the examination ombudsman at the FFIEC, we
    have recommendations in this area as well. As currently
    envisioned, the examination ombudsman would receive complaints
    or concerns from financial institutions.
        To enhance the effectiveness of this office, we suggest it
    design and implement a voluntary survey to be completed by a
    financial institution at the conclusion of the examination
    process. Further, this office should routinely ensure that no
    retaliatory actions have been taken against an institution. As
    part of this function, the ombudsman should also reach out to
    institutions it has not heard from to ensure they are being
    treated fairly.
        Section 4 of the bill directs the ombudsman to review
    examination procedures to ensure that policies are being
    followed and adhere to the standards for consistency
    established by the FFIEC. We suggest the language be modified
    to take into consideration the unique structural
    characteristics of credit unions, as well as the level of risk
    represented by an institution's operations, size, and other
    relevant factors.
        Finally, whenever the regulatory or compliance burden
    changes, the cost of implementation is borne by the regulated
    entities. Recent history suggests that these costs for credit
    unions go only in one direction--up. Given the circumstances
    that have prompted Congress to consider legislation of this
    nature, few credit unions would view it as a net positive if
    the benefits of the legislation were accompanied by increased
    costs to credit unions.
        We encourage the subcommittee to add language directing the
    regulators to identify the additional costs associated with
    implementing this legislation and reduce expenses elsewhere.
    Over the last several years, NCUA has significantly increased
    its budget. With the financial crisis behind us, the
    improvements sought by this legislation could be paid for
    through reductions in expenses at the agency.
        Chairwoman Capito and Ranking Member Maloney, credit unions
    face a real crisis of creeping complexity with respect to
    regulatory burden. It is made all the more challenging by
    examination practices. H.R. 3461 would help make the exam
    process fairer and more consistent. We appreciate your
    leadership in sponsoring this legislation.
        We look forward to working with you as the bill moves
    through the legislative process, and I would be happy to answer
    any questions the subcommittee may have.
        [The prepared statement of Mr. Watts can be found on page
    147 of the appendix.]
        Chairwoman Capito. Thank you. Our next witness is Mr. Noah
    Wilcox, president and CEO, Grand Rapids State Bank, on behalf
    of the Independent Community Bankers of America.
        Welcome, Mr. Wilcox.

    STATEMENT OF NOAH WILCOX, PRESIDENT AND CEO, GRAND RAPIDS STATE
    BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
                                 (ICBA)

        Mr. Wilcox. Thank you, Chairwoman Capito, Ranking Member
    Maloney, and members of the subcommittee. As you said, my name
    is Noah Wilcox. I am president and CEO of Grand Rapids State
    Bank in Minnesota, and also a member of ICBA's executive
    committee. I am pleased to represent community banks and ICBA's
    nearly 5,000 members at this important hearing today.
        The Financial Institutions Examination Fairness and Reform
    Act, H.R. 3461, will go a long way toward improving the
    oppressive examination environment by creating a workable
    appeals process and consistent common-sense standards for
    classifying loans, among other provisions. ICBA is pleased to
    support H.R. 3461.
        Invariably, those who have filed an appeal have described a
    process that is arbitrary and frustrating. Appeals panels
    routinely lack the independence and market expertise necessary
    to reach an informed, fair, and unbiased decision. A fair and
    effective appeals process would provide relief from an exam
    environment that is discouraging lending at the very time that
    bank credit is needed to sustain the economic recovery.
        Specific concerns include write-downs of performing loans
    based on collateral value regardless of the cash flow of the
    borrower, second-guessing of appraisals, changing an
    unpredictable interpretation of existing laws, and moving the
    capital goalposts beyond what is required by regulation.
        While all banks accept the need for balanced regulatory
    oversight, the pendulum has swung too far in the direction of
    overregulation. Good loan opportunities are passed over for
    fear of examiner write-down or criticism and the resulting loss
    of income and capital. The appeals process, which might offer
    relief, is instead an additional source of frustration.
        A typical community banker can expect to spend a year or
    more in appeals, and incur as much as $150,000 in legal fees.
    What is worse, a bias in favor of the examining agency is built
    into this process. Panels assembled to hear appeals are drawn
    from within the agency and consult closely with the examination
    team. Lacking adequate independence, their incentive and their
    priority appears to back decisions already made by the agency.
        Bias, or even the appearance of such, as well as fear of
    retribution is enough to deter bankers from using the appeals
    process. This is why the small number of appeals does not match
    the frustration of community bankers over exams. Taking the
    appeals process out of the examining agencies, as H.R. 3461
    would do, is a positive step.
        And while not completely independent of the agencies, the
    FFIEC being composed of the five banking agencies, I expect
    this level of separation between the appeals process and the
    agencies will provide a measure of distance and some insulation
    that will perhaps raise the comfort level of bankers so that
    they are willing to use the process.
        ICBA would encourage members of this subcommittee to
    consider taking a harder line by adding provisions to the
    legislation that would bring a higher level of accountability
    to the regulators and their field examiners. The current
    system, which grants examiners almost unfettered, unassailable
    authority, begs for checks and balances.
        That said, we are pleased to support the appeals provisions
    of H.R. 3461 as a foundation on which to build a more rigorous
    process. ICBA also supports provisions of H.R. 3461 that would
    create more consistent and common-sense criteria for loan
    classifications and capital determinations.
        Among other provisions, no commercial loan would be placed
    on non-accrual status solely because its collateral has
    deteriorated, and a modified loan must be removed from non-
    accrual status after it has performed for 6 months. Also, an
    examiner would not be allowed to require a well-capitalized
    institution to raise additional capital based on loan
    classifications under this legislation.
        Establishing conservative bright line criteria will allow
    lenders to modify loans as appropriate, without fear of being
    penalized. Often the best course for the borrower, the lender,
    and the community is a modification that will keep the loan out
    of foreclosure.
        But many examiners are penalizing modifications by
    aggressively and arbitrarily placing loans on non-accrual
    status following a modification, even though the borrower has
    demonstrated a pattern of making contractual principal and
    interest payments under the loan's modified terms. If these
    standards become law, they will give bankers the flexibility to
    work with struggling but viable borrowers and help them
    maintain the capital they need to support their communities.
        ICBA appreciates the opportunity to testify today. The
    current examination environment is a serious impediment to the
    flow of credit that will create jobs and advance our economic
    recovery. Legislative solutions are clearly needed to improve
    this environment. ICBA and I support the advancement of H.R.
    3461.
        Thank you.
        [The prepared statement of Mr. Wilcox can be found on page
    163 of the appendix.]
        Chairwoman Capito. Thank you, Mr. Wilcox.
        Our next witness is Ms. Jeanne Kucey, president and CEO,
    JetStream Federal Credit Union, on behalf of the National
    Association of Federal Credit Unions. Welcome.

    STATEMENT OF JEANNE KUCEY, PRESIDENT AND CEO, JETSTREAM FEDERAL
    CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL
                         CREDIT UNIONS (NAFCU)

        Ms. Kucey. Good afternoon, Chairwoman Capito, Ranking
    Member Maloney, and members of the subcommittee. My name is
    Jeanne Kucey, and I am testifying today on behalf of NAFCU,
    where I serve on the board of directors. We appreciate the
    opportunity to share our views on H.R. 3461, the Financial
    Institutions Examination Fairness and Reform Act.
        I am the president and CEO of JetStream Federal Credit
    Union, headquartered in Miami Lakes, Florida. JetStream has
    $126 million in assets and serves more than 16,000 members.
        Credit unions were not the cause of the financial crisis,
    yet often feel the effect of punitive measures designed to reel
    in the practices of bad actors and other financial
    institutions.
        Part of the response to the economic crisis was to create
    new layers of regulations and institute more aggressive
    enforcement of existing law. Regulators have increasingly
    tightened examination standards. For example, since the start
    of the crisis, examination cycles for credit unions have gone
    from 18 months to 12 months.
        Having examiners visit an institution creates a burden in
    itself, as credit unions must dedicate staff time and resources
    to prepare and respond to the examination. NAFCU supports
    effective exams that are focused on safety and soundness, and
    flow out of clear regulatory directives.
        However, the examination process by its very nature can be
    inconsistent. Regulatory agents in Washington try to interpret
    the will of Congress, examiners in the field try to interpret
    the will of their agency, and financial institutions often
    become caught in the middle.
        Many credit unions, including mine, have positive
    professional relationships with their examiners. We believe
    that this type of working relationship is important in having a
    successful process focused on safety and soundness. To that
    end, NAFCU has prepared a White Paper to help our member credit
    unions work with the NCUA and their examiners, and I would ask
    that a copy be inserted into the record with my testimony.
        Unfortunately, not all institutions have a positive
    relationship with their examiner, and thus there are four areas
    where Congress can help improve the examination process. First,
    congressional intent. Congress must make its intent clear to
    regulators.
        Second, transparency. Transparency is critically important
    to our Nation's regulatory agencies to promote safety and
    soundness. Regulations, and any subsequent guidance, must
    include clear, tangible criteria which credit union executives
    can follow. Credit unions should have access to all materials
    and guidance that examiners use or reference during
    examinations.
        Third, consistency. Maintaining a consistent supervisory
    and examination environment is vital to ensuring compliance
    with both safety and soundness, as well as consumer protection
    regulations. Notwithstanding changes in regulation, the
    standards by which a credit union is evaluated should not
    change between exam cycles.
        Additionally, regulators should ensure that their
    regulations are consistently applied from one examiner to
    another. Credit unions struggle to comply with fluctuating
    standards when based on an examiner's reliance on informal
    guidance. This ultimately increases compliance costs, without
    any clear benefit.
        Fourth and finally, the examination appeal process. The
    appeal process has a number of inherent flaws, including the
    exclusion, in most instances, of a review by an independent
    third party at any level of the process. Currently, the
    regulator serves as the prosecutor, judge, and jury. An
    independent review process could help ensure objectivity and
    avoid conflicts of interest.
        Several provisions in H.R. 3461 will address our concerns,
    as it will improve transparency and consistency in a meaningful
    manner. In conclusion, I would note that NAFCU supports
    effective and necessary regulation that provides a clear,
    tangible benefit to credit unions and their members.
        NAFCU believes that the legislation under consideration is
    a positive first step in improving the examination process.
    Introducing an independent third party to the appeal process
    will ensure that consistent standards are applied and will help
    bring more certainty to the examination process.
        Thank you again, Chairwoman Capito, Ranking Member Maloney,
    and members of the subcommittee for the invitation to testify
    before you today, and I would welcome any questions that you
    may have.
        [The prepared statement of Ms. Kucey can be found on page
    104 of the appendix.]
        Chairwoman Capito. Thank you. Our final witness is Mr.
    Eugene Ludwig, founder and chief executive officer, Promontory
    Financial Group, LLC. Welcome.

    STATEMENT OF THE HONORABLE EUGENE A. LUDWIG, FOUNDER AND CHIEF
           EXECUTIVE OFFICER, PROMONTORY FINANCIAL GROUP, LLC

        Mr. Ludwig. Thank you, Madam Chairwoman, Ranking Member
    Maloney, and members of the subcommittee.
        I want to thank you for inviting me to comment on this
    significant piece of legislation which addresses important
    issues of balance and fairness in the supervisory process. I
    would like to commend you, Madam Chairwoman, Ranking Member
    Maloney, and the other members of the subcommittee for your
    concern for this topic, and in particular for your giving
    serious consideration to the expanded use of ombudsman programs
    as part of the Federal financial regulatory and supervisory
    system. I will focus my remarks today on the ombudsman issue.
        America is blessed with an uncommonly capable group of
    financial supervisors, examiners, and regulators at our Federal
    agencies. As Comptroller of the Currency, a Member of the Board
    of the FDIC, and Chairman of the FFIEC, I spent 5 years
    surrounded by members of this group and had daily occasion to
    be impressed with their dedication, energy, and commitment to
    the tasks before them. Their efforts, and the efforts of their
    peers at other agencies, remain essential to the health of the
    U.S. financial system and the well-being of the American
    people.
        Nonetheless, every human system has its flaws. People make
    mistakes or differ in their judgments, and regulators are no
    exception.
        At regulatory agencies, identifying and rectifying mistakes
    is, of course, important to the particular institutions and
    individuals affected. However, it is also incredibly important
    to the financial system as a whole and the integrity of these
    important regulatory mechanisms.
        With this in mind, in 1993, while leading the OCC, I
    created the first formal ombudsman program at any financial
    regulatory agency. The program was successful. Four years
    later, when I appeared before this very committee, that
    ombudsman and his staff had resolved 110 formal appeals and
    facilitated resolutions in 359 additional cases.
        In the time since, such agencies as the Federal Reserve,
    the FDIC, the FHFA, and NCUA have followed the OCC's example.
    Ombudsman programs recognize the strength of the supervisory
    relationship. They do not encourage laxity, nor should they.
        I am a very big believer in sound regulation and
    supervision of our financial system. We need tough, but clear
    and fair, financial rules, not just to protect consumers, but
    also to ensure the quality of our banks and the health of our
    economic system.
        What H.R. 3461 proposes--what could be described as a
    ``super-ombudsman''--is a new authority to review a broad array
    of supervisory activities at all the banking agencies. The
    notion of an interagency ombudsman is thoughtful and has
    considerable merit, worthy of the very serious consideration
    that you are wisely giving it.
        I would suggest a few modifications to the concept you have
    proposed. Since the Federal regulatory agencies already have
    ombudsman programs with talented and experienced people
    involved, I would suggest that the new super-ombudsman play
    more of a coordinating role among the ombudsmen at the
    regulatory agencies, and act as a safety valve or an appeals
    mechanism.
        Another, perhaps even better, way to achieve the same goal,
    and one that might involve less new governmental expense, would
    be the creation of a new, permanent ombudsman task force at the
    FFIEC with a rotating chairperson responsible for its work. The
    task force would be made up of all the financial agency
    ombudsmen. And its work, along with the work of the individual
    ombudsmen, would be reportable to the Council and to Congress.
    The Council could help achieve the same goals of uniformity,
    quality control, and right of appeal as I suggest for the
    super-ombudsmen.
        I am also sympathetic to concerns raised by the agencies
    that, as proposed, a super-ombudsman would not be responsive to
    the heads of the financial regulatory agencies. Accountability
    to the agency head was, and remains, the cornerstone of the OCC
    ombudsman program.
        Agency heads have ultimate responsibility for the safety
    and soundness of the institutions their agencies supervise, and
    those heads should have the final say on agency matters. The
    legislation could clarify and ensure this responsibility
    without vitiating the effectiveness of the new ombudsman
    function.
        I would also suggest, Madam Chairwoman, that the new
    ombudsman function should also have the responsibility of
    reviewing regulations to try to achieve the most effective
    application of legislative mandates in the least burdensome
    fashion. This effort is important, and must be continual.
        Times change, and the rules that were once effective fall
    out of date or prove inefficient and need adjustment. Involving
    the ombudsman process, perhaps ombudsman-by-ombudsman, agency-
    by-agency, in looking again at rules that may be out-of-date, I
    think would advance the cause of effective supervision.
        Accordingly, I very much favor the advancement of the
    ombudsman concept that this committee has thoughtfully raised.
    I want to thank you very much for the opportunity to address
    the subcommittee on this important subject, and I look forward
    to answering your questions.
        [The prepared statement of Mr. Ludwig can be found on page
    117 of the appendix.]
        Chairwoman Capito. Thank you. I would like to thank the
    panelists, and I would like to begin the questions myself.
        The question we heard--and we heard this sort of repeatedly
    with the first panel on the subject of the ombudsman--they,
    talking about their individual review processes. And several
    members mentioned the incidences of retaliation.
        So I would like to ask Mr. Wilcox and Mr. Kelly and Mr.
    Watts and Ms. Kucey, really, have you heard of instances of
    retaliation by bank examiners? And what form does that take? Is
    it overt, subtle or whatever?
        Mr. Wilcox, if you will speak to that?
        Mr. Wilcox. Thank you. Not specific concerns, other than
    what has been widely reported in the media as recently as
    yesterday.
        There are some banks that have alleged that. I have not
    talked with them directly, but I would answer your question
    this way. What I do hear repeatedly from hundreds of bankers
    from coast to coast, in all 50 States, is their frustration,
    but their inability or paralysis about doing something because
    they are afraid of what is going to happen to them.
        And as a result, I have been asked by Members of Congress,
    both in the House and the Senate, to gather examples, to bring
    specific examples--
        Chairwoman Capito. Right.
        Mr. Wilcox. --to you.
        Chairwoman Capito. Right.
        Mr. Wilcox. And bankers will say, ``No way. I am not going
    to put my name with that, absolutely not.''
        Chairwoman Capito. Right. We ran into that in the field
    hearing in Georgia.
        Mr. Kelly?
        Mr. Albert Kelly. Thank you, Chairwoman Capito. I think,
    from my standpoint, many of the situations that the bankers
    encounter are subject to just a judgment determination, as was
    talked about in the prior panel. And I think that the concern
    is, much as Mr. Wilcox has said, something can go one way or
    something can go another. And if I object too strenuously, it
    is going to be very difficult to keep myself out of the next
    problem.
        And so I would say that be it reality or be it perception,
    it is a very, very strong feeling that bankers have that they
    don't really have, in many cases, the ability to object and to
    have a meaningful determination of something that probably was
    not as negative as it is posed to be.
        Chairwoman Capito. Yes.
        Mr. Watts?
        Mr. Watts. I would concur with those sentiments. We hear a
    great deal, not just in West Virginia, but in access to meeting
    on committees with CUNA around the country, that these are
    common problems. And credit unions bring these up readily and
    frequently.
        Chairwoman Capito. The issue of retaliation, specifically?
        Mr. Watts. But there is a concern, there is a frustration--
    not so much the retaliation, but the concern with the exam
    process. We encourage them to go through the channels that are
    currently in place and communicate either with NCUA, or through
    a survey that CUNA has, to be able to gather this information.
        They are fearful of putting the name on anything for the
    fear of what may come back to them. And even though we try to
    encourage them that it would be anonymous, there is this
    perception that the information will be obtained and they will
    find out who they are, and consequently there will be some
    retaliation.
        So in effect, the number of complaints is very small. But
    that is, in my view, because of the fear of retaliation.
        Chairwoman Capito. Right.
        Ms. Kucey, did you have a comment?
        Ms. Kucey. I definitely agree with what the other panelists
    have said. I think if you are a CEO and you have a contentious
    relationship with your examiner, and you are under examination
    and regulatory pressure, just the fear of retaliation is enough
    to keep you from voicing your concerns.
        Chairwoman Capito. Okay, thank you. I would like to--yes, I
    only have a minute left. So I will ask you the next question,
    then you can--I wanted to know. A lot of our concern is that
    this is hampering the banks' ability to really expand this
    economy.
        And is part of the 8.5 percent unemployment that we are
    sort of stuck in a result of the banks' hesitancy and reticence
    to lend because of the regulatory environment?
        Mr. Kelly?
        Mr. Albert Kelly. Just briefly on your prior question, the
    ABA has established an independent survey that is done after an
    examination. And we share that information, or in the process
    now of sharing that information with the regulator so that you
    know it is anonymous. But we do have that information and we
    are trying to build a better bridge.
        Chairwoman Capito. Okay.
        Mr. Albert Kelly. I think that there are a number of
    things--obviously the economy is such that it is still
    floundering. And so, it is sometimes hard to really find a good
    loan. But I believe also that there is much less exuberance on
    the part of banks to embrace the risk that they may have
    embraced in the past.
        When we talk about increased capital standards, in many
    cases smaller banks, most community banks, in reality, can only
    increase capital in this environment by shrinking. That is the
    only way their percentage goes up.
        And so, I think you see a lot of banks, that their
    strategic plan is to shrink the bank. One of the ways you do
    that is you don't make as many loans. So that would be my
    response, is that I think that there is certainly less vigor in
    making loans today.
        Chairwoman Capito. All right.
        Mrs. Maloney for 5 minutes?
        Mrs. Maloney. Thank you. I want to thank all of the
    panelists for being here. And I would like to ask Mr. Ludwig,
    in your testimony you raised one of the concerns that we heard
    from all of the regulators, that the final word should be what
    with the agency that has the responsibility of enforcement, of
    safety and soundness, of making the decisions to make the
    system work.
        So I think that you are in harmony with what they were
    saying to us in their prior testimony, every single one of
    them. I want to congratulate you for beginning, in 1993, the
    ombudsman system, when you were the Comptroller of the Currency
    of OCC. But how has it changed since then? Why do think the
    number has gone down so dramatically?
        It has gone down dramatically from your time at OCC, but
    all of the other agencies were even lower than the OCC. And
    what is your assessment of the appeals process now?
        Mr. Ludwig. Congresswoman Maloney, I think that is an
    excellent question. The fact is the whole process has evolved,
    and in a lot of ways has gotten ever more professional. So
    there has been a step forward here in the whole ombudsman
    process in the Federal Government.
        However the concerns that people have, I think, are real.
    There is a natural human tendency to worry about making an
    appeal against your supervisor. One of the things that we did
    during my time, which I would certainly suggest to the
    agencies, is to affirmatively encourage the banks to make
    appeals, and make clear through business with the examiners
    that there just absolutely can't be any retaliation, that it
    would be a real violation of agency practice.
        I spent a lot of time myself vigorously pursuing that, and
    I would encourage the new heads of these agencies to do that.
    One thing that they did do at the Comptroller's office, which
    may be true of the other agencies, is, after my time there was
    a discouraging, if not prohibition, of bringing matters to the
    ombudsmen if they were part of an enforcement action or pending
    enforcement action.
        I personally think that is a mistake. I think many of the
    issues that have become most contentious actually are headed
    towards enforcement issues. I think having the ombudsmen as a
    safety valve to hear virtually everything is a good thing.
        Mrs. Maloney. Also, the prior witnesses, the regulators,
    were concerned that the external appeals process would hamper
    the agencies and make them less efficient. What is your
    response to that, and do you believe a bank should be required
    to exhaust the internal appeals process before seeking an
    external review?
        Mr. Ludwig. I think having a coordinating function, whether
    it is a super-ombudsman or a task force at the FFIEC, that can
    be a safety valve when people really feel strongly about a
    matter and don't feel they are getting redress at their own
    agency is a good thing. And I think that is perfectly
    consistent with giving the agency head, at the end of the day,
    the final say.
        Just allowing that transparency, that opportunity to be
    heard and have flexibility, I think would add a lot of value.
        Mrs. Maloney. There was also a lot of concern about cost,
    particularly in this time where we are facing tremendous
    financial constraints. Could you comment on the cost, what you
    feel it would be? And do you prefer the task force approach in
    this situation?
        Mr. Ludwig. The OCC ombudsman program during my time had
    three people and I think, by the end of my time in office, had
    heard close to 1,000 formal and informal appeals. So in and of
    itself, it wasn't an expensive process. And I think one could
    do the same at the FFIEC level by way of coordination.
        But whether it is a super-ombudsman or a task force, there
    is a lot to be said for doing it as a first step as a task
    force, with many of the same attributes that are in this
    statute. But getting the ombudsman together as a consistent
    matter, and having a head of that task force rotate among the
    agencies, I think would take the whole process a step forward.
        Mrs. Maloney. Also, many of the regulators expressed
    concern on codifying the guidance. And they repeatedly
    expressed a concern to maintain a certain degree of
    flexibility. Do you share that concern?
        Mr. Ludwig. I think what you and the chairman of the
    committee and subcommittee is doing here is really very
    important. Oversight hearings, and this is partially by way of
    oversight, add tremendous value, just like a board of directors
    to a corporation.
        And asking these important questions--even at a granular
    form as you have been doing on loan review and supervision and
    the actual supervision practices--is enormously important in
    terms of the integrity of the process. I myself am a little
    wary of hardwiring things. I think taking a next step, asking
    the questions, studying them and perhaps at some point
    hardwiring these rules.
        But the problem of hardwiring is, the world changes. And it
    lacks a certain amount of flexibility. I think by way of
    direction, oversight, review, encouragement of these agencies
    to take a look at these matters, I think that will be responded
    to and you will have fulfilled a major function.
        Mrs. Maloney. Thank you. My time has expired.
        Chairwoman Capito. Mr. Renacci, for 5 minutes.
        Mr. Renacci. Thank you, Madam Chairwoman. And I want to
    thank the members of the panel. I want to get back a little bit
    to retaliation, but not stick on it too long.
        My colleague, Mr. Scott, made a comment about how few
    appeals there were. And as a previous business owner in the
    nursing home business, I can tell you that when we had
    regulators and surveyors walk in, we did not appeal because we
    were fearful of what would occur the next time they walked in.
        So it is interesting. Because it is human nature, and there
    is nothing wrong with that. It is human nature, and I hope that
    many of the agencies who are here today will realize that--that
    it is human nature, and it is going to occur.
        With that said, Mr. Ludwig, you were talking about--and I
    am trying to figure this ombudsman program because I like the
    idea of an independent. But you were talking about a super
    committee. Do you like an independent versus an internal
    better, a combination? Because I am thinking an independent
    would lessen the retaliation.
        Mr. Ludwig. I am kind of inclined towards a combo in
    coordination as a next step, sir. I think the ombudsman
    programs have taken a big step forward with the Federal
    Government. Now, it has taken many years. I was in office
    almost 20 years ago now when we started this thing. So it has
    been a bit of a time, but there have been steps forward.
        Allowing an appeals process, an independent appeals process
    which could be taken if things are egregious, I think does add
    value. But taking a step to basically vitiate the current
    programs and take them out of the agencies, I think has the
    disadvantage of discouraging what has evolved into a back-and-
    forth that adds value.
        Now, I do think encouraging insisting upon no retaliation,
    both of the committee in terms of oversight, asking the agency
    heads to redouble their efforts to ensure that doesn't happen,
    adds a lot of value. I don't think I would go so far as a
    complete independent ombudsman at this time, but I think your
    oversight in this area is important.
        And I understand that human nature is, you are very
    reluctant to do it. And that is why I think it is up to the
    agency head and the agency to be very vigorous in making clear
    to the supervisee and to the examiners that retaliation is not
    acceptable.
        Mr. Renacci. Ms. Kucey, you also talked about an appeal
    process, an independent third party. Do you agree with what Mr.
    Ludwig is saying, or do you believe it should be an independent
    third party?
        Ms. Kucey. We believe it should be an independent third
    party, for the reasons brought up by this panel and also
    brought up by several of you.
        Mr. Renacci. Okay.
        Mr. Wilcox, there seems to be a clear disagreement between
    regulators and bankers as to whether a loan should be placed on
    non-accrual status. Do you believe the regulators are at least
    being consistent when they place a loan on non-accrual status,
    without retaliation?
        Mr. Wilcox. I will answer it this way. A lot has changed in
    the field examination process during the past several years. We
    used to see at least part of the examination team exam after
    exam after exam. So there was some level of market expertise,
    some understanding of our financial institution and the
    surrounding economic environment, which led to a better
    dialogue about those kinds of things and the types of loans
    that might be discussed regarding non-accrual.
        Today, I would say the last three, maybe four exams that we
    have had it is a rotating cast of characters who have no
    concept of task accounting in Minnesota, no concept of Grand
    Rapids State Bank. And as a result, we spend a lot of time
    trying to educate them about what is happening. And those are
    factors in the non-accrual.
        I hear from colleagues across the country of loans that
    have positive cash flow and they are 20-year customers and have
    never missed a payment, but in the current economic environment
    the real estate or the equipment, something, has devalued. And
    that is being criticized and classified, which has other
    implications for the organization in terms of capital and other
    regulatory implications, other than just the classification.
        Mr. Renacci. Do you feel timely payments are being
    considered at all in classifications?
        Mr. Wilcox. Not consistently.
        Mr. Renacci. So there is some inconsistency. Mr. Ludwig,
    many--no, I am going to go back to you, Mr. Wilcox. So in your
    testimony, you state that community banks were facing up to
    $150,000 in legal fees as a result of the current appeals
    process.
        Do you think the appeals process proposed in this bill
    would save community banks money, or would it increase costs?
        Mr. Wilcox. I think to the extent that you can make this
    independent. And, frankly, I would suggest more of a firewall
    than this bill proposes and create it independently, outside of
    the FFIEC, so that you do have some insulation, which really
    takes out the issue of retaliation. When they are separated
    from the agency and, potentially, as Mr. Ludwig commented, with
    that streamlining, you could potentially reduce the cost.
        Mr. Renacci. Mr. Kelly and Mr. Watts, do you believe it
    should be independent or part of the organization?
        Mr. Albert Kelly. I believe that it should be independent.
        Mr. Watts. I definitely believe it should be independent.
        Mr. Renacci. All right. Thank you, gentlemen.
        Chairwoman Capito. Mr. Watt, do you have any questions?
        Mr. Watt. Thank you, Madam Chairwoman. I actually came back
    hoping to hear Mr. Ludwig's testimony, because generally when
    he testifies, I want to be in the room and hear what he has to
    say. We have been longtime friends and I admire and respect
    him.
        I note that you spent a lot of time talking about the
    ombudsman part of this bill. And I don't want to take you out
    too far, but it sounds to me like you don't think the rest of
    this bill--or maybe you think the rest of the bill hardwires,
    as you said, things a little bit too much. Am I misreading what
    you are saying?
        Mr. Ludwig. I have a lot of respect for the issues raised
    in this bill. I think it is an excellent effort on the part of
    the subcommittee, the ranking member, and the chairman to focus
    on real issues that bankers have to deal with day to day.
        But I think by way of oversight, other than the ombudsman
    issue and by way of direction, asking the agencies to review
    these matters with some care and oversight, and allowing some
    flexibility here, is probably a little better than hardwiring
    it. One might come to the conclusion at the end of today that
    there is not enough serious review of these issues by the
    agencies.
        One feels frustrated, and goes to the hardwiring. I don't
    think we are there yet, and I think allowing for flexibility
    has some advantage. But I certainly commend the subcommittee
    for the oversight. And I think even putting in legislation and
    direction to review these matters with care adds a lot of
    value.
        Mr. Watt. All right. I thought that is what I heard you
    saying, and I don't disagree with that.
        Mr. Watts, you were in the room when I asked the NCUA
    representative about a situation in North Carolina. Were you in
    the room?
        Mr. Watts. Yes, sir, I was.
        Mr. Watt. Do you have any particular feelings about what
    the NCUA is doing to those 51 credit unions in North Carolina?
        Mr. Watts. It is a fairly recent development, and I can't
    say that I have a significant amount of knowledge about it.
    There is a coordination of effort between the State regulator
    and the Federal regulator for credit unions. And it is
    unfortunate that that coordination has eroded and dropped down
    to a level beyond what you would hope it would be.
        It is unfortunate that the other credit unions in North
    Carolina that were State-chartered and federally-insured were
    impacted as they were. And beyond, sir--
        Mr. Watt. They haven't been impacted yet, but they are
    about to be if the regulator goes and uses this as an excuse to
    start auditing them. That seems, to me, to be completely
    unnecessary. Maybe I am missing something, which is why I am
    asking if I am overstating my concern here.
        Mr. Watts. I don't have any additional insight that would
    lessen your concern.
        Mr. Watt. All right. It is great to see all of you. I am
    sorry I missed your testimony. I had another commitment, but I
    appreciate your being here, and it is always good to see my
    good friend, Mr. Ludwig.
        Mr. Ludwig. And thank you, Mr. Watt, for those very kind
    remarks. I am honored by them.
        Mr. Watt. I didn't mean to ruin your reputation by saying
    good things about you in public but sometimes I should adhere
    to the adage. I can say good things about you or bad things
    about you, whichever one will help you the most.
        [laughter]
        I yield back, Madam Chairwoman.
        Chairwoman Capito. Thank you.
        Mr. Luetkemeyer, for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman. Just kind of
    quickly, I apologize for missing some of the earlier testimony.
    But Mr. Kelly and Mr. Wilcox, can you tell me whether the
    present ombudsman program is working?
        Mr. Albert Kelly. I am sorry?
        Mr. Luetkemeyer. The present ombudsman program that the
    different agencies have, is it working very well?
        Mr. Albert Kelly. I believe that we noted in our written
    testimony that we thought that the OCC--the general view of the
    ABA is that the OCC's program is the most effective. I think
    the lack of use of some of the programs are kind of reflective
    of the fact that they don't enjoy the independence that is
    stressed in the bill.
        Mr. Luetkemeyer. And cost. Is that an issue? Is cost an
    issue here?
        Mr. Albert Kelly. I am sure that cost is somewhat of an
    issue. But I would say that the independence is much more than
    the cost, quite frankly.
        Mr. Luetkemeyer. Mr. Wilcox?
        Mr. Wilcox. When I listen to the number of concerns I hear
    from my peers around the country, and then I listen to the
    numbers that were talked about on the first panel, I am pretty
    stunned, quite frankly. And I would--
        Mr. Luetkemeyer. Five or six complaints and probably in
    your neighborhood you probably have five or six folks who would
    love to appeal something.
        Mr. Wilcox. I am sure you probably hear from more than that
    on a daily basis. But those numbers tell me that it is not
    being effective.
        Mr. Luetkemeyer. Yes.
        Mr. Wilcox. It is not comfortable. They don't feel safe, or
    that it is going to be a wise use of their time to pursue that.
    That is the conclusion that I can draw, based on those numbers.
        Mr. Luetkemeyer. As we are going through the process here,
    we are trying to form a bill that is going to try and give some
    regulatory relief to your institutions. What else would you put
    in there if you had the opportunity? What other problem do you
    see that we are not addressing in here, or that you think would
    be something that we need to address or to recognize and
    perhaps come up with a solution for?
        Mr. Kelly?
        Mr. Albert Kelly. I think, first of all, I would say I
    think this is an excellent start. I think that we also believe
    that what may be called the penalty box needs to be reviewed,
    which is banks that end up under some type of various and
    sundry investigation are immediately prohibited from doing
    acquisitions and other things.
        And we think that would be a valuable piece to suspend
    because that is akin to you are going to be punished before you
    have your day in court, so to speak. And so I think that really
    ties up a number of banks that fall into that. At least that is
    what I have been told by a number of banks that have fallen
    into that path.
        Mr. Luetkemeyer. Yes. Just to follow up on that, one of the
    banks in my area has a CRA exam that has been extended for
    almost 3 years. As a result of that, they can't go out and
    expand with new branches or can't go out and purchase an
    additional facility.
        So it really hampers their ability to deliver services and
    expand your operation. Is that kind of what you are talking
    about?
        Mr. Albert Kelly. Yes, that is what I am talking about. And
    that can go to a number of things--
        Mr. Luetkemeyer. Right.
        Mr. Albert Kelly. -- be it a fair lending exam or CRE,
    whatever it may be.
        Mr. Luetkemeyer. Right. Okay.
        Mr. Wilcox?
        Mr. Wilcox. It is a good start, this bill. I think the
    independence issue, and taking that a little further, is
    something that I think deserves a hard look. In addition to
    that, expanding on the kind of transparency that is lacking
    today in terms of material supervisory determinations that
    examiners arrive at when they conduct an examination.
        For example, I hear lots of reports from friends and peers
    all over the country that they have been asked to allocate more
    dollars to their loan loss reserve. But when asking the
    regulator that is there at the exit interview or during the
    field examination to explain the formula, they are not given
    that information.
        If you are being asked to write a check that is $300,000 or
    $400,000 or $500,000, as an owner, as a CEO, I think you are
    perfectly entitled to understand how that math works. And that
    is just one simple example. There are lots of arbitrary
    decisions, or at least they appear arbitrary.
        And I think the communication and the transparency would go
    a long way to bettering that relationship, and putting bankers
    and regulators back on a path of working together and not
    having an adversarial relationship that seems to be developing.
        Mr. Luetkemeyer. I know over the course of discussions with
    my local bankers--and, in fact, this past week I was discussing
    it with the president of a very large regional bank in my area.
    And there is some testimony that has occurred in this committee
    already with regards to the costs that the banks are incurring
    as a result of compliance with all the regulations that are
    coming out.
        And it has reached the point where it is almost every time
    you hire one person, you have to hire one more person to do
    compliance. Is that what you see in the banks in your area, Mr.
    Kelly and Mr. Wilcox?
        Mr. Albert Kelly. The compliance area is certainly an area
    of expansion. And I think for all banks, we are no different.
    The ability to comply with the complexity of the regulations
    that are coming out in a very, very rapid-fire order, we are
    charged with doing. And so, we have staffed that up, and it is
    an expensive thing to do.
        Mr. Luetkemeyer. Mr. Wilcox?
        Mr. Wilcox. If I may?
        Mr. Luetkemeyer. Okay.
        Mr. Wilcox. I would concur. It is expanding. I would say
    our compliance cost has probably doubled in the last 24 months.
    That is non-revenue. It is great we are adding a job or two,
    but it is non-revenue-producing and challenging for the bank,
    and that will continue to be the trend.
        Mr. Luetkemeyer. And that is a cumbersome problem for the
    community banks, especially because they don't have the ability
    to spread those dollars out like a big--
        Mr. Wilcox. That is right.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman, for your
    indulgence.
        Chairwoman Capito. Mr. Scott?
        Mr. Scott. I am glad that some of the regulators are still
    here because we sort of had a he said-she-said situation. And,
    I asked early about this retaliation and I just want to get a
    clear answer because I think we need to have the truth on the
    table of exactly what has happened.
        If there is a culture of this, we need to know it. It may
    be something, and then we need to make sure that we have the
    proper tools in place in this bill that will eliminate that.
    Because as I see it, I think the financial institutions feel
    that they believe that the existing internal agency appeals
    process is limited, and then they feel that they don't have a
    recourse properly presented to them if they feel they got a
    wrong decision.
        And then this appeals process is in a way in which you feel
    if you do try to appeal it, they will retaliate. Is that a fair
    assumption of where we are? So tell me. We have two
    representatives of the banks and, I think, credit unions here.
    Is there retaliation? Give this committee an example of what
    that is, and let us get that on the table. Is it happening?
    Regulators are saying it isn't.
        Mr. Albert Kelly. Thank you, Mr. Scott. What I would say
    would be, as earlier stated, there is certainly, in the banking
    industry, a concern that they will worsen their situation by
    making too much or by objecting to a particular point.
        Mr. Scott. Do you have any evidence or facts where that has
    actually happened?
        Mr. Albert Kelly. As I mentioned earlier, we have at the
    ABA coordinated to get examination results. As far as an
    improved environment, what is that? And I believe we have
    instances where we can provide to the committee our results,
    just as we provide them to the regulatory agencies.
        Mr. Scott. Anyone else?
        Mr. Wilcox. If I may, I think retaliation is a little bit
    of a perception issue. It may be perceived on the bankers' side
    as retaliatory or retribution. And the regulators may see that
    as a logical next step, not retribution. But I think the core
    of the problem, and the issue that is stymieing this and making
    it difficult to move forward, is simply the fear of it. What
    if?
        And because there is so much concentrated power with each
    regulatory authority--my bank has been in business for 98
    years. And every time I have an exam, even though we are well-
    managed and we are in good shape, I know that if we did
    something wrong, they have the power to put the chains on my
    doors and put our business out of business.
        They hold that kind of power. That alone puts pause in
    somebody's mind to say, ``Hmm, how hard would you really want
    to push if there was an issue?''
        Mr. Scott. That is very good. That is what I meant. You
    have given a pretty good example. Do you believe that this
    ombudsman, or the mechanism we have in the bill, will suffice
    to bring this pressure of retaliation or whatever that is--that
    is what I am getting at.
        It bothers me for my bankers to come and say, ``We are
    going to be retaliated against,'' or, ``We have been retaliated
    against.'' And it is like I don't know what a challenge it is
    here today to get anybody to give an example of that. And we
    have a bill here. One of the issues we are trying to address is
    how do we prevent that and make sure that there is no
    retaliation if we can't get either side to tell us what it is?
        Mr. Wilcox. Sure. And I think one way to improve upon
    that--this is a good first step. You have a partially
    independent ombudsman process. Making it more independent may
    help, but the thing that you could add to that, that would
    really bring this full circle is a degree of accountability and
    a review process to hold the regulatory agencies accountable
    for their actions.
        That process doesn't exist today, and the bankers have no
    way to initiate that kind of recourse unless they want to
    really fully gamble.
        Mr. Scott. Do you feel that the ombudsman's part of this
    bill will suffice for that? Or we need to do something
    additional?
        Mr. Wilcox. I think you could strengthen it. It is a good
    first step, but building in accountability, some measures and
    processes of accountability for the regulatory agencies, in
    addition to independence for the appeals process, would help
    that matter greatly.
        Mr. Scott. Mr. Watts?
        Mr. Watts. Yes, sir. From a credit union standpoint, NCUA
    has an ombudsman, but it does not deal with appeals. So this
    would be a significant improvement. Now, there is an appeals
    process and there is an opportunity for a credit union to be
    able to file for and have their particular case reviewed and
    there is a process that is followed. But the ombudsman is not
    the one that does that.
        This would actually allow for a much more specific
    opportunity by a third party, to be able to review any issues
    that come before it. So this is a much-improved process if this
    were adopted for credit unions.
        Mr. Scott. Good. Thank you.
        Mr. Renacci [presiding]. Thank you.
        Mr. Canseco, from Texas, for 5 minutes.
        Mr. Canseco. Thank you, Mr. Chairman.
        Thank you very much for coming here today and offering your
    testimony. One thing I hear over and over again as I talk to
    Texas bankers, and also from around the country, is the
    difficulty they have in putting together a 5-year plan for
    their bank. There is simply too much uncertainty over upcoming
    rules and they don't know how best to prepare their bank to
    compete in the future.
        Mr. Kelly, how would the provisions in this bill better
    prepare SpiritBank or the members you represent in preparing a
    3- or 5-year plan for their bank?
        Mr. Albert Kelly. Portions of the bill, I believe, give
    additional certainty as to how certain things are treated. I
    think that certainly would be very helpful to any bank that is
    planning, relative to either loan growth or to managing some of
    the assets that they currently have.
        I think, likewise, trying to build a better regulatory
    environment, which I think is the intent of everyone from the
    regulatory panel to the bankers, is something that this bill
    provides; that there is something that actually is an
    independent voice out there where you can say, ``I don't really
    think this is the right way that this has been handled. Can we
    have an independent view of it?''
        99.9 percent of the banks out there want to please their
    regulators and want to stay on good terms with their
    regulators, and do not want to either risk irritating them or
    try to swim against the tide. But this gives something that
    allows them to have an--if it so breaks down to the point that
    they feel they need redress, this would allow them to know that
    they are able to work their plan and it be the plan that,
    hopefully, they will be able to take through to fruition.
        Mr. Canseco. Has SpiritBank increased its compliance staff
    since 2008?
        Mr. Albert Kelly. Yes, sir, we have. We have increased our
    internal audit significantly, we have increased our compliance
    area with additional staff, and we have a chief risk officer
    who has that exclusive title, as well. So all of those things
    have been added.
        Mr. Canseco. And is that true with what you hear from some
    of your members?
        Mr. Albert Kelly. I think all of our members would say that
    they are trying to prepare for the compliance; not only the
    compliance applications by the additional regulations that are
    being promulgated that certainly are required to be done. It
    takes an awful lot of time to be sure you are in compliance.
        Mr. Canseco. And what have they told you about compliance
    costs? Is it the same as what you are experiencing at
    SpiritBank?
        Mr. Albert Kelly. Yes. I think the industry itself is
    seeing an increase, necessarily. When you have a 2,380-page
    bill, that is Dodd-Frank, that requires the regulators to
    promulgate regulations and procedures, and then you have
    heightened regulations--we have talked about the HMDA logs and
    things such as that.
        Those areas are very focused upon, and banks have really no
    choice but to prepare to increase their compliance costs.
        Mr. Canseco. In your relationship with bank examiners, what
    have been the most significant challenges for your bank, and
    how would they be addressed in H.R. 3461?
        Mr. Albert Kelly. I think when it comes to our bank, when
    we are talking about--all banks have disagreements relative to
    classification. There is never a right-size-fits-all. From a
    standpoint of the non-accruals, I would guess, from our
    standpoint, we have generally tried to follow what the
    regulatory agencies would follow.
        I think that the--so I don't have and haven't had,
    necessarily, disagreements with those particular points. I
    think that this bill would help greatly if, in fact, we talk
    about the fact that when you have a piece of collateral and you
    know that firm value, to classify the entire balance is, as we
    have stated in our written testimony--it is as much a negative
    overstatement as we heard earlier saying you are overstating
    earnings.
        You have a piece of property that is worth, as we said in
    our testimony, $9.5 million, and you have a $10 million loan,
    yes, you have an impairment of half a million dollars. But do
    you really classify the whole thing if it is performing?
        And that is something that I think, today, those loans all
    get classified. And those obviously have a large impact on your
    capital and a large impact on your standing.
        Mr. Canseco. Can you offer any suggestions for improving
    H.R. 3461?
        Mr. Albert Kelly. As I told the gentleman from Missouri, I
    think that if we were able to include provisions there that
    would allow the suspension of the penalty box for those banks
    that have ongoing disputes so that they can expand, and should
    they have opportunity and they can go into different lines of
    business during that period of the dispute, I hear that from a
    number of a banks, that they feel like they have been put on
    the sidelines, which becomes punitive.
        Even if they end up being successful in whatever dispute
    that might be, they still miss the opportunity. In some cases
    it stretches over several years. So I think that would be
    extremely helpful, to have that in there.
        Mr. Canseco. Thank you very much, Mr. Kelly.
        My time has expired.
        Mr. Renacci. Thank you.
        I want to thank the panel for their testimony today. Before
    closing, I would like to ask unanimous consent to submit for
    the record the testimony of David Baris, executive director,
    American Association of Bank Directors. Without objection, it
    is so ordered.
        The Chair notes that some Members may have additional
    questions for today's witnesses, 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.
        This hearing is adjourned
        [Whereupon, at 5:17 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                February 1, 2012

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]