[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

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

           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

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