[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF THE CHALLENGES
FACING COMMUNITY FINANCIAL
INSTITUTIONS IN TEXAS
=======================================================================
FIELD 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
__________
MARCH 14, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-106
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75-078 PDF WASHINGTON : 2012
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
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
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Page
Hearing held on:
March 14, 2012............................................... 1
Appendix:
March 14, 2012............................................... 37
WITNESSES
Wednesday, March 14, 2012
Barrera, Janie, President and Chief Executive Officer, ACCION
Texas Inc...................................................... 17
Glenn, Robert A., President and Chief Executive Officer, Air
Force Federal Credit Union..................................... 4
Hansard, George H., President/CEO, the Pecos County State Bank,
Fort Stockton, Texas........................................... 6
Martinez, Maria J., President and Chief Executive Officer, Border
Federal Credit Union, Del Rio, Texas........................... 8
McCauley, Cliff, Senior Executive Vice President, Frost Bank, San
Antonio, Texas................................................. 10
Parker, Lester Leonidas, Chairman, President, and Chief Executive
Officer, United Bank of El Paso Del Norte, El Paso, Texas...... 11
Urrabazo, Ignacio, Jr., President, Commerce Bank, Laredo, Texas.. 13
APPENDIX
Prepared statements:
Barrera, Janie............................................... 38
Glenn, Robert A.............................................. 41
Hansard, George H............................................ 55
Martinez, Maria J............................................ 59
McCauley, Cliff.............................................. 69
Parker, Lester Leonidas...................................... 78
Urrabazo, Ignacio, Jr........................................ 88
AN EXAMINATION OF THE CHALLENGES
FACING COMMUNITY FINANCIAL
INSTITUTIONS IN TEXAS
----------
Wednesday, March 14, 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 9:30 a.m., at
the City Council Chambers of the Municipal Plaza Building, 114
W. Commerce Street, San Antonio, Texas, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito and Canseco.
Chairwoman Capito. This field hearing will come to order. I
would like to thank, first of all, the beautiful City of San
Antonio for hosting us. It's my first personal visit to the
City, and it's just lovely. And I think it's obvious from my
quick observations that it's very family-friendly and a great
and safe place to visit and enjoy the wonderful restaurants and
beautiful scenery and the Riverwalk. So thank you so much for
having us here.
And by way of introduction, my name is Shelley Moore
Capito. I'm the chairman of the Financial Institutions and
Consumer Credit Subcommittee of the Financial Services
Committee in the House of Representatives. I hail from the
great State of West Virginia. There are a lot of West
Virginians living in Texas, I know that, and there are a lot of
similarities between West Virginians and Texans. We're good-
hearted people, so I'm very, very happy to be here. I'm going
to kind of walk you through the process of what we're going to
do today, and then we'll proceed.
We're having a field hearing. And what this does is it
gives us a good flavor, a slice-of-life understanding of what
we're doing in Washington, bringing Washington to San Antonio,
but also we're going to take back what we're hearing today to
Washington and formulate policy that will enhance your ability
to do business and to grow here in Texas.
So Mr. Canseco and I will each give an opening statement,
and then our witnesses will be recognized for a 5-minute
opening statement. We will then have a couple of rounds of
questions where each one of us will be recognized for 5
minutes. And the hearing should last until around 12:15.
I want to thank my colleague, Mr. Canseco, for inviting me
here, and also for his great leadership on our committee. He
may be a freshman in name, but in reality, he is a force in our
committee and in Congress, and I really appreciate his
leadership. And I know it's not easy; I have a great
appreciation for how far he travels every week to serve. So,
you're really lucky to have him.
The title of this morning's hearing is, ``An Examination of
the Challenges Facing Community Financial Institutions in
Texas.'' We have a panel of witnesses who will provide us with
an overview of the landscape for community banks and credit
unions in Texas.
This Congress, our subcommittee has conducted a series of
hearings on the evolving regulatory environment for community
banks and credit unions. We have heard a consistent concern
from witnesses that the growing regulatory burden for community
banks and credit unions is making it more difficult to grow the
economy and help communities recover from an economic downturn.
We have also heard concerns about the inconsistent application
of examinations by the Federal financial regulatory agencies.
The recent trend of financial institution failures is
largely due to the financial crisis and the slow economic
conditions in communities across the country; however, this is
not a recent phenomenon. Since the early 1980s, there has been
a consistent trend of consolidation in the banking industry.
According to the FDIC, in 1984, there were 14,884 banking
organizations across the country. And as of February of this
year, there were only 7,349, nearly half the institutions that
there were 28 years ago.
Now, consolidation is not necessarily bad if you're doing
it on your own terms of when you want to do it, and in some
ways, it allows healthier institutions to grow. However, we
must ensure that our Nation is served by a diverse financial
system that includes community banks, credit unions, regional
banks, and national banks. Each entity is tailored to serve the
specific needs of different populations. This morning's hearing
is an important contribution to this dialogue, and I appreciate
our witnesses' willingness to testify in front of this
subcommittee.
I would also like to say in terms of observations that I
have already made since I have been here in Texas, the role of
the community bank and the ability to understand and work with
the individual communities is something that I think there's a
great concern about in rural areas like I live in, in West
Virginia, and like you have in Texas. We can't lose that valued
asset in our local communities through consolidation or
overburdensome regulatory regimes where a community bank cannot
meet or our financial institutions cannot meet the challenges
of the regulations.
So with that, I would like to now introduce our host. My
dad was in Congress in the 1950s and 1960s. In these little
cards that I now have from the 1950s and 1960s, he always
characterized himself as the hardest-working Congressman, but
I'm going to characterize your Congressman, Mr. Quico Canseco,
as the hardest-working member of my subcommittee. I now
recognize Mr. Canseco for the purpose of making an opening
statement.
Mr. Canseco. Thank you very much, Madam Chairwoman. And I
appreciate very much you coming down to San Antonio and holding
this very important hearing. I also want to thank you for your
tremendous leadership on the Subcommittee on Financial
Institutions and Consumer Credit. Welcome to San Antonio. And
I'm sure that you'll find us very, very hospitable. I want to
also let the City of San Antonio know that we're very, very
grateful to be having this hearing here in our City Council
chambers. It's a beautiful building and a very beautiful
environment.
I want to also thank our witnesses on the panel today. We
have representatives from San Antonio, Laredo, Del Rio, Fort
Stockton, and El Paso. I thank you all for being here, and I
look forward to your testimony and our discussion today which
is very, very important.
America has for many years been home to the most
competitive and dynamic financial sector in the world. This is
in large part due to the diversity of institutions that provide
loans and help increase capital formation in the private sector
of our economy. Unlike other nations where a small number of
mega institutions typically dominate the entire industry, in
America the vast number of community banks, credit unions, and
other small lenders offer a different business model that often
fits with the needs of small towns and communities, especially
here in Texas.
The community-oriented model focuses on relationships,
service, and flexibility with its customer base usually
standing in stark contrast with the model offered by larger
counterparts.
While community banks and credit unions oftentimes lack the
geographic diversity and deep pockets of the too-big-to-fail
banks, they remain vital to the economic well-being of millions
of Americans and American businesses.
Here in Texas, business owners, farmers and ranchers,
families, and others rely on local lenders in small towns such
as Del Rio and Fort Stockton to help grow their businesses,
create jobs, and enhance the overall quality of life in their
communities.
As someone who has spent years in community banking, I'm
intimately familiar with the importance of this model and the
need to preserve it. Unfortunately, in recent decades this
model has become threatened due to a variety of factors such as
rising compliance costs, economic booms followed by tremendous
busts, and perhaps most importantly, the tendency of
policymakers to paint all institutions with the same brush.
These have disproportionately affected small financial
institutions and threatened to turn our financial system into
one controlled by a very small number of banks.
As one participant at a recent community bank conference
put it, ``I think this country will be a very scary place if
there are only four or five banks providing credit.'' I
couldn't agree more with that statement. The numbers tell the
story--30 years ago, there were over 14,000 community banks in
the United States. Today, there are fewer than half that
number. It has recently been estimated that the Dodd-Frank Act
will require companies in the United States to spend 22 million
manhours for compliance each year. Undoubtedly, this is time
that will cost community banks and credit unions greatly.
The Sarbanes-Oxley Act of 2002 also had a similar
disproportionate effect and impact. And, of course, over 13
million of our fellow citizens remain unemployed, so community
banks and credit unions currently face a struggling economy on
top of a heap of new regulations.
And so, Madam Chairwoman, I hope today's hearing serves to
highlight some of the biggest challenges faced by small
financial institutions here in Texas, and what we discuss
today, what Congress should do in order to lift the regulatory
burden that is currently crushing banks and credit unions. The
focus must be on fostering a competitive environment where
small financial institutions can continue to play a vital role
in our economy. I yield back, and I thank you.
Chairwoman Capito. Thank you.
We will now turn to the panel. What I'll do is introduce
each of you individually right before you give your statement.
Our first witness is Mr. Robert Glenn, president and chief
executive officer of the Air Force Federal Credit Union.
Welcome.
STATEMENT OF ROBERT A. GLENN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AIR FORCE FEDERAL CREDIT UNION
Mr. Glenn. Thank you, Madam Chairwoman. Chairwoman Capito,
Ranking Member Maloney, and members of the subcommittee, Air
Force Federal Credit Union is very pleased to have an
invitation to appear before the subcommittee today for this
hearing.
In the course of my oral summation, I'm going to try to
cover briefly about our credit union, about credit unions in
Texas generally, and to explore some of the challenges that our
credit union has faced in regulatory compliance, and also to
discuss our views of our examination process and how our
industry is consolidated.
Air Force Federal Credit Union was chartered in November of
1952 as Lackland Federal Credit Union. At that time, we had 10
members who each initially deposited $5 into the credit union.
We ended up in 2011 with over 36,900 members and total assets
of $342 million. We have 142 employees. We have 131 who are
full time, and 11 who are part time.
We're probably one of the larger credit unions in the State
of Texas because in Texas, there are 536 credit unions. The
average size of a credit union in the State of Texas is $135.7
million, and they represent 7.8 million members.
In the State of Texas, 427 of those credit unions have less
than $100 million in total assets. The average credit union
size of that group is only $21.8 million in total assets. The
total average number of employees in each of those credit
unions is eight full-time employees, and one part-time
employee. If a credit union the size of mine with 142 employees
is having problems meeting compliance, you can imagine what
kind of difficulty a credit union with only 8\1/2\ full-time
equivalents would have. By the way, the State of Texas only has
13 credit unions that are over $1 billion in total assets, and
none of them are over $7 billion in total assets. None of them
fall under the examination requirements of the CFPB.
We all have limited resources, and that's why compliance is
such a challenge for smaller institutions. We don't have lots
of money, we don't have lots of time other than the time that
we have there to serve the folks that we're designed to serve,
our members and our customers, and we also use a lot of third-
party vendors. And when we're trying to comply, we have to get
those third-party vendors to line up their processes with the
new regulations, and they have to help us in our compliance
activities.
I want to go into a couple of regulations that were
particularly challenging. One of the most challenging for us
was the Credit Card Act. The Credit Card Act had a number of
different facets that were challenging to us, for example, the
constant due date. Under the practice before the Act, the due
date would move a couple of days either way depending on when
the statement would be prepared. And the statement was being
prepared based upon how cost-effective it would be to cycle the
statements throughout the month. Preparers of statements could
reduce their cost, hold down the cost to consumers ultimately,
they pay for everything, and we were able to avoid weekend
preparation of statements. It didn't make sense to prepare
statements on Saturday night when you can't put them in the
mail on Sunday morning. At least if you do put them in the
mail, they're not moving to the ultimate consumer.
And you have to wonder also about--if some of the other
aspects of that regulation required, for example, to change
dates or rates. If you had to change a rate, you had to provide
additional notice. We send lots of notices to our members, all
different kinds of varieties. We have past-due notices, notices
of payments that are coming due, we have statements, we have
NSF notices, notices for everything that you can imagine, and
they're all additional pieces of paper. And we hear from our
members that they throw most of those away. So you wonder what
good an additional notice is going to serve.
I know in our household we have probably three or four
credit cards. During the course of the passage of this
particular piece of legislation, we received nine separate
notices regarding the changes that they were implementing
before the Card Act went into place. And then subsequently, we
have had numerous notices on each of those accounts. They
didn't really mean anything because we pay the account off
every month in our household. And if you do that, the change in
rate is a nonissue.
We had additional information that was required to be
placed on the statements, particularly on the first page of the
statement. This new information was to show people how long it
would take them to pay their account off if they paid just the
minimum payment, and if they paid a slightly larger payment,
how they could pay it off more quickly. This extended the
length of the document, it caused more pages to be produced, it
extends the amount of money required to print, and so forth.
And I see a red light blinking, so I need to stop here.
[The prepared statement of Mr. Glenn can be found on page
41 of the appendix.]
Chairwoman Capito. Thank you. We do have a little timer
here, and it gives us 5 minutes. I'm not going to be so bold as
to come to San Antonio with my own hammer and hammer you down
right at 5 minutes. But if it gets really long, I might try to
do it. Thank you.
Our next witness is Mr. George Hansard, president of Pecos
County State Bank. Welcome.
STATEMENT OF GEORGE H. HANSARD, PRESIDENT/CEO, THE PECOS COUNTY
STATE BANK, FORT STOCKTON, TEXAS
Mr. Hansard. Thank you. Chairwoman Capito and members of
the subcommittee, just a couple of observations. First, I have
to say that this is probably the first time I have sat between
two credit unions. And as a banker, it's somewhat difficult.
Second, I'm just a West Texas small-town banker, and thank you
for putting my name on the back so that I remember who I am.
Again, my name is George Hansard. I'm the president and CEO
of The Pecos County State Bank in Fort Stockton, Texas. Pecos
County State Bank is a $150 million community bank that was
started approximately 80 years ago in Fort Stockton, Texas.
Fort Stockton only has a population of some 8,000 people. And
we have a location in Sanderson, Texas, which has a population
of 750 people. We are truly community bankers.
I have been the president of the bank for 6 years, and I
have been employed with community banks for over 32 years. I
appreciate the opportunity to address issues which I believe
have adversely affected community banks for the last several
years. The most important aspect that my board asked me to
relay is the inflection of my voice so that the subcommittee
will understand the frustration that we have seen.
Several months ago, we at Pecos County State Bank stumbled
across our bank's policy manual from 1986. That policy manual
was 100 pages long. Today, our same policy manual is over 1,000
pages, which requires a full-time compliance officer and also a
real estate clerk to remain abreast of regulatory changes to
ensure that we remain in compliance and their interpretation
thereof.
Community banks have been the life blood of this country,
and they're responsible for more small business successes than
any other resources, including government programs. What's
troubling to me and to my bank is the impact of government
regulation that has been based not upon common sense but on
politics.
Today, only 25 percent of Dodd-Frank has been implemented.
What has Dodd-Frank done to Pecos County State Bank? For one,
allowing a consumer the opportunity to determine whether the
bank may assess a charge on an overdraft. That overdraft is
created by a debit card that consumer used. In the old days of
check writing, no one had a problem with the bank assessing
that overdraft. The check was often handed over to the local
county attorney for collection or prosecution, and that
customer had to pay additional fees on top of the bank fees,
and in some instances, may have had a criminal record. Now
Dodd-Frank places no responsibility on that consumer for his or
her actions. And in my opinion and the opinion of most
community banks, this is simply price fixing and has no
rational basis.
Twenty years ago, a community bank the size of Pecos County
State Bank did not have a compliance officer nor did it have a
real estate clerk to handle the regulations which covered real
estate transactions. Now with Dodd-Frank, how many more staff
members will a community bank be forced to employ? These staff
members actually provide nothing to the bottom line of the
bank. We're not sure, but we do know that from over 3,000 pages
of law, our policy will surely double and our staff to handle
these complexities.
At Pecos County State Bank, I find it interesting that my
lending staff has not increased in the 11 years that I have
been with the bank, and we have been able to double the
outstanding of our loans with the same lending staff. But
during that same time period, we have had to add two employees
simply to handle government regulation. And if I have to double
that staff due to Frank-Dodd, that will constitute 10 percent
of my entire staff.
Another aspect of Dodd-Frank are the appraisal
requirements. In my 32 years of banking, and I think many other
bankers will agree, the banker who puts his hands on his
collateral makes good loan decisions. Contrary to popular
belief, community banks have no desire to make bad loans. Bad
loans not only impact the bank's bottom line, but they also
negatively impact the banker's job, the community, and are also
negative to a borrower. And a bad loan makes a good customer a
bad customer. Dodd-Frank takes that evaluation process
completely away from the community banker, and the community
banker must place trust in someone else putting their hands on
that collateral.
I do not believe in not being involved in evaluating
collateral taken to secure a loan. Maybe loans sold in the
secondary markets still need independence, but not loans which
the banker must live with. Would you purchase a home without
being involved in deciding the purchase price?
Further, a real life example of Dodd-Frank occurred in our
bank. We had used our real estate processor to also perform our
real estate appraisals. She is a licensed, State-certified
residential appraiser. Dodd-Frank put a stop to this even
though Dodd-Frank allows that appraiser to receive a copy of
the residential sales contract which clearly states the sale
price, the downpayment, the loan amount and terms, but it does
not allow that appraiser to be involved in any type of loan
processing, which is the same information she would get from
the sales contract. We believe that having a knowledgeable
appraiser/processor with loyalty to his or her employer, makes
for a more reasonable appraisal instead of those alleged in
Dodd-Frank. I had to tell her she had to make a choice. I lost
that important employee. She chose to remove herself from the
everyday process of regulations which was based upon politics
and not rationale. What does her family think now?
Is there a solution? I'm sure that the politicians who
wrote the legislation believe they are writing it in the best
interest of their constituents and there is a reason for much
legislation, but Dodd-Frank, with all of its amendments, is
far-reaching and overreacting. I strongly believe that the
postponement and repeal of Dodd-Frank is fair to the county as
a whole. Dodd-Frank may have good intentions, but these
intentions are misguided, certainly to community banks which do
not sell their loans in the secondary market.
Community banks did not participate nor did we profit from
the excesses that contributed to the recent economic meltdown
in the financial and housing industry, yet we are paying a high
price for the actions of a few large institutions. These
institutions have no fear. They're too-big-to-fail. In fact,
their only concern is how large their bailout will be. We as
community banks do not, nor have we ever had this luxury.
Community banks are different from megabanks. Community
Banks have been closed all over this country, and all the
megabanks have been bailed out by taxpayers' expense. The
rationale that it is fine to close community banks and to bail
out megabanks is inherently irrational. Don't you think
community banks are as important to that community as the
megabank is to its country? I can tell you that community banks
and their boards are at an all-time high in their level of
frustration. Something must be done that makes good common
sense.
Again, I appreciate the honor and the opportunity to voice
my opinion on such an important issue, not only for the
community banks, but for the country and its future. Thank you.
[The prepared statement of Mr. Hansard can be found on page
55 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Ms. Maria Martinez, president and chief
executive officer of Border Federal Credit Union. Welcome.
STATEMENT OF MARIA J. MARTINEZ, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, BORDER FEDERAL CREDIT UNION, DEL RIO, TEXAS
Ms. Martinez. Good morning, Chairwoman Capito, and good
morning, Representative Canseco. Thank you for the opportunity
to testify at today's hearing. My name is Maria Martinez. I'm
the president and CEO of Border Federal Credit Union (BFCU)
located in Del Rio, Texas, headquartered there. We have a
community charter, and we serve 13 counties, most of which are
underserved. BFCU has a low-income designation, and we're also
classified and certified by the U.S. Treasury as a Community
Development Financial Institution. We have over $107 million in
assets and approximately 22,000 members.
One of the current challenges affecting community credit
unions today is the current limit of 12.25 percent of assets on
the amount of member business loans a credit union can make.
This cap can be increased to 27.5 percent as proposed by H.R.
1418. This cap restricts us from being able to fully serve our
members, limiting the opportunity of many Texans.
Border FCU would like to enter the business lending market,
but we are reluctant to do so. The start-up costs and
requirements that we must comply with in order to offer small
business loans exceeds the ability of many credit unions to
cover their costs when faced with such a low gap. Also, we
don't want to start a business lending program only to turn
away members once we reach this low cap. Telling our members
that we cannot make the loan because Congress has imposed this
artificial cap is no comfort to our member who qualifies for
the loan and has come to us for help.
Raising the cap or eliminating it completely will open up
credit to small businesses in our communities and create jobs.
The lack of credit for small businesses slows the economy's
recovery. Member business lending by our community credit
unions is a vital solution to our current economic needs.
Another challenge we face is the excessive regulatory
burden. There is no doubt that the increasing amount of new
laws and regulations that credit unions face have become
overwhelming. As the credit union president, I spend many hours
reading each new law and regulation. I can't afford to hire
lawyers to interpret them for me. Most of these laws and
regulations are created to address a problem caused by
organizations other than credit unions. Yet, the regulators
continue to impose the same requirements on small credit unions
as they do on the largest financial institutions in the
country. This just doesn't make sense.
Consider, for example, the outdated requirement of posting
physical disclosures at our ATM locations. Changing the
physical signs to electronic disclosures displayed while using
the machine could avoid serious problems such as vandalism and
the wear-and-tear on the equipment. Or, for instance, the 400-
page proposed rule on remittances that will require us to
reconsider our ability to open the service to our members.
New regulations require more policies to be implemented by
the credit union, expensive modifications to computer systems
and the training of staff and our volunteer board members. It
is particularly challenging for small credit unions.
Unfortunately, we have seen too many small credit unions merge
due to the increasing regulations. Far too often, I hear that
they just couldn't keep up with the volume of changes in rules
and laws, and that is the major factor for the decision to
merge.
When Congress and regulators need to crack down on bad
actors, they should apply the changes to that specific industry
and business type rather than imposing this on credit unions.
Another challenge is the exam process. At times, it seems
there is a separation between the policy as stated by the
regulatory leadership and what occurs locally during the exam.
We all know that the exam process is part of operating a
financial institution, but it is also important that examiners
not overregulate or exceed their authority. Examiners have
tremendous powers. If a credit union believes that an examiner
has acted unreasonably, they have very few realistic options.
Passing H.R. 3461, which addresses the exam process, would be a
positive step in balancing the relationship between the
regulator and the regulated.
And, finally, it is important that consumers be equipped to
deal with the conflicts, financial products, and issues they
face today.
Border FCU serves an underserved community, an area where
oil and gas exploration is booming, and we also serve a
military base. We offer free programs such as home counseling
services, budgeting workshops, and volunteer income tax
preparation. Our volunteer staff educates our youth on
financial literacy at local schools, and we offer a youth
financial summer camp. All of these programs are designed to
create financial awareness.
I ask the subcommittee to continue to support financial
literacy programs. As communities grow and jobs are created,
programs must be accessible to consumers within the industry to
assist them with financial education. We all know that an
educated consumer is the best client of any institution.
Madam Chairwoman and Representative Canseco, thank you for
coming to Texas and holding this hearing. This concludes my
testimony.
[The prepared statement of Ms. Martinez can be found on
page 59 of the appendix.]
Chairwoman Capito. Thank you very much.
Our next witness is Mr. Cliff McCauley, executive vice
president, correspondent banking, of Frost Bank. I understand
this is a former Frost Bank--
Mr. McCauley. You are correct.
Chairwoman Capito. --building. It's beautiful. Welcome.
STATEMENT OF CLIFF MCCAULEY, SENIOR EXECUTIVE VICE PRESIDENT,
FROST BANK, SAN ANTONIO, TEXAS
Mr. McCauley. Thank you. Chairwoman Capito, Representative
Canseco, I am Cliff McCauley, senior executive vice president
of Frost Bank, where I have worked for over 30 years. My
current responsibilities include leading our correspondent
banking line of business, where I have the opportunity to work
with financial institutions all over the State of Texas on a
daily basis. I would like to welcome you to my hometown of San
Antonio and express my gratitude for you holding this hearing.
And as you mentioned, these chambers also have a special
meaning as this building served as the Frost Bank headquarters
for many years prior to the construction of our headquarters
just next door.
In my role of working with community financial institutions
for over 25 years, I have been a part of many business cycles
that have affected the banking industry and have seen the
corresponding attempts to prevent the downturns from happening
again. There were many sweeping regulatory changes after the
banking crisis of the 1980s when nearly half of the community
institutions in this State disappeared. These new regulations
were put in place to prevent the next crisis but did very
little in retrospect as numerous institutions grew into what we
now know are too-big-to-fail.
The regulatory burden that was put in place then is nowhere
comparable to the overkill we're experiencing today, and in my
opinion will have about the same effect of past attempts to
rein in the too-big-to-fail institutions while punishing the
community institutions that have historically played by the
rules.
If Dodd-Frank is allowed to stand and proliferate as a
monster regulatory overhaul, only the largest institutions will
be able to navigate its requirements, and the community
institution model will continue to diminish.
The cost of regulatory compliance is simply staggering. I'm
not talking about efforts to keep an institution out of
trouble; I'm talking about a well-meaning community institution
that has no intention of being unfair to members in their own
town. These smaller institutions spend a disproportionate
amount of money and time to just meet the reporting and
manpower requirements of this new regulatory overkill.
I personally know of two community banks that simply threw
in the towel and sold out after being beat up by regulators
about not having enough high power talent in their compliance
position, a position they tried fervently to fill but were
unable to attract someone of that caliber to relocate to their
rural community. That bank was purchased by a larger one in a
metropolitan city and no longer has the local service or long-
time employees who understand that community.
If the community banking model becomes an endangered
species as the megabanks take advantage of the consolidation
caused by regulatory burden, it would be very detrimental to
many communities, small businesses, and local public entities.
As we have seen in the past, when a large institution buys
out a smaller local entity, they tend to pick and choose the
profitable pieces that fit their model and abandon the parts
that don't. In many cases, the pieces that are discarded are
the locations in smaller markets, and there's evidence of this
today as some too-big-to-fail banks are simply closing local
offices because they no longer fit their model.
Jobs are lost as duties are moved to the acquiring office,
and the local community knowledge and service is lost forever.
If consolidation continues, as I wholeheartedly believe it
will, and there is not a local entity to pick up the pieces,
that local community will undoubtedly suffer as a result. It is
often noted that small businesses are the job engine of this
country. It is also a well-known fact that community
institutions cater to those small business customers to meet
their needs and help them grow their entities. Without a strong
community banking presence in so many smaller and rural areas,
the future outlook for those businesses decline as opposed to
prosper.
There are too many problematic provisions of Dodd-Frank to
cover today, but there is one provision that I continually try
to bring to light, and that is the repeal of Regulation Q. The
ability of banks to pay interest on business checking will
further strengthen the too-big-to-fail banks while being
detrimental to the community banks and small business
borrowers. This repeal has only negative effects for smaller
institutions and businesses while providing the too-big-to-fail
banks an opportunity to buy the deposits from relationship-
based institutions. This provision along with the scores of
other new regulations and the yet to be determined impact to
the CFPB simply spell incredible difficulty for the community
banking model. Unless there is at the very least an attitude
change by certain regulators away from a ``Gotcha'' mentality
and enforcement activities, this country will see hundreds and
eventually thousands of the community banks that serve their
area be forced to sell out to a larger entity with more
resources to fight the daily battles of overzealous regulatory
reform.
I appreciate the opportunity to be here today, and I would
be happy to expand on any of my comments or answer any
questions. Thank you.
[The prepared statement of Mr. McCauley can be found on
page 69 of the appendix.]
Chairwoman Capito. Thank you very much.
Our next witness is Mr. Les Parker, chairman, president and
chief executive officer, United Bank of El Paso Del Norte. Am I
saying that correctly? Welcome.
STATEMENT OF LESTER LEONIDAS PARKER, CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER, UNITED BANK OF EL PASO DEL NORTE, EL
PASO, TEXAS
Mr. Parker. Thank you, Chairwoman Capito, and
Representative Canseco.
My name is Lester Leonidas Parker. I am president,
chairman, and chief executive officer of United Bank of El Paso
Del Norte.
We're a $177 million minority community bank in a community
of some 900,000 souls, primarily Hispanic, and we're proud of
that.
For the past 7 years, our bank has been the principal SBA
lender in our SBA district. And we have built a solid record of
supporting small business. Indeed, we focus only on small
businesses and professional practices and do very, very little
consumer business whatsoever.
I started in commercial banking in 1962, 50 years ago in
September this year. I was fortunate, and America has been good
to me, I was able to earn a college degree and go on to
graduate school and such. I was a captain in the Army during
the Vietnam conflict. And you will hear a little more about
that later because it's relevant.
I have started three small businesses, two micros, and one
partnership. I have also been fortunate to start three
community banks, all of them successful, and I have cleaned up
one bank that was about to be closed by the FDIC. My present
bank was started 11 years ago, and it's owned by people from a
broad cross-section within our community--the first time that
has ever happened in El Paso.
I believe the House of Representatives in Washington is the
closest thing we have to the voice of the American people up on
that hallowed hill. Because of that, I really am honored to be
here before your committee. I believe you have the means to
help ensure that communities across America are able to retain
their major facilitator of economic growth, and that's their
local community bank.
The business model of community banks focuses principally
on the communities in which they are headquartered. The
business model of the too-big-to-fail banks focuses nationally
and internationally and has long-range objectives and desires
that really don't match up with those of community banks.
We have as community banks a strong sense of duty,
obligation, and commitment to those friends, neighbors, and
fellow citizens we have in our community, and we think that is
very, in fact, manifestly important.
Our bank maintains very, very good ratings with the
regulatory agencies, both State and Federal. We have very clean
portfolios of loans and investments. We have the lowest
nonperforming and past-due ratios in our entire area and have
maintained those for several years now. We are diligent about
running a very good bank that is a genuine service and a
genuine resource to our community, and we have received a
number of accolades because of that. We are a simple, non-
complex organization, yet the direct compliance costs in the
bank have increased 240 percent over the past 5 years far
exceeding the growth of the bank, its loans, investments or
deposits. That compliance cost figure includes only the direct
cost of specific managers while working on regulatory
compliance, the new cost of a skilled compliance officer, and
the cost of myriad outside, third-party auditors and reviewers
to ensure that our compliance efforts are adequate. It does not
count the other costs of implementation, the annual training
that I must do with all employees and the compliance activities
that they have throughout each week.
When we were examined by the Federal Reserve during the
fall of last year, the examination preparation commenced in
July as we began to provide huge amounts of data to them. We
have less than 800 loans in our bank; we have less than 3,000
accounts. The reason is because we're a small business bank. A
bank normally of our size would probably have 14,000 accounts.
Everything is on computer, so we downloaded our entire
bank, if you will, to the examiners in Dallas, Texas. They had
almost 3 months to massage that data. And when they came in,
they had 16 people who stayed for 2 weeks and set about to
absolutely micromanage everything they could. It's obscene.
I have a friend who is a community banker in a small town
south of Fort Worth. The town has 1,700 people. She has been
with that bank since she was a clerk. She now runs it and owns
it, and the bank is $40 million in size. She has 13 people,
including herself. In her last examination, she had six
examiners from the OCC who stayed a month. She has about the
same small number of accounts and loans as we do. She's also
very well rated. I fail to see why that kind of emphasis is now
put on small institutions.
I see the red lights flashing, but let me tell you one
thing. I had the pleasure of serving our county, and I
commanded a combat nuclear outfit. I had enough firepower to
take a small country off the map of the world. I can tell you,
we had excellent ratings. We had a Presidential unit citation.
We were overseen by the Department of Defense, the Department
of the Army, the Defense Atomic Support Agency, and the entire
staff of the United States Army. Everybody is nervous about
nuclear weapons. I don't like them personally, but I think they
probably have a use somewhere. We had less than 20 percent of
the regulation to control those monstrous weapons than we have
in our little bank to control what we do. So I leave you with
this: 40 years ago, I did not see problems in banks and banks
falling like flies, and yet the level of regulation and the
cost of regulation was far, far less than it is today.
As I see it from my standpoint, we will see community banks
continue to decline in number. We simply cannot afford the high
costs of Federal regulation. And as one banker, I will tell you
this, my major risks are not credit risks, risks of theft,
risks of some robber coming in with a gun in my office; my
number one risk is Federal regulatory risk. And I have a
greater risk of harm to my bank, to my stockholders from the
Federal Government than I have from anything else in this whole
world. That is obscene. Thank you very much.
[The prepared statement of Mr. Parker can be found on page
78 of the appendix.]
Chairwoman Capito. Thank you very much.
Our next witness is Mr. Ignacio Urrabazo, Jr., president,
Commerce Bank. Welcome.
STATEMENT OF IGNACIO URRABAZO, JR., PRESIDENT, COMMERCE BANK,
LAREDO, TEXAS
Mr. Urrabazo. Thank you, Madam Chairwoman, and thank you,
Representative Canseco for letting me participate in this
important forum. My name is Ignacio Urrabazo, and I'm the
president of Commerce Bank in Laredo, Texas. We're a basic
classical community bank situated in South Texas.
Commerce Bank has about $550 million in assets, and it was
established in 1982. We're a subsidiary of International
Bancshares Corporation (IBC). IBC is the largest bank, minority
bank in the continental United States with about $11.7 billion
in assets.
By way of background, I'm currently on the FDIC Advisory
Committee for community banking. I'm also on the executive
board and I am the treasurer of the Texas Bankers Association.
I serve in a variety of committees for the American Bankers
Association, and I'm also a former chairman of the board for
the National Bankers Association, which is the largest minority
banking trade association. I have been in banking for over 42
years.
This morning, I would like to focus on three things:
fairness; the current regulatory climate; and the impact to
banks and consumers from the regulators.
As they say, a picture is worth a thousand words, so I have
included in my pages a presentation that provides a visual of
what compliance looks like today in our bank, and it's complex,
and I'll leave it here for the record.
There's no need to rehash the causes of the unprecedented
financial meltdown that occurred in 2008, 2009. I do want to
say that the regulators were clearly a part of the problem who
got very little blame.
In my lifetime, the FDIC fund has been broken twice,
several decades ago with the S&L crisis, and just recently with
the subprime crisis. Unfortunately, the industry received
virtually all the blame, and the regulated agencies by and
large received a pass. As an old banker--not that old, but
older--I have to tell you that the regulators failed every bit
as badly as the industry, and they have never been called to
judgment.
As seen in prior economic cycles and prior periods of
crisis, policymakers and regulators overreact to the cyclical
problems that occur all the time. Congress' holistic approach
to fix everything in the financial sector has created
unnecessary and inflexible rules. The Dodd-Frank Act, in my
view, is a perfect example of a horrible overreach. The Dodd-
Frank Act, which is 848 pages long, is an outline directed at
the bureaucrats, and it instructs them to make still more
regulations and create more bureaucracies; it, in fact, can be
a multi-headed monster.
This action by Congress is unprecedented. I would like to
remind the committee, the laws that set up the American
business--the banking system in 1864 ran for 29 pages. The
Federal Reserve Act of 1913 ran for 32 pages. The banking act
that transformed American finance from the Wall Street crash,
commonly known as the Glass-Steagall Act, spread out for 37
pages. I ask you, how in the world will our community banking
system survive under the weight of the Dodd-Frank Act?
Community banks across the country will be destroyed by the
regulators creating additional regulations on top of existing
regulations. Community bankers are frustrated with the unknown
and the additional costs required for compliance and
implementation. This has come to banks when we're trying to
survive the worst economic crisis in the last 50 years and at a
time when our interest margins are shrinking, not to mention
the elimination of fee income through the Durbin Amendment and
the elimination of overdraft fees.
These fees are critical for the survival of community
banking. It is a key noninterest income that helps provide many
of our banks with the additional products and services that the
consumers need.
The Dodd-Frank Act has not been fully implemented, but we
have already seen its effects. While the Dodd-Frank Act has
some necessary provisions that are required for systematic risk
and certain complex financial products, we again see that the
good intentions for the short term will have unintended
horrible consequences for the long term.
Let me talk about some issues that I see having major
consequences not only for community banks, but more importantly
for the consumer.
First, in the area of compliance and fair lending, we're
seeing examiners becoming totally inflexible and rigid in the
interpretation of fair lending laws, all in the name of
fairness and equality. In order for a bank to avoid a violation
of fair lending laws and a referral to the DOJ, we have put in
place very inflexible and rigid underwriting standards to avoid
criticism.
On the surface, this sounds very appropriate, but in the
trenches we are now rejecting many long-time customers who pay
well, but do not qualify under these new standards, because of
the credit scores or the debt-to-income ratio. The same concept
applies to the pricing of these loans. Some of these customers
have had long-time relationships with the bank, but everybody
has to fit in the box. If you don't fit and the bank makes the
loan, you become an exception. If you become an exception and
create an outlier, you must justify the reason for making that
loan, and then the examiner will ask for similar exceptions to
other outliers that are in a protected class.
This applies to mortgage loans and consumer loans. The
result, exceptions create enormous fair lending risks, so banks
stop making exceptions. Furthermore, the FDIC has stated as a
policy, the FDIC does not want loan officer's discretion in
consumer lending. You must fit in the box. The bottom line is,
we are declining loans at record levels, and worst of all,
alienating our customers and damaging our reputation.
In addition to the above, the costs involved in monitoring
and living with such regulatory tests as regression analysis
has become burdensome and unclear. Banks provide data, and the
regulators will run regression analysis on women versus men;
Hispanic versus White non-Hispanic; unsecured loans for women
versus men; unsecured loans for Hispanic versus White non-
Hispanic; vehicle loans for women versus men; vehicle loans for
Hispanic versus White Non-Hispanic, and various other
combinations.
If there are no significant variances or a disparate impact
in the underwriting standards or the pricing, then the
regulator will continue to cut and slice the portfolio into
other combinations, such as one branch against another branch
or even one officer against another officer of different
branches until the regulators have exhausted every conceivable
iteration as they are clearly practicing ``Gotcha'' examination
tactics. Smaller banks will be forced to hire outside
consultants to gather and analyze the data at greater costs
because they do not have the resources to handle these
difficult and complex tasks internally.
All banks are different, all consumers are different. It is
very, very difficult to place everybody in the same box. Rules
are a poor substitute for good judgment. Policymakers are now
attempting, in effect, to force good judgment out of a process
of creating rules that embody their view of what is correct or
what is right. We have no discretion.
The second issue, and I'm going to go quickly through this,
is the CFPB's review of overdraft programs and their impact on
consumers. The CFPB has initiated new inquiries in overdraft
practices and their impact on consumers, and they are
soliciting feedback on a prototype ``Penalty Fee Box'' on the
consumer's checking account statement. Last year the Fed, the
FDIC, and the OCC all promulgated their own guidance and rules
to supervise overdraft programs.
Many community banks incurred significant costs instituting
new forms, new operating systems, new disclosures, and training
to comply with Reg E and Reg DD to establish full transparency
and ensure customer consent on the opt-in provisions, all based
on consumer choice. Now, the CFPB wants to review the same
programs. What this means for banks is new rules and new
guidance. The overdraft programs serve as a safety net for
consumers, and it's a service that is widely demanded by our
customers. It should be noted that the consumer has complete
control and can revoke their opt-in status at any time.
Overdraft protection satisfies a unique and important need
for consumer credit marketplace. Restricting access will not
eliminate the need that the consumers have for it, but it could
limit their access to it as banks begin to realize it's too
burdensome and too expensive to maintain, and carries too much
regulatory risk. I have included a recent study by Todd Zywicki
for the record that thoroughly studies the overdraft protection
system.
The third issue, quickly, is that consumer complaints will
now play a larger role with the CFPB and will have a
significant impact on my costs and many possible dangerous
consequences. The major concern to banks is the Unfair,
Deceptive, or Abusive Acts and Practices, UDAAP section. Banks
will clearly have to be familiar with customer complaint
programs, if for no other reason than to prove that the bank
takes such concerns seriously. Banks will have to identify
patterns of complaints and establish procedures to review such
patterns as well as individual complaints. Management systems
will have to be established and monitored.
Ridiculous and far-fetched allegations will surface to the
bank. The definition of ``abusive'' will be solely at the
discretion of the CFPB, the DOJ, and consumer groups. At IBC,
we have recently spent several hundred thousand dollars to buy
a consumer complaint system to help manage these complaints,
which is a huge burden on the bank.
Other areas of concern are higher capital requirements,
costly record-keeping and reporting requirements, standardized
plain vanilla products that will be required, changes in
mortgage disclosures, escrow accounts, mortgage credits to
curtail that QRM is implemented, municipal advisors. New rules
in bank's investment portfolio and other situations having to
do with safety and soundness examinations have become extremely
difficult.
In summary, community banks are facing stiff challenges for
the next few years. As interest margins shrink and fee income
becomes more difficult to obtain, the regulatory burden will
overrun small community banks causing them to either merge or
consolidate with larger banks or just go out of business.
Most large banks are not interested in small rural banks,
and rural banks do not want to become a part of a large holding
company; they are at a loss.
At the national level, the decrease (sic) of banks has
decreased. As one who has worked in community banks for over 4
decades, I maintain that despite policymakers' good intentions
in implementing regulations, they are ultimately detrimental to
a bank's ability to grow and create capital in other
communities and to build communities through job creation.
Thank you for involving us in this important forum where we
can share the experience of community banks. I hope other
perspectives, which are based on our day-to-day interactions
with consumers, help illuminate the need to lessen the burden
on community banks and consumers who already are negatively
impacted. Without community banking, we will no longer be the
America that created the largest economy in the world. We have
already lost over 11,000 community banks since 1985; we cannot
afford to lose any more. Thank you.
[The prepared statement of Mr. Urrabazo can be found on
page 88 of the appendix.]
Chairwoman Capito. Thank you very much.
Our final witness is Ms. Janie Barrera, president and chief
executive officer of ACCION Texas, Incorporated. Welcome.
STATEMENT OF JANIE BARRERA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ACCION TEXAS INC.
Ms. Barrera. Thank you very much. Good morning.
On behalf of the board of directors and staff of ACCION
Texas, welcome to San Antonio. We thank you for hosting this
conversation on the challenges facing financial institutions in
Texas. As a not-for-profit organization, we partner and work
with a broad spectrum of voices and practitioners in economic
development. I hope to share insight and expertise in the
challenges and opportunities that face you as policymakers.
San Antonio is the headquarters for ACCION Texas. We began
our work here in 1994 and have now become the largest
microlender in the United States, serving Texas, Louisiana,
Arkansas, Missouri, Alabama, Mississippi, Tennessee, and
Kentucky, some of the poorest States in our country. We have
provided over 12,000 business loans, and disbursed over $121
million to over 8,000 small businesses. ACCION currently has an
active portfolio of $25 million, and we have a 95 percent
repayment rate. The average credit score of our borrower is
575. We are also a registered Community Development Financial
Institution, a CDFI.
This year marks our 18th anniversary. As we reflect on the
challenges of financial institutions that are considered
nontraditional, we recognize the importance of oversight and
diligence. At the same time, we must remember that we need
intermediaries that deploy funds to individuals who are not 100
percent ready for traditional banks. ACCION, along with the
800-plus CDFIs across the country, provide a solution by
providing gap financing. With the funds we lend to business
owners, our work creates a culture of commerce via banking and
savings.
Over our history, we have been significant beneficiaries of
the U.S. Treasury CDFI Fund, the Department of Commerce, the
Department of Agriculture, and the Small Business
Administration. Since 1996, the CDFI Fund has awarded ACCION
Texas over $8 million in a combination of grants and loans for
loan capital, all of which was deployed, on average, within 12
months of receipt. And since 2000, ACCION has received $3.5
million from the SBA for microloans and technical assistance.
These funds, with other public and private financing, have been
essential in our expansion beyond our initial office in San
Antonio to 18 offices across our footprint.
These tumultuous economic times have had a substantial
impact on our lending, both positive and negative. While many
perceive Texas as having a strong economy, small business still
felt the brunt of low consumer confidence in sales and
volatility in the market. As traditional credit markets have
tightened and loan approval criteria have become more
restrictive at the bank level, we have witnessed an increase in
demand.
ACCION's loan originations in 2011 were almost $15 million,
an increase of 14 percent from the previous year. At the same
time, the number of applications received in 2011 increased by
over 1,000. This signaled to us that because of this increase,
there's a need. However, we were not able to help all the small
business owners because of the drop in applicant quality.
People waited too long to come to us, and the capacity to repay
the loan was no longer there.
We have seen a consistent annual growth in our portfolio.
The ever-increasing demand for our services and the associated
costs to keep up with the demand continue to provide challenges
from a liquidity perspective. We continue to rely heavily on
fund raising to support our growth since we are a financial
institution without depositors. A current example is our
pending $2 million CDFI Fund request to provide loan capital
for continued expansion of our services in the Delta. We view
our heavy reliance on fundraising as a significant risk for our
organization. We are working hard to diversify our support base
into new areas such as individual donors. But it is clear, to
ensure that funding capacity exists for microentrepreneurs,
Federal support plays a key role.
Please allow me to describe ACCION's role in economic
development.
ACCION is an alternative lender. The average credit score
of our borrowers is 575, the average loan size is $15,000, and
the loss rate is 5 percent. We make loans from $500 up to
$250,000. And we are part of the SBA pilot loan program that
guarantees loans up to 85 percent.
We exist to combat predatory lending. And we exist to help
individuals achieve the American dream through loans that will
not rob them of the ability to create an opportunity for
themselves.
We are regulated by our designation as a CDFI and a CDC.
ACCION currently adheres to compliance measurements that
are required by Treasury and the SBA.
ACCION supports the delineation between CDFIs and the
traditional lending institutions. And ACCION is committed to
being transparent and being accountable.
It is my hope that this commentary will prove to be
beneficial as you evaluate the current and potential state of
challenges and opportunities facing organizations like ACCION.
We, along with our borrowers, have benefited greatly in public
and private financing. Thank you very much.
[The prepared statement of Ms. Barrera can be found on page
38 of the appendix.]
Chairwoman Capito. Thank you very much.
I would like to thank all of you for the depth of your
testimony and your--we're supposed to be reading your face and
your voice. I think we have a good reading on that. I must
begin with the questions. I'm going to kind of throw this out,
so anybody who wants to answer this--some of you have alluded
to this in your testimony, but it's one of my little things
that really gets me about the Dodd-Frank Act. In Section
1021(b)(3), it directs the CFPB to ``Ensure that outdated,
unnecessary and unduly burdensome regulations are regularly
identified and addressed in order to reduce unwarranted
regulatory burdens.'' In other words, if this bill is going to
come in or the CFPB is going to come in and put new regulations
on, you have to scrape out the old ones, the outdated, the
outvoted, and no longer efficient burdens.
We wrote a letter to Secretary Geithner asking him to
delineate where he had actually identified burdensome and
outdated regulations, and he gave us two, one of which was the
creation of the CFPB, which we kind of couldn't figure that one
out, and the other one was changes to the Bank Secrecy Act, a
similar obscure thing. So I would like to know--he did admit in
his testimony that they had not really put this as a high
priority and made this something that they really--this is one
of the reasons--this is one of the ways that Dodd-Frank was
sold to several Members of Congress. So, I would like to ask
each of you in your institutions, in your examination processes
or as you're looking to meet the compliance regulations, has
there been any change in terms of removing the old and putting
in the new, or is it just putting the new on top of the old?
So, anybody who wants to answer. Mr. Parker?
Mr. Parker. My experience has been, Madam Chairwoman, that
it's simply a matter of putting the new on top of the old. As
with many of the laws that we see in the Federal Government,
there's no sunset provision for a lot of these regulations, and
they simply, as we say out in West Texas, get piled higher and
deeper just like a lot of stuff that we see out there.
Chairwoman Capito. Ms. Martinez?
Ms. Martinez. I think that some of those regulations are as
confusing to us as a community institution as they are to the
examiners. A lot of times, they come in and they're confused on
what they're supposed to be examining us on. So they go back to
the old rules, and then they have to visit the new ones because
we're very much informed on the new ones, so we want to comply
with what's up and standing in Congress at the time. And so, it
makes it very confusing when we have to comply with it because
they're not trained. This is a lot--it's a lot for them too.
Chairwoman Capito. Would anybody else like to--yes, Mr.
Urrabazo?.
Mr. Urrabazo. Talk about some old rules, we had a recent
examination where the flood insurance just popped out. That
rule has been there forever, and we have complied with it as
much as we could. But all of a sudden, they do a very detailed,
excruciating examination of flood insurance on everybody who
has real estate anywhere, so we had to do a lot of expensive
work and compiling of data on an existing rule that was there
but that for years and years was--maybe really looked at it--
they kind of superficially looked at it, then all of a sudden,
they just come in and do a full-blown examination on flood
insurance.
Chairwoman Capito. I can speak to that personally as I live
on the 8th floor of an apartment condominium in Washington,
D.C., and I refinanced like a lot of people across the country
did, and I got hung up on whether I had flood insurance on the
8th floor in Washington, D.C. So it's probably exactly the same
thing.
Mr. Urrabazo. Exactly what I'm talking about.
Chairwoman Capito. And it then became a question of whether
the condo association had enough reserves to be able to pay if
the parking garage were to flood. Anyway, it's exactly what
you're saying. And it took an extra 2 weeks because--actually,
probably more than that, and a few lawyers, I'm certain, to get
that all straightened out, which adds to the cost of everything
in the compliance.
Mr. Hansard. Chairwoman Capito?
Chairwoman Capito. Yes.
Mr. Hansard. One regulation you might pass on to the
Treasury Secretary is the Patriot Act. I think all the banks
have been affected by the Patriot Act, and at one time, it may
have had its place. But to sit down and say that certain
professions are high risk--and Congressman Canseco, I beg to
apologize right now because an attorney is considered high risk
in banking regulation. I agree some of them may be, but to make
that broad statement is simply unfair.
We have quit issuing money orders in our bank because of
the regulation. We have a lot of people who are low-income
individuals who come in and pay their bills with money orders.
We quit issuing money orders because of the regulation, that we
have to run basically a background check on them, and that
background check is a list that the Federal Government has put
out, not that anyone else has put out. And to tell you a real
live situation, several months ago, I was in a convenience
store trying to fill up my pickup truck with diesel, and for
some reason my debit card wouldn't work, so I had to go inside.
Inside at the counter was a woman buying $5,000 worth of money
orders with hundred dollar bills. She finished her transaction,
and she went out to her car--and this is in Fort Stockton,
Texas--and got into a solid black Mercedes with the darkest
tinted windows you have ever seen, with California license
plates. And there is no regulation for that convenience store
to get any type of identification nor is there for the United
States Postal Service, which sells money orders, to require any
kind of identification, but there is on banks. Those
regulations are outdated.
To open up a new account, we have to put our customers
through all types of scrutiny. And it takes hours and hours and
hours to go through the process that we have to take. My poor
new accounts personnel who used to have to have one password
basically to get into our new accounts system now have eight
passwords because they have to get to OFAC and all these other
things that we are required to have because of the Patriot Act.
Money is not being laundered through the banks. It's being
laundered through private businesses; it's not through the
banks. In my 32 years of banking, I cannot tell you of a single
instance that I have seen money laundering. And I would ask
these other bankers if they have seen it.
Chairwoman Capito. I'm going to ask one more question, then
I'm going to yield to my colleague. And this will really warm
everybody's heart on the panel and in the audience, I think.
The 2010, 2011 edition of the Bureau of Labor and Statistics
Occupational Outlook Handbook states that, ``Increasing
financial regulations will spur employment growth both of
financial examiners and of compliance officers by 31 percent
over the years 2008 to 2018.'' In the list of the top 30
fastest growing occupations in the United States, in which I
noticed home health aide was, for obvious reasons, as we're all
aging, in the top five. Compliance officers is one of the top
five fastest growing--financial compliance officers is one of
the fastest growing occupations in this country.
So we have heard a couple of things. We heard from Mr.
Parker that his cost has gone up over 200 percent, we heard
from Mr. Hansard who said that he had five--or if you had to
hire--you have your real estate person and a compliance officer
you know you're going to have to hire. Ms. Martinez said she
only--you have eight people total at your bank, or at your
credit union?
Ms. Martinez. No. We have 107 employees.
Chairwoman Capito. 107. So are 8 in the compliance area; is
that what your said?
Ms. Martinez. Pretty much. We have 13 managers who deal
with compliance; each one is respective of their area.
Chairwoman Capito. And what about you, Mr. Glenn?
Mr. Glenn. We have one compliance officer, but there are
about 20 people who have--invest themselves at various levels.
We estimate the cost of compliance, just in salary and
compensation alone, to be about $600,000 a year.
Chairwoman Capito. Okay. That's money that's not going to
the small business owner or the consumer to buy a car or to
send your child to college. Mr. McCauley, do you have a--
quantify on that?
Mr. McCauley. Yes. Ten years ago, our direct compliance
department consisted of four people, today it's over 30, and
that is direct. That's not including the people in accounting
and all that who support it. So it's incredible.
Chairwoman Capito. And I'm not sure if in your testimony
you specifically said--Mr. Urrabazo?
Mr. Urrabazo. Yes. We have--the same thing as Frost, we had
a smaller group, I can't remember, maybe 7 people in compliance
maybe 4 or 5 years ago. We now have 48 people working in direct
compliance. And it also includes the BSA people and the money
laundering people. But all compliance, in general, 48 people.
Our budget in there, direct, probably is about $4 million to $5
million. Indirect is probably around $6 million or $7 million.
Chairwoman Capito. And, Mr. Parker, I kind of skipped over
you; you told us 200 percent more--
Mr. Parker. We have 37 people in our bank, and 9 of them
are directly involved in compliance.
Chairwoman Capito. If I had asked you that question 5 years
ago, would that have been a different answer?
Mr. Parker. I'm sorry?
Chairwoman Capito. If I had asked you 5 years ago what the
proportion was of your compliance officers to your employees,
would it--is that consistent?
Mr. Parker. It would not have been 25 percent. It might
have been less than 10 percent.
Chairwoman Capito. Is this an issue for you, Ms. Barrera?
Ms. Barrera. It's is, Madam Chairwoman. Actually, I was
just thinking about the fact that even though we're a not-for-
profit, not regulated, we have two people in compliance just so
that we can make sure that we're honoring the things we should
be honoring.
Chairwoman Capito. Yes. And how many total employees do you
have?
Ms. Barrera. We have about 100 employees.
Chairwoman Capito. A hundred employees. So you think about
that, the diversion of resources into--now we have already
heard the old regulations and the new regulations--it's no
longer just the new regulations--I think this is stymied, is
part--I don't think it's the whole reason, obviously, but it
does contribute to the inability to get the growth that we want
to have.
The other issue, and then--I'm just going to make a
statement on this--has to be the talent pool. It's not like you
could walk into a bank and say, ``Hire me as a compliance
officer,'' and then all of a sudden you're going to be able to
sit down and make a judgment as to whether your financial
institution is compliant. There has to be a lot of training. If
you're lucky enough to get somebody who already has experience,
you're basically picking them off from one of your competitors,
most probably, or somebody who has moved into the community, so
this has to be a huge issue going forward.
I think this is maybe a little bit about what Ms. Martinez
was saying on the examination side, the same thing. The
examiners have a whole new portfolio, and they're not up to
speed on everything they need to be doing. So it's really--I
sense your frustration, and I hope you sense ours. I think we
have a lot of objective data showing this is a burden that--at
the end of the tunnel which is supposed to be more financial
growth, more lending, better protection for consumers who--and
particularly those in the lower and mid-lower who can't protect
themselves--are these folks dropping out of the banking system
altogether? They can't get a money order at your bank and
they're going to the local five-and-dime to get it, which there
probably aren't any five-and-dimes anymore--I'm dating myself--
but the local 7-Eleven or something, what kind of a lifestyle
change is that going to bring to those folks who really need
the stability of a good financial--with the financial literacy
and a financial understanding, which I think includes either
being a member of a financial institution, credit union or a
bank so that you have that stability. So with that, I'm going
to let Mr. Canseco ask his questions.
Mr. Canseco. Thank you, Madam Chairwoman. And thank you,
all of you, for participating in this panel. Just to follow up
on what Madam Chairwoman was bringing up, I know that in some
of our communities--Del Rio, Pecos County, and I don't know
about El Paso or Laredo--there is a drain on the talent pool in
order to get those vital resources where you need--for
compliance officers; is that correct? Yes?
Ms. Martinez. One of the things that is very challenging
for us is, because we're so remote from the bigger cities, we
cannot have the pool of personnel that we normally require. So
we end up hiring from the bottom up, and we train them. It's
very expensive to send them to outside training, so we
concentrate a lot on webinars. It is great to have webinars,
but you don't get the same kind of input that you would get
when you would go and really sit down in a classroom style. So
it's very expensive for those of us who are very remote from
the major cities to send somebody for training and to maybe
even develop that to be in management level positions.
Mr. Canseco. A lot of your compliance officers--and this is
a question for anyone who wants to chime in--are really not
producing anything for the bank other than working for the
government; would that be a correct analysis? Weigh in on that,
Mr. Parker or Mr. Urrabazo?
Mr. Urrabazo. Congressman Canseco, let me just say that
talking about personnel and qualified people, not only is it a
problem to find them, not only is it a problem to take them to
Laredo, Texas, but the biggest obstacle, even if you find some
very highly qualified people, is it is very, very difficult to
compete or to get head-on with the FDIC when they have a staff
of statisticians with Ph.D.'s doing regression analysis on your
data, and they can cut and slice that data in many, many ways.
And when you go talk to them about any kind of analysis, our
best person there with all kinds of background in compliance
cannot compete against a Ph.D. with a statistics background,
two or three of them at the same time, it's impossible to beat
them.
Mr. Canseco. We have talked a lot about compliance and new
rules and the burden that it poses on your banks and the cost
of that compliance, but one thing that I haven't heard yet, and
I would like all of you to weigh in on it, and that's how this
ultimately affects your customers because after all, that's
what you're in business for; how does this cost of compliance
affect your customers?
Do you want to start, Mr. Glenn?
Mr. Glenn. I guess the best example is the way they changed
the way you process mortgage loans. We used to have a rule of
thumb that the closing costs for a borrower were about 3\1/2\
to 4 percent of the loan amount. That would cover all of the
outside costs, including the origination fee. That number has
gone up about 50 percent, and it has also extended the amount
of time that it takes for a member to close the transaction. It
used to be you could close a mortgage loan in something like 30
days. It's not unusual to see 75 to 90 days for a member to
receive their money. That's not good for the economy, and it's
not good for the consumer. I don't know who it's good for
except the printers. I don't know.
Mr. Canseco. Mr. Hansard?
Mr. Hansard. I don't have a lot to add to that except that
we have not seen any benefit to the consumer. The more
regulation that we see, the more time that I have to spend on
paperwork instead of being able to sit across from the desk and
talk to that consumer. And as I said, I like putting my hands
on the collateral and going out and visiting my customers, and
that time is very, very limited.
Mr. Canseco. Ms. Martinez?
Ms. Martinez. I used to spend more time on developing
programs for the members, new programs, new products and
services. And now, I spend the majority of my time reviewing
laws and regulations.
Mr. Canseco. Mr. McCauley?
Mr. McCauley. You talk about fair lending; there are
several different elements of that. But we are relegated now to
having to make everybody fit into a box. There's no more
flexibility, there's no more risk-based pricing, there's no
more advantages to somebody to have a clean credit score. If
I'm going to make a loan, I have to make it--either it's an up
or down decision, and there's no flexibility based upon it. So
you're not really benefiting the customer. A lot of customers
are getting turned down because they don't fit in the box where
before you had the flexibility to work with someone. The
customer is not being benefited now because everybody has to
fit in the box, and they all pay the same amount. There is no
risk-based pricing, no reward for having a clean credit score,
paying your bills, taking care of your business. So, no,
there's no benefit to the consumer especially at all.
Mr. Canseco. Mr. Parker?
Mr. Parker. We have seen loan products go away. The last
bank I started is nearly a billion dollars in size now and had
a thriving mortgage section in it. That's gone. That's a
resource gone from our community. There are a number of other
products, as Cliff McCauley said, that do no longer exist.
We're being told by people who have never been in business of
any sort, who have never been in business anywhere, how to run
a business because they know best because they have learned
from books.
When I taught on a university level, I can tell you, I
taught people the basics. And I told them that when they went
out to pursue their careers, they would then get the second
part of their education. Unfortunately, we're having
regulations written by people which are then being checked by
examiners, none of whom have ever been in the private sector,
so they have no clue about the variety and the richness of the
human animal that we serve in business. We are all different,
and that's what's so wonderful about being in a country like
America where we're all mongrels of a sort. We really are all
different, and we all have different needs and different
desires. And you know what? Community banks used to be able to
meet most of those before current regulations. That's going
away. That's one thing.
Two, I have for your edification this thick pile of
papers--I didn't enter it into the testimony--but this is just
a sampling of all of the disclosures we must make. We have a
joke in the bank that whenever the House Financial Services
Committee comes into session, they ought to be required to read
this before entering into any business whatsoever. I'll tell
you what, when we pass this out as required, it has been
vetted, saucered and blowed, but our customers don't read it.
They throw it away. And, indeed, since only about--according to
the national experts--13 percent of the population is
functionally fully literate enough to understand this mess, I
can understand why we see our trash cans fill up with these
papers after we open accounts, after we do loans, this, that,
and the other. That's the consumer telling us what they think
of this.
Mr. Canseco. Mr. Urrabazo?
Mr. Urrabazo. I think it has been already discussed, but I
want to give you some examples of how some of these compliance
issues affect the consumer. I think I discussed that everybody
has to fit very clearly in that particular box. And I'll give
you an example of a very good customer of the bank who has been
with us for at least 25 years, and he's our maintenance person.
He came in for a loan, a consumer loan, to buy a truck. He had
had some credit problems a couple of years ago through some
kind of divorce issue, so he couldn't qualify under that
particular issue. So I declined the loan, he didn't fit in
there, even though I know very well that--he works with us, and
I'm the one who pays him, he's our maintenance person, but he
did not qualify under that box. I did not want to make an
exception because I have to find some other exceptions to that.
The funny thing about this, he's a good customer of the
bank, has been with us--paid us every time on time because I
debit his account every month. After I pay him, I debit it out.
So I have no problems with that. The funny thing about this is
that the next day, I had another customer who came in for a
renewal, and this person was marginal at best. I had had some
problems in collecting from this gentleman for the past 3 or 4
years; it's a $3,000, $4,000 loan. And as I renew the note, he
doesn't come into this box anymore because I have the note, I
cannot tell him to go away anymore. But what's funny about this
is when I gave him a price on the loan, he now has a lower
price than the one I had before because now he has to fit into
this little box. So before I was charging him, let's say, 12
percent, and now I have to charge him 13 percent. And I can
almost see his face when he left the bank and was being renewed
laughing at the bank because he says how in the world can I be
such a bad customer and they gave me a better rate now. This is
the fallacy and the joke about all this. You will not fit
everybody in that same box.
Chairwoman Capito. Ms. Barrera?
Ms. Barrera. Congressman, I think the other issue, the
question that needs to be asked, in terms of consumer
protection is regarding the predatory lenders. What are the
regulations there? How can we--you have heard examples already
of people not being able to be served either by the banks or
even by us. So our competition really is the predatory lenders
and pawn shops and people out there making loans if, can you
breathe, here it is, and here's your loan, and you're going to
pay 300 percentage points on it, or something on it because
you're just--it's volume for them and scalability, right? So I
think questions need to be asked along those businesses as
well.
Mr. Canseco. Thank you. I will say one thing--what we're
hearing here is that the whole business model of a community
bank, knowing your customer, working with your customer,
accommodating to your customer into the needs of your
institution in order to work together to build your community,
is being eroded because of rules and regulations and laws such
as Dodd-Frank. The ability to visit with a customer and work
with that customer now having to fit into a box is going to
really chase them away. And that's a sad testament to what we
have here. But I thank you all very much for your answers. And
I yield back for the time being.
Chairwoman Capito. If you all don't mind, I would like to
ask a couple more questions. I would like to know--I kind of
alluded to this, Mr. Parker, when I asked you if I had asked
you that question 5 years ago, what the difference might be. I
would like to know if your relationship with your regulators
has changed and--over the last, say, 3 or 4 years, and how--you
have all alluded to this in your individual testimony, but if
you could get a little more specific or have anything you want
to add on that issue, on the changing, evolving relationship,
are there--who said that--I think it was you again, Mr. Parker,
who said that there were eight people in the bank for weeks and
weeks--has it changed for you, Mr. Glenn? We'll just go through
the panel.
Mr. Glenn. Our examiners have always been fairly cordial,
but they are taking a much more exacting tack with us. And I
think it's--I view it more as a response to some heat they're
feeling from the legislature, and not all of that is
unjustified, but they are looking at things closer. I had one
odd thing happen during our last exam. Our credit union has
about $100 million in investments. And all but three of those
securities are Federal--all of them are Federal agency or
Treasury securities, but we classify all of the securities,
except for three that we hold, as ``held material.'' And one of
the things that they told us we had to do was start classifying
them as ``available for sale.''
The reason he said that we had to have this classification
as ``available for sale'' was because there might be a
liquidity issue. And I said, ``I have 20 percent liquidity.
Exactly how much liquidity do I have to have?'' And he couldn't
give me an answer to that, just that I needed to have these
things ``available for sale.'' And I asked him, I said, ``Now,
let me make sure I understand this. The reason that you have
them available for sale is to raise liquidity, but if I
classify the investments as available for sale, I have to mark
them to market every month and that can adversely impact my
capital, and wasn't that exactly some of the problems that
caused some difficulties in our corporate credit unions?'' And
he didn't have a response, but I still have to mark them to
market--now classify them as available for sale until 10
percent of my portfolio is like that.
Chairwoman Capito. Wow. Mr. Hansard?
Mr. Hansard. I have a few comments, but I have to be
careful about what I say. I have two branch applications in
process right now.
Chairwoman Capito. That's another issue, but--not you
specifically.
Mr. Hansard. At our last FDIC exam, we had 16 examiners in
the bank for 2 weeks. One examiner, all he did was work on a
trust exam. We have a very, very, very small trust department.
It has one account that totals $200,000, and that examiner
spent 2 weeks and grilled me for hours over that one account.
What was interesting to me is that they had just left a $2\1/2\
billion bank, which was the largest in their territory, and
only 2 examiners were sent to a $2\1/2\ billion bank while I
had 16 examiners in mine.
Ms. Martinez. The area that we service is a low-income
area. The majority of the people there, their credit scores
average between 550 and 570, so they are very low credit
scores. We currently don't do risk-based lending. However, the
examiners have been on my case for about 3 years that we need
to do risk-based lending.
My answer to that was that every single member who walks in
is risky because of the risk we take with that person being
that their credit scores are so low. We also have a low-income
designation which, really, when an examiner comes in, they need
to take that into account because of the area that we service.
And a lot of times, I think they forget that. They forget that
having a low-income designation is because you're serving a
different part of the country that requires probably more work
on it, but they don't realize that they still want to go back
and make sure that we adhere to some of the regulations that
they have, which we always do, and we document everything.
I have been very blessed. The examiners that I have had, we
are able to work with them, they always work with me. Just like
Mr. Glenn was saying, one of the things that a lot of the times
they don't understand is the investment area, they don't, when
it comes to the investments, because we do agency securities.
And they come in, they don't understand it, so they just create
a lengthy process on reviewing those. But I also have heard
that some of the other smaller credit unions have had some
issues, especially when they have that low-income designation.
Mr. McCauley. To answer your question, has the relationship
with the regulators changed, I'm going to answer that on more
of a global basis based upon work with other financial
institutions, and the answer is unequivocally yes, whether it
be--especially in the area of target exams, whether it be an
overdraft, fair lending or safety and soundness, it's primarily
centered with the Federal regulators, and--bring in a group
maybe that's not within the territory of the district of that
Federal examiner but from another State, another area, it's
almost as if they feel like the local group is, what we call
here brother-in-law in the local institutions, they don't
believe that there isn't a problem, and they come in with
really an attitude of, we're really going to get you this time.
And I have heard that from many, many bankers, real estate
target exams, from a group out of California saying, ``You
don't understand what's about to happen to you because we know
everything because we saw it.'' And so, yes, I think it has
eroded, but it's mainly on the Federal level. From what I'm
hearing, it's the Federal regulators, and what is, I guess,
really considered be a disconnect, and that there are edicts
coming from the wizard behind the curtain in D.C. Nobody wants
to own up to who that is, but from the standpoint--it's mainly
a Federal-centered issue.
Chairwoman Capito. All right. Thank you. Mr. Parker?
Mr. Parker. I think I can answer your question directly,
and I will tell you that we have two kinds of regulators, and I
don't say this because Commissioner Cooper is here. Our State
regulators approach things very differently than their Federal
friends do. The State regulators appear to take a little more
common-sense approach. They are just as diligent. In fact, I
haven't seen a diminishment of diligence. I have seen some
pretty good hard work from them. They call them as they see
them, and they're very fair.
The Federal people, on the other hand, are a very different
group. And they fall into two categories. One, they're the
safety and soundness people who come out, in our case from the
Federal Reserve Bank in Dallas. They have become much more
attuned to nitpicking. They will go back not only to current
regulations, but we may be hit with a violation of the law, the
regulation, the guidance, the SR letter, and then the
commentary to the regulation, and I have to tell you, the last
three of those have nothing whatsoever to do with the law. I
finally got them to admit that, yes, indeed, they are merely
opinion.
I have talked in my testimony about some rather egregious
examples, and I won't go over that again. The ones that are
particularly deadly are the compliance people. The consumer
compliance people that we see are on an absolute mission, and
they glory in the fact that they could refer you to the
Department of Justice. And the comment from the Department of
Justice is, ``Go ahead, because we have all the lawyers in the
world, and we have a lot more money than you do.'' That's the
attitude, and that's not proper. It's particularly not proper
coming from our government.
One last thing I might tell you, and I mentioned this in my
testimony, the last several exams--I have talked to the
examiners--we have had good relations with these folks for
years--and they are genuinely afraid--people in the regional
and the field offices are genuinely afraid of the people in
Washington, and I have never seen that before. That is some of
what's driving what we see today.
Mr. Urrabazo. I would just like to basically repeat, I
think Les Parker said it very clearly, I think there are
different types of examinations. And, again, I think the State
examiners are more practical, more realistic. They're firm, but
they understand the dynamics of our particular area, of our
particular economies, whether it's a booming economy in Laredo,
it could be a recession going on as opposed to what the
national is. So they understand, I think, the dynamics a little
bit better. I think they understand the type of customer we
have, the type of situation. In our case, we have a lot of
deposits out of Mexico. They understand that. I see a
difference then with the Federal examiners, whether it's the
Fed or the FDIC, and I do think that what Les is saying is
very, very correct. I think they're very, very skittish. I
think they go back to the regional office for guidance, if you
want to call it that, and sometimes even the regional office in
Dallas refers this to Washington. And by the time it gets to
Washington for some clarification on a fair lending issue, it
already has become a bad deal because nobody wants to make a
decision on this. And then the referral to the Department of
Justice is the last part of Washington to clean their hands on
anything of this sort.
I do know, though, that we also have various examinations,
for instance, the safety and soundness exam, a compliance exam,
the BSA/AML type of exam, an IT exam. We have all kinds of
exams going on. We have the internal auditors going, and we
have the external auditors. We have--everybody--any particular
month, I'll have somebody in the bank looking over some
documents. But what amazes me, and I see the difference again
between the Federal and the State, the Federal, for instance, I
had a situation here a couple of years ago where they had one
examiner stay one week in one type of investment that we had.
We have what they call BOLI, bank-owned life insurance--it's an
investment type of vehicle that we use--a $7 million investment
in there, which is really not that much. He spent one week
reviewing that particular investment. Every day, in the
afternoon, he would come to my office to discuss it. At the
end, nothing happened; he just passed on it. And I'm there
looking at this thing every day because you have to be very
careful--now, I will say, though, they're very professional,
and they will never--there are never any arguments, but they
were very professional in their approach, but I just don't
understand what they did in one week on a $7 million
investment, what we call BOLI, what he did. I just don't
understand. I would have done that in 3 hours.
Ms. Barrera. Our Federal examiners are there to look at our
funding, how did we use the funding and so on. So it's a
different kind of an exam, did we do with the funds what we
said we were going to do.
Chairwoman Capito. I want to take the opportunity--I have a
lot of other questions on the qualified residential mortgage,
on the appraiser regime that has come through Congress as well,
the CFPB complaint process, I guess, on their Web site. They
have thousands, I think, thousands of complaints on their Web
site, how are they framing these, how are they following up on
them, is it a fair process--is there any retaliation if you
accumulate more complaints than anybody else or certain types
of complaints. I think that's something that we need to
really--because as we all know, getting on the Internet and
lodging a complaint is a really easy thing to do. And certainly
we want to--you want to hear if things are going wrong.
The other thing I want to say is I have a bill out there
that talks about examinations. It has three components to it,
first, the timeliness of the reports, because we have heard
from the hearings that reports are not coming in, in a timely
fashion. Also, they're leaving the district office, so they're
leaving your financial institutions and going to the district
office with one sort of mindset, and by the time they come back
from Washington, they have a totally different viewpoint on it,
which sort of alludes to what you all are saying, that
Washington is playing a heavier role or changing the viewpoints
of the local examiners.
Second, it has some examination standards that come out of
the areas of our country that have had--really been devastated
by commercial real estate and residential real estate, property
values dropping to try to make sure that you don't have to
reclassify loans as long as the person is paying--I'm
simplifying this a lot--but paying and all that.
And third, the independent review process, where if you
have an appeal, that you're not appealing to the person who
made the decision to overturn the appeal of their own decision.
And we have set up an independent appeal process where an
independent body would be able to oversee, would give you ease
of--would give you a lot more objectivity, probably a lot more
expediency, and you also would have--it's human nature that
you're not going to want to overturn your own decision. So
there have been reports of retaliation or some--not retaliation
like we might think of it, but there are subtle ways to make
decisions because you're in a subjective world. So we're trying
to eliminate that.
Lastly I'll say, just for those of you who have a son or
daughter who's a bank examiner, we don't think you're bad
people. It's not about that. It's not a personal thing. It's
about getting it right. And in our Georgia testimony, we did
have the examiners on our panel. Today, we did not. But we are
listening to them as well because they have a viewpoint to
represent that we all, I think, in this room believe is very
important at the same time. I know I have met many of you who
started out as a bank examiner and then have gone into the
banking profession, and then now as a head of the banking
commission--am I saying--it's commission, isn't it--yes, here
in Texas. So those are rich experiences I think for anybody to
have in these kinds of positions, and I want to thank you for
coming today. So, any final questions from my colleague?
Mr. Canseco. I don't want to hog the microphone or the
question queue, but I do have some questions, if I may. And
just let me know, Madam Chairwoman, if I have overexceeded my
time.
Let me ask you, Mr. McCauley, the FDIC is conducting a
study in review of what type of institutions should be
classified as a community bank. Currently, the general
definition is a bank with less than $1 billion in assets, with
a few exceptions. Now, your bank does business all over Texas
but still has a community-oriented model in serving your
customers; what factors does the FDIC need to take into account
when determining the definition of a community bank?
Mr. McCauley. This has been an age-old question on how do
you define a community bank, and it has always been a moving
target. The FDIC--it's not about size. It is really about your
business model. There are so many banks now; there are over 30
banks over $1 billion in the State of Texas today, just because
of the asset growth and deposits that are in the system today.
So you can say there are a lot of big banks that I would tell
you are community banks. We're just a big community bank. Look
at the lines of business we're in. We didn't do subprime
mortgage lending, we don't do indirect lending. We don't do a
lot of the things that would categorize someone as a megabank.
So the FDIC needs to take into account really looking at their
business model, the lines of business that they participate in,
I think their reputation with their customer base, their long-
term history of success within the lines of business that they
choose to participate in and how well that they do it. You
could look at some other metrics as far as their foreign
activity and all of that, but I think that becomes--then you
start getting more complicated on the definition. It's really
looking at the business model, the lines of business that
they're in and how they operate and how they support the
communities that they're in.
Mr. Canseco. So putting it in simplistic terms, it's like
being in 6th grade and you have big kids and little kids and
medium-sized kids?
Mr. McCauley. Yes.
Mr. Canseco. Okay. So I understand that Frost Bank has
recently applied to become a State-chartered bank regulated by
the State Department of Banking; do you feel this is a step
that a number of community banks across the country could begin
to take, given the greater knowledge that State regulators have
about the areas that they serve?
Mr. McCauley. Let me speak about our decision. First of
all, it wasn't a hasty decision; this has been made over a long
period of time. And it was really--we have always had a very
good relationship with the OCC. We have been an OCC bank since
1898. So it's not a decision that you make flippantly, to make
this kind of a change. However, as we talked about a little bit
earlier, there's more of a disconnect now on the Federal level
than there ever has been before. And while we have had that
longstanding good relationship, we're a Texas-based bank. We
plan on being here for a long time. We have been here since
1868, and we plan on being around for another 150 years. And we
felt to serve our market, serve our communities, our customers
better as well as our shareholders, it would behoove us to have
a regulator that was closer to home that understands our
markets, that we could have an open and honest dialogue with.
Commissioner Cooper is very available to speak to all of his
member base. I think you have heard the testimony--and I hear
this all over the State--that--try to say, ``We really don't
like to be thrown under the same blanket as all banks''; well,
I don't think that all regulators should be cast that way.
Also, the State Banking Department has proven itself to be a
fair and a communicative regulator. Now that we will also come
under the direct regulation of CFPB being over $10 billion,
balancing that Federal regulation with a State regulator we
thought would be prudent.
As to the trend of other banks, I couldn't speak for them
in their decision. I will say that I travel a lot. I have
visited with literally hundreds of bankers since that decision
has been announced, and everyone has been very supportive of
our decision from both the national banks as well as the State
banks. The only two negative comments came from attorneys, so I
figured we probably made the right decision.
Mr. Canseco. Thank you. Let's turn now to interchange fees,
the Durbin Amendments. The final cap on those interchange fees
for debit cards has been in place now for several months. While
initial data show that--different results in revenue for large
versus small banks, there's great concern within community
banks that merchants will eventually route transactions to the
banks with lower interchange rates. Do you share these
concerns, and are you aware of any attempt to do this already?
Mr. McCauley. I absolutely share those concerns. Serving on
the payments and technology committee for ICBA, we have had the
opportunity to visit with many of the interchange providers,
and they will tell you that it's going to be incredibly
difficult over time to have a bifurcated system, to have a two-
tiered system. While, yes, we are over $10 billion, we are
directly affected by the Durbin Amendment, and it has been a
significant decrease in interchange revenue for our
organization. I don't think there's a community banker that I
have visited with around this country who doesn't agree that
it's eventually going to affect them directly. The merchants
will find a way to route these. They're not going to pay a
higher interchange fee for one institution versus another. I
think right now there is probably kind of a cooling-off period,
if you will, for the whole Durbin Amendment and nothing has
happened. But I don't think anybody's confused that eventually
it will, and it will, and I think every community bank agrees
with that.
Mr. Canseco. The customers, ultimately it's about the
customers; how are the customers being affected by this?
Mr. McCauley. Interchange revenue historically was utilized
to benefit the consumer, and it's something that people don't
really--they have a hard time realizing. Free-checking programs
were put in place as a give-back. That was a way to support the
consumer by giving them fee exclusive programs, free-checking.
What that did is it brought a lot of unbanked or underbanked
individuals into the banking system, which was part of the
Federal mandate and what banks were trying to accomplish. That
wasn't necessarily a profitable move for the banks, but it was
something that we could leverage that interchange to those
consumers.
You're going to see that change. Free-checking programs are
gone. There may still be some in place by the banks under $10
billion or they have been grandfathered, but they will go away.
Then, you're eventually going to see fees. I think we--you saw
Bank of America's transparency was trying to do that; they
removed that. But that was a shot over the bow that it's going
to happen. So not only do you have the free-checking product
going; you're going to have something that is going to the take
place as far as the fee to the consumer. I don't think I have
seen a roll-back in prices by any of the retailers that are
benefiting from this, and so the consumer is not winning at the
retail level nor eventually at the financial institution level
because there are no free loans.
Mr. Canseco. Thank you. How is my time? Okay.
Mr. Urrabazo, I have spent a good deal of time speaking
with Treasury officials over their proposed rule on the deposit
interest reporting. They seem to be prepared to forge ahead,
and I'm afraid they're not listening to the concerns of a
number of Texas banks. What are you currently hearing from some
of your customers over your proposed rule, and what the effect
is of a final rule going to have on banks throughout Texas?
Mr. Urrabazo. First of all, we did fight that battle about
10, 15 years ago, and we won it. The Treasury was trying to do
the same thing, regulate the foreign deposits in our banks.
Obviously, border banks are more effective than other banks
across the country. So the Treasury is only hearing a small
group of banks, Florida, Texas, California, some of the money
center banks in Chicago, maybe New York. The issue here is that
there's no benefit to the Treasury or America. If they're
trying to find the tax evaders--the U.S. tax evaders who are in
Mexico, as they exchange lists one through the other, they're
not in Mexico. There are zero or very few. So the issue really
is a much bigger global approach of what they're trying to do,
in my opinion.
The problem here is that, again, going back to the short-
term situation, we're going to get affected detrimentally,
especially in the border, as some of these Mexican citizens
come to realize that their name will be set up in a list with
an account number with an address and sent to their treasury in
Mexico, and who knows what's going to happen at that time.
Given the situation in Mexico, I'm talking about the violence
and the drug cartels, if that list gets out of hand to some of
those people or has been--into the black market, and that
particular customer of ours becomes aware that list is there,
then all of a sudden, he's susceptible to kidnapping and
extortion and other kinds of information. And that's what
they're afraid of.
The tax consequences are minimal for the Mexican citizen in
Mexico. The tax system in Mexico is very, very different than
our taxing system. Over there, if they pay 15 percent on their
income, that's too much. So if you even take a scenario of,
let's say, a million dollars that a Mexican citizen has here
and we pay him, let's say, 1 percent, $10,000, and he's going
to pay 15 percent tax in Mexico for that $10,000, which is
$1,500, that is not the issue. The tax is not the issue. The
issue is security. And that's why they're so concerned about
this. The Mexican press has really, really built it up over
there, and many of our Mexican customers are coming in, asking
questions, and they're very, very afraid. So I think what's
going to happen is going to be capital flight. That's the
bottom line to all this, and all this money is going to go
someplace else which is a safe haven.
Mr. Canseco. And who will ultimately pay the price for this
capital flight, is it your customers?
Mr. Urrabazo. Obviously, the banks. We don't have enough
money to lend, liquidity problems that we might have. And,
certainly, we don't have the ability to lend that money to our
consumers, to our investments, to our small business people. We
will not have that ability. We will have to shrink our
portfolio significantly. So we're deadly afraid of this. But,
again, the bottom line is there is no benefit to the United
States, zero.
Mr. Canseco. In your testimony, you described some of the
frustrations you have with regulators over fair lending laws
which can sometimes draw in the Department of Justice
investigations; can you give us some further insight into the
negative impact the regulatory approach over fair lending laws
has over your bank, other community banks, and your customers.
Very briefly, because I think I'm running out of time.
Mr. Urrabazo. Yes. Again, the fair lending laws are
extremely delicate, and very, very serious, and we're very,
very concerned about them, and we want to do the right thing.
Fair lending sounds correct, but it's very, very difficult to
put into one particular area and put it in the same box and be
fair to everybody. It's just very difficult. The issue is when
it goes to Dallas, and then from Dallas it goes to Washington,
and then from Washington it goes to the DOJ. And that's where
you have to have an extremely--a lot of professional people, a
lot of expert people who know what they're doing when it gets
to those levels. And I'm talking about attorneys, etc., etc. I
think that some of these cases are completely out of hand. When
you talk about maybe 55 accounts that were in one particular
branch that were out of whack with another branch by 75 basis
points, and you're talking about an $11 billion bank and you're
talking about 55 accounts, 55 mortgages, that's when it's
really out of hand.
Mr. Canseco. Thank you very much. One more question to Mr.
George Hansard. Community banks provide the credit necessary
for economic growth and job creation in communities such as
Fort Stockton; have you given any thought to what your
community would look like if there weren't institutions such as
yours to provide credit?
Mr. Hansard. I have given a lot of thought to it. If you
just had the megabanks in Fort Stockton, Texas, all that you
would see would be consumer loans, car loans, maybe credit
cards, things like that. I believe that your small businesses
that we work with every day would simply be nonexistent, the
mom-and-pop operations that I think drive the communities,
there wouldn't be that emphasis.
Mr. Canseco. How would large banks fare in a community like
Fort Stockton if they would come up and set up a branch there?
Mr. Hansard. I would hope not very well. No, in a community
like Fort Stockton, I don't believe that a large megabank would
be well-accepted. Our model is all the bank that you'll ever
need. We believe that. We handle consumer loans, we help people
get credit card loans, we do a lot of small mortgages that we
keep in-house. These are mortgages that would not qualify for
the secondary market. And if that was squeezed off, we have a
low-income community, and it would be very, very detrimental to
our consumers.
Mr. Canseco. And Fort Stockton is a community that wants to
grow and has a solid business background, doesn't it?
Mr. Hansard. Yes, sir.
Mr. Canseco. And would you agree that the cost of all these
regulations that we have been talking about ultimately are paid
by the consumers and businesses that rely on your bank
services?
Mr. Hansard. I would say so. Anyone who doesn't understand
that needs to go back to school, I would think.
Mr. Canseco. Thank you, Mr. Hansard. I yield back.
Chairwoman Capito. I think that concludes our hearing. I
think we have gotten a lot of very good information to take
back to Washington. I would like to thank a few folks that I
didn't thank in the beginning. I would like to thank my staff
for putting this together and doing an excellent job. And I
would like to thank Mr. Canseco's staff, both his district and
his D.C. staff, for working with us to make this successful.
And I would like to thank everybody who works in this building
and has helped us, as well. Thank you all. And I would really
like to thank Mr. Hansard's two young children who have sat
through 2 hours of this. I know you're proud of your dad or you
wouldn't be here. You're going to write a paper on this when
you get home, right?
With that, this hearing is adjourned. The Chair notes that
some Members may have additional questions for this panel,
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.
[Whereupon, the hearing was adjourned.]
A P P E N D I X
March 14, 2012