[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF THE CHALLENGES FACING
COMMUNITY FINANCIAL INSTITUTIONS IN OHIO
=======================================================================
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
__________
APRIL 16, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-116
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75-088 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:
April 16, 2012............................................... 1
Appendix:
April 16, 2012............................................... 33
WITNESSES
Monday, April 16, 2012
Barnes, Stan, Chief Executive Officer, CSE Federal Credit Union.. 4
Blake, William J., Deputy General Counsel, KeyBank............... 7
Cole, Martin R., President and Chief Executive Officer, the
Andover Bank................................................... 13
Fireman, Steven, President and General Counsel, the Economic and
Community Development Institute................................ 11
Haning, G. Courtney, Chairman, President, and Chief Executive
Officer, the Peoples National Bank, on behalf of the Ohio
Bankers League................................................. 9
APPENDIX
Prepared statements:
Barnes, Stan................................................. 34
Blake, William J............................................. 60
Cole, Martin R............................................... 82
Fireman, Steven.............................................. 88
Haning, G. Courtney.......................................... 92
AN EXAMINATION OF THE CHALLENGES
FACING COMMUNITY FINANCIAL
INSTITUTIONS IN OHIO
----------
Monday, April 16, 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 10 a.m., at
the Carl B. Stokes U.S. Courthouse, 801 West Superior Avenue,
Cleveland, Ohio, Hon. Shelley Moore Capito [chairwoman of the
subcommittee] presiding.
Members present: Representatives Capito, Renacci, and
Duffy.
Chairwoman Capito. The hearing will come to order.
I would first like to thank the City of Cleveland for
welcoming the Financial Institutions and Consumer Credit
Subcommittee to the Carl B. Stokes U.S. Courthouse, which is
beautiful, and for allowing us to use this chamber for our
hearing. So thank you to the City of Cleveland.
I am going to kind of walk everybody through today's
hearing. Obviously, this is a field hearing, so we will be a
little more informal than we might be in the regular hearing
room.
Mr. Renacci and Mr. Duffy and I will each give an opening
statement, and then our witnesses each will be recognized for a
5-minute opening statement. And then, we are going to have a
couple rounds of questioning where each Member will be
recognized for 5 minutes. We should be finished in plenty of
time for us to catch our flights back to Washington. We are
returning after a 2\1/2\ week Easter recess.
I haven't gotten a chance to really compare notes with my
colleagues, but I think we have--I certainly did, in my 2 weeks
home, get a lot of feedback where people are questioning what
direction we are going, and a lot of frustration, really, and
concern. So I hope that, with the great witnesses that we have
today, we will be able to dig down deep in some of this, at
least in terms of the Financial Institutions Subcommittee.
Over the past year, we have held field hearings across the
Nation to gain a better understanding of the unique challenges
faced by financial institutions in different regions of the
country.
In Georgia, which has had the highest number of bank
failures since the financial crisis, they have very unique
difficulties.
In Wisconsin, in Mr. Duffy's district, we heard from
community banks, credit unions, and small businesses about ways
to promote economic growth.
I also went to San Antonio last month where community
bankers and credit unions also discussed the growing regulatory
burden and cost of compliance.
And our most recent field hearing in Nevada provided me and
other Members with insight into private sector solutions to
mitigate foreclosures. They have an enormous issue with their
real estate in and around Las Vegas and in the State of Nevada.
Each hearing has been a learning experience for me, further
providing solutions to our Nation's problems and also
reinforcing that those solutions aren't going to necessarily
come out of Washington D.C. They will come out of the heartland
of America.
By the way, I am from West Virginia, for those who haven't
had a chance to hear me brag about that. There are a lot of
West Virginians here in Ohio. And I did say that if you all
would just learn how to drive, we would feel a lot better about
that. But, please, no West Virginia jokes. I don't want to hear
them.
This will mark the fifth field hearing for us. And I would
like to thank Mr. Renacci for serving as our host. He is my
vice chairman on the subcommittee, and he brings a wealth of
experience and a broad-based business background that has been
extremely helpful, not just in the subcommittee, but to me, in
particular. And I want to thank him for that.
We also have Mr. Duffy from Wisconsin, who is a freshman,
as well. And he has led the charge on some of our CFPB
legislation and others. So I want to thank him for coming
today.
Today, we are going to continue on the theme of a better
understanding of the local financial institutions. Our panel of
witnesses will provide insight as to the unique challenges
faced by financial institutions of varying sizes.
We will hear from small community banks and credit unions
about the regulatory impediments to promoting economic growth,
and KeyBank will provide Members with a better understanding of
the unintended consequences of the Volcker Rule, the very
complicated Volcker Rule.
Finally, we will hear from a community development
financial institution about their efforts to splurge off
growth.
As with other hearings, we are here to listen and learn,
and I look forward to that.
We normally have a timer, but I was just informed that the
timing device is in California. I don't know what it is doing
there, but there is another field hearing in California. I left
my watch in West Virginia when I left at 5:30 this morning, so
I have my dutiful staff members back there to tap me on the
shoulder. So if you hear me kind of wrestling around, you will
know it is time to move along a little bit. But I appreciate
everybody, really, the witnesses and the audience for coming.
And I would like to now yield to Mr. Renacci for the
purpose of making an opening statement.
Mr. Renacci. Thank you, Madam Chairwoman. And I want to
begin by thanking you for holding this important hearing and
for being gracious enough to hold it in the wonderful City of
Cleveland.
I also want to thank all the witnesses here today. I can't
emphasize enough what a pleasure it is to be in front of a
hometown crowd this morning.
I am proud to say that Ohio is home to some of the finest
financial institutions in the country, and I have no doubt
these institutions are committed to helping our economy achieve
a more robust and sustainable economic recovery.
When I travel around the 16th District, meeting with small
business leaders, I find a frustrated group who are eager to
expand their businesses, but are prohibited from doing so
because they cannot access the necessary capital.
At the same time, the financial institutions in my district
repeatedly say they are ready to extend credit to these small
businesses and have the capital to do so, but are unable to do
because of overzealous, inconsistent, and ever-changing
regulations. We are here today because cities like Cleveland
and institutions like yours are the ones affected by Washington
regulations. I believe part of the problem is that, for too
long, lawmakers have legislated from Washington with no real
sense of how the regulations will impact people across the
country.
I have no doubt that most regulations are drafted with the
best of intentions. The most problematic regulations are the
ones that sound reasonable on their face, but, taken
accumulatively, have a devastating impact. A perfect example is
the Dodd-Frank Act. The drafters' intentions were noble: to
prevent another financial crisis and prove transparency; to
stop banks from taking excessive risks; to prevent abusive
financial practices; to and end too-big-to-fail.
Unfortunately, instead of sound regulation aimed at reining
in fraudulent and destructive behavior, we ended up with
hundreds of pages of hastily thrown-together regulations.
Instead of preventing the next financial crisis, we have
managed to paralyze our financial institutions by creating a
sense of uncertainty and confusion.
Instead of sound regulations, we have left many of our
financial institutions standing on the sidelines unwilling and
unable to provide liquidity to our markets because they are
unsure what the rules are and when they might be unilaterally
changed again. The uncertainty in costs of new regulations is
having an especially profound impact on smaller institutions.
Without a large compliance staff or back office legal teams,
our smaller institutions are forced to divert precious capital
to keep up with new regulations; this is capital that would be
better used in the hands of its customers. That is why we are
here today. I want to hear the issues being discussed inside
our community institutions.
I want to hear how regulations coming out of Washington,
D.C., are impacting access to credit, how they are impacting
your institutions' ability to conduct business. I realize that
many of you are tired of telling your stories. I know sometimes
it seems like no one is listening. I want to assure you that we
are listening and we care.
Myself, Chairwoman Capito, Mr. Duffy, and many other
members of this committee have heard from similar institutions
across the country and we recognize that your institutions are
the key to our economic recovery.
Thank you, again, for being here today, and I look forward
to hearing your testimony.
Chairwoman Capito. Thank you. I now recognize
Representative Duffy for the purpose of an opening statement.
Mr. Duffy. Thank you. And it is an honor to be here in
Cleveland. This is my first trip to Cleveland, and I only got
to see it from about midnight last night until this morning,
but what I have seen so far is fantastic.
It is also great to be here with Chairwoman Capito, who has
done a fantastic job leading our subcommittee, and also to be
here with Mr. Renacci. As part of the freshman class, we serve
on financial services together. But, also, as a freshman class,
he is one of our greatest leaders and does a fantastic job
moving this herd of a freshman class, driving us forward, and
is respected by everybody and is, again, one of the best
leaders we have.
So it is a privilege to be here in Cleveland today.
I come from central and northern Wisconsin. I have had a
chance to talk to our small banks and our credit unions time
and time again, and I keep hearing the same thing over and
over; the regulations are killing them. It is making it harder
for them to do their jobs, to get capital out into their
communities. They talk about regulations that are stifling
their community and stifling their business.
They talk about the regulators coming in and these
outrageous reviews that take place, and standards are changing
from one regulator to the next, year over year. And the outcry
has been quite loud.
I guess I am interested today to see if you gentlemen have
the same stories that I hear in central and northern Wisconsin.
And if it is just a Wisconsin phenomenon or if it is a
phenomenon that takes place around the country.
I would also like to hear if you gentlemen have any ideas
for solutions. Obviously, we know we have to change the law and
the structure, but it would help if you would say, ``There is a
lot to be done, but if you could really focus on this area
first, that would do the most for us to help us do our jobs
better.''
So I am here with open ears and I look forward to hearing
your testimony.
Chairwoman Capito. That concludes our opening statements.
We will now turn to our panel. Your full written statements
will be made a part of the record, and I will introduce each of
you individually to give a 5-minute summary of your testimony.
We will then get to the question portion of the hearing.
First, I would like to recognize Mr. Stan Barnes, CEO of
the CSE Federal Credit Union. Welcome, Mr. Barnes.
STATEMENT OF STAN BARNES, CHIEF EXECUTIVE OFFICER, CSE FEDERAL
CREDIT UNION
Mr. Barnes. Thank you, Chairwoman Capito.
Chairwoman Capito. I don't know if your microphones are on
or working. Is there a green light on?
Mr. Barnes. Yes, there is.
Chairwoman Capito. There we go.
Mr. Barnes. Thank you, Chairwoman Capito, and members of
the subcommittee. Thank you for this opportunity today to
represent Ohio's 377 credit unions and 3 million Ohio credit
union members and to share with you on their behalf the
difficult circumstances facing community-based credit unions in
the form of overburdensome regulations and lack of transparency
in the examination process and to update you on the current and
future role of the credit union movement.
My name is Stan Barnes. I am the president and CEO of CSE
Federal Credit Union in Canton, Ohio. We are a $150 million
not-for-profit financial service cooperative, and we proudly
serve 30,000 members in the northeast Ohio area. And like every
credit union, we do so under the business philosophy of not for
profit, not for charity, but for service.
Regulatory burden and the cost of compliance, as you have
noted, is the number one concern among Ohio credit unions.
Attached to my testimony and submitted for the record are the
Federal regulatory requirements for both banks and credit
unions, which should put into some perspective the time, the
effort, and the cost tied to compliance.
In many cases, when credit unions should be dedicating
resources to the financial livelihood and benefit of their
members, they are instead challenged with the increasing burden
of following far-reaching rules and regulations.
And these regulations are particularly onerous on small
asset credit unions, which are subject to the same regulations,
but struggle to adhere to these guidelines due to thin
operating margins and small staffs. In fact, the vast majority
of Ohio credit unions, 65 percent, are small credit unions
under $35 million in assets.
To give you a sense of the increasing regulatory burden,
since 2008, Ohio credit unions have been subjected to more than
160 new rules and regulations from 27 different Federal
agencies.
Additionally, there are at least 27 rulemaking proposals
pending at various agencies, including the National Credit
Union Administration, the Federal Reserve, the Consumer
Financial Protection Bureau, the Department of Housing and
Urban Development, the Financial Accounting Standards Board,
the Treasury FinCEN, and the Federal Trade Commission, among
others.
Unfortunately, even though the natural person credit unions
that I represent did not cause the financial crisis, they have
been subjected to a flood of regulation that creates
unnecessary burden without any measure of the effectiveness of
the changes. With regard to examination standards and
inconsistencies, the experience of the majority of Ohio credit
unions is that the high standard of transparency and
accountability expected of financial institutions is
underwhelmingly practiced by the National Credit Union
Administration (NCUA) during the examination process.
Credit unions have voiced to the NCUA that their examiners
are practicing regulatory micromanagement and overreach. Quite
simply, regulators are dictating the business of operating a
credit union.
It is important that examiners not overregulate or exceed
their authority and substitute their judgment for that of the
volunteers and the executives in the governance, management,
and operations of credit unions.
While the relationship that I enjoy with my examiner is
transparent, professional, and rooted in mutual respect,
colleagues of mine have experienced the exact opposite.
I urge the committee to consider improvements to the
examination process. H.R. 3461, sponsored by the chairwoman, is
a good step in that direction. It does address the examination
process and is a positive step in balancing the relationship
between the regulated and the regulator.
It also provides for a more transparent and consistent
examination process. And I know that the Credit Union National
Association (CUNA), of which CSE is a member, supports the
legislation and is working closely with the NCUA to incorporate
examination enhancements and transparency.
CUNA has also urged the NCUA to take several steps to
improve the regulatory process and relieve credit unions'
regulatory burden. I have submitted a copy of a letter from
CUNA to NCUA Chairwoman Debbie Matz that recommends immediate
actions to relieve overwhelmed credit unions.
Credit unions have called on the NCUA to impose a
moratorium on new regulations for at least the next 6 months,
and have suggested that the agency reinstate the regulatory
flexibility program which provides well-managed and well-
capitalized credit unions an exemption from certain regulations
that are not statutorily required.
Despite the issues caused by regulatory overreach and
examination transparency, I am proud to say that credit unions
continue to serve their members with responsible and affordable
financial products and services. Over the years, credit unions
have grown considerably and play an important role in local
communities. In fact, research by the Credit Union National
Association finds that credit unions save Ohio members $132
million annually by offering better-priced, conservatively-
managed products and services. The not-for-profit cooperative
model is working and, in my opinion, it is best suited to meet
the needs of all Ohioans.
I have submitted as part of my testimony examples of the
Credit Union Difference in Action and how credit unions are
helping Ohioans in today's economy through financial education.
But credit unions can do more. With commonsense regulation
that would essentially double the arbitrary cap on small
business lending, credit unions can infuse $13 billion of new
capital into small businesses.
We ask that you support S.2231 and H.R. 1418.
Similarly, H.R. 3993, which would allow well-capitalized
credit unions to receive supplemental capital, a much needed
financial resource as credit unions face a difficult revenue
building environment and increased pressure to perform by
regulators. Again, we ask for your support in that measure.
We look forward to continuing to work with Congress to
resolve issues facing community-based financial institutions.
We ask that as you consider legislation in this arena, you
regularly consult credit unions in your districts. We want to
be a solution to the economic issues facing our State and
country and we are here to help.
Thank you for the opportunity to present to you this
morning, and I am happy to answer any questions that you may
have.
[The prepared statement of Mr. Barnes can be found on page
34 of the appendix.]
Chairwoman Capito. Thank you, Mr. Barnes.
Our next witness is Mr. Bill Blake, deputy general counsel
of KeyBank.
Welcome.
STATEMENT OF WILLIAM J. BLAKE, DEPUTY GENERAL COUNSEL, KEYBANK
Mr. Blake. Thank you. Thank you, Chairwoman Capito,
Congressman Renacci, and Congressman Duffy. It is a privilege
for me to be invited here today to talk about the Volcker Rule
and the proposed regulation. KeyBank and other regional banks
submitted a joint comment letter on the proposed regulation
several weeks ago. The letter was signed by Branch Banking and
Trust Company, Capital One, Fifth Third, KeyCorp, PNC, Regions
Financial, Suntrust, and U.S. Bancorp.
All of our institutions have one thing in common. Our
primary mission is to serve our local communities by providing
traditional banking services: deposits; loans; and trust and
asset management.
We are regional banking organizations who share the same
concerns about the Volcker Rule. We are not the complex,
global, interconnected businesses that Dodd-Frank was intended
to address. Our organizations don't engage in proprietary
trade, nor do we have any substantial interest in running hedge
funds or private equity funds.
Congress did not intend the Volcker Rule to unduly restrict
traditional banking and customer-facing activities or impose
substantial compliance burdens on banking organizations
primarily engaged in traditional banking activities.
The proposed implemented regulations too often take a one-
size-fits-all approach that results in unintended consequence.
In today's testimony, I would like to highlight four areas
in which the rule negatively affects our ability to serve our
customers, manage risk, control costs, and avoid losses. We are
concerned that the proposed regulation will actually increase,
rather than decrease, the risks to safety and soundness of our
organizations.
First, the proposal hampers our ability to meet the
liquidity needs of customers, especially small and middle-
market companies. We have long provided liquidity through our
market-making activities and market-making operations. Small
and mid-market companies have security issuances that are
relatively small in size and traded less frequently than large
companies.
Under the proposed rules, our legitimate market-making
activities and less liquid securities face a substantial risk
of being improperly viewed as illegal proprietary trading. The
implementing regulations need to ensure that issuances of small
and middle-market companies are not disadvantaged compared to
larger companies.
Second, effective hedging and asset liability management
activities are critical to the way we manage risk and ensure
the soundness and safety of our institutions. The proposal
fails to clearly protect bona fide hedging and ALM activities.
Organizations like ours will operate in a continuous zone
of uncertainty, unsure whether bona fide hedging and ALM
activities and trades will, on an after-the-fact basis, be
determined by an agency to constitute impermissible proprietary
trading.
Without the ability to execute our critical asset liability
activities, banks may scale back even traditional lending if
the risks associated with them cannot be appropriately hedged.
Small and middle-market businesses, as well as municipalities,
may see a reduction in lending and an increase in borrowing
costs.
Third, our organizations are committed to maintaining
strong and effective compliance programs that are appropriate
to the size, nature, and complexity of our organization's
activities, but the costly, detailed programmatic compliance
requirements of the Volcker Rule proposal go beyond what is
appropriate for regional banking organizations that do not in
any way, in a meaningful way, engage in trading that could be
viewed as proprietary.
We do not believe our organizations need such programs to
prove a negative in the fact that we don't do proprietary
trading. Instead, we think the Volcker Rule dollar threshold
for a programmatic compliance program should be raised from $1
billion to $10 billion. In fact, raising it to even $15 billion
would still capture more than 97 percent of the total trading
assets and trading liabilities of all U.S. banking
organization.
Finally, the rule requires banking organizations to divest
existing legacy investments in private equity funds, subject to
certain extensions. The purpose of this extended period was to
allow banks to unwind these investments in an orderly fashion
without the need for fire sales. Most of these investments
provide capital to small and middle-market companies.
All of the investments were legally made at the time they
were acquired, but the Volcker Rule now requires us to dispose
of all of them. The rules, as written, would likely result in
forced sales of private equity fund interests at distressed
prices, which would transfer significant value from the
regulated banking industry to private investors.
The rules essentially negate the availability of the
statutory 5-year period for running off illiquid investments.
The Volcker Rule provisions in Dodd-Frank are scheduled to go
into effect on July 21, 2012, a little more than 3 months from
now. The proposed rules generated over 17,000 comments from
academia, Members of Congress, trade groups, public interest
groups, and other interested parties.
We and a growing chorus of other interested parties believe
that substantial revisions to the proposed regulations are
necessary.
Accordingly, a final point I would like to make is that our
regional banking group strongly supports the efforts being made
by a bipartisan group of Senators, including Senators Crapo and
Hagan, to delay the effective date of the Volcker Rule, and we
ask you to support their initiative.
Key, along with other regional banks who share our view,
filed a comment letter with the agencies on February 13th to
explain our concerns. I am submitting a copy of our comment
letter with my testimony today. I encourage you and members of
your staff to consult it to get a better understanding of the
problems that we face.
I sincerely appreciate the opportunity to testify today,
and I especially thank you all for coming to Cleveland. We, the
regional banks, are committed to helping restore our economy
and we look forward to working with you.
Thank you.
[The prepared statement of Mr. Blake can be found on page
60 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. G. Courtney Haning, chairman,
president, and CEO of the Peoples National Bank. Thank you.
Welcome.
STATEMENT OF G. COURTNEY HANING, CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, THE PEOPLES NATIONAL BANK, ON BEHALF OF THE
OHIO BANKERS LEAGUE
Mr. Haning. Chairwoman Capito, Congressmen Renacci and
Duffy, my name is Courtney Haning, and I am the chairman and
present CEO of the Peoples National Bank of New Lexington,
Ohio. I am also chairman of the Ohio Bankers League (OBL), and
I am here speaking on behalf of its members.
The OBL is the only trade association in Ohio representing
the full spectrum of insured depositories, including mutual
thrifts, community banks, and multi-State holding companies.
Today, I am here to focus particular attention on the
challenges facing community banks. While larger banks care
about their customers, they do not share the same vested
interest in my community that I do. In many cases, we are the
only economic engine in the area we serve. If my customer is
forced to leave because he cannot find a good job, I cannot
follow him. So my bank must closely align with local needs. My
expertise is that I am a close friend to my customers, which
gives me added insight. This means I can make more loans safely
than my bigger competitors that rely on mathematical models.
Many successful businesses in Ohio started with a close call on
a loan made by a community bank, which could say ``yes,''
because it knew its customer well.
Unfortunately, this ability to exercise good judgment based
on local market knowledge is being threatened by both recent
regulatory burdens and inconsistent decisions by regulators.
Most banks in the Midwest did not participate in the
underwriting practices that contributed to the recent
recession. Sadly, however, we are paying for the past through
costly new regulatory burdens, anxious examiners, and customers
who are unwilling to borrow. These remedies are hitting all
segments of our financial statements, as costs are going up,
opportunities to earn revenue have been curtailed, and the
amount and cost of capital we need is increasing.
I know that your subcommittee has heard a great deal about
the issue of too-big-to-fail. That is an important problem.
However, today, I would like to talk about whether, under the
new environment, community banks have become too-small-to-
survive. While we see the cumulative effect of new regulations
and exam procedures, community bankers are concerned that
policymakers don't understand that we don't have the same
resources to meet new compliance demands as multi-State banks.
There are numerous new recordkeeping burdens set to take
effect. For example, under the rules proposed by the SEC, banks
will have to register as municipal advisors just to offer the
same deposit and loan services we have always provided to local
governments.
The goal of the new statute was to provide oversight for
advisors that fell in gaps between the banks and security
regulators, not to duplicate oversight for banks that are
already regulated.
Yet, the proposed rule will add to our overhead without
providing additional protections for consumers.
Examiners have a hard job that is made even more
challenging in difficult times. Yet, there can be no doubt that
examiners are becoming more rigid, leaving less room for
judgment. This is particularly detrimental for local bankers,
since our competitive advantage is our knowledge of that local
marketplace. If the examiners take away that flexibility
through a one-size-fits-all approach, it will handicap our
ability to compete.
For example, while fighting discrimination is an important
goal of government, as a result of recent changes, we are now
hesitant to loan to long-time customers if they do not qualify
based solely on objective criteria.
Now, everyone has to fit in a box. If the customer doesn't
fit, yet we approve the loan, that borrower becomes an
exception. If we create such an outlier, we must justify the
reasons for making the loan.
Our examiners will demand similar exceptions for outliers
in a protected class or the bank risks referral to the
Department of Justice for prosecution. As a result, bankers
stopped making exceptions.
All banks and customers are different, so that it does a
great disservice for examiners to create a one-size-fits-all
approach.
Finally, I would like to thank you for introducing H.R.
3461 to restore consistency to the bank exam process. We would
encourage you and your colleagues to follow through and see
that the good ideas in the proposal become law.
I believe bankers and examiners still want the same thing:
a healthy, vibrant, competitive banking system.
H.R. 3461, the Financial Institutions Examination Fairness
and Reform Act helps all parties achieve that goal.
In conclusion, I sincerely appreciate the opportunity to
testify here today, and I would like to thank the Members of
Congress and their staff for coming to my home State to gather
information on issues of vital importance. Banks have served
this country well and will continue to provide a significant
engine for economic growth and job creation if we are allowed
to perform without excessive regulatory burden or inconsistent
examination oversight.
We would urge the House of Representatives to continue on
the path they started at the beginning of the 112th Congress.
Hold bank regulators, including the CFPB, accountable for the
cost of compliance and ensure that the layers of regulation do
not accumulate to the point where it is no longer feasible for
community banks to continue to serve their local markets.
Thank you.
[The prepared statement of Mr. Haning can be found on page
92 of the appendix.]
Chairwoman Capito. Thank you. Our next witness is Mr. Steve
Fireman, president and general counsel, the Economic and
Community Development Institute.
Welcome. Thank you.
STATEMENT OF STEVEN FIREMAN, PRESIDENT AND GENERAL COUNSEL, THE
ECONOMIC AND COMMUNITY DEVELOPMENT INSTITUTE
Mr. Fireman. Thank you, Chairwoman Capito, and Congressmen
Duffy and Renacci. Thank you very much for having us.
On behalf of the board of directors and staff of the
Economic and Community Development Institute (ECDI), we want to
thank you for hosting this conversation regarding the
challenges faced by Ohio's community-based financial
institutions.
The Economic and Community Development Institute is a
501(c)3 nonprofit economic development organization, U.S. Small
Business Administration intermediary microlender, and a U.S.
Treasury-designated community development financial
institution.
Since 2004, ECDI has made $10.5 million in loans to around
550 local small businesses in central and southwest Ohio
creating and/or retaining approximately 1,650 jobs. Because of
our success in central and southwest Ohio, ECDI has recently
been approached by funders and stakeholders in the Cleveland
area and asked to expand our microenterprise development
services to northeast Ohio. The organization will open a branch
in Cleveland in July 2012.
In addition to filling the gap in the credit industry by
offering loans ranging from $500 to $100,000 to small local
businesses through our revolving loan fund program, ECDI
addresses the needs of very small business owners in the
creation and expansion of small business.
Challenges: Our challenges are quite different than some of
the challenges that are being discussed today. However, our
popularity is a direct result of the challenges being discussed
by the witnesses today. There is no doubt about that.
First and foremost, we are faced with the challenge of
demand for capital. As one of the few microlending
organizations in Ohio, there has been an increased demand for
ECDI to make business loans. As a young and dynamic
organization, ECDI is committed to scaling up to meet the
increasing demand. Since 2009, ECDI has demonstrated consistent
and dramatic growth in the amount of loan capital disbursed and
the businesses served.
In addition to seeing increased demand in our central Ohio
market, ECDI has expanded our services from 7 counties, when we
were doing business in 2009, to 49 counties currently at the
request of stakeholders, including SBA, the Ohio Department of
Development, and the aforementioned Cleveland Foundation. The
surge in demand for small business loans, as well as the
geographic expansion, has caused some challenges for EDCI.
The first challenge we have faced is keeping up with demand
for capital. At the end of 2010, EDCI's loan funds were nearly
100 percent deployed. EDCI faced this challenge head-on by
creating an investment instrument approved by the Ohio
Securities Commission called Invest Local Ohio.
Invest Local Ohio gives community members the opportunity
to invest in small business by investing in EDCI. Every dollar
invested in the Invest Local Ohio fund is loaned to Ohio small
businesses and leveraged with at least two more dollars from
other existing ECDI loan funds. ECDI investors receive a 2
percent return on their investment for a 3-year note, and a 3
percent return on a 5-year note. Challenge number two is
related, but a little bit different. It involves demand on our
capacity. This challenge is caused because, in addition to
outreach, assessment, training, processing, and servicing
loans, ECDI's model differs a bit from the banks and credit
unions in that we commit to provide ongoing technical
assistance to our portfolio beginning with the loan and
continuing throughout the life of the loan. We like to tell our
customers that when you do a loan with us, it is like getting
married; you are not going to get rid of us.
This is critical to building successful businesses and,
therefore, we proactively work with clients to keep a healthy
portfolio.
This is also very, very costly. As an SBA intermediary
microlender, ECDI receives a yearly allocation of technical
assistance funds to spend time with our clients on building
strong business and capacity. This is very valuable, but 75
percent of the funding is restricted to working with the
clients only after the loan is closed. Not only is this a huge
compliance-related burden associated with allocating and
tracking staff time, but very little of the SBA technical
assistance allocation is able to be used in working with
potential loan clients before the loan is closed. And none of
the funding is able to be used for general loan administration
such as underwriting, processing, and servicing.
Another challenge that we have is the unpredictability of
Federal funding. I don't think I need to say much more about
that, actually. But it is enough to say that, every year, we
have to compete for our Federal funding, CDFI and SBA money,
which is okay. We appreciate the competition. However, it is
just a difficulty in building an organization to scale when you
have to plan year-by-year, as opposed to a few years out.
Another challenge that we face, and this is very different
from the other banks sitting at the witness table with me
today, is that the philanthropic communities are not wired to
think about small business development as a viable target for
their dollars.
According to a report from the Foundation Center entitled,
``Spotlight on Economic Development Grantmaking in Ohio,''
although the amount of dollars granted to economic development
initiatives by foundations in Ohio increased by 152 percent in
the period of 2005 to 2008, grants specifically targeted
towards small business development decreased by a third.
Another related challenge or similar challenge has to do
with State economic development initiatives. Just as
traditional philanthropy is not wired to understand the
importance of small business development, the majority of
Ohio's sponsored economic development initiatives are not wired
to understand the importance of microenterprise development.
Instead, they focus time and money on traditional economic
development strategies such as attracting and retaining large
corporations.
Start-up initiatives that the State does put their money
into, such as Ohio's Third Frontier Program, benefit the high-
growth technology sector. While this is crucial and it is very
valuable, it neglects a large portion of Ohio's potential
employers: small businesses that employ five or less employees.
As a result, we have to spend a lot of time screaming and
yelling and trying to get in front of the Ohio Department of
Development, and now Jobs Ohio people, and explain our story
and why small business, really small business development is
crucial for job creation. Without continued Federal support and
education on the State level, microenterprise will not have the
opportunity to create the jobs that we have the potential to
create. As you can see, with each challenge, we try to look for
creative ways to continue to meet the capital demands of Ohio
entrepreneurs and microbusinesses.
Thank you for the opportunity to communicate these
challenges we face in serving small business. I hope this
testimony is useful as you return to Washington.
One other example I would like to give on a regulatory
burden is, we were the recipient of Small Business Loan Fund
dollars, SBLF dollars, a small allocation in the form of a
loan, a low-interest loan, which is how we get a lot of our
capital, like SBA capital and/or bank capital.
And it seemed like a good idea at the time. It was
$203,000, which we deployed to small business. However, the
process took approximately 6 months. We had auditors in from
three different States, which is probably all good shepherding
of Federal dollars, but--and then the closing. I went back and
forth with the closing attorneys from New York 16 times to get
to the actual deal closed.
So I can imagine that our $203,000 loan probably cost--I
don't even want to think about what it cost. But it was quite
an expensive deal.
I think that demonstrates some of the regulatory burden
that we face, as well.
Thank you very much.
[The prepared statement of Mr. Fireman can be found on page
88 of the appendix.]
Chairwoman Capito. Thank you.
And our final witness is Mr. Martin Cole, president and
chief executive officer of the Andover Bank.
Welcome. Thank you.
STATEMENT OF MARTIN R. COLE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE ANDOVER BANK
Mr. Cole. Thank you, Madam Chairwoman, Congressman Duffy,
and Congressman Renacci. Thank you for bringing this hearing to
Ohio, and for your invitation to testify today.
My name is Martin Cole. I am present CEO of the Andover
Bank. We are a rural, State-chartered community bank with $330
million in assets, which has been in existence since 1884. I
have been there for 36 years. Viewed from enough distance to
gain perspective, the structural flaws in our financial
regulatory system are clear.
In the early 20th Century, the average consumer or small
business only had one resource for financial services, a bank.
Thus, policymakers viewed banks as vital to the public's
interest and Congress enacted safeguards. Deposit insurance and
on-site regular examination provide two examples. Please note,
banks pay the entire costs for both.
The marketplace constantly innovates. Active regulation can
impede innovation. If one path is blocked, the marketplace will
blaze another. Significant government costs for banks pushed
the marketplace to invent non-banks to avoid these costs.
Simply put, bank supervision is far more intrusive and
expensive to banks than government regulation is to any of our
non-bank competitors.
Let me try to reinforce the public policy importance of
equivalent regulation with an Ohio example. Leading up to the
collapse of the housing market, Federal mortgage lending laws
theoretically applied to mortgage brokers, but in Ohio, no one
enforced those laws.
As a result, Ohio suffered from rampant predatory lending
as criminals and charlatans slipped through the enforcement
gap. When Ohio belatedly licensed brokers, its process included
criminal background checks. As I understand the numbers, an
estimated 2,000 brokers, who had been operating, never applied
for licenses. Of the roughly 10,000 who did, 14 percent were
found to have criminal backgrounds.
My bank's primary marketplace is a single county. For my
bank to prosper, I must invest in the communities we serve. As
a small bank, my sustainable competitive advantage is that I
can know my customers. Thus, I can safely make a small business
loan that another bank, relying only on credit reports and
credit scores, would rationally deny.
Across Ohio, there are thousands of successful businesses,
some grown large, that exist because of the initial insights
and hands-on help of a community banker. For that process to
work, the regulator must allow us to use informed judgment.
Today, what I hear from peers is that they feel that bank
examiners are not allowed to respect the judgment of skilled
bankers.
Let me be clear that I believe the financial services
industries should and must be regulated. I have enormous
respect for my regulators. Their job is very important and
very, very difficult.
Let me turn to consumer regulations. As a community banker,
I will succeed or fail based upon my reputation. We have
powerful incentive to work very hard at treating our customers
fairly and helping them make decisions that are best for them.
We understand there are bad guys in the marketplace and that we
need consumer protections.
However, for a smaller bank, every change in a regulation
imposes real cost and distracts my colleagues from our
customers. That is okay if the consumer gets a benefit that
outweighs the cost, but far too often, he or she does not.
The Ohio Bankers League, which represents Ohio's banks and
savings and loans from the smallest to the largest, operates an
on-line exam evaluation system. This system is new. Its purpose
is to provide useful feedback to agencies to help them improve
their procedures and training.
Evaluations of recent exams give cause for concern. Forty-
two percent of the participating banks reported that their
examiners were neither flexible nor open to the exchange of
views. Less than half of the banks believe their examinations
have resolved issues and recommended corrective actions in a
fair and reasonable manner.
I would commit two bills pending before the House.
The first is H.R. 3461. We are encouraged by its clear
focus on timely, fair, and effective examination.
Finally, while I understand that H.R. 1697 content is too
diverse to be considered by a single committee, I would ask for
your review of those provisions under your jurisdiction. Please
understand that redundant regulation or regulation designed for
larger, more complex institutions can severely harm the ability
of a small bank to respond to the legitimate needs of its
community.
I want to specifically thank Congress for recently raising
the SEC's shareholder threshold from 500 to 2,000. That single
change will make it far easier for smaller banks like mine to
raise capital in the future.
We have 460 shareholders. We have a list of individuals who
would like to buy our stock. We can now proceed with capital
expansion plans without fearing costly additional regulatory
requirements. Thank you.
In the movie, ``It's a Wonderful Life,'' George Bailey had
a crazy Uncle George who unintentionally and inadvertently
almost destroyed the financial institution he loved.
I have a crazy uncle, also. His name is Uncle Sam. I
believe he has inadvertently and unintentionally destroyed
community banking. Maybe you can be my Clarence.
I am grateful for your interest in Ohio and its
communities. I would be happy to respond now or in the future
to any questions you may have.
[The prepared statement of Mr. Cole can be found on page 82
of the appendix.]
Chairwoman Capito. Thank you. Thank you all very much for
your testimony. I think we have a good variety of witnesses
here, so I think we can get some good questions. I am going to
begin the question-and-answer portion.
Mr. Blake, I want to ask you about the Volcker Rule.
Knowing the complications of it, and I am glad you mentioned
that the Senate was making a move to postpone this, but there
has been a rush to get this onto the books and sort of in the
barn.
But the question I have is, you talked about safety and
soundness. What are the compliance costs? You mentioned
disproving a negative, so disproving that you are not engaging
in this. Have you been able to calculate what the compliance
costs would be to KeyBank? Have you already hired people to try
to meet these challenges?
Mr. Blake. We have not. We are waiting for more guidance on
the final rule and where it would wind up.
The proposed rule would certainly require us to, in my
view, at least hire a full-time compliance officer for nothing
other than the Volcker Rule.
But the reach of the Volcker Rule is so extensive that it
requires significant record-keeping, significant analytical
work, significant testing that the compliance program that is
part of the rule has, I think, about 24 different statistical
analyses that banks have to perform. Fortunately, we don't fall
into the biggest category, but we still would have to do a
number of those.
It is a little bit difficult without more guidance from the
Federal regulators to know exactly how much it is going to
cost.
But, for example, we have to identify every single trading
desk, and that is every area where there would be a trade made.
So we have a broker dealer, for example, that does marketing.
We have a treasury group that does asset liability management.
Each of those desks has to have procedures and policies. Each
of the trades has to be identified and tracked. And on an
after-the-fact basis, regulators will come in and let us know
whether any of that activity is proprietary trading.
Chairwoman Capito. Thank you. There has actually been a lot
of criticism, too, about the international implications of what
this rule could mean to our financial institutions.
I want to get to--I think Mr. Haning and Mr. Cole mentioned
this in their testimony. I was at a small bank in my district
over the holiday, and this whole theory, or not theory, but, I
guess--I don't want to say fear, because that might be too
strong, but consequence of community banks sort of being swept
under and, really, being forced to either merge or be acquired
because you meet the compliance costs, is really going to, I
think, endanger that one-on-one personal relationship. Your
bank has gone back, what did you say, 200 years--
Mr. Cole. Since 1884.
Chairwoman Capito. Yes, 1884. I am sure you have
relationships with probably everybody in your community and
know a lot of the folks in your communities.
In my bill, in the examination bill, we are trying to get
the consistency in there, the timeliness of it, the ability for
you to have questions answered and to appeal certain decisions.
Have you in your experience through your examinations,
tried to appeal decisions that have been made? And what has
been the result of that? Not yes or no, but really, do you have
any frustrations with that, I guess is what I am asking?
Mr. Cole. Not specifically in the safety and soundness
area. We do in the compliance area, and we have just recently,
because of the time period between examinations, the 4-year
period. And my discussion with the policymakers at The Federal
Reserve was that there was too much of a gap in communication,
a lack of understanding of what they wanted versus what the
regulations state, because there is a lot of nebulous
interpretation under the guise of fair lending.
As an example, I have been forced to go out and hire a
full-time compliance officer with salary and benefits of about
$60,000 a year.
We are currently employing the services of a consultant at
$1,200 a day. They are spending about 2 days a week in there;
just coming in, assessing what we need to do, trying to
interpret the--in anticipation of rules coming from the CFPB or
any other agencies.
It is the uncertainty and the unknown that we most fear.
And our bank is doing quite well. We are coming off of our
third consecutive year of record earnings. So it is not that we
are struggling in this market. The concern is the future.
This afternoon, when I return to the bank, I have an
appointment with a gentleman from a much larger banking
institution to discuss the possibility of merging.
So it is an option we have to consider for our
shareholders. Unfortunately, it would be a huge loss for our
particular area because of the services we provide.
Chairwoman Capito. What county are you in?
Mr. Cole. Ashtabula County.
Chairwoman Capito. Which is up to the east?
Mr. Cole. The very northeastern part.
And we have the number one market share in Ashtabula
County. We are a significant financial institution playing a
significant role in our community, and it would be a tremendous
loss.
But the reality is, what we see in the headwinds of
compliance, based on our size, we feel we have to generate a
larger size in one fashion or another to absorb the cost just
to meet regulatory compliance.
Chairwoman Capito. I am going to move on to Mr. Renacci. I
will get back to you, Mr. Haning, in our second round.
But I am sure this will give you great comfort to know that
one of the top 10 fastest-growing occupations in this country
is compliance officers in the financial institutions,
compliments of Dodd-Frank, I am sure.
Mr. Renacci is recognized for questions.
Mr. Renacci. Thank you, Madam Chairwoman.
I do want to thank all of you for being here. After
listening to all your testimony, it continues to reinforce some
of the concerns that I have over regulations.
And, Mr. Fireman, your comments about certain
unpredictability. Without uncertain predictability, things get
frozen up, too. So I appreciate that.
I will open this next question up to anyone on the panel.
Secretary Geithner has stated that FSOC will coordinate an
interagency review to identify and eliminate regulations that
are outdated, unnecessary, or unduly burdensome to insure
depository institutions. Have your trade associations been
active participants in this process based on the agency's work
to date?
Should we be optimistic that their efforts will yield
constructive recommendations for reducing regulatory burdens
that your institutions face?
Again, anyone on the panel who would like to address that?
Mr. Haning?
Mr. Haning. I can't say that I have seen any efforts on our
part of our association. Unfortunately, it sounds like a little
bit of government rhetoric.
I am sure they don't want anything to happen that would
cause undue harm to the financial institutions in Ohio or
across the country, but in the efforts, obviously, from Dodd-
Frank and the interpretation of much of what we have yet to
see, I can't see the efforts of reducing burden, more so of it
increasing.
Mr. Barnes. Congressman, if I could respond to that, also?
Our association works diligently to work with all of the
agencies, whether that is reviewing new rules and regulations
on behalf of credit unions and then filing comment letters with
respect to all of those on potential consequences or
alternatives or things like that. So, our association certainly
has.
What we hope the outcome of that will be is to bring an
element of common sense back into this regulatory process to
eliminate those things that are of no value, that simply
increase cost, and minimize the ability of local financial
institutions to serve consumers, and to restore some common
sense to the process.
My colleague from Andover Bank--that is $350 million, if I
understand that correctly--just spoke to you about the
incredible amount of effort that they have to input to comply
with that. And as I said in my testimony, 65 percent of credit
unions are $35 million or less. That is one-tenth of his size.
So you can imagine complying with those same rules.
So, we certainly are hopeful that any process to minimize,
streamline, and eliminate burdensome and duplicative
regulations will be successful, and we will do anything we can
to help.
Mr. Renacci. Mr. Blake, I am going to come back to the
Volcker Rule. The Volcker Rule was championed as an easy
solution. Simply stop banks from taking excessive risk with
federally-insured deposits and we would have all the answers.
The argument was that banks could not engage in proprietary
trading and financial systems would be safer. However,
reinstating a 1930s regulation in today's complex financial
world, of course, has proven to be very, very difficult.
When regulators went to draft the so-called easy fix, the
result was a 298-page proposal that included more than 1,300
questions seeking comments on nearly 400 topics.
Defining proprietary trading is not an easy task, is it?
Why is it so complicated?
Mr. Blake. I think it is complicated because while, in
fact, I believe Mr. Volcker himself said that proprietary
trading is one of those things that you know it when you see
it, but, otherwise, it is very difficult to detect.
I think the difficulty is that when Congress and when
regulators think of proprietary trading, they think of the
larger institutions, the money center banks, the investment
banks. And those institutions had proprietary trading desks.
They gave their desks a certain credit limit, a certain dollar
amount limit, and allowed them to trade for the firm itself.
So, they were buying and selling securities, derivatives,
credit default swaps, and making money or losing money for the
institution.
Most banking institutions never did that. Most banking
institutions focus on their core business, which is providing
deposits, loans, and other traditional banking services.
Mr. Barnes used a phrase earlier that I think is really
appropriate here. He called it ``regulatory micromanagement.''
That is really what we see with the Volcker Rule. What the
agencies are doing is trying to find proprietary trading in
every nook and cranny.
So if we are engaged in asset liability management, for
example, and we have a fixed-rate loan portfolio that we are
trying to hedge, if we don't do a perfect hedge, we make money.
And, oddly enough, making money is one of the indicia of
proprietary trading.
So it is micromanagement, overregulation, but certainly
micromanagement of the individual pieces of our business that
make proprietary trading and the Volcker Rule so complex.
Mr. Renacci. Just a quick follow-up, and you said this in
your testimony. In addition to raising costs, how could the
proposed rule actually increase the risk to a financial system?
Mr. Blake. If we are not able to do asset liability
management, that leaves us exposed to risk.
And, it is an old system. We take in deposits at one rate
and make loans at another rate, and the difference is the
spread where we make our money.
When we make fixed-rate loans, we have to hedge against the
possibility of interest rates raising. When we make variable
rate loans, we expect interest rates to drop, and we may hedge
that. So we have a fairly complex and fairly sophisticated
asset liability management system.
What the Volcker Rule does is require us to look at that
after the fact and say that, if our hedges were not perfectly
correlated--the phrase that the regulation uses is ``reasonably
correlated to the risk.'' But the problem with the regulation
is, it looks at it in hindsight. If we weren't able to predict
the degree of increase in the interest rates or the timing of
the increase in the interest rates, our hedges may actually
make us money. And curiously enough, that would, again, be
indicia that we are engaged in proprietary trading.
And that is why I say one of the fundamental problems with
it is the regulatory micromanagement; getting into the nitty-
gritty of asset liability management and looking at it on an
after-the-fact basis.
Mr. Renacci. Thank you. I yield back.
Chairwoman Capito. All right. Mr. Duffy?
Mr. Duffy. Thank you.
I come from a rural part of Wisconsin. I grew up in a town
that has roughly 2,000 people. The bigger Wall Street banks
necessarily weren't participating in my community. We had
credit unions and small community banks.
I have spent my adult life in smaller rural parts of
Wisconsin, and I have had an opportunity to deal with the
smaller banks, and I have had a chance to deal with the larger
institutions. And the larger institutions do good work, but I
guess I see the value that the smaller banks provide in the
rural areas across America.
And one of my concerns is that the rules and the
regulations that are coming out have a disproportionate impact
on the small credit unions and the smaller banks as compared to
larger Wall Street banks.
And I guess, if you look at the background as to why we are
seeing all these rules and regulations, it might be from some
of the bad actors that Mr. Cole referenced, but, also, some of
the behavior that has taken place on Wall Street and not
necessarily the behavior of the financial institutions that are
before us today. But the smaller institutions that didn't have
that role in the crisis are bearing the brunt of the new rules
that are now coming out.
Am I misguided in my comment or analysis on how I am seeing
this?
Mr. Barnes. No. I think you are dead on, Representative
Duffy. We certainly believe that what you are stating is true.
You are exactly right.
Credit unions that I represent had no impact or cause or
weren't a cause of the financial crisis, but, yet, we see
regulations being written to the lowest common denominator.
And our credit unions have always worked--as have many
community banks--with people to try to get to know them, to
treat them on a one-to-one basis, to give them a fair and
honest deal from the very beginning without ever beginning told
to by Congress or a regulatory agency.
But the problem is, with the regulations, when they are so
onerous and designed to curtail certain awful behaviors that
created such a problem, that there are so many unintended
consequences that we see that inhibit a small credit union's,
or any credit union's ability to continue to provide that
working one-to-one relationship without a huge burden of
regulatory experience.
So we believe you are right on target.
Mr. Haning. Congressman Duffy, I agree wholeheartedly.
I am from southeastern Ohio. My financial institution is
$110 million, so I am about a third of the size of these guys
to my left and right.
I also had to go to a full-time compliance officer, $50,000
plus benefits, which, prior to 5 to 7 years ago, was about a
third to a half position. Twenty hours a week would be max for
compliance, and now I have a full-time compliance person. Plus,
I pay for an outside audit to check the rules and regulations.
Unfortunately, community banks get caught in the trickle-
down effect of rules and regulations that are set for larger
financial institutions. They have a rule.
They have a good position.
I have a large institution one block to the left of my main
bank, and a large institution one block to the right of my main
bank.
They both offer the same products that I do. They are
mandated by law. They set the price for lower standards or
lower pricing. Where is your customer going to go? Is he going
to go to the big buy at the lower price or come and see you and
pay more?
So we, in effect, through trickle down, have to comply with
rules and regulations that are set for all financial
institutions.
A good examples of that is the debit card fee structure. We
were mandated in the amount that we could charge for processing
debit card transactions. We complied. We made some noise and
squirmed a little bit, but we complied. With some mediation, we
got the price upped a little bit, but still below the cost of
doing business. The merchant has taken that and run.
Home Depot and Fortune 500 companies are announcing to
their shareholders that they are going to have increased
earnings from debit card fees. They are not passing it onto the
consumer.
So while the middle man had good intentions, it never got
to the bottom-line consumer. Those are issues.
We also have the same issues with the examination process.
My bank is on an 18-month cycle. Over the last three exams, I
have seen a force of examiners come in. Completely different,
new faces. I had some disagreements.
We are a highly-rated, well-capitalized financial
institution. My earnings have stayed the same over the last 3
years because of increasing expenses.
I had the opportunity to have to call a district office. I
had some discussions with them, didn't get the answer that I
wanted or I thought was appropriate. Finally, I ended up
talking to the people in Washington. So, the next exam came in.
I had a whole new team. We had a wonderful examination and--but
some consistency, I guess, is where I am going with that. I
think the biggest problem we face is not knowing what to expect
when they walk in the door, and then sitting there not knowing
when we are going to get the report back.
Mr. Duffy. I have heard the same thing in Wisconsin.
But to the point of--if you look at the small institutions
and the impact that it has on that institution, the new rules
and regulations, as compared to a larger financial institution,
is it fair to say the larger institution has a broader base to
defray those costs over, as opposed to a smaller institution
and, therefore, the burden isn't equally worn by the larger and
the smaller institutions? It is unfairly placed on the smaller
institution. Is that not right?
Mr. Cole. Absolutely. And your presumption of what exists
out there is exactly right. Many legislative individuals have
indicated that same thing to me.
And even at the beginning of the crisis, my own
Representative, my own Senator told me, ``Marty, we understand
you are not the cause of it. We will make sure that this
doesn't impact you.''
We were in Washington last month. We spoke with Governor
Raskin of the Federal Reserve. She also indicated her
understanding and sensitivity to the community banking
industry.
I have read many articles about--stating, again, this
sensitivity to the community banking industry.
I think there is a feeling of sensitivity towards our
industry and, again, an appreciation and, I think, truly a love
for our industry by the public and, I feel, by Washington.
The disconnect is in its execution. The policymakers, I
think, in theory believe that there should be some kind of
different regulatory system for large and small institutions.
They don't know how to execute it, quite frankly.
And my complaint to Governor Raskin, my complaint to the
policymakers here at the Cleveland Fed is the lack of
understanding of the theoretical application of policy and the
execution in the field. Again, the intention is not being
carried out.
My compliance examiner bragged about his years of
experience of working as a compliance individual for a large
bank. He was already biased by what he had known and seen at a
larger institution and was expecting the same from us and, I
think, was surprised at the lack of sophistication that we
displayed. He didn't have the understanding of the differences
in the different institutions.
Many of the examiners, again, just don't understand how we
can operate the way we are--safely, soundly, profitably--
without the sophistication. And quite frankly, it is
challenging, but we are able to do it because it is different.
I think that theory and philosophy is where it gets
disconnected through the system because, obviously, it is a
bureaucratic system.
Mr. Duffy. To that point--I know I have to yield back in
one second. But I think we do--it is true. There is an affinity
for the smaller financial institutions.
And I think we have seen the difficulty in saying, ``How do
you structure one set of rules for a smaller institution as
opposed to a larger institution?'' I think that can be
problematic and there is a lot of struggle with that.
But I think it then goes to the point that, if you continue
to overregulate and have all of these different rules and do
not use a scalpel to make sure you have reforms in place that
actually address the lessons of the crisis, but, instead, you
use that crisis to wildly expand government into this sector,
the net impact is borne by the smaller institution, and I think
that is what we are seeing, and trying to make sure we have a
structure in place that allows that weight to be lifted off
everybody.
I think it allows you all to compete more effectively.
I know my time is up. I will yield back.
Chairwoman Capito. If you don't mind, we will do another
round. I have a couple more questions.
I wanted to ask, Mr. Fireman, you have mentioned in your
testimony the unpredictability of the Fed funds, and then you
mentioned two funds that you get funds from, the CDFI, and was
the other one SBA?
Mr. Fireman. Yes. SBA. We are a microlending intermediary,
so we borrow money from SBA. And the uncertainty there is not
necessarily the ability to borrow funds. That has been fairly
consistent. As an intermediary, each organization or agency at
any one time can borrow up to $5 million. That just got raised,
as did the definition of a microloan from $35,000 to $50,000.
So that has not been--knock on wood--the issue.
The issue, though, is, a year later--each year, you apply
for SBA technical assistance money. That is what I was
referencing, concerning our ability to take care of our
portfolio, other than unrestricted funds that we generate
ourselves or raise or get invested.
We have to apply--we use money that is a formula based upon
dollars on the street, average size loan, and performance of
the portfolio, all of which are fine.
However, there are 180 of us applying for a certain amount
of money, also. So that is what I was--
Chairwoman Capito. Okay. I am interested in the economic
development issues that you stated. Just briefly, what is the
unemployment rate in Ohio? I know it is above the national
average, correct?
Mr. Fireman. It is somewhere around 8.5 percent.
Chairwoman Capito. What kinds of businesses are you seeing
expanding? I am certain they are all small, obviously. And are
any of these--how does it shake out? Woman-owned businesses?
Are there more woman-owned businesses growing? I am just kind
of wondering if you have noticed anything like that.
Mr. Fireman. Our portfolio consists of 44 percent woman-
owned businesses. We work with main street businesses. We don't
work with tech companies.
Chairwoman Capito. So, retailers mostly.
Mr. Fireman. Retail, a lot of food-based businesses, local
food-based businesses, transportation, home healthcare.
Chairwoman Capito. It also has to do with healthcare.
Mr. Fireman. And, some like tech service, business-to-
business service industries in general.
Chairwoman Capito. Are there one or two of those that seem
to have more growth potential in your mind?
Mr. Fireman. We have seen some growth potential. A couple
of our home healthcare companies have gone from 3 or 4 people
to 60 or 70 jobs. And then some of the restaurants have grown
to multi-location chains or the same owner who has several
businesses, employing 40, 50, 80 people, as opposed to 5 or 6
people.
Chairwoman Capito. Let me just make a statement, and then I
will ask you all to react to it. The CFPB was created, and
Dodd-Frank itself was created to protect consumers, those who
had been harmed. And Mr. Cole talked about some of the
unscrupulous lending behavior, subprime loans, so we are
certainly aware of that.
My fear with everything that I have heard today, and I am
seeing it in my district, Mr. Haning said you are no longer, or
at least you are hampered now sometimes in the lending to your
long-time customers because of the way they are rated or
because of other issues.
In the pursuit of extending consumer protection, we are
really hurting or have the potential to harm those people who
are falling in the questionable category. There are more of
them. There is less availability of credit. Credit has
tightened up.
If you are spending $50,000 and you are spending $60,000
for a compliance officer, that is $50,000 or $60,000 you are
not lending on a car loan or a small business loan or whatever.
And so, obviously, in the examination process, the riskier
loans and the riskier consumer is going to be the one who is
going to get shut down first because it is going to make your
balance sheets and everything else in your exams look less
favorable if you keep engaging in those kinds--am I going down
the right path here? This is something I am very concerned
about. And I am starting at the credit union, and we will just
go down the line quickly, if you all want to make a quick
statement.
Mr. Barnes. Yes, ma'am. Certainly.
Chairwoman Capito. If you have an anecdotal issue, that
would be helpful to us.
Mr. Barnes. Sure. As was referenced before, when certain
loans don't fit inside of a box, those become exceptions.
Our credit union has worked very hard over the last 7 or 8
years to remove a lot of barriers in our lending policies to
really reach out and serve every member in our community. We
really take seriously the credit union mission to serve people
of small means.
Chairwoman Capito. Right.
Mr. Barnes. But many times, those loans, and you can't have
all of those. There has to be a balance. So we have developed a
lending program that has allowed us to enter in and engage in
that type of lending.
But the issue for us is, the relationship we have with our
examiner currently is positive. However, that can change. And
with this not-on-my-watch mentality that exists amongst so many
regulators when they come in, that is in jeopardy.
I would hate to think of what Stark County, Ohio, would be
like if it weren't for CSE doing the kind of lending that we
are doing. We do it safely, we do it soundly, and we do it
profitably. But when the rules change, or we don't know what
those rules will be in the future, that certainly--
Chairwoman Capito. Mr. Blake, I know you have a larger
institution. Certainly, you have seen this?
Mr. Blake. Yes. I would add, I think, one thing from our
perspective of the larger institutions. We go through the CCAR
process, the Comprehensive Capital Analysis and Review, which
are those stress tests that are generating so much publicity.
The stress tests apply a reverse economic scenario as to
our existing loan portfolios and predict losses in the future.
To the extent that our portfolio includes the lower-quality
loans, the regulators project larger losses. Larger projected
losses impact our ability to pay dividends or potentially pay
dividends, to share buybacks or take other capital action that
we think are necessary.
So like the smaller institutions, we also feel the same
pressure.
Chairwoman Capito. Mr. Haning?
Mr. Haning. Madam Chairwoman, a couple of issues. Number
one, we do have money to loan. I know you have heard that on
the trail, too. What we lack is consumer confidence.
There are consumers out there who still don't have great
confidence in the economy yet and they don't come in, or there
are those people who just don't qualify. We have not increased
our lending standards. They are the same as they were. We were
conservative 7 or 8 years ago. We still are. It is just, the
standards have not changed, therefore, less people qualify.
The interpretation of the rules from legislators to
regulators to the bank is an issue, which gets me to the point,
you saw me shaking my head, of not-on-my-watch. We have Federal
regulators from the OCC, now the CFPB, the Federal Reserve, the
FDIC, who were jockeying for position at one time, so they were
a little more stringent in their examination procedures, which
causes you to pull in the reins a little bit.
And the issues are such that, if we can't make loans, we
can't make a return, we can't get the money to the capital line
to grow the bank and to make mortgage loans.
Chairwoman Capito. Mr. Fireman?
Mr. Fireman. Our business--we were formed, and our mission
is to help underserved, underbanked, and unbanked communities
and make them bankable.
What has happened over the last couple of years is our
portfolio, or our originations, have gone from 70 percent
start-up to 70 percent existing business. All of the things
that the gentlemen are talking about have led to our bank
partners, credit union partners, community bank partners
referring us more and more of the customers who, historically,
wouldn't have been exceptions, or maybe it would have made
sense for them to work with, so they come to us. And what that
does is, it has the unintended consequence for those who were
actually formed to serve getting pushed out of the credit
marketplace.
We are in the business of providing opportunity and
accepting risk, and that is why we get paid to do the technical
assistance, that hand-holding that we do. And we still do that.
It doesn't mean that all of the customers being referred
are cherries or gems, but, by the same token, it does have an
adverse impact on those we used to serve. So that is kind of
how we see this whole--
Chairwoman Capito. Mr. Cole, did you have anything to add?
Mr. Cole. Yes. I just wanted to state that you are 100
percent correct in that I think the intentions of the CFPB and
others that are wanting to protect the consumer are going to
have unintended consequences of the opposite.
And, I believe that community banks operate very much, as
my colleague from the credit union is. We are very similar. And
I am very aware--my sister is the president and CEO of the
largest credit union in our marketplace. We compete head-to-
head.
Chairwoman Capito. That must make for great family
relations.
Mr. Cole. Interesting Thanksgivings.
But, actually, we share a common goal, and that is to
improve the quality of living in our county, which we both were
raised and grew up in. We both dearly love it, and we both
contribute back, her, in her way, and me, in my way.
So I am very familiar with the credit unions and how they
operate. We are very, very similar. Our focus is on everyone in
that community, especially the underserved.
And when you look at regulations, like the Community
Reinvestment Act, the credit unions do not have to comply
because they recognize that it is not necessarily given, how
they function, but we have to comply. And, again, it is
overburdensome because, again, the way we operate, we have to
reinvest back in our communities. There are many regulations
out there that simply do not apply to us by our inherent
nature.
And my recommendation would be--not that I want another
regulator, God forbid, but instead of the CFPB--and Congress
and Washington recognize the distinctive difference between the
size of banks when they come out with $10 billion. I don't know
if that is the number. But since I am trading under $30
billion, I am okay with $10 billion. But, anything less than
$10 billion should be treated differently.
Now, our concern is that the rulings coming out of the CFPB
are going to become best practices, just like the stress test
of larger banks, are going to become best practices. Examiners
are going to see these as best practices and apply them to us,
as well.
My recommendation would be: the establishment of a
community bank regulator; that banks of a certain size are
regulated by people who understand community banks; that we are
not subject to the other regulations, but those established by
a community bank regulator, made of panels and advisories of
community bankers who can work through these execution issues
and policy issues.
Chairwoman Capito. I appreciate that. Before I turn the
microphone over, I want to reiterate that consumer protection
is a huge issue for all of us and for everybody sitting here,
and you wouldn't still be in business if you didn't try to
engage in good consumer protection. Striking that right balance
is going to be difficult.
Mr. Renacci?
Mr. Renacci. Thank you, Madam Chairwoman.
And it is interesting. Mr. Cole, I was listening to your
comments, and I agree wholeheartedly. We had issues with the
big banks, the big Wall Street banks, and what we have done is,
we have thrown a blanket over everybody, which also includes
some of the smaller institutions, which just isn't fair.
So I kind of want to put a human face on this issue.
There are some who say regulatory relief is really just
shorthand for the desire of financial institutions to cut costs
or avoid burdensome regulations.
I remember 28 years ago when I came to Ohio, I went to a
small institution. I had a good credit history. And I borrowed
some money and started a business, and grew that business
because a small institution believed in me and they believed in
my background. They believed in my experience.
So I question, for example--let's talk about the customers
for once. How are we affecting Mr. Barnes and Mr. Cole and
maybe Mr. Haning? Put a human face on that.
Do you have those people, like I was 28, 29 years ago, who
come to your institutions looking for that first step to employ
people, to start a business, to engage in entrepreneurship and,
all of a sudden, these regulations are stopping you from
helping them?
Mr. Cole. Absolutely. I, myself, own a business. I am a
small business. Our bank is a small business. I am an
entrepreneur.
Before I became president and CEO, I was a commercial
lender. I can tell you stories of many people who came to us,
just like yourself, and we started them, and now are successful
businesses employing numbers of people who wouldn't have gotten
the start otherwise because other institutions wouldn't have
seen the person and the character and what is behind the
numbers. So as a community banker, growing up in the community
and knowing people, there is a value there that extends beyond
the numerical evaluation. So, yes.
We have people coming today, and because of the way we have
to rate loans--and I am still part of the credit committee. And
I, as a former commercial lender, struggle when I hear my
credit analyst and my loan people and my person in charge of
loan administration say, ``Well, you know, if we make this
loan, it is going to be immediately classified and we will have
to reserve.''
Seriously? And, yes.
And so we struggle. We struggle with that. And given
economic factors, we may not make that loan that, in my heart,
in my day, had I been making that--I would have made that loan
all day long.
So, yes. That situation does exist.
Mr. Renacci. I am sure my first loan would have been
classified, too. That is the problem.
Mr. Barnes, any comments?
Mr. Barnes. Congressman, yes. Thank you.
We do see many people with business opportunities who come
to us looking for financing, who have been turned down by
either banks or have had lines of credit terminated.
Our credit union does do some business lending, but we are
not involved at a huge level. So what we usually do is try to
pass those referrals onto credit unions in our area that do
provide that.
But they all come with a similar story; they have gone
elsewhere and they have either had lines of credits terminated
or they are not able to get a loan, or what did qualify at one
time no longer meets certain criteria or fits in that box. So,
certainly, from the business standpoint, we see that.
We also see it on the personal side, especially with
residential mortgages. And I don't mean any disrespect to
anybody on the panel, but sometimes some of the larger
institutions don't have an interest in doing small mortgages.
And a lot of it comes down to regulation. There is a ton of
regulation and compliance that is involved in executing a
mortgage for a member. And that cost and that level of
compliance is the same on a $200,000 mortgage as it is on a
$25,000 mortgage. So, we see many members coming to us with
small mortgages. In Stark County, Ohio, there are a lot of
repossessed homes that can be purchased for that amount of
money.
One example in particular, it was a young kid, 26 years
old, no credit, but he was a good kid. In fact, my dad was an
elementary school principal, and his mom taught school for my
dad. This was a kid that she had, and my dad knew him from
years ago. We were able to help him because of the personal
relationship, which anywhere else, I don't know if that would
have happened.
Mr. Renacci. Mr. Blake, do you agree with that? I am going
to put you on the spot, seeing that you are a bigger bank.
Mr. Blake. I think, because of our size, we tend to be more
statistically driven when it comes to making loans because our
regulators tend to look at us and drive us statistically.
We certainly try in our community branches to be the kind
of personal lender that my compadres over here are, but,
obviously, because of the size of the institution, we aren't
always able to do it as well as they are in those kind of
situations.
Mr. Renacci. Mr. Haning, Mr. Cole, financial institutions
often tell me they have no recourse when they have a dispute
with the regulator, be it the FDIC, the OCC, or the Federal
Reserve. In other words, the regulator is the judge, the jury,
and the executioner for any dispute or disagreement in a
regulatory examination.
How could the appeal process be improved in your mind or
your thoughts? And could the office also be strengthened to
give it more substantial power?
Mr. Haning. Congressman Renacci, I have a tendency to want
to agree with that assessment, but I also feel like there is a
process in place. The Ohio Bankers League also has a procedure
in which we can do some things anonymously and have the
association pass on the rule and regulation.
It comes down to the point of, we need to make a conscious
decision, is it worth the time and effort and possible
retribution of disagreeing with an examiner, what the outlying
results would be if we just let it go and try to comply. But
having an opportunity or a process that understands is very
critical. I think they have those things in place.
I have not taken that process, so I can't address that
specifically, but it is needed. There does need to be an avenue
to share your findings without a specific name and number.
Mr. Renacci. Just a quick follow-up, because you said
something that is very important, possible retribution. Do you
believe banks fear that, possible retribution? I know, a lot of
times, they don't want to appear in front of a panel because of
possible retribution, so--
Mr. Haning. I don't think it is anything, yes.
They will come in and they may dig a little deeper. They
may find a particular area that they want to drill down on and
find possible issues. So it is a possibility. I think, in
general, it is not something that happens on a regular basis,
but that is always a concern.
Mr. Renacci. Mr. Cole?
Mr. Cole. I think it depends on, from my perspective, who
the regulator is.
We are a State-chartered bank, so, thereby, we are
regulated by the State of Ohio. John, who is in the audience,
who is director of the department of financial institutions,
individual financial institutions, we have a great relationship
with him. If I have issues, I can pick up the phone and call
John. So I think the relationship there is different than it is
on the national level. From what I have heard from my peers,
the SEC is a little different.
I also have a good relationship with the Federal Reserve
Bank here in Cleveland, and I know policymakers, and I can pick
up the phone and call.
If you are not--unfortunately, the way the system works, I
think it is a matter of who you know.
Also, the issue is, is there blood in the water?
Unfortunately, what I have seen over my career is, once
there is blood in the water in a bank, there is very little
motive for the regulator to not be more aggressive. They are
not rewarded on the basis of public interest in terms of making
loans. They are not rewarded to see that banks--how much banks
do in the community. They are rewarded on the--and I think they
have gotten unfairly punished on this last crisis, so I think
they took a beating. And so if I am in their shoes, what am I
going to do? I am going to err on the side of being overly
conservative because I am not rewarded to do otherwise.
So if there is a situation out there where there are
potential problems, I don't want my regulators walking away
from that and not identifying everything.
When there is blood in the water, yes, I think they can get
overly aggressive, and I think the options for the individual
banks are very limited. And, yes, I do think they fear that. At
that point, having not been a CEO in that situation, but just
surmising, if that were to occur, I would be very compliant.
Mr. Renacci. That is an interesting analogy, blood in the
water. I will remember that one. Thank you so much.
I yield back.
Chairwoman Capito. Mr. Duffy?
Mr. Duffy. In regard to retribution, I hear a lot of my
institutions telling me stories, but saying, ``Make sure you do
not use my name. I don't want my name out there associated with
the story I am telling you, and I don't want to go public. You
can use it, but put a different name to it or leave it out.''
Just maybe a little follow-up on the ability to make this--
is it a character loan, or is it, you said, informed judgment,
and how that is now scrutinized. And I think Mr. Renacci made a
good point. You had someone who was willing to make an informed
judgment or look at his character and take a little larger risk
on him. And I imagine, in all of our communities, our financial
institutions being willing to make that kind of call have bred
more success than failure, I would imagine. That is why you can
do it and there are factors you can look at.
I think that is one of the concerns that I continuously
hear; you can't use your judgment as a banker to invest in a
business where the owner has good character and is a good risk,
because when the regulators come in, it will be classified.
Is that basically what your point was, Mr. Cole?
Mr. Cole. Yes. I did commercial lending for 20 years, and I
think maybe I was luckier than I was good, because I had a lot
of success. In the whole 20 years, I only had a few loans go
bad, and I had many businesses prosper.
And, yes, I used a lot of intuitive judgment and was given
the flexibility at that time to do that, as long as I had a
good rationale to support the loan.
Today, it is not that way. The same loans that I made then,
I would not be allowed to do today. And the document has to be
supported numerically. Again, there is a grading system.
And there is a heavy, heavy emphasis, a flawed emphasis, on
collateral and collateral values that, to me, is a whole other
subject in how this appraisal process is working.
But, again, my evaluation of collateral in my community,
which I probably know better than anyone, would not be able to
be used.
So there are a lot of things that have changed, and we have
become more sophisticated. There is modeling that must be done,
which has been going on in all aspects of the banking industry.
And we saw in the crisis that these models fail. These models
should never have replaced intuitive judgment, should never
have replaced human intelligence. Unfortunately, those models
are being used as the only intelligence.
Mr. Duffy. Maybe just one other thought, and I will then
yield back. Switching gears to the CFPB and consumer
protection.
One of the concerns we have had on our committee is, we
have our basic standard of safety and soundness, and then,
here, we have the CFPB with a different standard of consumer
protection and, at some point, those may sing in unison, but at
some point, they may be contradictory, which has led us to
have, I think, a lot of concern as to how we are going to deal
with safety and soundness and consumer protection.
Maybe if I can, again, echo what somebody else said
earlier, if you don't protect your consumers, if you are
working your consumers over and treating them unfairly, they
will go across the street to another bank or credit union and
you do not stay in business for very long, unless you are one
of the bad actors who are able to set up shop on the corner and
engage.
Have you thought through the consumer protection regulation
side as opposed to safety and soundness? Has that had any
points of concern for any of you?
Mr. Barnes. It certainly has been a concern for credit
unions. With respect to the CFPB, generally, credit unions
support their mission. Taking care of and making sure consumers
get a good deal is at the heart of what we do, what we have
always done. So, we want to see that continue.
And we also feel that the Director--certainly, we, in Ohio,
have a good relationship with Mr. Cordray and we believe that
he certainly intends to do the right thing.
With that said, however, there are issues and concerns that
we do have about the Consumer Financial Protection Bureau.
First of all, the existence of a single director is troublesome
for us. We would prefer to see a panel, similar to the NCUA
board, and appropriate congressional oversight. We feel that is
important.
The other thing that we see about the Consumer Financial
Protection Bureau is this: Credit unions have always given
their members a good deal. I will say that over and over. And
that is what the Consumer Financial Protection Bureau is in
place to ensure.
So, as they are looking at rules and regulations and
processes, even though they are not in charge of the
enforcement of the majority of credit unions, we still have to
follow their rules. And any time rules change, while the
outcome may be the same, and consumers, our members, still get
a good deal, those new rules come along with an increased cost
of compliance.
And then the second thing is, we just don't want to see
mission creep. We want to make sure that the Consumer Financial
Protection Bureau really does what it was intended to do, and
that is, take over the administration and enforcement of those
rules and regulations, as opposed to adding new ones to the
mix.
So we are concerned about that, and we are keeping a close
eye on it. But that is our position on that, sir.
Mr. Duffy. Mr. Fireman?
Mr. Fireman. I was just going to say, with regard to the
CFPB, I had meetings last month with the Director and I
discussed with him, not as related to us, but just concerns in
various sectors that I have heard about the agency, fear. And
his message was, ``Have them come talk to me. I am a reasonable
guy.'' And I think everybody knows that he is. So, I just
wanted to send that message.
Mr. Duffy. And I have heard a lot of positive comments that
the concern, when you set up an agency, will he be a lifetime
appointee? Probably not. You will see other heads of the
agency, which has raised some concern. But I think--is he in
Mr. Stivers' district? Maybe I am wrong on that.
And one of the other concerns that we brought up in a bill
that I introduced was the fact that, if there is going to be a
rule that comes up from the CFPB that is undermining safety and
soundness, it can be overturned by FSOC with a supermajority
vote.
I just have a hard time believing that Mr. Barnes or Mr.
Cole could make that appeal to FSOC; that a rule that affects
you two negatively will then, therefore, affect safety and
soundness in the country. I don't know if they are going to
listen to you.
But, in essence, if you are a bigger--and, Mr. Blake, maybe
not even you. I think if you have a larger Wall Street bank,
though, no doubt, they can make that argument.
And, again, you have empowered those institutions that did
not necessarily have other--those institutions that were
involved in the crisis and have left voiceless those who didn't
have any real role in the crisis with this agency that was
supposed to address consumer protection.
So, I appreciate you all coming in. And I don't know that I
will get another chance to question you, but I appreciate your
honesty and your willingness to share with us.
I yield back.
Chairwoman Capito. Thank you.
Do you have any other further questions, Mr. Renacci? Would
you like to make any comments?
Mr. Renacci. Thank you. I am going to go back to the CFPB
because I did ask Mr. Cordray, and Mr. Cordray is a good man,
but I asked him a question last week or 2 weeks ago in a
hearing, that he is walking into all of these examinations with
an attorney. Can you all tell me what your thoughts are when
the CFPB walks into your establishment--if they have, or if
they haven't yet--with an attorney?
Mr. Haning. Congressman Renacci, I would like to address
that.
I also met with Director Cordray last month in Washington,
and I talked with one of their newly-hired employees who said
their count was up to 100, and 87 of them were attorneys. So
everybody in his group has a legal background.
He also assured us that, for the best of the order, their
regulation wouldn't affect community banks, but that is not the
case, because what the examiners hear in the way of review
trickles down to us in the terms of best practice.
They don't need to learn six or seven different ways of
reviewing the same type of loan, so they are going to use a
best practice.
And although we have a good relationship with Mr. Cordray
and, once again, as my colleagues here said, we are not on
board with their method of reporting, we do have concerns. We
do have compliance issues. And if the best practice comes down,
I think we are all going to be looking at the same regulations.
Mr. Cole. Here is the analogy I would like to draw, in that
I think you all remember when the Cuyahoga River was on fire
and we couldn't fish out on Lake Erie, couldn't drink or swim
in Lake Erie. And so, there was a need for an intervention by
the government to put safeguards in place to protect the
citizens. And having grown up in this area, I was all in favor
of it. And now we have an opportunity with drilling in Ohio, to
have a significant economic boom in my area. And we want to
make sure that the EPA, again, acts responsibly to safeguard
the citizens, and at the same time, allow for economic
development.
I see that same application as it applies to the CFPB, as
the new EPA of the financial word. It has a purpose. There was
damage that was done. There were consumers who were harmed. And
I think we all want to see that fixed and corrected, but at the
same time, we have to make sure that it doesn't impede economic
development, because, of those same citizens that they are
protecting, they are going to be harming.
Mr. Renacci. I would always use the analogy, and I have
used it many times, I was a fireman at one point in time, and
everybody thought that the way to save the building was to
throw more water on it. Sometimes, when you throw more water on
it, the building burns faster. Keep that in mind as we talk
about regulations going forward.
But I do also want to thank all of you. You have been very
honest, and I appreciate your comments. I look forward to
working with you over the rest of this year and into the
future.
Thank you.
Chairwoman Capito. I want to thank our panelists and our
audience. And I think we have gotten some excellent testimony.
I want to thank you for taking time out of your busy days,
particularly on a Monday, to come before us.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, this hearing record will remain
open for 30 days for Members to submit written questions to
these witnesses and to place their responses in the record.
This hearing is adjourned.
[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]
A P P E N D I X
April 16, 2012