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




 
                    AN EXAMINATION OF THE CHALLENGES
                       FACING COMMUNITY FINANCIAL
                     INSTITUTIONS IN WEST VIRGINIA

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

                             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

                               __________

                            AUGUST 20, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-154



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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
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
BILL POSEY, Florida                  AL GREEN, Texas
MICHAEL G. FITZPATRICK,              EMANUEL CLEAVER, Missouri
    Pennsylvania                     GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia        KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri         ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin             ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York         JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio               GARY C. PETERS, Michigan
ROBERT HURT, Virginia                JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire

           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
KEVIN McCARTHY, California           JOE BACA, California
STEVAN PEARCE, New Mexico            BRAD MILLER, North Carolina
LYNN A. WESTMORELAND, Georgia        DAVID SCOTT, Georgia
BLAINE LUETKEMEYER, Missouri         NYDIA M. VELAZQUEZ, New York
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
SEAN P. DUFFY, Wisconsin             STEPHEN F. LYNCH, Massachusetts
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    August 20, 2012..............................................     1
Appendix:
    August 20, 2012..............................................    27

                               WITNESSES
                        Monday, August 20, 2012

Brewer, Tom, President and Chief Executive Officer, Peoples 
  Federal Credit Union...........................................     7
Brown, Sarah K., attorney, Mountain State Justice, Inc...........    11
Hageboeck, Charles, President and Chief Executive Officer, City 
  National Bank..................................................     5
Loving, William A., President and Chief Executive Officer, 
  Pendleton Community Bank.......................................     9
Wohlever, JW, owner, Mountaineer Mobile Homes, LLC...............    10

                                APPENDIX

Prepared statements:
    Brewer, Tom..................................................    28
    Hageboeck, Charles...........................................    39
    Loving, William A............................................    59
    Wohlever, JW.................................................    68

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of Hon. John D. Rockefeller IV, a United 
      States Senator from the State of West Virginia.............    73
    Written statement of Cyclops Industries, Inc.................    75


                    AN EXAMINATION OF THE CHALLENGES
                       FACING COMMUNITY FINANCIAL
                     INSTITUTIONS IN WEST VIRGINIA

                              ----------                              


                        Monday, August 20, 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 11:08 a.m., at 
the Robert C. Byrd U.S. Courthouse, 300 Virginia Street, East, 
Charleston, West Virginia, Hon. Shelley Moore Capito 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito and Renacci.
    Also present: Senator Manchin.
    Chairwoman Capito. This field hearing will come to order.
    Before making opening statements, first of all, I would 
like to give everyone an overview of the procedure today. I 
will make an opening statement, followed by Senator Manchin and 
Congressman Renacci. I want to welcome both of them here.
    Each witness will then be recognized for a 5-minute opening 
statement summarizing their written testimony, which they have 
already submitted, and which is on the table for those of you 
who would like to see it. We will then begin several rounds of 
questioning, where Members will be recognized for 5 minutes of 
questioning.
    So, I would like to thank everyone for joining us here 
today. This is the Financial Institutions and Consumer Credit 
Subcommittee, of which I am proud to be Chair. It is a part of 
the Financial Services Committee in Congress. When I assumed 
this chairmanship in January of 2011, one of my big priorities 
was to get around to different communities around the country.
    So far, we have been to Georgia, which, if you're 
unfamiliar with the numbers, Georgia has had an enormous amount 
of bank closures. I think they're up over 65 or 70; Wisconsin; 
Illinois; Texas; Nevada; and Ohio, we went to Mr. Renaccis home 
district in Cleveland. Each field hearing has highlighted 
different challenges facing small financial institutions and 
the communities that they serve. So I wanted to highlight some 
of the economic and regulatory challenges we face here in West 
Virginia and the effect on small institutions and clients in 
the communities that they serve.
    As I said, I am pleased to be joined here today by the vice 
chairman of my subcommittee, Jim Renacci from Ohio. Before 
coming to Congress, Jim spent his career as a small business 
owner and entrepreneur in a lot of different businesses. He 
understands the difficult growth environment facing small 
businesses and financial institutions, and has been a 
tremendous asset to me and to our subcommittee. I'm also 
extremely pleased that Senator Manchin is here with us today. 
We know Senator Manchin was in business well before he began 
his political career and has spent his political career helping 
small businesses and business investments.
    Four years ago, this Nation experienced one of the greatest 
financial crises in a generation. It was a combination of 
increased demand for housing, very lax underwriting standards, 
and a demand for subprime mortgage-backed securities from 
Fannie Mae, Freddie Mac, and Wall Street investment bankers 
that brought our Nation's financial systems to a precipice.
    In 2008, the U.S. Government bailed out the Nation's 
largest financial institutions in an attempt to stabilize the 
financial system. As most of you in the room know, I voted 
against the bailouts of the larger banks because I firmly 
believe firms that take on too much risk should pay the 
consequences for their actions. During the Dodd-Frank debate, I 
championed an effort to create a new code of bankruptcy to deal 
specifically with complex financial institutions. I lost that 
ballot. We now have what is called the Orderly Liquidation 
Authority, which will deal with unwinding these institutions 
but also has the ability to access the United States Treasury, 
and to me, that is ``too-big-to-fail.''
    With passage of the Dodd-Frank Act, the Nation's financial 
regulatory system is undergoing significant restructuring. Some 
of the proposed rules have merit. For instance, increased 
capital requirements for the largest financial institutions are 
one way to prevent government bailouts. There are also some 
transparency and disclosure in there that I think is extremely 
important.
    As the regulatory regime for the financial system undergoes 
this restructuring, it is important to ensure that rules and 
regulations are not applied in a one-size-fits-all manner, 
which will be the focus of our committee meeting today.
    West Virginia's community banks and credit unions did not 
cause the financial crisis, yet in many cases they are facing 
the same wave of new regulations as the largest financial 
firms. We are here today to learn about the effect the 
implementation of these rules is having on small financial 
institutions and credit unions.
    If we do not strike the appropriate balance for regulations 
applied to small institutions, we run the risk of further 
constriction of credit, and we are going to get into that 
today. This is especially troubling for States like West 
Virginia because we rely--and this is in the written testimony 
that you all have submitted--exclusively on small financial 
institutions for credit and lending.
    West Virginia has already witnessed the devastating impact 
that poorly conceived Federal regulations can have on an 
industry. We must make sure that as financial regulations are 
being created, they are appropriately tailored to the scope and 
the size of the institutions to which they are applied. Small 
financial institutions are crucial to provide the capital 
necessary for small businesses to grow. If they are hamstrung 
by uncertainty and a one-size-fits-all regulation, they will 
not be able to get our economy back on track and help small 
businesses grow and create jobs.
    I would like to thank our panelists for joining us this 
morning, and I now recognize my friend Senator Manchin for the 
purpose of making an opening statement.
    Senator Manchin. Let me just say thank you, first of all, 
Congresswoman Capito, for having this hearing here in West 
Virginia so we can bring our local expertise from around our 
State to be able to speak to us and we can take that back to 
our respective bodies of the Senate and the House. I also want 
to thank Congressman Renacci for coming in and taking time from 
his family. I know how tough that can be. You don't get much 
time anyway, so it makes it very special for him to do that.
    The concerns I have, being a first-term Senator, and with 
the collapse that we had, being a Governor at the time, 
watching what had happened, seeing the access to capital was 
probably one of the most detrimental problems that we had and 
can be the compounding problems that just continue to fester as 
far as the businesses, and having access basically, putting 
everybody into one blanket, if you will, when this came about 
with the financial fiasco, a lot of people attributed what was 
the last sequel, whatever you want to attribute it to, relaxing 
happening with the larger banks, the investment banks.
    The community banks in no way, shape or form are 
responsible for this, but yet they got caught up in the same 
brush, and with that, we have been working on legislation on 
the Senate side, myself and Jerry Moran, a Republican from 
Kansas, working together in a bipartisan way trying to bring 
some relief and looking at really where the problems are. We 
have a lot of people in the Senate right now who are concerned 
about making any moves or taking any steps that might basically 
cause a problem again, and we don't want to do that. But if the 
community banks are not a problem, the community banks can 
jumpstart our small businesses, why can't we give them some 
relief, a whole different pathway, and I think that's what we 
are really trying to do. We are trying to find out how we can 
best go back in a bipartisan way, Democrats and Republicans, to 
find out how we can attempt to get this economy moving by 
getting capital into it.
    I have introduced two pieces of legislation, I know 
Congresswoman Capito and myself both on one extensively, which 
gives relief as far as how proper they're being heard in the 
field process. We think it should be done in a very quick 
manner versus 8, 10, 12 months and you have no uncertainty. We 
are trying to get that expedited and also the Manchin/Moran 
bills, a financial institution examination fairness and reform 
and we think that will help immensely, so we are working very--
I know you all have been very much interested in the issue, 
supported it, and I encourage you to be very vocal with all of 
your colleagues around the country, to try to help get the 
relief that's going to be needed at this time, and I appreciate 
so much the opportunity to hear from you all today, thank you.
    Chairwoman Capito. Thank you. I would like to welcome here 
today, too, the State Commissioner of Banking, Sally Cline. 
Thank you for coming and being with us today. Now, I would like 
to introduce for the purpose of making an opening statement, 
Jim Renacci from Ohio, my vice chairman of the subcommittee. 
Welcome.
    Mr. Renacci. Thank you, Madam Chairwoman. I will begin by 
saying it is a pleasure to be here with my neighbors in West 
Virginia. It's not a long trip down here from Ohio. In fact, 
I'm happy to see some of my friends representing credit unions 
here today as well. Madam Chairwoman, I want to thank you for 
your diligent leadership during the committee's efforts to 
shine a light on burdensome regulations that are stifling our 
economic recovery.
    I believe this hearing is the last in a series of field 
hearings where we have the pleasure of hearing from small 
business community banks from across the country. I want to 
applaud you for taking these hearings to the people.
    I believe a large part of our Nation's problem is that many 
of those writing the rules in Washington have never actually 
had to live under those rules. I believe many of those in 
Washington have no idea what it takes to run a business and 
have no idea how difficult Washington has made the lives of our 
small business owners. While in D.C., we hear from a lot of 
academics, trade groups, special interests and, of course, 
plenty of regulators. We seldom have the opportunity to hear 
from witnesses like we have here today.
    Let's face it, I'm sure all of you would much rather be 
spending your time running your businesses, than coming to 
Washington to talk about onerous regulations. That's why I 
believe these hearings are so important. It is imperative that 
we can share real-life stories while the partisan bickering, 
gridlock, and uncertainly have a hand in government 
intervention in preventing entrepreneurs from righting our 
economic ship.
    I had the pleasure of hosting a similar field hearing in 
Cleveland earlier this summer. 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 getting our economy and our country back on track. 
Unfortunately, the same frustrations we heard in Cleveland are 
the same we have heard across the country from Nevada to Texas 
and all the way to Wisconsin. We constantly hear from 
frustrated small business owners who are eager to expand their 
business but are prevented from doing so because they cannot 
access the necessary capital.
    At the same time, we have heard from financial institutions 
that are ready to extend capital to these small businesses and 
have capital to do so, but are unable to do so because of 
overzealous, inconsistent, and ever-changing regulations. As I 
expect will be the case here today, the number one concern we 
have heard by all is the Dodd-Frank Act. The intentions were 
noble, to prevent another financial crisis, improve 
transparency, stop banks from taking excessive risks, prevent 
use of financial practices, and end too-big-to-fail.
    Unfortunately, instead of sound regulations aimed at 
reining in the fraudulent and reckless behavior of Wall Street, 
we ended up with thousands of pages of regulations which are 
crippling institutions and have nothing to do with the crises 
and the very institutions we must rely on to rebuild our 
economy. Instead of sound regulations, we have left many of the 
financial institutions standing on the sideline, unwilling and 
unable to provide liquidity on arguments because they are 
unsure what the rules are and when they might be unilaterally 
changed again.
    The uncertainty and the cost of new regulations is having 
an especially profound impact on our smaller institutions. 
Without a large compliance staff and back office legal teams, 
our smaller institutions are forced to divert precious capital 
to keep up with new regulations, capital that would be better 
put to the hands of its customers.
    I would like to end by saying that I understand what it's 
like to live under these rules coming out of Washington. As a 
businessman for almost 30 years, I can sympathize with your 
struggles and I understand that in order to turn this country 
around, we must get Washington out of the way. We must let all 
of you run your own business the way you know best. I want to 
thank you for being here today, and I look forward to your 
testimony.
    Chairwoman Capito. Thank you. So with that, we will begin 
to hear from our witnesses. Our first witness is Mr. Charles 
Hageboeck, but I know him as Skip, president and chief 
executive officer of City National Bank, on behalf of the West 
Virginia Bank Association. Welcome.

 STATEMENT OF CHARLES HAGEBOECK, PRESIDENT AND CHIEF EXECUTIVE 
                  OFFICER, CITY NATIONAL BANK

    Mr. Hageboeck. Thank you. Chairwoman Capito and members of 
the subcommittee, my name is Skip Hageboeck, and I am president 
and CEO of City National Bank headquartered here in Charleston. 
City National has $2.8 billion in assets, 73 branches located 
mostly in West Virginia, and over 800 employees.
    I appreciate that the committee is taking time to look at 
how banks which play a critical role in helping our economy 
grow are being impacted by the furious pace of new regulation 
in our industry and in particular the unintended consequences 
of such regulation. I'm thankful for the opportunity to present 
my views on the challenges facing community banks and 
particularly how regulatory impediments are making it 
increasingly difficult for banks like City National to help 
businesses and consumers borrow money to purchase homes, expand 
businesses, and efficiently transact their depository needs.
    The banking system is made up of a few large banks which 
control the majority of the banking assets, and a large number 
of community banks. Community banks like City National 
generally operate pretty simple organizations. We make small 
loans to consumers and businesses and we accept deposits. And 
while our business model is pretty simple, in general the 
products and services that we provide meet all the banking 
needs for our consumers and small business clients. As compared 
to large banks, we know our employees, our customers, our 
communities, and what's going on in our banks.
    West Virginia is a small State, but it is home to 68 
separate community-based banking charters. Community banks 
operate in small cities and towns that large banks avoid. We 
focus on smaller businesses and consumers. Our presence 
increases competition and makes credit available on better 
terms and with better service and they're more involved in 
supporting the community with both dollars and with our time.
    The bottom line is for many small cities and towns, the 
community bank is an important part of the economic fabric, and 
these towns would be worse off in the absence of community 
banks. But the viability of the community bank model is under 
attack. Earnings are under pressure as a result of the 
recession. At the same time, the burden of complying with 
regulation is more onerous than it has ever been before.
    The most important problem facing the banking industry 
today is the weak economy. Our customers will borrow and create 
jobs only when they believe that the economy can support higher 
sales. For City National, I can tell you that loan requests 
from customers who are growing their businesses have been 
slowing rather than increasing since the beginning of the year, 
signaling that the economy is now decelerating rather than 
expanding. It's a tough time to be a community bank. Loan 
demand is weak, interest rates are low, and sources of income 
are decreased.
    For many community banks, loan losses during recession 
reduce their capital levels, and while big banks were able to 
go out and recapitalize by issuing new common stock, small 
community banks that need new capital can't get it, which 
restricts their ability to lend. Within capital limits, many 
community banks find their ability to lend within their 
communities to be compromised.
    New regulation to make community banks subject to 
depository capital requirements is a significant threat for 
community banks that have large residential mortgage loan 
portfolios. So again, actually, it's a great example, because 
we hold a large number of mortgage loans, we think the 
implementation of Basel III will reduce our capital ratios and 
reduce our ability to lend to consumer and small business 
customers.
    I encourage Congress to delay implementation of Basel III 
capital requirements for community banks and carefully study 
the consequences of implementing these requirements for 
community banks.
    Bankers understand the need for regulations which ensure 
that banks remain safe and sound and that customers are 
adequately protected from abuse. What we don't understand is 
the explosive proliferation of regulation, most of which was 
enacted to address problems not associated with community 
banks, but which have nevertheless cost us tremendous amounts 
of money, distracted us from our core business purposes, and 
frequently had unintended consequences that are detrimental to 
our company and our customers.
    In my written testimony, I have provided numerous examples 
of regulations that have been problematic for City National, 
including ATM placards; privacy notices; burdensome regulation 
of our foreclosure process with no apparent purpose; student 
lending regulations, which forced City to stop making loans to 
customers for student loans; the negative customer impact of 
flood insurance regulations; City's concern that narrowly 
defined qualified mortgage could undermine our successful 
record in making mortgages for West Virginia customers; the 
negative customer impact of regulations surrounding the 
Consumer Financial Protection Bureau's (CFPB's) attempt to 
improve mortgage disclosures; the negative customer impact of 
risk retention requirements for secondary market loans; 
unintended consequences of regulations for high-priced 
mortgages, which hurt consumers; unintended consequences of 
regulations on derivatives requiring our small business 
customers to be qualified participants, a test most customers 
can't pass, which will limit our ability to help our customers 
obtain long-term fixed rate loans; and unintended consequences 
of regulations of municipal advisers that will hinder our 
ability to provide banking services to cities and counties.
    Hopefully, these examples help to highlight that well-meant 
regulation often comes with unexpected results, and often these 
results are not in the best interests of our customers, or not 
in our best interest, and by extension are not in the best 
interest of our communities either. Thanks.
    [The prepared statement of Mr. Hageboeck can be found on 
page 39 of the appendix.]
    Chairwoman Capito. Thank you very much. Our next witness is 
Mr. Tom Brewer, who is president of Peoples Federal Credit 
Union, on behalf of the West Virginia Credit Union League. 
Welcome.

STATEMENT OF TOM BREWER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
                  PEOPLES FEDERAL CREDIT UNION

    Mr. Brewer. Chairwoman Capito, Vice Chairman Renacci, 
Senator Manchin, thank you for the opportunity to testify at 
today's hearing on challenges facing financial institutions in 
West Virginia. My name is Tom Brewer, and I am president of 
Peoples Federal Credit Union in Nitro, West Virginia.
    The major change I have seen in my position involves an 
increase in regulatory compliance and the multitude of complex 
regulations we must now address. These come from not only the 
regulator, the National Credit Union Administration, but also 
from the Federal Reserve and other Federal and State agencies. 
Now with the creation of the Consumer Financial Protection 
Bureau, more concerns are raised as they also begin to issue 
new regulations.
    Regulatory compliance is a priority for credit unions and 
we struggle to remain fully compliant with the multitude of 
regulations. Peoples employs 29 full-time individuals to 
operate 3 locations, and one of these individuals is devoted 
full-time to compliance. With a small staff, having someone 
devoted full-time to compliance is a financial burden that was 
unheard of only a few years ago and diverts resources from 
other member services. The cost of compliance does not vary by 
size and is a greater burden for the smaller institutions.
    If a small credit union wants to offer a new service, it 
has to be concerned about complying with the same rules as a 
large institution, but it is only able to spread those costs 
over a much smaller number of businesses. Today, there are 100 
credit unions operating in West Virginia, with roughly half of 
them having less than $10 million in assets. Small credit 
unions consistently say their number one concern is the 
regulatory obstacle in maintaining services in the face of 
increasing regulations, and that is the key reason why some 
merge into larger credit unions.
    Of all the challenges we face in today's difficult 
financial environment, coping with compliance tops the list. 
There is nothing in the current climate of regulations that you 
could consider positive for economic growth in West Virginia.
    One area where improvement could be made with regard to 
economic growth would be the passage of legislation to increase 
the cap on member business lending for credit unions. By 
passing H.R. 1418, an additional $13 million in new capital for 
small business loans could be generated, creating an estimated 
140,000 jobs nationally, and in West Virginia, that amounts to 
31 million new business loans and 335 new jobs.
    Peoples serves as a financial lifeline for many in our 
three county communities. In fact, we are seeing smaller loans 
for such items as tires, hot water heaters, or loans to have 
utility services restored. There's little doubt many of our 
members are living paycheck-to-paycheck, and we strive to 
assist them with a wide median of affordable financial 
services.
    Peoples has experienced a significant increase in our 
deposits over the past few years as consumers seek safe and 
sound institutions to place their savings dollars. While we 
appreciate this confidence, with tight margins it does place a 
stress on our capital.
    I also recognize the role of the regulator is to evaluate 
financial performance and determine how well risk is being 
managed. However, there are many variations among credit unions 
in how risk is evaluated. We have an expectation of uniformity 
in the examination process and that expectation at times is not 
being met.
    For the most part, the examination process works fairly 
well. To strengthen the process, however, I strongly support 
H.R. 3461, the Financial Institutions Examination Fairness and 
Reform Act, as a way to ensure additional dependability in 
exams and to provide needed change in the appeals process.
    Overall, credit unions in West Virginia have a bright 
future. Deposits are increasing and loans are beginning to rise 
slightly once again; however, the number of credit unions 
continues to decline. In some cases, this is due to plant 
closings or company downsizing; however, for others it is due 
to the difficulty of operating a credit union in the 
environment of increased and complex regulations. When mergers 
occur, oftentimes local ownership is lost and a once successful 
community-based institution is gone forever.
    Thank you for the opportunity to testify before your 
subcommittee, and I'll be happy to respond to any questions you 
may have.
    [The prepared statement of Mr. Brewer can be found on page 
28 of the appendix.]
    Chairwoman Capito. Thank you. Our next witness is Mr. 
William A. Loving, president and chief executive officer of 
Pendleton Community Bank, on behalf of the Community Bankers of 
West Virginia. Welcome. And you are also the president-elect of 
the Independent Community Bankers of America, correct?
    Mr. Loving. Correct.
    Chairwoman Capito. Good luck.

 STATEMENT OF WILLIAM A. LOVING, PRESIDENT AND CHIEF EXECUTIVE 
               OFFICER, PENDLETON COMMUNITY BANK

    Mr. Loving. Thank you. Chairwoman Capito, Vice Chairman 
Renacci, and Senator Manchin, my name is Bill Loving and I am 
president and CEO of Pendleton Community Bank, a $260 million 
community bank located just about 200 miles from here in a 
small town of 781 people, Franklin, West Virginia. Thank you 
for inviting me here today to share with you my thoughts on the 
shape and the future of community banking in our great State. 
I'm also proud to be here representing all of the community 
bank members of the Community Bankers of West Virginia.
    The government's role in the day-to-day operation of the 
community bank has grown dramatically over the last decade, and 
I see that trend continuing at an alarming rate. I honestly 
cannot think of one aspect of my bank that is not heavily 
influenced by Federal regulation. My staff and I spend 
exponentially more time today working to ensure we are in 
compliance with Federal regulations than we did before the 
banking crisis of 2008. I can assure you that Pendleton played 
no part in causing Wall Street's financial mess, yet we are 
saddled with most of the same burdens as the too-big-to-fail 
banks.
    The most important point I can make to you is this: For 
community banks, every dollar spent on compliance is a dollar 
less that we have to invest and lend in the communities we 
serve. Every hour I spend on compliance is an hour I could be 
spending with customers and potential customers acquiring new 
deposits and making new loans.
    I could spend most of the day talking to you about overly 
burdensome regulations, but since my time is limited, let me 
highlight a few issues that are particularly concerning to 
community banks. First, the proposed rules to implement Basel 
III are quite possibly the most serious regulatory threat 
facing community banks today. If these rules are not changed or 
if community banks are not provided some relief, these rules 
could have potential to make community banking itself a losing 
proposition and trigger further industry consolidation.
    It's important to remember that Basel III was meant to 
apply to the largest interconnected internationally active 
banks. Applying international standards in a one-size-fits-all 
fashion demonstrates a failure to appreciate the differences 
between a bank like mine and the largest banks.
    Let me give you some idea of what these regulations would 
mean to my bank. Please understand that the calculations we 
made are based upon a series of assumptions, because neither 
our systems nor any provided by the regulators allow us to 
adequately delineate the components of this proposal.
    With that said, based upon our numbers, Pendleton will see 
an increase in our risk-weighted assets from $180 million to 
$208 million. That's a 15.5 percent capital charge we will have 
to absorb. Chairwoman Capito, that is $28 million that I will 
not be able to lend and invest in West Virginia.
    Next, new CFPB rules are a significant source of risk. In 
particular, the proposed ability to repay determination in 
mortgage underwriting has the potential to expose lenders to 
significant legal liability in the event of a default. We have 
urged the CFPB to provide a safe harbor legal protection 
standard. Without a safe harbor, many community banks will 
withdraw from the market, making it less competitive and more 
costly for borrowers in rural areas like mine and small 
communities throughout West Virginia.
    We are also very grateful to you, Chairwoman Capito, for 
introducing the Financial Institutions Fairness and Reform Act. 
This bill will go a long way toward improving the difficult 
examination environment faced by many community bankers across 
the country.
    I would also like to note that another concern for 
community bankers is a new municipal advisor registration 
requirement. We are very concerned that a provision of the 
Dodd-Frank Act could be interpreted broadly by the SEC, forcing 
thousands of small banks to register as municipal advisors and 
be examined by the SEC for something that's simply discussing 
current CD rates with the town treasurer over the phone. We're 
glad the committee passed H.R. 2827, introduced by Congressman 
Dold, which would exempt banks and our employees from this 
requirement.
    I would also urge this committee to consider a topic of 
equivalent interest to community banks, the need for a 
temporary extension of the FDIC's TAG Program. Extending TAG 
for an additional 5 years would serve the same goals I have 
stressed in this testimony: preserving community bank 
viability; supporting small business credit; and deterring 
further and future consolidation, all by keeping local deposits 
locally invested.
    Thank you for the opportunity to be here today, and I look 
forward to your questions.
    [The prepared statement of Mr. Loving can be found on page 
59 of the appendix.]
    Chairwoman Capito. Thank you. I would like to ask, with 
your consent, to insert into the record two statements: one 
from Ms. Kim Mack of Cyclops Industries; and the other from 
Senator Jay Rockefeller. Without objection, it is so ordered.
    Our next witness is Mr. John Wohlever of Mountaineer Mobile 
Homes in Martinsburg. Welcome.

 STATEMENT OF JW WOHLEVER, OWNER, MOUNTAINEER MOBILE HOMES, LLC

    Mr. Wohlever. Thank you. Thank you, Chairwoman Capito, Vice 
Chairman Renacci, and Senator Manchin for the invitation and 
the opportunity to be here today.
    My name is J.W. Wohlever, and I own Mountaineer Mobile 
Homes. We help individuals purchase and sell used mobile homes, 
and I would like to talk a little bit about the trouble that we 
have and our clients have just due to a lack of funding from 
community banks.
    We measure our business from three metrics, the metrics 
being the average price for one of our transactions per year, 
which is, applying over the last 3 years, of about $45,000 a 
transaction to right now at about $22,000. The second metric is 
the number of transactions we do per year, which has declined 
from 24 down to about 16. And the biggest metric is that 
Mountaineer Homes used to finance 60 to 40 percent, and we're 
down to about 10 percent a year, so virtually it's an all cash 
business.
    Anybody who has a home that's valued at $30,000 or more has 
insurmountable odds that we're going to find a cash buyer to 
get that transaction done. Two years ago, or 3 years ago, we 
really were dealing with about 6 community banks and one 
national bank, and of all those banks right now, we have one 
community bank that's still doing chattel loans, where you have 
a mobile home on rented land or a mobile home park. We only 
have one source in Martinsburg that will make that loan.
    I believe the reason that these community banks have gotten 
out of that is the Dodd-Frank Act. I believe that one of those 
provisions in there that if they make bad loans or they don't 
run their business properly, the Federal regulators can take 
over that bank, just scares them to death, so they have just 
contracted their lending practices to the point where they want 
to really stick to more traditional single-family homes and 
have gotten away from these chattel loans. And that really has 
left my company with limited options and a lot of mobile 
homeowners with limited options.
    I think the statistic is about 8 percent of all the homes 
in the United States are mobile homes. That's about 11 million 
homes. There are a lot of folks out there who could use that, 
and they have become part of that cycle of getting out of the 
rentals, moving into homes, stepping up into single-family 
homes. There's a lot of that.
    So we even looked at the prospect of saying, okay, let's 
just raise private capital and maybe we could become an active 
lender ourselves. And when we looked at the SAFE Act combined 
with the RED Laws, both regulations are just prohibitive. 
There's just no way we can deal with it, and my opinion is that 
only the big banks would have the ability to comply with those 
two regulations, so, therefore, it wasn't an option.
    And while there's a little bit better options for new 
mobile homes, I think last year in 2011 they built 50,000 new 
mobile homes, and 50,000 compared to 11 million really leaves a 
lot of mobile homes out there that make it tough. So that's--
what I would like to let the committee know is I think the 
Dodd-Frank Act has really scared these small and medium-sized 
banks which make up the majority of the community banks. I 
think it has just scared them to death away from mobile home 
lending. Thank you very much.
    [The prepared statement of Mr. Wohlever can be found on 
page 68 of the appendix.]
    Chairwoman Capito. Thank you. And our final witness is Ms. 
Sarah K. Brown, attorney for Mountain State Justice, 
Incorporated. Thanks for coming.

STATEMENT OF SARAH K. BROWN, ATTORNEY, MOUNTAIN STATE JUSTICE, 
                              INC.

    Ms. Brown. Thank you, Chairwoman Capito, Vice Chairman 
Renacci, and Senator Manchin for inviting Mountain State 
Justice to testify before you today on behalf of the low-income 
West Virginians we represent.
    To give you a bit of background, Mountain State Justice is 
a nonprofit law firm that represents hundreds of consumers in 
active litigation stemming from predatory mortgage lending. 
While our seven attorneys stay very busy, they're simply unable 
to represent each West Virginian facing foreclosure, and 
therefore we rely on changes in the law that alter the 
practices of the mortgage lending market to protect consumers.
    In particular, the Dodd-Frank Act prohibits practices that 
became standard in the mortgage market in the late 1990s that 
we see regularly in our practice. This reform is not only 
necessary to protect West Virginia consumers, but in our 
opinion, it's also necessary to level the playing field and to 
enable community financial institutions to keep up with 
national mortgage lenders.
    I would like to offer three real life examples of the 
hundreds of homeowners Mountain State Justice has seen suffer 
from similar problems. First, Jay and Annette Adame of Cool 
Ridge, West Virginia, were solicited by a broker to refinance 
their mortgage. At the time they were solicited, Mr. and Mrs. 
Adame were current on payments for their fixed-rate loan, and 
therefore initially refused offers to refinance. After repeated 
and aggressive telephone calls, Mrs. Adame ultimately agreed to 
refinance her home loan, relying on the broker's promise of a 
reduced monthly payment.
    As it turned out, unbeknownst to the Adames, their mortgage 
broker achieved the appearance of a lower monthly payment by 
originating a Pay Option Adjustable Rate Mortgage (ARM). In a 
Pay Option ARM, the initial monthly payment set by the note 
does not cover the amount of interest due, resulting in 
negative amortization. If the Adames make the initial monthly 
payment amount set by the note, which is the reduced monthly 
payment they were promised, the principal balance on their loan 
will rise.
    After the unpaid principal balance reaches 115 percent of 
their original principal balance, the monthly payment option is 
reset and results in a new minimum monthly payment well in 
excess of the obligation under their prior financing. Not only 
are these payments unaffordable to the Adames, they are now 
unable to refinance, as their principal balance exceeds the 
value of their home. Without resorting to litigation, Mr. and 
Mrs. Adame would have been foreclosed upon simply because they 
trusted their mortgage broker and lender.
    While our reputable community lenders have always 
considered the borrower's ability to repay, the requirements of 
Dodd-Frank are necessary to hold national lenders to that same 
standard.
    Next, Luke and Keveney Bair live in Sinks Grove, West 
Virginia, in the home that Luke built on land adjacent to his 
parents' farm. A mortgage broker and lender obtained an 
appraisal valuing their property at $160,000 when in fact it 
was only worth $99,000. The broker then induced the Bairs to 
consolidate unsecured debt into an adjustable rate loan by 
promising to refinance them into a lower fixed rate after one 
year.
    In exchange for directing the Bairs to this loan product, 
their broker received a fee of nearly $4,000 and an additional 
yield spread premium of about $2,400. The broker failed to 
refinance the Bairs after the promised one year and the Bairs 
are unable to refinance because their mortgage loan is in 
excess of the value of their home.
    Not only does Dodd-Frank require that appraisers and 
lenders ensure appraisals are performed fairly and accurately, 
it prohibits the extra kickbacks to mortgage brokers that is 
the yield spread premium. Without the incentive to originate 
certain high-cost loans for particular lenders, community 
institutions will be better able to compete for a larger share 
of the mortgage lending market.
    Finally, Virginia Richards is an 83 year old widow residing 
in Mammoth, West Virginia. She received a solicitation in the 
mail informing her that she had been pre-selected to refinance 
her mobile home loan to receive a lower monthly payment. Rather 
than complete a valuation of her property, the lender used the 
National Automobile Dealers Association book value for her make 
and model and then increased that amount well above book value 
without considering the specific features of her home. The 
lender also added hundreds of dollars to Mrs. Richards' actual 
fixed income in order to qualify her for the loan.
    The protections in Dodd-Frank requiring proper valuation 
and assessment of ability to pay are clearly just as important 
in the mobile home industry. The Dodd-Frank Act works to remedy 
the mortgage foreclosure practice resulting from a failure of 
regulation in allowing mortgage loans that were not affordable, 
not legitimately underwritten, and premised on fraudulent 
representations of value, rates, and promises to refinance.
    By eliminating predatory loans like Pay Option ARM and 
yield spread premiums as well as strengthening requirements for 
valuation and determination of ability to pay, the Dodd-Frank 
Act provides essential consumer protection and further benefits 
community financial institutions. Thank you.
    Chairwoman Capito. Thank you. We will now have a round of 
questioning, actually, probably a couple of rounds of 
questioning. I'm going to go ahead and start with my 5 minutes. 
Aaron has been keeping track of my time, so he'll make sure we 
stay in line.
    Let's talk about mortgages, because obviously that 
influences a lot of people, and influences all institutions. 
Mr. Brewer, do you do mortgages at Peoples?
    Mr. Brewer. We do mortgages, but currently most of our 
mortgages are being sold on the secondary market. The mortgages 
we currently keep are those that, for instance, maybe we're 
doing a workout for someone or helping someone, but any new 
purchases go to the secondary market.
    Chairwoman Capito. And, Mr. Loving, you do mortgages, and 
Mr. Hageboeck, in your testimony you mentioned that you do, 
also. Let's go to the ability to repay, because I think 
that's--we had testimony in front of our committee in Congress 
from the CFPB which is going to set the parameters for the 
ability to repay.
    Mr. Hageboeck, in terms of your institution, if the 
standard is not set properly, what would that do to your 
ability, what are you going to do, how are you going to react 
if you're worried about lawsuits pending? What is your reaction 
going to be and what would the resulting action be for people 
seeking a mortgage at your institution?
    Mr. Hageboeck. The ability to pay--in theory, our bank, and 
I think every bank in the country understands that we don't 
want to make loans to people who can't pay them back. When we 
make a loan, we're looking at the ability to pay interest and 
principal and to pay the principal down over 15 to 30 years 
pending. So the concept that we need someone to tell us that we 
have to determine whether a customer has the ability to repay 
seems silly to us. We have done that for 100 years as a bank.
    The key to that requirement, because in and of itself the 
ability to repay isn't going to cause us any harm because we 
try to do that anyway, is that we can be sued, as I understand 
it, for the life of the loan if something goes wrong. If we 
judge at the time the loan is made that the customer has the 
ability to repay it, and 22 years later something happens, and 
in retrospect it looks like maybe they didn't have the ability, 
all of a sudden, we have a problem. So we're going to become 
very, very tight with our lending subject to that kind of legal 
risk.
    And so, Dodd-Frank assumes that there will be something 
called a qualified mortgage, that if you meet certain 
parameters, then the mortgage will be exempt from that legal 
risk. The concern that we have is that the definition of 
qualified mortgage is going to be too narrowly drawn, that many 
of the loans we make here in West Virginia which we deem to be 
very safe, that we--in our experience we have had very few 
foreclosures through this most difficult of economic times, so 
our experience will tell us we know what we're doing in 
underwriting a customer's ability to repay.
    But we can envision a rule that defines a qualified 
mortgage in such a way that we are unable to make a lot of 
mortgages that we make today and we would cut back our mortgage 
lending to whatever is deemed to be qualified mortgages. I 
don't see us taking a legal risk, particularly based here in 
West Virginia, of making loans that would subject us to 
significant litigation.
    Chairwoman Capito. I think just going back to your comment, 
one of the things that came out in testimony that we had in 
Washington a month ago was that most financial institutions 
believe that if they can't write a mortgage within the 
qualified mortgage definition, they're not going to go outside 
that definition because of the risk, and that's what you're 
saying?
    Mr. Hageboeck. Exactly.
    Chairwoman Capito. Mr. Loving, do you have a comment on 
that?
    Mr. Loving. Yes. I would agree that having a concern that 
the regulations as crafted, that they will be too narrow and it 
will force a lot of lenders, lenders such as us, out of the 
marketplace, because we have borrowers every day who may meet 
that qualified residential mortgage definition, and with the 
assumption that is proposed, that revocable assumption that is 
there, I would much rather have an absolute exclusion rather 
than as Mr. Hageboeck said, 22 years later be sitting in a room 
much like this trying to determine what revocable assumption 
is. I would like to have it confined, because there are 
borrowers who are good borrowers who do not, and I'm afraid 
will not meet the regulations as they will be crafted.
    Chairwoman Capito. Thanks. Senator Manchin?
    Senator Manchin. Ms. Brown, the examples you gave, were any 
of those loans made by community banks?
    Ms. Brown. These three were not, Senator. We do have a few 
cases against community banks but it is a fraction of our 
practice.
    Senator Manchin. So the problems you have seen are with the 
large investment banks?
    Ms. Brown. That's primarily what we see, and I do think the 
issue of underwriting--community banks have a relationship with 
their customers, they hold loans on their books, they have the 
proper incentive to properly underwrite a loan, where national 
lenders, at this point, do not.
    Senator Manchin. And I would also like to say with 
Commissioner Cline being here, with West Virginia's laws, we 
get very few foreclosures from very few bank lenders, so 
there's something we're doing right.
    Mr. Wohlever, you said that your business has been harmed 
severely because of that crash?
    Mr. Wohlever. Yes, sir.
    Senator Manchin. Strictly because of that, the way the 
banking laws have been changed since the market crash--
    Mr. Wohlever. It's because so many banks have stopped 
making the mobile home loans.
    Senator Manchin. And to our three bankers here, when did 
you all have an inkling something was wrong? You all had to see 
it before, because you're in that market every day, when you 
knew that the large investment banks were way outside of the 
comfort zone. And I think, Mr. Brewer, you just mentioned that 
you're still selling your mortgages?
    Mr. Brewer. That's correct.
    Senator Manchin. To me, if you were keeping those mortgages 
in-house, it would be much more advantageous for me as a 
borrower from you to have that relationship and you to have 
that relationship with me, knowing me well enough to want me to 
succeed.
    Mr. Brewer. And we were up until approximately 2008.
    Senator Manchin. So then, the crash basically changed your 
business model for community banks?
    Mr. Brewer. That's correct, mainly because of the rate 
environment, and we could not afford to take the interest rate 
risk, being a small institution, to place those homes on a 30-
year note on our books.
    Senator Manchin. To compete with the larger investment 
banks?
    Mr. Brewer. That's correct.
    Senator Manchin. And what we're seeing and what we're 
reading and what we have been looking at as far as incentive, 
we're seeing that a lot of the large investment banks are still 
out there, and they're still making very risky investments. We 
haven't seen that being reeled in the way that I think we 
intended for it to be. You guys were harmed invariably from the 
get-go. That's the hardest thing I'm having to understand right 
now. How come it didn't protect what we wanted to protect and 
what we came after--I wasn't there at the time the bill was 
passed, but yet it changed your whole--Skip, I don't know how 
it would affect it so quickly in your situation, almost 
overnight as Mr. Wohlever said, in 2008 his whole business 
changed because he couldnt get capital. Is it something, Bill--
    Mr. Loving. I would say that, if we're talking in 
particular about mobile homes and modular homes, there were 
significant changes in the underwriting guidelines for 
mortgages such that in many cases, they will not qualify. We 
are a lender for mobile homes. We'll do mobile home loans both 
on rented or owned land, single-wide or double-wide, but many 
of the customers, as Mr. Brewer indicated, are looking for 
long-term fixed-rate mortgages.
    At the attractive rates that we're seeing today, many of 
the products that they're purchasing will not qualify, and so 
as a result of that, the solution is in-house financing, which 
we love to do, but we have a problem, as Mr. Brewer indicated, 
with an asset liability perspective. We cannot do a 6-month CD 
and a 30-year mortgage and offset the two. It just wouldn't 
work. And so, we have to look at asset liability and customer 
needs and whether the unit itself will qualify.
    Senator Manchin. Back to the first question I asked you, I 
have given you a chance to think about that. Did any of you see 
this coming? Did you feel that something was wrong in the 
banking world before we crashed, after Glass-Steagall was done 
away with in 1998-1999?
    Mr. Hageboeck. I don't think I saw things coming any sooner 
than the 2008 as the rest of us watched Barry, Stern and 
Lehmann go under and a variety of large banks.
    Senator Manchin. Did you anticipate there would be a 
problem if Glass-Steagall was done when it was repealed back 
in, what was it, 1998-1999? Did you all, and being in your 
profession, would you have anticipated now that's going to turn 
the faucet loose on them now?
    Mr. Hageboeck. No, I don't think so. That was a fair time 
ago. I think Glass-Steagall allowed, as I recall, commercial 
banking to combine with investment banking, to combine with 
insurance, and I'm not so sure that Glass-Steagall in and of 
itself was the problem.
    I think the problem was that large banks became larger, and 
then larger yet again, and then larger yet again to the point 
where they run organizations that are so complex that no one 
sitting at the top of that organization can possibly know 
everything that they do, every product they sell, every risk 
they take, and they try really hard to have risk committees and 
risk teams and they still miss stuff, as we have seen recently 
with JPMorgan Chase, a significant loss from something that 
they didn't really understand they were doing. In community 
banks, CEOs know what's going on in their organization because 
we're just a lot closer to it.
    Senator Manchin. Thank you. I'll save some more for the 
second round.
    Chairwoman Capito. Mr. Renacci?
    Mr. Renacci. Thank you, Madam Chairwoman, and thank you all 
for your testimony. It's interesting--I was a business person 
for 28 years and if you went back over the history of the loans 
that I took out to grow my business and looked at some of those 
loans, you probably today would not be able to do them, and I 
probably would have criticized loans over 28 years, yet I was 
able to create over 1,500 jobs and employ over 3,000 people 
starting a business at the age of 23. So I look at that and say 
it's interesting that the only jobs that are really being 
created today appear to be through Dodd-Frank. It's the 
regulators and it's your compliance staff at your banks. So I 
guess I would really like to hear from the three of you. If 
your compliance staff is growing, what are some of the costs to 
the customer? I'm trying to get specifics. We hear this so much 
in financial services that we're throwing compliance at them, 
it's hurting their ability to provide, and I would like to hear 
why is it hurting their ability to provide? Please give me some 
specifics. What is that compliance staff causing your specific 
banks to not be able to do?
    Mr. Hageboeck. In our case, we organize compliance 
thankfully a little differently than most institutions do. Most 
institutions have a compliance staff that really handles all 
aspects of compliance from the very beginning to the very end. 
We decided years ago not to do that and we have 2 people in our 
organization of 800 who are fully devoted to compliance. Their 
only responsibility is to become aware of the laws as they are 
passed and interpret them and then take them to people who work 
in our organization and communicate with them about what's 
expected of them and then to help them come into compliance. 
But we expect our line divisional management to take 
responsibility and ownership of compliance.
    Mr. Renacci. What would those two people be doing if they 
weren't doing compliance?
    Mr. Hageboeck. What would those people be doing?
    Mr. Renacci. Would you have two new people working on 
loans, meeting with customers? I guess what I'm asking is, has 
there been a diversion of two people away from that?
    Mr. Hageboeck. That's a really complicated question. More 
important than those 2 people are the 20 people I have in the 
organization who spend some significant part of their day on 
compliance. The head of my mortgage lending division, the head 
of my consumer lending division; I don't think they do anything 
other than compliance today.
    These are senior level folks who spend 8 hours a day doing 
nothing other than implementing regulations, which means 
they're not focused on how can we make more mortgage loans, how 
can we be more creative in bringing product to the market that 
will provide customers with an opportunity to work with us on 
the consumer side, how can we do a better job with auto lending 
and home equity lending? But those two folks do nothing other 
than compliance. That's a huge distraction.
    Mr. Renacci. Mr. Brewer?
    Mr. Brewer. With us, we have 29 full-time employees. We had 
to take one person, one of our officers and put them over 
compliance where approximately 70 percent of their day has 
nothing to do but with compliance-related issues, whether it's 
through regulation interpretation or training employees on the 
proper way to interpret the regulation or to implement the 
regulation. This means that person's previous job has to be 
divided among others or that cost that we put into that person 
is something that we could be putting into other services. That 
was that person's, part of that individual's job previously was 
to investigate and to research new products and services that 
we may offer our members. Now we're not even looking at new 
services. Not only do we have not anyone to look in that 
direction but the amount of regulation or proposed regulation, 
you don't know what the effect would be and what the true cost 
may be to you for a service like that.
    Mr. Renacci. Mr. Loving?
    Mr. Loving. In our institution, we have 78 employees. We 
have one full-time compliance officer, and we just recently 
went to a compliance committee. And the purpose for that is to 
have more people involved in the compliance process, 
particularly as we see Dodd-Frank and some of the other new 
regulations starting to unfold. We need to make sure there's 
more than one person involved in adhering to the compliance or 
the new compliance rules that are coming out.
    A small issue, you asked about the specific cost, as I said 
in my testimony, every dollar we spend in compliance in any way 
is a dollar that we are not investing in our community. But 
each year, as part of DSA and other regulations, we have a 
separate audit that is performed by an outside auditor that we 
pay for. We just recently had to have a RESPA audit done that 
was $5,000. And so it's a dollar here and a dollar there and it 
does add up to a considerable investment in compliance over the 
long haul.
    Mr. Renacci. Thank you. My time is up.
    Chairwoman Capito. I'm going to start again. Ms. Brown, on 
the three examples that you mentioned, I think the SAFE Act 
that we passed in a bipartisan way would help a lot with the 
licensing requirements and that's why we have seen a lot of 
these kind of fly-by-night brokers that vaporized on the 
national scene. Would you agree that has helped that situation, 
to your knowledge?
    Ms. Brown. I'm sure that has helped. I think that 
elimination of the yield spread premium is also key in changing 
incentives.
    Chairwoman Capito. There's a big push back on that and so I 
think that is yet to be determined on how that's going to push 
back on the industry absent--not necessarily Members of 
Congress. The other thing I think that I want people to know 
that we addressed is this appraisal issue. As you looked across 
the country, you saw it, and I'm sure the three of you sitting 
there cannot imagine that you would go back to your appraiser 
and say, I need another $150,000 on this property, and $50,000 
on this property in order for me to make this loan, and that's 
occurring particularly on the coast, most notably in 
California, Nevada, and led to some real terrible abuse of 
people, and people were throwing in cars and all other kinds of 
debt that they had to try to meet these challenges.
    So I hope that not only some of the SAFE Act has covered 
that, that we passed previously. And so I think some of the 
samples like Sarah mentioned, pointed out that community 
bankers are not the ones making these phone calls in the middle 
of the night or in the middle of the day to vulnerable 
consumers.
    I want to ask Mr. Hageboeck, you mentioned derivatives. 
This is a complicated topic, but I want to get it on the record 
again, because as you know, there is legislation out there that 
is being complicated not only by the influence of financial 
institutions but also agri-business, the power industry who try 
to hedge their investments when they're trying to figure out 
how to afford whatever fuel they're using. You mentioned in 
your testimony that you use derivatives in a small way to hedge 
and you don't believe that the new legislation is going to 
disallow that. What kind of influence is that going to have? 
How many customers do you really do this for? Is it a lot? I 
just have no idea.
    Mr. Hageboeck. Sure. It actually is a fair number. The 
problem for us is the same one Bill talked about, that our 
deposits are all fairly short term, so we need to match them up 
against loans that are fairly short term. With interest rates 
being as low as they are, most customers quite wisely would 
like to lock in a very long-term fixed-rate level, which we 
can't do, and I'm talking mainly about commercial customers 
rather than mortgages, which can be sold in the secondary 
market.
    So what we're able to do is add a derivative on top of that 
fixed-rate loan for the customer that converts it into a short-
term or variable rate loan to us. So we get what we need, 
variable rate loans to match up against our variable rate 
deposits. They get what they need, which is a long-term fixed-
rate loan. It's a wonderful solution to the problem, but now 
that customer, our small business that maybe is borrowing $3 
million to finance their building and they want it for 20 
years, they need to pass, or we think they're going to need to 
pass a test to be a qualified participant, I think was the 
phrase, and they're not going to qualify, because the law was 
designed not to deal with this customer but to deal with much 
more sophisticated folks but they're going to come under it and 
they're not going to qualify, and so they're not going to be 
able to get that product from us.
    So it's going to change the landscape for them so they're 
either going to get it from somebody who ignores the regulation 
and goes ahead and makes it anyway, or they're going to get it 
from a large bank that has capital markets operation that can 
affect the same transaction through their own huge balance 
sheet.
    Chairwoman Capito. So again, we're pushing business out of 
the community bank into the big four, I think you both 
mentioned in your testimony that the big four has what, like 43 
percent of the business--
    Mr. Hageboeck. The top 10 has 72 percent of the banking.
    Chairwoman Capito. The top 10 has 72 percent of the 
banking, but in a State like West Virginia, I think it could be 
really devastating.
    Mr. Hageboeck. Absolutely.
    Chairwoman Capito. I appreciate that, because that really 
shows again that a one-size-fits-all regulation is not 
appropriate in this arena, and then I'll give you a chance to 
talk again about Basel III because--oh, I know what I wanted to 
ask you. Who regulates you on that derivative portion? Is that 
the FDIC that oversees that or is it just--the FDIC is your 
primary regulator, correct?
    Mr. Hageboeck. The OCC for City National Bank.
    Chairwoman Capito. The OCC. Okay. So the OCC would oversee 
your derivatives and your--whether that person is qualified to 
be a participant or not as part of the overall examination?
    Mr. Hageboeck. I'm not sure whether or not there would be a 
regulator for that.
    Chairwoman Capito. I think that's the question, because you 
have all sorts of regulatory participation in a lot of 
different ways. What other regulators do you have in your bank? 
Do you have any SEC?
    Mr. Hageboeck. The SEC would regulate the holding company. 
The Federal Reserve would regulate the holding company. Of 
course, the FDIC is interested in every bank that they insure 
but we don't see them very often. We hear from them on the 
phone once in a while.
    Chairwoman Capito. Have you ever had the CFPB in your 
office in your bank?
    Mr. Hageboeck. No, we have not.
    Chairwoman Capito. Have you?
    Mr. Loving. We have not.
    Chairwoman Capito. Have you?
    Mr. Brewer. No.
    Chairwoman Capito. Okay. Senator Manchin?
    Senator Manchin. Ms. Brown, back to you again. Do you 
believe that relief is needed as you're hearing from the 
businesses and also from community bankers, help is needed for 
community banks?
    Ms. Brown. In terms of their regulation?
    Senator Manchin. Yes.
    Ms. Brown. I wouldn't feel comfortable speaking to that. I 
certainly respect their testimony here today and understand 
their concerns, but--
    Senator Manchin. A group like yourself, that is working 
with the nonprofits and this and that, it carries a lot of 
weight and it's very helpful if we're all moving in the same 
direction. I understand that we basically stymied the small 
community banks, the investments and the capital that we need 
to grow, so I'm hoping that you all will take a position on 
that.
    Ms. Brown. From our perspective, we prefer our local West 
Virginians to be able to work with these community lenders who 
do understand their specific needs, who are invested in their 
long-term well-being and commitment to homeownership. We do see 
a lot of what happened in the national mortgage market as a 
real threat and in a sense competition to our community banks 
and feel that along with the protection, Dodd-Frank does level 
the playing field and take away a lot of the incentive and 
misrepresentation that West Virginians really experienced from 
some of these national lenders. With those incentives taken 
away and the protections for national lenders almost, I think 
community banks would be better able to compete for the 
mortgage market for West Virginians.
    Senator Manchin. Thank you. Bill, if I could start with 
you, what do you think would be the thing that we could do that 
would help the most? If there's going to be one thing we can 
come together on in Washington, which I still think it is 
possible we can, what do you think that should be?
    Mr. Loving. I think for the regulation, we cannot have a 
one-size-fits-all regulation. I think we have to understand the 
community bank and credit union model, I'll include them in 
this, is different than the too-big-to-fail model, and we have 
to have regulation that allows us to compete, provide products 
that our customers want and need and is vital to our 
communities, and we continue to do so in the same fashion that 
we have done for many, many years, and that's having our 
interest and our customers' interest and our community's 
interest at heart. That's what community bankers are.
    Senator Manchin. Tom, we skipped you, I think.
    Mr. Brewer. I agree. I think we can't let some unscrupulous 
lenders brought on Dodd-Frank and now placed us in a position 
that we're looked at the same as these large financial 
institutions and we can't compete in that environment.
    Senator Manchin. Is there one thing that's really 
strangling you right now, is what I'm looking for. We're 
introducing legislation in a bipartisan manner here, trying to 
find the relief that you need and we're trying to get everybody 
to buy into this, but we need to have that.
    Mr. Hageboeck. If it were Christmas in August, the big 
present I would ask for, which is probably undoable, is to do 
away with Dodd-Frank entirely. From my perspective, it serves 
no useful purpose, although I can understand that for some 
large mortgage brokers, there were a lot of problems going on.
    Senator Manchin. From the investment bank, you think just 
go back to where we were?
    Mr. Hageboeck. From my perspective, Dodd-Frank is a harm 
and not a help. That would be my--if I had to narrow it down to 
something smaller and more doable--
    Senator Manchin. Sure.
    Mr. Hageboeck. --it would be the Basel III capital, which 
has not yet been promoted against us, which I think is going to 
be terribly detrimental.
    Senator Manchin. Which one is that?
    Mr. Hageboeck. Basel III capital growth. I think if we 
narrowed it down to one specific piece that would be the most 
potentially damaging--
    Senator Manchin. You consider that a football that could 
cause you more real problems than you have right now?
    Mr. Hageboeck. Yes.
    Senator Manchin. Mr. Wohlever, how long can businesses like 
you--I don't know who's suffering the most. I know that your 
type of business seems to be suffering. You got the brunt of 
it, right, from the get-go?
    Mr. Wohlever. I believe so, Senator.
    Senator Manchin. Okay. And are there other businesses, did 
any other businesses prosper at all through this whole Dodd-
Frank fiasco, if you will? Are there any of them, if you know 
of anybody who has been able to find capital in other types of 
businesses? I'm sure you're looking around a little bit trying 
to figure out which direction to go.
    Mr. Wohlever. Yes, I'm pretty well-connected in Martinsburg 
and most of the owners in Rotary are all kind of in the same 
boat.
    Senator Manchin. Everybody's hurting.
    Mr. Loving. The one thing I would say is I would agree with 
Mr. Hageboeck about Basel III, but I would like to keep in mind 
if we look into Dodd-Frank, there are some good components of 
Dodd-Frank for community banks, primarily the increase in the 
$250,000 coverage for community banks, allowing us to compete 
against the too-big-to-fail and believe me back in 2008 and 
2009, that was significant if that additional coverage was 
important. So we need to keep that in mind, and we also need to 
keep in mind that coverage is now paid fairly and has saved our 
institution about $130,000 a year of FDIC insurance because of 
the change in the assessment base. So there are some good 
things that are included in there that are a benefit to 
community banks, I'm sure.
    Senator Manchin. Thank you.
    Mr. Renacci. Ms. Brown, I was reading your testimony here 
and you say that I urge members of the subcommittee not to 
support repeal of any aspect of the Dodd-Frank Act and its 
consumer protections. So you're putting a broad brush on that, 
saying anything at all should not be repealed?
    Ms. Brown. I am, but I would first like to say the 
experience of my practice is I do all litigation and I have 
consumers in my office who have mortgage loans primarily that 
were originated before 2009. By the time they reach my office 
and we're engaging in litigation, I'm not seeing mortgage loans 
that have been originated after Dodd-Frank. Certainly, many of 
its provisions have not been enacted. So I don't want to speak 
too broadly, but I am anxious for a chance to see the 
implication of Dodd-Frank on the mortgage market the way the 
expenses are shifted and what impact that will have on mortgage 
lending.
    Mr. Renacci. Do you believe in any way that if we had 
better oversight from the standpoint if the regulators really 
had done all their job, that maybe some of these things would 
not have occurred in some instances you brought up?
    Ms. Brown. I think the problem arose from a lack of 
enforcement of regulation and also lack of existence of certain 
regulation. I think Dodd-Frank has for the first time brought 
to the regulatory arena protections that were not previously 
available.
    Mr. Renacci. So like the Senator was trying to bring up 
here, and you just said it again, there are some enforcement 
actions that weren't done and then there are some good things 
with Dodd-Frank. The problem is the broad brush of all Dodd-
Frank I think is causing some problems, which is a little what 
we're hearing over on this side. One of the other comments you 
made was an inference in your statement that Dodd-Frank might 
actually help level the playing field for community 
institutions. I would like to hear your thoughts. Do you 
believe Dodd-Frank will benefit your institutions?
    Mr. Brewer. I think there are aspects of it that could 
possibly, yes, but I think it places us in a position of 
operating our institutions to please the regulator versus to 
return to our member services and products. In that respect, 
there are just some issues with part of the bill.
    Mr. Loving. I would agree there are some issues that would 
level the playing field, but many create much concern. You 
mentioned CFPB and the process that--I guess in order now for 
them to write rules and regulation, and I think if I'm not 
correct, they are the only agency that has one director of a 
board and so you have literally one person writing consumer 
financial protection legislation that albeit well-intended, I 
think there are a lot of unintended consequences that will 
happen such as with the qualified mortgage and there's--they 
did make a change just recently in proposed legislation that I 
think will be beneficial, but there are a lot of unknowns out 
there for the CFPB that concerns me as well as some of the 
other regulations. I don't think that in itself will level the 
playing field. I think there will be a detriment to the small 
community banks.
    Mr. Hageboeck. There were some bad actors out there doing 
things they shouldn't have been doing, but by removing them, 
does that improve the playing field for us? I don't think so, 
because we weren't playing with those customers anyway. The 
three examples we heard were all cases where the customer 
didn't really need the services of the bank. They had something 
pressed upon them, so there was nothing there that we would 
have been a participant in, so I don't-- getting rid of the bad 
actors, that's desirable but it doesn't help us.
    Mr. Renacci. Let's talk a little bit about jobs and job 
creation, because I think that's really the key to getting our 
country moving, getting our economy moving again. Do you have 
any thoughts on how Dodd-Frank and the overregulation are 
hurting the job creators? Can you give me some examples of job 
creators who come to your institutions? That's really where the 
job creations come from, those entrepreneurs out there who are 
walking in your door and saying, I need capital. Mr. Brewer, 
you said that there were actually some--demand was up. Mr. 
Hageboeck, you said demand was down. So what's the truth, and 
also I would kind of like to bring it together in one 
conclusion.
    Mr. Brewer. Our demand is up for the automobile or small 
dollar loans, not mortgage lending, and we are not a commercial 
lender, so any commercial line we would do would be less than 
$50,000. That's all we, through regulation, are allowed to 
perform. Now, something that could help small business would be 
the passage of H.R. 1418, which would help just raise the 
business cap on credit unions.
    Mr. Renacci. If demand is down, I'm not sure if raising the 
cap--
    Mr. Brewer. We have some credit unions that do the 
commercial lending in West Virginia that are at their cap and 
cannot take on more business lending.
    Mr. Renacci. Is demand up or demand down? I always like to 
hear that when I go to a new State.
    Mr. Loving. In our case, demand is down. Our loan demand 
across-the-board is down. We have four offices in West 
Virginia, rural communities, one in Virginia, and in all 
offices demand is down, both from a commercial perspective as 
well as a residential perspective.
    Mr. Hageboeck. When I said demand was down, I was 
specifically talking about 2012, but we have seen the demand 
for credit decelerating since the beginning of the year. Credit 
is stronger certainly than it was at the debt recession in late 
2008, 2009, but the trends I think are negative and I 
particularly focus on commercial and residential mortgage.
    Chairwoman Capito. Any other questions? With that, I think 
I will thank our witnesses. We have gotten a lot of really good 
information, bringing it down to the street in West Virginia, 
so to speak. There are other issues that we're hearing about 
quite a bit--acquisitions and mergers, banks are saying we're 
going to have to be acquired because we can't survive in this 
environment. We're going to have more consolidation, and is 
that a good thing?
    Personally, I don't believe it is a good thing, and I'm 
worried about that for our customers, for our consumers and for 
the folks that you represent. I also worry about the folks that 
you're representing because I worry if we do something like 
really squeeze down on the definition of a qualified mortgage 
where City National is hard pressed to write their mortgage 
outside of the parameters of that, that's going to hurt the 
customer that you serve the most, the lower-income folks or the 
lower and middle income, who are on the edge a lot of times 
anyway and they need to have the flexibility that they have 
been able to offer and Mr. Wohlever needs some flexibility when 
people are looking at the definition of what he's trying to do 
in his business. I don't want to wake up 4 years from now and 
find out that we have disenfranchised the folks that we have 
been most trying to protect, and this concerns me. We certainly 
are trying to protect the general public from the unscrupulous 
behavior that we saw and that you documented and that we know 
was going on, but we certainly don't want to cause those 
families who are trying so hard to get a little bit ahead to 
not be able to get that one peg in the wall that's going to 
pull them up a little bit further in terms of financing or 
risk-taking. Senator Manchin, did you have a comment?
    Senator Manchin. I just thought of something. I would like 
to get very quickly your opinions on this, but knowing that the 
financial cliff, and it's not just a saying, it's for real, 
that we're facing and we're all going to have to be facing here 
after the November 6th election, because I truly don't believe 
anything will happen before that, but with that election 
coming, we're facing the tax changes as far as the Bush tax 
credits going off, we're facing also the sequestering, which 
was the mandatory cuts, and the uncertainty. We hear so much 
money being still on the sidelines. How much would you 
attribute with the uncertainty or the lack of confidence that 
we can fix the large financial problems that are causing the 
problem for the market for the downturn. Just very quickly from 
all aspects.
    Mr. Hageboeck. Senator Manchin, I think that's 100 percent 
of the problem. As you know, I'm a trained economist. I have a 
Ph.D. in economics from Indiana University in economics and 
psychology, and the business--
    Senator Manchin. You hear from your customers?
    Mr. Hageboeck. --just don't know about all those things 
that they mention. They're not going to go out and borrow money 
even though they may think there's an opportunity because there 
just is too much risk around investment today, and they're not 
going to borrow the money until they feel more certainty.
    Senator Manchin. Tom?
    Mr. Brewer. I agree. We hear our members talking about the 
uncertainty, not only here in the United States. They're 
concerned because of the global effect you hear of the markets 
in Europe and then locally layoffs and downsizing. So yes, the 
uncertainty is the big issue.
    Senator Manchin. You have a lot of customers. Are they 
talking about, are they concerned about the financial condition 
of this Nation right now?
    Mr. Brewer. Yes.
    Senator Manchin. So you all hear it. Bill?
    Mr. Loving. Yes, I would agree. I think uncertainty is a 
significant element in our economy today. No one can predict, 
can make an investment without knowing what the impact is going 
to be next year. So I think yes, it's a big issue.
    Senator Manchin. If people have money, they're sitting on 
it, right?
    Mr. Loving. They're sitting on it, they're not investing, 
yes.
    Senator Manchin. And they're not coming to you all trying 
to leverage their own money by borrowing money or anything, so 
that interest is down for that reason?
    Mr. Loving. Correct.
    Mr. Wohlever. Senator Manchin, I think that's an excellent 
observation. While that is kind of a simple question, it's very 
complex. There's so many elements that go into it and when you 
add up all these different areas of uncertainty, I do think we 
have just an enormous amount of people who are just waiting to 
see what's going to happen.
    Ms. Brown. Again, in my practice, I see homeowners 
currently in a mortgage and facing a lot of economic 
uncertainty in terms of how they're going to make each month's 
bills meet, so there's quite a bit of concern about the 
economic impact and the impact on their family monthly budget, 
and certainly there's some concern about the national budget as 
well. But in terms of whether they're going out to refinance or 
get other loans, at this point I see homeowners again trying to 
figure out this month's bills.
    Chairwoman Capito. I think that I will call the meeting to 
a close.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, this hearing is adjourned. I would like to thank 
everyone for your participation. I think we have gotten a lot 
of very valuable information.
    [Whereupon, at 12:25 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            August 20, 2012


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