[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                        EXAMINING COMMUNITY BANK 
                           REGULATORY BURDENS 

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 16, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-13

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

80-879 PDF                       WASHINGTON : 2013 



                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

SEAN P. DUFFY, Wisconsin, Vice       GREGORY W. MEEKS, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
GARY G. MILLER, California           MELVIN L. WATT, North Carolina
PATRICK T. McHENRY, North Carolina   RUBEN HINOJOSA, Texas
JOHN CAMPBELL, California            CAROLYN McCARTHY, New York
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              NYDIA M. VELAZQUEZ, New York
    Pennsylvania                     STEPHEN F. LYNCH, Massachusetts
LYNN A. WESTMORELAND, Georgia        MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         PATRICK MURPHY, Florida
MARLIN A. STUTZMAN, Indiana          JOHN K. DELANEY, Maryland
ROBERT PITTENGER, North Carolina     DENNY HECK, Washington
ANDY BARR, Kentucky
TOM COTTON, Arkansas



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 16, 2013...............................................     1
Appendix:
    April 16, 2013...............................................    45

                               WITNESSES
                        Tuesday, April 16, 2013

Burgess, Kenneth L., Jr., Chairman, First Bancshares of Texas, 
  Inc., on behalf of the American Bankers Association (ABA)......     9
Kim, Charles G., Executive Vice President and Chief Financial 
  Officer, Commerce Bancshares, Inc., on behalf of the Consumer 
  Bankers Association (CBA)......................................    11
Loving, William A., Jr., President and Chief Executive Officer, 
  Pendleton Community Bank, on behalf of the Independent 
  Community Bankers of America (ICBA)............................    13
Pinkett, Preston III, President and Chief Executive Officer, City 
  National Bank of New Jersey....................................    15

                                APPENDIX

Prepared statements:
    Burgess, Kenneth L., Jr......................................    46
    Kim, Charles G...............................................    65
    Loving, William A., Jr.......................................    76
    Pinkett, Preston III.........................................   144

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Letter to Federal Reserve Chairman Ben Bernanke, FDIC 
      Chairman Martin Gruenberg, and Comptroller of the Currency 
      Thomas Curry from Representatives Capito and Maloney, dated 
      February 19, 2013..........................................   149
Posey, Hon. Bill:
    Written responses to questions submitted to Kenneth L. 
      Burgess, Jr................................................   151
    Written responses to questions submitted to Charles G. Kim...   153


                        EXAMINING COMMUNITY BANK
                           REGULATORY BURDENS

                              ----------                              


                        Tuesday, April 16, 2013

             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 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, McHenry, Pearce, 
Posey, Fitzpatrick, Luetkemeyer, Duffy, Stutzman, Pittenger, 
Barr, Cotton; Meeks, Maloney, Watt, McCarthy of New York, 
Scott, Green, Ellison, Velazquez, Murphy, Delaney, and Heck.
    Ex officio present: Representatives Hensarling and Waters.
    Chairwoman Capito. The subcommittee will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time. Luckily, I don't think we 
are expecting votes until 1 p.m., so we will have a good 
stretch of time here.
    This morning's hearing is the second installment in a 
series of hearings focused on regulatory relief for community 
financial institutions.
    Last week, we heard from a panel of credit union 
representatives. Today, we will hear from community bankers. 
These hearings are an opportunity for our Members to further 
examine proposals for regulatory relief from community 
financial institutions.
    The challenges facing community banks across this Nation 
are not new. Every time our Nation experiences a financial 
crisis, Congress responds with new regulations, and in some 
cases new agencies, rather than identifying outdated, 
unnecessary, or overly burdensome regulations. While 
formulating these new policies, too often the response is just 
to pile new regulations on top of the old. We are now seeing 
this as the Dodd-Frank Act is implemented by the Federal 
regulatory agencies.
    Unfortunately, the growing regulatory burden is having a 
real effect on communities across the Nation. The more time and 
resources community bankers devote to compliance, the less time 
they have to work with their communities to drive innovation 
and economic growth.
    This is especially troubling given that the community banks 
provide 46 percent of the industry's small denomination loans 
to farms and businesses.
    These types of loans are often labor-intensive, and the 
strong relationships community bankers have with their clients 
allows them to provide tailor-made products.
    One of our witnesses today will discuss the adverse effects 
the regulatory burden is having on consumers and their access 
to financial products.
    We must find a way for policymakers, regulators, and 
financial institutions to develop better ways to track the 
cumulative burden regulations place on financial institutions.
    If we do not, we will continue to see further consolidation 
in the industry which will have a profound effect on the world 
communities, like the State I represent, West Virginia.
    In many of these areas, community banks are the only banks 
that serve the needs of their communities. Their local 
knowledge and connection to families and businesses they 
support is a critical aspect of our Nation's diverse financial 
system.
    One area that I will continue to focus on is the 
examination process for financial institutions. Last night, 
Representative Maloney and I reintroduced the Financial 
Institutions Examination Fairness and Reform Act. This 
bipartisan legislation has support from Members across the 
geographic and political spectrum.
    We need to ensure that regulators have the tools to 
maintain a safe and sound financial system, but we also need to 
ensure the community banks and credit unions have an impartial 
avenue to appeal materials, supervisory decisions, and ensure 
consistency in examinations.
    Today's witnesses will provide the subcommittee with 
recommendations on ways to improve the regulatory environment 
for community banks.
    I would like to thank you all for your willingness to share 
your thoughts. I am especially pleased that my constituent, 
Bill Loving, from Pendleton Community Bank is able to join us 
here today.
    Bill is a wonderful advocate for community banks and 
understands rural communities and the banks that serve them.
    I now yield to the ranking member of the subcommittee, the 
gentleman from New York, Mr. Meeks, 2 minutes for the purpose 
of making an opening statement.
    Mr. Meeks. Thank you, Madam Chairwoman.
    Thank you for holding this hearing today. This is, as you 
said, the second hearing we have held in the last month on 
examining regulatory relief for smaller institutions, whether 
they are credit unions or community banks, and I can't think of 
a more worthy topic to consider in this subcommittee.
    Community-based institutions play a vital role in every 
district in this country and I hope that this is something that 
we can agree upon on a bipartisan manner and look at reforms 
that will help these small banks. I will ask about Basel III 
and its potential impact on the industry.
    As I mentioned in our first hearing, I worry that Basel III 
is too complicated and does not offer the appropriate risk 
weightings to different classes of assets. For example, it 
would apply a discount to any asset that isn't sovereign debt 
in the U.S. Treasuries or cash.
    This means a bank that specializes in mortgages, for 
example, may have to hold a lot more capital against those 
mortgages to satisfy the minimum capital requirements; however, 
it would make sense to me to not have capital requirements that 
jeopardize the worthy economic activities spurred by lending 
firms from smaller and medium-sized or regional banks, 
institutions that don't engage in the exotic activities that 
some of the larger institutions do.
    As we learned in the FDIC's recently released community 
banking study, smaller and regional institutions are the 
engines of economic growth in this country because they lend to 
their neighbors and their communities to keep their farms or 
their small businesses going or to hire employees.
    In fact, as you have indicated, the study noted that 
although community banks hold only 14 percent of the banking 
industry's assets, they make 46 percent of the smaller 
denomination loans to farms and small businesses.
    They are often the sole source of mortgage financing, and 
therefore the lifeline of the housing industry in our 
communities. It was not their activity that blew up the global 
banking system, and I think the capital requirements we have 
placed on banks should recognize that.
    I want to work with all my colleagues, the Republicans and 
regulators and Democrats, on that issue to make sure that we do 
not stifle the economy through well-intentioned but ultimately 
inappropriate rules.
    Last week, I ended my opening statement at the hearing on 
credit unions by including a plea for credit unions to 
cooperate with community banks on regulatory reform. So what is 
good for the goose is good for the gander. I hope that the 
community banks represented here today will come together with 
credit unions to help advance commonsense reforms for both 
groups so we can make the changes necessary to decisively move 
the economy in the right direction.
    I thank you, Madam Chairwoman, and I look forward to 
hearing the testimony of the witnesses.
    Chairwoman Capito. Thank you.
    Mr. Duffy for 2 minutes.
    Mr. Duffy. Thank you, Chairwoman Capito, for holding this 
very important hearing. As you mentioned, last week we focused 
on credit union regulatory burdens. This week, we are focused 
on community bank regulatory burdens.
    My district is dotted with both types of lenders, and if 
our community banks can't get dollars out the door then it is 
not just the banks that suffer: it is the family who is trying 
to buy a home; it is the entrepreneur who is trying to start or 
expand their business; or it is the farmer who is trying to 
purchase a new piece of equipment who suffers. It is our local 
economies that these community banks serve that suffer when 
they are not well-functioning.
    In the past few years, we have seen banks consolidate, and 
tighten credit, consumer product options have diminished, and 
compliance costs have skyrocketed. While we have a strong 
community bank presence in Wisconsin, I wish I could say the 
sector is expanding, but unfortunately it is the opposite. The 
number of community banks in Wisconsin has decreased over the 
past years as the number of employees has also shrunk.
    On the other hand, the banking regulators are on a hiring 
frenzy. From 2010 to 2014, the CFPB has grown from zero 
employees to 1,500 employees. That is more employees than the 
Department of the Treasury.
    The Dodd-Frank Act promulgated more than 400 new rules and 
only about half of them have been finalized. The tide is still 
rising and the paperwork is piling up.
    Today, I look forward to hearing from our witnesses on how 
we can stop these negative trends and alleviate these burdens. 
I have strongly opposed a one-size-fits-all approach to many of 
these new regulations.
    There are 253 FDIC-insured banks in Wisconsin with under $1 
billion of assets. These are not the guys who caused the 
financial crisis, but they are being roped into the new 
regulations as if they were the bad actors.
    Today, I am interested in hearing more about your concerns 
with Basel III, QM, and how other rules are seriously affecting 
the way community banks lend and operate.
    My concern is that homeowners and small businesses back 
home in central, northern, and western Wisconsin are the ones 
getting hurt by many of these new regulations.
    With that, I yield back, Madam Chairwoman.
    Chairwoman Capito. The gentleman yields back.
    Mrs. Maloney for 3 minutes.
    Mrs. Maloney. Thank you, Chairwoman Capito and Ranking 
Member Meeks, for calling this hearing, and I also thank all of 
the panelists. We really look forward to what you have to say.
    First of all, Madam Chairwoman, I would like to remember 
Charlie Wilson, who passed away this past Sunday. He was a 
member of this body, a member of this committee for two 
Congresses, and he was himself a community banker and he 
brought that understanding and passion to the committee.
    He played a very forceful role particularly in financial 
institutions and community banks and also housing, and I wanted 
to remember him at the beginning of this hearing and the 
contribution that he made to Ohio and to our country.
    This hearing is the second in a two-part hearing on smaller 
financial institutions, community banks, credit unions, and 
regional banks and identifying ways that we can make sure that 
they keep doing what they do best: providing financial services 
to communities, neighborhoods, and their customers.
    These community banks, in the last financial crisis--which 
took $17 trillion out of our economy--were truly, I believe, 
the unsung heroes and heroines: the regional banks; credit 
unions; and community banks.
    I speak for the community that I represent. They were the 
financial institutions that kept providing the traditional loan 
opportunities for small businesses, home purchases, and 
refinancing. Those services were provided by the community 
banks and helped us revive.
    They are unique in many ways to the American financial 
system and we need to make sure that their services are there, 
that we understand their needs, and that the regulatory burden 
is not so great that it forces them to either close their doors 
or to merge.
    In response to this, the Chairlady and I have written a 
letter to the Federal Reserve that calls upon them to be 
uniquely aware of the capital requirements that are required 
under Basel III.
    Basel III was written for global commerce. If community 
banks are not involved in global commerce, then we should not 
have those standards on them.
    I ask permission to place this letter in the record. I have 
met with the Federal Reserve as I am sure the Chairlady has--
    Chairwoman Capito. Without objection, it is so ordered.
    Mrs. Maloney. --and I am getting very positive indications 
back that they are going to be sensitive to the dual 
responsibilities, and I have had such interest in this letter, 
Madam Chairwoman, that I want to circulate another one that 
other Members can sign because they keep asking me, ``Can I go 
on the Capito letter you did?'' And I said, ``We have already 
sent it.'' But they want to show their concern for fair 
treatment to these institutions.
    In response to the financial crisis that according to 
Christina Romer was 3 times stronger than the Great Depression, 
the community banks, along with the whole banking system, were 
under tremendous pressure.
    And during this time, Chairlady Capito and I authored the 
Financial Institution Examination Fairness and Reform Act to 
make sure that they had the strength to respond.
    In examinations, they often felt like they couldn't speak 
up, and this bill generated over 190 co-sponsors in the last 
Congress and has been introduced yesterday by Senators Manchin 
and Moran. I do hope that this is one area where we can reach 
across the aisle and have strong bipartisan support.
    And in closing, we have the need for both very large 
institutions that are necessary to compete in the global 
marketplace, but we don't need to have that standard then put 
on community banks that the regulation is so overwhelmingly 
burdensome. But we have to respect the role that each of these 
institutions plays in our financial system.
    I look forward to your testimony. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Pittenger for 1\1/2\ minutes.
    Mr. Pittenger. Thank you, Chairwoman Capito, for holding 
this important hearing and allowing me the time to make an 
opening statement.
    We have seen in the wake of the financial crisis the only 
prescription from D.C. was to regulate away the problem. 
Unfortunately, this has had a severe impact on smaller 
financial institutions, especially community banks, and it has 
also led it to an anemic economic growth and a persistent high 
unemployment.
    One of the first district events I held was to sit down 
with a number of community bank presidents and listen to their 
concerns regarding the amount of regulations pouring out of 
Washington.
    The same concerns were voiced time and again, ``We didn't 
cause the crisis, and our banks didn't take bailout money, but 
yet we are the ones suffering the consequences.''
    All we need to look at is the consolidation of these banks 
for the past several years. Even the FDIC's community banking 
study found that the number of federally-insured banks 
decreased from nearly 18,000 in 1984 to 7,000 in 2011. We are 
witnessing the devastating loss of community banks throughout 
the country.
    After sitting on a community bank board for over 10 years, 
I have seen firsthand how these institutions have a positive 
impact in the community and the types of services they provide 
to their customers.
    Failure to listen to their concerns and adopt a new 
regulatory approach will only lead to further consolidation of 
these banks, and less options for Americans, and will impede 
our Nation's economic recovery.
    Today's testimony provides a great opportunity to hear from 
community banks about regulatory and compliance issues, and I 
look forward to hearing their concerns.
    I yield back my time.
    Chairwoman Capito. Thank you.
    The ranking member of the full Financial Services 
Committee, Ms. Waters, is recognized for 2 minutes.
    Ms. Waters. Thank you very much. Madam Chairwoman, I would 
like to thank you for holding this hearing. This may be one of 
the most important ones that we will be involved with anytime 
soon.
    I want to thank the witnesses for taking time to come talk 
to us today, and I would like to personally thank Mr. Pinkett 
for agreeing to testify in front of the committee today.
    He is the CEO of City National Bank of New Jersey and 
serves on the Office of the Comptroller of the Currency's 
Minority Depository Institution Advisory Committee.
    Thank you very much, Mr. Pinkett.
    I know it is still a challenging time for community-sized 
institutions such as yourselves, and it can't be easy to take 
time away from your businesses, so I want to get you all back 
home as soon as possible because we really need you to be out 
there lending in your communities to help get this country back 
on track.
    That is exactly why we are here today. We want to know what 
we can do to help. We understand there is quite a bit of 
regulation that you are responsible for complying with in your 
day-to-day operations, and that burden falls particularly hard 
on smaller institutions such as yours.
    There is not a one-size-fits-all solution to regulation, 
and I have been encouraged by the Consumer Financial Protection 
Bureau's (CFPB) recognition of that fact.
    I understand that Director Cordray has been aggressive in 
his outreach to community banks and that the CFPB takes your 
input very seriously. This was recently evident by the 
community bank exceptions in the Qualified Mortgage rule. That 
dialogue is leading to results, and I hope it continues.
    Other regulators have taken note of the importance of 
community banks to our economy as well. In December, the FDIC 
released a thorough and enlightening study on community banking 
that has been quite helpful to our Members, and Governor Duke 
of the Federal Reserve recently highlighted how the Dodd-Frank 
Wall Street Reform Act is being implemented in ways that 
consider the size and the complexity of the institutions it 
impacts.
    Reading through your testimony, I am reminded that 
appropriately regulating the larger banks is just as important 
to your survival as reducing your regulatory burden.
    There are a lot of advantages to being a large institution, 
and I have heard many times that the small banks feel they are 
held to a higher standard, that regulators pay much more 
attention to their books even though community banks were not 
responsible for the financial crisis.
    I will continue to support the regulators in the 
implementation of the Wall Street Reform Act to ensure that our 
financial system is a stable one where small institutions like 
yours can thrive, but regulators are only tasked with enforcing 
the laws that Congress has passed.
    So it is appropriate for us as lawmakers to turn our 
attention to a discussion of what is and isn't working right 
now and what we might do to streamline these laws so we can get 
you back to your communities creating jobs.
    As you know, the House has already gotten to work on that 
by passing the Eliminate Privacy Notice Confusion Act. Our 
Members have received letters from your trade organizations, 
and over the recess, visited you in your home districts in 
order to gather information on other sensible reforms we might 
pursue that will help you put more of your capital to work.
    My staff and I have been reviewing these requests closely, 
and I look forward to a productive discussion today. This has 
been an area of strong bipartisan agreement, and I want to 
commend Chairwoman Capito and Ranking Member Meeks on working 
together to make this hearing possible.
    I yield back the balance of my time.
    Chairwoman Capito. Thank you.
    Mr. Fitzpatrick for 1\1/2\ minutes.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman.
    And I want to thank the witnesses for your testimony to the 
committee here today. I have been meeting on a fairly regular 
basis with community bankers back in my district and I 
consistently hear about examinations and regulations.
    More recently, I am hearing a lot of anxiety with respect 
to CFPB and also the Qualified Mortgage rule, and what I have 
been telling them is that I believe that there is a broad 
acknowledgement that Congress needs to do more to relieve 
community financial institutions from the regulatory burdens 
that they are facing, and I believe this recognition has been 
borne out from hearings like this and from meetings like the 
meetings that I am having and other Members of Congress across 
the country are having with their community bankers in their 
districts.
    Community bankers are vital to the economy and I want to 
thank you for what you do for our economy. I and my colleagues 
on the Financial Services Committee will continue to look at 
how we can help community banks, help Main Street, and I 
believe that we will produce some meaningful legislation to 
that effect.
    I know that I am committed to that and will continue to 
work with the community bankers in our districts to that end.
    I thank the chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Scott for 2 minutes.
    Mr. Scott. Thank you very much, Madam Chairwoman.
    I believe we all agree that regulatory reform is indeed 
necessary; however, as we work forward with these issues 
revolving around community banking, we must be sure the 
regulations meant to address too-big-to-fail do not wind up 
placing a disproportionate burden on the relative little guy of 
community banking.
    A disproportionate burden of say compliance costs due to 
simple economics of scale. We look at our industry, you have 
the smaller banks, you have community banks, you have a 
regional bank. What is the difference?
    We have medium-sized banks. We have credit unions. We have 
pawn brokers. We have loan companies. All have an impact when 
we do regulations. In my State of Georgia, we have led the 
Nation in bank failures. My colleague Lynn Westmoreland and I 
have looked at that and so far, there is a determination that 
in some cases, there has been too much regulation, and in other 
cases, there has not been enough regulation.
    So I assure all of you who are here to testify that this 
committee, our committee, understands your concerns and I am 
hopeful that as financial regulatory reform is implemented, we 
can work to come to a consensus and indeed ensure that 
loopholes, where they are, are closed, that transparency is 
emphasized, and those institutions which contributed to the 
financial crisis are indeed held accountable without harming 
smaller institutions, which is the heart and soul of our 
lending system.
    They are the ones that make the loans to the small business 
community. They are the ones that make the loans to 
entrepreneurs, to farmers, and to homeowners.
    And so I think it is important, in closing, that we 
underscore that we must not be afraid to make what I call smart 
adjustments to the regulatory responses to the financial 
crisis, be it Dodd-Frank or otherwise, where such adjustment is 
warranted, particularly to portions that may not work as we 
intended or may have unintended negative consequences.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Barr for 1\1/2\ minutes.
    Mr. Barr. Thank you, Chairwoman Capito, for holding this 
very important hearing to examine the regulatory burdens on 
community banks.
    As I have travelled around the 6th Congressional District 
of Kentucky and talked with community and regional bankers, 
whether in Lexington or in more rural parts of my district, I 
have consistently heard the same themes: that the regulations 
coming out of Washington are too burdensome, too complex, and 
oftentimes, flat out counterproductive.
    I am frequently told by my community bankers that they feel 
like they are no longer working for their communities, but 
instead that they are working for the regulators.
    I regularly hear that overregulation has effectively 
prohibited reputational relationship and character-based 
lending which deprives reputable entrepreneurs and small 
businesses of the ability to access the capital needed to 
create jobs.
    Why do we continue to suffer from persistent high 
unemployment in this country? Why is this the most anemic 
economic recovery since the Great Depression?
    I submit that this is one of the reasons, and the worst 
part is that while regulatory costs are most directly seen 
firsthand by the community banks, the consequences ripple right 
out into businesses on Main Street seeking credit to expand, 
the farmers seeking agricultural loans, and families working to 
purchase a home.
    I look forward to hearing from the witnesses about 
improvements that can be made to cost-benefit analysis, about 
contradictory signals they receive from Washington, and about 
whether the current regulatory environment is really protecting 
consumers.
    Chairwoman Capito. Thank you.
    And finally, Mr. Luetkemeyer for 1\1/2\ minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    I want to thank Chuck Kim this morning. He is a banker from 
the St. Louis area with Commerce Bank. He is a nice addition to 
the panel. I am sure he is going to have some great insights to 
offer today with regards to our discussion.
    Regulatory requirements disproportionately burden community 
banks that do not have the resources necessary to comply. That 
is why in the coming weeks, I will introduce legislation to 
reduce some of the burdens facing community banks.
    As in the 112th Congress, this legislation will seek to 
give community banks the ability to attract capital, support 
the needs of the customers, and contribute to the local 
economies.
    It is time for Washington to work with community banks 
instead of against them. I now look forward to working with the 
community leadership as well on initiatives to enable our 
community banks to help the communities they serve.
    And with that, Madam Chairwoman, I yield back.
    Chairwoman Capito. I thank the gentleman.
    And that concludes our opening statements, so I would like 
to welcome our panel of distinguished witnesses.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Our first witness is Mr. Ken L. Burgess, chairman, First 
Bancshares of Texas, Inc., on behalf of the American Bankers 
Association. Welcome, Mr. Burgess.
    I would ask all of the witnesses to pull the microphones 
close, so we are able to hear you. Thank you.

     STATEMENT OF KENNETH L. BURGESS, JR., CHAIRMAN, FIRST 
 BANCSHARES OF TEXAS, INC., ON BEHALF OF THE AMERICAN BANKERS 
                       ASSOCIATION (ABA)

    Mr. Burgess. Thank you, Chairwoman Capito. Chairwoman 
Capito, Ranking Member Meeks, my name is Ken Burgess, and I am 
the chairman of FirstCapital Bank of Texas, a community bank 
located in Midland, Texas.
    FirstCapital was formed in 1998 and has since expanded to 
$713 million in assets serving Midland as well as Amarillo and 
Lubbock.
    I appreciate the opportunity to be here to present the 
views of the ABA. Hearings like today's are very important. It 
is an opportunity to change the dialogue from just talking 
about the importance of community banks to what can be done to 
stop the rapid decline in the number of small banks and start 
taking action to assure we have a healthy and vibrant community 
banking sector.
    Many actions since the financial crisis have hurt, not 
helped, community banks. For example, at the same time that 
banks were trying to serve their local communities, new rules 
meant more compliance officers and fewer customer-facing 
employees.
    Just when regulators want to see banks grow, they raise 
capital standards and now are proposing new Basel III standards 
that will surely force banks of all sizes, but particularly 
small banks, to reduce lending.
    Just when the housing market most needs mortgage loans, new 
rules are imposing costs so high that many community banks will 
likely scale back their mortgage operations. These concerns may 
even force my bank and others like it out of the mortgage 
lending business altogether.
    Make no mistake about it, this burden is keenly felt by all 
banks. For my bank, we spend nearly $1 million on compliance 
every year and we added 10 new members to our staff to meet 
compliance requirements just this past year.
    As a $713 million bank, we are better able to absorb the 
compliance costs. For the medium-sized bank with $168 million 
in assets and only 39 employees, this burden is nearly 
overwhelming.
    Some would say this is simply the cost of doing business, 
but every dollar used for compliance costs is a dollar not used 
to lend in our communities, and unfortunately the costs are 
going up every year, and as they do, small banks disappear.
    In fact, there are 1,500 fewer community banks from a 
decade ago. Today, it is not unusual to hear bankers from 
strong healthy banks say they are ready to sell because the 
regulatory burden is simply too much.
    It is time to make changes that have tangible results. ABA 
applauds Congress on recent additions such as the ATM placard 
and privacy notice bill. More can and should be done. Let me 
highlight just a few.
    First, the financial services examination process should be 
improved. Our bank has been fortunate in that our exams have 
continued to be thorough and fair. This is how it should be for 
all banks; however, I have heard a much different story from 
many community bankers.
    We need an exam process that provides consistent, timely 
exam reports as well as an appeals process free from threat of 
retaliation. We thank Chairwoman Capito and Representative 
Maloney for introducing H.R. 1553, which addresses the many 
important concerns.
    Second, Basel III should be reformed so that capital rules 
enhance not inhibit the role of any bank, but particularly 
community banks.
    Current proposals would introduce significant volatility 
into bank capital levels and force many banks to change their 
core business model due to unfair risk weightings.
    Third, mortgage rules should be simplified and consistent. 
The new mortgage rules are creating severe legal risks. Our 
bank and many others will not make loans outside the narrow 
regulatory box, and many banks will likely be forced to exit 
mortgage and retail lending altogether due to higher risks.
    Fourth, clarify that banks are exempt from municipal 
advisor registration requirements and ensure that banks can buy 
and sell municipal bonds. We urge this committee to adopt a 
bill similar to S. 710, the Municipal Advisors Relief Act of 
2013, which was recently introduced in the Senate.
    In summary, community banks face an uphill battle against 
excessive regulatory burden. Congress has the power to lift 
some of this burden and to turn the tide in favor of our 
Nation's community banks.
    In order to do this, we need to move beyond simple good 
intentions and take decisive action. The ABA stands ready to 
assist this subcommittee in those efforts.
    Thank you very much.
    [The prepared statement of Mr. Burgess can be found on page 
46 of the appendix.]
    Chairwoman Capito. Thank you.
    Our second witness is Mr. Charles G. Kim, executive vice 
president and chief financial officer, Commerce Bancshares, 
Inc., on behalf of the Consumer Bankers Association.
    Welcome.

STATEMENT OF CHARLES G. KIM, EXECUTIVE VICE PRESIDENT AND CHIEF 
FINANCIAL OFFICER, COMMERCE BANCSHARES, INC., ON BEHALF OF THE 
               CONSUMER BANKERS ASSOCIATION (CBA)

    Mr. Kim. Thank you.
    Chairwoman Capito, Ranking Member Meeks, and members of the 
subcommittee, my name is Chuck Kim, and I am executive vice 
president and chief financial officer of Commerce Bancshares. 
Commerce was founded in 1865 and serves customers in Missouri, 
Kansas, Illinois, Oklahoma, and Colorado.
    Our engaged and passionate workforce is guided by our 
customer promise: we ask; listen; and solve. Commerce is also a 
member of the Consumer Bankers Association, which has been the 
recognized voice on retail banking in the Nation's capital for 
more than 90 years.
    On behalf of both Commerce and the CBA, I appreciate the 
opportunity to be here today. CBA has long been a proponent of 
reducing regulatory burden and is enthusiastic about working 
with the subcommittee to achieve our shared goals.
    First, we applaud Chairwoman Capito and others for 
highlighting how the CARD Act is unfairly impacting spouses' 
ability to access credit. This unintended consequence is a 
great example of how regulations can impact a bank's ability to 
provide financial products to consumers. We await the CFPB's 
final rule to correct this.
    I would also like to thank Congressman Luetkemeyer and 
others for their leadership in removing the unnecessary 
requirement of duplicative ATM fee disclosures and for their 
efforts this Congress on privacy issues.
    We have seen significant regulatory changes with the 
passage of the Dodd-Frank Act, the creation of the CFPB, and 
other new rules. The rules promulgated by our regulators were 
needed to protect consumers and ensure a healthy baking 
industry. As we adjust to this new landscape, unintended 
consequences will surely arise throughout the process.
    As we go forward with helping customers and small 
businesses meet their financial needs, regulators should 
consider not only the one-time cost and the annual cost of 
compliance, but also the impact on innovation, new product 
development, and the overall diversion of resources from 
meeting customer needs.
    Regulatory agencies should also consider how the various 
regulations overlap and interact. While one regulation might 
not be a problem, the issuance of numerous regulations at the 
same time can be very challenging.
    For example, we have seen a tremendous amount of change in 
the market space. New regulations on appraisals, servicing, 
loan officer compensation, and underwriting will impact the 
mortgage market as banks work towards compliance while seeking 
guidance on the new rules.
    One area where we find ourselves seeking answers is the 
Qualified Mortgage rule. As we prepare for the January 2014 
compliance date, we face some difficulty waiting for guidance 
from the CFPB. We need more clarity and enough time to comply.
    While we continue to move forward with the implementation 
of the CFPB's mortgage rules, we anticipate additional impacts 
from the Qualified Residential Mortgage (QRM) rule and Basel 
III, both of which also affect mortgages.
    The impact of Basel III on home equity lines may also harm 
small business owners who use them to start, fund, and expand 
their businesses.
    We are hopeful that regulators will provide the industry 
with a coordinated final QM rule to provide the clarity we as 
an industry constantly seek during any period of regulatory 
change.
    The absence of regulatory clarity is a difficult cost to 
quantify and may hinder a bank's ability to fully comply by a 
rule's specified effective date. Our systems are complex, they 
are intertwined, and they are very costly to change.
    When rules are not clear or there is uncertainty about 
future rules, financial institutions will minimize risk by 
delaying or eliminating new products and services.
    One way this can occur is when enforcement actions are used 
by regulators as a proxy for industry guidance instead of using 
the formal regulatory process. Enforcement actions that are not 
grounded in clear rules provide little clarity for the 
industry.
    Exams are the hallmark way in which consumer protection and 
safety and soundness are maintained by regulators; however, 
supervision can become unnecessarily burdensome if the 
examination process is inefficient, if the rules are too 
complex, if there are multiple regulatory agencies covering the 
same examination territory, or if the process is unnecessarily 
slow.
    We applaud this subcommittee for its work to improve the 
exam process and CBA looks forward to working with the 
subcommittee in the future.
    We would also suggest the subcommittee review 
inefficiencies in both the ESIGN Act and the CARD Act's rate 
increase review requirement to further reduce regulatory 
burden.
    In conclusion, we expect the regulatory environment to 
remain challenging as the CFPB and the prudential regulators 
issue more rules including QRM, Basel III, and others.
    It is important to understand how excessive and unnecessary 
regulations are costly are to consumers. The more clarity, 
coordination, and cost-benefit analysis we see, the better we 
can serve our communities and prevent unintended consequences. 
Thank you.
    [The prepared statement of Mr. Kim can be found on page 65 
of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. William A. Loving, president and 
CEO of Pendleton Community Bank, on behalf of the Independent 
Community Bankers of America.
    Welcome.

   STATEMENT OF WILLIAM A. LOVING, JR., PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, PENDLETON COMMUNITY BANK, ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Loving. Chairwoman Capito, Ranking Member Meeks, and 
members of the subcommittee, my name is William A. Loving, Jr., 
and I am president and CEO of Pendleton Community Bank, a $260 
million bank in Franklin, West Virginia. I am also chairman of 
the Independent Community Bankers of America, and I testify 
today on its behalf.
    America's 7,000 community banks, including those located in 
rural and small towns, are dedicated to lending in their 
communities and supporting their broad-based economic recovery.
    Unfortunately, in addition to the existing regulatory 
burden, a glut of new rules that are not proportional to our 
size, business model, or risk is stunting our potential to do 
so.
    Sensible, targeted, regulatory relief will allow community 
banks to realize their full potential as catalysts for 
entrepreneurship, job creation, and economic growth.
    To that end, ICBA has developed a package of legislative 
recommendations known as the Plan for Prosperity that will go a 
long way in rebalancing our regulatory burden and will allow us 
to invest more of our private capital and labor resources in 
serving our communities.
    Because my time is limited, I will focus on the mortgage 
provisions of the plan. We believe that portfolio lending, 
because it provides an overriding incentive for lenders to 
ensure a loan's affordability and performance, should be the 
principal criteria for protecting community banks from 
heightened litigation risk and exemption from costly new 
requirements.
    Such protections and exemptions are essential to preserving 
a private capital lending model. This model has worked well for 
decades, experienced a low default rate, and is often the only 
source of credit for many customers and communities.
    In the rural areas I serve, many loans are ineligible for 
sale into the secondary market because of stringent appraisal 
requirements, because the house sits on an irregular or mixed-
use property, or because the borrower has a nontraditional 
income.
    I am happy to hold these loans in my portfolio; however, 
the only way I can manage interest rate risk is to structure 
the transaction as an ARM loan or a ballooned loan which is re-
priced and renewed at maturity; typically 3 to 7 years.
    Because these loans cannot be securitized, they must be 
funded through retail deposits which include higher cost CDs. 
For this reason, the required pricing often triggers the 
regulatory definition of higher-priced mortgage loans, which is 
based on an unrelated secondary market index.
    But this lending model is at risk. New CFPB rules would 
only provide Safe Harbor litigation protections to balloon 
loans made by lenders that operate predominantly in rural 
counties. Applying the narrowly defined rule designation at the 
county level produces arbitrary results.
    Many community banks that have all the characteristics of 
rule lenders will fail the test. To illustrate the problem, 
attached to my written testimony is a State-by-State map of 
rural county designations based upon the criteria that CFPB 
will use. I urge you to look at your own State. You may be 
surprised at the results.
    In my State of West Virginia, arguably a rural State in its 
entirety, 26 of 55 counties fail the CFPB's rule test. 
Similarly, higher-priced loans, even when that pricing is 
aligned with the lender's cost of funds, risks, and other 
factors, are excluded from the Safe Harbor and will be subject 
to an escrow requirement for taxes and insurance.
    For low-volume lenders in particular, an escrow requirement 
is expensive and impractical. Our recommended solution avoids 
the torturous analysis required by the CFPB. It is clean, 
straightforward, and easy to apply: provide QM Safe Harbor 
status and an exemption from the escrow requirement for all 
community bank mortgage loans held in the portfolio.
    Additionally, the escrow requirement is unnecessary for 
portfolio lenders like Pendleton who have every incentive to 
ensure that the borrower can make tax and insurance payments.
    These burdens will simply curtail prudent lending to 
qualified borrowers who have no other sources of credit.
    Before closing, I would like to thank Chairwoman Capito and 
Congresswoman Maloney for introducing H.R. 1553 yesterday, 
which will provide for needed examination reforms called for in 
the plan to prosperity.
    I would also like to thank this committee and the House for 
quickly passing the Privacy Notice Confusion Elimination Act, 
another key provision of the plan introduced by Congressman 
Luetkemeyer.
    Finally, we are grateful to the members of this committee 
who have introduced additional provisions for the plan for 
prosperity. Thank you again for the opportunity to testify.
    [The prepared statement of Mr. Loving can be found on page 
76 of the appendix.]
    Chairwoman Capito. Thank you.
    Our final witness is Mr. Preston D. Pinkett, III, president 
and chief executive officer, City National Bank of New Jersey.
    Welcome.

    STATEMENT OF PRESTON PINKETT, III, PRESIDENT AND CHIEF 
      EXECUTIVE OFFICER, CITY NATIONAL BANK OF NEW JERSEY

    Mr. Pinkett. Thank you, and good morning.
    I am president of City National Bank of New Jersey. We are 
a $350 million African-American-owned and operated bank 
headquartered in Newark, New Jersey.
    At $350 million, that makes us the 7th largest African-
American bank in the country, and so I would like to talk a 
little bit about the difficulty minority banks are having as 
they deal with, sort of, all of the regulation and the business 
challenges we face.
    We are regulated by the Office of the Comptroller of the 
Currency. We are also regulated by the Federal Reserve because 
we have a holding company, and we are regulated by the FDIC, of 
course. And I could go on.
    And so, the regulations continue to pile up. As Ranking 
Member Waters mentioned--thank you very much--I am on the 
advisory board for the Office of the Comptroller of the 
Currency's Minority Depository Institutions Advisory Committee 
which is focused on trying to figure out what the regulators 
can do to improve access and support minority institutions.
    It is an effort that is focused on trying to make a 
difference in the communities where minority institutions 
function, and I think there is a lot of work that is happening 
and we are very pleased to be part of that.
    I accepted the job focused on minority institutions because 
I think it matters. I think this work is really important. 
There are a small number of minority depository institutions 
and an even smaller number of African-American institutions 
focused in America and we need to preserve those institutions.
    The largest challenge we face, I think, is that there is 
regulation in FIRREA Section 308 that speaks to the need for 
the regulators to preserve minority institutions, support 
minority institutions.
    What I hear from the regulators is that they don't have 
guidance from this body on what that means. So they have no 
specific authority or no specific guidance on how to make life 
a little more bearable for minority institutions.
    They understand the struggles we face. We are in high-risk 
markets engaged in high-risk business but they don't have 
levers or opportunities to, or even direction as to what it 
means to preserve and protect those institutions to support 
them.
    I really would like to applaud the work--the intention of 
this committee because I think that there is a lot to be done 
and it is important of course to continue to focus on securing 
the safety and soundness of the economy as well as of these 
institutions.
    We want to be fair. We want to be responsive to community 
needs. The banks that I work with in the National Bankers 
Association are all interested in the communities that they 
serve and no one wants to take advantage of consumers, and I 
think that is a fair assessment of all of the community banks 
that I know.
    It is important that this body understand that access to 
financial services through low- and moderate-income communities 
is essential and that it be through regulated institutions.
    If we were to fail, if we were unable to serve our 
customers, they would be forced to use alternative service 
providers and those service providers would charge much more 
and have much less compassion and understanding about how to do 
business with our customers.
    We understand that there is a commitment to consumers and 
we share that commitment. The degree to which there can be some 
flexibility in business models so as to ensure the products and 
services we offer are reflective of that which the community 
needs is important to us.
    Let me just touch on some of the things that haven't been 
mentioned. A lot of what I have prepared has already been said, 
so I don't want to repeat that over again. But there are some 
things with which those in our industry are struggling.
    We have TARP funds and the TARP redemption process is one 
in which it is unclear and for our institutions which are 
minority-owned because they are 51 percent minority-owned, the 
ability to raise capital is not quite as easy as it is for 
larger institutions or even non-minority institutions, and so 
the TARP redemption process being made clear and giving us 
sufficient time to align the resources we need would be 
helpful.
    We have gone through the process with the Capital Purchase 
Program. And next, that will be the Community Development 
Capital Initiative, the CDCI funding. Those institutions have 
not yet, in most instances, plan for how they will deal with 
that redemption.
    Tax policy: we have deferred tax excesses due to losses. To 
the extent that we could work out a solution for minority 
institutions so that the change of control provisions in 
investments don't adversely affect them when they raise 
capital, that would be helpful in sustaining the institutions 
and allowing them to survive.
    And on the last, I would just like to ask you to please 
encourage the Community Development Financial Institutions fund 
in Treasury to continue to support minority banks and minority 
institutions as they reach out to the communities to do the 
business of helping to turn the most needy areas of this 
country around. Thank you.
    [The prepared statement of Mr. Pinkett can be found on page 
144 of the appendix.]
    Chairwoman Capito. Thank you.
    I thank all of the witnesses, and we will now begin the 
question portion of the hearing. I will recognize myself for 5 
minutes.
    Several of you mentioned the costs of compliance but you 
mentioned that there was a 2001 survey which found that nearly 
half of the banks surveyed point towards compliance as the 
reason for not offering a new product, no longer offering 
certain accounts, or market expansion.
    I am interested in the effect this is having not only on 
the institution, but the consumer, and I think Mr. Kim and Mr. 
Burgess, you mentioned this in your testimony. What types of 
new products or new accounts are you talking about when you are 
talking about that?
    Mr. Kim. One thing that comes to mind are prepaid cards. 
Those are popular with a lot of consumers now whether they are 
gift cards or payroll cards or a general purpose reloadable 
card, and there has been a lot of regulation recently around 
those products that probably make the business case for them 
just kind of completely go away. And so, we would--
    Chairwoman Capito. For a community bank?
    Mr. Kim. Right. For a community bank and maybe for anybody. 
A bad regulation can hurt everybody in that case.
    Chairwoman Capito. Right.
    Mr. Kim. So, that is one area where we have seen some real 
problems and that is a product we issue. For instance, there 
were some regulations in a Q&A format that were put out 
recently which caused us to stop selling gift cards in our 
branches for a period of time until we get some clarity on the 
regulation.
    And so, customers are just not getting those products and 
others will shy away from those kinds of products because we 
have regulatory ambiguity.
    Chairwoman Capito. Right.
    Mr. Burgess, did you have any other suggested products, or 
where you are limiting your market expansion because of this?
    Mr. Burgess. Madam Chairwoman, I wouldn't say that it has 
limited us yet, but the two major concerns I have would be on 
the mortgage side because we are a relatively large mortgage 
lender for our size bank, and with some of the things that are 
coming out in the QM rules and a few of the other things that 
are coming out, we have a concern that the box is becoming so 
small for people to fit into and the risks are becoming so high 
to be outside that box from our standpoint, depending on how 
all of this comes out, we will have to make a decision as to 
whether we stay in the mortgage lending business.
    We are not as big of a retail lender outside of the 
mortgage business, but retail lending has some of the same 
concerns with some of the compliance issues that are arising.
    Chairwoman Capito. All right. Let's talk about Qualified 
Mortgages. It came up in everybody's testimony. This is my 
concern--as you mentioned the narrow box--you folks are in 
business obviously for your shareholders and to do the right 
thing.
    What kind of consumer do you envision that once these rules 
become--even if they are--let say that they lack the clarity 
because they are not going to be clear. Let's face it; it is a 
new world out there. And so, it is going to be more difficult.
    So you are going to err on the side of caution, I would 
imagine. Instead of saying, ``I will take the risk on this,'' 
you are going to pull back.
    What kind of consumer is the one who is going to be most 
hurt? I would imagine Mr. Pinkett might have a--because you 
dealt with higher risk. What kind of concerns do you have about 
your consumers in this new, Qualified Mortgage world?
    Are you just going to write less mortgages or--
    Mr. Pinkett. I'm sorry. It certainly becomes difficult to 
write as many mortgages. It becomes more of a factory as 
opposed to a customized consumer product. So the challenge of 
all the regulations that dictate what the product should look 
like is that they also dictate what the customer should look 
like--
    Chairwoman Capito. Right.
    Mr. Pinkett. --and it leaves less flexibility. I think the 
direction of ensuring that the consumer has choices and 
ensuring that the consumer is well-served is important, but I 
would offer that the regulators could ask us to justify how the 
product works in a way that is supportive of the customer as 
opposed to telling us what the product should look like.
    Chairwoman Capito. Excellent suggestion.
    Mr. Loving?
    Mr. Loving. As indicated, the QM rule has a narrow 
definition as it relates to the rule designation. That is a 
problem for us simply because of the high price mortgage, but 
you also will find farmers who have seasonal or nontraditional 
income. They fall outside of the income requirement.
    They may have high-wealth individuals who have substantial 
assets that historically we have made loans based upon their 
financial history, the financial net worth, but all of a sudden 
their income doesn't meet the criteria and so they fall outside 
the guidelines.
    So unfortunately, this rule will carve out a lot of good 
borrowers for mortgages.
    Chairwoman Capito. Okay.
    Mr. Kim, I have 10 seconds.
    Mr. Kim. I think also physicians, new physicians for 
instance is another area where we tend to be accommodating. 
They are people who are going to make a lot of money at some 
point in the future and they probably wouldn't fit a QM the way 
that we would underwrite them.
    Chairwoman Capito. Oh, actually I did hear that from one of 
my community bankers in West Virginia who sort of specializes 
in that product.
    All right. Mr. Meeks for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman.
    As legislators, one of the challenges we have is that many 
definitions exist for a community bank. And in February, 
Federal Reserve Chairman Ben Bernanke gave a speech on the 
importance of community banking to the economy.
    In that speech, he noted that although community banks 
provide a wide range of services for their customers, their 
primary activities revolve around the traditional banking 
models, specifically taking short-term deposits to fund longer-
term investments such as small business, agricultural, or 
commercial real estate loans.
    So my question, Mr. Burgess, is do you think it is more 
appropriate to define a community bank by its activities rather 
than the size of its balance sheet?
    Mr. Burgess. I would say that would be true because I think 
what should be done is we should look at the risks that a bank 
is taking to determine how much regulation needs to be there 
and not necessarily the size.
    Because there can be some fairly large regional banks that 
are just plain vanilla, providing plain-vanilla products and 
they are not taking a lot of risks that would create a lot of 
risk in the balance sheet, and I think the regulations are to 
be focused on risk and not on size.
    Mr. Meeks. Mr. Loving, would you support reforms that are 
targeted towards community banks that focus on providing 
services in ``traditional'' banking?
    Mr. Loving. I believe community banks are those that have 
operated and operate in the traditional banking model except, 
as you said it, short-term deposits and fund long-term 
investments.
    I think the risk model and the risk matrix that they employ 
is the definition of the community bank. They lend locally. 
They are relationship lenders. They know their customers. They 
are operated locally, and so I would agree.
    Mr. Meeks. Mr. Pinkett, could you tell us, have your 
interactions with regulators suggested that they are concerned 
about the preservation of MDIs?
    Mr. Pinkett. It has suggested that they are concerned. I 
think it has also suggested that they don't know how that 
concern translates to action.
    Mr. Meeks. What do you think would help preserve the MDI 
status? For example, CPP and raising capital?
    Mr. Pinkett. I think the--in dealing with the TARP issue 
and how that capital has flowed to the institutions and then 
how it gets paid out is a challenge.
    I think that part of the challenge is that we have to 
reflect the value of the institutions today as we redeem those 
shares and that is a challenge for Treasury, because in some 
sense, I would say Treasury sees this as more debt than equity 
in those institutions.
    But I think that the ability to raise capital really is 
reflective of the ability to manage getting new capital in 
without changing the nature of the institution.
    So focusing on the minority depository institution's 
activities and the fact that it remains focused on minority 
communities and remains managed by minorities and overseen by a 
minority board regardless of the makeup of the shareholders, I 
think would be a big step in allowing them to raise the capital 
they need to be stable and secure.
    Mr. Meeks. Mr. Kim, to what extent if any are compliance 
costs a driver for consolidation in the community banking 
sector? And do you know of any banks that have merged with each 
other perhaps or shut down entirely because they couldn't keep 
up with the compliance costs?
    Mr. Kim. We are very aware of what is going on in the 
community banking market both in banks smaller than us and our 
same size and truly that is a driving factor.
    I heard a story--it is interesting you ask this--last week 
I was sitting with a young man whose family had been in the 
banking business in Kansas.
    He said he made it through the Depression, made it through 
the Dust Bowl, and now he has a cousin who is in his 60s and is 
running a $70 million bank in Kansas and he said, ``They don't 
make a whole lot of profit. What profit that they made, they 
were going to have to invest in hiring compliance officers.''
    And his family, after all those years of being in the 
banking business--he actually said his cousin said, ``I don't 
want to burden my family with continuing to run the bank.''
    Mr. Meeks. Let me just also say though, when we talk about 
the QM rule, I wouldn't be here if the QM rule as proposed 
today was in place when my parents bought a house.
    They would have never qualified for a house under the QM. 
And had they not been able to buy that house, I wouldn't have 
been able to go to college because it was because of that house 
that they were able to finance my education.
    So what we will be doing with the QM rule as it is proposed 
is locking out a whole segment of Americans who want the 
American dream of owning a home, who can then help their 
children get the quality education that they need so that we 
can all prosper in this place--so I am with you 100 percent 
when--if you looked at some of these rules, there were all 
unintended consequences. Some of them just don't make any sense 
to me. The QM rule as proposed is one of them.
    I yield back.
    Chairwoman Capito. Thank you.
    Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman.
    You can see that all the news reporting about congressional 
gridlock has been wrong. We all get along and a great hearing 
of bipartisanship and I think it underscores the fact that this 
issue we are talking about today is not an urban versus rural, 
Democrat versus Republican, liberal versus conservative issue. 
This is an issue that is affecting our country as a whole, and 
I think it is really important that we have more light shed on 
it and we get some congressional action.
    I want to talk about Basel III a little bit because many of 
my Wisconsin bankers, some of whom are here today, continually 
bring this up to me and its impact on their ability to perform.
    We all want to have strong capital requirements. We all 
want to have safe and sound banks. We want to make sure we 
don't have taxpayers bail out the banking industry again.
    So when we look at Basel III and its proposals, why 
wouldn't you all agree with it? And if you don't agree with it, 
what negative impact will it have on your bank's ability to do 
its important job?
    Mr. Loving?
    Mr. Loving. There are several provisions of Basel III that 
concern community banks and concern me personally. The AOCI 
provision will certainly distort capital as interest rates 
move.
    And also the risk weights that are assigned to mortgage 
loans; if you take the Basel III provision and you take the QM 
requirement that is being proposed, that is a significant 
process on mortgage lending that will curtail mortgage lending 
and balloon loans in particular. Just because it is a balloon 
loan, by definition, it will receive a higher risk 
classification although it is not a riskier asset.
    Mr. Duffy. Mr. Burgess?
    Mr. Burgess. I am not even sure where to start on it 
because there are so many provisions in Basel III that could 
have a negative impact, but just to mention a few: eliminating 
trust preferred securities, which were grandfathered under the 
Dodd-Frank Act. We don't have a lot of that, but we have about 
$3 million of it and we have been able to use that as capital 
to help our bank grow and provide more loans within our 
communities and if that is taken away, we are going to have to 
find a place to replace that.
    The complexity of the weightings on each type of loan: in 
the past, we have risk-weighted pools and so you could go into 
the call report and you could figure out what the risk-weighted 
assets were by looking at the call report. You have to do that 
loan by loan, so there is complexity.
    And on the mortgage side, as he just mentioned, as I said, 
we are fairly large in the mortgage business, there are several 
provisions there that in our case, our mortgage loans are 
probably the safest loans that we have on our books. We have 
never foreclosed on a mortgage loan in 15 years. So we are now 
talking about significantly increasing the risk weightings on 
probably the safest part of our portfolio.
    I will stop now for others, but there are a number of other 
things.
    Mr. Kim. I would just say in general, as Chairwoman Capito 
pointed out, the rule was written for the world's banks and it 
makes sense for those systemically important institutions and 
there needs to be some sort of level playing field. It wasn't 
written for us.
    It really does not work for us. Now, the Federal Reserve 
and the way that it interprets the rules maybe will make it 
easier for banks of various sizes to comply by throwing some 
things out but we are not sure. There is no clarity.
    We don't know where that is going, and there have been 
calls from a couple of the FDIC Board Members, Tom Hoenig and 
other gentlemen, suggesting that there is a much simpler way to 
do this, especially for banks in our weight classes.
    Mr. Pinkett. Mr. Duffy, I feel like I should stand up for 
this since no one else has, but I really can't come up with a 
reason why a $350 million bank would want to go through the 
brain damage and difficulty of being--that this legislation was 
set up for, for trillion dollar institutions. It is just not 
appropriate for us.
    Mr. Duffy. And I wanted to make sure everyone had a chance 
to answer the question. I only have 45 seconds left. Does Basel 
III have an impact on a smaller bank's ability to compete with 
the larger bank? Is the cost imposed on a smaller bank greater 
than--
    Mr. Pinkett. Yes.
    Mr. Loving. Yes. It certainly does, and when you add to it 
the competitive advantage that the larger institutions have in 
cost of funding, it just complicates the competitive issue.
    Mr. Duffy. If you had a recommendation, would it be for an 
exemption or would it be for delays? What is the recommendation 
that you would give us?
    Mr. Loving. Exemption.
    Mr. Pinkett. Exemption.
    Mr. Burgess. Exemption. I would say we need to reduce the 
complexity of the rules so that it is much easier to determine 
what the capital needs are. It is so hard to figure that out 
right now.
    Mr. Kim. Neither. And if there is an exemption, it needs to 
be at the level of systemically important institutions, not 
banks like us.
    Mr. Duffy. I yield back.
    Chairwoman Capito. Mrs. McCarthy for 5 minutes.
    Mrs. McCarthy of New York. Thank you very much, and again, 
thank you for having a second hearing on what we can do.
    Mr. Kim, when you were speaking, the only thing I could 
think of is one size does not fit all. Unfortunately, down here 
in Congress, sometimes when the rules go by it is for 
everybody, and it just doesn't work out, and most of us here 
agree with that.
    I wanted to ask you, the alternative products that help 
move the underbanked and the unbanked into the financial system 
are of great interest to me and to my constituents out on Long 
Island, New York.
    It is important that there are safe, regulated products 
available to people that allow them to build their confidence 
and trust in the banking system while providing Main Street 
banking which many of us grew up with and we happen to like our 
local bankers to go in.
    So I guess in your testimony you were discussing 
conflicting regulatory requirements that make offering short-
term, small-dollar products very difficult, as well as 
inconsistency on certain regulatory requirements that make it 
difficult for banks to offer products that provide consumers 
access to funds to fill short-term gaps. You explained that a 
little bit, but could you go into that a little bit more 
detail?
    Mr. Kim. Sure. There is a need for short-term liquidity 
products. You can see it; little offices spring up in various 
areas of town for payday loans or title lending or any of those 
kinds of things. Some people do use the overdraft method to 
finance their short-term cash needs, which is not a very 
prudent way to do that.
    And I think to the extent that we can move those loans into 
the banking system and there is some sort of a Safe Harbor that 
we can operate under to offer those kind of products and we 
have to be able to offer them profitably.
    Frequently what happens and what kind of scares many 
bankers away from providing products to lower-income consumers 
is there is regulatory risk and there is also a lack of a 
business model and a lot of times people are willing to pay for 
things that maybe we don't think they should.
    How many of us have adult children who are willing to pay 
$5 to get cash out of an ATM despite the fact that we say, 
``Don't do that.'' They do that. They want the convenience. 
That is what they want.
    So I would say that if there was a Safe Harbor, a clear 
definition of how those products could work, we would all be 
better off if the banking system provided those as opposed to 
the nonbanks.
    Mrs. McCarthy of New York. Just a follow up, and this is 
going to be general to those who want to answer it, I had read 
the GAO report from 208 to 211 and we learned that many of the 
small bank failures during the financial crisis were attributed 
to high concentration in commercial real estate loans 
associated with poor underwriting in management in the 
institution itself.
    I am interested in hearing how you would propose to address 
these issues so that small banks may continue to lend while 
maintaining the safety and soundness of the institution.
    We do know that a lot of banks did fail and most of the 
areas that I was looking at on the map were probably areas that 
had high concentrations of large construction loans. How do we 
handle that? How would you all handle that?
    Mr. Burgess. I think in our particular case, we actually do 
make quite a few CRE-type loans, but we manage our 
concentrations and we make sure that we stay within the safe 
concentration levels that we should.
    And I think the regulators are doing a really good job of 
looking at that now and making sure that everybody has strong 
concentration policies in place to make sure that you are not 
putting all of your eggs in one basket.
    Mrs. McCarthy of New York. So you basically agree with 
those regulations, to keep that stronger so the banks don't 
fail?
    Mr. Burgess. I think that is one of the risk mechanisms 
which need to be there. If you put all your eggs in one basket, 
you are taking the risk that if things go bad in that area, it 
can take the bank down.
    Mrs. McCarthy of New York. Mr. Pinkett?
    Mr. Pinkett. Yes. I am in one of those banks that was 
overconcentrated in commercial real estate. That is how I got 
my job. I think the solution is to have--the regulatory 
solution, I mean, there is a management solution, which is 
better management. The regulatory solution would be to identify 
where there is poor management and actually to encourage 
management changes and to look at the bank not from a 
``gotcha'' point of view but from how a, ``Can I help you 
survive and move forward point of view?''
    That is guidance the regulators just don't have at this 
moment, but we are seeing more of it, I would say at least from 
my primary regulator, and having more productive conversations, 
which I think will help the banks succeed.
    I don't think there is anything this body or any other body 
can do if management is poor and continues to make bad 
decisions, but what we can do and what we ought to do for the 
taxpayers is to identify poor management and do as much as we 
can to move them out as quickly as possible.
    Mrs. McCarthy of New York. Thank you.
    Thank you for all your testimony.
    I yield back.
    Chairwoman Capito. Thank you.
    Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Capito.
    Thank you all for testifying, and thank you for making 
loans in our communities. I want to follow the chairwoman's 
questions about the Qualified Mortgage, the QM rule that the 
CFPB issued.
    Now, let me just go across-the-board, each one of you, yes 
or no, do you make mortgage loans?
    Mr. Burgess?
    Mr. Burgess. Yes.
    Mr. Kim. Yes.
    Mr. Loving. Yes.
    Mr. Pinkett. Yes.
    Mr. McHenry. Fantastic. We have seen from the CFPB the QM 
rule. I don't know if it is quite as thick as the Bible, but 
let's just say it is a little long and very complex.
    How many of you intend to make mortgages outside of that QM 
box?
    Mr. Burgess. Under no circumstances.
    Mr. Kim. We are still evaluating that.
    Mr. Loving. We are evaluating the implication as well of 
making mortgages outside of the designation because of the risk 
potential that is possible.
    Mr. Pinkett. We are also, the risks, but also the need that 
we see in the communities that we serve.
    Mr. McHenry. So there is a give-and-take and you would like 
to make mortgages outside of the QM rule and you are trying to 
figure out how to do that?
    Mr. Pinkett. We would like to service our customers if we 
can, yes.
    Mr. McHenry. And so the implication there is that the QM 
does limit your ability to do so?
    Mr. Pinkett. I believe it does.
    Mr. McHenry. Okay. Now, it is interesting because Richard 
Cordray, who under some reports has a position at the CFPB, and 
under other reports is unconfirmed--anyway, we will get into 
that issue at some other point, I would hope.
    But anyway, Mr. Cordray gave a speech at the Credit Union 
National Association--I don't think any of you on the panel 
were invited to that, but needless to say, I think some of you 
might have seen his comments that he wanted to encourage 
institutions to lend outside of the Qualified Mortgage rule.
    Let me just ask again. Mr. Burgess, any interest in doing 
that?
    Mr. Burgess. In our mind, we make about 1,000 loans or so a 
year and to have that much unmeasured risk out there that we 
cannot evaluate on an ongoing basis for the life of the loan is 
something that we just don't feel we can do.
    Mr. McHenry. Okay. So no interest.
    Mr. Burgess. No.
    Mr. McHenry. All right. Last week, it was reported that the 
White House is ``encouraging lenders to use more subjective 
judgment in determining whether to offer a loan.''
    Now of course, this contradicts Dodd-Frank. It also 
contradicts the rule put in place by the CFPB and what I am 
hearing from the industry is that runs counter to the 
encouragement of all their regulators.
    I am not asking you to testify against your regulators; I 
certainly want all of you to live happy and productive lives, 
and that is probably not the easiest way to make that happen, 
but just give me a little word about the conflicting messages 
you are receiving on this matter in particular.
    Mr. Kim?
    Mr. Kim. There is a continual friction between safety and 
soundness, the regulation and then the need to make loans in 
underserved markets and in fact the QM rule probably makes it 
harder to make loans in underserved markets.
    And so, if we comply with QM, we will make fewer loans 
there and they will rap us on the knuckles for not making the 
loans.
    So that is an example of where the lack of clarity or the 
conflict in the regulation is a problem.
    Mr. McHenry. Mr. Pinkett?
    Mr. Pinkett. We have not had any issues with our regulators 
on this topic. In general, I think it is a matter of, we both 
have the same interest, which is exactly as you phrased it, 
which is, how do you service customers and how do you run a 
safe and sound institution?
    Those two things sometimes are in competition and the test 
should not be a hard and fast rule. The test should be, are we 
using good quality judgment in making a decision?
    For us, it is a little different. We are not as large so we 
don't--we wouldn't set it up as a line of business, non-QM 
loans. What we would do is we would have to look at it on a 
one-by-one basis and make intelligent decisions with the 
information we have about our customers.
    Mr. McHenry. So you would like to be able to make those 
subjective decisions to give community lending?
    Mr. Pinkett. I think it is really the only way we can do 
the work that is really needed in this country. There are 
enough big banks that are underwriting to scores and numbers.
    The customers come to us because they say, ``We can't get 
anyone to listen to our story.'' When we talk to small business 
owners who say, ``I haven't been in business for 3 years and so 
therefore I can't get a banker to even come visit me because I 
don't have 3 years of financials,'' and they say, ``Thank God 
you can, because this is the only chance I have to get the 
money I need to grow my small business,'' that is what 
community banks do, and we just happen to do it in a community 
where there is even less opportunity for that kind of 
conversation.
    Mr. McHenry. Thank you.
    Chairwoman Capito. Thank you.
    Mrs. Maloney for 5 minutes.
    Mrs. Maloney. First of all, I want to thank all the 
panelists for their contributions today, but I particularly 
want to thank Mr. Kim for raising a concern about how spouses 
are treated in access to credit under the Credit Card Bill of 
Rights, which I authored, and it certainly was not my intent in 
any way, shape, or form to hurt women in our economy.
    I do want to say that with the work of Mrs. Capito and 
others, and we have met with Mr. Cordray and I believe he will 
be coming out with a rule that completely addresses that so 
there will be equality of treatment and equality of access.
    But I wanted to thank you for your attention to that and 
sensitivity to it. I appreciate it.
    I would like to start by asking Kenneth Burgess and then 
each one of you for a response to H.R. 1553, which was 
reintroduced yesterday in both the House and the Senate.
    This bill was written during the throes of the economic 
crisis. We were in the process of losing $18 trillion of wealth 
in our country and our phones were ringing off the hook with 
community bankers under tremendous stress: enforced mergers; 
being threatened with closure; and a feeling that their point 
of view was not being heard.
    And we wrote this to respond to this deep concern because 
we knew the value that the community banks were offering in our 
neighborhoods; oftentimes, the only access to credit during 
this period for mortgages and small business loans.
    Now, in the past 3 years, I don't believe I have gotten one 
community bank complaint. During the crisis, they were calling 
every day. They were frantic. They felt like the regulators 
weren't listening to them, and I am wondering, have the 
regulators changed their processes in any way to be more 
sensitive to the community bank concerns?
    Do you think this bill is still needed given the fact that 
the economy has improved and apparently they have made some 
different assessments of being more respectful and allowing the 
Bozeman role to be heard in the agency? Do you think the bill 
is needed and why, and what do you think is the most important 
aspect of it to help community banks in our overall economy?
    Mr. Burgess. Yes, I do. And as I mentioned in my testimony, 
we have not been in a situation, we have been in a little bit 
better economy where we are so we haven't seen the pendulum 
swing quite so far in our area.
    But that is kind of what happens when you have a crisis and 
a lot of the rulings or a lot of the decisions that are made by 
regulators when they come to a bank are subjective and a lot of 
it comes from the perception that regulator has; if they are 
looking at a lot of problem banks before they come in, they 
take a little bit harder line view in making some of the 
subjective decisions that they make.
    So I think it helps if we have an opportunity for an 
independent review of some of those decisions to make sure that 
those are being applied consistently across-the-board.
    And I did experience the 1980s in Texas, and so I did see 
the same types of things at that time and I know how that can 
happen. Fortunately, I am not having to deal with it at this 
time.
    Mrs. Maloney. Mr. Kim?
    Mr. Kim. Yes, I would echo Mr. Burgess' comments that we 
have had a very good relationship with our regulators. It has 
really not been a problem we have experienced. That said, I 
have heard a lot of my colleagues, and as you note, more so a 
few years back, lamenting what has gone on with the regulators.
    And even though perhaps it is not as big a problem now, the 
pendulum will swing back and if there are some independent 
rules and some appeals process, I am certain that the industry 
will appreciate that and it will be well-founded.
    Mr. Loving. Yes, I would agree and although the pendulum 
has swung--things are better in West Virginia--we never went 
through the crisis.
    We have always been fairly stable from an economic 
perspective, but I, like Mr. Kim, heard from colleagues across 
the country that they were under a severe and harsh exam 
environment and I think that the Act as presented will provide 
for the proper method to have a separate review and process for 
the banker to go through if there is an issue.
    And as Mr. Kim indicated, the pendulum will swing back. We 
will go through another crisis of some sort sometime in the 
future, and so this plan in place will be helpful.
    Mrs. Maloney. Mr. Pinkett?
    Mr. Pinkett. I have not had a problem with regulators. We 
have great relationships, I would say, with our regulators. 
They listen; we talk. They talk; we listen. We communicate 
well.
    I don't know--it is so far back I will just say this: 
historically, regulators have not been bankers and bankers have 
not been regulators. The regulators don't understand the 
operations of the institution and the bankers have never 
thought about all of the systemic risks associated with running 
an institution.
    So we have to communicate better. I think that what I have 
seen with my regulators is, and I was at the Federal Reserve in 
New York last week, and we were talking about the fact that 
they were hiring people from industry who understand how to run 
a bank. So I think encouragement on how to be a better 
regulator is really what is important.
    I have not had an issue that I would need to take to an 
ombudsman, but I think having that encouragement and having a 
framework where they understand what it means to be a regulator 
and what their challenge is and making sure that is clear, I 
think would be very helpful. If this legislation could do that, 
that would be great.
    Mrs. Maloney. Thank you.
    My time has expired. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Pearce for 5 minutes.
    Mr. Pearce. Thank you, Madam Chairwoman.
    I thank each one of you as individuals for participating 
today.
    This is the same story that we hear as we go around my 
district. I represent the southern district of New Mexico. Our 
per capita income is about $30,000 to $35,000, in small 
communities, and so your story is exactly the one that we hear.
    I will kind of start where Mr. Meeks was discussing that he 
went to college because his parents could get one of those 
nonstandard loans that Mr. McHenry was talking about, and in 
fact, that is my story, too. There were six kids and I was 
signing notes at the bank at age 13 and 14 all the way through 
high school; $2,000 a year we would buy a pig, show him at a 
local county fair, and we funded six educations--six college 
educations, and yet these stories are going to discontinue 
because of the CFPB.
    So when the CFPB is putting regulations in place that 
should apply to the trillion dollar banks, what they are going 
to do is choke off the small local banks and choke off access 
to capital and for people who would never qualify for a loan at 
one of the big institutions. We just wouldn't. The rates of 
return are not there.
    They are going to fall outside the box. I am hearing you 
all say you are not going to set up products and so this 
hearing is extraordinarily valuable. I look at it as the CFPB 
has a de facto war on the poor because it is the poor who are 
going to suffer when we don't have nonstandard mortgages.
    I was pretty interested in Mr. Pinkett's discussion on--and 
one of my concerns--we talk about GSE reform and privatizing 
GSE's. I guarantee, as a small State with $31,000 per capita 
income, I worry that the rates of return are not going to be 
there because Mr. Pinkett says the mainstream investors seeking 
higher rates of return would have us alter our decades-long 
focus on the most needy.
    And that is, I think, what is going to happen to the small 
rural areas if we have the GSE's that are totally, totally free 
market. We are never going to have a rate of return in Mr. 
Pinkett's neighborhood or my neighborhood, and so what you will 
do is you will take away those 30-year loans for that part of 
the market and again starve us for capital.
    But you mentioned also, Mr. Pinkett, about the unregulated 
nonprofit institutions that you compete with. Could you expand 
on that just a bit?
    Mr. Pinkett. In addition to the large banks and credit 
unions, we also have nonprofit organizations that operate in 
the communities that are able to access capital from the large 
institutions because it is debt capital, because they are 
unregulated, because they have a business model that allows 
them to repay that capital back in a much easier way than we 
would ever be able to do it given the fact that in order for me 
to make a payment back to a bondholder, I would have to get 
approval from at least two of my three regulators.
    Mr. Pearce. I appreciate that, and it is something that we 
don't see much in--that is a viewpoint I think is 
extraordinarily valuable for me today.
    Also, I think you all have adequately stated the same 
concerns our bankers are talking about in Basel III, that you 
weren't involved in any of the risky processes but you are 
getting nailed with the same responsibilities and your 
lending--your portfolios don't look like those large 
institutions, but you are still having to have the same capital 
requirements, the increased risk weighting. We hear that 
constantly.
    I guess not many of you mentioned the appraisal situation. 
That is one thing I hear a lot in New Mexico, that the 
appraisals under CFPB have suddenly gotten very difficult. Is 
that something you all are experiencing? Just a yes or no is 
fine.
    Mr. Loving. Yes, it is something we are experiencing. As a 
matter of fact, we just went to an appraisal management company 
to try to comply with the regulation, which added to time and 
cost of the appraisal.
    And we found cases where we knew the value of the property 
better than the appraiser because they are out of the area, or 
better yet, the appraiser cannot find the needed comps to 
fulfill the requirements and as a result, the loan doesn't 
qualify for the secondary market.
    Mr. Pearce. I would hope to get some comments from 
everyone, but I am going to squeeze one more question in, and 
that is on the flood insurance.
    Again, we are getting tremendous complaints on flood 
insurance. The last flood we had was back there when Noah was 
having his problems and we are getting stuck for what happened 
in Hurricane Katrina and so 1,000-year floodplains.
    Mr. Burgess, you had mentioned flood insurance in your 
written statement. I don't know if you would like to expand on 
that just a bit, the problems you are facing.
    Mr. Burgess. I think right now we are still trying to get 
our arms around the new rules, but I think one of the concerns 
that we have is that the penalties for a mistake are going from 
$500 to $2,000.
    And I guess one of the things we would ask is that you 
consider that penalty applying only to situations where there 
was actually not coverage on the loan for a period of time 
instead of just a technical violation.
    Mr. Pearce. Yes, and again it is a real problem, not a 
problem that you let a date lapse by one day and get stuck for 
$1,000.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Scott for 5 minutes.
    Mr. Scott. Thank you, Madam Chairwoman.
    Mr. Kim, let me direct my question to you, if I may. In 
getting our hands around the definition of what is a community 
bank, in your opinion, what is the asset size threshold or 
limit for a community bank versus say a regional bank?
    Mr. Kim. That is a good question. That is a very good 
question. I would say in terms of--we have talked before about 
application of capital standards and other rules that it should 
be more about the business model than it is about a particular 
asset size.
    So if I am a $20 billion bank and these guys are $1 billion 
banks, and I am doing about the same thing, then I am a 
community bank. I refer to myself as a ``super community'' 
bank, which means I do business in several communities. I bring 
community-like service and a bit broader product line than 
sometimes some of my smaller colleagues might be able to offer.
    So, $50 billion and under might be the sort of a super 
community bank; above that they tend to get called regional, 
but even above $50 million, some of those regional banks can be 
engaged in pretty much the same business we are.
    Mr. Scott. Right. So your bank, Commerce Bank, has an asset 
size of about $22 billion, which could clearly put you into the 
regional bank category, and the reason I am asking this is 
because I think you are the right person to get to this whole 
area of tracking compliance costs.
    So you are basically a regional bank. Now, let me ask you 
this. In what ways are regional banks similar or dissimilar 
from community banks? And I think you are the right person to 
ask this.
    Mr. Kim. We have larger staffs who exist to handle 
compliance problems. I have a very large compliance department. 
I have lawyers. I have people who are solely dedicated to that.
    In today's environment though, I am kind of like you guys 
because--as CEOs, they are spending a lot of their time working 
compliance instead of serving their customers.
    And we are taking a lot of our folks who interface with 
customers and directing them to compliance. That would be one 
difference. I have sort of more staff to take this on, but 
ultimately, it creates the same cost to the consumer.
    Mr. Scott. And what additional burdens do regional banks 
face even though they are not systemically significant in that 
way?
    Mr. Kim. I think I am more likely--for instance, take 
stress testing. Banks above $10 billion have to, starting this 
fall, undergo stress testing. Some of my colleagues at the $50 
billion-plus institutions are submitting 8,000-page documents 
for stress testing on an annual basis.
    Right now, I am interviewing consultants who are going to 
cost between $500,000 and $1 million to help me with stress 
testing. I am taking my best and my brightest data analytics 
people out of the business line and bringing them forward to do 
stress testing, which if you looked at our record, in terms of 
safety and soundness and loan losses, I am spending a ton of 
money on something that is unnecessary for a bank with my 
capital level and my history.
    Mr. Scott. So we know the importance of regulatory relief 
for the community banks. How important is regulatory relief for 
regional banks?
    Mr. Kim. I think it is extremely important. I think it is 
important to both. I think the risk on the smaller banks is 
that many of them are going to be forced to combine.
    On the regional banks, it is more that we take our eye off 
the ball of serving the customer, we raise the costs, and 
eventually we can get squeezed out, too, and then we are left 
with just the large banks.
    Mr. Scott. And finally, on the tracking of compliance 
costs, the FDIC did a study and interviewed a number of banks 
on how they track regulatory compliance and every one of them 
said that they didn't track regulatory compliance costs within 
their bank's internal cost structures because it was too time-
consuming, it was too costly, it was interwoven into their 
operations, and it would be too difficult to break out specific 
costs.
    Is that a general consensus? My point is, you have come to 
a conclusion as to what your bank's annual cost to comply is. 
And I was wondering, did you fall in that category? Do you have 
an estimate of compliance costs? And what would it be?
    Mr. Kim. It would be easier for me to do it and I don't 
have it off the top of my head.
    One thing I looked at last year is we have spent about 
100,000 hours creating new products in our information 
technology area; programmers and things working on new--15,000 
of those 100,000 hours last year was devoted to compliance 
matters.
    It was about 10 people--and that is just in the IT 
structure. Like I said, I have lawyers and compliance people 
and business line people who normally are interfacing or 
thinking about products and they are thinking about compliance 
now, and those are the people that it is hard to judge their 
time.
    Although I will say I am tracking time on stress testing 
because that is going to be a killer and I am going to want to 
be able to tell somebody someday how much time I spent on that.
    Mr. Scott. Thank you very much.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    The other day I was reading The Wall Street Journal, and 
there was an article by Sheila Bair, former FDIC Chairman, and 
in the article she talks about the risk weight models that were 
introduced as a result of Dodd-Frank, by a lot of banks, and 
how the difference between the megabanks and their risk models 
with regards to how they affect capital as well as the risk 
models that community banks use.
    And it was interesting because they were in there. She 
indicates that--I will give you a for-instance here. For 
instance, Morgan Stanley, in their weight risk model, the 
capital asset ratio or capital or the risk-based capital ratio 
was 14 percent by their particular model.
    But if you take out the model and use it the way it should 
be done, in the old way it was down to 7 percent; it cut their 
capital in half.
    The other bank they were putting in this article here was 
U.S. Bancorp; they are just basically a big community bank of 
$350 billion. With their particular risk weight ratio, they are 
a little bit over nine, but when we went to the original risk 
based ratio, they were just at nine. So suddenly, they became a 
much better capitalized bank then Morgan Stanley, and I think 
this is a concern that I have with regards to what is going on 
with our community bank situation.
    Have you seen, gentlemen who are here this morning, this 
type of situation affecting your ability to do your job and the 
competition with the big banks? Do you understand what I am 
asking?
    Mr. Burgess. I don't think at this point in time it has, 
but when somebody is trying to calculate what the effect of 
Basel III is on capital levels, the data to do that calculation 
does not exist in a public format.
    The level of detail that you have to go through to 
determine what the risk weightings are to determine those 
capital ratios is not available.
    Mr. Luetkemeyer. I think there is a fairness issue here 
though from the standpoint that these big guys all get to do 
their own risk models, where you all basically don't have all 
these other risky investments to sort of go out here and--when 
you are risk weighting a real estate loan, let's be honest, 
there is not a whole lot of risk there to that.
    But when you are talking about derivatives and securities, 
mortgage-backed securities, and all sorts of other products out 
there that are risky, and they are all guessing at what this 
is, it certainly puts them at a--whenever the regulators are 
not trying to put all this on a level playing field, there are 
a whole lot of problems here, I think.
    Mr. Kim. I think what you are illustrating there is the 
difference between those guys at the top with the complex 
business models that hold a lot of different assets, and maybe 
they are able to alter those models to make capital ratios look 
better.
    I am not going to pass judgment on whether they are doing 
that or not, but the problem really comes when you try to take 
that same level of information, that same level of modeling, 
and push it down on us and it was not created for banks our 
size and it is not going to work well for banks our size.
    It is going to put us through a lot of work that yields 
nothing because we don't have the kind of complex assets and 
risky assets that some of our brethren at the trillion-dollar 
level have.
    Mr. Luetkemeyer. I think it really is sort of--it doesn't 
help the big guys because there is not a level playing field of 
a model there that actually compares them all. It doesn't make 
any sense.
    So anyway, I will move on here. I know that HMDA exams are 
a pain in the neck for all banks and I see a lot of heads 
shaking already and the other day one of my local bankers gave 
me a quick sheet that they had done, a sort of survey of the 
civil money penalties that were assessed by the FDIC, the OCC, 
and the Fed with regards to exams over a 2\1/2\-year period 
from 2010-2012.
    And the FDIC came up with 166--and this is the State of 
Missouri, now where I am from--civil money penalties that they 
assessed over a 2\1/2\-year period and the Fed and the OCC had 
a combined total of five.
    I went to the FDIC, and I showed them this, and I said, 
``As a former bank regulator, this has red flags all over this. 
Can you explain this?''
    And in discussions with the Chairman and Vice Chairman, in 
fact they said, ``Well, we realize we have a problem. We are 
going to start advising our examiners to be more forbearing on 
the first set of exams to see if there is just oversight or if 
they are still learning the rules and regulations. And the 
second time we go in that is when we won't really be willing to 
go start assessing these civil money penalties.''
    Have you seen, over the last examination maybe not in the 
last--in the hope--and have you been examined in the last 3 or 
4 months? I guess that should be the first question.
    Okay. Mr. Loving, have you seen a little bit more 
forbearance with regards to their exam procedures? Because they 
have promised that to me.
    Mr. Loving. I can't say that I have because we just 
recently became a HMDA reporter because of an office we located 
in SMSA, but I will tell you the cost that we have incurred to 
make sure that doesn't happen has increased significantly.
    The number of days that our compliance officer looks at 
mortgage compliance from the 2007-2008 era to today is 
significantly more.
    Mr. Luetkemeyer. I know--if the chairman will bear with me 
one more second here--I am out of time. In testimony in this 
committee prior to this, we have already had bankers talk about 
in a situation like this where when they hire one loan officer, 
they also have to have one compliance officer.
    Is that kind of a standard that you have seen or something 
similar to that?
    Mr. Loving. Recently, we went to an eight-member senior 
management compliance committee in addition to our full-time 
compliance officer who also came to me the other day and said, 
``I believe we need to start looking at another compliance 
person because the job is becoming too intense for me to do the 
review that I need to--to comply to the level that you want to 
comply at.''
    So it is not quite one-to-one, but it is getting pretty 
close.
    Mr. Luetkemeyer. Okay. I thank you for your testimony.
    And I thank you for your indulgence, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Ms. Velazquez for 5 minutes.
    Ms. Velazquez. Thank you, Madam Chairwoman.
    Mr. Loving, community banks, as we all know, play a vital 
role in the small business lending market. We have heard on 
numerous occasions that regulatory burden is a driving factor 
in why community banks aren't lending more to small businesses.
    What role does regulation play versus other factors like 
lack of demand or tight lending standards in limiting access to 
credit for small businesses?
    Mr. Loving. I think it is important to note that community 
banks under $1 billion have actually funded to 60 percent of 
the small business loans in our country. So, community bankers 
are avid small business lenders.
    We have faced, due to the economic environment, a challenge 
in qualified borrowers. Community banks are active lenders in 
the community and we want to lend in the community but we do 
have challenges because of the perception from regulators, or 
for guidance, or from regulation itself that prohibits us from 
making a particular loan.
    So I can't say it is one thing, but it is a combination of 
many factors that had come into play when you hear that the 
banks aren't lending, but I can tell you we are all in the 
business of supplying credit to our communities and we are 
certainly looking for qualified borrowers to fund.
    Ms. Velazquez. However, at the height--and I would like to 
hear from Mr. Kim--of the credit crunch in 2009, thousands of 
valuable small businesses struggled to find credit because 
banks and credit unions were either unwilling or unable to 
lend. And we are not talking about unqualified borrowers.
    Today, however, the situation has reversed, as lenders are 
more willing to make loans while the number of borrowers in 
search of credit has dried up. With demand weak, what steps 
have your banks taken to attract borrowers and increase small 
business lending?
    Mr. Kim. Small business lending and small business people 
are great customers for banks. They typically do their personal 
business with you as well as their small business and maybe 
even some of their employees bank with you.
    So we are making great efforts to try to analyze our 
customer base to see who is involved in small business, 
reaching out to them, and offering them products. Maybe it is 
taking credit cards or maybe it is different kinds of services 
that might bring them into the bank and garner those 
relationships.
    It is difficult in that when you look at the 
creditworthiness of people who have been through the credit 
crisis, a lot of people took hits and a lot of small business 
people maybe are out of a job and they are starting a small 
business.
    Those are tough things for banks to lend into. You need an 
equity partner there, not a bank partner, when you are starting 
up that kind of business, but sort of at that next level up, we 
are reaching out and trying to get that business.
    Ms. Velazquez. Yes, Mr. Pinkett?
    Mr. Pinkett. I will just pick up on Mr. Kim's point. I 
think a lot of times we talk about capital for small 
businesses. We should leave open the possibility that what 
small businesses need is equity capital, not debt capital.
    And so, the idea that all small businesses should be able 
to borrow regardless of the situation of that business is one 
that we have been working to disabuse some of our customers of.
    Good customers, but we explain to them that this is not a 
debt need. It is an equity need because debt could put you out 
of business and that is the conversation that we don't have 
often with our customers in general, but we are starting to 
have with our customers so they understand our commitment to 
them is our commitment but it doesn't mean that the solution is 
a loan.
    Ms. Velazquez. But we do see that the bigger loans, those 
above $250,000, are much easier if we are talking about 
qualified borrowers.
    Mr. Pinkett. Right.
    Ms. Velazquez. Where we see a gap is between those smaller 
loans, and we are talking here about debt, those loans to help 
people start up their businesses for example. We didn't see or 
we haven't seen business formation at the rate that we saw in 
previous recessions like in the 1970s and 1980s compared to the 
one that we are seeing today.
    Mr. Pinkett. Yes, I would say that we are making small 
business loans but small business loans are harder to make in 
this economy than they have been in the past because the small 
business owners are not able to generate the revenue as quickly 
as they need to make that level, that debt service payment, and 
so that is the challenge.
    Helping them ramp up to get to a place where they are 
stable enough is the challenge. It is a lot easier to make 
larger loans to larger businesses because they have that 
capacity.
    And then the SBA's involvement in this process and their 
ability to provide guarantees that we can rely on that, that we 
can work with them to come up--
    Ms. Velazquez. Those are the loans the community banks and 
other banks are making. Those guarantees by the SBA, by the 
Federal Government. And even with those that are guaranteed by 
the Federal Government, and when we increase that guarantee 
from 75 to 90 percent, what you saw is that the banks were 
making the big loans but not the smaller loans.
    Chairwoman Capito. The gentlewoman's time has expired.
    Mr. Barr for 5 minutes.
    Mr. Barr. Thank you, Madam Chairwoman.
    The tradition of community banking in Kentucky has always 
been based on the three C's: collateral; capacity; and 
character, and the last point is what I want to focus on a 
little bit.
    Community banking is relationship banking. It is based on 
trust. Many times, community bankers go to church with their 
borrowers. Their children grow up together. It is about knowing 
your customers and trusting the discretion and business 
judgment of the banker.
    So banking can't just be a fit the boxes defined by some 
government agency, otherwise why even have bankers in the first 
place? My question is, do you get the sense that post-Dodd-
Frank, business judgment and discretion has been removed from 
banking?
    Mr. Burgess. One of the things that I probably pride myself 
the most on in my banking career, my 35 years of banking, is 
that as a community banker, I have been able to sit down with 
each individual customer, whether a consumer, a small business, 
whatever, and listen to what their problem is, listen to what 
their need is, and try to custom design a product and a 
solution for them.
    As that box that we keep talking about gets smaller and 
smaller and smaller, it is taking away our ability for the 
flexibility we need to be able to do that type of thing.
    That is probably the biggest concern I have because we 
can't make those customized decisions as much anymore, probably 
more so on the consumer side right now, but I have concerns 
with some of the new data gathering on the small business that 
we are going to start heading that way there as well.
    Mr. Barr. And while the others answer the question, maybe 
you could also amplify your answer by talking about the types 
of services or products that you maybe are no longer able to 
offer as a result of this removal of the banking judgment 
discretion.
    Mr. Loving. I will reiterate Mr. Burgess. Over my career, I 
have prided myself, and the community bankers pride themselves 
on knowing their customers, and it was heartwarming to hear the 
stories in this room of those who are where they are today 
because of the community banker.
    And at the end of the day, that is what community bankers 
do. We want to build better communities. We know our customers 
better than anyone and to try to fit someone in a box or make 
sure it fits in a box prohibits our ability to do what we do 
best.
    And so, I am very concerned. We have heard about 
subjective, and this group uses subjective models, they use 
subjective thoughts. We have always used subjective methods to 
approve a loan because we know our customer. We tailor the 
product. We tailor the loan.
    But when you start assigning rules and numbers to certain 
data, it is hard to fulfill those guidelines, and we will back 
off.
    And again, as I testified, the QM rule is one that--it 
very, very likely could cut off and strangle mortgage lending 
in community banks.
    Mr. Barr. Let me ask the witnesses also about paperwork for 
the consumers and whether or not your banks are able to collect 
or have you collected data after Dodd-Frank implementation 
about whether or not your consumers feel any safer as a result 
of some of the requirements that are imposed on the consumer 
and the borrower?
    Mr. Loving. If I may say that community bankers have always 
been known to be trustworthy souls, and I am sure many of the 
community bankers here hear the same thing when we go to a 
mortgage closing and there is a stack of papers an inch or two 
inches high. I am not sure it makes the consumer feel any 
better because they are saying, ``Well, just tell me where to 
sign. Just show me where to sign,'' and because they know that 
the product, the service that they are getting from their 
community bank is a trustworthy product and they trust their 
banker.
    Mr. Barr. Final question: I hear frequently that there is a 
disconnect between what the regulators say their mission is 
publicly and what individual regulators do in practice.
    In fact, in Kentucky, my community bankers have told me 
that one of their primary concerns is that there is an 
incentive for regulators to be excessive in their scrutiny 
because that is the way they get promoted.
    And the common frustration is that there is inconsistency 
among field examiners even when they are in the same region. 
Some of you have testified earlier about fear of retaliation.
    Could you all comment on this observation from community 
banks in Kentucky and also specifics about fears of retaliation 
with examiners?
    Mr. Burgess. I don't personally have a fear of retaliation 
because we have had a really good relationship with the 
regulators we have had, and we have not been in an economy 
where we had to worry about that too much.
    But, I think a lot of time the regulators have the best 
interests in mind to do the job the way it ought to be done and 
to be thorough and fair.
    But as I said before, perceptions based on where they are 
can change some of that, and I think there is a fear that above 
them, whoever is evaluating them, if they miss something, they 
could be in trouble for that. So I think that is where some of 
the fear comes from.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman.
    I thank the witnesses for appearing.
    I also think the ranking member for his comments earlier, 
and I would like to associate myself with the comments with 
reference to the community banks and the credit unions being 
the small institutions that have provided a lot of 
opportunities for persons in various communities.
    I like to consider myself a friend of both small banks and 
credit unions. I am not sure that we have a good definition for 
a community bank, but my suspicion is that $10 billion is a 
little bit high for a community bank.
    If I am incorrect and $10 billion is about the right size 
for a community bank, would someone please help me?
    Mr. Kim. I might say $10 billion is a little bit low.
    [laughter]
    Mr. Green. $10 billion is a little low?
    Mr. Kim. And I think the way you need to evaluate who, if 
some bankers are going to get favorable treatment and others 
are not I would suggest--and I am not going to wish unfavorable 
treatment on anybody, but I think you need to examine the 
business model.
    You need to examine what people do and that is more 
important, if banks aren't involved in derivatives trading, 
they don't have complex exotic products, they aren't making 
exotic loans, you know that. And you serve, and the bank is 
engaged in serving their community. I don't think that because 
I happen to serve customers across several communities that 
makes me any less of a community bank than someone who is maybe 
all within one county.
    Mr. Green. All right, let's see if there is another 
opinion. I seem to have hit a nerve.
    Mr. Pinkett. I would weigh in. I think my assessment of the 
industry is this: It is very difficult for a bank under $100 
million to continue to exist profitably. It is going to be 
difficult across the country.
    I think you are going to see that the optimal size of a 
small bank is going to be somewhere in the neighborhood of $1 
billion because that is what it is going to take to have the 
manpower to do all that is required to operate efficiently.
    And I am not suggesting that we should do away with 
regulation in order to allow smaller banks to exist. I think 
regulation is important. Compliance is important. Managing in a 
safe and sound way is important.
    Mr. Green. May I intercede for just one second? I 
appreciate where you are going, but would you do this for me? 
You are using a term that I have not introduced, and that is 
smaller banks. I have said community banks.
    Mr. Pinkett. Right.
    Mr. Green. Am I to assume that they are the same in your 
mind?
    Mr. Pinkett. No, I am about to tie those two together.
    Mr. Green. Okay. Thank you.
    Mr. Pinkett. Community banks, I think, will be in the range 
of $0.5 billion up to and I think your $10 billion number is 
about right. I don't think you are going to find many small 
banks smaller than that surviving, is the point I am making.
    Mr. Green. Is it your opinion that smaller banks should 
survive or should not?
    Mr. Pinkett. It would be great if they could survive; I 
don't see at this moment, given all that is in front of us, the 
possibility.
    Mr. Green. The smaller banks that I talked to do tell me 
that they are, as you have indicated, overregulated, but they 
don't see themselves in the same league, and maybe this is what 
one of our panelists have said, as the $10 billion banks.
    They really see themselves as true community banks. Now, we 
can debate that as to who is a true community bank and who is 
not, but they just see themselves as the real community banks: 
smaller than $10 billion.
    You walk in, you can meet the president, you have people 
working there who pretty much know the people who come in and 
out. They do live in the community--$10 billion banks, 
generally speaking, don't have quite the same relationship in 
their minds as banks that have $100 million, $200 million, 
maybe $0.5 billion.
    And we have a lot of these banks that are coming to me and 
saying, ``I really need help.'' I am not demeaning any of the 
banks, I am just trying to, in my mind, see if there is some 
merit to what these smaller banks--maybe that is a better 
term--smaller banks should receive in terms of attention.
    Mr. Pinkett, would you elaborate a little?
    Mr. Pinkett. That is exactly the point I was trying to 
make, Mr. Green, that there is a--community bank has become a 
term of art. There is a level of bank that I think is smaller 
than that and really needs assistance also, a different level 
of assistance and so--
    Mr. Green. Okay. Let's agree that one size doesn't fit all, 
that community banks, some that are larger, some that are 
smaller, need some help. And I am amenable to doing what I can 
to help.
    In fact, I have agreed to go into my community--one aspect 
of it in any event--and actually visit a community bank. They 
would like to show me, let me have a first-hand view of what is 
taking place.
    And my final question would be this: What one thing should 
I look for when I go into the bank, the smaller bank, the 
community bank, to visit? What is the one thing I should look 
for?
    Mr. Pinkett. I think what you will see is the relationship 
the customers have with the staff. They know each other. And 
there is a sharing because they are a part of the community in 
a different way than you can be if you are $20 billion--or I 
should say $50 billion, not to offend any one size institution.
    [laughter]
    Mr. Green. Mr. Chairman, may I just, in a sense of 
fairness, give Mr. Kim an opportunity to respond?
    If you would, Mr. Kim.
    Thank you, Mr. Chairman.
    Mr. Kim. And I would agree wholeheartedly with what Mr. 
Pinkett said. You go in and look and see the connection between 
the people in the bank with the customers that they are dealing 
with and I would suggest that we go to great lengths to have 
staff in our branches who are engaged with the customers who 
are interested in their communities.
    They are in the Rotary Club. They are doing things to serve 
their community. That is all part of our model. That is who we 
are.
    Mr. Green. Thank you very much, Mr. Chairman.
    Mr. Duffy [presiding]. The Chair now recognizes the 
gentleman from Arkansas, Mr. Cotton, for 5 minutes.
    Mr. Cotton. Thank you all for coming today. Thank you for 
your very helpful testimony and what you do for communities all 
around America.
    In Arkansas, as in so many of your communities, community 
banks are vital for providing credit to families and to small 
businesses, to young people who are just starting out.
    In Arkansas, we don't have much besides community banks and 
a few regional bank presences, also very helpful for local 
charities and schools, so we are very grateful for all you do.
    Sometimes, I hear from some of my constituents in Arkansas 
that banks aren't lending. That is something akin to saying 
that McDonald's is not interested in selling hamburgers. I 
think that most of you make your money by lending and to the 
extent that you are not lending as much as you want is probably 
the result of unwise decisions and actions on the part of 
people in this town.
    I would like to explore a point that Mr. Pinkett raised in 
response to the gentleman from Texas. First, you talked about a 
$100 million bank or less struggling to survive in this 
environment. Could you elaborate a little bit on why that is 
and also what the solution to that is if you are a bank with 
less than $100 million of assets? Do you have the opportunity 
to grow out of that trap or is there no solution to it?
    Mr. Pinkett. I will answer your last question first. I 
don't know the solution, which is why I am suggesting that 
there is a real struggle there. This solution would require 
additional capital. I think it is hard to attract capital at 
that size because the business model is not robust enough to 
cause investors to see where the institution will be able to 
make a go of it in most instances.
    Clearly, the cost of compliance is an issue, but it is not 
just the cost of compliance; it is also the competition. With 
the competition coming from large institutions, from small 
institutions, from regional institutions, from unregulated 
institutions, it is just hard to make that work.
    Most institutions of that size have people doing two or 
three jobs. If you have 15 or 20 employees, you have to have 
people doing 2 or 3 jobs. The ability to learn that, to know 
when one person retires who is doing three jobs, retires and 
you try to replace that person, you can't find another person 
who can do those three jobs that same way. If you fill that job 
with three new jobs, you have already increased your overhead 
costs.
    So I think the revenue stream that can be generated off of 
a $100 million book of business is probably just not 
sufficient.
    Mr. Cotton. Okay. In the debate about the size of the 
community bank, just to give you some context, in Arkansas I 
believe that there are fewer than 10 banks that would exceed $1 
billion in assets.
    There is one bank I have in mind that was started maybe 10 
or 12 years ago. It was probably less than $100 million then. 
It is now one of those few banks that are over $1 billion.
    Do you think that kind of growth is possible in today's 
environment? Can an underserved community create a new bank and 
then have that grow to be a bank that serves an entire region 
of a State like Arkansas?
    Mr. Pinkett. I would say it is possible. I don't know that 
we have created a model, though. And I think that is sort of 
the issue that I would ask you to think about: how do we create 
models and pathways for success?
    One of the things that the regulators I think could do more 
of is help lead the banks to success as opposed to simply 
standing over them and pointing out where there is failure.
    So I would say that turn in the regulator/bank relationship 
would be an important one for future success of banks, which in 
most instances should be considered small businesses, as well 
as for the communities that they serve.
    Mr. Cotton. And is that lack of a model do you think part 
of the reason why there have been so few charters for new 
community banks? I think maybe one in the last 2 or 3 years?
    Mr. Pinkett. I have no idea about that one--
    Mr. Cotton. Maybe if we could just go down the panel and 
get--same two questions about whether that kind of growth is 
possible in today's environment and is that part of the reason 
why there are so few banks starting?
    Mr. Loving. I cannot comment as to why, but I think there 
has only been one de novo charter issued in the last 2 years, 
and I think that is because of the stringent regulations 
required to open an institution and the business model that you 
have to have.
    Unfortunately, many of the de novos that started, they 
factored in their model, broker deposits, and other non-core 
funding deposits and those today are not available. So that 
would prohibit the growth that you saw back at the time that 
you were talking about.
    Mr. Kim. Growth is tricky. If any of us grow our bank too 
fast, you need to look at us closely, because we may be doing 
something we shouldn't be doing. It is hard to get a bank to $1 
billion.
    I think, as you see few charters out there, the business is 
not as much fun as it was when I entered it some 30 years ago, 
and it is not fun for these guys who have to spend, CEOs 
spending time working on compliance.
    And so I don't see a lot of people saying, ``Wow, that is a 
great business that I want to be in.'' Everybody kind of hates 
them right now. So why go out and start one of those? Plus, the 
returns on the small banks side, as Mr. Pinkett explained, and 
I think he is exactly on target--it is hard to attract capital 
for that.
    Now I think the way some banks get to the billion dollars 
tends to be consolidation, and consolidation makes sense at 
times and it is not necessarily bad.
    Mr. Burgess. And I think when you are talking about a lot 
of the small communities that you are talking about, I don't 
think there are the financial resources or the strength of the 
economy that would grow a bank that large.
    So no, I don't think that is possible. And I actually have 
a friend who has been running a bank for a number of years in a 
community of about 10,000 people just down the road. And his 
board has just asked him to sell the bank because they don't 
feel like they can handle what is happening anymore.
    Mr. Cotton. Thank you all for those answers, and thank you 
for being here today.
    Mr. Duffy. The Chair now recognizes the gentleman from 
Washington, Mr. Heck, for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    And thank you all very much for being here. Last week, we 
heard from another part of the financial sector which brought 
forward to us concerns about regulatory relief in the area of 
remittances. I have read all of your testimony, and I see no 
mention of it. Do you just not engage in this activity or is it 
of such a de minimis concern you didn't care to point it out?
    Mr. Loving. From our particular situation, it is not 
something that is a problem for us. We don't engage in it, sir.
    Mr. Heck. No one?
    Mr. Pinkett. Our own participation is through banking 
customers who are, and so we have some compliance issues around 
it, but it is not a major issue.
    Mr. Heck. All right. Then I would like to move on, if I 
may. In the last several years, the largest banks have grown, 
some would say dramatically, some would say astronomically in 
their market share of retail lending.
    Very quickly, what do you think are the major factors that 
caused that to occur? Maybe start with Mr. Burgess and go down, 
but be quick if you would, please.
    Mr. Burgess. You are talking about the larger banks?
    Mr. Heck. Yes. Their market share of retail lending has 
gone through the roof.
    Mr. Burgess. From our standpoint, they are set up to be 
more or less an assembly-line operation. A lot of the products 
on the retail side have become commodity-type products rather 
than customized-type products.
    And so, the banks like us are more of a customized type 
shop. We don't do high volume. They do, and they can offer 
lower rates, which is going to win out with the masses.
    Mr. Kim. Yes, and I would agree with that, and maybe echo 
that serving consumers is difficult and it is costly because 
the loans are smaller and some of these large banks with the 
way consumers want to interact with banks now online, much more 
quickly, not so much coming into the branch, that is going to 
be in favor of the largest banks.
    And I also think the mortgage business has been one that 
there has just been a lot of consolidation and that is why they 
own so much of that market. I am not so sure that banks our 
size have lost it. It has been more consolidation making it 
look like they have it.
    Mr. Loving. I can say that it is probably a couple of 
factors. One is based upon the size and the perception of too-
big-to-fail. There is a security movement or a movement because 
of security and there is also a cost beneficial to them from 
the funding side.
    Again, as I said earlier, whether it is 20 basis points or 
80 basis points, they can certainly price a product cheaper 
than we can in many cases and essentially buy the business. And 
so, I think a lot of it is because of the perception of too-
big-to-fail.
    Mr. Pinkett. Cost of capital, cost of processing, cost of 
technology, ability to market broadly, and access to 
securitizations. They just have a different business model than 
we have.
    Mr. Heck. Thank you. That was very insightful, and I 
appreciate it.
    Lastly, Mr. Green made reference to self-identifying as a 
friend of both credit unions and community banks, which some in 
this town would have you believe is a mutually exclusive 
characteristic.
    I want to make a point. If any of you, or as I strongly 
suspect, all of you, have ever engaged in a private 
conversation with your families or your colleagues at work in 
which you expressed frustration with the inability of the 
Members of the United States Congress, to sit down like adults 
and solve problems because there was the red side and the blue 
side and where is the best interest of America when it comes in 
all of this, then I frankly would just encourage you, the next 
time you are so tempted, to play back to you the other side of 
that.
    Here we have a circumstance that notwithstanding the fact 
that you compete for market share, there is consensus up here--
there is no doubt about it in my mind--that some form of 
regulatory relief is in order for both community banks and 
credit unions.
    Next time you are tempted to have that conversation about 
Congress, remember this, if you would please: You are leaving 
on the table a phenomenal amount of power and influence to do 
what, for example, Labor and the Chamber has done with respect 
to immigration reform, to come together and figure out where 
your mutual interests are so that we can do our job to grant 
you that which I think you so eloquently have made the case.
    Again, thank you very much for your presence here today.
    Mr. Duffy. The Chair now recognizes the gentleman from 
Pennsylvania, Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I also want to add my thanks to the members of the panel 
for your testimony, which is a great help to the committee and 
to the communities that you serve as well, as well as to your 
industry. I want to follow up on that issue of the need for 
regulatory relief.
    Mr. Pinkett, in your testimony earlier today, I found it 
very insightful that you are talking about when the regulators 
come to your community bank, to your institution, with the full 
weight of all of their regulations and the examinations and the 
sort of impact that has on your ability to operate in the real 
world as a community bank trying to make loans, trying to be 
responsive to the customers that you serve and that you want to 
serve.
    I am hearing the same thing from the community banks in 
Pennsylvania in the communities which I represent. I have a 
comment here from a community banker in Montgomery County, 
Pennsylvania, not far from where you are in New Jersey.
    He says, ``We don't believe that the regulators understand 
that their actions and the way they go about their business 
does impact our ability and willingness to lend and conduct 
commerce. They just look at their job as enforcing the 
regulations and not the negative impact of their actions and 
what they have in the economy. While this condition has always 
existed, in the current environment, it is material.''
    And Mr. Barr earlier was talking about, I think he was 
discussing the issue of the lack of new charters, the 
consolidation. We are losing banks. People don't want to take 
the risk of creating a small community bank in this regulatory 
environment that we have.
    The last de novo bank in Pennsylvania, I think, was about 5 
years ago. It is a small bank in my community, Monument Bank. 
It started 5 years ago. They have 40 employees. More than half 
of the employees are earning $50,000 or more, but what I am 
hearing for the last 5 years is that nobody wants to start a 
bank under the current regulatory environment.
    Those banks that exist don't want to expand. Any new jobs 
that are created are jobs that are designed directly to deal 
with all of these massive government regulations coming out of 
Washington.
    If there was one thing that we could do here, on this 
committee and in this Congress, to help reverse that trend to 
get people to start community banks and take those risks, which 
ultimately will help the community, what would that one thing 
be?
    Mr. Pinkett?
    Mr. Pinkett. I would say, the one thing I would ask is that 
you help the regulators, encourage regulators to recognize 
their dual mission. They have to protect the economy and so we 
need regulations. They have to keep us from making bad 
decisions that would harm the institutions, shareholders, and 
of course the taxpayers. So we need regulations.
    But they have to do that in a way that helps us build the 
banks so that we can better service the customers. We need 
regulations for consumers and so that we don't offer products 
that are harmful because some products are out there that are 
really harmful to consumers and they need to be regulated out 
because not everyone is of the same character as the folks you 
selected today, and they are doing business in harmful ways.
    But, we have to do that in a way that encourages the banks 
to be successful, that allows them to be successful, and 
encourages them to do a better job of managing the risk 
associated with this business because it is a high-risk 
business.
    Mr. Fitzpatrick. Mr. Loving?
    Mr. Loving. I would say that from a regulatory perspective, 
tiered regulation or scaled regulation is imperative to our 
industry. The risk model that I have and the risk model of one 
of the largest megabanks is significantly different. Most 
community banks across the country operate in a different risk 
model, yet we have to face the same regulation that the largest 
of the large face and the costs related to it. So I would say 
tiered regulation or scaled regulation to the risk and size of 
the institution.
    Mr. Fitzpatrick. Mr. Kim?
    Mr. Kim. Yes, I would just say the one-size-fits-all, as 
Mr. Loving said, and the more--one-size-fits-all doesn't work 
and we need clarity and we need coordination to the extent 
there is overlap with the regulators and we want to follow the 
rules. We may not like the rules, but we will follow them 
because that is what we do.
    Bankers--most of us are kind of rule followers. We don't 
want to get in trouble, so you have to make it clear for us, 
and that will enable us to comply and then we get opportunities 
like this to try to make some changes around the edges where 
there needs to be change.
    Mr. Fitzpatrick. I mentioned in my opening statement about 
the anxiety I have been hearing with respect to the QM rule. I 
have this small community bank in my hometown of Levittown.
    Mr. Terry Sager wrote to me about his concerns about no 
longer being able to lend outside the box, and Mr. Barr was 
talking about what he was referring to as character loans that 
they make in the Commonwealth of Kentucky. We make them in the 
Commonwealth of Pennsylvania, as well.
    Those loans that I guess you are being told now you are not 
really going to be able to make them. You look somebody in the 
eye, you know that they are going to be able to make that 
payment. You know that they have a good idea and that they are 
going to be successful, but you are now being told you can't do 
it.
    Any anecdotal, any particular case you want to talk about, 
a loan that you were able to make in the past that somebody was 
able to go on and build a business and create jobs that you are 
concerned under these new QM rules you are not to be able to 
make?
    Mr. Pinkett. Can I just say--if there is someone who can 
look a person in the eye and know they are going to repay the 
loan, I would like to hire that person. So some of this is 
just--I think just a little too far.
    I hear bankers say that also, but at the end of the day, 
there has to be some analysis and assessment about the 
capability of the person whether it is a consumer or business 
owner and that should be fair and consistent.
    And I think all we are saying is--piggybacking on what Mr. 
Kim said--let's find rules that we would like to follow as 
opposed to rules that we have to follow because he doesn't want 
to run his bank into the ground. He doesn't want the taxpayers 
picking up the tab for his work. He doesn't want to explain to 
his kids how he was a lousy manager and a steward of resources 
in this country any more than anyone in any of the regulatory 
agencies wants him to have that conversation.
    So I think we have to be careful about going too far in the 
other direction also, which is to say that looking you in the 
eye, I can tell you are going to pay me back. I think we need 
some rules. We need some regulations, let's just make them fair 
and reasonable and then we will all want to follow them.
    Mr. Fitzpatrick. Okay.
    Thank you, Mr. Chairman.
    Mr. Duffy. Thank you.
    I want to thank the panel for your time and testimony 
today. We appreciate you coming in. The committee is grateful.
    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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Without objection, this hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             April 16, 2013

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