[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING REGULATORY RELIEF
PROPOSALS FOR COMMUNITY
FINANCIAL INSTITUTIONS, PART II
=======================================================================
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
SECOND SESSION
__________
JULY 15, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-91
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
91-155 PDF WASHINGTON : 2015
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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 BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia 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 STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
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 RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico KEITH ELLISON, Minnesota
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana DENNY HECK, Washington
ROBERT PITTENGER, North Carolina KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
C O N T E N T S
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Page
Hearing held on:
July 15, 2014................................................ 1
Appendix:
July 15, 2014................................................ 35
WITNESSES
Tuesday, July 15, 2014
Blanton, R. Daniel, Chief Executive Officer, Georgia Bank &
Trust; and Vice Chairman, American Bankers Association (ABA),
on behalf of ABA............................................... 3
Clendaniel, David, President and Chief Executive Officer, Dover
Federal Credit Union, on behalf of the National Association of
Federal Credit Unions (NAFCU).................................. 9
Cline, Sara M., Commissioner, West Virginia Division of Financial
Institutions, on behalf of the Conference of State Bank
Supervisors (CSBS)............................................. 1
Fecher, Douglas A., President and Chief Executive Officer,
Wright-Patt Credit Union, on behalf of the Credit Union
National Association (CUNA).................................... 5
Isaac, William M., Senior Managing Director, FTI Consulting,
Inc.; and former Chairman of the FDIC.......................... 10
Saunders, Lauren K., Associate Director, the National Consumer
Law Center, Washington, D.C., on behalf of Americans for
Financial Reform, the National Consumer Law Center (on behalf
of its low income clients), the Center for Responsible Lending,
the Consumer Federation of America, and U.S. PIRG.............. 12
Stanley, Marcus M., Policy Director, Americans for Financial
Reform (AFR)................................................... 14
Vallandingham, Samuel A., President and Chief Executive Officer,
the First State Bank, on behalf of the Independent Community
Bankers of America (ICBA)...................................... 7
APPENDIX
Prepared statements:
Cotton, Hon. Tom............................................. 36
Luetkemeyer, Hon. Blaine..................................... 37
Pittenger, Hon. Robert....................................... 38
Royce, Hon. Ed............................................... 39
Blanton, R. Daniel........................................... 41
Clendaniel, David............................................ 52
Cline, Sara M................................................ 117
Fecher, Douglas A............................................ 125
Isaac, William M............................................. 149
Saunders, Lauren K........................................... 161
Stanley, Marcus M............................................ 177
Vallandingham, Samuel A...................................... 184
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of the American Financial Services
Association (AFSA)......................................... 192
Written statement of the Appraisal Institute................. 196
Written statement of the Financial Services Roundtable....... 198
Written statement of the National Association of State Credit
Union Supervisors (NASCUS)................................. 200
Written statement of Toyota.................................. 201
Cotton, Hon. Tom:
Written statement of Hon. Derek Kilmer, a Representative in
Congress from the State of Washington...................... 202
Luetkemeyer, Hon. Blaine:
Written statement of the Electronic Transactions Association
(ETA)...................................................... 204
Perlmutter, Hon. Ed:
Letter from Hon. Ben S. Bernanke, Chairman, Board of
Governors of the Federal Reserve System; Hon. Martin J.
Gruenberg, Chairman, Federal Deposit Insurance Corporation;
and Hon. Thomas J. Curry, Comptroller, Office of the
Comptroller of the Currency, dated September 13, 2013...... 214
Letter from Hon. Ben S. Bernanke, Chairman, Board of
Governors of the Federal Reserve System, dated January 27,
2014....................................................... 216
USA Today article entitled, ``Pots of marijuana cash cause
security concerns,'' dated July 13, 2014................... 218
Royce, Hon. Ed:
Letter from R. Dan Berger, President & Chief Executive
Officer, National Association of Federal Credit Unions
(NAFCU), in response to questions for the record, dated
July 16, 2014.............................................. 221
Response to questions for the record from Douglas A. Fecher.. 224
EXAMINING REGULATORY RELIEF
PROPOSALS FOR COMMUNITY
FINANCIAL INSTITUTIONS, PART II
----------
Tuesday, July 15, 2014
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Duffy, Pearce,
Westmoreland, Luetkemeyer, Stutzman, Pittenger, Barr, Cotton,
Rothfus; Meeks, McCarthy of New York, Scott, Green, Perlmutter,
Heck, and Sinema.
Also present: Representative Royce.
Chairwoman Capito. Good afternoon, everyone.
Due to several series of votes that we are going to have on
the Floor, Mr. Meeks and I have agreed to submit Member opening
statements for the record and we will move directly to the
witness testimony. I am sure you are all crying about that, but
anyway, I would like to start with our first witness and I want
to welcome her, my fellow West Virginian, Sara M. Cline--I call
her Sally--commissioner, West Virginia Division of Financial
Institutions, on behalf of the Conference of State Bank
Supervisors.
Welcome.
You all have 5 minutes for your opening statements and you
can submit your more extended statements for the record, which
I believe most of you have done, in any event.
So welcome, Commissioner Cline.
STATEMENT OF SARA M. CLINE, COMMISSIONER, WEST VIRGINIA
DIVISION OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE CONFERENCE
OF STATE BANK SUPERVISORS (CSBS)
Ms. Cline. Thank you very much. Good afternoon, Chairwoman
Capito, Ranking Member Meeks, and members of the subcommittee.
My name is Sally Cline and I serve as the commissioner of the
West Virginia Division of Financial Institutions. It is my
pleasure to testify before you today on behalf of the
Conference of State Bank Supervisors on H.R. 4626 and other
bills before the committee.
H.R. 4626 is just one example of Congress and State
regulators' shared interest in promoting smart and efficient
financial regulation. This bill will help States efficiently
regulate State-licensed non-bank financial services companies
through expanded use of the Nationwide Mortgage Licensing
System & Registry, or the NMLS.
NMLS was established by State regulators in January 2008.
We launched the system to regulate the mortgage industry more
comprehensively and more consistently. NMLS has been successful
in giving regulators the ability to keep track of bad actors
and provides responsible mortgage lenders with greater
efficiency and consistency in the licensing process.
Congress recognized this and codified NMLS into Federal law
through the Secure and Fair Enforcement for Mortgage Licensing
Act (SAFE Act). NMLS proved to be such a successful and
critical regulatory tool in the mortgage licensing arena that
State regulators, including my agency in West Virginia, have
expanded its use to serve as the licensing system for other
State-licensed non-bank financial services providers.
Since April of 2012, State regulators have been using NMLS
to include licensees such as check cashers, debt collectors,
and money transmitters. This month, my department began using
NMLS to license money service businesses. In total, 29 State
agencies are using NMLS to license additional industries, with
more coming on the system each quarter.
The expanded use of NMLS has brought greater uniformity and
transparency to non-depository financial services industries,
and it has streamlined the licensing process for both licensees
and regulators. A gap in the law, however, limits our ability
to use NMLS as a licensing system for certain non-mortgage
financial services providers.
Under the SAFE Act, information contained in the NMLS
retains whatever privileged and confidentiality protections
that information enjoyed prior to being entered into the system
as long as that information is shared among mortgage
regulators. Because my department licenses and supervises
mortgage lending, my agency is considered a mortgage industry
regulator.
Any regulatory information my department shares with other
mortgage industry regulators through NMLS keeps all legal
protections related to confidentiality and privilege. But if I
needed to share licensing and other regulatory information
through NMLS with a State regulator that does not license or
supervise mortgage lending, that regulator might not be able to
comply with the privilege and confidentiality protections that
I must follow.
The change proposed by H.R. 4626 addresses this
uncertainty, and would provide me and my regulated entities
with confidence that our information shared through the NMLS
will continue to be protected under State and Federal law.
State banking regulators continue to strive for better ways to
supervise our diverse system of financial services businesses,
and we support the committee's examination of bills designed to
alleviate community bank regulatory burden.
Our focus is not necessarily on less regulation, but on
right-sized regulations--regulations, for example, that take
into consideration the portfolio lending and relationship-based
business model of community banks.
My colleagues and I appreciate the work that Chairwoman
Capito has done in sponsoring H.R. 4626, and we thank the many
members of this committee who support it. We urge swift passage
of the bill in order to cut regulatory burden, streamline the
licensing process, and promote regulatory coordination at the
State and Federal level.
Thank you for the opportunity to testify today on this
important topic. I look forward to answering any questions you
may have.
[The prepared statement of Commissioner Cline can be found
on page 117 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. Daniel Blanton, chief executive
officer, Georgia Bank & Trust, on behalf of the American
Bankers Association.
Welcome.
STATEMENT OF R. DANIEL BLANTON, CHIEF EXECUTIVE OFFICER,
GEORGIA BANK & TRUST; AND VICE CHAIRMAN, THE AMERICAN BANKERS
ASSOCIATION (ABA), ON BEHALF OF ABA
Mr. Blanton. Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee, my name is Dan Blanton. I am the
CEO of Georgia Bank & Trust in Augusta, Georgia, and vice
chairman of the American Bankers Association. I appreciate the
opportunity to present the views of the ABA regarding
regulatory relief for community banks.
Today, our diverse banking industry is made up of banks of
all sizes and types. This depth and breadth is required to meet
the broad array of financial needs of our communities and
customers. Our $16 trillion economy requires a diverse U.S.
banking system.
Community banks are the backbone of Main Streets across
America. Our presence in both small towns and large cities
means we have a personal stake in the vitality of our
communities. When a bank sets down roots, communities thrive.
There is a widespread appreciation for the benefits
community banks provide to communities across the country. Yet
many actions taken by the banking agencies have hurt, not
helped, community banks.
During the last decade, the regulatory burden for community
banks has multiplied tenfold. Managing this tsunami of
regulations is a significant challenge for a bank of any size,
but for the medium-sized bank with only 40 employees, it is
overwhelming.
Today, it is not unusual to hear bankers from strong,
healthy banks say that they are ready to sell to larger banks
because the regulatory burden has become too much to manage.
The sad fact is that over the course of the last decade, 1,500
community banks have disappeared. Each bank that disappears
from the community makes that community poorer.
It is time to move from good intentions to changes that can
make tangible results. We applaud the efforts of Congress to
help community banks. Many of the bills being discussed today
are a strong step towards relieving the burden felt by
community banks, ensuring that they can continue to drive the
community's growth.
We urge Congress to work together, both House and Senate,
to pass legislation that will help community banks better serve
our customers. There are a number of measures being discussed
today. We appreciate the work of this subcommittee to address
these important issues. Let me briefly touch on some measures
that the ABA supports.
One immediate issue that must be addressed is Operation
Choke Point. This program requires banks to act as policeman
and judge, holding them responsible for the actions of their
customers. The Department of Justice pursues banks to shut down
accounts of merchants targeted without formal enforcement
action, and even charges having not been brought against these
merchants.
Banks are committed to combating the financing of financial
crimes. We already keep records and report suspicious
activities to law enforcement.
The policy is for banks to serve, observe, and report, but
not to police. Banks should not be judge and jury on whether
their customers are operating illegally. Thus, ABA supports
H.R. 4986, introduced by Representative Luetkemeyer, which
directly solves the problem created by Operation Choke Point.
ABA also supports H.R. 4042, introduced by Representatives
Luetkemeyer and Perlmutter, which would delay the
implementation of Basel rules on mortgage servicing assets
until the impact can be studied and better alternatives
explored. Many community banks sell a portion of their mortgage
loans but retain the servicing rights to these loans to
maintain a relationship with their local customers.
Harsh treatment of MSRs under Basel III would force many
community banks to sell these rights to non-banks. This is a
loss for the bank and its customer, as it can break up a long-
term relationship to serve loans and meet customers' financial
needs.
ABA also supports H.R. 4626, introduced by Chairwoman
Capito, to protect the confidentiality of information shared
with State regulators; and also H.R. 3913, introduced by
Representative Duffy, which requires a cost-benefits analysis
of new regulations.
We stand ready to work with you to make changes that will
secure the future of one of the Nation's most important assets:
its community banks.
Thank you, and I am happy to answer any questions you may
have.
[The prepared statement of Mr. Blanton can be found on page
41 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is--my plan here is to have one more
testimony and then we are going to have to go into recess while
we meet our obligations on the Floor. I apologize for that, but
that is kind of life on Capitol Hill--Mr. Doug Fecher, who is
the president and chief executive officer of Wright-Patt Credit
Union, testifying on behalf of the Credit Union National
Association.
Welcome.
STATEMENT OF DOUGLAS A. FECHER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WRIGHT-PATT CREDIT UNION, ON BEHALF OF THE CREDIT
UNION NATIONAL ASSOCIATION (CUNA)
Mr. Fecher. Thank you.
Chairwoman Capito, Ranking Member Meeks, and members of the
subcommittee, thank you for the opportunity to testify at
today's hearing. As you said, my name is Doug Fecher and I am
president and CEO of Wright-Patt Credit Union in Beavercreek,
Ohio. I am testifying today on behalf of the Credit Union
National Association.
Nearly 2 years ago, I had the privilege of testifying
before the Oversight & Government Reform Committee at a hearing
exploring whether financial regulation was restricting access
to credit. I say now as I said then: Credit unions face a
crisis of creeping complexity with respect to regulatory
burden. It is not just one new law or revised regulation that
challenges credit unions, but the cumulative effect of all
regulatory changes. The frequency with which new and revised
regulations have been promulgated in recent years and the
complexity of these requirements is staggering.
Two years later, the situation has not improved; rather, it
is worse. Since 2008, credit unions have had to deal with more
than 180 regulatory changes from at least 15 different Federal
agencies. These changes are putting credit unions and other
small institutions out of business. Nearly 300 credit unions
merge every year, and the primary driver of this consolidation
is regulatory burden.
Because most compliance costs do not vary by size,
regulatory burden is proportionately greater for smaller
institutions than it is for larger institutions. If a credit
union offers a service, it has to be concerned about complying
with virtually all of the same rules as a larger institution,
but they have no choice but to spread those costs over a much
smaller volume of business and have fewer resources available
to implement the changes.
This is one reason we continue to urge this subcommittee to
encourage the Consumer Financial Protection Bureau (CFPB) to
use their exemption authority with alacrity. If Congress wants
credit unions and other small, community-based financial
institutions to survive, the avalanche of regulatory change
must end. When regulation makes it too expensive for credit
unions to serve their members, consumers are not being
protected; they are being harmed.
Today's hearing is important because there are several
bills under consideration that would help reduce regulatory
burden. But these bills are not a complete solution to the
problem; they represent only a step in the right direction.
CUNA supports H.R. 3240, which directs the GAO to study how
the Federal Reserve has used Regulation D to conduct monetary
policy. This regulation adversely impacts credit union members
when they trigger more than six automatic transfers from
savings to checking accounts in a month.
Members are frustrated when their payments do not go
through and they are hit with an unexpected NSF fee. We think
the cap on automatic transfers ought to be increased, and this
legislation is a first step in that regard.
We also support H.R. 3374, which would provide parity to
banks and thrifts wishing to offer prize-linked savings
accounts to their customers. Federal credit unions and State-
chartered credit unions in States with enabling legislation
already have this authority. This legislation would extend the
authority to banks.
We think these are good programs for savers, and if a bank
wants to offer them, they ought to be able to. We support the
bill.
H.R. 4042 would direct the Federal banking agencies to
conduct a study of appropriate capital requirements for
mortgage servicing assets for small banking institutions. We
certainly understand the concerns expressed by the banking
trade associations with respect to capital requirements related
to mortgage servicing rights because we have similar concerns
regarding the much more stringent requirement that NCUA
recently proposed for credit unions.
H.R. 4042 was introduced prior to the publication of NCUA's
proposed risk-based capital rule, and the sponsors could not
have contemplated the need to include credit unions as part of
this legislation. We request that H.R. 4042 be amended to
include NCUA among the agencies conducting the joint study and
to delay implementation of NCUA's proposed rule until the study
has been completed.
In addition to these bills, CUNA also supports: H.R. 4626,
which is a technical correction to the SAFE Act; H.R. 4986,
dealing with Operation Choke Point; and the discussion draft
related to appraisal requirements. Our views on these and other
bills under consideration are outlined in my written statement.
CUNA commends the sponsors of each of these bills for their
leadership.
Madam Chairwoman, as I mentioned, these bills are simply a
step in the right direction towards reducing regulatory burden.
There is much more work that needs to be done. That is why in
my written statement I included a discussion of our concerns
with NCUA's proposed rule on risk-based capital; our support of
legislation related to credit union residential loan parity,
introduced by Representative Royce; and our encouragement of
legislation to increase the threshold for CFPB examinations.
We hope the subcommittee will consider these issues in the
near future.
Thank you very much for the opportunity to testify at
today's hearing. I look forward to answering any questions the
subcommittee may have.
[The prepared statement of Mr. Fecher can be found on page
125 of the appendix.]
Chairwoman Capito. Thank you very much.
Now, the subcommittee will stand in recess subject to the
call of the Chair. We will return following our vote series,
which we approximate to be at about 2:45. Thank you.
[recess].
Mr. Duffy [presiding]. The subcommittee will now come to
order.
The Chair now recognizes Mr. Vallandingham for his
statement.
STATEMENT OF SAMUEL A. VALLANDINGHAM, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, THE FIRST STATE BANK, ON BEHALF OF THE
INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Vallandingham. Thank you.
Chairwoman Capito, Ranking Member Meeks, and members of the
subcommittee, I am Samuel Vallandingham, president and CEO of
the First State Bank, a $270 million community bank in
Barboursville, West Virginia. I am pleased to be here on behalf
of the more than 6,500 community banks represented by the
Independent Community Bankers of America.
I will focus my testimony on three bills before this
committee that are of particular interest to community bankers:
the Community Bank Mortgage Servicing Asset Capital
Requirements Study Act; the End Operation Choke Point Act; and
the discussion draft, the ``Access to Affordable Mortgages
Act.'' The common theme of these bills is government overreach,
whether it is in the form of arbitrary capital requirements,
law enforcement abuse and examination practices that harm legal
and legitimate customers, or rigid and expensive appraisal
requirements that escalate the cost of mortgage credit. ICBA is
grateful to Representative Luetkemeyer for introducing these
bills.
The first bill, H.R. 4042, would delay the effective date
of the Basel III mortgage servicing asset, or MSA, provisions
for non-systemic banking institutions and mandate a joint
agency study of the appropriate capital treatment of MSAs.
Community bank mortgage servicing is at risk due to the
punitive new capital provisions of Basel III. Banks that have
strong capital ratios today and that have serviced mortgages
for decades without problems would have starkly lower capital
ratios under the new rule.
My bank would lose over $1.6 million in common Tier I
equity, reducing our Tier I ratio by 50 basis points. The
capital reduction, combined with higher risk-weighting of MSAs,
would reduce our risk-based capital ratio by 95 basis points.
This impact would force me to fundamentally change my business
model.
The Basel III rule is, in fact, increasing systemic risk--
the opposite of its intended effect. A high volume of MSAs is
shifting from regulated bank servicers to the shadow banking
system.
Non-bank servicers are not subject to prudential standards
such as capital, liquidity, or risk management oversight. FSOC
and Comptroller Thomas Curry have expressed serious concerns
about the impact of this trend on financial stability.
Community banks are best qualified to service the loans they
originate and have done so without problems for decades.
The study mandated by H.R. 4042 would provide information
that is critical for the design of appropriate rule. We urge
its expeditious consideration by this committee.
The second bill, H.R. 4986, would preserve the ability of
banks to serve legal and legitimate business customers without
undue pressure from law enforcement or examiners. H.R. 4986 is
a response to the Justice Department's Operation Choke Point,
which is pressuring community banks to sever relationships with
long-term customers in legal and legitimate businesses. Choke
Point has quickly become a threat to the free exercise of
commerce and the rule of law.
Community banks currently dedicate significant energy and
resources to monitoring, detecting, and reporting fraud and
other financial problems in compliance with the Bank Secrecy
Act. Banks are eager to cooperate with law enforcement, but we
cannot and should not act as police.
At the same time, bank regulators have been scrutinizing
bank relationships with businesses deemed high-risk or that
supposedly create reputational risk. We are grateful to
Chairman Hensarling for addressing this issue in a recent
letter to the banking agencies. It is beyond the scope of the
supervisory process to assess a bank's reputational risk or to
prohibit or discourage banks from serving legal customers.
Community banks are the best judge of their own
reputational risk. At my bank, we safeguard our reputation by
conducting due diligence of each customer relationship and
monitoring these relationships on an ongoing basis.
H.R. 4986 would clarify responsibilities of cooperation
between banks and law enforcement in cases of financial fraud;
it would promote direct prosecution of fraudsters; and it would
preserve access to banking services for legal businesses. In
addition, the bill would rein in DOJ's abusive use of subpoena
authority and create a safe harbor for banks serving businesses
that meet specific criteria.
We urge the committee to take up this legislation without
delay.
The third and last bill I will discuss, the Access to
Affordable Mortgages Act, will provide an exemption from
independent appraisal requirements for any mortgage with a
value of $250,000 or less held in portfolio, regardless of its
interest rate or its QM status. When a lender holds a loan in
portfolio, it bears the full risk of default, and has every
incentive to ensure that the loan is appropriately
collateralized. In-house appraisals or property valuations
performed by bank staff are more cost-effective for the
borrower, especially for low-value loans.
This draft bill will increase the flow of mortgage credit
for moderate-income borrowers and strengthen the housing
recovery in rural and small-town markets.
Thank you, and I look forward to answering any questions
you may have.
[The prepared statement of Mr. Vallandingham can be found
on page 184 of the appendix.]
Mr. Duffy. Thank you, Mr. Vallandingham. I should have
properly introduced you as the president and chief executive
officer of First State Bank, testifying on behalf of the
Independent Community Bankers of America. Thank you for your
testimony.
Next, Mr. Clendaniel, the president and chief executive
officer of Dover Federal Credit Union, testifying on behalf of
the National Association of Federal Credit Unions, is
recognized for 5 minutes
STATEMENT OF DAVID CLENDANIEL, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, DOVER FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL
ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)
Mr. Clendaniel. Good afternoon, Chairwoman Capito, Ranking
Member Meeks, and members of the subcommittee. My name is David
Clendaniel and I am the president and CEO of Dover Federal
Credit Union, a position I have held since 1997.
I am testifying today on behalf of NAFCU. NAFCU and the
entire credit union community appreciate the opportunity to
participate in today's hearing regarding legislative proposals
to help provide regulatory relief for community financial
institutions.
Credit unions didn't cause the financial crisis and
shouldn't be subject to regulations aimed at those that did.
Unfortunately, that has not been the case thus far.
At Dover Federal our compliance costs have more than
tripled since 2009, as we don't have the economies of scale
that large institutions have. We hear from many credit unions
that enough is enough when it comes to the tidal wave of new
regulations.
Before commenting on the legislation before us today, I
would like to update the committee on NCUA's risk-based capital
proposal and what impact this rule could have if it becomes
final without significant changes. As members of the
subcommittee are aware, this ongoing issue is of the utmost
importance to credit unions of all sizes.
My written testimony outlines in detail the concerns we
have with this proposal. Without significant changes to the
proposed rule many credit unions, including mine, would likely
consider changing charters away from being a credit union due
to the onerous nature of the proposal--a proposal that instead
of emulating the Basel requirements for banks goes a lot
further, particularly in its risk weights for credit unions.
We are pleased that the NCUA has indicated that they expect
to make changes in the proposal before finalizing. Still,
credit unions hope to have an opportunity to comment and
provide feedback on these changes before they are final.
NAFCU believes that this rule is so impactful that it needs
to be done right, with industry feedback throughout the
process, so credit unions can be clear on how things work
before they start making changes to comply. An important part
of this is making sure there is a sufficient implementation
period for any final rule. Congress must continue to provide
oversight and make sure that the issue is studied and fully
vetted for economic impact before the NCUA moves forward.
One way Congress could address this issue would be to add
language to the Community Bank Mortgage Servicing Asset Capital
Requirements Study Act, H.R. 4042, that is before the committee
today. Since this bill already tackles an issue with Basel, it
could be a suitable vehicle for Congress to weigh in on risk-
based capital.
I would also like to highlight several other measures under
consideration today that NAFCU supports. These include, first,
the American Savings Promotion Act, H.R. 3374, that would amend
Federal law to allow credit unions and other financial
institutions to use savings promotion raffle products. As the
country recovers from the worst financial crisis of our time,
creative programs with clear rules and guidelines that
encourage household savings merit serious consideration.
Second, the End Operation Choke Point Act, H.R. 4986.
Credit unions remain concerned with the aggressive nature of
the Justice Department's Operation Choke Point Program. While
preventing fraud is a laudable concern, this program is putting
unnecessary onus on credit unions to police activities of legal
third parties.
Third, the Regulation D Study Act, H.R. 3240. This
bipartisan legislation would mandate the GAO to study the
impact of the Federal Reserve Board's monetary reserve
requirements on depository institutions, consumers, and
monetary policy. Federal Reserve Regulation D is a prime
example of an outdated regulation that is on NAFCU's ``dirty
dozen'' list.
And finally, the SAVE Act Confidentiality and Privilege
Enhancement Act, H.R. 4626. This common-sense technical fix is
welcomed by credit unions.
My written statement highlights other measures we also
support, including outlining several areas where relief and
greater regulatory coordination is needed. I would encourage
the subcommittee to consider those areas, as well.
In conclusion, the growing regulatory burden on credit
unions from new laws and regulations is a top challenge facing
the industry. NAFCU appreciates the subcommittee's work to
review legislation to provide regulatory relief for credit
unions. We would urge the committee to move forward on these
ideas.
Congress should also continue vigorous oversight of the
Federal financial agencies, including NCUA, and take action on
these issues outlined in this statement where appropriate.
We thank you for the opportunity to share our thoughts with
you today. I welcome any questions you may have. Thank you.
[The prepared statement of Mr. Clendaniel can be found on
page 52 of the appendix. ]
Mr. Duffy. Thank you, Mr. Clendaniel.
The Chair now recognizes Mr. Isaac, senior managing
director at FTI Consulting, for 5 minutes.
STATEMENT OF WILLIAM M. ISAAC, SENIOR MANAGING DIRECTOR, FTI
CONSULTING, INC.; AND FORMER CHAIRMAN OF THE FDIC
Chairwoman Capito, Ranking Member Meeks, and members of the
subcommittee, I am grateful that you are holding this hearing.
The opinions I express today are my own; I do not purport to
speak on behalf of my firm, FTI Consulting. And in the interest
of full disclosure, some of FTI's clients have an interest in
matters before the subcommittee today.
By way of background, I was appointed to the FDIC Board of
Directors at age 34 by President Carter in 1978, and I was
named Chairman by President Reagan in 1981. I returned to the
private sector at the end of 1985 after serving nearly 2 years
beyond my 6-year term at the FDIC.
I also served during my term at the FDIC as Chairman of the
Financial Institutions Examination Council and as a member of
the Basel Committee. In my view, Operation Choke Point is one
of the most dangerous programs I have experienced in my 45
years of service as a bank regulator, bank attorney and
consultant, and bank board member.
Without legal authority, and based on a political agenda,
unelected officials at the Department of Justice are
coordinating with some bank regulators to deny essential
banking services to companies engaged in lawful business
activities that some government officials don't like. Bankers
are being cowed into compliance by an oppressive regulatory
regime.
Perfectly lawful businesses are being denied access to
essential banking services because they offer products or
services that unelected officials don't like. This ought to
alarm and frighten each of us, irrespective of our ideology,
party affiliation, or view of the particular products or
services being cut off.
Regulators and the DOJ have highlighted some two dozen
businesses they consider high-risk or undesirable. I have spent
my entire professional career in banking and bank regulation
and I don't discern any meaningful increase in risk in
providing basic banking services such as deposit accounts,
payroll processing, or check-clearing services to any of these
businesses, compared to a host of other legitimate businesses.
Operation Choke Point is fundamentally unfair to the banks
and to the legal businesses that find their banking services
cut off.
Once banking services are cut off to a legal business as a
result of a subpoena or the threat of a subpoena, there is no
chance for the business to appeal the decision. The company is
simply in a business that, while legal, has been determined
undesirable and therefore high-risk by the Federal bureaucracy.
This Orwellian result ought to be frightening--it is
frightening.
If government employees acting without statutory authority
can coerce banks into denying services to firms engaged in
lawful behavior that the government doesn't like, where does it
stop? The point is simple and incredibly important: Under our
constitutional republic, unelected government employees should
not decide which lawful businesses may have access to banking
services and which are to be denied. Those who have serious
concerns about payday loans, check-cashing services, adult
films, family planning clinics, or other products and services
should take their concerns to State or Federal legislatures and
attempt to enact reforms.
The DOJ should not be involved in bank regulation to any
extent whatsoever. Its job is to prosecute crime, as defined by
law. Bank regulators need to stay out of the political arena
and focus all of their energy on ensuring that banks are
operating in a safe and sound manner and are complying with all
laws and regulations. Neither the DOJ nor the bank regulators
should be allowed to dictate which lawful businesses will be
granted or denied access to banking services.
Representative Luetkemeyer's bill provides a safe harbor to
promote nondiscriminatory access to financial products and
services by banks and credit unions to businesses that are
licensed, registered as money services businesses, or have
reasoned legal opinions demonstrating the legality of their
business. The legislation also seeks to rein in DOJ's subpoena
authority by requiring judicial oversight.
Importantly, banks and credit unions would retain their
legal authority and discretion in establishing or maintaining
relationships with existing and potential customers. The
Constitution dictates that the place to debate whether payday
lending or any other lawful business should be allowed to
operate and have access to the banking system is in the halls
of Congress and the State legislatures, not in the back rooms
of government bureaucracies.
The Luetkemeyer bill is an extremely important step in
reining in government agencies that are greatly overstepping
their authority and breaching the constitutional separation of
powers among the three branches of government and between the
States and the Federal Government. While some of us may applaud
the attack against payday lending, ammunition distributors, or
home-based charities, we will likely take a very different
position when a new Administration decides to attack activities
more near and dear to our hearts.
I urge the Congress to enact immediately, without delay,
the Luetkemeyer bill, as Operation Choke Point is doing severe
and irreparable damage to firms engaged in lawful business
activities.
Thank you.
[The prepared statement of Mr. Isaac can be found on page
149 of the appendix.]
Mr. Duffy. Thank you, Mr. Isaac. Well said. Thank you for
your testimony.
The Chair now recognizes Ms. Saunders, the associate
director of the National Consumer Law Center, for 5 minutes.
STATEMENT OF LAUREN K. SAUNDERS, ASSOCIATE DIRECTOR, THE
NATIONAL CONSUMER LAW CENTER, WASHINGTON, D.C., ON BEHALF OF
AMERICANS FOR FINANCIAL REFORM, THE NATIONAL CONSUMER LAW
CENTER (ON BEHALF OF ITS LOW INCOME CLIENTS), THE CENTER FOR
RESPONSIBLE LENDING, THE CONSUMER FEDERATION OF AMERICA, AND
U.S. PIRG
Ms. Saunders. Thank you very much.
Chairwoman Capito, Ranking Member Meeks, and members of the
subcommittee, thank you for inviting me to testify today. I am
here to speak in opposition to H.R. 4986 and other actions that
would weaken efforts to stop banks from facilitating illegal
activity.
Banks play a critical role in enabling fraudsters to debit
consumers' bank accounts. In 2008, the Office of the
Comptroller of the Currency (OCC) ordered Wachovia Bank to pay
$125 million to reimburse elderly consumers whose accounts were
debited by scammers. Wachovia had plenty of warning signs of
fraud but chose to continue processing payments for a lucrative
client.
After Wachovia cut them off, some scammers moved to Zions
Bank, where they continued scamming seniors. Three banks had
previously turned down one scammer, but a bank broker that
specialized in finding banks willing to take on high-risk
clients took them to Zions in exchange for a share of the
profits. Minimal vetting would have alerted Zions, which soon
had direct evidence of its own, including warnings from
regulators and the bank's chief risk officer, but Zions
suppressed these concerns in light of the high profits.
Zions Bank is one of the banks that have received subpoenas
from Operation Choke Point, which focuses on banks that know or
willfully ignore evidence that they are facilitating fraud and
illegal activity.
The first--and to date, only--Choke Point case was against
Four Oaks Bank & Trust, which helped process payments for
illegal and fraudulent payday loans, a Ponzi scheme, and an
illegal gambling site. The bank overlooked hundreds of consumer
complaints, warnings from State A.G.s, and extremely high rates
of payments rejected as unauthorized.
The Four Oaks case is exactly the type of case that the
Justice Department should be bringing. But instead of focusing
on what DOJ is actually doing, some critics have drawn sweeping
conclusions from anecdotes on individual bank account closures.
Since long before Operation Choke Point, payday lenders and
check-cashers had been complaining about bank account closures.
In 2006, the Financial Service Centers of America testified
that, ``For the past 6 years banks have been abandoning us--
first in a trickle, then continuously accelerating, so that now
few banks are willing to service us.'' That was in 2006.
Some of the recent bank account closures may have more to
do with the money-transmitting side of a payday lender's
business than the loan side. Entities with insufficient anti-
money-laundering regimes may have trouble finding banks. And
some banks may prefer not to do the due diligence at all and to
leave that line of business to banks that will, as they should.
In addition, when banks choose to process payments in areas
rife with fraud and illegal activity, regulators are right to
insist that they be aware of the risks. Banks that can stop
fraud should, and they are also on the hook if they originate a
payment that is unauthorized or if the authorization is invalid
due to fraud or illegality.
If some banks have misunderstood a bank's duties in high-
risk areas, that can be clarified. But it would be a terrible
mistake to weaken controls that can block illegal activity from
the payment system.
H.R. 4986 would prohibit regulators from warning banks
about the risks of illegal payments. It would create an
inappropriate safe harbor for payments processed for an entity
with a State license, a money transmitter registration, or even
just a letter from its attorney.
A State license is no guarantee that a bank will not expose
the bank to liability. CashCall is a licensed lender in many
States, but it continued debiting consumer checking accounts
for money they did not owe after the payday lender it was
collecting for shut down its operations in response to
enforcement actions and court orders.
Similarly, registration as a money transmitter does not
ensure compliance with anti-money-laundering or know-your-
customer rules. And virtually anyone can get a letter from an
attorney vouching for the legality of their conduct.
Remember, fraud hurts more than the direct victims. Online
businesses and stores like Target lose business when consumers
are afraid to shop. When a scammer's bank debits a consumer
account at a small bank, it costs the consumer's bank, on
average, $100 to deal with the unauthorized charge, and as high
as $500.
I urge you to oppose H.R. 4986 and other measures that
would undermine efforts to prevent illegal activity that harms
millions of Americans, businesses, and American security.
Thank you for inviting me to testify today. I am happy to
answer any questions you may have.
[The prepared statement of Ms. Saunders can be found on
page 161 of the appendix.]
Mr. Duffy. Thank you, Ms. Saunders.
The Chair now recognizes Mr. Stanley, the policy director
for Americans for Financial Reform, for 5 minutes.
STATEMENT OF MARCUS M. STANLEY, POLICY DIRECTOR, AMERICANS FOR
FINANCIAL REFORM (AFR)
Mr. Stanley. Thank you.
Chairwoman Capito and members of the subcommittee, thank
you for the opportunity to testify before you today on behalf
of Americans for Financial Reform. AFR opposes H.R. 3913, H.R.
5037, and the Access to Affordable Mortgages Act of 2014. I
also note that Lauren Saunders has testified on behalf of AFR
as well as the National Consumer Law Center in opposition to
H.R. 4986.
AFR has no position at this time on the other bills being
discussed today.
H.R. 3913 would amend the Volcker Rule to, among other
things, ban any rulemaking under the section that would
``impose a burden on competition that is not necessary or
appropriate.'' AFR has consistently opposed this kind of broad,
vague statutory mandates. Such mandates are an open invitation
to endless lawsuits by well-funded Wall Street interests
seeking to overturn rules that may reduce their profits, even
if such rules serve the public interest.
This mandate also appears to prioritize competition over
other public interest considerations, such as equity and
financial stability. Existing law already provides ample
opportunity for judicial review of agency decisions. Congress
should not encourage further lawsuits by placing such vague
directives in statute.
We also disagree with the premise that the Volcker Rule
creates an excessive burden on competition. Bank trading
activities are dominated by a small number of too-big-to-fail
banks. Restricting proprietary trading at such banks should
improve competitive balance, not harm it.
Nor should the Volcker Rule harm the international
competitiveness of U.S. industry. This claim ignores the 60-
year period during which U.S. banks operated under Glass-
Steagall restrictions, which were much more far-reaching than
the Volcker Rule. This historical experience does not provide
evidence of harm to international competitiveness.
H.R. 5037 would impose new requirements and duties on the
Office of Financial Research (OFR). We oppose this legislation
as both redundant and harmful.
These requirements are redundant because the OFR already
engages in extensive public reporting, consults frequently with
member agencies, and is subject to the full range of
cybersecurity requirements applicable to the U.S. Treasury. The
requirements are harmful because the specific requirements in
the bill would damage the OFR's ability to perform its mission.
H.R. 5037 requires the OFR to provide a public advance
description of every report, guidance, working paper, or
information request to be conducted during the coming year, as
well as planned work dates associated with each such action.
Besides being unrealistic, this requirement would provide a
roadmap to Wall Street interests on how to lobby the OFR
concerning each detail of its work in progress.
The bill further requires OFR to make public the exact time
and nature of every consultation with any member agency staffer
regarding any report as well as every recommendation made in
such a consultation. Making these details public would exercise
a significant chilling effect on the willingness of member
agency personnel to share frank views with the OFR. Even
transparency laws such as the Freedom of Information Act
provide a deliberative process exemption to safeguard
deliberations on work in progress, but this is absent from H.R.
5037.
We also disagree that OFR's current level of public
transparency or consultation is inadequate. OFR's annual
reports and working papers provide significant detail on
current and upcoming projects as well as views on key financial
risks.
More recently, the OFR has been required to provide
detailed quarterly reports to Congress on all spending and
actions in the past quarter. The Treasury's recent letter to
the House on the OFR's asset management report also shows that
the OFR engages in extensive consultation with member agencies.
Consultation with the SEC on the asset management report
included the exchange of at least 15 draft versions of the
report, at least 13 separate meetings, and additional informal
consultation. SEC Chair Mary Jo White has stated that the SEC
commented extensively on the report when it was in progress.
The OFR's mission of studying potential emerging threats to
U.S. financial stability is a critical one. In order to perform
its mission, the OFR must have independence from political
pressures that may affect its member agencies.
The way to improve the OFR's work is to support its
independence and its ability to act as a warning voice
concerning threats others may choose to overlook. The changes
in H.R. 5037 would have the opposite effect.
The Access to Affordable Mortgages Act of 2014 would exempt
higher-risk mortgages of $250,000 or under from new appraisal
requirements included in the Dodd-Frank Act. We oppose this
exemption.
``Higher-risk mortgages'' refers to what were once called
``subprime mortgages.'' Fraud and predatory lending connected
to subprime mortgage origination was a major cause of the 2008
financial crisis.
Exempting higher-risk mortgages of up to $250,000 from
appraisal requirements would significantly undermine these new
regulatory protections. The $250,000 exemption would include
almost half of all new homes sold in the United States and
likely well over half of higher-risk mortgage loans.
The requirement that a lender retain the loan on their
balance sheet for at least 3 years does provide some
protection. But data on subprime loan defaults shows
significant increases in default past the 36-month point.
H.R. 4042 would mandate further study and delay in the
implementation of new capital rules on mortgage servicing
assets. AFR does not currently have a position on H.R. 4042.
However, we do have some concerns regarding this legislation.
These concerns are detailed in my written testimony.
Thank you very much, and now I am happy to answer any
questions you may have.
[The prepared statement of Mr. Stanley can be found on page
177 of the appendix.]
Chairwoman Capito. Thank you, Mr. Stanley.
With that, we will begin the question portion of our
hearing, and I will yield myself 5 minutes for questioning.
Commissioner Cline, you noted in your written testimony and
your oral testimony that the NMLS system has been successful in
streamlining the licensing system for mortgage loan originators
and improving information sharing from State to State. Could
you share with the committee why you think H.R. 4626 would
bolster these new licensing regimes? But better yet, could you
kind of frame it in terms of how it might help protect
consumers?
Ms. Cline. Yes. Thank you, Chairwoman Capito. And thank you
for your support of H.R. 4626.
Currently, under the SAFE Act, information is protected and
shared between mortgage regulators. What H.R. 4626 will do is
extend those protections of confidential and privileged
information between all regulators who choose to use the NMLS
to license other types of nonmortgage financial service
providers.
This system has been proven to increase uniformity. It is
reducing regulatory burden for the licensees. And it is
enhancing better coordination between the agencies that license
these entities.
As far as consumer protections, it does enhance consumer
protection and it benefits not only consumers but the industry
as well.
Chairwoman Capito. I would imagine, too, that it better
protects probably personal and private information for each
consumer as their information becomes a part of this system.
That, to me, would be one of the major benefits of this. Is
that correct?
Ms. Cline. That is correct. The NMLS employs numerous
controls to protect the privacy and the security of sensitive
information. It is required to be compliant with the Federal
Information Security Management Act, which it employs over 154
controls that are--they are reviewed, validated, and tested by
an independent third party on an annual basis. The NMLS is also
required to comply with all State and Federal laws.
But yes, in fact--
Chairwoman Capito. Thank you.
Ms. Cline. --it is a secure system.
Chairwoman Capito. Thank you.
Mr. Vallandingham, one of the issues we are discussing
today is the ability of financial institutions to maintain
mortgage servicing rights for the mortgages they originate. As
you noted in your testimony, recent regulatory actions are
making it more difficult to do so. Can you share with the
subcommittee how your institution views mortgage servicing
rights, and what that means for you as a community bank to
still be engaged in this practice, and how that would influence
consumers in your areas?
Mr. Vallandingham. Absolutely. As I stated in my testimony,
we would lose $1.6 million in Tier I capital. I have spent half
my life building our servicing portfolio, and it would take
that business model away from us. Our primary business line is
mortgage lending and the servicing that subsequently is created
by that, and ultimately, we would have to dramatically change
our business model because we could no longer grow and build
that servicing.
It is in a time period when servicing has increased cost,
and ultimately our economies of scale have been crushed. And at
that point in time this would hinder us from continuing to grow
and being able to build on a business model that has been
extremely successful for our organization.
In terms of our consumers, I get daily requests from
borrowers who want to buy a new home and come back to us
because of the service that they get. Community banks are
better positioned to provide the high-touch, high-quality
service to mortgage borrowers than some of these non-bank
shadow market servicers that have grown exponentially because
of this.
So ultimately, I think community banks do a better job of
it and we want to continue to build on that. This will
absolutely cap that business and take small banks out of the
servicing market.
Chairwoman Capito. And I would imagine, too, your customers
would prefer to know exactly when and how and who is servicing
their mortgage rather than have it be off in a different State
or very remote from them. Sometimes people run into problems,
and being able to go to the institution they know is carrying
these servicing rights would be, I think, a bonus to a
consumer, correct?
Mr. Vallandingham. My employees have such close
relationships with their borrowers that they often get letters,
they know about their family events, they even get presents at
holidays. When you call our organization and you want to ask
about your mortgage, you know that Debbie Kerns is going to
answer the phone in escrow and she is going to explain your
escrow analysis to you.
Chairwoman Capito. Right.
Mr. Vallandingham. If you were to call one of the larger
national non-bank providers you don't know who you would get.
You might even get a recording. And you don't know that you
would get your question answered.
Chairwoman Capito. Thank you. I have run over my time.
Thank you.
Mr. Green?
Mr. Green. Thank you, Madam Chairwoman.
And I thank the witnesses for appearing.
And I am also very grateful that I live in a country where
no one is above the law. And I am especially grateful to God
that I live in a country where no one is beneath the law.
If there is one among you who believes that banks do not
break the law, would you kindly extend a hand into the air?
I take it from the absence of hands in the air that there
are none among you and I ask that the record reflect that no
one believes, on this panel, that banks do not break the law.
Mr. Blanton and Mr. Isaac, there was a case that has been
mentioned out of North Carolina, a case that involved hundreds
of consumer complaints, as was indicated by Ms. Saunders, a
case that involved many, many complaints from banks, a case
wherein a settlement was made for $1.2 million. This bank
received $850,000 in fees. The Justice Department interceded
and as a result, there was some redress.
I hope it won't surprise you to know that earlier today
there was a witness present from the Justice Department who
indicated that but for this Operation Choke Point, that
settlement would not have taken place. So I ask you, my dear
friends, Mr. Isaac, do you have any disagreement with the
settlement against Four Oaks bank?
Mr. Isaac?
Mr. Isaac. I am not intimately familiar with the case,
but--
Mr. Green. All right.
Mr. Isaac. --I understand that there was some fairly
egregious behavior there, and I believe that there should have
been action taken, and I don't believe--
Mr. Green. Thank you very much.
Mr. Isaac. --and I don't believe that Operation--
Mr. Green. Let me, if I may, go to my next witness, and I
will come back to you.
Mr. Isaac. Could I just finish the answer?
Mr. Green. Not just yet, if I may, please.
Mr. Isaac. Okay.
Mr. Green. I want to accord you every courtesy. I don't
mean to be rude, crude, and unrefined, but I have a limited
amount of time.
Let me now move to Mr. Blanton.
Do you find any reason to differ with the way that case was
resolved? And do you find that it was appropriate to take
action, given that banks were complaining against Four Oaks?
Mr. Blanton. From what I understand, I believe that there
were instances where that happened. I think there were plenty
of signs there to indicate that, and I think action happened.
Whether or not Choke Point was a trigger--
Mr. Green. If I may, let me intercede again because I have
a minute and 40-plus seconds.
A witness from the Justice Department--I can accord you his
name for edification purposes: Mr. Delery, Assistant Attorney
General, Department of Justice--indicated that it was Operation
Choke Point that gave them the opportunity to bring to justice
in this circumstance.
I have read the bill that you both favor and I respect my
colleagues, but are you desiring to put banks in a position
such that they cannot answer for unlawful conduct, Mr. Isaac?
Is that your desire?
Mr. Isaac. Of course not. I prosecuted a lot--
Mr. Green. Is that your desire, Mr--
Mr. Isaac. I have prosecuted a lot of--
Mr. Green. --Blanton? Is that your desire?
Mr. Blanton. No, sir, it is not.
Mr. Green. This bill produces more than a safe harbor; it
provides an escape from liability.
Mr. Blanton. I would say, though, if the bank was doing its
job properly--
Mr. Green. The bank wasn't doing its job properly and that
is why you and I are having this discussion. It wasn't doing
its job properly. Do you want banks to just have an absolute
get-out-of-jail-free card so that they can take advantage of
consumers? You heard Ms. Saunders talk about the hundreds of
consumer complaints.
Ms. Saunders, is that correct? Were you correct when you
said that?
Ms. Saunders. I was quoting from the complaint in the Four
Oaks case, yes.
Mr. Green. And do you concur that it was necessary for the
Justice Department to intercede?
Ms. Saunders. Absolutely. They stopped a lot of fraud and
illegal activity by intervening.
Mr. Green. Thank you, Madam Chairwoman. I yield back.
Chairwoman Capito. Thank you.
Mr. Duffy, for 5 minutes.
Mr. Duffy. I was going to ask a poll question about how
many of you think that Federal bureaucrats and Obama
Administration officials are breaking the law, but I am going
to skip that right now.
Ms. Saunders, I want to talk to you about Operation Choke
Point. You agree with this policy from DOJ, is that correct?
Ms. Saunders. Yes. As I understand it, the operation
focuses on fraud and illegal activity and banks that are in a
position to stop it and I agree with that focus.
Mr. Duffy. And you went to law school. You are an attorney,
correct?
Ms. Saunders. Yes.
Mr. Duffy. Were you here for the testimony this morning?
Ms. Saunders. I was not.
Mr. Duffy. Okay. So we heard from Mr. Delery from DOJ, and
during the course of his testimony he was constantly talking
about fraudulent merchants that had to be addressed through
Operation Choke Point.
The problem is that Operation Choke Point focuses on these
merchants' ability to bank but doesn't look at any fraudulent
behavior with the merchants themselves. And so if you don't
bank a third party payer or a payday loan institution or a gun
sales institution, they can't do business. You put them out of
business.
But there is no due process. There is no ability to have a
hearing. There is no ability to have a judge hear testimony and
make a determination of, ``Yes, these people have committed
fraud,'' or, ``No, they are innocent.''
What you have is a bureaucrat in the DOJ saying, like you
just said, ``I have done an investigation. I have taken
complaints, and this is fraud.''
You believe in due process, don't you?
Ms. Saunders. I do.
Mr. Duffy. And if you are one of these subject merchants,
don't you think that they should have due process? Shouldn't
they have a hearing to determine whether they have committed
fraud under our laws or whether they are innocent? We shouldn't
just have bureaucrats in the DOJ do this, should we?
Ms. Saunders. I think if a bank has a merchant that has
unauthorized returns that are through the roof, warnings from
regulators of fraudulent illegal activity, I don't think we
need to wait for a trial to track down the people around the
globe who may be scamming people before the bank says, ``You
know what? I think there is fraud going on here and I am not
going to be part of it.''
Mr. Duffy. I was a prosecutor, and we would collect a lot
of evidence and a lot of firsthand statements and complaints,
and if we just convicted people without a trial and said,
``Well, look at all the information. I am not going to track
down this defendant and give them due process. I am not going
to give them a trial.''
What kind of government do we become if we don't offer
these protections to what we all believe is a legitimate
business until proven otherwise? When you have this bureaucrat
say, ``I have done an investigation.'' It is not open. It can't
be reviewed by the Congress; it can't be accessed by the
merchant. And I have just found that you have committed fraud
and we are going to cut off your ability to bank.
Is that the right way we should do business in the American
Government? Because that is what they are doing.
Ms. Saunders. I think it is a surprising statement to say
that a bank should not stop processing payments when they have
substantial, egregious evidence of fraud going on and that they
need to keep processing payments and debiting consumer accounts
before we can have--
Mr. Duffy. I don't know what law school you went to, but we
afford people due process. We just don't say, ``There is
evidence, and so I convict.'' I am astounded that you are
giving this testimony today saying there is evidence, with no
trial, just conviction with evidence.
Ms. Saunders. I see no conviction here, but in the Wachovia
case, for example, I don't think it would be right to continue
debiting--letting scammers debit seniors' accounts just because
we haven't yet had a trial of all those scammers. If Wachovia
knows what is going on, they know they are--these are scammers
using them to debit consumer accounts, they ought to stop it.
Mr. Duffy. Sure. But then shouldn't we--this is not the
only case, and there was only one example that was given of
someone who was prosecuted on the merchant side and Wachovia
was cited, but beyond that no one else has been prosecuted.
And I guess I would ask the panel, do you know of merchants
that have been put out of business because you have been unable
to bank them because of Operation Choke Point?
Mr. Vallandingham?
Mr. Vallandingham. Yes. There is a current news article
that Chase had been closing accounts for pawn shops in the
State of West Virginia. So they have been given 30 days to move
their account, close the account. They have done nothing wrong;
they have had no--they are not debiting anyone's account. Just
as a business class in our State, they are eliminated from the
banking system.
Mr. Duffy. And do you have any knowledge that they had a
trial and a determination that they were doing business
fraudulently?
Mr. Vallandingham. Absolutely not.
Mr. Duffy. Right. So they didn't have due process, correct?
Mr. Vallandingham. No, they did not.
Mr. Duffy. Ms. Saunders, that is my concern. We need to
have due process in this country and we don't want bureaucrats
in Washington sitting in the DOJ convicting people without a
hearing.
And I guess that is why, coming to Mr. Luetkemeyer's bill,
do you--does the panel agree that Mr. Luetkemeyer's bill takes
a step in the right direction to make sure we give some
protections to merchants from bureaucrats in the DOJ scheming
to go after businesses or merchants that they don't like?
Mr. Blanton. Yes. We support the bill.
Mr. Duffy. My time has expired. I yield back.
Chairwoman Capito. Thank you.
Mr. Perlmutter, for 5 minutes.
Mr. Perlmutter. Thank you, Madam Chairwoman. And I agreed
to give Mr. Green an opportunity to respond to Mr. Duffy for
just 15 seconds.
Mr. Green. Thank you very much. And I take all of these
things--
Mr. Perlmutter. I yield to Mr. Green.
Mr. Green. I tend to take things seriously--and thank you
very much. If others perform activities that are unacceptable,
I don't believe it gives us a license to accord unacceptable
activities to other entities.
And I just want to go on record as saying whatever happens
anywhere else doesn't change our need to make sure that we help
protect consumers. They should not be beneath the law, and no
one else--and no other entity should be above the law.
Mr. Perlmutter. Okay. Reclaiming my time, thank you, Madam
Chairwoman.
Mr. Isaac, it is good to see you.
Mr. Isaac. It is good to see you.
Mr. Perlmutter. I will start with the Choke Point question
that we have been dealing with, and I am somewhere between Mr.
Green and Mr. Duffy on this, that clearly there were some bad
actors. Those bad actors, through an investigation, have been
ferreted out. But in my opinion, you don't create, then, a
dragnet that then continues to sweep-up more and more people
into it; on a case-by-case basis you look for the fraud and you
punish the fraudulent.
So I agree with Mr. Green to a certain degree. Mr.
Luetkemeyer's bill I think is generally on the right track but
goes too far, especially on the liability component of it. But
I do appreciate his safe harbor piece, especially as it applies
to something going on in Colorado and 23 other States, and that
is, in fact, that those States have provided a regulatory
scheme for the use and business of marijuana, and part of what
is going on is it is very difficult for those businesses to
bank.
And I ask unanimous consent to place the USA Today article
from yesterday concerning the security measures that so many
have to go through in the record.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Perlmutter. I would like to see that those particular
businesses that are legal in their States can continue to do
business in a way that they aren't shut off from the banking
system. And I do think that Mr. Luetkemeyer's bill does provide
for that, so that is a saving grace of the bill for me.
My questions, though, I would like to--Mr. Stanley, you
were talking a little bit about the mortgage servicing. You
said you really didn't have any complaints about it, but you
still had some questions. What are your questions about it?
Because I am supportive of kind of delaying it, making sure
that the mortgage servicing doesn't flow from community banks
and insured institutions to non-banks.
There are plenty of non-banks. I am happy for them to have
business. But I don't want the insured institutions losing that
business either. What do you say about that?
Mr. Stanley. I think I have two things. In terms of our
questions, the prudential regulators did carefully consider
thousands of comments on their proposed Basel rules and they
chose the significantly eased capital requirements in many
areas, including residential mortgages, but they did not modify
the ceiling on these mortgage servicing assets, and I think
what we would like to see is more of the information from the
regulators on how and why they reached that decision that might
have included a lot of the data that this study might produce.
And in terms of movement to non-bank servicers, we feel
there are a lot of things driving that, that it isn't just
these capital rules, it is reputational, some of the
violations, frankly, that the big banks did on servicing, some
of the settlement issues. So there are a lot of things driving
that, we feel.
Mr. Perlmutter. Okay. Thank you.
I think that there are a lot of--the Basel components,
though, in my opinion, play a big role in driving some of that
mortgage servicing to the non-banks, and that is why we are
asking for a little bit of a timeout to just make sure whether
I am right or wrong. And so that is why we are doing it.
Madam Chairwoman, if I could, I would like to introduce
into the record several letters: a September 13, 2013, letter
from the Board of Governors of the Federal Reserve System to me
concerning mortgage servicing assets; a January 27, 2014,
letter from the Board of Governors of the Federal Reserve
System concerning that; a May 20th letter from the Independent
Community Bankers of America; and a May 12th letter from the
American Bankers Association.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Perlmutter. Thank you. I yield back.
Chairwoman Capito. Mr. Westmoreland?
Mr. Westmoreland. Thank you, Madam Chairwoman.
Mr. Stanley, when was Americans for Financial Reform--when
did you come into existence?
Mr. Stanley. Americans for Financial Reform was created, I
believe--I wasn't there at the time--in 2008 as a response to
the financial crisis and the feeling that people needed to--
Mr. Westmoreland. That's okay. That is all I wanted. Thank
you.
Now, to the six witnesses who live in the real world and
have real-life experiences of lending money and banking people
and working in the business, with respect to the FDIC's
complicity in Operation Choke Point, are you familiar with the
list of high-risk activities identified by the FDIC in the
summer of 2011 supervisory insights entitled, ``Managing Risk
in Third Party Payment Processor Relationships?''
Are you aware of any other list of high-risk merchants or
activities published by the DOJ, the FDIC, the FRB, or the OCC?
Just a quick head shake. Good.
Were any of your institutions offered the opportunity to
comment on the list before it was compiled and published?
Nobody?
Have any of these agencies reached out to your institutions
since the list was published to determine the impact on your
industry?
That is a little weird, isn't it, since it involves your
industries? You would think that the government would at least
want to have some input as to this.
Mr. Isaac, I know that you were past Chairman of the FDIC.
Did you ever see anything while you were there that the
Administration would have wanted to coordinate with regulators
to specifically cut off access to financial services?
Mr. Isaac. No, other than as prescribed by the law--for
example, money laundering and so forth. But apart from that,
cutting off drug dealers, terrorists, and so forth, which was
enacted by Congress, no.
Mr. Westmoreland. Mr. Isaac, I want to ask you one other
question. You briefly mentioned the idea that examiners and
bank regulators are more concerned with the bank's reputational
risk, seemingly to the exclusion of all other concerns, save
the capital ratio. Is it possible this emphasis on reputational
risk is detracting examiners from seeing other problems that
may be happening at a bank?
Mr. Isaac. I do believe, as I said in my full testimony,
that I am very concerned about the degree to which the
examiners over the past couple of decades have started focusing
on reputational risk. I don't know what it means; I don't know
anybody who knows what it means except that the bank is doing
something that the regulator doesn't like but the regulator
can't seem to quantify the risk and put it into the CAMELS
rating system, which is the objective standard we are supposed
to be using.
So I am very concerned about where we have gone with
reputational risk. I would get rid of it. I don't think it is a
helpful concept at all.
Mr. Westmoreland. Thank you.
Mr. Blanton, while I support the bills that are being
considered today, I don't think any of them come really close
to being the substantive regulatory relief that I have hoped
that this committee would one day take up. There are still some
issues around accounting methods, regulatory capital,
classification of distressed assets, examiner overreach, and
overreaction that I still hear from bankers every day. Are
these the things that--as vice president of the American
Bankers Association, are these the things you are hearing every
day, too?
Mr. Blanton. Yes, they are. We have a tremendous burden on
our banks that is especially disproportionate to the smaller
banks, in that they just really don't have the resources
available. And it is in a one-size-fits-all mentality to where
my bank at $1.8 billion and a $200 million bank have to comply
at the same level. It is very difficult for them to do that.
Mr. Westmoreland. Thank you.
Madam Chairwoman, I yield back the remainder of my time.
Chairwoman Capito. The gentleman yields back.
Mr. Heck, for 5 minutes.
Mr. Heck. Thank you, Madam Chairwoman.
I would first like to associate myself with the remarks of
the gentleman from Colorado, Mr. Perlmutter, with respect to
Congressman Luetkemeyer's legislation, both with respect to the
desire to seek a happy balance within it and its positive
intent, and also with respect to his concerns regarding the
impact on States which have legalized some form of marijuana
consumption.
And I would also like to thank the Chair. There are a lot
of bills on today's agenda that we can vote out of this
committee in a bipartisan way, and if I might editorialize, we
don't have enough days like that. And I thank you for it.
Let's see. Who am I going to pick--is it Mr. Fecher? I'm
sorry. I don't know how to pronounce your name.
Mr. Fecher. Yes. ``Fecher.''
Mr. Heck. ``Fecher,'' with a hard ``K.''
Mr. Fecher. I am from a good old German family.
Mr. Heck. I think I know that, as a ``Heck.''
I am enthusiastic about H.R. 3374, the American Savings
Protection Act, and I note that there are Federal laws which
have the effect of prohibiting banks and certain thrifts from
offering certain kinds of these, if you will, safe, regulated,
and innovative savings products. And I am just wondering, from
your professional experience, sir, can you think of any
compelling policy basis for enabling certain financial
institutions to offer these but prohibiting others from doing
so?
Mr. Fecher. No, I cannot.
Mr. Heck. As you read the legislation, Mr. Fecher, is there
anything in it that would preempt existing State laws in any
way? Does it change a State's ability to regulate these kinds
of products whatsoever?
Mr. Fecher. Not to my knowledge, no.
Mr. Heck. Would these products be subject to the same kind
of regulatory oversight as any other financial product offered
by a bank or a credit union?
Mr. Fecher. I believe they would, yes.
Mr. Heck. If you were to offer this in your institution--I
assume you do not at the present time--would you pay for the
promotion out of your marketing account and use that as an
attraction for a cash prize to incentivize increased savings?
Mr. Fecher. Yes, we would.
Mr. Heck. You are an awfully easy witness to work with, Mr.
Fecher. I would like to--
Mr. Fecher. We have had a lot of experience with these
prize-based accounts. They help average Americans decide to
save money because the interest rates that we are able to pay
on our deposit accounts are so small, if you are saving $500 or
maybe $1,000 it is not really much of an incentive to get a .25
percent interest rate on that.
And so the perceived value of the opportunity to win
something more meaningful will cause many Americans to
establish a savings program that they might not otherwise have
done. And we have seen that in the institutions that have done
this. So as a matter of public policy, that is why I support
it. I think we want Americans to save more money, especially
Americans of more modest means who don't have the significant
sums of money where interest rates matter more than this
perceived value of these prize-based accounts.
So I think properly done, it is a matter of good public
policy.
Mr. Heck. It took me four questions to get you to give the
speech I wanted you to give, but I am extremely grateful, sir.
Mr. Fecher. I caught on after a couple of seconds.
Mr. Heck. I think the point is made. We don't save enough,
and anything that we can do that does not compromise the
consumer but incentivizes the kind of behavior that every
single person sitting in this room believes would benefit them
not only as individuals but society as a whole ought to be an
easy public policy to pursue. And I want to publicly
acknowledge and thank both Mr. Kilmer and Mr. Cotton for
offering this legislation in hopes that my colleagues will give
it a ``yes'' vote as soon as they can.
I have a minute left, so I will get to the meatier stuff in
some regards, I guess, or the more controversial stuff.
You have raised some questions about the NCUA's risk-based
capital rule--its proposed rule. I have shared those concerns.
I have expressed my concern to the NCUA. I am not sure about
the whole shift of risk weightings after we saw what we did in
the financial crisis.
But if we are to go ahead and do something in this regard,
I would be curious and interested to know what your reaction
would be to that which I would only think is fair, to combine
it with giving credit unions tools to raise additional capital.
And as you know, there is legislation before this committee to
do that.
Mr. Fecher. Right. Thank you, Representative. That is an
important question. The NCUA's rule, as well-intended as it may
be, to ensure that credit unions are adequately capitalized for
the risk on their balance sheet--the rule, as written as
proposed, actually requires higher capital risk weightings in
many categories than even the community banks, despite the
performance of credit unions through the recent Great
Recession. And so that is the start of our concern.
You add that to the fact that a credit union's only way of
raising capital is through its earnings, what it ends up
meaning is that credit unions will be able to deliver less
value to their members on the street. And so what we ask is
that the subcommittee exercise oversight over NCUA's rule.
Now we believe NCUA will change the rule based on the over
2,200 comments that they received, but we believe it needs to
be changed substantially. Frankly, our hope is that it is
withdrawn and they start over again. Short of that actually
happening, we would hope that the committee would take a good
look at, ask questions kind of to what Mr. Stanley said before:
How do you justify these risk weightings? What is the empirical
evidence behind them?
Because if we set risk weightings that are just simply too
high it will cause credit unions to withhold value from their
consumer members on the street, and I don't think anybody wants
that to happen.
Chairwoman Capito. Thank you. The gentleman's time has
expired.
Mr. Heck. With one additional second of indulgence? I just
want to reiterate, we really are very grateful to have before
us legislation that we can all support.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you. And I think we will give
credit where it is due to the ranking member, as well. We have
worked together on these.
I would also like to ask unanimous consent to insert the
following Member's opening statements into the record: Ms.
Capito; Mr. Duffy; Mr. Luetkemeyer; Mr. Westmoreland; Mr.
Cotton; Mr. Pittenger; Mr. Stutzman; and Mr. Meeks.
And with that, I will yield 5 minutes to Mr. Luetkemeyer
for questions.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
I would like to ask the first question with regards to the
appraisal requirement bill that we have before us.
And, Mr. Blanton, I want to ask it of you. This section
removes the appraisal requirement on primary residences for
those loans under a quarter of a million dollars and held in
portfolio by a creditor for less than 3 years. Can you tell me,
if we do this, what kind of risk that the bank is exposed to by
going along with something like this?
Mr. Blanton. By and large, we are exposed to the risk of
making the loan and having this asset. And we can do
evaluations that are more cost-conscious ways of determining
the value of our asset--
Mr. Luetkemeyer. So in other words, there is not going to
be a whole lot more risk, basically, number one, the amount of
the loan is kind of minimal compared to the size of the
portfolio, probably, I would imagine; and number two, the
customers if something is held in your portfolio, therefore,
you are not somebody who is going to be as concerned about this
as if it is somebody who is a fly-by-night guy.
Mr. Blanton. No. With this asset in our portfolio we
understand the customer, we understand the risk we are taking,
and we have had various tools that are price-competitive for
this customer to be able to handle this loan for him at a more
reasonable price.
Mr. Luetkemeyer. Perfect. Thank you very much.
Mr. Isaac, I loved your testimony. Thank you very much for
your comments on Choke Point. I love that, ``the most dangerous
program that you have ever seen.'' I am going to keep that
quote.
But I appreciate your being here today, especially from the
standpoint that you are somebody who has not just talked the
talk; you have walked the walk. You have been there, you have
done that.
I was an examiner a long time ago, whenever you were
actually FDIC Chairman, so that is how long it has been, but I
appreciate your remarks today. And I am just kind of curious--I
know you were supportive of the bill--can you tell me--I know
there were a couple of remarks with regards to going too far.
Does the bill address, in your mind, the problem that we
have in the correct way, with DOJ and the FDIC joining together
to try and root out entire industries of businesses versus
going after the bad actors? Do you think that this bill goes
far enough, or too far, or just right? Can you give me an
analysis, please?
Mr. Isaac. I think it is just about right. And I am not
saying that people couldn't find ways to improve it here or
there. We can always try to do better on anything. But I think
it is just about right.
I have heard Mr. Delery's name mentioned several times in
this hearing, and I guess he testified this morning. He has a
memo dated September 9, 2013, which I would hope that everybody
would read, particularly pages 10, 11, and 14, in which he
makes some outrageous and very scary statements.
For example, this is on page 14: ``We are targeting banks
more than payment processors, and payment processors more than
merchants.''
Mr. Luetkemeyer. One of the things that--
Mr. Isaac. The theory is that if you target the banks, the
banks will run these people out of business, and you don't have
to spend money and resources going after the merchants, and he
actually says that--
Mr. Luetkemeyer. One of the things that--let me interrupt
just a second.
Mr. Isaac. Sure.
Mr. Luetkemeyer. One of the things that concerns me is the
fact that they are doing this under the Financial Institutions
Reform, Recovery, and Enforcement Act (FIRREA), and I am sure
you have adjudicated this law many times--
Mr. Isaac. Yes.
Mr. Luetkemeyer. --and you know that this is supposed to be
a bill that is used to provide a defense for the banks rather
than for a bill that goes after the banks, which is what they
are trying to do. Is that a correct characterization of the
law--
Mr. Isaac. The--
Mr. Luetkemeyer. --and what is going on?
Mr. Isaac. The provisions they are using were intended to
protect the banks--
Mr. Luetkemeyer. Right.
Mr. Isaac. --against fraud from--
Mr. Luetkemeyer. And they have flipped the model, haven't
they?
Mr. Isaac. --and they are being used to punish the banks.
Mr. Luetkemeyer. Their own interior--own inside memos
indicate that they are not sure they even have the legal
authority to do what they are doing. The other Oversight and
Reform Committee has that.
Mr. Isaac. He says in his own memo that this is dubious. I
think it is less than dubious; it is--
Mr. Luetkemeyer. Can you give me a brief overview of what
you think will happen? Let's say we pass this legislation, H.R.
4986. What will happen? What will be the response from the
banks to this legislation?
Mr. Isaac. I'm sorry--
Mr. Luetkemeyer. What will be the response by the banks to
this legislation? Are they going to--how will they react to
this?
Mr. Isaac. Unfortunately, it is not going to be an
overnight panacea. When the banks have already thrown people
out that are legitimate businesses, it is going to take time to
get them back into the banking system.
But once the safe harbor is there, the banks are going to
be able to make business decisions again, but I think you are
going to be very leery, having had the regulators say what they
have said about undesirable businesses and risk businesses. I
think they are going to be very slow to come back in, but
hopefully we can turn this around over time and we can stop the
exodus, we can stop legal businesses from being thrown out of
the banking system.
Mr. Luetkemeyer. And if they do that, they are not going to
go back in with somebody who is a bad actor.
Mr. Isaac. Pardon?
Mr. Luetkemeyer. I say, they are not going to go back into
business with somebody who is a bad actor. They are going to
pick and choose from all these folks that they have let go;
they will go back out and pick all the good ones, wouldn't
they?
Chairwoman Capito. The gentleman's time--
Mr. Isaac. One would think.
Chairwoman Capito. --has expired. We are going to move on
because we are--
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Chairwoman Capito. --heading up to votes.
Mr. Meeks?
Mr. Meeks. Thank you, Madam Chairwoman.
And I want to join with what Mr. Heck has said. Balance is,
I think, the key to this--to everything, is having the proper
balance. And there is no question, I think, that most Members,
especially on this committee, recognize that the regulatory
burden on smaller and community financial institutions is
significant and we need to provide regulatory relief.
The key is the balance, and it has to be the right relief
to the appropriate sector because entities--there are still
risks. Risks still exist in the financial system. The larger
banks are still getting bigger, and they are still too-big-to-
fail, and the expectation of rising interest rates poses a
significant risk to the community financial institutions.
So we do have to move quickly, but we also have to be
careful, I think, to make sure that it is the relief that is
the right relief, is the targeted relief. And that is what we
are trying to do here.
That is why I agree with Mr. Heck that many of the bills
that are up today for discussions are targeted proposals that
have gathered support--Democrats and Republicans, bipartisan.
And so I congratulate my colleagues on both sides of the aisle
for--we are all in this together.
I want to particularly say, though, that I am supporting,
and think that H.R. 3240, by Mr. Pittenger; H.R. 3374, by Mr.
Kilmer; H.R. 4626, by the Chair; and H.R. 5062, by my friend,
Mr. Perlmutter--all the bills, I think, bipartisan, we are
working on together trying to get it right. Sometimes, it takes
time to do that.
Now, I have had and do have reservations about my friend,
Mr. Luetkemeyer's bill, H.R. 4986, although I do have great and
strong concerns about the Choke Point and how legal businesses
have been impacted by this initiative. But the question is,
does it go a little too far? Because I oppose any attempts to
weaken the appraisal standards, as, I think, is proposed.
I would like to talk to you about that at some point.
And let me just start there and maybe I will ask Mr.
Stanley, and my question tells you why, has there been any
evidence that the existing appraisal regulations have led to
restrictions in access to credit for low- and moderate-income
borrowers? Because that is where my concerns lie.
Mr. Stanley?
Mr. Stanley. I am not familiar with any such evidence. And
there is substantial evidence that I think appraisal fraud did
harm low- and moderate-income buyers prior to the financial
crisis.
Mr. Meeks. Thank you.
And let me just say--let me jump. I just looked at the
time. I want to ask Ms. Saunders a question also.
I have stated that I have concerns about the way Operation
Choke Point has impacted some of the legal entities that have
operated within the law. Tell me, do you think that the
approach that H.R. 4986 takes is the right approach to deal
with this particular problem?
Ms. Saunders. No, I don't. I think it would weaken tools
against fraud. I think it would give a blank check to entities
who happen to have a license but may still be engaged in an
illegal activity that banks can stop.
I think the reasons that banks choose to close particular
accounts are complex and we can't just look at the headlines.
There are 17 million Americans in this country who don't have
bank accounts, many who have been blacklisted from banks. I am
sure we could find some patterns of businesses they are
involved in.
And banks make their own business decisions about what
areas of business they want to be in, things like money
transmitting. Unfortunately, all the fraudsters out there, it
forces us to be vigilant if we want to stop money going to drug
cartels and other illegal activity, we need to be vigilant.
Some banks don't want to be in those lines of business.
There are areas like debt settlement, the debt relief firms. We
have done a lot of work against foreclosure rescue fraud,
student loan debt relief scams. Anybody who watches TV sees
those, and there is a lot of illegal and fraudulent activity
out there.
So banks need to be vigilant, but I don't see any
widespread evidence of a problem. If there are any
miscommunications, I think those can be rectified without
legislation.
Mr. Meeks. We do have to be vigilant, but unfortunately,
what happens is we make laws and we make laws for the bad guys,
not for the good. Most of the folks who are sitting at this
table all have good business practices.
And that is why I say we have to have the balance, because
we have to try to make sure that when we do this balance, we
don't make laws that then overly negatively impact the good
guys. But at the same time, we can't hurt the consumer and the
individuals, and that is why I would just like to talk to Mr.
Luetkemeyer and some others because I think we have gone a
little too far.
Thank you, Madam Chairwoman--we have votes.
Chairwoman Capito. Mr. Pittenger?
Mr. Pittenger. Thank you, Madam Chairwoman. And thank you
for calling this really important hearing, which has really
clarified so much of how the regulatory environment has impeded
the availability of credit and capital to consumers.
I served on a community bank board for 10 years and
certainly appreciate the impact of what has happened to
community banks and to credit unions. What has happened, of
course, is we have diluted the availability of those
institutions and reduced them another 1,500 banks that aren't
there today, aren't there to serve the communities. So, it is a
great concern to me.
I would like to express thanks to Congresswoman Maloney for
cosponsoring with me H.R. 3240, the Regulation D Study Act.
Mr. Fecher, you spoke in some degree regarding that study
bill. I would like you to elaborate on why you think this
legislation is necessary.
Mr. Fecher. The legislation is necessary because Regulation
D, which I would imagine a lot of folks in this room have never
ever heard of, causes unnecessary NSF charges to consumers when
they exceed the statutory maximum number of automatic transfers
from a savings account to a checking account to cover drafts or
debits that may come in.
And it is not an uncommon occurrence, especially with the
way money moves through the financial system today, that a
member of a credit union--which happened at Wright-Patt Credit
Union just last week--calls up and says, ``Why did you charge
this NSF fee?'' We attempt to explain to them that they
exceeded their number of statutorily required automatic
transactions of six in the month and they say, ``What?''
And they first think it is the credit union's fault, and
then we explain, no, this is a Federal regulation that we have
to enforce. And frankly, that makes them madder.
So we advocate for the bill, and we think it should be
studied. We hope that the outcome of the study is that this
tool for monetary policy, that number of transactions could
almost be tripled without impacting the use of that regulation
in terms of monetary policy. So briefly, that is what that
regulation is all about, and we support the study.
Mr. Pittenger. Let's put it in context in terms of where we
are today with technology, and when this bill went into
effect--this regulation went into effect, the rule of six
transfers, there has been quite a change. It is just logic to
review this today, it seems to me, from where we were before.
Mr. Blanton, you are nodding your head. Would you like to
make a comment?
Mr. Blanton. I do also agree. You are, in fact, penalizing
people for properly managing their money. And with this system
that it is now, it is archaic from when it was originally put
in place, and you make us--it is very difficult for us to
compete with nonfinancial institutions that also compete for
deposit dollars that don't have these restrictions.
Mr. Pittenger. Mr. Clendaniel?
Mr. Clendaniel. I definitely agree with those comments.
This is a common-sense bill, and an outdated regulation.
Mr. Pittenger. How can consumers who are affected by the
limitations on withdrawals put on the savings accounts--how are
they really affected by this?
Mr. Clendaniel. Again, to echo what Mr. Fecher said, it--
there is a lot of confusion, first off, on the consumer's
behalf. And they just don't understand the fact that, what does
that mean? What does it mean I can only do six this month? I
did six last month at the teller line, yet I can only do six
online this month.
So there is a confusion between where and how they can do
those different transactions. Because in their mind, a transfer
is a transfer, no matter if they do it by check, by teller, or
by online services.
Mr. Pittenger. Mr. Isaac, you are nodding. Do you have a
comment?
Mr. Isaac. I agree.
Mr. Pittenger. Oh good. All right.
Thank you very much. I yield back my time.
Chairwoman Capito. The gentleman yields back.
It is the desire of the Chair to finish the hearing
before--we have been called for a vote. We have about 7
minutes, and we have 2 questioners left.
So, Mr. Barr?
Mr. Barr. Thank you, Madam Chairwoman.
Ms. Cline, as you know, the Dodd-Frank Act placed finance
companies, non-depository institutions, under the jurisdiction
of the CFPB, but because of an oversight, the Act did not
extend traditional protections of privilege to a variety of
information that would be ordinarily disclosed in the course of
a supervisory exam, either to the CFPB or to State agencies.
Mr. Perlmutter and I have introduced a bipartisan bill
called the Examination and Supervisory Privilege Parity Act of
2014 to remedy this situation and to provide regulators and
regulated parties with greater certainty about the protections
that apply when information is shared to and among regulators.
Why is this legislation needed and what kind of disclosures
would this foster, in your mind, that do not exist currently?
Ms. Cline. State bank regulators and the CSBS are in
support of this legislation. We think it is important that
privileged information be covered. But in addition to
privileged, we would recommend that the language be expanded to
include confidentiality.
In my home State of West Virginia, information shared with
my banking agency is shared under confidentiality rules; it
doesn't cover privilege. So that would be our only
recommendation, that your legislation also include a protection
for confidential information, as well.
Mr. Barr. Thank you, Ms. Cline.
And for Mr. Blanton, Mr. Vallandingham, and Mr. Isaac,
earlier today at another hearing, I shared with the Department
of Justice and financial regulators the following story from a
Kentucky resident who had received communication from their
bank, and the e-mail to our office was as follows: ``Our
family--and this is in reference to Operation Choke Point--
company has been in the business of leasing our land to coal
producers for decades. Today I returned a call from client
services at our bank in Lexington, Kentucky. They asked if we
lease land to coal producers that operate surface mines. They
said that we are receiving pressure from bank regulators and
will no longer do business with us if we have surface mines on
our property.''
Now to a man, every one of the regulators and the
Department of Justice denied that they are participating in the
EPA's war on coal. They denied that, notwithstanding what we
know about Operation Choke Point.
But my question to you all is, as bankers, does it surprise
you that a family business that does business in a politically
targeted business, namely, surface mining, would receive that
kind of a communication from their bank in light of the
regulatory pressures that we are seeing?
Mr. Blanton?
Mr. Blanton. It doesn't surprise me at all, unfortunately.
We are seeing this in a lot of cases, and that wasn't on the
list--the FDIC list--that wasn't there. But we are seeing this
in a lot of cases, where undue pressure and judgments and
opinions of whether it is a good or bad business are now being
pushed down to the bank and forcing us to try and take action
against customers such as that.
Mr. Vallandingham. That is the slippery slope that scares
us all. Today, it is these two dozen business; what will it be
tomorrow?
And at the end of the day, we are going to have to make
choices about legal businesses, whether we can bank them or
not, and ultimately put ourselves at additional liability. I
will take it another step further. It is a supersession of
States' rights. In our State, payday lenders aren't legal, so
we don't have that issue. But in the State next to us, they are
legal.
So ultimately, we are going to have to make some real-world
decisions that I don't think we should be forced to make. And
if somebody is committing fraud, we support the prosecution,
but the bank wasn't committing the fraud. The third party was.
Mr. Barr. Mr. Isaac?
Mr. Isaac. It doesn't surprise me at all, and it scares me.
I don't know where we are going.
Mr. Barr. I think to your point, Mr. Isaac, that a bank's
board and the bank's management is in a much better position to
ascertain the reputational risk of that bank than an
unaccountable, unelected Federal regulator in Washington, D.C.
And the irony of all of this is that under Operation Choke
Point, the Department of Justice is disfavoring certain
politically unpopular businesses by denying them banking
services, but at the same time they issue guidance designed to
help illegal business like marijuana dealers get access to
banking services.
What this tells me is that--
Chairwoman Capito. The gentleman's time has expired.
Mr. Barr. --using prosecutorial discretion, the Department
of Justice is picking winners and losers in the marketplace.
Chairwoman Capito. Thank you. We are running close on time
here.
Mr. Barr. Thank you.
I appreciate the indulgence. I yield back.
Chairwoman Capito. Mr. Royce?
Mr. Royce. Thank you, Madam Chairwoman. I appreciate you
holding this hearing.
I introduced one of the bills before us here today,
alongside the gentleman from Florida, Mr. Murphy, to bring some
common-sense reforms to the Office of Financial Research over
at the Treasury Department. That bill is H.R. 5037, the OFR
Accountability Act. It does ensure improved transparency and
better interagency coordination and stronger cybersecurity
protections at the OFR.
And I think Members of Congress on both sides of the aisle
have heard constant criticism about the quality of research at
the OFR, the lack of real coordination between the Office and
Federal financial regulators. And much of the criticism,
frankly, is focused on the asset management and financial
stability study published in September 2013 that they did.
With respect to this report, the House Oversight &
Government Reform Committee found that the OFR failed to
meaningfully consider the expert analysis provided by the
career professional staff at the SEC, resulting in what a group
of former regulators has called a flawed analysis of asset
managers and fundamental misconceptions about how security
markets function. The Oversight & Government Reform Committee
concluded that while OFR paid lip service to the SEC staff's
suggestions, OFR failed to meaningfully address the important
issues flagged in the SEC memorandum.
So I think this legislation does it in a thoughtful way.
The bill Mr. Murphy and I have put forward is balanced. It is a
bipartisan approach that includes reforms to the OFR that,
frankly, its inaction absolutely necessitates.
So I look forward to moving that bill expeditiously.
I do have one question, quickly. Maybe Mr. Clendaniel could
speak up on this, but it is on another subject.
Madam Chairwoman, if I could ask our credit union witnesses
what specific next steps they would like to see this committee
take as it relates to NCUA's risk-based capital proposal.
Mr. Clendaniel. I don't think I will have enough time to go
through all the steps with the time allowed, but I think the
one thing that could be done to help all credit unions and all
one hundred million members in the country is to include the
NCUA proposal into H.R. 4042 and do a stop and study to make
sure we know the full impact of what the proposal is and what
is also the right proposal for credit unions and for the
members.
Mr. Royce. Madam Chairwoman, because we have a vote on,
perhaps I could put my full opening statement in the record and
Mr. Clendaniel could put a full proposal forward.
And with that, I yield back, Madam Chairwoman.
Chairwoman Capito. I thank the gentleman for understanding
the time constraints here.
I would like to submit for the record statements from the
following organizations: the Appraisal Institute; the Consumer
Financial Services Association of America; the National
Association of State Credit Union Supervisors, the American
Financial Services Association; Toyota; and the Financial
Services Roundtable.
I would like to thank everybody for your patience.
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.
With that, I will declare this hearing adjourned, and I am
going to run to my vote. Thank you.
[Whereupon, at 4:44 p.m., the hearing was adjourned.]
A P P E N D I X
July 15, 2014
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