[Senate Hearing 113-535]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-535

 
          EXAMINING THE STATE OF SMALL DEPOSITORY INSTITUTIONS

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING THE CURRENT STATE OF SMALL DEPOSITORY INSTITUTIONS, IN 
    PARTICULAR THE STATE OF COMMUNITY BANKS AND SMALL CREDIT UNIONS

                               __________

                           SEPTEMBER 16, 2014

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
  
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

         Brett Hewitt, Policy Analyst and Legislative Assistant

                  Greg Dean, Republican Chief Counsel

              Jelena McWilliams, Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
                                  
                                  
                                  
                            C O N T E N T S

                              ----------                              

                      TUESDAY, SEPTEMBER 16, 2014

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Moran................................................     3
    Senator Warner...............................................     5

                               WITNESSES

Doreen R. Eberley, Director, Division of Risk Management 
  Supervision, Federal Deposit Insurance Corporation.............     6
    Prepared statement...........................................    51
Toney Bland, Senior Deputy Comptroller for Midsize and Community 
  Bank Supervision, Office of the Comptroller of the Currency....     7
    Prepared statement...........................................    56
    Response to written questions of:............................
        Senator Crapo............................................   247
        Senator Heitkamp.........................................   249
Maryann F. Hunter, Deputy Director, Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve System.................................................     9
    Prepared statement...........................................    63
 Larry Fazio, Director, Office of Examination and Insurance, 
  National Credit Union Administration...........................    11
    Prepared statement...........................................    68
    Response to written questions of:............................
        Senator Crapo............................................   250
        Senator Heitkamp.........................................   253
        Senator Moran............................................   255
Charles A. Vice, Commissioner of Financial Institutions, Kentucky 
  Department of Financial Institutions, on behalf of the 
  Conference of State Bank Supervisors...........................    12
    Prepared statement...........................................    91
    Response to written question of:.............................
        Senator Crapo............................................   256
Jeff Plagge, President and CEO, Northwest Financial Corporation, 
  on behalf of the American Bankers Association..................    33
    Prepared statement...........................................   102
John Buhrmaster, President and CEO, First National Bank of 
  Scotia, on behalf of the Independent Community Bankers of 
  America........................................................    34
    Prepared statement...........................................   119
Dennis Pierce, Chief Executive Officer, CommunityAmerica Credit 
  Union, on behalf of the Credit Union National Association......    36
    Prepared statement...........................................   135
    Response to written question of:.............................
        Senator Moran............................................   257
Linda McFadden, President and CEO, XCEL Federal Credit Union, on 
  behalf of the National Association of Federal Credit Unions....    38
    Prepared statement...........................................   167
    Response to written questions of:............................
        Senator Crapo............................................   258
        Senator Moran............................................   266
Marcus M. Stanley, Ph.D., Policy Director, Americans for 
  Financial Reform...............................................    39
    Prepared statement...........................................   241
Michael D. Calhoun, President, Center for Responsible Lending....    41
    Prepared statement...........................................   243

              Additional Material Supplied for the Record

Prepared statement of Mary Martha Fortney, NASCUS President and 
  CEO............................................................   270
Prepared statement of David Baris, President, American 
  Association of Bank Directors..................................   273


          EXAMINING THE STATE OF SMALL DEPOSITORY INSTITUTIONS

                              ----------                              


                      TUESDAY, SEPTEMBER 16, 2014

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met, at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order. Today we have two thoughtful panels that will help us 
explore the current state of our Nation's small depository 
institutions.
    For many years, it has been a priority of mine to support 
efforts that tailor supervision and regulations for small, 
often rural, financial institutions. Such an approach that also 
maintains appropriate safeguards and consumer protections can 
help ensure we have a truly level playing field for 
institutions. To that end, since I have served as Chairman of 
this Committee, we have had regular meetings, briefings, and 
oversight hearings, as we are doing again today, to encourage a 
balanced approach with respect to oversight of smaller 
institutions.
    I believe the regulators have been responsive and are 
thinking more about small institutions than ever before. 
Specifically, I believe there have been significant 
improvements by the regulators regarding exams, rules, and 
outreach to small institutions. The agencies are also currently 
undertaking a comprehensive review of their rules, with a 
specific focus on reducing burdens and duplication for small 
institutions.
    In addition, this Committee has taken other steps to 
address reasonable concerns of small institutions. It acted on 
a bill regarding ATM plaques. The Senate acted to ensure that 
community banks' viewpoints are represented on the Federal 
Reserve Board. Ranking Member Crapo and I weighed in with the 
Federal Reserve Board to ensure that community banks were 
treated appropriately under the new Basel III rules. We asked 
the NCUA to take another look at the impact of their risk-based 
capital proposal on small, rural credit unions. And we 
prioritized incorporating small institutions' ideas into our 
housing finance reform bill.
    When an unintended consequence of the final Volcker rule 
appeared, Members pushed regulators to swiftly remedy the 
issue, which they did. The CFPB is also currently reconsidering 
its definition of ``rural'' as it relates to mortgage lending 
because of concerns raised by members.
    I also asked Inspectors General to conduct an audit of each 
agency's examination process for small institutions to ensure 
that exams are conducted fairly and transparently, which 
resulted in improvements at each of the agencies. It is also my 
hope that the full Senate can unanimously pass Senator Brown 
and Senator Moran's bipartisan bill regarding privacy 
notification, another common-sense bill to reduce regulatory 
burden for small institutions, which is supported by over 70 
Senators.
    Today we will continue our conversation to find ways to 
improve the regulation and supervision of small institutions. 
That said, we must not forget the lessons of the past, and any 
effort at regulatory relief must find the right balance with 
safety and soundness as well as consumer protection to succeed. 
I look forward to hearing the viewpoints of today's panelists 
on these important questions and issues.
    I now turn to Ranking Member Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    This hearing is important because small depository 
institutions represent the lifeblood of many communities across 
America, and especially rural Idaho. Yet small financial 
institutions are disappearing from America's financial 
landscape at an alarming rate. This is in large part due to an 
ever increasing regulatory burden that small depository 
institutions face and cannot absorb. These small entities can 
only withstand a regulatory assault for so long before 
considering a merger or a consolidation.
    We lost more than 3,000 small banks and more than one-half 
of the credit unions since 1990. In fact, we lost 85 percent of 
the banks with less than $100 million in assets between 1985 
and 2013.
    And what strikes me as particularly worrisome about this 
number is that the vast majority of those small banks did not 
fail. On the contrary, the rates of failure, voluntary closure, 
and overall attrition were lower for these institutions than 
for any other size group. This means that 85 percent of good 
small banks with assets under $100 million are no longer 
serving their communities, which is alarming.
    Not only are we losing small banks, but our regulatory 
framework is discouraging creation of new banks. Only two de 
novo Federal banking charters have been approved since 2009, 
according to the FDIC.
    I heard from Idaho banks and credit unions that regulatory 
burdens have become so overbearing that small depository 
institutions can no longer absorb it, so they are 
consolidating, and new ones are not being created. A 
streamlining of regulatory requirements is necessary to ensure 
small depository institutions remain competitive.
    The banking regulators and NCUA have commenced a review of 
unnecessary, outdated, and unduly burdensome regulations as 
required by law, and I look forward to their recommendations. 
At our hearing last week, I was encouraged to hear that 
principals at the banking agencies are committed to making this 
regulatory review meaningful and impactful. A main criticism of 
a similar review completed in 2006 was that the banking 
regulators subsequently repealed or eliminated only a few 
substantive regulations. That must not be the case this time. 
Since 2006 alone, we lost close to 1,000 banking organizations. 
Those that remain need our help in removing unnecessary 
obstacles.
    I cannot stress enough the importance of this regulatory 
review. The regulators must not squander an opportunity to make 
a lasting impact on our regulatory landscape so that another 
1,000 institutions do not disappear.
    I strongly encourage the agencies to conduct an empirical 
analysis of the regulatory burden on small entities as a part 
of this review. Quantifying regulatory cost is not an easy 
task, but that should not stand in the way of regulators doing 
the right thing.
    I look forward to hearing from our witnesses today about 
what specific fixes should be made so that small institutions 
in Idaho and in other rural communities can keep their doors 
open and continue to serve local communities.
    There is bipartisan support to create regulatory 
environments in which small financial institutions can thrive. 
Last week Senator Heitkamp said that ``too big to fail'' has 
become ``too small to succeed.'' I could not agree more. There 
are a few specific bills currently that help address these 
concerns.
    Senators Brown and Moran's bill to eliminate a paper 
version of the annual privacy notice, as indicated by the 
Chairman, currently has 70 cosponsors.
    Senators Moran and Tester's CLEAR Act would go a long way 
to aid community banks, as would Senators Manchin and Johanns' 
bill on points and fees for qualified mortgages.
    Senators Toomey and Donnelly's legislation to increase the 
threshold for when regulated depository institutions are 
subject to CFPB's examination and reporting requirements would 
alleviate a great amount of regulatory burden.
    Senators Brown and Portman's bill to allow certain credit 
unions in the Federal Home Loan Bank System is another such 
item.
    I look forward to working with Members on both sides of the 
aisle to make the necessary, common-sense fixes to help 
community banks and credit unions. I also look forward to 
working with key stakeholders to get more specific on what 
should be done to preserve small depository institutions in 
America.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who would like to give a brief 
opening statement?
    Senator Moran. Mr. Chairman?
    Chairman Johnson. Yes.

                STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Thank you, Mr. Chairman. Thank you and the 
Ranking Member for having this hearing. It seems to me like we 
have had lots of conversations in this setting. As you 
described, this is an issue that matters to you. Our States, 
Mr. Chairman, are very similar, and community banks and credit 
unions are very important to the local fabric and the vitality 
of the towns that comprise our States.
    In my view, too many times our hearings have had those 
represented by the first panel in front of us, and I think 
without exception we always hear about how cognizant you are of 
the challenges that small financial institutions face. You 
express sympathy and concern. You explain to me that you have 
advisory boards and individuals who make certain that the 
community bank and credit union perspective is heard. And yet 
so many times the problems continue, despite your sympathy and 
care.
    I hope that the result of today's hearing is that you will 
take back with you a recommitment toward finding a way to 
relieve the burden of those community financial institutions. 
And while it is useful, I suppose, for you to express to us 
your desire, your sympathy, your care, your agreement with our 
position, I hope that today's hearing results in action taken 
by the agencies to actually make a difference in how you 
conduct the exams, reviews, and what rules and regulations you 
place upon those community institutions.
    In my view, the burden also lies with Congress. My 
colleagues have outlined a series of pieces of legislation that 
have been introduced, but the reality is none of them have been 
passed. And so while I may sound critical of the regulators, I 
am also critical of the U.S. Senate where I serve in which we 
have broad-based support, Republican, Democrat, pieces of 
legislation. In fact, the bill that has been mentioned has 99 
individual Senators who have agreed to allow it to pass. The 
privacy regulation issue, 99 us have agreed to allow it to 
pass, but yet we cannot get it across the finish line.
    I have two pieces of legislation that I think I am so 
interested in and would be so useful, but I am not wedded to 
those specifics of that legislation and would volunteer to all 
in the audience as well as my colleagues on the Banking 
Committee that anything we can do in this Committee to work 
together to find something that is acceptable to the vast 
majority of us, I am certainly interested in doing it. It does 
not have to be a piece of legislation that I and Senator Brown 
introduced. It can be a piece of legislation that we all work 
on together.
    And so while I hope the regulators will do their jobs as it 
fits their description of what they want to accomplish, my hope 
and goal is that all of us on this Committee and in the U.S. 
Senate would work together.
    A primary motivation for me to serve in Congress has been a 
belief in the value of rural America. Relationship banking is a 
significant component of whether or not many of the communities 
I represent have a future. It is only that community financial 
institution that is going to make the decision about loaning to 
a grocery store in town. It is only that entity that is going 
to decide that that farmer is worthy of one more year of 
credit.
    And so as we develop policies in Washington, DC, that make 
everything so uniform, a cookie-cutter approach to lending, it 
means that many of my constituents and the communities they 
live in will have a much less bright future and a significant 
reduction in the opportunity to pursue their farming and 
business careers and occupations.
    Mr. Chairman, this is an important issue. You have been an 
ally, and I appreciate that very much. I would conclude by 
saying that anything that I can do to work with any of my 
colleagues here on this Committee and the U.S. Senate to see 
that we do something in addition to having this hearing, that 
there is actually by unanimous consent or by agreement, that we 
could pass some of these very common-sense pieces of 
legislation that would make a significant difference so that I 
would not have to complain the next time we have the regulators 
in front of us we still have the same problems. The burden lies 
with, in my view, you as well as us, and we ought to work 
together to solve the problem.
    Mr. Chairman, thank you.
    Chairman Johnson. Senator Warner.

              STATEMENT OF SENATOR MARK R. WARNER

    Senator Warner. Mr. Chairman, I will be very brief.
    One, I want to echo what my friend, the Senator from 
Kansas, said. I am supportive of his legislation. I cannot 
understand why the Ranking Member did not list my bipartisan 
legislation as well in that litany, the RELIEVE Act, but----
    Senator Crapo. Deem it so amended.
    [Laughter.]
    Senator Warner. And the only quick point I want to make--
and I am sure we will get to the regulators--you know, 
whether--all of us who supported Dodd-Frank, and even those who 
did not, we tried to address this with an exemption from a lot 
of the regulatory responsibilities for institutions under $10 
billion. And somehow that got lost in the wash, it seems. And 
under the guise of best practices, even though there are not 
statutory requirements on a lot of this regulatory activity, I 
think the regulators have kind of--echoing what Senator Moran 
said, with the best practices approach, have used what was 
intended for large institutions to creep down to smaller. And I 
really hope this panel can share with us--we can try in kind of 
this one-off effort that we all have, and--but if there would 
be a more comprehensive approach, you know, count me in as a 
supporter, Mr. Chairman, of you and the Ranking Member and all 
of us, and we can try to get this done.
    Thank you.
    Chairman Johnson. I would like to remind my colleagues that 
the record will be open for the next 7 days for additional 
statements and any other materials you would like to submit.
    I have a prior commitment and will have to excuse myself 
before the end of the hearing. Senator Brown will take over the 
gavel, and I thank him.
    Also, I thank the witnesses on both panels for being here 
today.
    Now I will introduce our witnesses on the first panel.
    Doreen Eberley is Director of the Division of Risk 
Management Supervision at the Federal Deposit Insurance 
Corporation.
    Toney Bland is Senior Deputy Comptroller for Midsize and 
Community Bank Supervision at the Office of the Comptroller of 
the Currency.
    Maryann Hunter is Deputy Director of the Division of 
Banking Supervision and Regulation of the Board of Governors of 
the Federal Reserve System.
    Larry Fazio is Director of the Office of Examination and 
Insurance at the National Credit Union Administration.
    Charles Vice is Commissioner of the Kentucky Department of 
Financial Institutions. He also serves as the Chairman of the 
Conference of State Bank Supervisors.
    I would like to ask the witnesses to please keep your 
remarks to 5 minutes. Your full written statements will be 
included in the hearing record.
    Ms. Eberley, you may begin your testimony.

  STATEMENT OF DOREEN R. EBERLEY, DIRECTOR, DIVISION OF RISK 
 MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION

    Ms. Eberley. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, I appreciate the 
opportunity to testify on behalf of the FDIC on the state of 
small depository institutions. As the primary Federal regulator 
for the majority of community banks, the FDIC has a particular 
interest in understanding the challenges and opportunities they 
face.
    Community banks are important to the American economy and 
the communities they serve. While they account for about 14 
percent of the banking assets in the United States, they now 
account for around 45 percent of all small loans to businesses 
and farms made by all banks in the United States. And there are 
the only physical banking presence in 600 counties in the 
United States, according to our 2012 community bank data study.
    Our study also showed the core community bank business 
model of well-structured relationship lending, funded by stable 
core deposits, and focused on the local geographic community 
performed relatively well during the recent banking crisis. 
Amid the 500-some banks that have failed since 2007, the 
highest rates of failure were observed among noncommunity banks 
and among community banks that departed from the traditional 
model and tried to grow faster with risky assets often funded 
by volatile brokered deposits.
    Recognizing the importance of community banks, the FDIC 
strives to reduce the regulatory burden of necessary 
supervision. Since the 1990s, the FDIC has tailored its 
supervisory approach to the size, complexity, and risk profile 
of each institution. To improve our supervision of community 
banks, in 2013 we restructured our pre-examination process to 
incorporate suggestions from bankers to better tailor 
examinations to the unique risk profile of each institution and 
to better communicate our examination expectations. We also 
took steps to ensure that only those items that are necessary 
for the examination process are requested from an institution.
    The FDIC also uses offsite monitoring programs to 
supplement and guide the onsite examination process. Offsite 
monitoring tools using key data from bank's quarterly Call 
Reports have been developed to identify institutions that are 
reporting unusual levels or trends in problem loans or other 
changes that merit further review, allowing us to intervene 
early when corrective action is most effective. Offsite 
monitoring using Call Report information also allows us to 
conduct onsite examinations less frequently and to reduce the 
time we spend in institutions once we are there.
    The Call Report itself is tiered to the size and complexity 
of institutions. Less complex community banks complete only a 
portion of the report. For example, a typical $75 million 
community bank showed reportable amounts in only 14 percent of 
the fields in the Call Report and provided data on 40 pages. 
Even a relatively large community bank, at $1.3 billion in 
total assets, showed reportable amounts in only 21 percent of 
the fields and provided data on 47 pages.
    The FDIC also scales its regulations and policies to the 
size, complexity, and risk profile of institutions where 
possible. This has been evident in several recent rulemakings 
where specific provisions have been included to reduce the 
compliance burden on community banks that may not substantially 
engage in the activities subject to the rule.
    Currently, the FDIC and the other regulators are actively 
seeking input from the industry and the public on ways to 
reduce regulatory burden as part of the statutory process under 
EGRPRA. The Federal banking agencies are seeking comments on 
our regulations in a series of requests and are already 
currently reviewing the first set of comments from the public 
and the industry. The agencies also plan to hold regional 
outreach meetings to get direct input from stakeholders. As 
part of this process, the FDIC is paying particular attention 
to the impact of regulations on smaller institutions.
    The best way to preserve the long-term health and vibrancy 
of community banks and their ability to serve their local 
communities is to preserve their core strengths of strong 
capital, strong risk management , and fair and appropriate 
dealings with customers. We recognize that we play an important 
role in this equation, and we strive to achieve the fundamental 
objectives of safety and soundness and consumer protection in 
ways that do not involve needless complexity or expense. We 
remain open to suggestions from community bankers about 
additional ways we can appropriately reduce burden, and we also 
stand ready to provide the Committee technical assistance on 
regulatory burden reduction ideas.
    Thank you for inviting the FDIC to testify this morning. I 
look forward to answering any questions.
    Chairman Johnson. Thank you.
    Mr. Bland, please proceed with your testimony.

STATEMENT OF TONEY BLAND, SENIOR DEPUTY COMPTROLLER FOR MIDSIZE 
 AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF 
                          THE CURRENCY

    Mr. Bland. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, thank you for the 
opportunity to appear before you today discuss the challenges 
facing community banks and the actions that the OCC is taking 
to help community banks meet those challenges.
    I have been a bank examiner for more than 30 years and most 
recently served as the Deputy Comptroller for the Northeastern 
District where I had responsibility for the supervision of more 
than 300 community banks.
    Last month I assumed the role of Senior Deputy Comptroller 
for Midsize and Community Bank Supervision. In this position I 
oversee the OCC's National Community Bank Supervision Program 
for more than 1,400 institutions with assets under $1 billion.
    I have seen firsthand the vital role community banks play 
in meeting the credit needs of consumers and small businesses 
across the Nation. A key element of our supervision is open and 
frequent communication with bankers, and I personally place a 
high priority on meeting with and hearing directly from 
community bankers about their successes, their challenges, and 
frustrations.
    Frequent communications also help me better understand the 
impact our supervision and regulations have upon the daily 
operations of community banks. Not only are these meetings one 
of my favorite parts of the job, they are also quite productive 
and amongst my most important priorities.
    The OCC is committed to supervisory practices that are fair 
and reasonable and to fostering a climate that allows well-
managed community banks to grow and thrive. We tailor our 
supervision to each bank's individual situation, taking into 
account the products and services it offers, as well as its 
risk profile and management team.
    Given the wide array of institutions we oversee, the OCC 
understands that a one-size-fits-all approach to regulation 
does not work. To the extent that the statutes allow, we factor 
these differences into rules we write and the guidance we 
issue. My written statement provides several examples of the 
common-sense adjustments we have made to recent regulations to 
accommodate community bank concerns.
    To help community banks absorb and keep track of changing 
regulatory and supervisory requirements, we have developed a 
number of informational resources for their use. For example, 
each bulletin or regulation we issue now includes a summary of 
the issuance and a box that tells community banks whether and 
how the issuance applies to them.
    Guiding our consideration of every proposal to reduce 
burden on community banks is the need for assurances that 
fundamental safety and soundness and consumer protection 
safeguards are not compromised. We would be concerned, for 
example, about proposals that would adversely impact or 
complicate the examination process, mask weaknesses on a bank's 
balance sheet, or impede our ability to require timely 
corrective action to address weaknesses.
    However, we know we can do more to reduce regulatory burden 
on community banks, and we are exploring several options that 
we believe will help. For example, we believe community banks 
should be exempt from the Volcker rule. We also support 
changing current law to allow more community banks to qualify 
for an expanded 18-month examination cycle.
    We support more flexibility for the Federal thrift charter 
so that thrifts that wish to expand their business model and 
offer a broader array of services to their communities may do 
so without the burden expense of changing charters. And we 
believe community banks should be exempt from the annual 
privacy notice requirement. Finally, we are supportive of 
community banks' efforts to explore avenues to collaborate and 
share resources for compliance or back-office processes, to 
address the challenges of limited resources in acquiring needed 
expertise.
    I am also hopeful that recent efforts to review current 
regulations and reduce/eliminate burden will bear fruit. As 
Chair of the FFIEC, Comptroller Curry is coordinating the 
efforts of the Federal banking agencies to review the burden 
imposed on the banks by existing regulations consistent with 
the EGRPRA process. The OCC, FDIC, and the Fed launched this 
effort this summer and are currently evaluating the comments 
received on the first group of rules under review. We are 
hopeful that the public will assist the agencies in identifying 
ways to reduce unnecessary burden associated with our 
regulations, with a particular focus on community banks.
    Separately, the OCC is in the midst of a comprehensive, 
multi-phase review of our own regulations and those of the 
former OTS to reduce duplication, promote fairness in 
supervision, and create efficiencies for national banks and 
Federal savings associations. We have begun this process and 
are reviewing comments received on the first phase of our 
review, focusing on corporate activities and transactions.
    In closing, the OCC will continue to carefully assess the 
potential effect that current and future policies or 
regulations may have on community banks, and we will be happy 
to work with the industry and Committee on additional ideas or 
proposed legislation initiatives.
    Thank you for the opportunity to appear today, and I would 
be happy to respond to questions.
    Chairman Johnson. Thank you.
    Ms. Hunter, please proceed with your testimony.

 STATEMENT OF MARYANN F. HUNTER, DEPUTY DIRECTOR, DIVISION OF 
 BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Hunter. Thank you. Chairman Johnson, Ranking Member 
Crapo, and other Members of the Committee, I appreciate the 
opportunity to testify on the Federal Reserve's approach to 
regulating and supervising small community banks and holding 
companies.
    Having started my career as a community bank examiner at 
the Federal Reserve Bank of Kansas City, I have seen firsthand 
the important role that community banks play in providing 
financial services to their communities and local economies. I 
have also seen how critical it is that we supervise these 
institutions effectively and efficiently and in a way that 
fosters their safe and sound operations while still allowing 
them to meet the needs of their communities.
    Let me begin my remarks this morning by noting that the 
overall condition of community banks continues to improve and 
strengthen in the aftermath of the financial crisis. Community 
banks have stronger capital positions and asset quality, which 
not only makes them more resilient but also more willing and 
able to lend to creditworthy borrowers. Indeed, after several 
years of declining loan balances at community banks, we are 
starting to see an increase in loan origination, which is good 
news for the local economies that are served by community 
banks.
    In the wake of the financial crisis, we have spent the past 
several years revising our supervisory programs for community 
banks to make them more efficient and less burdensome for well-
run institutions. For example, we are building on our 
longstanding risk-focused approach to supervision and revising 
our monitoring program and field procedures, as well as 
conducting more examination work offsite to focus examiner 
attention on higher-risk activities and reduce some of the work 
that is done at lower-risk, well-managed community banks.
    This is important because even similarly sized banks may be 
affected very differently by a general policy or supervisory 
approach, depending on their risk profiles or business models.
    As Governor Tarullo testified before this Committee last 
week, we recognize that burden can also arise from regulations 
that may not be appropriate for community banks given their 
relative level of risk. To address this, we work within the 
constraints of the law to draft rules so as not to subject 
community banks to requirements that would be unnecessary or 
unduly burdensome to implement.
    A number of recently established rules have been applied 
only to the largest, most complex banking organizations, and to 
give just one example, the Federal Reserve and the other 
banking agencies have not applied the large-bank stress-testing 
requirements, which includes the Dodd-Frank stress testing as 
well as the Comprehensive Capital Analysis and Review, or CCAR, 
exercise of the Federal Reserve. They have not applied to 
community banks or their holding companies.
    In addition, we have taken steps to clearly identify when 
supervisory guidance does and does not apply to smaller 
institutions. We provide information via newsletter, Web site, 
and teleconferences targeted to the community bank audience to 
explain regulatory expectations and provide examples to help 
them understand new requirements.
    As we consider how to best tailor our rules and supervisory 
activities for community banks, we are keenly interested in 
better understanding the role that they play in the U.S. 
economy, the key drivers of their success, and as a result, we 
have partnered with our colleagues at the Conference of State 
Bank Supervisors to host two community banking research 
conferences at the Federal Reserve Bank of St. Louis, the 
second of which will be taking place next week.
    In this regard, I would like to recognize my colleague on 
this panel Mr. Vice for his personal leadership in that effort, 
and I expect he will have more to say about the conference and 
this important initiative in his remarks.
    But let me conclude by emphasizing that as we think about 
addressing regulatory burden at community banks, the Federal 
Reserve is focused on striking the appropriate balance. On the 
one hand, we take very seriously our longstanding 
responsibility for fostering a safe and sound financial system 
and compliance with relevant consumer protections. On the other 
hand, we believe that our supervisory activities and 
regulations should be calibrated appropriately for the risk 
profile of smaller institutions.
    We are committed to identifying ways to further modify and 
refine our supervisory programs to not impose undue burden 
while still ensuring that community banks operate in a safe and 
sound manner.
    Thank you for inviting me to share the Federal Reserve's 
views on matters affecting community banks, and I would be 
pleased to answer any questions you may have.
    Chairman Johnson. Thank you.
    Mr. Fazio, please proceed with your testimony.

 STATEMENT OF LARRY FAZIO, DIRECTOR, OFFICE OF EXAMINATION AND 
        INSURANCE, NATIONAL CREDIT UNION ADMINISTRATION

    Mr. Fazio. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, I appreciate the 
invitation to discuss the status of small credit unions.
    With one-third of credit unions having less than $10 
million in assets and two-thirds of credit unions having less 
than $50 million in assets, NCUA is acutely aware of the 
importance of scaling its regulatory, supervisory, and 
assistance programs to address the unique circumstances of 
small credit unions.
    Smaller financial institutions, in particular, have fewer 
resources available to deal with marketplace, technological, 
legislative, and regulatory changes. Smaller credit unions 
continue to have lower margins, higher operating expenses, and 
lower growth rates than larger institutions. As a result, 
during the last decade the long-term consolidation trend of 
smaller credit unions has continued.
    Ten years ago, credit unions with less than $50 million in 
assets accounted for 80 percent of all federally insured credit 
unions. Today that share is 66 percent. While some have grown 
and are no longer considered small, almost all of the remaining 
decline in small credit unions is from voluntary mergers.
    Our financial system benefits most when there is an 
effective balance between opportunities for the market to 
optimize performance and innovate, with prudent regulations to 
safeguard financial stability and protect consumers. Thus, 
NCUA's approach to regulating and supervising credit unions has 
continued to evolve with changes in the marketplace and the 
credit union system.
    NCUA also scales its regulatory and supervisory 
expectations and seeks to provide regulatory relief when it is 
appropriate and within the agency's authority to do so. Where 
regulation is necessary to protect the safety and soundness of 
credit unions and the Share Insurance Fund, NCUA uses a variety 
of strategies to ensure that regulations are targeted. These 
strategies include exempting small credit unions from several 
rules, using graduated requirements as size and complexity 
increase for others, and incorporating practical compliance 
approaches in agency guidance.
    We strive to strike a fair balance between maintaining 
baseline prudential standards for all financial institutions 
and reducing the burden on those institutions least able to 
afford it.
    NCUA also provides relief for smaller credit unions through 
the examination process. In 2012, NCUA adopted a streamlined 
examination program for smaller credit unions. These 
examinations now focus on the most pertinent areas of risk in 
small credit unions: lending, recordkeeping, and internal 
control functions. The agency has been testing additional 
streamlining and refinements throughout 2014 with plans for 
full implementation in 2015.
    NCUA appreciates the important role small credit unions 
play in the lives of their members and local communities, and 
the significant challenges they face. To help them succeed, 
NCUA's Office of Small Credit Union Initiatives provides 
targeted training, one-on-one consulting, and grant, loan, and 
partnership opportunities. This office demonstrates NCUA's 
commitment to helping small credit unions not only survive, but 
to thrive.
    NCUA also encourages credit unions to collaborate, both 
through direct cooperation as well as through credit union 
service organizations, to achieve economies of scale and expand 
member service opportunities.
    Finally, the Committee has asked for NCUA's views on 
regulatory relief legislation. Small credit unions face many 
challenges that require solutions based on size and complexity. 
Therefore, NCUA would advise Congress to provide regulators 
with flexibility in writing rules to implement new laws. Such 
flexibility would allow the agency to scale rules based on size 
or complexity to effectively limit additional regulatory 
burdens on smaller credit unions.
    NCUA also supports several targeted relief bills like S. 
2699, the Credit Union Share Insurance Fund Parity Act, and S. 
968, the Small Business Lending Enhancement Act. NCUA further 
asks the Committee to consider legislation to provide the 
agency with the authority to examine and enforce corrective 
actions when needed at third-party vendors, parallel to the 
powers of the FDIC, OCC, and the Federal Reserve. The draft 
legislation would provide regulatory relief for credit unions 
because NCUA would be able to work directly with key 
infrastructure vendors, like those with a cybersecurity 
dimension, to obtain necessary information to assess risk and 
deal with any problems at the source.
    In closing, NCUA remains committed to providing regulatory 
relief, streamlining exams, and offering hands-on assistance to 
help small credit unions compete in today's marketplace.
    I look forward to your questions.
    Chairman Johnson. Thank you.
    Mr. Vice, please proceed with your testimony.

    STATEMENT OF CHARLES A. VICE, COMMISSIONER OF FINANCIAL 
INSTITUTIONS, KENTUCKY DEPARTMENT OF FINANCIAL INSTITUTIONS, ON 
       BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS

    Mr. Vice. Good morning, Chairman Johnson, Ranking Member 
Crapo, and distinguished Members of the Committee. My name is 
Charles Vice. I serve as the Commissioner for the Department of 
Financial Institutions in the Commonwealth of Kentucky. It is 
my pleasure to testify before you today on behalf of the 
Conference of State Bank Supervisors.
    In my 25 years as a Federal and State bank regulator, it 
has become very clear to me the vital role community banks play 
in the economy. I know this because I have seen it firsthand in 
my State of Kentucky where a single community bank is the only 
banking option for four counties. Furthermore, dozens of other 
counties have no physical banking option except for local 
community banks. This is not a Kentucky phenomenon. About one-
fifth of all U.S. counties depend on community banks as their 
access point to the financial system.
    Because of their importance in these local markets, the 
continuing trend of consolidation is very concerning. During 
the past 3 years, the number of banks in the United States with 
less than $1 billion in total assets has dropped by 924, or 13 
percent. This has consequences for communities and for the 
diversity of the financial services industry. I know this 
Committee shares my concern on this issue, and I appreciate 
your efforts to examine the state of our country's community 
banks and regulatory approaches to smaller institutions.
    Community banks should be regulated and supervised in a 
manner that reflects their relationship-based lending model. 
Key to this effort is a deeper understanding of community 
banking and its impact. To that end, CSBS and the Federal 
Reserve will host the annual Community Bank Research Conference 
next week in St. Louis. This conference is a unique combination 
of academic research and industry input, gathered through a 
nationwide survey and in-person town hall meetings. Here are a 
few previews.
    Our survey included several questions about mortgage 
lending: 26 percent of respondents indicated that they would 
not originate non-QM loans; an additional 33 percent will only 
originate non-QM loans on an exception-only basis.
    In addition, one of the research papers to be presented 
examines a Federal agency's appeals processes. Research such as 
this helps to identify right-size regulation and solution-
oriented approaches to supervision. My written testimony 
highlights examples where State regulators have been 
particularly innovative. We have developed and implemented 
responsive practices to better serve smaller institutions. Some 
examples are as fundamental as coordinating supervision. Other 
examples show the States' flexibility in making supervision 
more effective and efficient. State regulators recognize that 
our Federal counterparts have made some positive contributions 
to a right-sized regulatory framework for community banks as 
well. But right-sizing regulation is not a one-time 
undertaking. It must be an ongoing effort to identify ways to 
meet our responsibilities as regulators while supporting growth 
and health of our community banks and our local economies.
    The primary action we can take to right-size regulation is 
to do away with a one-size-fits-all approach to regulation and 
supervision, and turn our attention to establishing a 
policymaking approach that considers the community bank 
business model. For example, when it comes to applications, 
agency decisions for smaller institutions should not set 
precedents for larger banks.
    Similarly, in the area of mortgage regulation, there should 
be greater flexibility tied to the reality of community banks' 
business model. This includes recognizing the inherently 
aligned interest between borrowers and creditors in portfolio 
lending. The CFPB Small Creditor QM does this, but more can be 
done through the passage of bills, including Senate bill 2641 
and House bill 2673, which grant the QM liability safe harbor 
to mortgage loans held in portfolio; and Senate bill 1916 and 
House bill 2672, which create a petition process for 
responsible balloon loan portfolio lending in rural areas.
    To be responsive to diverse institutions, agency leadership 
itself has to understand these institutions. State regulators 
support Senator Vitter's proposal that at least one member of 
the Federal Reserve Board have community banking or community 
bank supervisory experience. Similarly, the FDI Act's 
requirement that State bank supervisory experience on the FDIC 
Board should be clarified to reinforce Congress' intent to have 
a person who worked in State government supervising banks on 
the board. I am pleased to say that Senators Coburn and Hirono 
will be introducing a bill this week to accomplish this goal.
    As policymakers, we are capable of right-sizing regulations 
for these vital institutions, and we must act now to ensure 
their long-term viability. CSBS will work with Members of 
Congress and our Federal counterparts to build a new framework 
for community banks that promotes our common goals of safety 
and soundness and consumer protection.
    Thank you for the opportunity to testify today, and I look 
forward to answering any questions you have.
    Chairman Johnson. Thank you all for your testimony.
    I will now ask the clerk to put 5 minutes on the clock for 
each Member.
    Mr. Fazio, NCUA has received many comment letters on its 
proposed risk-based capital rule, including a letter that 
Ranking Member Crapo and I sent earlier this summer. Would you 
please update us about whether the NCUA Board will reissue the 
rule for a second comment period? Also, when does the NCUA 
Board expect to finalize the rule?
    Mr. Fazio. Chairman Johnson, that is an open question at 
this point, and it is premature for me to give a specific 
answer to the timing of the final rule and whether or not it 
would be reproposed for comment.
    What I can do in terms of updating you is indicate, as you 
had mentioned, we received over 2,000 comments as part of the 
proposed rule process which was out for over 120 days for 
comment. The NCUA Board has also conducted a series of 
listening sessions across the country throughout the summer to 
garner further input on the rule. And we continue at the staff 
level to consult with industry practitioners on technical 
aspects of the rule.
    So staff is in the process right now of working through all 
of those comments and analyzing those and conducting additional 
research and analysis in other areas that we also want to 
explore.
    Once we complete that process, we will then need to work 
with the NCUA Board to achieve consensus on a direction that we 
want to take for the final rule. Once we do that, we will be in 
a position to better speak to the timing and the issue of re-
comment. I can say it is the agency's top regulatory priority, 
so staff is working around the clock on this issue to do it as 
soon as we can, but we also want to make sure that we get it 
right and respond fully to the comments.
    I know that the commenters expressed significant interest 
in a second comment process. Also, some have indicated that 
timing is important because they would like some certainty as 
it relates to the capital planning and strategic planning they 
need to do related to the capital standards, contingent, of 
course, upon NCUA coming out with a sound and responsible rule. 
And so as we work through these comments and we analyze options 
for proceeding with the final rule, we will need to look at, 
and the board will need to make a decision about, whether or 
not that warrants a second comment period.
    Chairman Johnson. Ms. Eberley, has the FDIC issued any 
guidance or placed restrictions on the number of non-QM 
mortgages an institution can hold in portfolio?
    Ms. Eberley. So, no, we have not put any restrictions on 
institutions, but, yes, we have issued guidance on an 
interagency basis in December discussing our supervisory 
approach to both QM and non-QM loans, to provide assurance to 
institutions that there are no changes from a supervisory 
perspective.
    Chairman Johnson. Mr. Fazio and Mr. Vice, there is broad 
support in the Senate for a bill to change how depository 
institutions provide privacy notifications to their customers. 
Is this an appropriate change? And how are consumers protected? 
Mr. Fazio, let us start with you.
    Mr. Fazio. Chairman Johnson, NCUA supports that legislative 
relief pertaining to the annual privacy notices. We think that 
that bill provides consumers with adequate protections around 
the disclosures related to the privacy rights, provided there 
are no changes. It is posted electronically on their Web site. 
We think that the bill gives consumers the information they 
need and allows the institutions to have a cost-effective way 
of providing those disclosures.
    Mr. Vice. In reference to Senate bill 635, CSBS does 
support this bill. We think it is a common-sense approach to 
the regulation. The consumer is protected because they can see 
the privacy notice up front when the account is opened. In 
addition, they have access to it online, and the only time they 
would receive notification is if something changes with it. The 
only thing we would ask is that the bill does not preempt State 
law relative to privacy notices.
    Chairman Johnson. This question is for Ms. Hunter and Mr. 
Bland. What do you consider the biggest risk to the viability 
of small institutions? And what major step has your agency 
taken to address that risk? Ms. Hunter, let us begin with you.
    Ms. Hunter. Thank you. Well, Chairman Johnson, to answer 
your question, the biggest risk facing any particular 
individual community bank is generally credit risk. That is the 
largest part of the balance sheet, and so obviously to the 
extent which smaller banks are taking on credit risk, that is 
the area where often, if there is new product, for example, 
being offered, there may not be the expertise in-house to 
properly address the risk management necessary for that.
    In looking at individual banks, it comes down to the issue 
that I think affects the community banks more broadly across 
the portfolio, and the concern we often hear is the threat to 
the community bank business model. And really underlying that I 
believe is that the community banks are really concerned and 
struggling with how to produce revenue. And so the revenue 
comes in in several forms. One is avoiding costs, which could 
be associated with the cost of compliance with new regulations. 
There is also challenge by the low interest rate environment or 
the current economic environment, and some regions have not 
rebounded as well as others. But there is also competition for 
good loans from nonbank lenders. So all of these factors come 
into play, I think, in creating risk for community banks.
    The thing that I would also want to add is that community 
banks have a comparative advantage vis-a-vis larger 
institutions to the extent they really focus on relationship 
banking, the special knowledge they have of their customers, of 
their communities. And to the extent there are regulations or 
requirements that we place that reduce the discretion that they 
have in addressing specific and unique needs for their 
individual customers, I think that is where you will hear the 
most concern from community banks about their ability to 
compete, because it is almost in effect reducing the 
competitive advantage that they have by virtue of this very 
special local knowledge.
    Chairman Johnson. Mr. Bland?
    Mr. Bland. Chairman Johnson, in my conversation with 
community bankers, what I often hear is the amount and the pace 
of regulation and the impact that is having on the 
institutions' lending and also servicing their communities. And 
coupled with that is the changing operating environment where 
you see institutions now facing the various types of 
operational risk, including cybersecurity, the impact of 
technology is placing on them. So it is really getting to what 
is the right business model for the community bank.
    But first and foremost has been the burden of regulations 
and how that competes with their time and attention to service 
their communities. And what we really focused on at the OCC is 
when it relates to regulations that apply to community banks is 
provide information in a clear format to indicate what regs 
apply to them and how and why.
    In addition to that, we provide information sources, such 
as on the domestic capital rules a two-pager that clearly 
states what part of the rules apply to community banks. And, in 
addition, we also provide a quick reference guide for the CFPB 
mortgage rules to make sure community bankers understand and to 
help them as they wade through the various laws and 
regulations.
    And then to the extent that there are opportunities to 
exempt community banks without compromising safety and 
soundness and consumer protection standards, we have exempted 
them from certain rules as well. The heightened standards rule 
that we issued, the liquidity cover ratio, are some of the 
things that come to mind.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. And again, I thank 
each Member of the panel for being here today and sharing your 
testimony with us.
    Ms. Eberley and Mr. Bland, I was going to direct my first 
question to you. It was going to be on Operation Choke Point, 
but I am just going to--I probably will not have time to get to 
that. I just wanted to alert you that I will be, either in 
follow-up or in the hearing, discussing with you the 
implementation of Operation Choke Point and, frankly, whether 
it is appropriate for Federal regulatory agencies and the 
financial world to be utilizing the regulatory system to, in 
what I view, target business models that are not supported by 
the Administration. I know that each of you have taken actions 
to try to correct that issue and perception, and I just want to 
tell you, from what I am seeing, it is not working yet.
    But I am not going to give you a chance to talk with me 
about that right now. What I want to talk about right now is 
the bigger question of the EGRPRA review. Each of your agencies 
has said that you are engaged--I know that you are now engaged 
in a new review, and the issue that I want to raise with you is 
whether we can make this real. I am going to back to the 2004-
06 review that we did 10 years ago, and at that time Senator 
Shelby was the Chairman of this Committee, and he assigned me 
as one of the more junior Members of the Committee the 
opportunity to be the lead on developing the legislative 
response to the EGRPRA review. And for those of you who were 
involved at that time, you will remember we got extensively 
involved. All of the agencies were reviewing, providing 
information to us from the input and the analysis they were 
doing. We engaged with those in the private sector who were 
also making recommendations and so forth. We were creating 
lists and charts. I think we had on our list 180 or more items 
of potential legislative action that was needed to help reduce 
the regulatory burden on community banks. And then there was 
another long list of actions that could be taken by the 
regulators themselves without Congress' activity.
    The reason I go through that with you is I was pretty 
discouraged by the outcome. We did pass some legislation, and 
we passed some legislation that did some really good things. 
But in the context of what we could have done, I think we got 
just mostly low-hanging fruit.
    I was reading the response to your current effort from the 
ICBA which sort of makes the same point. They referred back to 
the earlier EGRPRA action and said that so little came of it, 
both at the regulatory and at the congressional level, that 
many in the industry felt like it was sort of a check-the-box 
experience where they were going through another regulatory 
requirement to do a regulatory review, and we will do it and we 
will have all these issues identified, and we will not have 
resolution put into place.
    I am using up most of my time explaining my question here 
to you, but my question is: How can we make it real this time? 
I want to give you one specific example. Last time, in 2004 and 
2006, one of the items on our list that we were not able to do 
was the annual privacy exemption that we are talking about 
today that everybody seems to be in agreement with. That was on 
our list. It was one of those we could not get done because 
there was an objection. And I will not go into where the 
objection came from, but the point is it was as though unless 
we had consensus from everyone involved, we could not get the 
political agreement to move forward on a fix. And somehow, both 
at the regulatory level and at the congressional level, we need 
to get by that this time. We do not want another tepid EGRPRA 
process.
    I would just like to ask those of you who can, in the 
minute that is left out of my question--and we will start with 
you, Ms. Eberley, to just respond to that generally. Are you 
committed and will you work on putting together a process that 
will generate outcomes rather than just lists this time?
    Ms. Eberley. So, yes, we are very committed and I think 
that all of the agencies are committed to the process. We are 
working together through the FFIEC. We just 2 weeks ago closed 
the comment period on the first round of regulations that we 
issued for comment. They covered international operations, 
powers and activities, and applications and reporting. And we 
did get some comments--not a lot. We hope that we will get more 
in the future. But we are still open for comments as well. We 
are going to have outreach sessions around the country. And 
from a preliminary look at the comments--so we are still early 
in the process--speaking on the FDIC's behalf, you know, there 
are some things that are directed directly to us that we may be 
able to have the control to change.
    So to the extent that we have the ability to do that, we 
are committed to act early, and I think we can get back to you 
a little further down the road after we have had an opportunity 
to digest the first round of comments.
    Senator Crapo. Well, thank you. My time is up, but if I 
could, Mr. Chairman, allow a quick response from Mr. Bland and 
Ms. Hunter.
    Mr. Bland. Senator Crapo, I echo Ms. Eberley's comments 
around the spirit of cooperation among the agencies, but also a 
concerted effort of the current principles to effect change.
    With respect to the outreach sessions that Ms. Eberley 
referred to, Comptroller Curry is personally planning to attend 
a number of those to really hear directly from the bankers, but 
also to lay out tangible types of actions. So there is a spirit 
but also a commitment to effect change this time.
    Senator Crapo. Thank you.
    Ms. Hunter?
    Ms. Hunter. And I would just very quickly add that I concur 
with my colleagues. We also at the Federal Reserve are 
committed to this process and very hopeful that we will have 
some very concrete actions that will come out of it in the 
efforts to reduce regulatory burden for small banks.
    Senator Crapo. Well, thank you.
    Mr. Vice. Could I add to that real quickly?
    Senator Crapo. Sure.
    Mr. Vice. Thank you. Again, Congress granted the States a 
seat on the FFIEC, and we really appreciate that. I wanted to 
update you that the CSBS is taking this seriously. We have had 
three calls on this already, and we are trying to identify 
outdated and burdensome regulation. And we completely agree 
with you. This activity must result in meaningful action and 
reform.
    Senator Crapo. Well, I thank you all on that. Sorry, Mr. 
Fazio, I did not give you a chance to respond, but I would just 
say let us make it right this time. Let us not make it so that 
the only thing that happens is the narrow band of things that 
everybody agrees to. Let us find a consensus of where we need 
to make fixes, and let us make the changes that we need to 
make.
    Chairman Johnson. Senator Warner.
    Senator Warner. Well, thank you, Mr. Chairman. Thank you 
for holding this hearing. And I really want to take up where 
Senator Crapo left off, agree with his macro comment on how we 
approach this, agree with Senator Moran's comments on privacy, 
support his legislation. But there seems--we have all got 
individual pieces of legislation. My RELIEVE Act, which is 
bipartisan, Senator Fisher and others on it, you know, takes 
the small bank holding company numbers, Ms. Hunter, from 500 
million to a billion, which we think makes sense, and I would 
hope you would concur. It deals, as somebody working, again, 
with the Chairman and the Ranking Member on QM definitions in 
terms of rural, takes the number in terms of mortgage 
origination from 500 to 1,000 per year, again, a step in the 
right direction; Mr. Fazio, deals with providing credit unions 
the parity with FDIC-insured institutions when it comes to the 
interest on lawyers' trust accounts.
    But my sense is we are kind of doing this all in a one-off 
basis, and a more comprehensive approach--and EGRPRA may be the 
right tool. I just want to publicly say I look forward to 
working with you and other Members of this Committee to do this 
kind of at a macro level, because it really needs to be done.
    I guess one item I would also want to raise with the 
regulators is I know when I meet with my credit unions or 
community banks and I make the defense of we put in the law 
exemptions for smaller institutions, and, you know, under 10 
billion, you are not applied to CFPB, and what happened--and 
you almost get kind of--you get laughed at by them because 
while we all pay homage to the role of these small 
institutions, we all look at this declining number, and, you 
know, we keep saying these things, and yet if this keeps going, 
the whole nature of small institutions being able to served 
particularly rural communities is going to disappear.
    One of the things that I constantly hear is that even when 
you put the exemption in place for a smaller institution, when 
it comes particularly to the examination process, what ends up 
being kind of an industry-wide or regulatory-wide best practice 
that may apply to the larger institution in effect trickles 
down into the smaller institution. I do not know how you 
further legislate against that, but I would love to hear from 
the regulators if you have got any suggestions for us, because 
I hear your testimony that you value these smaller 
institutions, want to provide specific relief. We keep trying 
to do this on a one-off basis. I agree with Senator Crapo that 
the more macro approach may be better. But, Ms. Eberley and Mr. 
Bland and Ms. Hunter, how do we guard against this examination 
creep, which is clearly not the legislative intent, yet still 
ends up happening under the guise of best practices?
    Ms. Eberley. So we address that every day, and it is our 
job to make sure that our examiners are enforcing the rules the 
way that they are written. So where there is a bright line, it 
needs to be observed.
    We have tried to make it very, very clear when we issue 
rules or guidance and there is a bright line, what the bright 
line is. An example that Maryann has raised already is the 
stress testing. When we issued the financial institution 
letters discussing that, we had a whole separate page talking 
about it not applying to community banks; the $10 billion 
threshold stood.
    So we can do part of it. Part of it is outside of our 
control and the banking industry, so there are outsiders that 
talk about the worry of regulatory creep and put a concern 
really in institutions' minds that this is going to happen to 
them and they need to be prepared. So we have to combat that as 
well.
    Senator Warner. But it is happening. I mean, community bank 
after community bank, when you take--you look at the one place 
that is expanding is the regulatory staff, which, again, back 
to Ms. Hunter's comment, makes them in a very competitive 
market even less competitive. So I am not fully satisfied with 
your answer.
    Ms. Eberley. OK. We also have an internal control group 
that audits our procedures and our adherence to our procedures, 
so we do reviews of every regional office that covers the 
examinations that that region has conducted to ensure adherence 
to policy. So we have other ways of tracking to making sure 
that our examiners are doing what they are supposed to be. If 
they are not, we ask bankers to call us and let us know. We can 
fix it.
    Senator Warner. Can you get me data on how many call and 
how you respond to that?
    Ms. Eberley. On how many--oh, bankers, yeah.
    Senator Warner. What your response level is to institutions 
that say this examination process is going beyond the scope, if 
you would get me that data, I would appreciate it.
    Ms. Eberley. [Response from Ms. Eberley:]

        The FDIC provides the banks it supervises a robust process for 
        appealing examination results, which includes an informal 
        resolution of issues through the field and regional supervision 
        staffs, informal resolution of issues throughthe FDIC's 
        Ombudsman, and a formal review by the appropriate Division 
        Director, and ultimately, if eligible, a formal appeal to a 
        board-level committee, the Supervisory Appeals Review Committee 
        (SARC).

        Informal Supervision Staff Process

        As part of the examination process, examiners or field 
        management serve as the first-level of review in an attempt to 
        resolve disputes or unresolved examination issues. Issues that 
        remain unresolved after the conclusion of an on-site 
        examination are elevated to the appropriate regional office for 
        a second-level review. If the regional office and the 
        institution are unable to resolve disputed issues, FDIC staff 
        notifies the institution's management and board of directors of 
        the institution's rights to appeal to the Division Director and 
        the SARC. However, most disputed examination issues are 
        resolved informally between institutions and the field or 
        regional staffs, and the institutions do not pursue formal 
        appeals of the issues in those cases. This informal process has 
        also proven effective at resolving questions about 
        interpretations of our regulations, policies and guidance. If 
        bankers have questions or concerns about whether a particular 
        rule, policy or guidance applies to their bank or about how 
        examiners are reviewing adherence to them, we encourage bankers 
        to raise questions to FDIC field or regional managers, or to 
        the Division Director.

        Formal Appeals to the SARC

        The first stage of the formal appeals process is to request a 
        review of the disputed finding by the appropriate Division 
        Director in the FDIC's Washington Office. The Division convenes 
        a panel of subject-matter experts who are familiar with the 
        relevant policy issue, but who played no role in the 
        examination in dispute. At the conclusion of the division-level 
        review, the bank receives a comprehensive response to its 
        request that summarizes the bank's position and supporting 
        arguments, the regional office's support for its findings, a 
        discussion of the applicable policies and examination guidance, 
        and the Division's final decision and rationale. Given the 
        comprehensive nature of the Division's response, often banks 
        choose not to pursue the second-stage appeal to the SARC. 
        Alternatively, some institutions narrow the scope of their 
        appeal to the SARC in light of the divisional response.

        Since 2005, the FDIC has received 74 requests for Division 
        level reviews. Of those, 50 were denied, 2 were approved, 4 
        were partially approved, 8 were deemed ineligible or 
        incomplete, 9 were withdrawn, and 1 bank closed during the 
        process. For the 38 SARC-level appeals since 2005, 20 were 
        denied, 2 were partially approved, 8 were deemed ineligible or 
        incomplete, 3 were withdrawn, and 5 banks closed during the 
        process.

        Informal Resolution through FDIC's Ombudsman

        Approximately 6,404 industry representatives contacted the FDIC 
        Ombudsman from January 2005 through August 2014 to request 
        assistance. Of this number, 366 complained about the FDIC. The 
        Ombudsman resolved or mitigated these complaints--or referred 
        them to another party for resolution when appropriate. In the 
        majority of these cases, the Ombudsman was able to provide 
        assistance by explaining FDIC policy and procedures and by 
        getting contacts to the right party within the FDIC.

    Senator Warner. If Mr. Bland and Ms. Hunter could comment 
as well, and also, Ms. Hunter, if you could make some comment 
on whether you all would have any concern on the small bank 
holding company level moving from $500 million to $1 billion.
    Mr. Bland. Senator Warner, as the Senior Deputy Comptroller 
for Midsize and Community Banks, my primary focus is on the 
community bank supervision. At the OCC we have a separate 
community bank program, and two-thirds of our examiners are 
devoted to community bank supervision. So we have established 
policies and practices that focus exclusively around the 
community banks and what their needs are and their risk 
profile.
    Your point on trickle-down is a valid one, and so it is 
very important that we do have a separate focus that we have at 
the OCC. But in addition to that focus, our practices lend 
themselves to make sure that what we do applies to a community 
bank and is not relative to other types of institutions of 
larger size. But a big part of that is our policies and 
procedures. We have compliance handbooks. We have training 
specifically for community bank examinations. And then 
periodically, as Senior Deputy Comptroller, I hold calls with 
our examining staff nationwide to have conversations around 
issues, concerns, and if we do see instances such as laws or 
regs that should not be applicable but they are, we have 
opportunities to talk to our staff about that.
    Ms. Hunter. I will just quickly address the trickle-down 
issue. Our approach at the Federal Reserve is very similar to 
that described for the FDIC and the OCC. We are really tackling 
it in two ways.
    First, our role in Washington is to provide oversight of 
the supervision program, so one of the things that the staff 
here does is we will look at what we call a horizontal review. 
So if we put in place a practice, especially if we are hearing 
from bankers that this trickle-down effect is happening, we 
will look across examinations, across all 12 districts to see 
how much variation are we seeing in how the standards are being 
applied. If we are seeing a high level of variation or seeing 
some outliers, we are then going back and retraining examiners 
or communicating better with bankers about expectations, as 
well as our own staff so that we can narrow that range of 
variability.
    Along with that we are investing in training examiners, and 
we are actually going through a process right now to look at 
the curriculum that we use for the commissioning process. We 
are developing separate curriculums for large institution 
examiners and small institution examiners so we can take out 
anything that might confuse where these boundaries are in terms 
of what is expected for community banks. So we are tackling 
that on that front.
    To speak to the small bank holding company policy 
statement, this is one I have heard from bankers. Obviously 
there is a lot of interest in us raising this threshold. Just 
really as a quick piece of background, this policy statement 
was developed decades ago in recognition that smaller banks do 
not have access to as much capital. It is not as easy as for 
larger institutions. And so they might need to rely on debt 
financing to accommodate local ownership, to promote local 
ownership of small institutions. The policy statement in 
essence says for small institutions you are exempt from 
consolidated capital guidelines, you do not need to file 
consolidated financial statements.
    We raised that threshold last in 2006, went from 150 
million to 500 million, and at that time some of the analysis 
that we did was to look at what percentage of the industry was 
covered under this policy statement. So it went from 55 percent 
under the old standard in 2006 up to about 85 percent of the 
bank holding companies now are covered under the small 
statement. Looking at if it were to raise again to the billion 
dollar threshold, given where we are today and the asset growth 
of institutions, about 88 percent of the industry would be 
covered. So it is not a dramatic change from the coverage that 
we envisioned in 2006 in raising that threshold.
    I know there are some proposals to consider a 5-billion 
threshold. If you applied that threshold, it would go to 91 
percent.
    The other thing I would just add on this and kind of the 
factors that we considered in 2006, why we did not raise it 
higher at that time, so some of the mitigating factors, 
consolidated capital guidelines are a pretty important 
component of our supervisory program, and so we want to make 
sure that we are covering enough of the institutions under 
that.
    The other thing is looking at what you lose by not having 
the consolidated financial information, and so we want to make 
sure, for example, do we have enough information that we are 
able to do the monitoring of financial performance and even the 
ability to conduct certain work offsite is based on monitoring 
and using the information that is reported. If we have less 
information, we might not be able to do as much work offsite as 
we currently do.
    So to the overall question, I think we certainly support 
raising thresholds over time, and I think the other thing I 
would suggest is to think about how we might--or just any 
restrictions on raising that threshold going forward or 
requiring legislation in order to get a raise of the threshold, 
that would be something--we do want to be able to raise those 
over time as it makes sense.
    Senator Brown. [Presiding.] Thank you, Ms. Hunter.
    Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much. While you 
are in the chair, Mr. Brown, let me thank you for the 
cooperation that you have extended to me and working to get S. 
635 accomplished. This is the privacy issue. What we have 
learned is that 99 percent is not quite sufficient, but we 
continue to work to see that the Senate might succeed.
    Let me start by trying to figure out what role Congress 
versus the regulators have in addressing and/or solving these 
issues. I think it was you, Mr. Bland, referenced--one of the 
things that you said about to the extent that the law allows. I 
think it was Ms. Hunter that said we seek less burdensome 
resolution of these issues. We have exempted them from some of 
them, speaking about banks.
    So how much leeway do you have? When my bankers come talk 
to me about the challenges they face in the compliance and 
regulatory environment, is this a problem with you? Or is this 
a problem with Congress?
    [Laughter.]
    Senator Moran. It is not a trick question.
    Mr. Bland. Senator Moran, I am trying not to provide a 
trick answer.
    [Laughter.]
    Mr. Bland. I think it is a combination of both, but I think 
to my comments, where I said to the extent of the law, one of 
the major fundamentals is safety and soundness and consumer 
protection. And so when we look at and make determinations of 
what regulations should or should not apply, that is one of the 
standards we look at. And what we are finding is, as the 
industry evolves, there is not a clear demarcation line in all 
instances anymore, especially the complexity. You look around 
technology and all, where there may have been years ago the 
ability to make a cutoff based on asset size, we now have to 
make a determination about what regulations apply based on the 
complexity and the operations of the institution. In some 
instances that is regardless of size.
    And so we really try to take that focus on safety and 
soundness and consumer protection.
    Senator Moran. I think what you are telling me--let me see 
if I understand you correctly--is that it is not a specific 
regulation, it is not 101, subparagraph (b), item (I), that 
necessarily causes the problem. It is the broader phraseology, 
safety and soundness, that then allows your examiners to make 
more judgmental decisions based upon policies of the 
regulation--of the regulator?
    Mr. Bland. Yes.
    Senator Moran. So the ability to address that legislatively 
becomes difficult. I assume we cannot direct you necessarily to 
get rid of that subparagraph. And this then requires you to use 
common sense and good judgment in making the determinations 
about whether something complies or does not comply.
    Mr. Bland. And ensures that the examiners--we have an 
overarching process to make sure we are being consistent and we 
are appropriately applying the law and our established guidance 
and practices. And so it is ensuring that we are executing the 
supervision the right way.
    When I look at my experience of examining banks of more 
than 30 years, I am not sure that additional regulation is not 
necessary. It is very----
    Senator Moran. I did not understand you. Is or is not?
    Mr. Bland. Is not necessary.
    Senator Moran. And so what I think you are telling me, 
reminding me, is that the people who are in the positions that 
you are in and those who work for you and those you work for 
are critical in the outcome of whether or not we have the right 
regulatory scheme and whether or not the burden is appropriate 
based upon the risk.
    Mr. Bland. Senator Moran, I believe Congress has the 
responsibility to determine what laws should be in place, but 
that has to be in tandem with the regulator's ability to 
effectively carry that out, and keeping in mind its core 
mission of safety and soundness and consumer protection.
    Senator Moran. Let me go to a specific piece of legislation 
that I am interested in. I have introduce Senate bill 727, 
Financial Institutions Examination Fairness and Reform Act. It 
is a bipartisan piece of legislation. The bill would create an 
Ombudsman under FFIEC to ensure consistency in examinations, 
but perhaps as important to me is it would also require that 
timely exam reports and providing examined financial 
institutions the ability to appeal their examination without 
fear of their examiner coming down on them.
    Senator Crapo mentioned Operation Choke Point. I actually 
think that what happened there sent one more message to those 
you regulate about needing to be fearful of their examiners. I 
think this was a mistake, and it set an attitude and atmosphere 
different than what existed before.
    I would tell you, though, that I have had Kansas bankers 
who bring me complaints or concerns about specific things 
within, in this case, the FDIC, but the list is longer than 
that. And I said let us meet with Chairman Gruenberg and let us 
have a conversation. You as the bankers and me in the room, we 
will have a conversation and see if we cannot sort this out. 
And we will hear what their perspective is; you can provide 
your input.
    Not a single banker was willing to sit in a room with the 
FDIC to present their case and to have that conversation 
because they were fearful of what the next exam would--how it 
would occur and what would happen.
    That is disturbing to me. This ought to be a cooperative 
effort in which we are determining the safety and soundness of 
the bank and trying to make certain that that bank fulfills its 
mission in their community. The fact that bankers--and so the 
end result was we had the President of the Kansas Independent 
Bankers meet with them. We had the President of the Kansas 
Bankers Association meet. It had to have that level, that 
distinction, and so no particular bank could encounter what 
they believed would be retribution for complaining about 
something that was happening.
    How do we get--certainly I am supportive of my legislation, 
but I would guess that all of you would tell me that is nothing 
that you want--that fear is nothing you want to have happen. 
Why does it exist? And how can you get rid of it?
    Ms. Eberley. Let me start. So we first encourage open 
communication through the examination process. We invite, by 
policy, board members to participate in any conversation during 
the examination with the examiners. That happens at the 
beginning of every examination. We have a policy against 
retribution. We enforce that policy.
    Relative to Operation Choke Point, which is a Department of 
Justice initiative, we do have guidance out on banks' 
relationships with third-party payment processors. There is BSA 
guidance out on those relationships. We have clarified how we 
are supervising that process, and we have asked that if any 
institution feels that our examiners are not carrying out our 
policies, that they notify their regional director, myself as 
the head of the Director of Supervision, our Ombudsman, or our 
Inspector General.
    Senator Moran. Do any of you oppose this legislation for 
this FFIEC Ombudsman on behalf of financial institutions? Do 
you see that as duplication of what you are already doing? Not 
necessary?
    Ms. Eberley. We have broad concerns with parts of the 
proposed legislation, including the Ombudsman, that would be 
outside of an agency that is accountable for its ratings that 
it assigns and its supervisory process, that it would take that 
appeals process to an entity that does not have accountability. 
We have----
    Senator Moran. Ms. Eberley----
    Ms. Eberley.----some other concerns as well----
    Senator Moran. Excuse me.
    Ms. Eberley. I am sorry.
    Senator Moran. No. Pardon me.
    Ms. Eberley.----with the accounting portions of the rule.
    Senator Moran. Do you think I exaggerate the circumstances 
I described related to me by bankers, that what I described is 
not common, it does not exist in any significant way, that it 
is an aberration that somebody is fearful of their regulator 
and the consequence of raising a complaint or a concern or 
disagreeing with an examiner? Is that just overstated?
    Ms. Eberley. I do not doubt that that is what you have 
heard and that you are relaying what you have heard. I have to 
tell you, though, we meet with bankers on a regular basis, and 
it is not what we hear when we are talking to bankers directly. 
We ask if anybody has a specific concern to bring it to us, and 
we get assurances that they would, but they do not have any 
concerns.
    Senator Moran. Have you ever had the experience of where 
there was a--that there was a response, an inappropriate 
response to a bank complaint, and then--you indicated we have 
policies in place. Examiners cannot cause retribution. Have you 
corrected retribution in the past?
    Ms. Eberley. I am not familiar with any acts of 
retribution, but your first question was whether a policy has 
been interpreted improperly and whether we have changed that, 
and we absolutely have. So through our normal appeals process, 
there have been decisions that go both ways. There have been 
occasions where a policy has not been interpreted properly, and 
we overrule the examiner's finding and make a finding in favor 
of the institution.
    Senator Moran. Let me make sure I understand----
    Senator Brown. And let us wrap it up.
    Senator Moran. Let me make sure I understand the answer to 
the question. You know of no instance in which a banker has 
alleged that there was retribution, and if there was--and since 
there was not, there has been no evidence that there has been a 
response from the agency?
    Ms. Eberley. I am not aware of any allegations.
    Senator Moran. Thank you, Mr. Chairman.
    Senator Brown. Thank you, Senator Moran. Thank you, Ms. 
Eberley.
    Senator Heitkamp?
    Senator Heitkamp. Thank you, Mr. Chairman.
    A couple quick questions first on privacy. How many of you 
read your privacy notices cover to cover? You know, I was one 
of the advocates back in the 1990s of the privacy notices. I 
think now we have had this great experiment. I am pretty sure 
that if I got a privacy notice and I knew that I was receiving 
it only because there was an amendment to the privacy, I might 
actually look at it.
    I guess this is a question for anyone. Do you know if there 
has ever been a study on how many people actually read privacy 
notices? But yet we incur millions of dollars of expense every 
year promoting privacy that we have no idea whether it is 
actually a consumer protection or, you know, in fact, has the 
opposite result, people become immune to actually looking and 
preparing the response to their institution.
    I also want to just extend what Senator Moran was talking 
about in terms of examinations. One bad apple spoils the bunch, 
and I say that because these are institutions who feel under 
siege, either by regulation or by examination. When one thing 
happens within one institution, it has a chilling effect across 
the board on all the institutions, particularly in that State. 
And so, you know, where you may say, look, we maybe get 1 
percent or 2 percent of complaints because of these issues, I 
will tell you that that 1 or 2 percent may have a much greater 
impact in the real world, because the chilling effect that you 
have when people feel like they are up against very high 
penalties, up against a lot of enforcement and enforcement 
obligations, their response is let us just not do it because I 
cannot risk my institution and the penalties. And so I will 
just say that.
    Chairman Gruenberg came to North Dakota at my request. 
Unlike Senator Moran's experience, our bankers sat down with 
him and actually had a one-on-one, very candid conversation 
about concerns about examinations as well as overregulation. I 
would tell you the follow-up there is why does it take so long 
to fix this when there was a lot of heading nodding, yes, I get 
what you are saying.
    And it is back to what we said last week, which is that we 
have got to act sooner rather than later because we are losing 
the lending lines in these institutions, and in my State, 96 
percent of all business is small business. This is the business 
lender of first resort. It is a rural lender, and we are seeing 
people retracting from that kind of lending because of concerns 
about regulation.
    Now, my main question is probably a little more esoteric, 
and it has to do with sub S's, and I know that this is not 
something that in the broad scheme of things always hits the 
radar here. But given the current housing situation in North 
Dakota, many of our community banks are having trouble getting 
timely appraisals--many of the community banks in North Dakota 
are sub S's, and I have heard concerns from many of them about 
the application of the Basel III capital conservation buffer, 
and you know that as C corporations, banks with capital 
deficiency under Basel III can pay their income tax before the 
dividend restrictions begin. Is the FDIC looking beyond the 
July guidance to allow S corporation banks to be granted the 
same flexibility? And this is a critical issue. I guess this 
goes to you, Ms. Eberley.
    Ms. Eberley. Thank you. And, Senator, we have--we issued 
guidance----
    Senator Heitkamp. The July guidance.
    Ms. Eberley.----in July, discussing how we would use the 
exemption that is built into the Basel III capital rules about 
the conservation buffer. So the conservation buffer basically 
restricts the amount of money that an institution can pay in 
dividends if they fall below the full amount of the buffer, 
which is 2.5 percent. It does not go into effect until 2016. It 
is not fully in effect until 2019.
    Nonetheless, we heard concerns about subchapter S banks, 
that they could fall below the threshold, and they had concerns 
that that would require their shareholders to pay taxes out of 
their own income, on the income from the institution.
    So what we have done is clarify how we would use the 
exemption to the extent that we can clarify in kind of a 
blanket way up front. And so we have said that for well-rated 
subchapter S institutions that would be paying out no more than 
40 percent of their net income to cover the tax obligation of 
their shareholders, that would remain adequately capitalized 
after doing so, we would generally expect that we would say 
yes. So there is a process for the institution to make a 
request, we would say yes.
    So we hear that institutions do not want to ask for things 
because they think we will say no, so we have signaled ahead we 
will say yes.
    We cannot go beyond that, and that would be the same 
treatment that we would give to a subchapter C corporation. We 
do not give blanket approval for an institution to be able to 
pay dividends or not be subject to dividend restriction if its 
capital is under pressure, particularly when the capital 
pressure and diminution of capital could lead to the failure of 
the institution or the path to failure.
    Senator Heitkamp. But these concerns just add to the weight 
of overall concerns and I think are resulting in consolidation 
of our small community banks and reducing the vibrancy and 
reducing the numbers in a way that I think is not good for the 
American financial markets and for lenders and borrowers. And 
so it is really critically important that we understand now one 
size fits all, that all of this in a cumulative way has a 
pretty dramatic effect. As we go forward--if I could just ask 
one more question. He is not paying attention. Anyway----
    [Laughter.]
    Senator Heitkamp. Given the current housing situation in 
North Dakota, many of our community bankers are having trouble 
getting timely appraisals, and they are frustrated. The 
appraisals come from out-of-State folks who really do not know 
the market, and I know I have frequently kind of told the story 
here that I come from a town of 90 people. We sell a house 
maybe once every 5 years. Good luck finding comparable sales in 
Mantador, North Dakota. The FDIC has taken a look at allowing 
community banks to conduct--have you taken a look at allowing 
community banks to conduct valuations for smaller mortgage 
loans that they will keep on the books? Will you commit to 
looking at that issue going forward? Because the appraisal 
issue in rural communities is real.
    Ms. Eberley. You know, the economic boom in your State has 
certainly contributed to a high demand for appraisers, and the 
supply is catching up. It has grown by 20 percent since 2012, 
since about mid-2012, the number of appraisers. So hopefully 
that is providing some relief on the supply side.
    The second thing I would say is that, you know, we do 
encourage institutions--and there has been confusion on the 
institutions' part about when an appraisal is required versus a 
valuation. We encourage institutions to use valuations when 
they can, and we issued technical assistance videos this year 
on both appraisals and valuations to clarify the difference 
between the two and when they are required. So, yes, we do 
encourage institutions to use valuations where that is 
appropriate.
    Senator Heitkamp. If I can just make one last comment, and 
it is not intended to be a criticism, but, you know, there is a 
lot of encouraging, and we have sent out this guidance, and I 
think if we had a greater level of trust between the regulators 
and the regulated, I think that all of those things would 
answer the question. But I think there is this sense that there 
is a ``gotcha'' world out there, and they are going to get me 
if I do something that really is coloring outside the lines. 
And I think we need to be mindful of building back that 
relationship. I think Senator Crapo made an excellent comment. 
We have started this process. We somehow cannot seem to finish 
it, even though we have got great bipartisan support. We all 
see it. And we have got regulatory support, but yet it does not 
happen. And that is the frustration here from the community 
banks and really from Main Street America, you know, going 
forward.
    And so let us kind of renew a commitment to working 
together, renew a commitment to continuing the process that 
Senator Crapo initiated many years ago, and actually achieve 
results, because all the talk that we have here is not going to 
amount to anything if we actually do not get results out of 
this process. So thank you all for the hard work.
    Senator Brown. Thank you, Senator Heitkamp.
    Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. And 
thank you for your excellent testimony.
    Ms. Hunter, the Independent Foreclosure Review has gone 
through several permutations. In 2013, it was decided to make 
cash payments directly to those who had been hurt in the 
foreclosure crisis. But it has been difficult to make the 
payments. In fact, some of the checks have not been cashed, 
about $3.9 billion at least, there is a residual. So you have 
both the opportunity and obligation to get that money out as 
quickly as possible to the States, and I wonder if you can give 
us some idea of when you will do this and what you will do.
    Ms. Hunter. Thank you for the question, Senator. Yes, for 
the Independent Foreclosure Review, one thing I would start 
with, about 86 percent of the funds in the pool to be 
distributed actually have been cashed, or checks have been 
cashed or deposited. So the percentage is actually pretty high. 
But that means there is 14 percent of checks that still have 
not been cashed at this point.
    We are continuing to try to locate the affected borrowers, 
and getting the money into the hands of the affected borrowers 
is our number one priority. And so that is continuing on.
    But I do think you raise a very important point. I know we 
have been working very closely with the OCC all along the way 
on this effort. We are working with them to evaluate various 
options, various alternatives to addressing the resolution of 
any unclaimed funds. And there are obviously a number of 
factors we will have to take into account, including any legal 
restrictions or other information that we get along the way.
    But I think you are raising a good point about ultimately 
the resolution of those funds, and any information that you are 
providing I am sure will be taken into account with the 
deliberations that we have and working with the OCC.
    Senator Reed. Well, I recently wrote to Chairwoman Yellen 
to urge that she consider getting this money out to funds in 
the States, in our case, the hardest-hit fund in Rhode Island 
that has had demonstrable success in preventing foreclosure and 
helping people, et cetera. The worst case would be having these 
funds sit there for another several years as you all decide 
what you have to do. So I urge prompt action.
    Mr. Fazio, I am a cosponsor of Senator Udall's bill, the 
Small Business Lending Enhancement Act. In your comments, you 
look at the bill and say it does contain appropriate 
safeguards, in your estimate, NCUA, to protect safety and 
soundness of qualified credit unions. This is a critical issue 
because no one wants to enable institutions to do things that 
are beyond their capacity and would in any way even remotely 
undermine safety and soundness. But that is your conclusion, 
though, that it would, in fact, not undercut safety and 
soundness.
    Mr. Fazio. No, we support the legislation. We believe that 
through the regulatory and examination process we could make 
sure that that authority was implemented safely and soundly by 
the credit unions that were willing and able and capable of 
actually doing that effectively.
    Senator Reed. And this would provide another source of 
lending to small businesses particularly, which is the general 
client to these credit unions.
    Mr. Fazio. Absolutely.
    Senator Reed. Now let me turn to another issue. You were 
talking about in your testimony, since 2008, nine third-party 
vendors, credit union service organizations, have caused more 
than $300 million in direct losses to the Share Insurance Fund 
and led to the failure of credit unions worth more than $2 
billion in assets. But as you point out, unlike banks, national 
or State chartered, these vendors are not within the regulatory 
responsibility of NCUA. Can you elaborate on why this authority 
is important and vital?
    Mr. Fazio. The authority is particularly important because 
increasingly credit unions are relying on third-party vendors, 
including credit union service organizations, to collaborate, 
cooperate, deliver services to members. They are often part of 
the credit unions' key operational infrastructure, and so they 
have a significant safety and soundness dimension for 
individual credit unions, as well as a more widespread or 
systemic impact if there is a problem.
    In fact, we have a few vendors that serve over half the 
credit union system in key areas, and so a problem with a 
particular vendor can quickly have a downstream impact on 
thousands or, if not, hundreds of credit unions. And so it is 
important for us to be able to have insight into the safety and 
soundness of that arrangement, including proprietary 
information that the client credit unions might not even have 
access to. And, in addition, if there is a problem with that 
vendor, we need to be able to address it at the source so that 
it does not end up causing significant problems for thousands 
of credit unions.
    Senator Reed. Again, in the spirit of our response to the 
crisis in 2007 and 2008, we are looking at systemic issues. 
This seems to be one that is worthy of attention.
    Mr. Fazio. Absolutely, and in particular, as it relates to 
technology service providers in cybersecurity.
    Senator Reed. Thank you very much.
    Senator Brown. Thank you, Senator Reed.
    Thank you all. I will do a round of questions, and then we 
will move to the second panel.
    The title of the hearing, as you think, is ``Examining the 
State of Small Depository Institutions.'' Most of you have used 
the words ``community institutions,'' ``community banks,'' 
``credit unions.'' I would just like each of you to give me 
very briefly--because I have a couple of more substantive 
questions, if you will, or more focused questions. Each of you, 
starting with Mr. Vice, if you would just tell me how you 
define a ``community institution.'' Is it size? Function? 
Activity? Just give me a short, each of you, definition of how 
you define in your regulatory sphere and in your mind what that 
means. Mr. Vice, what is a ``community institution'' to you?
    Mr. Vice. A couple of points that we look at: Where does it 
operate? Is it operating in the local market? How does it 
derive its funding? Is it funding from a local market? And what 
is its primary business lending? Is it taking the deposits that 
are received from that market and lending in that market? Where 
is the board and management centered? Are they members of that 
community? And the lending model of the institution should be 
not volume drive or automated processes but relationship 
lending.
    So I think instead of a bright-line dollar amount, it would 
be more of the characteristics of that, and the reason I am 
saying that is because we have many institutions in Kentucky, 
about six, that are over $1 billion. I would hate to see the 
bright line at $1 billion because I view each one of those 
institutions that meet these characteristics as a community 
bank in my mind.
    Senator Brown. Fair enough. Good.
    Mr. Fazio?
    Mr. Fazio. Senator, we do not use the community definition 
per se for credit unions. I think that relates to the fact that 
we have fixed fields of membership, a common bond that credit 
unions are based around. And we have only one version that is 
analogous to community charter. Other credit unions have single 
occupational sponsors and so forth. So we tend to use a couple 
of different definitions that are analogous. We also have a 
definition of ``small credit union'' that we use in terms of 
relief and assistance and so forth. We have low-income-
designated credit unions, which are credit unions that 
predominantly serve low-income individuals. We also have new 
credit unions, newly chartered credit unions that have some 
special provisions for that.
    We do not have a particular single asset size threshold. It 
tends to be assets as a simplification, $50 million for the 
smallest institutions, and then another threshold we use for 
certain rulemaking and supervisory contexts at $250 million.
    Senator Brown. Thank you.
    Ms. Hunter?
    Ms. Hunter. Yes, so in looking at community banks for 
purposes of how we manage our work, we use the $10 billion 
threshold. We moved to that once it was identified in Dodd-
Frank as a dividing line, if you will, and a clear threshold. 
But I would like to concur with the comments that my colleagues 
have made. Not every community bank is the same. We certainly 
recognize that a $150 million bank operating in a small town is 
very different from maybe an $8 billion bank operating in a 
suburban neighborhood.
    So while we include them all in our community bank program 
and we think about them collectively, we also recognize that 
there are differences and that our approach and the issues and 
the nature of the lending that they do will differ. And so we 
are certainly attuned to that.
    Senator Brown. Mr. Bland.
    Mr. Bland. Senator Brown, we take a similar approach that 
you have heard already. Oftentimes it is a general 
characterization of an institution that is in a generally 
defined market. They would offer traditional banking services 
and not an overly complex operation.
    The other side of it is that we consider them not to be 
large banks in terms of what large banks offer. So the 
community bank model is a general focus on those that are not 
as complex as other types of institutions, but generally you 
will see a defined marketplace, really straightforward, plain-
vanilla products and services.
    Senator Brown. Thank you.
    Ms. Eberley?
    Ms. Eberley. We use a definition that is based on the 
characteristics of the institution as opposed to a bright-line 
asset test. So it is relationship lending as opposed to 
transactional. It is core deposits versus volatile funding. It 
is a local geographic community that is fairly tightly defined. 
And so that ends up including about 300 institutions that are 
over $1 billion, and it actually excludes some that are less 
than $1 billion.
    Senator Brown. That is helpful. Thanks.
    Ms. Eberley, two quick substantive questions, if you would 
comment. Some are proposing legislation to remove affiliated 
title insurance costs from the cap on mortgage points and fees. 
What are your views on that?
    Ms. Eberley. I think we do not have an agency position, but 
have discussed it at the staff level, and I think it is 
something that you need to study the impact of what it would 
do. So taking the fees out from an affiliated company does 
treat affiliated and unaffiliated companies the same way so it 
makes it easier for institutions.
    But the original consumer protection that was intended in 
the original statute was to ensure that consumers were not 
paying a lot of costs in fees and points for a qualified 
mortgage.
    Senator Brown. And removing caps might do that.
    Ms. Eberley. It could, and if you have it--yes, it could, 
and the potential for conflict of interest as well.
    Senator Brown. So there is, if not taking a position on the 
issue, there is FDIC concern about----
    Ms. Eberley. Right, I think there are some things you have 
to consider and flesh out.
    Senator Brown. Thank you. Some are seeking to change the 
treatment of collateralized loan obligations under the Volcker 
rule. Any thoughts on that proposal?
    Ms. Eberley. Sure. I do not think it is actually necessary 
at this point. I think that the regulatory process has provided 
the relief, if you will. So new collateralized loan obligations 
that are being underwritten are conforming to the rule, the 
exemption that already exists in the rule for a CLO that is 
composed solely of loans. Existing obligations that are 
outstanding largely mature before the end of the conformance 
period, as the Fed has extended it. The Fed has indicated that 
they would extend the conformance period the maximum amount, 
which would take it to mid-2017.
    And to the extent that a nonconforming CLO would not mature 
before that time and would not be able to be conformed, they 
are in the aggregate on call report data right now reporting a 
net gain, so disposing of such an instrument would not impair 
an institution's capital.
    Senator Brown. So you said unnecessary or--are you agnostic 
on the proposal then? Or would you be cautious about it or----
    Ms. Eberley. I would be cautious. So there are tradeoffs 
here again in terms of changing the definitions and perhaps 
some unintended consequences.
    Senator Brown. OK. Thank you. Thank you to all of you on 
the panel. You were very helpful today to all of us. Thank you 
very much.
    The second panel has six people, so we are going to add a 
chair. Let me just do bios of the six witnesses as you get 
settled and as the staff figures out how to squeeze one more 
person in. Thanks again to Ms. Eberley, Mr. Bland, Ms. Hunter, 
Mr. Fazio, and Mr. Vice for joining us.
    Jeff Plagge is President and CEO of Northwest Financial 
Corporation, Arnolds Park, Iowa. He served as Chairman of the 
American Bankers Association.
    John Buhrmaster is President of First National Bank of 
Scotia in Scotia, New York. He serves as Chairman of the 
Independent Community Bankers of America.
    Dennis Pierce is Chief Executive Officer of Community 
America Credit Union in Kansas City, Missouri. He serves as 
Chairman of the Board of Directors of the Credit Union National 
Association.
    Linda McFadden is President and CEO of XCEL Federal Credit 
Union in Bloomfield, New Jersey. She is testifying on behalf of 
the National Association of Federal Credit Unions.
    Marcus Stanley, Policy Director at the Americans for 
Financial Reform, is a former Case Western Reserve University 
professor In Cleveland.
    And Michael Calhoun is President of the Center for 
Responsible Lending.
    I thank all of you for joining us. We will get settled and 
begin the testimony.
    [Pause.]
    Senator Brown. Thank you all for joining us. Mr. Plagge, we 
will start with you and your opening statement. Keep it to 
approximately 5 minutes. If you go over a little while, that is 
fine, but do not do 10, if it all the same. So, Mr. Plagge, if 
you would start, and we will work from my left to right. Your 
microphone, Mr. Plagge.

    STATEMENT OF JEFF PLAGGE, PRESIDENT AND CEO, NORTHWEST 
   FINANCIAL CORPORATION, ON BEHALF OF THE AMERICAN BANKERS 
                          ASSOCIATION

    Mr. Plagge. There we go. Thank you very much, Chairman 
Brown and Ranking Member Moran and Members of the Committee. My 
name is Jeff Plagge, President and CEO of Northwest Financial 
Corporation in Arnolds Park, Iowa. I am also the Chairman of 
the American Bankers Association. I appreciate the opportunity 
to be here today to represent the ABA and discuss the state of 
community banking.
    Let me begin by saying that the state of our community 
banks is strong, but the challenges we face are enormous. As I 
travel the country in the role as Chairman of ABA, I am 
constantly impressed by how resilient community bankers are and 
how dedicated they are to serving their communities. Like all 
small businesses, they have suffered through the Great 
Recession. Every day these banks work to meet the needs of 
their customers and their communities, but their ability to do 
so has been made much more difficult by the avalanche of new 
rules and regulations.
    Banks have had to deal with over 8,000 pages of final rules 
from the Dodd-Frank Act, with an additional 6,000 pages of 
proposed rules. This is an enormous challenge for any bank, but 
nearly impossible for a community bank, which typically has 
fewer than 40 employees.
    The impact goes beyond just dealing with new compliance 
obligations. It means fewer products are offered to customers. 
In fact, 58 percent of banks have held off or canceled the 
launch of new products due to the expected increases in 
regulatory costs and risks. This means less credit to our 
communities. Less credit means fewer jobs, lower income for 
workers, and less economic growth.
    If left unchecked, the weight of this cumulative burden 
could threaten the model of community banking that is so 
important to strong communities, strong job growth, and a 
better standard of living. We are already feeling the impact. 
Over the course of the last decade, over 1,500 community banks 
have disappeared. Today it is not unusual to hear bankers--from 
various healthy, strong banks--say they are ready to sell 
because the regulatory burden has become too much to manage, a 
new tipping point in that regard. These are good banks that for 
decades have been contributing to the economic growth and the 
vitality of their towns but whose ability to continue to do so 
is being undermined by the excessive regulation and the 
Government micromanagement. Each bank that disappears from a 
community means fewer opportunities in that community.
    We must stop treating all banks as if they were the largest 
and most complex institutions. Financial regulation and exams 
should not be one-size-fits-all. All too often, the approach 
seems to be if it is a best practice for the biggest, it might 
as well be best practice for all banks. This approach layers on 
unnecessary requirements and does little to improve the safety 
and soundness, but adds significantly to the cost of providing 
services--a cost which ultimately is borne by the customer.
    Examiners should give credit to well-run banks that know 
their customers. The one-on-one relationship banking model is 
the core of community banking. If everything is going to be 
forced into a standard regulatory box, then we might as well 
accept the fact that community bank consolidation will 
accelerate. One-size-fits-all judgments as to whether and how 
much to reserve against loans, especially when driven solely by 
numerical analysis, take away the bankers' autonomy and the 
value of their judgment in contributing to the best allocation 
of capital to enhance the growth of their communities.
    Instead, the ABA has urged for years that a better approach 
to regulation is to take into account the charter, the business 
model, and the scope of each bank's operation--in other words, 
risk-based, regulatory oversight. The time to address these 
issues is now before it becomes impossible to reverse the 
negative impacts.
    We are appreciative of the efforts of many on this 
Committee for introducing bills that make a difference. In 
particular, we would like to thank Senators Brown, Toomey, 
Manchin, Warner, Moran, and Tester for introducing their bills 
that have been talked about earlier by the first panel.
    While no single piece of legislation can relieve the burden 
that community bankers face, many of these bills could begin to 
provide much needed relief. We urge Congress to work together, 
House and Senate, to get legislation passed and to send to the 
President that will help community bankers better serve their 
customers.
    Thank you, and I would be happy to answer any questions.
    Senator Brown. Thanks, Mr. Plagge, and thank you for your 
kind words about our legislation.
    Mr. Buhrmaster, welcome.

STATEMENT OF JOHN BUHRMASTER, PRESIDENT AND CEO, FIRST NATIONAL 
BANK OF SCOTIA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS 
                           OF AMERICA

    Mr. Buhrmaster. Chairman Brown, Ranking Member Moran, 
Members of the Committee, my name is John Buhrmaster. I am 
President and CEO of First National Bank of Scotia, a $425 
million asset bank in Scotia, New York. We are a closely held 
bank serving rural and suburban communities in the areas of 
Albany, Schenectady, and Saratoga since 1923. I am a fourth 
generation community banker.
    I am also Chairman of the Independent Community Bankers of 
America, and I testify today on behalf of more than 6,500 
community banks nationwide. Thank you for convening this 
hearing.
    Based on my discussions with hundreds of community bankers 
from across the country, I can tell you the state of the 
industry is resilient and gaining strength in the wake of a 
historic financial crisis. My personal assessment is confirmed 
by the most recent FDIC Quarterly Banking Profile. Community 
banking income is up 3.5 percent from a year ago. More 
community banks are profitable, asset quality has improved, and 
there are fewer problem banks.
    However, in a historically low interest rate environment, 
community banks continue to struggle with low margins. Of 
particular concern is a regulatory burden that is growing both 
in volume and complexity, suffocating the true potential of 
community banks to spur economic growth and job creation in 
their communities. We look to this Committee and the Senate to 
address these genuine concerns. Even in the short time 
remaining in this Congress, there is still a real opportunity 
to provide meaningful relief for community banks. A number of 
important bills with broad, bipartisan support are positioned 
for action. ICBA urges the Senate to act before Congress 
adjourns.
    ICBA's legislative and regulatory agenda is built on the 
principle of tiered regulation, calibrated according to 
institutional size, business model, and risk profile. Tiered 
regulation will allow community banks to reach their full 
potential, without jeopardizing safety and soundness or 
consumer protection.
    The Senate bill that best captures the principle of tiered 
regulation is the CLEAR Relief Act, S. 1349, sponsored by 
Senators Moran, Tester, and Kirk. With 40 bipartisan 
cosponsors, the CLEAR Act is a package of true consensus 
provisions. We are grateful to the Members of this Committee 
who have sponsored and cosponsored this bill.
    The bill's provisions have been debated and advanced in 
different forms during this Congress. ICBA strongly encourages 
this Committee to ensure the CLEAR Relief Act or similar 
regulatory relief measures pass the Senate expeditiously.
    A total of six community bank regulatory relief bills have 
passed the House. Most passed with broad, bipartisan support 
and have Senate counterparts awaiting action. If scheduled, all 
or any one of these bills could pass the Senate with the same 
broad, bipartisan support. H.R. 3329, for example, would raise 
the Federal Reserve Small Bank Holding Company Policy Statement 
threshold to allow additional banks to more easily raise 
capital. My bank and other banks are bumping up against the 
current outdated threshold of $500 million. H.R. 3329 passed 
the House by voice vote.
    Another bill, the Privacy Notice Modernization Act, S. 635, 
sponsored by Senators Brown and Moran, has more than 70 
cosponsors, including most Members of this Committee. ICBA 
strongly urges the Committee's assistance in obtaining swift 
passage of these and other broadly supported bills.
    As important as our legislative agenda is, we also have a 
great deal at stake in agency rulemaking. I would like to 
highlight just one of ICBA's current agency initiatives.
    Two weeks ago, ICBA delivered a petition to the banking 
agencies calling for streamlined quarterly call report filings. 
The petition was signed by nearly 15,000 bankers representing 
40 percent of all community banks nationwide. The quarterly 
call report has grown dramatically. In 2001, my bank filed a 
30-page call report. Today the call report comprises 80 pages 
of forms and 670 pages of instructions. A typical community 
with $500 million in assets spends close to 300 hours a year of 
senior-level, highly compensated staff time on the quarterly 
call report. Now Basel III may add nearly 60 additional pages 
of instructions.
    ICBA is calling on the agencies to allow highly rated 
community banks to submit a short form call report in the first 
and third quarters of each year. A full call report would be 
filed at midyear and at year end. The short form call report 
would contain essential data as required by regulators to 
conduct offsite monitoring. This change, together with action 
on some of the bills I have cited, would allow community banks 
to dedicate more resources to serving their communities and 
sustaining a broad-based economic recovery.
    Thank you again for the opportunity to testify today, and I 
sincerely look forward to your questions.
    Senator Brown. Thank you, Mr. Buhrmaster.
    Mr. Pierce, welcome.

     STATEMENT OF DENNIS PIERCE, CHIEF EXECUTIVE OFFICER, 
   COMMUNITYAMERICA CREDIT UNION, ON BEHALF THE CREDIT UNION 
                      NATIONAL ASSOCIATION

    Mr. Pierce. Thank you, Chairman Brown and Ranking Member 
Moran. We appreciate the opportunity to testify at today's 
hearing.
    Credit unions were established to promote thrift and 
provide access to credit for provident purposes. We exist to 
provide consumers and small businesses with an alternative to 
the for-profit institutions.
    The good news is the credit union system remains very sound 
and has seen historically strong membership growth in the wake 
of the financial crisis. We recently celebrated 100 million 
credit union memberships and total assets of $1.1 trillion. The 
system is very well capitalized. These milestones show that the 
steps Congress and State legislators took many years ago to 
authorize credit unions has been successful, and credit unions 
are increasingly relevant and critical to consumers and small 
businesses.
    Credit unions continue to serve the purpose for which 
Congress provided the tax exemption. The bad news is that it is 
becoming increasingly difficult for credit unions to serve 
their members when the laws and regulations coming out of 
Washington are blind to the structural and size differences 
between credit unions and banks. Congress and regulators ask a 
lot of small, not-for-profit financial institutions when they 
tell them to comply with the same rules as JPMorgan and Bank of 
America because the cost of compliance are proportionately 
higher for smaller-sized credit unions than these huge 
institutions. Almost half of the credit unions in the United 
States operate with five or fewer full-time employees. The 
largest banks have compliance departments many times that size.
    The rules that the CFPB has issued so far have not taken 
the key distinctions between the large and small institutions 
into consideration as much as they can or should under the law. 
Further, what is maddening to credit union managers and 
volunteers is the abundance of rules to which they have been 
subjected recently, brought on by actions taken by others in 
the financial services sector. Credit unions did not engage in 
the practices that contributed to the financial crisis and 
prompted these new rules and regulations. We do not understand 
why our members' service should suffer because someone else 
treated their customers poorly.
    We urge the Senate to be proactive in its oversight of the 
National Credit Union Administration, which has issued a deeply 
flawed proposal on risk-based capital. We appreciate the 
leadership of those on the Committee, including the Chairman 
and the Ranking Member, who have weighed in with concerns 
regarding this rule. We appreciate that NCUA has already 
signaled major changes, and we urge this Committee to help 
ensure the agency's changes result in a balanced rule that is 
fully consistent with the Federal Credit Union Act.
    While CUNA supports strong but fair safety and soundness 
efforts, our members continue to raise numerous issues about 
arbitrary examinations and inadequate appeals processes. We 
urge the Committee to work with the Federal Financial 
Institution Examination Council and State regulators to 
minimize ad hoc examiner decisions that can be extremely 
difficult to appeal.
    We also urge you to take action to require the CFPB to use 
the exemption authority Congress has already provided to 
relieve community banks and credit unions from onerous 
requirements. We were dismayed that the exemption provided in 
the remittance rule did not go further, and we believe mortgage 
and mortgage servicing rules should provide more exemptions and 
relief for credit unions.
    This Committee should exercise its oversight responsibility 
regarding the Federal Housing Finance Agency. The proposal on 
home loan bank eligibility and the possibility of increased 
guarantee fees concern us greatly. If adopted, these actions 
will make it more difficult for credit unions to serve their 
members and could adversely affect credit availability.
    Finally, we hope the Committee will take action on several 
bills that represent small steps in the right direction.
    We ask the Senate to pass Senators Brown and Moran's 
privacy notification bill so that we have the opportunity to 
make the privacy notices consumer receive more meaningful and 
reduce credit unions' cost for mailings that consumers simply 
disregard.
    We ask the Senate to pass Senator King's bill, which is 
cosponsored by Senators Warner and Tester, so that lawyer trust 
accounts held at federally insured credit unions have insurance 
coverage on par with that of FDIC-insured banks.
    We ask the Senate to pass Senators Brown and Portman's bill 
related to the Federal Home Loan Bank eligibility for privately 
insured credit unions so that this small group of credit unions 
will have access to the home loan banking system subject to the 
same regulations as insurance companies and other financial 
institutions.
    These bills have already passed the House of 
Representatives, each without a single vote of opposition, so 
they are simply waiting for the Senate to act.
    We also ask that these and similar measures be considered 
as the first step in a major overhaul of the rising flood of 
regulations. We understand that appropriate regulation is 
necessary, but overregulation hurts those it is intended to 
help. Without meaningful relief, consolidation in the credit 
union sector will continue, and Americans' access to affordable 
financial services will be in jeopardy.
    Thank you so much for the opportunity to testify. I will be 
pleased to answer questions.
    Senator Brown. Thank you very much, Mr. Pierce.
    Ms. McFadden, welcome. Your microphone, Ms. McFadden.

 STATEMENT OF LINDA McFADDEN, PRESIDENT AND CEO, XCEL FEDERAL 
CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL 
                         CREDIT UNIONS

    Ms. McFadden. Good morning, Senator Brown and Ranking 
Member Crapo and Members of the Committee. My name is Linda 
McFadden. I am testifying today on behalf of NAFCU. I am happy 
to be appearing before the Committee today to talk about the 
state of small financial institutions.
    I currently serve as the President and CEO of the XCEL 
Federal Credit Union in Bloomfield, New Jersey. XCEL Federal 
Credit Union was started in 1964 by the employees of the Port 
Authority of New York and New Jersey. We now have $155 million 
in assets and over 18,000 members.
    Credit unions, no matter what their size, have always been 
some of the most highly regulated of all financial 
institutions, facing restrictions on who we can serve and our 
ability to raise capital. Many credit unions are saying, 
``Enough is enough,'' when it comes to the overregulation.
    While NAFCU and its member credit unions take safety and 
soundness extremely seriously, the regulatory pendulum post 
crisis has swung too far to the environment of overregulation 
that threatens to stifle economic growth.
    Since the second quarter of 2010, we have lost over 1,000 
federally insured credit unions, 96 percent of which were 
smaller institutions below $1 million in assets. Many smaller 
institutions simply cannot keep up with the new regulatory tide 
and have had to merge out of business or be taken over.
    At XCEL, we have felt the pain of these burdens as well. 
There are costs incurred each time a rule is changed, and the 
costs of compliance do not vary by size of institution. We are 
required to make updates, to retrain our staff each time there 
is a change, just as the larger institutions.
    The biggest challenge facing XCEL today is NCUA's risk-
based capital proposal. The proposal as it is written would 
negatively impact XCEL, taking us from a well-capitalized 
credit union to adequately capitalized. This proposal would 
force us to curtail lending to small businesses such as a 
recent loan we issued to a ServPro franchise that was seeking 
to grow his business and meet the demand of Hurricane Sandy. My 
written testimony outlines in greater detail the concerns we 
have for this proposal. Without significant changes to the 
rule, many credit unions, including mine, will be negatively 
impacted.
    Congress must continue to provide oversight and make sure 
that the issue is studied and fully vetted for economic impact 
before NCUA moves forward.
    Regulatory burden is also a top challenge facing all credit 
unions, and that is why in 2013 NAFCU unveiled a ``Five Point 
Plan'' for regulatory relief and a ``Dirty Dozen'' list of 
regulations to repeal or amend, which are outlined in my 
written testimony. There are several bills pending in the 
Senate that we would urge action on to provide the first steps 
to relief for credit unions.
    S. 635, the Privacy Notice Modernization Act of 2013, would 
remove the requirement that financial institutions send 
redundant paper notices to the members.
    S. 2698, the RELIEVE Act, this legislation, along with S. 
2699, would provide important relief to credit unions with 
interest on lawyers' trust accounts, IOLTAs, ensuring parity 
between the coverage between the National Credit Union Share 
Insurance Fund and FDIC on these accounts.
    S. 1577, the Mortgage Choice Act of 2013, would make 
important changes that would exclude affiliated title charges 
from the points and fees definition and clarify that escrow 
charges should be excluded from any calculation of points and 
fees.
    We also encourage the Committee to weigh in with regulators 
to urge them to take steps to provide regulatory relief. A 
series of steps that regulators such as NCUA, CFPB, the Federal 
Reserve, and the FHFA can take to help credit unions are 
outlined in my written testimony.
    In conclusion, the growing regulatory burden on credit 
unions is the top challenge facing the industry today, and 
credit unions are saying, ``Enough is enough,'' when it comes 
to the overregulation of our industry. We would urge the 
Committee to act on credit union relief measures pending before 
the Senate and to call on NCUA to dramatically change and 
repropose its risk-based capital rule.
    We thank you for the opportunity to share our thoughts with 
you today, and I welcome any questions.
    Senator Brown. Thank you, Ms. McFadden.
    Dr. Stanley, welcome.

    STATEMENT OF MARCUS M. STANLEY, Ph.D., POLICY DIRECTOR, 
                 AMERICANS FOR FINANCIAL REFORM

    Mr. Stanley. Senator, thank you. Senator Brown and Members 
of the Committee, thank you for the opportunity to testify 
before you today on behalf of Americans for Financial Reform.
    There is no question that the community banking business 
model, with its emphasis on local knowledge and relationship-
oriented lending, can create unique benefits for local 
economies, for risk management, and for customer service.
    At the same time, community banking is still banking, and 
the basic principles of banking regulation apply. Thus, in 
making regulatory decisions, policymakers should seek to 
preserve the special benefits of community banking without 
undermining the core regulatory goals of prudential soundness 
and consumer protection.
    In striking this balance, the first point to consider is 
size. According to the FDIC's functional definition of 
``community banking,'' 99.7 percent of community banks have 
fewer than $5 billion in assets, and these banks hold 94 
percent of community banking assets. Furthermore, the economic 
problems in the community banking sector appear most 
concentrated among smaller entities. The entire decline in the 
number of banks over the last three decades has occurred among 
banks with fewer than $1 billion in assets, particularly those 
with less than $100 million.
    More recent profit trends show that there is a continuing 
divergence in the fortunes of smaller banks and the rest of the 
sector.
    During the first 6 months of 2014, not a single bank with 
more than $10 billion in assets registered a loss, but over 12 
percent of banks with less than $100 million in assets did.
    Although it is obvious that community banks are small, it 
is still a point worth making. We often see larger banks seek 
to benefit from regulatory accommodation when there is little 
evidence that these larger banks either share the unique 
characteristics of community banks or face the kinds of 
economic issues seen among smaller banks.
    The data above suggests that measures aimed at assisting 
community banks should generally be limited to those banks with 
fewer than $5 billion in assets and have their strongest focus 
on those with $1 billion in assets or less.
    Community banks were obviously not at the center of the 
2008 crisis. This suggests that the regulatory response to the 
crisis should focus on larger entities, and for the most part 
it has. Most new areas of Dodd-Frank regulation have been 
tiered, either in statute or through regulatory action, so they 
have their greatest impact on larger banks. New derivatives 
rules generally exempt banks with under $10 billion in assets 
from mandatory clearing and margining. New prudential 
requirements instituted by the Federal Reserve under Section 
165 of the Dodd-Frank Act are limited to bank holding companies 
with over $50 billion in consolidated assets and are most 
stringent at advanced approaches' banks with in excess of $250 
billion in assets.
    Of course, this does not mean that the financial crisis has 
had no effect on the oversight of community banks. The crisis 
taught many hard lessons about credit risk, securitization 
risk, and the significance of consumer protection. These 
lessons apply in all areas of banking. The risk management 
failures observed during the crisis affected community banks as 
well. Over 450 banks failed between 2008 and 2012, more than 90 
percent of which were community banks. At one point during this 
period the Deposit Insurance Fund showed an aggregate deficit 
of over $20 billion. The potential exposure created by the 
Deposit Insurance Fund has only been increased by the expansion 
of the deposit insurance guarantee to a quarter million per 
depositor in the Dodd-Frank Act.
    Regulators have applied the lessons of the crisis in ways 
that have resulted in stronger prudential oversight of real 
estate lending as well as securitization holdings and a more 
stringent definition of capital. While motivated by the 
financial crisis, these changes are not mandated by the Dodd-
Frank Act. They would likely have occurred anyway as a response 
to the crisis experience.
    I would like to close with a few general suggestions on 
ways that policymakers can address the needs of community 
banks.
    First, community banks are particularly likely to benefit 
from technical assistance in reporting and analysis. This will 
reduce the initial fixed cost of compliance, particularly for 
the smallest community banks, which might otherwise need to 
hire consultants or additional employees.
    Second, policymakers should be attentive to the ways in 
which stronger regulation of larger banks is necessary to help 
level the playing field in financial services. Legislative 
efforts to mandate higher capital levels for the largest banks, 
such as the bill introduced by Senators Brown and Vitter, are a 
valuable corrective to funding costs and balances, as are 
regulatory rules that scale capital requirements by bank size 
and funding models.
    Finally, any measures to assist community banks should be 
limited to actual community banks--that is, generally small 
banks--and should not weaken fundamental regulatory oversight 
powers that should apply to all types of banks. One example of 
a proposal that, in my opinion, may not meet this test would be 
S. 727, the Financial Institutions Examination Fairness and 
Reform Act. This legislation is not limited in the size of 
banks it applies to, and it would create so many additional 
restrictions on the capacity of bank supervisors to make and 
enforce independent judgments that it could fundamentally alter 
the nature of regulatory oversight.
    Thank you for the opportunity to testify here today. I am 
glad to respond to questions.
    Senator Brown. Thank you, Dr. Stanley.
    Mr. Calhoun, welcome.

    STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Calhoun. Thank you, Chairman Brown, Ranking Member 
Moran. This is, as everyone has noted, a critical hearing about 
institutions that are critical to the health of the overall 
economy and particularly underserved markets.
    The Center for Responsible Lending is the affiliate of a 
long-time community development lender. Over more than 30 
years, we have provided billions of dollars of home loans, 
small business loans, and consumer financial services to tens 
of thousands of families. We are directly familiar with the 
benefits and challenges of delivering these products and 
services as a community lender.
    Personally, I have been in charge of a number of these 
lending programs, including home lending and small business 
lending. I also have served for more than a decade as the 
general counsel for the lender and have personally drafted and 
overseen the distribution of the privacy notice, the annual 
privacy notice, which we have discussed today. So I think I 
have more invested in that than perhaps anyone else in the room 
right now on a personal level.
    I think everyone here acknowledges the role and value of 
community banks and credit unions. As noted, there are more 
than 100 million credit union members in the U.S. Community 
banks and credit unions provide basic account services for a 
substantial part of the overall U.S. population. And it has 
also been acknowledged that we need flexibility in how we 
regulate these institutions. This has been acknowledged by the 
regulators here today and by the CFPB as well.
    I want to comment first on the CFPB and recognize some 
initiatives there that specifically provide flexibility for 
community banks.
    First of all, as this Committee knows and as commented on, 
the CFPB's most important and visible rule was the qualified/
mortgage ability to repay rule, which goes to the heart of the 
cause of the financial crisis. The CFPB on its own volition 
created a special small creditor definition under that rule, 
not required by statute. Pursuant to that, for example, it set 
a different interest rate standard for loans that could receive 
a safe harbor. As we know, over 95 percent of loans in the 
overall market received safe harbor, but for community banks 
they were given an extra 200 basis points.
    So what that means in today's market, for the market 
overall you can get a safe harbor for a loan up to 5.5 percent 
interest rate on a first mortgage loan. For community banks, 
the CFPB raised that to over 7.5 percent. It is a floating 
margin, but in today's market over 7.5 percent for community 
banks.
    Similarly, the CFPB created small bank exceptions for 
servicing, and today it is taking comments on how to craft 
effective protections for community banks for special balloon 
loans. It created a broad exception for the next 2 years, and 
it is, as we talk now, taking comments on how to expand what is 
captured in the rural definition, and we support those efforts 
to expand that.
    At the same time, it is critical to ensure that consumer 
protection is not lost. A corollary to the community banks 
playing a key role in the economy is that they are part of that 
economy in both impact and are impacted by it. The Dodd-Frank 
reforms protect the economy and community banks in key ways.
    First, by providing basic consumer protections in 
sustainable financial transactions, it creates an avenue and 
opportunity for confident consumers to invest. Consumer 
spending is still over 70 percent of our overall economy.
    And, second, as we saw in the housing boom, the absence of 
standards led to a race to the bottom that affected all members 
of the financial market. If you did not participate in those 
risky products, you saw your market share plunge. And even when 
you did not participate, everyone was affected by plunging home 
values, risky mortgages, foreclosures, and heavy job losses. 
And so we must not lose sight of maintaining those basic 
protections that have been created for both consumers and for 
the whole economy.
    A specific issue I want to address is portfolio loans, and 
there sometimes is an assumption that portfolio loans are by 
definition safe. I would remind us that two of the largest 
failing institutions in the crisis--WaMu and Wachovia--were 
driven down in large part by portfolio loans, and even among 
some community banks, there have been portfolio loans that have 
been very unsafe for consumers, particularly with refinances, 
when the consumer's home equity is what really provides the 
collateral for the loan, they are in the first-loss position, 
and that has and can encourage risky lending.
    In conclusion, we urge both flexibility for community banks 
and effective consumer protections. They are both key pillars 
of a healthy economy. We are committed to continuing to work 
with community banks, credit unions, their associations and 
regulators, and this Committee to achieve that goal, and I look 
forward to your questions. Thank you.
    Senator Brown. Thank you, Mr. Calhoun. Thank you all for 
your really helpful testimony and for the kind words about a 
number of pieces of legislation Senator Moran and I are working 
on.
    Mr. Buhrmaster said something as he was testifying, what I 
was thinking of a couple years ago, Fed Governor Tom Hoenig of 
Kansas City said--did a back-of-the-envelope calculation that 
would require 70,000 examiners to examine a $1 trillion bank 
with the same level of scrutiny as a community bank, something 
that--I mean, it is slightly debatable, whatever the ratios 
are, but certainly is, I think, telling.
    Let me start with Dr. Stanley. The House counterpart of 
this Committee, the Financial Services Committee, is moving 
forward with legislation to amend the application of the 
Collins amendment to insurance companies, legislation I worked 
on with Senator Collins and Senator Johanns, sitting on this 
Committee also. They have in the last few days added extraneous 
provisions that I believe, unfortunately, are supported by the 
associations testifying today. Two such provisions deal with--I 
asked the last panel about--deal with derivatives and 
collateralize loan obligations.
    Do you have views on those two provisions, Dr. Stanley?
    Mr. Stanley. Yes, I do. As you know, we worked closely with 
your office on the development of this legislation, and I think 
it was really a model for how we can develop bipartisan 
initiatives to address genuine technical changes, genuine 
technical fixes in Dodd-Frank. And I know you put a lot of 
effort into reaching out to us, to Sheila Bair, to the 
industry, to create something that could get bipartisan support 
and move through the Senate on that basis. And it is 
unfortunate that these provisions, which I do not think show 
that level of drafting care or work, have been added on in the 
House.
    I think the Volcker rule provision on collateralized loan 
obligations, we heard from the regulators that that is an 
unnecessary provision. And it also puts in statute a change in 
the definition of ownership that would essentially say that if 
you can fire the manager, fire and replace the manager of a 
securitization, then you do not own it. I think that could very 
well turn out to be a problem in the future. To me, if you can 
hire and fire someone, you know, you have some ownership 
interest there.
    And the derivatives elements in that legislation, I think 
they do a lot of things the regulators have already done in 
terms of exempting end users from a derivatives margin, but 
they also effectively eliminate the CFTC's authority to step in 
and require a derivatives margin in a case where it might be 
necessary in the future at a nonbank derivatives dealer. And I 
think that could be dangerous.
    So I just do not think that those pieces of legislation 
show the care that you showed in creating the insurance 
capital.
    Senator Brown. Thank you. The original bill--or the second 
generation of the original bill, if you will, that ultimately 
went through the Senate with no dissenting votes, which is not 
always easy here, as you know. So thank you for your help.
    Mr. Calhoun, the same House legislation attached to the 
Collins amendment would remove affiliated title insurance costs 
from the cap on mortgage points and fees. Give me your thoughts 
on that.
    Mr. Calhoun. Well, first of all, Federal law has 
distinguished between affiliate fees and non-affiliate fees for 
several decades. It was in the original provisions of the Truth 
in Lending Act, and it was there because of the concern that 
affiliates might be charging more for similar products and 
encourage lenders to require products that may not be 
necessary. This is a particular risk in title insurance, and we 
are talking about significant dollars. So in DC today, for a 
median-priced house, title insurance is $3,000 or more, the 
bulk of which is paid as a commission actually to the party who 
secures the title insurance.
    There are companies who offer lower prices. They talk about 
these premiums being set at the State level. That is the 
maximum premium. That is not the required premium. There is 
some competition below that. And so, for example, in DC there 
are title insurers who will save you 25 percent or more off 
that price. You will not get that discount with an affiliate 
title. And so you are talking about in DC an extra $750 that 
that consumer is going to pay. But across the country, you are 
talking hundreds of extra dollars that consumers will pay for 
that.
    Senator Brown. So with this provision added to the Collins 
amendment bill, where Dr. Stanley used to live, in Cleveland, 
it could cost a home buyer several hundred dollars?
    Mr. Calhoun. Yes. More for the affiliate----
    Senator Brown. Several hundred more----
    Mr. Calhoun.----and you will see pressure for those 
premiums to keep going up. They are already way out of sync 
with what title insurance costs in this day of automated title 
searches.
    Senator Brown. Thank you. Legislation, Mr. Calhoun, was 
recently introduced that would scale back the Consumer Bureau's 
examination authority from banks with more than $10 billion in 
assets to those with more than $50 billion in assets. By my 
count, that would narrow the examination authority of CFPB from 
109 institutions out of 6,000 to 19, so it would be pretty much 
one-quarter of 1 percent of institutions would be subject to 
that. What do you think of that?
    Mr. Calhoun. We have deep concerns there. Again, as your 
numbers show, it reduces it from the current 2 percent of 
community financial institutions that are subject to 
examination to about a quarter of 1 percent. But those larger 
ones, as I mentioned, provide significant levels of financial 
services, for example, deposit accounts to the American public. 
We looked at numbers that about a quarter of deposit accounts 
overall in the aggregate (and particularly from those larger 
members) are provided by these institutions. And there are a 
number of issues that have been highlighted in investigations 
there, for example, overdraft fees on debit cards that are 
subject to appropriate review, and we would hope that this 
continues at the current levels.
    Senator Brown. OK. Thank you, Mr. Calhoun.
    Senator Moran?
    Senator Moran. Chairman, thank you.
    Let me first on a specific issue turn to Mr. Pierce and/or 
Ms. McFadden. Credit unions are very interested in being 
allowed to utilize third-party vendors. I want to make sure I 
understand this issue, if either one or both of you would like 
a chance to tell me the story.
    Mr. Pierce. Sure. First of all, I think NCUA's concerns are 
primarily overstretching their reach. We saw very little 
problems related to these service organizations even during the 
financial crisis and certainly did not see a large impact on 
the financials of the Share Insurance Fund as a result of that.
    I think they have that opportunity under the existing 
structure through our institutions to look at the organizations 
that we choose to do business with. We have certainly had them 
do that in the course of examinations of our credit union. And 
we also have and own service organizations that we are more 
than happy to make sure that they have the ability to ask 
questions about the operations of those institutions. So while 
I think there may be a few exceptions that they could speak to, 
I think in the majority of service organizations and third-
party vendors there is not huge risk to credit unions under the 
current structure.
    Senator Moran. Thank you very much.
    Ms. McFadden. I would like to add to that. Just for the 
Committee's knowledge, a CUSO, or credit union service 
organization, is an organization that is created and made up by 
credit unions, and the people who participate in what they 
offer are also credit unions. So NCUA is already regulating 
these entities when they regulate my shop. When they come in 
and look at my vendor due diligence and they run into a CUSO, 
they can see what other credit unions participate in that CUSO 
and follow through. They are examining that entity not only 
once, but they are examining it with every credit union that 
uses that CUSO.
    So why do they need to overstep the bounds and go into that 
entity and review them again? Is not reviewing them five or six 
or ten times sufficient? That is my question.
    Senator Moran. Thank you very much.
    Let me ask the two of you, Mr. Buhrmaster and Mr. Plagge, 
you heard the testimony of the previous panel. I wanted to give 
you the opportunity to respond to anything that you heard that 
you would like for us to know based upon the testimony that was 
given. I am particularly interested in knowing about the value 
of an ombudsman. Is there a willingness for bankers to visit 
with their regulators, with credit unions to visit with their 
regulators, to express concerns?
    And then, second, help me determine whether or not the 
problem lies with the law--I guess ultimately it all lies with 
the law if there is a problem because we give the authority for 
regulators to do what they do. But it seems to me what I heard 
today is that it is much more likely as compared to complaining 
about the particular section and provision of a regulation or 
legislation, law. It is in the safety and soundness and other 
broad regulatory arenas that many of the things that our 
bankers face today are--the challenges that they face today 
arise.
    And then, finally, I would like for you to explain to me 
why, as Mr. Stanley, Dr. Stanley, indicated, you are different 
than larger institutions, but also indicated that there was a 
reason to make certain that the regulations were of a 
satisfactory nature. What makes you different that we ought to 
reach a different conclusion or the regulators ought to reach a 
different conclusion when regulating your institution as 
compared to something significantly larger or something 
significantly different than a community financial institution? 
Mr. Plagge?
    Mr. Plagge. Very good. Thank you. I will mention one other 
thing beyond those three things. The discussion earlier about 
the EGRPRA exercise and the importance of that--and I would 
echo everything that was talked about on that--is let us make 
it real. You know, the process of going through that stuff 
every 10 years is probably never going to have the impact that 
it would if we would take that issue on every time a new 
regulation was introduced to say what should go off when 
something new comes on. So I applaud your comments on that. Let 
us get serious about it. Let us make it more cohesive and more 
comprehensive than just individual one-offs.
    Senator Moran. Mr. Plagge, may I interrupt you and say one 
of the other questions I would like to hear a response to is I 
think we heard from the regulators with us today, as we do 
every time they are in front of this Committee, that they have 
an advisory committee, they understand the special nature of 
community institutions, they have newsletters and meetings with 
bankers and work in collaboration to make sure that the 
regulations are of the appropriate nature for community banks.
    I would like to know your reaction to that kind of 
testimony. Today and every other time that we have had this 
conversation, those are the answers we get. Is all of that 
true? And if it is true, why do you or your members continue to 
come to us or to me and indicate problems?
    Mr. Plagge. It is true their outreach has improved 
dramatically. They have gone far above on the advisory boards 
and everything else to do their outreach. But the problem is 
all too often we do not see the actions of that outreach. We do 
not see the changes in the discussions. The ombudsman program, 
although we have always had personally a great relationship 
with our regulators, I hear on the road a lot there is a fear 
factor in tackling that and complaining about an exam or 
tackling a particular issue. So we are supportive of that, that 
it should be an independent process and push that forward.
    The law versus the regulation side of it, the regulator 
side of it, I think there are pieces on both sides. The 
regulators can do things themselves without action on your part 
to change the law, and we have encouraged that. We have sent 
specific letters requesting those changes.
    Senator Moran. Have you ever seen it happen?
    Mr. Plagge. Very few changes have actually happened. Kind 
of back to the comment before about the EGRPRA exercise, and 
that is--so I am hopeful this time we will get real about it 
and actually make some changes.
    And the difference side, just the comment I would make 
there is a lot of the discussion earlier was about the 
definition of a community bank. It is a relationship business 
that we are in, and many times when they look at us--you know, 
in my written testimony I talked about the 12 different kind of 
exams, reviews, third-party oversight, audits, and everything 
that our bank--we have a $200 million bank and a $1.3 billion 
bank has gone through it in any given year. There ought to be 
some process in that that we get rewarded for those kind of 
exercises, and it should lower some of the regulatory burden, 
and as well as understanding that we are focused community 
banks in our communities, and all the information they already 
get will help them in their oversight without the continual 
exercise of more and more exams and more and more questions.
    Senator Moran. Thank you, Mr. Chairman.
    Mr. Buhrmaster. Thank you very much. You have thrown a few 
things up in the air, and I would like to address at least as 
many as I can in the time that we have.
    As far as EGRPRA, we have a wonderful opportunity here to 
address changes in our regulatory structure. A lot of work was 
done last time, but nothing really significant happened. But it 
is different now than it was then. Tiered regulation is seen in 
an entirely different way now than it was the last time this 
exercise was taken. And I think if the EGRPRA process looks at 
solutions in regard to tiered regulation, I think they are 
going to have greater success and they will have more changes 
that will affect us directly and that will help community banks 
meet the needs of their community.
    Now, you mentioned have the regulators said, yes, we hear 
you but we do not see changes. A great example of that is the 
small bank policy statement, the small bank holding company 
policy statement. You know, we have heard the regulators say 
this is something that probably should change, this is 
something that is worthwhile. Why hasn't it changed? You know, 
there is a great need for other sources of capital for 
community banks now. There are a thousand less banks now than 
there were in 2006 when this took effect. Where have those 
assets gone? Well, those assets have merged into larger banks 
or other community banks, and these community bans have not 
changed their business model, yet they are larger than they 
were before. We are larger than we were in 2006, and yet we 
have not changed our business model. That level needs to keep 
up with the times and the reality of the consolidation process 
that is out there.
    Finally, you had asked about where community banks differ 
from their larger brethren. It is business model; it is 
relationships. It is the fact that--we do not like 
foreclosures, we do not like repossessions, because we have to 
see those folks in the community. You know, what we would 
rather do is we would rather sit at a loan officer's desk, sit 
at a table with a customer, and talk to them about what is 
going on in their life and why they need this loan and what 
they need to make their business grow and what they need to 
make our community grow. Yet we find our loan officer's time is 
taken up considerably by checking boxes and signing forms.
    I mean, heck, when I started out, you know, we were using 
carbon notes that were this big. If I tried to use a carbon 
note with all the disclosures for a car loan right now, it 
would stretch the length of this table.
    You know, these are regulations that have been added that 
do not give the benefit to the consumer because it is just too 
much for the consumer to handle.
    Senator Moran. Thank you.
    Mr. Pierce. Well, first of all, credit unions by our nature 
are cooperative institutions, so we are owned by the people 
that do business with us. So it is in our best interest to not 
mess with the boss. So our compliance is focused in on what is 
best for the people that we work with, with our membership. And 
so we continue to believe that.
    From a regulator's standpoint, all of us up here will tell 
you we have no problems with the regulator because we do not 
want to tell you that we do have problems, but somebody else 
does. And we do a lot of survey work at CUNA, and that 
continues to be a problem that comes up, that there are issues 
with regulators. And I think you alluded to this earlier, but 
in the end a lot of it has to do with communication or the lack 
of communication. And it is a real challenge to sit down with 
someone and have a conversation and try to change their 
opinion, and oftentimes it is changing their opinion about what 
they believe your institution is about.
    I think it is a problem. I think we continue to see that 
problem show up when we ask credit unions about it. They still 
show--I think it is better, but I think there is still a lot of 
room for improvement.
    I think another great example of maybe that overreach is 
the risk-based capital rule that NCUA is proposing. There are 
many good attributes in there, and I think a comprehensive 
risk-based product for capital for credit unions would be 
great. But this is not the one that does it. It leaves out an 
awful lot of key elements. It does not properly evaluate the 
risk-based nature of capital. It does not--I think it 
inappropriately misstates the law and their ability to 
establish a well-capitalized number beyond the limit that was 
established in Congress. And it does not include access to 
supplemental capital or other resources that I think would be a 
great add for credit union members.
    So I think they try. I do not think they get there.
    Senator Moran. Thank you.
    Ms. McFadden. Hello, Senator Brown. I would like to answer 
Senator Moran also. The written testimony that we provided goes 
into a lot of items in detail on how we can be given regulatory 
relief. But as far as NCUA and some of their thought processes 
in regulating us, they have the ability to use a waiver for 
member business lending. They do not exercise that right. That 
is just one of the number of things that they have at their 
disposal that they just fail to use. They have those tools in 
their toolbox. They do not ever pull them out. Or if they do, 
the waiver process is so complicated and so long, I have lost 
that member business loan before I have ever had a chance to 
book it, because the process took too long.
    The other things is I think just in the way they are going 
about this risk-based capital, they came out with a proposal 
that was so off the wall that they knew was going to cause a 
stir within the credit union movement. And instead of saying we 
will take this back, we will make some adjustments, we will get 
you involved in the process, and then we will repropose it so 
you all can look at it, no, they are saying, no, there is not 
going to be a reproposal. They are going to change the proposal 
as they gave it to us, they are going to make changes to it, 
and then Chairman Matz even told us in our listening session 
there would not be any reproposal for us to comment on, that it 
was going out how they decided. That is not a collaborative 
working environment.
    So when they draw lines in the sand like that, credit 
unions are afraid to come forward and take their issues to NCUA 
because they know that they are very close-minded about it.
    Senator Moran. Thank you. Thank you, Mr. Chairman.
    Senator Brown. Thank you, Senator Moran. I have one more 
question, and it is for Dr. Stanley. Then we will wrap up.
    Several House bills, Dr. Stanley, relating to financial 
services have been compiled into one bill. These proposals, 
pretty much sold as job creation proposals, are deregulatory in 
nature, of course, reducing SEC oversight over market 
participants, shortening the timeframe for market analysis and 
agency review and public offerings, limiting certain disclosure 
requirements. Give me your thoughts on that if you would.
    Mr. Stanley. I have to say that this is--I think there are 
13 or 14 different bills in the Fitzpatrick jobs bill. We have 
not reviewed every single one of those. There are quite a 
number that the SEC has already taken action on 
administratively.
    I think that some of the moves to put these things in 
statute are going to restrict the ability of the SEC to protect 
investors, the ability that they would have if they acted 
through regulation to protect investors. For example, there is 
a bill that exempts some mergers and acquisitions brokers from 
certain kinds of SEC oversight, and I believe that that bill 
does not say that--it does not say that bad actors would not 
qualify for the exemption from SEC oversight. And that was a 
recommendation that was made by the State securities 
administrators, that you should not let bad actors, people with 
a history of fraud or abuse, take advantage of this. But I do 
not think it made it into the House bill. I think a 
particularly egregious House bill that is coming along later 
this week is H.R. 1105, which is on the oversight of private 
equity fund advisors. This is being sold as something that 
helps small businesses, but, in fact, it would remove even the 
very minimal reporting and oversight that was required in Dodd-
Frank by giant private equity firms. And, you know, we saw as 
soon as the SEC started to get those reports from private 
equity firms, we saw evidence of very large scale abuses of 
investors. And to just remove that oversight for some of the 
wealthiest entities on Wall Street and sell it as helping small 
business I just do not think is appropriate.
    Senator Brown. Thank you, Dr. Stanley. Thank you all for 
participating. We very much appreciate it. The hearing is 
adjourned.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF DOREEN R. EBERLEY
           Director, Division of Risk Management Supervision
                 Federal Deposit Insurance Corporation
                           September 16, 2014
    Chairman Johnson, Ranking Member Crapo and Members of the 
Committee, I appreciate the opportunity to testify on behalf of the 
Federal Deposit Insurance Corporation (FDIC) on the state of small 
depository institutions. As the primary Federal regulator for the 
majority of community banks, the FDIC has a particular interest in 
understanding the challenges and opportunities they face.
    My testimony will highlight some findings from our community bank 
research efforts and discuss some key performance statistics for 
community banks. I will describe the FDIC's oversight of community 
banks and how it differs from our supervision of large banks and will 
touch on some of our outreach and technical assistance efforts related 
to community banks. Additionally, I will discuss how the FDIC has taken 
the characteristics and needs of community banks into consideration in 
the drafting of regulations. Finally, as you requested in your letter 
of invitation, I will discuss some important factors for consideration 
when analyzing regulatory relief proposals.
Community Bank Research Agenda
FDIC Community Banking Study
    Since late 2011, the FDIC has been engaged in a data-driven effort 
to identify and explore issues and questions about community banks--the 
institutions that provide traditional, relationship-based banking 
services in their local communities. Our research is based on a 
definition of community banks that goes beyond asset size alone to 
account for each institution's lending and deposit gathering 
activities, as well as the limited geographic scope of operations that 
is characteristic of community banks.
    Our initial findings were presented in a comprehensive Community 
Banking Study (Study) published in December 2012.\1\ The study covered 
topics such as structural change, geography, financial performance, 
lending strategies and capital formation, and highlighted the critical 
importance of community banks to our economy and our banking system.
---------------------------------------------------------------------------
    \1\ FDIC Community Banking Study, 2012. https://www.fdic.gov/
regulations/resources/cbi/study.html.
---------------------------------------------------------------------------
    While community banks account for about 14 percent of the banking 
assets in the United States, they now account for around 45 percent of 
all the small loans to businesses and farms made by all banks in the 
United States. In addition, the Study found that over 600 of the more 
than 3,100 U.S. counties--including small towns, rural communities and 
urban neighborhoods--would have no physical banking presence if not for 
the community banks operating there.
    The Study highlighted some of the challenges facing community banks 
in the present environment. Beyond the high credit losses that were 
experienced as a result of the recession, community banks have also 
experienced a squeeze on net interest income during the protracted 
period of historically low interest rates that has followed. Also, 
while the available data do not permit a breakdown of regulatory versus 
nonregulatory expenses, a number of community bankers interviewed as 
part of the Study stated that the cumulative effect of regulation over 
time has led to increases in expenses related to complying with the 
supervisory and regulatory process.
    Nonetheless, the Study also showed that the core business model of 
community banks--defined around well-structured relationship lending, 
funded by stable core deposits, and focused on the local geographic 
community that the bank knows well--actually performed comparatively 
well during the recent banking crisis. Amid the 500 some banks that 
have failed since 2007, the highest rates of failure were observed 
among noncommunity banks and among community banks that departed from 
the traditional model and tried to grow faster with risky assets often 
funded by volatile brokered deposits.
    Our community bank research agenda remains active. Since the 
beginning of the year, FDIC analysts have published new papers dealing 
with consolidation among community banks, the effects of long-term 
rural depopulation on community banks, and on the efforts of Minority 
Depository Institutions to provide essential banking services in the 
communities they serve.\2\
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    \2\ See: Backup, Benjamin R. and Richard A. Brown, ``Community 
Banks Remain Resilient Amid Industry Consolidation,'' FDIC Quarterly, 
Volume 8, Number 2, 2014. pp. 33-43; Anderlik, John M. and Richard D. 
Cofer Jr., ``Long-Term Trends in Rural Depopulation and Their 
Implications for Community Banks,'' FDIC Quarterly, Volume 8, Number 2, 
2014, pp. 44-59. Breitenstein, Eric C., Karyen Chu, Kathy R. Kalser, 
and Eric W. Robbins, ``Minority Depository Institutions: Structure, 
Performance, and Social Impact,'' FDIC Quarterly, Volume 8, Number 3, 
2014. https://www.fdic.gov/bank/analytical/quarterly/.
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Community Bank Performance and the New Community Bank Quarterly Banking 
        Profile
    Another important development in our research effort has been the 
introduction this year of a new section in the FDIC Quarterly Banking 
Profile, or QBP, that focuses specifically on community banks.\3\ 
Although some 93 percent of FDIC-insured institutions met our community 
bank definition in the first quarter, their relatively small size 
(encompassing only 14 percent of industry assets) tends to obscure 
community banking trends amid industry aggregate statistics. This new 
quarterly report on the structure, activities and performance of 
community banks should provide a useful barometer by which smaller 
institutions can compare their own results. This regular quarterly 
report is an important and ongoing aspect in the FDIC's active program 
of research and analysis on community banking.
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    \3\ FDIC Quarterly Banking Profile, http://www2.fdic.gov/qbp.
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    Our most recent QBP shows that community bank loan balances grew by 
7.6 percent in the year ending in June, outpacing a 4.9 percent rate of 
growth for the industry as a whole. All major loan categories increased 
for community banks. One-to-four family mortgages increased by 4.6 
percent over the year. Small loans to businesses--loans to commercial 
borrowers up to $1 million, and farm loans up to $500,000--totaled 
$297.9 billion as of June 30, an increase of 3.1 percent from a year 
ago. Almost three-quarters of the year-over-year increase in small 
loans to businesses was driven by improvement in commercial and 
industrial loans and nonfarm nonresidential real estate loans.
    Net interest income--which accounts for almost 80 percent of net 
operating revenue at community banks--was $16.8 billion during the 
first quarter, up 6.3 percent from a year ago. The average net interest 
margin at community banks of 3.61 percent was 4 basis points higher 
than a year ago and 46 basis points above the industry average. 
However, noninterest income was down 9.5 percent from second quarter 
2013, at $4.5 billion in the second quarter 2014, as revenue from the 
sale of mortgages and other loans declined by 29.1 percent from a year 
ago. Relative to total assets at community banks, noninterest expense 
declined to 2.91 percent (annualized) from 2.98 percent a year ago, as 
assets grew at a faster pace than noninterest expense.
    As of second quarter 2014, our analysis shows that community banks 
reported net income of $4.9 billion, an increase of 3.5 percent from 
the same quarter a year ago, compared to an earnings increase of 5.3 
percent for the industry as a whole. More than half (57.5 percent) of 
all community banks reported higher earnings than a year ago and the 
percentage reporting a quarterly loss fell to 7.0 percent from 8.4 
percent.
Supervisory Approach for Community Banks
    Since the 1990s, the FDIC has tailored its supervisory approach to 
the size, complexity, and risk profile of each institution. To improve 
our risk-focused process, in 2013, the FDIC restructured our pre-
examination process to better tailor examination activities to the 
unique risk profile of the individual institution and help community 
bankers understand examination expectations. As part of this process, 
we developed and implemented an electronic pre-examination planning 
tool to ensure consistency nationwide and to ensure that only those 
items that are necessary for the examination process are requested from 
each institution.
Examination Cycle
    With respect to onsite examinations, the Federal Deposit Insurance 
Act requires regular safety and soundness examinations of State 
nonmember banks at least once during each 12-month period. However, 
examination intervals can be extended to 18 months for institutions 
with total assets of less than $500 million, provided they are well-
managed, well-capitalized, and otherwise operating in a safe and sound 
condition. Most community banks we supervise have total assets under 
$500 million and meet the other criteria and, therefore, are subject to 
extended safety and soundness examination intervals. In contrast, the 
very largest institutions we supervise are subject to continuous safety 
and soundness supervision during the year rather than a point in time 
examination.
    FDIC policy guides consumer compliance examination schedules, which 
also vary based on the institution's size, prior examination rating and 
risk profile. Community Reinvestment Act (CRA) examination schedules 
conform to the requirements of the Gramm-Leach-Bliley Act, which 
established the CRA exam cycle for most small institutions. The FDIC 
also uses different CRA examination procedures based upon the asset 
size of institutions. Those meeting the small and intermediate small 
asset-size threshold are not subject to the reporting requirements 
applicable to large banks and savings associations.
    The FDIC utilizes offsite monitoring programs to supplement and 
guide the onsite examination process. Offsite monitoring programs can 
provide an early indication that an institution's risk profile may be 
changing. Offsite monitoring tools using key data from bank's quarterly 
Reports of Condition and Income, or Call Reports, have been developed 
to identify institutions that are experiencing rapid loan growth or 
reporting unusual levels or trends in problem loans, investment 
activities, funding strategies, earnings structure or capital levels 
that merit further review. In addition to identifying outliers, offsite 
monitoring using Call Report information helps us to determine whether 
it is appropriate to implement the extended examination timeframes.
    The Call Report itself is tiered to size and complexity of the 
filing institution, in that more than one-third of the data items are 
linked to asset size or activity levels. Based on this tiering alone, 
community banks never, or rarely, need to fill out a number of pages in 
the Call Report, not counting the data items and pages that are not 
applicable to a particular bank based on its business model. For 
example, a typical $75 million community bank showed reportable amounts 
in only 14 percent of the data items in the Call Report and provided 
data on 40 pages. Even a relatively large community bank, at $1.3 
billion, showed reportable amounts in only 21 percent of data items and 
provided data on 47 pages.
Rulemaking
    The FDIC also considers size, complexity, and risk profile of 
institutions during the rulemaking and supervisory guidance development 
processes, and where possible, we scale our regulations and policies 
according to these factors. The FDIC has a longstanding policy of 
implementing its regulations in the least burdensome manner possible. 
In 1998, the FDIC issued its Statement of Policy on the Development and 
Review of FDIC Regulations and Policies.\4\ This policy statement, 
which was updated and reaffirmed, as recently as 2013, recognizes the 
FDIC's commitment to minimizing regulatory burdens on the public and 
the banking industry.
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    \4\ http://www.fdic.gov/regulations/laws/rules/5000-400.html.
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    A number of recent FDIC rulemakings implement provisions of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) that were designed to benefit community institutions. For example, 
the assessment base for deposit insurance was changed from domestic 
deposits to average total assets minus average tangible equity, which 
shifted more of the deposit insurance assessment burden from smaller to 
larger institutions. As a result, aggregate premiums paid by 
institutions with less than $10 billion in assets declined by 
approximately one-third in the second quarter of 2011, primarily due to 
the assessment base change. Under the Dodd-Frank Act, the deposit 
insurance coverage limit was permanently increased to $250,000, which 
particularly benefits small businesses and other depositors of 
community institutions. The Dodd-Frank Act also increased the minimum 
reserve ratio for the Deposit Insurance Fund (or DIF) from 1.15 percent 
to 1.35 percent, with the increase in the minimum target to be funded 
entirely by larger banks.
    In addition to issuing rules to implement the provisions of the 
Dodd-Frank Act that benefit community banks, the FDIC also has taken 
into account the unique characteristics of community banks in its 
rulemaking to implement other important reforms to the financial 
system. For example, in adopting the implementing regulations for the 
Volcker Rule, the agencies recognized that, while the requirements of 
the implementing statute apply to all banking entities regardless of 
size, the activities covered are generally conducted by larger, more 
complex banks. Accordingly, the agencies designed the Volcker Rule to 
reduce the burden placed on banks that do not engage in proprietary 
trading activities or have only limited exposure to fund investments.
    Under the Volcker Rule, a bank is exempt from all of the compliance 
program requirements, and all of the associated costs, if it limits its 
covered activities to those that are excluded from the definition of 
proprietary trading. This exemption applies to the vast majority of 
community banks. For community banks that are less than $10 billion in 
assets but do engage in activities covered by the Volcker Rule, 
compliance program requirements can be met by simply including 
references to the relevant portions of the rule within the banks' 
existing policies and procedures. This should significantly reduce the 
compliance burden on smaller banks that may engage in a limited amount 
of covered activities.
    The FDIC and other bank regulators also adopted regulatory capital 
rules for community banks. The FDIC recognizes that a number of the 
more complex requirements of our capital rules are not necessary or 
suitable for community banks. As such, many aspects of the revised 
capital rules do not apply to community banks. For example, the new 
capital rules introduce a number of provisions aimed only at the large, 
internationally active banks. These provisions include the 
supplementary leverage ratio, the countercyclical capital buffer, and 
capital requirements for credit valuation adjustments and operational 
risk, to name a few. In addition, the revised capital rules contain 
large sections that do not apply to community banks. Most notably, the 
advanced approaches framework only applies to internationally active 
banks and the market risk rule only applies to banks with material 
trading operations.
    To assist bankers in understanding and complying with the revised 
capital rules, the FDIC conducted outreach and technical assistance 
designed specifically for community banks. In addition to the 
publication of a community bank guide and an informational video on the 
revised capital rules, FDIC staff conducted face-to-face informational 
sessions with bankers in each of the FDIC's six supervisory regions to 
discuss the revised capital rules most applicable to community banks.
Subchapter S
    The Basel III capital rules introduce a capital conservation buffer 
for all banks (separate from the supplementary leverage ratio buffer 
applicable to the largest and most systemically important bank holding 
companies (BHCs) and their insured banks). If a bank's risk-based 
capital ratios fall below specified thresholds, dividends and 
discretionary bonus payments become subject to limits. The buffer is 
meant to conserve capital in banks whose capital ratios are close to 
the minimums and encourage banks to remain well-capitalized.
    In July, the FDIC issued guidance clarifying how it will evaluate 
requests by S corporation banks to make dividend payments that would 
otherwise be prohibited under the capital conservation buffer. Federal 
income taxes of S corporation banks are paid by their investors. If an 
S corporation bank has income but is limited or prohibited from paying 
dividends, its shareholders may have to pay taxes on their pass-through 
share of the S-corporation's income from their own resources. 
Relatively few S corporation banks are likely to be affected by this 
issue, and in any case not for several years; the buffer is phased-in 
starting in 2016 and is not fully in place until 2019.
    As described in the guidance, when an S corporation bank does face 
this tax issue, the Basel III capital rules allow it (like any other 
bank) to request an exception from the dividend restriction that the 
buffer would otherwise impose. The primary regulator can approve such a 
request if consistent with safety and soundness. Absent significant 
safety and soundness concerns about the requesting bank, the FDIC 
expects to approve on a timely basis exception requests by well-rated S 
corporations to pay dividends of up to 40 percent of net income to 
shareholders to cover taxes on their pass-through share of the bank's 
earnings.
Community Banking Initiative and Technical Assistance
    In 2009, the FDIC established its Advisory Committee on Community 
Banking to provide advice and guidance on a broad range of policy 
issues impacting small community banks and the local communities they 
serve. In February 2012, the FDIC sponsored a national conference to 
examine the unique role of community banks in our Nation's economy. 
Later in 2012, roundtable discussions were conducted in each of the 
FDIC's regions that focused on the financial and operational challenges 
and opportunities facing community banks, and the regulatory 
interaction process.
    In discussions with community bankers in these venues and through 
our routine outreach efforts, it became clear that community banks were 
concerned about keeping up with changing regulations and policy issues 
and were interested in assistance from us to stay informed. As a 
result, in 2013, the FDIC created a regulatory calendar that alerts 
stakeholders to critical information as well as comment and compliance 
deadlines relating to new or amended Federal banking laws, regulations 
and supervisory guidance. The calendar includes notices of proposed, 
interim and final rulemakings, and provides information about banker 
teleconferences and other important events related to changes in laws, 
regulations, and supervisory guidance.
    We also instituted a number of outreach and technical assistance 
efforts, including increased direct communication between examinations, 
increased opportunities to attend training workshops and symposiums, 
and conference calls and training videos on complex topics of interest 
to community bankers. In spring 2013, we issued six videos designed to 
provide new bank directors with information to prepare them for their 
fiduciary role in overseeing the bank. This was followed by the release 
of a virtual version of the FDIC's Directors' College Program that 
regional offices deliver throughout the year. We have also issued a 
series of videos, primarily targeted to bank officers and employees, 
dealing with more in-depth coverage of important supervisory topics 
with a focus on bank management's responsibilities.\5\ We have hosted 
banker call-ins on topics such as proposed new accounting rules, new 
mortgage rules, and Call Report changes. The FDIC is also currently 
offering a series of Deposit Insurance Coverage seminars for banking 
officers and employees.\6\ These free seminars, which are offered 
nationwide, particularly benefit smaller institutions, which have 
limited training resources.
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    \5\ Technical Assistance Video Program: https://www.fdic.gov/
regulations/resources/director/video.html.
    \6\ Deposit Insurance Coverage: Free Nationwide Seminars for Bank 
Officers and Employees (FIL-17-2014), dated April 18, 2014.
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    These resources can be found on the Directors' Resource Center, 
available through the FDIC's Web site.\7\ Additionally, in June 2014, 
the FDIC mailed an Information Packet \8\ to the chief executive 
officers (CEOs) of FDIC-supervised community banks containing resources 
and products developed as part of the FDIC's Community Banking 
Initiative, as well as documents describing our examination processes. 
In addition to an introductory letter to CEOs, the packet contains 
brochures highlighting the content of key resources and programs; a 
copy of the Cyber Challenge, a technical assistance product designed to 
assist with the assessment of operational readiness capabilities; and 
other information of interest to community bankers.
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    \7\ See https://www.fdic.gov/regulations/resources/director/.
    \8\ See http://www.fdic.gov/regulations/resources/cbi/
infopackage.html.
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EGRPRA Review
    The FDIC and other regulators are actively seeking input from the 
industry and the public on ways to reduce regulatory burden. The 
Economic Growth and Regulatory Paperwork Reduction Act of 1996 \9\ 
(EGRPRA) requires the Federal Financial Institutions Examination 
Council (FFIEC)\10\ and the FDIC, the Federal Reserve Board (FRB), and 
the Office of the Comptroller of the Currency (OCC) to review their 
regulations at least once every 10 years to identify any regulations 
that are outdated, unnecessary, or unduly burdensome. EGRPRA also 
requires the agencies to eliminate unnecessary regulations to the 
extent such action is appropriate. The second decennial EGRPRA review 
is in process with a required report due to Congress in 2016. On June 
4, 2014, the Federal banking agencies jointly published in the Federal 
Register the first of a series of requests for public comment on their 
regulations.\11\ The comment period for this request closed on 
September 2, 2014. The agencies are currently reviewing the comments 
received. The agencies also plan to hold regional outreach meetings to 
get direct input as part of the EGRPRA review process before the end of 
2015.
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    \9\ Public Law 104-208 (1996), codified at 12 U.S.C.  3311.
    \10\ The FFIEC is comprised of the Board of Governors of the 
Federal Reserve System (FRB), the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the 
National Credit Union Administration (NCUA), the Consumer Financial 
Protection Bureau (CFPB) and the State Liaison Committee (SLC), which 
is comprised of representatives from the Conference of State Bank 
Supervisors (CSBS), the American Council of State Savings Supervisors 
(ACSSS), and the National Association of State Credit Union Supervisors 
(NASCUS).
    \11\ http://www.gpo.gov/fdsys/pkg/FR-2014-06-04/pdf/2014-12741.pdf.
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    The FDIC has developed a comprehensive plan for conducting its 
EGRPRA review that includes coordination with the other Federal banking 
agencies.\12\ As the primary Federal regulator for the majority of 
community banks, the FDIC is keenly aware of the impact that its 
regulatory requirements can have on smaller institutions, which operate 
with less staff and other resources than their larger counterparts. 
Therefore, as part of its EGRPRA review, the FDIC is paying particular 
attention to the impact its regulations may have on smaller 
institutions.
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    \12\ http://www.fdic.gov/EGRPRA/.
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Consideration of Regulatory Relief Proposals
    As indicated above, the FDIC strives to tailor rules, policies, and 
supervisory practices to the size, complexity and risk profile of the 
institutions we supervise, and we welcome suggestions regarding where 
we can do more. When we review such suggestions, our focus is their 
effect on the fundamental goals of maintaining the safety-and-soundness 
of the banking industry and protecting consumers.
    Strong risk management practices and a strong capital base are 
fundamental to the long-term health of community banks and their 
ability to serve their local communities. Most community banks know how 
to manage the risks in their loan portfolios and have strong capital 
positions. And of course, community banks have a strong interest in 
retaining customers by treating them fairly. Serving the credit needs 
of their local communities, while managing the attendant credit risks, 
truly is the core expertise of many community banks and what they do 
best. Reports by the General Accounting Office (GAO) and the FDIC's 
Office of Inspector General (IG),\13\ and our own Community Banking 
Study have shown that banks--even those with concentrated asset 
portfolios--with sound risk management practices and strong capital 
have been able to weather crises and remain strong.
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    \13\ Causes and Consequences of Recent Bank Failures (January 
2013), GAO-13-71 and Comprehensive Study on the Impact of the Failure 
of Insured Depository Institutions (January 2013), EVAL-13-002.
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    Institutions that did not survive, according to these reports, were 
those with weaker or more aggressive risk management approaches, 
including imprudent loan underwriting and rapid growth often financed 
by wholesale funds or brokered deposits. One of our IG reports also 
found that banks that heeded supervisory directives regarding risk 
management practices were more likely to survive.
    We believe the evidence strongly supports the idea that the best 
way to preserve the long-term health and vibrancy of community banks, 
and their ability to serve their local communities, is to ensure their 
core strength is preserved: strong capital, strong risk management and 
fair and appropriate dealings with their customers. We also believe our 
own supervision plays an important role in obtaining corrective action 
to address problems where this is needed, and that this also promotes 
the long-term health of community banks.
    This being said, we remain alert to the importance of achieving the 
fundamental objectives of safety-and-soundness and consumer protection 
in ways that do not involve needless complexity or expense. As noted 
elsewhere in this testimony, we have a number of forums for hearing and 
considering suggestions in this regard, and we stand ready to provide 
our views and technical assistance to this Committee.
Conclusion
    The FDIC's research and community bank operating results both show 
that the community banking model is doing well. The FDIC tailors its 
oversight of banks according to size, complexity and risk, and has 
provided a number of tools to assist community bankers understand 
regulatory requirements and expectations. Going forward, we continue to 
look for ways to improve our supervisory processes, and stand ready to 
provide technical assistance regarding proposals that seek to achieve 
the fundamental goals of safety-and-soundness and consumer protection 
in ways that are appropriately tailored for community banks.
                                 ______
                                 
                   PREPARED STATEMENT OF TONEY BLAND
  Senior Deputy Comptroller for Midsize and Community Bank Supervision
              Office of the Comptroller of the Currency *
                           September 16, 2014
I. Introduction
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     * Statement Required by 12 U.S.C.  250:

    The views expressed herein are those of the Office of the 
Comptroller of the Currency and do not necessarily represent the views 
of the President.
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    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to discuss the challenges 
facing community banks and actions that the Office of the Comptroller 
of the Currency (OCC) is taking to help them meet those challenges and 
remain a vibrant part of our Nation's financial system. Consistent with 
the Committee's invitation letter, my testimony provides an overview of 
the OCC's supervisory program for small national banks and Federal 
savings associations (hereafter referred to as community banks) and 
describes initiatives we have implemented to address their specific 
needs and concerns. These initiatives include offering a broader array 
of practical resources and tools that are tailored to community banks 
as well as refinements to our supervisory processes to improve, for 
example, the clarity and timeliness of supervisory reports and 
expectations. I also describe actions we have taken to tailor 
supervisory policies and regulations to recognize the business models 
of community banks while remaining faithful to safe and sound banking 
practices, statutory requirements, and legislative intent. These 
efforts include our ongoing Dodd-Frank Act related rulemakings, our 
decennial review of regulations to identify where they could be 
streamlined or eliminated, and our exploration of ways to provide more 
flexibility for Federal savings associations to respond to the changing 
economic and business environment as well as to meet the needs of their 
communities.
    Before describing these initiatives and actions, I would like to 
provide my perspective on community banks. Last month I assumed the 
role of Senior Deputy Comptroller for Midsize and Community Banks. In 
this role, I am responsible for the OCC's community bank supervision 
program that oversees approximately 1,400 institutions with assets 
under $1 billion. Previously, I served as the OCC's Deputy Comptroller 
of the Northeastern District where I was responsible for the oversight 
of more than 300 community banks.
    Community banks play a crucial role in providing consumers and 
small businesses in communities across the Nation with essential 
financial services and a source of credit that is critical to economic 
growth and job expansion. Throughout the country, community bankers 
help small businesses grow and thrive by offering ``hands-on'' 
counseling and credit products that are tailored to their specific 
needs. Community banks and their employees strengthen our communities 
by helping meet municipal finance needs and through their active 
participation in the civic life of their towns.
    Community banks are important to the OCC. Approximately two-thirds 
of our examination staff is dedicated to the supervision of these 
institutions. In my previous role as deputy comptroller, and now as 
senior deputy comptroller, I regularly meet with community bankers to 
hear first-hand their successes, their challenges, and their 
frustrations. I have seen how well-managed community banks were able to 
weather the financial crisis and provide a steady source of credit to 
their local communities and businesses. But I've also heard the 
concerns expressed by many community bankers about the long-term 
viability of their business models and their frustration that too much 
of their time and resources are spent on trying to track and comply 
with an ever expanding array of regulatory requirements rather than 
meeting with and responding to the needs of their customers and 
communities.
    In my meetings with community bankers, I underscore the advantages 
they have over larger competitors because of their deep understanding 
of the unique needs of their local markets and customers and their 
ability to tailor their products to meet these needs. The willingness 
and ability of community bankers to work with their customers through 
good times and bad is one reason why local businesses rely on community 
banks. Following the recent financial crisis, we took a look at what 
factors enabled strong community banks to weather that storm, and 
summarized those findings in our booklet, ``A Common Sense Approach to 
Community Banking,'' published last year. This booklet shares best 
practices that have proven useful to boards of directors and management 
in successfully guiding their community banks through economic cycles 
and other changes and challenges they might experience.
    I am pleased to report that the overall financial condition of 
community banks has improved considerably since the crisis: the number 
of troubled institutions has declined significantly, capital has 
increased, asset quality indicators are improving, and there are signs 
that lending opportunities are rebounding. Indeed, community banks have 
experienced growth in most major loan categories and at a higher pace 
than that of the Federal banking system as a whole. Despite this 
progress, challenges remain. For example, economic recovery and job 
creation continues to lag in many regions and communities, and many 
community bankers face the challenge of finding profitable lending and 
investment opportunities without taking on undue credit or interest 
rate risks. Strategic risk is a concern for many community bankers as 
they search for sustainable ways to generate earnings in the current 
environment of prolonged low interest rates and increased competition 
and compliance costs. Moreover, the volume and sophistication of cyber 
threats continue to challenge banks of all sizes.
    The remainder of my testimony describes steps that the OCC is 
taking to help community bankers meet these challenges, to help them 
navigate the changing regulatory landscape, and to ensure that the 
OCC's supervisory policies and regulations are appropriately tailored 
to community banks. It also provides the OCC's perspectives on factors 
the Committee may wish to consider as it explores legislative proposals 
aimed at reducing regulatory burden on community banks.
II. OCC's Approach to Community Bank Supervision
    The OCC is committed to supervisory practices that are fair and 
balanced, and to fostering a regulatory climate that allows well-
managed community banks to grow and thrive. The OCC's community bank 
supervision program is built around our local field offices, and a 
portfolio management approach. Our community bank examiners are based 
in over 60 locations throughout the United States in close proximity to 
the banks they supervise. They understand the local conditions that 
affect community banks. The local assistant deputy comptroller (ADC) 
has delegated responsibility for the supervision of a portfolio of 
community banks. Each ADC reports up to a district deputy comptroller 
who reports to me.
    Our program ensures that community banks receive the benefits of 
highly trained bank examiners with local knowledge and experience, 
along with the resources and specialized expertise that a nationwide 
organization can provide. Our bank supervision policies and procedures 
establish a common framework and set of expectations. Each bank's 
portfolio manager tailors the supervision of each community bank to its 
individual risk profile, business model, and management strategies. Our 
ADCs are given considerable decisionmaking authority, reflecting their 
experience, expertise, and their ``on-the-ground'' knowledge of the 
institutions they supervise.
    We have mechanisms in place to ensure that our supervisory 
policies, procedures, and expectations are applied in a consistent and 
balanced manner. For example, every report of examination prepared by 
an examiner is reviewed and approved by the responsible ADC before it 
is finalized. In cases where significant issues are identified and an 
enforcement action is in place, or is being contemplated, we undertake 
additional levels of review prior to finalizing the examination 
conclusions. We also have formal quality assurance processes that 
assess the effectiveness of our supervision and compliance with OCC 
policies. These policies include periodic, randomly selected reviews of 
the supervisory record, with oversight by our Enterprise Governance 
unit that reports directly to the Comptroller.
    A key element of the OCC's supervisory philosophy is open and 
frequent communication with the banks we supervise. In this regard, my 
management team and I encourage any banker who has concerns about a 
particular examination finding to raise those concerns with his or her 
examination team and with the district management team that oversees 
the bank. Our ADCs and deputy comptrollers expect and encourage such 
inquiries. Should a banker not want to pursue those chains of 
communication, our Ombudsman provides a venue for bankers to discuss 
their concerns informally or to formally request an appeal of 
examination findings. The OCC's Ombudsman is fully independent of the 
supervisory process, and he reports directly to the Comptroller. In 
addition to hearing formal appeals, the Ombudsman's office provides 
bankers with an impartial ear to hear complaints and a mechanism to 
facilitate the resolution of disputes with our examination staff.
III. Enhancements to the OCC's Community Bank Supervision Program
    At the OCC we continuously seek ways to improve our supervisory 
processes and how we interact with the banks we supervise. A frequent 
comment I hear from community bankers and their directors is the need 
for more practical information and tools that can help them identify 
and respond to emerging risks. I also hear about the challenges 
community bankers face in trying to absorb and keep track of new or 
changing regulatory and supervisory requirements, and their desire to 
have a ``one-stop'' source where they can go for information. In 
response to these requests, we have taken a variety of steps to improve 
and expand upon our suite of tools and resources for community bankers 
and their directors.
A. Information and Resources
    OCC BankNet: Over the last several years, we have enhanced OCC 
BankNet, our dedicated Web site for national banks and Federal savings 
associations. The site is designed to provide a ``one-stop'' source 
that bankers and their directors can use to obtain up-to-date 
information on OCC policies and regulations, various educational 
programs, workshops and Web conferences, as well as resources and 
analytical tools designed for community banks. We also are expanding 
its use as a safe and secure means that bankers can use to transmit 
supervisory data or various forms and applications to the OCC.
    To provide community bankers with more practical tools and 
research, we have expanded the portfolio of stress testing tools 
available on BankNet to include tools and worksheets for individual and 
portfolio commercial real estate, acquisition and development and 
agricultural loans--the types of loan products that are commonly 
offered by many community banks. To help community bankers keep abreast 
of emerging economic trends and accounting policies, we have started 
providing quarterly ``snapshots''--brief summaries on topical issues of 
interest to bankers. The snapshots include recent and pending 
accounting proposals that may affect banks, and information on national 
and regional economic and real estate trends, which are especially 
useful for community bankers.
    Quarterly Letters: We have taken a number of initiatives to help 
community bankers manage the flow of information. A number of years 
ago, we instituted a quarterly letter that each of our ADCs send to the 
banks in his or her portfolio. These quarterly letters summarize all of 
the bulletins and rules that the OCC issued during the previous quarter 
and highlight any particular supervisory issue or concern that the ADC 
may be seeing. During the past year, we refined the format and content 
of our quarterly letters in response to feedback from bankers. In 
addition, the portfolio manager has a quarterly discussion with the 
institution's CEO about recent regulatory issuances, significant 
changes in the bank's strategic plan, and market changes affecting the 
bank.
    Banking Bulletins: We have redesigned our bulletins. Each bulletin 
includes a ``highlights'' section that summarizes the key points of the 
guidance and a box that informs community banks whether and how the 
guidance may apply to them.
    Semiannual Risk Perspective Report: Community bankers also have 
asked us to be more transparent about the issues and risks that are 
receiving heightened supervisory attention and our rationale for that 
attention. To provide this transparency, the OCC publishes a Semiannual 
Risk Perspective report. This report, compiled by our National Risk 
Committee, summarizes the current operating environment, condition and 
performance of banks, and key risks across the OCC's lines of 
businesses. Because the issues and challenges facing community banks 
can differ from those that larger banks confront, the report provides 
data and commentary for both large and small banks. Beginning with the 
most recent report, published in June, the report also outlines our key 
supervisory priorities for the next 12 months for large, midsize, and 
community banks.
    Outreach: We provide timely information via alerts and joint 
interagency statements about a range of issues including cyber attacks 
and vulnerabilities. We also are expanding our use of Web and telephone 
conferences with bankers to explain our expectations when we issue 
significant new policies or rules or when we see emerging risks that 
may be of special interest to community bankers. Recent examples 
include seminars on cybersecurity, interest rate risk, and compliance 
issues such as community bank implementation of the Consumer Financial 
Protection Bureau's (CFPB) ability-to-repay and qualified mortgage 
standards, and the OCC's guidance on managing third-party 
relationships. We also have expanded our offerings of director 
workshops. These hands-on workshops, targeted for community bank 
directors, are taught by some of our most experienced ADCs and 
community bank examiners and provide directors with practical tools to 
help carry out their responsibilities.
B. Improved Internal Supervisory Processes
    The above initiatives underscore our commitment to continually look 
for ways to improve the information and resources we provide to 
community banks. We are equally committed to improving our internal 
supervisory processes to ensure that our supervision of individual 
banks is balanced, timely, and consistent. Specific actions we have 
taken to respond to concerns raised by community bankers are described 
below.
    Communication on Matters Requiring Attention (MRAs): One of the 
lessons we learned from the crisis is that when we find deficient 
practices, we and bank management must have a common understanding of 
the deficiencies and the actions required by bank management to correct 
them. To improve the clarity and consistency of our communications, we 
developed internal guidance used by all of our community bank examiners 
that establishes clear criteria and a format for the information to be 
conveyed when citing MRAs. The guidance directs examiners to document 
and share with bank management: 1) the specific concern that has been 
identified; 2) the root cause of the concern; 3) the likely consequence 
or effects on the bank from inaction; 4) the supervisory expectations 
for corrective actions; and 5) bank management's commitment to 
corrective action, including applicable timeframes. As part of our 
transparency efforts, we provide summary data about MRAs in our 
Semiannual Risk Perspectives and on our BankNet Web site.
    Timeliness of Examination Reports: We have responded to banker 
concerns about the timeliness of reports of examination (ROEs) by 
establishing clear timeframes and benchmarks for completing and sending 
ROEs to a bank's board of directors. We have incorporated these 
benchmarks into the performance standards for all the managers within 
our community bank line of business. I am pleased to report that over 
90 percent of the ROEs issued to 1- and 2-rated community banks are 
mailed within 90 days of the exam start date and within 120 days for 3, 
4, or 5-rated banks.
    Consistent Application of Policy: Finally, to ensure that our 
examiners are aware of and applying supervisory policies consistently, 
we periodically conduct nationwide calls with all of our community bank 
examiners and managers. We use these calls to explain our expectations 
for new policies or regulations, and to communicate common issues and 
areas of emerging risks.
IV. Tiered Regulation
    Given the broad array of institutions we oversee, the OCC 
understands a one-size-fits-all approach to regulation does not work, 
especially for community banks. We recognize that community banks have 
different business models and more limited resources than larger banks, 
and, to the extent underlying statutory requirements allow it, we 
factor these differences into the rules we write and the guidance we 
issue.
    The OCC seeks to minimize burden on community banks through various 
means. Explaining and organizing our rulemakings so these institutions 
can better understand the scope and application of our rules, providing 
alternatives to satisfy prescriptive requirements, and using exemptions 
or transition periods are examples of ways in which we tailor our 
regulations to accommodate community banks, while remaining faithful to 
statutory requirements and legislative intent.
    For example, our final interagency rule to implement the domestic 
capital requirements illustrates how we seek to tailor our regulatory 
requirements to reflect the activities of individual banks. The 
financial crisis made it clear that all banks need a strong capital 
base, composed of high quality capital that will serve as a buffer in 
both good times and bad. Consequently, the new capital rule not only 
raises the minimum capital ratios, but it also emphasizes the need for 
common equity, the form of capital that has proven to be best at 
absorbing losses. However, the crisis also showed that there are very 
important differences between the largest banks and the rest of the 
industry. It is clear that the largest banks, which were taking on the 
biggest risks, can have an outsized impact on the entire system. That 
is why we have differentiated our capital requirements and are imposing 
higher capital requirements through the supplementary leverage ratio 
and the countercyclical capital buffers to the largest banks. We also 
adjusted our final capital rule to address significant concerns raised 
by community bankers. The final risk-based rules retain the current 
capital treatment for residential mortgage exposures and allow 
community banks to elect to treat certain accumulated other 
comprehensive income (AOCI) components consistently with the current 
general risk-based capital rules. Treating AOCI in this manner helps 
community banks avoid introducing substantial volatility into their 
regulatory capital calculations.
    Other recent rulemakings do not apply to community banks. For 
example, our heightened standards rule recognizes that large banks 
should be held to higher standards for risk management and corporate 
governance and require more formal structures in these areas than 
community banks. That is why the rule generally applies only to those 
banks with average total consolidated assets of $50 billion or more. 
Similarly, our recent rule that establishes quantitative standards for 
short-term liquidity funding does not apply to community banks.
    The OCC responded to community bank concerns when finalizing our 
revised lending limits rule in accordance with section 610 of the Dodd-
Frank Act to include counterparty credit exposures arising from 
derivatives and securities financing transactions. Specifically, the 
rule now exempts from the lending limits calculations certain 
securities financing transactions most commonly used by community 
banks. In addition, the rule permits small institutions to adopt 
compliance alternatives commensurate with their size and risk profile 
by providing flexible options for measuring counterparty credit 
exposures covered by section 610, including an easy-to-use lookup 
table.
    Similarly, our final rule removing references regarding credit 
ratings from our investment securities regulation, pursuant to section 
939A of the Dodd-Frank Act, allowed an extended transition period of 
almost 6 months for banks to comply with the rule. In response to 
concerns raised by community bankers about the amount of due diligence 
the banks would have to conduct, we also published guidance to assist 
banks in interpreting the new standard and to clarify the steps banks 
can take to demonstrate that they meet their diligence requirements 
when purchasing investment securities and conducting ongoing reviews of 
their investment portfolios.
    Our final rule implementing the Volcker Rule provisions of the 
Dodd-Frank Act is another example of how we seek to adapt statutory 
requirements, where possible, to reflect the nature of activities at 
different sized institutions. The statute applies to all banking 
entities, regardless of size; however, not all banking entities engage 
in activities covered by the prohibitions in the statute. One of the 
OCC's priorities in the interagency Volcker rulemaking was to make sure 
that the final regulations imposed compliance obligations on banking 
entities in proportion to their involvement in covered activities and 
investments.\1\
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    \1\ Shortly after the agencies issued the final rule, we learned 
that certain collateralized debt obligations backed primarily by trust 
preferred securities (TruPS CDOs), which were originally issued as a 
means to facilitate capital-raising efforts of small banks and mutual 
holding companies, would have been subject to eventual divestiture and 
immediate write-downs under the applicable accounting treatment and 
that the rule was inconsistent with another provision of the Dodd-Frank 
Act--the Collins Amendment. Given the importance of this issue to 
affected community banks and to mitigate the unintended consequences, 
the agencies responded promptly by adopting an interim final rule to 
address this concern. See 79 Fed. Reg. 5223 (Jan. 31, 2014), available 
at http://el.occ/news-issuances/Federal-register/79fr5223.pdf.
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    The OCC also is providing more manageable ways for community banks 
to digest new regulatory and supervisory information and to assist them 
in quickly and easily understanding whether and how this information 
applies to them. As I noted previously, each bulletin announcing the 
issuance of a new regulation or supervisory guidance now includes a box 
that allows community banks to assess quickly whether the issuance 
applies to them and a ``highlights'' section that identifies the key 
components of the rule or regulation. We have also identified other 
means to convey plain language descriptions of complex requirements and 
to assist community bankers in understanding newly issued rules. For 
example, the OCC produced a streamlined, two-page summary of the final 
domestic capital rule highlighting aspects of the rule applicable to 
community banks and key transition dates. We supplemented this summary 
with an online regulatory capital estimator tool that we developed with 
the other Federal banking agencies. Likewise, we provided to community 
banks a quick reference guide to the mortgage rules the CFPB issued in 
January.
V. Additional Opportunities to Reduce Burden and Improve 
        Competitiveness
    The OCC is committed to exploring additional ways to reduce 
unnecessary regulatory burden on, and promote the competitiveness of, 
community banks. For example, in response to concerns raised by 
community banks and our ongoing research, the OCC would be supportive 
of exempting community banks from the Volcker Rule. We also would 
suggest a change to current law that would increase the $500 million 
asset size threshold for community banks so more of them can qualify 
for an exam every 18 months, rather than every year. As well, we 
support pending legislative proposals to exempt banks from issuing a 
mandatory annual privacy notice requirement in certain circumstances.
    We believe the foremost factor when evaluating our consideration of 
proposals to reduce burden on community banks is to ensure that 
fundamental safety and soundness and consumer protection safeguards are 
not compromised. We would be concerned, for example, about proposals 
that would adversely impact or unduly complicate the exam process, mask 
weaknesses on a bank's balance sheet, or impede our ability to require 
timely corrective action to address weaknesses.
    In addition to these overarching principles, there are other 
factors that we consider when evaluating proposals. For example, a 
number of the tools that we make available to bankers to assist them in 
risk identification and that we use to tailor and streamline our 
examinations, rely on the detailed data we collect in certain Call 
Report schedules. We recognize that the decision to include detailed 
data requires both an analysis of the costs that community banks face 
in preparing their Call Reports, and an evaluation of the benefits to 
the agency of being able to do more examination work and monitoring 
offsite.
    Pursuant to the requirements of the Paperwork Reduction Act, the 
OCC and other Federal banking agencies, under the auspices of the 
Federal Financial Institutions Examination Council (FFIEC) seek comment 
on Call Report changes and on the agencies' estimates of the burden 
hours of those proposed changes. In analyzing potential changes to the 
Call Report, we consider ways that we can tailor reporting requirements 
to the size of a bank's activities. At the OCC, we have an internal 
review process for any material changes to the Call Report that OCC 
staff may want to propose to the FFIEC for consideration. Our internal 
standard is that Call Report data should directly support long-term 
supervisory needs to ensure the safety and soundness of banks, and that 
any additions must be supported by a strong business case that 
discusses the relative benefits, costs, and alternatives.
    Recently, we have received proposals to reduce the burden 
associated with the preparation of the Call Reports including the 
feasibility of allowing certain banks to file a short-form Call Report 
for two quarters of a year. I have discussed the Call Report issue in 
numerous meetings with bankers, and we are committed to giving careful 
consideration to their concerns.
    Finally, we have heard countless examples of the need for increased 
resources to operate in today's environment as well as the difficulties 
in attracting and retaining needed expertise. We are supportive of 
community banks exploring avenues to collaborate, for example, by 
sharing resources for compliance or back office processes. We believe 
opportunities exist for community banks to work together to face 
today's challenges, and we are prepared to be a resource to assist in 
these efforts.
    Regulatory Review Efforts: Notwithstanding our efforts to ensure 
that our regulations are appropriately calibrated, we recognize the 
need to periodically step back and review our regulations to determine 
if there are ways that we could streamline, simplify, or in some cases, 
remove, regulations to ease unnecessary burden on banks. The OCC has 
two concurrent efforts underway that could help identify ways to reduce 
regulatory burden.
    OCC/OTS Rule Integration: The Dodd-Frank Act transferred to the OCC 
all the functions of the Office of Thrift Supervision (OTS) relating to 
the examination, supervision, and regulation of Federal savings 
associations. As part of our integration effort, we are undertaking a 
comprehensive, multi-phase review of our regulations and those of the 
former OTS to reduce regulatory burden and duplication, promote 
fairness in supervision, and create efficiencies for national banks and 
Federal savings associations. We have already begun this process and, 
in June of this year, we issued a proposal to integrate national bank 
and Federal saving association rules relating to corporate activities 
and transactions. The comment period on this proposal closed a few 
weeks ago, and we are currently reviewing the comments received.
Economic Growth and Regulatory Paperwork Reduction Act of 1996
    (EGRPRA): The OCC and the other Federal banking agencies are 
currently engaged in a review of the burden imposed on insured 
depository institutions by existing regulations as part of the 
decennial review required by the EGRPRA. EGRPRA requires that, at least 
once every 10 years, the FFIEC, OCC, FDIC, and Federal Reserve review 
their regulations to identify outdated or otherwise unnecessary 
regulations for all insured depository institutions. The EGRPRA review 
provides the FFIEC, the agencies, and the public with an opportunity to 
consider how to reduce burden and target regulatory changes to reduce 
burden on all institutions. The OCC, as chair of the FFIEC, is 
coordinating this joint regulatory review.
    In connection with the EGRPRA process, the agencies published a 
Federal Register notice this past June asking for comment on three 
categories of rules. The comment period on this first notice ended 
earlier this month, and the agencies are reviewing the comments 
received. Over the next 2 years, the agencies will issue three more 
Federal Register notices that will invite public comment on the 
remaining rules. In each notice, we will specifically ask the public to 
identify ways to reduce unnecessary burden association with our 
regulations, with a particular focus on community banks.
    Charter Flexibility: One of the strengths of the community bank 
model is the diversity it provides in the types of charters and 
missions of institutions that can serve a local community. We see this 
most prominently in the important roles that minority-owned and mutual 
savings institutions play in their communities. We have established 
advisory committees with leading representatives of these banks to help 
us address the unique challenges facing these institutions. One issue 
that we hear from Federal savings associations is about their desire to 
offer a broader range of services to their communities without having 
to change their charter type. More specifically, any Federal savings 
association that wants to expand its mortgage lending business model to 
one that emphasizes a mix of business loans and consumer credit would 
need to change charters. I believe that the Federal savings association 
charter should be flexible enough to accommodate either strategy. When 
the Comptroller was a regulator in Massachusetts, that State made 
powers and investment authorities, as well as supervisory requirements, 
the same or comparable regardless of charters, and allowed State 
thrifts and banks to exercise those powers while retaining their own 
corporate structure. Congress may wish to consider authorizing a 
similar system at the Federal level. This flexibility will improve the 
ability of Federal savings associations to meet the financial needs of 
their communities.
VI. Conclusion
    Community banks are an essential part of our Nation's communities 
and small businesses. The OCC is committed to providing effective 
supervision of these banks while minimizing unnecessary regulatory 
burden. We will continue to carefully consider the potential effect 
that current and future policies and regulations may have on community 
banks and will be happy to work with the Committee on any proposed 
legislative initiatives.
                                 ______
                                 
                PREPARED STATEMENT OF MARYANN F. HUNTER
    Deputy Director, Division of Banking Supervision and Regulation
            Board of Governors of the Federal Reserve System
                           September 16, 2014
Introduction
    Chairman Johnson, Ranking Member Crapo, and other Members of the 
Committee, I appreciate the opportunity to testify on the Federal 
Reserve's approach to regulating and supervising small community banks 
and their holding companies. Having started my career as a community 
bank examiner at the Federal Reserve Bank of Kansas City and eventually 
becoming the officer in charge of bank supervision at the Reserve Bank, 
I have experienced firsthand how important community banks are to their 
communities and how critical it is that the Federal Reserve supervises 
these institutions effectively and efficiently. In my testimony, I will 
discuss some of the ways the Federal Reserve ensures that regulations, 
policies, and supervisory activities are tailored to address the risks 
and activities of community banks without imposing undue burden. The 
Federal Reserve recognizes the important role that community banks play 
in providing financial services to their local economies and seeks to 
supervise these banks in a way that fosters their safe and sound 
operation without constraining their capacity to support the financial 
needs of their communities.
Current State of Community Banking Organizations
    The Federal Reserve supervises approximately 800 State-chartered 
community banks, the large majority of which are small community banks 
with total assets of $1 billion or less, that are members of the 
Federal Reserve System (referred to as State member banks).\1\ In 
addition, the Federal Reserve supervises over 4,000 bank holding 
companies and more than 300 savings and loan holding companies, most of 
which operate small community banks and thrifts.
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    \1\ For supervisory purposes, the Federal Reserve uses the term 
``community banking organization'' to describe a State member bank and/
or holding company with $10 billion or less in total consolidated 
assets.
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    During the recent financial crisis, most community banks remained 
in sound condition. But a large number faced challenges as economic 
conditions weakened, particularly those that had developed large 
commercial real estate loan concentrations and funded their activities 
with nontraditional funding sources. In recent years, many of these 
banks have recovered, and by the second quarter of 2014 the number of 
banks on the Federal Deposit Insurance Corporation's ``Problem List'' 
had fallen to 354, far fewer than the peak of 888 reported at the end 
of the first quarter of 2011.\2\ Despite this decline, the current 
number of problem banks is still roughly seven times the number of 
problem banks at the end of 2006, before the crisis began in 2007-
08.\3\
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    \2\ See Federal Deposit Insurance Corporation, Quarterly Banking 
Profile, Second Quarter 2014, available at www2.fdic.gov/qbp/2014jun/
qbp.pdf.
    \3\ See Federal Deposit Insurance Corporation, Quarterly Banking 
Profile, Fourth Quarter 2006, available at www2.fdic.gov/qbp/2006dec/
qbp.pdf.
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    However, capital levels and asset quality at small community banks 
have improved since the financial crisis.\4\ At year-end 2013, the 
aggregate tier 1 risk-based capital ratio for community banks was 15.3 
percent, up from a low of 12.7 percent at year-end 2008, and the 
aggregate leverage ratio was 10.4 percent, up from a low of 9.4 percent 
at year-end 2009. Noncurrent loans and net charge-offs have decreased 
over the past 4 years. After several years of declining loan balances 
at small community banks, we are starting to see a slow increase in 
loan origination. In addition, earnings have improved in the past 
couple of years, largely from reductions in provision expenses for loan 
losses. Yet, despite these promising financial indicators, small 
community banks continue to experience considerable pressure from low 
net interest margins, and many report concerns about their prospects 
for continued growth and profitability.
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    \4\ Figures are based on quarterly Call Report data filed by 
commercial banks and savings associations. See www.ffiec.gov/
ffiec_report_forms.htm.
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Supervision of Community Banking Organizations
    The Federal Reserve strives to scale its supervisory expectations 
based on the size, risk profile, condition, and complexity of a banking 
organization and its activities and recognizes that a one-size-fits-all 
approach to community banks is often not appropriate. For example, the 
Federal Reserve has employed a risk-focused approach to supervision of 
community banks since the mid-1990s.\5\ In the intervening years, we 
have adjusted this approach to better calibrate the work conducted 
relative to the complexity and risk of each bank.
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    \5\ Board of Governors of the Federal Reserve System, Division of 
Banking Supervision and Regulation (1997), ``Risk-Focused Framework for 
the Supervision of Community Banks,'' Supervision and Regulations 
Letter SR 97-25 (October 1). In addition, the Board of Governors first 
approved a risk-focused consumer compliance supervision program on 
September 18, 1997.
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    If a bank is engaging in nontraditional or higher-risk activities, 
our supervision program typically requires greater scrutiny and a 
higher level of review of specific transactions. Conversely, if a 
bank's activities are lower risk, we adjust our expectations for 
examiners to a lower level of review. In this way, we alleviate 
examination burden on community banks with histories of sound 
performance and modest risk profiles. Last year, we began a process to 
enhance the ongoing updating of our examination procedures to reflect 
key lessons of the crisis. Overall, these adjustments should enhance 
our supervisory efficiency by targeting more intensive examination work 
at bank activities that proved to be higher risk and reducing some 
examination testing at community banks that performed well throughout 
the crisis.
    The Federal Reserve adopted a new consumer compliance examination 
framework for community banks in January 2014.\6\ While we have 
traditionally applied a risk-focused approach to consumer compliance 
examinations, the new program more explicitly bases examination 
intensity on the individual community bank's risk profile, weighed 
against the effectiveness of the bank's compliance controls. As a 
result, we expect that examiners will spend less time on low-risk 
compliance issues at community banks, increasing the efficiency of our 
supervision and reducing regulatory burden on many community banks. In 
addition, we revised our consumer compliance examination frequency 
policy to lengthen the timeframe between onsite consumer compliance and 
Community Reinvestment Act examinations for many community banks with 
less than $1 billion in total consolidated assets.
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    \6\ Board of Governors of the Federal Reserve System, Division of 
Consumer and Community Affairs (2013), ``Community Bank Risk-Focused 
Consumer Compliance Supervision Program,'' Consumer Affairs Letter CA 
13-19 (November 18); and ``Consumer Compliance and Community 
Reinvestment Act (CRA) Examination Frequency Policy,'' Consumer Affairs 
Letter CA 13-20 (November 18).
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    In addition to our efforts to refine our risk-focused approach to 
supervision, we have been increasing the level of offsite supervisory 
activities, which can tangibly reduce burden on community banking 
organizations. For example, last year we conducted a pilot program 
under which we conducted some aspects of the loan review process 
offsite, relying on the bank's electronic records to evaluate loan 
quality and underwriting practices. Overall, community bankers that 
were part of the pilot were very supportive of this approach, which 
reduced the amount of time examiners needed to spend onsite at bank 
offices. As a result, we plan to continue using this approach in future 
examinations at banks that maintain electronic loan records.
    While offsite loan review has benefits for both bankers and 
examiners, some bankers have expressed concerns that increasing offsite 
supervisory activities could potentially reduce the ability of banks to 
have face-to-face discussions with examiners regarding asset quality or 
risk-management issues. In that regard, we will continue to work with 
community banks that may prefer their loan reviews to be conducted 
onsite. In short, the Federal Reserve is trying to strike an 
appropriate balance of offsite and onsite supervisory activities to 
ensure that resources are used more efficiently while maintaining high-
quality supervision of community banking organizations. The Federal 
Reserve has invested significant resources in developing various 
technological tools for examiners to improve the efficiency of both 
offsite and onsite supervisory activities. The expanded use of 
technological tools has assisted in completing community bank 
examination work offsite while ensuring the quality of supervision is 
not compromised. For instance, the Federal Reserve has automated 
various parts of the community bank examination process, including a 
set of tools used among all Reserve Banks to assist in the pre-
examination planning and scoping. This automation can save examiners 
and bank management time, as a bank can submit requested pre-
examination information electronically rather than mailing paper copies 
to the Federal Reserve Bank. These tools also assist Federal Reserve 
Bank examiners in the continuous, offsite monitoring of community 
banking organizations, enabling examiners to determine whether a 
particular community banking organization's financial condition has 
deteriorated and warrants supervisory attention between onsite 
examinations.
Tailoring Regulations for Community Banking Organizations
    As Governor Tarullo testified before this Committee last week, we 
recognize that the burden community banks encounter when attempting to 
understand and implement a new regulation may be disproportionate to 
the level of risk to which these institutions are exposed.\7\ To 
address this, we work within the constraints of the relevant statutory 
mandate to draft rules so as not to subject community banks to 
requirements that would be unnecessary or unduly burdensome to 
implement. When a proposed rule is issued to the public for comment, we 
gather critical information regarding the benefits and costs of the 
proposal from those we expect to be affected by the rule as well as 
from the general public.
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    \7\ Daniel K. Tarullo (2014), ``Dodd-Frank Implementation,'' 
statement before the Committee on Banking, Housing, and Urban Affairs, 
U.S. Senate, September 9, http://www.federalreserve.gov/newsevents/
testimony/tarullo20140909a.htm.
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    These feedback channels have been instrumental to our efforts to 
appropriately scale rules and policies to the activities and risks at 
community banks. For example, in developing the final capital 
guidelines that were issued in July 2013, the Federal banking agencies 
included in their final rules several changes from the proposed rules 
to respond to comments and reduce the regulatory burden on community 
banks.\8\ As a result, many of the requirements will not apply to 
community banks. In addition, the Federal Reserve and the other Federal 
banking agencies developed a streamlined supplemental Community Bank 
Guide to assist noncomplex community banks and holding companies in 
understanding the possible impact of the new rules on their 
operations.\9\
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    \8\ See Board of Governors of the Federal Reserve System (2013), 
``Federal Reserve Board Approves Final Rule to Help Ensure Banks 
Maintain Strong Capital Positions,'' press release, July 2, 
www.federalreserve.gov/newsevents/press/bcreg/20130702a.htm.
    \9\ See Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation (FDIC), and Office of the Comptroller of 
the Currency (OCC) (2013), New Capital Rule: Community Bank Guide 
(Washington: Board of Governors, FDIC, and OCC, July), 
www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_2013
0709.pdf.
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    Many recently established rules have been applied only to the 
largest, most complex banking organizations. For example, the Federal 
Reserve and the other Federal banking agencies have not applied large-
bank stress testing requirements to community banks. The Federal 
Reserve has continued, through public statements and examiner training, 
to explain clearly the requirements, expectations, and activities 
relating to Dodd-Frank Act stress testing (DFAST) and the Federal 
Reserve's Comprehensive Capital Analysis and Review (CCAR) exercise and 
to reinforce that DFAST and CCAR requirements, expectations, and 
activities do not apply--either explicitly or implicitly--to community 
banking organizations.\10\
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    \10\ For more information, see Board of Governors of the Federal 
Reserve System, FDIC, and OCC (2012), ``Statement to Clarify 
Supervisory Expectations for Stress Testing by Community Banks,'' May 
14, www.federalreserve.gov/newsevents/press/bcreg/bcreg20120514b1.pdf.
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Clarifying Expectations for Community Banks
    The Federal Reserve has made a concerted effort to explain to both 
community bankers and Federal Reserve examiners which entities are 
subject to new rules and policies. In addition to tailoring 
regulations, as discussed previously, one significant way we clarify 
the applicability of guidance to community banks is to provide a 
statement at the top of each Supervision and Regulation letter and 
Consumer Affairs letter. These letters are the primary means by which 
the Federal Reserve issues supervisory and consumer compliance guidance 
to bankers and examiners. This additional clarity allows community 
bankers to focus efforts on the supervisory policies that are 
applicable to their banks. Moreover, it is important to note that we 
work closely with our colleagues at the State banking agencies and the 
other Federal regulatory agencies to ensure that our supervisory 
approaches and methodologies are consistently applied to all community 
banks.
    While it is important that our written guidance and regulations 
clearly convey supervisory expectations and identify the applicable 
audience, we know that some of the most important communications are 
not necessarily those that come out of Washington, DC, but rather the 
formal and informal conversations that take place between examiners and 
bankers during onsite examinations. These conversations are fundamental 
in ensuring that the Federal Reserve's policies are communicated to and 
correctly interpreted by community bankers. These discussions provide 
for clear communication of issues identified during the examination 
process, and community bankers also tell us that they appreciate 
learning from examiners about where they stand relative to comparable 
banks. There is a risk that these conversations, however, may 
inadvertently suggest that practices at larger banks should be adopted 
by community banks, when that is not actually the Federal Reserve's 
intent.
    To ensure that supervisory expectations are communicated 
appropriately, therefore, the Federal Reserve is making its 
longstanding program for training examiners more robust. For example, 
we are currently modernizing our longstanding examiner commissioning 
program for community bank examiners, and a key part of this effort is 
reviewing the curriculum to ensure that supervisory expectations for 
larger banks do not make their way into the curriculum. In addition, 
when new supervisory policies are issued, we typically arrange a 
teleconference to explain the new policy to examiners, including 
whether and to what extent the policy is applicable to community banks. 
By effectively training our examination staff and providing channels 
for keeping them informed of newly issued policies in a timely manner, 
examiners are better equipped to understand the supervisory goals of 
regulations and guidance for community banks and to provide guidance to 
community banks.
    To help ensure that examiners implement supervisory policies 
consistently across community banks, Federal Reserve Board staff 
analysts monitor bank supervision activities and sample recently 
completed examination reports to assess whether policies are 
implemented appropriately and whether examiner conclusions are 
adequately supported. These analysts also conduct periodic reviews of 
specific examination activities carried out by Reserve Bank examiners 
to assess their implementation of supervisory policies and standards at 
community banks. Periodically, we become aware of particular concerns 
being raised by the industry with regard to community banks being held 
to inappropriate standards. We take these concerns seriously and focus 
our reviews of examination activities to confirm that examiners are 
appropriately implementing supervisory policies and reaffirming policy 
objectives when necessary.
    In addition to the examination process, the Federal Reserve Board 
has established additional mechanisms to ensure that supervisory 
policies for community banks are appropriately tailored and to provide 
other avenues of discussion for community bankers to share their 
perspectives with the Board and senior Reserve Bank officials. For 
example, the Federal Reserve established a Community Depository 
Institution Advisory Council (CDIAC) at each of the 12 Federal Reserve 
Banks and at the Board.\11\ Members are selected from representatives 
of banks, thrift institutions, and credit unions in each Federal 
Reserve District, with a representative from each of these 12 local 
CDIACs serving on a national council that meets with the Federal 
Reserve Board twice each year. These meetings provide the Federal 
Reserve Board with valuable insight regarding the concerns of community 
depository institutions, which often include issues relating to 
regulatory burden and examination practices.
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    \11\ For more information on the CDIAC, see www.federalreserve.gov/
aboutthefed/cdiac.htm.
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    The Board of Governors also has a community and regional bank 
subcommittee of its Committee on Bank Supervision.\12\ This 
subcommittee reviews policy proposals to ensure they are appropriately 
tailored for community banks. The subcommittee also meets with Federal 
Reserve staff to hear about key supervisory initiatives at community 
banks and ongoing research in the community banking arena.
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    \12\ For more information on the Board's committees, including 
membership, see http://www.federalreserve.gov/aboutthefed/bios/board/
default.htm.
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    On this latter point, one of the great strengths of the Federal 
Reserve as the central bank of the United States is its role in 
conducting and fostering economic research. With this in mind, the 
Board's community bank subcommittee has been encouraging more research 
about community banking issues to better understand the role of 
community banks in the U.S. economy and the effects that regulatory 
initiatives may have on these banks. That initiative to encourage more 
high-quality research on community banking issues ultimately led to an 
inaugural community banking research and policy conference: ``Community 
Banking in the 21st Century,'' jointly hosted by the Federal Reserve 
System and the Conference of State Bank Supervisors (CSBS) in 2013 at 
the Federal Reserve Bank of St. Louis.\13\ Later this month, the 
Federal Reserve and the CSBS will host a second community banking 
research conference, again at the Federal Reserve Bank of St. 
Louis.\14\ Among other topics, the conference will cover community bank 
formation, behavior, and performance; the effect of government policy 
on bank lending and risk taking; the effect of government policy on 
community bank viability; and the future of community banking.
---------------------------------------------------------------------------
    \13\ Abstracts of research papers discussed at the 2013 conference 
are available at www.stlouisfed.org/banking/community-banking-
conference/abstracts.cfm.
    \14\ For more information on the 2014 conference, see 
www.stlouisfed.org/banking/community-banking-conference-2014/.
---------------------------------------------------------------------------
    We have also developed several platforms to improve our 
communication with community bankers and to enhance our industry 
training efforts. For example, we have developed two programs--Ask the 
Fed and Outlook Live--that have become quite popular with community 
bankers who are interested in learning more about topics of importance 
to both banks and supervisors. Ask the Fed is a program for officials 
of State member banks, bank and savings and loan holding companies, and 
State bank regulators that provides an excellent opportunity for 
bankers and others to ask Board and Reserve Bank staff policy questions 
outside of an examination context, primarily on safety-and-soundness 
and related issues. Outlook Live, which is a companion program to the 
Federal Reserve's quarterly Consumer Compliance Outlook publication, is 
a Webinar series on consumer compliance issues that is led by Federal 
Reserve staff.\15\
---------------------------------------------------------------------------
    \15\ Consumer Compliance Outlook is available at 
www.philadelphiafed.org/bank-resources/publications/consumer-
compliance-outlook/, and Outlook Live is available at 
www.philadelphiafed.org/bank-resources/publications/consumer-
compliance-outlook/outlook-live/.
---------------------------------------------------------------------------
    We are also now using periodic newsletters and other communication 
tools to highlight information in which community bankers may be 
interested and to provide information about how examiners will assess 
compliance with Federal Reserve policies. In addition to Consumer 
Compliance Outlook, in 2012 the Federal Reserve System established the 
Community Banking Connections Web site and quarterly newsletter to 
focus on supervisory issues that are of practical interest to community 
bankers and bank board members.\16\ The Federal Reserve also launched a 
series of special-purpose publications called FedLinks.\17\ These 
publications highlight key elements of specific supervisory topics and 
discuss how examiners will typically review a particular bank activity 
and the related risk-management practices. The common goal for all of 
these outreach efforts is to build and sustain an ongoing dialogue with 
community bankers through which supervisory expectations are helpfully 
conveyed and clarified.
---------------------------------------------------------------------------
    \16\ Community Banking Connections is available at 
www.communitybankingconnections.org.
    \17\  FedLinks is available at http://www.cbcfrs.org/fedlinks.cfm.
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Reducing Regulatory Burden for Community Banks
    The Federal Reserve continues to explore ways to reduce regulatory 
burden for community banks. In analyzing regulatory burden on community 
banks and other institutions, the Federal Reserve tries to strike the 
appropriate balance between, on the one hand, achieving its 
longstanding responsibilities of fostering a safe and sound financial 
system and compliance with relevant consumer regulations and, on the 
other hand, ensuring that our supervision and regulation are calibrated 
appropriately for smaller institutions. Whenever the Federal Reserve 
contemplates possible regulatory changes, we conduct a thorough 
analysis of the effects of such changes on the ability of institutions 
to manage their operations in a safe and sound manner as well as the 
ability of Federal Reserve examiners to identify risks that may pose a 
threat to individual institutions or to the financial system more 
broadly.
    An example of the how the Federal Reserve and the other Federal 
banking agencies consider a variety of factors when reviewing 
regulations for burden is the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (EGRPRA) review. The agencies have recently 
started their second EGRPRA review by requesting public comment to 
identify potentially outdated, unnecessary, and burdensome regulations 
imposed on insured depository institutions. The comment period for the 
EGRPRA review for the first set of regulations ended early in 
September. The Federal Reserve and the other agencies plan to engage in 
discussions with bankers and interested parties regarding the EGRPRA 
review and will post relevant information from these meetings on the 
EGRPRA Web site once finalized.\18\
---------------------------------------------------------------------------
    \18\ For more information on EGRPRA and the regulatory review 
process, see http://egrpra.ffiec.gov/index.html.
---------------------------------------------------------------------------
Conclusion
    Although the financial condition of community banks has been 
improving, we recognize that many community banks continue to face 
challenges. The Federal Reserve has a long history of tailoring 
supervisory practices for community banks, and we will continue to 
modify and refine our supervisory programs to not impose undue burden 
while still ensuring that community banks operate in a safe and sound 
manner. We will continue to solicit the views of smaller institutions 
in Federal Reserve and interagency rulemaking processes and welcome 
their feedback on community banking issues more generally.
    Thank you for inviting me to share the Federal Reserve's views on 
these matters affecting community banking organizations. I would be 
pleased to answer any questions you may have.
                                 ______
                                 
                                
                                
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               
                                
                                
                                 
                 PREPARED STATEMENT OF CHARLES A. VICE
                 Commissioner of Financial Institutions
             Kentucky Department of Financial Institutions
         on behalf of the Conference of State Bank Supervisors
                           September 16, 2014
INTRODUCTION
    Good morning, Chairman Johnson, Ranking Member Crapo, and 
distinguished Members of the Committee. My name is Charles Vice, and I 
serve as the Commissioner of Financial Institutions for the 
Commonwealth of Kentucky and I am the Immediate Past Chairman of the 
Conference of State Bank Supervisors (CSBS). It is my pleasure to 
testify before you today on behalf of CSBS.
    CSBS is the nationwide organization of banking regulators from all 
50 States, the District of Columbia, Guam, Puerto Rico, and the U.S. 
Virgin Islands. State banking regulators charter and supervise more 
than 5,000 insured depository institutions. Additionally, most State 
banking departments also regulate a variety of nonbank financial 
service providers, including mortgage lenders, mortgage servicers, and 
money services businesses. For more than a century, CSBS has given 
State supervisors a national forum to coordinate supervision of their 
regulated entities and to develop regulatory policy. CSBS also provides 
training to State banking and financial regulators and represents its 
members before Congress and the Federal financial regulatory 
agencies.\1\
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    \1\ www.csbs.org.
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    In my 25 years as both a Federal and State bank regulator, it has 
become abundantly clear to me that community banks are vital to 
economic development, job creation, and financial stability. I know 
this Committee shares my convictions, and I appreciate your efforts to 
examine the state of our country's community banks and regulatory 
approaches to smaller institutions.
    My testimony today will highlight the importance of community banks 
and their relationship-based business model, State regulators' vision 
of a right-sized community bank regulatory framework, and the States' 
efforts to produce new and enhanced research to promote a better 
understanding among policymakers about the role of community banks and 
the impact they have upon our local, State, and national economies and 
communities. I will also expand upon State and Federal regulators' 
efforts at right-sizing regulation and supervision, and highlight 
specific ways in which Congress and the Federal banking agencies can 
adopt right-sized policy solutions for community banks.
COMMUNITY BANKS & RELATIONSHIP LENDING ARE ESSENTIAL
    The U.S. banking system is incredibly diverse, ranging from small 
community banks to global financial conglomerates. This diversity is 
not a mistake, but rather a product of our unique dual-banking system. 
The dual-banking system, comprised of State and national banks 
chartered by State and Federal regulators, has encouraged financial 
innovation and institutional diversity for more than 150 years.
    Community banks are essential to the U.S. financial system and 
economy. The Federal Deposit Insurance Corporation (FDIC) classifies 
nearly 93 percent of all U.S. banks as community banks, meaning there 
are 6,163 community banks embedded in local communities throughout the 
country.\2\ The defining characteristic of a community bank is its 
relationship-based business model--a business model that relies on the 
bank's knowledge of its local market, citizens, and economic 
conditions. Community banks are able to leverage this personal, soft 
data in a way that large, model-driven banks cannot. This is why 
community banks have an outsized role in lending to America's small 
businesses, holding 46 percent of the banking industry's small loans to 
farms and businesses while only making up 14 percent of the banking 
industry's assets.\3\ A community banker knows the entrepreneur opening 
a new business around the corner. A community banker also knows the 
local real estate market and the home buyer seeking a mortgage loan. 
These relationships allow community bankers to offer personalized 
solutions designed to meet the specific needs of the borrower.
---------------------------------------------------------------------------
    \2\ ``Quarterly Banking Profile: Second Quarter 2014.'' FDIC. 
Available at: https://www2.fdic.gov/qbp/2014jun/qbp.pdf.
    \3\ ``FDIC Community Banking Study.'' FDIC, pp. 3-4 (December 
2012). Available at: http://www.fdic.gov/regulations/resources/cbi/
study.html.
---------------------------------------------------------------------------
    Community banks engage in relationship lending in the largest U.S. 
cities and the smallest rural markets. Their role in providing credit 
and banking services is just as vital as the largest financial 
institutions. Their relationship-based lending business model is a 
complement to the largest banks' model-driven, economies-of-scale 
business model. In fact, many consumers, businesses, and farms are not 
served particularly well by standardized, model-driven lending. This is 
especially the case in rural areas, where the FDIC has found that 
community banks are three times more likely to operate a banking office 
outside of a metro area than their large bank counterparts.\4\
---------------------------------------------------------------------------
    \4\ Ibid.
---------------------------------------------------------------------------
    Simply put, community banks are a vital part of a very diverse 
financial services marketplace and help ensure credit flows throughout 
the Nation's diverse markets. They provide credit and banking services 
in a flexible, innovative, and problem-solving manner, characteristics 
that are inherent in the community bank relationship-based business 
model.
STATE REGULATORS' VISION FOR COMMUNITY BANK REGULATION
    State regulators charter and supervise banks of all sizes, and we 
support and encourage banking industry diversity as a central goal of 
the dual banking system. Just as community banks have a first-hand 
knowledge of their local communities, we State regulators have an in-
depth knowledge of our State-chartered banks and the communities in 
which they operate. Our local focus and authority provide us with 
flexibility. The 50+ different State banking agencies are able to serve 
as laboratories of regulatory and supervisory innovation, developing 
practical solutions and approaches that fit the needs of their 
particular States.
    We are concerned that one-size-fits-all banking regulations are not 
differentiating enough between types of banks and are preventing 
community banks from delivering innovative, flexible services and 
products to their customers and the markets in our States. Recent 
regulatory reform efforts have centered on addressing the problems 
posed by the largest, most systemically important banks, and rightfully 
so. However, a global megabank and a small community bank are simply 
not the same.
    Statistics on the U.S. banking industry illustrate the immense 
differences between a typical community bank and global megabank. 
Nearly 90 percent of the 6,656 U.S. depository institutions have less 
than $1 billion in total assets. The 5,983 banks falling below this 
threshold hold less than 9 percent of the banking industry's total 
assets. On the other hand, there are four U.S. banks with more than $1 
trillion each in total assets--J.P. Morgan Chase, Bank of America, 
Wells Fargo, and Citigroup. These four institutions hold approximately 
41 percent of the banking industry's total assets. The average size of 
a community bank's assets in the United States is $225 million, and 
employs 54 people on average. The four largest banks, all exceeding $1 
trillion in total assets, average 188,100 employees. You can quickly 
see that a global megabank and a community bank have very little in 
common, and regulations designed for the former simply should not be 
applied to the latter. While there are examples in which laws and 
regulations have established certain applicability thresholds, this 
needs to occur more often and the differentiation in approach more 
meaningful.
    Design dictates outcome, and State regulators believe that rules 
that treat all banks the same, regardless of size and business model, 
promote further consolidation and will lead to a banking system with 
very little diversity and innovation. Indeed, I continue to hear from 
my community banks in Kentucky that regulations are driving flexibility 
and local problem-solving out of their banking decisions and forcing 
them into standardized banking products and practices. Community banks 
rightfully fear that this standardization hurts their communities and 
customers and runs counter to their time-proven relationship-based 
lending business model.
    Regulators have the responsibility to regulate and supervise our 
community banks in a manner that recognizes their relationship-based 
business model. My testimony outlines a regulatory approach that 
counters one-size-fits-all, an approach that State regulators call 
right-sized regulation, and how it is particularly well-suited for 
community banks. This search for right-sized regulation and supervision 
is a matter that State regulators take very seriously and, as my 
testimony illustrates, have taken considerable measures to achieve. 
Based on this Committee's work and the measures taken by both Federal 
and State regulators, I am confident that we as policymakers can 
undertake this effort to recognize the community bank business model.
    Right-sized regulation does not mean less regulation, but rather 
regulations and supervisory processes that are appropriately designed 
to accommodate an institution's underlying business model. In the 
context of community banks, right-sizing requires understanding the 
business of community banking, tailoring regulations to meet this 
business model, and utilizing risk-based supervision. Congress and 
Federal regulators have undertaken measures to aid community 
institutions using each of these elements. These efforts are positive, 
but must be built upon in a purposeful, comprehensive manner to form an 
appropriate regulatory framework for community banks that allows them 
to thrive.
THE NEED FOR ROBUST COMMUNITY BANK RESEARCH
    State regulators recognize that designing a right-sized regulatory 
framework requires us to truly understand the state of community 
banking, the issues community banks face, and the nuances within the 
community banking industry. Data-driven and independently developed 
research on community banks is sorely lacking when compared to the 
breadth of research dedicated to the largest financial institutions and 
their impact upon the financial system and the Nation. To address the 
need for research focused on community banks, State regulators, through 
CSBS, have partnered with the Federal Reserve to conduct the annual 
Community Banking in the 21st Century research conference.\5\ Bringing 
together State and Federal regulators, industry experts, community 
bankers, and academics, the research conference provides valuable data, 
statistics, and analyses about community banking. Our hope is that 
community bank research will inform legislative and regulatory 
proposals and appropriate supervisory practices, and will add a new 
dimension to the dialogue between the industry and regulators.
---------------------------------------------------------------------------
    \5\ ``Community Banking in the 21st Century.'' Federal Reserve 
System/CSBS. Available at: https://www.stlouisfed.org/banking/
community-banking-conference-2014/.
---------------------------------------------------------------------------
    The research conference represents an innovative approach to 
research. The industry informs many of the themes studied, providing 
their perspective on issues through a national survey and local town 
hall meetings. At the same time, academics explore issues raised by the 
industry in a neutral, empirical manner, while also contributing their 
own independent research topics. This approach ensures that three 
research elements--quantitative survey data, qualitative town hall 
findings, and independent academic research--all enhance and refine one 
another, year after year. The research conference's early success 
underscores the interest and need for community bank research: this 
year, more than 1,000 community bankers participated in the national 
survey, more than 1,300 bankers attended local town hall meetings, and 
more than 37 research papers were submitted by academics for 
consideration, a considerable increase from the number of papers 
submitted for the 2013 conference.
    Last year's inaugural conference has already provided us with 
valuable data and research findings on the importance of community 
banks and the centrality of their relationship-based lending model. For 
example, a study presented last year found that community bank failures 
lead to measurable economic underperformance in local markets.\6\ 
Research also shows that the closer a business customer is to a 
community bank, the more likely the startup borrower is to receive a 
loan.\7\ Community banks also have a key advantage through ``social 
capital,'' which supports well-informed financial transactions. This so 
called ``social capital'' is the basis for relationship lending and 
exists because community bankers live and work in the same communities 
that their banks do business. The success of the community bank is tied 
directly to the success of consumers and businesses in those 
communities. This is especially true in rural areas, where the 
community bank relationship-based lending model results in lower 
default rates on U.S. Small Business Administration loans than their 
urban counterparts.\8\
---------------------------------------------------------------------------
    \6\ Kandrac, J. ``Bank Failure, Relationship Lending, and Local 
Economic Performance.'' Available at: https://www.stlouisfed.org/
banking/community-banking-conference/PDF/Kandrac
_BankFailure_CBRC2013.pdf.
    \7\ Lee, Y., and S. Williams. ``Do Community Banks Play a Role in 
New Firms' Access to Credit?'' Available at: https://
www.stlouisfed.org/banking/community-banking-conference/PDF/
Lee_williams.pdf.
    \8\ DeYoung, R., et. al. ``Small Business Lending and Social 
Capital: Are Rural Relationship Different?'' Available at: https://
www.stlouisfed.org/banking/community-banking-conference/PDF/
DGNS_2012_SBA_lending.pdf.
---------------------------------------------------------------------------
    These highlights provide examples of the value this type of 
research can provide. Policymakers can have better understanding of the 
role and value that community banks play in our economy. This should 
inform and inspire us to not establish broad asset thresholds out of 
political pressure, but craft meaningful approaches that are consistent 
with a banking model that we want to exist because of the value 
community banks bring to the economy and the limited risk they present 
to the financial system.
    The second annual Community Banking in the 21st Century research 
conference is next week, September 23-24, at the Federal Reserve Bank 
of St. Louis. While this year's survey results are not yet public, I 
want to share a few key findings with you today.
    Bankers have been very vocal about the compliance burdens 
associated with the new Ability-to-Repay (ATR) and Qualified Mortgage 
(QM) rules. Our research finds that community banks continue to see 
opportunity in residential mortgage lending, but have a mixed view of 
making non-QM loans, with 26 percent of respondents indicating that 
they would not originate non-QM loans and an additional 33 percent only 
originating non-QM on an exception basis. Assessing the new ATR and QM 
mortgage standards against existing loans, 67 percent of bankers 
identified a low level of nonconformance, suggesting the two rules 
generally align with existing bank practices.
    However, bankers in the town hall meetings were quite clear: the 
ATR and QM mortgage rules have required banks to make significant 
operational changes in order to comply. These changes have increased 
the cost of origination, the cost to the consumer, and have reduced the 
number of loans a bank can make. If a new requirement is generally 
consistent with most community banks' practices, why does 
implementation produce increased cost and a reduction in credit 
availability? This is not an outcome that any of us should want.
    It will come as no surprise to hear that community banks have 
voiced concerns about increasing regulatory compliance costs, but these 
costs have been difficult to quantify historically. To encourage 
additional data and research in this area, the survey seeks to identify 
how increased compliance costs are realized in the bank's operations. 
Survey data show that rising compliance costs primarily take the shape 
of spending additional time on compliance, hiring additional compliance 
personnel, and increasing reliance on third-party vendors.
    The survey shows less than a quarter of respondents looking to add 
new products and services in the next 3 years. This was confirmed in 
the town hall meetings, where bankers indicated that the compliance 
burdens and security concerns are significant headwinds to new products 
and innovation. Similarly, bankers expressed that new regulations have 
changed how they approach serving their customers, shifting their 
mentality away from creating flexible products for customers and toward 
what regulations allow them to do. We must take this as an important 
red flag. Any industry that is not in a position to innovate while the 
world around it is innovating has questionable long-term viability.
    In addition to the qualitative feedback from the town hall meetings 
and the survey results, a dozen research papers will be presented next 
week. This year's lineup of research papers and speakers will buildupon 
last year's research, and provide some interesting perspectives.\9\ For 
example, one paper set to be discussed looks at the current regulatory 
burden surrounding community banks, and finds that more than 80 percent 
of responding banks report a greater than 5 percent increase in 
compliance costs. Another paper examines the Federal banking agencies' 
appeals processes, finding the processes seldom used, inconsistent 
across agencies, and at times dysfunctional. The paper recommends 
establishing an independent authority for appeals that could apply a 
more rigorous standard of review. Still another paper provides new 
research on de novo banks. State regulators are concerned by the lack 
of de novo banks during the economic recovery, and we believe more 
research is needed to appreciate the role new bank formations play in a 
vibrant, healthy banking system and to see if there are any regulatory 
impediments to de novo banking activity. Findings like these are just 
what policymakers need to inform their work toward designing a right-
sized policy framework for community banks.
---------------------------------------------------------------------------
    \9\ The full line-up of papers presented and the conference Web 
cast will be available at https://www.stlouisfed.org/banking/community-
banking-conference-2014/.
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STATE EFFORTS TO RIGHT-SIZE COMMUNITY BANK REGULATION & SUPERVISION
    State regulators have a long history of innovating to improve our 
regulatory and supervisory processes to better meet the needs of our 
banks, their customers, and our States. Because of our roles and where 
we fit in the regulatory framework, State banking departments are able 
to pilot programs at the local level based on our particular needs. 
This often leads to innovative practices bubbling up from individual 
States and expanding into other States. At the same time, each State 
has the authority to choose what works best in their local context. 
This regulatory flexibility is a strength of the State banking system. 
After all, community banks in Kentucky might face localized issues that 
my department should address in one manner, while another State's 
banking regulator might have a different set of supervisory challenges 
to address.
    I would like to highlight just a few cases in which State 
regulators have proven to be particularly adept at developing and 
implementing flexible practices to better serve our smaller 
institutions. Some of these examples are broad, historic initiatives 
that have significantly shaped the trajectory of U.S. banking 
regulation and supervision, such as the joint and coordinated bank 
examination framework. Other examples provide local snapshots 
highlighting the flexibility that individual States exercise on a 
regular basis. The significance that these are State-based solutions 
cannot be understated. States have the dexterity to experiment with 
supervisory processes in ways that the Federal Government cannot 
without applying sweeping changes to the entire industry. This is by 
design and a trademark of our dual-banking system. As States develop 
these practices, CSBS has developed several vehicles for States to 
share techniques and best practices with one another, allowing for the 
speedy deployment of successful models nationwide and maximizing 
regulatory efficiency.
Joint Examinations of Multi-Charter Holding Companies
    Joint bank examinations trace their roots back more than two 
decades, when due to interstate branching restrictions, bank holding 
companies would often own independently chartered banks in different 
States. To improve regulatory efficiency, State banking agencies began 
conducting joint examinations of multi-charter holding companies with 
other State regulators.
    Before the Riegle-Neal Interstate Banking and Branching Efficiency 
Act of 1994 (Riegle-Neal), States like Iowa and Indiana were already 
coordinating with other State banking regulators to conduct joint State 
examinations for multi-charter holding companies. This approach 
eliminated regulatory duplication, reduced the regulatory burden on the 
individual banks and the holding company, and helped the regulators 
develop a holistic view of the entire holding company. Once Riegle-Neal 
was passed, States built upon their existing practices in order to 
coordinate with Federal supervisors, crafting examination plans across 
State and agency lines. In 1996, the States formalized cooperative and 
coordination agreements, the Nationwide Cooperative Agreement\10\ and 
Nationwide State-Federal Supervisory Agreement,\11\ to facilitate the 
supervision of multi-State banks and to define the nature of State-
Federal supervision. These agreements set up a model centered on the 
examination team of the holding company or lead institution and, while 
close to 20-years old, still form the basis for State-Federal 
supervisory interaction. These agreements foster effective coordination 
and communication among regulators and have led to a supervisory model 
that reduces burden and enhances responsiveness to local needs and 
interests in an interstate banking and branching environment.
---------------------------------------------------------------------------
    \10\ Nationwide Cooperative Agreement (Revised 1997). Available at: 
http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/
nationwide_coop_agrmnt.pdf.
    \11\ Nationwide State/Federal Supervisory Agreement (1996). 
Available at: http://www.csbs.org/regulatory/Cooperative-Agreements/
Documents/nationwide_state_fed_supervi
sory_agrmnt.pdf.
---------------------------------------------------------------------------
    This process ultimately leads to a more consistent examination 
experience for these community institutions. Rather than the holding 
company having to handle numerous examinations throughout the year, 
regulators conduct coordinated examinations of all the holding 
company's institutions at the same time, satisfying State and Federal 
supervisory requirements in a streamlined manner.
    This is just one of many illustrations of how State regulatory 
agencies have shown great flexibility and willingness to reduce burden 
for their State-chartered institutions, all while maintaining the same 
level of effective oversight.
Central Point of Contact
    Many State banking departments follow the practice of assigning a 
single individual as a central point of contact to specific 
institutions to conduct ongoing offsite surveillance and monitoring. 
The offsite portion of this process promotes efficient and effective 
State supervision, allowing examiners to carry out their work away from 
the bank, freeing up bankers' time and office space. At the same time, 
central points of contact also provide banks with a single person to 
turn to when they have supervisory questions and issues, ensuring a 
more direct, faster response to their needs.
Arkansas Self-Examination Program
    A State-specific example of regulatory innovation can be found in 
the Arkansas Self-Examination Program. The program serves both as an 
offsite monitoring program and an effective loan review report for bank 
management. Since its introduction in 1986, the program has created 
significant regulatory efficiencies and benefits to participating 
community banks.
    When an Arkansas bank volunteers to participate in the Self-
Examination Program, it provides the Arkansas State Bank Department 
with roughly three pages of financial information each month. Arkansas 
regulators use this information to spot problem areas and trends that 
may threaten the bank's safety and soundness. In exchange for this 
data, the Department provides participating institutions with reports 
that reflect the bank's month-by-month performance, a performance 
comparison with peer institutions, and early warnings that flag issues 
of concern. Both the information provided by the banks and reports 
generated by the Arkansas State Bank Department remain confidential. 
While the program is not a replacement for examinations, it is an 
excellent supplement that benefits the regulator and the bank.
    Although the program is optional, the participation rate of 
Arkansas banks typically exceeds 90 percent. By creating a simple, 
direct, and valuable tool for community banks, Arkansas regulators can 
better protect consumers and the marketplace and ensure the continuing 
success of their financial institutions.
New Examiner Job Aid
    In addition to coordination with the industry to make supervision 
more efficient, State regulators are increasingly turning to technology 
to enhance and streamline supervision. In 2012, CSBS published a Loan 
Scoping Job Aid (job aid) for examiners that encourages State 
regulators to consider institution-specific criteria that may lead to a 
smaller, yet more effective, loan review methodology.\12\ Loan review 
is the cornerstone of safety and soundness examinations, providing 
examiners the best avenue for determining a bank's health. The CSBS job 
aid provides methods for examiners to improve their loan scope by 
reviewing a different sample of loans than would otherwise be the case. 
This more thoughtful, risk-focused, yet surgical approach will help 
regulators identify new risks and provide community banks with more 
meaningful and useful examination results.
---------------------------------------------------------------------------
    \12\ Available at: http://www.csbs.org/regulatory/resources/Pages/
JobAids.aspx.
---------------------------------------------------------------------------
    These examples demonstrate the willingness of State regulators to 
seek innovative solutions and methods to provide comprehensive and 
effective supervision, while tailoring our efforts to the business 
models of banks. Banks should be in the business of supporting their 
communities. We are working to enact supervision that ensures safety 
and soundness and consumer protection, while allowing State-chartered 
banks to serve their customers most effectively and contribute to the 
success of our local communities, our States, and our Nation.
RIGHT-SIZED REGULATION IN THE FEDERAL CONTEXT
    While some see the industry's regulatory challenges as being about 
the volume of regulation, State regulators see the issue as the type of 
regulation and the compatibility between a given regulation and the 
business model of the regulated entity. State regulators are concerned 
that regulations seem aimed at removing all risk from community 
banking. The tendency is to focus on the 489 banks that have failed 
since the crisis as justification for a more conservative approach 
overall. However, when you approach regulation and supervision from the 
perspective of the over 5,000 community banks that did not fail, I 
believe you come to a more balanced and accommodative approach. The 
many smaller banks that successfully navigated the financial crisis and 
continue to operate today have shown their ability to manage the risks 
of their business. Laws and regulations should recognize this, and 
regulators, in implementing policies and regulations, need to focus on 
whether institutions are properly managing and mitigating--not 
necessarily eliminating--the risks of their business.
FEDERAL EFFORTS AT REGULATORY RIGHT-SIZING
    State regulators recognize that our Federal counterparts have made 
some positive and constructive contributions to a right-sized 
regulatory framework for community banks. However, we must recognize 
that in some cases, these efforts would not have been necessary had 
statutes or rules been appropriately designed or applied to community 
banks in the first place. By and large, the efforts outlined below 
prove that Federal policymakers, both in Congress and at the Federal 
banking agencies, have the commitment to promote right-sized 
regulations in additional areas.
The CFPB's Small Creditor QM
    The Consumer Financial Protection Bureau's (CFPB) ATR mortgage 
regulations represent an effort at regulatory right-sizing. Portfolio 
lending--originating loans with the intent of holding them in 
portfolio--is an important part of many community banks' mortgage 
business. Portfolio lenders have an aligned economic interest with the 
borrower. These banks bear the full risk of default, which incentivizes 
them to ensure the consumer can afford the loan in the first place.
    The CFPB recognized this inherent alignment of interests in 
creating the Small Creditor QM, a part of the ATR rule which provides 
smaller lenders with greater flexibility for mortgages made and held in 
portfolio. This regulatory right-sizing provides benefits to the 
communities served by these small creditors, as community bank 
portfolio lenders can continue making loans designed for borrowers who 
might not fit standardized credit profiles such as small business 
owners, seasonal workers, the self-employed, and young graduates with 
short credit histories but otherwise sound financial management.
Tailoring Regulatory Communication to Smaller Institutions
    The Federal regulatory agencies have made efforts to produce useful 
and accessible guides for smaller institutions on complex rules. While 
State regulators question whether overly complex rules should apply to 
community banks, we acknowledge the agencies have taken important steps 
in communicating the requirements of such rules.
    For example, the ATR and QM statutes in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) resulted in a 
thorough and complex final rule.\13\ To ensure the industry was better 
informed about this complex final rule, the CFPB undertook a 
communications campaign designed to ease compliance with the rule for 
institutions of all sizes. Similarly, the FDIC sought to tailor 
communications and outreach regarding new Basel III capital rules to 
community banks, hosting community bank-focused outreach sessions, an 
on-demand video, a national conference call, and capital estimation 
tool to solicit meaningful input from community banks.
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    \13\ Dodd-Frank Act Sections 1411 and 1412.
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The Federal Financial Institutions Examination Council
    A key ingredient to making regulation responsive is effective 
regulatory coordination. Congress has created a Federal body tasked 
with doing the type of agency coordination necessary for right-sizing 
regulation and supervision across the banking industry. The Federal 
Financial Institutions Examination Council (FFIEC) was established in 
1978 ``to promote consistency'' and ``ensure progressive and vigilant 
supervision.''\14\ The FFIEC provides all community institution 
regulators with a forum for right-sizing regulation. Congress 
originally encouraged State interaction at the FFIEC by mandating that 
the States participate in FFIEC meetings at least twice a year. 
Congress subsequently cemented the importance of the State perspective 
in bank regulation by giving the States a voting seat on the FFIEC in 
2006.\15\ State regulator involvement in the FFIEC is conducted through 
the State Liaison Committee (SLC). Currently, Massachusetts Banking 
Commissioner David Cotney chairs the SLC. I have also served as a 
member of the SLC, representing the States on the FFIEC's Task Force on 
Supervision.
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    \14\ 12 U.S.C.  3301.
    \15\ P.L. 109-351, Title VII,  714(a).
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    One of the FFIEC's current major projects is the review of banking 
regulations mandated by the Economic Growth and Regulatory Paperwork 
Reduction Act.\16\ State regulators, through our presence on the FFIEC, 
are committed to using this review as an opportunity to pinpoint 
regulations that may not be properly suited to the business model of 
community banks. We are eager to participate in this process with our 
Federal colleagues and look forward to a productive result for right-
sized regulations.
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    \16\ 12 U.S.C.  3311.
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    Another area of focus for the FFIEC is cybersecurity. State 
regulators are active participants in the cybersecurity work being done 
through the FFIEC, and encourage fellow FFIEC members to continue the 
commitment to raise awareness and strengthen the oversight of 
cybersecurity readiness for community institutions. States are 
furthering this effort through a cybersecurity outreach program. The 
Executive Leadership of Cybersecurity initiative is designed to create 
awareness and provide tools to bank executives as they navigate the 
complex security issues facing financial institutions.\17\ With the 
FFIEC as a coordination forum, the States are confident that the 
collective action between States and Federal regulators will be a 
reliable resource for all parties looking to minimize & mitigate the 
risks facing financial institutions today.
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    \17\ http://www.csbs.org/cybersecurity.
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Automated Exam Tools
    State regulators' ability to tailor loan review to the risks facing 
an institution, as discussed above, is possible because of technology 
developed by the FDIC. The Examination Tools Suite Automated Loan 
Examination Review Tool (ETS-ALERT) has been an excellent resource for 
automated loan examination and review, serving as the backbone for risk 
scoping that takes a community bank's business model into account. The 
FDIC, Federal Reserve, and States use this program to review loans 
during the course of an examination. This program serves as a 
standardized platform that greatly improves the efficiency of the 
examination process across the country and reduces regulatory burden.
Dodd-Frank and the Role of State Regulators
    State regulators are best positioned to recognize risks building up 
in their local markets, and they can quickly address these local risks 
at the State and local level. Congress recognized the importance of 
State regulators and local intervention in the Dodd-Frank Act by 
reaffirming the importance of the States in the financial regulatory 
fabric. Through measures including recalibrating the relationship 
between the National Bank Act and applicable State law, the intentional 
requirements for the CFPB to coordinate with State regulators, and the 
role of State regulators in the Financial Stability Oversight Council, 
Congress has affirmed the importance of the State regulatory 
perspective and the local focus and greater flexibility that 
perspective provides.
Money Remittance Improvement Act
    Recognizing the unique approach of State supervisory agencies and 
the value such an approach can bring to Federal partners, the recently 
enacted Money Remittances Improvement Act improves the Financial Crimes 
Enforcement Network's ability to coordinate with State regulators and 
leverage State anti-money laundering compliance examinations. We 
applaud Congress for this simple, direct act that simultaneously allows 
State regulators to add value to the work of Federal regulators as well 
as reduce the overall regulatory burden on institutions engaging in 
money remittances.
OPPORTUNITIES FOR POLICYMAKERS TO RIGHT-SIZE COMMUNITY BANK REGULATIONS
    Right-sizing regulation is not a one and done undertaking; for 
State regulators, this concept is in our regulatory DNA and part of our 
regulatory mission, and we urge our fellow regulators and Congress to 
pursue this approach at every opportunity. State regulators--
individually and collectively, through CSBS--have devoted a great deal 
of energy to identifying ways to ensure that our financial regulatory 
system reflects and supports the diversity of the banking system. 
Through groups such as the CSBS Community Bank Steering Group, we have 
an ongoing effort to identify ways to meet our responsibilities as 
regulators in a manner that supports the growth and health of our State 
and local economies and the community institutions that serve those 
economies. Accomplishing this requires a focus on right-sizing 
regulation, throughout the entire policymaking process, from 
legislation, to regulation, to supervision, and to Congress's ongoing 
oversight role.
    The following represent specific actions that Congress and/or the 
Federal banking agencies can undertake to promote right-sized 
regulations for community banks.
Study Risk-Based Capital for Smaller Institutions
    The Basel Committee on Banking Supervision designed risk-based 
capital standards for internationally active banks. These standards are 
overly complex and inappropriate for community banks and their business 
model. Indeed, research has shown that a simple leverage requirement 
would be equally, if not more, effective than risk-based capital 
requirements for community banks, and would be much less 
burdensome.\18\
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    \18\ Moore, R., and M. Seamans. ``Capital Regulation at Community 
Banks: Lessons from 400 Failures.'' Available at: https://
www.stlouisfed.org/banking/community-banking-conference/PDF/
Capital_Regulation_at_Community_Banks.pdf.
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    Congress should mandate the U.S. Government Accountability Office 
(GAO) investigate the value and utility of risk-based capital for 
smaller institutions. The resulting GAO study should seek to understand 
how risk weights drive behavior in the volume and type of credit a bank 
originates, as well as the burden of providing the necessary data for 
calculating capital ratios.
Mortgage Rules Should Better Reflect the Realities of Community Bank 
        Portfolio Lending
    Community banks that hold the full risk of default of a loan are 
fully incented to determine the borrower's repayment ability. Laws and 
regulations regarding mortgage lending should reflect this reality.
QM for Mortgages Held in Portfolio
    When a community bank makes a mortgage and holds that loan in 
portfolio, the interests of the bank and the borrower are inherently 
aligned. Yet, the survey and town halls conducted in conjunction with 
our upcoming Community Bank Research Conference point to a problem: 
while much of community banks' existing mortgages businesses are 
consistent with the Ability-to-Repay and Qualified Mortgage 
requirements, complying with the regulations is not only creating an 
outsized regulatory burden but also curtailing lending. One solution 
that would tailor the requirement to the nature of community bank 
mortgage lending is to grant the QM liability safe harbor to all 
mortgage loans held in portfolio by a community bank. To accomplish 
this, CSBS supports passage of S. 2641 and a similar House measure, 
H.R. 2673, as an appropriate means of facilitating portfolio lending.
Improving the CFPB's Rural Designation Process
    The Dodd-Frank Act's ATR requirement's restrictions on balloon 
loans and the CFPB's efforts to provide limited relief for balloon 
loans made by smaller institutions in rural areas illustrate the need 
for regulatory right-sizing and a conscious effort to understand and 
adapt regulation to the community bank business model. When used 
responsibly, balloon loans are a useful source of credit for borrowers 
in all areas. Properly underwritten balloon loans are tailored to the 
needs and circumstances of the borrower, including situations where the 
borrower or property is otherwise ineligible for standard mortgage 
products. Because banks can restructure the terms of a balloon loan 
more easily than an adjustable rate mortgage, they are able to offer 
the borrower more options for affordable monthly payments, especially 
in a rising interest rate environment. As a regulator, I prefer that 
lenders and borrowers in my State have flexibility and options when 
selecting consumer products and mortgages. Since the mortgage is held 
in portfolio, community banks must work to ensure that the product is 
tailored to take into consideration all risks associated with the 
credit in order to avoid default.
    Community banks retain balloon mortgages in portfolio as a means of 
offering credit to individuals that do not fit a standard product but 
nonetheless can meet the monthly mortgage obligation. That is the logic 
behind the Dodd-Frank Act provision providing balloon loans with QM 
status if those loans are originated in rural or underserved areas by a 
small creditor.
    However, the CFPB's approach to implementing this provision relies 
on one analytical framework, the Department of Agriculture's Urban 
Influence Codes. Unfortunately, this approach produces many illogical 
outcomes. For example, Nye County, Nevada, is the third-largest county 
in the United States. Despite containing only 2.42 persons per square 
mile and its Yucca Mountain once being considered for a nuclear waste 
repository due to its remoteness, Nye County is not considered rural 
because it neighbors Clark County, the home of Las Vegas. This is the 
difficulty of applying one framework to something as inherently 
localized and granular as evaluating whether an area is ``rural.''
    CSBS has suggested that the CFPB adopt a petition process for 
interested parties to seek rural designation for counties that do not 
fit the Urban Influence Code definition--a step that is within the 
CFPB's current authorities. My fellow State regulators and I were 
pleased to see Congress take up this issue, with the introduction and 
House passage of H.R. 2672. We urge the Senate to act on S. 1916, the 
Senate companion to H.R. 2672. More fundamentally, portfolio lending is 
not a ``rural'' issue or an ``underserved'' issue, it is a 
relationship-based lending issue for all community banks. Eliminating 
the rural or underserved balloon loan limitations for qualified 
mortgages would effectively expand the CFPB's Small Creditor QM 
framework to include all loans held in portfolio by community banks. 
Similarly, removing the rural or underserved requirements from the 
exception to mandatory escrow requirements for higher-priced loans 
would make right-sized regulations business model focused, not 
geographically focused.
Tailor Appraiser Qualifications for 1-4 Family Loans Held in Portfolio
    Current appraisal regulations can curtail mortgage lending in 
markets that lack qualified appraisers or comparable sales. Congress 
should require regulations to accommodate portfolio loans for owner-
occupied 1-4 family loans, recognizing the lender's proximity to the 
market and the inherent challenge in securing an accurate appraisal by 
a qualified appraiser.
Community Bank Fair Lending Supervision Must Acknowledge the Business 
        Model and Be Applied Consistently
    State regulators take the difficulties that many underserved 
borrowers have had in obtaining access to fair credit very seriously, 
especially in regards to mortgage lending and homeownership. State 
regulators are committed to enforcing institutions' compliance with the 
letter and spirit of our fair lending laws, but we are concerned about 
regulators' over reliance on opaque statistical models that use small 
samples to judge fair lending performance and inconsistencies in 
Federal regulators' approach to fair lending supervision. Many times it 
is not the statute that creates the problem, but the interpretation, 
guidance, and the examination techniques utilized. Federal agency 
leadership must commit to a more pragmatic and transparent approach to 
fair lending supervision.
    Federal regulators should not use one-size-fits-all techniques and 
tools on community banks in fair lending examinations. A smaller 
institution makes case-by-case lending decisions based on local 
knowledge and local relationships. While statistical analysis plays a 
role in fair lending supervision, it is not the beginning and end of 
the analysis. Supervisors must utilize their flexibility to look beyond 
statistical models to take a more holistic view of the lending 
decision.
    Despite assurances of consistent approaches from ``headquarters'' 
to ``the field'' and of continued collaboration to ensure consistency, 
State regulators have observed meaningful differences in how the three 
Federal banking agencies treat community banks on fair lending issues 
and as well as a disconnect within the individual agencies. Federal 
agency leadership has the responsibility to make sure this is not the 
case, and they must be accountable for ensuring transparency and 
consistency.
    The current approach to fair lending for community banks is having 
a chilling effect on credit availability, as banks, frustrated by the 
examination process, are curtailing or exiting many consumer credit 
products. From a public policy perspective, we should want community 
banks doing this business. If there were only 66 banks that had 
compliance or Community Reinvestment Act problems in 2013,\19\ and 
referrals to the Department of Justice are minimal, why are banks 
experiencing such in-depth and extensive reviews?
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    \19\ ``FDIC Annual Report 2013.'' FDIC. Available at: https://
www.fdic.gov/about/strategic/report/2013annualreport/AR13section1.pdf.
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The Application Process for Community Banks Must Reflect the Business 
        Model
    Community bank applications submitted to Federal banking agencies 
for transactions such as mergers and capital investments can take an 
extended time to process because the agencies have to ensure the 
decision will not establish a precedent that could be exploited by 
larger institutions. The approval of a merger, acquisition, or 
expansion of activities should be related to the overall size and 
complexity of the transaction, and community banks should not be 
unnecessarily penalized for the potential action of larger financial 
institutions. Federal law, an agency rule, or a clause in an approval 
letter could provide the necessary protection by stating that 
application decisions for banks below a specified size (perhaps $10 
billion) do not establish a precedent for institutions above a certain 
size threshold.
    To further address the length of time the agencies take to review 
community bank applications, the application review and approval 
process for institutions below a certain size should be de-centralized 
with more final decisionmaking authority given to FDIC Regional Offices 
and the regional Federal Reserve Banks.
    Additionally, the Federal agencies need to be open-minded when 
faced with circumstances that do not fit within predetermined 
parameters. Most recently in my State of Kentucky, two banks took over 
2 years to gain regulatory approval for a merger despite being 
affiliates that would clearly benefit from becoming one institution. In 
this particular situation, I saw that the strengths in one institution 
addressed the other's weaknesses. Had the Federal agency focused on the 
actual circumstances of each institution and on the merger's positive 
impact for each institution and the organization as a whole, both 
institutions--particularly the smaller of the two--could have avoided 
prolonged burden and the expense that resulted from redundant processes 
and management.
Federal Regulatory Agencies Leadership Should Include State Supervisory 
        Representation
    Meaningful coordination in regulation and supervision means 
diversity at the highest governance levels at the Federal regulatory 
agencies. The current FDIC Board does not include an individual with 
State regulatory experience as required by law.\20\ The Federal Deposit 
Insurance (FDI) Act and Congressional intent clearly require that the 
FDIC Board must include an individual who has worked as a State 
official responsible for bank supervision. As the chartering authority 
for more than 76 percent of all banks in the United States, State 
regulators bring an important regulatory perspective that reflects the 
realities of local economies and credit markets. Congress should refine 
the language of the FDI Act to ensure that Congress's intent is met and 
that the FDIC Board includes an individual who has worked in State 
government as a banking regulator.
---------------------------------------------------------------------------
    \20\ 12 U.S.C.  1812(a)(1)(C).
---------------------------------------------------------------------------
    Similarly, to ensure the Federal Reserve's Board of Governors (the 
Board) properly exercises its supervisory and regulatory 
responsibilities, Congress should require that at least one Governor on 
the Board has demonstrated experience working with or supervising 
community banks. Last fall, CSBS released a White Paper \21\ on the 
composition of the Board of Governors and an infographic \22\ that 
illustrates the background and experience of the members of the Board 
of Governors throughout the Board's history. The White Paper highlights 
two key trends: Congress' continuing efforts to ensure the Board's 
composition is representative of the country's economic diversity, and 
the Board's expanding supervisory role. The infographic illustrates the 
growing trend of naming academics to the Board. In addition to adhering 
to Congressional intent, ensuring that at least one Governor has 
demonstrated experience working with or supervising community banks 
will also help the Federal Reserve as it exercises its monetary policy 
and lender of last resort functions. Governors with practical community 
banking and regulatory experience have a unique and tangible 
perspective on the operation of local economies that will assist the 
Federal Reserve as it performs these vital functions.
---------------------------------------------------------------------------
    \21\ ``The Composition of the Federal Reserve Board of Governors.'' 
CSBS. Available at: http://www.csbs.org/news/csbswhitepapers/Documents/
Final%20CSBS%20White%20Paper%20on
%20Federal%20Reserve%20Board%20Composition%20(Oct%2023%202013).pdf.
    \22\ Available at: http://goo.gl/eCKVrS.
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    CSBS was pleased to see that the Senate endorsed this concept by 
adopting Senator Vitter's amendment to the Terrorism Risk Insurance Act 
requiring that at least one member of the Board of Governors have 
community bank supervisory or community banking experience.
MOVING FORWARD
    Congress, Federal regulators, and State regulators must focus on 
establishing a new policymaking approach for community banks. We must 
embrace creativity, innovation, and customized solutions to the 
problems facing small banks today. Community banks need a broad, 
principles-based regulatory framework that effectively complements and 
supervises their unique relationship-based lending model. Such a 
framework acknowledges community banks' distinct contribution to 
thousands of local markets, ensures banking industry diversity, and 
ultimately promotes economic growth.
    Policymakers are capable of right-sizing regulations for these 
indispensable institutions, but we must act now to ensure their long-
term viability. CSBS remains prepared to work with Members of Congress 
and our Federal counterparts to build a new right-sized framework for 
community banks that promotes our common goals of safety and soundness 
and consumer protection.
    Thank you for the opportunity to testify today, and I look forward 
to answering any questions you have.
                                 ______
                                 
                                 
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             PREPARED STATEMENT OF MARCUS M. STANLEY, Ph.D.
            Policy Director, Americans for Financial Reform
                           September 16, 2014
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before you today on behalf of Americans for 
Financial Reform. AFR is a coalition of more than 200 national, State 
and local groups who have come together to reform the financial 
industry. Members of our coalition include consumer, civil rights, 
investor, retiree, community, labor, faith based and business groups.
    Community banks can bring unique benefits to the communities they 
serve. The qualities that generally characterize community banks--deep 
roots in a particular locality, an emphasis on relationship as opposed 
to transactional banking, and a business focus on traditional lending 
and deposit gathering activities--can create special advantages for 
both prudential risk management and customer service. They also create 
a special affinity for small businesses. Community banks hold almost 
half (45 percent) of small loans to business, despite accounting for 
less than 15 percent of total banking assets. The health of community 
banking is thus a valuable focus for this Committee.
    At the same time, community banking is still banking, and the basic 
principles of banking regulation apply. While community banks today are 
not large enough to create the kinds of risk to the financial system 
seen in the 2008 crisis, the failure of a community bank holding 
publicly insured deposits will still directly impact the deposit 
insurance fund. Furthermore, a consumer who is victimized by an unfair 
business practice is equally harmed whether this practice occurs at a 
community bank, a mid-size bank, or a large Wall Street bank.
    Thus, in making regulatory decisions, policymakers should seek to 
preserve the special benefits of community banking without undermining 
the core regulatory goals of prudential soundness and consumer 
protection, either for community banks or for other larger institutions 
who may also seek regulatory accommodations.
    There is no contradiction in these goals. Permitting unsound 
practices that bring temporary profits at the expense of later losses 
or bank failures does not serve the long-term health of community 
banking. This is particularly true since bank failures lead to 
additional costs to the deposit insurance fund that must be paid by 
assessments on healthy and successful community banks. And permitting a 
minority of institutions to compete by foregoing consumer protections 
does no favors to those institutions that make the effort to treat 
consumers fairly.
    In my testimony today, I would like to make several broad points. 
The first point concerns size. Community banks are small. 99.7 percent 
of community banks have fewer than $5 billion in assets, and these 
banks hold 94 percent of community banking assets.\1\
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    \1\ All the data on community banks and bank profitability by size 
in this testimony is based on information from the FDIC Quarterly 
Banking Profile, available at https://www2.fdic.gov/qbp/index.asp, and 
the 2012 FDIC Community Banking Study, available at https://
www.fdic.gov/regulations/resources/cbi/study.html. The classification 
of community banks was performed by the FDIC using a functional (i.e., 
not size-based) definition of community banking.
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    Furthermore, the economic problems in the community banking sector 
appear most concentrated among the smaller entities in community 
banking. In terms of long-term structural change, the entire decline in 
the number of banks over the last three decades has occurred among 
banks with fewer than $1 billion in assets, particularly those with 
less than $100 million. The number of FDIC-insured banks with fewer 
than $1 billion in assets has declined by two-thirds since the mid-
1980s, while the number of banking institutions with more than $1 
billion in assets has increased by a third.
    More recent profit trends show that there is a continuing 
divergence in the fortunes of the smallest banks and the rest of the 
sector. In 2013, over 97 percent of banks with more than $1 billion in 
assets had returned to profitability. In contrast, approximately 9 
percent of banks with fewer than $1 billion in assets were unprofitable 
last year, a rate more than three times higher than for larger banks. 
The problem was most acute among the very smallest banks, those with 
fewer than $100 million in assets, where over 13 percent were 
unprofitable. The general pattern of a divergence by size has remained 
in place during the first half of this year. During the first 6 months 
of 2014, not a single bank with more than $10 billion in assets 
registered a loss, but more than 12 percent of banks with less than 
$100 million in assets did.
    It may seem obvious that community banks are small. But it is a 
point worth making, since we often see larger banks seek regulatory 
accommodation when there is little evidence that these larger banks 
either share the unique characteristics of community banks or face the 
kind of economic issues seen among smaller banks. The data above 
suggest that measures aimed at assisting community banks should 
generally be limited to those banks with fewer than $5 billion in 
assets, and should focus most on those banks with fewer than $1 billion 
in assets.
    The second point I would like to make concerns community banks and 
the regulatory response to the 2008 global financial crisis. Community 
banks were obviously not the central contributor to the 2008 crisis. 
This is not because community banks cannot create systemic risk. Two of 
the largest systemic banking crises in the last century, the Great 
Depression and the 1980s Savings and Loan crisis, were driven by the 
failures of relatively small community banks. But community banks alone 
are too small a share of today's financial system to create a systemic 
crisis of the scale seen in 2008. Key players in that crisis were large 
Wall Street dealer banks, large commercial banks and thrifts that 
played a key role in securitization markets, and nonbank mortgage 
originators.
    This suggests that the regulatory response to the crisis, 
particularly those responses aimed at systemic risk, should focus on 
these kinds of entities. And for the most part, it has. Most new areas 
of Dodd-Frank regulation have been `tiered', either in statute or 
through regulatory action, so that they have their greatest impact on 
banks that are significantly larger than community banks. Examples 
include new derivatives rules which generally exempt banks with under 
$10 billion in assets from mandatory clearing and margining, new 
prudential requirements instituted by the Federal Reserve under Section 
165 of the Dodd-Frank Act, which are limited to bank holding companies 
with over $50 billion in consolidated assets and apply most stringently 
to `advanced approaches' banks with in excess of $250 billion in 
assets, and new supplementary leverage ratio rules that generally apply 
to `advanced approaches' banks and are most stringent for banks with 
over $700 billion in assets.
    But as I'm sure others on this panel will point out, this does not 
mean that the financial crisis has had no effect on the oversight of 
community banks. It has. The financial crisis taught many hard lessons 
about credit risk, securitization risk, and the significance of 
consumer protection. These are lessons that apply in all areas of 
banking. The failures to properly underwrite and manage risk that we 
saw during the crisis affected community banks as well. Over 450 banks 
failed between 2008 and 2012, more than three times the total number 
that failed over the 15 years prior to the financial crisis. The great 
majority of these were community banks. At one point during this period 
the deposit insurance fund showed an aggregate deficit of over $20 
billion. The U.S. Treasury and the U.S. taxpayer are the final backstop 
for any lasting deficit in this fund. Regulators are applying, and 
should apply, what they have learned about oversight of lending, 
securitization, and consumer protection to ensuring the soundness of 
community banks.
    Regulators have applied the lessons of the crisis to community 
banks in several ways. In prudential regulation, this has occurred 
through the mechanism of FDIC supervision and through the new Basel 
capital rules. These changes have resulted in stronger prudential 
oversight of commercial and residential real estate lending, as well as 
securitization holdings, and a more stringent definition of capital. 
While motivated by the financial crisis, these changes are not mandated 
by the Dodd-Frank Act. They would likely have occurred in any case as a 
response to the crisis experience.
    The creation of the Consumer Financial Protection Bureau was, of 
course, a result of the Dodd-Frank Act. The CFPB is intended to address 
consumer fraud and abuse by the financial industry. The CFPB does not 
directly supervise banks with under $10 billion in assets, although its 
rules do apply to them. An exemption of community banks from new 
consumer rules would clearly be inappropriate, as it would create a 
two-tier system of consumer protection that would allow practices that 
have proven exploitative and dangerous to continue in one segment of 
banking.
    My final point addresses some ways in which policymakers can 
accommodate the needs of community banks in regulatory implementation. 
First, regulators should explore additional technical assistance aimed 
at lowering the fixed costs of regulatory reporting for community 
banks. Regulation, particularly regulation that involves extensive 
reporting or analysis requirements, generally creates a fixed cost for 
initial compliance, with the marginal costs of additional regulated 
transactions much lower thereafter. A smaller bank generally has fewer 
transactions to spread these fixed costs over. Technical assistance 
aimed at assisting community banks in creating shared infrastructure 
for standardized reporting and analysis would be helpful in reducing 
these initial fixed costs, particularly for the smallest community 
banks which might otherwise need to hire consultants or additional 
employees. The FDIC has already placed significant technical assistance 
on their Web site and should explore additional ways to provide such 
assistance or help small banks create mutual resources for regulatory 
compliance.
    Second, policymakers should be attentive to the ways in which 
stronger regulation of larger banks, especially the very largest banks, 
is necessary to help level the playing field in financial services. As 
Members of this Committee know, regulators themselves admit that the 
problem of `too big to fail' has not been solved. The fact that markets 
permit the largest banks to operate with lower capital levels and 
funding costs than community banks is likely related to the 
understanding that the unsolved TBTF issue may lead to greater 
government support in the event of bank failure. Legislative efforts to 
mandate higher capital levels for the largest banks, such as the bill 
introduced by Senators Brown and Vitter, are valuable in this area, as 
are regulatory rules that scale capital requirements by bank size.
    There is another, related, difference between community banks and 
large Wall Street banks. Large banks are more heavily engaged in 
complex financial market activities whose risks have in many cases not 
been well understood and for which both regulators and private 
counterparties have permitted inappropriately low levels of prudential 
safeguards. Examples of such activities are large-scale broker-dealer 
and derivatives activities with associated large trading books and 
collateral accounts, central roles in originate-to-distribute 
securitization, and reliance on wholesale money markets. Efforts by 
regulators to make the capital and liquidity costs of these financial 
market activities reflect their true risks are a key component of new 
financial regulations. Reforms in this area should also help local 
relationship-oriented banking become more competitive with large-scale 
transactional banking.
    Thank you for your time and attention. I look forward to taking 
questions.
                                 ______
                                 
                PREPARED STATEMENT OF MICHAEL D. CALHOUN
               President, Center for Responsible Lending
                           September 16, 2014
    Good morning Chairman Johnson, Ranking Member Crapo, and Members of 
the Committee.
    Thank you for the opportunity to testify on the need to maintain 
strong and reasonable consumer financial protections in the wake of the 
financial crisis.
    I am the President of the Center for Responsible Lending (CRL), a 
nonprofit, nonpartisan research and policy organization dedicated to 
protecting homeownership and family wealth by working to eliminate 
abusive financial practices. CRL is an affiliate of Self-Help, a 
nonprofit community development financial institution. For 30 years, 
Self-Help has focused on creating asset building opportunities for low-
income, rural, women-headed, and minority families, primarily through 
financing safe, affordable home loans. In total, Self-Help has provided 
$6 billion in financing to 70,000 home buyers, small businesses, and 
nonprofits and serves more than 80,000 mostly low-income families 
through 30 retail credit union branches in North Carolina, California, 
and Chicago.
    CRL recognizes the importance of small lenders and credit unions, 
and the financial services they provide. We also appreciate the 
different business model they use to provide these services and support 
regulatory oversight that appropriately recognizes and accommodates 
these differences. Community banks, credit unions, and other smaller 
financial institutions often have smaller transactions and closer ties 
to borrowers and the communities they serve. This allows for more 
tailored lending and underwriting that result in more successful 
lending. Smaller financial institutions also participate much less in 
capital market transactions than their larger bank counterparts. CRL 
agrees that in the context of regulatory reform, it is important to 
continue to recognize the work of small lending institutions and how 
important it is for these institutions to be able to continue to 
successfully conduct their business in the community. Fortunately, the 
Consumer Financial Protection Bureau (CFPB) and other financial 
regulators also acknowledge these differences and have worked to tailor 
their rules accordingly. However, when adopting separate rules or 
exceptions to rules, it is essential to carefully craft them to ensure 
that consumer protections are not compromised.
1. The CFPB and Other Regulators Have Recognized That it is Essential 
        To Have a Flexible Approach That Supports Small Depository 
        Institutions.
    The regulators of small depository institutions have adopted a 
flexible approach to regulation and oversight. The CFPB has taken a 
lead in adopting regulations that are balanced for financial 
institutions and has made accommodations for smaller lenders. The 
CFPB's most visible and important rules have addressed past flaws in 
mortgage lending, which proved to be the underlying cause of the 
financial crisis that led to the great recession. The new mortgage 
rules strike the right balance of protecting consumers without 
constraining lenders from extending credit broadly. The rules-required 
by The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank'')\1\--address a key cause of the mortgage meltdown and 
ensuing recession: the practice of many lenders to make high-risk, 
often deceptively packaged home loans, without assessing if borrowers 
could repay them. Because of these reforms, lenders now must assess a 
mortgage borrower's ability to repay a loan.
---------------------------------------------------------------------------
    \1\ Pub. L. 111-203.
---------------------------------------------------------------------------
    Families who, in the past, were too often steered into unfair, 
harmful financial products will benefit from the safer mortgage 
standards defined in the CFPB's Qualified Mortgage (``QM'') rule. While 
protecting borrowers, the CFPB's rule also provides lenders with 
significant legal protection when they originate qualified mortgages. 
The rule rightfully provides certain exemptions for small and community 
lenders.
    We note that the housing crisis was not merely caused by a drop in 
housing values. Reckless and poorly regulated mortgage lending 
undermined the housing market and sparked the crisis. As noted above, 
the CFPB then promulgated the QM rule and the Ability-to-Repay 
standard, which established reasonable and clear conditions under which 
the market can move toward safer lending. The new rules, which went 
into effect on January 10, 2014, established four pathways to QM 
status. With some exceptions for certain agencies and small lenders, 
loans will meet QM criteria if: 1) they are fully amortizing (i.e., no 
interest-only or negatively amortizing loans; 2) the points and fees do 
not exceed 3 percent of total loan amount, 3) the terms do not exceed 
30 years, and 4) the rate is fixed or, for adjustable-rate loans, has 
been underwritten to the maximum rate permitted during the first 5 
years.
    The CFPB also established an Ability-to-Repay provision that 
requires lenders to determine whether a borrower can afford a mortgage. 
Lenders are deemed to have complied with the Ability-to-Repay provision 
if they originate loans that meet the QM definition. This provision 
will prevent features such as no documentation loans that allowed for 
reckless lending and resulted in a myriad of defaults and foreclosures. 
Reforms such as these will allow the housing market to recover, more 
borrowers to achieve successful homeownership, and it will 
significantly reduce the likelihood of the Nation experiencing a 
similar housing crisis in the future.
    When a loan gains QM status, it carries with it a legal presumption 
of complying with the Ability-to-Repay requirements. The rule creates 
two different kinds of legal presumptions: a `safe harbor' and a 
`rebuttable presumption.' Under a `safe harbor,' a borrower is unable 
to challenge whether the lender met its Ability-to-Repay obligations. 
If the loan is a prime QM loan, under a `rebuttable presumption,' the 
borrower has the ability to raise a legal challenge but must overcome 
the legal presumption that the lender complied with this Ability-to-
Repay obligation.
    The CFPB adopted numerous special provisions for small depository 
institutions to ensure that they can participate and compete in the 
financial services market. For example, the CFPB created the small 
creditors definition when it promulgated the QM rule, a special 
designation that was not required by the Dodd-Frank Act. The CFPB 
created this designation using its regulatory authority with the goal 
of preserving access to credit for those who rely on the services of 
small creditors. Under this definition, lenders need to meet two 
criteria to count as a small creditor: first, the institutions must 
have assets of less than $2 billion and second, originate no more than 
500 first-lien mortgages per year. Mortgages originated by an eligible 
small creditor can obtain QM status if the loan meets the points and 
fees threshold, is fully amortizing, does not include interest-only 
payments, and has a term of no more than 30 years. In addition, the 
lender is also ``required to consider the consumer's debt-to-income 
ratio or residual income and to verify the underlying information.''\2\ 
However, these lenders do not need to meet the 43 percent debt-to-
income ratio threshold or use the debt-to-income ratio standards in 
Appendix Q. These bright line rules provide appropriate guidance for 
small lenders, while still offering appropriate flexibility.
---------------------------------------------------------------------------
    \2\ Consumer Financial Protection Bureau, Ability to Repay and 
Qualified Mortgage Standards under the Truth in Lending Act (Regulation 
Z), 78 Fed. Reg. 34430, 35487 (June 12, 2013) (rule was issued by the 
CFPB on May 29, 2013 and printed in the Federal Register on June 12, 
2013).
---------------------------------------------------------------------------
    In addition, the CFPB created a QM definition for small lenders 
specific to balloon loans. This designation is required by Dodd-Frank 
for small lenders operating predominantly in rural or under-served 
areas. The Bureau used its regulatory authority to establish a 2-year 
transition period that allows all small creditors--regardless of 
whether they operate in rural or underserved areas--to obtain QM status 
for balloon loans that are held in portfolio. After the transition 
period, the balloon loan exception only applies to those lenders who 
operate in rural or underserved areas under a definition that CFPB will 
continue to study. The mortgage rules also establish a minimum period 
of time for which escrows must be held for higher-priced mortgages. The 
CFPB also created an exemption to the escrow requirement for small 
creditors operating predominately in rural and underserved areas.
    Small creditors receive accommodations regarding the legal 
safeguards of QM loans. The rule establishes a two-tiered system 
regarding legal protections for lenders. For the vast majority of 
loans, lenders will have a `safe harbor' against potential legal 
challenges from borrowers. Somewhat higher costing loans will have a 
`rebuttable presumption.' The threshold between the two depends on the 
loan's annual percentage rate (APR) relative to the average prime offer 
rate (APOR). A loan's APR is a figure that represents the overall cost 
of the loan, including both the interest rate as well as some specified 
fees. The APOR is a calculation that reflects the APR for a prime 
mortgage, and these figures are released on a weekly basis.
    For the general QM definition using a 43 percent debt-to-income 
ratio threshold or the definition based on eligibility for purchase or 
insurance by Fannie Mae, Freddie Mac, and government agencies, the 
dividing line between a `safe harbor' and a `rebuttable presumption' is 
1.5 percent above APOR for a first-lien mortgage and 3.5 percent above 
APOR for a subordinate lien mortgage. For loans below the thresholds, a 
lender receives a `safe harbor.' For loans above the thresholds, they 
receive a `rebuttable presumption.' Regarding small lenders, the CFPB 
adjusted the first-lien threshold for a safe harbor upward to match the 
second-lien threshold, resulting in a 3.5 percent threshold for both 
first and second-lien mortgages to receive the safe harbor.\3\ For 
instance, for a 30 year first-lien mortgage (with today's APOR rate of 
4.16 percent),\4\ larger lenders originating QM loans receive safe 
harbor protection at an interest rate of 5.66 percent, whereas small 
lenders receive safe harbor protection for a higher interest rate of 
7.66 percent. The effect of this CFPB created exception is a 
significant additional flexibility for smaller lenders.
---------------------------------------------------------------------------
    \3\ Consumer Financial Protection Bureau, Ability-to-Repay and 
Qualified Mortgage Rule: Small Entity Compliance Guide 28 (2014), 
available at http://files.consumerfinance.gov/f/201401_cfpb_atr-
qm_small-entity-compliance-guide.pdf.
    \4\ Available at https://www.ffiec.gov/ratespread.
---------------------------------------------------------------------------
    The CFPB continues to review appropriate considerations for small 
lending institutions. The CFPB has requested comment on whether to 
increase the 500 first-lien mortgage cap under QM's small-creditor 
definition.\5\ CRL expressed support to a reasonable increase of the 
500 loan cap, limiting any potential increase to rural banks or for 
loans held in portfolio. We also encouraged the CFPB to examine data 
and feedback to determine if the 500 loan cap is creating problems for 
small-servicers to conduct business and reach underserved markets.
---------------------------------------------------------------------------
    \5\ 79 Fed. Reg. 25,730, 25746 (May 6, 2014).
---------------------------------------------------------------------------
2. Reasonable Flexibility With Oversight is Essential but Exceptions 
        and Exemptions Must Be Carefully Drawn To Protect Consumers and 
        To Mandate Responsible Lending.
    As outlined above, the CFPB has rightfully taken careful 
consideration to formulate rules that protect consumers and allow for 
broad access to credit. However, we have serious concerns about some 
proposed legislation that would loosen consumer protections.
    The Portfolio Lending and Mortgage Access Act (H.R. 2673), 
introduced in the House of Representatives, would inappropriately 
exempt all mortgage loans held in portfolio.\6\ These mortgages still 
carry significant risk to consumers, financial institutions, and the 
overall economy. In the financial crisis, many of the toxic loans, such 
as negative amortization loans underwritten to initial teaser rates 
were held in bank portfolios. These loans had initial payments that 
covered only a small amount of the accruing interest. As a result, the 
balance of the loans dramatically increased each year. Lenders made 
these loans based upon only this initial, artificially low payment, 
even though the loans required borrowers to make dramatically higher 
payments after a few years. Further increasing the risk of these loans, 
many lenders did not even document the income of the borrowers, instead 
making no documentation (``no-doc'') loans. Hundreds of billions of 
dollars of these loans were made, and many were kept on bank 
portfolios. These loans soon crashed, helping to trigger the financial 
crisis, and devastating banks such as Washington Mutual and Wachovia.
---------------------------------------------------------------------------
    \6\ Note that this legislation does not set a loan size limitation, 
nor does it establish a loan-holding period.
---------------------------------------------------------------------------
    Portfolio loans also pose risks for consumers and tax-payers. For 
refinance loans, borrowers put their hard earned equity at stake. This 
equity covers the risk of the lender in the event of foreclosure, but 
borrowers lose all of their home wealth. Many portfolio lenders in the 
housing expansion period engaged in these asset-based loans, with 
disastrous results for consumers. It is important to remember that in 
the subprime mortgage market, which was a trigger for the crisis, only 
10 percent of loans were first-time homeowner loans; the bulk of these 
were refinance loans, largely based on the homeowners' equity.\7\ 
Therefore, it is imperative to preserve Ability-to-Repay standards for 
these loans.
---------------------------------------------------------------------------
    \7\ Center For Responsible Lending, Subprime Lending: A Drain on 
Net Homeownership, CRL Issue Paper No. 14 , TBL 1 (2007) , available at 
http://www.responsiblelending.org/mortgage-lending/research-analysis/
Net-Drain-in-Home-Ownership.pdf.
---------------------------------------------------------------------------
    The Ability-to-Repay standard and the QM rule are also important 
safeguards for the mortgage market. When the housing market expanded, 
sustainable mortgages, such as 30-year fixed-rate mortgages with full 
documentation were squeezed out by toxic products that appeared to be 
more affordable for consumers, but in fact had hidden costs and a high 
risk of foreclosure. Lenders who did not offer these toxic products saw 
their market shares plummet. They often felt they had to offer similar 
products in order to maintain market share and stay in business. The 
result was a race to the bottom. If exceptions to these critical 
lending standards are not very carefully drawn, we risk a repeat of 
this disastrous period of lending. I urge both bodies of Congress to 
reject the Portfolio Lending and Mortgage Access Act and any similar 
legislation that weakens responsible and safe lending standards set 
forth by regulators such as the CFPB.
Conclusion
    A healthy national economy depends on both healthy community 
financial institutions and consumer protections. We applaud the work of 
credit unions and small lenders who provide services to communities 
greatly in need of opportunity. We also applaud the role small 
creditors have played in creating successful homeownership for many who 
would not otherwise have the opportunity.
    The reckless and predatory lending that occurred without 
appropriate safeguards resulted in one of the worst financial disasters 
of American history. In order to avoid the repetition of past mistakes 
that proved to be devastating for American families, regulators like 
the CFPB must protect the American people and ensure access to a broad, 
sustainable mortgage market. We understand the need for appropriate 
flexibility for small depositories, but it must be balanced against the 
need for consumer safeguards, and not extend exemptions tailored for 
small banks and credit unions to larger financial institutions. I look 
forward to continuing to work with these community institutions, their 
associations, the regulators, and this Committee to ensure that these 
institutions can thrive while consumers are protected. Thank you for 
the opportunity to testify today, and I look forward to answering your 
questions.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM TONEY BLAND

Q.1. As I highlighted in the hearing, increased regulatory 
burden on small depository institutions is concerning 
especially in light of the fact that we have lost approximately 
one-half of our banks and credit unions in the last 25 years. 
Is your agency prepared to do an empirical analysis of the 
regulatory burden on small entities in addition to the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) 
review? If so, what specific steps can your agency take to 
ensure that such empirical analysis is comprehensive and 
meaningful? If not, please explain why not.

A.1. The OCC currently conducts analyses of the effects of our 
rules specifically on small entities. For each OCC rulemaking, 
the Regulatory Flexibility Act (RFA) requires Federal agencies 
including the OCC to determine whether a new rule will have a 
significant economic impact on a substantial number of small 
entities. If the OCC concludes that the rule does have such an 
impact, then the OCC must prepare initial (at the proposed rule 
stage) and final (at the final rule stage) regulatory 
flexibility analysis. OCC economists conduct the analyses 
required by the RFA. In addition, the Paperwork Reduction Act 
(PRA) requires the OCC to estimate the burden (as defined in 
that statute and its implementing regulations) imposed by the 
rules it adopts on all entities, including small entities.
    The OCC complies with these requirements and, in addition, 
conducts other analyses required by law to assess the economic 
effect of a proposed or final rule. For example, the OCC 
evaluates the economic impact of final rules pursuant to the 
requirements of the Congressional Review Act (CRA).

Q.2. Comptroller Curry recently stated that he is chairing the 
EGRPRA effort at the Federal Financial Institutions Examination 
Council (FFIEC). When can Congress expect a first report of the 
agencies' EGRPRA findings and recommendations?

A.2. The EGRPRA statute requires the FFIEC to submit a report 
to Congress at the end of the EGRPRA review process that 
summarizes the significant issues raised in the public comments 
and the relative merits of such issues. This report will 
include an analysis of whether the Agencies are able to address 
the regulatory burdens associated with these issues or whether 
the burdens must be addressed by legislative action. The review 
process will be completed by the end of 2016.
    The agencies recently announced the schedule for EGRPRA 
outreach meetings. The first outreach meeting will be held in 
Los Angeles on December 2, 2014. Comptroller Curry and I will 
attend. The outreach meetings will feature panel presentations 
by industry participants and consumer and community groups, as 
well as give interested persons an opportunity to present their 
views on any of the 12 categories of regulations listed in a 
June Federal Register notice.
    The reduction of regulatory burden is an ongoing process at 
the OCC. We will make changes to our regulations to address 
burden identified during the EGRPRA process, where appropriate, 
and will not wait until the end of the EGRPRA process. For 
example, the OCC is currently in the process of integrating 
certain OCC and former Office of Thrift Supervision rules, and 
we will take relevant comments that we receive through the 
EGRPRA process into account as we finalize these rules.

Q.3. Your agency recently revised their guidance on third-party 
payment processors to remove the previously designated high-
risk merchant categories that have caused financial 
institutions to cease banking relationships with a number of 
legitimate businesses. Nonetheless, just last week I have heard 
from two Idaho constituents who had difficulty obtaining new 
banking services. What steps are you taking on the ground to 
make sure banks can actually provide services to these 
legitimate businesses, and that examiners are promptly and 
adequately trained to implement the revised guidance?

A.3. The OCC issued Bulletin 2008-12 regarding payment 
processors on April 24, 2008, and incorporated Federal savings 
associations into the guidance as of October 13, 2013. The OCC 
has not otherwise revised the guidance. As an agency, we have 
made a concerted effort to communicate a balanced message 
regarding risk management expectations to OCC supervised 
institutions. Comptroller Curry addressed the Association of 
Certified Anti-Money Laundering Specialists and his comments 
outline this balanced approach. Specifically, Comptroller Curry 
stated ``[Banks] shouldn't feel that [they] can't bank a 
customer just because they fall into a category that on its 
face appears to carry an elevated level of risk. Higher-risk 
categories of customers can call for stronger risk management 
and controls, not a strategy of avoidance.''\1\ Comptroller 
Curry echoed these comments in remarks before the American 
Bankers Association and the Risk Management Association. Deputy 
Chief Counsel Daniel P. Stipano, in his written and oral 
statements before the Subcommittee on Oversight and 
Investigations also stated that, ``[a]s a general matter, the 
OCC does not recommend or encourage banks to engage in the 
wholesale termination of categories of customer accounts. 
Rather, we expect banks to assess the risks posed by individual 
customers on a case-by-case basis and to implement appropriate 
controls to manage each relationship.''\2\
---------------------------------------------------------------------------
    \1\ Remarks by Comptroller of the Currency Thomas J. Curry before 
the Association of Anti-Money Laundering Specialists, March 17, 2014.
    \2\ Testimony of Daniel P. Stipano before the Subcommittee on 
Oversight and Investigations, July 15, 2014.
---------------------------------------------------------------------------
    The OCC also publishes a quarterly summary for all national 
banks and Federal savings associations of all significant 
speeches, testimony, and bulletins to ensure the timely 
exchange of information. We continue to use this vehicle to 
underscore our position on acceptable risk management practices 
and supervisory expectations.
    In addition to our public statements, we continue to 
reinforce previous policy publications that provide appropriate 
and relevant guidance to the industry and our examiners. The 
OCC's Payment Processor Risk Management Guidance (OCC Bulletin 
2008-12) was issued in April 2008, and this guidance is still 
appropriate and relevant. The guidance outlines the OCC's 
expectations for how national banks and Federal thrifts should 
manage the risks associated with payment processors. Together 
with our Risk Management Guidance on automated clearing house 
(ACH) activities (OCC Bulletin 2006-39), issued in September 
2006, we have provided the industry with foundational guidance 
for appropriate payment risk management.
    The OCC recently issued a Statement on Banking Money 
Services Businesses (MSBs). The Statement reaffirms our 
expectations regarding the providing of banking services to 
MSBs. The Statement reiterates our longstanding position that 
banks should assess the risks posed by individual customers on 
a case-by-case basis, and implement appropriate controls to 
manage these relationships commensurate with the risks 
associated with their customers. It further states that, as a 
general matter, the OCC does not direct banks to open, close, 
or maintain individual accounts, nor do we encourage banks to 
engage in the wholesale termination of categories of customer 
accounts without regard to the risk, presented by the 
individual customer, or the bank's ability to manage the risk.
    Finally, as a part of our ongoing examiner training 
efforts, we continue to re-emphasize that higher risk in the 
banking sector does not mean unacceptable or unmanageable risk. 
We stress to our examiners during their training that if a bank 
has higher risk products, services, and customers, the quality 
of the bank's risk management should be commensurate with the 
risk level of the institution. This message is critical to the 
supervision of our industry and cannot be overstated. To that 
end, in September 2014, we held a nationwide Knowledge Sharing 
Call, to discuss emerging risks related to BSA/AML and to 
reinforce our risk management supervisory expectations with our 
examination staff.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM TONEY 
                             BLAND

Q.1. The Independent Community Banks of America recently 
delivered to you a petition from their members. The petition 
requests relief from filing the long form call report every 65 
days. In order to reduce the staff time and research necessary 
to file these reports every quarter, ICBA recommends that 
highly rated community banks be allowed to submit short form 
call reports in the 1st and 3rd quarters and long form call 
reports in the 2nd and 4th quarters. Is this a viable option 
that you could implement? If so, why not do it? If not, why 
not?

A.1. The OCC is mindful that both existing and new regulatory 
reporting requirements have the potential to create regulatory 
burden, especially on smaller financial institutions. 
Therefore, where possible, the OCC seeks to reduce this 
regulatory burden, as well as provide guidance and resources 
for community banks to reduce the complexity in regulatory 
reporting.
    OCC staff has met with representatives from the ICBA to 
discuss their concerns about regulatory reporting burden and 
their proposal for a short-form call report. In response to the 
concerns raised by the ICBA and others, the OCC and other 
members of the FFIEC are exploring steps that could be taken to 
lessen regulatory reporting requirements for community banks, 
including a possible short-form report as recommended by the 
ICBA. Our objective will be to provide meaningful regulatory 
relief, while still meeting the OCC's minimum data needs to 
maintain safety and soundness. As this work moves forward, the 
OCC and other members of the FFIEC plan to continue the 
dialogue with the ICBA and other interested parties and to 
publish any proposed changes for notice and comment.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM LARRY FAZIO

Q.1. As I highlighted in the hearing, increased regulatory 
burden on small depository institutions is concerning, 
especially in light of the fact that we have lost approximately 
one-half of our banks and credit unions in the last 25 years. 
Is your agency prepared to do an empirical analysis of the 
regulatory burden on small entities in addition to the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) 
review? If so, what specific steps can your agency take to 
ensure that such empirical analysis is comprehensive and 
meaningful? If not, please explain why not.

A.1. NCUA is ever mindful of the impact of regulation on small 
credit unions, and we are proactive in our efforts to identify 
outdated, ineffective, unnecessary, or excessively burdensome 
regulation. We then take steps to eliminate or ease those 
burdens, consistent with safety and soundness.
    As part of NCUA's voluntary participation in the EGRPRA 
review, NCUA will evaluate the burden on small entities for 
those regulations within NCUA's control. However, NCUA has no 
authority to provide regulatory relief from requirements under 
the Bank Secrecy Act and anti-money laundering laws imposed by 
other Federal agencies.
    The agency's existing efforts to address regulatory burden 
go beyond our voluntary participation in the EGRPRA review. For 
example, it is NCUA's long-standing regulatory policy to 
conduct a rolling review of one-third of the agency's 
regulations each year so that the agency reviews all of its 
regulations at least once every 3 years. Similar to EGRPRA, 
this policy opens NCUA regulations to public review and comment 
and is designed to help the agency identify opportunities to 
streamline, modernize, or even repeal regulations when 
appropriate.
    More recently, under NCUA Board Chairman Matz, the agency 
also has undertaken a Regulatory Modernization Initiative that 
aims to reduce regulatory burdens and synchronize the agency's 
rules with the modern marketplace. As part of this initiative, 
NCUA took perhaps its biggest step toward easing the regulatory 
burden on small institutions by amending the definition of 
``small entity'' from a threshold of less than $10 million in 
assets to less than $50 million in assets. The process of 
raising this small credit union threshold involved an empirical 
review of the activities, balance sheet composition, and cost 
structures of credit unions by size, as well as thoughtful 
consideration of comments received throughout the rulemaking 
process. As a result, today, more than 4,000 credit unions 
(approximately 65 percent of the industry) qualify for 
regulatory relief under this new threshold.
    In addition to reducing the regulatory burden on small 
credit unions, NCUA is committed to helping them succeed. In 
2004, the agency established the Office of Small Credit Union 
Initiatives to foster credit union development and deliver 
financial services for small, new, and low-income credit 
unions. Today, the office offers training, consulting, grants, 
loans, and valuable partnership and outreach to thousands of 
small credit unions.

Q.2. In June, Chairman Johnson and I expressed concerns about 
the amount of new capital that could be needed under the NCUA's 
proposal on risk-based capital, and the rule's impact on credit 
unions in rural communities like those in Idaho and South 
Dakota. How will the proposed rule affect credit unions in 
small communities and rural communities? What areas of the 
proposed rule is the NCUA looking to adjust in light of the 
comments received?

A.2. Following the comment period on the risk-based capital 
proposal during which NCUA received more than 2,000 comment 
letters, NCUA Board members publicly expressed a willingness to 
reconsider the risk weights in several asset categories, 
including agricultural and member business loans. Chairman Matz 
also made statements in official correspondence to Members of 
the Senate Banking Committee and others in Congress expressing 
her commitment to carefully examine how the rule might affect 
availability of credit for consumers, home buyers, family 
farmers and small businesses in rural areas and underserved 
communities.
    However, the rule as originally proposed and any potential 
changes to it will not go forward. After the hearing, Chairman 
Matz announced her intention to issue a revised proposed rule 
for a new comment period rather than go forward with the 
issuance of a final rule.
    The decision was reached as the final proposal began to 
take shape. As staff reviewed changes being contemplated, they 
noted potential concerns with Administrative Procedure Act 
compliance as a result of significant structural changes being 
considered. Subsequently, Chairman Matz determined that it 
would be prudent to issue a revised proposed rule for public 
comment.
    Based on stakeholder comments on the initial proposed rule, 
the amended proposal will include a longer implementation 
period and revised risk weights for mortgages, investments, 
member business loans, credit union service organizations and 
corporate credit unions, among other changes. Stakeholders will 
also be invited to comment on an alternative approach for 
addressing interest rate risk.

Q.3. What specific compliance challenges do your members face 
in preparation for the new capital structure as proposed by the 
NCUA? How can your members mitigate some of those challenges? 
If the risk-based capital proposal gets finalized as-is, will 
credit unions and their members face higher cost and lesser 
availability of credit as a result?

A.3. One of NCUA's primary goals in drafting the proposed rule 
was to minimize compliance challenges by relying primarily on 
data already collected on the Call Report to calculate a credit 
union's risk-based capital ratio. As initially proposed, the 
rule would have required the collection of some additional 
data, but the agency determined this change did not represent a 
material increase to the burden of completing the Call Report.
    By excluding small, noncomplex credit unions (those with 
assets less than $50 million) from the proposed rule's 
requirements and looking at the current make-up of the 
industry, NCUA was able to determine that only 3 percent of all 
credit unions (or 199 credit unions) would be reclassified 
according to their net worth and subject to prompt corrective 
action.
    The Board recognizes the importance of giving these credit 
unions ample time to make the changes necessary to achieve 
their desired classification--accumulate additional capital or 
reduce portfolio risk--and to update their internal systems, 
policies, and procedures to account for these changes. The 
agency received many comments from the public on this issue and 
the Board has signaled that it will reconsider the length of 
the implementation period to ensure credit unions have adequate 
time to improve their prompt correction action classifications. 
When the Board issues a revised proposed rule for a new comment 
period, the implementation period will be longer than the 18 
months initially proposed.
    The NCUA Board both understands and shares the policy 
objective of ensuring continued prudent lending to support the 
Nation's economy. Prior to announcing the intent to issue a 
revised proposed rule for a new comment period, all of our 
analysis indicated that a small minority of credit unions would 
need to adjust their business plans in response to the revised 
regulation. The agency has aimed and will continue to endeavor 
to mitigate any potential impact on the cost or availability of 
credit to consumers and businesses served by those credit 
unions by providing them with sufficient time to improve their 
prompt corrective action classification.
    Ensuring that credit unions hold sufficient capital to 
withstand reasonable economic shocks is fundamental to ensuring 
the safety and soundness of the credit union system. Sufficient 
capital at each federally insured credit union, combined with 
the strength of the National Credit Union Share Insurance Fund, 
will protect 98 million credit union members from losses and 
contribute to the overall stability of the economy.

Q.4. Since 1990 more than half of all credit unions--roughly 
6,000 institutions--have disappeared. In your experience, what 
role has regulatory burden played in credit unions' decisions 
to merge or cease operations?

A.4. Much of the decline since 1990 is the result of voluntary 
mergers between credit unions, so while a credit union may 
``disappear'' in name, the result is often a larger, stronger 
credit union that can offer more or better services to a larger 
field of membership.
    In my experience, a credit union is often motivated to 
merge or forced to cease operations because it lacks the 
resources to manage a range of internal and external 
challenges. The evolution of regulation burdens may be one of 
these challenges, but the most common reasons for a merger or 
closure are:

   LThe retirement of a long-term CEO and the lack of a 
        succession plan.

   LAn aging or declining field of membership resulting 
        in stagnant or declining growth.

   LPoor management decisions, insufficient internal 
        controls, or employee fraud.

    Because nearly two-thirds of the credit union system is 
comprised of ``small entities'' with less than $50 million in 
assets, mergers are common. To decrease the likelihood of 
mergers, NCUA's Office of Small Credit Union Initiatives offers 
a wide variety of programs to assist small credit unions. To 
help viable small credit unions thrive, 28 NCUA staff offer 
individualized consulting, loan and grant opportunities, 
targeted training, and valuable partnership and outreach on 
strategic management and operational issues. These efforts are 
in addition to the agency's concerted efforts to reduce the 
regulatory and supervisory burdens for small credit unions, 
whenever possible and consistent with safety and soundness.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM LARRY 
                             FAZIO

Q.1. NCUA's proposed risk-based capital rule contains a 
provision allowing NCUA to impose individual minimum capital 
requirements on a credit union. This section of the proposal 
also states that: ``The appropriate minimum capital levels for 
an individual credit union cannot be determined solely through 
the application of a rigid mathematical formula or wholly 
objective criteria. The decision is necessarily based, in part, 
on subjective judgment grounded in agency expertise.'' What 
role do you foresee individual examiners and their 
recommendations playing in the assessment of these individual 
minimum capital requirements in any final rule?

A.1. As mentioned in the response to Senator Crapo, NCUA is not 
moving forward with the existing proposed risk-based capital 
rule. Instead, NCUA will issue a revised proposed rule for a 
new comment period.
    As initially proposed, the risk-based capital rule did not 
grant new authority to NCUA to impose minimum capital 
requirements on individual credit unions. Part 702 of NCUA's 
prompt corrective action regulations prescribes certain 
mandatory and discretionary supervisory action that the NCUA 
Board is permitted to take against a credit union that is 
adequately capitalized, undercapitalized, significantly 
undercapitalized, or critically undercapitalized.
    The proposed rule did not expand or otherwise change this 
authority; it simply set forth the process NCUA would use to 
require an individual credit union to hold higher levels of 
risk-based capital to address unique supervisory concerns.
    The NCUA Board recognizes the impact an individual minimum 
capital requirement could have on a credit union and applies a 
very high duty of care and review to any such action. NCUA must 
provide notice and give the credit union an opportunity to 
respond before imposing a higher capital requirement. This 
requirement would also be subject to appeal and could not be 
imposed by an individual examiner. Instead, the authority would 
be reserved for the NCUA Board.
    The role of the examiner does not change under the proposed 
risk-based capital rule. NCUA examiners are responsible for 
classifying the credit unions they examine according to their 
levels of capital and for communicating that classification to 
the credit unions and the appropriate offices within the 
agency. Any action taken in response to the deterioration of a 
credit union's capital level is prescribed by the rule, not the 
individual examiner.

Q.2. NCUA is charged by Congress to oversee and manage the 
National Credit Union Share Insurance Fund (NCUSIF), the 
Temporary Corporate Credit Union Stabilization Fund, the 
Central Liquidity Fund, and its annual operating budget. These 
funds are comprised of monies paid by credit unions. Currently, 
NCUA publicly releases general financial statements and 
aggregated balance sheets for each fund. However, the agency 
does not provide non-aggregated breakdowns of the components 
that go into the expenditures from the funds. Why doesn't the 
agency provide greater disclosure of the nonaggregated amounts 
disbursed and allocated for each fund?

A.2. NCUA financial statements and footnote disclosures are 
presented as required by Generally Accepted Accounting 
Principles (GAAP) as evidenced by all funds receiving a clean 
audit opinion from the independent auditor. Detailed 
expenditure information is presented on the face of the 
financial statements for the Operating Fund, Central Liquidity 
Facility, and Community Development Revolving Loan Fund.
    For the Share Insurance Fund, expenditure data is 
aggregated within the principal financial statements as 
required by GAAP, but more detailed information can be found 
within the financial statement disclosures. For example, on the 
face of the 2013 Share Insurance Fund's Statement of Net Cost, 
an aggregate balance is presented for operating expenses. 
However, within the financial statement footnotes, operating 
expenses are detailed by the following specific line item 
categories: employee salaries; employee benefits; employee 
travel; contracted services; administrative costs; and rent, 
communication, and utilities. The 2013 audited financial 
statements can be found on the agency's Web site.\1\
---------------------------------------------------------------------------
    \1\ See http://go.usa.gov/wWfA.
---------------------------------------------------------------------------
    In addition to preparing audited annual financial 
statements for each fund, the agency presents its annual budget 
proposal to the NCUA Board at the November open Board meeting. 
NCUA formulates the agency's operating budget using zero-based 
budgeting techniques in which every expense is justified each 
year. Once approved, the operating budget is subsequently 
adjusted at the open Board meeting each July based on a mid-
year financial analysis.
    A portion of the Operating Budget is reimbursed from the 
Share Insurance Fund through the Overhead Transfer Rate. The 
share of the Operating Budget paid for by the Share Insurance 
Fund is also presented to the Board for approval at the open 
November Board meeting.
    Budgetary materials presented at the Board meetings and 
other explanatory budgetary materials are available to the 
public on the agency's Web site.\2\
---------------------------------------------------------------------------
    \2\ See http://go.usa.gov/wWGB.
---------------------------------------------------------------------------
    The Temporary Corporate Credit Union Stabilization Fund 
follows a similar budget formulation and presentation process 
with its annual budget presented to the Board at the December 
open Board meeting. Materials presented to the Board related to 
the 2014 budget are found on the NCUA's Web site.\3\
---------------------------------------------------------------------------
    \3\ See http://go.usa.gov/wWGQ.
---------------------------------------------------------------------------
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MORAN FROM LARRY FAZIO

Q.1. NCUA's risk-based capital proposal requires a credit 
union, upon receiving notice from the NCUA that they intend to 
impose individual minimum capital requirements, to provide a 
response to NCUA explaining why the credit union does not feel 
the individual minimum capital is appropriate. The proposal 
allows the credit union to request the NCUA Ombudsman to 
provide a recommendation to the NCUA. However, there appears to 
be no independent appeals process for the credit union to 
pursue. Essentially, the credit union is required to protest 
the requirement to the same body who intends to impose them in 
the first place. Why is there no independent appeals process 
for these individual minimum capital requirements?

A.1. Any decisions to impose minimum capital requirements on 
individual credit unions will be made solely in the interest of 
protecting the safety and soundness of the National Credit 
Union Share Insurance Fund. NCUA alone is responsible for the 
Share Insurance Fund and, therefore, has not instituted a 
process for appealing capital requirements to an independent 
third party.
    The power to impose an individual minimum capital 
requirement, which NCUA has never used, is included in the 
agency's current risk-based net worth rule and is consistent 
with the Basel Capital accords. The Federal Deposit Insurance 
Corporation has also long maintained this authority, and NCUA 
used the FDIC's rule as a basis for the proposed rule.
    As initially proposed, the proposed risk-based capital rule 
would improve the transparency around the process by which a 
minimum capital requirement would be imposed. The initial 
proposed rule demonstrates that there is ample opportunity for 
a credit union to appeal or protest such a requirement. Under 
the proposed rule, a credit union would have the opportunity 
to:

   LExplain its objection to the individual minimum 
        capital requirement.

   LRequest a modification to the requirement.

   LProvide documentation, evidence, or mitigating 
        circumstances it wants NCUA to consider in deciding 
        whether to establish or amend the requirement.

   LRequest a review and recommendation from the NCUA's 
        Ombudsman.

    The NCUA Ombudsman, which was established by the NCUA Board 
in 1995 to investigate complaints and recommend actions, is 
independent from other agency operations and reports directly 
to the NCUA Board. In the context of Board-imposed individual 
minimum capital requirements, the Ombudsman will help the 
complainant define options and will recommend actions to the 
parties involved, but cannot at any time decide on matters in 
dispute or advocate the position of the complainant, NCUA, or 
other parties.

Q.2. Do you intend to include an independent appeals process in 
any final rule?

A.2. For the reasons stated above, the NCUA Board seems 
unlikely at this time to institute an independent appeals 
process in the final rule.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM CHARLES A. 
                              VICE

Q.1. The Federal regulators are undertaking an EGRPRA review of 
outdated, unnecessary and overly burdensome regulations. The 
State regulators are a part of that review through their 
representative's seat at the FFIEC. What specific steps will 
State regulators undertake to ensure that this EGRPRA review 
produces meaningful results with positive consequences for 
small entities?

A.1. The Economic Growth and Regulatory Paperwork Reduction Act 
(``EGRPRA'') requires the Federal prudential banking agencies 
and FFIEC to identify outdated, unnecessary, or unduly 
burdensome regulations every 10 years. This process presents an 
opportunity for Federal regulators to identify regulatory 
challenges facing financial institutions, an important step 
that must be taken to right-size regulations for community 
banks.
    State regulators are represented at the FFIEC by the State 
Liaison Committee (``SLC''), the Chairman of which has a voting 
seat on the Council. The SLC, with the help of CSBS, has 
encouraged community bankers across the country to engage in 
the EGRPRA comment process to best position the FFIEC to 
identify laws and regulations that are not suitable for the 
community bank business model. As a part of the process, the 
SLC and other State regulators are committed to participating 
in industry outreach meetings to garner broad input on what 
works and what needs to be changed.
    While CSBS supports the current EGRPRA process, gathering 
information is meaningless if the information is not analyzed 
and used to develop implementable action plans. Accordingly, 
the SLC will evaluate public comments submitted during the 
process to help identify specific areas of laws and regulations 
which are outdated, necessary and overly burdensome with 
respect to the community banking business model.
                                ------                                


   RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM DENNIS 
                             PIERCE

Q.1. The Privacy Notices Modernization Act, S. 635, was 
introduced by Sen. Sherrod Brown and myself to relieve 
financial institutions of the annual requirement that their 
privacy policy disclosures be physically mailed to their 
customers. This legislation is supported by 74 Senators in 
addition to Senator Brown and myself. Consumer Financial 
Protection Bureau Director Richard Cordray has testified that 
this annual mailing requirement may be an area where the cost 
of compliance outweighs the benefit to the consumer. Building 
upon that, the CFPB has begun a rulemaking in an attempt to 
address this issue. However, I remain unconvinced that the CFPB 
will be able to fully address the issue without a modification 
of the statute. Would you please elaborate on the CFPB's 
attempt to address this issue? Would you please also share 
whether S. 635 would provide the actual relief intended by the 
supporters of this bill?

A.1. CUNA supports S. 635, the Privacy Notices Modernization 
Act. We appreciate the strong support for this legislation. 
This legislation will provide regulatory relief to financial 
institutions, including credit unions, by exempting them from 
annual privacy notice requirements when certain conditions are 
met.
    As you note, 74 Senators have cosponsored the legislation; 
we believe the bill has the support of nearly every Senator. 
Companion legislation (H.R. 749) passed the House of 
Representatives in 2013 by voice vote. This legislation is an 
example of the vast majority of Senators and Representatives 
coming together on a bipartisan basis to support legislation 
that both reduces regulatory burden and enhances consumer 
protection. S. 635 would make the privacy notices consumers 
receive more meaningful to consumers because they would be sent 
only when a financial institution changes its privacy policy. 
This is commonsense legislation, which is why nearly every 
Senator and Representative supports the bill.
    You have asked me to elaborate on our views of the proposal 
by the Consumer Financial Protection Bureau (CFPB) on this 
matter. While we generally support the CFPB's proposal as a 
step in the right direction, the legislation remains important 
for several reasons and we strongly encourage its enactment.
    Under the CFPB's proposal, credit unions and other 
financial institutions would be permitted to post privacy 
notices online instead of delivering them to member/customers 
if an institution meets certain conditions: (1) the institution 
does not share information with nonaffiliated third parties 
except for purposes covered by the exclusions allowed under 
Regulation P; (2) the institution does not include on its 
annual privacy notice an opt out under the Fair Credit 
Reporting Act (FCRA); (3) the annual privacy notice is not the 
only method used to satisfy the requirements of the FCRA; (4) 
key information on the annual privacy notice has not changed 
since the institution provided the immediately previous privacy 
notice; and (5) the institution uses the Regulation P model 
form for its annual privacy notice.
    Although the proposal is a step in the right direction, we 
feel it is more prescriptive than it needs to be. Without the 
enactment of S. 635, we are not certain that the Bureau will 
modify its proposal. Even still, enactment of S. 635 is 
preferable because it would provide immediate relief, with no 
requirement on the CFPB issue a rule in order for institutions 
to take advantage of the provisions of the legislation.
    Finally, we do not think changes to S. 635 are needed, 
although legislative history making it clear to the CFPB that 
it should not use any discretionary authority to impose 
additional conditions on financial institutions would be 
helpful.
    We appreciate your support for S. 635 and look forward to 
working with you to secure its enactment.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM LINDA 
                            McFADDEN

Q.1. What specific compliance challenges do your members face 
in preparation for the new capital structure as proposed by the 
NCUA? How can your members mitigate some of those challenges? 
If the risk-based capital proposal gets finalized as-is, will 
your members and their members face higher cost and lesser 
availability of credit as a result?

A.1. The biggest challenge facing XCEL FCU today is NCUA's 
risk-based capital proposal. Capital requirements should not be 
a substitute for proper credit union management or appropriate 
examinations. The proposal, as it is written, would negatively 
impact XCEL FCU, taking us from a well-capitalized credit union 
to adequately capitalized. This proposal will be putting 
restraints on the growth of credit union and will restrict XCEL 
from implementing products and programs which are needed to 
compete in the financial industry. Reducing assets and cutting 
expenses to gain capital is not the solution for safety and 
soundness of the insurance fund. Running a fundamentally sound 
financial institution, while providing our members with the 
best products and services, and the latest technology is a 
necessity to keep us viable in this industry for generations to 
come.
    This ongoing issue is of the utmost importance to credit 
unions of all sizes and the one-size-fits-all approach 
currently being taken by NCUA will stifle growth, innovation 
and diversification, not only at XCEL, but at credit unions in 
general.
    The proposed rule will force XCEL's board and management to 
change our business model even though we have had steady 
balanced growth with good solid returns over the past few 
years. We have developed a sound concentration risk policy and 
set limits on our diversified loan and investment portfolio. 
This proves that our credit union has been managing this 
portion of the business well for years. If the NCUA continues 
forward without heeding current concerns on the proposal, XCEL 
would need to email certain aspects of our lending, ultimately 
hiring our members and the local economy.
    NAFCU's Economics and Research department's analysis of the 
proposed rule determined that credit unions with more than $50 
million in assets will have to hold $7.1 billion more in 
additional reserves to achieve the same capital cushion levels 
that they currently maintain. While NCUA contends that a lower 
amount of capital is actually needed to maintain current 
capital levels, the agency ignores the fact that most credit 
unions maintain a capital cushion above the minimum needed for 
their level--often because NCUA's own examiners have encouraged 
them to do so. Because credit unions cannot raise capital from 
the open market like other financial institutions, this cost 
will undoubtedly be passed on to the 98 million credit union 
members across the country. A survey of NAFCU's membership 
taken found that nearly 60 percent of respondents believe the 
proposed rule would force their credit union to hold more 
capital, while nearly 65 percent believe this proposal would 
force them to realign their balance sheet. Simply put, if the 
NCUA implements this rule as proposed, credit unions will have 
less capital to loan to creditworthy borrowers, whether for a 
mortgage, auto, or business loan.
    Attached for your reference is XCEL's comment letters to 
the NCUA on the agency's prompt corrective action/risk-based 
capital proposal.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Q.2. Since 1990 more than half of all credit unions--roughly 
6,000 institutions--have disappeared. In your experience, what 
role has regulatory burden played in credit unions' decisions 
to merge or cease operations?

A.2. Credit unions have a long track record of helping the 
economy and making loans when other lenders often have left 
various markets. This was evidenced during the recent financial 
crisis when credit unions kept making auto loans, home loans, 
and small business loans when other lenders cut back. Still, 
credit unions have always been some of the most highly 
regulated of all financial institutions, facing restrictions on 
who they can serve and their ability to raise capital. Credit 
unions continue to play a crucial role in the recovery of our 
Nation's economy.
    Credit unions remain a relatively small part of the 
marketplace when compared to the banking industry. They are 
oftentimes a lender of last resort for consumers that have been 
denied credit via other financial institutions.
    Today, credit union lending continues to grow at a solid 
pace, up about 14 percent in March compared to 2009. In short, 
credit unions didn't cause the financial crisis, helped blunt 
the crisis by continuing to lend during difficult times, and 
perhaps most importantly, continue to play a key role in the 
still fragile economic recovery. Although credit unions 
continue to focus on their members, the increasing complexity 
of the regulatory environment is taking a toll on the credit 
union industry. While NAFCU and its member credit unions take 
safety and soundness extremely seriously, the regulatory 
pendulum post-crisis has swung too far toward an environment of 
overregulation that threatens to stifle economic growth.
    During the consideration of financial reform, NAFCU was 
concerned about the possibility of overregulation of good 
actors such as credit unions, and this was why NAFCU was the 
only credit union trade association to oppose the CFPB having 
rulemaking authority over credit unions. Unfortunately, many of 
our concerns about the increased regulatory burdens that credit 
unions would face under the CFPB have proven true. While there 
are credible arguments to be made for the existence of a CFPB, 
its primary focus should be on regulating the unregulated bad 
actors, not adding new regulatory burdens to good actors like 
credit unions that already fall under a functional regulator. 
As expected, the breadth and pace of CFPB rulemaking is 
troublesome, and the unprecedented new compliance burden placed 
on credit unions has been immense. While it is true that credit 
unions under $10 billion are exempt from the examination and 
enforcement from the CFPB, all credit unions are subject to the 
rulemakings of the agency and they are feeling this burden. 
While the CFPB has the authority to exempt certain 
institutions, such as credit unions, from agency rules, they 
have been lax to use this authority to provide relief.
    As noted in your question, the impact of this growing 
compliance burden is evident as the number of financial 
institutions continues to decline. Nearly 21 percent of all 
credit unions (more than 1,600) have gone away since 2007. A 
main reason for the decline is the increasing cost and 
complexity of complying with the ever-increasing onslaught of 
regulations. Since the 2nd quarter of 2010, we have lost 957 
federally insured credit unions, 96 percent of which were 
smaller institutions below $100 million in assets. Many smaller 
institutions simply cannot keep up with the new regulatory tide 
and have had to merge out of business or be taken over.
    This growing demand on credit unions is demonstrated by a 
2011 NAFCU survey of our membership that found that nearly 97 
percent of respondents were spending more time on regulatory 
compliance issues than they did in 2009. A 2012 NAFCU survey of 
our membership found that 94 percent of respondents had seen 
their compliance burdens increase since the passage of the 
Dodd-Frank Act in 2010. Furthermore, a March 2013 survey of 
NAFCU members found that nearly 27 percent had increased their 
full-time equivalents (FTEs) for compliance personnel in 2013, 
as compared to 2012. That same survey found that over 70 
percent of respondents have had noncompliance staff members 
take on compliance-related duties due to the increasing 
regulatory burden. This highlights the fact that many 
noncompliance staff are being forced to take time away from 
serving members to spend time on compliance issues. 
Furthermore, a number of credit unions have also turned to 
outside vendors to help them with compliance issues--a survey 
of NAFCU members, conducted in June of 2014, found that nearly 
80 percent of respondents are using third-party vendors to help 
comply with the new CFPB TILA-RESPA requirements.
    At XCEL FCU we have felt the pain of these burdens as well. 
There are costs incurred each time a rule is changed and most 
costs of compliance do not vary by size, therefore it is a 
greater burden on smaller credit unions like mine when compared 
to larger financial institutions. We are required to update our 
forms and disclosures, to reprogram our data processing systems 
and to retrain our staff each time there is a change, just as 
large institutions are. Unfortunately, lending regulation 
revisions never seem to occur all at once. In recent years, 
XCEL FCU has spent over $13,000 just to update our loan 
documents and train our staff on these new documents. If all of 
the changes were coordinated and were implemented at one time, 
these costs would have been significantly reduced and a 
considerable amount of XCEL FCU's resources that were utilized 
to comply could have been used to benefit our members instead.
    In some cases, our ability to provide service to our 
members has been hindered. For example, XCEL FCU eliminated 
processing outgoing international wires and ACHs due to the 
complexity of the revised remittance regulations that were 
implemented. We felt the risk and compliance requirements 
involved with providing these services were excessive.
    In 2013, the CFPB implemented eight new mortgage rules, 
seven of which were finalized in October 2013 and were 
effective by January 2014. A majority of credit unions are 
small financial institutions like mine which operate with a 
limited staff. It is a struggle to keep abreast with the 
constantly changing regulations. Tracking the proposals and the 
changes made to them as they work through the regulatory 
process began to monopolize my senior management's time. 
Timeframes between when the rules are being finalized and are 
effective are often becoming shorter and shorter. These shorter 
periods do not provide ample time to read through these rules 
to ensure that we stay in compliance. This is one of the 
reasons that I found it necessary to hire an additional staff 
person to work as a Compliance Officer, so that my senior 
management staff can concentrate on other responsibilities that 
they have. This cost is an additional $50,000 in salary and 
benefits.
                                ------                                


   RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM LINDA 
                            McFADDEN

Q.1. The Privacy Notices Modernization Act, S. 635, was 
introduced by Sen. Sherrod Brown and myself to relieve 
financial institutions of the annual requirement that their 
privacy policy disclosures be physically mailed to their 
customers. This legislation is supported by 74 Senators in 
addition to Senator Brown and myself. Consumer Financial 
Protection Bureau Director Richard Cordray has testified that 
this annual mailing requirement may be an area where the cost 
of compliance outweighs the benefit to the consumer. Building 
upon that, the CFPB has begun a rulemaking in an attempt to 
address this issue. However, I remain unconvinced that the CFPB 
will be able to fully address the issue without a modification 
of the statute. Would you please elaborate on the CFPB's 
attempt to address this issue? Would you please also share 
whether S. 635 would provide the actual relief intended by the 
supporters of this bill?

A.1. Thank you for this important question. NAFCU and its 
member credit unions support the bipartisan legislation 
introduced by Sen. Brown and yourself that would remove the 
requirement that financial institutions send redundant paper 
annual privacy notices if they do not share information and 
their policies have not changed, provided that they remain 
accessible elsewhere. These duplicative notices are costly for 
the financial institution and often confusing for the consumer 
as well.
    As you know, similar legislation has passed the House by 
voice vote and this legislation has over 74 cosponsors in the 
Senate. We strongly encourage the Senate to pass this small 
measure of relief this year.
    As noted in your question above, earlier this year the 
Consumer Financial Protection Bureau proposed changes to 
Regulation P in regards to annual privacy notices. The proposed 
rule revises Regulation P, implementing section 503 of the 
Gramm-Leach-Bliley Act (GLBA) to provide an alternative 
delivery method for annual privacy notices under certain 
conditions. NAFCU appreciates the CFPB taking an important step 
to achieving the goal of improved annual privacy notice 
requirements especially as a legislative solution remains 
elusive. Still, as discussed below, NAFCU believes that 
legislative action and certain adjustments are necessary to the 
CFPB proposal to provide the necessary clarity and relief that 
the CFPB is attempting to achieve through the proposal.
    GLBA requires financial institutions and a wide variety of 
other businesses to issue privacy disclosure notices to 
consumers. The notices must be ``clear and conspicuous'' and 
disclose in detail the institution's privacy policies if it 
shares customers' nonpublic personal information with 
affiliates or third parties. The law also requires telling 
existing and potential customers of their right to opt out of 
sharing nonpublic personal information with third parties. Such 
disclosures must take place when a customer relationship is 
first established and annually in paper form as long as the 
relationship continues even if no changes have occurred. This 
proposal would change these annual privacy notice requirements 
for financial institutions that do not engage in information 
sharing activities for which their customers have the right to 
opt out. Specifically, it would allow such financial 
institutions to post their annual privacy notices online rather 
than delivering them individually.
    Under the proposal, a credit union would be allowed to post 
its privacy notice online rather than mailing the notice, if it 
meets the following conditions: (i) it does not share the 
customer's nonpublic personal information with nonaffiliated 
third parties in a manner that triggers GLBA opt-out rights; 
(ii) it does not include on its annual privacy notice 
information about certain consumer opt-out rights under section 
603 of the Fair Credit Reporting Act (FCRA); (iii) it's annual 
privacy notice is not the only notice provided to satisfy the 
requirements of section 624 of the FCRA; (iv) the information 
included in the privacy notice has not changed since the 
customer received the previous notice; and (v) it uses the 
model form provided in GLBA implementing Regulation P.
    Credit unions that choose to rely on this new method of 
delivering privacy notices would also be required to: (i) 
convey at least annually on another notice or disclosure that 
their privacy notice is available on its Web site and will be 
mailed upon request to a toll-free number. This notice or 
disclosure would have to include a specific Web address that 
takes the customer directly to the privacy notice; (ii) post 
their current privacy notice continuously on a page of its Web 
site that contains only the privacy notice, without requiring a 
login or any conditions to access the page; and (iii) promptly 
mail their current privacy notice to customers who request it 
by telephone.
    NAFCU strongly supports the CFPB's proposal to allow the 
posting of privacy notices online under certain conditions 
because we believe it will significantly reduce regulatory 
burden without impacting consumers' ability to access their 
privacy policies. NAFCU continues to hear from our members that 
annual privacy notices provide little benefit, especially when 
there has been no change in policy or if customers have no 
right to opt out of information sharing because the credit 
union does not share nonpublic personal information in a way 
that triggers such rights. Instead, the mailed privacy notices 
are often a source of confusion to consumers. Furthermore, they 
represent an unproductive expense for credit unions that could 
be better directed toward serving consumers. Accordingly, NAFCU 
and our members believe that the proposed alternative delivery 
method will allow consumers to be informed regarding their 
financial institution's privacy policy without being inundating 
with redundant information. For those consumers who wish to 
read their annual privacy notices, NAFCU believes the notices' 
availability on the Web site and by mail, upon request, will 
appropriately meet consumers' needs in an efficient and cost 
effective manner for credit unions.
    NAFCU appreciates the Bureau's efforts to ease the annual 
privacy notice requirements. However, it urges the CFPB to 
allow credit unions to tailor Regulation P's Model Privacy 
Notice to fit their individual policies and circumstances. 
Although many credit unions, like other financial institutions, 
use Regulation P's model form, they often slightly modify it to 
fit their memberships' specific circumstances. Under the 
proposal, however, using the Model Privacy Notice would become 
a requirement for credit unions seeking to post their privacy 
notices online. Because the proposal is unclear as to whether 
and to what extent a credit union could modify the Model 
Privacy Notice and still qualify for the alternative delivery 
method, NAFCU and its members would like additional assurances 
that this condition, if adopted, would allow credit unions to 
vary the model form in manners that comply with Regulation P.
    While NAFCU strongly supports the proposed alternative 
delivery method, we question whether some of the proposal's 
stipulated conditions for posting privacy notices online are 
appropriate. NAFCU believes it is inappropriate to require 
credit unions to maintain a toll-free number for customers to 
call and request that a hard copy of the annual notice be 
mailed to them. A number of NAFCU's members do not currently 
have a toll-free number and requiring one for the purpose of 
this proposal would impose a significant burden. Because credit 
unions invest significant time and energy toward member 
service, NAFCU and our members do not object to a requirement 
of providing paper copies of the annual privacy notice upon 
request. We do, however, object to a requirement that would 
mandate credit unions to bear additional, unnecessary costs. 
Credit unions should be given the flexibility to develop 
reasonable means appropriate for their specific memberships by 
which a consumer can request a copy of the annual privacy 
notice. Accordingly, NAFCU urges that the Bureau not require 
credit unions to maintain a toll-free number in order to post 
their privacy notices online. In the alternative, NAFCU 
proposes that the CFPB provide an exception from this proposed 
requirement for credit unions that do not otherwise have a 
toll-free telephone number.
    Further, NAFCU believes that the CFPB should not require 
credit unions to continuously post their privacy notices on 
their Web sites. While NAFCU understands the Bureau's intention 
of ensuring that consumers have consistent access to their 
annual privacy notices, we believe that this requirement could 
unintentionally expose credit unions to frivolous lawsuits. 
Under the proposal, credit unions that choose to post their 
annual privacy notices online would be required to post their 
current privacy notices continuously on their Web sites. This 
``continuously'' verbiage would effectively require that credit 
unions' Web site remain functional at all times. In light of 
the unique nature of cyberspace, however, this requirement is 
practically impossible. While credit unions, like all financial 
institutions and business, strive to operate and maintain their 
Web sites' constant functionality, there are sometimes internet 
disruptions that are beyond the control of Web sites' servers, 
servicers, or sponsors. By including the ``continuously'' 
verbiage, the CFPB opens up the door for malicious individuals 
to sue credit unions for minor Web site disruptions that are 
beyond their control. These frivolous lawsuits will only drive 
up operational costs, and, in turn, lead to higher costs for 
consumers. NAFCU and our members strongly recommend that the 
Bureau remove ``continuously'' from the proposal.
    Given these factors, we believe that the best solution to 
address the privacy notice issue is for the Senate to enact the 
legislation pending before it.

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