[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
__________
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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
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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
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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.
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\1\ FDIC Community Banking Study, 2012. https://www.fdic.gov/
regulations/resources/cbi/study.html.
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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.
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\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/.
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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\
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\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/.
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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.
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\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\
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\18\ For more information on EGRPRA and the regulatory review
process, see http://egrpra.ffiec.gov/index.html.
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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.
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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.
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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.
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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.
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\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.
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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.
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\12\ Available at: http://www.csbs.org/regulatory/resources/Pages/
JobAids.aspx.
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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.
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\20\ 12 U.S.C. 1812(a)(1)(C).
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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.
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\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.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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\1\ Pub. L. 111-203.
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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.
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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.
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\5\ 79 Fed. Reg. 25,730, 25746 (May 6, 2014).
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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.
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------
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.
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]