[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                 BEARING THE BURDEN: OVER-REGULATION'S 
                    IMPACT ON SMALL BANKS AND RURAL 
                              COMMUNITIES

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

                                 HEARING

                               BEFORE THE

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                              JUNE 9, 2016

                               __________
                               
                               
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 
                               

            Small Business Committee Document Number 114-064
              Available via the GPO Website: www.fdsys.gov
              
              
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
                       Jan Oliver, Chief Counsel
                  Michael Day, Minority Staff Director
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Tim Huelskamp...............................................     1
Hon. Judy Chu....................................................     2

                               WITNESSES

Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers 
  Association, Oklahoma City, OK, testifying on behalf of the 
  American Bankers Association...................................     3
Mr. Shan Hanes, President/CEO, First National Bank of Elkhart, 
  Elkhart, KS....................................................     5
Mr. Marcus Stanley, Policy Director, Americans for Financial 
  Reform, Washington, DC.........................................     8

                                APPENDIX

Prepared Statements:
    Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers 
      Association, Oklahoma City, OK, testifying on behalf of the 
      American Bankers Association...............................    21
    Mr. Shan Hanes, President/CEO, First National Bank of 
      Elkhart, Elkhart, KS.......................................    30
    Mr. Marcus Stanley, Policy Director, Americans for Financial 
      Reform, Washington, DC.....................................    37
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    CUNA - Credit Union National Association.....................    44
    ICBA - Independent Community Bankers of America..............    50
    NAFCU - National Association of Federal Credit Unions........    59

 
 BEARING THE BURDEN: OVER-REGULATION'S IMPACT ON SMALL BANKS AND RURAL 
                              COMMUNITIES

                              ----------                              


                         THURSDAY, JUNE 9, 2016

                  House of Representatives,
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                    Tax and Capital Access,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Tim Huelskamp 
[chairman of the Subcommittee] presiding.
    Present: Representatives Huelskamp, Luetkemeyer, Kelly, and 
Chu.
    Chairman HUELSKAMP. I call this hearing to order.
    It has been just about 6 years since the passage of the 
Dodd-Frank Wall Street Reform, and in that time we have seen a 
steady stream of new rules and regulations imposed upon 
financial institutions. These hundreds of rules and thousands 
of pages of regulation have been touted as necessary to secure 
financial stability, and targeting just those large 
institutions which were blamed for the financial collapse. But 
as this Committee has learned, our small community banks have 
not been spared from the regulatory burden.
    Across the country, community banks are seeing the costs of 
complying with regulations soar, and the result has been less 
capital available for the main street shop looking to expand, 
for the entrepreneur looking to start a business, and for our 
neighbors hoping to purchase a new home. The impact of 
regulation on community banks is felt especially hard in our 
country's rural areas, like my district in Kansas.
    The rising cost of regulation is causing many small banks 
to be forced to merge with larger entities that may not 
understand the local community, or causing them to shut their 
doors entirely. In rural towns without many other alternatives 
for access to capital, the results of these top-down 
regulations can be devastating and impact the whole town and 
the entire county and region. Home mortgage lending, small 
business lending, agricultural lending, all areas where 
community banks play a leading role in providing capital, 
become much more difficult and much more costly to consumers.
    Our rural communities are still feeling the harsh effects 
of the recession. During the so-called ``recovery,'' growth in 
business establishments was reserved for the big cities. From 
2010-2014, a full half of all new business were started in just 
20 of our Nation's counties, all near large metro areas. During 
that same time, most rural counties have actually seen a 
decrease in business establishments. More businesses are 
closing for good than opening up.
    At today's hearing, we will hear about the impact financial 
regulations are having on our rural communities from those who 
see it every day, including from within my home district, 
Kansas's ``Big First'' District. Discussions of financial 
reform are often centered on big cities and large institutions 
on Wall Street, but today we will hear from those areas of 
rural America, form Main Street, which can too often be 
overlooked in these conversations.
    I thank the witnesses for being here this morning, and I 
look forward to your testimony.
    I now yield to Ranking Member Chu for her opening remarks.
    Ms. CHU. Thank you, Mr. Chair.
    Just 6 years ago, our nation was in the early stages of 
recovery from one of the worst economic downturns in history. 
We lost 4 million jobs, 7 million people faced foreclosure, and 
families saw over $16 trillion in wealth disappear as the 
bottom fell out of the housing and stock markets. After taking 
extraordinary steps to stem the losses and stabilize the 
economy, Congress enacted the Dodd-Frank Act in 2010 to address 
the many loopholes that caused the collapse. The bill 
established strong new standards for the regulation of large, 
leveraged financial institutions and made the protection of 
consumers seeking mortgages and credit products a top priority.
    Dodd-Frank was directed primarily at the largest financial 
services firms and significant efforts were made to ensure that 
any new regulatory burden on the small banking community was 
properly mitigated. For example, many of the Dodd-Frank Act 
provisions only apply to institutions with over $10 billion in 
assets, leaving 98 percent of all banks in the U.S. largely 
exempt. Additionally, the Consumer Financial Protection Bureau 
has gone to great lengths to balance the burden of new 
regulations on small banks with the ultimate goal of protecting 
consumers.
    Initially, there was significant concern that regulatory 
burdens would have a negative effect on access to capital for 
small businesses, but fortunately, it appears to be having less 
impact than originally feared. According to the PayNet Small 
Business Lending Index, access to credit continues to improve 
for small businesses. In fact, lending is up 70 percent since 
Dodd-Frank's enactment. Similarly, the Wells Fargo Gallup Small 
Business Index poll indicates small business owner optimism is 
at its highest point since 2008. Furthermore, data from federal 
regulators also points to a healthy small business lending 
market. The Federal Reserve has found that lending standards 
for small firms have eased considerably since the recession 
while loan and lease balances at community banks have increased 
$21 billion in this past quarter alone. SBA lending, too, has 
come roaring back to surpass prerecession levels. In 2015, the 
Agency made 63,000 loans totaling $23.5 billion.
    Although the small business lending environment appears to 
be robust, critics of the act continue to point to the 
decreasing number of small financial institutions as proof of 
burdensome regulation. However, it is important to remember 
that the decline in the number of community banks is not 
something that started happening after Dodd-Frank was 
implemented. The sector has actually been consolidating for the 
past 30 years.
    Experts can disagree on the reasons for consolidation in 
the community bank sector but I think we can all agree that 
things are improving. Revenue is up, lending has increased, 
asset quality is steady, and credit worthiness of borrowers is 
on the rebound. As both lenders and borrowers, small businesses 
have much at stake when it comes to financial regulatory 
reform. The Dodd-Frank Act has the potential to make the entire 
system more stable and safer for small firms and the real 
economy to grow and create jobs. It is my hope that the 
testimony today will add important perspectives on the 
interaction between Dodd-Frank and Main Street, and I want to 
thank the witnesses for being here today.
    Thank you. I yield back.
    Chairman HUELSKAMP. Thank you, Ms. Chu.
    If Committee members have an opening statement prepared, I 
would ask they be submitted for the record. Let me explain the 
opening statements and timing for the witnesses.
    You each have 5 minutes to deliver your testimony. The 
light will start out as green. When you have 1 minute 
remaining, the light will turn yellow. And finally, at the end 
of your 5 minutes, it will turn red. I ask that you try to 
adhere to that time limit.
    With that, I would like to introduce our first witness this 
morning, Mr. Roger Beverage, who is visiting us today from 
Oklahoma City, or Edmond. Mr. Beverage is the former Executive 
Vice President of the Nebraska Bankers Association and is 
currently the President and CEO of the Oklahoma Bankers 
Association. He has held this position for over 25 years. Mr. 
Beverage is testifying today on behalf of the American Bankers 
Association, and Mr. Beverage, we welcome you here today. You 
have 5 minutes, and you may begin.

 STATEMENTS OF ROGER M. BEVERAGE, PRESIDENT AND CEO, OKLAHOMA 
BANKERS ASSOCIATION; SHAN HANES, PRESIDENT/CEO, FIRST NATION AL 
BANK OF ELKHART; MARCUS STANLEY, POLICY DIRECTOR, AMERICANS FOR 
                        FINANCIAL REFORM

                 STATEMENT OF ROGER M. BEVERAGE

    Mr. BEVERAGE. Chairman Huelskamp, Ranking Member Chu, thank 
you so much for the opportunity to be here today to present 
about how the growing volume of bank regulation, particularly 
for smaller hometown banks in rural areas, is negatively 
impacting consumers.
    Let me be clear. Banks are a resilient group. They have 
found ways to meet customers' needs despite the ups and downs 
of the economy, but it is a job that has become much more 
difficult because of new rules, guidances, and the seemingly 
ever-changing expectations of federal banking regulators. It is 
this cumulative impact of regulatory overload that often pushes 
small banks out of existence, either to merge or to sell. In 
fact, there are nearly 1,500 fewer community banks today than 
there were just 5 years ago.
    When I came to Oklahoma in 1988, there were well over 400 
banks in our state. Today in Oklahoma, there are 211 that are 
chartered by the State of Oklahoma or a national bank doing 
business in Oklahoma. But more frightening to me right now is 
the seeming lack of interest in granting new charters. This 
trend apparently will continue unless changes are made that 
provide relief to community banks, but particularly those that 
serve rural areas.
    Let me also be clear about the kinds of banks I am talking 
about. These banks are very small. In Oklahoma, for example, 
out of the 211, 97 of them are under $100 million, 46 are under 
$50 million. Those are very, very small banks that had nothing 
to do with the financial crisis that led up to the issues of 
2008 and Dodd-Frank. In Kansas, you have 156 banks that are 
under $100 million in total assets. These banks have a handful 
of full-time employees and they all perform a lot of different 
functions. There is no one functionality that you have in a 
small bank like that. These are the kinds of banks that serve 
rural America.
    Regulations shape the way banks do business and can help or 
hinder the smooth functioning of the credit cycle, but every 
regulatory change that applies to America's hometown banks 
directly affects the cost of banking products and services for 
consumers. Even small changes can reduce credit availability. 
They can raise costs. What the ranking member talked about is 
driving consolidation. We have seen that considerably in our 
state. What that does is ultimately those three things limit 
consumer choice.
    I believe Congress must take steps to ensure and enhance 
the banking industry's ability to serve their consumers and 
rural areas. When a bank reduces its product and service 
offerings or disappears, everyone in that community is 
impacted.
    Importantly, in rural communities, local banks are in many 
instances the exclusive source of capital for farmers, 
ranchers, small business owners, and residents. Once that 
capital access system becomes dysfunctional in rural areas as 
it is today, then the community itself begins to encounter more 
difficult challenges in order to survive.
    We ask for bipartisan support for legislation introduced by 
Congressman Tipton that would require regulators to tailor bank 
supervision and that would take into account the charter, the 
business model, and the scope of each bank's operations. 
Regulators should be empowered and directed to make sure that 
rules, regulations, and compliance requirements only apply to 
those segments of the industry where warranted. Representative 
Barr's American Jobs and Community Revitalization Act also 
contains provisions that will reduce regulatory requirements 
for smaller community banks in ways that make it easier for 
those banks to meet their customers' needs.
    Additionally, Congress should help reduce needless 
impediments to mortgage lending that have constrained the 
ability of community banks to help homebuyers and dampen the 
growth of prosperity across our Nation's rural communities. In 
Oklahoma, approximately 25 percent of the state's banks are no 
longer in the home mortgage business. They have concluded that 
the litigation and regulatory risk are simply too great given 
the limited number of those kinds of loans that they make in a 
given year. That means that the consumer is denied credit or 
asked to find some other source for it.
    We encourage Congress to support legislative efforts like 
H.R. 1210 that would treat loans held in portfolio, which is 
one of the most traditional and lowest-risk lending in which a 
bank can engage as qualified mortgages. This would provide a 
much needed direction to the current restricted standards.
    There is additional legislation introduced by 
Representatives Luetkemeyer, Neugebauer, and Barr that contain 
measures to help America's hometown banks get back to serving 
their communities by ensuring that costs and benefits are 
considered before changing or issuing new regulations and that 
streamline currency transaction reporting and require a review 
and reconciliation of existing regulations.
    ABA stands ready to help Congress address these important 
issues that will in turn help community banks, particularly 
those in rural areas, better serve their customers and their 
communities.
    Thank you very much, and I will be happy to try and answer 
some of the questions you may have.
    Chairman HUELSKAMP. Thank you, Mr. Beverage. I appreciate 
your testimony.
    Our second witness this morning is Mr. Shan Hanes, who is 
visiting us today from Elkhart, Kansas, which is located in my 
home district, Kansas's ``Big First.'' Elkhart is a community 
in southwest Kansas with a population just over 2,000 folks, 
and I might add, 26 graduates in the senior class. Where I come 
from that is actually kind of a big school. For the past 9 
years, Mr. Hanes has served as president and CEO of the First 
National Bank of Elkhart--and by the way, when you are in 
Elkhart, you are not quite in Oklahoma or Colorado, but you can 
see them from there--and previously has served as President of 
the Kansas Ag Bankers Division of the Kansas Bankers 
Association.
    Mr. Hanes, we welcome you here today. Thank you for joining 
us, and you may begin.

                    STATEMENT OF SHAN HANES

    Mr. HANES. Thank you, Chairman Huelskamp, Ranking Member 
Chu, and members of the Subcommittee. My name is Shan Hanes, 
president and CEO of First National Bank of Elkhart, Kansas. I 
appreciate the opportunity to present the views of rural banks 
and the impact of overregulation in rural America.
    First National Bank is a $78 million bank with a main bank 
location in Elkhart, Kansas, the county seat, and one branch 
serving Rolla, Kansas. We have 20 employees, and we are a 
typical agriculture (ag) bank. Despite our small size, we are 
the largest lender in the county and represent an average-size 
bank in rural Kansas.
    I have been very proud to be an Ag banker in a rural 
community for 20-plus years. There are days we can still get in 
our unlocked pickup truck to go to work in the morning and have 
cash lying in the seat. We simply take it to work as it is a 
payment from a customer who will call us eventually and tell us 
which of their loans to apply it to.
    One of my loan officer's customers actually won a 
multimillion dollar lottery, and he did not feel safe holding 
the ticket in his possession over the weekend, so he took it to 
his loan officer's house. He did not want us to put it in the 
vault. He just wanted him to hold the lottery ticket for him 
over the weekend. That is community banking. That is what it 
means to be a community rural banker.
    When I started in lending, a typical consumer loan was one 
page and the consumer would actually read the note and 
disclosure. Now a typical consumer loan is closer to 20 pages 
with many documents to sign and customers have no interest in 
reading that many documents. We made a simple loan so 
complicated that customers simply will not read the documents.
    The topic of today's hearing is very timely. Increased 
regulations made it much more difficult to lend and be a main 
driving force in our local community. Despite this, the banking 
industry is well-positioned to meet the needs of rural America.
    In 2015, farm banks, like mine, increased ag lending 8 
percent and now provide over $100 billion in total farm loans. 
Interest rates continue to be near record lows and banks have 
the people, capital, and liquidity to help rural America 
through any turbulence in the rural economy. Rural banks are 
healthy and continue to be forward-looking, growing capital, 
and increasing reserves.
    I would like to thank Congress for its commitment to the 
guaranteed lending programs, both SBA and USDA. However, I 
believe Congress needs to consider reforms to these programs, 
specifically, to allow greater flexibility with SBA loans for 
agriculture and to raise the cap on USDA farm service agency 
guaranteed loans simply due to the rising cost of agriculture. 
There needs to be an additional in-depth look and discussion in 
modernizing these programs, providing something as simple as 
electronic signatures. Guaranteed loans have allowed our 
customers to continue to get access from banks like mine as 
they grow, ensuring credit for bank customers across the 
country.
    We remain concerned, however, with competition on an uneven 
playing field. Overburdensome regulations and a lack of 
appraisers in rural America means small, rural banks simply 
cannot survive. The result would be devastating to the local 
residents in those communities. Every day my bank competes with 
other banks in parts of Kansas, but we also compete with Farm 
Credit System, which is a 300 billion GSE. This lender has a 
huge tax advantage over my bank. Currently, with the combined 
State and Federal tax rate of 38 percent, we have to work until 
July just to pay our tax bill. There needs to be serious 
discussion on leveling the playing field between banks and Farm 
Credit.
    In addition to unfair competition, banks have to deal with 
ever-changing and expanding regulations. Due to the Dodd-Frank 
Act, a bank like mine has to outsource much of our compliance, 
and we are more than paying a full-time teller's salary for 
compliance and outside audit teams. The impact is one fewer 
bank employee serving our customers, one less paying job in a 
rural community.
    Due to regulations, many banks in rural Kansas have moved 
out of the mortgage-lending business completely, often due to 
increased compliance. What used to be a staple for every 
community bank is no longer even a product offering. When you 
consider a bank like mine where we keep our loans in our 
portfolio, we are taking the risk, and any adverse decision 
affects our bottom line. This is why I believe that if the loan 
is held in portfolio, it should automatically be a qualified 
mortgage.
    Through regulation, our loan closings have become much 
slower. We have had to hire an outside consultant to assist us 
in completing a pre- and post-closing review. In my area, there 
are many more houses on the market now. I believe it is 
partially due to the increased time it takes to close these 
loans. This only further slows down an already slowing rural 
economy.
    On a real estate loan, the bank no longer makes a credit 
decision; the bank makes a compliance decision to determine if 
a loan will be made.
    Lastly, there are a lack of rural appraisers, not just in 
Kansas, but across rural America. Increased regulations have 
made it harder for someone to become an appraiser, and it is 
especially hard for young people to get into that line of work. 
Lenders need appraisers or they cannot close a loan. Congress 
should examine the current rules of becoming an appraiser, 
especially in rural areas, so banks can continue to lend 
effectively.
    Banks like mine are proud of the work we do to support our 
rural communities. However, it will be very difficult to simply 
survive to continue lending to our customers and provide for 
our community and your constituents if there are no reforms to 
the many obstacles that stand in our way. The lending decision 
should be made locally to customers by their community bank, 
not by rules and regulations from Washington, D.C. that does 
not understand my business or my customers.
    Thank you. I would be happy to answer any questions you 
might have.
    Chairman HUELSKAMP. Thank you, Mr. Hanes. I appreciate your 
testimony and you joining us today.
    I now yield to Ranking Member Chu for the introduction of 
our final witness, Mr. Marcus Stanley.
    Ms. CHU. Yes, I am honored to introduce Mr. Marcus Stanley. 
Marcus Stanley is the Policy Director of Americans for 
Financial Reform, a coalition of more than 250 national, state, 
and local groups, who have come together to improve regulation 
of the financial sector. Members of AFR include consumer, 
labor, civil rights, investor, retiree, community, faith-based, 
and business groups, along with prominent, independent experts. 
Mr. Stanley has a Ph.D. in public policy from Harvard 
University, previously worked as an economic and policy advisor 
to Senator Barbara Boxer, as a senior economic economist at the 
U.S. Joint Economic Committee, and as an assistant professor of 
Economics at Case Western Reserve University.
    Dr. Stanley, thank you for joining us today.
    Chairman HUELSKAMP. Thank you for the introduction. Mr. 
Stanley, you may begin. Thank you.

                  STATEMENT OF MARCUS STANLEY

    Mr. STANLEY. Thank you. Chairman Huelskamp, Ranking Member 
Chu, and members of the Committee, thank you for the 
opportunity to testify here today.
    Today's hearing asks us to consider the impact of the Dodd-
Frank Act on small banks. I want to make two broad points. 
First, community banks face economic headwinds that are 
unrelated to Dodd-Frank, connected both to long-term trends and 
to the effects of the financial crisis itself.
    Second, the big picture is that community banks have 
returned to profitability under Dodd-Frank. In 2015, just over 
95 percent of community banks earned a profit. That is compared 
to 78 percent in 2010, the year Dodd-Frank was passed.
    Consolidation in the banking industry is not a new 
phenomenon. The number of FDIC insured banks has declined by 2/
3 over the past 30 years with the decline concentrated among 
banks with less than $1 billion in assets. The number of 
community banks has declined every single year since 1984.
    The causes of these long-term trends include changes in 
economies of scale in banking and deregulatory measures that 
assisted the expansion of large regional and global banks. The 
catastrophic effect of the financial crisis made things worse. 
Over 400 community banks failed between 2008 and 2011. Facing 
huge losses in the Deposit Insurance Fund and historically 
devastating recession, FDIC's supervisors cracked down on risks 
in existing banks and made it more difficult to open new banks, 
a regulatory response that would have occurred even if the 
Dodd-Frank Act had never passed.
    When we look at the well-being of community banks since the 
passage of Dodd-Frank, as well as specific provisions of the 
law, we see a better picture. Not only have more than 95 
percent of community banks returned to profitability today, but 
return on equity has been steadily increasing. Average 
community bank ROE has gone up every year since the passage of 
Dodd-Frank and reached almost 9 percent in 2015, a level that 
some larger banks, such as Citigroup or Bank of America might 
envy.
    One reason for this is that in drafting Dodd-Frank, 
Congress made major efforts to shield small banks from 
additional regulations targeted at the large banks and nonbanks 
who were at the center of the 2008 crisis. Smaller banks are 
exempted from numerous provisions in the law, including new 
heightened prudential standards in Title I, new over-the-
counter derivatives regulation, and direct CFPB examination .
    As detailed in my written testimony, regulators have 
continued this practice in implementing the law with efforts to 
shield small banks from compliance burdens in areas ranging 
from the Volcker Rule to new mortgage regulations. The Dodd-
Frank Act was major legislation passed in response to the worst 
financial and economic crisis since the 1930s, so it clearly 
does have impacts throughout the financial system. But, those 
impacts are concentrated on the large banks and nonbanks that 
are, in fact, the major competitors of community banks.
    At the same time, I do not wish to imply that there are not 
real issues with small business access to credit and issues in 
rural areas that this Committee can and should address. 
Although small business lending has increased significantly in 
recent years, it has still lagged during the recovery, and the 
economic expansion has been more concentrated in urban areas. 
Helping small banks to address this issue should be high on our 
agenda, but looking at the Dodd-Frank Act as it is caused seems 
misguided. Instead, I would urge the Committee to look at 
credit guarantees from entities like the Small Business 
Administration, the Department of Agriculture, and other forms 
of credit that are under the jurisdiction of the Committee.
    We must also make sure that nonbank financial entities are 
competing on a level playing field with regulated banks. Online 
marketplace lenders are a rapidly growing provider of small 
business lending and are subject neither to consumer protection 
laws nor risk controls. The evidence indicates that they often 
provide a substandard and even exploitative product. Just 15 
percent of small business borrowers from online lenders express 
satisfaction with their experience, while 75 percent of small 
business borrowers from community banks did. That is from a 
joint study by seven regional Federal Reserve banks that cover 
pretty much the whole country. Congress should consider 
expanding oversight of online marketplace lenders.
    Thank you for the opportunity to testify, and I look 
forward to taking questions.
    Chairman HUELSKAMP. Thank you, Mr. Stanley. We appreciate 
your testimony. We will now begin our questioning. I recognize 
myself for 5 minutes.
    I will first start with Mr. Hanes. I cannot imagine you got 
into this business to navigate your way through miles of red 
tape. What brought you in this line of work, and what do you 
see as your role in the community of Elkhart, Kansas?
    Mr. HANES. I have been a community lender for 20-plus 
years, do not want to give the exact number. I enjoy being part 
of production agriculture. Growing up on a farm myself, that 
was my lifestyle and that was my livelihood. Now I get the 
opportunity to help a number of customers continue their 
lifestyle and continue their goals. Being in a small community, 
being with the bank and being a leader in that community, you 
are on a number of boards, and we understand how vital it is to 
keep our community together, to keep our community whole. We 
need new businesses. We need people coming to town. The bank is 
the lifeblood of that. That is who is going to be able to bring 
those individuals to town. That is who is going to be able to 
fund those loans to allow them to realize their dreams. That is 
what I enjoy doing, seeing somebody be able to start their own 
business.
    Chairman HUELSKAMP. You talked a little bit about home 
mortgage lending, perhaps small business loans as well. I would 
like for you to explain how the regulations have restricted 
your ability to meet those needs. Secondly, who will take care 
of those needs if the First National Bank of Elkhart were not 
there?
    Mr. HANES. That is a huge challenge from our side. I 
brought a couple things I would like to show. When I came to 
banking 20-plus years ago, this was a real estate note. We had 
a note, green, nice pretty form being a bank. A mortgage, that 
was it. A customer would actually read that, understand it, ask 
us questions. This is a real estate note, now. It is a half-
inch thick, lots of pages to sign. We could not get a customer 
to read this if we forced them to. It is just flat too thick. 
We have taken it from something simple to something overly 
complex.
    In our local market we do not have a lot of secondary 
mortgage options. We were just informed some time ago that our 
secondary mortgage lender that has been a big supporter of 
southwest Kansas now will no longer make a real estate loan 
less than $50,000. Well, that seems small. The average loan 
size of residential loans in our portfolio, $33,000. There 
would not be anybody in our portfolio that would even qualify 
to apply for a residential loan. I understand that is not a 
jumbo loan in your line of work, but at our bank that is a 
house loan. That is a typical house loan. We have to continue 
to serve that market as best we can, but we have to figure out 
a way that we can do it within the regulatory constraints, and 
that is the challenge we are not meeting.
    Chairman HUELSKAMP. I am hearing this from other 
communities as well. Who is going to issue the home mortgage in 
these situations? I know many of the folks in the Kansas 
Bankers Association, in Oklahoma as well, are exiting the 
marketplace. Mr. Stanley is worried about online and some of 
these other entities, but what are the other options you have?
    Mr. HANES. There are not a lot of options because our 
customers do not fit the model. They do not always have a W-2 
that allows them to get paid once a month, and it is an easy 
way to figure their income. They have farm income. They have 
Schedule Fs, it does not fit the box. The loans that we wind up 
with are the ones that do not have access, cannot get access to 
those other markets. As a result, they have limited access to 
credit.
    Chairman HUELSKAMP. Thank you, Mr. Hanes.
    Mr. Beverage?
    Mr. BEVERAGE. If I might add to that just a moment, Mr. 
Chairman, as I said earlier, banks are fairly resilient and try 
to figure out a way to meet their customers' needs. One of the 
things that has happened in Oklahoma is that our Bankers Bank 
has created an opportunity for referrals to Oklahoma City for 
consideration of those rural mortgages, because they do a lot 
of them, and they are able to withstand the litigation and 
regulatory risk that a much smaller bank cannot. In addition, 
one bank family has created a mortgage business that they 
offer, but since you are giving it up to your competitor, you 
might not get quite as many referrals to that instance.
    My point is that with that referral also goes access to the 
community bank, and it is that relationship that is at risk 
here. It is that relationship, that reliability, the trust, the 
bond of trust that a banker like Shan has with his customers. A 
community bank is just simply so much more than a bank.
    Chairman HUELSKAMP. Does Dodd-Frank understand or take that 
into account at all?
    Mr. BEVERAGE. Some of the language does, but in the real 
world, no. The answer is based on the reality that the 
mentality is one size fits all.
    A friend of mine had a $15 million bank. Very, very small. 
3-1/2 employees. He had to do the same thing that JPMorgan 
Chase does. He made cattle loans and he made wheat loans. That 
is it, he did not do anything else. He did not have any 
derivatives. I mean, I am not sure he could spell derivative. 
Nevertheless, he was just a simple community bank in a simple 
little town of about 250 people. He just sold because he could 
not deal with it anymore. He is not the only one that is going 
to do that, and that is part of the issue.
    My question to you, Mr. Chairman, is if rural community 
banks go away, who is going to finance the business of food 
production?
    Chairman HUELSKAMP. That is a worry I have as well, as a 
farmer and a resident of small town America in western Kansas. 
Thank you.
    I next recognize Representative Chu for her questions.
    Ms. CHU. Thank you. Mr. Stanley, low income and minority 
neighborhoods were devastated by predatory mortgage lending in 
the years leading up to the housing crisis. Do you think these 
communities are better off today with the ability to repay in 
qualified mortgage rules that were enacted under Dodd-Frank?
    Mr. STANLEY. Yes, I do. One thing we saw prior to the 
crisis was that people with equity in their homes were being 
targeted for exploitative loans that they could not pay back, 
at which point the bank would seize the collateral and perhaps 
profit on a loan that never should have been made. I do think 
that the QM and the Ability-to-Repay rules have made a critical 
difference in a lot of areas across America and will make a 
critical difference in addressing that.
    Ms. CHU. While small financial institutions are 
particularly critical of these rules, how has the CFPB, the 
Consumer Financial Protection Bureau, specifically tailored the 
rules to account for the relationship banking model of small 
institutions?
    Mr. STANLEY. The CFPB has made a lot of efforts to do that. 
One thing we have heard several times from the other witnesses 
is the desire to exempt on portfolio loans, loans that are held 
in portfolio from regulation. That can make sense for a bank 
that truly has a relationship lending model, and the CFPB has, 
in fact, exempted loans held in portfolio from many of the 
requirements under the new mortgage rules. It has been very 
responsive to that.
    One thing that we see here in Washington, D.C., is that 
when you actually look at legislation that would roll back 
parts of Dodd-Frank and would do things like exempt loans held 
on portfolio, you see it does not just apply to small rural 
banks. It does not just apply to community banks. It applies 
across the board to large regional banks. Frankly, the reason 
that legislation draws fire from organizations like Americans 
for Financial Reform, from proponents of reform, is that it is 
not limited to the kinds of banks that we are talking about 
here today. I think that there is space both with regulators, 
and even possibly in Congress on a bipartisan basis, for 
legislation that is truly targeted at the kind of small rural 
banks we are talking about today.
    Ms. CHU. Yes, Mr. Beverage?
    Mr. BEVERAGE. Just to add something to what Mr. Stanley 
said about the CFPB and their willingness to accommodate some 
of these issues, he is correct. But, it has taken a while to 
get there. One of the things that we have done is that we have 
invited CFPB employees to come to Oklahoma. Two of them have 
taken us up on that, and I have taken them to small rural banks 
to show them how they work. I think that has had an impact as 
it enables the CFPB experts to understand the differences 
between a $40 million bank in Allen, Oklahoma, and Bank of 
America. I think that is important. But Mr. Stanley is right; 
it is getting better.
    Ms. CHU. Thank you. I do appreciate that greatly.
    Dr. Stanley, the CFPB is required to carry out extensive 
analysis before issuing regulations that will impact smaller 
institutions. As you know, a number of changes were made to 
accommodate small, rural lenders under CFPB's mortgage rules. 
Do you think the small creditor exemption allows community 
banks to continue making the mortgages that are the best for 
the customers?
    Mr. STANLEY. The small creditor exemption does include a 
lot of additional flexibility on things like balloon payments, 
escrow requirements, debt-to-income ratios, and these kind of 
things. That is the flexibility that we need to see in small 
rural areas. Yes.
    Ms. CHU. We have heard on many occasions that Dodd-Frank is 
the reason for many of the problems facing community banks. Can 
you explain how the Dodd-Frank Act can actually do the opposite 
and help level the playing field with their larger 
multinational competitors?
    Mr. STANLEY. Yes. What we saw prior to the crisis was large 
banks gaming the system in a lot of ways. They would use 
complex international models to claim that their assets were 
less risky than the assets held by smaller banks, and they 
would use that to hold less capital and borrow more, be 
overleveraged. And Dodd-Frank has taken a lot of steps to even 
that. I think the CFPBs' jurisdiction over nonbanks is also 
very significant in terms of leveling the playing field.
    Ms. CHU. Can you elaborate on your testimony regarding the 
issue of the declining number of community banks and the role 
of the FDIC's s supervisorial practices?
    Mr. STANLEY. Yes. I think there is no question that the 
FDIC cracked down as a supervisor on a lot of bank risks in the 
parade around the crisis. I think a lot of that was justified 
because there were a lot of banks that had made loans in the 
commercial real estate space that had valuations that were 
inflated. As the economy was damaged, some of those risks were 
excessive. We saw a lot of banks failing, and the FDIC was 
concerned about that. They did crack down. I think there are 
issues and questions. They also cracked down, as one of the 
witnesses mentioned, on the opening of new banks and put in new 
requirements because they saw a lot of newer banks fail during 
the crisis. That is something that could be reexamined and 
thought about in terms of how they have done that.
    Ms. CHU. Thank you. I yield back.
    Chairman HUELSKAMP. Next, I recognize Representative Trent 
Kelly for questions.
    Mr. KELLY. Thank you, Mr. Chairman, and Ranking Member. 
Thank you, witnesses, for being here.
    Community banks are very important. I am from Mississippi, 
in a rural area with a lot of manufacturing, and a lot of 
agriculture. Quite frankly, it used to be the post office was 
the center of gravity for most small communities. The post 
office has consolidated, so now you have a town because you 
have a community bank. When you lose that bank, you lose the 
town. It is not just the banking. It is the guy who coaches 
softball or kids' baseball with you. It is the guy who goes to 
church with you on Sunday and sits by the pew. Your banker in 
those small communities is much more than your banker, and I 
understand that.
    Unfortunately, based on your testimonies here today, it is 
not just Dodd-Frank. I can tell you my bankers do not have the 
same view as Mr. Stanley about Dodd-Frank and the impact it has 
on small banks. I can tell you they have talked to me again and 
again. I can tell you that the regulations are five binders 
this thick that they have to comply with, and they do not get 
paid for compliance. They have to comply with that, and they do 
not have the expertise. The net effect of that is a cost to the 
consumer, it has to be sucked up by the consumer because it is 
a nonrevenue-generating process.
    Based on that, what is the impact that Dodd-Frank and other 
regulations have on the consumer and their financial ability to 
get along? Mr. Hanes?
    Mr. HANES. I appreciate the question because that is 
exactly why I am here. That has been the big challenge. As I 
testified earlier, it used to be a source of pride within our 
little community bank. When we would do audits, or something 
internally, we would use it as a cross-training opportunity. We 
would grab somebody that might be from the other side of the 
bank and have them audit a loan side, or have a loan side audit 
an operations side. It was a way we could educate, we could 
cross train, we could bring that next level of leaders into the 
bank. Because they have gotten so thick, so heavy, and frankly, 
they are ever-changing, we cannot do that anymore. We do not 
have the expertise. We cannot have the expertise in our little 
20-employee shop. What we have had to do is outsource to 
outside firms that come in for a period of a week or a few days 
and do those audits. Well, that comes at a cost. In our 
respect, we are paying more than a full-time employee's salary 
to outside firms to come in and do audits that we used to be 
able to do ourselves. I do not have a problem doing the audits. 
I do not have a problem following the regs, but they have 
gotten so large, so cumbersome, and frankly, they seem to 
change and we cannot do that anymore. The effects one less 
employee, one less teller serving our customers, our customers 
do not get as good a service, one less job in the community. 
You are right, we are the t-ball coach and the swim coach and 
the basketball coach. It is one less job.
    Mr. KELLY. Let me follow up on that a little bit because my 
community seems like it is a lot like yours in Elkhart. A lot 
of my loans are not $50,000, and a lot of times they are for 
homes because the state prices are much better in rural areas. 
You can get a lot more house for a lot less money. It is also 
because of the same economic things where you do not have the 
steady W-2 necessarily. What impact does it have for those 
$50,000 or less loans, for folks that are not going to be able 
to get that money anywhere, which means they do not have a 
house and those things. Can you expand on that just a little 
bit?
    Mr. HANES. Sure. Thank you, I appreciate that.
    The biggest house loan in town probably would struggle to 
get to six digits. We do not have that large of a housing 
market. The largest number of people looking for a house loan 
do not want, do not need, and would not ask for a loan in six 
digits. They are looking for that $50,000 to $60,000, that 
$40,000 house to get them started. The secondary market is not 
an option because they simply will not even take an application 
if it is under $50,000 because they have determined anything 
below that is not profitable for them. So, their only option is 
their local community bank, and the majority of the banks 
around me do not make residential real estate loans anymore. As 
a result of that, they have far less access to credit than they 
would have had before, and it has put them at a disadvantage 
both now and for the long term. They cannot own a house.
    Mr. KELLY. Mr. Chairman, if I can, I will let Mr. Beverage 
comment.
    Mr. BEVERAGE. I wanted to add to what Shan said. The 
primary impact on consumers is that it increases their costs. 
In a rural area, you simply do not have a pool of compliance 
officers who are knowledgeable about everything that is going 
on and everything that is required of a bank today. You do not 
have any choices regardless of what you would pay them, so you 
have to outsource. You have to use the association, or a 
program that we would sponsor, or your own private expert to 
help you get through what the OCC has told us is the principal 
issue for examination s. Compliance is one. Cyber security is 
two. Credit is three. That is important to understand.
    Mr. KELLY. My time is expired. I yield back, Mr. Chairman, 
thank you.
    Chairman HUELSKAMP. Thank you.
    Next, I recognize Representative Luetkemeyer, Vice Chairman 
of the Committee. Welcome to the Subcommittee.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. Glad to be with 
you.
    I also serve on the Financial Services Committee, and so we 
have been working on some Dodd-Frank issues and some Dodd-Frank 
reform. We have heard a lot of testimony. Let me read you a few 
statistics. Before Dodd-Frank became law, 75 percent of banks 
offered free checking; now only 37 percent at the end of 2015. 
Dodd-Frank fueled a 21 percent surge in checking fees, 15 
percent fewer credit card accounts since 2008 at a cost now of 
more than 200 basis points more than what they had. 73 percent 
of community banks report regulatory burdens are preventing 
them from making residential loans. We have heard that 
testimony. One last number here. The cost of the smallest 
commercial industrial loans has risen at least 10 percent from 
the pre-crisis average.
    I can tell you, I am from Missouri, at the end of 2015, we 
had 44 banks that were $50 million or less. Those are little 
bitty guys. Remember, we are talking about small, rural 
communities, and that is probably the only bank in town, like 
probably yours is, Mr. Hanes, and those guys, out of 44, 26 
lost money last year.
    FDIC did a study back in 2013. It said within the next 5 
years, any bank $250 million or less is probably going to go 
out of business. Not because they are bad banks, not because of 
the economy, but because the rules and regulations that are 
coming are going to force them to consolidate, and Dodd-Frank 
is the culprit. Dodd-Frank created all of this group of 
regulations that is out there.
    Mr. Hanes, you talked a minute ago about QM rules. QM, at 
your size, you are supposed to be exempt from it; right? But, 
if you want to sell a mortgage to the secondary market, do you 
have to comply with it?
    Mr. HANES. Yes, we do.
    Mr. LUETKEMEYER. So even hough you were exempted, you still 
have to comply. These rules roll downhill, do they not?
    Mr. HANES. That is the part I would like to say, Ms. Chu. 
We were supposed to be exempted from a lot of Dodd-Frank and 
that threshold. But what happened, whether intentionally or 
probably unintentionally, was the trickle-down effect, exactly 
what we are talking about. What is a best practice for Bank of 
America, the examiners see that and they see that is a nice 
stress test, that is a nice little study, why do you guys not 
do that, too? It trickles down to where, all of a sudden, we 
are doing that same thing as Bank of America. The big banks, 
they might have a team, a department, a program that they 
developed to handle that, we do not. We have got Excel. We have 
to come up with something that is going to work. That trickle-
down effect is what we were not exempted from. I agree that is 
a challenge.
    Mr. LUETKEMEYER. I have another question for you, Mr. 
Beverage. I have a question with regards to Dodd-Frank, we are 
losing one community bank a day across the country right now. 
Dodd-Frank was supposed to be the cure all here. It was 
supposed to keep the big guys under control, but I believe--let 
me make this statement, and Mr. Beverage, I will appreciate 
your comment on it--I believe Dodd-Frank has caused the big 
banks to get bigger and put the pressure on the small banks to 
go out of business and merge with them. Would that be a fair 
statement?
    Mr. BEVERAGE. Yes, sir. It does not tell the whole story, 
but it is certainly relevant.
    One of the things that I wanted to add to what Shan said, 
and in response to what Mr. Stanley testified about, is the 
exemption that banks under $10 billion are supposed to have 
from the CFPB. They do have exemption from direct examination 
authority, although there is ride-along authority, and that is 
a different issue, but they are not exempt from the rules and 
regulations that the CFPB has revised and imposed. They still 
have to follow those. The primary federal banking regulator is 
then the one that examines for compliance. In smaller banks, 
that is a cost, that does not bring a dime to the bottom line, 
which means less capital, and more importantly, less ability to 
lend to consumers.
    Mr. LUETKEMEYER. Okay, very quickly. My experience keep 
discussing this with bankers across the country of all 
different sizes, and I have asked this question of a lot of 
them and they say anytime, because of the increased costs of 
compliance and the complexity of it. When you hire a loan 
officer, you have to hire one compliance officer. When you look 
at these small banks, when you hire a loan officer, the 
compliance officer does not make you any money. You have to 
spread those costs out over your bank, and you reach a point at 
which the rubber band breaks and then you have to do something 
different. This is where they are.
    I think I could go on all day here but I see my time is 
about out, but I appreciate you gentlemen's testimony this 
morning, and I think that small banks make loans to small 
businesses. That was the testimony in this Committee not too 
long ago, and I think that we need to make sure that we keep 
the banks in business so the small businesses have an access to 
credit ability. Without that, small business communities dry 
up, and whenever rural America goes away it hurts the ability 
to produce food and produce all the rest of the things this 
country relies on.
    Thank you very much for your testimony today.
    Chairman HUELSKAMP. I appreciate those questions, I will 
note Mr. Hanes has come a long way and I would like to ask him 
another question. I think you drove 100-plus miles to an 
airport, then took a connection, two of them to get here. You 
have come a long way. One other subject you did bring up, Shan, 
is that you thought it an unfair playing field in the 
particular area of agriculture, which is the bread and butter 
of your bank, it is hard to compete. Can you describe that a 
little bit more and what would you suggest as a way to level 
that playing field?
    Mr. HANES. I believe there are several ways. I believe you 
are referring to Farm Credit Services and their tax-exempt 
status on real estate loans. They currently have a tax rate of 
about 4 percent. If you compare that to my 38 percent bracket, 
that is a huge, unlevel playing field. There are several ideas 
that I would like to consider. The biggest and the most obvious 
is they do not pay income tax on income earned from interest on 
real estate loans. Give us that same opportunity. I do not mind 
competing with anybody, that is what made America great. But 
let us compete on a level playing field and do not let me start 
34 percentage points behind them on a tax rate.
    Chairman HUELSKAMP. I appreciate that.
    I want to follow up with Mr. Stanley, in trying to 
understand your perspective of what is occurring here, and I do 
not know if you have ever been in a small town or a community 
bank we are talking about, looked at that, but frankly, Mr. 
Stanley, I do not know how they are able to compete with the 
Bank of America. The regulatory or the legal changes coming out 
hopefully at a Financial Services Committee, Bank of America 
does not want the changes. They do not want to change Dodd-
Frank. They like the setup. As I understand, they are opposed 
to making changes. They found out how to game the system. But 
when you have Mr. Hanes and other banks across western Kansas, 
I think we all agree we want consumers to have more options, 
not fewer of them. When I hear from community banks that they 
are saying any loan under $100,000, and there are very few of 
those, are losers--they are going to lose money on them, and 
the Feds do not want them to do it anyway--they are left with 
some of the predatory lenders you are talking about. Bank of 
America is not going to come to Elkhart, Kansas. I guarantee 
you that. They have no desire. What they want to do is maybe 
buy up your bank. I do not know what they would want to do, I 
think they would just want to ignore that. I am just trying to 
understand from the perspective and the group you represent, 
which in inner cities I think you saw those predatory 
practices, but how does that apply to a small rural town if 
they are going to have no options when we are done with Dodd-
Frank? I open it up to you, Mr. Stanley.
    Mr. STANLEY. I think, first of all, you are going to see a 
lot of large financial institutions that end up supporting the 
package that comes out of Chairman Hensarling. I think that 
there is enormous diversity in the American banking system. We 
have 6,500 banks across all different sizes of communities. 
What we are very focused on and concerned about is that any 
changes to tailor these regulations, and there have been 
changes made both at the regulatory level and in the Dodd-Frank 
statute, do not become loopholes that can then be used by 
larger banks or can be used in rent-a-charter situations where 
somebody gets a bank charter and then sells stuff out into the 
secondary market that does not meet certain kinds of standards.
    One thing I see with a lot of the legislation that comes 
out is it is not limited to the kinds of banks that are in 
Elkhart, Kansas. It is not limited to $100 million banks, $250 
million banks. It does open the door to either banks that are 
in that $50 to $500 billion space, the very large regional 
banks that are among the largest couple dozen banks in the 
country, or even to the top six or seven global banks that 
dominate Wall Street. I think that there is space, there has 
been space in the Senate. Actually, there was a package passed 
for community banks that was limited to community banks, so I 
think there is bipartisan space for legislation that is very 
targeted and crafted to the kinds of banks that you are talking 
about in Elkhart, Kansas, but we do not often see that.
    Chairman HUELSKAMP. Do you think they represent any threat 
to the economic system? Why are they being punished by these 
regulations at all? I mean, we have experts. They spent hours 
and days and weeks and months and years of putting it together, 
and the other day Mr. Hanes comes in and says most of my 
competitors are leaving the marketplace. The big city said, 
well, that is just too bad you cannot get a home mortgage in 
Elkhart, Kansas. That is one of the costs of taking care of the 
big banks. But I agree with Mr. Luetkemeyer. The end result is 
they are too big to fail and too small to succeed, and I think 
that is happening in this arena.
    Mr. STANLEY. Would you like me to respond?
    Chairman HUELSKAMP. Please.
    Mr. STANLEY. I think there are a couple things. First of 
all, with respect to consumer protection, if something happens 
that damages a consumer, it may not matter to that consumer 
whether that happened at the hands of a small bank or a large 
bank. I think the vast majority of cases, there is no intent to 
harm consumers, some of these rules that we are talking about--
overdraft fees, things like that, the CARD act that affected 
credit cards. That probably does not affect you guys much. But, 
overdraft fees were a source of revenue for small banks. There 
were abuses in terms of overdraft fees and there were consumer 
protection things that were done to address that. Interchange 
fees. That is something there were complaints about from small 
businesses, but small banks had issues and problems with the 
regulatory changes that were made for interchange fees. That is 
one set of things on these consumer protection things.
    I think in terms of prudential protections, we do have to 
remember that even if you do not threaten the national global 
financial system, you are dealing with insured deposits. There 
is a backstop, a government backstop behind those deposits, so 
there is an interest by the FDIC in prudential risk regulation 
as long as those insured deposits are there.
    Chairman HUELSKAMP. Mr. Stanley, I appreciate that, and I 
will note I do not know of a single bank in the western half of 
the State of Kansas that failed in this situation. They get to 
take on all the regulations, so I am not worried so much about 
consumer protection; I am worried that they will not have any 
more choices. We will probably be sitting here in 3 or 4 years 
saying gosh darn it, what are we going to do to make sure they 
can get a loan in Elkhart, Kansas? We are about at the end of 
that stick.
    I am going to ask Ms. Chu or Mr. Luetkemeyer, I am being a 
little flexible here, if you have any follow-up questions.
    Seeing none, or if you had another round of questions?
    Mr. LUETKEMEYER. I have a couple more here.
    Mr. Beverage, we have been discussing a little bit about 
new banks being chartered. There have only been, what, two in 
the last 5 years, I think?
    Mr. BEVERAGE. Maybe three.
    Mr. LUETKEMEYER. Maybe three? You know, if you are an 
investor and you go out here and you see the numbers we have 
been throwing around here today, especially small banks, if you 
are an investor, why would you want to invest in a business 
like this where you are going to get regulation from the top 
down, and more of it when the CFPB is just out of control with 
the TRID rule, the QM rule that basically runs real estate 
mortgages out of existence in small communities? If you are a 
new bank trying to get started, what are you going to make 
loans on? Can you give me some insight? I do not see why an 
investor would go in and try to buy, start a new bank.
    Mr. BEVERAGE. In this environment, neither do I. I would 
advise against it until we get some changes that will help 
community banks serve consumers in ways that do not jeopardize 
them. I just cannot help but say this. Community bankers do not 
get up in the morning thinking about how they can screw their 
customers. They get up in the morning thinking about how they 
can take care of them because those customers are vital to the 
survival of that community. When a bank makes a loan, 
basically, there are two questions. You know this. One, can you 
and will you repay it? If all of that works, then the bank 
wins, the customer wins, and the community wins because you get 
jobs, you get economic involvement, you get economic activity. 
These people grow up together, for heaven's sake. They know 
everybody. They have a list of things that they can no longer 
do because they are afraid of fair lending allegations. They 
are afraid if I screw up on an appraisal or on a valuation, or 
if I do not dot an I, or cross a T properly, I am going to get 
sued. Now, rightly or wrongly, that is a fear.
    Mr. LUETKEMEYER. One of the problems with the QM rule is 
that by saying it is a qualified mortgage means it is a 
qualified mortgage, inferring that it is a preferred mortgage. 
If it is a nonqualified mortgage, they are by inference saying 
there must be some additional risk there. There must be a 
problem here. It opens you up as a banker to a lot of liability 
exposure even though it may not be. Just the inference it is a 
nonqualified loan, by differentiating between the two, suddenly 
now you are put in a position to decide is there a liability 
risk that I have got to take here by making this kind of a 
loan, a nonportfolio loan? This is the predicament that banks 
are in, and this is why you wind up not making real estate 
loans and getting out of the business because you see the 
liability situation sit in front of you, like I cannot take 
this risk.
    Mr. LUETKEMEYER. Mr. Hanes, I see you have been anxious to 
jump in here.
    Mr. HANES. Sorry about that.
    Number one, as I said earlier, we are now making a 
compliance decision, not a credit decision--when we look at a 
loan--and that is wrong. That is not what we are built to do. 
That is not what we should be doing, but we are making a 
compliance decision. Are we going to make this loan? Is this 
one that we are not going to get written up for later? Is this 
one that we are not going to have to redisclose everything 
because we got something on a wrong line? It is a compliance 
decision to not make a loan versus a credit decision.
    I would like to follow up on your original comment there, I 
had an opportunity in 2011 to put a holding company together to 
buy the local bank, a great source of pride and a great 
opportunity. I have actually gone down that exact path. To 
follow up on what Mr. Stanley said, community banks have become 
profitable in spite of Dodd-Frank; definitely not because of 
Dodd-Frank. We continue to work around and with those rules. 
The reason you invest in the local small bank, I can tell you 
is because you want the bank there. You do not want it being 
sold. You do not want it closed. The group that we put 
together, they grew up there. They want their local bank there. 
They grew up knowing that that was their bank and that was 
where their kids banked, and those kids are now customers. They 
have moved on to California or wherever, and they are still our 
customers. The reason you get investors to invest is because 
they want their local bank and they want to be a part of their 
local bank. We are not getting investors from outside; we are 
getting investors from down the street and across the street.
    Mr. LUETKEMEYER. Just to show you, I did not bring it with 
me this morning, but I have a sheet at home that details how 
you go through a real estate mortgage. There are 247 things on 
this sheet of paper here that you go down and you check a box. 
Okay, it is this size, so you go here. Then I got this kind of 
collateral, so you go here. It is a sole proprietorship or it 
is a husband and wife, so you go here. There are 247 ways you 
can get tripped up when you make a loan. A lot of that is on 
the CFPB. That is their problem.
    QM, CFPB's own sheet is like this. You take two sheets and 
you put them together like this, it is like a Rubik's cube. You 
go through here, you go out here, you go here, and then you 
wind up going on this one. It is unbelievable, and you wonder 
why banks get out of lending. You wonder why they are getting 
exposed to this. You wonder why the costs of consumers go up. 
Somebody has to pay for this extra compliance cost when you 
have one loan officer for one compliance officer.
    Thank you, gentlemen, for being here today. I yield back.
    Chairman HUELSKAMP. I would like to thank all of our 
witnesses for their participation today. It is never easy to 
take time out of your busy schedules and to come and talk with 
us, but you help us understand the unique impact that 
overregulation can have on our rural communities. All too often 
it is our consumers, our small businesses, farms and ranches, 
and entrepreneurs that ultimately feel the burden. Here at the 
Committee, we remain dedicated to working to ensure that small 
businesses are allowed to grow, thrive, and provide economic 
opportunities to the community.
    I ask unanimous consent that members have 5 days to submit 
statements and supporting materials for the record.
    Without objection, so ordered.
    This hearing is adjourned.
    [Whereupon, at 11:06 a.m., the Subcommittee was adjourned.]
                            
                            A P P E N D I X


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

    Chairman Huelskamp, Ranking Member Chu and members of the 
subcommittee, my name is Roger Beverage, and I am the President 
and Chief Executive Officer of the Oklahoma Bankers 
Association. I appreciate the opportunity to present the views 
of the American Bankers Association (ABA) on the impact of 
regulations on rural communities. This is a subject near to my 
heart. The ABA is the voice of the nation's $16 trillion 
banking industry, which is composed of small, regional and 
large banks that together employ more than 2 million people, 
safeguard $12 trillion in deposits and extend nearly $8 
trillion in loans.

    ABA appreciates the opportunity to be here today to speak 
on how the growing volume of bank regulation--particularly for 
America's hometown banks--is negatively impacting consumers 
because these same, perhaps well-intentioned rules and 
regulations limit the ability of banks throughout the nation to 
meet the needs of our customers' and communities. This is not a 
new subject, yet the imperative to do something grows every 
day.

    America's hometown banks are resilient, and have found ways 
of meeting our customers' needs in spite of the ups and downs 
of the economy. But it is a job that has become much more 
difficult because of the avalanche of new rules, guidances and 
seemingly ever-changing expectations of the regulators.

    This new regulatory atmosphere--not the local economic 
conditions--is often the tipping point that drives small banks 
to merge. The fact remains that there are nearly 1,500 fewer 
banks today than there were 5 years ago--a trend that will 
continue until some rational changes are made that will provide 
some relief to America's hometown banks.

    In fact, today in Oklahoma there are 211 banks chartered in 
the state. When I came to Oklahoma in 1988--there were well 
over 400 banks. More frightening is the lack of interest and 
ability for new charters. There have only been two true de 
novos since 2010, and none in Oklahoma.

    Each and every bank in this country helps fuel our economic 
system. Each has a direct impact on job creation, economic 
growth and prosperity in the community it serves.

    America's hometown banks are like other businesses--they 
buy their ``product'' at wholesale and then sell it at 
``retail.'' What that means is credit cycle that banks 
facilitate is simple: customer deposits provide funding to make 
loans. These loans allow customers of all kinds--businesses, 
individuals, governments and non-profits--to invest in their 
hometown and across the globe.

    The profits generated by this investment flow back into 
banks as deposits and the cycle repeats--creating jobs, wealth 
for individuals and capital to expand businesses. As those 
businesses grow up, they, their employees and their customers 
come to banks for a variety of other key financial services 
such as cash management, liquidity, wealth management, trust 
and custodial services. For individuals, bank loans and 
services can significantly increase their purchasing power and 
improve their quality of life, helping them attain their goals 
and realize their dreams.

    This credit cycle does not exist in a vacuum. Regulation 
shapes the way banks do business and can help or hinder the 
smooth functioning of the credit cycle. Bank regulatory 
changes--through each and every law and regulation, court case 
and legal settlement--directly affect the cost of providing 
banking products and services to customers. Even small changes 
can have a big impact on bank customers by reducing credit 
availability, raising costs and driving consolidation in the 
industry that limits consumer choice.

    Everyone who uses banking products or services is touched 
by changes in bank regulation. It is imperative that Congress 
take steps to ensure and enhance the banking industry's ability 
to facilitate job creation and economic growth through the 
credit cycle. The time to address these issues is now before it 
becomes impossible to reverse the negative impacts. When a bank 
disappears everyone is impacted.

    Importantly, in rural communities, smaller community banks 
are (in many instances) the exclusive source of capital 
farmers, ranchers, small business owners and its residents. 
Once that capital-access system becomes dysfunctional--as it is 
today--the community itself begins to encounter more difficult 
challenges in order to survive.

    We urge Congress to work together--Senate and House--to 
pass legislation that will enhance the ability of community 
banks to serve their customers. In particular, Congress can 
take action to ensure credit flows to communities across the 
country by:

          > Supporting tailored regulations for the banking 
        industry;

          > Improving access to home loans, and;

          > Removing impediments to serving customers.

    In the remainder of my testimony, I will highlight some 
specific actions under each of these suggestions that would 
help begin the process of providing meaningful relief to help 
community banks and help bank customers.

    I. Support Tailored Regulation for the Banking Industry

    Banks are in the business of serving customers and 
communities. Banks are where prospective homeowners obtain home 
loans, small businesses find capital, and customers receive 
advice on how to manage their nest eggs for a financially 
secure future.

    But the role banks play serving their communities has been 
placed in jeopardy by the broad array of new regulations. For 
example, the typical small bank with one compliance officer has 
recently had to contend with more than 2,000 pages of new 
regulations, and that is just the housing, capital and 
remittance areas.

    Moreover, the Dodd-Frank Act has charged federal financial 
regulators with writing and enforcing 398 new rules, resulting 
in at least 13,644 pages of proposed and final regulations, and 
that's with regulators only halfway through the rulemaking 
process. While not all of those rules apply to all banks, many 
do. Even the rules that do not, tend to have trickle down and 
become ``best practices'' as determined by the bank's primary 
federal banking regulator. Those regulators then apply those 
requirements to thousands of banks otherwise not subject to the 
rule.

    The key to changing the consolidation trend is to stop 
treating all banks as if they are the same or as if all banks 
operate in the same manner as the largest and most complex 
institutions. They don't. Financial regulation and examination 
should not take a one-size fits all approach. To do so, only 
layers on unnecessary requirements that add little to improve 
safety and soundness, but add much to the cost of providing 
services--a cost which bank customers ultimately bear.

    Instead, ABA has urged for years that a better approach to 
regulation is to tailor bank supervision to take into account 
the charter, business model, and scope of each bank's 
operations. This would ensure that regulations and the exam 
process add value for banks of all sizes and types.

    Regulators should be empowered--and directed--to make sure 
that rules, regulations and compliance burdens only apply to 
segments of the industry where it is warranted. Only then can 
America's hometown banks be freed up to best serve their 
communities.

    Tailor Regulation to a Bank's Business Model

    The ABA recommends that Congress ensure that regulation is 
tailored to a bank's business model. Time and again, I hear 
from bankers wondering why the complex set of rules, reporting 
requirements, and testing that are imposed upon the largest 
most diverse and global institutions become the standard 
applied to the smaller community banks in the country. The 
approach seems to be: ``If it's the `best practice' for the 
biggest banks it must be the best practice for all banks.'' 
Such an approach makes no sense in our diverse banking system 
with different business models and strategies.

    Of course, the supervisory process should assure risk is 
identified and managed prudently. This risk assessment must be 
appropriate to the type of institution. In the aftermath of the 
financial crisis, the pendulum of bank examination has swung to 
the extreme--affecting every sized bank. Overbroad, complicated 
restrictions supplant prudent oversight. Inconsistent 
examinations hinder lending, increase costs, and create 
procedural roadblocks that undermine the development of new 
products and services for bank customers.

    The banking agencies should move towards customized 
examinations that consider the nature of a bank's business 
model, charter type, and perhaps most important, bank 
management's success at managing credits, including a 
borrower's character, prior repayment history and strength of 
personal guarantees. In today's complex banking environment, an 
array of risk factors has had a far greater impact on a banks' 
ability to serve its customers--as well as its likelihood to 
get in trouble--than an arbitrary asset size.

    The ABA encourages Congress to support legislation that 
would ensure banks are regulated according to their business 
model, such as H.R. 2896, the Taking Account of Institutions 
with Low Operation Risk Act (TAILOR Act) of 2015, introduced by 
Rep. Scott Tipton (R-Colo.). This legislation would require 
regulators to tailor regulatory actions so that they apply only 
when the bank's business model and risk profile require them--
not just based on asset size. This legislation empowers 
regulators to make sure that rules, regulations and compliance 
requirements only apply to segments of the industry where 
warranted.

    II. Improve Access to Home Loans

    The mortgage market touches the lives of nearly every 
American household. Banks help individual consumers achieve 
lifelong goals of homeownership by giving them access to the 
funding they need. Without home loans most Americans would not 
be able to purchase a home.

    Banks are a major source of mortgage loans--holding more 
than $2 trillion in one-to-four family home loans on their 
books and originating others under government guarantees. In 
addition, banks support the housing industry with construction 
and development loans, and homeowners with home equity lines of 
credit. These critical services of banks results in more income 
and jobs in communities, along with a larger tax base for local 
governments.

    Borrowers across the country--served by banks of all 
sizes--should be able to obtain safe, sound and well 
underwritten home loans. However, it is clear that new 
restrictive regulatory requirements have kept some creditworthy 
borrowers, particularly first-time homebuyers, from obtaining 
much needed mortgage credit. The complex and liability-laden 
maze of compliance has made home loan origination more 
difficult, especially for borrowers with little or weak credit 
history. Over-regulation of the mortgage market has reduced 
credit available to bank customers, raised the cost of 
services, and limited bank products. The result has been a 
housing market still struggling to gain momentum.

    In Oklahoma, approximately 25 percent of the state's banks 
have simply elected to get out of the home mortgage lending 
business. They have concluded that both the litigation and 
regulatory risks they would encounter are simply too great 
given the limited number of such loans they normally would make 
in a given year. That means their customers are either denied 
credit or must search for an alternative source of capital. 
This is especially true for rural areas.

    Congress can help reduce needless impediments to mortgage 
lending that have constrained the banking industry's ability to 
help first-time homebuyers and dampened the growth of 
prosperity across the nation's communities. For example, 
Congress should:

    Treat Loans Held in Portfolio as Qualified Mortgages

    The Dodd-Frank Act (DFA) is very restrictive in its 
definition of ``ability to repay'' (ATR) and Qualified Mortgage 
(QM)--having a detrimental impact on the market and consumer 
access to credit. Portfolio lending is among the most 
traditional and lowest-risk lending in which a bank can engage.

    Loans held in portfolio are well underwritten because if a 
loan is to be held in a bank's portfolio, the bank carries all 
of the credit and interest rate risk associated with that loan 
until it is repaid. Therefore it must be conservative to 
protect the safety and soundness of the bank, and these loans 
are made with no risk to the nation's taxpayers.

    ABA supports H.R. 1210, the Portfolio Lending and Mortgage 
Access Act, introduced by Rep. Andy Barr (R-Ky.), which passed 
the House on Nov. 18, 2015. It would treat any loan made by an 
insured depository institution and held in that lender's 
portfolio as complaint with the Ability-to-Repay/Qualified 
Mortgage requirements and would provide an important and much 
needed correction to the restrictive standards that now exist.

    This legislation is fully consistent with the intent behind 
the Dodd-Frank Act in that it encourages ``skin in the game'' 
or risk retention by the originating lender. By encouraging 
banks to hold these loans on their books, the act will expand 
safe, affordable lending for more borrowers who look to 
America's hometown banks for safe, affordable credit.

    TILA-RESPA Integrated Disclosure Rule (TRID)

    The TILA-RESPA Integrated Disclosure Rule (TRID) became 
effective in October 2015 and changed all residential mortgage 
origination disclosures as well as systems which generate and 
track originations. The new rules are extremely lengthy and 
technical, and carry substantial administrative and legal 
liabilities.

    ABA has expressed high concerns that this rule contains 
inadequacies that require immediate clarification and 
resolution for the Consumer of Financial Protection Bureau 
(CFPB). Uncertainty about the treatment of minor errors and 
oversights has broadly affected mortgage originators. Current 
legal uncertainties ultimately harm the consumer. Such 
uncertainties threaten liquidity in key portions of the market 
possibly restricting consumers' access to mortgage credit. In 
addition, lack of legal uncertainty poses risks that ultimately 
inflate prices to the consumer.

    ABA and various industry partners have communicated to 
Director Cordray that immediate action is urgently needed to 
allay lender and investor concerns regarding TRID liabilities. 
We have requested that the CFPB: (1) formally publish 
authoritative guidance clarifying the scope and extent of TRID 
legal liabilities and assuring stakeholders that there are 
viable cure provisions for correcting technical errors and 
mistakes; (2) form an internal Task Force to engage with 
industry stakeholders to identify compliance and legal problems 
to be addressed via published guidance or interpretive 
rulemaking, and; (3) extend the current ``good faith'' 
implementation period for TRID until all regulatory issues and 
fixed and banks are granted a reasonable period to adapt 
compliance systems. Such actions will ensure a healthy bank 
mortgage lending environment, while ensuring consumers have 
access to well-priced financial options.

    III. Remove Impediments to Serving Customers

    Rules and requirements surround every bank activity. When 
it works well, bank regulation helps ensure the safety and 
soundness of the overall banking system. When it does not, it 
constricts the natural cycle of facilitating credit, job growth 
and economic expansion. Finding the right balance is key to 
encouraging growth and prosperity as unnecessary regulatory 
requirements lead to inefficiencies and higher expenses which 
reduce resources devoted to serving customers and communities.

    Regulatory requirements for the banking industry have grown 
dramatically in recent years, hindering in particular rural 
banks' ability to take care of their customers and serve local 
communities. By reducing or minimizing regulatory requirements 
for these rural community banks, Congress would allow banks to 
provide more credit, products and services to meet the needs of 
their local communities.

    Address the Cumulative Impact of the Increasing Number of 
Regulations

    The ABA supports many bills that would address banks' 
concerns with growing regulatory requirements on consumers and 
especially rural areas. Several bills incorporating provisions 
which would provide regulatory relief to America's hometown 
bank have been introduced in the House and Senate, such as:

          < H.R. 1389, the American Jobs and Community 
        Revitalization Act of 2015, introduced by Rep. Andy 
        Barr (R-Ky.), and;

          < H.R. 1233, the Community Lending Enhancement and 
        Regulatory Relief Act (CLEARR Act), introduced by Rep. 
        Blaine Luetkemeyer (R-Mo.)

    American Jobs and Community Revitalization Act of 2015

    ABA supports Rep. Andy Barr's (R-Ky.) American Jobs and 
Community Revitalization Act of 2015 legislation which contains 
a number of provisions that will reduce the regulatory 
requirements for America's rural hometown banks around the 
county in ways that make it easier for them to meet their 
customers' needs. For example, the legislation includes 
provisions that would:

           Require a review and reconciliation of 
        existing regulations. Congress should require a review 
        and reconciliation of existing regulations that may be 
        in conflict with or duplicative of new rules being 
        promulgated by the banking agencies, or which in their 
        application badly fit the variety of institutions that 
        make up the banking industry.

           Streamline currency transaction reporting. 
        Anti-money laundering efforts by financial institutions 
        can be improved by eliminating needless currency 
        transaction reporting through a ``qualified customer'' 
        exemption to the Currency Transaction Reporting (CTR) 
        rules. This would significantly reduce the more than 13 
        million CTRs filed annually, saving banks many hours 
        each year in filling out unneeded and unused forms. 
        Importantly, it would give them more time to devote to 
        what they do best: take care of their customers and 
        communities.

           Ensure Subchapter S banks are treated 
        equitably. Banks are required to build capital under 
        the Capital Conservation Buffer requirements of the 
        agencies' Basel III regulations. However, the current 
        regulations do not take into consideration the unique 
        cash flows applicable to S Corporation banks where 
        income is calculated prior to consideration of 
        distributions for payment of taxes arising from S 
        Corporation activities. This puts S Corporation banks 
        at a disadvantage when compared to C Corporation banks.

    Community Lending Enhancement and Regulatory Relief Act

    ABA supports Rep. Blaine Luetkemeyer (R-Mo.) Community 
Lending Enhancement and Regulatory Relief Act (CLEARR Act) 
which contain a number of provisions that would lift or modify 
many unnecessary restrictions, better allowing community banks 
to meet the needs of their customers. In particular, this 
legislation would:

           Ensure the costs and benefits are considered 
        before issuing new regulation. The bill also would 
        require the Securities and Exchange Commission (SEC) to 
        conduct an analysis of the costs and benefits, 
        including economic benefits, of any new or amended 
        accounting principle. Benefits to investors would have 
        to outweigh costs before the SEC could recognize the 
        principle.

           Improve Access to Home Loans. This bill also 
        contains a number of provisions to ensure consumers 
        have access to home loans as discussed above.

    Evaluate Necessity of Basel III Complex Capital 
Requirements

    In addition, Basel III poses a significant compliance 
requirements on most rural community banks. The banking 
agencies estimate that the direct compliance cost of only the 
risk weighted asset portion of the final rules to be $43,000 
per institution for banks under $500 million in assets.

    While complex, the risk weighted asset portion of Basel III 
is just one component of the final rules. The overall cost for 
banks over $500 million is almost certainly significantly 
higher. Unnecessarily, complex capital requirements force banks 
to devote resources away from lending opportunities.

    Although the industry is over a year into implementation, 
many institutions continue to struggle with understanding the 
rule's complexities. The sections of Basel III ABA members most 
commonly cite as creating the greatest compliance burden 
include: (1) new definition of High Volatility Commercial Real-
Estate (HVCRE); (2) new risk weighting methodology for private 
label securitizations; and; (3) new credit conversion factors 
for short-term lines of credit. Furthermore, even as America's 
hometown banks are working through Basel III implementation, 
the international Basel Committee has issued a steady stream of 
new proposals that could be adopted in the United States.

    ABA believes that highly capitalized banks and particularly 
those that serve rural America, should be exempt from Basel III 
and any potential future changes to the Basel framework. Using 
data from the Federal Deposit Insurance Corporation (FDIC), ABA 
estimates that some 4,000 banks may already have far more 
capital than Basel III would require. For these banks, the 
considerable and costly work of Basel III compliance yields no 
additional supervisory or safety and soundness benefits, and 
provides no services to customers.

    Conclusion

    America's hometown banks have been the backbone of 
communities across nation. Our presence in small towns and 
large cities everywhere means we have a personal stake in the 
economic growth, health and vitality of nearly every community. 
Once again, this is particularly true for those banks that 
serve rural America.

    A bank's presence is a symbol of hope, a vote of confidence 
in a town's future. When a bank sets down roots, communities 
thrive. When they leave or reduce services, communities, and 
consumers do not thrive. It's that simple.

    We urge Congress to act now and pass legislation to help 
turn the tide of community bank consolidation and protect 
communities from losing a key partner supporting economic 
growth.
                               June 2016


                              Testimony of


                               Shan Hanes


                           before the

                        Small Business Committee


          Economic Growth, Tax and Capital Access Subcommittee


                 United States House of Representatives

                            May 2016

    ----------------------------------------------------------


                          Testimony of

                           Shan Hanes

                           before the

                    Small Business Committee

      Economic Growth, Tax and Capital Access Subcommittee

                             of the

             United States House of Representatives

                          June 9, 2016

    Chairman Huelskamp, Ranking Member Chu, and members of the 
Subcommittee, my name is Shane Hanes, and I am the President 
and CEO Board of First National Bank in Elkhart, Kansas. First 
National Bank is a $78 million bank with a main location in 
Elkhart, Kansas and one branch serving Rolla, Kansas and the 
surrounding area. We have 20 employees and we predominantly 
lend to agriculture. Despite our small size, the bank is the 
largest lender in the county and we represent an average sized 
bank in rural Kansas.

    I am also a member of the American Bankers Association's 
Agricultural and Rural Bankers Committee. I appreciate the 
opportunity to present the views of the ABA on credit 
conditions and credit availability in rural America.

    The nation's $16 trillion banking industry, which is 
composed of small, regional and large banks that together 
employ more than 2 million people, safeguard $12 trillion in 
deposits and extend nearly $8 trillion in loans. Rural credit 
issues are very important to the banking industry as banks have 
provided credit to rural areas since the founding of our 
country. Over 5,000 banks--over 82% of all banks--reported 
agricultural loans on their books at year end 2015 with a total 
outstanding portfolio of over $171 billion.

    The topic of today's hearing is very timely. The rural 
economy has been slowing, with farm sector profitability 
expected to decline further in 2016 for the third consecutive 
decline. However, farm and ranch incomes for the past five 
years have been some of the best in history. With the new Farm 
Bill in place, farmers, ranchers, and their bankers have 
certainty from Washington about future agricultural policy and 
how it will affect rural America. Interest rates continue to be 
at or near record lows, and the banking industry has the 
people, capital and liquidity to help rural America sustain 
through any turbulence in the rural economy.

    Banks continue to be one of the first places that farmers 
and ranchers turn when looking for agricultural loans. Our 
agricultural credit portfolio is very diverse--we finance large 
and small farms, urban farmers, beginning farmers, women 
farmers and minority farmers. To bankers, agricultural lending 
is good business and we make credit available to all who can 
demonstrate they have a sound business plan and the ability to 
repay.

    In 2015, farm banks--banks with more than 15.5% of their 
loans made to farmers or ranchers--increased agricultural 
lending 7.9 percent to meet these rising credit needs of 
farmers and ranchers, and now provide over $100 billion in 
total farm loans. Farm banks are an essential resource for 
small farmers, holding $48 billion in small farm loans, with 
$11.5 billion in micro-small farm loans (loans with origination 
values less than $100,000). These farm banks are healthy and 
well capitalized and stand ready to meet the credit demands of 
our nation's farmers large and small.

    In addition to our commitment to farmers and ranchers, 
thousands of farm dependent businesses--food processors, 
retailers, transportation companies, storage facilities, 
manufacturers, etc.--receive financing from the banking 
industry as well. Agriculture is a vital industry to our 
country, and financing it is an essential business for many 
banks, mine included.

    Banks work closely with the Small Business Administration 
to provide credit through the 7(a) and Section 504 guaranteed 
lending programs. Additionally, banks like mine utilize USDA to 
make additional credit available by working with the Farm 
Service Agency to promote Guaranteed Farm Loan Programs and 
Rural Development for their many programs available for rural 
communities. The repeal of borrower limits on USDA's Farm 
Service Agency guaranteed loans has allowed farmers to continue 
to access credit from banks like mine as they grow, ensuring 
credit access for farmers across the country and the guaranteed 
funding of USDA's Rural Development programs has encouraged 
banks like mine to use these programs when applicable.

    In my testimony today I would like to elaborate on the 
following points:

          > Banks compete with competition on an uneven playing 
        field;

          > Banks must deal with the daily impact of new and 
        enhanced bank regulations and impediments to growth for 
        rural communities;

          > Bank's specific impediments to growth and impact on 
        rural lenders;

          > The current issues with appraisers in rural America 
        and the impact on our business as lenders.

    I. Unfair competition

    The Farm Credit System is a government sponsored entity 
that has veered away from its intended mission and now 
represents an unwarranted risk to taxpayers. The Farm Credit 
System was founded in 1916 to ensure that young, beginning, and 
small farmers and ranchers had access to credit. It has since 
grown into a $304 billion behemoth offering complex financial 
services. To put this in perspective, if the Farm Credit System 
were a bank it would be the ninth largest in the United States, 
and larger than 99.9% of the banks in the country. This system 
operates as a Government Sponsored Entity and represents a risk 
to taxpayers in the same way that Fannie Mae and Freddie Mac 
do. It benefits from significant tax breaks--valued at $1.3 
billion in 2015--giving it a significant edge over private 
sector competitors. Moreover, the Farm Credit System enjoys a 
government backing, formalized by the creation of a $10 billion 
line of credit with the U.S. treasury in 2013. The Farm Credit 
System has veered significantly from its charter to serve 
young, beginning, and small farmers and ranchers, and now 
primarily serves large established farms, who could easily 
obtain credit from the private sector. In fact, the majority of 
Farm Credit System loans outstanding are in excess of $1 
million. Any farmer able to take on over $1 million in debt 
does not need subsidized credit. Moreover, the volume of small 
borrower loans accounted for 14% of all new Farm Credit System 
loans in 2015. In addition to the Farm Credit System, the 
Credit Union industry has grown to over $1 trillion in assets 
and their tax benefit is estimated to exceed $26.75 billion 
over the next ten years.

    II. Impact of new and enhanced bank regulations and 
impediments to growth for rural communities

    One of the most daunting challenges has been the sheer 
volume of recent regulations. For many years, our compliance 
was primarily handled within the bank by employees. It allowed 
for cross-training of employees and fostered individual 
education regarding the regulations and bank policies. When 
necessary, the bank would outsource an audit to provide 
independence or a specific expertise. However, the rules and 
regulations change so often that a banker cannot stay abreast 
or competent to review the details of the new rules and 
regulations. Therefore, we have begun outsourcing most audits 
to a point that we are paying a full-time teller salary to 
compliance audit teams. The impact is one fewer bank employee 
serving customers on a daily basis and one less salary paid to 
a member of our community.

    III. Specific impediments to growth and impact on rural 
lenders on real estate lending

    Reduced Credit Offerings: Many banks in rural Kansas have 
moved out of the mortgage lending business. Not because the 
loans are not safe and profitable, but due to compliance. 
Historically, because we only make standard real estate loans 
with 20% down payment, these loans were safe and sound credit 
decisions with some of the lowest loss ratios and were the 
``bread and butter'' for both the bank and community. In my 
bank, we don't sell mortgages on the secondary market, so a 
poor credit decision would affect our bottom line and 
shareholders directly. Due to these factors in banks similar to 
mine, banks are exiting the mortgage lending market not due to 
credit decisions, but due to compliance and regulatory 
decisions. The mortgage lending rules were intended to address 
the credit risk side; however the compliance risk has become 
greater than the credit risk. If the loan is held in the bank's 
portfolio, it should automatically be a qualified mortgage (QM) 
loan as the credit risk lies with the bank.

    Loan Closings: To try and comply with the onerous 
regulations, we've hired an outside consultant to assist us 
completing pre-closing and post-closing real estate reviews of 
all consumer real estate loans. This added time and expense 
became necessary as we did not possess the necessary compliance 
expertise in house. Additionally, my bank doesn't close enough 
consumer real estate loans on a monthly basis to gain the 
expertise in house. This added compliance has increased the 
closing costs to the consumer and delayed the closing of their 
loan to allow for extra review of loan documents.

    Payment Structure and Reduced Standard Loan Options: One of 
the biggest advantages that rural banks had over large 
commercial banks was the ability to customize payment structure 
to meet their specific needs. We know our customers, we know 
when they receive paychecks and we know their cash flow needs. 
We could leverage this to compete against large lenders and 
better serve our community. However, due to the regulatory 
constraints, we've moved to a canned loan product system. We 
now make ``monthly payment consumer loans'' regardless of how 
and when the customer is paid. Because this product ``fits the 
system.'' In an effort to protect the consumer, the regulatory 
environment has harmed the consumer's access to credit and 
flexibility of their bank to tailor the repayment to their 
specific needs. Local lending decisions should be made locally, 
not by a bureaucrat in Washington, D.C.

    Costs to Make a Real Estate Loan: Every rural bank has a 
similar story: A little elderly lady with her house free and 
clear comes to the bank for a loan because her air conditioner 
unit is out. Historically, the bank would have placed a small 
mortgage on her house, produced a quick valuation on the home, 
and funded the purchase of a new air conditioner unit. However, 
due to the costs and time required to close a consumer real 
estate loan, the loan is not a profitable loan. We have to make 
a choice to either make the loan going through the regulatory 
hoops and cost to the borrower, or make the loan unsecured to 
the customer at a significantly higher interest rate and 
shorter repayment terms. The sad reality is that due to 
compliance on loans like this, some banks will not be involved 
in this type of lending. We have chosen to make more loans, 
like the above example, unsecured as we believe it is our duty 
to help the customer despite increased regulatory costs.

    Houses for Sale: Historically, our rural town has 40 to 60 
homes for sale as customers have their existing home for sale 
and are looking to upgrade to a larger home. However, we 
currently have between 100 and 120 homes for sale in a small 
county of 3,000 people. The unusually high number of homes for 
sale may be partially due to other external factors, but I 
would argue strongly that it is partially due to increased 
regulatory compliance and few lenders in that credit market. 
The lenders who are still in the mortgage credit space are more 
conservative, have higher closing costs, and are much slower to 
complete the transaction. These factors all further slow-down 
an already slowing down rural economy.

    Secondary Market: The most widely used secondary real 
estate market provider in our market recently changed their 
policy to not make any real estate loans less than $50,000. The 
average residential real estate loan at our bank is less than 
$33,000. Many of our customers would not qualify to even apply 
for a mortgage on the secondary market due to these new rules.

    IV. Current issues with appraisers in rural America and the 
impact on our business as lenders

    Appraisers: When a bank is making a loan on an agricultural 
or commercial property, one of the initial steps is to receive 
a certified general appraisal. However, due to a shortage of 
appraisers and the ever increasing demands on appraisals, 
receiving a timely appraisal is very difficult. We've had to 
wait six months or more to receive an appraisal. Due to the 
impediments to becoming a certified appraiser, it is difficult 
for new individuals to acquire a license and there is limited 
desire for an existing appraiser to take on an apprentice who 
will eventually be his direct competitor. Customers shouldn't 
have to wait six months for a credit decision simply because 
the bank cannot receive a completed appraisal.

    The American Bankers Association has been very involved in 
the issue of the lack of rural appraisers. The ABA has held two 
large meetings with various stake-holders to create a working 
solution on the appraisers issue. The most common them, 
however, is that there needs to be more incentive for 
individuals to become involved in the real estate appraisal 
business, especially in rural areas. Congress needs to get 
involved in making it easier to become an appraiser or we will 
continue to see long delays in customers closing on home 
mortgages.

    Conclusion

    Rural banks will continue to serve their customers to the 
best of their abilities despite the many obstacles that have 
hurt their business models. Rural banks will compete with 
anyone on a level playing field and they have not backed down 
from such competition in the past. But when there is a 
combination of an unfair playing field and over burdensome 
regulations, all banks have great difficulty in surviving, not 
just competing. Banks are drivers of the economy, and this is 
especially true for rural banks. With smart reforms to unfair 
competition, regulations that hold banks back from helping 
their customers and providing incentives for people to become 
involved in rural appraising, rural banks will once again be 
able to help their local economies grow.

    Thanks you for the opportunity to address the subcommittee 
and share my view on rural banking. I would be happy to answer 
any questions that you may have.
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