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







                    EXAMINING LEGISLATIVE PROPOSALS
                     TO ADDRESS CONSUMER ACCESS TO
                      MAINSTREAM BANKING SERVICES

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 27, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-105






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

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

                   RANDY NEUGEBAUER, Texas, Chairman

STEVAN PEARCE, New Mexico, Vice      WM. LACY CLAY, Missouri, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK,              DAVID SCOTT, Georgia
    Pennsylvania                     CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana          STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina        MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky                  DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania       KYRSTEN SINEMA, Arizona
FRANK GUINTA, New Hampshire          JUAN VARGAS, California
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
TOM EMMER, Minnesota



























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 27, 2016...........................................     1
Appendix:
    September 27, 2016...........................................    35

                               WITNESSES
                      Tuesday, September 27, 2016

Michel, Norbert J., Research Fellow, Financial Regulations, 
  Heritage Foundation............................................     9
Paul, Ronald D., Chairman and CEO, EagleBank, on behalf of the 
  Independent Community Bankers of America (ICBA)................     7
Turner, Michael A., President and CEO, Policy and Economic 
  Research Council (PERC)........................................     6

                                APPENDIX

Prepared statements:
    Michel, Norbert J............................................    36
    Paul, Ronald D...............................................    43
    Turner, Michael A............................................    48

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of the American Bankers Association........    71
    Written statement of CUNA....................................    73
    Written statement of Equifax and the National Consumer 
      Telecom and Utilities Exchange Inc.........................    74
    Written statement of FICO....................................    76
    Written statement of IBAT....................................    81
    Written statement of the National Association of REALTORS...    82
    Written statement of PERC....................................    83
    Written statement of the U.S. Chamber of Commerce............    86
Ellison, Hon. Keith:
    Written statement of the Credit Builders Alliance............    88
    Written statement of the National Association of REALTORS...    89
    Written statement of CFED....................................    90
    Written statement of the National Consumer Reporting 
      Association................................................    92
    American Banker article entitled, ``Five Ways Alternative 
      Data Can Expand Credit Access..............................    94
    Rent Reporting for Credit Building Pilot.....................    96
Emmer, Hon. Tom:
    Written statement of the American Bankers Association........   130
    Written statement of the Alabama Bankers Association.........   131
    Written statement of the Arizona Bankers Association.........   132
    Written statement of the California Bankers Association......   134
    Written statement of the Community Development Bankers 
      Association................................................   135
    Written statement of the Community Bankers Association of 
      Georgia....................................................   138
    Written statement of Independent Bankers of Colorado.........   140
    Written statement of the Independent Bankers Association of 
      New York State, Inc........................................   141
    Written statement of the Independent Bankers Association of 
      Texas......................................................   143
    Written statement of the Independent Community Bankers of 
      America....................................................   145
    Written statement of the Idaho Bankers Association...........   146
    Written statement of the Illinois Bankers Association........   148
    Written statement of the Kansas Bankers Association..........   150
    Written statement of the Maryland Bankers Association........   152
    Written statement of the Minnesota Bankers Association.......   154
    Written statement of the Montana Bankers Association.........   156
    Written statement of the National Urban League...............   158
    Written statement of the National Bankers Association........   160
    Written statement of the North Carolina Bankers Association..   162
    Written statement of the North Dakota Bankers Association....   163
    Written statement of the bankers of Nevada...................   165
    Written statement of the New York Bankers Association........   166
    Written statement of the Ohio Bankers League.................   168
    Written statement of the Pennsylvania Association of 
      Community Bankers..........................................   170
    Written statement of the South Carolina Bankers Association..   172
    Written statement of the South Dakota Bankers Association....   174
    Written statement of the bankers of Tennessee................   176
    Written statement of the Texas Bankers Association...........   178
    Written statement of the Virginia Bankers Association........   180
    Written statement of the Wisconsin Bankers Association.......   182
    Written statement of the bankers of West Virginia............   183
Luetkemeyer, Hon. Blaine:
    Written responses to questions submitted to Dr. Norbert 
      Michel.....................................................   185
Royce, Hon. Ed:
    Written statement of the Housing Policy Council..............   187
    Written statement of the National Association of Home 
      Builders...................................................   189
    Written statement of the National Association of REALTORS...   190
    Letter to FHFA Director Watt from Representatives Royce, 
      Bachus, Himes, and Maloney, dated January 9, 2014..........   191
    Letter to FHFA Director Watt from various undersigned 
      organizations, dated November 14, 2014.....................   193
    Letter to FHFA Director Watt from leaders of communities of 
      color, dated April 29, 2015................................   196
    Letter to Monica Jackson, Office of the Executive Secretary, 
      CFPB, from various undersigned Members of Congress, dated 
      August 22, 2016............................................   199
    Written statement of Congressman Pete Sessions (TX-32).......   201
    Written statement of the U.S. Chamber of Commerce............   203
    American Banker article entitled, ``Credit Access Bill Would 
      Shore Up Financial Literacy''..............................   205
    Written statement of KASASA..................................   207
 
                    EXAMINING LEGISLATIVE PROPOSALS
                     TO ADDRESS CONSUMER ACCESS TO
                      MAINSTREAM BANKING SERVICES

                              ----------                              


                      Tuesday, September 27, 2016

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Pearce, Posey, 
Fitzpatrick, Luetkemeyer, Mulvaney, Pittenger, Barr, Rothfus, 
Tipton, Williams, Emmer; Clay, Scott, Maloney, Capuano, Heck, 
Sinema, and Vargas.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Royce, Ellison, and Moore.
    Chairman Neugebauer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of the subcommittee may 
participate in today's hearing for the purposes of making an 
opening statement and questioning the witnesses.
    Today's hearing is entitled, ``Examining Legislative 
Proposals to Address Consumer Access to Mainstream Banking 
Services.''
    I now recognize myself for one minute to give an opening 
statement.
    Today's hearing is important to consider legislation that 
can have a tremendous impact on consumer credit, product 
access, and education. I am pleased that our committee members 
on both sides of the aisle have taken thoughtful approaches to 
tactful issues that affect the daily lives of the American 
consumer. For example, Representative Royce has put forth two 
bills that would ensure a competitive environment for the 
selection of credit scoring models at GSEs, and to ensure the 
continued offering of credit education and counseling services. 
The latter bill is one that I want to continue to work with his 
office to refine and see if we can move across the finish line.
    Representatives Tipton, Williams, and Emmer all have put 
forth to bills seeking to address problems with the Federal 
Deposit Insurance Act that classifies certain deposits as 
brokered deposits. These bills aim to ensure that new and 
innovative consumer products can continue to be offered without 
unnecessary regulatory restraints. Today's panel will help this 
committee ensure all policy issues are considered and that we 
are informed in making thoughtful decisions as we move forward.
    The Chair now recognizes the ranking member of our 
Financial Institutions and Consumer Credit Subcommittee, Mr. 
Clay, for 2 minutes for an opening statement.
    Mr. Clay. Thank you, Mr. Chairman, and thanks for calling 
this hearing. I view this morning's hearing as an important 
opportunity to discuss the challenges faced by 10 million 
unbanked or underbanked American households who, for various 
reasons, do not have an account at a bank or other financial 
institution. I am also concerned about how we can help the 
estimated 26 million consumers representing about 11 percent of 
the adult population in this country who are considered credit 
invisible. They are called credit invisibles because they do 
not have any credit history with one of the nationwide consumer 
reporting agencies. The CFPB found that blacks, Hispanics, and 
individuals in low-income neighborhoods are more likely to have 
no credit records with nationwide credit bureaus, or to not 
have sufficient current credit history to generate a credit 
score.
    As credit scores are increasingly used to determine so many 
aspects of consumers' lives today, to have 1 in every 10 adults 
in this country to be considered credit invisible is a serious 
problem. Because of the importance of these issues, I 
appreciate this chance for members to get valuable input from 
external stakeholders about the legislative proposals that they 
have introduced. This hearing will ensure that members have the 
chance to fully vet these proposals, ensuring that we 
understand the benefits, but also are made aware of any 
potentially unintended consequences that may result if these 
bills are enacted into law.
    To this end, I hope the members who have introduced the 
bills that we will be discussing today will be open to any 
suggestion from the witnesses and others about possible changes 
to the bills to ensure that the text actually achieves the 
intended purposes to help vulnerable consumers, and I will 
yield back.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentleman from California, Mr. Royce, is recognized for 1 
minute.
    Mr. Royce. Mr. Chairman, thank you very much. I thank you, 
and I thank Chairman Hensarling for holding this hearing. I am 
in southern California, and we have one of the highest costs of 
living in the country, so access to credit is really vital in 
our communities to the well-being of the family. And the 
difference between good credit and bad credit is the ability to 
purchase a home out in California, or it is the ability to be 
able to actually own your car, or pay for a college education. 
This legislation that we are looking at here, H.R. 347, the 
Facilitating Access to Credit Act, would ensure that consumers' 
access to credit education services aren't choked off by 
lumping them in with credit repair scam artists. And in the 
digital age, the American people should have more tools at 
their disposal, not less.
    H.R. 4211, the Credit Score Competition Act, my other bill 
here, opens up the GSEs to alternative credit scoring models 
and in doing so expands the pool of home buyers without 
lowering the bar for qualifications, and it eliminates the 
government-backed monopoly in this regard. So both of these 
bills are strongly bipartisan with support from many members of 
this committee.
    And with that, Mr. Chairman, I asked for unanimous consent 
to submit to the record support letters from the Financial 
Services Roundtable, the National Association of REALTORS, the 
National Association of Homebuilders, and letters in support of 
alternative credit scoring model considerations by the GSEs 
from 18 civil rights and advocacy groups, the Leaders of the 
Congressional Black Caucus, Congressional Hispanic Caucus, 
Congressional Asian-Pacific-American Caucus, the Congressional 
Progressive Caucus, and a bipartisan group of members of this 
committee, including myself and Representative Maloney and 
Representative Himes. And I would also ask to submit a 
statement of support for the Facilitating Access to Credit Act 
from Representative Sessions of Texas, an opinion editorial in 
favor of the bill from the CEO of the Consumer Data Industry 
Association, a letter expressing concerns regarding CROA's 
jurisdiction from the U.S. Chamber of Commerce, and a recent 
letter I authored to the CFPB about CROA.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Royce. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. The time of the gentleman has expired. 
The gentleman from Minnesota, Mr. Ellison, is recognized for 2 
minutes.
    Mr. Ellison. Thank you, Mr. Chairman. What if there was a 
way with no government money and the backing of Democrats and 
Republicans to give tens of millions of Americans an increase 
in their credit scores, to give people a credit score that 
accurately reflected their ability and willingness to pay, that 
made it easier for them to buy a car, get a mortgage, start a 
business, because they had access to affordable interest rates, 
that allow young people to get a car note without relying on 
their parents to co-sign, that allowed widows to quickly 
establish a credit score, even if their credit was in their 
husband's name, that allowed residents of public housing to 
easily build a credit score?
    What if middle and working class and poor people who pay 
their bills on time get rewarded with access to lower cell 
phone and utility deposits? What if it was easier for people 
stung by bankruptcy or financial trouble to quickly improve 
their credit scores?
    Well, it is not impossible. It is not even hard. All I do 
is ask you to join me and my Democrat and Republican 
colleagues, a special thank you to Congressman Mike Fitzpatrick 
and many others, to support the Credit Access and Inclusion Act 
of 2015, which amends the Fair Credit Reporting Act to clarify 
the Federal law with respect to reporting certain positive 
consumer credit information to consumer reporting agencies and 
for other purposes. And let me just say, thank you to the 
advocates who, without their tireless work, we wouldn't be here 
today, and I just want to say a special thank you to Mr. Turner 
who's here to talk about it in an expert way. I yield back.
    Chairman Neugebauer. I thank the gentleman. Now the 
gentleman from Colorado, Mr. Tipton, is recognized for 1 
minute.
    Mr. Tipton. I'd like to thank the chairman and the ranking 
member for holding this hearing. Preserving consumer access to 
mainstream banking services is certainly an important topic and 
should continue to be a consistent bipartisan goal of this 
committee. I would also like to thank the witnesses for taking 
the time to be able to appear before the subcommittee today. 
Your expertise is invaluable as we discuss these legislative 
proposals. H.R. 6162, the Protect Prepaid Accounts Act, is a 
legislative relief effort I introduced to clarify that prepaid 
funds deposited in an insured depository institution satisfy 
the requirements of the Primary Purpose Exclusion to the 
definition of a deposit broker. As a result of the 2014 
revision to a deposit broker regulations, the FDIC has 
determined the primary purpose exception applies only 
infrequently to prepaid products and typically requires a 
specific request for a determination by the FDIC. 
Unfortunately, the practical impact of this conclusion is an 
increase in deposit insurance costs to any depository 
institution that operates a prepaid program. Inevitably, this 
also leads to an increase in costs and less choices for 
consumers as banks commit additional resources to compliance 
rather than to their customers.
    Prepaid products are an incredibly important tool utilized 
by numerous organizations, including State and Federal 
Government agencies, as well as universities and corporations, 
to make a variety of disbursements to consumers. Importantly, 
prepaid card users include 67 million Americans considered 
unbanked and underbanked.
    Mistakenly classifying prepaid accounts as brokered 
deposits may force depository institutions to drop their 
programs, impacting students, workers and government benefit 
recipients, that all rely on prepaid products to access the 
financial system. This legislation will ensure that financial 
institutions will be able to devote their time to their 
customers. The most financially vulnerable Americans will 
continue to have safe and reliable access to their money. Mr. 
Chairman, I thank you for this hearing and look forward to our 
comments from our committee, and I yield back.
    Chairman Neugebauer. I thank the gentleman. The gentlewoman 
from Wisconsin, Ms. Moore, is recognized for 1 minute.
    Ms. Moore. Thank you so very much, Mr. Chairman, and 
ranking member, and thank you, panelists, for coming here to 
speak with us today. I am so happy, especially, to have Dr. 
Michel here, to speak in support of H.R. 4116, the Reciprocal 
Deposits Bill. And I want to thank our Ranking Member Waters 
for working with me on this legislation and for her support. 
H.R. 4116 is a targeted way for us to help minority-owned, 
small, and CDFI institutions within our districts. It is good 
for rural and for urban districts. I appreciate that this bill 
has bipartisan support, and I look forward to this bill passing 
here today. And with that, I would yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    Mr. Scott. Mr. Chairman, I ask unanimous consent to submit 
a letter from a number of consumer, civil rights, and other 
advocates about H.R. 41172.
    Chairman Neugebauer. Without objection, it is so ordered.
    Chairman Neugebauer. The gentleman from Texas, Mr. 
Williams, is recognized for 1 minute.
    Mr. Williams. Thank you, Mr. Chairman. Community banks are 
independent, locally owned and operated institutions. Community 
bank officers often know their customers and are often deeply 
involved in their local communities. While large banks can 
offer these same customers a wide range of products and 
resources, community banks often rely on third-party venders. 
H.R. 5660, the Retail Checking Account Protection Act of 2016, 
is a bipartisan bill providing regulatory relief to community 
banks so they can compete with larger financial institutions. 
This commonsense bill provides a simple clarification that 
enables community banks to offer advanced banking services and 
innovative financial products via third-party service providers 
without the fear of increased regulation or having those 
customer deposits be deemed brokered.
    Simply put, I believe the regulatory risk and deposit 
classification should be based on the strength and 
characteristics of the relationship established between an 
individual depositor and their bank, rather than by a bank's 
use of third-party service provider or service.
    Mr. Chairman, I look forward to discussing the bill further 
with the witnesses today, and I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentleman, and now the 
gentleman from Minnesota, Mr. Emmer, is recognized for 1 
minute.
    Mr. Emmer. Thank you, Mr. Chairman, for calling this 
legislative hearing today. As you know, Congresswoman Moore and 
I introduced H.R. 4116 to modernize a law that currently treats 
reciprocal deposits like brokered deposits, despite fundamental 
and very meaningful differences. As we all know, reciprocal 
deposits are safe, practical, core-like deposits that enhance 
the ability of a community bank to serve loyal customers. 
Ultimately, this leads to more capital in our communities to 
fund economic development. From local governments, nonprofits, 
and small businesses, to folks living on the iron range to 
urbanites in the Twin Cities in Minnesota, reciprocal deposits 
are both necessary, and in the public interest. They are a way 
for Americans to ensure deposits without having to use multiple 
banks while actually reducing the likelihood of taxpayer 
bailouts like we saw in the aftermath of the Great Recession.
    I want to thank the witnesses in advance for testifying 
today, and I look forward to discussing the merits of enacting 
this vital policy proposal, and I yield back.
    Chairman Neugebauer. I thank the gentleman and will now 
introduce today's witnesses. Today, we welcome the testimony of 
Dr. Michael Turner, the President and CEO of the Policy and 
Economic Research Council, or PERC; Mr. Ron Paul, who is the 
chairman and CEO of EagleBank, testifying on behalf of the 
Independent Community Bankers of America; and Dr. Norbert 
Michel, Research Fellow in Financial Regulations at Heritage 
Foundation.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony, and without objection, 
each of your written statements will be made a part of the 
record.
    Chairman Neugebauer. I now recognize Dr. Turner for 5 
minutes.

 STATEMENT OF MICHAEL A. TURNER, PRESIDENT AND CEO, POLICY AND 
                ECONOMIC RESEARCH COUNCIL (PERC)

    Mr. Turner. Thank you, Mr. Chairman, Ranking Member Clay, 
and members of the subcommittee. I am here to offer testimony 
in support of three bills: the Facilitating Access to Credit 
Act, the Credit Access and Inclusion Act, and the Credit Score 
Competition Act. I will just paraphrase the Jackson Five, that 
the core message of my 1, 2, 3 bills is as easy as A, B, C, 
action by Congress.
    Let me begin with the Facilitating Access to Credit Act. In 
all my years of dealing with consumer finance issues, the one 
issue that has unified members of both parties with regulators, 
advocacy groups, and industry, is the importance of a need for 
more financial literacy. In fact, consumers both want and need 
more convenient and robust credit education. They need this to 
enjoy a better life through better credit for the reasons that 
Congressman Ellison enumerated earlier. Since 1970, in fact, 
this institution has encouraged consumers to communicate, to 
dialogue with national consumer reporting agencies, credit 
bureaus, about their credit reports. And, in fact, thousands of 
lenders have instructed consumers to reach out to credit 
bureaus, national credit bureaus, about their reports and 
scores. More recently, in 2004, with the implementation of the 
FACT Act and free annual disclosures, this dialogue between 
consumers and credit bureaus was enhanced, and, in fact, 
regulators now have been making a push for free score 
disclosures.
    Despite this complex architecture of communication that is 
guided toward financial literacy, credit report and credit 
score literacy, a wedge has been driven between consumers and 
credit bureaus in the form of a circuit court decision that 
expands the definition of credit repair organization and now 
includes all sorts of things that have nothing to do with 
credit repair, including credit education.
    This topic has been researched by my organization, the 
University of Arizona, and others, and what we found is that 
personalized credit education makes a difference. It 
outperforms the best available options currently dramatically. 
In addition, the CROA barriers effectively deter more than 9 in 
10 consumers from taking up these services. It basically 
renders them meaningless. And as a consequence, the very 
existence of these convenient, high-tech, accessible credit 
education services are currently at risk and require 
Congressional action, such that H.R. 347 puts out.
    Another area requiring Congressional action is the Credit 
Access and Inclusion Act. And I have the privilege of now being 
before this body for my third time dating back to 2005, talking 
about this very issue. There are 54 million credit invisibles 
today. We use a different definition than the CFPB. We included 
not only those who have no credit file, but who have 
insufficient information in the report to generate a score. 
This group is overwhelmingly comprised of younger Americans, 
elderly Americans, lower-income Americans, and members of 
minority communities. They remain trapped by the credit Catch-
22, that is to say, that in order to qualify for mainstream 
credit, you have to have already had credit.
    So credit access for credit invisibles means high cost 
credit access, payday lenders, pawn shops, check-cashing 
services. One study estimates that $3.4 billion of wealth are 
stripped from credit invisibles a year, and that use of payday 
loans alone increases hardship on this group by 25 percent, 
meaning it makes it more difficult to pay essential bills like 
utilities, dental and health care, as well as prescription 
drugs, and this is just payday loans, not including the other 
high-cost forms of credit.
    The Credit Access and Inclusion Act would empower consumers 
with a tool that would allow them to stamp out credit 
invisibility. Currently, when utility companies and telcos 
report to credit bureaus, they report late data. We are 
permitting late data to be reported, which for many credit 
invisibles may be the only trade line in their file. What this 
does is rather than credit reports and scores being a tool for 
inclusion, it becomes a tool for exclusion. It becomes a 
blacklist. We have fought this around the world and had this 
changed in countries, most recently including Australia and New 
Zealand, for that very reason.
    The Credit Access and Inclusion Act would clarify this, 
because right now, State regulators think that it is okay for 
negative data to be reported, but not for positive data. We 
believe that this is already permitted, that this bill would 
end regulatory uncertainty, and enable this tool to be used for 
consumers' benefit.
    How good of an idea is this? Well, my colleague who has 
fighting for this for years now, Jose Quinonez, just last week 
was made the most recent MacArthur Foundation genius, in part, 
because of his innovative ways to facilitate access to credit 
using alternative data. I will stop. I see I am over. Thank you 
very much for the privilege of testifying today.
    [The prepared statement of Dr. Turner can be found on page 
48 of the appendix.]
    Chairman Neugebauer. I thank the gentleman. And now Mr. 
Paul, you are recognized for 5 minutes.

 STATEMENT OF RONALD D. PAUL, CHAIRMAN AND CEO, EAGLEBANK, ON 
 BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Paul. Chairman Neugebauer, Ranking Member Clay, and 
members of the subcommittee, my name is Ron Paul, and I am 
chairman and CEO of EagleBank, a $6.4 billion asset community 
banks headquartered in Bethesda, Maryland. I am pleased to 
testify today on behalf of the Independent Community Bankers of 
America and the nearly 6,000 community banks we represent. 
EagleBank has 430 employees, and serves 12,000 customers in the 
Washington, D.C. Metropolitan area. EagleBank has been able to 
build strong relationships with our customers because we know 
we are committed to the Washington region, that we are active 
lender to local businesses, and a vital part of the regional 
economy.
    A bipartisan bill before the subcommittee today, H.R. 4116, 
will help keep deposits in the community by ensuring the FDIC's 
classification of deposits that reflect the true 
characteristics. Introduced by Representatives Gwen Moore and 
Tom Emmer, H.R. 4116 would promote the use of reciprocal 
deposits as a stable source of funding to support community 
lending, which we know is the backbone of our local economies.
    Reciprocal deposits allow a customer to effectively receive 
FDIC insurance on deposits that exceed the $250,000 insurance 
limit without the inconvenience of splitting their funds 
amongst multiple banks. A bank distributes the amount of 
deposits that exceeds the insurance limit through a network of 
banks and receives reciprocal deposits back from other banks 
within the network. The customer enjoys the convenience of 
maintaining a relationship with one local bank, and receives 
the benefit of full deposit insurance. At EagleBank, our 
customers who use reciprocal deposits include local 
governments, nonprofit organizations, foundations, businesses, 
individuals, and law firm, with significant escrow balances. 
Many of these customers have stipulations that require that 
their deposits be collateralized or insured, but these 
customers also take great interest in where they place their 
deposits and continuing to build their relationships with their 
local community bank.
    EagleBank's reciprocal deposits support our lending to 
local small businesses. This lending activity helps create jobs 
and stimulate growth in the regional economy. Recognizing this, 
many local governments within the Washington area choose to 
keep their deposits in local banks. Several of them have formal 
programs in which EagleBank is involved. Our participation in 
the program with Montgomery County, Maryland has resulted in 
the creation of 525 jobs over the last 4 years. In addition, 
EagleBank is the leading community bank SBA lender in the 
Washington region. Without the insurance available on 
reciprocal deposits, these types of programs would not be 
feasible. Broken deposits are disfavored and discouraged by the 
FDIC because they are not considered to be a reliable source of 
funding. While this is true, reciprocal deposits are an 
incredibly stable source of funding because they are provided 
by long-term, core customers. At EagleBank we have found that 
reciprocal deposits behave just like other core deposits. This 
is because these deposits come from our local customers. Our 
relationships with them are long-term and include multiple 
services and products. Because the FDIC insurance reduces the 
customer's risk, these deposits are stable and an important 
ingredient of our relationships with our core customers.
    These deposits are not hot money. Having these deposits 
allows us to continue our active lending to local businesses 
like hardware stores, medical practices, restaurants, which are 
often not able to create credit from large regional or national 
banks. Our average commercial loan is $700,000, confirming our 
commitment to these small businesses.
    Because reciprocal deposits have been classified as 
brokered deposits, they are stigmatized and subject to certain 
restrictions that keep community banks from using them to their 
full potential. H.R. 4116 would rectify this by creating a 
limited exception from FDIC restrictions on reciprocal 
deposits. The bill includes safeguards that limits a bank use 
of reciprocal deposits, gives the FDIC full discretion to 
address any safety and soundness concerns, and ensure the bill 
is focused, as it should be, on reciprocal deposits used by 
community banks.
    Thank you, again, for allowing me to testify. You have been 
offered an opportunity to enact legislation, H.R. 4116, that 
will have a meaningful impact in our communities before the 
close of the 114th Congress, and I strongly encourage you to do 
so. I am happy to take any questions later. Thank you.
    [The prepared statement of Mr. Paul can be found on page 43 
of the appendix.]
    Chairman Neugebauer. I thank the gentleman. And Dr. Michel, 
you are recognized for 5 minutes.

  STATEMENT OF NORBERT J. MICHEL, RESEARCH FELLOW, FINANCIAL 
                REGULATIONS, HERITAGE FOUNDATION

    Mr. Michel. Good morning, Chairman Neugebauer, Ranking 
Member Clay, and members of the subcommittee. Thank you for the 
opportunity to testify at today's hearing. My name is Norbert 
Michel. I am a research fellow in Financial Regulations at the 
Heritage Foundation, and the views I express in this testimony 
are my own. They should not be construed as representing any 
official position of the Heritage Foundation.
    The main aim of my testimony this morning is to argue that 
Congress should end the practice of providing FDIC deposit 
insurance to brokered deposits. There are three main issues 
that I would like to address on this front today: First, 
providing Federally backed insurance deposits was, and is, a 
bad idea. Doing so may have helped mitigate bank runs during 
the depression era, but it came at a very high cost. It created 
moral hazard and adverse selection problems, give increased 
incentives and continued to do so, for risk taking in the 
banking industry. As a result, protecting the FDIC's insurance 
fund, protecting the taxpayers, remains a major justification 
for heavily regulating the banking sector by restricting their 
activities, capital structure, and asset composition.
    The tragedy is that this system is enormously complex, 
breeds regulatory capture and special interest lobbying, 
imposes high costs on the private sector, destroys the 
competitive process, crowds out private capital, and ultimately 
weakens financial markets. While there is no doubt that some 
banks, especially community banks, want and need to improve 
their access to funds to grow their business, the best way to 
help those banks is to eliminate the Federal backing so that 
Congress can remove regulations that impose these high costs on 
the banks. That is how you bring more private capital into the 
market.
    That brings me to my second point, which is, that expanding 
the use of Federally insured brokered deposits in any way 
compounds the moral hazard and adverse selection problems that 
exist in our system. It is certainly true that the Banking Act 
of 1933, which created the FDIC, accounted for the possibility 
that individuals might have a claim on an FDIC-insured deposit 
account that a third party opened on their behalf, and it may 
still make sense, in some very limited cases, to allow FDIC 
insurance to pass through to such a deposit owner. However, 
markets have evolved such that deposit brokers now use FDIC 
insurance to back wholesale funding for banks. This sort of 
operation was clearly not the original intent behind FDIC 
insurance, and perpetuating it suggests that we should 
Federally back all sources of funds for banks simply for the 
purpose of supplying credit.
    This sector of the market now makes it very easy for 
individual investors to obtain deposit insurance in excess of 
the FDIC coverage limit, as you have just heard. And no reading 
of the historical record supports the notion that Congress 
originally had such a purpose in mind. It is its expansive use 
of Federally backed deposit insurance that led the FDIC in 1984 
to introduce regulations to limit the ability of investors to 
obtain Federal deposit insurance on brokered deposits. It is 
also the main reason that in 1991, the U.S. Treasury Department 
recommended completely eliminating FDIC insurance for brokered 
deposits. And this action, eliminating FDIC insurance for 
brokered deposits, would now be the wisest course of action.
    That brings me to my final point, which is that bills such 
as H.R. 4116 and, to a degree, H.R. 5660, do not move us in the 
right direction. H.R. 4116 redefines reciprocal deposits so 
that they are no longer considered brokered deposits. The bill 
essentially provides a regulatory carve-out for a type of 
brokered deposit. Because adequately and undercapitalized banks 
are currently restricted in how they can use brokered deposits, 
redefining reciprocals in this manner would free institutions 
from those specific restrictions.
    It is true that H.R. 4116 limits the use of newly defined 
reciprocals to institutions with a composite condition of 
outstanding or good, a CAMELS rating of 1 or 2. But that 
standard is not as objectively difficult to meet as the well-
capitalized standard, which is kind of the point of the 
restriction, that currently restricts the use of brokered 
deposits. If the bank is good, there is no problem. There is no 
restriction. Thus, H.R. 4116 is likely to increase the use of 
reciprocal deposits, at least at the margin.
    I have similar concerns with H.R. 5660, a bill that could 
be viewed as an alternative way to give reciprocals a 
regulatory carve-out. Many people in the industry feel that 
these reciprocals should be viewed differently because they are 
safer, and they consist mostly of stable retail deposits. And 
while there is a plausible case that those reciprocals are 
safer than other types of brokered deposits, as the FDIC has 
recently argued, we simply do not have enough data yet to 
conduct a proper comparison of those risk characteristics 
across brokered deposits. We shouldn't be doing anything in the 
meantime that expands the use of or the reliance on FDIC 
deposit insurance. Congress can strengthen financial markets by 
lowering the coverage limit, requiring coverage to be 
aggregated to the individual level, and removing coverage for 
brokered deposits. Thank you, and I am happy to answer any 
questions you have.
    [The prepared statement of Dr. Michel can be found on page 
36 of the appendix.]
    Chairman Neugebauer. I thank the gentleman. Members will 
now be recognized for 5 minutes for questions. And the Chair 
recognizes himself for 5 minutes.
    Dr. Turner, in 2014, the 9th Circuit Court of Appeals ruled 
that credit education, credit monitoring, and credit counseling 
all kind of fall under the Credit Repair Organization Act, or 
CROA. This ruling has really the potential to freeze the 
offering of many services beneficial to consumers as they look 
to make strategic decisions to improve their credit. Can you 
kind of explain the difference between credit education and 
counseling versus credit repair?
    Mr. Turner. That is a very important question, and this is 
really the core of the proposed legislation. Let me provide an 
analogy just from day-to-day life. When you take your car to 
the garage to have the tires rotated, or the oil changed or a 
regular tune-up quarterly, every 6 months, that is maintenance. 
That is enhancing the performance of your car moving forward. 
When you are in a collision and your car is towed to a garage, 
that is repair. It is basically a completely different domain. 
Credit education is helping consumers improve their behavior to 
improve their score moving forward. Credit repair is 
retroactive. It is helping people repair things that have 
already happened, so that is a very critical and important 
distinction.
    Chairman Neugebauer. Do you think there is a more clear way 
to make that definition so that are clearly distinguished 
between the two? Are we there?
    Mr. Turner. I think that the bill before this committee 
does a very good job balancing the need to protect consumers 
and to promote competition, and enable innovation in the credit 
education space. I do think that a product-based approach is 
feasible. I completely disagree with the FTC's position. The 
FTC, by the way, testified before the Senate that they were 
very sympathetic to the credit bureaus and the need for 
exemption from CROA on this type of issue, but they professed 
being stuck, being unable to find some product-based approach 
that would enable the exemption and the benefits of this credit 
education, but filter out bad actors. I think there are ways to 
do it. I think there is an array of options before Congress, 
and I think that this is one that is quite feasible.
    Chairman Neugebauer. Thank you. Mr. Paul, the brokered 
deposit statute was enacted many years ago, and since then, 
many changes have occurred in how financial products and 
services are offered to consumers, namely, the offering of 
prepaid cards, through third parties, deposit-placing networks 
that help community banks find nationwide funding. What are 
some of the challenges of the brokered deposit statute, and how 
do these bills, do you think, help address that issue?
    Mr. Paul. I think what is critical is the fact of being 
able to better define the word ``relationships.'' Everything 
that we are talking about, at least in my testimony, is based 
on that relationship. You have many, many relationship that 
have been for many, many years that deposit money into 
community banks. As a result of the FDIC insurance, apparently 
that trigger recreates a different definition of a 
relationship, which we don't believe to be the case. A 
relationship is a relationship, ones that we have built for 
many, many years. And, therefore, that core deposit that we 
have with that relationship is part of what we define as core 
deposits, and, therefore, should be part of what we could then 
turn around and use that liquidity to be able to put back into 
the community in lending.
    Chairman Neugebauer. One of the things, we have seen a lot 
of technology advances in the financial services world and how 
banks are able to offer their services today with online 
banking and using your iPhone and all of those. And today, 
consumers have a vast variety of ways to access financial 
products. Has this regulatory environment kept up with the 
technology, and is it time to address issues like this one?
    Mr. Paul. Clearly, the regulatory environment is getting 
tougher and tougher for community banks to be able to work with 
them. The answer is yes in many different ways. The extent that 
we are required now through compliance, through BSA, through a 
variety of acts that are all very appropriate, but 
unfortunately, to the extreme, has created more and more 
problems. Our branching network is only 21 branches. We are not 
big branch believers, because of the technology side, and we 
feel that the regulatory world needs to keep up with the IT 
side to allow us to be able to operate within a reasonable 
cost.
    Chairman Neugebauer. I thank the gentleman. The ranking 
member of the subcommittee, Mr. Clay, is recognized for 5 
minutes.
    Mr. Clay. Thank you, Mr. Chairman. I would like to submit 
for the record a letter from the National Urban League in 
regard to H.R. 4116.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Clay. Thank you. Mr. Turner, in your testimony you 
mentioned that you are currently doing a joint study with HUD 
and six public housing authorities in participation with the 
credit reporting agencies about rental payment history of 
public housing households. This study, which we understand is 
currently underway and has no published results to date, is 
specifically looking at the question of the consumer-level 
impacts of reporting rental payment history for public housing, 
rather than currently housing authorities do not report this 
data to HUD, and we have no real way of understanding how the 
reporting of alternative data will affect these households.
    We understand that there should be a published report in 6 
months to a year. Do you think it would be more appropriate to 
wait to move on including HUD-assisting households in H.R. 4172 
until we know more, including the results from your joint 
study?
    Mr. Turner. That is a terrific question, and let me try and 
unbundle it. Rent reporting is discussed in Congressmen Ellison 
and Fitzpatrick's bill. And, in fact, our study looked as 
public housing authorities' subsidized rental data, as well as 
other rental data, but it is important to note that other 
rental data is already being reported. TransUnion has fully 
reported rental payment lines in credit files. Experian has 
positive data. So it is already out there. We are looking at 
how data from public housing authorities would perform relative 
to other data that is already in the market.
    So if we are asking specifically about whether to move 
forward or not with encouraging PHAs to voluntarily report 
until the research findings are completed, I would say that 
makes sense. But by the same token, and with that same 
yardstick, we have over a decade of research, irrefutable 
empirical research based on the experience of millions of 
Americans that show the benefits of energy, utility, and 
telecom data being fully reported. So if it is logical to wait 
for research until we know on the one hand for PHA data, well, 
it is also logical to act now on the energy, utility, and 
telecom data.
    Mr. Clay. Okay. That is fair. That is fair. Given the 
chronic underfunding of public housing in the recent decade, 
some PHAs have struggled to maintain accurate rent roll data. 
We have especially heard recent reports of this as PHAs are 
converting public housing to other forms of rental assistance 
through the rental assistance demonstration. H.R. 4172 does not 
address the need to ensure that the data provided by PHAs to 
consumer reporting agencies is accurate. How do you suppose we 
address this issue?
    Mr. Turner. Another terrific question. Procedurally, there 
are a couple of things that would happen. Again, we are looking 
at what are the credit market impacts, and if they look like 
they are positive impacts, then there could be some basis for 
encouraging PHAs to fully report to national consumer reporting 
agencies; but you can't just switch that data on. You don't 
make the decision, report, and the bureaus take it. Their whole 
process is to ensure that the quality, and reliability, and 
integrity of data, the timeliness in reporting.
    So a lot of those wrinkles would be ironed out just in 
creating the relationship with the national credit bureaus. In 
addition, there are plenty of organizations--I would be remiss 
if I didn't mention Credit Builders Alliance--that are focused 
like a laser on this very issue in terms of how PHAs with their 
disparate practices may actually establish that relationship to 
ensure their tenants get the benefit. So there are options, 
should that move forward in a voluntary system.
    Mr. Clay. Thank you. Mr. Paul, H.R. 4116 exempts only 
reciprocal deposits from being considered funds obtained 
through a deposit broker. Reciprocal deposits are a subject of 
custodial deposits. Would the bill be improved by broadening 
the exemption to include all custodial deposits while still 
using the same institutional quality measures?
    Mr. Paul. The ICBA doesn't have a position on the custodial 
side. Obviously, the reciprocal is what we are focused on in 
being the relationship-driven deposit that goes out and then 
comes back, so we don't have a position on the custodial side.
    Mr. Clay. All right. Thank you so much, and my time is up.
    Chairman Neugebauer. I thank the gentleman, and now the 
vice chairman of the Financial Institutions and Consumer Credit 
Committee, Mr. Pearce, is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. I really appreciate 
this hearing. The 2nd District of New Mexico has 52 percent 
Hispanics, 60 percent overall counting Native Americans and 
other minorities, 60 percent minority population. We are one of 
the poorest two or three districts in the country, and so we 
are right on point into things that affect the elements like 
Mr. Clay had mentioned, that many people just don't have access 
to credit.
    So I really appreciate the approach that you have taken. I 
would also like to compliment the gentleman from Minnesota, Mr. 
Ellison, that the bill that he has put forward is very 
thoughtful and going right at one of the sources.
    Mr. Turner, Dr. Turner, have you done, has your study--you 
said you got information from a decade-long study. Have you all 
worked on the HUD payments? Do you know that that would 
ultimately result in positive credit information for a lot of 
right now invisibles?
    Mr. Turner. So there are a couple of things here. We have 
looked at different types of alternative data, prioritizing the 
most logical. The data that is more credit-like than cash-like, 
the data that has the highest coverage of the 54 million credit 
invisibles, and then data from more concentrated industries, 
just from a business process perspective it is easier to 
acquire. So we prioritize energy, utility, and media data, 
wire-lined, wireless, broadband, cable TV, and so forth. And we 
have done probably more than a dozen studies at this juncture, 
both in the U.S. and abroad, looking at the impacts. And what 
we find is that to your initial point, the largest net 
beneficiaries are members of minority communities, 22 and 21 
percent increase in credit access as a result of alternative 
data for African American and Hispanics; 14 percent for Asian; 
14 percent for elderly Americans. And this is very 
significant--
    Mr. Pearce. I appreciate that. I don't mean to interrupt, 
but the clock is ticking. We have 5 minutes. So, specifically, 
to the HUD and even to education loans, the government, college 
tuition loans, does your study include that or not? That is 
just a fairly straightforward question.
    Mr. Turner. Right. So we are looking at data from public 
housing authorities that would come directly to credit bureaus, 
not HUD data. The PHAs would report the data, not HUD.
    Mr. Pearce. But essentially, it would come from those 
projects, so is the ultimate effect going to be positive to the 
people that are right now credit invisible, or is the overall 
result going to be negative? That is what I am trying to drive 
at.
    Mr. Turner. Unfortunately, we would have to wait until the 
study is complete. But based on our other research, we have 
good reason to believe it would be a net positive.
    Mr. Pearce. Fair enough. What about the education? You 
mentioned that also, and, again, I feel like that that has 
great upward potential. Have you done any work to see about 
which demographics that your positive impacts affect? In other 
words, does it affect the entire education spectrum, or are the 
positives clustered towards more education and the less effect 
on less education? I personally think, with education, you are 
going to find positive impacts up and down the education 
spectrum, but I would like to know your input?
    Mr. Turner. Terrific question. I will be quick. We are on 
our third study right now. Our first study looked at tens of 
thousands of individuals, a very reflective sample, and it 
showed that the personalized credit education had a material 
impact, meaning people moved into a better score tier at twice 
the rate of those who just looked at generic information like 
you get from mint.com.
    We have worked with now four different community 
development organizations, Operation Hope, the National Urban 
League, United Way Atlanta, United Way Charleston, so it is not 
a reflective population. It is a population of people who are 
oftentimes financially distressed, and we have seen those same 
results replicated in that population.
    Mr. Pearce. Right. Mr. Paul, the gentleman to your left--I 
think he is actually to your right, but he is sitting to your 
left--he had some compelling arguments. Did you want to make 
observation on any of those and things that could impact our 
decisions as we move forward? I mean, you made good points, 
too, but do you have anything to offer?
    Mr. Paul. Sure. I respectfully disagree.
    Mr. Pearce. Oh, okay. I suspected that, but I was going to 
look for a little more meat on the bone.
    Mr. Paul. I think that the FDIC is a critical, critical 
part to community banking. And I think that based on the fact 
that we know that currently over 70 percent of the deposits in 
this country are in the ``too-big-to-fail'' banks, those are 
not the banks that are giving and supporting the small 
businesses that we so desperately need to continue to support. 
We believe that it would be a devastation to the community 
banking world if FDIC insurance was modified and believe 
strongly that it is critical for us to be able to continue to 
have the liquidity under the safety and soundness parameters to 
be able to continue to fund the loan growth in our community.
    Mr. Pearce. I appreciate both of your inputs on that. And I 
yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman. The gentleman 
from Georgia, Mr. Scott, is recognized for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. First of all, I want to 
commend my colleague, Mr. Keith Ellison from Minnesota, for the 
excellent work he is doing on 4172, which I support. And I want 
to, first of all, ask you, Mr. Turner, because you raised a 
good point there, when you mentioned the credit Catch-22. I 
liked that. I saw the movie when I was much, much younger, as 
we all were, Catch-22. And I think it is very important for us 
to understand, I think what you mean is in order to qualify for 
credit, you already have to have credit. But what I want to 
point out is that this is not just a problem for consumers. It 
is also a problem for small businesses. It is a huge problem 
for small businesses.
    According to the 2015 Small Business Credit Survey, the top 
reason why new businesses were denied credit is insufficient 
credit history. That is very important. And I understand that 
some progress has been made recently with the establishment of 
the National Consumer Telecom & Utilities Exchange database and 
the FICO XD score.
    So, Dr. Turner, what I want to know is if you have any 
concerns as we work with H.R. 4172 in terms of looking at this 
degree of progress that has been made with this database and 
the FICO XD score in solving your credit Catch-22 problem?
    Mr. Turner. Great question. And, yes, my concern is that 
the data is just not flowing because of the regulatory 
uncertainty. The terrific effort by FICO and LexisNexis and 
Equifax really relies on overwhelmingly wireless telecoms data, 
none of the other media data, and just a paltry sum of utility 
data. So that is just not enough, frankly. So it does highlight 
the promise and the potential, and it is a great first step, 
but much more can be done, and this would be facilitated by 
Congressman Ellison and Congressman Fitzpatrick's bill.
    Mr. Scott. Absolutely. Mr. Chairman, if I may, I have a 
letter here from Equifax, which is a very, very important part 
of my district down in Georgia, that I would like to submit for 
the record if I may.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Scott. Ranking Member, would you please take him that. 
Thank you. Now, let me turn to the panel as a whole. It 
occurred to me that just last week, the CFPB used its UDAP to 
sue a credit repair company for deceptive practices. And even 
though this action did not involve a credit bureau, I think it 
still highlights the many existing tools that regulators and 
watchdogs currently have at their disposal to protect 
consumers. So my question would be to the panel, is that there 
is a general concern that H.R. 347, the Facilitating Access to 
Credit Act, might give the big three credit bureaus a license 
to scam consumers. Do you share this concern?
    Mr. Turner. Let me start, if that is okay?
    Mr. Scott. Yes, please, Mr. Turner.
    Mr. Turner. Not at all. I think your initial observation is 
correct. There are layers and layers of regulations protecting 
consumers from any such behavior. And importantly, let's go 
back to the difference. What we are talking about is 
delineating credit education from credit repair. The credit 
bureaus, or any of the organizations that would be exempted 
under H.R. 347 are not offering credit repair services. They 
are offering credit education. And even if they were, you still 
have the CFPB scrutiny that didn't exist when CROA was passed 
in 1996, and you have all the protections under both UDAP and 
the Fair Credit Reporting Act. So those organizations are 
uniquely situated to be the lowest risk, and the most logical 
institutions for consumers to turn to for credit education.
    Mr. Scott. Thank you. And also, panel, in 2015, after a 
settlement was reached with 31 State attorneys general, one of 
which was the State attorney general in my home State of 
Georgia, there was a commitment by the big three reporting 
agencies to create a national consumer assistance plan in an 
effort to improve consumer interaction with the big three 
credit bureaus, and improve the accuracy of data in those 
credit reports. It has been a year now since the settlement, so 
are you seeing any improvements in the customer experience 
thanks to the National Consumer Assistance Plan? Mr. Turner.
    Mr. Turner. I think the bureaus made massive investments as 
part of that agreement, but I would like to point out the 
study, the national study that we did, that the FTC cited 
extensively in their report to Congress, there is a high level 
of satisfaction with the dispute resolution process in place, 
and also, the accuracy rate of data in the national credit 
bureaus is remarkably high. This was back in 2010 or, yes, 2011 
when we published that report. Even more progress has been made 
since then.
    Mr. Scott. Thank you, Mr. Chairman, for your courtesy with 
a little more time. I appreciate it.
    Chairman Neugebauer. I thank the gentleman. The gentleman 
from Missouri, Mr. Luetkemeyer, the chairman of our Housing and 
Insurance Subcommittee, is recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and welcome to 
our guests this morning.
    I want to start out with Mr. Paul. I appreciate your 
comments with regards to H.R. 4116. You know, Mr. Michel talked 
about other ways he didn't believe FDIC insurance was 
important. Whenever you talk to your customers, and they want 
to have secure deposits, you know, especially with regards to, 
like, your subdivisions, your local city and county funds, they 
are required to secure those, are they not, somehow, or insure 
them, correct?
    Mr. Paul. That is correct.
    Mr. Luetkemeyer. So, my way, my limited knowledge here, 
there are a couple different ways to do that. You can use FDIC 
insurance on the first 250; you can buy private insurance as 
well as put up other securities to secure this. Is that 
correct?
    Mr. Paul. That is correct.
    Mr. Luetkemeyer. What kind of costs do you incur to do this 
with all these different sorts of things?
    Mr. Paul. Well, one of the biggest problems in terms of 
buying additional security is to be able to securitize their 
deposits is, clearly, that would take the liquidity out of the 
lending side. So, unfortunately, those that require repos and 
securities as an alternative, which is certainly an 
alternative, all that does is take the liquidity out of our 
ability to turn around and lend back into the community.
    When we designed the program with Montgomery County, that 
was one of the discussions that we had with them. And they were 
very clear that the driving force for them was that they wanted 
to create jobs. And that is why we created the program where, 
literally, we said that for every dollar that the county puts 
into EagleBank or other community banks, that we would agree to 
provide $2 worth of lending into the community, small business 
lending within the community, which ultimately provides those 
jobs.
    So having the ability to take that liquidity, to put it 
back into the lending world, is really the driving force in the 
design of these programs.
    Mr. Luetkemeyer. Okay. The costs that you incur, for 
instance, if you have to purchase private insurance on 
everything above 250, would you pass that cost on to your 
customer?
    Mr. Paul. No. We couldn't, because it would be 
extraordinarily expensive, even if you could find that 
opportunity.
    Mr. Luetkemeyer. Well, I know that we do that sometimes 
with banks that I am familiar with.
    Mr. Michel, you made the comments with regards to that, 
that you think we don't need it anymore. How do you solve the 
problem when you have these political subdivisions that require 
security for the deposits if you are going to do away with FDIC 
insurance? And it makes it more difficult to leverage these 
deposits and secure them and cuts the ability of banks to then 
actually give access to credit to their other customers in the 
community. What is your answer to that?
    Mr. Michel. Well, my answer to that is that the system that 
we have has evolved because of FDIC insurance, which is 
something that has been expanded over the years, which has led 
to the high-cost problem that you are talking about. So I don't 
think that--
    Mr. Luetkemeyer. High cost? How do you--
    Mr. Michel. High cost for private insurance. It has crowded 
out private insurance. It has essentially made private deposit 
insurance companies leave.
    Mr. Luetkemeyer. No. No, they are still around.
    Mr. Michel. There are, but I mean, comparatively speaking. 
I don't think that we could say they haven't crowded private--
that the FDIC insurance hasn't crowded out private deposit 
insurance.
    Mr. Luetkemeyer. I think the private folks are on the top 
end of this. You use FDIC on the bottom, and it is sort of like 
a reinsurance program in a way, and you provide the back end 
with the private insurance. I mean, we do that all the time 
where I am from. I mean, it is not--
    Mr. Michel. No, I understand that. But I still think that 
the empirical evidence would suggest that some private 
companies have been crowded out of that.
    Mr. Luetkemeyer. My question, though, is, how do you 
rationalize, or how do you solve the problem, though, of the 
private entities that want some security, some insurance, to 
make sure--these are taxpayer dollars that you are dealing that 
need to be securitized. You want the taxpayer dollars to be at 
risk? You do not want them diversified among different banks to 
minimize the risk?
    I mean, that is what we are talking about here. We are 
talking about reciprocal deposits. These aren't deposits that 
are brokered. These are private deposits that are taken and 
used in a way that securitizes them in a way from the fact that 
you diversify, put in different banks, which, you know, spreads 
your risk.
    Mr. Michel. No, sir, I do not believe that we should be 
putting taxpayer dollars at risk in any way.
    Mr. Luetkemeyer. Then how do you solve this problem if you 
don't have FDIC insurance, private insurance, or enough 
collateral to securitize them?
    Mr. Michel. Again, as I started to say, I believe that if 
you did lower and restrict the brokered deposits to a larger 
extent with FDIC insurance, that you would bring private 
capital back into the market. And under the current law, 
without 4116, you can still do this. This doesn't change that. 
The restrictions are only applied to less-than-well capitalized 
banks. So this is a blatant lowering of that restriction from 
well to adequately, or less-than-well-capitalized banks going 
to a CAMELS rating. I don't think that is--I don't think that 
is something that we should be doing.
    Mr. Luetkemeyer. I see my time has expired. With that, I 
yield back the balance of my time, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Minnesota, Mr. Ellison, is 
recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chair.
    And, Mr. Turner, I am glad you mentioned the Credit 
Builders Alliance. They worked with Experian to help subsidize 
housing renters. In their analysis, 75 percent saw a credit 
score increase. The majority saw a credit score increase of at 
least 11 points. Only 3 percent saw a score decrease of 11 
points, and 21 percent saw no change.
    And I ask unanimous consent to add the written reporting 
pilot to the record.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Ellison. Thank you. Thank you, Mr. Chairman.
    Let me ask you this, Dr. Turner: We do have substantial 
empirical evidence about the benefits of reporting on-time 
utility and telecom payments. We don't have as much research 
into reporting rental payments for assisted housing tenants. Do 
you see any potential harm to tenants if their on-time rental 
housing payments, or their late payments, are reported to 
credit reporting agencies? What would be the best practices for 
a housing provider to look like?
    Mr. Turner. I mean, look, having the positive data 
reported, this is what the Experian-Credit Builders Alliance 
study shows, and, you know, minimal number of folks who have a 
score reduction, and even smaller number who are negatively 
materially impacted. And that is logical.
    I guess the question is, how does that compare to fully 
reporting the data, and then what percentage of the tenant 
population may see a movement into a lower tier? The reality, 
though, is that thickening files, having another trade line, 
ending credit invisibility, those offer opportunities to have a 
better life through better credit. So it also makes the system 
more forgiving. The negative data right now from PHAs and from 
landlords is being reported. If you are evicted, it goes into 
your public record. So we are still punishing people for their 
credit transgressions, but not rewarding them for their good 
behavior. So that logic applies to the current rental practices 
as well as the utility and telecoms and media data as well.
    Mr. Ellison. Thank you. Also, if I may ask you this on this 
similar line of questioning: As you can see from the slide, 
utilities make up about 7 percent of the collections. So we 
know that late utility payments are reported right now. In 
addition, about 3 million people have their utility payments 
reported to the National Consumer Telecom & Utilities Exchange.
    So can you talk about and explain how, if and when utility 
payments are reported to credit agencies? And also, you can 
chime in on this question of if we were to make a change, if 
H.R. 4172 became law, how would that make lives better for 
people?
    Mr. Turner. Great question. A couple of things. We are 
doing a project right now called Credit Deserts with the 
Mission Asset Fund, Jose Quinonez's Circle Lending Group in the 
Bay area. And we are looking at--and this is sponsored by the 
Silicon Valley Community Foundation. We are going to map and 
show exactly how having alternative data, the utility/telecom/
rental data, changes the lending landscape, how it affects the 
ratio of high-cost lenders to mainstream lenders, and how it 
changes the nature of access for credit invisibles away from 
high-cost credit toward mainstream credit. So that is 
forthcoming. It is all based on the decades of empirical 
research that shows what a powerful tool this is.
    In terms of the utility data in collections, again, this 
goes back to the point that the status quo is a harm, that the 
11 years that I have been coming here, each year, billions of 
dollars of wealth and assets are stripped from the credit 
invisible population because they can't access mainstream 
affordable credit.
    This tool, which costs Congress nothing, which is already 
in practice and could easily be enhanced, because your bill 
would end the regulatory uncertainty. I have talked to many 
utility companies who have gone to their State PUC and PSC and 
have said, We would like to fully report to a credit bureau, 
and their public--their State regulator says, No, over our dead 
body, largely because either they have been misinformed by 
local advocacy groups about the consequences, or they simply 
don't understand it.
    And why would they? They set telecom's tariffs. They are 
media people. They set utility rates. They don't understand the 
Fair Credit Reporting Act. So this is actually quite potent 
and, again, no cost to Congress.
    Mr. Ellison. Thank you. If either one of you gentlemen want 
to weigh in on 4172, we welcome your views.
    Thank you very much. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman, Mr. Royce from California, is 
recognized.
    Mr. Royce. Thank you, Mr. Chairman.
    Dr. Turner, I was going to ask you a question. When 
constituents hear this concept of credit repair, I think the 
first thing they think about are those ads that say, too-good-
to-be-true emails. The subject is: Credit problems? No problem. 
No problem. Or signs, sometimes you see them on the street, and 
they say, We can erase your bad credit, 100 percent guaranteed.
    So clearly, these aren't legitimate actors, but how do we 
separate out the good from the bad? I think people need access 
to credit counseling. They need education services. That is 
what they need, but they don't need to get ripped off. And, as 
you know, with H.R. 347, we tried to get this right by 
exempting the supervised credit bureaus, given that they want 
to provide credit education and not credit repair, and they are 
examined and overseen by the CFPB, as opposed to these outfits 
that put the signs up around town.
    So, Dr. Turner, in simple terms, what are the differences 
between the credit repair scams that CROA was intended to stop, 
and the credit education services that could be offered if H.R. 
347 were passed out of this committee?
    Mr. Turner. And, again, this is the most important point 
that your legislation addresses. Look at golf.
    Credit repair would be someone who after you have completed 
18 holes of golf says, Let me see your scorecard. Here, I think 
you double counted here and let me shave a few strokes off 
there. So it is trying to change your score after the fact.
    Credit repair would be a person who coaches you on your 
technique, your driving ability, your short game, so that, 
moving forward, you improve in future rounds. It is this 
retrospective versus prospective. It is a very simple, but 
quite important distinction.
    Mr. Royce. Let me ask you another question. I previously 
submitted for the record a letter from the Congressional Black 
Caucus, and Hispanic and Asian Pacific American Caucus, and the 
Congressional Progressive Caucus, which was sent to FHFA 
Director Watt in April of last year. And in it, they wrote: 
``The current FICO score version designated for use by the GSEs 
are not the most current innovations in the marketplace. Newer 
credit scoring models have been introduced and are valuable, 
and the GSEs should update their current FICO model and 
implement other credit scoring models that provide enhanced 
benefits to homeowners.''
    So I would ask you, do you agree that this is exactly what 
the other bill, H.R. 4211, is designed to do?
    Mr. Turner. I do agree. And we have done research on this 
topic, and we found there is no market failure in the credit 
score market, but there is enormous path dependency. So that, 
for example, FICO is having problems dislodging earlier 
versions of FICO. You know, so there is this dynamic.
    And the other issue is that when this GSE guideline was 
created in 2004, there wasn't competition, there was a dominant 
player, and that guideline now reflects an anachronistic 
market. And there have been lots of versions of FICO--we are on 
FICO 9 now--and other scores that have entered that actually 
have many of these benefits to other communities that just 
aren't reflected. So your bill does--
    Mr. Royce. And what would that mean for access to credit 
for these communities?
    Mr. Turner. Well, we believe that in different credit 
segments, it would make access to credit more inclusive, 
fairer, and more responsible.
    Mr. Royce. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from North Carolina, Mr. Pittenger, is 
recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman, for calling this 
important hearing.
    I thank each of you for being here. Mr. Paul, thank you for 
your role as a community banker. I served on a community bank 
board for a decade, from the time we chartered until the time 
we sold it. I certainly appreciate the important role that you 
play in our community and how vital it is for our local 
economies.
    To that end, I would like to ask, relative to the demand 
for loans, which had been much lower in recent years, and 
obviously, we have a low growth in our economy, do you see a 
co-relationship between the two?
    Mr. Paul. We are very fortunate to be in a wonderful market 
in the Washington, D.C. area. We currently have approximately 
100 percent loan-to-deposit ratio. So it gives you a little bit 
of an indication as to--and by the way, with pristine credit 
quality. So we are making loans to the small business. We have 
100 percent loan to deposit. So clearly, deposits are critical 
for us to continue to fund our loan growth.
    So we believe that this is a sustainable growth that we 
have had, about 12 percent loan growth that we have had, and 
believe that will continue.
    Mr. Pittenger. Thank you. This is a remarkable region, 
obviously unique and not shared universally around the country. 
Do you see the loan demand increasing with H.R. 4116? Will this 
be an enhancement?
    Mr. Paul. Absolutely. I just attended two national 
conferences. And in the 18 years that I have been doing this, I 
have never heard the discussion as much as we did this past 
week on the need for deposits. So it was a remarkable change--
and I do this probably every quarter. It was a remarkable 
change in the discussions on panels, institutional investors, 
as to so many banks within our communities in the urban 
settings that are looking and issuing concerns on the ability 
to continue to raise deposits. Again, these are community 
banks; these aren't the bigger banks.
    Mr. Pittenger. Thank you. The logs I am referring to 
referencing brokered deposits, that they are defined as being 
hot money. Can you explain why core deposits, what they are, 
and how reciprocal deposits are core deposits and not hot 
money?
    Mr. Paul. Sure. I will give you a perfect example of this. 
We have a relationship with a class action suit law firm, a 
relationship that we have had for over 10 years. And they could 
average $75 million worth of deposits in the bank, that we 
obviously take that $75 million and put it back into loans.
    The issue with the class action suit is that the court 
requires those deposits to be insured. And, as the Congressman 
asked earlier, the issue has to do with whether or not those 
deposits would be put into a repo or put back into the lending 
market. So, as an example, those deposits need to be FDIC-
insured, and we put them through the network system, we get 
those deposits back, and then we are able to put that back out 
into the lending side. So clearly, if that wasn't the case, we 
would have a problem.
    Mr. Pittenger. Thank you. To all the witnesses, I would 
like to ask who, in your opinion, is in a better position with 
the resources, the budgets, the technical knowledge, experience 
to develop and deploy new financial products, services and 
delivery mechanisms, the large regional and national banks or 
community banks? Mr. Turner, just quickly, if we could go down 
the line, and give us--
    Mr. Turner. I defer my time. The other panelists are more 
knowledgeable about this than I.
    Mr. Pittenger. Good. Mr. Paul.
    Mr. Paul. I'm sorry, could you repeat the question?
    Mr. Pittenger. Well, who has the better capacities to 
deliver new financial products, the large regional banks or the 
community banks?
    Mr. Paul. We feel that we are in an ideal position, being 
in that $6.5 billion size, that we understand the needs of the 
community, but we are nimble enough to be able to design the 
products that the community requires. So we feel really good in 
the position we are to be able to satisfy the needs of the 
community.
    Mr. Pittenger. Mr. Michel.
    Mr. Michel. Well, I don't have anything against community 
banks or regional banks or the larger banks. And I think they 
are all having problems, and we should address the overall high 
regulatory cost and the issues that affect the industry in 
general, and the economy in general as opposed to carving out 
any particular benefits for any of the particular groups.
    Mr. Pittenger. So you don't see that there is a certain 
niche or capacity that the community banks might have that 
would--
    Mr. Michel. I mean, yes. I mean, certain banks have certain 
advantages over other banks, and size by itself is not always 
the factor. So I wouldn't want to single out any particular 
group, no.
    Mr. Pittenger. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Pennsylvania, Mr. Rothfus, is 
recognized for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Dr. Turner, I would like to talk a little bit about some of 
the research you have done on the efficacy of credit education 
services. Based on your research, can you describe the types of 
consumers that would benefit from personalized credit 
education?
    Mr. Turner. Sure. There have been independent studies that 
show differences among segments of the population in terms of 
credit awareness and credit invisibility. We didn't actually 
look at this from a segmentation analysis perspective. The 
groups that we worked with, the community development 
organizations, like Operation HOPE and the National Urban 
League, people came to them seeking financial literacy. And 
most of those people were in distressed situations.
    And let me give you an example. A woman named Jeannine from 
Ohio, she had her first exposure to credit in college with 
credit cards and ran into some trouble, and basically ignored 
it for 20 years until her car that she got in college died. She 
is married, has six children, two grandchildren; she needs a 
car. So she needed credit, and she needed to address her credit 
problems.
    She went to Operation HOPE. Operation HOPE sent her to a 
personalized credit education service from one of the national 
credit bureaus. Working with them, she was able to increase her 
score by over 150 points. So not only did she then qualify for 
a new car, but she also was able to qualify for a higher-paying 
job that required a threshold credit score, which then, in 
turn, allowed her to buy a home. So there was this positive 
cascade. And that is exactly the type of person who would stand 
to benefit from this credit education service.
    Mr. Rothfus. Is that more reactive or proactive? That 
sounds like that counts as a more reactive kind of scenario.
    Mr. Turner. What she learned, she is applying moving 
forward. She will be applying these lessons for the rest of her 
life. It is a very compelling story, and I am going to feature 
it in our final report. And what I heard from her, I heard from 
many of the others whom I have interviewed who went through 
this.
    So reactive would have been if she went to a credit repair 
organization and, you know, places like Lexington Law Firm that 
basically swamp the bureaus with contesting everything, every 
derogatory, whether it is accurate or not. That is reactive. 
And it doesn't necessarily get triggered by an incident; it is 
just someone wants to improve their score for whatever purpose.
    The coaching, the explaining how your behavior can impact 
your score, that is proactive.
    Mr. Rothfus. Mr. Paul, I want to talk to you a little bit 
on 4116. You state in your testimony that reciprocal deposits 
allow community banks to compete with larger institutions for 
deposits. You note that, ``The largest banks have a definite 
advantage in soliciting deposits that exceed the insurance 
limit because of the perception, validated during the financial 
crisis, that they are too-big-to-fail, and that they and their 
depositors will be propped up by the government.'' You also 
said, ``Size alone is used as a proxy for safety.''
    How would the constriction of reciprocal deposits impact 
your bank's competitive position vis--vis larger institutions?
    Mr. Paul. Sure. The niche that EagleBank has within the 
community is, again, on the commercial small business side. As 
I said, about $700,000 or less is our average size loan. So the 
ability to understand the needs of the community and understand 
the needs of the businessperson is what is so important in 
their needs. The hardware store, the restaurant, et cetera, 
that is the backbone of what we deal with every single day, 
and, again, needing that liquidity to continue to fund those 
particular businesses.
    So the reciprocal deposit issue for us is just an 
absolutely critical instrument for us to be able to continue 
the ability to be able to loan that back into the community.
    Mr. Rothfus. Dr. Michel, in your testimony, you note that 
reciprocal deposit networks are ``merely facilitating what an 
individual could do on his own by opening several accounts at 
several banks.'' But instead of an individual having to travel 
from bank to bank to open multiple accounts, banks can do this 
with their own services, like CDARS, a Certificate of Deposit 
Account Registry Service. You argue that this violates the 
original intent of FDIC insurance. Reciprocal deposits give 
banking customers the peace of mind that their deposits are 
safe. This should naturally prevent or limit the potential for 
bank runs.
    If that is the case, would you agree that this practice is 
consistent with the idea behind deposit insurance, namely to 
prevent or arrest bank runs?
    Mr. Michel. Well, I am not sure that it really did prevent 
the bank runs as we think that it does. I think that is sort of 
a conventional myth, to some extent. But, again, I don't think 
that typical customers have any idea what reciprocal deposits 
are, or brokered deposits, for that matter. I mean, I think we 
are talking about large investors or institutional investors 
versus the typical mom and pop.
    Now, of course, the funding is being used to help some of 
those people, I understand that. But the bill that we are 
talking about simply removes one layer of restrictions from 
well-capitalized banks having no constrictions at all, to 
something that is a little bit less than well-capitalized. I 
mean this is a marginal change at best, but I think the 
implication is that it is something that we should not be 
doing. And I understand that the FDIC insurance is required for 
some of these accounts, but, again, that is something that we 
should not be doing.
    Mr. Rothfus. I yield back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Colorado, Mr. Tipton, is recognized for 
5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. Again, thank you for 
holding this legislative hearing today.
    And after listening to the comments from our panel and some 
of the questions that have been offered today, I do want to 
extend my thanks again to Mr. Royce from California for 
introducing the Credit Score Competition Act. And I thank the 
chairman for including it in today's legislative hearing.
    H.R. 4211 will allow Fannie Mae and Freddie Mac to be able 
to consider alternative scoring models when determining whether 
to be able to purchase a residential mortgage, and allow two 
government-sponsored entities to be able to make mortgage 
purchases based on alternative scoring models. And I believe 
this will open up the home ownership opportunities for those 
people who are creditworthy but unable to be able to build 
credit based on the traditional credit scoring models, as well 
as supporting many Americans' dream of owning a home.
    The Credit Score Competition Act will increase innovation, 
alleviate portfolio risk, and lower systemic risk in the 
housing market. I would like to encourage all of my colleagues 
to support this important piece of legislation.
    I would also like to be able to ask maybe Mr. Paul from the 
independent banker's perspective on a piece of legislation that 
we have introduced, H.R. 6162, the Protect Prepaid Accounts 
Act.
    Mr. Paul, I appreciated your testimony on brokered deposits 
and, as I mentioned earlier, my bill, the Protect Prepaid 
Accounts Act, ensures that prepaid accounts fulfill the primary 
purpose exception included in the statutory definition of 
deposit broker.
    How is a bank going to be impacted when prepaid accounts 
are defined as brokered deposits, and does this lead to 
additional cost in compliance burdens for our banks?
    Mr. Paul. Yes, it certainly does increase the cost to the 
bank because of the regulatory requirements. But, having said 
that, it is another great source of deposits for community 
banks in being able to get these prepaid cards and, again, just 
creates the liquidity for us to be able to put back into the 
marketplace.
    Mr. Tipton. And I appreciate your point on that, because we 
know that 67 million Americans are considered unbanked or 
underbanked. As a way to access the financial market system, 
and they need the prepaid card products to be able to achieve 
that. How are they impacted if banks cannot shoulder some of 
those compliance costs? As I am listening, and it is a little 
follow-up on Mr. Pittenger's comments in regards to the 
community banks that we are seeing in Colorado that are being 
crushed by regulatory compliance. One more burden, one more 
charge, one more cost is inhibiting their ability to be able to 
provide and create service for people that are underserved in 
the banking institution.
    Mr. Paul. As you can imagine, the number of prepaid cards 
that are out in the marketplace right now creates a huge 
regulatory burden. Every one of those cards needs to be 
analyzed as to where the money is coming from, why it is 
coming, why it is not part of your core business as defined as 
core business.
    So the regulatory issues associated with it and, therefore, 
the costs associated with it are enormous. Alternatives that 
these people have is just incredibly expensive. Cash checking, 
a variety of things like that. So the ICBA definitely supports 
the prepaid cards.
    Mr. Tipton. And I appreciate your comments on that. You 
know, in June of this year the FDIC concluded the government 
benefit cards could fall under the primary purpose exception to 
the definition of brokered deposits. Considering that the FDIC 
recognized in this context that prepaid cards have the primary 
purpose of facilitating certain types of payments and not 
brokering deposits, shouldn't this rationale be applied to most 
prepaid accounts?
    Mr. Paul. Yes.
    Mr. Tipton. That is the answer we wanted to be able to 
hear.
    Mr. Paul. Short and sweet.
    Mr. Tipton. That is just common sense. So, you know, 
individual prepaid products and programs do have an ability to 
petition the FDIC for a determination on whether the product 
fits into that primary purpose exclusion. Is it helpful to the 
industry, your banking industry and banks, to have the FDIC 
rule on a case-by-case basis in a time-consuming manner with 
potential for conflicting determinations?
    Mr. Paul. Tough question. Obviously, the broad-brush stroke 
that most regulatory agencies take becomes a very, very 
difficult part of the examination that we go through on a 
regular basis. So individualization, based on CAMELS rating, 
credit quality, et cetera, is something that I think is a 
driving force that we need to look at more and more.
    Going back to the car example, for those that have clear, 
great car experience driving, their insurance premiumis very 
low. In our world right now, when it comes to FDIC insurance 
and a variety of things, it is just that broad brush. If you 
part within a certain amount, regardless of your CAMELS rating, 
you have a certain cost associated with it. And I just don't 
think that is a fair, balanced approach and cost.
    Mr. Tipton. Thank you so much.
    I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Massachusetts, Mr. Capuano, is 
recognized for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I was 
listening to this in a secure location elsewhere and I have 
read some of the documentation, and I think there are some 
reasonable questions and issues being raised here.
    I can remember when I first got started as a young man and 
married with my wife trying to figure out how to access credit 
so that someday we could buy a house and all that other kind of 
stuff. And the truth is, it was a maze to me, no different than 
anybody else. I had a law degree, but nobody ever taught me 
about how to build up my own credit, because there were no 
classes to take, there was nothing to do, and kind of just 
struggled through it.
    And, to be perfectly honest, I had no idea what my credit 
rating was for years, and even today, I barely know what it is. 
I think it is okay now, but, you know, we have done okay so I 
got no complaints.
    I guess for me, I am interested in people that don't know 
these things, not stupid people, but educated people, 
thoughtful people, capable people, who don't know how to do 
these things, having been one.
    There are ways I know to educate people how to improve 
their credit score. First, find out what it is; second of all, 
try to improve it. And I am just curious, do you think that an 
effective way to do it is to find ways to specifically educate 
people on how their credit score is created and how to change 
it, and is it something that is worthwhile doing for the 
average person? I guess we will start with you, Mr. Turner.
    Mr. Turner. It is incredibly important, and it has been 
impactful. Again, the personalized credit education, what we 
have seen in our experience in interviewing, you know, a 
thousand different people who participated, this is a fearful 
relationship. They have a lot of anxiety about their credit, 
their credit report, and their credit score.
    I have heard references made to what is online, which is 
helpful. They say it is like going to a library and checking 
out a book, and there is lots of useful information, but it 
doesn't tell me how to apply it to my situation. And when they 
connect with that person, that credit educator that talks to 
them, that answers all their questions, it assuages their fears 
and makes them feel comfortable. That gives them the 
confidence--I kept hearing confidence in my interviews--to move 
forward and address their issues, moving forward to change 
their behavior in ways that they now understand impact their 
report and their score.
    We have seen twice the materiality, meaning that twice as 
many people move into a better risk tier with a personalized 
credit education than with just the generic information.
    Another really important point is, this is convenient. It 
is fingertip access. They can access it online, set up an 
appointment, call, set up an appointment; but it is this wait, 
this barrier. Life happens. Jeannine herself, she has kids. She 
missed her first appointment. It took her 2 weeks to 
reschedule, and she almost didn't. She rescheduled, she made 
the appointment, and look what happened.
    Mr. Capuano. Mr. Paul, would you agree with those general 
comments, that it is good for some people to access that type 
of services?
    Mr. Paul. Yes.
    Mr. Capuano. Mr. Michel, how about you?
    Mr. Michel. That it is good for some people to--
    Mr. Capuano. To access the ability to learn how to improve 
their credit score. Most of us don't know. I know you guys all 
know this stuff cold. Most of us don't know.
    Mr. Michel. Sure. Denying access to stuff like that would 
be silly.
    Mr. Capuano. I guess during some of my discussions with 
other people, some people have raised some concerns about these 
things. They figure, well, if I open myself up to people that I 
am trying to provide this stuff, I am a little concerned they 
can charge me too much, they can screw around with me, they can 
put me into different financial products that I can't afford.
    And I guess I am just wondering, do you think there are 
proper and sufficient safeguards against those kinds of 
concerns? Those are legitimate concerns. I am looking to 
educate people, but I am not looking to put them in a position 
where they can be taken advantage of. Again, we will start with 
you, Dr. Turner.
    Mr. Turner. Sure, those are concerns. But there are layers 
of regulations in place already. And, again, we are talking 
about credit education. We are talking about exempting 603(p)s 
and 603(f)s under the FCRA, national consumer reporting 
agencies, who have an obligation to maintain maximum accuracy 
of their data. They don't have an incentive to push people into 
financial products they can't afford, to overextend them. That 
incentive simply doesn't exist. So, while that may be the case 
with other organizations that are also seeking an exemption for 
reasons of their own, it is certainly not the case for those 
that are identified in H.R. 347.
    Mr. Capuano. Thank you. My time is pretty much up. I 
appreciate the opportunity.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Williams, is 
recognized for 5 minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    Thank you all for being here today. I am a small business 
owner. In full disclosure, I am a car dealer. And I deal with 
credit every single day, and that is one reason, for the 
record, I support H.R. 347 for my colleague, Congressman Royce.
    According to the FDIC's community banking study, more than 
1,200 U.S. counties out of 3,283 counties encompassing 16.3 
million people would have limited physical access to mainstream 
banking services without the presence of community banks. That 
is why I think my bill, 5660, is needed for community banks and 
Main Street America.
    And, Mr. Paul, I want to start with you by asking you some 
yes-or-no questions. Do you believe community banks are 
important to our Nation's economy?
    Mr. Paul. Yes.
    Mr. Williams. You know, you mentioned that reciprocal 
deposits represent core deposits of long-term customers that 
are one of the most stable sources of funds; and, again, that 
is a reason why I think was my motive behind 5660. Would you 
agree that a bank's core deposits should also not be deemed to 
be brokered, simply because a community bank is partnered with 
a third-party service provider?
    Mr. Paul. Yes.
    Mr. Williams. And do you believe community banks caused the 
2008 financial crisis?
    Mr. Paul. Absolutely no.
    Mr. Williams. Do you believe that the measures that were 
put in place to better supervise large Wall Street firms have 
resulted in more regulatory costs and burdens for community 
banks?
    Mr. Paul. Yes.
    Mr. Williams. And do you believe that today's regulatory 
climate and burdens have caused some community banks to 
withdraw service and/or delay investment in developing new 
financial products and services to help the customer?
    Mr. Paul. Yes.
    Mr. Williams. And finally, do you believe regulatory costs 
and burdens have contributed to industry consolidation and the 
lower number of community banks we have as compared to just 5 
years ago?
    Mr. Paul. Absolutely.
    Mr. Williams. Now, a couple more questions which you can 
explain a little bit, if you don't mind. Would you agree that, 
in general terms, community banks, the business model is 
relationship-based, whereby loans are made based on sound 
financial documentation and a personal understanding of an 
individual or business's needs?
    Mr. Paul. Absolutely. We all talk about knowing your 
customers. And EagleBank spends an enormous amount of time 
knowing the customers, having access to decision-makers, 
certainty of execution. Those are all the things that we take a 
lot of pride in, and being able to continue to do that and 
being able to support our communities, understand our 
communities, understand the needs of our communities.
    Eighteen years ago, when I was one of the founders of 
EagleBank, we made the decision to stay within the Washington 
metropolitan area for the sole purpose of understanding our 
customers, and understanding the needs of our customers. Being 
one of the largest community banks in the Washington 
metropolitan area, we still only have 3 percent of the market. 
So it just goes to show that the need of community banking is 
growing more and more and more.
    Being $6.5 billion from zero 18 years ago is an indication 
of just how critical and how the need that we have for 
community banking, so we can understand our customer and 
understand what they need. Going back to the earlier question 
of our ability to design products that they need, we have a 
product committee that meets every other month to be able to 
understand those needs of the community. So the answer is, is 
that we think community banking is an absolute integral part of 
our economy.
    Mr. Williams. Well, it is people doing business with 
people. And I can tell you, being in the car business for 44 
years, community banks are probably a need now more than ever 
and they are hurting now more than ever.
    Mr. Paul. Yes, sir.
    Mr. Williams. Next question: Would you agree that low-cost 
deposits residing in accounts opened by and utilized by local 
residents who have their paychecks directly deposited to their 
accounts, who regularly use electronic services to pay bills 
online and who use their accounts' debit cards to pay for small 
everyday transactions represent relation-based deposits?
    Mr. Paul. Absolutely. We have--our logo, to follow up on 
your point, is relationships first, because that is the 
backbone of what a community bank is, is based on those 
relationships. The fact that we have been able to have the 
millennials and younger people that are drifting more and more 
towards the online banking side doesn't mean that it is not a 
relationship. It is just their access to be able to do what 
they want to do within their funds. But clearly, it is all 
driven by that relationship.
    Mr. Williams. Finally, do you believe that relationship-
based deposits do not pose any of the risks that bank 
regulators associate with brokered deposits, specifically fully 
insured funds residing in individually held accounts?
    Mr. Paul. That is correct.
    Mr. Williams. Thank you for your testimony.
    And, Mr. Chairman, I yield back.
    Chairman Neugebauer. Thank you. I thank the gentleman.
    Mr. Emmer is now recognized for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman.
    At the outset, I would like to offer over 30 letters from 
23 different States, at least 23 different States, in support 
of H.R. 4116 for the record.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Emmer. Thank you. Mr. Chairman, again, I want to thank 
Congresswoman Moore for her leadership on this issue, and the 
13 members of this committee who have cosponsored this policy 
proposal, which include Ranking Member Waters and 
Representatives Beatty, Cleaver, Duffy, Heck, Huizenga, 
Luetkemeyer, Maloney, Mulvaney, Pittenger, Schweikert, Sinema, 
and Stivers. I also want to thank the 25 State banking 
associations and all of the national associations that have 
endorsed H.R. 4116.
    As we can see, H.R. 4116 is widely supported by industry 
and Members of Congress, ranging from the Freedom Caucus to the 
Progressive Caucus. Thanks to the hard work of these people and 
the commonsense provisions contained in this bill, we will 
strengthen the economies of our local communities, benefit many 
of our civil institutions, like nonprofits and schools, and 
reduce the likelihood of taxpayer bailouts of private financial 
institutions. This legislation will do so by updating the 
Federal Deposit Insurance Act to differentiate the way the 
Federal Government regulates reciprocal deposits from 
traditional brokered deposits.
    Specifically, it enables adequately capitalized banks to 
hold up to the lesser of 10 billion or an amount equal to 20 
percent of the total liabilities in brokered deposits, 
something the FDIC effectively allows today via waivers. This 
is because, unlike brokered deposits, traditional brokered 
deposits, reciprocal deposits are stable, meaning they do not 
flow from bank to bank, chasing interest rates. Additionally, 
reciprocal deposit customers are loyal, long-term, and 
generally use multiple services from the bank.
    On the other hand, brokered deposits, traditional brokered 
deposits, may be more likely to chase the yield, meaning they 
take deposits from bank to bank, and consequently, present more 
risk for banks, especially when the economy becomes turbulent.
    By enabling deposits from patrons to effectively stay in 
these communities, which often include underserved urban or 
rural communities, this much-needed capital will be lent out to 
local residents and businesses. Currently, many large 
depositors are leaving these underserved areas and community 
banks for larger banks in financial districts of larger cities, 
which stifles job growth and wealth creation in the places that 
need this most.
    The thought by some consumers is that their money is more 
safe in a larger bank, but this bill reassures consumers that 
their money is just as safe in a small bank as it is in a big 
bank, thus reducing the moral hazard that arises from too-big-
to-fail.
    However, it isn't just elected officials at the Federal 
level and banks who recognize the need for improved regulatory 
framework for reciprocal deposits. Many States have amended 
their laws or regulations as well. I will spare you the litany 
of States but, by my count, at least 30 States have done so so 
far. As you can see, there is a great deal of support for this 
bill and I am looking forward to hearing from our panel.
    Mr. Paul, if you would, with the exception of the broker, 
the term ``broker,'' isn't it accurate that traditional 
brokered deposits, which actually became a concern in the early 
eighties with the savings and loan crisis, and reciprocal 
deposits, which, frankly, are relatively recent, maybe the last 
decade they have come into fore, are not the same. Isn't that 
correct?
    Mr. Paul. Completely, completely different. It goes back to 
the word, where did the relationship start? Where did the 
deposit start?
    Mr. Emmer. If I can, in fact, traditional--I am going to 
outline this for you and, hopefully, we are in agreement. In 
fact, traditional brokered deposits can be problematic because 
they can be--I think Representative Pittenger referred to it as 
hot money. This is because traditional brokered deposits are 
not local and may easily run from bank to bank, and this is 
because traditional brokered deposits are often obtained by 
offering rates above the rates in the bank's local market, 
correct?
    Mr. Paul. Yes.
    Mr. Emmer. Reciprocal deposits, on the other hand, are 
really traditional core deposits that come from local 
depositors and are obtained at the rate offered in the local 
market, correct?
    Mr. Paul. Correct.
    Mr. Emmer. Now, H.R. 4116 is based on this critical 
distinction between core and traditional brokered deposits. 
Would you agree that reciprocal deposits are generally more 
stable than traditional?
    Mr. Paul. Yes, absolutely.
    Mr. Emmer. And why?
    Mr. Paul. Well, again, it is back to the relationship. You 
clearly have to drill back down to where the money started. And 
if the money started based on a relationship, that relationship 
will continue within that bank for an extended period of time. 
There is no reason for it to leave.
    Mr. Emmer. And are these particularly valuable to minority-
owned and community development banks, and in whatever time 
could you explain why if you agree they are?
    Mr. Paul. Sure. A lot of it goes back to CRA, being able to 
do CRA-type loans, being able to do SBA-type loans. So the 
answer is that, yes. In Montgomery County, as an example, 50 
percent of the population in Montgomery County wasn't born in 
Montgomery County. So the ability that we have to be able to do 
this type of lending as a result of Montgomery County 
donating--donating, gifting, not gifting either--being able to 
deposit the money into our community bank allows us to be able 
to make those loans back into the community.
    Mr. Emmer. Thank you. I see my time has expired.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thank you, Mr. Chairman. Thanks for holding this 
hearing.
    And I want to commend my colleague, Congressman Ellison, 
for looking at the issue of credit invisibility and looking at 
the possibility of helping improve credit accessing and 
inclusion, particularly for low-income Americans. And, Dr. 
Turner, I appreciate your testimony.
    I do, though, have a few questions about the legislation 
that I have cosponsored, H.R. 4172. And the first one to Dr. 
Turner, the first question to Dr. Turner would be how you would 
expect credit reporting agencies to weigh on-time payments, 
timely payments of utility bills and media bills, telecom 
bills, and landlords furnishing that kind of data. How would 
they weigh that with other credit information, and how 
significant would the enhancement be to their credit score?
    Mr. Turner. So I am not going to portend inside knowledge 
of the weights assigned by various players in that space. We 
have built scorecards, and we have knowledge of how this is 
done.
    Generally, right now, because there is insufficient data in 
the main databases, the FCRA databases of the big three, they 
are general purpose credit, they are weighed in consistent 
fashion with that. However, as more data becomes available, the 
models will be optimized over time, primarily because it is a 
competitive marketplace, and they would want to show an 
advantage using this data. I'm sorry.
    Mr. Barr. I was going to say, I generally agree that more 
information is better, alternative data inclusion is better. 
But just to refine my question, would you anticipate that the 
credit reporting agencies would assign equal weights to 
derogatory or negative information, late payments, as they 
would to the inclusion of positive information?
    Mr. Turner. So the negative data is already being weighted. 
Usually, it comes and it is a serious derogatory so it is quite 
substantial. The positive data, this could be, for the credit 
invisibles, for the thin-file population, this may be their 
only trade line, their only piece of information. So that could 
have very substantial weight, and that would enable them to 
more quickly build or rebuild and repair their credit than if 
that weren't reported.
    Mr. Barr. How about any potential negative implications of 
inclusion of this information? What would be the risk, if any, 
to a consumer that this information be included? Under this 
legislation, do consumers have to opt in? Are they allowed to 
prevent information from being disclosed?
    Mr. Turner. Well, a couple of things. I want to offer 
comfort in that presently, there are at least 28 countries 
around the world that permit fully reported nonfinancial 
payment data into credit bureaus. This covers about one-third 
of humanity and about two-thirds of all adults who have credit 
reports around the world. In many cases, this has gone on for 
as much as 50 years, and none of the sky-is-falling negative 
consequences that opponents have put forward have been borne 
out.
    Here in this country, the same thing. We don't see any 
evidence of that. Now, we don't consider it a harm if someone's 
score is negatively impacted because they have been late paying 
bills. That actually protects them from overextension and 
getting credit they can't afford, which would lead to far worse 
things.
    Mr. Barr. One final question related to this, and that is, 
that there have been some objections raised to the legislation 
by I think Equifax. Are you familiar with those?
    Mr. Turner. Yes, I am.
    Mr. Barr. The National Consumer Telecom & Utilities 
Exchange has written the committee, raising the prospect of 
unintended consequences of the legislation. And I think that 
the specific concern is that reporting data to multiple credit 
bureaus and managing disputes from several sources can be 
expensive and time-consuming. And the concern that is cited is 
the possibility that requiring reporting to multiple credit 
bureaus would actually discourage fulsome disclosure.
    I take it you disagree with that analysis, and why?
    Mr. Turner. Well, there is precedent. Most data furnishers 
today, lenders, creditors, those who report report to all 
three. And with information communications technology, the 
marginal cost of reporting to one, two, three or a thousand is 
basically zero.
    Mr. Barr. Anything else about the objections from the 
NCTUE?
    Mr. Turner. No. I mean, I think that that highlights the 
value, especially to the credit invisible population, of having 
this data in the origination process. That is a mousetrap. But 
there is not enough data right now. We would like more of that 
data, to your point that more information allows for better 
risk assessment. We would like that to be pervasive.
    Mr. Barr. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from South Carolina, Mr. Mulvaney, is 
recognized for 5 minutes.
    Mr. Mulvaney. I thank the chairman. I appreciate the 
opportunity.
    I don't have a lot of questions for the panel, although I 
was sort of disappointed that Professor Jordan was not here as 
I take every opportunity I get to point out when we have a 
fellow Georgetown alum here and not a Texas A&M person.
    And I do apologize for being late. There were several of us 
who were participating in a classified briefing on the Iran 
payment, so my apologies. And for that reason I won't ask any 
questions, because they may have already been asked.
    I do want to say a couple things for the record. Because it 
is rare, Mr. Chairman, that I actually get phone calls from 
back home about some of the more esoteric bills that we take up 
on this committee, but there are actually two of them on the 
list: One of them is Mr. Emmer's H.R. 4116, of which I am a 
cosponsor; and the other is H.R. 347. So if I can, for the 
record, I would like to say just a couple things.
    First of all, regarding Mr. Royce's bill, I have both 
credit education and credit repair services in my district. And 
I understand what Mr. Royce is trying to do. I think he is 
trying to do what we all try and do, which is sort of weed out 
the bad actors, but still not punish the good actors. And that 
is to be commended. I do understand that he does that by 
looking at an entity-based system as opposed to an activities-
based system; and I think he appreciates after several folks, 
myself included, have spoken to him and his staff that there 
are some weaknesses to an entity-based system.
    An activities-based system might be the better way to weed 
out the bad actors. Just because you fall into this credit 
repair doesn't mean you are a bad player, by any stretch of the 
imagination. So I appreciate Mr. Royce's efforts generally, and 
I also appreciate his efforts and hope we can continue to talk 
about ways to make the bill do what we all want it to do.
    On Mr. Emmer's bill, which is a really big deal where I 
come from, because even though I sit on the suburbs of 
Charlotte, North Carolina, which is a major banking center, 
most of the banks in my district are very, very small. We do 
not have a large footprint from the large money center banks in 
my district. My district is fairly rural. And if we do not 
allow these types of syndicated loans, the loans to be shared, 
they will be out of the business of handling the bigger 
accounts. They won't be able to handle money for the State. 
They won't be able to handle money for the Department of 
Education. Might not even be able to handle the money for the 
local school board, simply because the amounts involved exceed 
the insurance.
    So I applaud what Mr. Emmer is doing and, like I said, for 
a rare occasion, some stuff that we are doing--the big stuff, 
you know, when we do financial choice, it obviously affects the 
financial services operations in my district. But it is nice to 
have a couple of these smaller bills that most folks don't pay 
attention to, they don't get the same attention, they are not 
as glamorous, they are not as sexy, but they are just as 
important.
    So I appreciate you having the hearing on them. I 
appreciate Mr. Emmer's work, Mr. Royce's work, and look forward 
to working with everybody to see if we can pass this.
    With that, I yield back the balance, unless somebody else 
wants some additional time. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And I want to thank our witnesses. You know, the purpose of 
this hearing today was to open up a record on these particular 
pieces of legislation. I thought we had some good discussion 
and good debate, some good input, as these bills move forward.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 11:51 a.m., the hearing was adjourned.]







                            A P P E N D I X



                           September 27, 2016





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