[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
PRESERVING CONSUMER CHOICE.
AND FINANCIAL INDEPENDENCE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 18, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-8
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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
ROBERT DOLD, Illinois
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
March 18, 2015............................................... 1
Appendix:
March 18, 2015............................................... 59
WITNESSES
Wednesday, March 18, 2015
Bosma-LaMascus, Peggy, President and Chief Executive Officer,
Patriot Federal Credit Union, on behalf of the National
Association of Federal Credit Unions (NAFCU)................... 10
Fenderson, Tyrone, President and Chief Executive Officer,
Commonwealth National Bank, on behalf of the American Bankers
Association (ABA).............................................. 5
Levitin, Adam J., Professor of Law, Georgetown University Law
Center......................................................... 11
Miller, Patrick, President and Chief Executive Officer, CBC
Federal Credit Union, on behalf of the Credit Union National
Association (CUNA)............................................. 6
Williams, J. David, Chairman and Chief Executive Officer,
Centennial Bank, on behalf of the Independent Community Bankers
of America (ICBA).............................................. 8
APPENDIX
Prepared statements:
Bosma-LaMascus, Peggy........................................ 60
Fenderson, Tyrone............................................ 109
Levitin, Adam J.............................................. 121
Miller, Patrick.............................................. 135
Williams, J. David........................................... 186
Additional Material Submitted for the Record
Green, Hon. Al:
Written statement of Hilary O. Shelton, Director, NAACP
Washington Bureau & Senior Vice President for Policy and
Advocacy................................................... 225
Pittenger, Hon. Robert:
Letter from Ira M. ``Don'' Flowe, Jr., Chief Credit Officer,
BlueHarbor Bank............................................ 232
Bosma-LaMascus, Peggy:
Additional information provided for the record in response to
a question posed by Representative Sherman during the
hearing.................................................... 234
PRESERVING CONSUMER CHOICE.
AND FINANCIAL INDEPENDENCE
----------
Wednesday, March 18, 2015
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
HVC-210, Capitol Visitor Center, Hon. Jeb Hensarling [chairman
of the committee] presiding.
Members present: Representatives Hensarling, King, Royce,
Lucas, Neugebauer, Pearce, Posey, Fitzpatrick, Westmoreland,
Luetkemeyer, Huizenga, Hurt, Stivers, Mulvaney, Hultgren, Ross,
Pittenger, Barr, Rothfus, Messer, Schweikert, Dold, Guinta,
Tipton, Williams, Poliquin, Love, Hill; Waters, Maloney,
Sherman, Lynch, Green, Cleaver, Himes, Kildee, Delaney, Sinema,
Beatty, Heck, and Vargas.
Chairman Hensarling. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``Preserving Consumer Choice
and Financial Independence.'' I now recognize myself for 3
minutes to give an opening statement.
I would say of all the priorities of our committee, I know
of not one that is more urgent than providing some regulatory
relief for our community financial institutions. It is not an
exaggeration to say that they are literally withering on the
vine. We are losing more than one a day and they are not
perishing of natural causes. The sheer weight, volume, cost
complexity, and uncertainty of Federal regulation is a burden
that is killing them off. And as they die, unfortunately so do
the dreams of millions and millions of our fellow citizens,
hardworking taxpayers who rely upon these community financial
institutions to help buy a pickup truck to drive to work, maybe
help fund the first kid in their family to ever go to college,
or to start a small business and achieve their American dream
of financial independence.
It is not an exaggeration to say that every single week, we
hear from another financial institution that is having trouble
meeting the needs of their customers. I have one here from a
bank in Arkansas who says that due to the Qualified Mortgage
(QM) rule, they have had to cease funding mobile homes, ``which
have long been a source of homeownership for low- to moderate-
income consumers in our markets.''
Here is one from a credit union in California who says that
due to Federal regulation, one of their members can no longer
wire funds to a family member in the Ukraine. Here is one from
a bank in Massachusetts, that writes, ``We have experienced a
spike in loan declines to women.'' Further investigation
identified that women attempting to buy the family home to
settle their divorce and stabilize their family were being
declined at a high rate due to the Dodd-Frank Qualified
Mortgage rules and the ability-to-pay rules.
Regrettably, these are not exceptions. We hear from these
banks and credit unions every day and we understand how the
Federal regulation can adversely impact low- and moderate-
income Americans.
Now some, particularly those on the other side of the
Capitol, have said community financial institutions are doing
just fine. In fact, they have said, ``Regulators have been
doing a pretty good job of protecting community banks.'' I
suspect many of our witnesses will disagree with their
statement. And I believe that assertion is just wrong,
dangerously wrong and out of touch with low- and moderate-
income Americans.
Much, but certainly not all, of this regulatory burden has
emanated from Dodd-Frank. I am not a fan of Dodd-Frank, but
even I can find some good in it: what Dodd-Frank attempted to
do on Section 13(3) of the Fed; what it has done to help
eliminate the credit rating agency's monopoly; what it has done
to make balance sheets less opaque.
So if I can find some good in it, I hope that my friends on
the other side of the aisle can admit that maybe it has done
some harm. I know Barney Frank has found at least a half dozen
different areas where he would amend his own law. He said it
right in front of us, right in front of this committee back in
July. So I would ask all my Democrat colleagues to have an open
mind as we enter into this, and I invite all Members to engage
in the bipartisan effort of regulatory relief for our community
financial institutions; find some common ground.
I will reserve the right to have an exception to the rule,
but the rule is going to be that if any Member brings us a
legitimate bipartisan piece of legislation to provide needed
regulatory relief to community financial institutions, we will
mark it up. Time is of the essence, so let's get started.
I yield 4 minutes to the ranking member.
Ms. Waters. Thank you, Mr. Chairman. Today we gather to
supposedly discuss preserving consumer choice. And while the
principle itself is an important one, I am highly skeptical
that any of the issues or solutions we will consider today can
be described as a serious effort to do so. History tells us
that opposed to virtually every effort to sensibly correct
private sector failures have cried wolf in our position to
reform; saying that the regulation would end by hurting the
very people it tries to help by removing their choices. It is a
talking point that has existed for as long as this government
has tried to protect consumers and the broader economy.
For example, in 1934 New York Stock Exchange President
Richard Whitney opposed the creation of the Securities and
Exchange Commission, arguing that it would destroy the markets
and businesses Congress sought to protect.
As recently as March 2007, just months before the economic
collapse, representatives of industry and the Bush
Administration argued in front of this very committee that
reforms to the toxic subprime market would harm access to
credit for first-time home buyers. Over time, these
regulations, like those that prohibit child labor, mandate
seatbelts, and protect consumers from poor quality foods,
drugs, and toxins in our environment, among others, have shown
that markets and industries function better when consumers know
that products need basic standards, and that means protecting
consumers from unsafe and unsound financial products, no matter
how profitable they are to lenders or how cheaply they can be
offered to borrowers.
The irony is that by weakening regulations and consumer
protections put in place after the Great Recession, this
committee would affect choice and financial independence, but
in the wrong way. It would invite a return to a recent time
when hardworking Americans were choosing whether to pay for
medication or their mortgage, and when they were choosing
between taking their family to a homeless shelter or spending
one more night in the car. A free market system with ample
consumer choice only works when businesses compete on cost and
quality.
I don't know how much they can cut corners or bend the
rules. That is true whether they are talking about faulty
exploding toasters or faulty exploding mortgages. Mr. Chairman
and Members, I welcome your invitation for bipartisan
legislation. As you know, I have met with you and I have tried.
We have worked hard and continue to work hard for community
banks. Unfortunately, there are those who wish to include too-
big-to-fail banks in anything that we try for our community
banks. We have witnessed a time when consumers had no
protection. We have witnessed a time a time when not only did
consumers have no protection, but the fact of the matter is, we
had one of the most important things happen in Dodd-Frank, and
that is the development of the Consumer Financial Protection
Bureau, which has taken into consideration concerns of
community banks, and has made modifications. And we have said
on this side of the aisle, where there are technical changes or
concerns, we are willing to work with them.
And so I am pleased to hear the offer that has been made by
the chairman today and I look forward to working with them in
any and every way that we can to deal with real issues and not
just talking points.
Chairman Hensarling. The gentlewoman yields back. The Chair
now recognizes the gentleman from Texas, Mr. Neugebauer, the
chairman of our Financial Institutions Subcommittee, for 2
minutes.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
important hearing. There was a recent Harvard University study
that appropriately described what I knew when I was a community
banker, that their competitive advantage is the knowledge and
history of their customers and the willingness to be flexible.
Unfortunately, this big regulatory burden that we have
placed over our community financial institutions is taking away
their flexibility. And every Member here has been back to their
district and has heard from their financial institutions on how
they are maybe not able to provide the same services, or make
some of the same loans that they made in the past.
What we are also hearing is, alarmingly, that we are seeing
a lot of consolidation in our community financial institutions.
I think when you look at the credit unions and the community
banks, that nearly 2,200 consolidations over the last 4 or 5
years, and why is that important to our communities? Because
when you look at the community financial institutions, they are
the primary supplier of credit for our small businesses. They
are, in many cases, the only source for mortgages in those
particular markets.
If you look at, in my district, for example, production
agricultural loans. Community financial institutions make over
75 percent of the production agricultural loans in this
country. And so we have to move away from the government knows
what financial products are best for you, and go back to the
scenario where the customer, the consumer, the borrower and
their lender are working out the best solutions for them. And
we also need to preserve our community financial institutions
which are such an integral part of our community.
And so, Mr. Chairman, I thank you for holding the hearing
today. And I look forward to hearing from our witnesses on this
very important subject. With that, I yield back.
Chairman Hensarling. The gentleman yields back.
We will now go to our witnesses.
Our first witness is Mr. Tyrone Fenderson, the president
and CEO of Commonwealth National Bank, testifying today on
behalf of ABA. He received his bachelors degree from Faulkner
University and completed the graduate programs at the Louisiana
State University and Troy University. He was named to
Birmingham Business Journal's top 40 under 40 list in 2006.
Our second witness is Mr. Patrick Miller, the president and
CEO of CBC Federal Credit Union, testifying today on behalf of
CUNA. Prior to joining CBC, Mr. Miller worked for 22 years in
the financial services industry. Mr. Miller is a graduate of
Hiram College.
At this point, I will yield back to the gentleman from
Texas for our next introduction.
Mr. Neugebauer. Thank you, Mr. Chairman. It is my pleasure
to introduce David Williams, the chairman and CEO of Centennial
Bank in Lubbock, Texas, testifying today on behalf of ICBA. He
is a Lubbock native, second generation of family. Their family
has been in banking for a very long time. David knows a lot
about community banking. And another special relationship that
I have is that not only is David a personal friend, but about
38 years ago Mr. Williams helped this young homeowner from
Lubbock, Texas, start a development company and took a chance.
I think that is the spirit of community banking, so we are
delighted to have Mr. Williams testifying today.
Chairman Hensarling. And the gentleman's recommendation is
that he took a chance on you?
Our next witness, Peggy LaMascus, is the president and CEO
of the Patriot Federal Credit Union in Chambersburg,
Pennsylvania, and she is testifying today on behalf of NAFCU.
This Thursday is Ms. LaMascus' 45th anniversary in the credit
union industry. We all know she must have started at the age of
10. Ms. LaMascus is a graduate of the Huntington College of
Business.
And finally, Professor Adam Levitin is a professor of law
at Georgetown University Law Center, and he has testified
before us before. Before joining the Law Center, Professor
Levitin worked as an attorney in private practice and clerked
on the U.S. Court of Appeals for the third circuit. He holds
degrees from Harvard Law School, Columbia University, and
Harvard College.
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. For those who have not testified before, there is a
green light, yellow light, and red light system, not unlike the
lights you encounter on the highways, and they mean the same
thing. We would appreciate you keeping to the 5-minute limit.
At this time, Mr. Fenderson, you are recognized for your
testimony.
STATEMENT OF TYRONE FENDERSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMMONWEALTH NATIONAL BANK, ON BEHALF OF THE AMERICAN
BANKERS ASSOCIATION (ABA)
Mr. Fenderson. Chairman Hensarling, Ranking Member Waters,
my name is Tyrone Fenderson, and I serve as president and CE0
of Commonwealth National Bank in Mobile, Alabama. My bank is
one of the small community banks that I hear members of this
committee often speak of. We are a $60 million institution that
works every day to serve the needs of our customers of Mobile.
I appreciate the opportunity to be here to represent ABA
and to discuss how the growing volume of bank regulations,
particularly for community banks, is hurting the ability of
banks to meet the needs of consumers and our communities. ABA
appreciates the leadership of many members of this committee in
addressing this issue. Community banks are resilient. We have
found ways to meet our customer's needs despite the ups and
downs in the economy. This job has been made much more
difficult by the avalanche of new rules, guidance, and
seemingly ever-changing expectation of regulators.
It is this regulatory burden and the fear of even more
regulation that often pushes small banks to sell to banks many
times their size. In fact, today there are 1,200 fewer
community banks than there were 5 years ago. This trend will
continue unless some rational changes are made to provide
relief to America's hometown banks.
Regulation shapes the ways banks do business and can help
or hinder the smooth functioning of the credit cycle. Every
bank regulatory change directly affects the cost of providing
banking products and services to customers. Even small changes
can reduce credit availability, raise costs, and drive
consolidation. Everyone who uses banking products and services
is impacted by changes and bank regulation.
Let me briefly share a story that a banker recently shared
that illustrates the impact these rules have on communities.
The bank located in Texas recently had to take all lending
discretion away from its loan officers. Due to the fears of
inadvertently violating fair lending regulations, it now must
rely solely and exclusively on a numbers-driven model to
underwrite their loans. This has meant turning away loans that
they otherwise would have made. In one case, this meant turning
down a 30-year customer who had never been late on a payment
for a loan to repair the heat in his daughter's home.
Stories such as this are common in hometowns across the
country. This is why it is so important for Congress to take
steps to ensure that the banking industry's ability to
facilitate jobs and grow our economy exists.
We urge Congress to work together, Senate and House, to
pass bipartisan legislation that would enhance the ability of
community banks to serve our customers. We support legislation
that would require regulators to tailor their regulatory
approach so that it only applies where the bank's business
model and risk profile require it. Regulators should be
empowered and directed to make sure that rules, regulations,
and compliance burdens only apply to segments of the industry
where it is warranted.
Some of the bills introduced by this committee are also an
important first step. Representative Barr's American Jobs and
Community Revitalization Act, H.R. 1389, contains provisions
that would reduce the burden on community banks in ways that
make it easier to meet customer's needs.
A few key provisions include ensuring that loans held in
portfolio are considered Qualified Mortgages; requiring a
review and reconciliation of existing regulation; providing a
longer exam cycle for highly-rated community banks; and
streamlining currency transaction reports for seasoned
customers.
Additionally, legislation introduced by Representatives
Luetkemeyer, Neugebauer, and Barr contains measures that would
help American hometown banks get back to serving our
communities. Some of these provisions of the bill would
eliminate mailing the privacy notices when no changes have been
made to privacy policies; allow highly-rated, well-capitalized
community banks to file short-form call reports; establish an
effective appeals process to the definition of a rural area;
and ensure proper oversight of the CFPB. ABA stands ready to
help and work with Congress to address this important issue. I
would like to thank you for your time, and I will be happy to
answer any questions that you may have.
[The prepared statement of Mr. Fenderson can be found on
page 109 of the appendix.]
Chairman Hensarling. Thank you.
Mr. Miller, you are now recognized for your testimony.
STATEMENT OF PATRICK MILLER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CBC FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT
UNION NATIONAL ASSOCIATION (CUNA)
Mr. Miller. Thank you, Chairman Hensarling and Ranking
Member Waters. Thank you for the invitation to testify today
for the Credit Union National Association. I am Patrick Miller,
president and CE0 of CBC Federal Credit Union located in
Oxnard, California. America's 100 million credit union members
rely on their credit unions for safe and affordable financial
service products. As member-owned, not-for-profit institutions,
credit unions continue to provide tremendous benefits in terms
of lower interest rate loans, higher returns on deposits, low
or no-fee products and services, and financial counseling and
education. Because credit unions actively fulfill their mission
as Congress intended, consumers benefit to the tune of about
$10 billion annually.
However, since the beginning of the financial crisis,
credit unions have been subjected to more than 190 regulatory
changes from nearly 3 dozen Federal agencies, totaling nearly
6,000 pages. These new rules, usually aimed at curtailing
practices that we don't engage in, impact us because we have to
do several things: assess the rule and determine how to comply;
change internal policies and controls; design and print new
forms; dedicate additional resources to retrain staff; update
computer systems; and finally, help our members understand all
these changes.
And we have done this over 190 times in just the last few
years. Obviously, this takes time and money, both of which
could be far better spent serving our members. After all, every
additional dollar spent on compliance is a dollar that cannot
be loaned to a member.
Regulatory burden is not just about the dollars and cents
of running a credit union. We serve hardworking members, your
constituents, and this constant onslaught of regulations
directly affects their ability to borrow. Not every member and
every loan fits arbitrary rules imposed by regulators. Without
the flexibility to determine the appropriate services, credit
union members lose out. After the CFPB issued a QM rule, we
originated about half the amount of our borderline mortgage
loans that we would have made before.
For example, we had to deny 50 families a home loan, who we
feel were qualified borrowers, simply because we feared
regulatory scrutiny on non-QM loans. I should be able to
evaluate the ability to repay of my credit union members in
Oxnard, California. The decision should not be left to someone
in Washington.
Overregulation has real-world consequences for our members.
Credit unions should not be required to comply with rules more
appropriately suited for too-big-to-fail institutions. I agree
with members of this committee who said that too-big-to-fail
has turned into too-small-to-survive. Small financial
institutions are consolidating at an alarming rate due to the
weight of regulatory burdens and the high cost of compliance.
Jobs are lost, communities are underserved, and the consumer is
left with fewer options. For example, regulations that
adversely affected my credit union are the CFPB mortgage
servicing rules. These rules were created because of companies
like high-risk mortgage servicers and Wall Street banks, not
credit unions. Our credit unions have never had any loan
servicing complaints, yet the pages and pages of new rules make
it more onerous and expensive to service home loans.
Outsourcing costs are outrageous and would cost our credit
union more than $100,000 per year. This is an unnecessary
expense, and since credit unions are member-owned, this extra
cost affects our members directly.
While I can share numerous other stories with the
committee, I also want to focus on just a few of the more than
two dozen recommendations for statutory changes found in my
written testimony. For example, we encouraged Congress to
ensure the CFPB uses exemption authority to a much greater
extent than it has to date. Members of this committee have
acknowledged that the Bureau has such authority, but we believe
it is now being used sufficiently. We ask Congress to clarify
and strengthen these exemption instructions as they pertain to
smaller depository institutions like credit unions.
We also urge the committee to actively engage in the debate
over data security. Credit unions and their members are greatly
impacted by the weak merchant data security practices that have
allowed several large-scale breaches. At my small credit union,
we dedicate $575,000 a year to cybersecurity because protection
of data is of the highest priority, particularly when merchants
are not doing their part. The negligence of those that don't
protect their payment information costs my industry money, and
shakes the confidence of our members. These fees would be
significantly reduced if those that accept payments were
subject to the same standards as those that provide cards.
Frankly, I am concerned about the security of the vast
amount of consumer data being collected by the CFPB and other
regulators. More needs to be done on this issue, and we
encourage the committee to act.
My written testimony also includes two recommendations
related to the Federal Home Loan Bank System: one would permit
credit unions to join the System; and the other would give us
parity with banks and extend the community financial
institution exemption to include credit unions under $1 billion
in assets.
Credit unions did not cause the crisis, but you wouldn't
know that based on the hundreds of rules to which we have been
subjected. Since you believe we are not the problem, please
work with us to remove the barriers that keep us from serving
our members, your constituents. Congress can do a lot more to
remove barriers for credit unions and we are grateful for the
committee's desire to address these issues. Thank you again for
the opportunity to testify today.
[The prepared statement of Mr. Miller can be found on page
135 of the appendix.]
Chairman Hensarling. Mr. Williams, you are now recognized
for your testimony.
STATEMENT OF J. DAVID WILLIAMS, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CENTENNIAL BANK, ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Williams. Chairman Hensarling, Ranking Member Waters,
and members of the committee, I am David Williams, chairman of
the Centennial Bank in Lubbock, Texas. I am pleased to
represent the Independent Community Bankers Association of
America, and 6,400 community banks, at this most important
hearing.
Centennial Bank, chartered in 1934, is a $740 million bank.
It serves rural and urban markets in the Panhandle, South
Plains, and central Texas. Our mission is to build successful
and meaningful lifetime relationships with our customers. This
long-term culture, typical of thousands of community banks
across the Nation, is at risk today.
In recent years, Centennial Bank has seen the nature of our
business fundamentally change from lending to compliance.
Regulatory burden reaches the level of overkill when it injures
the customer or consumer it was intended to protect.
Please consider the following examples: A startup small
business owner, or farmer, may have business-related debt on
their credit report that will disqualify them under QM's 43
percent debt-to-income (DTI) limitation. Business formation
should be encouraged, not punished. Minority borrowers are more
likely to exceed the DTI limitation according to a Federal
Reserve study of lending in 2010.
As a small creditor under the CFPB's definition, my bank is
not subject to the debt-to-income limitation and we serve these
customers, but many other community banks do not have small
creditor status.
Even as a small creditor, my bank is significantly limited
by QM. Here are some examples of loans that are not QM even for
small creditors. Low-dollar loans are common in many parts of
the country for rural and refinancing. Both the QM closing
fee--excuse me, but the QM closing fee cap is often a challenge
when making these loans. Balloon loans, which were used to
manage interest rate risk on loans that can't be sold into the
secondary market, are non-QM unless they are made by lenders in
predominantly rural areas, beginning in 2016.
For banks like mine that serve both rural and urban
markets, it is nearly impossible to meet the ``rural lender''
definition. In our New Mexico market, regulatory barriers to
mortgage lending are pushing would-be homeowners into the
rental market. In Clayton, New Mexico, for example, an average
renter now pays $800 to $900 a month, though he or she could
purchase a much nicer home for $80,000 with a monthly mortgage
payment of $400. I believe the disparity between rents and
mortgage payments in this market is directly attributable to
the overly stringent underwriting required by the new mortgage
rules.
I hear these stories again and again from community bankers
in Texas and around the country. These are not isolated
anecdotes. Numerous empirical studies, which I cite in my
written statement, have reached the same conclusion. The good
news is there are readily available solutions to this pending
crisis. ICBA's plan for prosperity is a robust regulatory
relief agenda with nearly 40 recommendations that will allow
Main Street and rural America to prosper. A copy of the plan is
attached to my written statement.
This committee's work in the last Congress set the stage
for enacting meaningful regulatory relief in Congress. We are
encouraged by the bills that have been introduced so far, many
of which reflect our plan for prosperity. Chairman Neugebauer's
Financial Product Safety Commission Act, H.R. 1266, would
changes the structure of the CFPB so that it is governed by a
five-member commission. This would create a system of checks
and balances that is absent in the single director form of
governance.
I want to highlight the CLEARR Act, H.R. 1233, introduced
by Representative Luetkemeyer, which contains provisions
addressing mortgage regulatory relief, capital access, and
reform of oversight and supervision. The CLEARR Act has been
endorsed by 34 State community bank associations. A key
provision of the bill, automatic QM status for any mortgage
held in portfolio, is also contained in the Portfolio Lending
and Mortgage Access Act, H.R. 1210, introduced by
Representative Barr.
A portfolio lender that holds 100 percent of a credit risk
has every incentive to thoroughly assess the borrowers
financial condition. This is a simple, easy-to-apply solution
to the threat of QM. These bills, among others before the
committee, are all a part of the solution to regulatory burden.
We strongly encourage this committee to complete the work that
was done in the last Congress, and enact meaningful regulatory
relief for community banks. Thank you again for the opportunity
to testify. I look forward to your questions.
[The prepared statement of Mr. Williams can be found on
page 186 of the appendix.]
Chairman Hensarling. Ms. LaMascus, you are recognized for
your testimony.
STATEMENT OF PEGGY BOSMA-LAMASCUS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PATRIOT FEDERAL CREDIT UNION, ON BEHALF OF
THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)
Ms. LaMascus. Thank you. Good morning, Chairman Hensarling,
Ranking Member Waters, and members of the committee. My name is
Peggy LaMascus, and I am testifying today on behalf of NAFCU.
Tomorrow will mark my 45th anniversary with credit unions,
having started at Westvasamco Federal Credit Union on March 19,
1970. For the last 33 years, I have been the CEO of Patriot
Federal Credit Union, a community credit union in Chambersburg,
Pennsylvania, serving over 51,000 members in 3 counties in
Pennsylvania and Maryland.
The entire credit union community appreciates the
opportunity to expand on the topic of regulatory relief. The
impact of the growing compliance burden is evident as the
number of credit unions continues to decline. Since the second
quarter of 2010, we have lost 1,200 federally-insured credit
unions, 96 percent of which were below $100 million in assets.
Many institutions simply cannot keep up with the new
regulatory tide and have had to merge out of business or be
taken over. Many others have had to cut service to their
members. Credit unions and their members need regulatory
relief, both from Congress and their regulators, including NCUA
and the CFPB. Our members at Patriot have been directly
impacted by regulations. For example, we hear from members who
are angered by the outdated six transfer limitation from
Federal Reserve Regulation D. This includes a homebound,
disabled member who managed her finances primarily through
phone and electronic services because of the difficulty of
leaving home to come to a branch. She is one of our many
members feeling the burden of this outdated requirement.
Other members can no longer make international remittance
transfers with us. Patriot opted to stop doing them because the
new CFPB requirements were too costly and burdensome to comply
with for the limited number we make annually. One of the
greatest challenges credit unions face is the major disconnect
between the regulatory agencies in Washington, and the real
world credit unions and their members live in.
While regulators have taken some small steps toward relief,
too often arbitrary assets thresholds don't actually consider
the risk or complexities of institutions. Regulation of the
system should match the risk to the system. My written
testimony outlines NAFCU's updated, five-point plan for credit
union regulatory relief, as well as our new top 10 list of
regulations that need to be amended or eliminated.
One example of a burdensome regulation where costs will
outweigh the benefits is NCUA's new risk-based capital
proposal. The new proposal is an improvement over the initial
proposal, but the problem with the regulation remains. The
proposed rule is extremely costly, and NCUA has not
demonstrated why credit unions need a broad brush regulation.
Despite NCUA's estimate that a limited number of credit
unions will be downgraded, the proposal would force credit
unions to hold hundreds of millions of dollars in additional
reserves to achieve the same capital cushion levels they
currently maintain. These funds could otherwise be used to make
loans to consumers or small businesses.
Ultimately, we believe legislative changes are required to
bring about comprehensive capital reform, including allowing
credit unions access to supplemental capital. NAFCU also
believes that field of membership rules for credit unions
should be modernized on both the legislative and regulatory
fronts, and I have outlined ideas for those in my written
testimony.
Additionally, cost and time burden estimates issued by
regulators are often grossly understated. We believe Congress
should require periodic reviews of actual regulatory burdens of
finalized rules, and ensure agencies remove or amend those
rules that vastly underestimated the compliance burden.
Some credit unions have reported to NAFCU that it has taken
them over 1,000 hours to comply with CFPB's new mortgage
requirements. There are also a number of bills outlined in my
written statement that NAFCU supports and we would urge action
on. My statement also highlights areas where regulators can
provide relief without congressional action.
In conclusion, the growing regulator burden on credit
unions is the top challenge facing the industry today. It must
be addressed in order for credit unions to survive and meet
their mission of serving their members' needs. We thank you for
the opportunity to share our thoughts with you today. I welcome
any questions you may have.
[The prepared statement of Ms. LaMascus can be found on
page 60 of the appendix.]
Chairman Hensarling. And, Professor Levitin, you are now
recognized for your testimony.
STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER
Mr. Levitin. Chairman Hensarling, Ranking Member Waters and
members of the committee, good morning. Thank you for inviting
me to testify today. My name is Adam Levitin, and I am a
professor of law at Georgetown University, where I teach
courses in consumer finance, among other topics.
I am glad to see the committee show interest in the
problems facing community financial institutions. Community
banks and credit unions play an important role in their
communities and in the American financial system. They are key
sources for small business and commercial real estate and
agricultural credit, and they are essential for preserving
consumer choice in the financial services marketplace.
There is no question that as an industry, community
financial institutions are ailing. The number of community
banks in the United States has fallen nearly in half over the
last decade. This is the continuation of a long-term trend.
Indeed, for the past couple of decades community banks have
disappeared at a steady rate of around 300 a year, and similar
situations exist for credit unions.
The central problem that community banks face, however, and
the main reason they are disappearing is not regulation and is
not the CFPB. Community banks have been disappearing at the
same steady rate for decades before the CFPB came into
existence, much less before its regulations became effective.
CFPB regulations have only been in effect for the past 1 or 2
years. It is hard to blame new regulations for a decade's old
trend.
The CFPB has actually repeatedly put a friendly sum on the
regulatory scale to ease regulatory burdens for community
banks. My written testimony outlines no fewer that 10 CFPB
regulatory exemptions for small financial institutions. This is
on top of key statutory exemptions. Additionally, the CFPB has
a proposed rulemaking that would expand some of the exemptions
to potentially cover nearly all community financial
institutions.
The CFPB has also taken pains to create multiple channels
for smaller financial institutions to communicate their
concerns to the Bureau, including voluntarily establishing a
community bank advisory board, a credit union advisory board,
and an office of financial institutions. All of this is in
addition to the special rulemaking requirements with which the
CFPB must comply under the Small Business Regulatory
Enforcement Fairness Act.
The real problem that community banks face is not the CFPB
or regulation; instead, it is the cold, hard truth of the
market. Size matters in consumer finance. Community banks lack
the economies of scale necessary to compete in the key consumer
finance market of mortgages and credit cards. Increasingly,
economies of scale matter for deposits because mobile banking
and security issues are driving up technology costs. In short,
community banks face a serious structural disadvantage in the
consumer finance marketplace.
Members of this committee have proposed a number of bills
that would address various aspects of CFPB regulation. I
address some of these bills in detail in my written testimony.
With one exception related to mortgage servicing, I believe
them to be ill-advised, because they are either premature,
unnecessary, or, in some cases, would actually encourage
predatory lending or restrict access to credit.
These bills would also add to regulatory uncertainty. Any
changes that are made now by statute would call for a further
round of regulations and more uncertainty for the industry.
Most critically, though, none of these bills are responsive to
the real problem faced by community financial institutions.
Focusing on the weedy details of CFPB regulations instead of
addressing the unequal playing field between community banks
and mega-banks is like worrying about electrolysis and chin
hairs while ignoring a malignant tumor. It just misses the
point.
If this committee really wants to help community financial
institutions, the single best thing it could do would be to
pass legislation that would tax or break up the mega-banks.
Additional regulatory exemptions for community banks are
insufficient to save this industry because no amount of
regulatory exemptions will sufficiently level the playing field
for community banks.
Moreover, these exemptions will come at the cost of
consumer protection. American families' financial security
should not be put at risk to subsidize private corporations,
even community banks. If Congress truly cares about community
banks, it needs to take action to break up the too-big-to-fail
banks, to benefit from the implicit taxpayer guarantee, and
pose a serious threat to financial stability. Until and unless
this is done, community banks will never be able to compete on
a level playing field. The only way to save the community
banking industry in the long run is to break up the mega-banks.
Thank you.
[The prepared statement of Mr. Levitin can be found on page
121 of the appendix.]
Chairman Hensarling. The Chair now yields himself 5 minutes
for questions. Ms. LaMascus, you are sitting right next to the
law professor who says regulation is not your problem. Do you
agree with that assessment?
Ms. LaMascus. No, I don't. I do believe that there should
be an exemption for credit unions or a general exemption for
small institutions. The CFPB does provide some exemptions for
small institutions; however, they vary based on each rule. I
understand the arguments that each rule deserves its own
consideration for its impact on small institutions. We think
the CFPB could provide better relief if it would provide one
general exemption for small institutions, such as credit
unions, for most of the regulations.
Chairman Hensarling. Ms. LaMascus, you mentioned in your
testimony a member of your credit union whom I believe is
disabled, and after triggering the six-transfer limitation
under Reg D, this disabled member has to find some physical way
to walk into the credit union. Did I understand you correctly?
Ms. LaMascus. She has to have someone who helps her get to
the credit union. Of course, we are an accessible credit union,
but it is difficult. She has to find--
Chairman Hensarling. Do you happen to know if this member
somehow works on Wall Street, because supposedly these
regulations were designed to rein in Wall Street. Is she part
of the Wall Street--
Ms. LaMascus. No, no, she does not work on Wall Street.
Chairman Hensarling. Do you have a branch on Wall Street?
Ms. LaMascus. No.
Chairman Hensarling. Do any of you all have a branch or
credit union or bank on Wall Street? You don't.
Mr. Levitin. Mr. Chairman?
Chairman Hensarling. It is my time, Professor Levitin. I am
sure you will have plenty of time to have your views heard.
So we understand that there has been a decline in our
community financial institutions but the statistic I have shows
it has been greatly exacerbated over the last few years. I
think the rate of decline has almost doubled. I also see that
there have only been four de novo bank charters since Dodd-
Frank came about.
Isn't part of the problem here that the regulations are
really helping commoditize credit? So we have the thesis that
regulations are not your problem, your problem is scale. You
are told you have to know your customer for purposes of law
enforcement. Apparently, it is not good enough to know your
customer for purposes of credit extension. If you are denied
the ability to engage in relationship banking, which I assume
the regulations are causing us to lose relationship banking,
and I assume you are having more difficulty competing. Mr.
Williams, I see your head nodding. Do you have an opinion on
the matter?
Mr. Williams. Yes, Mr. Chairman. Recently we merged with
another bank to achieve economies of scale for reasons that I
would disagree on. Regulatory burden clearly is a major cause
of that. And we provide credit to rural Americans and the QM
rule is affecting that, certainly in west Texas. And to farmers
and small business folks in that area and clearly it is
disqualified applicants that we would have once approved.
Chairman Hensarling. Mr. Fenderson, do I understand it
properly that your bank is one of the few federally-chartered
minority-owned banks; is that correct?
Mr. Fenderson. Yes, sir, we are one of the three national
chartered banks owned by African-Americans, predominantly.
Chairman Hensarling. Do I understand that you primarily
serve underserved areas around the Mobile, Alabama, area?
Mr. Fenderson. That is correct.
Chairman Hensarling. And do I also understand that when the
QM rule came out, you had to suspend mortgage lending to your
underserved population, is that correct?
Mr. Fenderson. When the regulation burden started, we had
to pull back and suspend mortgage lending in order to
understand it. We have 27 full-time equivalent employees, and
as an institution in a metropolitan market, we simply did not
have the staff and had to add compliance staff.
Chairman Hensarling. So as a minority-owned bank, serving
an underserved population, if you have to suspend mortgage
lending, where do these people go?
Mr. Fenderson. To alternatives, which means we don't get a
chance to make that money, and it means that they have to find
other alternative sources, which sometimes are not very
friendly with the price.
Chairman Hensarling. I assume some of them may not have the
ability to actually find the credit necessary to buy that home
that they wanted to buy?
Mr. Fenderson. That is correct.
Chairman Hensarling. And you also don't have a branch on
Wall Street; is that correct?
Mr. Fenderson. We do not.
Chairman Hensarling. Okay. The Chair now recognizes the
ranking member.
Ms. Waters. Thank you, Mr. Chairman. First, I would like to
go to Mr. Levitin. A recent Harvard working paper states that
community banks share banking assets, and the lending market
has been in a fast decline since the passage of the Dodd-Frank
Act and echoes the concerns of the industry that recent
financial reforms and the establishment of the Consumer
Protection Financial Bureau are the cause. Are you familiar
with that study, Mr. Levitin?
Mr. Levitin. I am.
Ms. Waters. And do you agree with the conclusions?
Mr. Levitin. No, I think it is a--
Ms. Waters. Why not?
Mr. Levitin. It is not really a scholarly study, let's
start with that.
Ms. Waters. What you do mean it was not scholarly?
Mr. Levitin. Well, how to count the ways. I think one of
the most simple things is the way it treats the data. The
article looks at--it says, well, community banks have been
shrinking since the Dodd-Frank Act, therefore it is because of
the Dodd-Frank Act. That is bad logic, that is what is called
an ex post ergo--ah, I am going to get my Latin wrong, but
point being, just because something happens afterwards doesn't
mean it is an effect.
Rather, what the article completely ignores is that there
has been a long-term trend with community banks shrinking, and
that the article is not actually able to show any cause and
effect with the Dodd-Frank Act, much less when the regulations
under the Dodd-Frank Act actually go into effect, which has
only been in the past year.
Actually, it is ironic because in the last year, the fourth
quarter of the last year, community banks grew 28 percent over
the previous year. They actually had a great end of the year as
compared to the large banks, which did not. So I think it is
really hard to say that regulation is causing all the problems
of community banks.
Is it possible that there is a regulation or two that needs
to be tweaked? No doubt. I would not make such an absolute
argument against it. But I think it is just a serious mistake
to claim that regulation is the problem for community banks. I
would note for the chairman's benefit, Regulation D is not a
CFPB regulation and has been on the books without changes for
many, many years. So the problem that you discussed with Ms.
Bosma-LaMascus is not one caused by any new regulatory changes.
Ms. Waters. All right. Thank you very much. I think I would
like to go to Ms. Peggy Bosma-LaMascus. I see that you have
mentioned as the various to credit unions that Congress--to
correct these barriers, Congress should make several
improvements to the Federal Credit Union Act. One you list is
to restore credit unions' business lending authority, increase
the member business lending cap. Would you make more loans,
mortgage loans if we did that?
Ms. LaMascus. Yes.
Ms. Waters. I can't hear you.
Ms. LaMascus. Sorry. Yes.
Ms. Waters. Do you realize that there are many Members,
particularly on this side of the aisle, who support that?
Ms. LaMascus. Yes.
Ms. Waters. And have you worked with the banks so that you
could have an effort to come together to support the credit
unions being able to increase business lending? A lot of you
say we should work together more. Can the banks and the credit
unions come together around something like this?
Ms. LaMascus. I can't necessarily speak for my brethren who
are down the line here.
Ms. Waters. Have you talked to them about it? Have you
tried? You have been around for a long time. In 40 years, have
you ever talked to the banks about coming together and stop
opposing your ability to expand business lending?
Ms. LaMascus. Representative Waters, actually today, we
have many issues on which we are very much in agreement, and,
in fact, I believe we are all in agreement that if Congress
could require realistic and robust cost-benefit analyses of
proposed regulations, documentation, that we would all be able
to give much more targeted feedback so that the result would be
smarter regulation.
I believe that we are all supportive of changes to Reg D,
such as increasing that limitation from six. It makes sense in
today's lifestyles with so many people using electronic
technology. I believe that we are all in agreement on changes
that need to be made to the--
Ms. Waters. Thank you very much. I just wanted to mention
that because that is one of the issues that I care a lot about.
Mr. Miller, you talk a lot in your testimony about what is
wrong with the Consumer Financial Protection Bureau, and you
mentioned everything from they should go before the
Appropriations Committee to have a five-member mission, et
cetera. What and why do you think those issues are important to
what you need to have done to eliminate your ability to make
loans?
Mr. Miller. We feel that generally, the structure of how
the CFPB was created creates a situation where there is
regulation without representation from all relevant
stakeholders. We believe a larger board of three to five
members--I would prefer five members--who are appointed would
allow for diversity of perspectives, and opinions, and
deliberation, and debate before decisions are made, before
rules are rolled out.
Ms. Waters. Thank you very much.
Mr. Miller. We think transparency and the appropriations
process and budget process would make sense too.
Chairman Hensarling. The time of the gentlelady has
expired. The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Williams, in
your testimony you talked about the QM rule and debt-to-income
ratio and low-dollar, high-cost loans. I was just thinking as
you were saying that, and then you mentioned about people not
able to access homeownership, and continue to rent. I was
thinking about Hart, Texas. I was wondering if that single mom
maybe works at the Hart Cafe part-time, and she has another
part-time job, but she has saved up some money over the years,
and she would like to quit being a renter and wants to be a
homeowner. If you can't make that loan, who is going to make
that loan to her?
Mr. Williams. Congressman, I can't say who would make that
loan. We couldn't make the loan or we would have difficulty,
because it is a small community, it is going to be non-
conforming--it is a non-conforming property because it is not
an urban. We wouldn't have comparables for the appraisals. It
would be a very difficult loan to make. We would try to find a
way to do it. We do have portfolio lending services, but under
the QM rule, we could not make a qualified loan.
Mr. Neugebauer. And so particularly, I believe, in Hart,
you are the only bank, is that correct?
Mr. Williams. Yes, sir, that is correct.
Mr. Neugebauer. In a lot of communities around the country
now there is just one community bank left. And so if there is
not a community bank left to make those loans, whether it is a
mortgage loan for that single mom or a production agricultural
loan, it doesn't leave a lot of choices, does it?
Mr. Williams. No, sir, it doesn't. I have empirical data
from our State association of Texas where we went out and
solicited feedback from our member bankers, and 25 percent of
those banks' remarks in the rural markets, if they were not
there to make the loans, no one was there to make the loans.
Mr. Neugebauer. I thank you for that. Mr. Miller, I think
you mentioned in your testimony about one of the credit unions
in Corpus Christi maybe--the CFPB's final rules on making
remittances was put in place, I think, about 150 members of the
credit union kind of lost access to be able to utilize those
services. What other kinds of choice limitations are going on
in the credit unions that are beginning to limit the products
that members are able to access?
Mr. Miller. The remittance rule is a great example, well-
intended legislation, if you wanted to give people a chance to
shop for a half hour after they place their instructions to
send a wire, an international wire. I don't know anybody who
shops after they make a decision and walks into a non-Wall
Street bank or credit union and says, I am going to shop around
and see if I can save $10 on my international wire transmittal.
Most people do their shopping before they walk in and make a
decision. That is our opinion on the remittances.
On QMs, we have turned down 50 members who couldn't get a
home loan because we are afraid of regulatory scrutiny. What
that is going to do is, it's going to force fewer and fewer
choices for the consumer. They are going to pay more, because
when there are fewer choices, markets are efficient, so whoever
gets that business is going to charge a little bit more, and
fewer people are going to enjoy the benefits of homeownership,
which I know has always been something the members of this
committee are pretty passionate about: Letting people who
qualify to own a home, own a home.
Whether it is credit cards, whether it is car loans,
whether it is personal loans or school loans, there are all
kinds of--the same thing is going to happen in virtually every
category of lending: fewer choices; higher prices; fewer jobs;
fewer banks and credit unions that are generating their own
jobs to create a cascading impact on their local economies;
fewer business lenders; fewer mortgage lenders; fewer car loan
lenders. It is going to cost jobs and it is going to be a down
draft in on the economy. There won't be an explosion of
toasters and mortgages; there will be an implosion of jobs and
economic growth.
Mr. Neugebauer. Thank you. Mr. Fenderson, you indicated you
are a relatively small bank, I think $60 million, is that
correct?
Mr. Fenderson. That is correct.
Mr. Neugebauer. We have the new Basel III capital
requirements for small institutions which became effective
January 1st of this year. So for a small institution, when you
have to keep more capital, what does that do to your ability to
serve your customers?
Mr. Fenderson. I can speak generally about that, we are not
a seller servicer so we are not applicable to Basel III, but
the colleagues I speak with across the country understand that
will restrict--if they have to hold more capital, then they are
not able to make as many loans, and it will make them decide
how they treat those loans, on whether they want to be in that
business or not. In fact, I have heard of some servicers who
are getting out of that business.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. Maloney. Thank you, Chairman Hensarling and Ranking
Member Waters. Professor Levitin, as you know, my colleagues on
the other side of the aisle have had a string of hearings, a
relentless campaign to weaken Dodd-Frank and they claim that it
is too costly for financial institutions, but this just looks
at one side of the equation, the cost to financial
institutions. I would look also and take into account the cost
to consumers of not having adequate consumer protections in
place. They say this downturn cost $16 trillion of household
wealth, large unemployment, we were shedding 700 jobs a month,
800 jobs a month. Can you comment on the long-term cost to
consumers, and I would say the overall economy, of not
adequately regulating financial products and services?
It has been said that our regulation didn't keep up with
the innovation, and experts testified before this committee and
others that this was the first financial crisis in history that
could have been prevented with better financial regulation of
risky products and risk-taking. So, your comments please.
Mr. Levitin. The financial crisis was completely
preventable and would have been prevented if the Dodd-Frank Act
mortgage regulations had been in place. The scape of the scale
of the financial destruction, and particularly household
wealth, and especially for communities of color, as a result of
improving mortgage lending, not all of which was done through
securitization, but a great deal which was also financed
through bank portfolio lending, particularly Countrywide,
Wachovia and Washington Mutual all had large portfolio lending
operations. All of that caused tremendous loss of wealth for
American families.
I think it is also important to note that sometimes
regulations actually not only protect consumers, but put money
back in their pockets. The Credit Card Act, of which you were
one of the authors, has been found to actually have saved
consumers billions of dollars, yet we don't hear--
Mrs. Maloney. Over $10 billion a year, that is a stimulus
package that we gave the American people.
Mr. Levitin. I thought you would have the number. But we
don't hear a peep about that when regulation is discussed.
Instead, regulation is only looked at in terms of compliance
costs without seeing the benefits, whether it is financial
stability or clear pocketbook savings for American families.
Mrs. Maloney. So just to emphasize, do you think these
costs outweigh the incremental costs of compliance to financial
institutions? I would say the Credit Cardholders Bill of Rights
helped institutions, it hasn't hurt their bottom line; you cut
out unfair, deceptive practices so that more people have trust
in their services.
Mr. Levitin. There are costs to doing business and there is
not an inherent right to get to operate a bank. It requires a
charter and you have to be able to be competitive. And part of
being competitive is being able to comply with regulations,
particularly regulations that are necessary for preserving
certain minimum standards within the industry.
Mrs. Maloney. Also in your testimony, you noted that the
CFPB has already granted community banks significant regulatory
relief. In your opinion, do you think the CFPB has been
sufficiently responsive to the concerns of community banks?
Mr. Levitin. Generally, I believe it has been.
There are some places where one might dicker with the CFPB
about a particular threshold for exemptions. For example, on
the remittances rule, should the number of remittances be 100
per year or 200? I think there are reasonable differences of
opinion.
But, directionally, I think the CFPB has made considered
judgments. And it is trying to balance important considerations
not just about small financial institutions but about
consumers.
Mrs. Maloney. And you raised another important point in
your testimony, that the oversight of the non-bank mortgage
servicing industry is uncoordinated, to use your words, and
that, ``Until and unless housing finance reform is resolved,
the industry will remain in flux and in need of reform.''
Given the uncertainty surrounding housing finance reform,
what alternatives would you suggest concerning coordination
across the relevant regulators of non-bank mortgage servicers
that could begin to address the reforms that you believe would
improve the overall economy and consumer experience?
Chairman Hensarling. The gentlelady's time has expired, so
a quick answer, please.
Mr. Levitin. Obviously, there are tremendous difficulties
with getting any kind of legislation passed on housing finance
reform. Until and unless that happens, I think that there needs
to be a formal coordination mechanism among financial
regulators on mortgage servicing in order to try and stabilize
the servicing industry.
Chairman Hensarling. The Chair now recognizes the gentleman
from Missouri, Mr. Luetkemeyer, the chairman of our Housing and
Insurance Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Professor Levitin, I just want to thank you. Mr. Perlmutter
and I have been working on, for the last 2 years, legislation
to delay the implementation of Basel III on capital standards
for mortgage servicing assets, and I see in your testimony you
support doing that. I certainly appreciate that.
Just quickly, have you ever worked in the private sector?
Have you ever worked at a bank or a credit union?
Mr. Levitin. No, I have not.
Mr. Luetkemeyer. Have you--
Mr. Levitin. I have worked for them, but I have never
worked at them.
Mr. Luetkemeyer. Okay. I was just kind of curious. So your
real-world experience is really based on what you read in books
or magazines or newspapers or read from studies of things that
go on in the financial world. Is that correct?
Mr. Levitin. No, that is not correct.
Mr. Luetkemeyer. You just said--
Mr. Levitin. I would add to that, I regularly work as a
consultant for financial institutions and trade associations,
including one of the ones that is represented here. And I
also--
Mr. Luetkemeyer. Mr. Levitin, I think one of the--
Mr. Levitin. --before I get to see the internal workings of
financial--
Mr. Luetkemeyer. As part of your testimony here, you
continually try to say that the CFPB is the problem that these
folks here are consumed with, and I think their testimony talks
about the overwhelming amount of regulations. Your testimony
basically talks about the CFPB. And I think each of these folks
have given that.
And just to make the point about the CFPB, I have here a
letter, and I will just sort of summarize it. Basically, what
they are saying is that on February 25th, the CFPB proposed to
suspend a rule with regard to credit card users and the card
agreements that the Bureau had developed so that they could
streamline their system. Because they don't have enough people
to input the automation and do the cataloging and review that
it is going to take, they don't even have the ability to
watchdog and oversee the rules they make.
So I wish they would give time to the other institutions
they oversee to be able to have the ability to implement these
rules on their own, which they don't seem to be willing to do.
Along that line, I brought with me this morning a real
estate loan matrix. This was put together by a compliance
company, a company that deals in providing forms for
institutions that provide real estate loans. And there are
seven--I am sure you can't see it, but there are seven
different categories of security. There is a total of 370 boxes
that have to be checked or reviewed to see where this loan fits
into. There is a timetable down here that has 24 different
forms that have to be used at some point, or may be used,
during the course of the implementation and working out this
loan.
This is the kind of stuff that is overwhelming the system.
It is not just the CFPB; it is all of this in its totality. So
I appreciate the comment this morning by Mr. Williams that said
25 percent of the loans would no longer be made by you as a
result of this type of inundation and the QM rule and all these
things that are going on.
So I was just kind of curious if I can get a figure from
each of you this morning with regards to how much have you seen
that this curtailed.
For instance, Mr. Williams and Mr. Miller, where do these
people go when you no longer have access? Are these people
going to get their home loans now at FHA, to the Federal
Government, these agencies? Where are they going?
Mr. Williams. I can't answer that, Congressman. All I can
say is my information was wrong. I said 25 percent said there
are no other banks or financial institutions in the area, and
it is actually 29.7 percent. And I apologize, but I wanted to
correct that.
It is important to understand that there are secondary
lenders, but it is going to cost the consumer a great deal more
money, or they are going to have to rent. They are not going to
be able to get a loan.
Mr. Luetkemeyer Mr. Miller, do you know where those folks
go when they can't get a loan from you?
Mr. Miller. I think, in most cases, because they came to
us, they didn't go to a big bank for a reason. Because they
either already got turned down, or they wanted to come in to
somebody local that they know and they trust, that they have
been a member of for decades.
Mr. Luetkemeyer. Mr. Fenderson, do you know where your
folks go when they can't get a loan?
Mr. Fenderson. I would say that community banks represent
choice and flexibility when consumers try to decide. So, like
Mr. Miller noted, they are coming to us for a reason, because
they believe that we have the flexibility. Unfortunately, there
are some consumers who are not highly qualified for mortgages,
and that gives us the ability to do those loans. And then they
have to find a source that is probably not as cost-effective.
Mr. Miller. If I could add, maybe they still rent that
mobile home that the other bank can't make a loan on anymore.
Mr. Luetkemeyer. Ms. LaMascus, do you know where your folks
go when you can't make a loan to them?
Ms. LaMascus. They either are unable to conduct their
transaction or they have to go somewhere else where they have
to pay more, dealing with people they don't know. They are not
able to work with their trusted creditors.
Mr. Luetkemeyer. So, basically, what you have all told me
is that there is an access-to-credit problem as a result of the
excessive amount of rules, regulations, forms, and restrictions
you have to deal with.
Mr. Williams. Yes, sir.
Mr. Luetkemeyer. Thank you very much.
I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Massachusetts, Mr. Lynch.
Mr. Lynch. I want to thank you all for your willingness to
come before the committee and help us with our work.
And I feel like I have to defend Professor Levitin down
there. I do want to point out that Mr. Levitin is the only
witness on our panel this morning who is not being paid by a
specific interest, in connection with his testimony. Mr.
Levitin has not received any Federal grants or any compensation
connected with his testimony. He is not testifying on behalf of
any organization, and the views expressed by him are his own.
So, enough about that.
Mr. Levitin, let me ask you, your testimony indicates that
there were--you identified several accommodations that we try
to make in Dodd-Frank to actually address the clear differences
between the mega-banks that we were trying to reel in and the
community banks.
And I know from my personal work on that bill with
Congressman Frank that we tried at every turn to try to make a
distinction between the regulation against the big banks that
caused the problem and the community banks who did not cause
the problem.
I love my community banks. And maybe this is just my
district, but when I have seen community banks go away in my
district, they have merged where there have been acquisitions.
Larger community banks have purchased smaller community banks
in pursuit of growth. As a matter of fact, we have had two
major credit unions that have been so successful in my district
that they have converted to become banks so that they could
expand further than their jurisdiction allowed as a credit
union.
So, yes, they have gone away, but for growth purposes.
But, Professor Levitin, if you could just talk a little bit
about what you identified in some of your testimony, but drill
down a little bit deeper about the advantages that we have
tried to give to community banks so that they might succeed.
Mr. Levitin. Sure.
In the Dodd-Frank Act, I think there are three really
important distinctions made between community banks and credit
unions and large banks.
First, the Consumer Financial Protection Bureau has no
authority to examine financial institutions with less than $10
billion of assets. Instead, their examinations occur with their
regular prudential regulator, and they are, therefore, subject
to only one set of examinations, not two.
Mr. Lynch. So in the universe of the under $10 billion,
what is the percentage of that? Do you have any idea?
Mr. Levitin. I have the number right around here.
For the under $10 billion, we are talking about--for banks,
there are 108 banks that have over $10 billion in assets. That
is out of 6,518 banks in the United States. So about 2 percent
of banks are subject to CFPB examination. And only five credit
unions--
Mr. Lynch. Wow.
Mr. Levitin. --out of--it is around 6,400.
Mr. Lynch. And we are being accused of overreaching.
Mr. Levitin. That is correct.
Mr. Lynch. Okay.
Mr. Levitin. The second thing the Dodd-Frank Act does is it
exempts these smaller financial institutions--again, less than
$10 billion of assets--from enforcement actions by the CFPB.
Enforcement actions would have to be undertaken by their
prudential regulators. And, to date, I am not aware of their
prudential regulators having undertaken a single enforcement
action for authorities that exist under the Consumer Financial
Protection Act.
Finally, the Durbin Amendment to the Dodd-Frank Act exempts
financial institutions with less than $10 billion of assets
from regulation of debit card interchange fees, the fees that
merchants have to pay whenever they accept a debit card
transaction. That gives smaller institutions a tremendous leg
up competitively against large institutions.
So, there are already a number of things in the Dodd-Frank
Act that are really trying to look out for small financial
institutions.
Mr. Lynch. Great.
I only have 40 seconds left. Anything else you want to add
to your testimony that you might have been asked by another
Member and didn't have an opportunity to respond?
Mr. Levitin. Not at this point, but I appreciate that.
Mr. Lynch. Okay.
I yield back, Mr. Chairman. Thank you.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce.
Mr. Pearce. Thank you, Mr. Chairman.
And I thank each of you for your testimony today.
Mr. Levitin, you made a comment on page 7 of your testimony
that absent FDIC insurance, depositors would never use small
institutions instead of large ones.
Where did you get that information from?
Mr. Levitin. I think you can look at what happened at the--
Mr. Pearce. No, I just asked where you got it from.
Mr. Levitin. I got that from my own research, sir.
Mr. Pearce. Okay.
So, Mr. Fenderson, do you find, when the people walk in the
door to make deposits, they tell you they are there because you
are an FDIC institution?
Mr. Fenderson. No, sir.
Mr. Pearce. Okay.
Mr. Miller, you have a lot of small outfits. Do they walk
in to you and say, we are looking for your insurance, that is
the reason we are going to put our money with you?
Mr. Miller. No, sir.
Mr. Levitin. Sir, I would just point out there are three
non-FDI-insured--
Mr. Pearce. No, no. Please. No, please. You are the one who
was critical. I think you said that there was not a scholarly
study earlier in answer to one of the questions, and I am
trying to get to the basis of the scholarly study that came up
with the observation that people only use small institutions
because of the FDIC. Because that has no relevance. I represent
the Second District of New Mexico, and I will guarantee you the
people who walk in the doors are not there because they are
FDIC-insured.
The Second District, by the way, is Roswell, New Mexico.
The aliens landed there. And the aliens have more knowledge of
what happens in small banks than what you do, sir. And your
scholarly study leaves a little bit to be desired.
Mr. Levitin. Sir, I think I am entitled to a point of
personal privilege on this.
Chairman Hensarling. The time belongs to the gentleman from
New Mexico.
Mr. Pearce. You will have to ask the chairman for personal
privilege.
I am just telling you that when you say in your testimony
that a portfolio lender can lend at high rates and aggressively
pursue defaults--50 percent of the homes in my district are
manufactured houses. Now, those people who loan money and keep
the mortgages in their portfolio are not doing that so they can
go and repossess those things. They are trying to help low-
income borrowers get a place to live.
Mr. Levitin. You have no disagreement with me on that, sir.
Mr. Pearce. Mr. Chairman, if you would have him pursue his
own time, I would appreciate it.
But your scholarly study that you bring and give to us
today is offensive to the people on the low-income ladder,
because Dodd-Frank has made it very difficult for them to make
a living. It is, in fact, a war on the poor and the middle-
income people of this country. And to have you sit here and
just say things that the people next to you can't counteract
is--
Mr. Miller. Mr. Pearce, can I make a follow-up comment?
Mr. Pearce. Yes.
Mr. Miller. I also take umbrage with the comment that it is
just a cost of doing business. There is no such thing as a cost
of doing business because it is passed directly on to our
members and the customers of the banks that are represented
here. We pass on roughly 25 basis points on every loan and
increase higher interest rates because of compliance costs. We
pay our members roughly 25 basis points less overall on
deposits because of compliance costs.
Mr. Pearce. Mr. Miller, do you--
Mr. Miller. So it is not a cost of doing business. It is a
cost to your constituents and our members.
Mr. Pearce. I understand.
Mr. Miller, do you make loans on manufactured houses?
Mr. Miller. No, we do not.
Mr. Pearce. I'm sorry, not Mr. Miller but Mr. Williams. I
was looking at Mr. Williams and calling him Mr. Miller.
Mr. Williams. Yes, we do. And the answer to your first
question is, no.
Mr. Pearce. Yes, okay. People don't come in for the FDIC
insurance.
Mr. Williams. They do not.
Mr. Pearce. So what is the status in the manufactured house
loans?
Mr. Williams. We can't qualify them under the QM rules.
Mr. Pearce. Do you hold them in portfolio?
Mr. Williams. Yes, sir.
Mr. Pearce. How many do you repossess in a year?
Mr. Williams. The last 4 or 5 years, I would say maybe one,
possibly two.
Mr. Pearce. Yes. That is what I--
Mr. Williams. A very, very small number.
Mr. Pearce. There is only one institution left in the
southeast part of New Mexico that makes loans on these kind of
houses, and they have the lowest default rate of any.
And so it seems like scholarly studies would include coming
out and actually visiting those institutions where they make
those kinds of loans before they start passing along this
genius bit of information that caused the CFPB to include
balloon loans and these manufactured housing loans as predatory
lending, because it makes life very difficult for us out there
in the parts of America that never get visited by the educated-
leap-making scholarly studies.
The fact that there are two tiers of regulations--that is
another point that Mr. Levitin makes--do you find those two
tiers of regulation, Mr. Williams?
Mr. Williams. I find it--I would like to see multiple-
tiered regulations.
Mr. Pearce. Yes. In other words, the regulator just--they
are not going to learn two standards. They are going to come
in, and they are going to judge everybody by the same standard.
That is trickle-down regulations, and it is a point that is
completely overlooked by the CFPB.
But, again, thank you.
Mr. Williams. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, ranking member of our Oversight and Investigations
Subcommittee.
Mr. Green. Thank you, Mr. Chairman.
And I thank the ranking member, as well.
Mr. Levitin, you have some comments that you would like to
make. I would like to yield some time to you for your
commentary.
Mr. Levitin. I very much appreciate that, Mr. Green.
I think it is important to understand FDIC insurance a
little better than the gentleman from New Mexico was
discussing.
There are, I think, around three financial institutions in
the United States, three depositories, that do not have FDIC
insurance. No depository is required to have FDIC insurance.
They choose to get it. And why do they choose to get it?
Because they know they can't compete without it.
It is not that any consumer goes in looking for FDIC
insurance; we take it for granted today. We just assume that
every bank has FDIC insurance.
But there are all kinds of regulations that support the
existence of our financial services industry in its current
state. And I think that you deeply misunderstood what I was
saying in my testimony, and I hope that misunderstanding is
being corrected.
Beyond that, I think it is just offensive to throw at me
characterizations about being an elitist or something when you
know absolutely nothing about where I am from or my background.
And I would appreciate it if I would be treated with courtesy
when I testify here.
Thank you.
Mr. Green. Thank you, sir.
Permit me, if I may at this time, Mr. Chairman, to
introduce for the record, with unanimous consent, testimony of
Mr. Hilary Shelton. This is what he would say if given the
opportunity to present testimony. He represents the NAACP.
May I ask unanimous consent to present this for the record?
Chairman Hensarling. Without objection, it is so ordered.
Mr. Green. Thank you.
Now, let's talk for just a moment about what we do and what
we say. We talk about small banks, community banks, but we
legislate large. When we try as best as we can to legislate for
the small, the terminology becomes large.
Example: We have actually had testimony indicating that a
community bank is a $50 billion bank. If we legislate for a
community bank and the legislation covers $50 billion banks,
have we done what we sought to do?
Many of the community banks that I have worked with, that I
talk to, have indicated that they would like to get some help,
and I would like to help them.
The question becomes, what is a community bank? Is a $50
billion bank a community bank?
I am going to ask my friend from Texas.
Mr. Williams?
Mr. Williams. Congressman, it is very difficult to define a
community bank--
Mr. Green. I will withdraw my question.
Mr. Williams. Okay.
Mr. Green. Let me go on.
We want to help the small banks. More than 90 percent of
the banks in this country have assets of under a billion
dollars, a billion or under, 90 percent or more. And we would
like to help that 90 percent, or we would like to move it up to
a higher amount.
But whenever we try to do this, we run into this question
of the legislation applying to $50 billion banks. It is very
difficult to perceive of legislating to cover $50 billion banks
under the guise of helping small banks. That is a difficult
lift. So I would like to help the small banks, but whenever we
get to a definition, we can't seem to find one.
So let me ask you, Mr. Fenderson, is a $50 billion bank a
community bank?
Mr. Fenderson. A $50 billion bank that has the sensitivity
of its community--
Mr. Green. ``Has the sensitivity of its community.'' So if
we pass legislation to help small banks under the guise of
helping community banks and we help the $50 billion banks--you
have just heard the testimony about mega versus small banks--we
will end up helping mega-banks.
So, in your opinion, a $50 billion bank can be a community
bank?
Mr. Fenderson. Yes. We need the ability to be flexible as
a--
Mr. Green. Are you a $50 billion bank?
Mr. Fenderson. We are a $60 million bank.
Mr. Green. $60 billion?
Mr. Fenderson. $60 million.
Mr. Green. Okay. So I am asking you about billions. Is a
$50 billion bank a small bank?
Mr. Fenderson. By asset size, a $50 billion bank is not a
small--
Mr. Green. Is it a community bank?
Mr. Fenderson. A $50 billion bank can be a community bank.
Mr. Green. Therein lies the problem, dear sir. Therein lies
the problem.
If we want to help you and the $60 million banks and the
billion-dollar banks and the banks under $10 billion and we
legislate such that we cover $50 billion banks, why don't we
just repeal Dodd-Frank? Because that is what we are talking
about here. We would end up eliminating the protections that
Dodd-Frank accords consumers from the mega-banks.
Mr. Fenderson. May I answer?
Mr. Green. I have no more time.
Mr. Neugebauer [presiding]. The time of the gentleman has
expired.
I now recognize the gentleman from Florida, Mr. Posey, for
5 minutes.
Mr. Posey. Thank you, Mr. Chairman.
I have to agree with my distinguished colleague that maybe
we should repeal it. I think that is a great idea.
In the meantime, I have a question for Mr. Miller.
Mr. Miller, you stated that you are concerned about the
data collection at the CFPB, and I wonder if you would be kind
enough to expand on those concerns, and what it is that you
fear.
Mr. Miller. There are roughly 37 new data fields that are
collected on a loan because of the proposed HMDA rules from
CFPB. They say they want to improve the quality of data
gathered. We believe this is Big Brother gone wild.
The rule adds these 37 new data elements. We don't know
what they are going to do with it, but we do know what the data
elements are. They include things like where you live, your
age, your sex, value of your home, income, how much you spend,
how much you owe, your payment amounts on your credit cards and
other debt obligations.
That is too much information that could be use for improper
purposes. Anybody can go ask for this information. It is an
invitation to massive identity theft that could threaten the
financial security of hundreds of millions of Americans.
Mr. Posey. Besides anyone asking for the information, we
know of quite a few Federal databases that have been violated,
including the Pentagon.
How secure do you feel that data is in the hands of the
CFPB?
Mr. Miller. My members tell me they are very fearful. I am
more concerned about what my members think, but we are also
very fearful. We want more done in this area, and we would ask
the committee to do some work to establish some very tight
standards.
So if they are going to gather all this information and
make it accessible to people, what is the purpose? And do a
cost-benefit analysis. And how many people are we going to
catch making a bad loan as a result of gathering all these new
data fields? And where is the information security for your
constituents?
Mr. Posey. As they did with the foreign deposit issue, the
Treasury obviously does not feel that it is important to comply
with the cost-benefit law. And since they control the purse
strings of the CFPB, I am hesitant to believe there is any
possibility we would get the proper relief there.
A question for you and Mrs. Bosma-LaMascus: The NCUA has
put out a new proposal on risk-based capital after thousands of
comments, including a letter I signed along with 323 other
Members of Congress, which supposedly improves the risk-based
capital rule.
What do you think about that rule, and is it necessary?
Does it add to the regulatory burden?
Mr. Miller. We believe there are improvements in the second
draft of risk-based capital from NCUA, but we think several
components result in additional situations like we just
discussed that are solutions that won't work to problems that
don't exist.
Mr. Posey. We understand that. We interpret that as the
omnipresent defenders of the nonexistent problems of the
people. We are getting quite familiar with that.
Mr. Miller. Yes. Yes, sir.
For example, they were asked to establish what the
definition of ``well-capitalized'' is, and they added another
definition--or they were asked to address ``adequately
capitalized.'' Then they added another definition of what
``well-capitalized'' is. So they have created more complexity,
and we don't think that is what they were commanded to do. They
were commanded to provide one definition, and they created two.
So we don't support the two-tiered rule on capitalization.
We also--no, I will just yield to Ms. LaMascus because I
want to make sure she has some time, because we are running out
of your time.
Mr. Posey. Thank you very much.
Ms. LaMascus. Thank you, Mr. Miller.
We don't have enough time to talk about the additional
complexity that this new way of measuring our capital based on
this risk would cost and add to credit unions.
We believe it is unnecessary. NCUA has not been able to
substantiate to us why it is necessary. It is costly. They are
building in additional tiers, as Mr. Miller talked about, which
will take millions of dollars out of play for credit unions to
be able to lend to their members and keep our economy growing.
So--
Mr. Posey. Who owns the credit unions? Who are the big,
greedy capitalists they are trying to protect us from?
Ms. LaMascus. They are all members. Credit unions are owned
by their members, which tend to be working-class people.
Mr. Posey. Thank you, Mr. Chairman.
Mr. Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Sherman, is
recognized for 5 minutes.
Mr. Sherman. The backbone of our economy is small business.
All of us in our districts every week meet people who can't get
the business loan they need to expand. And, as much as I want
to help the businesses represented here, I want to help the
businesses that need to borrow for those business loans,
particularly if they are in the San Fernando Valley.
Now, the ranking member has pointed out that one way to do
this is through member business lending and credit unions. And
I think that has been covered well at the hearing, and I
certainly support it.
But I am told by many depository institutions, they say,
look, if we make a loan at prime that deserves to be at prime,
everything is fine, but if we make a loan at prime-plus-4,
prime-plus-5--because there is some risk, because there is a 1
in 20 chance that we are going to have some problems
collecting, and our examiner comes down on us like a ton of
bricks, and requires, in effect, a 100 percent charge-off.
What do we need to do--and don't limit yourself to changing
Dodd-Frank. I know that is the hot political issue. What do we
need to do so that you can make the $5 million prime-plus-5
loan to the small business that has an element of risk in it,
for which you deserve to be compensated, but needs capital to
expand?
I am looking for someone who wants to answer.
Yes, Mr. Williams?
Mr. Williams. Congressman, the best thing we could do in
your specific example would be to do away with the QM rule as
regards the qualification, potentially, for that business. And
I know that relates to a mortgage--
Mr. Sherman. Yes, that relates to a mortgage.
Mr. Williams. And that relates to a mortgage--
Mr. Sherman. We are talking about businesspeople who will
pledge their homes--
Mr. Williams. Yes.
Mr. Sherman. Okay.
So there is one small element of this, and that is some
institutions that don't do a lot of real estate servicing want
to make a loan to one of their customers, and they are required
to have an impound account.
And I am working on legislation now with others to at least
say that if you are holding if for your portfolio--because it
really is a loan to help somebody expand their business or
really is a personal loan--that if you don't want to have an
impound account, you would not have to if it is a loan you are
holding for your portfolio. I think that would help a bit.
But what modification would you have for QM loans that are
really business loans?
Mr. Williams. For loans that we hold in our portfolio, for
them to be exempted from QM.
Mr. Sherman. Just exempt from QM, not--
Mr. Williams. Yes, sir. Because we take 100 percent of the
credit risk--
Mr. Sherman. That is my bill on steroids.
Mr. Williams. --and we are comfortable with that because we
underwrite it.
Mr. Sherman. Gotcha.
I have a question about the HUD-1 that is being phased in,
TILA and RESPA forms. These go into effect on August 1st. I
wonder what steps the organizations you represent are taking to
comply with this regulation and make sure that consumers who
buy a home this summer won't face disruptions?
Do you think you are on schedule?
I will ask first the representative of the American Bankers
Association.
Mr. Fenderson. Yes, sir. Thank you very much.
We, as a small community bank, rely heavily upon the vendor
to provide those new disclosures to us. And there is an
integration process that has to be fulfilled.
We don't have a timeline because our service provider
cannot provide us with a timeline so far. All we know is that
there is a bullet deadline that we have to meet and that there
are some--
Mr. Sherman. How confident are you that you can meet it
without disrupting the real estate market?
Mr. Fenderson. Unfortunately, we are relying upon a service
provider. And so I don't have a whole lot of confidence that we
will get there, except for the fact that they have to get it
done.
Mr. Sherman. Gotcha. If I had a service provider I was
relying on, I would want to find out whether they are going to
be able to help.
One other issue is we have all these data thefts,
cybercrime. And a lot of retailers, for example, have not done
a good job, or at least an adequately good job, in protecting
their data. It is my understanding that part of the reason for
that is because all of the cost that is occasioned by these
cyber breaches falls on the folks represented here.
What do we need to do so that there is a fair sharing of
the cost of this data theft, particularly with credit and debit
cards?
Chairman Hensarling. Regrettably, the time of the gentleman
has expired.
Mr. Sherman. I look forward to getting a response for the
record.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
The outlook for community banks and credit unions is one of
increasing challenges because we have smaller financial
institutions that have fewer assets over which to spread these
compliance costs that we are talking about here. And looking at
the numbers, they seek to achieve this economy of scale as a
consequence through mergers, which is not exactly what we want
to encourage here.
From 2013 to 2014, the number of community banks fell by
273 banks. Now, that is a 4\1/3\ percent decrease in just one
year. And, similarly, we heard testimony that, since mid-2010,
1,200 federally-insured credit unions have left the market. And
that is not the calling card of a sector that is doing better
than ever.
So I will go to Mr. Williams and I will ask him--because we
did hear previously from a community bank that saw its
compliance cost double in the last few years. They had to hire
a new full-time--they had to hire full-time employees, they
testified, as I recall, at $65,000 each. And a recent
Minneapolis Fed study found that one-third of banks with assets
under $50 million would become unprofitable with the addition
of just two full-time employees. That study was done because of
these compliance costs.
So, a question for Mr. Williams: Are we experiencing this
situation where increased personnel costs affect the
variability to extend credit?
Mr. Williams. Congressman Royce, yes, we are.
Frankly, it is difficult to measure our total compliance
cost. I have colleagues who have said they have done an in-
depth study and their costs are 18 percent of their operating
budget. We estimate 15 to 20 percent of our operating overhead
is now focused on hard and soft costs for compliance costs. And
this would be up, from 10 to 15 years ago, a 5 percent number.
So I would easily say fourfold.
Mr. Royce. Personally, I think much of the problem is that
recent regulations are aimed at attempting to outlaw risk-
taking, rather than ensuring through examination and
supervision that such business practices are backed by adequate
capital and low leverage.
And so, because of the approach, in my view--if instead the
focus was capital on the part of the regulatory community here,
banks would be hiring more loan officers than they are hiring
lawyers on the compliance end. I think we have set this thing
in a way in which is very injurious to the extension of credit.
But let me raise one other issue, which was mentioned by
our ranking member, Ms. Waters. Today, Congressman Jared
Huffman and I are going to reintroduce a bill which corrects a
disparity between banks and credit unions in the treatment of
loans made to finance the purchase of small apartment buildings
known as non-owner-occupied one- to four-unit buildings. And,
specifically, the bill removes these loans from the calculation
of the member business lending cap imposed on credit unions.
So I am wondering if I can ask our credit union witnesses
if this bipartisan bill will help increase credit availability
for commercial businesses and for rental housing without
costing taxpayers a dime.
Mr. Miller. The short answer is, yes, it will.
The overwhelming majority of these types of loans go to
regular, average, working Americans who have just done well
enough in life where they can afford to buy a rental property
or they move into a new home and they want to convert a
dwelling that they were in into a multifamily dwelling, and
they are just regular folks. They are not running big
businesses. They are not real estate investment trusts.
And it would free up capital for credit unions to do more
member business lending and generate more jobs.
Ms. LaMascus. Thank you very much, sir, for doing that for
credit unions.
Our credit union does not currently offer member business
loans, but we will, and that will be important to us.
May I make a couple more comments on the compliance for
you?
Mr. Royce. Absolutely.
Ms. LaMascus. I found it very interesting what you were
saying.
First off, within the last couple of years, two very small
credit unions found themselves having to merge, and they were
are able to merge with Patriot Federal Credit Union. One was
only $6.5 million in assets; one was $11 million. They just
could not keep up with the regulations and also be able to
provide services to their members.
In addition to the things that Mr. Miller has done, we have
had to hire 2 full-time compliance officers within the last 3
years. I just hired another person. About 50 percent of his
time will be spent on compliance.
Mr. Royce. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, ranking member of our Housing and Insurance
Subcommittee.
Mr. Cleaver. Thank you, Mr. Chairman.
Let me, first of all, thank you all for being here. As Mr.
Lynch said, these committee hearings are designed for the
receipt of information that will help us do our work.
I want to associate myself with the comments of my
colleague Mr. Green, who talked about the very difficult task
of separating the small banks, community banks, and credit
unions from the humongous banks, the ones that are probably
``too-brute-to-prosecute.''
But I want to just tell you, I don't know if any of you are
sports fans, or whether or not you have paid attention to the
fact that yesterday Chris Borland, a 24-year-old linebacker for
the world-champ Patriots, retired after one season. He made
some comments that I think are profound about the game.
``I played the game. As a result, last January 6th, I had
my 7th operation on my left knee, and 2 on my right shoulder.
It is a tough game.''
I don't know, Ms. LaMascus, if you have ever been hit by a
245-pound linebacker running at full speed.
Ms. LaMascus. Not lately.
Mr. Cleaver. Yes. It is not fun. I have been hit by those--
two of those games played in Lubbock.
But the NFL responded to the retirement of Borland by
saying that they are continuing to redesign the rules. Now,
when I played, you could go low and hit someone just about
anyplace. They will not allow clipping anymore. You used to be
able to hit people in the backfield, which you can't do
anymore, at least not from behind. They are continuing to
change the rules trying to protect the players.
I have a friend, Otis Taylor. I went to school with him. He
is an all-pro wide receiver who can't get out of bed today.
Many of you remember Earl Campbell, particularly the Texans, I
am sure, our chairman, Mr. Neugebauer, and Mr. Green. Great
running back. Can't even walk anymore. You have to roll him on
the field during the annual Old Timers' Day at the stadium in
Houston.
The rules are being redesigned. People are trying to
protect the players. It is a brutal game.
Are all of you in favor of trying to come up with rules to
protect the players? Whether you played the game or not, if you
watched it, do you agree with me that changing the rules is
okay?
And the helmets are now much more expensive. They are
trying to design helmets that will reduce the likelihood of
someone getting one of these hits to the head that will affect
them for the rest of their lives.
So should the NFL continue to try to design rules to
protect the players?
Mr. Fenderson. Yes, sir.
Mr. Cleaver. Does anybody disagree?
Mr. Williams. Yes, we agree. I agree.
Mr. Cleaver. Because people are getting hurt. Is it--
Mr. Fenderson. Yes, sir.
Mr. Williams. Yes, sir.
Ms. LaMascus. Yes.
Mr. Levitin. Yes.
Mr. Cleaver. No one disagrees.
Mr. Fenderson. Might I expand on that?
I would like the ability to be able to get out of bed
tomorrow, walk into our bank, and continue to service the
customers that we serve. What we are asking Congress to
consider is tailoring legislation that matches my business
model.
We didn't to secure title to mortgages. We accept deposits,
we make loans. That is how we meet the needs of our community.
We make mortgage loans that we portfolio. We make automobile
loans that we portfolio.
Mr. Cleaver. Yes. But I want you to harken back to--I
harken back to what Mr. Green said earlier. We can't have this
hearing and disregard the fact that the thing that separates
the things that many of us would like to do, which is to remove
the burdens from you--and I am not sure that--and maybe we are
not articulating well enough the challenge of trying to get
something to do that. I think that if we paused, the five of
you would have difficulty coming to an agreement on how do we
separate the ``too-brute-to-prosecute'' from community banks.
Thank you, Mr. Chairman. I apologize for going over my
time.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Fitzpatrick.
Mr. Fitzpatrick. I thank the chairman.
And I also want to thank the panel members who have given
testimony here today, especially the community bankers and the
credit union professionals who meet with our constituents and
help them, provide the credit to start their small and family-
owned businesses and buy their first homes.
And I wanted to follow up on one of the comments, actually,
from the committee to the panel, that credit unions are fewer
in number today because of strength and growth and because they
have gone on to perhaps merge with a larger entity. And I am
sure in an occasional case, that is true. We could probably
point to one.
Ms. LaMascus, in your testimony you stated that the impact
of this growing compliance, which is the subject of this
hearing, is evident as the number of credit unions continues to
decline, dropping by 23 percent. You said dropping by--I think
you said 1,800 since 2007. Is that correct?
Ms. LaMascus. 1,200.
Mr. Fitzpatrick. 1,200? And those 1,200, they don't cease
to exist today because of strength and growth in the economy or
that they have gone on to become some different or larger
charter or entity. Why do they not exist?
Ms. LaMascus. They can't keep up with regulations, is one
huge reason. They don't have the staff, they don't have the
resources to be able to study them, to implement them, to pay
for them, and also be able to provide the services to their
members. They just don't have the resources to do it.
And, frankly, that is why I advocate for smart regulations.
I would agree, we don't want people to be hurt. But we do
believe that smart regulations make more sense.
That is why we believe that for you to require regulators
to do lookback cost-benefit analyses so that they can document,
show us why they are recommending or planning to put in place
what they are, we could give better, more targeted feedback. I
believe, then, that it would be more collaborative, and less
confrontational, because we all do want to protect and help the
consumer.
We could do this together. And then hopefully, we will
learn from that, and then later we can go back and revisit and
modify where the costs were greatly underestimated.
So we believe that smarter regs make more sense.
Mr. Fitzpatrick. Ms. LaMascus, my district is not far from
where you do business. I represent southeastern Pennsylvania,
Bucks County, Montgomery County. And I was thinking, as you
were testifying, about a small credit union that I represent,
the Ukrainian Selfreliance Federal Credit Union.
It probably has less than 10,000 members, less than--or
maybe $250 million in assets. And the individuals who come
here, new citizens, new residents of Pennsylvania and of the
United States, many times are going straight to that credit
union for the cultural background, the language.
And they are not going to be acquired by some larger
entity. They are struggling to cover these compliance costs,
the same compliance costs that the big companies can cover, but
they are doing it with much smaller, sort of, cost-
effectiveness. And I worry about, where will these individuals
who go to Ukrainian Selfreliance today, where will they go?
Ms. LaMascus. Unless they can qualify to join another
credit union, or if it is a merger, they will have to find
someplace else to go, likely to someplace that doesn't know
them and is not able or willing to do for them what their
credit union can.
Mr. Fitzpatrick. Right.
Mr. Williams, you were talking about--you referred to the
HMDA reports. Increasing the amount of information for HMDA
reports adds to the cost of doing business--
Mr. Williams. Yes, sir.
Mr. Fitzpatrick. --for community bankers; is that true?
Mr. Williams. Yes, sir.
Mr. Fitzpatrick. Mr. Fenderson, do you agree?
Mr. Fenderson. Yes, it does.
Mr. Fitzpatrick. Do you believe that these demands
translate to better homeowner lending?
Mr. Fenderson. I do not believe they translate into better
home loan lending. Anytime you add a checklist upon checklist
upon checklist, our bank is subject to have to spend more time
on that, and, therefore, we are not able to help as many
customers as we would like.
Mr. Williams. If I could follow up, we have had to go to a
full-time employee just for HMDA reporting in anticipation of
the expanded areas we need to report on.
Mr. Fenderson. Of specific note, I would say that
currently, HMDA data is collected on banks that are $43 million
and larger in size. And that is a--I don't know when that was
enacted, but it is probably not a modern number. That probably
should be looked at. And, I think, does 25 or more mortgage
loans a year, which is not modern.
Mr. Fitzpatrick. I am out of time.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman.
I actually am not satisfied to wait for entry into the
record the answer to Mr. Sherman's question, so I want to take
you back to it, if I may.
I think where he ended when his time ran out was, is it
true when there has been a breach of a retailer's system that
you, the financial institutions, are on the hook to make the
consumer whole?
Mr. Williams. Yes.
Mr. Fenderson. Absolutely. We spent $8,000 because of the
Home Depot breach.
Mr. Heck. How much?
Mr. Fenderson. $8,000.
Mr. Williams. We spent a great deal more than that.
Mr. Miller. We spent more that $150,000 on the Target
breach.
Mr. Williams. It was significant.
Mr. Levitin. I think it is actually a little more
complicated. Consumers--
Mr. Heck. I am going to get there.
Mr. Levitin. Okay.
Ms. LaMascus. Ours was about $42,000.
Mr. Heck. Thank you for that.
So what I hear from retailers is that they have to pay
fines to the credit card companies, which they believe are
intended to help cover some of the cost of the loss.
Mr. Miller. If you can send me the information on where I
can get that recovery, I would be very interested--
Mr. Heck. That is what I am getting at. Is it true that
retailers pay fines to credit card companies when there has
been a breach? And if it is true, have any of your ever seen
any recovery?
Professor, if this gets to where you were going to--
Mr. Levitin. Yes. It is true. If you want to see something
published on it, I have an article for which I am happy to give
you the citation about this.
The consumer liability is capped by the Truth In Lending
Act--
Mr. Heck. Right.
Mr. Levitin. --and the Electronic Funds Transfer Act. So
the consumer is not going to be out of--in most situations, the
consumer will not be out of pocket.
There are considerable collateral losses that occur in a
data breach. Some of those get eaten by the financial
institutions. A lot of them get eaten by merchants. Walmart's
estimate for what a data breach costs is something like $100
per consumer.
Mr. Heck. Does their loss--
Mr. Levitin. When it is millions, you are talking about
real money there, when it is millions of records.
Mr. Heck. Okay. But I heard all of them say they have not
recovered from--
Mr. Fenderson. Yes, we are not Walmart, unfortunately, and
we don't have the dollars that they do.
Mr. Heck. Yes. Well, I am getting back at his point,
though.
None of them said they got any recovery. You said it was--
Mr. Levitin. Oh, no, no. I am saying Walmart--usually, it
is the retailer that eats most of the cost of the data breach.
Banks eat a small bit of it, but it is mainly the retailers.
Mr. Williams. I would disagree. We suffered--
Mr. Miller. The biggest cost is reputation risk that--it is
our card that the member swiped, and we are the ones that have
to call them. We can't tell them which retailer it was that
caused the data breach to their information--
Mr. Heck. All right.
Mr. Miller. --so we are the ones that take the reputation
hit.
Mr. Williams. And we have to replace all the cards that
have been breached, not just the ones that actual fraud has
been perpetuated on.
Ms. LaMascus. And Walmart is not protecting our members. We
are.
And I agree with whoever said it down there, our members
want to know who did this, who caused it, because they don't
want to do business there anymore, and we can't tell hem.
Mr. Levitin. There are technology changes that--
Mr. Heck. I have more questions and limited time, but I do
think that this exchange indicates: one, a problem; two, a
complexity to the problem; and three, a very worthy subject of
consideration.
I just want to note for the record that there are other
committees in the House of Representatives taking this up. It
would be, I think, nice, if I can use this as a friendly
suggestion, that this committee that has significant interest
in the financial sector could exam it from the standpoint of
its impact on you.
Professor, I read your testimony, I listened, and you make
a case. But I am wondering if you would at least acknowledge
that there are significant compliance costs, whether or not
that is the reason, as you argue against--and I followed that
logic chain--there are significant compliance costs placed on
small institutions.
Mr. Levitin. Absolutely. And I appreciate that you picked
up on the subtle difference between whether it is the real
cause of these institutions' problems or whether--I make no
argument that there are no compliance costs. There are serious
compliance costs.
Mr. Heck. Thank you. That is all I needed.
Lastly, for anybody from the institutions, I am concerned
that smaller institutions are being required to exit certain
lines of business and become more specialized, and therefore
more concentrated.
I wonder if that is your perspective? And, do you think it
may have a material impact on safety and soundness if you are
becoming more concentrated as economies of scale disallow,
prohibit, or impede your entry to other areas?
That is a great question to finish on with my time running
out.
Mr. Miller. The short answer is, yes, it is going to cause
some credit unions to get out of mortgage lending because of
the QM rules. So they are going to be more concentrated in car
loans and credit cards.
Mr. Heck. Is your safety and soundness affected?
Mr. Miller. Yes. When you take away the ability to have
multiple lines of business and concentrate them in fewer, you
create more risk.
Mr. Heck. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
Professor, are you still on the Consumer Financial
Protection Bureau's Board? Are you still a member of that?
Mr. Levitin. I am a member of the Consumer Financial
Protection Bureau's Consumer Advisory Board, yes.
Mr. Westmoreland. Okay. So you do represent--
Mr. Levitin. No, I do not, sir. I am here today solely in
my individual capacity. I have no authority whatsoever to speak
for the Advisory Board, and the Advisory Board is an
independent body from the Bureau itself.
Mr. Westmoreland. But you are on that Board, correct?
Mr. Levitin. I am on the Board, as well as the president of
American Express, as well as the president--
Mr. Westmoreland. No, that is okay. I just wanted to know
if you were. I don't want to know the rest of them.
The gentleman from Missouri made a great analogy about the
NFL changing rules to keep players from getting hurt. It seems
to me the CFPB is protecting the people in the stands while the
players on the field are getting clipped and getting hurt. And
so, if your objective or if our objective is to save the
players on the field, I think these gentlemen and the lady are
the players on the field.
I want to ask a question, and start with you, Mr.
Fenderson, and we will just go straight down the line.
If an unbanked person came into your bank on a Monday and
said that his or her car was broken down on the side of the
road, and they needed $150 to get it fixed, and they would pay
you back Friday, would you make that person that loan?
Mr. Fenderson. Yes, we would. We have a small-dollar loan
program.
Mr. Westmoreland. And what would be the charge on that?
Mr. Fenderson. For unsecured lending, 18 percent.
Mr. Westmoreland. How much?
Mr. Fenderson. 18 percent.
Mr. Westmoreland. 18 percent.
Would you, the credit union, make that?
Mr. Miller. Yes, we would. And I don't know the specific
rate, but I can get back to you on that on a follow-up.
Mr. Westmoreland. Okay.
Mr. Miller. I have another comment regarding Mr. Cleaver's
testimony and Mr. Green's testimony. I believe a $50 billion
bank or credit union looks a lot more like a $10 billion bank
than any way that it would resemble a $1 trillion mega-bank.
Mr. Westmoreland. Okay.
Mr. Williams?
Mr. Williams. Yes. We don't have a minimum loan. We would
make it. And, in Texas, we would make it at 17\1/2\ percent
because 18 percent is usurious.
Mr. Westmoreland. Ma'am?
Ms. LaMascus. Yes, we would make it, and it could be up to
18 percent.
But I would like to make one other comment, as well. We are
talking about the cost of regulation on our institution, and
that is a serious concern. But it does also impact the
consumer, because all the procedures, all the processes, all
the checklists, and all the things that we can and can't do get
between us and our members. We can't really spend that time
with them finding ways that we can better help them with their
financial situation because of regulations.
Mr. Westmoreland. Professor, would 18 percent be a fair
interest rate for that?
Mr. Levitin. Sure. I don't have any problem with 18
percent.
Mr. Westmoreland. Okay.
Mr. Levitin. That is actually by Federal regulation that
they are capped at 18 percent.
Mr. Westmoreland. So you--
Mr. Levitin. I want to say, I liked your analogy with the
ball game, protecting the fans. We do that. When you go to a
hockey game, they have a wall so the fans don't get hit by a
puck.
Mr. Westmoreland. Thank you.
Mr. Fenderson, you made reference to several of the bills
that our colleagues are going to introduce. I am planning on
reintroducing the Financial Institutions Examination Fairness
and Reform Act. I don't know if you are familiar with that, but
Mrs. Capito, who is now in the Senate, had introduced that in
the last Congress.
And there is a section in there that talks about non-
accrual loans, where you have a loan that is current but then
the regulators come in and tell you for certain reasons, you
have to put it in a non-accrual.
Does that hurt your bank when you have to do that?
Mr. Fenderson. It does. It is a tremendous drain where we
were accruing for that loan and, therefore, recognizing the
income, and, therefore, we are not able to recognize that
income.
Mr. Westmoreland. Mr. Williams?
Mr. Williams. Yes, I agree, clearly.
Mr. Westmoreland. Would you have any problem with that
being in the bill, these regulations that say a current loan
would have to be some way put into a non-accrual status--would
not have to be put into a non-accrual?
Mr. Fenderson. What we would like to have is the ability to
manage, and manage our own risk. And by doing that, if we think
that loan is a problem, we will probably place it in non-
accrual on our own.
Mr. Westmoreland. Okay.
Mr. Williams?
Mr. Williams. We would have a very similar situation. We
would think we would have already identified it and we wouldn't
need a regulator to do so.
Mr. Westmoreland. Okay.
Thank you, and I yield back, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Vargas.
Mr. Vargas. Thank you very much, Mr. Chairman. I appreciate
the opportunity to speak.
I am also happy that my colleague from Missouri has left,
because I was a 245-pound lineman and linebacker.
But I guess the only thing I--and I am not trying to make
any points here today, so I don't have any bones to pick, other
than one for Latin. I think you were looking at ``post hoc ergo
propter hoc.'' That is the logical fallacy that I was thinking
that you were thinking of when you were thinking of ``after
this, therefore because of this.''
Mr. Levitin. You got it. And what is really embarrassing
about this is, back in 8th grade, I won a Latin competition.
Mr. Vargas. Oh, okay.
I listened to all the testimony today, and I think we are--
there is a lot of goodwill, I think, in trying to figure out
how to treat smaller financial institutions differently and
whether the exemptions that exist now in the CFPB are robust
enough, really, to handle their problem. And it seems that the
testimony here is saying, no, they are not. They haven't gone
far enough.
Professor, why don't you comment on that? Because I think
that is what we are getting to here, that you can't treat a
bank with an ``M'' the same as one with a big ``B,'' when you
talked about $60 billion or $60 million. They are different
banks.
Mr. Levitin. Oh, absolutely, I would agree with you. I
think I am trying to make--there are two points I would make.
The first is that yes, there are real--regulation causes
difficulties for smaller financial institutions. It is not
their main problem, but it does cause difficulties for them. We
should be thinking about ways to ease their regulatory burdens.
We need to do it in a way that it doesn't cost consumers
important protections. The current way regulations work right
now is we have a table full of representatives of regulated
depositories. They are not the only actors in the market. There
are also non-banks, and the non-banks are subject to the same
statutes.
So for example, the Qualified Mortgage rule, which is an
exception to the ability--that isn't just for banks and credit
unions. It is also for the hard money lenders that have
historically been rather predatory in their lending. It would
be, I think, a totally reasonable thing to make clear by
statute that the CFPB could exempt regulated depositories and
credit unions from certain rules--the CFPB doesn't think that
it has that authority currently. That would be a sensible way
to proceed, and then let the agency exercise more discretion
about this.
Mr. Vargas. I think we need to look at that, because I
listened to Mr. Fenderson, and I understand his issue. I think
he is here saying, we have a lot of people I could really loan
to, and the bank should be loaning to them, but I really can't
at this moment. The regulations that are on me are too rough; I
would have to hire another person. It is very costly. I can't
do that.
I actually represent the border in California, and we have
our own special set of problems there because of potential
money laundering. A lot of the big banks are going out of that
area because of those regulations, so I do think that there is
something that has to be done and maybe there is some middle
ground here to be reached.
Mr. Levitin. I think it is important to look at the size
threshold, $50 billion is a very, very large bank. $10 billion
which is often used--for $10 billion, you could buy the
Cowboys, the Patriots, and the Giants, and have some money to
spare. You would own three different football teams, but that
is not a community bank.
Mr. Vargas. No, I understood that. In fact, some of the
questions--
Mr. Miller. Can I make a comment on that? The assets of a
$10 billion credit union do not represent the equity of a $10
billion dollar credit union. They are more like $1 billion in
assets; they can't go buy the Patriots.
Mr. Vargas. In fact, I think that is why the nature of the
institution is important. I think that is what they were
getting to when the questions were being asked earlier--is a
$50 billion bank a community bank?
Mr. Miller. It looks a lot more like a community bank than
a $1 trillion mega-bank with hundreds of thousands of
employees.
Mr. Vargas. Thank you, sir. I do understand that. But I
think that is why the question was difficult. Mr. Fenderson,
you wanted to say something?
Mr. Fenderson. I would say, again, the emphasis has to be
on the business model. Regulators are well-trained to do their
jobs. I think Congress can help make sure they are put in a
lane where they get the flexibility to regulate us the way we
need to be regulated, based on our business model and the risks
that we take.
Mr. Vargas. I believe someone else had their hand up.
Ms. LaMascus. Yes, thank you. In my testimony, I referred
to credit unions being, regardless of size, a cooperative
institution organized for the purpose of promoting thrift among
its members and creating a source of credit for provident and
productive purposes. There is not a thing in there that says I
should be having to spend 25 or more percent of my time
figuring out regulation and implementing them. Dodd-Frank gave
CFPB the exemption--
Mr. Vargas. I don't want to cut you off, but I don't want
to go over my time.
Ms. LaMascus. Thank you.
Chairman Hensarling. The gentleman yields back. The Chair
recognizes the gentleman from Illinois, Mr. Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman. Thank you all so
much for being here. I appreciate your time and your input in
this very important issue, just to discuss Dodd-Frank and
absolutely necessary regulatory relief for community banks and
credit unions. I have come to strongly believe that Dodd-Frank
is damaging our economy and is slowing our Nation's economic
recovery.
Dodd-Frank's current regulations and guidelines span 8,231
pages. I think that is just 60 percent about of what is coming.
Our Nation's job creators will spend $60 million labor hours
and employ 30,000 workers to navigate this bureaucratic
minefield.
Unfortunately, community banks and credit unions which help
people access the American dream have been disproportionately
hurt by Dodd-Frank. These institutions provide almost half of
small business loans and serve 1,200 rural counties that
otherwise would have limited options. Without them, as we have
heard today, many responsible Americans would not be able to
own a home, start a business, or preserve a family farm.
Community financial institutions depend on personal
relationships and local knowledge of their community to lend.
This means they can tailor-make loans to fit their customers'
needs.
This lending model actually works. These lenders know your
story, know your business, and know exactly what kind of loan
you need. Large banks often can't follow that lending model.
Their size forces them to make simple, plain vanilla loans, and
disproportionately consult statistics like income or credit
score to evaluate borrowers.
Our economy absolutely needs both kinds of lending.
Unfortunately, parts of Dodd-Frank target the relationship
lending model by forcing these smaller institutions into
regulatory straitjackets, tailor-made for big banks. For
example, in my home State of Illinois, Robert Smith of Soy
Capital Bank and Trust Company has told us that the Qualified
Mortgage rule has reduced their ability to make mortgage
exceptions to people with unique circumstances, even though
they can afford the loan.
Real lives are disrupted along the way as banks reduce
lending, merge with competitors or shut down. Thankfully, there
are bipartisan solutions to provide much-needed relief to
community banks and credit unions. My constituents in the 14th
Congressional District of Illinois are desperate for real
solutions here, so I am grateful for the opportunity to explore
them with each of you today.
I am going to address my first question to Mr. Williams,
and then if Mr. Fenderson, Mr. Miller, and Ms. Bosma-LaMascus
could also comment. Proponents of regulatory relief can be
painted as being against consumer protection and eager to
return policies that cause a financial crisis. I find this
narrative ridiculous, including when it comes to regulatory
relief for community financial institutions.
Consumers need regulatory protection. We all agree with
that, but these institutions were not the cause of the
financial crisis such as subprime lending, securitization or
derivatives. Will targeted regulatory relief for small banks
and credit unions return us to policies that cause the
financial crisis, do you think? I will start with Mr. Williams.
Mr. Williams. It would not. It is a difficult question to
answer, Congressman, but we need the relief so we can provide
the services to our customers. I agree with everything you have
said. We know our customers and we are going to try to find
ways to make the loans. What has happened is examples in Dodd-
Frank under QM have made it difficult for us to approve those
credits.
Mr. Fenderson. The flexibility to do our jobs and serve the
customers that we serve is all we are asking for. And that
obviously comes in the form of relief because of the unintended
consequences that we deal with. Let me be clear, small
institutions, as everyone knows, are not regulated by the CFPB.
However, the rules that they regulate create a playing field in
which we have to participate.
Mr. Hultgren. Let me get on to my next question--probably
you all would echo similar things here. This is personal for
me--my family owns a funeral home, I grew up in a family
funeral home, and I am convinced that my mom and dad would not
have been able to purchase that funeral home in the mid-1970s,
but for a local community banker who saw something special in
them. The idea of judgment, being able to know a person, know a
community, and be able to make a decision, Dodd-Frank takes
that away, takes that ability away to be able to know a
customer, have a business, not a model, know a community, and
be able to make those decisions. To me, that is tragic.
I think it also is reflected in the fact that the lowest
number of business startups that we are seeing in 3 decades is
part of this problem.
Let me touch quickly on, community financial institutions
don't need the same regulations as large ones. As Federal
Reserve Governor Daniel Tarullo has said, many rules and
examinations that are important for institutions that are
larger do not make sense in light of the nature of the risk to
community banks.
A question would be, could we have some sort of tiered
regulation, should we give Federal Reserve or other regulatory
agencies clear legislative authorization? We just have a few
seconds, so if any of you have any thoughts?
Mr. Miller. The short answer is yes, because we didn't
create the problem, and all of us combined as small community
banks and credit unions don't add up to the systemic risk
created by the large banks.
Mr. Williams. Absolutely, yes.
Mr. Hultgren. My time has expired. Thank you for being
here. I know it takes courage sometimes to come out and talk
about these things. We need your voice. I yield back to the
chairman. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate it. And
gentleman, I'm sorry, but ironically, I had to step out to
introduce a constituent at the Small Business Committee, which
is dealing with conflicting regulations from the EPA and the
Department of Energy. This is the frustration that I have, is
we have so many of those circumstances, even here in the
financial services world.
Mr. Fenderson, it struck me, you were discussing how
smaller institutions are exempt; we know that, right? But it
sets a new bar, doesn't it? It sets a new regulatory bar. When
we had Mr. Cordray in here earlier, I was exploring some of
this with him and expressing to him why many of the companies
that I talked to in Michigan want to talk anonymously. He
seemed a little confused by that, why anybody would want to be
anonymous in their criticism. I think anybody who has dealt
with that knows exactly why you want to be anonymous on that.
But he couldn't seem to understand that was the new floor that
was being set, the new bar that was being set. And I think that
is something we have to be very diligent about.
I want to hit a little bit on Qualified Mortgages. And we
have examples, I have one here from Michigan, anonymous, as you
can imagine. Sixty percent of their mortgages are to members of
the credit union, members with under a 600 credit score, but
they charge the same interest rates, and this is in a small,
poorer, rural area, and they are looking at dropping even
offering those credit opportunities. A closing fee of $50 plus
whatever a third-party vendor charges. But suddenly they are
finding these criteria and they are not matching up. I am
curious for any of the four of you, are you going to be
offering non-Qualified Mortgages, or if not, why not? You have
talked a little bit about QM.
Mr. Williams. Congressman, we do offer them, we do offer
non-QM loans.
Mr. Huizenga. And will you continue to do that?
Mr. Williams. Yes, we will continue, but that doesn't
matter. Almost all of the banks are dropping out of it because
they are fearful of not being able to obtain the safe harbors
that QM offers. The important thing is we need to get QM
dropped on portfolio loans that we underwrite, and we are
willing to accept that credit risk.
Mr. Huizenga. Any others?
Mr. Fenderson. We absolutely will continue to make those
loans, it is a market that we serve. It is an expectation that
we have and a part of the role that we play in the communities
we serve.
Mr. Huizenga. Others?
Mr. Miller. We will do about half that we were before,
because we, frankly, are fearful of the regulatory scrutiny.
Ms. LaMascus. We are not yet within the requirements for
it, but we will be. And I would anticipate that we would make
QM loans. The thing that is fortunate for us is we will have
time to see how case law plays out on this and make a better
business decision at that time, but that is the problem is
trying to determine what is the level of risk?
Mr. Huizenga. Mr. Miller, you might have hit on, what are--
my follow-up question is, what are the costs to your members
and/or your customers? You are saying that maybe half of the
people you would have serviced, you are not going to be able
to, because you are afraid of that additional scrutiny and
maybe from some of the others--the trade-offs that--
Mr. Miller. We may even lose a relationship because we made
a business decision, not in Oxnard, California, but it was made
for us in Washington, and the member gets mad at us because we
said no, when we said yes to them the last 3 times they have
come in to do a mortgage over the last 20 years. That is
frustrating. They have to go somewhere else and it will
probably cost them more.
Mr. Huizenga. My colleague--
Mr. Miller. If they can get it at all.
Mr. Huizenga. --Mr. Hultgren was talking about his small
family business. I have a small family business, a third-
generation as well. I am really concerned about what impact
recent mortgage rules are going to have on small businesses in
the community and their ability to be small business owners, to
be community leaders. Anybody on the panel?
Mr. Williams. I would like to follow up and say that a lot
of these loans we make are nonconforming markets that are
rural, and if we don't make them, nobody will.
Mr. Huizenga. So you are willing to take that additional
risk to make sure that you are servicing your community?
Mr. Williams. Yes, and we understand the risk. We
underwrite it and that is what we do.
Mr. Miller. I would say we also, everyone at this table is
probably good at underwriting. Over a 6-year period beginning
in 2009, we are a $400 million credit union, we do a lot of
mortgage loans, we had a total of $339,000 of charge-offs for
mortgages, less than one-tenth of 1 percent. I would offer a
thought that we respectfully appreciate the help, but I think
we are pretty good at underwriting mortgage loans. We don't
need more regulations to help us do that.
Mr. Huizenga. Mr. Fenderson, quickly?
Mr. Fenderson. I just wanted to quickly say that we will
make small business loans whether it pulls us into the question
of adding HMDA data or not. That is the only way we understand
the rule to suggest that we bring in QM, because a business
loan is not a consumer transaction.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina, Mr.
Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman, and I thank each of
the witnesses for your public service and for being with us
today. Last week, I had the occasion of meeting with a small
community bank in my district, with the president and the
credit officer there. Mr. Chairman, for the record, I would
like to introduce a memo that they have provided.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Pittenger. The discussion we had was frankly very
informative but very alarming to appreciate the real challenges
and difficulty that each of you go through. I am going to read
a bit of his comments. I videotaped it, and then we have
transcribed the comments. It was so amazing to me what,
regrettably, he had to say. He said, ``We are a $145 million
bank, with 2 branches and 27 employees. We all spend time with
customers trying to build our business. But the sheer
complexity in the mortgage system makes it almost impossible
for an entity of our size to appropriately meet all these
regulations. This is the ability to repay a Qualified Mortgage
rule, small entity guide''--and he held it up, this guide is 56
pages.
There have been, since it was published on August 14, 2013,
4 pages of additional rules that have been added. If based on
this guide you meet certain criteria, you have to provide an
escrow account for an individual's taxes and insurance on their
mortgage. If you want to do this, there is another small entity
guide for the TILA-RESPA. That is another 91 pages, and he held
it up. If you want to pay your mortgage originator, then you
have the 80-page small entity guide, and he held that up for
the 2013 loan origination.
For all of these guides, there is a paragraph that is
contained in all of it. There are other guides that apply to
the mortgage loans as well. That basic paragraph says, ``This
guide's summarizes the ATR QM rule, but is not a substitute for
the rule.'' Essentially, it says you must refer to the final
rule. The final rule is 185 pages long. The final rule then
refers to the Act. The Act, of course, is thousands of pages.
As I said earlier, it is longer than the Bible. So our ability
to understand all of these rules and appropriately follow them
is very difficult to do. And he said, ``Congressman, do
whatever you can. Help us out.''
I would just like to know if this is your experience as
well, Mr. Fenderson, Mr. Williams, and any of the rest of you,
Mr. Miller?
Mr. Fenderson. I would say that you explained a very real
scenario in which as a banker, we not only--our credential
regulator is the OCC. They have regulation that they are
sharing with us that we have to understand and interpret, and
then we have the rules from the CFPB that we have to learn and
understand. And so that creates a volume of information such
that if you have 27 employees, which happens to be exactly what
we have, it becomes difficult. We only have one person who is
dedicated to compliance. We had to add that person in order to
try to be prepared for the regulations that are coming down the
pike.
Mr. Pittenger. Another cost burden to you.
Mr. Fenderson. Absolutely.
Mr. Pittenger. Mr. Williams?
Mr. Williams. Clearly we are seeing in our area, 11 percent
of banks are just getting out of the business that once were in
the business of making single-family residential loans. We had
the wheel invented, we are staying in it, but the point is, we
have a long relationship with our rural customers. We
understand them, we know who is going to repay and who is not,
and we are going to stick with them. That doesn't matter, too
many banks are getting out of it simply over, we are not going
to make QM loans.
Mr. Pittenger. How many man-hours would you say a year is
added to your compliance requirements?
Mr. Williams. We had one compliance officer 5 years ago;
today, we have six.
Mr. Pittenger. Mr. Miller, do you want to make a comment?
Mr. Miller. We haven't grown our compliance department as
aggressively as Mr. Williams' bank has, but we are heading down
that road.
Ms. LaMascus. NCUA has estimated that it will take 40 hours
to review the 450-page proposal regarding our call reports
under the new risk-based capital they are proposing. When you
mentioned the Bible, it made me think of something that I was
thinking about yesterday: Envision 450 pages. That is almost a
ream of paper that you get in a standard package. Good luck!
Someone might be able to read it in 40 hours, but to understand
it, figure out how it is going to impact your operation and all
of the changes you have to make, 40 hours is nothing toward the
additional labor this costs. I was thinking when I thought of
that much paper, of the Old Testament. It is huge, and 40 hours
does not adequately describe the number of hours.
Mr. Pittenger. Longer than the Bible, but none of the good
news.
Ms. LaMascus. That is right, that is right.
Chairman Hensarling. Regrettably, the time of the gentlemen
has expired. See if you can top that. The gentleman from
Kentucky, Mr. Barr, is now recognized.
Mr. Barr. Thank you, Mr. Chairman, and thank you to the
witnesses and the organizations that you all represent for your
endorsement of several pieces of legislation. We have
introduced the Portfolio Lending and Mortgage Access Act, the
HELP Rural Communities Act, and the American Jobs and Community
Revitalization Act.
The law professor's testimony today was that Dodd-Frank and
regulations are not the cause of the decrease in the number of
community banks and credit unions in America. He has gone to
great lengths, it seems, to distinguish between causation and
correlation. And when I was in law school, I preferred the
Socratic method to lecture classes. So let's do a little bit of
Socratic method right here down the row of our witnesses. Since
the enactment of Dodd-Frank and the Qualified Mortgage rules,
have your compliance costs increased or decreased, Mr.
Fenderson?
Mr. Fenderson. Our compliance costs have increased.
Mr. Barr. Mr. Miller?
Mr. Miller. Increased by more than $100,000.
Mr. Barr. Mr. Williams?
Mr. Williams. Increased by probably 15 to 20 percent.
Mr. Barr. And Ms. LaMascus?
Ms. LaMascus. Increased by at least $250,000.
Mr. Barr. Have you had to hire more or less compliance
officers, Mr. Fenderson?
Mr. Fenderson. More.
Mr. Miller. More.
Mr. Williams. More.
Ms. LaMascus. I have hired two more, and just hired another
one, and 50 percent of his time will be on compliance.
Mr. Barr. And since the finalization of the Qualified
Mortgage rule, has the volume of your mortgage originations
increased or decreased?
Mr. Fenderson. Ours has remained roughly the same, but we
have not made as many mortgages.
Mr. Miller. We are also about the same, but we have a lost
opportunity cost because we have had to turn away 50 members.
Mr. Williams. Our volume is static, we are making about the
same number of loans, but we are still turning down loans.
Ms. LaMascus. Decreased.
Mr. Barr. And has the cost of borrowing for your customers,
if you are remaining static, increased or decreased?
Mr. Fenderson. Unfortunately, we are in a heavily
competitive market, so it has not gone up cost wise, per se,
because in order to get that loan on the books, we have to be
competitive.
Mr. Miller. We have also had to be competitive with rates,
so our margins have suffered.
Mr. Williams. Our margins have suffered, but the costs have
gone up, primarily on appraisals.
Ms. LaMascus. Costs have gone up and margins have declined.
Mr. Barr. And my final question, do higher compliance costs
and the compromising of your business model that you had before
Dodd-Frank make it more likely or less likely that a small
community bank or credit union like yours will fail?
Mr. Fenderson. I would say that most institutions that are
well-run would have an opportunity to merge before they fail.
Mr. Barr. Okay. Merge or fail, that is a good point.
Mr. Fenderson. Yes.
Mr. Miller. More likely.
Mr. Williams. More likely.
Ms. LaMascus. More likely.
Mr. Williams. As a matter of fact, we did merge,
specifically because we had two banks, and with the cost, we
felt like the economies made a lot of sense.
Mr. Barr. With respect to the portfolio lending idea that
we have proposed, the professor blames portfolio loans on the
financial crisis. What do you think was the principal cause of
the financial crisis? Portfolio loans or the originate to
distribute model that was fueled by Fannie Mae and Freddie Mac
that allowed for purchases of billions of these subprime
mortgages, unlike portfolio loans that were not properly
underwritten? In other words, just as a summary, what was the
root cause of the financial crisis? Was it portfolio loans, or
was it GSEs fueling subprime origination? I will just ask Mr.
Williams on that one.
Mr. Williams. GSEs, subprime.
Mr. Barr. Okay. Does anybody disagree with that?
Mr. Levitin. Yes, sir.
Mr. Barr. Well, besides the professor. We heard your
testimony, sir.
Mr. Levitin. I don't think you actually characterized what
I said correctly.
Mr. Barr. We heard your testimony.
Mr. Levitin. You mischaracterized it. I did not say
portfolio--
Mr. Barr. I heard your testimony. I have one minute left.
Let me just ask you this about Professor Levitin's arguments
against the bill and Director Cordray's as well. What do you
think the likelihood is that your institutions would make ill-
advised loans if you have to retain the credit risk? Remember,
this is on your members and on your shareholders. Is it more
likely that you would make ill-advised loans if you know you
have to retain the credit risk? Mr. Fenderson, we will start
with you.
Mr. Fenderson. The mortgages that we make and hold in
portfolio are obviously loans that impact the long-term nature
of our balance sheet and its quality, so we will continue to
make those loans.
Mr. Barr. Mr. Miller?
Mr. Miller. It is less likely. Once again, I offer our
mortgage charge-off figure, over a 6-year period for a $400
million credit union, was $339,000, less than one-tenth of 1
percent. We are pretty good at evaluating risk in our
portfolio.
Mr. Barr. Mr. Williams, in anticipating your similar
response, could you also add to that? Are you in a better
position to assess the credit risk of your customers as a
community bank knowing your customers than the Consumer
Financial Protection Bureau in Washington?
Mr. Williams. Yes, we are, and our business is to make good
loans.
Ms. LaMascus. We know our members, we make good loans, and
we don't differentiate with our underwriting whether we are
going to keep them in portfolio or sell them off in the
secondary market. We use equally, credible underwriting.
Mr. Barr. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania, Mr.
Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman. Let me start by
thanking you all for appearing before the committee this
morning and sharing your stories with the American people. Your
experiences are important because they are illustrative of the
problems that come about when you have a one-size-fits-all,
Washington-knows-best approach to regulating community banking.
Instead of institutions making reasoned decisions based on
actual knowledge and long-standing relationships with their
customers, the elites here in Washington, D.C., would rather
have everyone fit into predetermined boxes or not have access
to banking at all. This mindset has a direct impact on the
ability of institutions to serve their local communities,
particularly those in need. It dictates whether an institution
will offer important services like free checking and overdraft
protection, whether it can offer a mortgage for a first-time
home buyer, or whether it can extend a loan to a promising
startup business.
In my district in Western Pennsylvania, for example, we
have a credit union in Johnstown that ran into regulatory
barriers when it was trying to rescue a deserving single mother
from a mortgage that had been sold 4 different times with the
interest rate increasing with each new lender.
We also have a community bank in Pittsburgh that provides
loans to small businesses. The institution does not offer
prepackaged loans or loan terms, but rather every loan is
specifically designed considering the facts, circumstances, and
risks.
The bank tried to set up a compensation system for its loan
officers that rewarded them for building and maintaining
relationships with their consumers. The FDIC, however, thinks
that the system violates CFPB lending regulations, and the CFPB
won't give the banks a straight answer.
In the meantime, the bank isn't making many of these loans,
and local small businesses are at a block. Finally, we have a
community bank in Monroeville that recently calculated the
amount of time that the institution had devoted to studying,
analyzing, making changes, and training staff to comply with
new CFPB regulations. The bank determined that it took over
2,000 hours, in other words, it took more than a year. Every
hour spent doing this was nonproductive and took the bank staff
away from meeting with customers and serving its community.
To be clear, these institutions and the consumers they
serve had nothing to do with the financial crisis, yet they are
the ones that are being harmed the most by Dodd-Frank and the
regulatory avalanche that has followed. And they are the ones
that will suffer if the President continues to promise to veto
any legislation that attempts to fix this under a misguided
belief that Dodd-Frank is the next thing to gospel. Western
Pennsylvanians want to say yes to commonsense reform, but
Washington just continues to say no.
Ms. Bosma-LaMascus, and also this is for Mr. Fenderson,
since the passage of Dodd-Frank, fees have gone up for many
products and services, making it increasingly difficult for
middle-class and lower-income Americans to access banking
services. For example, in 2009, 76 percent of banks offered
free checking, but now, only 39 percent of banks offer that
service. And the mandatory account balance to qualify for free
checking has increased.
Similarly, 76 percent of banks offered bank accounts free
of charge in 2009, but this number has dropped to 38 percent
following the passage of Dodd-Frank. I think that we would all
agree that more needs to be done to ensure that people are not
shut out of the mainstream banking system. So I would be
interested to hear about your own experiences on this issue and
how Dodd-Frank has negatively affected your ability to do this
and what you are doing in response. Mr. Fenderson?
Mr. Fenderson. Thank you very much. We have seen a steady
reduction in what we call non-interest income, that is a source
tied to overdraft fees and other ancillary fees. We did have to
repeal and retire our free checking account because we frankly
had to figure out a way to replace that revenue. The impact to
the consumer is that they now have to pay for an account that
they did not have to pay for before. So as an institution,
unfortunately, we see the burden of our need to generate a
return, which is a part of the safety and soundness earnings in
order to continue to be in business.
Mr. Rothfus. Ms. Bosma-LaMascus?
Ms. LaMascus. We grandfathered our free checking accounts,
so our members who already had them still have them. But also,
in order to keep the cost down for our consumer members on a
couple of our other share draft type checking account types,
our members, when they use their debit card, can actually earn
money back. So that is how we are able to continue to provide
additional checking services for them, but we did do that. But
that is why we have such concerns about debit cards and
interchange and the fraud connected with them.
Mr. Rothfus. Thank you, I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Hampshire, Mr.
Guinta.
Mr. Guinta. Thank you very much, Mr. Chairman, and thank
you all for participating in this morning's hearing. I, too,
share a deep concern about the regulatory environment and the
burdens that affect my State and the credit unions and
community banks that try to do business and provide access to
credit to many families across New Hampshire. My State has
about 26 different credit unions, and has about 36 different
community banks. As a matter of fact, New Hampshire is the
birthplace of the credit union, Saint Mary's Bank.
I have recently spoken with other bank presidents, Rick
Wallace from Piscataqua Savings Bank. I want to tell you a
little bit about his story, and then I want to get some
comments, both from the professor and from some others. He has
one branch in Portsmouth, New Hampshire. He is a small $230
million bank, less than 50 employees. The regulatory compliance
requirements that have come out of Dodd-Frank have forced him
to focus on meeting compliance rather than being focused on
consumer access to credit, according to the bank president.
He is telling me now that he is only making about half the
loans that he used to prior to Dodd-Frank. And that his own
cost analysis has determined that 25 percent of his bank
resources are now going to compliance. So my question I first
want to ask the professor is, do you believe that this
regulatory environment, do you believe that is a true and
accurate assessment of what he is communicating? And if you do
agree, do you think that the regulatory environment is actually
harmful in some circumstances to the actual end-user and
consumer?
Mr. Levitin. To answer your question, I have no reason to
doubt what this bank president says about his lending volume.
Regarding compliance costs, that is a very subjective and
difficult measurement. I don't doubt his numbers, I just am not
sure what they really represent. No one has a good way of
measuring compliance cost, there is no definitive measure.
As far as the ultimate question, though, are regulatory
burdens harming smaller financial institutions? Yes, in some
circumstances. They have real costs to small financial
institutions. There are also benefits from some of the
regulations, and we need to think about the proper balancing.
You won't see any blanket objection from me to having
regulatory relief for smaller financial institutions, but I
think that the regulatory relief needs to be smart, it needs to
be targeted, and it cannot come at the cost of consumer
protection.
Mr. Guinta. Could you identify maybe one or two regulatory
relief items that we should pursue for small community banks?
Mr. Levitin. Certainly. One thing that I think should go
the way of the Dodo Bird are the Gramm-Leach-Bliley privacy
notices. Nobody reads them. If anything, the only effect they
have would be to lull consumers into thinking they actually
have some privacy rights. There is no reason anyone, even the
large banks, should spend money on giving those notices.
Mr. Guinta. Ms. LaMascus, could you give me a little idea,
from your perspective, on the two or three things that we
should be doing to try to reduce the regulatory compliance to
your industry?
Ms. LaMascus. Yes, first, I am glad to hear Professor
Levitin comment on smart regulations. I think we are making
progress. If I were to limit to just three out of all the
opportunities for improvement, NAFCU and member credit unions
would request legislative capital reform, including
supplemental capital. We would ask for field of membership
relief, and that we pursue smarter regulation by requiring
realistic robust cost and benefit analyses that we could
provide better feedback and get smarter regulations.
Mr. Guinta. And do you believe the lending volume decline,
whether it is community banks or credit unions, is directly
impacted by regulatory requirements in Dodd-Frank?
Ms. LaMascus. Yes. I can give you an example.
Mr. Guinta. Please do.
Ms. LaMascus. I would like to actually go off of what
someone said here--I think it was you--about the mortgage
officers who were being compensated for the relationship and
that type of thing. I think this is an example of how
regulations get between the financial institutions and their
customer members.
A mortgage officer in a community bank or in a credit union
is one of the best-positioned persons to know that person's
financial condition and also to be able to see other ways that
they can help them make better financial choices and actually
save them money or enhance their return. So it is unfortunate
that those people are being prohibited or discouraged from
being able to further that relationship.
Mr. Guinta. Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Colorado, Mr.
Tipton.
Mr. Tipton. Thank you, Mr. Chairman. And I thank the panel
for taking the time to be here. The professor just talked about
having smart regulations. Yesterday, we had Secretary Lew
before our committee. I found it a little bit surprising that
the chairman of the FSOC, in not one of their hearings, ever
spoke about community banks. Unfortunately, when we are talking
about smart rules, smart regulations, we see Dodd-Frank roll
up, and apparently our community banks are simply an
afterthought when it comes to Washington, D.C., and the impacts
that we are seeing. Do you think it would be in the interest,
perhaps, of the Chairman of the FSOC to maybe pay attention to
the community banks, Mr. Williams?
Mr. Williams. Yes, I do, because the FDIC finding is that
94 percent of the banks in the United States are community
banks.
Mr. Tipton. Did you know when we are talking about
regulations, we get focused here obviously on the financial
services industry. When we look across-the-board, a report came
out last year which said that $2 trillion is being paid in
regulatory costs. Ultimately, those costs get passed on to
consumers, which is stifling.
Small businesses need opportunities to be able to grow. Is
it your experience in your community--I visited with First
Colorado National Bank in Delta, Colorado, a small community
bank, and they are seeing more businesses shut down. In fact,
we have a report that just came out that we are, for the first
time, seeing more small businesses shut down in this country
than there are new business startups. Is that going to impact
your ability to be able to help your community?
Mr. Williams. Are you speaking to me, Congressman?
Obviously, if we see businesses shut down, that is jobs, that
is everything. And yes, that is going to hurt our ability to be
effective in our communities. We are in rural communities that
are generally non-growth, so any time a business shuts down, it
hurts the community because we don't have the jobs.
Mr. Tipton. Thank you.
Mr. Fenderson. Without question, as small businesses go, so
does our local economy, and we understand there is an ecosystem
to ensuring that we all have an opportunity to succeed.
Mr. Tipton. When we are talking about small community
banks, often simply as a matter of survival, and you spoke of
this, Mr. Fenderson, about being able to consolidate, to get
the economies of scale, I believe, Mr. Williams, that you had
spoken about it also. We are looking at some legislation right
now, I believe, Mr. Fenderson, you are already covered under
this. The OCC has an 18-month exam cycle for well-run banks.
Would it be sensible, as we see a need for that economy of
scale, to be able to take up that 18-month cycle for
examination up to, say, a $1 billion bank, would that be a good
idea?
Mr. Williams. Yes, sir, absolutely.
Mr. Tipton. Would you support that? I know you have
ambitions to grow that bank.
Mr. Fenderson. I certainly would, and I think that the exam
cycle needs to reflect the safety and soundness concerns of the
business model, and therefore, it would make sense to extend
that. And also attached to that, some turnaround time with
respect to delivering the final report.
Mr. Tipton. Great. I would like to talk a little bit about
the Federal credit unions as well, a topic we haven't been able
to cover here today. I recently heard that Partner Colorado
Credit Union and Pikes Peak Credit Union were forced into a
difficult situation right now. Partner Colorado Credit Union is
close to surpassing the 100th international wire remittance in
2015, primarily due to 2 members who send wires twice a month.
They must now decide whether or not to offer international
wires to make a large change to their wire platform to become
compliant with the International Wire Remittance Rules. Either
way, the credit unions and their members actually lose.
Mr. Miller, would you like to, maybe, address this first?
Although I am confident there are several examples of
burdensome regulations that don't necessarily apply to credit
unions, can you give us some ideas and discussion on CFPB's
International Remittance Transfer Rule?
Mr. Miller. It is another example of majoring in the minors
and focusing on a problem that really doesn't exist. People
don't shop for a wire before they walk into the bank or credit
union to place that instruction and get that money to somebody
who really needs it. People send a wire because there is some
kind of emergency or some kind of urgent need for the recipient
to receive their funds. They are not going to use this half-
hour waiting period to go shop and try to save $10 or $20; they
want to get the money there, and they want to get it there now.
Your constituent is looking down the barrel of having to
double the cost for every one of those transactions that member
is trying to do, and that is unfair to the consumer.
Mr. Tipton. Ms. LaMascus? Any comment?
Ms. LaMascus. We previously did just a few of the
remittances. Whenever the changes came through, we did research
it, and we found that for us to be able do it, it would have
been cost-prohibitive. We could not see our members being able
to justify, nor us justify doing for them, about $50 to
transfer $100 or something like that. It didn't make sense.
Mr. Tipton. It just simply echoes Ronald Reagan's words
that we need to be frightened if the Federal Government is here
to help.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Williams.
Mr. Williams of Texas. Thank you, Mr. Chairman, and I thank
all of you for being here today. I am a small business owner in
Texas, a job creator for 44 years, a Main Street guy, and in
full disclosure, I am an auto dealer. And I understand that
they are squeezing you to get to me, I get it. When a new
regulation is put into place or a new law is enacted, banks or
credit unions have to increase the amount of resources they
devote to compliance. More regulators, I am told, are hired by
some bankers than loan officers.
While the stated purpose of these new laws and regulations
is to protect consumers, the opposite is actually happening.
Increasing regulation means two things: fewer products; and
fewer services.
For example, take Dublin, Texas, the home of Dr. Pepper,
population just shy of 4,000. Bankers have told me that because
of regulatory overreach, they won't make loans for homes valued
at $150,000 or more, much less for $50,000, which is the
average price in Dublin.
And who does this impact? We know who it impacts. It
impacts the seller, impacts the buyer, and the bank trying to
make the loan. But what about the plumbers? What about the
carpenters and electricians and local contractors and hardware
stores that would benefit if we sold a home? So is it goes on
and on and on. And regulations are not just hurting banks but
the customers who depend on them.
And for the customer, relationships matter. My constituents
want to bank with people they can trust, and that is not the
Federal Government. And they want a banker to have
relationships that are built not in a week or a month or a year
but over a lifetime. And I tell everybody in the Federal
Government, being a small-business owner, reputation is the
most important thing all of us have at the end of day,
something that this Administration just doesn't get.
Now in Texas, we are not immune to the impact of Dodd-
Frank. The other day, as we have talked about, in Texas alone--
and, Mr. Williams, you will probably back me up on this--we
have 115 fewer community banks than we did 4 years ago. And
that is an economy that is the best in the world.
Mr. Williams. Yes.
Mr. Williams of Texas. And so we had Secretary Lew here
yesterday, and we were talking about Dodd-Frank, and he was
expounding on how great it was and said that we--we had also
talked about how there is a possibility that he can just, with
the stroke of a pen, take the $50 billion guys and get them
out. Even Barney Frank agrees with that. But he thinks he has
to continue to get Dodd-Frank in full implementation before he
would do that. And I told him that I would like for him not to
do that, because if we go that long, we could lose banks, we
could lose all lending institutions, we could lose businesses,
and we could lose jobs. So I hope he considers that.
And then there is the worry and the fervor and the fear
over fair lending evaluations and the use of disparate impact
as a viable theory to evaluate all this. It is reportedly
limiting the number of banks willing to make small-dollar
loans; we understand that. And as someone who is in the
automobile business, I am very sensitive to the idea that some
think that people are given different rates based on race,
religion, or gender.
So I support reform in the Consumer Financial Protection
Bureau's mortgage rules, but I also want to make it easier on
you to be recognized for your performance and not penalized.
I guess I would ask a question, really ``yes'' or ``no'' to
all of you. I want to get back to what Secretary Lew said.
Should we wait for full implementation of Dodd-Frank, or should
we try reform it and get you guys out of it?
Mr. Fenderson. We should reform it.
Mr. Miller. If it is broke, fix it. Reform it.
Mr. Williams. We definitely need to reform it.
Ms. LaMascus. We weren't the bad actors. Reform it. Get us
out of it.
Mr. Williams. And it would also help mitigate the costs on
consumers that we have to pass along.
Mr. Williams of Texas. Right.
Mr. Levitin. I think it really depends on the provision.
Mr. Williams of Texas. Okay. Thank you.
Now, we have talked, too, about--one of the questions I had
was how much this is affecting your bottom line. We have talked
a lot about that.
I heard a thing the other day that says it takes more man-
hours to meet Dodd-Frank now, halfway through it, than it did
to build the Panama Canal. So that puts it in perspective.
We also just heard from the professor that it is hard to
measure compliance costs in a business. I would think that--is
that right, Mr. Miller?
Mr. Miller. That is correct, sir.
Mr. Williams of Texas. But you also might--one way to
measure this is it is cutting into your bottom line--
Mr. Miller. Yes, it does.
Mr. Williams of Texas. --because you are having to hire
someone who can't loan money out.
Mr. Miller. It does cut into the bottom line tremendously.
Mr. Williams of Texas. I will be brief. The economy is not
fixed. I think that Main Street America is still hurting. Risk
and reward is being attacked.
And I guess I would ask any one of you just to respond
quickly: If we reduce burdensome regulations on you all, don't
you think it would help small-business guys like me to take
risks, get rewards, put people to work, get them off
unemployment, and get net worth back in America?
Mr. Fenderson. Yes.
Mr. Williams. And it would decrease your cost of doing
business.
Mr. Miller. Yes.
Ms. LaMascus. Yes.
Mr. Williams of Texas. All right. Thank you very much.
Thank you for being here.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love.
Mrs. Love. Thank you.
I appreciate you all being here today.
I have sat here, and I have listened to testimony and
listened to questions and expertise from scholars and expertise
from professionals in the area. I have just a couple of yes-or-
no questions, and then I want to just get into what I believe
is the primary purpose of us being here.
First of all, Mr. Levitin, yes or no, do you consider
yourself a professional or an expert in this area?
Mr. Levitin. I do.
Mrs. Love. Okay. Do you proclaim that you know more, yes or
no, than the consumers and the members of these banks and the
four people who are sitting next to you?
Mr. Levitin. About what?
Mrs. Love. Do you know more about the banking industry than
the people sitting next to you?
Mr. Levitin. About certain aspects of it, yes.
Mrs. Love. Okay.
It is really interesting to me, as I have sat here and I
think about my experiences in the past, short 2\1/2\ months, is
this is the biggest problem that we have. We continue to say to
the American people: Let Washington fix all of our problems.
Let the professional, the scholarly elites make the decisions
for us. Let us go in and try and protect the American people
from themselves.
And I think it is high time that we as Americans start
trusting the American people again to make decisions in their
homes, in their communities, and with the community banks that
actually know them by name.
I have realized, in everything that we have looked at, in
all of our history, when Washington gets too involved in
anything, the same thing always happens: Prices go up and
quality goes down, every single time.
And I want to just be very clear here that I am not anti-
government. I am pro-limited-government. I am pro the American
people having more decision-making in what they are doing and
learning and being able to--I think that the American people
are smart enough to make decisions.
So I just wanted to just ask a few questions concerning
what this hearing is about today. I have been hearing a lot
about small banks and how much more vulnerable to costs and
burdens of regulations they are because of the lack of balance
sheets and resources of the larger banks in which to absorb the
cost of compliance.
Would you say--and this question is for Mr. Fenderson--that
smaller banks are suffering terribly and disproportionately, in
your opinion, under the burden of Dodd-Frank and Basel III?
Mr. Fenderson. I think there is a combination of regulation
as a whole that require small banks to react and respond, and,
therefore, it is a burden on us financially.
Mrs. Love. Okay.
As a result, and certainly not surprisingly, community
banks are failing and certainly merging and being bought out by
larger banks at near record rates. And, certainly, the rate of
new banks being launched has fallen to an all-time low level in
8 decades.
Would you say that would be as a result of some of the
regulations that we are seeing today, Mr. Williams?
Mr. Williams. Yes.
Mrs. Love. Do we--go ahead?
Mr. Williams. And I would also like to follow up. The Basel
capital rules are coming in over time, they are being phased
in. And we shouldn't be subjected to those capital rules,
clearly, because we don't have the risk that are designed for
the international banks that they are written for.
Mrs. Love. Okay.
So, Mr. Miller, you talked about the cost of compliance
being pushed down to the consumer. Would you say that you would
have hard evidence of that actually happening, that you can see
the cost of compliance, of trying to conform to these
regulations, actually being passed down to the consumers who
come in and are trying to receive a specialized, more personal
relationship and loan from your institution?
Mr. Miller. Absolutely, and we have hard evidence. We can
submit some follow-up comments for the record on that from some
of my peer credit unions.
I also want to make another comment, if I may. There was an
inference that there is a conflict of interest with four of the
people at this table earlier today because we represent the
banks and credit unions for which we work.
I work for my 22,650 members. They are member-owners. They
elect a board of directors. It is all volunteer. They hire me,
and I hire my staff to run the credit union on their behalf. I
don't think that is a conflict of interest, respectfully.
Mrs. Love. I would also say that I work for the American
people, and I work for my district. And that is exactly what I
am doing here, making sure that I have their back in terms of
letting them keep a little more of their money so that they can
take care of their needs.
I also want to say that when we are looking at some of
these things, what I tend to see is that Dodd-Frank is actually
making it so that these banks are being pushed to be either
absorbed or being pushed into bigger banks, which is what we
are trying to protect the American people from.
Anyway--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. Hill. Thank you, Chairman Hensarling and Ranking Member
Waters, for this good panel.
I appreciate all of you being here and suffering through a
long morning with us.
I spent 35 years in the banking business prior to being
elected to Congress in November, starting in Texas and in
Arkansas. And so I have lived under all these rules and all
these organizations for 3 decades and enjoyed every minute of
it. It was a dream come true and prepared me for running for
Congress.
Professor, you made a comment earlier that sort of left the
impression, I think, that FDIC insurance is optional in some
way. And since FIRREA or FDICIA, I don't remember which, it is
certainly not. It is contingent on getting a charter to be a
bank in the country.
Mr. Levitin. For getting a national bank charter, it is.
For getting a State bank charter, it is not.
Mr. Hill. I don't believe that is true. We are not going to
debate it today. I would just invite you to go check that out.
I also reject the premise that banks sell bad loans on the
secondary market and keep good loans for their own portfolio,
which seems sort of implicit, kind of hanging in the room. I
have certainly never seen that in my 3 decades of experience.
I also reject the fact that somehow consumer protection was
lax in the financial services industry prior to the dawn of a
new world with the CFPB. We have had State attorneys general,
we have had insurance departments, securities departments,
State banking departments, we have had the FDIC and the OCC, I
think, do a splendid job of enforcing consumer regulation in
the commercial banking and credit union industries for years
and years.
Finally, I would like to suggest that the burden of
regulation is cumulative. And we never talk about that, we
never reflect on that. And it is like that last straw that
breaks the camel's back.
For me, something I would like to point out is just the
breadth of paperwork in 4 or 5 years. I am so glad our bank
went to our loan committee on iPads so that we didn't have to
cut down more trees.
But I got a note the other day from a bank in Searcy,
Arkansas, in my district, for a $174,000 home loan. And prior
to the ability-to-repay rules that are now in place, the
package was this thick. And that comports with my memory of it,
from just leaving banking a few weeks ago. This is the size of
the packet today, 255 pages, not including the appraisal, not
including the tax returns, to go through a loan approval
process--255 pages versus 20 pages.
So I think that speaks to what everyone is feeling. And all
that cost is sent to the consumer, and I hope everyone
understands that.
The last topic I want to get your views on is this issue of
disparate treatment that Mr. Williams raised. Because we all
want our consumers to get an absolute fair deal and a great
deal from our financial institutions, be they banks or credit
unions, and we want that regardless of a bank's size, right? So
the fair lending laws are good, and HMDA allows us to check to
make sure we are doing a good job.
But reflect on this one-size-fits-all, no price
variability, no matter what your geography you are covering, in
disparate treatment.
Let's start with you, Mr. Fenderson.
Mr. Fenderson. I would say that as we evaluate consumer
loans, we try to evaluate them on an individual basis. And, in
many cases, we are dealing with someone that we have dealt with
before. But when we are dealing with a new borrower, we simply
evaluate their ability to repay and all the things that we
normally have to check and balance for.
We don't think that, as an institution, there is any
disparate treatment to pricing a loan based on its risk,
because your debt-to-income ratio may be higher than another
borrower. So we would like to retain that ability do that.
Mr. Hill. Mr. Miller?
Mr. Miller. I would concur with Mr. Fenderson that we need
flexibility to make appropriate business decisions. And if you
look at how credit unions have done in controlling risk, we
have done a phenomenal job.
And this one-size-fits-all approach once again forces us to
major in the minors. We are forcing minor players in the
industry to comply with rules that the major offenders have
committed. And that is not fair for the consumer, it is not
fair for the American people, it is not fair for the economy
and jobs. And, once again, it is going to create this implosion
of jobs in the financial services industry that also has a
cascading effect and causes loss of jobs in other industries.
And tax revenues will suffer as a result of that, too.
Mr. Williams. Congressman, disparate treatment, we are very
concerned about this expanded HMDA reporting. We think that is
designed to be the new enforcement mechanism and the backbone
for the Federal regulators to enforce disparate lending on
banks. We have had a lot of experience with fair lending in the
past, and it is a very difficult issue when dealing with
disparate lending, disparate impact.
Mr. Hill. Thank you.
I yield back, Mr. Chairman.
Chairman Hensarling. The gentleman yields back.
There are no other Members in the queue, so I would like to
thank each and every one of our witnesses for their testimony
and their patience today.
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.
This hearing stands adjourned.
[Whereupon, at 1:04 p.m., the hearing was adjourned.]
A P P E N D I X
March 18, 2015
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