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


                    EXAMINING LEGISLATIVE PROPOSALS
                    TO REDUCE REGULATORY BURDENS ON
                        MAIN STREET JOB CREATORS

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

                                 HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 21, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-55
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

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

                   RANDY NEUGEBAUER, Texas, Chairman

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

                              ----------                              
                                                                   Page
Hearing held on:
    October 21, 2015.............................................     1
Appendix:
    October 21, 2015.............................................    41

                               WITNESSES
                      Wednesday, October 21, 2015

Ireland, Oliver, Partner, Morrison & Foerster LLP................     6
Kupiec, Paul H., Resident Scholar, American Enterprise Institute.     4
Stanley, Marcus, Policy Director, Americans for Financial Reform 
  (AFR)..........................................................     7

                                APPENDIX

Prepared statements:
    Ireland, Oliver..............................................    42
    Kupiec, Paul H...............................................    50
    Stanley, Marcus..............................................    58

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy; and Tipton, Hon. Scott:
    Written statement of the Credit Union National Association...    65
    Written statement of the National Association of Federal 
      Credit Unions..............................................    69
Tipton, Hon. Scott:
    Letter from the American Bankers Association, dated July 6, 
      2015.......................................................    71
    Written statement of the Independent Community Bankers of 
      America....................................................    72

 
                    EXAMINING LEGISLATIVE PROPOSALS
                    TO REDUCE REGULATORY BURDENS ON
                        MAIN STREET JOB CREATORS

                              ----------                              


                      Wednesday, October 21, 2015

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Pearce, Lucas, 
Posey, Luetkemeyer, Stutzman, Mulvaney, Pittenger, Barr, 
Rothfus, Guinta, Tipton, Williams, Love, Emmer; Clay, Meeks, 
Hinojosa, Scott, Maloney, Sherman, Delaney, Heck, Sinema, and 
Vargas.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representatives Hultgren, Stivers, Messer, 
and Green.
    Chairman Neugebauer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Examining Legislative 
Proposals to Reduce Regulatory Burdens on Main Street Job 
Creators.''
    Before I begin, I would like to thank the witnesses for 
traveling to 2128 Rayburn, and making yourselves available for 
our questions. I also ask unanimous consent that any members of 
the full Financial Services Committee who are not members of 
the subcommittee be allowed to participate in today's hearing.
    Without objection, it is so ordered.
    I now recognize myself for 3 minutes to give an opening 
statement.
    Good morning. Today, we continue the subcommittee's focus 
on providing regulatory relief for Main Street job creators. 
Throughout this Congress, we have seen examples and heard 
testimony about how regulatory impediments prohibit job 
creation, cause consolidation of community financial 
institutions, and decrease the choices for our consumers.
    Some of the proposals we have already considered have 
received bipartisan support. Many of the bills before this 
subcommittee today are no different. For example, 
Representative Stivers introduced H.R. 2121, the SAFE 
Transitional Licensing Act, which will ensure that workers who 
originate mortgages at depository institutions are able to move 
to nondepository institutions with a minimal amount of work 
disruption. This bill has very broad bipartisan support on the 
committee and in the House.
    H.R. 2473, introduced by Ranking Member Clay and I, will 
ensure that small credit unions are able to more easily access 
the secondary mortgage market to ensure their members get 
competitive prices and robust credit availability. This bill is 
especially important in light of the Federal Housing Finance 
Agency's (FHFA's) proposed rule changing the membership 
requirements of the Federal Home Loan Banks.
    While not yet bipartisan, H.R. 3340, from Representative 
Emmer, is another important bill to be considered today. It 
would provide much needed congressional control over the budget 
of the Financial Stability Oversight Council (FSOC). While I 
may not always agree with FSOC, it is perfectly positioned to 
help coordinate multi-agency regulatory issues. I have become 
increasingly disappointed that FSOC has failed to provide that 
coordination and has instead become dominated by the Treasury 
and the Federal Reserve.
    Some will argue that this bill will undercut FSOC's work, 
but that is really not the case. H.R. 3340 preserves the 
funding stream for FSOC in the Office of Financial Research 
(OFR), but requires congressional approval on how they spend 
the money.
    Several other great bills are before our committee today to 
demonstrate the hard work of several of our members, and I look 
forward to hearing from our witnesses about how these bills 
will work from a mechanical standpoint, and how they will also 
help us achieve the policy objective of reducing regulatory 
burdens for our job creators.
    I now recognize the ranking member of the subcommittee for 
as much time as he may consume.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you to each of the witnesses for your insight and 
for your testimony today.
    Much of our work in this subcommittee has been dedicated to 
finding common ground on regulatory relief. We have been 
partially successful in doing so, and today's hearing includes 
a number of proposals that provide real relief for Main Street, 
including H.R. 2473, as the chairman mentioned, a proposal that 
we have cosponsored.
    I would caution my colleagues against proposals that have 
failed to attract bipartisan support and that undermine the 
implementation of the Dodd-Frank Act, like H.R. 2896 and H.R. 
3340, or like H.R. 2287, which seeks to pressure the National 
Credit Union Association (NCUA) into shrinking its budget just 
as credit unions become more complex. Regulatory relief is a 
worthy objective, but it should always be balanced against 
broader considerations, such as ensuring the safety and 
soundness of our financial system, protecting the independence 
of our financial regulators, and supporting the implementation 
of Dodd-Frank.
    Thank you again to each of today's witnesses. And I yield 
back the remainder of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now, the Chair recognizes the gentleman from Colorado, 
Mr. Tipton, for 2 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. I would like to thank 
the ranking member for holding this hearing.
    Reducing the regulatory burden for Main Street job creators 
like small banks and credit unions is certainly an important 
topic and should continue to be a consistent bipartisan goal of 
this committee. I would like to thank our witnesses for taking 
the time to appear before the committee today as well.
    I ask for unanimous consent to enter into the record 
letters from the American Bankers Association, the Independent 
Community Bankers of America, the Credit Union National 
Association, and the National Association of Federal Credit 
Unions supporting the Taking Account of Institutions with Low 
Operational Risk (TAILOR) Act.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Tipton. H.R. 2896, the Taking Account of Institutions 
with Low Operational Risk, or the TAILOR Act, which I 
introduced with Representative Barr, is a legislative relief 
effort designed to give financial regulators the ability to 
appropriately tailor regulations to fit a bank or credit 
union's business model and risk profile.
    Banks and credit unions are currently regulated under a 
one-size-fits-all approach, regardless of the size or risk 
profile. This means that regulations designed and intended for 
big banks are also applied to small community and independent 
banks or credit unions imposing compliance regimens and costs 
that many of them find unbearable. This legislation has the 
support of 37 cosponsors and over 55 State bank and credit 
union associations.
    Additionally, several regulatory agencies recognize that 
banks and credit unions which engage in traditional banking 
activities should have their regulatory burden eased. That is 
exactly what this legislation is intended to do. FDIC Chairman 
Thomas Hoenig noted that for the vast majority of commercial 
banks that stick to traditional banking activities, and conduct 
their activities in a safe and sound manner, with sufficient 
capital reserves, the regulatory burden should be eased.
    Tailoring regulations to account for the business model, 
risk profile, and cumulative impact ensures a strong regulatory 
model that minimizes burdensome regulations. Research has also 
shown that one-size-fits-all regulations have made it harder 
for community banks' customers to obtain loans, as well as 
making banking and credit services more expensive for small 
businesses, those living in rural communities like the Third 
District of Colorado which I represent, and millions of 
American consumers and businesses that are more challenging to 
reach or more expensive for larger banks to service.
    This legislation will reverse that trend and help small 
banks and credit unions focus on their communities again so 
that Main Street can access the credit it needs for sustainable 
economic growth.
    Thank you, and I yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    I will now introduce our panel. Dr. Paul Kupiec serves as a 
resident scholar at the American Enterprise Institute. Dr. 
Kupiec's work focuses on the study of systemic risk and the 
management of and regulations of banks and financial markets.
    Mr. Oliver Ireland serves as a partner in the law firm of 
Morrison & Foerster. Mr. Ireland's practice focuses on retail, 
financial services, and bank regulatory issues.
    And Mr. Marcus Stanley serves as policy director at 
Americans for Financial Reform. Dr. Stanley's work focuses on 
all aspects of financial regulations with a focus on Dodd-Frank 
law.
    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.
    Dr. Kupiec, you are recognized for 5 minutes.

    STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Kupiec. Chairman Neugebauer, Ranking Member Clay, and 
distinguished members of the subcommittee, thank you for 
convening this hearing. It is an honor for me to testify here 
today.
    My testimony will consider the merits of seven separate 
bills that are currently under consideration. In my opinion, 
none of these bills will magnify financial sector risks, nor 
will any of these bills dilute the Dodd-Frank Act's requirement 
for heightened supervision and regulation of systemically 
important financial institutions (SIFIs).
    Many of these bills propose commonsense improvements to 
existing legislation. For example, the SAFE Transitional 
Licensing Act of 2015 creates a 120-day grace period during 
which a licensed mortgage loan originator may continue 
originating loans while changing jobs and applying for a new 
license.
    The National Credit Union Administration Budget 
Transparency Act will approve accountability and management of 
the NCUA by requiring public disclosure and soliciting comments 
as part of the annual budgeting process.
    The Community Bank Capital Clarification Act amends Section 
171 of the Dodd-Frank Act so that all bank holding companies 
with less than $15 billion in consolidated assets will be 
exempt from the Dodd-Frank Act mandatory holding company 
leverage and risk-based capital regulations. Bank holding 
companies below the $15 billion threshold as of December 2009 
were exempted in the Dodd-Frank Act because they were not seen 
as a threat to financial stability. I do not see why similarly 
sized institutions would pose a threat today.
    The Preserving Capital Access and Mortgage Liquidity Act of 
2015 allows credit unions under a billion dollars to join the 
Federal Home Loan Bank (FHLB) System without meeting the FHFA's 
proposed mortgage threshold rules. This amendment would merely 
put the FHLB membership requirements for credit unions on par 
with those of small banks.
    The Financial Stability Oversight Council Reform Act places 
the Office of Financial Research under the normal congressional 
appropriations and oversight process. The OFR should have been 
subject to these procedures from the beginning.
    Two proposed bills are more involved and require a bit more 
explanation. The TAILOR Act of 2015 requires bank regulatory 
agencies to modify their supervision and regulation practices 
so that they are appropriate for the risk profile of smaller 
institutions. There is a legitimate concern in Congress that 
the Dodd-Frank Act includes new heightened standards for 
supervision and regulation that were intended for larger 
institutions but instead are being applied to all regulated 
depository institutions.
    The TAILOR Act requires regulators to modify their one-
size-fits-all approach to regulation and reduce regulations and 
processes that are burdening smaller institutions with 
unnecessary and unproductive compliance costs. Regulators must 
explicitly recognize the need to tailor regulations and 
supervisory processes and reflect this tailoring in their 
examination manuals and notices of proposal rulemaking.
    The final bill I will discuss, H.R. 2209, requires the 
banking agencies to amend their Liquidity Coverage Ratio (LCR) 
rule to give low-risk, highly liquid, State and municipal bond 
obligations treatment that is consistent with their liquidity 
characteristics. The LCR requires large banks and bank holding 
companies to hold a sufficient quantity of highly liquid assets 
(HQLA) to enable them to survive a hypothetical month-long bank 
run. The LCR has specific requirements that determine which 
bank assets count as HQLA. The final LCR rule does not 
recognize State or municipal bonds as HQLA, so they have no 
value toward satisfying the LCR requirement.
    Many public comment letters recommended that investment 
grade liquid, State, and municipal securities be included in 
HQLA. The reasons for counting State and muni securities in 
HQLA include the fact that many of these bonds are at least as 
liquid as the corporate bonds that are eligible for HQLA 
treatment, many have higher ratings and better liquidity than 
some of the foreign bonds that are also eligible for Level 1 
and Level 2 assets in the HQLA, and many asset-specific 
characteristics for the Level 2 and Level B requirements are 
met by many State and municipal bonds.
    There is concern that the exclusion of State and municipal 
bonds from the definition of HQLA will damage muni market 
liquidity as banks will no longer favor holding these issues. 
In May 2015, the Federal Reserve Board proposed amending its 
LCR rule to recognize State and municipal bonds as Level 2 
assets, which would count as HQLA.
    H.R. 2209 will require the Federal banking agencies to 
revise the final LCR rule to include qualifying State and 
municipal bonds as Level 2A assets in the definition of HQLA. 
This change is appropriate and consistent with the public 
interest. I would go further and recommend that State and 
municipal bonds that satisfy the characteristics required by 
Level 2B assets should also be recognized in HQLA.
    Thank you, and I look forward to your questions.
    [The prepared statement of Dr. Kupiec can be found on page 
50 of the appendix.]
    Chairman Neugebauer. Thank you.
    Mr. Ireland, you are recognized for 5 minutes.

 STATEMENT OF OLIVER IRELAND, PARTNER, MORRISON & FOERSTER LLP

    Mr. Ireland. Thank you, Chairman Neugebauer, Ranking Member 
Clay, and members of the subcommittee. I am pleased to be here 
today. My name is Oliver Ireland. I am a partner in the 
financial services practice at Morrison & Foerster here in town 
and previously was an Associate General Counsel with the 
Federal Reserve Board. I was with the Federal Reserve System 
for 26 years before joining private practice. I currently have 
more than 40 years experience dealing with bank regulatory 
issues.
    Today, the subcommittee is considering seven different 
proposals that cover a broad range of issues. My testimony will 
touch on each of them. I look forward to questions and to 
drilling down on details at the subcommittee's pleasure.
    The TAILOR Act, H.R. 2896, would address the problem of 
regulatory burdens on smaller institutions due to requirements 
designed for larger and more complex institutions. Many of the 
provisions of the Dodd-Frank Act tried to differentiate between 
larger and smaller institutions, some of them in the statute, 
some of them in the regulations, but there is nevertheless a 
trickle-down effect on smaller institutions.
    Smaller institutions remain subject to some very complex 
rules, including things such as the Volcker Rule, and while in 
practice it shouldn't apply to any of their activities, they 
still have to understand the Rule in order to be sure that it 
doesn't. So I think the TAILOR Act is another step to try to 
address regulatory burden on smaller institutions. I think it 
is an important step.
    H.R. 2987, the Community Bank Clarification Act, would 
expand the grandfather for capital instruments for under-$15 
billion institutions. This is a technical change to the current 
statute. Drafting legislation, particularly in a response to a 
crisis such as the recent financial crisis, and creating the 
Dodd-Frank Act is hard work. There are bound to be technical 
issues. This is one of the technical issues, it is a cleanup, 
and I can't see why there should be any controversy with 
respect to that provision.
    H.R. 2473, Preserving Capital Access and Mortgage 
Liquidity, expands credit unions' access to Federal Home Loan 
Bank membership and Federal Home Loan Bank borrowing and should 
promote credit union lending to smaller businesses, smaller 
farms, and community development organizations, and I think 
that is also desirable.
    H.R. 2121 is the SAFE Transitional Licensing Act and deals 
with mortgage originator licensing under the SAFE Act and 
facilitates the movement of mortgage originators, individuals, 
from depository institutions to nondepository institutions and 
between States. I understand that there is perhaps a subsequent 
discussion draft of that bill, and there may be technical 
issues that need to be worked out, but I think the thrust of 
the proposal is good and will improve competition among 
mortgage originators, and competition improves quality.
    H.R. 2287 deals with budgetary transparency for the NCUA. I 
understand that bank regulators don't necessarily like to have 
their budgets scrutinized. I lived as a bank regulator for a 
long time, and I think at least the bank regulatory budget 
ought to be something that people are aware of and understand 
the purposes of and understand what is going on, and I am for 
budgetary transparency.
    H.R. 2209 deals with municipal obligations under the 
Liquidity Coverage Ratio. I think that the failure to include 
municipal obligations as high-quality liquid assets in the 
current rules will adversely affect the liquidity of those 
obligations and will almost inevitably adversely affect the 
pricing of those obligations, making it more difficult and more 
expensive for States and municipalities to raise funding going 
forward. And as my colleague Dr. Kupiec pointed out, the risks 
of expanding high-quality liquid assets to pick up these assets 
are minimal.
    The Financial Stability Oversight Council Reform Act again 
is budgetary transparency and budgetary accountability for the 
Office of Financial Research. I think the people of the United 
States have a right to know how their money is being spent and 
oversight over that money, unless there are serious issues that 
the political process will impair those functions, which I 
don't see here.
    Thank you. I look forward to your questions.
    [The prepared statement of Mr. Ireland can be found on page 
42 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Now, Mr. Stanley, you are recognized for 5 minutes.

  STATEMENT OF MARCUS STANLEY, POLICY DIRECTOR, AMERICANS FOR 
                     FINANCIAL REFORM (AFR)

    Mr. Stanley. Thank you. Chairman Neugebauer, Ranking Member 
Clay, and members of the subcommittee, thank you for the 
opportunity to testify before you today.
    AFR opposes H.R. 2287, H.R. 2896, and H.R. 3340. We also 
have some concerns regarding H.R. 2209. We have no views on the 
other bills under consideration today.
    The TAILOR Act would mandate that Federal banking 
regulators tailor regulations to the risk profile of regulated 
institutions. We view the specific requirements in this 
legislation as unnecessary, as regulators are already scaling 
rules to the business model of affected institutions.
    We also view several of the provisions in this bill as 
potentially harmful. H.R. 2896 requires Federal financial 
regulators to limit the regulatory impact costs and burdens to 
regulated institutions. This broad and vague mandate 
prioritizes reducing the cost of regulation over the offsetting 
benefits gained for consumers and the general public. It would 
apply to all regulated entities and is not limited to community 
banks.
    While the requirements in H.R. 2896 sound reasonable in the 
abstract, their practical effect would be to layer additional 
requirements on an already lengthy and cumbersome rulemaking 
process and to create numerous litigation opportunities for the 
financial industry to challenge regulation in court based on 
the extremely broad and vague mandates in this legislation.
    H.R. 3340 would eliminate the independent funding for the 
Financial Stability Oversight Council and its research arm, the 
Office of Financial Research, and also require that the OFR 
provide an advance comment period prior to issuing any report.
    The FSOC and the OFR were created as a direct response to 
the grave weaknesses in the financial regulatory system that 
were revealed in the 2008 financial crisis. The inability to 
provide unified and coherent oversight of nonbank financial 
institutions, as well as the financial system as a whole, 
contributed directly to the financial crisis of 2008 and its 
disastrous impact on the U.S. and world economy.
    Political independence is crucial to the work of the FSOC 
and the OFR. While there are many checks and balances built 
into the process of FSOC designation, including multiple appeal 
opportunities and the ability to challenge FSOC designation in 
court, the potential micromanagement of financial risk 
assessment through the congressional appropriations process 
should not be one of them.
    The importance of impartial risk assessment is the reason 
why all of our major bank regulators, including the FDIC, the 
OCC, the Federal Reserve, and the CFPB, are independently 
funded outside of the congressional appropriations process.
    The bill's requirement that the OFR solicit public comment 
prior to issuing reports on financial risk would also limit the 
independence of the agency and its ability to objectively 
assess risk, free of outside pressures.
    H.R. 2287 would require the National Credit Union 
Administration to make drafts of their agency budget publicly 
available for comment and to respond to or incorporate such 
public comments in their final agency budget. We believe the 
budgetary requirement in H.R. 2287 is inappropriate for a 
public regulatory entity. The NCUA has the crucial role of 
safeguarding the taxpayer guarantee of publicly insured credit 
union deposits. It requires independence from those it 
regulates.
    While credit unions certainly did not cause the 2008 
crisis, it is still important to remember that significant 
public action was required during that period to rescue the 
credit union system. This included the seizure and closure of 
several large credit unions and the issuance of over $30 
billion in government-guaranteed bonds to stabilize the system.
    H.R. 2209 would mandate that banking regulators classify 
investment grade municipal debt obligations as liquid assets 
under the Liquidity Coverage Ratio. AFR shares concerns 
regarding the treatment of municipal debt in the LCR rule and 
raised similar concerns in our comment to regulators. However, 
we believe that given existing regulatory efforts to address 
this issue, and the apparently quite limited impact of the LCR 
rule on the municipal debt market, it is more appropriate to 
leave this issue to regulatory action rather than act through 
statute.
    In relation to the FSOC, which is related to the H.R. 3340 
bill being discussed today, I would also like to mention 
another piece of legislation, H.R. 1550, that while not 
included in today's legislation, may also be marked up by the 
committee soon. This legislation would at least double the time 
it takes for the Council to designate a large financial firm 
from the current 2 years to at least 4 years, and it could 
create a situation where a large financial firm that is skilled 
at manipulating the process could delay increased regulatory 
oversight almost indefinitely.
    FSOC designation is already a multiyear process that 
includes some 10 major steps and multiple opportunities for 
appeal. Given the importance of the FSOC, Congress should 
reject legislation like H.R. 1550 that would bog down 
operations even further.
    Thank you.
    [The prepared statement of Mr. Stanley can be found on page 
58 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    I will now recognize myself for 5 minutes for questions.
    I want to go to H.R. 2209, the municipal securities as 
high-quality liquid assets. It was mentioned that in the 
current rule that high-quality investment grade municipals 
would not be HQLA. And so I think one of the questions that 
comes from that is--and I will start with you, Dr. Kupiec--what 
are the consequences to these municipals and to States if these 
investment grade municipals are not allowed to be high-quality 
liquid assets?
    Mr. Kupiec. Thank you. Any rule that limits a large set of 
financial institutions' ability to hold these kind of 
instruments cannot be a good thing for the State muni bond 
markets. It has to increase the rates they pay on new issues. 
The liquidity rules singling out types of instruments that 
can't be used to satisfy a liquidity requirement is like a 
feedback loop. If you can't buy the bonds, banks aren't going 
to buy the bonds, and the liquidity in the bond market will go 
down. There will be ramifications.
    The bill under consideration--all it asks for is that if 
the bonds actually satisfy the specifications in the rule that 
would make them eligible for Level 2A or 2B status, they ought 
to be recognized. The rule is very explicit about the liquidity 
criteria. So if the bonds meet the liquidity criteria, why 
aren't we recognizing them? It seems to me a fairly 
straightforward way to improve the Liquidity Coverage Ratio.
    Chairman Neugebauer. Mr. Ireland, you said in your 
testimony that the demand for these securities generated by the 
designation would create liquidity and result in lower cost of 
funding. Can you also elaborate, then, on how this designation 
can increase the demand by the banks for these municipal 
securities?
    Mr. Ireland. I think a key feature is looking at the market 
liquidity and banks' investment incentives under the Liquidity 
Coverage Ratio in conjunction with other rules. For example, 
the leverage ratio in the capital rules, and particularly the 
supplemental leverage ratio for larger institutions, to the 
extent that it is binding, tends to discourage institutions 
from holding lower-yielding high-quality bond assets because it 
places the same capital charge on those assets as it places on 
higher-yielding loan assets, for example.
    So as you are looking at your balance sheet, the larger 
banks are discouraged, essentially, from holding municipal 
securities because of some of the capital rules, and they will 
have an incentive, however, to hold securities that satisfy the 
Liquidity Coverage Ratio rules, and things that are similar but 
aren't listed in the Liquidity Coverage Ratio rules will suffer 
significantly. And I think you are going to start to see a 
cliff effect at the line between those eligible high-quality 
liquid assets and things that aren't. And so you are making the 
market through the rules, and if you leave the munis out of the 
rules, I think it is inevitable, as Dr. Kupiec has said, going 
to cost municipalities and States money and their funding.
    Chairman Neugebauer. It appeared to me that there were 
really kind of two losers, and that one is the States and 
municipalities, but also the banks. In this very-low-interest 
rate environment, a few basis points makes a big difference. 
And obviously, the municipals have two advantages to them, one 
a little bit higher yield, and the other is the tax 
consequences of not being taxable also enhance that yield a 
little bit.
    Mr. Ireland. I think it adversely affects everybody 
concerned.
    Chairman Neugebauer. Mr. Stanley, you mentioned in your 
testimony that there were some important safeguards in H.R. 
2209 that you were complimentary of, so would you elaborate a 
little bit on those?
    Mr. Stanley. Yes. Dr. Kupiec mentioned those safeguards, 
that the legislation does specify that in order to be eligible 
muni bonds would have to satisfy the rules for liquidity, 
marketability, and being investment grade. And I thought it was 
good that that was specified in the statute.
    Chairman Neugebauer. I thank the gentleman. I don't really 
have enough time for another question, so I am going to 
recognize the gentleman from Missouri, the ranking member of 
the subcommittee, Mr. Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Stanley, could you describe the regulatory capture 
concerns that are created by a process where credit unions are 
shaping their regulators' budget?
    Mr. Stanley. Yes. The concern is that the regulated 
entities, in this case credit unions, would have an incentive 
to take risks with insured deposits, and the NCUA, of course, 
is in a supervisory role to ensure that they don't do that. So 
there are differing interests there. And if regulated entities 
could effectively punish their regulator for stringent 
supervision, for preventing them from taking risks that might 
profit the credit union but risk those insured deposits, then 
they could use the budget process to do that.
    Mr. Clay. So H.R. 2287, if adopted, sets a dangerous 
precedent for other prudential regulators?
    Mr. Stanley. Absolutely. These are not self-regulatory 
bodies. They are public regulatory bodies protecting the public 
interest and protecting potential taxpayer exposure on insured 
deposits, and it is very important to keep that line clear.
    Mr. Clay. What lessons did we learn from the financial 
crisis concerning the dangers of captive regulators and 
excessive industry influence on the budgets of prudential 
regulators?
    Mr. Stanley. I think there were many, many lessons. 
Regulators clearly ignored a massive buildup of systemic risk 
throughout the financial system. There appears to have been 
this kind of bidding process between different regulators where 
agencies like the Office of Thrift Supervision let it be known 
that they were more lenient as regulators in order to get the 
budgetary advantages of supervising particular entities.
    And in retrospect, the failures of risk management and the 
failures of regulators to spot these risks building up in the 
system were just egregious, and there is a lot in Dodd-Frank 
instructing and requiring regulators to take stronger action, 
and we need to not roll that back.
    Mr. Clay. Is there any reason to believe that the credit 
union industry won't seek the same kinds of reductions in the 
NCUA supervisory resources that they sought from 2001 to 2009 
when the NCUA held predecisional budget hearings?
    Mr. Stanley. Yes, that is a great example. I was speaking 
more broadly about the financial crisis, but in the specific 
case of credit unions, the NCUA actually had fewer supervisors 
in 2009 than they did in the year 2000, despite the growth of 
the financial sector, and we had a major crash of the credit 
union system in 2009 and 2010 which required large-scale public 
intervention. So that is a lesson we need to learn from.
    Mr. Clay. All right. At this point, Mr. Chairman, I have no 
further questions and I yield back.
    Chairman Neugebauer. I thank the gentleman.
    I recognize the gentleman from New Mexico, the vice 
chairman of the subcommittee, Mr. Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    I appreciate each of you and your testimony.
    Now, one of the things that we have been wrestling with in 
our State is that the Dodd-Frank regulations were intended for 
the large institutions but they bleed down to the smaller ones 
because it's impossible in the mindset of regulators to have 
two different mindsets when you walk in, so they are going to 
hold to the tighter regulations.
    Mr. Kupiec, are you familiar with any of the effects that 
this is having on financial institutions in the smaller rural 
States, ones without the big megabanks?
    Mr. Kupiec. I am familiar with the general process you 
described, having worked for a bank regulatory agency for many 
years. I am not particularly familiar with anything that is 
going on in any particular institution.
    Mr. Pearce. Thank you.
    Mr. Kupiec. The process, though, is kind of very natural. 
Within the bank supervisory community, the supervisors who are 
in charge of the largest institutions are generally thought to 
be sort of the best and the brightest. They are the top of the 
class, the ones who get promoted, the ones who move up in the 
agencies. And this sort of creates this standard that all the 
other examiners want to do exactly what the guys in the big 
institutions and women in the big institutions are doing.
    There is this very natural process where the regulations 
imposed on the--the most complicated regulations are the ones 
that everybody wants to use because it sort of promotes the 
examiner's career path. So there is a real sort of social force 
here that makes the more complex regulations feed down into the 
smaller institutions. It is pervasive in the way the 
examination process works.
    Mr. Pearce. If you have been inside the room doing the 
process, then maybe I would like to hear your observation on 
Mr. Stanley's assertion that tailored rules will limit the 
regulatory compliance impact, cause liability, other budgets, 
and it will mandate the prioritization of the cost of 
regulations to financial institutions over the offsetting 
benefits to the consumers.
    Because I see that playing out exactly the opposite way. 
There is nobody from a big institution in New York who is going 
to come out and give a loan for a mobile home in my district, 
and 50 percent of the houses in my district are mobile homes. 
And so, there are people like Mr. Stanley who would say, no, 
they all have to come by the same rule, and it is not really 
unfair to the small people. Banks are closing at an alarming 
rate in the smaller States, in the smaller rural communities, 
and there is nobody coming from Washington, D.C., to give small 
business loans and to lend money for trailer houses.
    So I would like your observations on his comments that that 
would somehow disenfranchise the consumers out there. It looks 
like putting them under the bigger regulatory standards of the 
big institutions is actually what is disenfranchising the 
consumers. Would you like to comment?
    Mr. Kupiec. I would say a good example of this is the rules 
that were promulgated by the Consumer Financial Protection 
Bureau (CFPB) on the mortgage underwriting standards, where 
small bankers in small towns have to adopt what were 
essentially the same practices that the largest banks would use 
to document all kinds of processes when, in fact, in a small 
town those things may not be the right way to underwrite 
mortgages, that they took basically a computer-driven 
underwriting standard that would apply in the largest shops and 
forced those standards to be reflected in the smaller banks. So 
that is exactly the kind of problem that these rules cause, and 
it does force smaller banks out of the business.
    Mr. Pearce. But you as a former regulator confirm that your 
observation is that the people who percolate to the top in the 
regulatory field are going to be the ones who come from the big 
institutions, and they have that bias towards everyone 
following the same rule, and so you are confirming that.
    Mr. Stanley, I would love to hear your observation as to 
why we in the small community shouldn't be screaming at the 
process which is eliminating our access to capital. The poor 
people in New Mexico are not going to be able to get a loan off 
of Wall Street, believe me. When you succeed, and people with 
your viewpoint succeed in shutting us down, we have nothing 
else. So I would appreciate your observations.
    Mr. Stanley. Let me say, first of all, to take the case of 
the CFPB, the CFPB did provide extensive exemptions for small 
banks and banks in rural communities from those underwriting 
provisions, the qualified mortgage provisions that Dr. Kupiec 
refers to. And I would also say, if our concern is, say, banks 
under a billion dollars, which make up a very substantial 
portion of community banks and are, I think, the community 
banks where we have the economic issues, let's limit these 
bills to banks under a billion dollars; let's put size 
limitations on these bills.
    Mr. Pearce. Mr. Chairman, before I yield back, and I 
appreciate that, but those safeguards that were put into the 
bill you hear are being routinely ignored because the bias 
inside the agency says so.
    Again, I yield back. And I appreciate your response, sir.
    Chairman Neugebauer. The gentleman's time has expired.
    I now recognize the gentleman from Texas, Mr. Hinojosa, for 
5 minutes.
    Mr. Hinojosa. Thank you, Chairman Neugebauer and Ranking 
Member Clay, for holding this hearing.
    And thank you to those distinguished panel members for your 
appearance and testimony here today.
    Small businesses and Main Street are the lifeblood of our 
economy. We should be doing everything we can to ensure that 
Main Street America is able to prosper.
    Sadly, however, this Congress is going down a path 
fundamentally hurtful to Main Street. While this committee 
examines legislative proposals aimed at helping Main Street, 
the House today considers H.R. 692, the Pay China First Act. 
This H.R. 692 is nothing but default by another name. Moreover, 
adding insult to injury, H.R. 692 mandates that we pay 
foreigners instead of American servicemembers and veterans.
    Rather than acting responsibly, this Congress prefers to 
play Russian roulette with our economy and the lives of 
millions of Americans. Raising the debt ceiling does not 
increase the deficit nor authorize new spending. It merely pays 
the bills this Congress has already authorized. Raising the 
debt ceiling is the only responsible thing to do, in my 
opinion.
    My first question goes to Paul Kupiec. H.R. 2209 would 
consider muni bonds that are liquid and readily marketable, as 
well as investment grade to be treated as Level 2A liquid 
assets. The banking regulators appear to have been unable to 
fairly or effectively differentiate between municipal 
securities.
    So by skirting the regulatory process, is Congress 
essentially picking winners and losers between financial asset 
holdings for banks and financial institutions?
    Mr. Kupiec. Thank you very much for the question.
    I don't think that Congress is necessarily stepping in to 
pick winners and losers. What I think they are doing is 
stepping in to encourage the bank regulators to actually pay 
attention to this problem.
    As I mentioned, in May the Federal Reserve Board introduced 
a notice of proposed rulemaking to allow munis to be considered 
as Level 2B assets, even though they passed the final rule the 
prior October and didn't permit muni assets in. So, the Federal 
Reserve Board has started to rethink the rule and change the 
rule. And what the committee has merely said was, this is a 
good idea, speed it up, but if they qualify as Level 2A assets, 
why aren't you counting them as 2A assets then?
    Mr. Hinojosa. Let me ask you then, of the more than 90,000 
municipal insurers--that includes States, cities, schools, and 
hospitals--which municipalities do you think would qualify as 
liquid, readily marketable, and investment grade? Give me a few 
examples.
    Mr. Kupiec. I couldn't give you names right off, but I am 
sure that you want me to say it is the larger municipalities 
and States, and I would have to agree, that is probably the 
case.
    Mr. Hinojosa. Those in small communities like mine and that 
of the former speaker, I think that we are very concerned that 
the small ones would be hurt.
    Let me ask you this last point. NCUA, did they voluntarily 
between 2001 and 2009 lead to a substantial reduction in the 
NCUA budget during that period and leave the agency 
insufficiently resourced to respond to the credit union 
failures during that 2008 financial crisis?
    Mr. Kupiec. I am not versed in what happened internally in 
the NCUA over that time, but I would say that all of the 
financial regulators were unable to respond to the crisis. So I 
don't think it was particularly a unique situation in NCUA, and 
I am not sure just allowing budgets to be produced without any 
public accountability or with public knowledge fixes the 
problem.
    Mr. Hinojosa. Mr. Oliver Ireland, the TAILOR Act would 
require the Federal regulators to engage in additional--is my 
time up? I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Missouri, the chairman of our Housing 
and Insurance Committee, Mr. Luetkemeyer, is recognized for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I would like to start out with talking about H.R. 2987, the 
Community Bank Capital Clarification Act, and I think basically 
it is kind of a unique piece of legislation, because I think it 
addresses a unique problem here from the standpoint that within 
Dodd-Frank, there is a problem that has arisen with regard to 
trust-preferred securities that are used as Tier 1 capital or 
count toward it.
    Dodd-Frank stuck in there a date of any bank holding 
company that is $15 billion or more at that point in time goes 
into a separate set of rules and those under don't. And what 
happens if the institution gets rid of its Tier 1 trust-
preferred securities is they get to fall back, and there is no 
provision for that to allow to happen, so they are kind of 
stuck in limbo here, is my understanding.
    And so, Mr. Ireland, I want to ask you if my interpretation 
of that is correct, and what kind of institutions are going to 
benefit from this bill?
    Mr. Ireland. First of all, I think your interpretation is 
correct. I think it is basically a drafting glitch in the 
original Dodd-Frank Act. And an institution that downsized 
since 2009, the 2009 grandfather date in the bill, and was 
above $15 billion in the holding company before that and became 
below $15 billion afterwards because perhaps they sold off some 
of their units or for other reasons, they are now a smaller 
institution, but they don't get the same treatment as other 
smaller institutions. And I just don't see the logic to that 
difference.
    Mr. Luetkemeyer. Mr. Stanley, is there any meaningful 
advantage to examine the bank's capital adequacy at a date back 
in time like this?
    Mr. Stanley. Excuse me, I didn't quite hear the question.
    Mr. Luetkemeyer. Is there a meaningful advantage to 
examining a bank's capital adequacy going back in time to a 
historic date like this?
    Mr. Stanley. We don't have views on this legislation and we 
don't have an objection to it, I don't think.
    Mr. Luetkemeyer. You realize then it is a glitch, and we 
need to fix the problem so that those banks which are 
inadvertently caught in this trap can get this thing fixed?
    Mr. Stanley. I think that $15 billion line is one example 
of many, many places in Dodd-Frank where there was an attempt 
to restrict the impact of these new rules and regulations to 
larger banks. And if you have a bank that is now legitimately a 
smaller bank, I think that it makes sense not to apply it.
    Mr. Luetkemeyer. I appreciate your support. Thank you.
    I know that the gentleman from Colorado has a great bill I 
think here, the TAILOR Act, and I don't want to steal his 
thunder, but I do have one comment about this bill because I 
think it is extremely important that, in my judgment, what he 
is trying to do here is within 3 years, have the agencies 
revisit the rules that they have implemented since the passage 
of Dodd-Frank. And to me, this is just common sense.
    Any time you do anything in the business world, you are 
constantly reviewing to make sure that the decisions you made 
are accurate, the decisions you made actually work. In this 
situation, what we are trying to do is take a commonsense 
approach to these rules and have the regulators go back and 
take a look at them. Maybe they need to be strengthened. Maybe 
they need to be weakened because they are too tough. But we 
won't know unless we review them and find out the impact, 
because none of these rules were created with an impact 
statement, with any sort of cost-benefit analysis, they were 
all just thrown out there in this bill. And it has been 5 
years, so let's stop and think about this.
    So I know, Mr. Kupiec and Mr. Ireland, both of you had some 
very positive statements to say about the TAILOR Act. I wonder 
if you would like to, Dr. Kupiec, make a couple more judgments 
on it?
    Mr. Kupiec. I just think it is a good idea to move forward, 
to put the regulatory agencies on notice that you do expect the 
rules to reflect the risk profile. And I can't see why this 
isn't a good idea.
    Mr. Luetkemeyer. It is interesting, because I think the 
regulators, when they go in and examine, they are going to 
require that the banks review their loan files, their loan 
documents, on a regular basis, so why shouldn't the regulars go 
back and look at the rules on a regular basis? It makes sense 
to me.
    Your opinion, Mr. Ireland?
    Mr. Ireland. This is an old problem. We have had this for 
decades that the regulatory system focuses on the larger bank 
problems, the burdens trickle down to the smaller banks, and 
the regulators, trying to solve the bigger problem, don't 
adequately adjust for the impact on smaller banks. There are 
numerous examples of legislation trying to fix the problem, but 
it is still here and we haven't fixed it. And I think 
everything Congress does to draw attention to it is beneficial 
to small banks, small businesses, and the customers they serve.
    Mr. Luetkemeyer. Thank you. And I yield back the balance of 
my time, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now, the Chair recognizes the gentleman from Georgia, 
Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    These seven legislative proposals that we are considering 
today serve, in my opinion, as a positive step to help reduce 
many of the regulatory burdens. But I am particularly 
supportive of H.R. 2287, which would require the National 
Credit Union Administration Board to submit a detailed draft of 
their budget to the Federal Register for comment and hold 
public hearings.
    Now, I think it was about a month or so ago that NCUA Chair 
Debbie Matz appeared before this committee and gave us some 
very interesting testimony. But the record will reflect that 
her testimony revealed a very severe need for our particular 
legislation, because our legislation would simply have the NCUA 
be held accountable for its budget and would allow the credit 
unions that they represent to take a more active role in its 
budget decisions.
    And I believe that our bill, with Representative Mulvaney 
providing the leadership, will do just that. It is very 
necessary, from her testimony, to really show how crucial it is 
to do this so that we can build a more positive relationship 
between the NCUA and the credit unions that it represents.
    And so I wanted to make that clear, Mr. Chairman, because 
this is one time that a hearing has produced a great need for 
legislation, and this committee has, under the leadership of 
Representative Mulvaney, provided just that leadership, and I 
am proud to work with him on it.
    Mr. Ireland, I am concerned about smaller banking 
institutions and the larger banking institutions. Could you 
explain more about the stratification that smaller banking 
institutions experience regarding trying to implement risk-
based models compared to our larger banking institutions?
    Mr. Ireland. Sure. The problem, and we have seen this now, 
we have seen constant consolidation in the banking world. Banks 
keep getting bigger over time. One of the things driving this 
is the regulatory cost of being a bank and doing compliance. 
And if you are a smaller bank, you have to understand the 
regulations you have to comply with and you have to put in 
place compliance programs, and that is even if the rules, like 
the Volcker Rule, are designed for much larger banks, you are 
still not completely exempt. And then you have to spread the 
cost of that regulatory compliance effort over a much smaller 
base, and so it drives up the cost to the smaller banks and 
makes it less economic for them to operate.
    A $500 million bank can't proprietary trade under the 
Volcker Rule. How can a $500 million bank tell whether or not 
it is proprietary trading, since it doesn't have the money to 
sit down and read that 800-page Federal Register notice and 
sort out the 2,500 or 3,000 footnotes in it? So the burden on 
smaller banks is disproportionate to the burden on larger 
banks.
    Mr. Scott. And there is another bill that I think is also 
very important, and that is Representative Stivers' H.R. 2121 
concerning the difficulties that loan originators face when 
moving to another State or seeking a license. Could you give me 
some examples of those difficulties, Mr. Ireland or Mr. Kupiec 
or Mr. Stanley, any of you?
    Mr. Ireland. I would be happy to address that. One of the 
problems is that you have to become licensed as a loan 
originator if you are not in a bank. You have to be registered 
if you are in a bank. So if you are in a bank, if you work for 
a bank as a mortgage loan officer and you want to move to a 
nonbank, you have to become licensed, and there is going to be 
a delay in that process. And what this bill would do is provide 
a 120-day transition period so you can work while you get the 
license as you move to the nonbank provider, and the same kind 
of things work in moving from one State to another.
    Fostering mobility among individual loan originators, 
people who work in the business, fosters competition and is 
going to make the system work better. And so I think this kind 
of thing makes a lot of sense. There are in this bill and in 
the other bills some details that may need to be worked out, 
but I think moving in this direction is something that the 
committee wants to do.
    Mr. Scott. Thank you, Mr. Ireland.
    Chairman Neugebauer. I now recognize the gentleman from 
South Carolina, Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. I thank the chairman and the ranking member. 
I also thank Mr. Scott for his input on H.R. 2287, which I want 
to review very briefly. I wish Mr. Hinojosa was still here. He 
had asked a question earlier about the NCUA budget from 2001 
through 2009, and I think he implied in his question that the 
budget had gone down to the point where the NCUA was not able 
to deal with the financial crisis.
    I am looking at the numbers from 2002 through 2009, and 
they didn't go down, and I haven't heard anybody here claim 
that they were unable to deal with the financial crisis. In 
fact, everything I have heard about the credit unions is they 
weren't really part of the financial crisis to begin with, that 
they may have faced some challenges that came with the larger 
overall declining economy, but certainly they were not at the 
epicenter of the difficulties.
    I wish that he was here to hear that because I think that 
concern--and the reason he raised it, by the way, for those of 
you who follow H.R. 2287, is that the NCUA is now claiming that 
if we have to go back to the system we had between 2001 and 
2009, they won't have enough money, that additional insight and 
oversight by the folks who pay the bills will effectively drive 
the regulator out of business.
    That is simply not the case with the historical numbers 
from the period of time when they used to do that. They used to 
have that type of oversight, from 2001 to 2009, and when Chair 
Matz came in, she stopped that process. So just to set the 
record straight, we don't have a problem historically. There is 
no correlation between oversight and participation and the NCUA 
not being able to do its job.
    Now with that, there is another complaint, Mr. Ireland, 
that Chair Matz is making now, which is that if you go back to 
the old system it will cause the agency to--will jeopardize the 
agency's policy independence. How would you respond to that, 
sir?
    Mr. Ireland. I don't think transparency without control 
jeopardizes their independence. So if what you are saying is 
you are going to make your budget public, you are going to 
solicit comments on your budget, and you are going to respond 
to your budget, that puts you through a discipline to justify 
what you are doing. It doesn't cede control of the budget to 
somebody else. It doesn't mandate reductions in the budget. I 
think that adds discipline to the budgetary process, and I 
think the NCUA and, quite frankly, the rest of the bank 
regulators in their bank supervisory activities can only 
benefit from that kind of discipline.
    Mr. Mulvaney. And again for people who are not familiar 
with the issue, the money to run the NCUA right now comes from 
the credit unions. Since credit unions are owned by their 
members, it is actually the members' money that is going to 
fund the oversight. And without the participation of the credit 
unions, there is actually nobody there watching after the 
members' money. Not us and not them. It is sort of the reason 
we have introduced H.R. 2287.
    I do want to point out for the record that Chair Matz has 
offered to have a public hearing. She just announced it this 
past Friday. But I understand she will not be publishing the 
budget before that hearing. Even though she said she would 
welcome questions about the budget, she is not going to publish 
it.
    By the way, when she was here last time, she promised us 
that would be on the website, and I don't know how you 
reconcile those two things. If it is not available before the 
meeting, I am not sure what the meeting is. I also understand 
that at least one board member was not made aware of that 
meeting. And that is the type of atmosphere that I think is 
unhealthy when we have Federal regulation.
    Mr. Stanley, I will press you on one issue, because you 
have checked in on the other side of this issue, which is you 
think the NCUA should be outside of what you call--should be 
free from politics, I think were your words. If I am misstating 
that, please let me know, but that is what I have in your 
testimony, that it should be free from politics.
    Let me ask you a question. Let's put FSOC and NCUA aside. 
What other Federal agencies would you like to see free from 
politics?
    Mr. Stanley. I am not sure it was free from politics 
exactly, but I think the issue is that the entities that an 
agency regulates are only a small portion of the entire public 
interest. They are just one aspect of our economy and of our 
public. And there is often--there is a broader public interest. 
For example, the NCUA has oversight over insured deposits, and 
there may be exposure to the U.S. Treasury if there are 
sufficient losses on those insured deposits. So, there is a 
public interest that is different there.
    Mr. Mulvaney. I am not disagreeing with you, but how would 
more transparency and participation in the budget process put 
that in jeopardy?
    Mr. Stanley. I think there is already extensive 
transparency in the NCUA budget. They put up a very extensive 
justification of their budget and all the details of their 
budget numbers on their website. I think what this bill seems 
to call for is the involvement of regulated entities.
    Mr. Mulvaney. It is not available to the folks before this 
meeting next week. How can you say that?
    Mr. Stanley. I think that when they finalize their budget, 
it is available. People can see what that budget is and what 
that justification is, and certainly they can raise an issue. I 
think the issue is bringing regulated entities into the process 
of setting the budget in advance.
    Mr. Mulvaney. Fair enough. We are a regulated entity. We 
represent the taxpayers, and we bring the taxpayers into the 
process of looking at their regulators' budgets every single 
day. It seems to have worked for the last 240 years. Not well 
all the time, but it does seem to work.
    With that, I will yield back the balance of my time. Thank 
you.
    Chairman Neugebauer. I thank the gentleman.
    The Chair recognizes the ranking member of the full 
Financial Services Committee, the gentlewoman from California, 
Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much.
    I would like to pose a question to Mr. Stanley.
    Mr. Stanley, H.R. 3340 would eliminate the independence of 
the Financial Stability Oversight Council and the Office of 
Financial Research by subjecting their budgets to the 
appropriations process. In your opinion, what would be the 
effect of this legislation? What are the benefits of having an 
independent counsel to monitor systemic risk as well as an 
independent research office to support that mission?
    Mr. Stanley. I think this kind of relates to the previous 
question that was asked. I think we have all seen in 
Washington, D.C., that there can be a narrow interest with 
money at stake that can hire lobbyists to influence the process 
and have an untoward influence on the process. And those narrow 
insider interests can come to dominate processes like financial 
regulation.
    I think the benefit of having some independence for these 
financial regulatory agencies is that they can make their own 
calls on the risks to the broader public, the potential risks 
to the broader financial system and the public, including risks 
to people who maybe are not the insiders here in Washington, 
D.C., who don't have the ability to hire lobbyists to monitor 
all these issues constantly. And these regulators need the 
independence to make the right call for the public interest 
even if it could cost a regulated entity some money over the 
short term.
    And we saw in the lead-up to the financial crisis the price 
we pay when that doesn't happen, including for entities like 
credit unions. Five of the major corporate credit unions 
failed, and there was $30 billion in U.S. Government bonds put 
out to support them.
    So I think FSOC independence is very important to make 
those calls.
    Ms. Waters. Would you agree, Mr. Stanley, that FSOC is an 
extremely important part of Dodd-Frank reforms? It is in Title 
I. And you have just alluded to the management of risk. Would 
you agree that this agency should be absolutely independent and 
not be interfered with again by special interests or politics, 
that if we are to deal with the subprime meltdown and the 
crisis that was created, that we absolutely need to have FSOC 
being able to identify a risk and to deal with it?
    Mr. Stanley. Yes. I do think the FSOC is one of the 
absolutely central elements of Dodd-Frank, because when you 
look at so many of the entities that were involved in the 
financial crisis, they were not traditionally regulated 
commercial banks. They were investment banks who were following 
a capital markets model who at that time were not regulated as 
commercial banks. They were insurance companies like AIG.
    And as our financial sector morphs and evolves, free of the 
limits that were once put on it by Glass-Steagall, you get a 
lot of lending and financial activities taken over by nonbanks, 
and it is crucial to be able to monitor that process and spot 
emerging risks. Regulators fell far, far behind in that 
process, and we can't let it happen again.
    Ms. Waters. Thank you.
    And I would also like to ask another quick question. H.R. 
3340 would also require the OFR to first solicit public comment 
before issuing a proposed report, rule, or regulation. Are you 
aware of any agency that is required to first seek public 
comment on the substance of a report they haven't yet 
published? What would be the effect of imposing this 
requirement on the OFR? Is there any harm in allowing the OFR 
to first publish a proposed report prior to seeking comment?
    Mr. Stanley. I am not familiar with any requirement that 
reports be somehow pre-cleared with interested parties before 
even putting that report out to the public. A report is not a 
regulation. A report is something that is an attempt to inform 
the public and inform the public debate. And if people disagree 
with that report, they are perfectly free to contend with it 
after it is out there in the public and produce new information 
and data. And we have seen that happen with OFR. And I think to 
some degree the idea that you are going to preclear these 
reports would impoverish the public debate. It is almost an 
attempt to allow that it could result in censorship of 
information before it reaches the public, and I think that is a 
problem.
    Ms. Waters. I thank you very much.
    And I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentlewoman.
    The gentleman from North Carolina, Mr. Pittenger, is 
recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you for being with us today.
    I would like to thank Congressman Emmer for his role on the 
FSOC reform bill, particularly as it relates to the budget 
process or lack thereof and the need for greater transparency 
and accountability.
    Dr. Kupiec, do you believe that there is any limitation at 
all in the funding opportunities for FSOC and OFR?
    Mr. Kupiec. Limitation. So in terms of the--
    Mr. Pittenger. Could they, for example, double their 
budgets every year if they wanted to?
    Mr. Kupiec. I think they have a revenue stream, so I am not 
sure of the size of their budget relative to their revenue 
stream at the moment.
    But in terms of the FSOC and the OFR, this notion that they 
are independent is insane, as far as I can tell, because the 
Secretary of the Treasury is the head of the FSOC. And the head 
of the OFR has an office in the Treasury and meets with the 
Secretary of the Treasury all the time. I don't know how that 
would be considered independent in any world that I am aware 
of.
    So this whole notion that they are completely independent 
of politics and their budget must be completely independent of 
politics doesn't make any sense to me. They are part of the 
political system, very much so, and the notion that their 
budget should be outside the regular government appropriations 
is strange to me.
    My understanding is the proposed bill would not affect the 
way that financial institutions have to fund the OFR, but it 
would affect how much of those resources the OFR were allowed 
to spend, it would be subject to the normal congressional 
process. And I don't see why they have any particular role or 
are absolved from politics in any way at all and shouldn't be 
subject to the congressional budgetary process and oversight.
    Mr. Pittenger. How about disclosures? Do they disclose less 
information than comparable entities like the Fed?
    Mr. Kupiec. I am mostly familiar with OFR studies that they 
put out and comment on them, and many of them have been very 
political in nature. And I think part of the reaction in this 
bill is, in fact, that before an OFR study becomes final, that 
people should be able to weigh in and claim foul if they think 
the OFR is producing political research instead of 
dispassionate research. And I think that is my opinion about 
the reaction to this, and it is exactly because the OFR and the 
FSOC are not independent agencies.
    Mr. Pittenger. Mr. Ireland, would you like to comment?
    Mr. Ireland. I think on the report issue, there was an 
example where the OFR put out a report on asset managers, and 
the SEC subsequently went to the lengths to solicit public 
comment on it. You only got public comments through the SEC, 
and there were valuable comments submitted. I think there were 
a lot of misunderstandings in that report and perhaps some 
factual errors.
    I would also point out that the members of the FSOC all 
have their own budgets. We are not talking about the FSOC 
members having their budgets cut or the actual regulators 
having their budgets cut. We are talking about transparency and 
the appropriation process for a research arm that supports 
essentially the Secretary of the Treasury. And Federal Reserve 
Chair Yellen has her own research people who can research FSOC 
issues and do research FSOC issues.
    So you are not really impairing the operation of FSOC. You 
are dealing with part of the Treasury, and putting part of the 
Treasury in the appropriations process like most of the rest of 
the Treasury.
    Mr. Pittenger. How about openness as it relates to public 
notice of meetings? Are they required to give any public 
notice?
    Mr. Ireland. Their meetings are generally not public, and 
there is substantial litigation by one of the entities that has 
been designated as systemically important based on the 
reasonableness of the process that we have gone through, and I 
think some transparency into that process would be beneficial 
for all concerned going forward.
    Mr. Pittenger. Mr. Kupiec, do you have any comments?
    Mr. Kupiec. I agree with Mr. Ireland. The FSOC meetings, 
there is a closed portion and sometimes an open portion that is 
available for the public. I am not aware if the law requires 
them to be announced ahead of time or not. I am not that 
familiar with the details of that part of it.
    Mr. Pittenger. Thank you very much. My time has expired.
    Chairman Neugebauer. I thank the gentleman.
    Now, the gentleman from New York, Mr. Meeks, is recognized 
for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Chairman, we often speak of providing regulatory relief 
for small banks, and I think if we are serious about it we 
should start by making quick fixes wherever possible where we 
can offer some immediate relief. So I introduced H.R. 2987 
along with Representative Maloney, Representative King, and 
Representative Luetkemeyer, to provide a technical correction 
to Section 171 of Dodd-Frank to allow small banks with less 
than $15 billion in assets to be able to continue to use their 
trust-preferred status as part of their Tier 1 capital.
    The intent of this section of Dodd-Frank was to make sure 
that the large banks have high-quality capital while providing 
an exemption for smaller banks with assets under $15 billion. 
But I believe it was a mistake to set in law a fixed date of 
December 31, 2009, as a permanent judgment date for determining 
which banks had less than $15 billion in assets to qualify 
regardless of what happened to the size of the institutions in 
the future.
    This is inconsistent with other legislation that uses asset 
thresholds like the CFPB's $10 billion threshold or the SIFIs 
$50 billion threshold. All these thresholds are based on the 
size of the institution today. It is also unfair to 
institutions that are currently as small as $6 billion today 
but are still regulated like large banks with over $15 billion.
    This bill would allow banks that have assets of less than 
$15 billion today to be treated fairly and therefore be 
eligible for the exemption that was meant to be available for 
such small institutions. And in this bill we make sure that the 
intent of Dodd-Frank is entirely preserved, so if the bank's 
assets go back to above $15 billion, then they lose that 
exemption. So this bill would provide relief for institutions 
that go below $15 billion for as long as they remain below that 
level.
    This is a simple fix, Mr. Chairman, and is also logical, 
and these banks need the relief, and they need relief now.
    Mr. Chairman, I hope we can have this included in our next 
markup and approve this legislation as soon as possible. And I 
am pleased that this is one of the pieces of legislation that 
we were able to do in a completely bipartisan manner. We have 
over 40 cosponsors, about half and half: 50 percent 
Republicans; and 50 percent Democrats. And I want to thank my 
colleagues on both sides of the aisle for their hard work on 
this legislation.
    Lastly, I believe that high-quality municipal bonds, some 
of which are more liquid and less risky than highly rated 
corporate bonds, should be included in the definition of Level 
2A high-quality liquid assets in the LCR. This is critically 
important for cities like my little City--New York, a little, 
small City on the coast--and is another important improvement 
that we need to approve.
    So in the time I have left, I will just ask to the 
witnesses whether or not you think that banks should be 
regulated today based on the size of their assets back in 2009, 
or do any of the witnesses believe that banks under $15 billion 
pose a systemic risk to the financial services industry?
    Gentlemen?
    Mr. Kupiec. I agree with your statements. It makes a whole 
lot of sense that the $15 billion is changed not to reflect a 
given date in the past.
    Mr. Meeks. Mr. Ireland?
    Mr. Ireland. I would agree. I think that the $15 billion 
should be an ongoing number, and if you are below $15 billion, 
you get the benefits, and if you are above $15 billion, you 
don't. And I am hard-pressed to think of a $15 billion 
institution as systemic.
    Mr. Meeks. Mr. Stanley?
    Mr. Stanley. We don't have a position on this bill. We do 
feel there were a lot of problems in the trust-preferred 
securities market, and it is positive that regulators took 
action. But it is possible that certain banks are caught up 
inappropriately in that. We haven't examined the issue closely 
enough.
    Mr. Meeks. We want you to research it and come back and 
give the same answer as Mr. Ireland and Mr. Kupiec.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Colorado, Mr. Tipton, is recognized for 
5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. And I would like to 
thank our panel again for taking time to be here.
    One of the primary concerns I hear out of my district from 
small, locally-owned banks and credit unions is the cost of 
compliance.
    Dr. Kupiec, you mentioned in your testimony the tendency 
for banking regulators to apply best practice supervision on 
supervised institutions. If you would speak to, how does this 
impact those institutions. And as well, the TAILOR Act will 
require regulators to examine potential unintended impacts of 
examination manuals or other regulatory directives, and that 
works in conflict with tailoring the regulatory actions. Will 
this alleviate some of that impact?
    Mr. Kupiec. Yes. Thank you.
    The tendency for a large bank, the examination and 
regulation of the largest banks, is really to adopt a very 
data-intensive approach where you have large databases and comb 
through the data and use models and apply all kinds of fancy 
statistical techniques which may or way not work. But we have a 
tendency to like to do that in the largest institutions, to 
create very complex regulations.
    And this permeates down through the examination team of 
examiners. If you want to move up in the world, you want to be 
a big bank examiner, not a small bank examiner. And what is the 
best way to do that? You try to learn what the big bank 
examiners are doing, and you try to impose it on the banks you 
are examining so that you get experience in the field, you get 
recognized.
    I think it is a natural problem with the system. And then 
it starts imposing more and more data requirements, more and 
more data processing, the need for more and more vendor models, 
all kinds of things for small banks that probably really aren't 
necessary and don't have a benefit.
    So that is my experience working in a bank examination 
agency.
    Mr. Tipton. Essentially, Mr. Stanley had asserted that 
there were exemptions that were created for small banks. You 
are stating that is not really the reality. We are seeing the 
unintended consequences of regulations that are impacting small 
banks, and just having regulations that the TAILOR Act would 
require that are going to be sculpted for those institutions 
would make good common sense?
    Mr. Kupiec. I think what Mr. Stanley says is technically 
correct. There are lots of places in the law that differentiate 
between the size of the institutions. However, there is never a 
clean break between a certain size and another size. It depends 
on the business practices and what kinds of loans they are 
making and what kind of area it is. There are all kinds of 
considerations.
    And I think the TAILOR Act speaks more to a duty and 
requirement of the regulators to pay attention to these 
differences, whereas the very sharp limits in the current law 
are really not up to the task of differentiating between risk 
profile and the best public interest of what is really 
required.
    Mr. Tipton. Thank you.
    One of the frustrations that we hear--I have had the 
opportunity to be able to serve on a small local bank and used 
to be able to make what were called ``character loans,'' 
knowing the people that you actually work with. And I would 
like to be able to give you one example from my district.
    I have a small business in Vail, Colorado. It is a ski and 
bike rental shop. I have had it for over 20 years. This 
gentleman applied to refinance his primary residency, but based 
on a 2-year average of his 2013-2014 tax returns, he didn't 
qualify. His 2015 profit, however, P&L statement, showed that 
his net income was in excess of the 2014 tax return, but it 
could only be used to be able to support the 2-year average 
unless he paid thousands of dollars to be able to have an 
accountant review his 2015 financials. In the end, he had to be 
able to pay off a couple of auto loans that he had to his 
detriment in order to be able to qualify.
    This signals to me the loss of that relational banking that 
I think is so important in our community banks. Mr. Ireland, 
will tailoring regulations to community banks and credit 
unions--would this model enable these institutions to increase 
consumer and commercial access to credit?
    Mr. Ireland. It should. I think that is the intent, and if 
the regulators respond appropriately to it, they should lessen 
the burdens on smaller institutions, and character loans should 
come back. We saw this problem in the 1990s in response to the 
thrift crisis, that character loans dried up. We are seeing it 
again. The regulators try to do things risk-based, but risk-
based often means we are going to increase the scrutiny on the 
bigger guys, we are not going to reduce the scrutiny on the 
smaller guys.
    And the scrutiny trickles down. It just does. We tell banks 
to look sort of one layer up in the regulatory tiers in doing 
their own planning just to be safe, because that is what the 
examiners tend to do. That is the standards they tend to hold 
them to.
    Mr. Tipton. Thank you. My time has expired.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from New York, Mrs. Maloney, is recognized 
for 5 minutes.
    Mrs. Maloney. I want to thank you for holding this hearing 
on these important bills. And I have two that I am particularly 
concerned about.
    I would like to ask Paul Kupiec about H.R. 2209, which Mr. 
Messer and I introduced earlier this year, that would level the 
playing field for our cities and States by requiring the 
banking regulators to treat certain municipal bonds as liquid 
assets, just like corporate bonds. And as a former city council 
member, I know the importance of muni bonds to allow States and 
cities to finance infrastructure and schools, and to pave 
roads.
    Unfortunately, in the banking regulators liquidity rule, 
which requires bank to hold a minimum amount of liquid assets, 
the regulators chose to allow corporate bonds to qualify as 
liquid assets but completely excluded municipal bonds, even 
municipal bonds that are just as liquid as corporate bonds. And 
this makes no sense and threatens to raise borrowing costs for 
municipalities across this country.
    The Fed has already recognized this error and is amending 
its rule to allow certain muni bonds to count as liquid assets, 
but the OCC is still refusing to amend its rule and insists on 
favoring corporations over municipalities.
    So I would like to specifically ask you, Mr. Kupiec, if you 
considered two identical bonds, same size, same maturity, same 
everything, both bonds are liquid enough to satisfy all of the 
liquidity criteria in the OCC's rule, but one bond was issued 
by a corporation, and one was issued by a local government, and 
under the OCC's rule the corporate bond would be considered a 
high-quality liquid asset, but the muni bond would not, even 
though they had the exact same liquidity, do you think that is 
a fair outcome?
    Mr. Kupiec. No, I support the law.
    There is another issue here that the Fed is considering 
Level 2B treatment, which is pretty limiting. You are only 
allowed to count 50 percent of the market value of the bond and 
only up to 15 percent of your total LCR requirement.
    So the Fed's proposal, which they haven't put out any final 
information on, they just put out a notice of proposed 
rulemaking, would still limit muni treatment for those that 
satisfy at least Level 2B criteria to Level 2B. But there are 
many muni bonds and State bonds that satisfy Level 2A criteria, 
and the bill under consideration would require the regulators 
to recognize those liquidity characteristics. I do not.
    I think the LCR rule has a lot of issues with it. It is 
causing a lot of difficulties in a lot of places, including 
large banks not wanting to take deposits anymore. So I think 
that it certainly is a rule that merits some attention from 
Congress, and I think this is a good idea.
    Mrs. Maloney. Thank you.
    I would like to ask Mr. Ireland if you would comment on the 
Community Bank Capital Clarification Act, which I have 
cosponsored with Mr. Meeks in several Congresses. In Dodd-Frank 
we allowed community banks with less than $15 billion in assets 
to keep counting certain securities they had already issued as 
capital. For some reason, Dodd-Frank said that in order to 
qualify for this relief, you had to be less than $15 billion in 
assets on December 31, 2009, even though we didn't pass Dodd-
Frank until 6 months later in 2010. And I can tell you that was 
not intentional. We did not update that date to reflect it 
then.
    So this bill simply states that for banks that were only 
briefly above $15 billion in assets on December 31, 2009, but 
have fallen below that threshold and continue to be below that 
threshold, that they should be treated like other banks below 
that threshold as community banks.
    I would like to ask you if you think there is any reason 
why we shouldn't treat banks that are currently under $15 
billion, and will continue under $15 billion, as community 
banks for capital purposes?
    Mr. Ireland. I can't identify any.
    Mrs. Maloney. Pardon me?
    Mr. Ireland. I can't identify any reason why you wouldn't 
adopt this provision.
    Mrs. Maloney. Why we would adopt it?
    Mr. Ireland. Why you wouldn't adopt it.
    Mrs. Maloney. Why we wouldn't. I agree. I think it is just 
common sense.
    Mr. Ireland. It is just common sense. I can't see why you 
wouldn't do this.
    Mrs. Maloney. Thank you. Thank you for that statement. And 
we have many Members of Congress who feel very, very much the 
same way.
    I would like to follow up, Mr. Kupiec, with you. The OCC 
has been able to distinguish between liquid corporate bonds and 
illiquid corporate bonds. Do you think it would be possible to 
distinguish between liquid and illiquid municipal bonds as well 
to be able to distinguish as the Fed has proposed? In other 
words, why don't we treat the municipal bonds fairly?
    Mr. Kupiec. My understanding is that the public comments on 
the rule have done analysis and identified many State municipal 
bonds that are more liquid than the corporate bonds that are 
given Level 2B treatment now. So the answer is that you can 
distinguish, and I think they should include them.
    Mrs. Maloney. My time has expired, and I thank you for your 
wisdom and your comments and your support for these bills. 
Thank you.
    Chairman Neugebauer. I thank the gentlewoman.
    The gentleman from Texas, Mr. Williams, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    And thanks to all our witnesses for being here today.
    I am a small business owner in Texas. I am a car dealer. 
And you can imagine what I think of the CFPB and how they are 
issuing laws and so forth. But also it is quite evident that 
they have largely ignored congressional intent.
    As a member of this subcommittee, I am proud to have 
cosponsored many of the proposals we are discussing today, 
including H.R. 2121, H.R. 2897, and H.R. 3340. All of these 
proposals will help reduce the regulatory burdens facing so 
many families and small businesses in America today, and again 
speaking of Main Street.
    I want to take a second to focus on H.R. 3340, sponsored by 
my good friend, Congressman Emmer. His proposal, which 
ultimately brings the budgets for the Financial Stability 
Oversight Council and the Office of Financial Research under 
appropriations, will no doubt provide for greater transparency 
where it is sorely needed. My first question to you, Mr. 
Kupiec, is the following: Has the FSOC been transparent through 
the process of designating MetLife, Prudential, General 
Electric Capital, and American International Group as nonbank 
SIFIs?
    Mr. Kupiec. No, I don't think they have been.
    Mr. Williams. Mr. Ireland, what do you think about that?
    Mr. Ireland. I would agree with Dr. Kupiec. I don't think 
they have been transparent either.
    Mr. Williams. Mr. Stanley?
    Mr. Stanley. They provided a public justification of their 
decision that was fairly extensive, and I believe the FSOC 
process provides extensive transparency to the companies that 
are being designated. A lot of that information and that 
process is not made public because there can be trade secrets 
involved.
    Mr. Williams. Next question to you, Mr. Kupiec and Mr. 
Ireland, how has the nontransparent designation process for 
nonbank SIFIs been harmful to consumers and taxpayers?
    Mr. Kupiec. I think any process where you can impose new 
sweeping regulations with no justifiable cause creates two 
problems. It could create the impression that the government 
has decided that these nonbank SIFIs are truly too-big-to-fail 
and they will get special assistance should they get into 
trouble. The people who passed Dodd-Frank say, no, that would 
never happen. I disagree. I think it creates a class of 
institutions that are identified as being different and more 
important than the other institutions, which isn't a good idea.
    And the other thing is the extra regulations involved are 
costly and problematic. MetLife has spent huge resources trying 
to defend itself against this case. The FSOC has the unlimited 
resources of all the agencies on board, including the New York 
Federal Reserve and the Federal Reserve Board and their staff 
of economists, to create arguments and ideas, and MetLife has 
to defend itself against that. It is tremendously expensive.
    Mr. Williams. Mr. Ireland, can you add something to that?
    Mr. Ireland. Yes, let me add one other point here. By being 
designated a SIFI, you become regulated by the Federal Reserve 
Board, which is a bank regulator and understands the bank 
regulatory model. And whether that model is appropriate for GE, 
a large, diversified company, or an insurance company, of which 
there have been a number of designations, is really debatable. 
The expertise and the usefulness of that model for that 
purpose, I think is questionable, and I think that FSOC would 
have been better served to think more carefully about the tools 
it has and the classes of people it designated rather than 
going through the sort of ad hoc designation process that they 
have used.
    So I think greater transparency in the overall process 
would be better for the designation process and provide more 
certainty to market participants and give them more confidence 
in going forward in the economy.
    Mr. Williams. A final question to again Mr. Kupiec and Mr. 
Ireland, have these SIFI designations made the American economy 
safer?
    Mr. Kupiec. Definitely not. One of the unfortunate aspects 
of SIFI designation is we are designating nonbank SIFIs before 
there are any rules or regulations that have been written to 
suggest how they are going to be regulated. What is the 
regulation that is actually needed by their SIFI designation? 
We are designating them first, and there is no standard for 
regulation that has been put out yet.
    Another issue that is significant is that in Section 600 in 
the Dodd-Frank Act, there is a power that gives the Federal 
Reserve Board the right to draft prompt corrective action rules 
for the components of designated SIFIs. So the Federal Reserve 
Board, right now there is--prompt corrective action applies to 
banks. There is no prompt corrective action per se by any 
Federal regulator for an insurance company, or for a broker-
dealer. The SEC has rights there. But one of the sections of 
the Dodd-Frank Act gives the Federal Reserve Board the power to 
draft prompt corrective action rules over these nonbank SIFIs 
it regulates.
    So it comes back to Ollie's point of what expertise does 
the Federal Reserve Board have in exercising prompt corrective 
action rules and judgments over things that it really hasn't 
regulated over time?
    Chairman Neugebauer. The time of the gentleman has expired.
    Mr. Williams. Thank you for your testimony.
    I yield back.
    Chairman Neugebauer. The Chair now recognizes the gentleman 
from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    We have a lot of bills under discussion today, and most of 
them are pretty good. The first is the Community Bank Capital 
Clarification Act, and I think that the importance of this 
bill, its fairness, could be illustrated by the fact that if 
you had two $14 billion institutions even 10, 20 years from 
now, they just happened to be at $14 billion apiece, and one of 
them would have one rule, but the other would have a different 
rule because back in 2009 it was $16 billion.
    Obviously, we ought to treat identical banks identically, 
and if the bank is below the threshold it ought to be below the 
threshold. The idea that you would have a mark--I don't know 
what the mark would be on the forehead of the bank--because it 
was over the threshold decades ago would treat identical 
institutions in a nonidentical manner.
    I have cosponsored the National Credit Union Administration 
Budget Transparency Act because I think it does make sense for 
an organization to publish its budget and to hear from folks 
who comment on it. There is some concern that all of the 
comments will be to tell the NCUA to do less regulation. People 
who raise that fear have never met anyone from the ICBA, but I 
am confident that the ICBA will have comments about the Credit 
Union Administration's budget.
    I think the witnesses have already talked about the 
importance of allowing mortgage professionals to move from one 
job to another and to bring their skills. It is the unskilled 
mortgage professionals that can get us into trouble, and that 
is why I think Mr. Stivers has a good bill, the Safe 
Transitional Licensing Act of 2015.
    Let's see, a fourth bill is Preserving Capital Access and 
Mortgage Liquidity. The FHFA says we need to fix this problem, 
we need to extend parity for credit unions under a billion 
dollars in assets, and I look forward to cosponsoring that 
bill.
    And I would go on at length about H.R. 2209, Mr. Messer's 
bill to require the Federal banking agencies to treat certain 
municipal obligations as Level 2A liquid assets, but the 
gentlelady from New York did such an excellent job of 
explaining the importance of that bill that I don't have to.
    I will ask the witnesses whether they have any comments on 
those four bills, and if not, I may shock my colleagues and 
yield back my time before I have gone over time.
    Mr. Kupiec. I have one comment on H.R. 2209. I would also 
recommend that the committee consider Level 2A and 2B 
treatment, that the ones that qualify for 2A as the bill is 
written should be allowed as 2A. I don't understand why you 
wouldn't also want things that qualify as Level 2B assets to be 
recognized as Level 2B assets. If they meet the standard, why 
not recognize them?
    Mr. Sherman. Maybe that is something we will do in this 
bill. Maybe it is something we will do later. I look forward to 
working with the author on that and deciding whether we try to 
get it all done in one bill or not.
    And seeing no further comments from our distinguished 
witnesses, I yield back with over a minute left.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from Kentucky, Mr. Barr, is 
recognized for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    With respect to H.R. 3340, Mr. Emmer's Financial Stability 
Oversight Council Reform Act, of which I am a cosponsor, and I 
appreciate the leadership of Mr. Emmer on this important 
transparency measure, my question to the witnesses is in 
response to Mr. Stanley's argument for the need for political 
independence. I believe Mr. Stanley's phrase was the reason why 
FSOC's funding is not subject to the appropriations process or 
congressional review of how these fees are used is the need for 
political independence.
    Of course in the Declaration of Independence, Thomas 
Jefferson talked about the fact that governments are instituted 
among men deriving their just powers from the consent of the 
government. And I think Mr. Jefferson as a Founder of our 
country would be troubled to find that so many of the 
regulatory agencies in our country are not instituted among the 
American people based on the consent of the governed, but 
instead on this principle of the need for political 
independence. That, to me, resembles more the institutions that 
we saw in the Soviet Union instead of a democratic society 
where governing entities are subject to the consent of the 
people.
    I would be interested to hear from the witnesses about Mr. 
Stanley's argument for the need for political independence and 
why more transparency is not a good idea.
    Dr. Kupiec?
    Mr. Kupiec. Yes. First of all, I am not going to comment on 
your comparison of the FSOC to a Soviet-style agency. I will 
leave that one alone.
    The FSOC is not an independent agency. It is chaired by the 
Secretary of the Treasury, who is--I think he works for the 
President, last time I checked. The head of the OFR has an 
office in the Treasury, meets with the Secretary of the 
Treasury by his own volition all the time in regular meetings. 
It is essentially functioning as a research arm of the 
Treasury. I do not see this as an independent agency the way it 
is run, so I think this argument of independence holds no 
water.
    And I share your concern about this notion that some of the 
banking agencies' budgets should be completely off limits from 
public scrutiny because they have to be independent. I think 
they work for the public. The public has a right to know things 
about the budget and what things cost, and I think that is all 
part of the process.
    Mr. Barr. Mr. Ireland?
    Mr. Ireland. I agree with Dr. Kupiec. I would add that the 
Secretary of the Treasury is not just the Chairman of FSOC. The 
Secretary of the Treasury's vote is required for many of FSOC's 
actions. The Secretary of the Treasury is a head of an 
Executive Branch agency and is subject to removal by the 
President for policy disagreement. So the idea that FSOC is 
some sort of wholly independent agency, I just don't think is 
true.
    And I would agree with the thrust of your comments. I think 
there may be places--I came out of the Federal Reserve and 
would be a little bit concerned about lack of budgetary 
independence for monetary policy because I think there is some 
potential abuses there. But I don't think that same argument 
applies, for example, to the Federal Reserve's bank supervisory 
functions or the other bank supervisory functions. It is nice 
for them to be independently funded, but for them to justify 
why they are spending their money or maybe they should be 
spending more money on other things that would be evident to 
the public process, I think is probably in the public interest.
    Mr. Barr. Mr. Stanley, why is it that the American people 
shouldn't expect accountability to them through their elected 
Representatives in Congress?
    Mr. Stanley. If I could just defend myself against the 
charge of Soviet tyranny, I do believe that the American people 
should expect accountability, and I do believe--I may not have 
expressed myself as well as I could have in my written 
testimony--because I do believe that everything we do here in 
Washington, D.C., does have a political component to it and 
appropriately does have a political component to it.
    But the question is, how do we design our political 
institutions so that the public interest is respected as 
opposed to a narrow special interest? And in the world of 
financial regulation there is enormous amounts of money at 
stake and there are narrow special interests with a lot of 
money at stake. So we try to insulate, to provide some 
insulation from those--
    Mr. Barr. Thank you, Mr. Stanley.
    Since my time is expiring, if the witnesses could also 
speak to Mr. Stanley's argument with the TAILOR Act as to his 
assertion that the existing regulations already tailor, and 
what about the inadequacy of those existing tailoring efforts 
by the regulators?
    Dr. Kupiec?
    Chairman Neugebauer. I am going to have to ask the 
gentleman to ask the witnesses to respond--
    Mr. Barr. My time has expired. I'm sorry. We won't be able 
to get to that question.
    Thank you. I yield back.
    Chairman Neugebauer. I now yield to the gentleman from 
Minnesota, Mr. Emmer, for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman.
    And I especially thank the panel for being here today.
    I am sure that most of us on this committee can agree that 
financial regulators play an important role. I expect that most 
of us will also agree that financial regulations are best 
administered when there is the appropriate and necessary 
balance between Congress, the industry, and regulators. As one 
of you has testified, ``Significant disruptions to our banking 
system almost always trigger legislation designed to address 
the problems that led to those events as they are perceived at 
the time. Later on, with the benefit of hindsight, it often 
becomes apparent that our bank regulatory system has become 
unnecessarily complex and constraining, whether due to the 
remedial legislation or to the normal evolution of banking 
services and markets.''
    In fact, as elected Representatives, we should not only be 
doing anything within our constitutional authority to address 
any issues that can trigger serious disruptions to our banking 
system, but we should also be doing everything in our power to 
prevent bailouts with taxpayer dollars.
    The Financial Stability Oversight Council, also known as 
the FSOC, and the Office of Financial Research, more commonly 
known as the OFR, were created by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act. The question for our 
hearing today is how we can improve the function and the 
ability of the FSOC and the OFR to achieve their statutory 
mission by enacting reform that recognizes the importance of 
congressional oversight to enhance transparency and 
accountability of these government-created entities to allow 
for better stakeholder participation.
    If we agree that this committee should be working with both 
the financial services industry and regulators to prevent 
future crises and bailouts, and most importantly, to better 
protect consumers and taxpayers, we should also be able to 
agree that minor changes at the FSOC and the OFR will not only 
enhance their ability to perform, but would create a more open 
environment where the benefits and the costs of FSOC's actions 
can be examined and debated in the open.
    H.R. 3340, the FSOC Reform Act, reaffirms the 
constitutional principle of checks and balances. Congress has 
and should have responsibility for oversight of government-
created institutions to ensure that the regulation these 
institutions put in place actually help and not harm Americans.
    FSOC and OFR are no exception. I believe the FSOC Reform 
Act will provide am important and necessary check and balance, 
and with appropriate congressional oversight and enhanced 
transparency, the FSOC and the OFR will be better able to 
perform for our financial industry and for our consumers.
    And with that, I would ask Dr. Kupiec, it is a very simple 
bill, can you tell me, going to this argument about 
independence--which, by the way, we are dealing with an 
organization that we have just heard testimony, you have the 
Secretary of the Treasury who sits on it, sits on the FSB. You 
literally have every one of these heads of these agencies, the 
10 voting members are appointed by the President, and I expect 
they are card-carrying Democrats. So I don't know how you take 
the political aspect out of this institution.
    Dr. Kupiec, if the OFR is still going to be able to collect 
the assessments, how would this impact, if we are not talking 
about budgetary constraints, we are just talking about an 
appropriations process, how would this impact, if at all, the 
independence, the so-called independence of this agency to do 
its job?
    Mr. Kupiec. I think the independence argument is kind of a 
bogus argument. I think what the bill would do would be to put 
the OFR budget under oversight and supervision where it 
belongs. The Congress would have a say. I do not think, since 
the OFR budget funds the FSOC, the notion is somehow this would 
squeeze the FSOC's budget. I very much doubt that. And for one 
reason, the FSOC is staffed in large part by staff of places 
like the Federal Reserve Board and the New York Fed who can 
second people there and pay them Federal Reserve Board salaries 
and Federal Reserve Board benefits.
    So the FSOC is not going to be starved for talent by this. 
It is merely the process that government agencies should be put 
under. Congress should appropriate their budgets. My 
understanding is that the assessments would still accumulate. 
It is just that Congress would decide how much of those they 
can spend and for what reasons through a process, a give-and-
take process. So I don't really see a big problem with it. I 
think it is a big step forward.
    Mr. Emmer. Thank you.
    My time has expired. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Pennsylvania, Mr. Rothfus, is 
recognized for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. I appreciate the 
conversation we are having about regulatory relief for our 
local Main Street institutions.
    I would like to turn a little focus, Mr. Ireland, if I 
could--when you appeared before this committee in June, we had 
the opportunity to discuss a piece of bipartisan legislation 
that I had introduced, H.R. 1660, the Federal Savings 
Association Charter Flexibility Act. As you may recall, the 
bill permits a Federal savings association to elect to operate 
subject to supervision by the Office of the Comptroller of the 
Currency with the same rights and duties of a national bank.
    You spoke favorably about the bill, stating that it would 
save time and money, streamline our regulatory system, and 
would appropriately balance caution and restraint with the 
ability to innovate and to provide financial services to 
consumers and businesses. Am I correct in understanding that 
you still hold those views?
    Mr. Ireland. You are correct.
    Mr. Rothfus. Thank you.
    Today, I would like to continue that discussion about 
thrifts and mutual institutions and talk about the regulatory 
burdens that these institutions face and their ability to grow 
to meet the needs of their local communities. On a basic level, 
can you please describe how mutual banks differ from other 
types of financial institutions and how they are going to raise 
capital?
    Mr. Ireland. Mutual organizations derive their funding from 
their customers and build their capital base through retained 
earnings, and stock organizations obtain their capital by 
issuing securities into the markets. The growth of capital in a 
mutual organization is a much slower process, and to adjust to 
significant capital changes, for example, as have been flowing 
out of Basel III, is more difficult for a mutual organization.
    In addition, I think that many of the capital rules are 
designed to deal with problems as they were observed in stock 
companies--and this particularly goes to the capital 
instruments issue that I think you are referring to--and how 
those rules affect mutuals, I think is a separate question.
    And the assumptions you make about the market effect of 
Tier 1 capital, Tier 1 common equity capital, in a stock 
company simply may not apply to a mutual. You may not have the 
same kinds of concerns in the mutual that you have in the stock 
company. And I think tailoring capital rules to mutuals is 
something that ought to be done and the regulators ought to 
look at that very, very seriously.
    Mr. Rothfus. I am glad you raised that, because I have 
introduced another commonsense bipartisan piece of legislation, 
H.R. 1661, the Mutual Bank Capital Opportunity Act of 2015, 
which would provide mutual institutions with the option of 
issuing a mutual capital certificate to raise additional 
capital without sacrificing their structure. By statute, the 
certificates would qualify as Tier 1 common equity capital and 
share many of the same qualities as preferred stock. Do you 
have any comments about this proposal?
    Mr. Ireland. I would support that proposal. I think that 
there could be details that need to be worked out as you go 
forward, but I think that something needs to be done to 
accommodate the mutual organizations. Otherwise, ratcheting up 
Tier 1 capital may simply strangle them and put them out of 
business.
    Mr. Rothfus. Dr. Kupiec, at a recent roundtable discussion 
in Pittsburgh, one of my local community bankers stated that 
the current regulatory environment is ``as harsh as it has ever 
been. Harsher.'' Another local banker described the Federal 
regulatory environment as, ``death by a thousand cuts,'' and 
pleaded that community institutions--and he emphatically said 
this--need help now.
    In this Congress, the committee has already marked up a 
long list of bills that would help fix this, and we are 
considering more good bills today. In your opinion, what is the 
one proposal that Congress could pass tomorrow that would make 
the most difference?
    Mr. Kupiec. Of these seven?
    Mr. Rothfus. Or any of the bills that we have done to date, 
these seven.
    Mr. Kupiec. I wouldn't have all of them off the top of my 
head, right? So--
    Mr. Rothfus. Would you agree with the assessment that the 
environment is harsh?
    Mr. Kupiec. Yes, I would, and I think the bills asking for 
relief, or requiring relief, are fully appropriate.
    Mr. Rothfus. And do you see the same kind of urgency for 
regulatory reform that this community institution would have 
been telling me about?
    Mr. Kupiec. I think they are telling you the truth.
    Mr. Rothfus. Mr. Ireland, do you have any idea on what one 
proposal that Congress could pass tomorrow that would make the 
most difference for community institutions?
    Mr. Ireland. I don't have the time to list them all. I 
can't get it down to one. I think you have very serious 
problems right now.
    Mr. Rothfus. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from New Hampshire, Mr. Guinta, is recognized 
for 5 minutes.
    Mr. Guinta. Thank you, Mr. Chairman.
    I would also like to thank the panel for the discussion 
today of these legislative initiatives.
    I have two areas of focus, one very quickly on H.R. 2987 
for Mr. Ireland. Can you specifically state how many 
institutions H.R. 2987 will benefit at present?
    Mr. Ireland. I haven't had the time to go back and examine 
the historic call report or reports--it is not call reports, it 
is the holding company reports that you would have to look at--
to identify those. I understand that there are at least two of 
them. And I don't think the number is what really matters. I 
think the statute is just drafted wrong, and you want to fix 
that glitch in the statute. That is not the way you ought to 
draft grandfathers.
    They have grandfathered the instruments. They don't want 
new trust-preferred issued. But the institutions that have 
issued them, whether they are above or below $15 billion is a 
completely separate issue and doesn't promote in any way 
evasion of the purposes of the capital rules.
    Mr. Guinta. Okay. Thank you.
    I want to move on to a different issue now, on H.R. 2287. 
The NCUA operates independent of the congressional 
appropriations process. Their annual operating budget is used 
to carry out a list of duties, such as examination and 
supervisory authority. However, a substantial portion of the 
NCUA operating budget is funded by a fee from federally-insured 
credit unions across the Nation. This fee is based upon the 
prior year asset balance and rates that are set internally by 
the board.
    Our Federal agencies, I think, need to be transparent. They 
need to be accountable. I don't see much problem with that. I 
also took a look at the budgeting over the last decade, and it 
appears for the most part that the budget has gone up.
    I took a look at the testimony earlier this year, on July 
24th, I think it was, by Chair Matz, and I want to talk about 
that testimony a little bit. And I want to talk to Mr. Stanley 
about this.
    Back on that date, she testified, and I believe the 
gentleman from Georgia, Mr. Scott, was asking the questions, 
and she made a statement, and the statement was this: ``I don't 
believe that the credit unions necessarily represent the 
members, and if they did, they wouldn't be asking us to cut our 
budget because I think the members would like us to protect 
their life savings and would like us to have the resources that 
we need to do that adequately.''
    That was her statement. I, in full disclosure, am a member 
of a credit union. I wonder if I could first ask you one 
question. Do you know a woman by the name of Barbara 
Cunningham?
    Mr. Stanley. I do not.
    Mr. Guinta. Do you think Chair Matz knows Barbara 
Cunningham?
    Mr. Stanley. I couldn't say, but possibly not.
    Mr. Guinta. I will tell you who Barbara Cunningham is. I 
know her. She is the loan officer at St. Mary's Bank, which is 
the oldest credit union in the Nation, that helped my wife and 
I get into our home. I trust her. I don't trust a faceless 
bureaucracy in Washington.
    So I have significant problems with that one statement that 
Chair Matz made, because it suggests that the bureaucracy in 
Washington cares more about me than the person who lives in my 
community, who works with me to try to find a way to get a 
mortgage for a home for my wife and my two children. That is 
the fundamental problem I have with this notion that Washington 
knows better than people back home.
    I served as a State representative, I served as a mayor, I 
served as a city alderman. I have known the people that I do 
business with for years, and I have a relationship with them. 
That is the fundamental obligation and responsibility that I 
think people feel when they, as customers, go into a credit 
union and have that direct relationship.
    So when your statement earlier suggested that the 
transparency is not necessary, I find that hard to believe 
would be problematic in order for NCUA to do their job. I think 
they can do their job, they can show the public how they are 
spending their money, and the consumer also can have a 
relationship, and a good one, with their credit union.
    So, unfortunately, my time has expired, and I can't get 
your response, but I will send you a written letter and ask for 
your response, because I do want to give you the opportunity to 
respond.
    And I yield back.
    Mr. Stanley. Absolutely. Thank you.
    Mr. Neugebauer. I thank the gentleman.
    And now, I recognize the gentleman from Indiana, the 
chairman of the Republican Policy Committee, Mr. Messer, for 5 
minutes.
    Mr. Messer. Thank you, Mr. Chairman.
    I want to join the chorus of support for H.R. 2209. I thank 
Mrs. Maloney for her work on this legislation. I want to thank 
both Chairman Neugebauer and Chairman Hensarling for their 
willingness to bring this bill forward. Others have talked 
about it, so I won't repeat the statements made by others, but 
the bill is aimed at this remarkable situation that we have 
where Federal banking regulators have excluded all American 
municipal bonds from being treated as high-quality liquid 
assets under the LCR rule, creating the remarkable situation 
where not only corporate bonds, but certain foreign 
subsovereign bonds qualify for liquid assets when American 
municipal bonds don't qualify.
    By the way, I should apologize for my voice. I was part of 
the 12th man at the Colts-Patriots game this week. We are proud 
of our Colts, and obviously disappointed in the outcome.
    That approach, as others have testified, doesn't make any 
sense. These are great assets. They are among the safest 
investments in the world. They are often not traded because 
people want to keep them once they invest in them, but they are 
highly liquid in the sense that in times of financial crisis, 
folks can flip them, if needed, as others have also testified, 
by discouraging these bonds from being treated in the way that 
reflects their true value. It drives up the cost of borrowing, 
which doesn't make any sense.
    I want to direct my question to Mr. Kupiec and potentially 
Mr. Ireland, not to go over what others have said, but maybe to 
make sure we get it on the record. Do you see any reason why 
these assets should be discounted or why the Fed, for example, 
should--because, as you know, the Fed has come up with this 
rather Byzantine way of looking at it--do you see any reason 
why those assets should be discounted or should they be treated 
as face value?
    Mr. Kupiec. No. I think if you set a specific criteria that 
the liquidity of the asset has to meet to qualify as a Level 1, 
Level 2A, or 2B asset, if they meet those requirements, they 
ought to be counted.
    And I would differ a little bit. The Federal Reserve is the 
only agency that has actually made a movement towards including 
some municipal bonds, so I think they are ahead of the rest of 
the regulatory agencies in at least realizing the problem.
    But I think the bill points in the right direction. If they 
qualify, if they have all the characteristics of a Level 2A 
asset, why aren't you counting them as a Level 2A asset? And I 
would add, if another segment of them qualifies as Level 2B, 
then count them as Level 2B.
    Mr. Messer. I appreciate that advice and I will actually 
try to work with the committee and Mrs. Maloney to see if we 
can include that.
    I will get back to Mr. Ireland in just a second. I want to 
just follow up with Mr. Kupiec very quickly. Could you comment 
just for a second about the problem with the Fed, the OCC, and 
the FDIC having different approaches to these kinds of bonds?
    Mr. Kupiec. The Federal Reserve rule would apply to any 
Federal Reserve bank that they supervise and holding companies. 
And so it would apply at the holding company level, whereas the 
OCC would apply at the bank level. So you might have a 
situation where if the rules don't all agree, the bank might 
have to have a different set of liquid assets than would count 
at the holding company level, which would just be unnecessarily 
complex.
    So I think it is better that the rules all agree, which is 
why this bill is also important. It tells all the agencies to 
come with this solution, and I think it is the right one.
    Mr. Messer. Mr. Ireland, do you have anything else to add?
    Mr. Ireland. I would agree with Dr. Kupiec. If the assets 
meet the tests for liquidity and quality, they ought to get 
treated in the appropriate category. And it makes absolutely no 
sense and will just distort markets and cause all kinds of 
problems to have different rules for different institutions. 
You need a consistent rule here, and picking and choosing by 
issuer as opposed to character of the asset, I think is 
inappropriate.
    Mr. Messer. Thank you. I yield back.
    Mr. Neugebauer. I thank the gentleman.
    The gentleman from Ohio, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. I thank the chairman for allowing me to sit in 
on this panel. I am not on this subcommittee, so I appreciate 
the opportunity to be here.
    I appreciate the witnesses for sticking with us for a long 
time and a lot of questioning. I think the bills today are a 
lot of commonsense bills. Something Dr. Kupiec just said really 
made me think, as we were talking about H.R. 2209.
    Dr. Kupiec, why do we have one set of accounting 
principles?
    Mr. Kupiec. So we can compare across companies, if they are 
comparable.
    Mr. Stivers. Inside a company and across companies and 
compare apples to apples. Is that an appropriate way of saying 
it?
    Mr. Kupiec. Sure. You want every yardstick to have the same 
length, yes.
    Mr. Stivers. So shouldn't that also apply here when you are 
talking about across companies and inside companies with regard 
to assets, and if something meets the characteristics of a 
certain type of asset, shouldn't it be included in the asset 
and shouldn't we have consistency so that we can compare inside 
a bank holding company at the bank level and across companies?
    Mr. Kupiec. I think it makes a lot of sense to have one 
rule, yes.
    Mr. Stivers. So that is the kind of commonsense stuff we 
have here. One of my bills that two of you have talked about, 
and I think it is possible that Mr. Stanley does not have a 
position on it because he didn't mention it, is H.R. 2121, the 
SAFE Transitional Licensing. I think Mr. Ireland did a great 
job of explaining it to one of the other Members of Congress 
who asked a question. I appreciate that.
    We are continuing to work with interested parties, and we 
have a new discussion draft that I think even makes the bill 
better. Instead of just a straight 120-day period, the new bill 
basically says the application or the transitional authority--
and we make it an authority, not a license so that the 
regulators actually can clamp down on folks if they need to--
but it is good until the application is approved, denied, or 
withdrawn, or in the event that it is incomplete, the limit is 
120 days if the application is incomplete.
    We also create the ability for the regulators to deal with 
bad actors. We make sure that we allow the regulators to 
require a background check if they want one. There is already 
something that says if you have been convicted of a felony, if 
you have been subject to a cease-and-desist order, or you have 
been denied or revoked or suspended for your license, this 
process wouldn't apply. And I think Mr. Ireland talked about it 
pretty well.
    But, Dr. Kupiec, do you want to talk about why we need the 
ability for folks in labor markets to move from employer to 
employer or State to State, if they need to, and how that is 
good for consumers?
    Mr. Kupiec. I think, historically, one of the features of 
the mortgage business in the United States has been its ability 
to sort of expand quickly when it needs to and contract quickly 
when it needs to. Mortgage banking is--the business is 
volatile. And this may or may not be a good thing, but 
sometimes real estate is more in fashion than others, and these 
people need to change jobs and move States. And my 
understanding of the law is, in order to be under this 120-day 
grace period or however you may improve that in the new bill, 
that you actually have to be on the national registry.
    Mr. Stivers. That is correct.
    Mr. Kupiec. And consumers would have access to your 
information on that registry while you were waiting for your 
new license.
    So to the extent that the information is for consumer 
protection, my sense of this is that the consumers would have 
access to that underwriter's originator's information on the 
national registry.
    Mr. Stivers. Exactly.
    Mr. Ireland, do you want to talk a little bit about how 
this is an unintended consequence of a two-tiered system. So we 
had a tiered system for State-regulated folks who had to have a 
license, and then the other folks who are at a bank who didn't 
need to have a license. And so when you want to change between 
them, you have to get licensed, but it was kind of an 
unintended consequence that people then, if they want to change 
from a bank entity, a federally-regulated entity to a State-
regulated entity, wouldn't be able to work for a number of 
months. That is pretty hard for most people to feed their 
family on, and it is clearly an unintended consequence.
    Mr. Ireland. Oh, I think so. I think it makes it very hard 
to move from a bank to a nonbank, and provides a very great 
deterrent in that regard and cuts down on competition between 
banks and nonbanks. And I think this is in the interests of the 
originators. I think it is also in the interests of the 
efficiency of the market.
    Mr. Stivers. And the consumers.
    Mr. Ireland. And the consumers.
    Mr. Stivers. Mr. Stanley, you didn't have a position on 
this bill. Do you like what you hear?
    Mr. Stanley. I like what I heard in the last 5 minutes, but 
since I have 200 members in my organization, freelancing on 
endorsements is tough.
    Mr. Stivers. I didn't ask you to endorse anything. I asked 
you if you liked what you heard.
    Thank you. I yield back the balance of my time.
    Mr. Neugebauer. I thank the gentleman.
    The gentleman from Indiana, Mr. Stutzman, is recognized for 
5 minutes.
    Mr. Stutzman. Thank you, Mr. Chairman. And I appreciate the 
witnesses being here today. I apologize for being late and 
catching up here on a couple of things.
    But I want to talk a little bit about--I don't know if you 
all talked about the municipal bonds already, but if you have, 
I will move over to H.R. 2473, the Preserving Capital Access 
and Mortgage Liquidity Act of 2015. Can some of you talk a 
little bit about why H.R. 2473 is necessary and related to the 
community financial institution definitions, if any of you 
could be able to discuss that a little bit?
    Mr. Kupiec. I think the issue is that the Federal Housing 
Finance Agency has issued rules about how large the mortgage 
activity has to be in an institution before you can gain 
Federal Home Loan Bank membership and be able to use Federal 
Home Loan Bank loans pledging collateral. And I think this 
bill, there is a carve-out, I believe, for small banks under a 
billion dollars, and I think the new rulemaking by the Federal 
Housing Finance Agency would not allow credit unions to have 
the same access to the Federal Home Loan Bank as small banks. 
And I think my impression is this rule just kind of levels that 
playing field, so that if a small bank had access to the 
Federal Home Loan Bank, then a credit union would have access 
too if they are under a billion dollars.
    Mr. Stutzman. Do you think there is a sound policy reason 
for not including credit unions in that definition?
    Mr. Kupiec. No, I think credit unions are appropriately, if 
they do mortgage business and they have mortgage collateral, I 
think the Home Loan Bank, that is their mission, to provide 
liquidity. And in a lot of places, credit unions are becoming 
more and more important. We heard earlier that they gave some 
of the members their mortgages, and I think small credit unions 
would benefit from accessing the consumers as well.
    Mr. Stutzman. Mr. Ireland or Mr. Stanley, would you like to 
comment on that?
    Mr. Ireland. I would just like to point out that I think 
the effect of this legislation goes beyond mortgage loans. I 
think it goes to small business loans and agricultural loans 
and community development loans as well and those activities of 
credit unions. And I think it is strongly in the interests of 
the credit unions and the communities that they serve that they 
have access to the additional source of funding through the 
Home Loan Banks.
    Mr. Stanley. I have no comment.
    Mr. Stutzman. All right. Thank you.
    Could any of you mention or discuss a little bit about the 
possibility that the lack of exemption for small credit unions 
increases the possibility that current members in good standing 
will risk having their membership involuntarily terminated?
    Mr. Kupiec. I think if you had a credit union, and it was a 
member of the Home Loan Bank and it had loans from the Home 
Loan Bank, and for some reason during the year its business 
activity, its membership didn't want the loans or the mortgage 
loans that would meet the limit, they would--I think they have 
2 years, it actually has to be an average over 2 years--but if 
the membership stopped providing a service, even though the 
Federal Home Loan Bank lending may have been an important part 
of funding the credit union, they could face being cut out of 
the Home Loan Bank access.
    Mr. Stutzman. Has the cap on asset size for community 
financial institutions been increased before?
    Mr. Kupiec. In my preparation, I looked back at the old 
laws, and there is a 1999 amendment to the Federal Home Loan 
Bank law that for the community investment institutions, there 
was a $500 million cap and it was indexed to inflation. And so 
there is that limit, but I think the limit that this particular 
bill is trying to address is one that is being imposed by a 
proposed Federal Housing Finance Agency regulation and not a 
Federal Home Loan Bank legal rule.
    Mr. Stutzman. Do you think Congress is the best place to 
address this issue?
    Mr. Ireland. I think this is a necessary change to the 
statute. Aside from the Federal Housing Finance Agency's 
actions, I think if you look at the statute, this looks like it 
makes sense.
    Mr. Stutzman. Thank you, Mr. Chairman.
    Mr. Neugebauer. I thank the gentleman.
    And I would like to thank our witnesses for their testimony 
today.
    Without objection, I would like to submit the following 
statements for the record: the Credit Union National 
Association; and the National Association of Federal Credit 
Unions. Without objection, it is so ordered.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]

                            A P P E N D I X



                            October 21, 2015
                            
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